Investing in Timberland REITs | The Motley Fool

Timberland Real Estate Investment Trusts (REITs) focus on owning and managing land that is used to grow wood. This is what sets them apart from other REITs. Most focus on owning buildings or other facilities that are rented to tenants.

Given this difference, investors need to understand how Timberland REITs work, the benefits of owning them, and their risks. Here’s a closer look at these factors and some Timberland REITs to consider.

A person working with a tablet in the forest.

Image source: Getty Images.

Understand Timingland REITs

Timberland REITs own and manage Timberland Property. They harvest and sell wood to sawmills and wood products production facilities owned by the REIT or third parties. Timberland REITs also focus on maximizing the value of their land holdings, which may include selling for higher and better uses than growing wood like conservation or housing.

This business model sets Timberland REITs apart from many others REITs. Most REITs generate relatively stable rental income from renting their properties to tenants. Timberland REITs, on the other hand, generate income from the sale of timber, timber products, and real estate. The price of commodities tends to go up and down with supply and demand, which increases income volatility. Timber REITs can be similar to others cyclical stocks produce the goods such as Raw materials company and Oil producers.

Benefits of Investing in Timberland REITs

One of the benefits of producing a commodity like wood is that higher prices can increase the returns of wood REITs. This makes Timberland REITs a great way to invest in wood when the market is in a cyclical upswing. The housing market is a big driver of lumber prices, making timing REITs another way to get invest in apartments.

Although wood prices can be volatile due to changes in demand, they tend to rise over the long term. A growing population is driving the need for more housing and more timber.

As a raw material, wood benefits from inflation. Timberland is a good hedge against inflation as rising timber and land prices should add value to a timber REIT’s real estate portfolio and its cash flow from sales of timber, timber products, and real estate.

Risks of Investing in Timberland REITs

Commodity prices can be lowered in both directions. While Timberland REITs benefit from higher lumber prices as this increases their sales and earnings, falling lumber prices can lead to decreases in sales and earnings. This variability can make Timberland REITs’ stock prices more volatile than other REITs. Periods of persistently lower timber prices can force a timber REIT to cut its dividend.

In addition to the commodity price risk, nature poses another risk for Timberland REITs. Forest fires, weather events, diseases and insects can destroy woodland. The effects of climate change could have an overwhelming impact on Timberland REITs in the future.

At the same time, wood REITs are also exposed to a risk that is common to all REITs: the interest rate risk. Like other REITs, Timberland REITs tend to borrow large amounts of money to buy real estate. When interest rates rise, a Timberland REIT’s interest expense may increase if it has floating rate debt or has an upcoming debt maturity.

Rising interest rates also increase the return on income from lower-risk investments such as government bonds. This gives income-oriented investors more options. As a result, REIT stock prices fall frequently and Dividend yield are increased to compensate investors for their higher risk profile.

4 Timberland REITs to Consider in 2022

There are four publicly traded timber REITs:

Timberland REIT

Ticker symbol

Market capitalization

Company description

Weyerhaeuser company

(NYSE: WY)

$ 28.2 billion

One of the world’s largest private forest owners.

Rayonians

(NYSE: RYN)

$ 5.4 billion

A global timber company.

PotlatchDeltic Corporation

(NASDAQ: PCH)

$ 3.6 billion

A diversified wood products company.

CatchMark Timber Trust

(NYSE: CTT)

$ 375 million

A pure wood investor.

Data source: Ycharts. Market capitalization from 11/30/2021.

Here’s a closer look at these Timberland REITs.

Weyerhaeuser company

Weyerhaeuser is by far the largest forest REIT. It owns 11 million acres of woodland in the US and manages land in Canada under long-term licenses, giving it access to an additional 14 million acres. The company also operates 35 wood products manufacturing facilities across North America. In addition, it has a real estate, energy and raw materials business that aims to get the most benefit from every acre of land it owns.

In addition to its size and diversification, Weyerhaeuser also differs from other Timberland REITs in its dividend policy. At the end of 2020, the company introduced a new framework for paying a quarterly basic dividend and a variable additional dividend. The company has set the base payout so that it is sustainable with lower raw material prices. With the variable additional dividend, Weyerhaeuser would distribute additional cash to the shareholders in the event of higher wood prices. Overall, it aims to distribute 75% to 80% of its annual funds available for distribution through dividends.

Rayonians

Rayonier has two core businesses: forest resources and real estate. The company owns 2.6 million acres of woodland in the Pacific Northwest, the southern United States and New Zealand. In addition, it maximizes the value of its properties by selling selected forest areas for higher and better use.

Rayonier is the purest game with wood. The REIT generated an average of 70% of its earnings before interest, taxes, depreciation and amortization (EBITDA) from his lumber business in recent years. The remaining 30% comes from the real estate business. For comparison: The diversified Weyerhaeuser only achieves about 37% of its EBITDA from wood, with the majority coming from the manufacture of wood products. Given its leverage on wood, Rayonians are likely to benefit more from higher wood prices.

PotlatchDeltic Corporation

PotlatchDeltic is a diversified timber agricultural company. It operates 1.8 million acres of woodland in Alabama, Arkansas, Idaho, Louisiana, Minnesota, and Mississippi. The company also operates six sawmills, an industrial-grade plywood mill, a residential and commercial property development business, and a program to sell woodland.

PotlatchDeltic’s diversified businesses help generate relatively stable cash flow that has supported sustained dividend growth over the years. While the company generates additional cash flow from higher wood prices, it uses that money to drive higher shareholder returns (Share buybacks and Special dividends) and growth investments such as acquisitions. For example, the higher wood prices in 2021 enabled the company to pay out a significant special dividend.

CatchMark Timber Trust

CatchMark Timber has shifted its strategic priorities in recent years. It sold its wooded areas in the Pacific Northwest and left a joint venture it led in 2021. These initiatives allowed the company to focus on expanding its high quality woodland position in the southern United States and pursuing new environmental initiatives.

In late 2021, the company owned 370,000 acres of woodland in Alabama, Georgia and South Carolina. The aim is to maximize the value of this land by harvesting timber and selling real estate. In addition, the company wants to use its income from environmental initiatives through projects such as CO2 sequestration, Solar power, and banking for wetland mitigation. This should help offset some of the loss of income from running the investment management business.

Timberland REIT investment options

The four listed timber REITs each offer different options for investing in forest areas. Investors should examine each one carefully to determine which will best fit their investment plans.