Historically, timber land has appreciated at a rate that outpaces inflation. This has made many who expect a coming bout of inflation to invest in timber acreage. Lately, though, just like most other commodities and natural resources and, timber prices have come under pressure.
In 2011, timber prices increased, but they did so from a generally low price point. Prior due that, timber prices became depressed because demand for wood in new construction decreased so substantially after the real estate market imploded. This reduced demand for timber has allowed several timber growers to grow their trees more so than they would normally prefer. Many have argued that housing has already bottomed, which could bode well for the timber business and potential future price increases.
Many believe that timber real estate investment trusts are one of the best ways to get exposure to timber. Under the current tax laws, REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Timber REIT dividends are currently taxed as long-term capital gains, and not at the corporate dividend or ordinary income tax rates. This differs from most REIT dividends, which are generally taxed at the significantly higher income-tax rate. This also makes timber REIT dividends different than most REIT, bond and traditional equity payouts, and makes timber REITs a rather unique asset class, though these differences could narrow under future tax schemes
Below are recent performance rates for four timber REITs that are publicly-traded in the United States, listed in alphabetical order: Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and Weyerhaeuser (WY). I have provided their present yields, as well as their one-month, three-month and 2012-to-date share performance rates. I have also included the Guggenheim Timber ETF (CUT), which holds large positions in timber REITs as well as other business types. Beyond holding timber REITs, Guggenheim's Timber ETF holds significant positions in companies that produce and sell products made from trees, such as paper and packaging.
The broader market, as expressed by either the Dow Jones Industrial Average or S&P 500, has outperformed the average performance of this group recently. There was some performance divergence within this group of timber investments. PCH and RYN had noticeably underperformed PCL, WY and CUT earlier in the year, with the latter three moving more in line with the broader market, but the gap between these companies has narrowed over the last two months. In the near term, if commodity prices continue to face pressure, as they have for the last several months, these REITs will likely continue to decline.
See a 3-month performance comparison chart for the above-listed timber REITs and timber ETF:
Some of the largest owners of timber acreage within the United States are these above-listed real estate investment trusts. The lack of demand for timber products through the last few years made many of these REITs structure themselves to minimize their expenditures and overhead, including divesting some basic materials and consumer goods segments. The resulting companies are less diversified and considerably more focused upon timber production, with more direct sensitivity to timber price changes.
Disclosure: I am long WY.