Major Shift At Weyerhaeuser
Last week the Weyerhaeuser Company announced that Daniel S. Fulton has replaced Steven R. Rogel as president and CEO. From the Weyerhaeuser press release [here]:
FEDERAL WAY, Wash., April 17, 2008 — Weyerhaeuser Company (NYSE: WY) today announced that the board of directors has elected Daniel S. Fulton, 59, president and chief executive officer and a member of the board effective immediately. Fulton has served as president since Jan. 1.
Fulton assumes the role of CEO from Steven R. Rogel, 65, who remains chairman in a non-executive role.
The change is more than a customary replacement of one executive for another. It marks a major shift in the corporate strategy at the largest timber company on the West Coast. Since incorporation in 1900, Weyerhaeuser has been a vertically integrated forest product company (VIFPC). That means they owned timberland and sawmills, as well as a product distribution chain. VIFPC’s were the classical standard model in the U.S. timber industry for nearly a century.
But that has changed. The trend recently has been toward dis-integration into separate land-owning companies and milling/manufacturing companies. The new arrangement has been driven by high capital gains taxes on the integrated sister companies. Real estate investment trusts (REIT’s) that own only land receive much more favorable tax treatment than manufacturing plants. Very often REIT’s are acquired (or invested in) by pension and insurance funds for exactly that reason: low tax rates.
It appears that Weyerhaeuser is following the trend and becoming a REIT by divesting itself of the manufacturing side. The new CEO is a real estate specialist. The model being followed appears to be similar to Plum Creek Timber Company, a REIT created out of the old Burlington Northern holdings in 1989 [here].
J. Brian Fiacco, a “retired” forester formerly with Westvaco, wrote perceptively about the Weyerhaeuser changes on his Timberland Blog [here]. (I put retired in quotes because like many foresters, Brian has never stopped doing it, even though his salary was replaced by his retirement pension and he doesn’t show up at the old office anymore.) From Timberland Blog:
Weyerhaeuser Continues March to REIT
Weyerhaeuser, the last major public integrated forest products company still standing, continues its march to a REIT structure. For some background on the Weyerhaeuser REIT issue, you can visit my posts of May 4, 2007, Weyerhaeuser Takes First Step Toward REIT; May 8, 2007, TIMOs and REITs and Oct 30, 2007 which includes some REIT speculation and an estimate of the value of Weyerhaeuser’s timberland. The May 8th post includes an excellent background article on REITS by Cliff Hickman with the U.S. Forest Service.
Yesterday’s announcement that Daniel Fulton, head of Weyerhaeuser Real Estate just last December, and promoted to President of Weyerhaeuser just four months ago, has been promoted to CEO of Weyerhaeuser. That’s a fast track! And a significant step toward the REIT.
One of the issues preventing Weyerhaeuser from converting to a REIT is all of its manufacturing facilities. It is clear that WY has been moving rapidly to divest itself, by sale or mill shut downs, of facilities. Check out this list of news releases since the first of the year. The number of mills shuttered or sold already this year is staggering. Although individually they may appear to be small steps, collectively, it appears to me to be a giant step toward the REIT.
I think Weyerhaeuser was originally optimistic that they could save the company by means of the Timber Revitalization and Economic Enhancement Act (the so-called TREE Act) which would have lowered the capital gains tax rate on timber sales to 14%. I think that the possibility of any tax reduction for large corporations is pretty much dead for the foreseeable future and I’m sure the folks at Weyerhaeuser would not argue that. Another step toward the REIT and the march goes on.
It would appear that the only remaining question now is “When?”. “If” is history. -Brian
Brian is one smart cookie. He knows his stuff, and I have huge respect for his insight and prognosticating expertise when it comes to commercial forestry issues. He followed the above post with another that demonstrates more of his crystal ball powers [here]:
The Vertically Integrated TIMO?
One of my readers pointed out an interesting development to me recently. As has become so obvious, the vertically integrated forest product companies (VIFPC) are almost a thing of the past due to the elimination of favorable capital gains tax rates and the high tax rates on C corporations. The pass-through tax structure for TIMOs (pension funds) and REITs has pretty well destroyed the VIFPC as a viable tax structure. So the new landowners and managers become true timberland companies unburdened by the tax structure brought by those pesky mills.
The interesting observation is that The Forestland Group has recently completed the first part of the purchase of Roy O Martin’s LeMoyen, Louisiana, hardwood sawmill, 10,000 acres of hardwood timberland, and 20-year harvesting rights on an additional 138,000 acres of hardwood timberland in south Louisiana. Read more.
Now back up about two years to when Anderson-Tully “merged” with one of The Forestland Group’s funds. ATCO had a huge hardwood sawmill in Vicksburg billed as the largest hardwood sawmill in North America. You can read about that transaction here.
So now we have a new acronym (we need a new acronym), the VITIMO! It will be interesting to watch this trend develop, if it is a trend. When The Forestland Group buys its first pulp mill, I’ll know its for real! -Brian
For an Oregon old school perspective, the redoubtable Bear Bait chimed in with this:
The REIT deal is you sell shares of it to other entities that have long term needs. Insurance companies holding timber have their own tax and business models, and the long term part of it fits and does not subtract from their worth. Same with pensions. Very interesting to have liberal left public employee money in timber that only realizes dividends at timber sale time. No cut timber, no dividends. How that will drive public policy is going to be interesting.
REITs also sell amenity real estate. They will further complicate the urban-wildland debate as they put more land into the fray. Oregon will not see the pressure other states will because of our statewide punitive zoning laws. The opportunity is not here. Although, the Boise Cascade successors have sold quite a bit of ground in Yamhill and Columbia counties to “wine” and “vineyard” speculators. But in quarter section chunks. For lots of money. But they have only so much land they can sell under their buy agreement, and they have reached that limit.
Now we have Plum Creek (largest landowner in US), the Oregon successor to G-P lands, plus Whorehaeuser and their Coos Bay, EugeneSpringfieldSweethome, holdings left after they sold their big (620,000 acres) Klamath tree farm and the 80,000 acre Molalla holdings, now including Willamette Industries land which is Santiam Lbr, Schneider Bros Lbr, Bauman, Rex Clemens, Bohemia, Crown Zellerbach, and all the ground WI held with Trask Lumber at Carlton, the DallasFallsCityBlackRock holdings, Snow Peak and Simpson Tbr lands. All that is now in Whorehaeuser hands, and both these big time landowners are now in the real estate business. It is a new day in Oregon. I wonder what kind of initiative stuff we will see as they seek ways to dispose of land at a profit… time will tell. And they will sell land to bank their coffers, prop the stock, and to keep the quarterly profits up. — bear bait
Big doings at Whorehaeuser. The landscape is changing. One thing is for sure, the “timber industry” of today is nothing like it was even 15 years ago. The old forms are gone. The new forms are something else. It is no longer useful (if it ever was) to refer to the “timber industry” as some sort of monolithic entity. That shorthand doesn’t apply anymore.
by Forrest Grump
A certain forestry publisher is an American hero as well as a Master of the English Language.
In the long run, I think it will be better to get the land base away from the big companies, though. They have owned it and abused it long enough. The transition will be rough and ugly, and some of the old traditional economy will fade away, but the future will not be altogether bad. I have optimism; the glass is half full.
by bear bait
The new paradigm for timber will mean much more frequent turnover of ownership. The profits will be taken when needed, and keeping up with who owns what will keep an army of real estate lawyers, accountants, and cadastral people all busy for a long time. You have to know that computer technology, satellite mapping, and gps located property lines all have made keeping track of productivity, potential, and the cats all in the herd a lot more practical job than was the case just a decade ago.
I can see timberland and timber cutting rights separated, and both used as investment tools by financial institutions needing longer term returns. Any change in tax law will again change how business is done. As is always the case, government will be so far behind that they will need years to figure out what has happened and what the possible outcomes might be. The need to beat the tax man will always prevail and the REIT and TIMO models are proof positive.
The Congress and a byzantine tax system are driving the whole deal. Congress by inattention to real problems with double and triple taxation of assets bought and paid for with taxed money, and landowners being taxed for their ability to keep even with government borrowing and the resulting inflation. In real dollars most capital gains are not enough to stay even with the falling value of the dollar or the inflated value of it in the domestic market. Once again, public policy is to wipe our butts on a hoop, and thus finding a clean spot for future use is hopeless.
Hang on, because there is a distinct possibility that we are going to have legislative and executive branches of government with a bent towards increased taxes on the middle class and higher brackets coming in to power next year. The forest products industry will change its looks like a squid on speed and will be unrecognizable to most by 2010.
Small mills cannot continue to cut high priced timber and pay their loans. The Timber Barons can’t continue to lose money and disappoint bankers. The sawmill and panel business is on its way out. We will be importing lumber and exporting logs. You just watch.
We have a huge commercial fishing industry in Alaska, but 95% of the value of the catch is exported. It is cheaper to catch the fish, land them in Alaska (thus paying the landing tax-a sort of severance tax), then freeze them and ship the product to Asia where it gets value added and then shipped to the US for consumption. We are exporting the value added jobs. The profits are made offshore and not subject to US taxes. That is a real model in Seattle that Weyco and their ilk have to see with some pain. Look for it to happen to logs and lumber. Or at least a very different model of some type.
The land use will change, MUST change. There is no economic efficiency in holding a crop for 30 or 40 years until harvest. Growing sawtimber takes too long. Efficient producers (and capital investment) will lean toward short-term crops with annual harvests (or at least with rotations no longer than 10 years, such as Christmas trees).
At the same time the libby Big Government types will look to lock up private land for no economic use whatsoever. Recall that Gail Kimbell wants to declare 400 million acres of private land “open space” with no roads, no homes, no harvests, and frequent wildfires [here, here]. That is twice the current holding of the USFS and virtually all the private forest land in the continental U.S.A.
I called her a criminal for that and caught a lot of flack. But I stand by my assessment. The political elite have no idea in Creation how the economy works. They are stuck on bizarre notions of tweety birds and happy wildfires. Their notions of “nature” are Disney-esque and unreal. But that’s what we get for electing the goofiest people we can find, and hiring public employees based on their politics and alleged victimhood instead of their professional training and expertise (which they wholly lack).
by Forrest Grump
Byzantine, Bear? My thoughts exactly. No wonder every consequence seems to be unintended.
I just had an executive lunch with a certain forestry publisher and the REIT phenomenon was one of several topics. The landscape has changed in a fundamental way and nobody seems to have made the connection. Perhaps now that Weyco has taken the leap, the lights will come on. Too late. The old rules no longer apply. What the new rules allow will be a shock.