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Valuing Timber REITs: Net Asset Values (NAV) versus Dividend Yields

This is the third in a series related to Forisk’s Q3 2018 forest industry analysis and timber price forecasts for the United States and Canada.

When comparing investments into traded REITs versus actual real estate assets – whether land or commercial real estate or bowling alleys – we improve our understanding by evaluating absolute and relative metrics. This remains especially true for the range of timberland investment vehicles, including public timber REITs.

We have a specialized interest in these firms. In 2008, Forisk registered the FTR (“footer”) Index to track the timber REIT sector and provide a benchmark for comparative analysis. Each week, we publish a one-page FTR Index Summary that compares the FTR Index relative to other benchmarks.  So, when late at night on July 17th, a client forwarded a stock valuation from BMO Capital Markets with a downgrade of Rayonier, a public timber REIT, I read it with interest and quote a key conclusion: “RYN is trading ~8% above our estimate of net asset value (NAV)…

[For reference, over the past twelve months, Rayonier (RYN), which currently comprises 14% of the timber REIT sector, gained 35.9%.]

Our internal research includes periodic estimates of firm-by-firm NAVs to benchmark returns relative to peers and alternate timberland investment vehicles. One lesson has been the importance of dividend yields to investors. As Friday July 13th, timber REIT dividend yields averaged 3.41%, ranging from Rayonier’s 2.74% to CatchMark Timber Trust’s 4.33%. The 30-year U.S. Treasury yielded 2.96% that day, for comparison.

How did the market respond to the RYN analysis, and what does this tell us about investor sentiment? The figure below summarizes the daily share price performance for CatchMark (CTT), PotlatchDeltic (PCH), Rayonier (RYN) and Weyerhaeuser (WY) relative to the S&P 500 during the week of July 16th. BMO published the downgrade after trading hours on July 17th, so we see the market response on July 18thand 19th. The drop appears sector-wide and sector specific, as the S&P held steady.

Notably, all four timber REITs declined on July 18th, and all four increased on July 19th, as investors took the dip, overall, as a buying opportunity. Neither investors nor analysts challenge the ability of core timber REIT operations to generate cash flows.  For the four-day period, two firms closed higher and two firms closed lower than where they opened the week. And RYN’s closing price put its yield at 2.93%, directly in-line with U.S. Treasuries.

To subscribe to the free weekly FTR Index Summary and to obtain historical FTR Index data in an Excel format, please contact Heather Clark, hclark@forisk.com

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