The Weyerhaeuser Company has finally dropped that other shoe, or at least has decided to drop it. Last month, Weyerhaeuser announced that its board of directors had finally committed the company to becoming a Real Estate Investment Trust or REIT. The company may make the switch in 2010. Or it may not. The only question is when.
Arguably, that has been the question for a long time. Many investors and observers have been awaiting this news for years.
In 2008, the company lobbied successfully for legislation that cut its tax rate in half, comparable to the corporate tax paid by a REIT — if a REIT paid taxes. But a REIT isn't likely to have much taxable income. Instead, it channels 90 percent of its earnings to shareholders, who pay as individuals, avoiding the “double taxation” levied on most corporate profits and dividend income.
Weyerhaeuser will hardly be the first on its block to take the plunge. Congress created the REIT back in 1960, evidently in order to make the joys of commercial real estate speculation available to Everyman. (This was, of course, long before Everyman started viewing his own house as a speculative investment.) As that long-gone Congress conceived them, REITs “are, in essence, financial vehicles that allow investors to pool their capital for participation in real estate ownership or mortgage financing, while providing those investors with the benefits of many of the tax advantages available to larger and more sophisticated investors and businesses who can afford to invest directly in real estate,” Jack H. McCall explains in The Legal Basics of REITs (PDF), published by Tennessee Journal of Business Law in 2001. “Hence, REITs can generally be thought of as ... a kind of business enterprise that is analogous to a mutual fund for real estate investments.”
Twenty-nine years later, Congress “modernized” the legislation, allowing a REIT to own a taxable operating subsidiary to provide unconventional services to tenants of REIT property. This could mean providing telecom services to the people who live or work in your high-rise. It could also mean milling the timber cut on your forest land. Plum Creek got the IRS to say yes, the REIT laws applied to timber too. By now, Jada A. Graves wrote a few years ago in REIT.com, “timber REITs have joined an assorted group of equity REITs specializing in movie theaters, correctional facilities, and car dealerships.”
Once the IRS said yes, Plum Creek quickly reorganized itself as a REIT. Plum Creek’s transformation attracted a lot of outside capital. The company promptly used its new wealth to buy The Timber Company, which owned all of Georgia Pacific’s timberland. Thanks to the GP purchase, Plum Creek has supplanted Weyerhaeuser as the nation’s largest private timber land holder. Other traditional forest products companies have restructured accordingly. In 2004, 2005, and 2006, Rayonier, Longview Fibre, and Potlatch became REITs too.
And no wonder: In many analysts' and investors' eyes the advantages of the old vertically integrated forest products company have been outweighed by disadvantages in the federal tax code. Wall Street doesn’t want the timber without the tax breaks. A flow of logs to nearby mills has been replaced by a flow of tax-advantaged dollars to distant investors. To Wall Street, forests are no longer about wood; they're about money.
“Forest land is increasingly a financial, rather than an industrial asset,” the UW College of Forest Resources reported to the Washington Legislature last spring. The report observed that “old-line companies have monetized their forest assets and been replaced by institutional investor-managers, or reorganized into real estate investment trusts.”
Wall Street has just been waiting for Weyerhaeuser to join the 21st century. Scott St. Clair wrote in Crosscut that “Wall Street effectively made the decision that it will no longer measure the value of Weyerhaeuser by what it makes but, rather, by what it owns.”
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