How Weyerhaeuser's Results Reflect on Timber REITs

Includes: IP, LPX, PCL, RWR, VNQ, WY
by: Judy Weil

Weyerhaeuser (NYSE: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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