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| Right time to buy stocks of timber companies |
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2009/8/24
Ten years ago, it would be hard to imagine a more stable investment than timber, or those Real Estate Investment Trusts (REITs) that bought millions of acres of harvestable trees.
Here are just a few reasons why the 1990s were an ideal period to have timber as an investment:
• The housing market was solid, with growth beginning to surge in major cities.
• Much of the world was still pre-digital, and businesses still relied heavily on shuffling paper (which of course comes from trees).
• Electronic news was still a novelty; magazines and newspapers were still going strong.
What a difference a decade makes:
• Housing is in the dumps, with no clear sign of a resurgence on the horizon.
• Business has gone digital, shunning paper wherever possible.
• The world is increasingly getting its news electronically, as evidenced by the number of newspapers that have gone out of business.
The shift away from paper has resulted in an almost complete lack of demand for wood or wood pulp. As a result, prices for paper and lumber have hit multi-year lows. Lacking any catalyst for change, it's the perfect setup for an extremely overvalued scenario in the timber industry.
Timber REITs Heading Down The Commercial Real Estate Road
In the mid 1990s, timberland prices hovered around the $1,500 to $2,000 per acre range. But today, a more realistic valuation is less than half that. And therein lies the problem: Many of the timber REITs haven't devalued their land.
If that sounds a little like the overvalued commercial real estate mess we're in right now, it's no accident. The biggest problem? REITs are managed by human beings.
Just like their counterparts in the commercial real estate market have done, timber REIT managers have adopted a "wait it out" strategy, in hope that timber values - and by extension the land it's growing on - will suddenly reverse. Don't bet on it.
And unfortunately for the REITs and their shareholders, hoping and praying for a resurgence in the housing market isn't going to work. What's more, it's going to get even worse...
These Three Timber Companies Could Be Set To Tumble
Over the next few years, timber prices could drop another 50% in the next few years, as it could take the anemic housing market - the only possible timber demand catalyst - as long as five years to fully recover.
However, most timber REITs haven't taken a big hit to their balance sheets. Not yet anyway. But that's all about to change.
As a result of the aforementioned head-in-the-sand mentality, Plum Creek Timber (NYSE: PCL), Potlatch (NYSE: PCH) and Weyerhaeuser (NYSE: WY) are all on the verge of imploding. Weyerhaeuser isn't a REIT, but it suffers from the same issues.
At a minimum, all are going to have to significantly cut their dividends, which aren't based on anything remotely resembling ongoing operations. Nearly all their 2009 income (and I use that term loosely) - will come from land sales.
That's a problem, too - and not just because of depressed prices for timber. Many REIT managers hope they'll be able to sell land to real estate developers to generate cash.
Huh? You've got to be kidding: With the current depressed state of the housing market, developers aren't exactly chomping at the bit to buy more land. After all, many of them are still writing down the value of land they already own.
This Timber REIT Is Well-Diversified... And Bucking The Trend
While it's clear that REITs are going to take a big hit to their balance sheets before the dust settles, there are others that will likely be the biggest losers of all.
You see, over the past few decades, university endowments, pension funds and Timber Investment Management Organizations (TIMOs as they're referred to) plowed an estimated $40 billion into timberland.
TIMOs are privately run organizations that hold and manage timber on behalf of institutional investors. And here's the big problem: The funds that the TIMOs manage have predetermined liquidation dates - many of which are coming due in the next several years.
When that happens, timber industry land prices could fall even further.
One notable exception to the REITs woes is Rayonier (NYSE: RYN). It has a much more diversified stable of holdings; namely its performance fibers division, which makes plastics and packaging used LCD screens, photo film, cosmetics, detergents, and many other products.
The bottom line is that investors who own timber REITs - with the exception of Rayonier - may want to consider lightening their position or eliminating it. In fact, you could consider establishing a short position in Plum Creek, Potlatch, or Weyerhaeuser - the three timber REIT stocks most likely to fall the hardest over the next 12-18 months.
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