Description

This pitch is pretty simple. We believe REITs generally have been very slow to price in the new interest rate investment. There was some discussion of this on the BREIT thread. However, plot the cap rate vs 10 year across effectively REIT outside of office/hotels and you will see the stocks have never been this expensive vs the 10 year. It is in this spirit we want to flag one of the most overvalued sectors in real estate with what we believe is a highly lazy investor base: timber reits. We are short PCH and WY.

As a result of structural problems in the US north and Canada, timber reits such as Potlach have seen a structural decline in their timberland volumes. PF for their recent acquisition of Catchmark, Potlatch has seen its Timberland segment volumes go from 7.7mm tons in 2018 to 7.6mm today (ie a 2% decline). With the recent rise in interest rates, there is limited reason to suspect much of an improvement in volumes from here. 

Additionally, the Company remains highly expensive. If you compare the fwd EV/EBITDA multiple of PCH vs the RMZ, you see it has seldom been more expensive.

Similarly, rel to the 10 year, PCH equity has never been more expensive based on consensus 1 year forward numbers.

Over the last few decades, you can see lumber prices seldom spike much above 400/mbf. Yes there are spikes. However, today with lumber in the high 400s, PCH acknowledged on its own earnings call it hasn’t heard of any mill curtailments. We believe it is totally reasonable to underwrite something between 400-450mbf lumber prices over the long run.

At 400-450/mbf lumber prices, that implies PCH equity today is trading at between a 3% and 4% yield. Again, this is a no-growth biz over the long haul. We believe this should be an 8%+ yielding business in this rate back drop. Thus we see ~50% downside from current prices in PCH equity. Note we see similar downside to WY. 

Catalyst

Continue derating. Nominal FCF/dividends vs high rates