Timberland’s Towering Potential
In times of inflationary peril, hard assets have been shown to outperform in bubble after bubble. Real estate in particular has always been an extremely effective inflation hedge, given that there is limited supply and nearly constant upward pressure on prices over the long-term thanks to population growth.
While all types of real estate typically hold and even gain in value during times of inflation, some types of real estate perform better than others. For instance, commercial real estate such as shopping centers and regional malls can lag other property types due to the negative impact inflation can have on consumer spending.
Residential real estate such as apartment complexes performs better than commercial real estate, given that most units are on year-to-year leases versus the longer five-year terms typical in commercial real estate. Because of more frequent re-pricing intervals and the constant turnover of units, multi-family developments are able to respond much more quickly to rising housing prices.
Interestingly, though, hotels outperform apartments thanks to the fact that those properties are literally re-priced every 24 hours. So as long as the broader economy is still relatively healthy, they are the most nimble of all.
According to data from the Campbell Group, a timberland investment management company with assets under management up and down the West Coast and in the southern US, timberland is probably the best long-term real estate inflation hedge. Their data shows that between 1987 and 2012, timberland showed a correlation to inflation of about 0.45. From a broader perspective, that lagged only US Treasury Bills and the S&P Goldman Sachs Commodity Index, which both had correlations of about 0.65.
According to other data, historically timber prices have increased much faster that overall prices for more than a century and, during America’s last great inflationary run between 1973 and 1981, timberland values gained an average 22 percent annually.
And demand isn’t expected to slow any time soon. In 2011, the Food and Agriculture Organization of the United Nations forecasted wood demand will double by 2040.
Weyerhaeuser Co (NYSE: WY) has long been one of my favorite plays on timberland and it has recently become even more attractive.
The company operates in four basic units: wood products, cellulose fibers, timberlands and real estate.
The wood products division, which generates about 40 percent of revenue, produces and markets joists used as structural supports, oriented strand board used in walls and floors, and lumber that’s found at any do-it-yourself or hardware store.
Making products that are used in everything from toothpaste and newspapers to diapers and bandages, Weyerhaeuser’s cellulose fibers operation generates 24 percent of the company’s revenue. Given the ubiquity of cellulose fibers, this business provides buoyancy to the company’s earnings, even in down cycles, and is typically one of its strongest performers in terms of growth.
While about a third of the cellulose fiber the company produces is consumed in North America, about 25 percent is ultimately sold into the ex-Japan Asian market, i.e. China. Another 15 percent usually finds its way to Japan and 12 percent to Europe, with the remainder sold to other emerging markets.
A major driver of the growth in the fiber division is Weyerhaeuser’s innovation in developing proprietary varieties of fibers, helping to shield it from the extremely competitive nature of the cellulose fiber market. With relatively low barriers to entry, the pulp market sees a fairly steady flow of newcomers, particularly when prices are as high as they are now.
For the purposes of an inflation hedge, we’re most interested in the company’s timberlands, which typically account for about a quarter of revenues.
The company controls about 6 million acres of timber forest, with about a third of its holdings located in the extremely productive Pacific Northwest region of the US, which primarily produces Douglas fir. The remaining two-thirds mostly consist of pine producing forests in the Southern US, with about 300,000 acres of pine and eucalyptus property in Uruguay.
The Pacific Northwest is the most productive timberland in the US, thanks to its cool, damp climate and typically abundant rainfall. The Douglas fir that dominates the region is also a much higher value wood than the pine typically harvested in other parts of the country.
The fact that it’s the largest timber producer in the Pacific Northwest makes Weyerhaeuser extremely attractive, because the company’s location gives it easy export access to China. This location also leaves it well placed to pick up the supply slack created by lower production caps in Canada, which is typically a key Chinese supplier.
Weyerhaeuser was hard hit during the 2007-2009 recession. During this period, the company’s earnings plummeted and its share price fell from a high of about $60 to a low of $19. Since then, it has given itself a complete makeover, unloading its paper and corrugated packaging businesses and converting itself into a real estate investment trust in 2010.
That transformation has dramatically improved the company’s performance and efficiency, speeding its return to post-recession profitability. And now it is about to take another transformational step.
Weyerhaeuser has long been one of the top 20 homebuilders in the US, with the company’s real estate division typically accounting for between 10 percent and 15 percent of total revenue. But in bad times such as the real estate bust a few years ago, the homebuilding unit is a serious drag on profits even as it ties up capital.
Recognizing that, last month the company announced that it would separate out its homebuilding operations in the coming months, either through a spin off or split off. It will then merge with TRI Pointe Homes (NYSE: THP) in a combination that creates a new top 10 US homebuilder valued at about $3 billion, of which Weyerhaeuser shareholders will own about 80 percent.
While the details of the transaction are still being ironed out—the goal is for the deal to ultimately be tax free—it is expected to close sometime in the second quarter.
The upshot: This company is unlocking significant value for shareholders by creating a standalone homebuilder, while also providing an increasingly attractive inflation hedge. Weyerhaeuser Co is a buy up to 40.
While all types of real estate typically hold and even gain in value during times of inflation, some types of real estate perform better than others. For instance, commercial real estate such as shopping centers and regional malls can lag other property types due to the negative impact inflation can have on consumer spending.
Residential real estate such as apartment complexes performs better than commercial real estate, given that most units are on year-to-year leases versus the longer five-year terms typical in commercial real estate. Because of more frequent re-pricing intervals and the constant turnover of units, multi-family developments are able to respond much more quickly to rising housing prices.
Interestingly, though, hotels outperform apartments thanks to the fact that those properties are literally re-priced every 24 hours. So as long as the broader economy is still relatively healthy, they are the most nimble of all.
According to data from the Campbell Group, a timberland investment management company with assets under management up and down the West Coast and in the southern US, timberland is probably the best long-term real estate inflation hedge. Their data shows that between 1987 and 2012, timberland showed a correlation to inflation of about 0.45. From a broader perspective, that lagged only US Treasury Bills and the S&P Goldman Sachs Commodity Index, which both had correlations of about 0.65.
According to other data, historically timber prices have increased much faster that overall prices for more than a century and, during America’s last great inflationary run between 1973 and 1981, timberland values gained an average 22 percent annually.
And demand isn’t expected to slow any time soon. In 2011, the Food and Agriculture Organization of the United Nations forecasted wood demand will double by 2040.
Weyerhaeuser Co (NYSE: WY) has long been one of my favorite plays on timberland and it has recently become even more attractive.
The company operates in four basic units: wood products, cellulose fibers, timberlands and real estate.
The wood products division, which generates about 40 percent of revenue, produces and markets joists used as structural supports, oriented strand board used in walls and floors, and lumber that’s found at any do-it-yourself or hardware store.
Making products that are used in everything from toothpaste and newspapers to diapers and bandages, Weyerhaeuser’s cellulose fibers operation generates 24 percent of the company’s revenue. Given the ubiquity of cellulose fibers, this business provides buoyancy to the company’s earnings, even in down cycles, and is typically one of its strongest performers in terms of growth.
While about a third of the cellulose fiber the company produces is consumed in North America, about 25 percent is ultimately sold into the ex-Japan Asian market, i.e. China. Another 15 percent usually finds its way to Japan and 12 percent to Europe, with the remainder sold to other emerging markets.
A major driver of the growth in the fiber division is Weyerhaeuser’s innovation in developing proprietary varieties of fibers, helping to shield it from the extremely competitive nature of the cellulose fiber market. With relatively low barriers to entry, the pulp market sees a fairly steady flow of newcomers, particularly when prices are as high as they are now.
For the purposes of an inflation hedge, we’re most interested in the company’s timberlands, which typically account for about a quarter of revenues.
The company controls about 6 million acres of timber forest, with about a third of its holdings located in the extremely productive Pacific Northwest region of the US, which primarily produces Douglas fir. The remaining two-thirds mostly consist of pine producing forests in the Southern US, with about 300,000 acres of pine and eucalyptus property in Uruguay.
The Pacific Northwest is the most productive timberland in the US, thanks to its cool, damp climate and typically abundant rainfall. The Douglas fir that dominates the region is also a much higher value wood than the pine typically harvested in other parts of the country.
The fact that it’s the largest timber producer in the Pacific Northwest makes Weyerhaeuser extremely attractive, because the company’s location gives it easy export access to China. This location also leaves it well placed to pick up the supply slack created by lower production caps in Canada, which is typically a key Chinese supplier.
Weyerhaeuser was hard hit during the 2007-2009 recession. During this period, the company’s earnings plummeted and its share price fell from a high of about $60 to a low of $19. Since then, it has given itself a complete makeover, unloading its paper and corrugated packaging businesses and converting itself into a real estate investment trust in 2010.
That transformation has dramatically improved the company’s performance and efficiency, speeding its return to post-recession profitability. And now it is about to take another transformational step.
Weyerhaeuser has long been one of the top 20 homebuilders in the US, with the company’s real estate division typically accounting for between 10 percent and 15 percent of total revenue. But in bad times such as the real estate bust a few years ago, the homebuilding unit is a serious drag on profits even as it ties up capital.
Recognizing that, last month the company announced that it would separate out its homebuilding operations in the coming months, either through a spin off or split off. It will then merge with TRI Pointe Homes (NYSE: THP) in a combination that creates a new top 10 US homebuilder valued at about $3 billion, of which Weyerhaeuser shareholders will own about 80 percent.
While the details of the transaction are still being ironed out—the goal is for the deal to ultimately be tax free—it is expected to close sometime in the second quarter.
The upshot: This company is unlocking significant value for shareholders by creating a standalone homebuilder, while also providing an increasingly attractive inflation hedge. Weyerhaeuser Co is a buy up to 40.