I recently wrote two articles on Timber REITs, Understanding Investments in Timber REITs and A Layman's' Analysis of Plum Creek Timber Company (PCL). My intension was to write a similar article to my second on each of the other three Timber REITs, Potlatch (PCH), Rayonier (RYN), and Weyerhaeuser (WY) and then maybe throw in articles on other timber MLPs and C corps like Pope Resources (POPE), Deltic Timber Company (DEL), and St. Joe's (JOE). However, after researching Potlatch, I realized that I may have neglected some analytical points on Plum Creek. So this article compares Potlatch with Plum Creek so as to throw in some of the data that I may have left out of the Plum Creek Article.
I really believed that I was going to find a completely different story about Potlatch than Plum Creek. However, as I dug deeper I found more similarities than I expected. They do differ in size and geographic concentration, however, many of the financial metrics are similar. As you can see from the table below, Plum Creek is about 4.5 times larger than Potlatch in terms of acres. The largest concentration of acres for Plum Creek is the Southeast. Potlatch has its highest concentration of land in the Inland West. Of the two major timber growing areas in the country, the Southeast and the Pacific Northwest, Plum Creek has a higher percentage of acres in these two regions than Potlatch. In fact, Potlatch has no Pacific Northwest acres.
Acres (000) (from PCL and PCH websites)
When we look at my estimated timberland values in the table below, we see that most of Plum Creeks' timberland value is in the Southeast. Potlatch also has its highest timberland value in the Southeast. (I might add here that I have re-thought the average per acre values that I used in my previous articles and decided that I most likely undervalued timberlands in the Northeast, Lake States, and Inland West. I have changed these per acre values from $500 per acre to $625 per acre here.) Again, of the two major timber growing areas in the country, the Southeast and the Pacific Northwest, Plum Creek has most of its value in these two regions while Potlatch only has 48% of its value in the Southeast with none in the Pacific Northwest. On average, a Plum Creek acre is worth more than an average Potlatch acre.
Estimated Value ($ millions)
In terms of manufacturing, Plum Creek owns a total of eight mills, including sawmills, plywood mills, MDF mills, and re-manufacturing mills while Potlatch operates four sawmills and one plywood mill. Capacity wise, Plum Creek has less lumber manufacturing capacity than Potlatch but more plywood capacity. In 2011 Plum Creek ran its mills at about 62% of capacity while Potlatch ran its mills at near full capacity. Another difference is that Plum Creek specializes in pine and spruce boards while Potlatch lumber is mostly SYP, Douglas-fir, larch, and SPF dimensional lumber. Also, Plum Creek's manufacturing is concentrated in Montana, while Potlatch's mills are located in Arkansas, Minnesota, Michigan, and Idaho.
As far as real estate potential goes, Plum Creek owns land in better locations than Potlatch. Real estate is made up of land suitable for development, rural residential, recreation, and conservation. I estimate Plum Creek's average real estate acre to be worth about $2,100/acre to $2,200/acre and Potlatch's to be worth $1,500/acre to $1,600/acre. In addition, the real estate operations for both companies sell non-strategic timberlands at timberland prices.
Real Estate Acres (from 2011 10Ks)
Recreation & RR
In terms of market cap and debt, Plum Creek has a market cap of about $6.6 billion with long-term debt at $2.8 billion. (This is from PCL's 2011 10K). Add these together and you get a value of $9.4 billion. If we take my estimated timberland value of $8.0 billion and my estimated value of the manufacturing mill at $0.3 billion and real estate value over timberland value of $0.9 billion we get $9.2 billion. Hence, by my estimates Plum Creek seems fairly valued. Plum Creeks' debt is about 35% of its timberland value, well within my safe range of 30% to 50%.
In terms of market cap and debt, Potlatch has a market cap of about $1.2 billion with long-term debt at $.3 billion. (This is from PCH's 2011 10K). Add these together and you get a value of $1.5 billion. If we take my estimated timberland value of $1.2 billion and my estimated value of the manufacturing mill at $0.25 billion and real estate value over timberland value of $0.15 billion we get $1.6 billion. Hence, by my estimates Potlatch seems slightly under-valued, but only slightly (within my margin of error). Potlatch's' debt is about 27% of its timberland value, again well within my safe range.
Timber harvest for Plum Creek was at reduced levels in 2011 because of weak markets and low prices. Potlatch harvested near normal levels in 2011 but plans to reduce harvest in 2012. In addition, harvest mix for 2011 was quite different for the two companies. Plum Creek harvested a higher percentage of pulpwood in 2011 than did Potlatch.
2011 Timber Harvest
I find it helpful to look at some metrics on a per acre basis. This is where some of the similarities come in. Both look very similar on a per acre basis on several metrics. Let's look at some of the main differences. Potlatch has a much larger exposure to manufacturing on a per acre basis. However, remember that Plum Creek only ran at 62% capacity in 2011. Timberland revenue/acre differences are most likely due to the two factors. First, Plum Creek sells more timber as stumpage than does Potlatch. There are no logging and hauling cost when timber is sold as stumpage. The higher costs per acre are most likely the offset of this. Second is the mix difference noted above. Plum Creek is carrying more debt per acre than Potlatch. The cash on hand per acre for Potlatch is more disturbing to me, however, I assume this is easily covered by revolving credit.
Per Acre Values (2011 10Ks)
Real Estate Revenues/Acre
Cash on Hand /Acre
Timber, real estate, and lumber have been in the doldrums for the last four years or so. Timber REITs are struggling but are managing. There are no signs that I see that indicate things will get any worse. In fact indicators are pointing to slow but steady gains going forward. Potlatch did cut its dividend the fourth quarter of 2011 from $.51 to $.31 per quarter. This was a cut from about 6% to 4%. The Plum Creek dividend is also about 4%. In my opinion this made total sense as Potlatch's dividend could not be sustained at 6% with today's low cash flows. As things improve cash flow should recover nicely for both companies.
One reason to own Timber REITs is for the hard assets they own. My analysis above shows that asset values are in line with market cap. Another reason is for the dividends. Although Potlatch recently cut dividends they are still at a respectful 4%. Although both look a little shaky right now, due to debt, low earnings and cash flow, I believe both look good going forward as timber, real estate and lumber improve.
So which is the better Timber REIT to own? I can't help but like Plum Creek for its regional diversity, better real estate, and exposure to Asian markets. On the other hand, Potlatch does not look that bad when compared with some of the same per acre metrics as Plum Creek, and its lumber business should look pretty good when housing recovers. So for the present time I'll continue to own both.
* I recently listened to the Q1 conference calls for both Potlatch and Plum Creek. I heard nothing to be too concerned about. Both see 2012 as being similar to 2011 with a slight pickup the second half of the year. China export markets are slow right now but are expected to improve. Slight improvements in housing starts and hence lumber and log prices are forecast in the second half. Real estate should be about the same.