How Weyerhaeuser's Results Reflect on Timber REITs

Weyerhaeuser (WY) is not a timber REIT, though many of its investors would like it to be. Its results show how timber REITs are likely faring though.

From Weyerhaeuser’s Q408 conference call:

No land sales and reduced timber volumes resulted in lower Timberland's earnings of $45 million. Significant declines in number and OSP prices, and weak volumes throughout our product lines were the main contributors to the $90 million reduction in wood products earnings.

Since the market peak in 2005, North American lumber demand has dropped 30%. During the same period Weyerhaeuser production has declined 32%. In addition to volume impact, we've also seeing significant price decline. For example, we have not seen Douglas-fir fir pricing at these low levels in 25 years.

In just the past 11 days, we have announced the closure or indefinite curtailment of lumber and veneer operations at four mills in Aberdeen, Washington; and Pine Hill, Alabama. These are in addition to the seven operations we either closed or indefinitely curtailed in 2008.

Further shutdowns are likely if markets do not improve.

[In] timberlands, we are dealing with lower harvest levels in response to deteriorating market demand. Harvest levels in the fourth quarter were down approximately 13% from the third quarter due to market declines and adverse weather conditions. For the year, harvest levels were essentially flat to 2007. It should be noted however that nearly one third of the harvest in the west was associated with the need to harvest wood damage by the severe storms that struck the northwest in December 2007.

Following the reduction in demand, domestic log prices were also lower while export realizations were up slightly as our export markets remain steady.

There was a slight increase in some of our lumber pricing. But again, as we look at the economic situation and the market conditions, we don't see an ongoing uplift in the lumber prices going forward.

On land:

In the fourth quarter, we sold land, eliminated option and impaired land identified for future sale. These land related activities account for 469 million of our 630 million fourth quarter pre-tax loss as follows.

$130 million from divesting land in Arizona and California, 58 million from eliminating options on land in virtually all of our markets and 280 million from impairing land we are likely to sell in the future. This land is located in Arizona, California, Nevada and the Pacific Northwest.

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Comments

[Alan Young:]

Weyerhaeuser is in pretty good shape because they have such a broad asset base. They've been eating their book for a year, reducing it by 30% (from $20B to $14B yoy), and still have a great balance sheet. Other timber REITs, I wouldn't be so sure.

Feb 12 02:01 AM

[scimitar:]

But couldn't the timber REITs simply cut back on logging if the prices of lumber keep dropping? There's essentially no risk to cutting back, because biological growth will continue regardless of the market conditions. And this biological growth will ultimately lead to a higher supply of timber that the companies can utilize when prices return to normal levels.

Sure, the book value of the trees may decrease, but if there's no risk to letting them continue growing, who cares?

Feb 12 02:03 AM

[SA Editor J...:]

Dear Scimitar,

If you read the transcript, Weyerhaeuser execs say they have cut down on logging quite a bit. A good portion of their harvest came from the retrieval of timber that had been felled during storms and natural disasters. It seems what you say is accurate and will likely emerge more clearly as a trend in next quarter's results.

To read the transcript, you can click on the link in the article.

ATB,
Judy

Feb 12 02:07 AM

[User 356199:]

How can a storm during the very last month of the year cause an increase in harvests during 2007? It takes months to figure out how to salvage the fall down. That theory doesn't hold water. They increased harvests in 2007 because the export market for logs was good in 2007 and they increased harvests for domestic users to generate cash to offset losses in other segments of their business.

If Weyco becomes a REIT, the tax hit would be huge. Taking the impairments now will help toward making that change.

When Weyco overpaid for Willamette, the number of employees was about 67,000 combined - 50,000 at Weyco and 17,000 at Willamette. By the end of 2009, Weyco will have less than 18,000 employees left. That is pretty sad.

Timber REITs have costs. They have to generate cash so they have to harvest something to pay interest and other costs. Certainly, trees will get bigger, but they may not be more valuable in the future. There are many, many things to consider. In hindsight, several REITs have overpaid for the timberlands acquired in recent years. That will be apparent soon.

Housing starts at the peak were about 2.3 million. In 2009, they will likely be less than 600,000. That is about 25% of the total. If you thought 2008 was bad for (housing focused) building materials companies, you ain't seen nothin' yet.

The only way Weyco has been able to show a profit since the acquision of Willamette has been to sell off assets:

- Paper to IP
- Australian operations and timberlands
- Composite panel operatations
- Coastal BC operations
- etc.

Weyco cannot figure out their future. If you don't believe me, just ask their employees...

Feb 12 10:23 PM

[sid h:]

let the timber value keep falling and see how many timber farmers quit planting seedlings.

Mar 02 12:38 PM

[User 398038:]

Where user 356199 writes "How can a storm during the very last month of the year cause an increase in harvests during 2007? It takes months to figure out how to salvage the fall down. That theory doesn't hold water. ...allow me to try to explain.
Think of a storm as an "involuntary harvest." If this "storm" is a hurricane (and I know that much of Weyerhauser's property is in Alabama which is certainly exposed to storm's along the Northern gulf coast) then you can be looking at a LOT of timber being "involuntarily harvested."
Where you are under the impression that "it takes months to figure out how to salvage the fall down", this is not actually true at all.
Once the timber is down, there is a very limited amount of time to "harvest" it - that is - to actually SELL it for any purpose whatsoever. Trees that have been "involuntarily harvested" in storms will, more often than not, have to be sold for pulp at best ...though they might have been cut and sold for use as poles or sawlogs otherwise.
The volume of timber left on the ground after a storm which must be salvaged - or lost - immediately also creates a huge supply that quickly runs into a bottle neck of demand. Far more of this damaged timber is available for sale than there is a need for - IF there is any real demand whatsoever.
Storms are great for the mills. The damage done to stands of timber drives the price of timber down at the very same time that damage done to homes and other buildings drives the demand for lumber up. This means that mills can buy low and sell high at the same time.
I hope that resolves your confusion.

Apr 20 02:54 AM