Editor’s note: A previous version of this article stated that Weyerhaeuser would apply to become a REIT, when in fact it is already a REIT. The Fool regrets the error.
A persistent mountain pine beetle epidemic plus the housing crisis equals desperate times for Canadian forestry companies; many survivors are investing what's left into timberland located in the U.S. South.
In or around 2016, lumber supplies coming from Canada are expected to peak. Unless the situation deteriorates further, Canada's overall supply is expected to decrease by 9%, or 400,000 homes worth of wood products.
As you can see in red, the area affected increased substantially through 2009, and to my knowledge the progress hasn't slowed. Thus far, the mountain pine beetle epidemic has spread across 43 million acres, killing 710 million cubic meters of timber since the current infestation began.
The allowable annual cut (AAC) over the same time period was 71 to 78 million cubic meters ; so they've already lost about a decades worth of trees.
It's happening for three key reasons
1) Governmental lands are not professionally managed
2) Old growth, mature trees (+80 years) are more susceptible to disease and harmful insects
3) Less than harsh winters have not slowed the pine beetles progress
Canada's bad news is good news if you own timberland in the US
Timber is a highly fragmented business; countless families own more than 25 acres.
Aside from going out and buying the real thing, owning Plum Creek Timber (NYSE:PCL) is one of the best ways to capitalize on Peak Lumber. Pioneers of the timber REIT, Plum Creek is arguably the most diversified pure-play land and timber investment available.
A sophisticated market maker of timber acreage. Plum Creek is often selling when others are eager to buy and vice versa. Rick R. Holley, CEO, has stated: "Asset allocation decisions will be the difference between good returns and great returns" (Foolish investors couldn't argue with him).
Owning and managing 6.3 million acres, Plum Creek's 470 professional foresters are working with an eye toward maximizing the value of trees and resources on every acre. By closely monitoring their lands, the risk of a pine-beetle-like infestation is greatly reduced, because any problem areas can be identified and eliminated before they spread.
The team has done a superb job of allocating assets so far; if their financial position was a tree it would have to be a mature white oak (strong to quite strong) or ponderosa pine (for those in the Pacific NW). Old reliable, Plum Creek has been making quarterly dividend payments to shareholders since 1996.
Patience pays: Buyers of Plum Creek below $44 can lock in a 4% yield
Plum Creek's management team has positioned the company to profit from the inevitable, a point in the construction cycle when rising lumber demand is met with Canada's falling supply.
Weyerhaeuser (NYSE:WY) is another name that could benefit as a result of the mountain pine beetle epidemic.
Through names such as Pardee and Quadrant, they rank among the twenty largest home builders, but just for the time being. Weyerhaeuser has stated publicly they are pursuing strategic alternatives for the home builder division.
Post sale or spin-off, Weyerhaeuser will begin to look more like a pure-play on timber assets. After acquiring Long View Timber for $2.65 billion ($4,100 per acre), Weyerhaeuser owns approximately 7 million acres.
Rayonier (NYSE:RYN) is third largest, with 2.4 million acres owned— 80% of which are located in the US South. The location, location, location piece would be its 200,000 HBU (higher and better use) acres along the I-95 coastal corridor between Savannah, GA and Palm Coast, FL.
Plum Creek values its HBU acreage between $2,000 and $4,000 per acre. If comparable, Rayonier's coastal properties could be worth $600 million on their own.
Rayonier's performance fibers segment was responsible for 60% of EBITDA in the most recent quarter; forest resources and real estate made up the difference. Dividends have been growing at 36% since 2007.
Plant some money into the forestry business...
Post-2016, there will be a point in the construction cycle when rising lumber demand worldwide is met with Canada's falling supply.
Plum Creek Timber, Weyerhaeuser, and Rayonier are all heavy hitters. They will be willing and able to increase production when prices warrant doing so. Until then, the trees will keep on growing and the dividends should keep on flowing.
Daniel is long shares of PCL in client portfolios. Mini-Mutual Funds by Daniel T. Cook & Partners LLC. Daniel T. Cook & Partners, LLC is registered with the State of Florida as a (RIA) Registered Investment Advisor. Custodial and clearing services are provided through Scottrade Advisor Services, member. SIPC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.