Weyerhaeuser is up a tree on Wall Street

For its 108 years of existence, the kingdom and the power that is Weyerhaeuser has survived the Great Depression, world wars, booms and busts, environmental critics. But now it is facing a much more potent adversary: Wall Street.

Big investors are pressuring Weyerhaeuser to fundamentally restructure its business. The company is already shrinking, and more radical downsizing is likely. At risk are hundreds of high-paid corporate jobs at its Federal Way headquarters, as well as those in its real-estate units and the blue-collar work that is among the best-paid in small communities around the Northwest.

Weyerhaeuser will have nearly 50 percent fewer employees worldwide compared with early 2007 when it completes a deal to sell its container-board and packaging subsidiaries. It employed about 37,900 at the end of last year. But Chief Executive Dan Fulton has promised investors further "curtailments, shutdowns," and moves to "dramatically reduce overhead."

Weyerhaeuser's immediate troubles come from the same poisoned well that choked Safeco and still menaces Washington Mutual: the housing bust. Weyerhaeuser's first-quarter revenues declined nearly 24 percent, and last month it announced a write-off of up to $325 million, largely because of real-estate troubles. Impatient investors caused Weyerhaeuser shares to touch a five-year low on Thursday to close at $49.60.

A Weyerhaeuser spokesman declined to make Fulton available for comment, citing a "quiet period" ahead of the Aug. 5 earnings announcement. But in a May conference call with securities analysts, Fulton said the housing downturn has had "a devastating impact" on the company.

Its Weyerhaeuser Real Estate Co. unit has been hammered, especially by the cratering market for single-family suburban houses in California and Arizona. Quadrant Homes, one of six Weyerhaeuser subsidiaries nationally and the largest homebuilder in Washington state, has scaled back operations to building five houses a day instead of seven as home-deal cancellations hit 50 percent.

The housing recession also flattened demand for Weyerhaeuser products, and yet another challenge is higher fuel costs. A cheaper dollar that makes American exports more competitive is one of Weyerhaeuser's few consolations.

But investors are little consoled. They've been agitating for major changes, including transforming Weyerhaeuser from a public company into a real-estate investment trust, or REIT. A REIT manages a portfolio of property, which in this case would be timberland.

New direction for company?

At first glance the idea might seem a little loopy. Weyerhaeuser a REIT? It's one of the last true integrated forest-products companies, until lately doing everything from cutting the trees to making wood products to building houses — even owning small railroads in the United States and a shipping line to transport logs to Asia. It operates in 44 states and 13 other countries, and has scores of subsidiaries. Why not make General Motors a REIT, too?

REITs typically distribute most of the earnings directly to their shareholders, avoiding some corporate taxes. That tax advantage is a big draw for investors, and it was successfully used by Seattle-based Plum Creek Timber, which became a REIT in 1999.

Wall Street sees Plum Creek's experience as the way to best realize the value of timberlands.

Weyerhaeuser management has said it couldn't immediately convert to a REIT even if it chose to — the conversion costs would be too high. Still, Joshua Zaret, senior research analyst at Longbow Research in New York, said eventually "a REIT is likely." The move would have to be approved by shareholders.

Tellingly, last year Debra Cafaro, a top executive of several REITs and the treasurer of the National Association of REITs, joined the board.

The company may receive some tax relief in the controversial new farm bill, which might save it up to $100 million. But that break appears to run for only a year. So far, Weyerhaeuser stock "is propped up by the belief it will convert to a REIT," Zaret said.

The company could even be a takeover target for a private equity firm or go private itself, he said, adding that those are less-likely outcomes. What isn't negotiable is business as usual.

Deutsche Bank analysts recently criticized Weyerhaeuser as a "tortoise" compared with nimble Plum Creek.

Speculation and rumors

Fulton became president in January and CEO in April, moving over from the top job at Weyerhaeuser Real Estate Co. The company had already spun off its fine-paper business and agreed to sell its container-board, packaging and recycling businesses to International Paper. It soon put its Westwood Shipping Line and four small railroads on the block.

Fulton made the direction clear at the annual shareholders' meeting in May. "Trees define us," he said. "We will have other businesses, but we will only manufacture products where we have the technology, a unique skill or opportunity, and the ability to do so in a capital-efficient manner."

Zaret credits management with responding to investors. "It's unfair to say they're doing nothing," he said. "Their hands are tied by the economic environment." He said the asset sales should help earnings and that Weyerhaeuser's balance sheet is strong.

(He owns no Weyerhaeuser shares, and Longbow has no business relationship with the company.)

What happens next is a source of speculation and dire rumors in Seattle.

Two outcomes seem most likely. A return to its roots means Weyerhaeuser might shed its real-estate unit when the housing market recovers. And the already announced sale of subsidiaries, pressure to cut overhead costs and an eventual conversion to a REIT would mean far fewer headquarters jobs. Some of these moves might be announced this summer.

Future projects will be close to the core business, to judge from the remarks of Fulton and other executives, including its alternative-energy and carbon-offset projects.

In an area far removed from its own roots of sliding logs down the hill into Elliott Bay, one might ask: Does Weyerhaeuser even matter anymore?

It does. First, as a company that ranks 147th on the Fortune 500, it is a hub of talent, capital and decision-makers — a major asset for any metro area. Weyerhaeuser has made generations of Washingtonians rich, and some of that money arguably powered Seattle's rise into a global capital of technology and ideas. In addition, the company's forest holdings are so extensive that its future is of great consequence in a 21st-century world of climate change and rising energy prices.

To get a sense of those holdings, check out any detailed atlas. For example, on page 81 of Benchmark's Washington Road and Recreation Atlas, a huge part of the land around Grays Harbor is identified as "Weyerhaeuser Twin Harbors Tree Farm." Weyerhaeuser owns or manages 22 million acres of timberlands.

It's in those forests that Wall Street sees green.

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. You may reach Jon Talton at jtalton@seattletimes.com