With the market in its current state of fear and confusion, investors are looking for any signs of safety. This is evident by the current paltry rates on T-bills. While treasuries will provide safety, long-term investors, especially those with decades to spare, can do better and still remain safe.
Raw land and timber have been great places to position long-term money over the years as they have historically outpaced inflation. Timber has a low correlation to other asset classes and has served as a great diversification tool. Its replenishable asset base makes it ideal for long-term investors who have decades to wait. However, unless you're an institutional investor, like an Ivy League school endowment purchasing 100,000 acres worth of raw land in British Columbia, it is next to impossible. Regular investors do have a few choices in order to play the space, however.
Skip The ETFs: Buy The REITs
Recently Claymore Securities launched an exchange-traded fund (ETF) tied to the Clear Global Timber Index. This Index tracks a global group of stocks involved in the ownership and management of forests for the production of pulp and wood-based products. The ETF is called the Claymore/Clear Global Timber Index ETF (AMEX:CUT). Barclays Ishares followed suit by providing exposure to timber with a listing of its iShares S&P Global Timber & Forestry Index Fund (Nasdaq:WOOD).
While the Ishares and Claymore-traded funds may be useful to some investors, I think they miss the mark. Investors looking to participate in pure land ownership should look elsewhere. Each of the ETFs, in addition to timberlands, own a heavier weighting to paper-product companies, packaging firms and agricultural products. This makes them poor choices for a pure raw timberland play. While the ETFs are not necessarily bad funds, as they have their purpose, for most of us that purpose is lost.
Investors wanting to own a "pure" play of timber and forest land should focus their attention on the few Real Estate Investment Trusts (REIT) in the sector. While these are not 100 percent timberland owners, as they own saw mills and other tree-based side businesses, they are significantly greater correlated to the asset class than the ETFs and are the best way non-institutional money can own a piece of the timber pie.
In addition, these timber REITs offer healthy dividends over the miserly rates offered by the two ETFs - currently less than 1 percent for the Claymore fund and a 2.9% proposed yield for the Ishares. Timber REITs also benefit from a unique piece of tax code. Due to the fact that their main asset is harvested after a long period of time, their dividends are generally treated as a long-term capital gain and taxed at a maximum 15%.
Plum Creek Timber (NYSE:PCL) is the first and largest publicly held timber REIT, owning almost 8 million acres of timberland in 18 states. The former Burlington Resources spin-off was originally structured as a master limited partnership but converted to the REIT structure in 1999. In addition, Plum Creek owns and operates 10 wood-product manufacturing facilities and reserves rent and royalty payments via various activities on its land, including hunting leases and natural resource claims. It recently completed a two-year, $9.5 million project installing the world's largest biofilter in its Columbia Falls fiberboard plant. Vice President Henry Ricklefs feels this highly efficient technology might cost a little more than alternatives in the beginning, but it will be an environmentally sound product that will last longer.
On October 21, the board approved a $200 million buyback program. This allows the company to periodically buy back common stock using open-market purchases. Currently the shares yield around 4.4% or $1.68 per share.
Rayonier (NYSE:RYN) controls 2.6 million acres of forest territory certified by the Sustainable Forestry Initiative, including 343,000 acres in New Zealand. Rayonier recently put its New Zealand acreage up for sale to capture value for shareholders. The company also receives 40% of its revenue from sales outside the United States and Canada. This gives shareholders some international exposure. Rayonier is yielding 6 percent, or $2 a share, and has grown its dividend at an annualized 29% rate over the last five years. At a price-to-earnings ratio of 13, it is the cheapest of the three timber REITS.
Potlatch (NYSE:PCH) can trace its origins back to 1903 with its founding as the Potlatch Timber Co. While it is the smallest land owner of the three, the company still holds an impressive 1.7 million acres. Potlatch is also the only publicly traded forest land owner whose core reserves are 100% certified by the Forest Stewardship Council and the Rainforest Alliance. On October 23, it released its third-quarter earnings report. Net income fell 38% to $25.3 million, or earnings per share of 63 cents, down from $1.04 per share in Q3 2007. Even though this was a substantial drop, it beat earnings estimates of 51 cents, according to Reuters.
Recently, Potlatch announced plans for a tax-free spinoff of its pulp-based businesses to shareholders. The new company will be called Clearwater Paper. This would make Potlatch a more timber-focused entity. Potlatch closed the trading day down 2.9% at $32.84 and is paying over a 6 percent dividend yield or $2.04 per year.
Timber/raw land is a great long-term, low-correlated asset class that provides inflation protection. For the timber exposure, aside from owning natural land itself, individual retail investors could bypass the two current ETFs and pick up shares of previously mentioned REITs.