With uncertainty in Europe, tight credit markets and falling projections for demand for commercial office space and residential construction, The Wall Street Journal published a profile of the REIT sector that summarized the “dethroning” of REITs as a preferred equity category by investors (“Investors check out of real-estate stocks”, October 5, 2011). Of note, REITs that manage hotels and industrial space fell 32% and 24% during the third quarter of 2011. How did this sector-wide “slap down” affect timberland-owning REITs?
Timber REITs Fall with the Sector
While publicly-traded timberland-owning REITs, and REITs generally, outperformed the S&P 500 over 10-year, 3-year and 1-year benchmarks (see table), the timber REIT sector took a shellacking during the quarter. The timber REIT sector, as measured by the FTR (Forisk Timber REIT) Index, returned -20.84% for the quarter, and sits at -8.27% year-to-date.
Individually, the four publicly-traded timber REITs produced varying returns for the quarter, with Weyerhaeuser leading the way down, and Potlatch holding its own on a relative basis:
- Potlatch (PCH): -10.63%
- Plum Creek (PCL): -14.38%
- Rayonier (RYN): -15.55% (split adjusted)
- Weyerhaeuser (WY): -28.87%
Weyerhaeuser drove timber REIT returns as it comprises 44% of the market capitalization weighted FTR Index. Mathematically, the drop in share prices proved advantageous to investors shopping for dividend yields as Weyerhaeuser’s yield approached, and temporarily exceeded, 4%. Yields for Potlatch continue to exceed 6%, while Plum Creek and Rayonier hover between 4 to 5%. The question becomes the sustainability of dividend levels given the outlook on core revenue generators for these firms. Our research targets the ability of current cash generators by firm to satisfy cash obligations (i.e. debt service and dividends) in the near and mid-term.
Looking forward, the sector suffers from downward revisions associated with housing demand and construction in the United States, and the associated declining need for softwood lumber manufactured from the pine, Douglas-fir and hemlock trees grown by the timber REITs. Alternately, the Performance Fibers and log export businesses have provided timely and opportunistic lifts to revenues.
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