Weyerhaeuser Is More Than a Housing Play

by Aaron Levitt | June 19, 2013 8:09 am

As we’ve pointed out[1], despite the huge run-up in housing-related plays, the timber sector hasn’t exactly been playing nice with the bullish data points. Following roughly a year of run-up, futures contracts for both Chicago-traded random-length lumber and oriented-strand board have plunged during recent weeks despite housing’s positives.

Those falling prices also have done damage to the various producers of lumber like Deltic Timber (DEL[2]) or Rayonier (RYN[3]), as well as various timber REITs and forest products firms.

Overall, the disconnect between rising housing numbers and the recent bearishness with the timber producers is setting up a nice value play for investors in industry giant Weyerhaeuser (WY[4]), whose latest moves prove why it’s one of the best.

A Spinoff and a New Focus

Given that timber investing is a game of patience[5], Weyerhaeuser seems to be setting itself up for the long haul.

The century-old producer of forest products — now a real estate investment trust — has agreed to pay $2.65 billion deal to purchase Longview Timber from Canadian asset manager Brookfield Asset Management (BAM[6]). That acquisition will add substantial acreage in the key Pacific Northwest that is contiguous with existing timberlands owned by Weyerhaeuser.

Overall, the deal will add roughly 645,000 acres[7] in California and Washington that will expand Weyerhaeuser’s timber holdings in the Pacific Northwest by more than 33% to approximately 2.6 million acres. The purchase will also increase the total amount of U.S. timberlands it owns or controls to approximately 6.6 million acres.

As if adding considerable prime timberland holdings[8] wasn’t enough, Weyerhaeuser also unveiled a potential shift to its business strategy.

The firm revealed that it would explore “strategic alternatives with respect to Weyerhaeuser Real Estate,” the company’s homebuilding and real estate development business. According to a prepared statement, WY’s board intends to consider a broad range of alternatives including a potential sale or spinoff of the business. WRECO is one of the largest homebuilders in the country and has some of the best margins industry.

The Big Payoff

Both of these moves could be a huge win for current and future WY shareholders.

The takeover will be the third largest North American forestry acquisition. Back in 2006, Resource Management Service’s paid nearly $5 billion to purchase of assets from International Paper (IP[9]). While, timber REIT, Plum Creek (PCL[10]) shelled out $3.34 billion to gain control of businesses from Georgia-Pacific back in 2001. While that might seem expensive — WY is paying about $4,109 an acre — what it’s getting in exchange is worth the price.

Roughly two-thirds of the trees located on the Longview parcel are Douglas Firs. This species of pine commands a premium price in export markets like China. While China’s economic growth may be slowing today, the long term will still see more its new middle class citizens demanding homes. Analysts predict that China will need to import about 182 million cubic meters of wood by 2015 — an increase of 70% from its current level. As these timber assets mature and are harvested, Weyerhaeuser will be able to siphon more profits from those logs.

Not that it has to wait very long.

The purchased acreage is already mature timberlands and harvesting logs will be immediately accreditive. The deal is expected to close in July and Weyerhaeuser predicts that it will instantaneously raise its earnings and funds available for distribution. As such, Weyerhaeuser plans to boost its quarterly cash dividend by 2 cents to 22 cents per share for the September payment.

Then there is WRECO to consider.

By selling or spinning off its homebuilding division, WY becomes a “pure-play” on timber assets. Many analysts believe that the company has been held back as most investors don’t understand Weyerhaeuser’s hybrid business model. Slimming WY’s portfolio from 4 to 3 businesses could unlock the true value of WRECO. Overall, analysts estimate that a sale of the homebuilder[11] could be worth between $4.5 and $5 billion as a standalone company. That translates into about $8 to $9 per share for Weyerhaeuser.

All in all, the moves make great operational sense that will translate into real gains and dividends for shareholders. Despite all of this, WY shares are still about 13% below their 52-week highs and have only gained about 1.6% this year.

Given the rosy picture and the fact that the company is making the right long-term moves, investors may want snag-up shares of the undervalued timber REIT before it’s too late.

As of this writing, Aaron Levitt was long WY, RY & PCL.

Endnotes:
  1. pointed out: http://investorplace.com/2013/06/housings-hot-but-lumbers-not/
  2. DEL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DEL
  3. RYN: http://studio-5.financialcontent.com/investplace/quote?Symbol=RYN
  4. WY: http://studio-5.financialcontent.com/investplace/quote?Symbol=WY
  5. game of patience: http://investorplace.com/2012/10/prop-up-your-portfolio-with-timber/
  6. BAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAM
  7. the deal will add roughly 645,000 acres: http://www.reuters.com/article/2013/06/16/us-brookfield-weyerhaeuser-kapstone-idUSBRE95F0E620130616
  8. prime timberland holdings: http://investorplace.com/2013/04/jump-into-the-timber-super-cycle/
  9. IP: http://studio-5.financialcontent.com/investplace/quote?Symbol=IP
  10. PCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=PCL
  11. sale of the homebuilder: http://investorplace.com/ipo-playbook/2013-homebuilder-ipo-craze-continues-with-new-home-company/

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