Weyerhaeuser, The Last Timber REIT

| About: Weyerhaeuser Co. (WY)

I don't mean that Weyerhaeuser will be the last timber REIT ever! It's just the last one I've written about. It was also the last one formed. I've never been a large fan of Weyerhaeuser (NYSE:WY). It's the only timber REIT I don't own. Although WY has long been a leading timber company, beginning in about 1900, its actions over the last 10 to 15 years have not made me an admirer. Around the turn of this century (2000), WY spent several years pursuing a hostile takeover of Willamette Industries. When the takeover action began, it made some sense, but by the time it happened, it made no sense at all. Weyerhaeuser went heavily into debt and spent the next several years selling off assets to pay down the debt. By the time it was over, WY was no better off than when they started.

Then again, about the same time period, when most of the other vertically integrated forest products companies were either selling off their timberlands or converting to REITS, WY stubbornly refused to do either until investor pressure forced their hand. In order to qualify for REIT status, WY had to again sell off large pieces of itself. Since 2007 WY has sold off its Shipping Lines, Hardwood operations, Short-line Railroads, Trus Joist commercial operation, Containerboard and Packaging operations, Australian operations, Fine Papers operation, New Zealand operations, and Canadian wood products distribution centers. So, the present company is not what it once was. In my opinion, the dust still needs to settle over the WY REIT conversion to see whether it made sense or not. Actually, I think WY might have been better of splitting into two companies, a REIT and a manufacturing company. Another factor that keeps me from owning WY is that their dividend yield is the lowest of the Timber REITS.

That said, here is a snapshot the current Weyerhaeuser. WY has four primary businesses, timber, wood products, cellulose fibers, and real estate. As you can see in the table below, similar to Rayonier (NYSE:RYN), WY is more of a forest products company than a timber REIT. Timber, the REIT activity, only accounted for about 24% of its 2011 revenues.

2011 Sales


Sales ($millions)


Timber (REIT)



Wood Products



Cellulose Fibers



Real Estate



Timberland Segment

In the US, WY owns or leases 6.4 million acres in eight states. Of the US ownership, 33% is in the Pacific Northwest and 67% in the Southeast. These are the two major timber growing regions in the US. In Canada, WY leases 13.9 million acres in British Columbia, Alberta, Saskatchewan, and Ontario. WY is a major exporter of logs to Japan, China, and Korea. Japan is by far WY largest Asian customer. WY also has small JVs in Uruguay, Brazil, and China.

As you can see in the table below, log sales, both 3rd party and intersegment, account for 83% of the timberland segment sales. Miscellaneous product sales account for the remainder. Western log sales, which include export logs, accounted for most of this. Log prices in the Southeast are still very depressed.

2011 Timberland Segment Sales


Sales ($ millions)


3rd Party Customers:













Logs Total





Pay as cut timber sales



Timberlands sales and exchanges



Higher and better use land sales



Minerals, oil and gas



International operations



Other products



Other Total



Unaffiliated Total




Intersegment Log sales:


United States






Intersegment Log sales Total






Wood Products Segment

WY has always been one of the largest North American lumber producers. They presently own 18 sawmills, 10 engineered lumber mills, 6 OSB mills, and 2 plywood mills. Six of these mills are in Canada. WY's lumber capacity is 4,515 million board feet (mmbf). Compare this to Plum Creek (NYSE:PCL) at 330 mmbf, Rayonier at 370 mmbf, and Potlatch (NASDAQ:PCH) at 623 mmbf. In 2011, WY ran at about 75% capacity. Structural lumber accounted for about 44% of this with the remaining 56% divided between OSB, plywood, engineered products, hardwood, and other products. Because of the housing slump, lumber prices have been depressed for several years, however, prices have begun improving recently, particularly on the West Coast. Wood products earnings were in the red for 2011.

2011 Wood Products Segment Sales


($ millions)


Structural lumber



Engineered solid section



Engineered I-joists



Oriented strand board



Softwood Plywood



Hardwood lumber









Cellulose Fibers Segment

On the pulp and paper side, WY is basically in the absorbent fibers business. The main product for AF is fluff pulp used in baby diapers and such. They also produce liquid packaging which is used in products like milk cartons. CF has two mills in Georgia, one in Mississippi, one in North Carolina, and one in Alberta Canada. In addition, WY has a 50% interest in North Pacific Paper Corporation (NORPAC), a joint venture with Nippon Paper Industries, which produces newsprint and high-brightness publication papers in Longview Washington. Pulp prices were up slightly in 2011 compared to 2010.

2011 Cellulose Fibers Segment Sales


($ millions)


Fluff Pulp



Liquid packaging board



Other products






Real Estate Segment

When it comes to real estate, WY is basically in the home construction business. It also does a small amount of residential lot development. Operations are concentrated in metropolitan areas in Arizona, California, Maryland, Nevada, Texas, Virginia and Washington State. They do business under the names Quadrant, Pardee, Maracay, Trendmark, and Winchester. Because of the housing slump, real estate has been depressed, however, early signs of improvement have been seen recently, particularly in Arizona and Nevada.

2011 Real Estate Segment Sales


($ millions)


Single Family Home Construction



Lot Development









Financial Highlights ($Millions)


Q1 2012







Operating Income




Net Income




Diluted EPS








Cash provided by Ops




Cash used in Investing




Long Term Debt




Market Cap.


$10.4 bil.


Comparisons with 2010 are difficult due to the dust still not being settled on the REIT conversion. Too many one-time items and special charges muddy the water. Q1 2012 was not a particularly good quarter. Because of the concentration in lumber and home building, WY is more tied to the housing market than some of its competitors. WY is calling for improving conditions in the second half of 2012 and expects 2012 to be about 10% better than 2011.

Market capitalization is $10.4 billion with debt of about 4.5 billion. The dividend is about 3.0% with the 5 year dividend growth rate of 3.2%. In my estimate, the US timberlands are worth about $11.3 billion, about $1,832 per acre on average. This is slightly more than WY's Market Cap. Weyerhaeuser is trading at a P/E of about 48.3. In my opinion, earnings need to improve quite a bit to justify this valuation. However, its timber assets are well worth the current price. For the time being, I'm going to remain on the sidelines as far as adding WY to my portfolio. I'd like to see better earnings, cash flow, and a higher dividend, but see no way for this to happen until home construction rebounds considerably.

Disclosure: I am long RYN, PCL, PCH.

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