Recent Performance Review For Timber REITs And ETFs

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

Interest in timber land has increased over the last few years, though it did bottom out along with the rest of the market in late 2008 and early 2009. Demand for wood for use in construction has decreased dramatically, corresponding to the decrease in housing starts. Additionally, paper use, though still ubiquitous in our society, is expected to continue to decrease in the coming years due to digitization and other technological innovations.

Nonetheless, many individuals believe that now is a good time to allocate into timber. Due to the reduced demand for timber, prices are depressed. As a result, most timber growers are allowing their trees to grow. They will be left with more trees and an older stock, where those older trees may produce superior, high priced wood product at a later date. Moreover, timber product prices have a history of increasing at a rate that outpaces inflation.

Currently, some of the largest owners of timber acreage within the United States are housed within 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 shed non-core businesses and simply allow the timber to grow until demand and prices reach desirable levels.

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-month, 6-month and 2011-to-date 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.

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Over the last three months, RYN and WY have performed the best of the group, both appreciating by around a quarter. Much of timber's recent strength appears tied to positive information coming out of home-builders, many of which appreciated greatly during Q4 of 2011.

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 capital gains, and not at the corporate dividend or ordinary income tax rates.

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.

Disclosure: I am long WY.

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.