Although most experts agree that the housing market is still a ways away from recovery, it is not unreasonable to believe that a bottom has been reached or is at least on the horizon. Assuming this to be the case, lumber and real estate may very well be an interesting commodity to explore.
A Unique Asset
When we think about the lumber or wood used in the housing market and other industries, one must really think about LAND. Land brings to mind real estate and the special tax treatment of REITs - Real Estate Investment Trusts. Most REITs involve holdings in commercial property - office buildings and shopping centers, or residential properties - apartments, condos, hotels, etc., but a unique and small group of REITs hold interests in raw land and timber.
While there are a number of land related investment choices including Louisiana Pacific LPX, Weyerhaeuser WY, and Pope Resources POPE, to name a few, perhaps the most well known timber REIT is Plum Creek Timber PCL. Plum Creek is the largest landowner in the United States, currently holding 6,600,000 acres in 19 states. Primarily concentrated in the Pacific Northwest and the Southeast United States, Plum Creek is a sophisticated grower and manager of a variety of species earmarked for particular needs of the building industry.
An interesting question relates to how Plum Creek should be valued. The traditional valuation based on a P/E of 33 might seem high, at least as compared to the average of the S&P 500. But what about a value based on the underlying land itself? Considering a current market cap of 6.1 billion with 6.6 million acres, that works out to an attributable value of a mere $925.00 per acre. No doubt those millions of acres consist of a wide variety of uses and some worth much more than $925 and perhaps some worth less. For those of you city dwellers that are not routinely "surveying the back 40," just remember that an acre is 43,560 square feet - (a hell of a flat in Manhattan). Seems like quite a bit of space, and remember, you're not paying $925 for a month's rent, you're buying that acre for a one time payment of $925.
Furthermore, for that same $925 an acre, you're also getting a considerable amount of timber, as well as a highly sophisticated group of experts managing that land. Pretty good deal.
FINANCIAL STRUCTURE AND TAXES
In order the be classified as a REIT the corporation must distribute 90% of it's taxable earnings on an annual basis. Ordinarily these distributions are paid in dividends.
When REITs distribute annual earnings to taxpayers, these earnings are taxable to the shareholders as dividend investment income. This dividend income is taxable as ordinary income except when classified as "qualified." The IRS requirement is generally met by shareholders who have owned the REIT for a minimum of 60 days before or after the dividend was declared. When REIT dividends are considered qualified, they are taxed at long-term capital gain rates, which are significantly less than ordinary income tax rates.
Plum Creek currently pays a dividend of $1.68 per share which translates to a yield of 4.4% on a share price of $38.00.
At $925/acre with a 4.4% dividend and a housing market that is at bottom and most likely can't get any worse, Plum Creek is an interesting play for income, value and diversification.