By Ellie Winninghoff
Imagine investing in a dividend yielding business where the balance sheet grows when times are tough.
Timberland, of course, has been a favorite alternative investment vehicle for top-performing endowments from the likes of Harvard and Yale. But due to million dollar-plus minimums required by the specialized private equity firms known as timberland investment management organizations, or TIMOs, that manage these hard assets on their behalf, individuals generally have not been able to partake.
An intriguing option, one that offers dividends and liquidity as well as a low barrier to entry, is timberland owning publicly-traded REITs.
The Forisk Timber REIT (FTR) Index, which tracks publicly-traded timber REITs, rose 88% between 2000 and 2011 versus a 2.4% drop in the benchmark S&P 500. In contrast, private timberland values rose 68% during the same time period, based on the NCREIF (National Council of Real Estate Fiduciaries) private timberlands index.
This means that publicly-traded timber REITs beat the S&P 500 by an average of 8.19% per year and beat private timberland by an average of 1.81% per year during that period.
"A useful exercise in our equity research has been comparing the relative per-acre administrative loads of TIMOs and publicly-traded timberland owning REITs," Brooks Mendell, president of Forisk Consulting, wrote on the company blog of his Athens, Ga.-based timber investment consulting firm. "At the end of the day, the earnings potential of timberland assets varies more by location than by ownership structure, assuming structures of comparable tax efficiency."
He says the best locations are in the Southeast and the Northwest. The Southeast is traditional southern yellow pine country, which is a fast-growing commodity timber. Trees in the Northwest take longer to grow, but are of higher value when they reach maturity and many of those tress are going to China, a thriving market.
There are four publicly traded timber REITs: Plum Creek Timber (PCL), Weyerhaeuser (WY), Potlatch (PCH) and Rayonier (RYN.) Rather than representing direct ownership of hard assets, these securities are a claim on the earnings of timber-growing and selling businesses. Together, they account for 20% of the privately-held U.S. timberland versus 37% owned by 27 U.S.-based TIMOs, according to Forisk Consulting. As of March 27, the market caps of these REITs ranged from $1.3 billion for Potlatch to $11.8 billion for Weyerhaeuser.
As REITs, these firms must pay out 90% of taxable REIT income. And as of March 27, the group's dividend yields ranged from 2.70% for Weyerhaeuser to 4.10% for Plum Creek Timber. Unlike with most REITs, their dividends count as capital gains.