My father retired from the US Forest Service a few years ago, and since then has been building up his land holdings in the South to manage them for their timber. This is a long-term venture (one that my sisters are not too happy with), but is more secure than many other investments. There have been numerous other articles written on the subject, but I want to take another look at one of the current Timber REITs, specifically where they are now and where they are going.
Plum Creek Timber Company, Inc (PCL) is one of the largest private land owners in the United States and organized as a REIT. It owns approximately 6.3 million acres in major timber producing regions of the United States and has a market cap of just over $7 billion. Since reaching their 52-week high of over $54 in May, shares have slid to the current price of just under $43, around 10% above the 52-week low. While I'm not calling a bottom for the company right now, I think investors should be ready to jump back in as the housing market begins to recover and timber prices start to climb.
The nice thing about timber, as opposed to other agricultural crops, is that if you don't like the price right now, you can hold the land, and reduce the harvest, until the price climbs higher. In the recent conference call David Lambert (CFO and Sr. VP) referenced that:
The Southern Resources' $23 million operating profit was $1 million lower than the first quarter's results. Our harvest volumes were 5% lower than the first quarter as we elected to hold some volume off the market in anticipation of better pricing.
Additionally, the company has stated it will use that strategy in managing assets:
Our primary business is to actively manage our timberlands to capture the most value from every acre we own. That means owning timberlands in the most robust markets, making prudent investments in the growth of our timberland assets and harvesting trees at the best "economically mature" point in the life cycle of a tree.
Revenues have shown a general down trend, which I think the market has viewed negatively. However this is in line with its previous strategy of restricting the sale of timber to only what is needed to keep operations going and paying a dividend.
Right now, timber prices are not great. While they have been depressed, mainly due to the collapse of the housing market, they are beginning to recover and show a slight uptick. The company holds just over 50% of its land in the South.
During the recent conference call for 2Q13, Rick R. Holley, Chief Executive Officer and Executive Director, mentioned the need to see an increase in the housing starts near the 1 million mark in order to see a corresponding jump in the production capacity for the mills in the South, and correlating into a jump in timber price growth:
But I think longer term, to see these markets continue to grow, as we see 1 million starts kind of actually come to fruition this year, and if we start to see kind of the 1 million, 1.2 million move into 2014, I think you're going to see meaningful increase in production capacity in the South and therefore, log prices will grow.
Based on the U.S. Department of Housing and Urban Development housing report for July 2013, construction permits, starts and completions are up:
Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 943,000. This is 2.7 percent (±0.8%) above the revised June rate of 918,000 and is 12.4 percent (±1.3%) above the July 2012 estimate of 839,000.
Single-family authorizations in July were at a rate of 613,000; this is 1.9 percent (±0.9%) below the revised June figure of 625,000. Authorizations of units in buildings with five units or more were at a rate of 303,000 in July.
Privately-owned housing starts in July were at a seasonally adjusted annual rate of 896,000. This is 5.9 percent (±14.5%)* above the revised June estimate of 846,000 and is 20.9 percent (±12.9%) above the July 2012 rate of 741,000.
Single-family housing starts in July were at a rate of 591,000; this is 2.2 percent (±9.7%)* below the revised June figure of 604,000. The July rate for units in buildings with five units or more was 290,000.
Privately-owned housing completions in July were at a seasonally adjusted annual rate of 774,000. This is 1.8 percent (±12.9%)* above the revised June estimate of 760,000 and is 15.0 percent (±17.9%)* above the July 2012 rate of 673,000.
Single-family housing completions in July were at a rate of 571,000; this is 5.9 percent (±10.2%)* above the revised June rate of 539,000. The July rate for units in buildings with five units or more was 195,000.
Conclusion: Although I am not calling the bottom for the price right now, I think serious investors need to closely watch PCL to jump in. There are some positive indicators for future growth. The price of timber bottomed in 2012, and albeit slowly, is starting to appreciate. The housing market is starting to grow again, but is nowhere near pre-2007 levels. The company has a plan in place to manage the sale of assets to maximize shareholder value, and is willing to return that to investors through a healthy dividend.