This is the fourth in a series of excerpts from Forisk’s Q1 2017 forest industry analysis and timber price forecasts for North America.
All equity indices tracked by Forisk – timberland and otherwise – produced positive returns in 2016; only private timberlands generated positive returns for each of the past five years. Figure 1 compares 2012 through 2016 annual performance of indices tracking the S&P 500, all publicly traded real estate investment trusts (NAREIT), private timberlands (NCREIF), and public timber REITs (FTR). Overall, public timber REITs returned 5% as a group in 2016 and 6% since the U.S. Elections in November 2016. And for 2016 and thru January 2017, there have been 9.3 million acres of announced, completed U.S. timberland transactions and another 2.3 million acres of pending transactions.
Figure 1: Timber Investment Indices Relative to Other Assets, 2012-2016
The U.S. Presidential Election has generated ongoing questions and speculation regarding implications for timberland investors and forest industry firms. In response to these questions, Forisk focuses on what we can measure: the performance of public timberland-owning REITs and other public timberland owners not structured as REITs (Pope Resources and Deltic) relative to key benchmarks since the Election in November 2016. Through January 2017, all four public timber REITs trailed the S&P 500, while three of four individual firms had positive returns. Deltic Timber (DEL) and Pope Resources (POPE) leaped 33% and 26% respectively in the three months since the Election.
Forisk Flashback: research we completed over ten years ago and published in 2008 analyzed stock market responses to four announcements of forest industry corporations converting their structures from traditional C-corporations to real estate investment trusts (REITs). These announcements were Plum Creek in 1998, Rayonier in 2003, Potlatch in 2005, and Longview Fiber in 2005. All four announcements were associated with significant abnormal increases in the stock prices of the four firms on the day before, day of, or day after each firm’s announced REIT conversion (Figure 2). This “flashback” provides an opportunity to recap the reasons why firms find the REIT structure attractive for real estate generally and timberlands specifically.
Figure 2: Cumulative Returns by Day for Firms Becoming Public Timber REITs
Link to the original article here.
Two of the most attractive REIT characteristics are their liquidity and tax efficiency. For publicly-traded stocks, shares in these firms are easily bought and sold on a daily basis, while direct buying and selling of timberlands typically require longer time frames, higher administrative costs and more starting capital. Also, as REITs, these firms effectively pay no corporate income tax on earnings from timber activities, with taxes paid by shareholders on dividends. This provides REITs with a clear advantage over C-corporations while mirroring the tax efficiency of ownership structures used by family and individual investors.
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