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I recently read a quarterly newsletter by Brookfield Timberlands Management LP, a wholly owned subsidiary of Brookfield Asset Management Inc. (BAM). In it, they discussed the NCREIF (National Council of Real Estate Investment Fiduciaries) Timberland Index results for 2012. NCREIF is an appraisal-based index. It included both third-party independent appraisals as well as internal appraisals of timberlands purchased for investments. Its members are generally the TIMO (Timberland Investment Management Organizations) community. TIMOs manage privately owned timberland investments. However, the results would also reflect on the value of the timberlands owned by the publicly traded timber REITs, Weyerhaeuser (WY), Plum Creek (PCL), Rayonier (RYN) and Potlatch (PCH). Timberland properties are routinely bought and sold by the TIMOs and timber REITs to and from each other.

For 2012, the total return from timberland investments in the index was 7.76%. This is broken down between EBITDDA returns and appreciation returns. Total EBITDDA returns were 2.68% and appreciation returns were 4.97%. The NCREIF Timberland Index is made up of 443 properties totaling 15.1 million acres with a total market value of $26.0 billion.

The Index is further broken down by region.

2012 NCREIF results

South

Pacific Northwest

Northeast

Lake States

Total

EBITDDA

2.29%

3.86%

1.69%

0.27%

2.68%

Appreciation

3.07%

9.41%

2.71%

4.05%

4.97%

TOTAL

5.41%

13.54%

4.42%

4.33%

7.76%

Of particular interest is the large EBITDDA and appreciation return for the Pacific Northwest. This is mainly due to the export market, which is unique to the PNW. Actually, this number could have been even higher if NCREIF did not lump in what I call the inland west, Idaho, Montana, eastern Oregon, and eastern Washington, as well as California, with the PNW.

EBITDDA returns are still on the low side due to low sawtimber prices and lower-than-normal harvest levels. Harvest levels are rising but have still not returned to the norm since the housing crash. This is probably less so in the PNW than in the other regions, again due to the export market. EBITDDA returns for the timber REITs would be reflected in their net income and cash flow results. Appreciation, however, would not.

Let's look at how these appreciation returns can be applied to the publicly traded timber REITs. The table below shows acres owned by each REIT by region.

Timber REIT Acres

Region

PCL

WY

RYN

PCH

Total

South

3,255,000

4,107,160

1,868,247

406,000

9,636,407

Pacific Northwest

471,000

2,038,400

389,273

2,898,673

Inland West

897,000

812,000

1,709,000

Lake States

656,000

223,000

879,000

Northeast

1,100,000

130,870

1,230,870

Total

6,379,000

6,145,560

2,388,390

1,441,000

16,353,950

The table below contains my best estimate of timberland values based on my estimated regional averages. It shows Plum Creek's average acre is worth about $1,390 per acre, Weyerhaeuser's $2,115 per acre, Rayonier's $1,587 per acre, and Potlatch's $1,046 per acre.

Estimated Timber REIT Timberland Value ($ millions)

Region

PCL

WY

RYN

PCH

Total

South

$5,859

$7,393

$3,363

$731

$17,346

Pacific Northwest

$1,295

$5,606

$973

$7,874

Inland West

$673

$609

$1,282

Lake States

$492

$167

$659

Northeast

$550

$98

$648

Total

$8,869

$12,998

$4,434

$1,507

$27,809

Average $/Acre

$1,390

$2,115

$1,587

$1,046

$1,700

NCREIF Appreciation

$369

$754

$197

$59

$1,379

4.2%

5.8%

4.5%

3.9%

5.0%

If we apply NCREIF regional appreciation returns to the table above we get 4.2% timberland value appreciation for Plum Creek, 5.8% for Weyerhaeuser, 4.5% for Rayonier, and 3.9% for Potlatch. Instead of using the PNW value for the Inland West, I used the average of the four regions. I did this because I believe the PNW is distinctly different from the Inland West. The table below shows how this translates to unit values for each timber REIT.

PCL

WY

RYN

PCH

$/Unit (appreciation)

$2.28

$1.39

$1.61

$1.45

Unit Price

$51.23

$31.16

$58.03

$45.34

4.4%

4.5%

2.8%

3.2%

Again, this most likely had no affect on the current unit prices. All of the timber REITs have had nice run-ups in unit values over the last 12 months or so. Most of this price run-up has been in anticipation of improvements in the housing market and demand for logs and lumber products. Through the end of 2012, very little price appreciation has been seen in log prices, even though lumber prices have been recovering nicely. Again, the Pacific Northwest has been the exception. I expect this to change in 2013. In fact, my sources in the Pacific Northwest report that log prices for both export and domestic logs are running at the highest prices seen in some time for the first quarter of 2013, well above 2012 prices.

Source: Timberland Investments Return 7.76% In 2012