August 26, 2001

Not Just for the Birds: Timber Is a Commodity for the Long Run
By ELIZABETH REED SMITH

Investors who have lost patience with the stock market may want to take a walk in the woods. Trees, harvested as timber, make up one of the few investments whose returns have outpaced stocks, bonds and real estate over the last 30 years.

Timber has a built-in hedge against price fluctuations. If log prices drop, owners can put off harvesting trees. In the meantime, the trees grow more valuable.

"It's a unique asset class," said Richard J. Holohan, a timber analyst at Salomon Smith Barney. "I haven't come up with anything like it, in that if you don't like the price of timber, you don't cut the tree, and it grows thicker in cubic feet. People pay more for a thicker tree."

Wealthy investors and institutions including universities, pension funds and foundations unearthed the merits of the sector long ago. They use investment firms to manage their forests. While it is more difficult for individuals to invest in the commodity, they still have choices, analysts say.

The main appeal of the sector is its long-term profitability. Over the last 30 years, annualized returns on timber have averaged 15.2 percent, compared with 13.2 percent for the Standard & Poor's 500-stock index, according to a study published by the Hancock Natural Resource Group, a unit of John Hancock Financial Services (news/quote). The group, based in Boston, oversees three million acres for 42 institutional investors, including the California Public Employees' Retirement System, known as Calpers, the largest pension fund in the country.

Timber investing also has some tax advantages. The I.R.S. views profits from the sale of the commodity as capital gains, taxing them at a rate of no more than 20 percent.

Investors with less than $100,000 for buying timberland may want to acquire shares in publicly traded companies instead. Few, however, are pure timber plays. Blue-chip companies like International Paper (news/quote) and Weyerhaeuser (news/quote) own huge forest tracts, but their balance sheets are also laden with mills and inventories of finished goods.

"Most of these companies are selling finished goods," said Eva Greger, managing partner of GMO Renewable Resources, the timber management unit of Grantham, Mayo, Van Otterloo, a money manager based in Boston. "When you buy pure timber, you are not getting the processing assets and the liability that comes with them."

The best bet, Mr. Holohan said, is the Plum Creek Timber Company (news/quote), which is fast becoming the most powerful of publicly traded pure timber businesses. Plum Creek, a real estate investment trust based in Seattle, won shareholder approval on Aug. 15 to merge with the Timber Company, a separate operating group controlled by Georgia-Pacific (news/quote). Plum Creek management will assume control of the company, which will bear the Plum Creek name.

The merger, scheduled to close in October, will turn Plum Creek into the second-largest timberland owner in the United States, with holdings of 7.9 million acres, behind International Paper. Plum Creek now owns 3.2 million acres.

Plum Creek shares struck a 52- week high of $30 on Aug. 14, the day before the merger vote; they now trade at $29.30. Despite that price, Chip Rewey, senior portfolio manager at Sloate, Weisman, Murray & Company, a money manager based in New York, said the company had room to grow. "I think the stock still has upside at this point," Mr. Rewey said, adding that he focused mainly on the stock's dividend yield because real estate investment trusts are forced to pay out most of their earnings in exchange for beneficial tax treatment. Plum Creek now pays out $2.28 a share in a tax-advantaged annual dividend.


T its current price, and excluding the tax advantage,that is a yield of about 7.8 percent, accounting for a sizable portion of the company's total 2000 return of 13.86 percent, the company said. In a report published last month, Mr. Holohan estimated that Plum Creek would earn 95 cents a share this year.

One drawback to Plum Creek, some timber experts say, is that it is affected by trends of the overall real estate investment sector, even though it has nothing in common with these companies aside from its tax structure. Real estate investment trusts, known as REIT's, typically own commercial and residential properties.

"We are really a natural-resource company in REIT clothing," said Rick R. Holley, the chief executive of Plum Creek. "We are still educating people about that."

Plum Creek's rivals, none of them REIT's, are considerably smaller, Mr. Holohan said. Crown-Pacific Partners, based in Portland, Ore., is restructuring to cut its 77.6 percent debt-to-assets ratio while preserving its core timber assets, which total 800,000 acres. By comparison, Plum Creek's debt-to-assets ratio is 58.4 percent. Crown Pacific last paid a quarterly dividend of 56 cents a share on Nov. 14 last year. Shares of Crown Pacific now trade at $7.45.

Rayonier Inc. (news/quote), based in Jacksonville, Fla., has 2.4 million acres of United States and New Zealand timber, but it also manufactures specialty pulp products. Weak pulp prices have hurt the company, according to a Morgan Stanley Dean Witter (news/quote) report issued last month. Rayonier trades at about 19 times earnings; its annual dividend of $1.44 a share yields 3 percent. Rayonier closed on Friday at $47.60.

Laura Sloate, chief investment officer at Sloate, Weisman, said that among these companies, Plum Creek had unparalleled flexibility because of its diverse timber holdings. "They have that luxury not to cut in certain areas because they are so big geographically," she said.