Timber REITs - Investing in Timber without Owning an Acre
Timber REITs: Investing in Timber without Owning an Acre
Real Estate Investment Trusts, or REITs, are a group form of real estate investment that own and manage commercial or other income-producing properties such as shopping centers, residential rental real estate, office buildings, warehouses, and now, timberland. In the 20th century, industrial ownership of timber-producing forest lands has ranged between 9% and 17% of all timberlands in the United States. Industrial ownership in the past has implied that a tract of timberland was owned by a large forest products supplier or manufacturer and intensively managed for wood volume production. Since about 1999, however, there has been a dramatic change in thinking about the best way to own and manage these lands. The previously held belief can best be summarized as "the more, the better" - it was thought that holding large tracts of timberland was the only way for industrial owners to remain competitive in an increasingly global marketplace. Recent trends have shown this idea to be false, and within the past 10 years vast acreages of timberlands have been divested. As an example, between 2000 and 2004 more than 23 million acres of timberland changed hands.
As a result of these divestments, many large forest products companies are no longer majority owners of large tracts of timberland. Some of these well-known names include Boise Cascade, Crown Zellerbach, Georgia-Pacific, International Paper, Scott Paper, and Stone Container Corporation. At the beginning of this trend, large investment organizations known as TIMO's (timberland investment management organizations) were formed to purchase large portions of the divested acreage. TIMO's generally take the form of C-corporations, the traditional way that large businesses and investment groups are organized. It soon became apparent, however, that TIMO's structured as C-corporations (C-corps) were at a direct tax disadvantage to other forms of land and business ownership, such as limited liability corporations (LLCs), S-corporations (S-corps), and especially real estate investment trusts (REITs).
REITs must meet certain requirements in order to be considered as such by the IRS, including having shares in the organization that are fully transferable, having at least 100 shareholders, and paying those shareholders a minimum of 90% of taxable income as dividends. The tax difference between a traditional C-corp and a REIT is that C-corps are basically subject to double taxation, paying federal corporate income taxes as well as federal and state income taxes paid by shareholders, with both corporate and personal taxes paid on the same income. As long as they continue to meet the requirements, however, REITs are permitted to deduct payments made to shareholders as dividends from their corporate income tax, which usually means they pay no corporate income tax at all. REIT shareholders must still pay income taxes on dividends and capital gains.
Since 1999, four large forest product corporations have restructured as REITs, in response to economic pressures and shareholder insistence that timberlands have historically been an undervalued and therefore under-performing corporate asset. These companies are Longview Fiber, with timberland in Washington and Oregon; Plum Creek, with holdings in 18 states; Potlatch, with land in Arkansas, Idaho, Minnesota, and Oregon, and Rayonier, which has holdings throughout the United States. Together, these REITs own and manage nearly 12.5 million acres of timberland in the United States.
Recent changes to the four timber REITs include Brookfield Asset Management's (BAM) purchase of Longview Fiber in 2007, which took the publicly-traded REIT private; Longview Fiber no longer functions as a REIT but as a wholly owned subsidiary of BAM. Another recent development, finalized just last week, is the joint venture between Plum Creek and The Campbell Group LLC, which allowed Plum Creek to capture the value of over 450,000 acres of timberland in Arkansas, Georgia, Mississippi, North Carolina, Oklahoma, and South Carolina. This transaction added to the value, earnings, and cash flow of Plum Creek and did not affect its status as a timberland REIT. The business press has also been reporting for the past two years that Weyerhaeuser is considering restructuring itself as a REIT, but several obstacles remain, including lower-than-projected revenues, a large amount of debt, the question of how to divest itself of its milling and manufacturing facilities, and the ability to prove to the IRS that the restructuring would be for legitimate business purposes other than mere tax avoidance.
The restructuring of former forest products firms into REITs opens the door to small investors wishing to invest in timber, who generally do not have the large amounts of capital required to invest either directly in timberlands or through a TIMO. The idea is relatively simple: since REITs are publicly traded, investors now have the opportunity to purchase stocks in companies that focus on growing and selling timber. While some forest product companies have been publicly traded for years, timber REITs offer distinct financial and tax advantages over these firms, many of which have struggled with massive debts and poor cash flow during the past few decades. One caveat is that timber REITs often generate revenue primarily through milling and manufacturing rather than direct sales of timber, and so are better suited to those seeking forest products investments rather than a return on timber sales alone.
The announcements of the conversion of four major timber companies to timber REITs were accompanied by significant increases in the stock price of each. Overall investor response to timberlands structured as REITs has been very positive, with many investors expressing a preference for timber REITs over traditional timber or forest product C-corps. This makes sense given that these types of investments are both highly liquid and tax-efficient. Timber REIT investors are also more likely to realize higher returns due to greater access to revenue generated from managing timberland, in combination with lower overall taxes.
In the past, forest products corporations in the United States that owned vast amounts of timberlands had a direct stake in the ecological well-being of these areas. After all, an unhealthy forest produces low volumes of poor-quality wood and other products. Timber REITs, therefore, may offer positive outcomes not only financially, but ecologically as well, because it is more likely that they will preserve timberlands in a healthy, productive state that not only generates profits from the trees that are grown there, but provides desirable and necessary features such as wildlife habitat. Over the past 15 to 20 years, conservation groups, hunting and outdoor recreation organizations, land managers, and forest scientists have decried the loss of responsible stewardship over vast amounts of productive timberland to planned communities, ranchettes, shopping centers, or other development as forest products firms turn to land divestment as they seek to unlock the full value of their land assets.
This does not mean that timberlands owned by timber REITs will not be developed for residential or commercial use. After all, the RE in REIT stands for real estate, and it is naive to think that these companies will be able to provide returns for investors in contemporary markets from timber management alone. As one might expect, development of timberland by REITs is not without its controversies. For example, county officials and conservation groups in Montana have recently voiced concern over plans by Plum Creek to convert some of its private inholdings in national forests from timberland to residential subdivisions. Whatever the outcome of this case, development of private timberlands by REITs is almost sure to continue: in 2007, Plum Creek earned approximately 25% of its total revenues through direct sales or development of timberlands.
Today's economic reality is that many timberlands will eventually be sold for development. Some former timber companies that did not restructure as REITs have sold their timber holdings outright to developers. Given the fact that it has become increasingly difficult to make a profit on logging or forest products manufacturing, timber REITs can be viewed as at least slowing the negative impacts of development on the environment, because they are still holding on to millions of acres of timber which are unlikely to be developed, at least in the near future. Former timber companies that have restructured as REITs are still largely acting as responsible stewards of these timberlands. Timber REITs also allow small investors the chance to earn returns in this economic sector, which was previously difficult if not impossible. In addition, the tax structure of REITs offers direct advantages to shareholders over other organizational options. For these reasons, timber REITs are seen by many as a generally positive trend, both ecologically and financially.
For our readers who would like to check out the timber REITs, we have included their ticker symbols and their Yahoo Finance company profile web addresses below:
Plum Creek Timber Co. Inc., ticker PCL,
Potlatch Corp., ticker PCH,
Rayonier Inc., ticker RYN,
The following web pages offer more information on the topic of timber REITs, from a variety of viewpoints:
http://www.forisk.com/UserFiles/File/Qtr%2001Q07news.pdf ("Introduction to Timber REITs") - this is a PDF file, Adobe Reader required to open
http://thetimberlandblog.blogspot.com/2007/05/timos-and-reits.html ("TIMOs and REITs")
http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20080827006006&newsLang=en ("Plum Creek Timber Company, Inc. Captures the Value of 454,000 Acres of Southern Timberland")
http://seattletimes.nwsource.com/html/businesstechnology/2004449276_weyco31.html ("No Weyerhaeuser REIT Soon")
http://www.hcn.org/issues/372/17746 ("Easing into Development")
Added: Wed Sep 17 2008