The Tax Man and Timber REITs

20 01 2012

Nobel Prize-winning physicist Albert Einstein once said, “the hardest thing in the world to understand is the income tax.”  On the other hand, actor Wesley Snipes reportedly said, “taxes are only complicated if you pay them.”  (Actually, that might have been Wesley’s cellmate while they served time for tax evasion.)  Lucky for investors in timberland-owning REITs, the Tax Man’s bite hurts less than for other REITs and dividend-paying stocks that are subject to ordinary income tax rates.

Most timber REIT distributions (related to income from the sale of timber) are treated as long-term capital gains and taxed at relatively lower 15% tax rates compared with ordinary dividends.  Recently, all four public timber REITs announced the tax treatment of dividends paid in 2011:

For Plum Creek (PCL), Rayonier (RYN) and Weyerhaeuser (WY), 100% of the dividends paid in 2011 will be treated as capital gains. For Potlatch (PCH) investors, $1.01188 per share (54.955878% of the total distribution) will be treated as return of capital, while the balance will be treated as capital gains.

Click here to learn more and register for “Applied Forest Finance” on February 9th in Atlanta, Georgia.


Buddha and Wood Bioenergy

16 01 2012

The Buddha tells the private equity fund he can fulfill one of its wishes.  A managing director asks, “could you simplify the tax code?”  Seeing the Buddha frown in silence, the person suggests another wish,  “could you make our cellulosic ethanol project work at commercial scale?”  After a long sigh, the Buddha says, “let’s talk about capital gains taxes.”

Last week, the New York Times published a take-down of government biofuel mandates (“A Fine for not Using a Biofuel that Doesn’t Exist,” 1/9/12).  For 2011, gasoline and diesel suppliers will pay ~$6.8 million in penalties because they failed to mix 6.6 million gallons of cellulosic biofuel into their motor fuels as required by law.  One problem: we can’t produce cellulosic ethanol at commercial scale.  So we’re fining firms for noncompliance when compliance remains unfeasible. (Say that five times fast….)

The article reaffirms from multiple sources the conclusion of our 2011 wood biofuels study:  substantial technical hurdles remain.  Even the executive director of the Advanced Biofuels Association acknowledged in the article that wood-based biofuel “was not yet ready for commercial introduction.”

Last month, I summarized the current state of cellulosic ethanol following a similar skinning by the Wall Street Journal (click here for the post and article link).   In the end, the articles and our research spotlight the random, distorting impact of these targets and incentives.  While support and incentives for bench research helps turn the machinery of scientific advancement, mandates based on unproven technologies encourages deceit by market participants and may suppress more promising ideas and technologies.

Timber REITs, Timberland and the Transfer of Wealth

11 01 2012

People who cite a rising stock market as evidence of economic health (1) make me nervous and (2) remind me what Timber REIT said to Timberland as they walked out of the gym:  “You’re such a hard asset.”

Roiled and riled markets – and a recent phone call asking about the difference between timber REIT and timberland investments – provide an opportunity to revisit the differences between financial assets and real (hard) assets.  While real assets include consumable goods and productive factories and firms, financial assets – such as bonds or shares of publicly-traded firms – consist of claims on real assets.  Financial assets allow investors to save, diversify risk, borrow and, ultimately invest so that more real assets can be produced and consumed in the future.

“Aren’t shares in timber REITs similar to owning timberlands?”  Sorry, no.  Thanks for playing.  When you own shares in a timber REIT, you don’t own timberland.  You own a piece of a business, over which you have no control unless you are a major shareholder, that happens to generate revenue from selling trees and related activities.    In theory, shares of timber REITs rise over time because they account for the trees and other products being produced and sold.  As the economy improves, so do revenues and,  assuming stable margins, profits to shareholders.  In practice, the super liquidity of timber REIT equities also diminishes their diversification potential; timber REITs basically correlate to the S&P 500 over time.

Timberlands, on the other hand, are real assets.  The challenge of the asset class over the past five years reflects a run-up in prices that outpaced housing markets and GDP growth.  While interest in timberland assets remains extremely strong, we continue to reach for firm ground following a decade-long transfer of wealth from first-time buyers to early entrants exiting the timberland market.

Click here to learn more and register for “Applied Forest Finance” on February 9th in Atlanta, Georgia.

2011 Timber REIT Results: Led by RYN, Sector Outpaces S&P 500

3 01 2012

In 2011, timberland-owning REITs, as a sector, outperformed the S&P 500.  As measured by the Forisk Timber REIT (FTR) Index, publicly-traded timber REITs returned 5.69% versus 0.00% for the S&P (see tables).  The FTR Total Returns Index, which accounts for dividend distributions, earned 9.62% in 2011.

While the timber REIT sector performed well, individual firm performance varied.  Not including distributions, Rayonier (RYN) alone generated positive, stand-alone returns of 27.47%, which accounts for a mid-year 3-for-2 stock split.  The other three timber REITs generated negative returns of 1 to 4 percent.  The primary distinction between RYN and its timber REIT brethren is the relative size, magnitude and profitability in 2011 of its specialty performance fibers division.