Description

Plum Creek Timber Co. Inc. (NYSE: PCL), is a REIT that owns 7.8 million acres of timberland in the United States. It is the second largest owner of private timberlands in the U.S., owning land in 19 states. The company doubled its timberland when it acquired The Timber Company from Georgia-Pacific Corp in October 2001. The company has a market capitalization of $5.1 billion making it the third largest REIT by market capitalization. The company has debt of $1.2 billion and cash of $150 million giving an E/V of $6.15 billion. The company’s combined 2000 revenue is $1.2 billion, with EBITA of $522 million, FFO of $461 million and FFO/share of $2.56. The company is well positioned to provide a 12+% annual return to investors through a combination of dividend and share price appreciation.

The company currently pays a dividend of $2.28 per share with a current yield of 8.15%. Since the company is a REIT, approximately 50% of that dividend is treated as a nontaxable return and the other 50% is treated as a capital gain dividend subject to maximum taxation of 20%. The company is committed to maintaining its current $2.28 per share dividend payment and increasing its free cash flow so that the dividend/FFO ratio is 75% instead of the current 89% rate.

The company has two main lines of business: Timber and Real Estate/Natural Resources. The Timber business involves the harvesting and sale of timber. One half of the timber harvest is harvested and sold pursuant to long term contracts and the other 50% of the timber harvest can be sold at market prices if appropriate. The company expects that it will be able to increase the total sustainable annual harvest units by approximately 10% during the next 10 years. Unlike other natural resources, timber has a history of sustainable real price appreciation. During the 1960 to 2000 period, timber had a CAGR price appreciation of 13.3% versus an 11.5% CAGR for the S&P 500 during the same period. Timber can have annual value growth rates of 7 to 15% per year due to such real price increases (2 to 4% per year), volumetric growth (trees have predictable and quantifiable biological growth), grade change (a tree’s value increases disproportionately as it grows in diameter) and quality timber management.

The company’s Real Estate/Natural Resources business has two principal components. First, as urbanization continues, some of the company’s land may have greater value for commercial or recreational purposes rather usage as timberland. The company has identified 400,000 acres as having near term commercialization value. The company also generates revenue through mineral sales, cell tower leases and other similar activities. The company recently hired Tom Lindquist, an executive vice president of prominent real estate developer Trammel Crow, to head up Plum Creek’s Real Estate/Natural Resources Group.

The unique value creation characteristics of timber combined with the opportunistic value creation activities of the company’s Real Estate/Natural Resources Group should provide PCL’s shareholders with an ongoing CAGR of 12+%.

Catalyst

The acquisition of The Timber Company put Plum Creek into the major leagues as both as a large cap REIT and a “pure play” timber company with multiple opportunities to generate value from both timber harvests and revenue generation from sale or non-timber uses of its 7.8 million acres. As available timberlands continue to shrink due to urbanization, Plum Creek’s vast timberland holdings will provide the company with an economic moat that increases in value.