Things Are Happening At Weyerhaeuser

| About: Weyerhaeuser Co. (WY)
This article is now exclusive for PRO subscribers.

On June 16, Weyerhaeuser (NYSE:WY) made three significant announcements. First, it announced a new CEO, second it announced the purchase of 645,000 acres in the Pacific Northwest (PNW) and third it announced that it is considering divesting of its homebuilding business.

The new CEO will be Doyle Simons. Simons will be taking over in October from retiring CEO Dan Fulton, who has been Weyerhaeuser's CEO since 2008. Fulton successfully guided Weyerhaeuser through its REIT conversion. Doyle had been CEO of Temple-Inland, which was acquired by International Paper (NYSE:IP) in February 2012. Doyle had a 20-year career with Temple-Inland, so he is quite familiar with the timber business.

With the acquisition of 645,000 acres in the Pacific Northwest, Weyerhaeuser now becomes the largest timber REIT when measured by acreage. Weyerhaeuser now will own 6.8 million acres to Plum Creek's 6.4 million acres. The deal is supposed to close in July. The table below shows the new acreage owned by each of the timber REITs by region. In addition to being the largest timber REIT, Weyerhaeuser's lands are concentrated in the two primary timber-growing regions, the Pacific Northwest and the South.



Plum Creek (NYSE:PCL)


Rayonier (NYSE:RYN)

Potlatch (NASDAQ:PCH)






Pacific Northwest




Inland West



Lake States











To be sure, Weyerhaeuser paid a premium for these lands. Comp sales that I was able to find showed the average PNW acre to have sold for $2,494 per acre in 2011, $3,088 per acre in 2012. Weyerhaeuser paid $2.65 billion or just about $4,100 per acre, or a 33% premium over 2012 prices. In Weyerhaeuser's defense, we are in a rising market. Also, I know from personal knowledge that these are exceptional lands so they should be expected to bring a higher-than-average price. They are high site, meaning high productivity, and they have a high percentage of ground-based logging, meaning low cost. I looked at these lands when they were for sale by Longview Fiber and Hampton Associates. At that time they were purchased by Brookfield Asset Management (NYSE:BAM), which is selling them now to Weyerhaeuser. Another defense of Weyerhaeuser's price is strategic. Large acreages of this quality timberland rarely go on sale. To purchase this many quality acres would have taken years if done piecemeal. This purchase increased Weyerhaeuser's total acreage by almost 10% and its PNW acreage by about 33%. The land contains large volumes of high-quality Douglas-fir that brings a premium price from exports to Japan. And lastly, timberland is priced using discounted cash flow analysis. In today's low interest rate environment, a low discount rate is totally justified. The purchase will be paid for by about 50% new debt and 50% equity.

The third announcement was concerning Weyerhaeuser's home building business, WRENCO. It is studying the possibility of selling the unit, spinning it off into a new company, or keeping it. I always felt that this was a strange business for a timber company to be in. Sure, homebuilding uses lumber and land, which Weyerhaeuser produces and owns, but it still seemed like a forced fit. It also made WY doubly susceptible to the housing cycles. My feeling is that a spin-off or a sale would be best. WRENCO is a quality operation, and with the housing market on the upswing, WRENCO could bring a premium price. WRENCO generated $1.07 billion in sales in 2012. Competitors, D.R. Horton (NYSE:DHI) had revenues of $4.4 billion, Pulte Group (NYSE:PHM) $4.9 billion, and Toll Brothers (NYSE:TOL) $1.9 billion. WRENCO as a standalone would be in the top 20 home builder.

Overall, I see these three announcements as positives for Weyerhaeuser. A new CEO, especially one from the outside, should bring fresh ideas and new directions to the company. The acquisition of 645,000 acres of high quality PNW timberlands improves Weyerhaeuser's already high-quality timber portfolio. It will have a significantly higher harvest level of higher-value export and domestic logs. Lastly, if Weyerhaeuser sells or spins off WRENCO, it will consolidate the business more as a natural resource company. For sure, it will still be in the real estate business but more like the other timber REITs as sellers of HBU lands rather than a home builder.

As most of my readers know, WY is the only timber REIT that I do not own. With these latest moves, I may be tempted to add WY to my portfolio.

Disclosure: I am long PCL, RYN, PCH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.