Real Estate Recovery Plays
Scott is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Real Estate market looks to be recovering with home prices rising by the largest percentage in seven years. They are up 2.5% in June and 6% over the previous quarter, according to Corelogic Inc. a real estate data firm. Freddie Mac, which uses different variables to measure growth, shows a 4.8% quarterly increase in home prices. Attractive mortgage rates and a dwindling supply of homes on the market are the key factors driving home price growth. The supply of homes has dropped because distressed properties have started to be absorbed, banks have slowed on new foreclosures, and home builders have held off on new construction because of the flood of cheap foreclosed properties on the market.
I see improvement all around me, in my home town of Redondo Beach, CA home sales were up 22% year over year as of June. This July when I went to buy a home for myself I was bidding against 4 other parties and ended up buying the house above the asking price. The Los Angeles industrial property market that I have worked for so long has also seen vacancy drop from 4.6% to 4.2% with rents increasing $0.02 PSF, as large logistics companies working the Ports of Los Angeles and Long Beach snap up warehouse space in anticipation of an economic turnaround. I think this upward trend in real estate is for real. As supply shrinks across all real estate sectors, new construction will follow. Market leading home developers like Lennar (NYSE: LEN) and Toll Brothers (NYSE: TOL) have already experienced a huge run up in share price in anticipation of the turnaround. Lennar's stock price jumped over 150% from its 52 week low of $12.14. While Toll Brothers has experienced similar gains rising from a low of around $14.00 to over $32.00 a share. So where do we look if we want to get in on the housing turnaround, without jumping on the builder bandwagon? The answer is....the indirect benefactors of a real estate resurgence, - timber suppliers Plum Creek and Weyerhaeuser.
Plum Creek Timber (NYSE: PCL) and Weyerhaeuser (NYSE: WY) are the two largest owners of timber producing land in the United States, with 6.6 and 6.4 million acres located primarily in the Northwest and Southeast region of the Unites States. The core business of both companies is the same; harvesting and selling raw timber, the production of finished wood products, land management, and real estate development. They are continually assessing the highest and best use of their land resources for timber production, real estate development, or development of non-timber resources like oil and natural gas. There are a number of reasons why I like these timber companies as an investment. First, timber is a commodity that is especially sensitive to the rule of supply and demand. With a potential real estate market turnaround looming, commodity prices for timber could soar. Second, both companies have the potential to generate additional revenue through higher-use of its land holdings. Once the land has been harvested for timber the company has the potential to sell or lease the land for development, mining, recreation, or they could opt to plant and harvest again. Third, the value of their large land holdings, some of which are suited for real estate development, will appreciate with a general rise in real estate values.
Both Plum Creek and Weyerhaeuser have their strengths and weaknesses. Plum Creek’s strength is the size and quality of its land holdings. According to analysts, Plum Creek has the highest quality land bank of all the timber REITS. All of Plum Creek's 6.6 million acres are owned by the company, while Weyerhaeuser’s land holdings are a mix of owned and leased land. Plum Creek specializes in the harvesting of raw timber and generating revenue through exploitation of secondary revenue streams on non-strategic timberland, which includes some in-house property development. Plum Creek is attractive because it pays a juicy 4.17% dividend and is still trading in the same $36-$40 price range it was at a year ago. Plum Creek's focus on timber and land management makes it more of a pure timber play, which limits your exposure to the still unpredictable housing market. Revenue and share price will grow if the construction market takes off, but if real estate flat lines again, you won’t take the hit you would with a homebuilder and you’ll collect a nice dividend in the meantime.
Weyerhaeuser also harvests raw timber, but they are more heavily invested in the production of finished wood products and real estate development than Plum Creek. Weyerhaeuser has a mill production capacity of 4,515 million board feet compared to Plum Creek’ s 330 million board feet capacity. This means Weyerhaeuser can produce significantly more finished lumber than Plum Creek. The real estate development side of Weyerhaeuser known as WRECO, is one of the 20 largest residential developers in the United States. The advantage in production capacity of finished lumber products and residential development puts Weyerhaeuser in a better position to capitalize on a growing housing market. This stock will probably yield greater returns if the real estate market comes back strong, but it will also expose you to greater losses if it doesn’t. Weyerhaeuser also pays a dividend of 2.5%, nice but less than Plum Creek
Foolish Bottom Line
Weyerhaeuser as a stock will be more reactive to the housing market with its emphasis on finished lumber and real estate development; it has already reacted to the positive housing news this year by jumping 40% per share. Weyerhaeuser could still offer greater growth than Plum Creek, but also greater risk. It all depends on how confident you are in the real estate rally. Plum Creek's stock stands to benefit from this real estate rally once it begins to effect timber commodity prices and land values. The stock price has yet to make to a big jump but offers you a nice dividend while you wait. For stability and consistent growth Plum Creek would be my pick. If you are looking for a timber stock that is going to react to housing news like a homebuilder stock, and offer you greater potential growth, Weyerhaeuser would be the choice.
schuber85 has no positions in the stocks mentioned above. The Motley Fool owns shares of Weyerhaeuser Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.