Friday, October 17, 2008

Thoughts on Timberland
Wells Timberland REIT has struggled under the weight of its massive debt. Until the debt gets repaid it will not be able to acquire any more timber properties. Investors in Timberland have an investment that for the foreseeable future is a highly leveraged and non-diversified. I am stating the obvious in saying that in a deleveraging economy is not an ideal position.

Much of my focus has been on Timberland's mezzanine debt and not Timberland as an investment. Does Timberland make sense as an investment? I am not sure it does. Even if the mezzanine loan is paid on schedule, Timberland will still have a sizable debt load and only one property. Timberland has a $212 million senior loan that is due 2010 and $42 million of preferred stock. I don't see Timberland acquiring additional timber properties until this debt is repaid or refinanced. I don't see any distributions to investors until Timberland's debt load is reduced. More properties that will diversify the portfolio and cash returns to investors are not in Timberland's near-term future.

The risk / reward ratio of Timberland is heavy on risk and light on reward. It has one property, and as noted above, it will likely be a long time before another property is acquired. The lone property was so expensive it will remain the 800-pound gorilla even if additional properties are acquired. An investor would have to look long and hard to determine whether this investment is appropriate and fits in their portfolio.


Anonymous said...

I think the optimistic intentions of Wells Timberland was to make money selling off the land to recreational buyers and higher-and-best-use situations. (Like Plum Creek.) Timber sales would be part of the income stream but could not possibly be a major factor from a profit standpoint. If significant profits could be made from the timber MWV would have kept the land. Wells' timing coming into the raw land market was unfortunate. Too much money for too much land with too much leverage. The only "greater fool" left is the common stockholder.

Rational Realist said...

I have been obsessing over Timberland's financing that I have not looked to deeply at its operations, other than it is nowhere near profitable. Small parcel land sales and recreation fees are incidental. Don't get fooled by the high price per acre on small parcel sales. The attractive part of the acquisition was the sale-leaseback with MWV. MWV pocketed $400 mill.