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.
The implied supposition in this commentary is that the publicly traded timber REITs have similar risk to 30 Treasuries – hence the comparison. However, if you evaluate the betas of these firms, they are substantially riskier – WY (beta 1.60), RYN (beta 0.69), CTT (beta 0.56), PCH (beta 1.41). These are not, as a group, significantly different from the market portfolio and a beta of 1.0. The Sharpe or Treynor ratios for these two groups (30 year US treasuries and the publicly traded timber REITs) look a little different. Investors may be interested understanding the return per unit risk opportunities of the investment opportunities mentioned. I wonder if an event study might show significant differences in the timber REIT share prices on July 18th and again on July 19th. Just a thought.
Not sure why you compare dividend yields to U.S. Treasury yields? Are they of similar risk? The betas or standard deviations certainly imply some differences. Seems like if you want to state that the TREITs behaved different than the market then an event study should be performed to test the hypothesis? BTW, what should the market comparison be – other REITs? not the S&P 500? Just a thought?