Sunday, June 22, 2008

Weyerhaeuser Redux

By now I'm sure that you are aware that Weyerhaeuser was successful at getting a modified version of the Tree Act passed as a part of the mammoth Farm Bill this year. Shortly thereafter they announced that they would not be converting to a REIT until 2010 at the earliest. The reason given to shareholders, by Chief Financial Officer Patricia Bedient, was that "A REIT conversion for Weyerhaeuser would not be tax efficient in 2009. However, this does not preclude the REIT option for Weyerhaeuser in 2010". The underlying reason for the tax inefficiency was reportedly the housing slump. I'm a little more than suspicious.

Among other things in the modified TREE Act are:

  • Provides a 15% tax rate for corporations on gains from timber that has been held for at least 15 years. (This 15% rate is comparable to that paid by many of Weyerhaeuser’s competitors; C-Corporations like Weyerhaeuser current pay a 35% rate on timber gains.)

  • Timber REIT provisions which are much more lenient with respect to manufacturing revenue.

That certainly sounds good for Weyerhaeuser. It makes it much easier for Weyerhaeuser to convert to a REIT and allows it to keep more of it's manufacturing facilities. So why did they announce that they would not convert to a REIT in the near future?

Here are a couple of quotes from Weyerhaeuser's PAC website explaining why the Tree Act should be passed:

  • “For Weyerhaeuser, timberlands ownership and integration with manufacturing is a core strength of the company.”

  • “After the TREE Act is passed into law, we will develop a strategy focused on continuing to obtain permanent relief. There will be potential major changes in the tax code in 2009-2010, which will be an opportunity to obtain this permanent relief.”

So, it appears that Weyerhaeuser will continue to fight the change to a REIT. What impact does this have on it's shareholders? Here is a chart that compares stock performance (management performance??) of Weyerhaeuser to Plum Creek.

That kind of says it all! Weyerhaeuser is over 80% owned by institutional investors. I wonder how long they will be willing to wait? --Brian

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