Timber REITs: Above Vicissitudes of Cycles

A few quick thoughts from reviewing Plum Creek Timber Q3’08 conference call:

 

Nice balance sheet:

At the end of June we signed a Purchase and Sale Agreement with the Nature Conservancy and Trust for Public Land in which we will sell approximately 310,000 acres of Montana land for $510 million.

We have a lot of cash... We have plenty of capital clearly to take care of the dividend through even the most difficult times, to be opportunistic in the timberland acquisition market and also when it makes sense to buy our stock back. 

Still buying land:

During the third quarter we completed three privately negotiated acquisitions totaling 120,500 acres which were purchased for approximately $64 million.

These guys don’t worry about credit crises and stock market turmoil:

We think the market turmoil highlights the defensive characteristics of an investment in timberlands. The long-term natures of timberlands, biological growth, non-correlation with financial markets, and inflation protection, among others, have attracted a variety of investors seeking direct investment in the asset class. These buyers are generally equity buyers, employing little or no leverage. As a result, Timberland transactions have continued to be completed despite the credit crunch of the past year.

There’s still a fair amount of capital on the sidelines trying to invest in timberlands… longer term. They’re looking through this cycle. If anything they’re starting to look at this cycle and lower prices as being more upside when you look out a year or two years…  There’s still a lot of capital chasing very little opportunity.

On oil price:

I don’t think any of us on this call probably believe that oil is going to stay at $50 or $60 a barrel. I don’t believe it will be $200 a barrel either... Whichever one of these administrations ends up in office, they’re both going to focus alternative energies and I think you’re going to see more renewable fuel standards around the country requiring even power plants to use 20% of their power from a renewable sources and an ideal one, especially in the southern United States is going to be wood. So I think it’s something that’s going to get some legs under it.

 

Comments

[fatcat:]

You sent me straight to the online dictionary with that one,Judy....

2008 Oct 31 06:19 AM

[SA Editor J...:]

:-)

Just keeping you on your toes...

2008 Oct 31 07:55 AM

[AJ30:]

I doubt burning wood to fuel electric power plants would be an acceptable alternative use.

2008 Oct 31 01:17 PM

[searcher:]

The last two sentences of this article are definitely worthy of the gallery in Pantheon of Inanity.

2008 Oct 31 02:42 PM

[stonebluff:]

You can make lequid fuel from wood chips and sawdust.

2008 Oct 31 06:07 PM

[Saoirsi:]

Timber and land are both concrete, non-ephemeral, and always have some use, regardless of whether markets tank or not. As you say, true biologically-based "growth cycles," mostly disconnected from from men-in-suits' idiocracy - a level of insulation that may as well put it on a different planet. You also have about 1-5+ years to delay harvest in case of down prices.

Regarding wood as fuel: there are some "old school" technologies which make it quite comparable to oil, especially at $60+ a barrel prices.

Combined Heat and Power plants - also known as Cogeneration - deliver energy in the form of both electricity and heat.

In Denmark, for example, several cities operate District Heating systems, whereby heat is literally piped into buildings and apartment as a utility, form CHP plants.

Wood pellets act in some ways like a "liquid" in terms of storage tanks, and can be used in individual suburban and even some urban contexts with a high level of automation in burners. Pellets do require an intermediate manufacturing process involving heat, moisture and pressurisation. They also need to be below a certain percentage moisture, or are less effective.

Wood chips have some advantage in requiring less intermediate processing, are a bit less fussy concerning moisture. In Ireland, some institutions, such as hotels, use woodchip burners quite effectively. It's also possible for companies to sell the heat, rather than the pellets, by renting container-like units that operate on-site, containing the burner and storage tanks, which are then maintained by the heat-utility company.

An advantage with both of these can be the use of thinnings from forestry, which might normally be a drain.

One key issue when bringing these fuels to market, is the level of intermediary processing; one estimate (I think) is that every time a tonne of the wood is handled, you subtract €5. And the more that a company can add value (e.g. through processing the wood for pellets) especially on-site, the more financial value can be reclaimed from the market, rather than just selling a raw commodity.

Wood-gas burners are another old, very efficient and proven technology with a high level of modern technological development. They've also been used - and can be still - in automotive contexts, believe it or not. FEMA even issued a do-it-yourself handbook for farmers in case of national emergency. The process involves heating the wood to release the gas, which is then burned, and is not very complicated.

2008 Nov 02 10:40 AM