Who knew that trees would become one of the next big real estate plays? But as many major investors renew their long-term mentality when it comes to returns, the timber industry represents a new frontier, both globally and in the U.S.

 

Recently, for example, ATP, the biggest pension fund in Denmark, committed $582 million to a portfolio of direct investments in timberland.

 

Closer to home, the $12 billion Kansas Public Employees Retirement System (KPERS) in Topeka committed $60 million to timber manager Campbell Group according to Robert “Vince” Smith, chief investment officer for the system. It’s the fund’s second major investment in timber, after committing $60 million to Molpus Woodlands in January 2010. KPERS was assisted by real estate consultant The Townsend Group, and the move is part of the system’s 14% real-return target allocation.

 

Even smaller pension systems are getting in on the action. The Firefighters & Police Officers Pension Plan in Alexandria, Va., and the Davie Police Pension Plan in Florida are searching for timber investment managers. Alexandria is looking to commit about $5 to $10 million, while Davie is targeting $3 million.

 

Timber has become so popular that a few private timber companies have converted to REITs, making the sector a small but significant portion of the National Association of Real Estate Investment Trusts (NAREIT) Index.

 

The biggest so far, Weyerhaeuser Co., based in Federal Way, Wash., last week made significant moves to finally convert to a REIT later this year. Weyerhaeuser is the second-largest owner of U.S. timberland, declared a record $5.6 billion special dividend to signal the next step in its conversion process.

 

Weyerhaeuser CEO Daniel Fulton said in a recent interview that the dividend payout is the latest signal that the company will convert to a REIT this year, and addresses investor concerns that its shrinking market valuation could have derailed the process. The dividend, limited to 10% cash with the balance in stock, will be paid Sept. 1.

 

Weyerhaeuser shares (NYSE:WY) closed at $16.59 on Wednesday July 28, down $0.37. That’s a nice rebound, however, after the company’s shares peaked at $20.89 in April but then fell to $13.52 in early July.

 

According to reports, some shareholders, including Franklin Mutual Advisers LLC, have pressured the company to become a REIT to reduce taxes on earnings from its more than 6 million acres of timberland. In April, shareholders approved a plan to distribute shares as part of the planned conversion.

 

As a REIT, most earnings from the timberland will not be subject to corporate tax before flowing to investors. Under U.S. law, 110-year-old Weyerhaeuser is required to pay out all undistributed earnings and profit to shareholders to qualify to become a REIT.

 

Once the Weyerhaeuser REIT is effective, the four timber REITs will account for a significant share of the total REIT market, or 5% to 8% of the NAREIT index. According to Michael Grupe, executive vice president for research and investor outreach at NAREIT, executives there are discussing whether to break out timber REITs into a separate subcategory.

 

Surprisingly, returns of the three existing timber REITs now in the index have tracked the NAREIT Equity Index.

 

Plum Creek Timber Co. Inc. (NYSE:PCL), Rayonier Inc. REIT (NYSE:RYN) and Potlatch Corp. (NYSE:PCH) delivered a one-year total return of 26.46% and a three-year annualized return of 5.87% for periods ended Dec. 31. That compares favorably to the NAREIT Equity Index, which returned 27.99% for the year and -12.41% for the previous three years.

 

Other REIT sponsors have entered the game in the past few years. Atlanta-based Wells Real Estate Funds, which has launched several major nontraded REITs in the last decade, started its own nontraded timberland REIT in August 2006, and now has $400 million of interests in more than 300,000 acres of land across 20 counties in west central Georgia and east central Alabama.