I have written in the past of the four timber REITs, Plum Creek Timber Co. (PCL), Potlatch Corp. (PCH), Rayonier (RYN), and Weyerhaueser (WY), tREITs to coin a phrase, as well as Pope Resources (POPE), an MLP that is very similar to the tREITs. I thought an eight month update might be in order as the third quarter earnings season approaches. As of August 31 2012, the S&P 500 total return was up about 14.1% year to date. This includes 12.5% in capital gains and 1.6% in dividends. This was calculated using the SPDR S&P 500 ETF. The tREITs, on an un-weighted composite basis, are up 20.2%. This includes a 17.3% capital gain and a 2.9% dividend.
As you can see from the table below, the total returns vary from a low of 12.5% for Rayonier to a high of 35.8% for Weyerhaeuser.
Year to date Total Returns
tREIT plus One
From this it certainly looks like the timber business is booming. However, this is not necessarily the case. Demand for logs from China, which has been a bright spot in the Pacific Northwest, has been down since 4th quarter 2011 and has not shown signs of rebounding yet. Most experts do believe that strong demand from China will return eventually. Most of the tREITs have shown decreased revenues from timber operations for the 1st half of 2012. This is due to continuing low sawlog prices in the South and reduced harvesting. The one exception was Plum Creek, which increased harvest levels.
Real Estate was up for Weyerhaeuser due to its homebuilding business. This is a good early sign of a housing recovery. Another good sign is that the lumber businesses of all four tREITs were up from 14% to 28% year to date. Rayonier's performance fibers business was up slightly due to higher prices, while Weyerhaeuser's fluff pulp business was down 10% for the year.
Total revenues were up or flat across the board while net income was down for Plum Creek, Potlatch, and Pope and up for Rayonier and Weyerhaeuser. Cash flow from operations covered the dividend for Rayonier, Weyerhaeuser, and Pope but not for Plum Creek and Potlatch. My take is that the tREITs plus one are still treading water but seeing early signs of a housing recovery in their lumber and real estate businesses. Log prices generally lag lumber prices which are slowly going up.
So, why the great year to date total returns? I believe it is due to two factors. First, some investors are already pricing in a housing recovery, and secondly, in times like these, investors like to own hard assets. Even with several years of low log prices, timberland values have not fallen. A good example of this is a recent timberland sale of 1.9 million acres of timberland in Louisiana, Oregon, Idaho, Washington, and Minnesota from Forest Capital Partners to John Hancock and Molpus, all TIMOs (Timberland Investment Management Organizations). The unannounced price is speculated to be between $2.0 and $2.5 billion. By my estimate, this is at pre-crash timberland values to as much as a 10% premium.
I'm definitely still a fan of the tREITs plus one. I believe the dividends are safe and all will see a considerable bounce back if and when housing recovers and log demand from China resumes.