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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

December 15, 2009 at 10:16 AM

Weyerhaeuser makes its own history, but will the plan fly?

Top of the News: Amid the wall-to-wall Dreamliner coverage, another Seattle-area business icon is making news. Weyerhaeuser says it will convert to a real estate investment trust next year.

The move has been expected for some time. On the surface, it’s straight-forward: A REIT distributes some 90 percent of its income directly to shareholders, in exchange for a corporate tax rate of zero (Weyerhaeuser’s is currently 35 percent).

Wall Street has been pressuring Weyerhaeuser to make the move based on the success, in Wall Street’s mind, of Plum Creek Timber Co., based in Seattle. In both cases, the companies are primarily focused on their real estate and timber holdings. Weyerhaeuser’s story, of course, is more complicated.

This was one of the companies, along with the Northern Pacific and Great Northern railroads, that built the Northwest. The inter-generational wealth created by the company helped seed countless businesses and charities. As one of the largest integrated forest product companies in the world, with a headquarters in the Puget Sound region, it drew talent and capital, and made decisions affecting investments around the world.

Weyerhaeuser made a big bet on the housing bubble, especially with its house-building subsidiaries. When the bubble popped, nearly all of the company’s units suffered. But even before the severity of the crash set in, Weyerhaeuser was backing away from its old integrated ambitions, cutting back, selling off business lines. The Federal Way headquarters staff has been decimated.

So a REIT, it will be. Pre-crash it made a certain creative-destruction sense beyond the tax benefits. That was an economy dominated by house-building and pushing development ever farther into the exurbs and rural areas. Not only was this profitable for the timber business, but some landholdings could conceivably be sold at a high profit for suburbanization of spectacular wilderness. CEO Dan Fulton comes from the real-estate arm.

It’s a gamble, however, whether that old model can restart itself, certainly whether it can do so at the volume and profitability of the old days. Wall Street may be looking in a rear-view mirror. The Plum Creek success may not be replicated. It’s especially not clear how Weyerheauser will fare in the great reset?

Now the company talks about research and development efforts and other forward-leaning projects. But it’s difficult to see how these will be funded by a REIT, which exists for the quick profit of shareholders rather than the decades-long process that built Weyerhaeuser. REITs don’t exist to make productive, value-added things. They don’t exist to spend decades building a major company. Like much on Wall Street, they are primarily a short-term financial play, taking the profits out of assets that in some cases it took generations to build.

It’s not a stretch to see the eclipse of Weyerhaeuser as the story of the American economy.

Today’s Econ Haiku:

What would the Wrights say

As the Dreamliner takes flight?

This flying machine

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