Executive Profiles
Wooden Nickels
By By Dan Chasan March 29, 2010
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A 1991 photo shows a logger working with fallen Western |
Last spring, the Weyerhaeuser Co. closed its wonderful
Pacific Rim Bonsai Collection to the public. The company didnt say how much it
would have cost to keep the bonsai exhibit open, but this move was one more
belt-tightening measure blamed on the recession.
Weyerhaeuser had opened the bonsai exhibit at its Federal
Way headquarters just 20 years before, as a gift to the people of Washington on
the states centennial. The company and its environment were very different
then. George Weyerhaeuser, a grandson of founder Frederick Weyerhaeuser, still
chaired the familys namesake business, although only the year before, he had
been replaced as president by Jack Creighton. Weyerhaeuser was still the
nations largest private timberland owner, having nearly 10 percent of King
County, where its Snoqualmie sawmill had operated since World War I.
But Weyerhaeuser was trying to refashion itself. The companywhich
Forbes magazine profiled that year in an
article entitled Lost in the Woodshad been less profitable than its
competitors. It started jettisoning non-core businesses it had acquired or
developed in the 1960s and 1970s, including financial services and disposable
diapers. But it refused to emulate some competitors by unloading timberland in
the Northwest.
Now, the company is refashioning itself again. In January,
its board of directors announced that the business will morph into a Real
Estate Investment Trust, or REIT. Shareholders will vote on the plan at the
firms April meeting. The news drew relatively little attention, but it could
have a major impact on the region. The transformation, which would require the
company to channel virtually all of its income back to shareholders, puts
pressure on Weyerhaeuser to maintain strong cash flow to pay dividends. A
business that has long been considered a good steward of the states forests
could find itself under pressure to sell land to maintain that flow.
Even without a change in corporate governance, Weyerhaeuser
has become a very different entity from when its bonsai exhibit opened in 1989.
It still owns 1 million acres of Washington forest, but since the start of the
millennium, Weyerhaeuser has closed its Snoqualmie and Enumclaw mills (the
Snoqualmie mill had largely shut down in 1989), and sold its timberlands in
King, Pierce and Snohomish counties. It has shifted nearly all its Washington
operations to the southwestern corner of the state.
The firm has also unloaded its paper and container board
businesses. In 2007, when Weyerhaeuser got rid of the paper unit, then-CEO
Steve Rogel told Reuters, We are focusing in on the core businesses that we
intend to grow with in the future, which at the time included container board.
But not for long: In 2008, Weyerhaeuser sold its container board operations to
International Paper.
Increasingly, Wall Street has based valuation of
Weyerhaeuser on its vast timber holdings, which still total some 20 million
acres, including roughly a million each in Washington and Oregon. A 2007 report
by the University of Washingtons College of Forest Resources observed that
forests had changed from industrial assets to financial assets. Pension funds,
university endowments and other institutional investors have long liked
timbers combination of long-term appreciation and steady cash flow.
Institutional investors, endowments, and private equity
funds hold over $50 billion in U.S. timberland assets, George A. Fasano and
Thomas J. Straka wrote last year in the Journal of Financial Planning. The land has been sold by traditional forest
products companies and bought by timberland investment management organizations
(TIMOs) [which buy and manage timber for investors] and real estate investment
trusts (REITs). Analysts predict that TIMOs/REITs and other investor groups
will buy another 10 to 15 million acres in the next decade.
But the market for forest products has been volatile. When
American housing starts, which topped 2 million in 2005, dropped three years
later to less than half that level, wood prices plunged. Weyerhaeuser lost $175
million in the last quarter of 2009, $545 million for the year. The company
slashed its dividend twice last year, first from 60 cents to 25 cents per share
and then down to a nickel. It has announced another 5-cent dividend for the
first quarter of 2010. Even when the economy recovers, no one expects housing
starts to hit 2 million again. Much of Wall Street has looked gloomily on
Weyerhaeusers prospects.
But not everyone has shared the gloom. Two years ago, Kent
Croft of Croft-Leominster, which manages investments and mutual funds, told U.S.
News & World Report that one [stock]
everybody hates right now is Weyerhaeuser, the timber company. We like it for
the timber assets to be realized over time.
Croft says basically the same thing today. REIT or not,
were just attracted to the assets, Croft notes. Everything else is sort of
gravy. He tries to look three to five years down the road. Should the company
appeal to investors with shorter horizons? I think at these prices, yeah, he
says. Investors werent attracted by the REIT announcement, but they may be by
the actual REIT conversion in April, Croft explains. Will Weyerhaeuser outperform
the market from here on? Croft thinks so. But then, if you had asked two years
ago, I would have said the same thingand I would have been wrong.
By transforming itself into a REIT, many believe,
Weyerhaeuser will boost its stock price. But the conversions not a simple
process. To become a REIT, a company must jump through a number of hoops, not
least distributing retained earnings to its shareholders. For Weyerhaeuser,
this step means coming up with some $1.3 billion in cash. Without saying it planned
to become a REIT, Weyerhaeuser made it clear that last years second dividend
cut enabled it to hoard cash, just in case.
Congress created the REIT form in 1960 so that more people
could invest in commercial real estate. The law allowed people to securitize
and bundle individual investments, creating, in effect, a mutual fund for real
estate. In 1999, Congress modernized the legislation, allowing a REIT to own
a taxable operating subsidiary that provided services to tenants of REIT
property.
Seattle-based Plum Creek Timber Co. received IRS permission
to apply the new law to timber, then quickly reorganized itself as a REIT. Plum
Creeks transformation attracted a lot of investors. In 2001, the company used
its new wealth to buy The Timber Co., which owned Georgia Pacifics forest
lands. Thanks to the purchase and subsequent acquisitions in the Midwest and
East, Plum Creek has supplanted Weyerhaeuser as the nations largest private
timberland holder. Many analysts and investors now believe that the advantages
of the old vertically integrated forest products company are outweighed by
disadvantages in the federal tax code. Other traditional forest products
businesses have restructured accordingly. In 2004, 2005 and 2006, Rayonier,
Longview Fiber and Potlatch also converted themselves to REITs.
Weyerhaeusers more tradition-minded board was reluctant to
follow suit. Five or 10 years ago, they did not like to discuss the REIT,
says Longbow Research analyst Joshua Zaret.
The price of standing pat was paying more taxes than forest
products companies that made the switch. To reduce that disparity, Weyerhaeuser
in 2008 lobbied successfully for legislation that cut its tax rate in half,
comparable to the federal tax a REIT would pay on any taxable income. But the
disparity remained. Thats because REITs typically channel 90 percent of their
earnings to shareholders, who pay taxes as individuals, avoiding the double
taxation levied on most corporate profits and dividend income. If you
reorganize as a REIT, your tax rate is probably zero, Zaret says.
A company that wants the tax break cant make more than 20
percent of its earnings from operations that arent REIT qualified. Unloading
the paper and container board operations got Weyerhaeuser over that hurdlemany
people assume thats why the firm unloaded them. But Weyerhaeuser spokesman
Bruce Amundson says thats not so, that neither division fit into
Weyerhaeusers new view of the future. With the growth of online
communications, the future of paper looked questionable. And with competitors
starting to supply the Asian container board market with products manufactured
abroad, the future of that business looked questionable, too.
Nevertheless, Amundson pointed out last year that the
company had made the structural changes it would need to become a REIT. It had
reorganized itself into two separate reporting units: timber and everything
else. It had also started reporting on a calendar-year schedule, as the REIT
law required.
Looking at the brave new landscape of REITs and TIMOs,
former Washington Commissioner of Public Lands Brian Boyle, who now leads the
University of Washington School of Forest Resources Northwest Environmental
Forum, says Everybodys claim is that they manage for the long term. But he isnt
convinced.
Theyre in it to return money to their investors, Boyle
says. If [timber] prices go down and the unit holders income goes down,
theyre likely to say, Cut more.
The one thing that experience has shown, Boyle says, is that
when companies change over, they employ a whole lot fewer people. Millworkers
and other residents of timber towns accordingly tend to view changes in
ownership with anxiety. So do conservationists, who have increasingly
recognized that a working forest is better than no forest at all.
Conservation Northwest Executive Director Mitch Friedman
says he doesnt much like the idea of REITs and TIMOs taking over so much
working forest in the Northwest. He appreciates the irony of a conservationist
getting nostalgic about vertically integrated forest products companies, but he
says the REIT form of corporate ownership has enormous long-term
implications.
Boyle worries that virtually no private landowner has much
incentive to keep land in timber production if theres a chance to do something
else. TIMOs are certainly converting forest land to other uses. And
nonindustrial owners are, too. If there isnt some way that a landowner can
make a buck, Boyle says, then, basically, the answer is to convert it.
Boyle envisions different public agencies joining with
private owners to create large
anchor forests, managed for timber production and environmental benefits for
the long term. Friedman likes the idea of anchor forests, too.
As a way to maintain productive forests, Boyle envisions
landowners getting money to provide environmental benefits. One obvious benefit
is carbon sequestration: Weyerhaeusers trees may become even more profitable
if Congress establishes a cap and trade system for carbon emissions.
Weyerhaeuser is hoping for cap and trade, public affairs manager Anthony Chavez
says, and it hopes to get tradable offsets for the carbon sequestered in
sustainably grown lumber.
But the people who have pushed Weyerhaeuser to become a REIT
arent all pension funds and university endowmentsthe companys traditional
institutional investors who take a long-term approach to their investments. And
Wall Streets interest in REITs isnt necessarily a good thing. Some people see
this reorientation toward monetizing assets as a national problem. In Maine,
over 70 percent of industrial forest land . . . has changed hands in the past
decade, according to an article in Sustainable Management of the Acadian
Forest last year, and it seems that the
industry is currently doing more inventory management than sustainable forest
management.
Jack Creighton, who succeeded George
Weyerhaeuser Jr. as Weyerhaeusers chairman, and who ran the company as CEO
from 1991 to 1997, says hes suspicious of Wall Streets long-term intentions.
I put the pension funds in a totally different category [from the other
investors], Creighton says. For pension funds, getting into [timber REITs]
was a great decision. Timber gives the pension funds the cash flow they need
over long periods, without taking away any value of the underlying assets.
Other investors may not have the same abiding interest in the long term. Im
cynical in that Wall Street comes and goes, Creighton says. I think the
people who want Weyerhaeuser to turn into a REIT [are really just] in it for
the short-term profit.