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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


TimberWest income Trust


TimberWest Forest Corp.(TWF-UN:TO)

We first selected Timberwest forest income trust for our Bulldog portfolio back in June. We suggest you read the original article in the archives.  Since then the outlook for this trust looks better and better. The high dividend yield looks set to continue and we believe this will make a great longer term investment for our Dependable portfolio.

Below is an extract from TimberWest's second quarter results announcement. It shows that the company's dividend distributions are very sustainable due to their lumber sales and associated products but also that Timberwest's real estate assets will continue to add further to the cash distributions, as and when the properties are sold off.

TimberWest Announces 2006 Second Quarter Results
Thursday August 3, 6:29 pm ET

Company generates distributable cash of $35.5 million, or $0.46 per Stapled Unit, on increased real estate activity and strong log and lumber sales, reflecting a higher-value sales mix and improved pricing
The second quarter of 2006 was another strong quarter for TimberWest. The Company generated distributable cash of $35.5 million or $0.46 per Stapled Unit. On a year to date basis, the Company has generated approximately 80% of  its annual distributable cash requirements, having generated distributable cash of $67.0 million or $0.86 per unit.

This is considerably better than the Company's 2005 performance when it generated $15.4 million of distributable cash during the second quarter and $39.3 million for the first half of that year.
Our strong financial position for the first half of the year is attributable to higher production and sales
volumes, a higher-value sales mix with a higher percentage of fir, improved pricing, and solid real estate sales, " said President and CEO Paul McElligott. "Of note is that our strong financial performance in the first half of  2006 resulted in the Company closing the second quarter with its lowest net debt level ever at $184.8 million." 

Log sales volumes for the quarter were up 11% over the comparative period in 2005. While volumes sold into the domestic market were down slightly, export log sales volumes in the second quarter were up about 25% over the comparative period in 2005, and on a year to date basis were up 30%.  As noted in our previous results releases, much of the increased export volume in the current year can be attributed to fibre freed up as the result of the repurchase of a fibre supply agreement in late 2005.  Heavy snow pack at higher elevations resulted in harvesting taking place predominantly at lower elevations during the second quarter. As a result, the harvest mix and resulting sales mix remained weighted to Douglas fir, which is a higher-value species.

Despite a much stronger Canadian dollar, external sales realizations were strong this quarter compared to the second quarter of 2005. The higher component of fir in the sales mix and an increase in Japanese exports were the key drivers behind this increase. In addition, prices held up reasonably well in all of our markets, with cedar price improvements the most noticeable.

"TimberWest is continuing with its enhanced real estate program," added McElligott. "Proceeds from the sale of  real estate were $11.4 million for the quarter, with the sale of the former Youbou sawmill site accounting for  the majority of these proceeds. This is significantly higher than the second quarter of 2005 when real estate sales proceeds were $0.3 million."  As disclosed in the Company's first quarter unitholder materials, real estate values on Vancouver Island have climbed in recent years and this triggered an updated strategic review of TimberWest's entire land portfolio. At the end of the first quarter of 2006, the Company announced that, based on this review, over an initial five-year planning horizon, approximately 10,000 hectares of higher and better use (HBU) properties had been identified with an estimated current market value of between $150 million and $200 million.

During the second quarter, the Company completed the work with its real estate consultants in ascertaining what the portfolio of HBU properties was for the 6- to 15-year time horizon. TimberWest is pleased to report that an additional 28,000 hectares of HBU lands have been identified, making for a total potential portfolio of 38,000 hectares of HBU properties available over the next 15 years. "As is, where is", our external consultants have estimated the current market value of the Company's entire HBU portfolio, excluding timber, to be in the range of $300 million to $450 million, with the potential to increase this value over time through value-added development activities on selected properties. Even "as is, where is", this represents a premium to the carrying cost of these lands.

We are continuing to evaluate the best way to realize these values for unitholders. The sales process for the Elk Falls Lumbermill, the Company's only remaining sawmill, is still underway with potential investors conducting due diligence on this asset.  TimberWest is hopeful a successful sale can be announced later this year but there is no certainty this will materialize given the stronger Canadian dollar, thelumbermill's financial performance, and the softwood lumber agreement recently negotiated with the US, which in its present form severely disadvantages the coastal BC industry.  Labour negotiations for a new collective agreement at the lumbermill have been suspended until the outcome of the sales process is known.

As TimberWest enters the second half of the year, the Company expect results for the next six months to be below those of the first half of the year as our sales volumes will be lower, North American markets are anticipated to weaken and, seasonally, hemlock will become a larger proportion of the harvest mix. Housing activity in the US has begun to dampen and lumber prices are falling. In addition, hemlock is a less profitable species than Douglas fir as it has more limited and lower-value end uses - this species continues to be a challenge for us, as it is for all of our peers on the coast. As well, the third quarter of 2006 has already begun with very hot weather on the coast and we have taken more downtime than usual so far this quarter.

Despite the fact that the second half of the year is expected to be weaker than the first half, we are confident that TimberWest will generate enough distributable cash from its timberland and real estate operations to cover its distribution requirements for 2006.

TimberWest is pleased to announce a distribution of $0.269 per Stapled Unit, payable October 15, 2006, to unitholders on record on October 1, 2006. From inception to June 30, 2006, the Company has generated distributable cash of $731.1 million while, including the July 15, 2006 distribution of $20.9 million, the Company has paid out $691.9 million to unitholders.

Due to the seasonal and cyclical nature of TimberWest's business, cash flows may fluctuate from quarter to quarter and from year to year. One of the objectives of TimberWest's cash distribution policy is to make even distributions to unitholders, which may differ from actual cash generated during the period.

Buy TimberWest now (TWF-UN.TO) It should be a great low-risk, high dividend payer for the next several years.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.