Tuesday, July 22, 2008

Timberland – Keep it or sell it?

I like to look forward and speculate about what is going to happen. Sometimes with a good analysis, sometimes with just a good guess. Either way, nobody can say that you’re right or wrong. Only time can do that. And it does.

But once in awhile it is good to look back. Maybe to say “I told you so” or perhaps to see just how foolish I have been with some of my prognostications. Either way, the value is in the looking.

About ten years or so ago the TIMO sector was starting to grow in earnest. It was clear (to some at least) that C Corp ownership of timberland was probably not the best ownership structure. The large timberland owners were all Integrated Forest Products Companies (IFPCs) and some had already been experimenting with different corporate structures such as LPs and REITs. Most were maintaining the status quo and capitalizing on TIMO investor driven demand by selling off their “non-strategic” holdings to generate cash or reportable earnings.

By 2000, the pulp and paper industry was about five years into some very bad times from a profitability standpoint. The investment community (and I know many of my readers are market analysts - so pay attention to this little trip back in time), had one mantra. “Sell your timberland and pay down debt”. The decade before that it was all about percent self-sufficiency. The higher the level of self-sufficiency (the more land owned), the more favorable the analysts view of the company. Mantras change abruptly.

Interesting discussions occurred in many offices during the two or three years before and after 2000. (“Let’s keep the land and sell the mills!” – Heresy!). Reactions to the analysts’ demands (or maybe to the poor profits) were varied. In some cases, corporate management bought into the analysts view, other managers explored and ultimately implemented the evolving REIT structure and one major company maintained the status quo. So who was right? Perhaps this chart will shed a little light on the issue.

Picking Weyerhaeuser as the major representative (about the only one actually) of the “status quo” decision makers, I’ve compared their stock prices to the REIT crowd (PCH, PCL and RYN) and the timberland divestures crowd (represented by IP, MWV and LPX) over the past five years. What does this tell us?

The status quo decision was right in the middle with respect to stock price performance.

An examination of the three timberland sellers (those that restructured based on the advice and pressure of the analysts) were all losers – some big time losers. Analysts pay attention. Your advice and pressure destroyed a great deal of shareholder value. But then again, it wasn’t your fault. The fault lies squarely with the senior management that took those companies down that course. The final chapter has yet to be written for these firms but it sure doesn’t look like the right decision at this point.

The shareholders of the three companies that saw the REIT opportunity and charted their own course through a complex and somewhat risky maze were very well rewarded relative to the others. All three of these companies actually acquired land over the five year period. What a difference is made by good strategic decisions on the part of senior management. History pins the Gold Medal on Rayonier’s senior management team. –Brian

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