REIT will ease tax burden, allow company to pass profits to shareholders


Capital Press

The Weyerhaeuser timber company plans to transform its organizational structure, but that's not expected to affect milling infrastructure in the West.

"There's nothing in this conversion that would cause us to make a change in our operations," said Bruce Amundson, financial spokesman for the company. "Any change would be for strategic reasons."

Weyerhaeuser recently said the company will shift from its current corporate structure to that of a real estate investment trust, or REIT.

REITs are financial vehicles that can legally avoid paying corporate income taxes to the federal government as long as their earnings are entirely passed through to shareholders.

To take advantage of REIT tax status, a company is subject to restrictions on its assets and income, according to the National Association of Real Estate Investment Trusts.

For example, at least 75 percent of a REIT's income must be derived from operations directly related to its real estate holdings and at least 75 percent of its assets must be in real estate.

Weyerhaeuser doesn't believe the company will need to reduce manufacturing to fit into a REIT structure, said Amundson. "We can make this conversion with the current businesses we have, and that would include milling operations."

Brooks Mendell, a financial analyst who tracks the timber industry, agreed that Weyerhaeuser won't need to make drastic operational changes at this point.

However, Mendell said, the firm has already divested several facilities used to make paper, container board and hardwood lumber.

"Weyerhaeuser has been shedding manufacturing assets for years," he said. "These are all assets that have enabled Weyerhaeuser to make that announcement."

As a REIT, the company will still need to send its logs to processing facilities, Mendell said. Milling infrastructure is already scarce in some areas, so the firm wouldn't shoot itself in the foot by further weakening it.

"Weyerhaeuser sawmills are critical to maintaining the value of some of their own timber lands," he said.

The company has spent a lot of money modernizing sawmills in Oregon and Washington, even while reducing its overall manufacturing operations, said Gordon Culbertson, Pacific Northwest Region manager for the Forest2Market timber consulting firm.

"I think they've identified the core operations they're going to invest in," he said.

The timetable for Weyerhaeuser's conversion has not yet been specified, Patricia Bedient, the company's chief financial officer, said during a conference call with investors and analysts.

Weyerhaeuser held off on shifting to REIT status in 2009 because the company wouldn't realize much tax benefit due to its financial performance, she said.

So far this year, the company has lost about $370 million on total revenues of about $4 billion, according to filings with the U.S. Securities and Exchange Commission.

The timing of the REIT conversion will be affected by the pace of Weyerhaeuser's anticipated recovery, Bedient said. "We will take into consideration the developing economic environment."

Lumber inventories are currently very low, so the timber economy appears to be headed for improvement, said Culbertson. "I think we've hit the bottom, but it's not going to be a quick climb back up."

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