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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