Timber titans see end to downturn

Firms say log prices probably hit nadir earlier this year


Capital Press

Major real estate investment trusts that control large swaths of U.S. forest land are reporting signs of economic improvement, but the road for the timber market remains bumpy.

"Business conditions appear to have stabilized in many of our markets," Rick Holley, president and CEO of Plum Creek, said during a recent conference call.

Plum Creek, a REIT, owns about 7 million acres of forest in the U.S. and derives its income primarily from timber and real estate sales, as well as some manufacturing.

Log prices are holding steady but remain historically low, which is in line with the organization's projections, said David Lambert, Plum Creek's senior vice president and chief financial officer.

"Generally, the markets are as expected," he said.

The firm's net income fell to $19 million in its most recent fiscal quarter, from about $69 million in the third quarter of 2008, according to filings with the U.S. Securities and Exchange Commission.

However, the company's overall financial performance so far this year has improved.

At $208 million, Plum Creek's net income for the first nine months of 2009 was up about 50 percent compared to 2008, largely due to lower costs and expenses, according to SEC filings.

The company believes log prices in the Pacific Northwest bottomed out in April, with the long downward slide reversing itself moderately since then, Holley said.

In a separate conference call, the head of another major timber REIT said he was "cautiously optimistic" about the market for timber.

Log prices probably reached a low point earlier in the second quarter of 2009, but the likelihood of a sharp rebound in the next six months is not high, said Michael Covey, president and CEO of Potlatch Corp., an investment trust that owns about 1.6 million acres of forest land in the U.S.

"We don't see a meaningful catalyst for saw log prices to rise in the fourth quarter (of 2009) or the first quarter of next year," Covey said.

Potlatch recently reported a substantial profit increase, with net earnings for the first nine months of the year rising 30 percent over 2008, to about $74 million, according to SEC filings.

However, those results were largely buoyed by a single $49 million timber deed sale in September.

"It's not a function of ongoing operations," said Brooks Mendell, president of Forisk Consulting, a firm that analyzes financial developments in the timber industry.

Rayonier, a REIT that controls about 2.5 million acres in the U.S. and New Zealand, reported a major jump in profits in 2009.

The company's net income rose to $215 million from about $105 million at this point in 2008, according to SEC filings.

However, those profits were strongly boosted by the U.S. government, which in April began providing the firm with a tax credit of $0.50 per gallon of "black liquor" used in its operations, according to SEC filings.

Black liquor is a byproduct of pulp mill operations that's used as an alternative fuel source.

The tax credit reduced Rayonier's costs by about $142 million in 2009, but it expires at the end of the year, according to SEC filings. Without the credit, the firm's profits would have dropped roughly 30 percent.

Plum Creek, Potlatch and Rayonier are exposed to different risks, but their performance tracks the demand for timber very closely, Mendell said.

The fate of REITs ultimately rests on residential construction, he said.

At about 573,000, housing starts in September were down nearly 30 percent from September 2008 and 50 percent down from September 2007, according to the most recent statistics from the U.S. Commerce Department.

"All three businesses are dying for improvements in the housing market," Mendell said.

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