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Public Timber REITs Report Mixed Results in First Quarter of 2011

Between April 25th and April 29th, all four public timberland-owning REITs reported their Q1 2011 financial performance.  Three of the four firms reported earnings per share below Wall Street consensus expectations:

Overall, results continue to reflect the US housing downturn and, on a firm-by-firm basis, special items and substantive performance by non-timber business segments.  Neena Mishra, Director of Equity Research, further summarizes results by firm:

On April 29, Weyerhaeuser (WY) reported Q1 2011 net earnings at $99 million or $0.18 per diluted share. Excluding the after-tax gain on the sale of non-strategic timberlands, we arrive at operating earnings of $3 million or $0.00 per share, compared with a $0.15 per share consensus estimate. Timberland earnings grew $33 million with higher log export demand in the West. While Japan remains WY’s largest export market (70% of export volume); China’s share of WY’s exports rose from 7% to 24% over the past year.  Wood Products’ loss shrunk from $85 million in Q4 2010 to $36 million, but Cellulose Fibers reported lower earnings due to higher costs and lower productivity. Real Estate lost $1 million, versus earnings of $33 million last quarter, as single-family home sales declined 40%.

On April 25, Plum Creek (PCL) reported Q1 2011 earnings at $0.23 per share, one cent short of consensus estimates. Northern Resources reported a $7 million profit, $3 million higher than last quarter, driven by higher sawlog prices in the Northwest, and seasonally higher hardwood harvest volumes in the Northeast. Southern Resources reported operating profits of $19 million, down $9 million from Q4, due to lower harvest volumes and sawlog prices. Real Estate earned $38 million and Manufacturing earned $4 million. WY expects harvest volumes of 15 to 16 million tons in 2011. Management maintained earnings expectation for FY 2011 at $1.25 to $1.45 per share.

On April 26, Rayonier (RYN) reported Q1 2011 net income at $58 million, or $0.70 per share, 12 cents ahead of consensus estimates, primarily driven by strong global demand in Performance Fibers. Resource operating income of $11 million was $3 million higher than the prior year quarter as softwood prices in the North and New Zealand increased due to strong Asian demand. Northern softwood log prices rose 45% from the prior year period, more than offsetting lower sales in the Atlantic.  Real Estate operating income of $7 million was $10 million lower, mainly due to reduced non-strategic timberland sales. Performance Fibers operating income of $76 million was $31 million higher due to increased volumes and prices. RYN now expects FY 2011 earnings at $2.85 to $3.10 per share, up from $2.50 to $2.70 per share. Harvest volumes are expected to increase about 33% in the North, while Atlantic and Gulf Region volumes are expected to remain flat, over the next 10-year period.

Potlatch (PCH) also reported its Q1 2011 results on April 26. Earnings came in at $7.7 million, or $0.19 per diluted share. Excluding special items, we arrive at operating earnings of $ 0.28 per share, two cents short of the consensus. Northern Resource reported improved log volumes and pricing by 12% and 16%, respectively; while pulpwood volumes declined 14%, pricing rose 4%. Southern Resource log volumes and pricing improved 4% and 1%, respectively, while pulpwood volumes were up 4% year-over-year, prices were down 10%. Real Estate reported revenues of $1 million and Wood Products had an operating income of $2.9 million. RYN maintained its harvest outlook of 4.2 million tons for FY 2011.

Looking forward, recently released housing data points to weaker market conditions than previously expected. Higher fuel prices will also impact results this year. Increased Chinese demand for wood continues to be a big story: though relatively small based on volumes, it has led to rising log prices in the West for both export and domestic logs. Increased demand for logs and wood products from Japan are expected in due course. We remain positive on the longer term prospects for these firms, as once housing markets return these companies will benefit from increased harvest volumes and improved mix.

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