Because Plum Creek is Montana’s largest forest products company and largest private landowner, whatever the company does matters greatly to Montana. Because Plum Creek is also one of America’s largest forest Real Estate Investment Trusts (REIT), perhaps it is time for a discussion on how REITs “think.”
For starters, I recommend two good source items for further reference:
One, South Carolina consulting forester J. Brian Faccio’s Timberland blog (http://thetimberlandblog.blogspot.com), which clearly discusses current trends and thinking in the forest investment market. Two, for a dash of history and déjà vu, is a 58-page Pinchot Institute paper published in 2001, available on Google by punching in its title: “Industrial Timberland Divestitures and Investments.”
In general, REITs are focused on buying, building and/or holding commercial and residential rental property, such as shopping malls, apartment complexes and office buildings. Plum Creek’s reincorporation opened a new field and new way of thinking about commercial real estate based on industrial (commercial) forest land.
The old way of thinking was, a timber company thought about land in terms of growing trees from which it could make money, same as ranchers think about land for growing cows to make money. The new way, which really isn’t new, is that REITs and their counterpart Timberland Investment Management Organizations (TIMOs) focus first on growing money. How the money grows, and from what, is secondary.
Think of managing a stock portfolio for return, by whatever means. REIT/TIMO managers do precisely the same, but land is the “stock.”
Most stock portfolios tend to concentrate mostly on a solid, “core” stock. Similarly, REIT/TIMOs have mostly “core” lands that perform solidly as working forest.
Stock managers also tend to “diversify” with some holdings that might take off – either up or down. And what stocks do investors usually pay most attention to? Not the “core” – but the stocks that might make, or lose, the most money.
So when a REIT or TIMO examines its portfolio, what gets looked at first? Not the “core” of growing trees, according to Faccio: “Valuing timberland typically begins by identifying the non-timberland values,” and, to use a fancy word, “disaggregate” them, meaning “to divide into constituent parts.”
REIT/TIMO managers break out the land porfolio, figuring out how each acre will make money, how much, and when. Whatever use generates the most money soonest is how that land will be used.
REIT managers break out the land portfolio into three basic classes: The biggest is, of course, the “core” forest lands. The “hot stock” is “Highest and Best Use” (HBU) lands, i.e., trophy real estate and/or mineral leasing.
Last, but most definitely not least, are “Non-strategic” lands. Non-strategic ground sometimes just doesn’t work, but is perfect for someone else’s needs. Deal! Everyone is happy.
Trouble is, most non-strategic lands are, honestly, the equal of a ranch’s swamp bottom or junk stock. No rational buyer wants either. So…what to do with it? The trick of “monetizing” anything is to find a buyer who “values” what you’ve got “higher” than you do, then flip the money into something sexier.
Well, as the Pinchot paper explains, “Frequently, environmentally sensitive properties are difficult to operate and are poor cash generators.” In short, the swamp is where the critters are. So, as the Pinchot folks explain: “Selling these properties unlocks or ‘monetizes’ their conservation values. These values are frequently higher than their operational values.”
For the smart REIT/TIMO, the solution is to “re-brand” unwanted non-strategic land as “Conservation” land for “conservation” buyers. And who is that?
Well, those folks who just “monetized” their gas hog with “Cash For Clunkers” might know. Plum Creek, plus a mess of other REIT/TIMOs, know for sure.
It’s you.