With the growing value of timberland, REIT conversion is all the rage among forest-product companies. However, if timberland REITs are so beneficial, why are two of them, Rayonier (NYSE: RYN) and Plum Creek Timber (NYSE: PCL), trading at a discount while non-REIT Weyerhaeuser's (NYSE: WY) shares are outperforming them both? Let's have a look.

Timberland is an attractive investment for a variety of reasons: prices are stable and continue to rise, timberland owners can delay a harvest if they perceive prices are too low, wealthy baby boomers are retiring in rural areas and even the prospect of alternative fuels. Timber REITs are a way to buy an interest in timberland and have liquidity on top of it. (To learn more on REITs, see What Are REITs? and The REIT Way.)

Get Paid to Wait
With a market capitalization of not quite $3.5 billion, Rayonier is one of the largest owners of timberland in the United States and also does business in New Zealand and Australia. It has three core businesses: timberland management, real estate sales and development, and cellulose fiber. Combined, these businesses bring in $1.1 billion in sales which results in $277 million in gross profit and a 17.3% return on equity. All this sounds incredibly ordinary, doesn't it?

The reason you may want to take a look at Rayonier is that it is an asset play, pure and simple. At current prices it is trading at a steep discount to what it is conceivably worth. The closing price on Friday, June 8, 2007 was $44.29 per share. Based on recent transactions of other timberland sales, the company is worth somewhere between $51 and $57 per share.

The risks to owning Rayonier are more systematic than individual: forest fires, a prolonged period of weakness in housing or government/environmental considerations. However, RYN's dividend yields 4.24% and is taxed at capital gains rates while you wait.

Another Asset Play
Plum Creek Timber Company is the largest private-timberland owner in the United States with 8.2 million acres spread across 21 states. It is also a REIT, and is similar in most respects to Rayonier discussed above, but it is literally double the size as measured by market capitalization ($7.2 billion versus $3.5 billion).

Plum Creek has been busy selling off its properties that are better suited to recreation and development. It then uses the cash to purchase additional pure timberland at a far lower price. Because of its size and geographic reach, PCL enjoys something of a competitive advantage but again, the reason for looking at these shares is the discount they are trading at relative to what they are actually worth.

And again, while you wait for something to happen, you get paid a tax-advantaged 4.14%

The Big IF
Unlike Rayonier and Plum Creek, Weyerhaeuser is not an REIT. It is a corporation ($17.7 billion market cap) and has other businesses beyond timber. WY is the industry's model of vertical integration, having paper, containerboard, packaging and recycling business in addition to its timberland. The big "IF" is, will management sell off the containerboard as well as the paper and perhaps other assets, and would it then operate as a timber REIT? Management says it's considering all strategic options. Also, management's not shy about saying that the company is feeling heat from its investors to convert into an REIT.

The effects of a weak housing market are being felt by Weyerhaeuser more than its peer group. However, its pulp and packaging business has cushioned the housing weakness because of its other industrial applications. Although the sale of its fine-paper business enabled WY to half its $12 billion debt load, the sale of its pulp and packaging business would be worrisome, as the company would then lose this cushion.

While you wait to find out the answer to the big "if", your dividend will yield you not quite 3% and is fully taxable. The company's revenue of $21 billion should remove any angst you have over the safety of the dividend.

The End Game
Why is WY feeling the heat to convert to a more tax-advantaged REIT? Rayonier's stock appreciated 133% between the time the company announced its intention to convert to a REIT in July of 2003 and when it actually became a REIT in January of 2004.

However, before you pick up the phone or click that mouse, consider this: Rayonier's P/E multiple is about 18-times, PCL's is roughly 27-times and Weyerhaeuser is a whopping 123-times. It all comes down to sales prices and timber prices. One more item you should consider: The mountain pine beetle has destroyed 17 million acres of timberland in Canada. The area will recover, and when this happens, what will be the effect of this over supply? Your pencil better be very sharp on this one.

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