PCH - Weyerhaeuser: The Best Overall Timberland Play

2024-03-21 16:41:26 ET

Summary

• Timber pricing in the U.S. has not kept up with inflation due to oversupply, while lumber prices have risen significantly.
• Timber REITs have seen weak profitability from timber segments, but strong profit margins from wood products.
• The timber and timberland sector is transitioning from a decade of oversupply to long-term undersupply, driven by new sources of demand such as solar conversions and carbon capture.

While land is an inherently limited resource, timber has largely been oversupplied in the U.S. due to government incentives put in place long ago encouraging farmers and other large landowners to plant forests, particularly in the South. The forests planted in these incentive programs have been reaching maturity in the last decade resulting in an oversupply of timber and consequently low timber pricing. Note the TimberMart-South data showing pine sawtimber pricing about the same as 10 years ago.

Mixed hardwood sawtimber is up modestly over the 10 year period and pulpwood is actually down significantly. Overall, I think it is quite clear that timber pricing has not kept up with inflation and this is largely due to the aforementioned oversupply.

Lumber, however, has been much more favorably priced. For clarity, here is the difference between timber and lumber:

The timber real estate investment trusts, or REITs, have seen fairly weak profitability from their timber segments, instead deriving the bulk of their EBITDA from wood products. Vertical integration allowed Weyerhaeuser Company ( WY ) and Potlatch ( PCH ) to use much of their timber internally to make lumber and engineered wood products which have had much stronger profit margins....

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