Weyco Earnings and Timberland Sale

Weyerhaeuser finally announced the results of the sale of the 82,000 acre block in SW Washington. The buyer is HTRG which payed about $200 million or $2,439 per acre. Weyerhaeuser says "While the land sold is high-quality, productive timberlands, it no longer fits our long-term strategic plan." Apparently the the species composition is low to Doug Fir, which is managements focus, and that is why this particular block was selected for sale. I suspect that the fact that the sale brought in $200 million with $150 million going to the bottom line was the real critical driver behind the sale. It has been a tough time for Weyco and they need to convince investors that they can pay a consistent and reliable dividend. Read the news release here.


Weyco also posted earnings this morning. Net earnings for Q4 were $171 million which illustrates just how significant the $150 million gain on the land sale is (note that the gain will not show up in the financials till Q1 of 2011). Earnings for the year were about $4.00 per share but a full 83% of that came from tax adjustments resulting from the conversion to the REIT. 


It looks as if Weyerhaeuser has turned the corner. It has been hard to analyze the numbers due to all of the asset sales, charges and REIT conversion but it does seem that they are now actually profitable. The timberland segment is slowly improving - mainly from improved stumpage prices in the Northwest. Wood products remain the major earnings drag but losses have been reduced somewhat. They have contained the bleeding from the Real Estate segment and are producing solid profits from the Cellulose Fibers group. Here are links to the earnings announcement and some supporting slides for the conference call.


Land sales will remain the ace in the hole to assure dividends but I am going to guess that Weyerhaeuser will play it sparingly. --Brian

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Visit me at Timberland Strategies.

A BRIEF TIMO BACKGROUNDER

In discussions with newcomers considering investments in timberland or the publicly traded timber REITs, I frequently find that there is substantial misunderstandings about what a TIMO is and what the TIMO role is in the investment community. This backgrounder is intended to answer those questions. For a much deeper understanding of TIMOs, here is a link to an outstanding and in depth report prepared by Cliff Hickman with the U.S. Forest Service. It was prepared in early 2007 so some of the numbers are out of date but, other than that, it is the best researched report on TIMOs and REITs that I have seen.

What is a TIMO?

A Timberland Investment Management Organization. Note that the first word is timberland, not timber as it is so often written. There is a big difference. Timber refers to trees, timberland is land with trees on it! Many news articles in well-known financial news publications (WSJ, Barron's) have confused the two in recent years, which has led to significant confusion surrounding pricing and values of timberland. The second key point is that TIMOs do not own land; they buy land, manage it and sell it for their clients. They have teams experienced in both forest management and portfolio management. For this advice and service, they charge a fee.

Some history…

During the 1980’s, institutional investors began recognizing the value of adding timberland to their portfolios. By the early to mid 1990’s, there was a call by many analysts in the investment community for the pulp and paper companies to monetize their timberlands to reduce debt. More favorable federal income tax rates and accounting policies applied to the TIMO’s clients than the pulp and paper companies, which made the timberland more valuable for the former compared to the latter. Growth of the TIMOs was rapid as investors sought to acquire timberland and the pulp and paper companies sought to dispose of it. The companies that did not sell their land generally converted to the REIT form of corporate structure to provide higher after-tax returns for their shareholders.

Who are the TIMO’s clients?

They are large institutional investors with a focus on financial objectives, many of which are tax exempt. Specifically:

• Pension funds
• Public retirement systems (CalPERS, the California public employee retirement system, was one of the first and largest timberland investors). European pension funds invest in U.S. timberland also and U.S. funds own timberland in other countries.
• Corporate pension funds
• University endowments (Harvard and Yale were among the first institutional timberland investors)
• High net worth individuals and families
• Hedge funds
• Foundations

Note that the clients are all large investors.  The largest clients generally acquire land in separate accounts while some of the smaller clients participate in accounts with commingled funds. TIMOs are not structured to accommodate most individual investors (there are other good options for individuals though).

How do TIMOs differ from the so-called Timber REITs?

TREITs, or Timber Real Estate Investment Trusts, own the timberland, TIMOs do not. The publicly traded TREITs are Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and soon to be Weyerhaeuser (WY). The tax structure for REITs allows the profits to be passed through to the shareholders avoiding the double taxation associated with the C corporations. That tax efficiency is why Weyerhaeuser is converting to a REIT.

How much timberland do the TIMOs manage?

The TIMOs manage approximately 25 million acres worth more than $30 billion. The three REITs (not counting Weyerhaeuser) own about 11 million acres worth about $15 billion. Including Weyerhaeuser, the REITs own about 17 million acres worth about $28 billion.

Who are some of the TIMOs?

Below is a list, in alphabetical order, of some of the largest TIMOs. All of them have web sites that you can google to get additional information about them.

• Conservation Forestry
• Forest Capital Partners
• Forest Investment Associates
• Forest Systems
• Global Forest Partners
• GMO Renewable Resources
• Hancock Timber Resources Group
• Lyme Timber Company
• Molpus Woodlands Group
• ORM/Pope Resources
• Resource Management Services
• RMK Timberland Group
• The Campbell Group
• The Forestland Group
• Timberland Investment Resources
• TimberVest
• Wagner Forest Management

Are there differences between TIMOs?

Yes. They have different investment philosophies that appeal to investors with differing objectives. For example, The Forestland Group invests primarily in natural forests, particularly hardwood. The Hancock Timber Resources Group puts an emphasis on forest technology to improve timber yields and financial returns. Some TIMOs focus on acquiring “conservation land” or land that can have “conservation easements” quickly sold and separated from the fee ownership. Some TIMOs have good information systems with strong financial controls and some do not. Some conduct field audits, some do not. Some have outstanding technical groups in-house, some contract it outside. Some manage the timberland themselves and some contract with consulting foresters. All of these issues should be weighed by investors and the right TIMO selected based on the objectives of the investor.

This post can be downloaded as a pdf here. Visit  the Timberland Strategies web site here. --Brian

Email: jbfiacco@gmail.com

Gone Hunting!

Okay, I've been "out-of-pocket" off hunting for caribou and moose in Newfoundland (beautiful country!) for the last week and a half. Let's see what has happened since I've been gone.

Hancock sold 10,000 acres:
of Coosa River timberland for Alabama's Forever Wild Land Trust program. "The Forever Wild Program was established in 1992 by constitutional amendment to provide for the purchase of public recreational lands. Since its inception, the program has purchased 133,000 acres of land for general recreation, nature preserves and additions to Wildlife Management Areas and state parks. To learn more about the Forever Wild Program, please visit http://www.alabamaforeverwild.com/."

"The Hancock Timber Resource Group has a long history of working with communities, states and conservation groups to protect environmentally sensitive land. To date, our Sensitive Lands Program has protected approximately 320,000 acres across the United States," said Mike Wolf,director of North American Forest Operations, Hancock Timber Resource Group. Read more about it.

Speculation on Weyerhaeuser's Conversion to a REIT:
I guess this speculation is a long way from new news but there is a very informative article in Barrons. Following are a few quotes from the article (as I write, WEYCO stock is trading at about $74/share).

"BASED ON RECENT PRIVATE-MARKET transactions, Zaret, a former forester, values Weyerhaeuser's timber assets at $13 billion, or $59 a share -- just a bit under the company's stock-market value of $14.6 billion. At current prices, that means investors are getting Weyerhaeuser's other assets for a relative pittance. The timber business generated just 5% of last year's sales of $22 billion, but accounted for 64%, or $762 million, of total operating income."

"Wood products, which chipped in almost $8 billion of revenue, is Weyerhaeuser's second-most-valuable business, according to Zaret, who estimates it's worth $3.2 billion, or $15 a share. The real-estate business, whose income Zaret expects to slump 58% in '07, comes in at around $10 a share. In all, the analyst values Weyerhaeuser's parts at $103 a share, some 51% above its current price."

"This tax disadvantage prompts the market to value timber held by publicly traded C corporations at a discount to land held by REITs or private owners. Plum Creek, the largest REIT with more than eight million acres of timberland, trades for 18 times Ebitda, well above the multiple of 10 or 11 for the average paper company. Weyerhaeuser fetches eight times Ebitda."

"Timber companies could get some relief this year from Congress, which is mulling passage of the Timber Revitalization and Economic Enhancement Act. Aimed at enhancing the industry's global competitiveness, it would cut the timber-harvest tax for C corporations by 60%, to 14%."
Read "A Tribute to Timber" in Barrons.

It is a very interesting article that shows the pickle that WEYCO is in. Its tax structure has to change. Either Congress makes changes or WEYCO becomes a REIT.

Pope and Talbot Seeks Financial Protection:
"Pope and Talbot, Inc (Pink Sheets:PTBT) today announced that, in order to address its financial challenges and to support efforts to be a more efficient organization, the company and its U.S. and Canadian subsidiaries have applied for protection under the Companies' Creditors Arrangement Act (CCAA) of Canada. Pope & Talbot's Board of Directors, in a unanimous decision, directed the company to take this action as the best alternative for the long-term interests of the company, its employees, customers, creditors, business partners and other stakeholders." Read release.

Ethanol from Trees, Not Corn!

Before I start on the corn rant again, there are a couple of recent articles that I found interesting. The first is kind of a summary, from an investor/financial perspective, of the shifting ownership from industry to investors that was done by Laura Mandaro with MarketWatch. See "For-sale signs pop up on U.S. timberlands". Some interesting facts.

For an update on what is happening in the State of Washington, click here. The focus is on the loss of timberland to development. There are references to Hancock, Weyerhaeuser, Port Blakely, UW and the Forest Service.

On Feb.3, disappointed with President Bush's push for corn ethanol, I wrote "Perhaps soon a President will wake up to the fact that he/she has a nation with forests capable of providing ethanol (and other forms of fuel) and a very capable research team already in place that is capable of making it happen". I doubt that Dubya spends much time reading blogs but I am certainly glad that he woke up and is now making research commitments to "cellulosic" ethanol!

The obvious outcomes of the corn ethanol push are already well under way. Corn prices have jumped. Today's newspaper reported farmer's intent to increase the acreage in corn by 15% (farmers are no dummies, they have already sold a portion of that harvest at these increased prices). Most of the new acreage in corn will be at the expense of other crops, like soybeans and milo, meaning we will see price increases in many other foods plus the many non food products manufactured from soybeans. If the corn thing isn't halted quickly, there will be a new rash of conversion from timberland to farm land. When the shift to cellulosic ethanol occurs, some folks will be holding the bag as corn prices drop substantially. The only thing that will hold corn prices up will be farm subsidies funded by us good old taxpayers. And in a double whammy, we will have higher food prices as well. There is a certain odor about this. To put it bluntly, it stinks of farm belt politics!

But things are at least moving in the right direction (slowly). The following appeared in a recent issue of the Forest Landowners Fast Facts newsletter.
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New Wood Biomass Coalition Formed

Recently, FLA lobbyist Frank Stewart participated with other representatives from like-minded groups to help effectively organize to "provide advocacy, education, information, and outreach to public and private entities that promote research, development, and funding for sustainable woody biomass utilization and markets."
As a result of that organizational meeting, the coalition adopted the name, "Woody Biomass Committee," and set goals, including: · Reduce America's dependence on foreign oil and improve the nation's national security position · Improve forest health · Create new markets for renewable fuels, including woody cellulosic ethanol in rural America, which will promote economic opportunities and growth while supplying a sustainable supply of woody biomass for all biomass/bioenergy products
These are certainly aspirations in keeping with FLA ideals for the 110th Congress, which are: · Statutory and regulatory definitions of "wood biomass" should be defined as "wood" and not simply as wood residues, wastes, and/or byproducts. · Wood biomass must be a full partner with other cellulosic feedstocks in all bills, laws, regulations, and other federal initiatives. · Markets for wood biomass must be developed to maintain forestland investments as vital, so forestland investors continue to hold their land as forestland. Without suitable markets, forestland divestitures may increase.
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There was also an article in the last NC State alumni magazine with a focus on research aimed at reducing lignin in cottonwood specifically for ethanol production (although originally the research was done for pulp production). So, overall, research is beginning to shift from pulping to energy production in support of the new role that timberland will soon play. --Brian