Plum Creek’s Risky Businesses

By Beacon Staff

MISSOULA – As the Plum Creek Timber Company becomes increasingly prominent in the real estate game, the nation’s biggest private landowner is learning to deal with the ebbs and flows of those two unpopular headline grabbers of late: the weak housing market and its associated credit worries.

Less than a week after the timber giant reported that third quarter profits were down 36 percent from last year, the company’s director of land asset management in Montana, Jerry Sorensen, spoke to a room of about 300 – including prominent developers, Realtors, planners and economists from around the Northwest – about Plum Creek’s transition into the real estate market at the second annual NewWest.net Real Estate and Development of the Northern Rockies Conference. Sorensen opened up his presentation with a Bob Dylan quote: “You don’t need a weatherman to know which way the wind blows.”

“The timber industry,” Sorensen said, “is certainly in transition – everybody knows that.”

Though Sorensen was booked to speak at the conference long before Plum Creek’s third quarter’s earnings were released, his appearance came at an appropriate time and in an appropriate place: western Montana. That region’s fire season had much to do with the low profits, according to statements from Plum Creek President and CEO Rick Holley. In both a press release and a conference call with various analysts, Holley explained that because of Montana’s active fire season, a national credit crunch and dips in the housing market, he wasn’t surprised by the quarter’s low earnings. But he is optimistic for the fourth quarter, as is Sorensen.

“Much of the shortfall is the result of certain land sales moving from the third quarter to the fourth quarter,” Holley said in a statement. “We continue to expect to report very good results for this segment in 2007.”

Holley described the main reasons for Plum Creek’s slow quarter: Land deals were delayed or cancelled because of wildfires; new homes weren’t built for the same reason; a national credit crunch and lulls in the housing market exacerbated those problems; portions of the timber harvest were burned up and work was stopped due to the fires. Holley believes fourth quarter profit stimulation will come from the revival of land deals that were postponed in the third quarter and salvage logging.

Plum Creek has grown substantially since it converted into a real estate investment trust (REIT) in 1999. Today, with 8.2 million acres nationwide, it is the largest private landowner in the U.S. It was real estate, however, that was hit hardest in the third quarter, as profits from both the timber and manufacturing/milling sectors were nearly on par with those of 2006. Of the company’s $407 million third quarter revenue – $59 million of which was profit – only $94 million of it came from real estate, down from $129 million last year. But officials estimate this quarter’s real estate revenue will be high.

“Our fourth sales are expected to be quite strong in excess of a $125 million,” said David Lambert, Plum Creek’s chief financial officer, in the conference call.

Sorensen said several factors place greater importance on real estate than ever before, including the continued decrease of domestic timber supply, a growing trend of buyers looking to foreign timber markets like British Columbia and of course the higher value of rural real estate land over timberland. One unfortunate result of Plum Creek’s growth, Sorensen said, is that the company hasn’t kept the public engaged and aware of its activities as well as it did when it was smaller.

“When I started with the company, I think we were a lot more open,” Sorensen said. “As we grew, we kind of stepped back … In terms of broader public exposure, we’re trying to engage more of that.”

One part of public communication Sorensen believes Plum Creek has done a good job at, though, is working with counties – Missoula, Lake and Flathead in particular – to help decide land-use issues and help draft growth policies.

“This is very hard work, but we take it very seriously,” he said of the growth policy work.

Sorensen said in an interview that Plum Creek’s lost assets and affected real estate numbers in the Flathead were consistent with the overall earnings statistics. Fires like the Chippy Creek took their toll on Plum Creek’s landholdings, but nothing like the Jocko Lakes Fire, which took out 20,000 of the 41,000 total timberland acres the company lost.

Sorensen pointed to the Township 110 Land Company as an example of Plum Creek’s efforts to remain a force in the real estate market. Township 110, a property development company, is a subsidiary of Plum Creek that is active in Montana. Its office for its Midwestern and Northwestern lands is in Columbia Falls. Plum Creek owns 1.2 million acres in the state and it also employs 1,446 Montanans, while operating nine in-state manufacturing facilities and employing eight full-time wildlife biologists and hydrologists.

“Rest assured, Montana is definitely a very important part of our business,” Sorensen said.

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