Additionally, land assets for Tri Pointe would surge — roughly 10 times higher — after the deal. TPH will have about nine years’ worth of lot supply, compared to an average of 7.4 years for other homebuilders like D.R. Horton (DHI) and Pulte (PHM).
The spin-off is pretty good for Weyerhaeuser, too.
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 because most investors don’t understand Weyerhaeuser’s hybrid business model. Slimming the company’s portfolio from 4 to 3 businesses will unlock the true value of WRECO as a growth play and better showcase the stable nature of the timber asset class.
Not mention, the deal frees up resources to plow back into that core timber business — such as this year’s accreditive $2.65 billion purchase of Longview Timber from Canadian asset manager Brookfield Asset Management (BAM).
Homebuilding has been great lately, but is prone to booms and busts. Those busts have hurt Weyerhaeuser’s earnings in the past. By simply focusing on growing and harvesting logs, WY should be able to report “smoother” earnings going forward and produce steadier cash flows — the kind of cash flows that lead to big dividend increases in the future. After the transaction closes, analysts estimate that WY will see year-over-year growth in earnings of 97.3% and 16.8% for the next two years.
All of this should sound familiar to investors in ConocoPhillips (COP) and its spin-off of refiner Phillips 66 (PSX). It’s basically the same idea: Spilt “growth” from “stable” and watch them both trade at higher multiples.
Buy WY Shares
For investors, timber investing is a game of patience and Weyerhaeuser seems to be setting itself up for the long haul. Ultimately, the spin-off/merger will help strengthen the shares long term appeal. At the same time, investors will be getting a bit of growth from newly created WRECO/TPH firm. It’s a win-win.
The play here is to buy WY shares. That way, you’ll get the best of both worlds and will still be able to keep the boring and dividend paying timber assets after the deal closes. You can always sell the homebuilder shares if the housing market starts to get rocky. Meanwhile, the timber assets should keep on pumping out dividends for the future.
As of this writing, Aaron Levitt was long WY