There's an old saying that "money doesn't grow on trees." While that's true, trees can be a money-maker for investors. Timberland owners can sustainably harvest their trees, selling them at a profit to wood product makers. When lumber prices are high, timberlands produce a lot of cash.
That business model of owning timberland and turning it into higher-value wood products has served PotlatchDeltic (NASDAQ: PCH) well over the years. Here's a closer look at the real estate investment trust (REIT) focused on making money off owning trees.
PotlatchDeltic Corporation profile
PotlatchDeltic is a timberland REIT. The company operates three business segments: Timberlands, wood products, and real estate.
The timberlands division consists of more than 1.8 million acres of timberland across the following states:
- Arkansas: 923,000 acres
- Idaho: 627,000 acres
- Mississippi: 99,000 acres
- Minnesota: 93,000 acres
- Alabama: 91,000 acres
- Louisiana: 6,000 acres
The company is the largest private landowner in Idaho, where it owns some of the most productive timberlands in the Inland Northwest. Meanwhile, it's the second-largest private landowner in Arkansas.
PotlatchDeltic's wood products segment consists of seven manufacturing facilities that produce lumber and plywood. It's one of the 10 largest lumber producers in the U.S. with 1.2 billion board feet of capacity. Meanwhile, it owns a leading plywood mill with more than 160 million square feet of capacity.
The third prong of its business model is its real estate segment. This business aims to maximize the value of its vast land portfolio by finding higher and better uses for select tracts of land other than harvesting timber. PotlatchDeltic has identified 185,000 acres of rural land it intends to sell at a premium value to what it's worth as timberland. It also has a 4,800-acre master-planned community in Little Rock, Arkansas, more than halfway through its development. PotlatchDeltic sells home lots to builders and land to commercial developers for new offices, multifamily properties, and retail space.
PotlatchDeltic has historically generated about 55% of its adjusted EBITDA from its timberlands segment, 30% from wood products, and roughly 15% from real estate. However, there's lots of variability year to year due to fluctuations in timber and wood products prices and the timing and volume of real estate sales. For example, thanks to historic lumber prices in early 2021, 60% of its earnings came from its wood products segment compared to 32% from timberlands and 8% from real estate.
That business model makes PotlachDeltic different from most other REITs. It doesn't generate steady rental income backed by long-term leases. Instead, it produces income by selling commodities like timber and wood products at market prices, which fluctuate with supply and demand.
PotlatchDeltic Corporation news
Despite the pandemic, PotlatchDeltic delivered strong results in 2020. Overall, the REIT generated record earnings as all three of its business segments had record years. That's because the pandemic fueled a surge in homebuying as renters took advantage of low interest rates to buy homes with more space, driving demand for timber, wood products, rural land, and residential building lots. Meanwhile, it also prompted a boom in home improvement projects as homeowners renovated their homes, spurring additional demand for timber and wood products.
PotlatchDeltic had several other noteworthy accomplishments in 2020. The REIT took advantage of low interest rates to refinance debt, reducing its borrowing costs. It further boosted its balance sheet by selling 72,440 acres of nonstrategic timberland in Minnesota for $48 million. These factors enabled the company to return $123 million in cash to shareholders via dividends and share repurchases.
Those strong demand trends carried over into 2021, enabling PotlatchDeltic to get off to a phenomenal start. The company reported record earnings, driven by record results in its wood products and timberlands segments thanks to historic lumber prices. The company also benefited from strong demand for rural and development land in the period.
PotlatchDeltic Corporation stock price
Timber and wood products prices can be very volatile. Those fluctuations have caused PotlatchDeltic's stock to be a bit more volatile than the S&P 500 over the past few years. However, thanks to its record-breaking first quarter in 2021, the REIT has outperformed the S&P 500 over the last five years: