Friday, April 18, 2008

Weyerhaeuser Continues March to REIT

Weyerhaeuser, the last major public integrated forest products company still standing, continues its march to a REIT structure. For some background on the Weyerhaeuser REIT issue, you can visit my posts of May 4, 2007, Weyerhaeuser Takes First Step Toward REIT; May 8, 2007, TIMOs and REITs and Oct 30, 2007 which includes some REIT speculation and an estimate of the value of Weyerhaeuser's timberland. The May 8th post includes an excellent background article on REITS by Cliff Hickman with the U.S. Forest Service.

Yesterday's announcement that Daniel Fulton, head of Weyerhaeuser Real Estate just last December, and promoted to President of Weyerhaeuser just four months ago, has been promoted to CEO of Weyerhaeuser. That's a fast track! And a significant step toward the REIT.

One of the issues preventing Weyerhaeuser from converting to a REIT is all of its manufacturing facilities. It is clear that WY has been moving rapidly to divest itself, by sale or mill shut downs, of facilities. Check out this list of news releases since the first of the year. The number of mills shuttered or sold already this year is staggering. Although individually they may appear to be small steps, collectively, it appears to me to be a giant step toward the REIT.

I think Weyerhaeuser was originally optimistic that they could save the company by means of the Timber Revitalization and Economic Enhancement Act (the so-called TREE Act) which would have lowered the capital gains tax rate on timber sales to 14%. I think that the possibility of any tax reduction for large corporations is pretty much dead for the foreseeable future and I'm sure the folks at Weyerhaeuser would not argue that. Another step toward the REIT and the march goes on.

It would appear that the only remaining question now is "When?". "If" is history. --Brian

3 comments:

  1. Brian, your crystal ball work is very impressive.

    Please expand on the short- and long-term implications. How will these changes affect the stock price? The integrity of the WY holdings? Is this company breaking up? What facilities will they retain, and what ultimately will they do with the land? As assets are liquidated, what will they do with the cash?

    Thank you for your insights ahead of time.

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  2. Mike,
    I'll give you my opinion on these issues but that's all it is. First, with respect to the stock price, the best thing that I have seen was the Barrons' article last October (see my October "Gone Hunting" post for a link). It put the value of the timberland at about $60/share, real eatate business at $10/sh, wood products at $15/sh and the total company at a little over $100/sh.

    I kind of suspect that they will follow the Plum Creek model meaning that the REIT would retain the timberland, real estate business and at least a part of the wood products business. You do the math.

    So, I guess I am saying that the company will be broken-up, the timberland will not be sold, and Weyerhaeuser will continue to be "The Tree Growing Company" and doing an outstanding job managing its timberland (probably doing a little more buying and selling, and little more development).

    Long-term impact is anybody's guess and depends completly on Congress and its fickle tax policies. If they think that they are not getting enough of the REIT tax revenue, the pass-through tax treatment could well end. Then the new conundrum would be to build back to a vertically integrated forest products company or to sell out the entire enterprise to a pension fund that doesn't pay any taxes! --Brian

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  3. A couple of years ago the head forester at WY stated that they desired to make 8 percent per annum return on their timberland. But Douglas-fir does not grow that fast. It has been observed around here that they are cutting 30 yo stands, very young for DF, juvenile wood only, studs and chips only.

    Plum Creek is busy liquidating their land. Cleacut and sell to second home buyers. Creating some political turmoil in ID as the Old Guard is being replaced by Californicating McMansioners. But the land is not productive enough to grow timber at high IRR. No new sawmills in ID in 15 years, but there are some new chip/OSB type mills. The New Guard is spending money like water and economically it has been a good thing for ID, even though the Traditionals are upset.

    Roundwood out, chipwood in. Even so, trees as a commercial farm crop are iffy on lowsite land. There has been some push internationally to grow pulpwood on 6 to 12 year rotations in tropical wet regions (very high site) but that's not competitive with mining almost-free boreal pulpwood in Canada and Siberia.

    And there seems to be a growing trend to farm high-value hardwoods for decorative/specialty wood. Figured grain. Mostly back East, but that's out of my region and I don't know how big a sector that really is.

    WY changes are significant. Your outlook matches mine only more so. Thank you for the prognosticating, which I suspect is right on.

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