All four companies are timber REITs, but their similarities end there because while 75% of their assets must be real estate assets, they can own other businesses in their taxable REIT subsidiaries (TRS).
For example, about 70% of Rayonier's revenues derive from cellulose pulp, a value-added specialty pulp used in the manufacture of products like pharmaceuticals, LCD screens and diapers. And while this is a forest product, it is not a tree. "You can call it pulp, but it's way beyond pulp," says Steven Chercover, senior research analyst at D.A. Davidson in Portland, Oregon. "It's not a commodity; it's closer to a chemical business."
As such, says Mendell, the company is more akin to a traditional manufacturing firm. "Strong earnings from this segment helped Rayonier weather the housing downturn more effectively than any other timber REIT," he says, pointing out that exports account for 60 percent of the firm's specialty cellulose fibers.
Plum Creek Timber, in contrast, has relatively few manufacturing assets. As the oldest timber REIT (since l998), it is the largest and most geographically diverse timberland owner in the group. Potlatch, meanwhile, is the smallest of the four firms, with most of its timber assets in the upper Midwest.
And then there's Weyerhaeuser, which converted to REIT status in 2010. It's the most diversified of the four firms with TRS assets including wood products manufacturing, cellulose fibers, and five home building subsidiaries.
Weyerhaeuser's broad diversity, however, is a "plus-minus," says Mendell, who explains that one of the biggest advantages of adding timberland to a client's portfolio is diversification. "But if you want to add a timber REIT to your portfolio and that business is already diversified, you don't get the benefit of adding timberland to your portfolio."
Is This Alternative?
Many people argue that timberland isn't correlated with other financial assets and is therefore an alternative investment. Others disagree. Clark Binkley, managing director at International Forestry Investment Advisors LLC, in Portland, Ore., posits that these investments, while long-term by Wall Street's standards, are short-term relative to the biological growth to maturity of most trees. In the U.S., that can range from 35 to 40 years for Southern yellow pine to a century or more for hardwood oak growing in the northern Midwest.
"The argument is that trees grow while the sun shines, but they do not read the Wall Street Journal," he says. "If you buy bare land and plant the trees, 100% of the return will come from tree growth. But are investors doing that? We believe the only structurally uncorrelated component of returns from timberland is tree growth."
Binkley manages tree farms in places such as Chile that include super fast-growing trees. So he plants and waits for the biological growth for harvest. In that sense, he says, his fund is uncorrelated because they are waiting out the entire biological growth cycle of its trees.
Theoretically, publicly-traded REITs are also waiting out the entire biological growth of their trees, so in a sense if somebody wanted to invest and hold on for a lifetime their return may well be uncorrelated--especially for Plum Creek Timber, which is fairly close to a pure-play timber operation.