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Plum Creek Timber Co. Inc. (PCL), Potlatch Corporation (PCH) – REIT’s: Once the Darlings, Now the Dogs?

Plum Creek Timber Co. Inc. (NYSE:PCL)I’m sick and tired with the daily fluctuations in the market driven by fear and speculation over when the Federal Reserve’s bond buying program known as Quantitative Easing will be slowed and eventually stopped.

Actually, check that.  Daily fluctuations don’t bother me at all; it’s the 24/7 financial news organizations fanning the flames that really grinds my gears.  The upside to all the consternation is that quality businesses with strong long-term value can go on sale when the masses overreact.

Recent comments from the Federal Reserve regarding the timing of the end of Quantitative Easing caused investors to flee the very same high yielding investments they clamored for two years ago.  In a single week in late June investors pulled $4.5 Billion out of municipal bond funds.  Utility stocks, typically popular dividend payers, have tanked relative to the S&P over the last 3 months.

Real Estate Investment Trusts (REITs) have suffered the same fate.

Two REIT’s I have my eye on after this recent drop are  Plum Creek Timber Co. Inc. (NYSE:PCL) and Potlatch Corporation (NASDAQ:PCH). Both companies manage timberlands across the United States.  They make money by selling logs, selling land, and selling manufactured wood products.  Plum Creek Timber Co. Inc. (NYSE:PCL) is the larger of the two with 6.4 Million acres of timberland across 19 states and a $7.6 Billion market cap.  By comparison, Potlatch Corporation (NASDAQ:PCH) owns 1.4 Million acres in only 3 states and sits at $1.6 Billion in market cap.  Both stock charts look amazingly similar:

I believe these companies have been unfairly punished by the market over the last few months despite positive future prospects, but before I get into why their future is so bright I want to look a little closer at the companies themselves.

Plum Creek Timber

Plum Creek Timber Co. Inc. (NYSE:PCL) is the largest private land owner in the United States.  The company generates roughly 50% of sales from logs: sawlogs used for lumber and wood products and pulplogs used for pulp, paper, and wood pellets. The remaining sales are evenly split between real estate and manufactured wood products.  The real estate segment deals with land that the company deems as more valuable to be sold to commercial or residential real estate interests as opposed to wood production.  Revenues dipped during the recession from $1.6 Billion in 2008 to $1.2 Billion in 2010 and $1.34 Billion in 2012.  The CEO has been in the position since 1994 and has been with the company since 1989.

REIT’s are often sought for their dividend, and Plum Creek Timber Co. Inc. (NYSE:PCL) fits the bill with a 3.8% yield.  The cash flow situation looks good with $353 Million in operating cash flow in 2012 and $272 Million paid in dividends.  The debt situation looks a little scary at $1.8 Billion with only $1.2 Billion in equity, but the interest expense is consistently sitting around 50% of operating income so I’m not overly concerned.


Potlatch Corporation (NASDAQ:PCH) can be thought of as a mini Plum Creek Timber Co. Inc. (NYSE:PCL). Its business segments are basically the same, although the distribution of sales is different.  Potlatch Corporation (NASDAQ:PCH) earns 60% of its revenues through manufactured wood products, 35% from timber sales, and only 5% from real estate.  Their sales didn’t suffer much at all through the recession.

Revenues in 2008 were $440 Million, increased to $540 Million in 2010, and slumped a bit to $525 Million in 2012.  The dividend picture is similarly attractive with a 3.1% yield.  In 2012 the company earned $80 Million in operating cash and paid $50 Million in dividends.  The debt situations are even alike – Potlatch Corporation (NASDAQ:PCH) has $320 Million in long term debt making for a scary debt to equity ratio above 200%, but interest payments are around 30% of operating income so again I’m not worried.  The CEO has been with the company since 2006 and was previously employed by Plum Creek Timber Co. Inc. (NYSE:PCL), for 23 years.

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