Believe it or not, betting on companies that harvest and sell timber is a type of real estate investment. Timber real estate investment trusts (REITs) have a strong connection to the housing market and their fortunes rise and fall with other real estate investments.
Although they're not your traditional investment in brick-and-mortar buildings, timber real estate investment trusts (REITs) have become a popular asset class. There are currently four timber REITs -- together, they own more than 17 million acres of timberlands.
- Potlatch (Spokane, Washington)
- CatchMark (Atlanta, Georgia)
- Rayonier (Wildlight, Florida.)
- Weyerhaeuser (Seattle, Washington)
Timber REITs have had a tough time in recent years resulting in negative returns. Uncertainty in the housing market coupled with rising interest rates and worrisome regulations all wore on timber REITs in 2018.
Moreover, the timber industry is extremely sensitive to changes in the economy and there’s not much guaranteed income like there is in most other REITs. The income from timber REITs is strictly based on market prices and industry demand.
Since timber REITs produce wood, the price can only go as high as demand for it allows. And about half of the demand comes from the housing industry.
Timber REIT comeback
Investors looking to diversify their portfolio with this niche REIT may have economic and demographic trends in their favor. While a slowdown in the housing market made for a tumultuous 2018, 2019 has proven to be a better year for the sector.
"Timber REIT performance is tied to the housing market and thus to a strengthening economy. As economic conditions and employment improve, housing starts [to] rise and increase the demand for lumber," notes the REIT Institute.
These four timber REITs practice sustainable foresting and their land is certified by the Sustainable Forestry Initiative or the Forest Stewardship Council. This bodes well for the future.
The Top Timber REITs
|REIT||Headquarters||1-Year Total Return|
|PotlatchDeltic (NASDAQ: PCH)||Spokane, Washington||24.33%|
|CatchMark Timber (NYSE: CTT)||Atlanta, Georgia||37.10%|
|Weyerhaeuser (NYSE: WY)||Seattle, Washington||18.39%|
|Rayonier (NYSE: RYN)||Wildlight, Florida||-0.76%|
Let's take a look at each timber REIT individually.
PotlatchDeltic has about 1.9 million acres of timberland in Alabama, Arkansas, Idaho, Louisiana, Minnesota, and Mississippi. It was founded in 1903 as Potlatch Lumber.
The REIT acquired Deltic Timber two years ago, helping expand its harvest volumes and increase lumber production. PotlatchDeltic manufactures and sells lumber, panels, and particle boards.
CatchMark Timber Trust is headquartered in Atlanta. This is a newer timber REIT and was founded in 2007. CatchMark owns 1.6 million acres of timberland.
The CEO recently said people should encourage healthy timberland and lumber markets because it’s an incentive for landowners to commit the capital to reforestation. CatchMark is focused exclusively on timberland ownership and management.
Weyerhaeuser is one of the largest and oldest REITs in the country. The Seattle-based company has been around since the early 1900s and went public in the 1970s when it owned 900,000 acres of land. Weyerhaeuser became a REIT in 2010.
The company owns or controls more than 13 million acres and manages an additional 14 million acres of timberlands in Canada. Along with lumber sales, the company owns and manages real estate, energy, and natural resources. It also sells wood products.
Rayonier has headquarters in the U.S. and New Zealand. This REIT owns 2.4 million acres of land and was founded in 1926. Although it’s considerably smaller than the largest timber REIT, Rayonier is still the second-largest REIT in its sector.
The company’s CEO recently said that trade tensions with China haven’t necessarily impacted Rayonier’s market outlook. He added that China continues to have a large need to import wood. Rayonier has been involved in several smaller deals in 2019.
Forecast for timber REIT investing
With demographic trends suggesting a comeback of the single-family housing market in 2020 and beyond, the long-term outlook for timber REITs appears to be strong. But if the economy takes a fall, so do these REITs, since consumers have less to spend on timber.
Timberland is a hedge against inflation, according to the Realtors Land Institute, which says that historical data on timberland returns and inflation show a positive correlation between the two.
Moreover, trees continue to grow in volume (and value), regardless of economic conditions.
The Realtors Land Institute also points out a few potential pitfalls to be aware of with timber REIT investing, including market uncertainty and the fact that timber isn't a liquid asset (it can take 6–18 months to sell). Environmental and weather challenges can also pose problems, but geographic diversification helps lower those risks.
Should you invest in timber REITs?
Timber REITs got a bad rap in 2018, but are expected to recover as home building and remodeling rebounds. Want to learn more about timber REITs? Check out our full guide to investing in this asset class.