TIMOs and REITS- An Intro by Cliff Hickman


Many of us federal lands forest types haven’t followed how the transfer of lands from timber industry to TIMO’s and REIT’s developed.  It was discussed a bit in the recent Oregonian article on the timber industry in SW Oregon.

My intention here was to find an accessible explanation and to provide the space in the comments for others to provide their own favorite papers, memories and thoughts.  So that if someone wants to know about the topic, this post will ultimately end up being a good place to start.

This is the terrain of forest economists- the folks who analyze legions of (not particularly exciting) numbers so the rest of us don’t have to.  And the Forest Service has had some excellent forest economists, including Cliff Hickman, a former colleague of mine in the Policy Analysis shop. Cliff’s work is clearly written, and goes to the heart of the questions I had Thanks, Cliff!

Here’s a link.

Reasons for Changing Ownership Pattern:

The reasons for the changes in private forestland ownership that have occurred in the US may be viewed from at least three different perspectives: 1) that of the former VIFPCs that elected to sell-off all or part of their forestland holdings,6 2) that of the TIMOs and the institutional investors they represent, and 3) that of the former VIFPCs that elected to restructure and create timber REITs.

Key motives and factors influencing the VIFPCs that elected to sell-off some or all of their forestlands included the following:7

  • Relatively weak financial performance and the need to improve returns to stockholders. – Stockholder returns over the 10-year period 1995 to 2005 averaged +6.2% for the “Forestry and Paper Group” as compared to +12.1% for the S&P 500, and +13.1% for the Dow Jones Industrial. (04) To ensure continued flow of investment capital into the industry, it was essential that stockholder returns be increased – and the sale of timber holdings was seen as a way to achieve this end.

  • Generally Accepted Accounting Principles (GAAP): – Related to the preceding factor, GAAP for “Sub-Chapter C Corporations” precludes such entities, when it comes to computing their return on investment, from recognizing any appreciation in the value of the timberland assets they hold – only profit realized from the harvesting and processing of trees may be considered. This treatment contrasts with the conventions that apply to “Sub-Chapter S” and “Limited Liability” corporations, to TIMOs, and to REITs. (01, 12)

  • Rising Forestland Values: – Related to both of the preceding factors, throughout much of the US forestland values have been rising in response to what has been characterized as “the grand tidal wave of sprawl now sweeping over the nation.” (09) As forestland values rose, so did the value of what was arguably the primary asset held by the VIFPCs. Although GAAP prevented these companies from recognizing this appreciation in value in their formal accounting, it didn’t stop them from “cashing in” through the sale of some of their lands – especially tracts with good access, proximity to urban areas, water frontage, scenic value, or outdoor recreation potential.

  • Consolidations made to enhance international competitiveness also increased debt burdens. – Over the last 10 to 15 years, the VIFPCs in the US have faced increasing competitive pressure from low cost timber suppliers and forest products manufacturers in other parts of the world. In response, the domestic industry went through a period of substantial consolidation. Oftentimes significant debt was incurred to finance these consolidations. The sale of timber holdings was seen as a way to get this debt off corporate balance sheets. (01)

  • Rethinking of the long held belief that ownership of timberlands was essential to ensure future availability of an essential raw material at reasonable cost. – Historically, as previously noted, a major rationale for the acquisition of timberlands by the VIFPCs was to gain some degree of control over the conditions of availability of an essential raw material. During the last 10 to 15 years, however, many firms came to believe they could confidently rely on open market sources of timber – both domestic and international.8 (01, 04)

  • Federal income tax policies. – While no doubt unintentional, federal income tax policies also appear to have encouraged many US forest products companies to divest themselves of their timber holdings. Of greatest importance is the fact that the traditional VIFPCs are classified as “Sub-Chapter C Corporations” for income tax purposes. For this type of entity, any profits obtained from the sale of timber are taxed twice – once at the corporate level (35%), and once at the stockholder level when dividends are disbursed (15%). The practical effect of this tax policy is that investors who own both manufacturing plants and forestland often recoup as little as 50 cents out of every dollar of profit made from cutting trees whereas investors who own just forestland can normally pocket at least 85 cents out of every dollar.9 (01, 04, 07, 14)

5 thoughts on “TIMOs and REITS- An Intro by Cliff Hickman”

  1. Back on June 30, 2016 I wrote an article on this blog titled, “What changed in the 6-months since Weyerhaeuser bought Plum Creek?

    Here are some snips from that article:

    The Flathead Beacon and most of the media coverage in Montana continues to largely ignore another important piece of the puzzle here: something called Real Estate Investment Trusts (REITs).

    Ironically, Dave Skinner (sometimes a commenter on this blog) is also a regular Flathead Beacon columnist and he wrote this piece for the Flathead Beacon on REITs and the Weyco-Plum Creek merger back in December 2015.

    As I recently pointed out, while Dave and I don’t agree on much, I do agree with much of Skinner’s analysis of REITs, and specifically how it pertained to the Weyerhaeuser-Plum Creek Deal.

    Here are some important snips not to be missed in Dave’s article:

    “That Weyerhaeuser and Plum Creek are merging might have surprised some Montanans. Not me. Why not? Well, I guess it’s time to remind everyone America’s timber beasts are dead, replaced by a new kind of beast – Real Estate Investment Trusts (REITs)….

    REIT’s must pay 90 percent of untaxed annual profit to shareholders, who are then taxed 15 percent on their capital gain. All things being equal, a dollar in a REIT pays back 35 percent more to an investor than a dollar in an otherwise-identical integrated company. In the Wall Street universe, where billions chase hundredths of a point, that was a big fat hairy deal….

    Significantly, America’s all-time greatest integrated timber barony, Weyerhaeuser (Weyco for short), held out the longest … in fact, lobbying Congress for tax treatment that would render the company equivalent to a REIT in terms of tax burden and shareholder return. For that effort, in 2008 Weyco scored a reduction in income tax to 17 percent, saving $182 million.

    Nonetheless, with REITs paying zero – Weyco kept spinning off mills (and people) in order to get under the REIT manufacturing-asset threshold, converting to REIT in 2010….

    REITs aren’t focused on timber, except as a means of generating what stockholders crave – cash.”

    Dave Skinner’s full piece from December 2015 is titled “The New Forest Beasts: I felt it was just a matter of time before the merger phase of the REIT game began” and you can read Dave’s entire article here, and it certainly would be a good use of time to better under the “REIT game.”

  2. Leave it to Matt to dredge up Dave the Skeleton.
    Cliff did a pretty good job here but I’d put tax policy as number two against the rate of return. The vast bulk of Wall Street trading chases tiny percentages of profit margin, so the discovery (by Plum Creek) of the REIT advantage (and the long time frame and structural requirements of becoming a REIT) gave it a huge window of opportunity — through which the rest of the industry threw itself as soon as it could.
    Timberlands are now purely a speculative RE play, with the marginal ground now lined up for Land and Water Conservation Fund monies at well over FMV or any rational NPV.

  3. Regardless of the state of journalism, I think think we pretty much agree on the facts (per Dave) – “What matters to us is, REITs and TIMOs aren’t focused on timber, except as a means of generating what stockholders crave – cash.”

    So what does that mean (beyond local tax consequences)? Private forests are being managed differently – how? What does that mean for state forest practices regulations, and for managing nearby national forests)? And the splitting of mill ownership from forest ownership probably has some consequences for national forests, too.

    I thought it might be interesting to look at how the Flathead National Forest (Dave’s home forest) addressed the changing timber markets related to changing ownership. There’s a section in their 2014 Assessment on “Trends driving the supply and demand for timber” (p. 123). It talks about mills, but doesn’t mention any of this. About the closest it gets is: “Actual timber volume offered is also influenced by factors outside the authority of the Forest Service. For example, forest conditions on adjacent non-national forest lands can limit harvesting opportunities on Forest Service lands, in order to provide for wildlife habitat needs.” A serious plan would have taken into account what was likely to occur on those lands and the implications for the national forest.

    • TIMOs and REITs certainly have a focus on profits, just like other enterprises, but they can and do manage forests for the long term. Here’s a quote from a 2017 article I wrote, in which I interviewed Gus Gerrits, a forester in western Washington State who was managing a property for a large large institutional investor:

      “They plan to make some of their money back by selling the property, so they’re not looking to come in and cut everything off and leave a piece of ground that’s cut over,” Gerrits said. “So we do a lot of silvicultural work—PCT [precommercial thinning], commercial thinning—the same as if they were going to keep the property and harvest again at 45 years. And we do a lot of roadwork to keep the property well-maintained, so that when it does go up for sale, it’s a very valuable property. This particular client is not afraid to spend money on silviculture, because they know that if [the timber] is growing strong and ready to be harvested in 20 or 30 years without needing any more management, it’s going to make the property that much more valuable.”


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