What is The Pinchot Plan and Is it a Good Investment?

Many of you may have heard of the Pinchot Plan. Then again, many of you may not have any idea what I’m talking about. Like many other investment ideas floating round on the Internet these days, it’s someone’s catchy name for a class of investments. This particular group of investments has been deemed the “Pinchot Plan” Did the former head (actually the first) chief of the U.S. Forest Service, Gifford Pinchot, have anything to do with setting these investments up? Not really anything at all. In fact, Pinchot’s been dead since 1946. He does have a national forest named after him in Washington State, however. That’s important for one reason only in the context of this group of investments.

One of the clues to their identity was that the investment entities are exempt from paying federal income taxes, according to Title 26, sections 856 – 860 of the Internal Revenue Code. This IRS code section states that certain business entities can pay zero corporate income taxes. That’s right, zero, nada, zip! None of their income is considered taxable for the purposes of federal income taxes. Here’re a few quotes from the federal tax code, section 856 that gives a big clue about what these investments actually are, and one of the reasons they can be so favorable:

"For purposes of this title, the term ``real estate investment
trust'' means a corporation, trust, or association--

(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial
interest;
(3) which (but for the provisions of this part) would be taxable
as a domestic corporation;
(4) which is neither (A) a financial institution referred to in
section 582(c)(2), nor (B) an insurance company to which subchapter
L applies;
(5) the beneficial ownership of which is held by 100 or more
persons;
(6) subject to the provisions of subsection (k), which is not
closely held (as determined under subsection (h)); and
(7) which meets the requirements of subsection (c)."

So, that pretty much indicates that we’re talking about REIT’s, since that portion of the tax code deals exclusively with them. There are many flavors of REITs, however. The Pinchot Plan deals with those that are concerned primarily with land management, development, use, and raw materials extraction.

According to one of the websites / emails that purports to have the “inside information” on this investment plan, there are 6 companies. One of which they almost mention by name. Because the company referenced is called “Plum Creek” and there is a Plum Creek Timber Company based in Seattle, a REIT that happens to be the nation’s largest private landowner, I think it’s a pretty safe assumption that the email refers to them as one of the 6 companies.

As for the other 5 companies, a web search on some of the information contained in the email brings up Rayonier Inc, a REIT since Jan 1, 2004. This company derives much of its revenue from auctioning its timber reserves located in Alabama, Washington, New Zealand, Florida and Georgia. It gained almost a million acres when it acquired Jefferson Smurfit Corp in 1999, making it the 8th largest landowner in the U.S.

One of the others on the list looks to be the Potlatch Corp, located in Spokane, WA. They have, as the email suggests, over 1.5 million acres of land. Their most recent acquisition was 179,000 acres of central Idaho timberland they bought last month for $215 million. Recently they converted into a REIT. The fact is that the conversion allowed them to pay shareholders the one-time $15.15 per share dividend the email refers to. One aspect of the Potlatch REIT is its emphasis on recreational properties. Once leaders in timber products production, such as lumber and OSB (oriented strand board), used heavily in home building, they have shifted their emphasis to a more development oriented business strategy.

According to CEO Mike Covey, Potlatch will no longer consider land acquisitions that have no recreational component. They may have made this decision at just the right time, as new home starts, one of the primary uses of lumber and OSB, face a big decline. Potlatch began divesting itself of manufacturing assets a few years before its REIT conversion, and did so quite profitably. In 2004 they sold their OSB plant in Minnesota for a whopping $457.5 million, and netted a healthy profit. They still operate 13 manufacturing facilities, though.

Number three on the Pinchot email list is probably Longview Fiber (NYSE: LFB), a timber producer in, appropriately enough, Longview, WA. I’m more familiar with this company, because some of my wife’s high school friends work there. Actually, living much of my life in the Pacific Northwest, I’m more than a little familiar with most of the companies that the Pinchot email refers to. Longview was actually sold earlier this year to Canadian firm Brookfield Asset Management, the Borg of asset management companies with assets worth over 75 billion USD (and growing fast).

Most of the information in the email is sufficient to discern the true identity of the companies in question, thanks to the wonders of the Internet and the modern search engine. If you have a few spare hours, you can figure almost anything out on your own these days. The problem is, who has a few spare hours these days?

How have these REITs fared recently? Looking strictly at stock price, Potlatch closed today at $43.02, up about 15% since the beginning of last year. Since it was turned into a REIT at the beginning of 2004, Rayonier (RYN) has steadily gained, going from $27.50 to its latest close of $44.03. That’s a 37% gain in the past 3 years and 9 months. The other REIT I looked into as part of the Pinchot Plan research, Plum Creek Timber has gained just shy of 35% in total since its REIT conversion in July of 1999.

So from a purely stock appreciation, none of them has lost any value, and most have gained enough to make them worthwhile. Their real value, however isn’t from a stock price perspective. They pay huge dividends. You know how I feel about those. It’s pretty much all good. If you get good, consistent dividends over the long term, you almost don’t need stock price appreciation. Oh, it sure doesn’t hurt, but you can make impressive gains without them, if your dividends are solid and reinvested.

Did these companies pay dividends, as the email suggested they were required to? Rayonier paid out $129 million and $144 million in dividends in 2005 and 2006 respectively. They had a forward annual dividend rate this year of 2.00 and a 5yr average dividend yield of 3.80%. Plum Creek Timber’s rate was lower, at 1.68, but they had a higher 5yr yield of 4.60%. Potlatch returned an identical 4.6% yield and a forward dividend rate of 1.96.