Is Wells comiing to the party too late?

Implications: Timberland has been an excellent investment over the last 30 years – both for the return it has provided,  and as a diversification vehicle. Wells with their experience in other forms of REITs is expanding their product mix by launching a Timberland REIT.  However, in some important  timber regions of the country, much of the investment grade timberland is either already in publicly traded REITSs or controlled by Timber Investment Management Organizations (TIMOs ) either as non traded REITs or limited partnerships.

Analysis: In several important US timber regions (most notably the Pacific Northwest and the Northeast) virtually all the large blocks of investment grade timberland was owned by large vertically integrated forest products companies.  With a few notable exceptions (e.g.Temple-Inland NYSE:TIN  and Weyerhaeuser NYSE:WY) these lands are now in publicly traded REITs (e.g. Potlatch NYSE:PCH and Rayonier NYSE:RYN) or controlled  by TIMO’s such as John Hancock Timber Resources Group, Forest Capital Partners, and The Campbell Group, among others who manage them as nontraded REITs or limited partnerships.

Though some work can be contracted out to consultants, a local forestry staff is required order to properly manage timberland for a group of investors. It takes on the order of > 10,000 – 30, 000 acres (depending on the region) within commuting distance of a local company forestry office to economically justify this staff. Also, large contiguous blocks of ownership are much less costly (on a per acre basis) and easier and less costly to manage than small scattered blocks. Since in several regions the  availability of investment grade timberland in economically efficient sized blocks that would be available at a cost that will provide an acceptable return on investment is extremely limited, it is problematic whether Wells will be able to meet their goal of geographical and timber type diversity anytime soon.

The increased competition for investment grade timberland that the entry of a large player like Wells into the TIMO arena brings and the higher timberland prices for such land that will likely ensue should be a boon for companies such as TIN that have large timberland holdings that could be available for sale. That could also apply to WY in the unlikely event that they sell their timberlands, but they’re more likely to convert to a REIT.