Forisk quoted in Capital Press regarding structure of $6 billion distribution to Weyerhaeuser shareholders as part of REIT conversion

29 04 2010

Capital Press – The company is most likely letting the market figure out how much the transaction is worth on a per-share basis, said Brooks Mendell, president of Forisk Consulting, a firm that tracks timber industry finances.

The Internal Revenue Service began allowing REITs to pass 90 percent of profits through to shareholders in the form of stock in 2008.

The decision was made in reaction to the financial crisis, which left some companies strapped for cash, Mendell said. “They had all those REITs that were in dire financing trouble.”

When credit markets froze in 2008, such companies had difficulty raising money to repay debts and needed to be financially flexible, according to the National Association of REITs.

“The plus for the company is it allows them to preserve cash,” Mendell said.

The strategy is not without risk for shareholders, since the larger number of outstanding shares could dent the stock price, he said. “It potentially has a dilutive effect on the stock.”

On the other hand, the shareholders will benefit if Weyerhaeuser performs better financially, Mendell said. Also, when existing shareholders obtain additional shares, they basically take over a larger slice of the company, he said.

Weyerhaeuser lost nearly $570 million in 2009 and nearly $1.2 billion in 2008, according to filings with the U.S. Securities and Exchange Commission.

It may seem counterintuitive for the company to overhaul its corporate structure to cut down on tax expenses when it’s losing money, but there’s a good reason for the timing, Mendell said.

During the prolonged timber recession, Weyerhaeuser sold off manufacturing assets for financial reasons, he said.

However, the firm would need to divest some manufacturing capacity anyway as part of a REIT conversion, since the IRS limits non-real estate income and assets, Mendell said.

Weyerhaeuser was able to strategically sell off assets to meet both purposes, he said. “You kill two birds with one stone.”

Mateusz Perkowski, Capital Press

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Wood Bioenergy: Cellulosic Ethanol Projects Remain Doubtful

29 04 2010

In evaluating the potential wood demand and timber investment implications of evolving bioenergy markets, we begin by organizing announced wood-using bioenergy projects into three technological categories:  pellets, wood-to-electricity, and cellulosic ethanol.  Then, as a first step, we screen out cellulosic ethanol projects.  Why?  While wood pellet and boiler-based electricity technologies have been around for decades and proven operable at scale, cellulosic ethanol, which embodies the dream of turning renewable forests and wood residues into liquid fuel for powering vehicles, remains unproven and questionable as an investment.  Currently, the primary challenges of cellulosic ethanol include technology, financing and quality.

To date, no project exists that can produce, at scale, cellulosic ethanol economically.  Production costs are too high.  The primary challenge remains the efficient break down of cellulose, a core focus of bioenergy bench research. For example, last month, The Economist magazine noted that two Danish firms announced advances in this area through producing cheaper enzymes to take on this task. America’s biofuel muddle: coming up empty, March 27, 2010.

Financing is scarce.  Projects rely on grants, loan guarantees and subsidies.  Range Fuels in Soperton, Georgia has received in excess of $150 million in federal grants without producing, to date, any cellulosic ethanol.  As Minnesota Public Radio reported, Future of cellulosic ethanol remains uncertain, April 26, 2010.

Finally, and fundamentally, ethanol is a poor quality fuel.  It corrodes pipelines and engines; it generates but two-thirds the energy of gasoline; and it survives today in the US as an additive, not as a stand-alone fuel.

Tellingly, the Environmental Protection Agency (EPA) cut to size its 2010 mandate for cellulosic ethanol production in the US from 100 million gallons to 6.5 million gallons.

FTR Index Down 0.48%; Timber REITs Report Mixed Outlooks

27 04 2010

Forisk’s market cap weighted FTR (“footer”) Index of publicly-traded, timberland-owning real estate investment trusts (timber REITs) fell 0.48% over the past week as Plum Creek (PCL), Potlatch (PCH), and Rayonier (RYN) released earnings information and absorbed new assessments from ratings agencies.

Plum Creek announced 1st quarter earnings of $0.54 per diluted share while revenues declined 32.6%.  Increased revenues from the timber and manufacturing portions of the business were offset by a sharp 63% decline in real estate revenues.  Moody’s raised Rayonier’s rating from Baa3 to Baa2, thereby confirming a stable outlook for the firm.  Potlatch’s wood products segment generated quarterly operating income for the first time since the 3rd quarter of 2008 on increasing lumber sales volume and pricing.  In addition, interest in non-strategic timberlands and rural real estate remained stable during the quarter.

Despite Wet Weather, Pine Grade Markets Recover; Use of Woods-Direct Chips Increasing

23 04 2010

Southern demand for pine grade timber raw materials rebounded 6.1% during the 1st quarter of 2010, according to the Wood Demand Report, after reaching five-year lows the previous quarter.  Data providers reported that “markets have turned around” while others confirmed restarting production during the past few quarters.   Several mill managers expressed concern that, while markets improved, they feared that mills may overproduce in the near-term, thereby suppressing potential price recovery for end products such as lumber and plywood.

Pine pulpwood demand increased 1.1% South-wide during the quarter at both pulp and OSB mills.  In addition, the 1st quarter produced the highest reported consumption of in-woods chips for both pine and hardwood since 2006.  Consumption of both products has increased gradually over the past few years.

Looking ahead, we expect increasing consumption to continue.  Pulpwood demand in the US South is projected to recover in two years and reach pre-decline highs by 2013, according to the ForiskForecast.  Demand by pulp and paper users will be modest, and OSB producers will “consume more as the housing market recovers,” according to Dr. Tim Sydor, Forisk’s Forest Economist.  The primary growth in pulpwood demand will be from wood bioenergy customers.  We project wood bioenergy producers in the South will consume a pulpwood equivalent on par with OSB producers by 2015.

Wood Bioenergy: March/April 2010 Summary

15 04 2010

According to the March/April summary of Wood Bioenergy South, as of April 14, 2010:

  • 130 wood-consuming bioenergy projects have been announced in the US South.
  • In total, these projects represent potential, incremental wood use of 46.6 million tons/year by 2020.
  • Based on Forisk analysis, projects representing only 18.9 million tons/year pass basic viability screening.

Click on figure for the detailed downloadable summary.