Timber REITs: do they behave like direct timberland investments?

Implications: Publicly-traded timber REITs - such as Plum Creek and Rayonier - provide a liquid and tax efficient structure for investor participation in timberland-related investments.  Non-traded timber REITs retain the tax efficiency, but sacrifice certain liquidity benefits, depending on the operating agreements.  In addition, and perhaps most importantly, timber REIT investment performance does not mirror the risk and return characteristics of direct timberland investments.

Analysis: Publicly-traded timber REITs - such as Plum Creek, Rayonier and Potlatch - provide a liquid and tax efficient structure for investor participation in timberland-related investments.  The tax efficiency benefit addresses the double-taxation problem of traditional C-corporations - like Weyerhaeuser - that pay taxes at the corporate level on timber earnings, in addition to the taxes paid by their shareholders on dividends.  The liquidity provided by public-shares addresses the high barriers to entry for direct, hard-asset timberland investing.

Non-traded timber REITs retain the tax efficiency, but sacrifice certain liquidity benefits, depending on the operating agreements. Wells Fargo is not alone in this space as other institutional investment managers and private firms have and manage timberlands in non-traded REITs that are marketed in a quasi-public format.  A specific challenge for Wells Fargo will be the acquisition of sufficient timberland assets at sufficiently attractive prices to generate satisfactory returns.

In addition, and perhaps most importantly, timber REIT investment performance does not mirror the risk and return characteristics of direct timberland investments.  Current research by Forisk highlights how REIT structures can minimize the best attributes of timberland investments, including enhanced portfolio diversification.