Forest Land – A Bad Investment?

This cartoon is from the New Yorker in 1983.. as they say "the more things change.."
This cartoon is from the New Yorker in 1983.. as they say “the more things change..AND does say something about most of us on this blog

Taking what I’m sure is a mini-break from fires.
In our discussion of timber companies who own land (and taxes they pay), I thought it might be interesting to folks on the blog to talk a little about TIMOs and REITS, which don’t get as much press in the west. For example, I received this in July in my Morningstar probably can’t see it unless you are a member.

So perhaps the landowning timber company in the west will become as rare as .. the spotted owl. If we want to be a country that has forest industry, then small private and feds in the west may have to step up in terms of supply. If we want to get it from Canada, I’m sure our northern neighbors will be happy to oblige. A perhaps ironic end to years of Canadian lumber disputes.

Over the past three- and five-year periods, MeadWestvaco (MWV) shares have underperformed the U.S. packaging peer group. Unlike most of its competitors, which have shed legacy land holdings and noncore businesses to focus on packaging, MeadWestvaco still owns more than 600,000 acres of land, actively engages in property development, and runs a specialty chemical business that is largely unrelated to the core packaging business.

We consider the specialty chemical and real estate operations to be a distraction from the core business and believe they are a key reason that the packaging business has struggled in recent years. We think MeadWestvaco shareholders would be best served by an outright sale of the specialty chemical business and a tax-free real estate investment trust spin-off of the land and property management business.

Stock value is important, therefore analysts are important, therefore..

Here’s an introduction to the issue by Dovetail Partners.. but you can search on “TIMOs and REITS forest impacts” and find a variety of scholarly and non-scholarly articles.

12 thoughts on “Forest Land – A Bad Investment?”

  1. Timberland REITs and TIMOs are great investments as long as you get in at the right price point.

    A big change from the Dovetail report is the 2011 Weyerhaeuser conversion to a REIT structure. I have significant experience with both REITS and TIMOs. TIMOs can be great investment but you better know what you are getting into and not blindly buy into their hype. I know one large well known insurance company that offered TIMOs. Unfortunately, they believed their own hype and paid too much for their timberlands. Needless to say they took a hit and got out of the business.

    IMHO the four major Timberland REITS have been way overpriced for the last several years based on people searching for yield and based on all of the housing recovery hype that has boosted everyone’s expectations for a phenomenal housing recovery in spite of employment and wage information. In addition Uncle Sam’s successful efforts to raise home prices and the prospects for increased interest rates don’t add much reason for investing in these stocks. Some of the false hype is that the stock prices are more stable and do not fluctuate as much as the stock market indices. That was true many years ago but since then, their betas have generally been very close to 1.0.

    PCH – 8/24/13 –
    EV/FCF = 206, P/E = 25, D/E = 207, Dividend Payout Ratio = 75%, Beta = 0.81

    PCL – 8/24/13 –
    EV/FCF = 97, P/E = 31, D/E = 246, Dividend Payout Ratio = 115%, Beta = 0.97

    RYN – 8/24/13 –
    EV/FCF = 41, P/E = 19, D/E = 101, Dividend Payout Ratio = 88%, Beta = 0.89

    WY – 8/24/13 –
    EV/FCF = Negative, P/E = 26, D/E = 78, Dividend Payout Ratio = 63%, Beta = 1.25
    An additional unspecified amount of debt has been added to WY since the 12/31/12 D/E number above. Of course there are also expected synergies and anticipated offsetting asset sales that could have a significant impact.

    • Gil.. heavens!.. I was not going to invest in REITS or TIMOS.. I was only pointing out that keeping forestland is a no-no to analysts, and therefore “industrial timberlands” and their practices and property taxation could be a thing of the past.

  2. Sharon

    I don’t even consider MWV to be a significant forestry company anymore. As the article implies, their retained acreage is primarily for capitalizing on HBU opportunities.

    Re: “keeping forestland is a no-no to analysts, and therefore “industrial timberlands” and their practices and property taxation could be a thing of the past.”

    –> Disagree, there are plenty of analysts hyping the REITs. Unless you are only referring to a particular subset of analysts.

    –> Don’t understand what you mean that industrial timberlands could be a thing of the past. Where else is the wood and timber for paper, lumber, plywood, osb, wood pellets, and feedstock for biofuels going to come from?

    • Sorry, I meant that Timberlands Owned by Timber Industry might be a think of the past. And that analysts prefer Timber Industry not to own land.

      I don’t consider TIMO’s and REITs as “timber industry”, that is the ownership is not held by the traditional “timber industry” folks..

      TIMOs buy, manage, and sell forestland and timber on behalf of various institutional investors – e.g., insurance companies, pension funds, endowments, and foundations. (01) Where restructuring occurred, the land and timber is now held by “Real Estate Investment Trusts” (REITs). REITs are entities that buy, manage, and sell real estate or real estate related assets – e.g., mortgages – on behalf of various private investors.3 (

      from the Timberland Blog here. Note also a link to a paper by Cliff Hickman here.

      When, for example, people in the NW claim that “the timber industry” does not pay enough property taxes, if this trend continues, it will be “various private investors who own REITs and TIMOs do not pay enough taxes”. Any favorable treatment of lands will be a “deal done by corporate and private investors in REITS.”

      “The timber industry” has been a target for many in the past, but when many states do not have them to speak of, and in the future, when they do not actually manage land, it makes it harder to broad-brush them as the Corporate Archvillains. Is this clearer?

  3. Ms. Sharon

    Boy have we got some educating to do for you. 🙂

    1st most of Mr. Hickman’s article is correct
    2nd their isn’t any context to his introduction that you quote above. Let me try to fill in the blanks.
    A) There is a HUGE difference between a standard REIT and a Timberland REIT. Mr. Hickman’s definition that you quote only applies to true REITs not Timberland REITS.
    B) When a Vertically Integrated Forest Products Company like WY or PCL becomes a Timberland REIT they break the company up into three wholly owned companies. The first is the retained Manufacturing companies (RYN = pulp mills, WY = pulp mils, sawmills, engineered wood and etc.). The second is the Marketing company and the third is the Timberlands company. So it is still a vertically integrated company except now, Timberlands has to identify what it is going to cut next year and transfer those volumes over to the marketing company. The marketing company then sells the timber to the highest bidder which technically could be any mill but often isn’t because of long term supply agreements. So what we have is a tax dodge that was included in the REIT structure in order to encourage the long term view necessary to foster sound management of natural resources. Is it a bad tax dodge? No, it simply allows the profits from the REIT portion of the company to be only taxed once instead of twice. The investors are the same investors that owned the company before the restructuring – the company’s shareholders. Since the REIT profits weren’t taxed at the corporate level the company can better compete and the shareholders get more profit upon which to pay more taxes.
    C) As to TIMO’s, the lands are managed by either the TIMO (i.e. a John Hancock subsidiary) or a forestry consulting firm. Generally the silent partners/shareholders are set up under a Master Limited partnership which again results in the taxation only of distributed profits. TIMOs often offer multiple investment vehicles of different time horizons and when the time horizon for one vehicle is met that vehicle’s timberlands are often liquidated. Other’s like John Hancock tend to keep their timberland.

    In conclusion, nothing has changed except the organizational structure necessary to take advantage of tax law.

    So, Re: ““The timber industry” has been a target for many in the past, but when many states do not have them to speak of, and in the future, when they do not actually manage land, it makes it harder to broad-brush them as the Corporate Archvillains. Is this clearer?”

    –> Per my comments above you should now be able to see that every state that had “The timber industry” before still has them and in the future they they will actually be managing timberlands or either their shareholders will replace management or they will go out of business and another timberland company will buy their lands and actively manage them. So the beat goes on. BTW, these timberland companies have a vested interest in the USFS not offering more timber for sale. The NSO and the Old Growth movement has been a positive for them. In defense of the timberland companies that I have worked for, they have willing worked with the USFWS/EPA on HCP’s, Conservation Easements and other environmental concerns.

    I hope that this helps you better understand what has happened.
    As I said in an earlier post, my experience in this area is extensive.

    • Gil: Honest to Gore, I have a hard time following some of your stuff because of all the reliance on ephemeral acronyms — and I have a life-long career and a PhD in forestry. I’ve reluctantly become familiar with REITs, NSOs, BTWs, and IMHOs, but TIMO, HCP, MWV, HBU, PCL, etc., leave me cold and stop me from reading much closer. From my perspective, I’m trying to connect with the public because they need to be educated, not exclude them from discussions because they have NIIH what is being said. If it wasn’t for Sharon’s insertion of a few helpful definitions I would have missed all of the subtleties and most of the sense about your comments regarding the differences between Real Estate Investment Trusts (REITs) and Timberland Investment Management Organizations (TIMOs). That’s about all of the obscure (to almost everyone) jargon I can handle in a discussion.

      PS NIIH stands for “No Idea In Hell,” in case you were wondering.

    • Gil, thanks for that clarification. I was thinking John Hancock is not equal to Weyco, but if I understand you correctly, Weyco REIT is still Weyco.

      I also remember when I worked for CSREES (now NIFA) a firm which had sold off its timberlands came to us to see if Extension could get more people to sell timber to them.

      But this firm had really sold their timberlands, not just divided the company up into sections, one of which held timberlands (which sounds like what you say Timber REITs are.

      Wish I could ask Cliff about this, but I don’t have his email..anyone who does can send to me at

  4. Bob

    So sorry that I ruined your day. 🙂 Forgive my false assumption that everyone understood these so called “ephemeral acronyms” which have been around for 15 to 20 years and longer. We are even, you nearly gave me a hernia trying to figure out what NIIH meant until I got to the end of your post. BTW, I take offense at the Al Gore reference 🙂

    Apparently there is a dearth of understanding in this group about industrial forestry and, I hope I am wrong but, I also sense a strongly negative view of same. So, let me see if I can’t do a better job (next time, be smart and don’t complain). 🙂 Let’s deal with the priorities in gaining a basic understanding of the Timberland Industry:

    1) Do you understand that TIMO’s (Timberland Investment Management Organization) and Timberland REITs (Real Estate Investment Trusts) don’t really change much in terms of the timber industry? Ownership whether a TIMO or a Timberland REIT is a distinct single legal entity. Timberland ownership is not dispersed among investors (partners/ shareholders) in either case. The investors are what is known as passive investors in that they do not take any active role in managing the company other than to vote annually on such things as the board of directors, auditors, and a few other extremely high level governance issues. In TIMOs the passive investors are generally pension funds, endowments, foundations and high net worth individuals. Naturally when a single investor who owns a major part of the legal entity is dissatisfied with the results, they can cause some stress to management but that is about the extent of their recourse outside of legal action, takeover, acquiring seats on the board and other such uncommon occurrences.

    –> Did I get my message across that Timberland REITs are distinctly different than standard REITs? Where standard REITS are focused on managing malls, skyscrapers, and other typical real-estate, buildings, land for commercial non forestry development and (new to me) for investing in mortgages. The inclusion of Natural Resources in the REIT tax structure was to provide a tax incentive to Natural Resources which deserve tax advantages to encourage long term management even more than is justified for other long term assets like buildings.

    2) Did you get the message that the timberland industry has not and will not go away? It has merely reorganized to take advantage of tax laws. Just think of the acreages involved in these large legal entities:

    –> The four major Timberland REITs as identified by their stock ticker symbols are WY (Weyerhaeuser), PCL (Plum Creek), PCH (Potlatch) and RYN (Rayonier). They respectively own or manage: WY = 20.5 (6.6 in the US) million acres , PCL = 6.5, PCH = 1.4 and RYN = 2.7 (2.4 in the US) million acres. All of these Timberland REITs are subsidiaries of the parent company which also owns and manages subsidiaries which include non REIT properties and manufacturing facilities.

    –> The larger TIMOs are as follows as of 2011 from Oct/Nov 2012 Journal of Forestry (JOF):
    Forestland Group 3,400,000 acres, Campbell Group 3,040,000, Hancock Timber Resource Group 2,948,000, Resource Management Service 2,600,000 (a lot of this is former IP (International Paper timberland)), Forest Capital Partners 2,500,000, GMO Renewable Resources 2,100,000, Forest Investment Associates 2,000,000, Molpus Woodlands Group 1,800,000 (including former Temple Inland timberlands), Wagner Forest Management 1,400,000, Region Morgan Keegan (RMK) Timberland Group 1,100,000, and Seven Islands Land Management 1,000,000 acres. Unless my memory fails me, of these TIMOs, only Hancock Forest Management is a subsidiary of an insurance company, RMK is a bank subsidiary, GMO is a financial investment firm. In these companies, TIMOs are but a small part of their total business. The rest of the TIMOs are independently established by forestry consulting firms or a group of principles with some forestry experience who establish the TIMO, they then identified lands that they wanted to buy and then they solicited a pool of investors to invest in that purchase and receive dividends from the profits resulting from the management of those lands.

    3) So all that is left is to clear up some of those long standing “ephemeral acronyms” that distress your poor pea picking brain so greatly.
    – MWV = Mead Westvaco a paper and paper board company who makes about 50% of the beer cartons that you bought after reading my last post.
    – HBU = Higher and Better Use lands = those land who are not core timberland acreage because there is an opportunity to sell them at a value in excess of their present net worth as timberland. These include swamps sold to duck hunters (lots of acres), recreational home sites, potential industrial properties along major interstates, and many other opportunities. The preponderance of these are in the past and will mostly be limited to future opportunities that develop as communities continue to grow.
    – HCP = Habitat Conservation Plans = an agreement with the USFWS to modify forest management practices so as to provide travel corridors and other habitat needs for certain endangered species.
    – MOU = Memorandum Of Understanding = agreement with any governing body to modify forest management practices to provide protection for any species of concern or any archeological site (such as Indian Burial Mounds) and other such special places.

    Aren’t you glad you asked?

  5. Gil: My day wasn’t ruined, and I am glad I asked. Also very pleased by the manner in which you almost got a hernia — my intent, exactly. Payback is its own reward. By “ephemeral” I mean that these acronyms were devised after I had turned 40 or 50 and will be mostly gone shortly after we are, if not (hopefully) before we are. It’s mostly a result of DOS programming and federal arrogance/insecurity so far as I can tell, and creates obfuscation during the course of normal communications. Except among the inner circle, of course — just like priests who used Latin in the Middle Ages and for similar reasons. Exclusive membership in the hagiarchy, with those that can master the jargon, or interpret it, being given secret knowledge and the ability to exclude the masses from their ruminations and analyses.

    For 20+ years I was a reforestation contractor, operating almost entirely on industrial lands and completing more than 80,000 acres of reforestation contracts. We used PCT and a small handful of other inner circle terms and that was about it. Then federal male modelers got computers and couldn’t type (everyone except me was a girl in my HS typing class) and were worried about “memory” (“keystrokes”). Hence, the insane proliferation of acronyms that is only now starting to die out. We have laws requiring Plain English (PE?), but no one seems to be paying much attention to them.

    I have a strong appreciation for industrial forestry and understand the need for it — but an even stronger appreciation for private, non-industrial forestry (PNIF?), due to the far greater variety of objectives and treatments. BTW, WY used to be Wyoming, not Weyco; Plum Creek used to be Plum Creek (two syllables, not the three needed for PCL); Potlach used to be Potlatch, not PCH (also 2 vs. 3 syllables); and Rayonier used to be Rayonier. What’s wrong with that? We did call Georgia-Pacific GP, and the United States USA, but those were syllable-savers, not keystroke considerations — and most people really did know them.

    No need to be offended by the Gore reference — he invented the Internet and thereby helped spawn most of the acronyms hardly anyone else knows. They are certainly not common knowledge, no matter how long they have been around. They are exclusionary jargon plain and simple, and seem to serve no real purpose other than to limit conversations to the elitists who make them up and use them. Try spouting a few to your neighbors or distant relatives if you don’t believe me — or most tree farmers or non-government foresters or wildlife biologists or journalists or HS students. They will have NIIH what you are talking about, for the most part.

    (Sometime we can discuss the “protection” given Indian burial sites — very much like the “protection” we have given old-growth or spotted owls (“NSOs”). Mostly racist and highly ineffective when compared to Catholic or Protestant cemeteries. Or the burial sites of most other races not involved in war or ethnic cleansing events.)

  6. Bob

    Re: “By “ephemeral” I mean that these acronyms were devised after I had turned 40 or 50 and will be mostly gone shortly after we are, if not (hopefully) before we are.”

    –> I don’t know what is happening to this site, everyone wants to redefine words from their dictionary meaning. Shoot, I might as well go back to acronyms since words don’t mean anything to anybody either. 🙂 🙁

    • Gil: I am totally into dictionary definitions — and I’m guessing most of these acronyms can’t be found there. Plus, it’s just me on a personal crusade — probably no one else on the site. Sharon’s into civility, Matthew’s into Wilderness, Larry’s into wildfire mitigation, I’m into Plain English, etc. Go ahead and use acronyms, everyone else does. Mostly I’m just teasing, but also I’m using them as a soapbox for my own personal agenda. Warning: I’m also upset with foresters who insist on calling well known plants by their (equally ephemeral) Latin names, and those that use metrics to describe tree diameters, distances, and acreages in the US. But it is certainly not a blog policy! (And I personally appreciate when people use parentheses to define acronyms, Latin terms, and metric measurements).

  7. For what it’s worth, the Morningstar article lists this breakdown of MWV’s ~643,000 acres:

    Forestland – 199,330 acres (Forestry, timber harvesting, recreational leases)

    Land Development – 102,880 (Master planned communities, mostly in Charleston area)

    Rural and Recreational – 327,930 (Land ideally auited for recreational users or small investors)


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