Potlatch move seen as boon to shareholders

Potlatch Corp.’s shareholders will benefit from the company’s plans to convert its vast timber holdings into a real estate investment trust, an analyst said Tuesday.

After the Jan. 1 conversion, the stock will operate sort of like a bond – pumping out quarterly dividends from profits on Potlatch’s 1.5 million acres of private forestland.

“It’s a bonanza for the shareholder,” said Steve Chercover, a forest products research analyst for D.A. Davidson in Portland. “It’s looking more like a bond that a cyclical stock.”

Under the REIT structure, Spokane-based Potlatch will pay out 90 percent of its timberland earnings as dividends. On a practical level, that means company stockholders will reap about $2.60 in annual dividends for each share of stock they own, versus the current 60 cents per share.

Potlatch also expects to pay out a special dividend during the first quarter, which will be worth $15 to $16 per share, Chercover said.

Chercover kept his “neutral” rating on Potlatch stock, which dropped slightly Tuesday to close at $54.30 per share. Meanwhile, analysts at Banc of America Securities upgraded their rating from “neutral” to “buy.”

Potlatch is the nation’s fourth timber company to pursue a real estate investment trust.

Plum Creek created the nation’s first and largest timberland REIT in 1999, which covers 7.8 million acres of forest in 19 states. Raynonier Inc. also operates it timberlands as a REIT, and Longview Fibre plans to make the conversion next year.

Potlatch’s board of directors mulled the move for about a year, said Penn Siegel, Potlatch’s chairman and chief executive officer.

The deciding factor was the tax advantages, Siegel said. Under its current corporate structure, Potlatch pays federal taxes of 35 percent on its timberland earnings. When those earnings get passed onto shareholders, they can end up owing another 15 percent in capital gains tax.

Potlatch’s conversion to a REIT will do away with the double taxation, Siegel said, because REITs don’t have to pay the federal tax on timberland income.

“It’s a much more tax efficient structure,” Siegel said. “For every dollar of income, the shareholder keeps 85 cents.”

Buying new forestland will also be easier under the REIT structure, Siegel said. Currently, the company is competing with other entities for land acquisition – including pension funds – that don’t have to pay the federal tax. That means they can borrow money at lower interest rates, Siegel said.

Potlatch owns private forest land in Idaho, Minnesota and Arkansas. The company sees value in increasing its timber holdings, Siegel said.

“Unlike anything else you can invest in, forests don’t wear out or become obsolete,” he said. “It’s a renewable resource.”

Creation of a REIT requires approval from Potlatch shareholders, who will vote on the issue later this year.

Potlatch’s manufacturing operations will not become part of the REIT. They will be part of a separate subsidiary, and will be subject to federal taxes.