Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.
June 17, 2013 at 2:56 PM
Weyerhaeuser finds a big deal in its back yard
On the way to becoming a real estate investment trust in 2010, Weyerhaeuser got out of the fine paper business, closed mills and factories, sold its containerboard, packaging and recycling business and shrank its workforce by 70 percent. There seemed to be little left to see from this one-time titan except the mandatory funneling of most of its earnings to investors and benefiting from the tax break for REITs. That changed over the weekend, when the company, headquartered in Federal Way, announced that it would buy Longview Timber for $2.65 billion. Not only that, but it said it might dump its house-building subsidiary.
The former is a blockbuster deal that adds to Weyerhaeuser’s timberlands at a time when timber demand is rebounding. The latter, if it comes to pass, would represent a major shift from Weyerhaeuser’s strategy. In the mid 2000s, facing years of underperforming the S&P 500, Weyerhaeuser placed special hope in residential real estate and its Wreco (Weyerhaeuser Real Estate Co.) unit which includes Quadrant Homes and Pardee Homes. Also, one of the little-discussed appeals of focusing on holdings of timberlands, was the notion that exurban building would continue and some of the company’s land might become valuable subdivisions. Not for nothing did Wreco’s former chief, Dan Fulton, become chief executive of the new Weyerhaeuser. Then the housing crash hit, not only tanking demand for lumber but badly wounding Wreco like all house builders. As part of Sunday’s news, the company said Fulton, 63, will retire and Doyle Simons, former CEO of Temple-Inland, will become chief executive in August.
Simons, 48, came up through the executive ranks of Temple-Inland, a pulp and paper company which was purchased last year by International Paper. Even as it was converting to a REIT, Weyerhaeuser was saying “trees are our future.” This leadership reaffirms that mantra, and if the housing division is spun off the company will become even more of a pure play. Housing is recovering, but we’re not going back to a 2000s boom, nor is exurban mass building as appealing as it seemed before the crash.
In a conference call with analysts on Monday, Fulton said the acquisition will expand Weyerhaeuser’s timber holdings in the Pacific Northwest by 33 percent to approximately 2.6 million acres. After completing the deal in July, the company will own or control 7 million acres. The company will assume $2.65 billion in debt, but Fulton said, “This one-of-a-kind acquisition is very straightforward. It’s one that we believe can be completed quickly, and we are confident that we will start to realize the benefits immediately…We believe that this is a truly unique opportunity for Weyerhaeuser to do a scaled transaction of high-value timberlands west of the Cascades, right at our own backyard.” CFO Patty Bedient said nearly 40 percent of Weyerhaeuser’s timber holdings will be in the Northwest with this acquisition.
Fulton sought to soothe investors in the REIT. The company announced an increase in its quarterly dividend from 20 cents to 22 cents a share beginning with the third quarter dividend, which will be payable in September. This will be the third dividend increase in the past four quarters. Even so, Standard & Poor’s lowered its outlook on Weyerhaeuser from stable to negative. The ratings agency warned it could downgrade the company’s debt, already close to junk status, if the acquisition is funded with less than 50 percent equity or of the housing recovery fades. Even so, shares rose today and are up about 38 percent over the past year.
Emphasizing that the new timber is west of the Cascades, the most valuable timberland in the U.S., Fulton told analysts:
We intend to leverage our silviculture, infrastructure, logistics and marketing expertise to reap the full potential of these lands. This transaction enhances our leading position as the largest owner of Timberlands in the region. These lands are highly complementary and contiguous with our existing ownership in these areas.
No timetable was given for the evaluation of Wreco’s future. But with this acquisition, Weyerhaeuser gains a bunch of mature trees as demand and prices are rising, including from Asia. The trick will be managing the debt.
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Today’s Econ Haiku:
Isn’t in Paris either
Bonne chance, mon ami