Asset Focus: Timber REITs
Timber REITs (real estate investment trusts) are often lauded as one of the best-performing institutional investments on record. But they are also often overlooked for their capacity generate solid regular investment income. Today, we put that oversight right with our quick one stop guide to investing in timber REITs for income.
What Is A Timber REIT?
A timber REIT is quite simply a real estate investment trust that investments specifically in timber-producing property. In order to qualify for the tax advantages of REIT status, all of the same criteria apply to timber REITs as to other forms of REIT.
Qualifying REITs do not pay income tax on their profits. This is a huge advantage both to the business and to it’s shareholders. Usually, a corporation pays income tax on its profits, and then shareholders pay income tax again on their dividend distributions. Removing this double taxation has obvious financial appeal for investors.
While these tax breaks are great, there are some criteria to adhere to. In order qualify, a timber REIT must:
- Be structured as a corporation.
- Invest at least 75% of its assets in real estate or real estate-related assets.
- Earn 75% of its income from real estate (rental income for example).
- Pay out at least 90% of its taxable income to shareholders as dividends.
There are also some restrictions on the minimum number of shareholders a REIT can have (at least 100). And there are further restrictions as to how much of a REIT each shareholder can own.
How Do Timber REITs Work?
While most REITS you will find invest in real estate such as shopping malls, office blocks, multifamily apartment buildings or other large scale commercial real estate, timber REITs own and operate commercial timber producing forests.
A timber REIT will usually make most of its income from the production, harvest and sale of timber. Some sell the raw timber they produce, while others own mills and sell refined lumber products. In many cases, they also earn income from mineral rights, oil and gas deposits, and leasing their properties to third parties.
How to Invest in Timber REITs
While it is true that many REITs are available only to institutional investors, there are also a number of publicly-traded timber REITs. You can buy shares in a timber REIT the same way as any other publicly-listed company. So you can use one of the many online trading platforms that provide easy access to the whole market.
Here is my top 4 publicly-traded timber REITs, with links to help you start your own research:
Of course, this short list is subject to change. If you want to stay up to date on this, and all best income-generating investment options out there, you can join the Priority Investor email for FREE right here using the one-click form below.
What Returns Can I Expect From a Timber REIT?
Much has been written about how timber investments have outperformed almost every asset class for institutional investors for many years. Just take a brief glance at the published performance of university endowments and pension funds to see for yourself.
You see, timber is a fairly unique asset class in that trees grow physically every year, producing more timber to sell. This creates more timber to sell, regardless of whether lumber prices happen to be up or down. If the market is in a slump, timber growers can just leave their trees to continue to produce even more timber to harvest later.
Combine this physical asset growth with the fact that demand for timber from an ever-growing and consumerist global population is growing at the fastest pace in history, and you have a winning formula for long term profitability.
Because Timber REITs tend to own lots of properties that mature at different times, their income is year-round. This means that they distribute dividends to shareholder on a quarterly basis. At the time of writing, Catchmark has a dividend yield of 4.64%, far above that of the S&P500 at around 1.35%. Shares in the company have also increased in value by about 17% over the past year.
Is Investing in Timber REITs Risky?
All investments carry risks, and timber REITs are no different. Aside from the risk of investing your money in general, there are some risks that are specific to REITs. There are also some risks to consider that are specific owning and operating a timber production business.
First off, investors mostly buy REIT shares for the better than average yields. This means that REITs are exposed to interest rate risk. If interest rates rise, investors demand a similar increase in yield from their riskier investments – and that includes REIT stocks. For REIT yields to rise, the share price must fall, and therein lies interest rate risk!
Another consideration for timber REIT investors is the sensitivity of the timber trade to economic conditions. Selling timber and processed lumber relies on consumer demand. If consumer demand falls – during a recession for example – timber prices may fall significantly. This impacts both asset value and income for a timber business.
Case in point… during the great recession in 2008, the largest publicly traded timber REIT; Weyerhaeuser lost 75% of its value. That said, timber itself is a long term investment, and so too should be timber REITs. Of course, the share price has since bounced back heavily.
Conclusion and Resources
Informed investors make better decisions. If you want to learn more about Timber REITs and other investments that generate monthly income, you can further your research using the following resources:
- Garnaco – The Ultimate List of Investments That Pay Monthly Income
- Forisk – Growing and Harvesting Dividends
- REIT Institute
- Canadian Science Publishing – US Timber REITS
- Seeking Alpha – Catching Fire