While money doesn't grow on trees, growing timber can be a profitable business. That has certainly been the case for leading timberland real estate investment trust (REIT) Weyerhaeuser (NYSE: WY), one of the world's largest private timberland owners. In 2019, the timberlands and wood products company generated $6.6 billion in net sales and nearly $1.3 billion of adjusted EBITDA.
However, while the timberland business can be quite profitable, it's not as stable as other real estate subgroups. That's one of the many things that REIT investors need to know before investing in this leading timberland company.
Weyerhaeuser company profile
Weyerhaeuser is one of four REITs focused on owning and managing timberlands. The company currently owns 11 million acres of land in the U.S. and manages 14 million acres in Canada, making it the largest private timberland owner in North America. It also operates 35 manufacturing facilities across the U.S. and Canada.
The REIT has three operating segments:
- Timberlands: Weyerhaeuser sells raw lumber to third-party domestic customers (59% of 2019's revenue), its lumber mills (24%), and export customers (17%).
- Real estate, energy, and natural resources: Weyerhaeuser aims to maximize the value of every acre it owns, which includes selling parcels for higher and better use (HBU) and leasing the surface and subsurface rights for oil & gas exploration, wind and solar generation, cell towers, and aggregate and industrial materials extraction.
- Wood products: The company manufactures lumber (No. 2 in North America), oriented strand board (No. 4), and engineered wood products (No. 1) to serve the new residential (65% of sales), repair and remodel (20%), and nonresidential (15%) end markets.
In 2019, Weyerhaeuser's timberlands segment contributed 53% of its adjusted EBITDA, followed by wood products at 37%, and real estate, energy, and natural resources at 11%.
Weyerhaeuser has a three-fold approach to creating shareholder value. The foundation is the company's unmatched portfolio, which it's always working to improve by enhancing its acreage position. Second, the company aims to deliver industry-leading performance by maximizing its margins through optimization and cost reductions. Finally, it's a disciplined allocator of capital focused on:
- Returning cash to investors: It aims to pay a sustainable dividend (though it temporarily suspended the payout in early 2020 due to COVID-19) and opportunistically repurchase shares.
- Investing in its business: The company makes disciplined capital expenditures and seeks to capture value-enhancing growth opportunities.
- Maintaining an appropriate capital structure: The REIT plans to keep an investment-grade credit rating and opportunistically manage its liabilities, like its pension plan.
The timber REIT primarily grows shareholder value by managing its timberlands and manufacturing facilities to maximize their value. However, the company will pursue outside opportunities when the right one comes along. One of its most notable deals was the 2016 merger with fellow timber REIT Plum Creek for $8.4 billion, which created a $23 billion timberland and wood products behemoth.
Its more recent focus has been on strategically enhancing its portfolio through bolt-on acquisitions or acreage trades. In September of 2020, Weyerhaeuser enhanced its Oregon timberland holdings by signing two agreements with Hancock Natural Resource Group. The company bought 85,000 acres of timberlands in mid-coastal Oregon and sold 149,000 acres in the southern portion of the state, paying a net $40 million in cash to Hancock.
Weyerhaeuser derives a lot of value from the land it owns and manages. Because of that, one of the biggest risks it faces is from nature. Wildfires can impact its operations by affecting its ability to harvest lumber and burning its timberlands, which was the case in 2020 when wildfires in Oregon reached some of its timberlands. Meanwhile, disease and insect infestations can also affect its operations. Weyerhaeuser tries to combat these threats by actively managing its forests, including harvesting trees before they're lost to natural afflictions and removing dead and dying timber to reduce the risk of wildfires.
Weyerhaeuser also has lots of exposure to the volatile lumber market because of its wood products business. It's not as leveraged to lumber prices as fellow timberland REIT PotlatchDeltic (NYSE: PCH), a top-ten lumber manufacturer that sells indexed Idaho sawlogs. However, peers Rayonier (NYSE: RYN) and Catchmark Timber Trust (NYSE: CTT) don't have any direct exposure to lumber price volatility because they only manage timberlands.
On the one hand, the company's vertical integration enables it to maximize the value of its timberlands. It can earn higher margins on the raw lumber it produces by turning some of it into more valuable wood products. That can pay big dividends when lumber prices are high, which was the case in 2020 as the repair and remodel market took off.
However, this exposure to pricing cuts both ways as lower lumber prices can negatively affect its results (which was the case in 2019 as its wood products business generated nearly 50% less adjusted EBITDA than the prior year). That can cause it to underperform timberlands-only-focused REITs like Rayonier and Catchmark Timber as well as other real estate subgroups, which mainly earn stable lease income.
Weyerhaeuser stock price
The volatility of lumber prices reflects in Weyerhaeuser's stock price performance, which has significantly underperformed the market in recent years: