In this article, we discuss 12 best land and timber stocks to buy. If you want to see more stocks in this selection, check out 5 Best Land and Timber Stocks To Buy.
Horizon Kinetics is an investment adviser managed by Murray Stahl that focuses on discovering investment prospects that are often overlooked or undervalued by the broader market. Their approach is research-oriented and involves conducting extensive analysis to identify enduring trends and potential investment themes. The firm places particular emphasis on the significance of owning tangible assets like timberland, farmland, and intellectual property, which they believe can generate consistent returns over an extended period. In this article, we delve into Horizon Kinetics’ 1st Quarter Commentary, which provides insights into various topics such as the banking crisis, diverse asset classes, different business models including land, a comparison between gold and cryptocurrencies, and the potential regulatory challenges faced by cryptocurrencies.
The Silicon Valley Bank Crisis
The Federal Reserve is currently facing circumstances that extend far beyond the scope of the Taylor rule. In economics, the Taylor rule proposes that the Federal Reserve should increase interest rates when there is high inflation or when employment reaches its peak level. Conversely, interest rates should be lowered when employment levels and inflation rates are low. Horizon Kinetics noted that one of these circumstances is the recent banking crisis, which commenced with the collapse of Silicon Valley Bank (SVB) on March 10. SVB, with assets comparable to Morgan Stanley and one-third larger than American Express, was the 16th largest bank in the United States. The Federal Deposit Insurance Corporation (FDIC) was compelled to intervene and order the closure of SVB when the bank depleted its cash reserves and became unable to meet withdrawal demands from depositors. Interestingly, unlike previous instances, the bank’s downfall was not attributed to credit losses. Just three weeks prior, the Forbes 2023 edition of America’s Best Banks had ranked SVB as the 20th best bank in terms of operating efficiency and profitability ratios, indicating effective management. It is crucial to recognize that this issue is not specific to SVB but represents a systemic problem affecting the entire banking industry, with SVB serving as a convenient example.
An additional issue affecting the entire system, triggered by the Federal Reserve’s decision to increase short-term interest rates, is the emergence of immediate and interchangeable competition for depositors of banks. These depositors had previously endured periods of minimal or zero interest rates offered by banks. Hence, even prior to the collapse of SVB, there had been a significant outflow of deposits from the banking system. It is important to note that attempting to extrapolate a few weeks or months of data, as shown in the accompanying table, to an annualized basis is a significant distortion. Nonetheless, deposit outflows from banks had been persisting for at least a year and intensified in the weeks leading up to these events.
Banks and Real Estate
Banks currently hold trillions of dollars in commercial real estate loans. Horizon Kinetics data suggests that as of the end of 2019, before the Covid-19 pandemic, one category of these loans had a U.S. office vacancy rate of 11.4%. However, by September 2022, this rate had increased to 15.4%. Despite this increase, it has not posed significant issues thus far, as delinquency and charge-off rates for commercial real estate loans have remained low during this period. Nonetheless, during a crisis, these rates can escalate significantly. At the end of last year, the delinquency and charge-off rates for commercial real estate loans were 0.68% and 0.04%, respectively. In the first quarter of 2010, these rates were much higher, at 8.92% and 2.1%, respectively. If the currently low delinquency rate were to reverse for any reason, it would result in severe financial difficulties.
What Comprises a Land Company?
Land is a business asset with the longest lifespan, and it may be the only asset that can last almost indefinitely. The value of land also increases due to its growing scarcity as the global population continues to rise. Arable land per person is consistently decreasing worldwide. Moreover, land has the ability to transition into progressively higher-value uses over time. For instance, grazing pasture can be transformed into farmland, which can later be integrated into an expanding urban area. On the outskirts of a city, a warehouse can be converted into an office park, while within the city, a low-rise building’s plot can be repurposed into a towering office structure. Investing in land involves embracing the fact that while it can yield substantial returns in the long run, the process of value appreciation can be extremely protracted. It is not uncommon for individuals to wait their entire lives to see a significant return on their real estate investments. Many become disenchanted with the investment before the slow process of compounding can yield results. Nevertheless, land has the potential to be an exceptional vehicle for long-term returns and as a hedge against inflation.
One may argue that the real estate investment trust (REIT) industry and home builders serve as comparable alternatives to investing in land. However, Horizon Kinetics pointed out that there are key distinctions to consider. REITs own various properties such as office buildings, homes, storage facilities, or malls, and their income primarily stems from the activities and operations associated with these properties, rather than from the land itself. It is important to note that REITs are required to distribute a significant portion of their income as dividends, limiting the potential for internal compounding through reinvestment or share repurchases. Additionally, they rely on external funding, often through debt and share issuances, to finance expansion, which can make them sensitive to credit and interest rate fluctuations and dilute shareholder returns.
Regarding home builders, while they may acquire land for their projects, this land is typically held as inventory and used for relatively near-term purposes. The land is converted into operational assets and is not retained solely for its land value. Acquiring land for homebuilding can be costly and challenging, particularly during economic upswings. Furthermore, the homebuilding industry often involves debt leverage, which contributes to its short-term cyclical nature.
An Iconic Land Company
There is a land company that has been publicly traded for over a century, making it the fourth-longest listed company on the New York Stock Exchange. What sets this land company apart is its stability, as it has not undergone any significant recapitalizations, acquisitions, or ownership changes that would complicate return calculations. The results are truly remarkable. The initial stock price was $20 per share, and nearly 40 years later in 1927, it reached $2,000, becoming the highest-priced company on the Exchange at that point. Today, the share price is 286,857 times higher than the initial $20, which would equate to a staggering $5.7 million per share if there were no stock splits. This exceptional land company is known as Texas Pacific Land Corporation (NYSE:TPL). While it is commonly categorized as an energy sector company, it was originally classified under “Real Estate Trust & Land Stocks” in financial newspapers’ quotation sections, per the Horizon Kinetics report.
Challenges Associated with the REIT Framework
The Horizon Kinetics report also discussed that the REIT structure often appears to function as a means to raise significant amounts of external capital from equity investors and lenders, which is then converted into dividend payments. Unfortunately, a considerable portion of the potential growth is often transferred to investors in the form of equity offering fees and interest expenses. While growth can be achieved during periods of high equity valuations through the issuance of new shares to fund beneficial acquisitions, this growth is dependent on capital market pricing rather than inherent in the business model. Additionally, the debt incurred in this process introduces significant cyclical risk.
Timberland REITs, on the other hand, can take advantage of the inflationary benefits associated with land ownership. There are a couple of reasons for this. Firstly, similar to corporate land companies and homebuilders, timberland REITs already possess extensive land holdings, eliminating the need for additional land purchases. Secondly, while they are required to distribute a majority of their income, they have an inherent source of internal growth: the annual growth of timber. This growth comes at virtually no input cost as it is primarily driven by solar power. In fact, trees are perhaps the only large-scale commercial application of solar power that does not require energy-conversion capital equipment like solar panels.
With this outlook in mind, we discuss some of the best land and timber stocks to buy. These include Texas Pacific Land Corporation (NYSE:TPL), The Howard Hughes Corporation (NYSE:HHC), and Weyerhaeuser Company (NYSE:WY).
We listed down the best land and timber stocks from Horizon Kinetics’ 1st Quarter Commentary, where the firm highlighted the top companies operating in the sector. The following performance and acreage figures are taken directly from the Horizon report. We also selected some of the land and timber companies below based on hedge fund sentiment towards each stock as of Q1 2023. The REITs included in this list own substantial land which consistently gains value over time, in addition to generating income from rental leases. This is why they are classified as land stocks, as explained in the Horizon report.
12. PrairieSky Royalty Ltd. (OTC:PREKF)
Number of Hedge Fund Holders: N/A
PrairieSky Royalty Ltd. (OTC:PREKF) holds the title of being Canada’s largest non-government landholder, owning a vast expanse of 9.7 million acres in western Canada. To put it into perspective, this land is roughly equivalent to the combined size of New Jersey and Massachusetts. If PrairieSky Royalty Ltd. (OTC:PREKF)’s royalty interests in government-owned land are included, the total land ownership extends to an impressive 18.3 million acres. PrairieSky Royalty Ltd. (OTC:PREKF) follows a business model that prioritizes an anti-dilutive capital allocation strategy over the long term. This approach is a management decision. PrairieSky’s shares offer a dividend yield of 4.6%, which could potentially be higher. However, the company maintains a low payout ratio in order to have enough cash flow for both investing in additional properties and conducting share repurchases.
Following PrairieSky Royalty’s bi-annual investor day, TD Securities downgraded PrairieSky Royalty Ltd. (OTC:PREKF) stock from Buy to Hold on May 18. The downgrade comes with a price target of C$24. TD Securities recognizes the advantages of the royalty model compared to other business types but attributed the downgrade to the stock’s strong performance so far this year and its current valuation.
In addition to Texas Pacific Land Corporation (NYSE:TPL), The Howard Hughes Corporation (NYSE:HHC), and Weyerhaeuser Company (NYSE:WY), PrairieSky Royalty Ltd. (OTC:PREKF) is one of the best land and timber stocks to watch.
11. Acadian Timber Corp. (OTC:ACAZF)
Number of Hedge Fund Holders: N/A
Acadian Timber Corp. (OTC:ACAZF) provides primary forest products in Eastern Canada and the Northeastern United States. The company is divided into two segments, namely NB Timberlands and Maine Timberlands. Acadian Timber Corp. offers a variety of products including softwood and hardwood sawlogs, pulpwood, and biomass by-products. Acadian Timber Corp. (OTC:ACAZF), which focuses on generating income, possesses approximately 1.1 million acres of timberland in Maine and New Brunswick. Additionally, the company manages an additional 1.3 million acres of Canadian Crown Lands. With a minimal salary expense, Acadian Timber likely employs a small workforce of around a dozen employees or so. The company stands out as an exception to the growth constraints typically associated with real estate investment trusts. It is one of the premier land and timber stocks to invest in.
On May 4, Acadian Timber Corp. (OTC:ACAZF) reported Q1 GAAP earnings per share of C$0.22 and a revenue of C$22.36 million, topping Wall Street consensus by C$2.55 million.
CIBC analyst Hamir Patel on January 10 maintained a Neutral rating on Acadian Timber Corp. (OTC:ACAZF) and lowered the firm’s price target on the shares to C$16 from C$17.
10. Gladstone Land Corporation (NASDAQ:LAND)
Number of Hedge Fund Holders: 9
Gladstone Land Corporation (NASDAQ:LAND) is a real estate investment trust (REIT) that specializes in acquiring and owning farmland and farm-related properties situated in key agricultural markets across the United States. Gladstone Land Corporation (NASDAQ:LAND) leases these properties to third-party farmers. In addition to general farmland, the company also owns farms that cultivate permanent crops like almonds, apples, cherries, figs, lemons, olives, blueberries, and pistachios.
Gladstone Land Corporation (NASDAQ:LAND) has a vast ownership of over 115,000 acres of farmland, spread across 169 farms in 15 states. However, it faces certain growth limitations as a real estate investment trust. On the positive side, leasing farmland comes with the advantage of no operational expenses for Gladstone. The responsibility for capital expenditures, such as farm equipment, lies with the farmers who lease the land. As the property owner, Gladstone Land Corporation (NASDAQ:LAND) primarily provides the land and collects rent. In the event of rising prices of agricultural products, particularly during an inflationary cycle, the farmland’s value is expected to increase inherently. It is one of the best land and timber stocks to buy.
According to Insider Monkey’s first quarter database, 9 hedge funds were long Gladstone Land Corporation (NASDAQ:LAND), compared to 7 funds in the preceding quarter. John Overdeck and David Siegel’s Two Sigma Advisors is the biggest stakeholder of the company, with 265,900 shares worth $4.4 million.
9. Tejon Ranch Co. (NYSE:TRC)
Number of Hedge Fund Holders: 10
Tejon Ranch Co. (NYSE:TRC) is involved in real estate development and agribusiness. The company, along with its subsidiaries, operates through five distinct segments – Commercial/Industrial Real Estate Development, Resort/Residential Real Estate Development, Mineral Resources, Farming, and Ranch Operations. It is one of the top land and timber stocks to buy.
The value of the land owned by Tejon Ranch Co. (NYSE:TRC) is primarily derived from its strategic location. Los Angeles serves as the largest port city in the United States and is a significant hub for e-commerce shipments. However, the city’s high rents, property prices, congestion, and regulations pose challenges for the expansion and development of warehouse and logistics facilities. Tejon Ranch Co. (NYSE:TRC) has capitalized on this situation by successfully developing over 8 million square feet of commercial, industrial, and retail space, including distribution centers, in close proximity to Los Angeles. Notable tenants leasing from Tejon Ranch Co. (NYSE:TRC) include companies such as Ikea, Dollar General, and Caterpillar. Interestingly, Tejon Ranch Co. (NYSE:TRC) itself occupies a land area that is approximately the same size as Los Angeles.
According to Insider Monkey’s first quarter database, 10 hedge funds were bullish on Tejon Ranch Co. (NYSE:TRC), compared to 9 funds in the preceding quarter. Murray Stahl’s Horizon Asset Management is the largest stakeholder of the company, with 1.15 million shares worth $21 million.
8. Rayonier Inc. (NYSE:RYN)
Number of Hedge Fund Holders: 14
Rayonier Inc. (NYSE:RYN) is a prominent real estate investment trust focused on timberland, possessing valuable assets situated in highly productive areas for softwood timber growth within the United States and New Zealand. The trust generates revenue through fees charged to logging operators. It possesses a vast land portfolio spanning 2.8 million acres across 11 states in the US and New Zealand. It is one of the best land and timber stocks to watch.
On May 19, Rayonier Inc. (NYSE:RYN) declared a quarterly dividend of $0.285 per share, in line with previous. The dividend is payable on June 30, to shareholders of record on June 16.
Michael Roxland, an analyst at Truist, initiated coverage on Rayonier Inc. (NYSE:RYN) on May 15 by assigning it a Hold rating and a price target of $33. Rayonier Inc. (NYSE:RYN) stands out among the three publicly traded timber real estate investment trusts (REITs) because it exclusively focuses on timber and does not have any supplementary businesses like wood products. The analyst informed investors that the Hold rating is influenced by factors such as decreased demand for wood and timber, rising interest rates, concerns about profitability in the Pacific Northwest, and apprehension about an oversupply of sawtimber in the southern region of the United States.
According to Insider Monkey’s first quarter database, 14 hedge funds were long Rayonier Inc. (NYSE:RYN), compared to 16 funds in the earlier quarter. Ian Simm’s Impax Asset Management is the biggest stakeholder of the company.
Here is what Third Avenue Management has to say about Rayonier Inc. (NYSE:RYN) in their Q3 2020 investor letter:
“Third Avenue has long championed enterprises with sound business practices run by aligned control groups that exhibit strong stewardship. Within Third Avenue’s real estate strategy, this oftentimes leads the Fund to “pass” on investments in companies with uncertain environmental liabilities, business models that could be deemed predatory, and corporate governance structures that are stacked against key stakeholders. Consequently, the select-set of real estate and real estate-related business that make it into the Third Avenue Real Estate Value Fund represent some of the true industry leaders in respect to their ESG practices, including Rayonier, that own more than ‘2.7 million’ acres of timberlands and sequester more carbon than any other privately-held enterprises globally (to our knowledge) — an underappreciated attribute that may ultimately have incremental value through a carbon-credit initiative or even strategic value for larger enterprises seeking to offset emissions.”
7. PotlatchDeltic Corporation (NASDAQ:PCH)
Number of Hedge Fund Holders: 16
PotlatchDeltic Corporation (NASDAQ:PCH) possesses a land portfolio of 2.2 million acres distributed across Alabama, Arkansas, Georgia, Idaho, Louisiana, Mississippi, and South Carolina. As a manufacturer of wood products, the company employs 1,300 individuals. In addition to its primary operations, PotlatchDeltic Corporation (NASDAQ:PCH) operates several facilities through its taxable real estate investment trust (REIT) subsidiary, including six sawmills, an industrial-grade plywood mill, a business focused on residential and commercial real estate development, and a program for the sale of rural timberland. The company also has a leadership role in sustainable forest management.
On May 5, PotlatchDeltic Corporation (NASDAQ:PCH) declared a quarterly dividend of $0.45 per share, which is payable on June 30 to shareholders of record on June 2.
Kurt Yinger, an analyst at DA Davidson, maintained a Buy rating and a price target of $55 on PotlatchDeltic Corporation (NASDAQ:PCH) shares on April 25, following the company’s better-than-expected Q1 earnings. According to the analyst’s research note, the company achieved these results by capitalizing on favorable logging conditions and achieving record harvest levels. Although the profitability of the Wood Products segment faced challenges, the firm suggests that it will still remain competitive, and possibly even favorable, compared to industry peers who are yet to release their earnings reports.
According to Insider Monkey’s first quarter database, 16 hedge funds were bullish on PotlatchDeltic Corporation (NASDAQ:PCH), with collective stakes worth $217.4 million. Jeff Ubben’s Inclusive Capital is the largest position holder in the company, with 3.14 million shares worth $155.7 million.
ClearBridge Small Cap Strategy made the following comment about PotlatchDeltic Corporation (NASDAQ:PCH) in its Q4 2022 investor letter:
“We also seized the opportunity to add PotlatchDeltic Corporation (NASDAQ:PCH), in the real estate sector. The company owns 1.8 million acres of timberland in the U.S. as well as six sawmills, an industrial-grade plywood mill and a rural timberland sales program. The stock has been weak since lumber prices peaked in 2022, creating an exceptionally compelling entry point far below the value of its net assets. We believe the company will be able to successfully navigate through a potential downturn in construction without meaningful impairment of its assets based on its strong balance sheet. Additionally, as PotlatchDeltic’s inventory of trees will increase in value over time, the company will benefit from delaying its harvesting activity until the market rebounds to a more attractive level.”
6. West Fraser Timber Co. Ltd. (NYSE:WFG)
Number of Hedge Fund Holders: 16
West Fraser Timber Co. Ltd. (NYSE:WFG) is a diverse wood products company involved in the manufacturing, selling, marketing, and distribution of wood-based products. These include lumber, engineered wood products, pulp, newsprint, wood chips, and other residuals and renewable energy sources. It is one of the best land and timber stocks to buy. West Fraser Timber Co. Ltd. (NYSE:WFG)’s Q1 2023 revenue of $1.63 billion outperformed Wall Street estimates by $200 million.
On April 20, CIBC analyst Hamir Patel maintained an Outperform rating on West Fraser Timber Co. Ltd. (NYSE:WFG) but lowered the firm’s price target on the shares to C$126 from C$129.
According to Insider Monkey’s first quarter database, 16 hedge funds were bullish on West Fraser Timber Co. Ltd. (NYSE:WFG), compared to 15 funds in the last quarter. Murray Stahl’s Horizon Asset Management is the largest stakeholder of the company, with 454,723 shares worth $32.4 million.
Like Texas Pacific Land Corporation (NYSE:TPL), The Howard Hughes Corporation (NYSE:HHC), and Weyerhaeuser Company (NYSE:WY), West Fraser Timber Co. Ltd. (NYSE:WFG) is one of the best land and timber stocks to invest in.
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Disclosure: None.12 Best Land and Timber Stocks To Buyis originally published on Insider Monkey.