With new ledearship, Will WY succomb to change, or stay the course?

Implications: Over the last 10 years over 20 million acres of C-Corp ownership have been converted from fee simple to Timber Management Organization (TIMOs) and REITs.  The last holdout and the one of the largest landowners of all time is the Weyerhaeuser Corporation.  WY owns about 6.8 million acres of timberland in the United States, and also leases over 30 million acres of land in Canada, not included in this discussion.   In my previous role in timberland planning, I was constantly asked to explain the economic rationale of owning forestlands.  Over the years I realized that the discussion boils down to the proper quantification of cash flow from timberlands, the financial risk of these timberlands, and the cost ramifications of divesting timberlands.  

Analysis:  Most large integrated forest products companies purchased their timberlands no later than 1950 with some going back as far as the 1870s. Many of these acres were purchased during the depression at rock bottom prices. Timber is depleted not depreciated and the bare land itself is not depleteable.   If you own a tract for 100 years, the current timber value is likely fully depleted and the timber coming off the tract is extremely low cost, especially when compared to outside market prices at the next margin. These low cost fiber sources are most often co-mingled with other more expensive fiber, and the cost advantage can get lost in the shuffle, which amounts to a subsidy of the manufacturing facilities.  Timberlands have historically been investments that are inherently low risk, with published betas in the 0.5 to 1.0 range.  Another confounding principle is that under GAAP, Fee timberlands are not allowed to claim unrealized gains as a component of returns.  Both TIMOs and REITs are allowed to quantify these gains.   The Fee timberlands contribution to the vertically integrated timber/pulp/paper company would follow  
1.      Biological Growth                                         (2 -  5%/  Year)
2.      Price escalation for pulpwood, etc                 (1 -  2% / Year) 3.      Out sale of high value timber products          (0.5-1% / Year) 4.      Total “value” of Fee lands                             (3.5 -8%/ Year)  

Remember that these rough return estimates are understated if compared to REITs, again due to GAAP, and that these values are achieved at a very low beta.  Fee timber also hugely buffers the cost curve for the benefitting mill, with 10-50% of the total required fiber coming from these integrated lands.  Having said all that, the sale of these Fee lands generates Millions of dollars in cash – which must be handled with extreme caution – to minimize potential tax liabilities.  This would lead us to discussion of REIT formation and the Reverse Morris Trust.  Topics for another day.