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Industrial Timberland Ownership: Trends and Current Status in the U.S.A.

Brooks C. Mendell, Ph.D.
FORISK Consulting
 
 

 
While estimates of industrial ownership range from only 9% to 17% of overall U.S. timberland ownership through the 20^th century, this ownership is considered the most productive from a forest management perspective (Society of American Foresters 2006; Clutter et al. 2005; Sacco 2005).  Industrial timberland ownership is associated with intensive management of natural and planted stands that produce more wood volume in less time and experience fewer losses from fire, disease, and insects than do publicly or other privately owned forests.
 

Traditionally, the forest products industry viewed timberland ownership as strategic and necessary to remain competitive (Yin et al 1998). However, this thinking has changed and traditional industrial owners have been divesting timberland assets. Over 23 million acres of industrial timberlands changed ownership from 2000 to 2004 alone (Wilent 2004). These transactions featured traditional vertically integrated forest products companies selling to a new generation of institutional and financial investors classified as timberland investment management organizations (TIMOs). A current industry profile includes more former than current timberland owners, and a growing group of timberland-owning real estate investment trusts.  Several compnies that still own timberlands hav announced plans for divestiture as well (Table 1).
 

Table 1. Former and current U.S.A. industrial timberland owners (as of March 2007)

Sources: Sacco 2005; Mendell 2005
 

Why is the Forest Products Industry Divesting Timberlands?

 
Operational, regulatory, and financial reasons encouraged this shift away from industrial ownership.  On the ground at the wood procurement level, it became clear that timber markets had become more liquid, permitting wood using facilities to satisfy their raw materials needs without actually owning timberlands.  Also, institutional investors argued that forest management is a commodity service and that, operationally, managers in timber-specific firms could manage these assets more efficiently.
 

Regulations, in the form of tax laws, put traditional C-corporations, at a direct tax disadvantage relative to real estate investment trusts (REITs) and the single-taxed limited liability corporations (LLCs) and S-corporations of private investors. C-corps face “double-taxation” as they pay federal income taxes and their shareholders pay personal income taxes on dividend distributions.  Alternately, REITs, LLCs and S-corps – assuming they meet specific operational and organizational requirements – do not pay taxes at the corporate level and are thus more attractive to shareholders.  Thus, financially, one can argue that timberland should be owned in a single-layer tax structure, no exceptions.  Potlatch and Longview Fiber came to this conclusion and, as of January 2006, restructured as timber REITs, joining Plum Creek Timber and Rayonier (Mendell 2005).
 

In addition, rising property taxes and disparate property tax policies – particularly in Georgia – raised the annual operating and opportunity costs of owning timberlands. Increasing land values near population centers such as Atlanta and recreation centers such as Florida complicated the economics of growing timber for corporate managers.
 

This reality of the tax code and poor forest industry performance relative to broader measures of stock market performance created pressure on industry executives to improve financial returns (Table 2). Industry consolidation during the 1990’s through 2004 left firms such as Georgia-Pacific, International Paper, and Weyerhaeuser with debt-laden balance sheets.  Divesting timberlands provided a ready means for generating cash to pay down debt and “unlock” shareholder value.
 

Table 2: Forest Product industry performance relative to key benchmarks

Source:  Wall Street Journal, 2/28/05
 

In part due to these issues, timberland ownership recently emerged as a source of risk for industrial owners, as hedge funds, corporate raiders, and activist shareholders identified timberlands as an undervalued, and perhaps under performing, asset on industry balance sheets.  Examples of this activity in 2005 include Carl Icahn’s pursuit of Temple-Inland and Franklin Mutual pressuring Weyerhaeuser to improve returns from forestlands.
 

Other firms changed corporate strategies in the 1990s.  St. Joe Company, Florida’s largest private landowner, made a strategic decision to shift its focus from forestry to real estate.  As such, the firm has focused on converting its remaining 800,000 acres into a range of developments, planned communities, ranches, and home sites.  Georgia-Pacific decided to follow Kimberly-Clark into the consumer goods market, spinning off its timberlands in the process in 1997 and, ultimately, selling its 5.6 million acres to Plum Creek.
 

Ironically, environmental and conservation groups have expressed a nostalgic view of former industrial timberland owners. Relative to the new breed of financial investors and the associated rapid pace of ownership changes, industry owners are seen as preferred partners because of their relative stability and acknowledged timberland stewardship.
 

Conclusion

 
The apparent overhaul of forest industry timberland ownership reflects a simple calculus of debt, taxes, and opportunity costs.  High levels of debt following a period of industry consolidation, tax disadvantages associated with property taxes and C-corporate structures, and growing opportunities to explore land development opportunities created overwhelming reasons to explore timberland ownership alternatives. In sum, given current trends and tax policies, it is unclear why any publicly traded forest products would retain substantive industrial timberlands within a traditional C-corporate structure. Interestingly, most forest products firms in the Southern hemisphere, especially In Latin America, have continued to remain vertically integrated land owning, timber growing, and wood processing firms.
 

Literature Cited

 
Clutter, M., B.C. Mendell, and D. H. Newman, 2005. The changing landscape of industrial timberland ownership in the South, Carolina Forestry Magazine. November, p. 25-27
 
Mendell, B.C. 2005. Western timberlands and corporate restructurings. Timberland Report, James W. Sewall Company, 3rd quarter, 7(3): 1-5.
 
Sacco, S. 2005. Greenies are from Venus and timber beasts are from Mars, Forest Systems presentation at California Forest Futures 2005.
 
Society of American Foresters. 2006. Forest facts. www.safnet.org/aboutforestry/facts.cfm, accessed 3/13/06.
 
Wilent, S. 2004. Investors increase timberland holdings.  The Forestry Source 9(December 2004): 1-4.
 
Yin, R., J.P. Caulfield, M.E. Aronow and T.G. Harris, Jr. 1998. Industrial timberland: current situation, holding rationale, and future development. Forest Products Journal 48(10): 43-48.
 

 
Dr. Mendell is Principal and Founder of Forisk Consulting and a Visiting Assistant Professor of Forest Business at the University of Georgia.  A 2004 Fulbright Scholar in Uruguay, Dr. Mendell received B.S. and M.S. degrees from M.I.T, an M.B.A. from the University of California at Berkeley, and a Ph.D. in Forest Finance from the University of Georgia.