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Originally published Friday, April 17, 2009 at 12:00 AM

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Chilly times push Weyerhaeuser closer to REIT

Weyerhaeuser is in a financial crisis so deep the largest U.S. lumber producer turns down the heat in its offices to save money and is contemplating upending its corporate structure after 109 years to become a real-estate investment trust.

Bloomberg News

Weyerhaeuser is in a financial crisis so deep the largest U.S. lumber producer turns down the heat in its offices to save money and is contemplating upending its corporate structure after 109 years to become a real-estate investment trust.

Other U.S. timberlands managers have converted to REITs to slash corporate taxes. The move would reward Weyerhaeuser shareholders, whose annual meeting was Thursday at the Federal Way headquarters, by returning most profits to them as dividends.

At the same time, it may force the spinoff of more non-timber assets.

The company has been shedding them under CEO Daniel Fulton, who has closed 10 wood-products mills this year, halved capital expenditures, sold off packaging businesses, frozen salaries and eliminated almost half of the work force, now at 19,850.

A record $1.2 billion loss on $8 billion in revenue last year and the likelihood of negative cash flow through 2010 has put Fulton into "conservation" mode, said Joshua Zaret, an analyst with Independence, Ohio-based Longbow Research.

"His priorities are stemming the cash leakage and battening down the hatches," Zaret said.

Weyerhaeuser has lowered the thermostat at headquarters to 55 degrees on weekends and after hours, said spokesman Bruce Amundson, who wears a sweater when he works late.

Fulton also cut costs this month by shutting a public bonsai garden, eliminating one full-time and one part-time position.

"We missed the depth and severity of this homebuilding crisis," said Fulton, 60, who headed the real-estate unit for seven years before becoming CEO last April. "The primary business going forward is the one we started with in 1900, which is timberlands ownership and management."

Forecast of uptick

Fulton told reporters after the meeting that the housing market may hit bottom later this year. "We'll start to see some modest recovery in 2010 and pick up steam in 2011," he said.

Weyerhaeuser, which calls itself "the biggest homebuilder you've never heard of," was slow to consider REIT status partly because it didn't want to shrink, Zaret said.

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Under REIT rules, 75 percent of pretax income must come from real-estate property. No more than 25 percent can come from manufacturing, including homebuilding.

Now, Fulton is telling shareholders Weyerhaeuser qualifies for 2009 REIT status, after selling businesses including a packaging unit for $6 billion to International Paper in August.

It may make the REIT switch as early as next April, when the company files income taxes, he said. "I'm not fighting it."

The Weyerhaeuser of the future may be two companies, with its timber business separate from its lumber and real-estate arms, said Robert Willens, president of a New York tax advisory firm.

While residential real estate could still be a taxable subsidiary of a REIT, shareholders might prefer a pure timber business, Willens said. A REIT pays no corporate income tax on timber sales.

Weyerhaeuser would follow Seattle-based Plum Creek Timber, which converted to a REIT in 1999, and Spokane's Potlatch, which made the move in 2006.

Plum Creek is the largest nongovernment owner of U.S. timberlands, with 7.4 million acres. Weyerhaeuser, which got its start in 1900 when German immigrant Frederick Weyerhaeuser bought a swath of Washington forest the size of Rhode Island, is No. 2, with 6.4 million acres.

"Plum Creek has a huge advantage," Willens said. "They're avoiding taxes on 35 percent of their pretax income, so they have that much more to invest in their business and share with shareholders in the form of higher dividends."

Timberland owned by Weyerhaeuser may be worth $10 billion, more than the $6.5 billion market valuation for the company as a whole, said Russell Croft, a fund manager at Croft-Leominster in Baltimore, which holds 250,000 shares among $600 million in assets.

"They have that underlying timberland asset, which is one of the reasons we like the stock," Croft said.

The challenge will be preserving cash as the housing market remains depressed, said Ed Sustar, a senior paper and forest-products analyst at Moody's Investors Service. Moody's put Weyerhaeuser on review for a possible multiple-notch credit-rating cut in February.

In the fourth quarter, timber was the only profitable business for Weyerhaeuser, which expanded into packaging in 1949, fine paper in 1961 and residential housing in 1969.

It owns six homebuilders across the U.S., including Pardee Homes in Los Angeles and Phoenix-based Maracay Homes, the latter added at the height of the bubble in 2006 for $213 million, plus a $40 million deferred payment in 2007.

Mea culpa

"I did it; I'm the guy," Fulton said, acknowledging he misjudged the market.

In February, the U.S. recorded 357,000 annualized single-family-housing starts, down 79 percent from the peak of 1.7 million in 2005, according to U.S. Commerce Department figures. As the economy recovers, housing starts should return to 1.2 million to 1.4 million a year, Fulton said.

Weyerhaeuser is also finding cash scarce and may have to stretch to cover the cash portion of an estimated $6.5 billion dividend it would have to give shareholders before becoming a REIT, said Sustar, the Moody's analyst.

The company had $4 billion in cash and bank credit lines at the end of last year.

"The burning issue is how to minimize the cash bleed," said Zaret, the Longbow analyst. "Everything's going to depend on the timing of a housing recovery, and at this point there's no light at the end of the tunnel."

Copyright © 2009 The Seattle Times Company

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