When most people think of investing in a real estate investment trust (REIT), there's a good chance they think of equity REITs that own physical commercial real estate like apartments, office, retail, or industrial properties, but that's not the only type of equity REIT to invest in. Weyerhaeuser (NYSE: WY), one of four timberland REITs, takes a different approach to real estate, investing in land and energy. Unlike many equity REITs, 2020 has proven to be a positive year for the company, with share prices up just over 116% since March. Let's take a look at who the company is and whether Weyerhaeuser is a buy right now.
A long history in timberland and land
Originally founded in 1900 by Frederick Weyerhaeuser, Weyerhaeuser has grown from its modest 900,000 acres of timberland in the Northwest to now over 11 million acres of timberland in the United States and Canada. It became a publicly traded REIT in 2010 and has greatly expanded its portfolio beyond timberlands to now include a diversified portfolio of assets such as energy, wood products, natural resources, timberland, and land.
In the third quarter of 2020, it produced a total net earnings of $283 million on net sales of $2.1 billion, and it's one of the largest privately held timberland operators in the world. The company earns money by growing and harvesting timberland, selling logs and lumber both domestically and internationally.
The case for Weyerhaeuser
COVID-19 has negatively impacted millions of Americans, businesses, and industries. Timberland, however, is one of the lucky ones actually benefiting from the pent-up demand for new construction, lumber, wood products, and other environmental services, and Weyerhaeuser's financials show it. As of Q3 2020, EBITDA increased 93% when compared to the previous quarter and net earnings per share increased 192% when compared to the same quarter of the previous year.
Its lumber revenues were through the roof with the highest EBITDA ever at $615 million for wood products. Its recent surge in revenues has allowed the company to reinitiate its dividend, which was temporarily suspended after the onset of the coronavirus pandemic. Starting in the fourth quarter of 2020, the company will pay $0.17 quarterly with an additional variable dividend that will be paid in accordance to the performance of the company, which it believes will remain within a 75% to 80% payout ratio.
The case against Weyerhaeuser
Timberland, land, and environmental investments aren't without risk. 2020 has resulted in increased demand for timberland and wood products as homebuilding surges, but it has also been a year of unprecedented natural disasters. Fires throughout the Pacific Northwest ravaged one of its forests in Oregon, causing an $80 million loss for the company. The company recently announced its plan to sell 149,000 acres of southern Oregon timberlands and invest in 85,000 acres of mid-coastal Oregon timberlands, an area that is less prone to fires.
The outlook remains positive for Weyerhaeuser, with the company predicting an even stronger Q4 and 2021 for timberland. But while demand may be booming right now, it's important for investors to remember that this trend is unlikely to last over the long term. Supply will eventually meet demand and drive lumber and log sales back to balanced levels.
What investors instead should be focusing on is the financial health of the company and its long-term prospects. The company has taken advantage of the additional revenues and reduced its gross debt by over $400 million on a year-to-date basis and achieved its target leverage ratio while having $787 million in cash and cash equivalents, both of which are great moves and will help the company maintain its dividends and balance sheet when business returns to normal.
I believe Weyerhaeuser has potential for future growth over the next few quarters, but once demand returns to normal levels I think revenues and share price will reflect that. Share prices are still below all-time highs but still provide just over a 2% return to investors, not including the variable dividend. Investors looking to diversify their portfolios to include a new asset class while remaining exposed to the real estate market can benefit from this growth but should be aware that this growth won't last forever. However, the company is in good financial standing with a huge portfolio of environmental and timberland assets.