Housing starts are gaining momentum. After hitting a 50-year low in 2010, starts have moved meaningfully higher over the past three years. That said, they still have a way to go before hitting historical norms.
The average long-term annual start rate is roughly 1.3 million units per year. The latest data, for March, show the annual rate at 946,000 units. The continuing claw-back to historical norms presents an investing opportunity.
I like the idea of investing in an impending housing recovery, but I don’t like the idea of home-builder stocks. Home building is a volatile business due to bottlenecks created by weather, land prices, labor quality, and commodity prices. I prefer to take a step back and invest in companies that supply materials to the industry.
What material is more basic to housing than timber?
I like timber and I like Plum Creek Timber (NYSE: PCL), a REIT that’s one of the largest timberland owners in the United States. Plum Creek owns 6.8 million acres of timberland spread around the country. With a 4% yield, Plum Creek is also one of the better income investments related to housing.
The potential in Plum Creek is certainly there. Standard & Poor’s Economics projects housing starts will rise 28% in 2014. Industry consultants Wood Markets expects North American lumber production to increase by almost three billion board feet this year.
Longer-term, an even brighter picture is developing. Total North American stud demand is expected to grow 10% annually. Wood Markets writes, “The prospects of lumber ‘super-cycle’ coupled with record high lumber prices are very possible by 2016 (perhaps as early as 2015 for studs).”
As for Plum Creek, management expects higher timber and lumber prices to fuel a 30% increase in the company’s harvest over the next 10 years.
Of course, these are projections, and projections frequently fail to materialize. What if the dates, pricing, and production schedules fall below expectations? Fortunately, Plum Creek has appeal beyond housing. Keep in mind, it not only owns timber, it owns the land the timber grows on.
Plum Creek runs an active real estate segment and continually reviews its portfolio to identify properties that have significantly more value in other commercial uses. he company estimates that roughly 800,000 of its 6.8 million acres are of higher value than for timber. In other words, Plum Creek has the opportunity to generate significant value through land deals.
From an investor’s perspective, Plum Creek has additional value as a portfolio-diversifying investment. Timberland is highly correlated with inflation and U.S. Treasury bills, which is what you need to maintain purchasing power. But it is much less correlated with stocks and other investments, which is what you want to smooth market volatility.
With that said, investors can be put off by Plum Creek’s earnings, which tend to be volatile. What they fail to realize is that Plum Creek is a REIT, which means it has high non-cash expenses, such as depletion allowances for timber, that reduce reported earnings. The good news is that EBITDA per share, a cash-flow proxy, is more than double reported EPS and is sufficient to maintain its high-yield dividend.
I’m on board with a housing recovery, but I’m also on board with conservatism. I want an investment that can perform with housing, and one that can perform even if housing can’t.
Is this happening in your neighborhood?
It feels like robbery. Local governments are broke. But instead of cutting spending, they’re forcing homeowners to pay up – raising property taxes when most of us are feeling the pinch. There used to be nothing you can do about it – until now! There’s a a special Federal program that allows you to completely pay off your real estate taxes through exclusive rebates. And they are available to any American. In fact, you can collect a Real Estate Tax Rebate this month! And every 30 DAYS after that! Click here to find out how to enroll.