This is the second in a series related to timberland investments. The first addressed benchmarking private timberland investments.
Real estate investment trusts (REITs) own and manage income producing real estate such as buildings, warehouses, rental properties, and, since 1999, timberlands. Buying shares of timberland-owning REITs (timber REITs) provides one avenue for adding exposure to timber, wood products and housing to an investment portfolio. The timber REITs include:
- CatchMark Timber (symbol: CTT);
- Plum Creek Timber (symbol: PCL):
- Potlatch (symbol: PCH);
- Rayonier (symbol: RYN); and
- Weyerhaeuser (symbol: WY).
Investors value public timber REITs when deciding whether or not to accumulate or dispose of shares. Successful timber REIT investments result from buying (and holding) timber REIT stocks at attractive prices. The key challenges for REIT investment analysis are (1) having a method for assessing when timber REITs are over or underpriced relative to firm value and (2) having a method for assessing when timber REITs as a sector are over or underpriced relative to other REITs or the overall stock market.
Stock price reflects value in the eyes (and spreadsheet) of the investor. Does the firm’s share price imply that it’s under or over-valued relative to the value of its assets and future prospects? As perceived value rises and falls, so goes the share price. When valuing timberlands and timberland-owning REITs, estimating value is a function of estimating and, ultimately, discounting cash flows. If a timber REIT exhibits strengthened cash flows over time, this leads to expectations of higher distributions, high values and higher share prices.
These firms own both timberland and manufacturing assets. While EBITDA multiples and liquidation analysis can be used for both, we employ several approaches for estimating and testing timberland values for assessing net asset values (NAVs). These include:
- Implied market values: subtracting values for all non-timber assets from firm market capitalization and dividing this by the acres owned provides a starting point for how public markets value owned timberlands;
- Regional index values: the National Council for Real Estate Investment Fiduciaries (NCREIF) publishes a quarterly index of private, institutional timberland investments by region in the U.S. Applying the values from these indices to timber REIT acres by region provides another estimate for value. In cases, state-level data is available as well for this approach;
- Localized asset analysis: this hybrid sum-of-parts approach includes (1) segregating timberlands, at a minimum, at the state-level or, preferably, into market-relevant units; (2) modifying baseline timberland values by applying, when available, market-specific comparables; and (3) adjusting these values based on market-specific recovery rates for wood demand and timber prices.
Ultimately, investors attempt to identify timber REITs that are trading below estimated NAVs. The divergence between price and NAV could be a function of a lack of understanding of the properties, poor current market conditions or unattractive balance sheets. This is a key theme with respect to timber, as the longer-term prospects of a given firm are tied to longer-term cycles in housing, demographics and consumer goods.
For firm-level analysis, mitigate where possible the danger of using averages for valuations and pricing forecasts. If we don’t take a position on the local, REIT-specific markets, we are not accounting for or distinguishing a host of fundamental local land and wood demand issues, values, and risks.
Forisk will detail timber REIT valuation approaches as part of “Investing in Timberland and Timber REITs” in Atlanta on October 8h, a one-day course that details the operations, performance, risks and costs of available timberland investment vehicles.