Timberland

Timber REITs and Joint Ventures

Timber REITs and Joint Ventures

How can timber REITs leverage their available capital, given the fact that they must distribute, and cannot retain, earnings? Over time, timberland-owning REITs have identified and employed multiple investment strategies to leverage available capital. These strategies include:

  • “Recycling capital” through programs such as 1031 like-kind exchanges;
  • Buying back company shares through repurchasing programs; and
  • Organizing joint ventures (JVs) to share risk, access capital  and leverage expertise.

In the end, each of these represent approaches to enhancing returns from the same pool of internal capital and assets. In this post, I focus on JVs related to timberland.

Timber REITs, like their vertically-integrated forest industry predecessors and cousins, have structured JVs to invest in manufacturing assets and explore emerging bioenergy markets (for example, consider Weyerhaeuser’s JV with Chevron). However, unlike REITs that focus on commercial real estate, JVs specific to timberland assets remain relatively uncommon. One notable exception is Plum Creek’s (PCL) “Timberland Venture” with The Campbell Group (TCG), a timberland investment management organization (TIMO).

In October, 2008, PCL contributed 454,000 acres of Southern timberlands and TCG contributed $783 million in cash to Southern Diversified Timber, LLC (“the Timberland Venture”). In exchange, PCL received a $705 million preferred interest and a 9% common interest, while TCG received 91% of the Timberland Venture’s common interest.

PCL’s preferred interest entitles it to a cumulative preferred return equal to 7.875% per annum. TCG manages the JV’s timberlands, which are located in six states: Oklahoma, Arkansas, Mississippi, North Carolina, South Carolina and Georgia.

For PCL, the JV transaction was both earnings and cash flow accretive, while allowing the firm to maintain an interest in potential upside. Separately, PCL received cash of $783 million through a loan from the JV. The transaction, structured as such, provided certain tax advantages relative to standard divestiture, and supplied PCL with capital that was used, in part, to retire debt and repurchase stock.

This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of LANDTHINK. Use of this content without permission is a violation of federal copyright law. The articles, posts, comments, opinions and information provided by LANDTHINK are for informational and research purposes only and DOES NOT substitute or coincide with the advice of an attorney, accountant, real estate broker or any other licensed real estate professional. LANDTHINK strongly advises visitors and readers to seek their own professional guidance and advice related to buying, investing in or selling real estate.

About the author

Brooks Mendell, Ph.D.

Brooks Mendell, Ph.D. is President and Founder of Forisk Consulting, a forest industry, timber REIT, bioenergy and timber market research firm. Dr. Mendell has over fifteen years of operating, research, and consulting experience in forest business and finance. Mendell has published over sixty articles and two books on topics related to timber and timberland REITs and markets, forest business management and operations, and communication skills.

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