Seeking advice about timber REITs

[Matt Bo]

Hi guys, brand new here (first post).  I hope I'm in the right place to ask this.  If you know of a better site, or a better board on this site, please let me know.

I've been thinking about investing in a timber REIT.  I've been having trouble coming to conclusions on my own, I was hoping maybe someone here would be more knowledgeable.  I've always been an environmentalist at heart.  I spend most of my free time outdoors, and became interested in my career path (energy efficiency engineer) for environmental reasons initially.  (I also grow and sell seedlings in my spare time!  But that's a conversation for another time).  So the insight I'm hoping to obtain here is about the sustainability of the forest management practices for the various timber REITs.  A while back, I read a book about the hostile takeovers of some of the old forestry/timber companies in California.  It talked about how those companies had done a great job at sustainably harvesting the timber and in essence protecting Redwood forests for generations, only for the forests to practically vanished as soon the companies were taken over.  I seems to me that hoping for America's beautiful forests to be forever protected in the form of National/State Parks, or conservation funds, is a fool's errand... these are GREAT initiatives that I donate to, but there's only so much you can do on the taxpayer's dollar/donation.  With these alone, the result would end up being fragmented and incomplete.  I'd like to support a company which is monetizes the forest assets (the only true path to lasting sustainability, haha), but does so in a responsible way that benefits the local ecosystems and overall environment.

So here's what I've learned so far:

Plum Creek:  Have not done much research on them so far.

Potlatch:  Seems pretty good?  Uses not only the SFI certification, but also the FSC certification, which seems to be most environmental groups' certification of choice.  However, when I look at their financial statements, it seems that they make the most money (percentage-wise) of all these REITs in the form of HBU sales (selling timber land for "higher and better uses", which could mean to conservation funds or recreational parks, but usually means real estate developers).  Based on my point of view, which is that I want to support a company that keeps the forests in-tact and thereby makes them last, I think this would almost be the worst stat to see?

Rayonier:  They seem the most vertically-integrated.  They make most of their money not from selling timber or land, but from making actual products like fibers (this is kind of like the old companies used to do, right?).  I think this would make them most likely to keep their forests in tact and unfragmented.  However, they've come under a lot of flak for how polluting their mills are.  But, maybe the only reason I don't hear this about the other REITs is simply because they sold all their mills and now just manage land.  Maybe they sell their timber to mills that are just as polluting.

Weyerhaeuser:  Seems like the "plain vanilla" of all the pros and cons I've seen so far.  None of the pros, none of the cons.  Uses SFI, but not FSC.  Not much news about polluting mills, but perhaps just because they are no longer vertically integrated, which also makes them less reliant on keeping their forests for themselves.  From their financial statements, it seems like they sell quite a bit for HBU, but not as much as Potlatch (is it naive to seek a company that doesn't sell much to HBU? Do I just need to accept that they all do this?)

Or are these all bad, and I should support something else?

Anyways, as you can see, I have a lot of thoughts but not much direction at the moment.  I'm hoping someone can help!

[Ron Scott]

Some info here:

http://seekingalpha.com/article/435821-understanding-an-investment-in-timber-reits

[beenthere]

REIT
I had to look it up.

real estate investment trust

[Banjo picker]

Thanks beenthere, is been a hard day, and I just wasn't gona....Banjo

[BradMarks]

I don't know a lot for sure, but my take on the REIT's is they are generally the land base spun off from the production facilities, for tax purposes.  I'm not sure what you can read from a financial statement about the specific management practices of a REIT company.  Personally I know they vary, from sustainable to "take the money and run".  And as in any acquisition, and REIT's do acquire land, there is always the "log to pay for it" equation.  And a side note on the Redwoods.  If you are referring to the "Headwaters" controversy, that was when family held Scotia Lumber sold out.  What was a sustainable land base got liquidated in a hurry, intentionally, and then bankruptcy ensued.  That land is now part of the Mendocino Redwood Co. holdings, managed at a much reduced cut rate.

[WDH]

I worked for Weyerhaeuser for the last 20 years of my career.  They were only a REIT for the last 5 years of so that I worked for them.  Nothing changed except for how the Government taxed the Company and the Shareholders.  The management practices are sound and focused on long term productivity.  The Research group is the best in the Industry.  The land base is not static.  Some lands are sold, inevitably, for higher and better use than timberland.  That is just a fact of modern life.  Other timberlands are bought and brought into the fold.  So, there is some turnover.  The landbase is a portfolio. The vast majority of the landbase is managed for timber production with a consideration for wildlife, recreation, and aesthetics.   

Almost all Forest Products companies have moved to REIT status if they owned land, or either they spun it off.  The reason is Wall Street.  Investors believed that the Timberlands were undervalued on the Companies books, and forced the Companies to split or sell the land to drive up the stock price.  Simple modern day economics. 

We live in a modern world.  Even so, the management practices on the properties managed for timberlands are focused on best management practices and sustainability of those acres.  That does not mean that they will not be sold for development if that is the best use ($ wise) for the land. 

I am not recommending that you invest in Weyerhaeuser or any other Timberland REIT.  That is your choice.  It could make sense as part of a diversified portfolio.  You might make a better return in investing in another segment of the world market.  Free will, it is what makes America great. 

[Clark]

WDH mentions companies spinning off the land-owning part and forming it into a REIT. That was quite common and we see the effects of that with landowners of one name, a different company to manage it and an agreement to sell the timber to another company (usually the one that originally owned the land). Overall that has been a good move for the forest. When a company owns both the land and a mill they have to feed, the management of the land becomes driven by the need to keep the mill productive. The forest always loses in that situation.

I would say two things about REITs: 1. A vertically integrated forest products company likely has poorer management of their forest lands than a company that only owns land.
2. If you saw the inner workings of a REIT and the ruthlessness that financial profitability brings to the forest, you wouldn't invest in them.

Don't get me wrong, sometimes the only way to get a forest back on track (in terms of management) is to leave it looking like a war zone and start from scratch. Most people, myself included, don't like the look of that choice but it is sometimes the reality of the situation.

Clark

[mad murdock]

The company for which I work, works for a lot of the REITs you mentioned. In the states we work (CA,ID, WA, OR, MT), there are Forest Practices Rules in place that dictate to all forest land owners minimum standards of forest land management that must be maintained. If you are really interested in understanding the truth of how private timberland is being mansged for the long haul, spend some time shadowing a forester who works for one of these companies. Any of them that you mentioned are doing a way better job than any of the alphabet soup fed land management agencies, the federal managed lands here in the west are a disaster. Case in point are the massive wildfires of the last many years.  There may be well meaning folks within these agencies but no real game changing practices in management of these lands has twken place for decades due to everything being fouled up by politics. That being said, some REIS are better than others.  Like WDH stated i dont think anyone has spent more time and energy on R&D (as far as the large ones go) than WEYCO. They have quite the heavily staffed R&D unit at Federal Way in WA, and they look at everything!  As they have taken over some smaller outfits (like the Willamette Industries takeover about a dozen years back), they have adopted superior management methods in use by these outfits to improve their overall stewardship practices.  Probably the best land managers out there are some of the smaller private mill owned and family land trusts, but all of them are decent, in my view.

[Puffergas]

Or are these all bad, and I should support something else?

It looks like the need to sell part of the land off is used to pay dividends to the investors.

IMHO it would be more helpful to developed more forest products so that a lot of small land owners could flourish.

[Matt Bo]

Guys, these responses have been really helpful.  I especially appreciate people offering personal experience.  I'm still unsure as to what to do, but this thread is helping sort my mind for sure!  Keep the responses coming!