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US timber investments restructured

Historically, timber acreage has appreciated at a rate that outpaces inflation in the US. This has made many who expect a coming bout of inflation to invest in timber acreage. Lately just like most other commodities and natural resources timber prices have come under pressure. Source: Seeking Alpha

In 2011, timber prices increased, but they did so from a generally low price point. Prior due that, timber prices became depressed because demand for wood in new construction decreased so substantially after the real estate market imploded.

This reduced demand for timber has allowed several timber growers to grow their trees more so than they would normally prefer. Many have argued that housing has already bottomed, which could bode well for the timber business and potential future price increases.

Many believe that timber real estate investment trusts (REITs) are one of the best ways to get exposure to timber. Under the current US tax laws, REITs must distribute at least 90 per cent of their taxable income in order to eliminate the need to pay income tax at the corporate level.

Timber REIT dividends are currently taxed as long-term capital gains, and not at the corporate dividend or ordinary income tax rates. This differs from most REIT dividends, which are generally taxed at the significantly higher income-tax rate.

This also makes timber REIT dividends different than most REIT, bond and traditional equity payouts, and makes timber REITs a rather unique asset class, though these differences could narrow under future tax schemes.

Some of the largest owners of timber acreage within the United States are in real estate investment trusts.

The lack of demand for timber products through the last few years made many of these REITs structure themselves to minimize their expenditures and overheads. The resulting companies are less diversified and considerably more focused upon timber production, with more direct sensitivity to timber price changes.