One of the strongest sectors of the U.S. economy is housing, and the economy appears to be in the middle of an extended recovery. Investors can find many ways to participate in this trend, but one not frequently considered is timber real estate investment trusts.
Weyerhaeuser is the behemoth in the sector. It has been around since 1900 and now owns or controls more than 13 million acres of forest lands. Weyerhaeuser shares have a market capitalization of $24.12 billion, following its acquisition of Plum Creek Timber in February 2016.
Rayonier is a smaller operator, with 2.7 million acres of working forests and a market capitalization of $3.39 billion. It has been around for 90 years.
It's important for timber to be as close as possible to end markets and transportation. Both of these companies primarily produce lumber in the U.S., although Weyerhaeuser is also in Canada and Rayonier operates in New Zealand (close to China, a very important end market).
The beauty of timber as a resource is that it grows! Each and every year a tree enlarges its circumference. If sustainably harvested, timberlands can become an increasingly valuable commodity. Demand for pulpwood (converted into items such as paper towels and toilet paper) and logs (for lumber) rises and falls depending on economic conditions around the globe. Consider that China's slowdown over the past couple of years reduced its need for imported logs, causing prices to weaken for exporters in New Zealand and the U.S. Pacific Northwest.
The current health of the housing industry seems to be setting up for better conditions domestically and potential improvement in China. Prices are gradually rising.
When you own millions of acres of forest land, what do you also own? Real estate with the potential to be developed. Rayonier analyzes property in the southeastern U.S. for its greatest potential and highest business use. When it determines that forest land is valuable for residential, commercial or industrial use, it sells or develops the land for a higher profit. You can imagine that some lands in northeast Florida might be extremely valuable for development. This is another profit center for Rayonier. (And, as a company, it generates more than $500 million in revenue from only about 325 employees!)
What does it mean that these companies operate as REITs? As an investment vehicle, REITs were created by Congress in 1960 to allow investors to commit funds efficiently to income-producing real estate. REITs legally avoid paying federal income tax by distributing at least 90% of their taxable income to shareholders as dividends. (A portion of the payout may be classified as a return of capital, generating modest tax benefits and extra record-keeping for taxable investment accounts.)
Weyerhaueser and Rayonier are strong domestic operators with dividend yields in the 3.5% to 4% range. If you're looking for solid investment income, likely asset growth and the potential for equity appreciation, you might want to take a chip out of these companies. After all, the housing industry likely will always need timber.
This article is commentary by an independent contributor. At the time of publication, the author held positions in RYN.
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