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Summary

  • Still not much new in Q2.
  • PCL reducing harvest in 2014.
  • Some positive signs but pine sawtimber prices remain flat.

Pardon me if this article closely resembles the one I wrote on Potlatch last week. I said in that article that I expected similar results from the other Timber REITs. Plum Creek's results, so far, bear that out.

Timber REIT Plum Creek, (NYSE:PCL) reported 2nd-quarter results Wednesday. As usual, I will concentrate on year-to-date numbers rather than quarterly results because of the seasonality involved with timber operations, with two of the main factors being weather and markets.

Year to date, revenues were up about 5% from last year. Operating income was flat at $139 million, and net income down 17% from 2013. Cash from operations was up 35% or $189 million versus $140 million last year. Distributions were up 11% over 2013.

On a business segment basis, timber revenues were up about 15% from 2013 levels and operating income and EBITDA both up 28%. This was due largely to the new Westvaco acquisition.

Real estate revenues were down -24% from last year and operating income was also down -24%. As I have stated before, real estate results for timber REITs are very lumpy so too much should not be read into these results.

Wood products revenues were flat compared to 2013 but operating income was down -21% from 2013. I am not sure of the reason for operating income to be so far down on flat revenues but I suspect it is due largely to increased sawlog prices in Montana and Idaho.

As I said in my previous article on Potlatch (NASDAQ:PCH), timber REITs, PCH, Rayonier (NYSE:RYN), and Weyerhaeuser (NYSE:WY) continue to struggle primarily due to the housing market. The housing recovery continues at an extremely slow pace. New starts have been continuously revised downward over the last few years. Even so, 2014 starts are predicted to be up to a little over 1 million, and 2015 starts are predicted to be up 23%. Whether they will remains to be seen, although I have my doubts. As long as the current administration's policies are in effect, I see little to stimulate a full housing recovery. I see the housing recovery as being held hostage to job growth.

The slow housing recovery continues to hold southern pine sawtimber prices at historically low levels. The recovery of these prices holds the largest upside to Plum Creek and other timber-REIT results in the near future. Everyone agrees that any meaningful increase to lumber demand must come from the South as western prices and harvest levels have been just about fully recovered for several years now due to Asian demand. To address this, Plum Creek has reduced its Southern harvest volume for 2014 and is shifting as much as possible to pulpwood stands. I believe this is a prudent move.

There were many positives mentioned on PCL's earnings call. These include beginning shipments to new pellet mills, increased sales from energy and natural resources, increased productions from the new Westvaco lands, the identification of about 88,000 acres of HBU lands in the Westvaco acquisition, and some trial exports to China from the Southern US. In addition, the MDF mill that burned is back in production with insurance covering most of the losses.

Plum Creek's unit price is at about $42.65, up about 1.9% year to date. They pay a distribution of $.44 or about a 4.2% yield. Long-term debt remains at about $2,414 million.

As I said in my previous article, I expect to see similar results from the other timber REITs as they report over the next week. The big story is the near non-existent housing recovery that continues to hold down southern pine sawtimber prices. For the time being, I see Plum Creek, and the other timber REITs in somewhat of a holding pattern with slight ups and downs from quarter to quarter until something new develops in housing.

It is interesting to look at a comparison of Potlatch and Plum Creek's 2014 results to confirm my assertions.

First 6 Months 2014

PCH

PCL

Revenues

+4%

+5%

Operating Income

+9%

0%

Cash From Operations

+65%

+35%

Distributions

+13%

+11%

Timber Revenues

-9%

+15%

Real Estate Revenues

+189%

-24%

Wood Products Revenues

0%

0%

Timber Operating Income

-10%

+29%

Real Estate Operating Income

+187%

-24%

Wood Products Operating Income

-29%

-21%

Source: Comments On Plum Creek's Q2 2014 Results