Real estate investments have been one of the biggest victims of the pandemic. With the unemployment rate over 11%, renters are struggling to pay rent and others are fleeing high-priced living in major cities.
But one real estate market is thriving: timber. And the easiest way to get a cut of this booming sector is our best REIT to buy today.
You see, demand for timber is closely tied to home building and renovations. And these segments got an unexpected boost amid the pandemic.
People were suddenly stuck at home, bored, and spending less money on the usual entertainment. They began building and fixing things around the house instead. They put in new bathrooms. They added decks to their houses.
Governments deemed The Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW) as essential businesses. They remained open through the pandemic.
Demand for homes skyrocketed as apartment dwellers decided that living close to other people in a pandemic was not a fantastic idea.
Some big-city dwellers decided that if you can work from home in a big city, you can work from home in a smaller town with fewer people.
New home demand is now surging – May was the best month for homebuilders in more than a decade – and home builders say a shortage of existing homes is also a driving factor.
The DIY home project market and new home demand have caused a massive increase in lumber demand.
Lumber futures have soared, with prices more than doubling off the March lows.
I have said before that timber REITs, which own lumber yards and land for cutting trees, are a smart business. They can reduce their acreage during recessions and expand during strong economic times. They also benefit when the dollar is weaker and lumber prices go higher. With the U.S. dollar index at a two-year low, timber REITs are on fire.
As the crisis started, timber REITs raised concerns about the potential economic weakness killing demand.
They cut or eliminated their dividends to increase cash reserves if financial conditions worsened.
But now, it appears they are ready to start returning money back to shareholders in a big, big way.
Here’s our first timber REIT to invest in now…
Bouncing Back in a Downturn
Industry leader Weyerhaeuser Co. (NYSE: WY) suspended its dividend and took steps to cut costs. As recently as May, they were talking about cutting engineered wood capacity by 10%.
Obviously, that is no longer under consideration as demand and prices have both climbed steadily.
Weyerhaeuser will report earnings this Friday, and it is expected they will beat analyst estimates and release an upbeat forecast for the rest of the year.
They may not fully reinstate the dividend yet, but keep in mind that REITs have to return 90% of profits to shareholders or lose their tax status. They could find themselves having to increase the payout and maybe even pay a special dividend by year end to keep their REIT status.
Reinstatement to the prior dividend level would yield around 5%. It would also lead to a pop in the stock price as income-seeking investors return to the stock.
But this next timber REIT pays an even higher dividend…
The Best Timber REIT to Buy Now Yields Over 5%
CatchMark Timber Trust Inc. (NYSE: CTT) did not cut its dividend when the virus began to impact the economy. CatchMark felt that any reduction in timber sales was deferred, not lost. The timber REIT had also diversified its business model so that the harvesting of timber was not its only revenue stream. CatchMark also manages timberlands for investors and has a thriving real estate business.
Although CatchMark did not predict the coronavirus, all the steps they have taken in the last year perfectly prepared them to deal with the potential crisis and be perfectly positioned to benefit from the quick and robust recovery of timber markets. CFO Ursula Godoy-Arbelaez pointed out on the most recent conference call that the REIT’s efforts to reduce leverage, recycle some properties, and lower borrowing costs had perfectly prepared the REIT to deal with the potential dangers of the pandemic.
When no danger appeared, CatchMark was perfectly positioned to benefit from the rapid appreciation in timber prices.
This REIT becomes even more attractive when considering how CEO Brian Davis answered an analyst question about his capital allocation strategy. He replied that his priorities, in order, were the dividend, liquidity, debt reduction, share repurchases, and then acquisitions. These are the things that make shareholders money and maintain a margin of safety.
The dividend yield of CatchMark is about 5.7% right now.
The Bottom Line
Looking ahead, the future is pretty bright for timber REITs. The pulpwood markets are strong. And packaging demand from the e-commerce industry could keep cardboard demand at very high levels for a very long time.
We had a new housing shortage before the pandemic created new demand. It will take years for the supply-demand imbalance to settle, and that will be supportive of lumber prices. Demand has proven that it can remain strong no matter what the virus tries to do to the U.S. economy.
The recent strong performance by timber should also draw some institutional money into the sector during the second half of this year. Long-term investors should see outstanding returns from both of these timber REITs.
— Garrett Baldwin