Thomas Jefferson and Timberland Ownership in the United States

15 03 2013

Through executing the Louisiana Purchase in 1803, President Thomas Jefferson proved himself, among other things, the preeminent timberland acquisition professional.  In this bold embrace, he more than doubled the size of the United States by acquiring 820,000 square miles of land west of the Mississippi from France for $15 million dollars.  That equals 524.8 million acres at 2.9 cents per acre (or just over 50 cents per acre in today’s dollars).

[Picture an excerpt from Jefferson’s resume:  Experienced negotiator and real estate professional.  Acquired over half a billion acres of fertile soil and natural resources. Includes land in 14 states such as Arkansas, Colorado, Iowa, Texas, the Dakotas (both) and Wyoming.  Creator of the swivel chair.]

The Louisiana Purchase was opportunistic.  U.S. negotiators wanted to buy New Orleans, but Napoleon needed financing to wage war on England.  So he rejected the New Orleans proposal and countered with a deal to sell all of France’s North American land holdings.  The U.S. team, led by Secretary of State James Madison, took the offer and closed the transaction.  Bada bing, bada boom.

Forisk’s ongoing research of timberland investment vehicles highlights how private timberland owners and ownership have changed over time since the days of powdered wigs.  Today, timberland investment professionals scour the landscape and courthouse documents for the next purchase in Louisiana or in Arkansas or in Texas.  As of 2013, Forisk counts 217 owners that each own and manage 25,000 acres or more for a total of ~91 million acres of private timberlands.  Of these acres, 18% are owned by the four public timber REITs (Plum Creek, Potlatch, Rayonier and Weyerhaeuser).

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.

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Timber REITs and the “Dividend Tax” Cliff, Part II

4 12 2012

Part I of Timber REITs and the “Dividend Tax” Cliff summarized, in words, the implications to shareholders of publicly-traded timberland-owning REITs if the current dividend tax rate expires on December 31, 2012.  This post quantifies the implications and puts into context the impact of changing tax rates on timber REIT shareholders relative to shareholders of non-timber REITS or other dividend-paying stocks in the United States.  The bottom line: timber REIT equities retain a tax-advantaged status in a post-tax cliff environment.

Let’s compare the dividend yields of the four public timber REITs – Potlatch (PCH); Plum Creek (PCL); Rayonier (RYN); and Weyerhaeuser (WY) – under different assumed tax scenarios:

  • No Taxes:  our “fantasy” and “frictionless plane” scenario.
  • Current Post Tax: reflects the present code that taxes dividends at 15%.
  • Post “Cliff”:  represents a return to pre-2003 rates, which treats timber REIT dividends as (mostly) capital gains and taxes them at the pre-2003 capital gains rate of 20%.
  • Non-Timber REIT:  captures a return to taxing dividends at the marginal ordinary income tax rate.  Our scenario focuses on shareholders in the 35% ordinary income tax bracket.

Table 1 summarizes how the impact on dividend yields, while negative in all scenarios, slices results to a greater degree for non-timber REITs.

Table 1

20121204 Table 1

What would you need to receive in dividends from your timber REIT investments to generate the same dividend yield “pre” versus “post” change in the tax code, if it occurs?  Table 2 summarizes this result relative to non-timber REIT shares.

Table 2

20121204 Table 2

While dividend yields do not tell the whole story, they do provide a starting point for comparing alternate investments.  At a minimum, stocks that emphasize dividends compete with risk-free rates offered by U.S. Treasuries (currently 1.63% pre-tax for 10 years).  Other factors to consider include:

  • Total expected returns:  investors reasonably expect a risk “premium” for holding stocks over bonds, and this premium supports expectations of total returns which sum dividends and appreciation.
  • Effective tax rates:  actual tax rates vary significantly across investors.  Institutions such as mutual funds and pension funds hold approximately two-thirds of public equities in the U.S.  And many individuals attracted to dividend-paying stocks pay lower ordinary income tax rates.

In the end, regardless the valuation math and legislative decisions, timber REITs, in the world of dividend-paying stocks, feature an attractive tax profile for potential investors.

Click here to learn about and register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.  The course details necessary skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.





Timber REITs and the “Dividend Tax” Cliff, Part I

29 11 2012

This is the first in a two-part series summarizing implications to timber REIT shareholders from expiry of the current tax provisions specific to dividend income.

Fear battles greed once again as chronicled by the business press in the looming “fiscal cliff” faced by U.S. investors and taxpayers.  See, for example, “Stocks Diving off the ‘Cliff’” and other lemming-oriented reports. For those of us nestled in the woodsy world of timberlands and timber REITs, how might changes in the tax code affect timber REIT investments?

How are dividends taxed currently?  In December 2010, President Obama signed into law a two-year extension of many provisions signed into law by President Bush in 2001 (often termed the “Bush-era tax cuts” and enacted in 2002 and 2003).  The extension retained the current 15% maximum tax rate of qualified dividends for most taxpayers and 0% for those in the 10 to 15% ordinary income tax brackets.

What are “qualifying dividends”? These include dividends received by shareholders (1) of qualified corporations and (2) who held the underlying stock for at least 61 days within an IRS-defined 121-day period relative to the ex-dividend dates of the firms.  Importantly for us, this includes dividends paid by real estate investment trusts (REITs).

What happens if the dividend tax rate expires as scheduled on December 31, 2012?  Shareholders would pay taxes on dividend income at their ordinary income tax rate.  Currently, for example, unmarried individuals who earn more than $85,650 and joint-filing married couples who earn more than $142,700 pay basically 35%, on the margin, in Federal taxes.  However, the issue varies with timber REITs because most dividends qualify as long-term capital gains.  Currently, the qualified dividends and long-term capital gains are taxed at 15%. If the current extension expires, capital gains would be taxed at the pre-2003 rates of 20% (still lower than the marginal ordinary income rate paid by most investors).

Ultimately, changes in dividends or net cash received affect valuations as investors compare after-tax yields and expected returns across asset classes.

Part II provides numerical examples to quantify the implications to shareholders. Dr. Brooks Mendell delivers keynotes and workshops related to forest finance and timberland investment vehicles.  Click here to learn about and register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.





Did “Superstorm” Sandy Supercharge Short-Term Timber REIT Returns?

19 11 2012

No.

Let me explain.

On October 29th, 2012, Hurricane Sandy – crowned “Superstorm Sandy” by the media – landed on the East Coast of the United States, disrupting businesses from North Carolina to Maine and west to Michigan and Wisconsin, with concentrated damage in the Northeast.  According to The Wall Street Journal, initial estimates of the insurable losses exceeded $15 billion with total damages falling between $30 and $50 billion (“Sandy’s insured-loss tab: up to $20 billion”, 11/2/2012).  In response to multiple questions from investors and reporters about the potential effects on timber stocks, I conducted a simple “event study” to see if, in the short-term, we observed statistically “abnormal” moves in timber REIT stocks immediately before or after Sandy.

Testing the effects of Hurricane Sandy on the publicly-traded timberland-owning sector presents issues that complicate potential results:

  • Our “event” hit the U.S. on October 29th, a Monday.  Wall Street, in response, closed for trading on October 29th and October 30th, and reopened on October 31st.  From a research standpoint, this gave investors a couple of days to sort things out (if that was possible in this case) and diminishes potential relevant price moves.  (It also suggests a “long-term” event study may be worth revisiting several months from now….)
  • There was this other “event” occurring around the same time: a U.S. Presidential Election.  History suggests Presidential Elections affect trading activity, too….
  • Pure manufacturers of building products, such as lumber and OSB, may show more direct effects in this type of post-catastrophe environment.

We used a simple regression to estimate the relationship between returns from the S&P 500, which represents the overall market, and the Forisk Timber REIT (FTR) Index, which represents the publicly-traded timber sector.  Then we create an “event period” that frames when Sandy might impact timber REIT stock prices.  For this short-term study, we used an eleven-day period starting five trading days before the event and ending five trading days after the event.  The table below summarizes the results.

The estimated “Cumulative Abnormal Return” for the event window totaled -1.3%.  For the five days following the event, the CAR totaled -0.8%.  In sum, for this particular question and this particular timeframe, Sandy proved much ado about nothing.





Timber REITs: Trees Outgrow the Market Long-Term and Year-to-Date

10 10 2012

In forestry and timberland investing, sometimes our job is to get out of our own way.  In other words, let the forestry asset do what it’s going to do for us given it’s inherent exposures to housing and pro-cyclical financial performance.   Year-to-date and over the past ten years, publicly-traded timberland-owning firms (timber REITs) outpaced the S&P 500, while private timberland investments led even timber REITs for the ten year investment period (figure).

Reflecting on alternate timberland investment vehicles in an improving post-recessionary environment, we can reaffirm key advantages delivered by the asset class.  Positive cash flows.  Portfolio diversification.  Optionality.   Meanwhile, the risk profile for the sector has changed.  New investors face limited downside in their portfolios to the physical risks of insects, disease, fire and weather events, but struggle to quantify the risks associated with shifting forest certification and regulatory expectations.

For FTR calculation methodology, please visit www.forisk.com and click on “Equity Research.”  To subscribe to the free FTR Weekly Summary, or for information regarding Forisk Equity Research, please contact Brooks Mendell, bmendell@forisk.com.





Timber REITs: Dividend Yields and the Dallas Mavericks

29 07 2012

Rayonier’s (RYN) announced ten percent dividend increase reminded me of the well-traveled quote from investor and Dallas Mavericks owner Mark Cuban on stocks and dividends:

I believe non dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it.

The quote speaks to the importance of considering ‘total return’, which accounts for both (cash) income and (capital) appreciation, when valuing investments.  For timberland-owning REITs, this includes (1) quarterly dividends and (2) changes in stock prices for a given time frame.  For direct timberland investments, this includes (1) income generated from, in part, timber sales and other forest management activities as well as (2) appreciation of the land and standing forest.

Last week, NCREIF announced year-to-date (through Q2 2012) total returns for private US timberlands of 0.97%.  This total return number includes 1.54% from income and -0.57% from appreciation.  Alternately, publicly-traded timber REITs, as measured by the Forisk Timber REIT (FTR) Index, generated year-to-date total returns (through July 27, 2012) of 19.93%.  As of July 27, 2012, the four timber REITs provided the following dividend yields:

  • Plum Creek (PCL): 4.15%
  • Potlatch (PCH): 3.69%
  • Rayonier (RYN): 3.50%
  • Weyerhaeuser (WY): 2.54%

However, timberlands-versus-timber REITs is not an acorn-to-acorn comparison. For multi-year investors, direct ownership of timberlands continue to provide superior capital preservation and diversification, while public REITs offer superior liquidity and total returns with more risk.  While timber REITs attract attention from dividend-seeking investors, the figure below highlights the advantages and disadvantages of focusing solely on dividend yields (income) when investing in equities.  Equity values can and will dive with the overall market (see 2008-2009) while long-term investors gained through buy-and-hold-and-dividend reinvestment strategies.

Reminder: Early registration for “Timber Market Analysis” ends August 1st.  This one day course will be taught August 15th in Atlanta. Click here for more information





Timber REITs Accelerate Past the S&P 500 YTD for 2012

5 07 2012

As we hit midfield for 2012 and closed out the second quarter, the timber REIT sector as measured by the Forisk Timber REIT (FTR) Index posted a 12.09% gain relative to 8.31% for the S&P 500 (click here for the free FTR Weekly Summary).  While the year-to-date results vary by firm (see table), the sector benefited from (1) strong exposure to improving markets for homes and construction in key US regions and (2) attractive dividend yields relative to other industries and REIT subsectors.

For investors and analysts tracking wood and timber REIT markets, Forisk offers “Timber Market Analysis” on August 15th in Atlanta, a one-day course detailing a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here