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

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Timber REITs Outperform S&P, Private Timberlands and Other REITs for 1Q, 2Q 2011: Why?

4 08 2011

It’s December 31, 2010 and you’re sitting on a pile of cash.  Do you invest in the S&P 500, an all-REIT index, private timberlands or publicly-traded timber REITs?  Based on the performance of key indices, putting your chips in with public timber REITs for the first half of 2011 would have financed your NFL season tickets and three bottles of Pappy Van Winkle (see table).  What explains the outperformance?  Is this a short-term, steroid-induced, Lenny Dykstra surge, or longer-term, touchdown-accumulating Dan Marino consistency?

As with all things timber, investment models, benchmarks and timeframes matter.  In practice, timberland investments require high initial investments and longer placement periods, while public timber REITs provide easily-traded alternatives.  It’s the difference between investing in a high maintenance, portfolio-stabilizing hard asset and a liquid, dividend-yielding, more volatile equity. Over the first quarters of 2011, US timberlands (as measured by the NCREIF Timber Index) and timber REITs (as measured by the Forisk Timber REIT (FTR) Index) returned 1.4% and 15.9%.  Over the past ten years, US timberlands and timber REITs returned, on average, 6.8% and 6.7% per year.

Why the recent timber REIT pop? Factors driving strong recent performance are primarily firm-specific. The FTR Index includes four publicly-traded timber REITs, Plum Creek (PCL), Rayonier (RYN), Potlatch (PCH) and Weyerhaeuser (WY).  Key events driving equity returns in 2011 include (1) Weyerhaeuser’s REIT conversion from a C-corporation and (2) Rayonier’s strong results from its performance fibers business.  At the sector level, timber REITs benefitted from their different use of and exposure to debt markets relative to the other REIT sectors, which employ, in cases, more leverage and access the stomach-churning CMBS markets.

To learn more about timber REIT assets, strategies and valuations, participate in the “Investing in Timber REITs” workshop on August 23rd in Atlanta.