Unlike most other REITs, there's lots of variability in Weyerhaeuser's earnings. That's because instead of collecting relatively steady rental income backed by leases, it has exposure to volatile lumber prices. As a result, its EBITDA has fluctuated wildly in recent years, rising from $1.6 billion in 2016 to more than $2 billion in 2017 and 2018 before slumping to $1.3 billion last year.
Its earnings seemed set to decline again this year because of COVID-19, which led it to suspend its dividend to preserve cash. However, soaring lumber prices because of red-hot demand from the new construction and repair and remodel markets are providing a big boost to its wood products division this year.
While Weyerhaeuser can't do anything about lumber price volatility, it can improve its operations to increase its margins. Since 2014, the company's operational excellence program (OPX 1.0) has enhanced its results by $650 million by increasing its efficiency, optimizing its operations, and reducing costs. The company recently launched OPX 2.0, which aims to capture another $50 to $70 million of margin improvements this year. The REIT targets to capture maximum value for every product it sells while making money at the bottom of the market cycle. Given this strategy, Weyerhaeuser seems poised to be a more profitable company in three years.
That likelihood of increased profitability will provide the company with more cash flow, which it intends on allocating across three buckets:
- Returning cash to shareholders through a sustainable dividend and opportunistic share repurchases.
- Invest in its business by making disciplined capital expenditures and capturing value-enhancing growth opportunities.
- Maintain an appropriate capital structure by keeping its investment-grade credit rating and opportunistically managing its liabilities.
This three-fold capital allocation strategy also gives investors a good idea of what to expect from Weyerhaeuser over the next few years. For example, while the company doesn't currently pay a dividend, it will likely reinstate a payout in the coming quarters. Notably, the reset level will probably be below the prior one given the company's target of sustainability. With some of its businesses generating steadier cash flow than others, it will likely set its payout level based on those stable sources.
Weyerhaeuser will also likely continue to actively manage its portfolio so that it can maintain a strong balance sheet and capture value-enhancing growth opportunities. For example, last year, it sold its timberlands in Michigan and Montana to optimize its portfolio and strengthen its balance sheet. Meanwhile, earlier this year, it enhanced its timberlands in Oregon by selling acreage in the southern part of the state to buy land in the mid-coastal region, paying a net $40 million for the exchange. The company will likely continue that approach of strategically selling land so that it has the financial flexibility to pursue better opportunities when they arise. Overall, the focus will be on enhancing its acreage portfolio rather than expanding it for the sake of growth.