Weyerhaeuser’s (WY) Dividend as a Timber REIT

23 11 2010

From the desk of Neena Mishra, Director of Equity Research:

While Weyerhaeuser (WY) has completed all steps required for converting to REIT status, it technically becomes a REIT upon (1) filing its tax return in early 2011 and (2) electing the REIT status in the tax return, effective January 1, 2010.

Among the steps taken for conversion, Weyerhaeuser reorganized businesses and paid out accumulated earnings and profits. Whereas the parent company (which will be a REIT) continues to hold the majority of the timber assets, the non-REIT qualifying assets are held in a wholly-owned taxable REIT subsidiary (TRS).  TRS assets include Weyerhaeuser’s Wood Products manufacturing, Cellulose Fibers business and the Weyerhaeuser Real Estate Company (comprised of five home building subsidiaries). Additionally, the activities of the timberland segment which do not qualify for REIT status, such as sales of higher-and-better-use (HBU) lands, mineral income, R&D activities, nurseries/seedling orchards etc. will reside in the TRS. Furthermore, the debt of the company has been assumed by the TRS, which is expected to service the debt and support the dividend in the long term.

WY’s annual dividend, currently $0.20 per share, will increase as the company assumes REIT status. Management will provide guidance for future dividends in December.

Currently, the average dividend yield for the three publicly-traded timber REITs is ~5%. If applied to WY’s share price of ~$17 per share, this translates to a potential annual dividend of $0.85 per share. However, we expect WY’s near-term dividend to be below that level as its Homebuilding and Wood Products manufacturing businesses remain severely impacted by the down housing markets. A dividend of ~$0.50 to $0.60 per share appears feasible given current cash flow levels from timberlands. As a REIT, the company will be required to distribute 90% of its earnings; but the company has some flexibility with its timberland earnings as it can continue to defer harvest or change the harvest mix.

A modest rebound in the housing markets would directly benefit WY. Growing export demand, particularly from China, will support log prices while the shortfall in Canadian harvests due to the Mountain Pine Beetle infestation and rising demand for biofuel remain long-term positives. The company also stands to benefit from the current tax ruling for cellulosic biofuel credits and expects $240 million of potential tax credits in Q4 2010. Thus, we have a positive outlook on the dividend payout, especially in the case of an advanced cyclical recovery.

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