Wall Street Transcript Interview with Joshua Barber of Stifel Nicolaus & Company: U.S. Timber REITs to See Increased Demand from Homebuilders

Wall Street Transcript

67 WALL STREET, New York - October 17, 2012 - The Wall Street Transcript has recently published its REITs Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Inexpensive Access to Capital; Regulation Raises REIT Dividends; CBD Properties Outperform Suburbs; Apartment, Lodging, Self-Storage and Office REITs

Companies include: Weyerhaeuser Co. (WY), Plum Creek Timber Co. Inc. (PCL), Potlatch Corp. (PCH), Rayonier Inc. (RYN), JPMorgan Chase & Co. (JPM), National Retail Properties, In (NNN), Realty Income Corp. (O), CapLease, Inc. (LSE), Newcastle Investment Corp. (NCT), NorthStar Realty Finance Corp. (NRF), iStar Financial Inc. (SFI), Fortress Investment Group LLC (FIG), National Semiconductor Corpora (NSM)

In the following excerpt from the REITs Report, an expert analyst discusses the outlook for the Timber REITs and other REITs sub-sectors for investors:

TWST: What is your outlook for each of the subsectors you cover, and what are the main trends affecting the fundamentals for those companies?

Mr. Barber: Let's start with the timber REITs. I think we are actually the only REIT Analysts that cover the timber space, so we tend to look at them on a bit more of a relative-to-REITs basis. We favored that group for a little while, just in the sense that they trade at bigger discounts to net asset value than virtually any other real estate asset class, although there are probably some good reasons for it. They also are among the more economically sensitive ones, particularly to the housing market. So we like the timber REITs as a two-to-three-year, medium-to-long-term play on a housing recovery with big, liquid companies that often have good balance sheets and are paying you a dividend yield today.

If you were to say to me, "Josh, I am hugely convinced there is going to be a housing recovery," I'd tell you there are names with more upside. If I had crystal ball, I'd say I don't need to own timber this year, the year that I think housing definitely recovers, because you can own names like homebuilders that are much more sensitive to that and would outperform even timber in that sort of environment.

But looking at it today from a REIT perspective and saying, "I'd like to own names that are within the REIT index that have that home-construction sensitivity," I think timber REITs are a great way to do that. Plus, if you are uncertain about the pace that that recovery starts unfolding and you want a name with some really good longer-term supply/demand fundamentals, I think you look at timber and say, "Over a three-to-five-year period, I think those names offer some very compelling returns, and I am getting paid to wait, and I don't really have the risk of any balance sheet issues in the interim."

The supply/demand there, longer term, I think is very good, not so much from the perspective of U.S. home construction, but the supply of timber itself is going to be very impacted in the next three to four years from diminished Canadian supply. That's mostly due to the pine beetle that's in British Columbia. That's been an issue there for I'd say the last 11, 12 years. The beetle has become more of an epidemic than anything else. It's eaten through, literally, a lot of trees there, and really weakened the structural lumber component that you can be pulling out of those trees. Canada has basically responded by overharvesting those trees in the last few years, because they literally are "use it or lose it" with a lot of those trees. So we've seen a greatly increased harvest out of Canada for the last 10 years. And it is still somewhat more increased than what the sustainable forestry would be today, but again, they are doing it because it is a limited resource.

Three to four years from now, especially if we have a much stronger U.S. home construction market, I think it puts not only more output demand on existing U.S. forest land, but given that Canada has been a very large source of lumber supply for the North American markets, having Canada be materially diminished, especially in British Columbia, I think is going to be a great source of long-term demand and long-term benefit to the U.S. timber owners.

TWST: And the triple net REITs?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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