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.
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