When it comes to investing in timber, the long haul is what matters. And for shareholders of timber-focused real estate investment trust Weyerhaeuser (WY), the long term just got better.
The timber company’s latest deal to sell its homebuilding and real estate company — WRECO — will allow it to focus on the business of owning and operating boring profitable timberlands. That’s a prime spot to be in as timberlands’ stable and inflationary-beating returns continue to trounce other investments.
At the same time, the proposed merger/spin-off with Tri Pointe Homes (TPH) will create a growth-oriented company that should benefit as the U.S. housing market takes off. That should help WRECO trade at a much higher multiple once it’s no longer tucked inside the boring timber-focused firm.
Essentially, the deal allows investors to have the best of both worlds, and they should be buying with both fists.
A Tax-Free Timber Transaction
Weyerhaeuser seems to be making good on its promise to unlock value from WRECO. Back in June, the timber REIT said it was looking at “strategic alternatives” with respect to the company’s homebuilding and real estate development business. WRECO is one of the largest homebuilders in the country, with some of the best margins industry.
Yet, it was never fully appreciated inside the REIT structure … hence the deal with Tri Pointe.
While the transaction seems complicated at first, the basic premise is that Weyerhaeuser will distribute ownership of WRECO to its current shareholders. Then there will be a merger in which WRECO will become a unit of Tri Pointe. It’s called a Reverse Morris Trust transaction, and it enables smaller firms to “buy” a larger company. (TPH’s market cap is only about $500 million, WY’s is nearly $17 billion.)
However, Weyerhaeuser isn’t giving the company away for free — its shareholders will own the majority of the new, combined homebuilder. WY will receive 130 million shares in the deal and 80.5% of TPH/WRECO, as well as about $700 million in cash. The spin-off/merger will be treated as a tax-free distribution for WY.
Overall, the total value of the deal is worth about $2.7 billion.
A Great Deal For Both WY & TPH
For shareholders in both Tri Pointe and Weyerhaeuser, the deal will be quite lucrative in the long term.
First, Tri Pointe immediately leaps into the upper tier of U.S. homebuilders. So far, TPH has been focused on the Californian and Colorado housing markets. But with the WRECO buy, it can now expand into Las Vegas, Texas, Arizona, D.C., and the Puget Sound region in Washington state. The deal would also up its average home selling price and move toward more upscale buyers.