Timber REITs: This Money May Grow On Trees

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Includes: CUT, PCH, PCL, RYN, WOOD, WY
by: Zvi Bar

Interest in investing in timber land has increased over the last few years after bottoming out along with the rest of the market in late 2008 and early 2009. At that time, demand for wood for construction decreased dramatically, corresponding to the decrease in U.S. housing starts, and has subsequently stayed at depressed levels. Additionally, paper use, though still ubiquitous, is expected to continue to decrease over the years due to digitization and continued technological innovations.

Many individuals believe that now is a good time to allocate into timber. The cost of raw commodities like timber is expected to increase if inflation rates increase over the coming years. Currently, due to the reduced demand for timber in home-building, prices are depressed and most timber growers are allowing their trees to grow. They will be left with more trees and an older stock, and those older trees should yield superior, higher priced wood product in the future, when demand does again increase.

REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Under the current tax laws, timber REIT dividends are taxed as long-term capital gains, and not at the corporate dividend or ordinary income tax rates. Most REIT dividends are treated differently than timber REIT dividends, and taxed at a significantly higher rate than are timber REITs. This makes timber REIT dividends different then most REIT, bond and traditional equity dividends, and a somewhat unique asset-class.

Below are four timber REITs that are publicly traded in the United States, listed in alphabetical order: Plum Creek (NYSE:PCL), Potlatch (NASDAQ:PCH), Rayonier (NYSE:RYN) and Weyerhaeuser (NYSE:WY). I have provided their present yields, as well as their 1-week, 2012-to-date and 3-month share performances. I have also included the iShares S&P Global Timber & Forestry Index (NASDAQ:WOOD) and the Guggenheim Timber ETF (NYSEARCA:CUT), both of which have large positions in timber REITs as well as traditional corporations.Click to enlarge
So far in 2012, these six equities have appreciated by an average of 7.04 percent. Over the last three months, the group has appreciated by an average of 18.28 percent.

Currently, some of the largest owners of timber acreage within the United States are these real estate investment trusts. The lack of present demand for timber products may allow and/or compel these REITs to structure themselves in a manner that minimizes expenditures and overhead. Essentially, these companies can and arguably should shed non-core businesses and simply allow the timber to grow until demand and prices reach desirable levels. While investors wait for demand to pick up, these timber REITs offer an above average dividend that should only increase when demand returns.

Both of the listed ETFs also hold significant positions in companies that produce and sell products made from trees, such as paper and packaging, and both appear to have performed similarly during the recent market sell-off, even though their portfolios do exhibit several differences.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

Disclosure: I am long WY.