Timber firm on hook for $6 billion

Weyerhaeuser to issue stock as part of REIT conversion

By MATEUSZ PERKOWSKI

Capital Press

The Weyerhaeuser timber company expects to pay out nearly $6 billion to shareholders as part of a major change to its corporate structure.

By converting into a real estate investment trust, or REIT, Weyerhaeuser can avoid paying federal corporate income taxes as long as its profits are entirely passed through to shareholders.

To take advantage of that tax status, however, Weyerhaeuser must first pay out past retained profits as well.

In light of the company's 110-year history, that sum is expected to approach $6 billion, said Kathy McAuley, the firm's vice president of investor relations.

The payout is an important step in the conversion to REIT status, which Weyerhaeuser expects to claim in its tax filings for 2010, she said. "We continue to move through that process."

At least 10 percent of the total amount, or roughly $600 million, must be paid out in cash, while the rest can be issued in the form of stock.

The company currently has about 211 million shares outstanding, with the stock price recently hovering above $50 per share.

Weyerhaeuser can issue up to 950 million additional shares to existing shareholders as part of the payout, McAuley said.

The value of the newly issued shares will be determined during a three-day trading period that will occur after the payout is officially announced, she said.

The number of shares issued by the company will depend on the stock price established during that trading period, she said.

In other words, the total amount paid out in the form of stock -- roughly $5.4 billion -- will be divided by the stock price to calculate how many new shares Weyerhaeuser must issue.

The company is most likely letting the market figure out how much the transaction is worth on a per-share basis, said Brooks Mendell, president of Forisk Consulting, a firm that tracks timber industry finances.

The Internal Revenue Service began allowing REITs to pass 90 percent of profits through to shareholders in the form of stock in 2008.

The decision was made in reaction to the financial crisis, which left some companies strapped for cash, Mendell said. "They had all those REITs that were in dire financing trouble."

When credit markets froze in 2008, such companies had difficulty raising money to repay debts and needed to be financially flexible, according to the National Association of REITs.

"The plus for the company is it allows them to preserve cash," Mendell said.

The strategy is not without risk for shareholders, since the larger number of outstanding shares could dent the stock price, he said. "It potentially has a dilutive effect on the stock."

On the other hand, the shareholders will benefit if Weyerhaeuser performs better financially, Mendell said. Also, when existing shareholders obtain additional shares, they basically take over a larger slice of the company, he said.

Weyerhaeuser lost nearly $570 million in 2009 and nearly $1.2 billion in 2008, according to filings with the U.S. Securities and Exchange Commission.

It may seem counterintuitive for the company to overhaul its corporate structure to cut down on tax expenses when it's losing money, but there's a good reason for the timing, Mendell said.

During the prolonged timber recession, Weyerhaeuser sold off manufacturing assets for financial reasons, he said.

However, the firm would need to divest some manufacturing capacity anyway as part of a REIT conversion, since the IRS limits non-real estate income and assets, Mendell said.

Weyerhaeuser was able to strategically sell off assets to meet both purposes, he said. "You kill two birds with one stone."

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