Indexing Timber REIT Performance: Weyerhaeuser, Where Art Thou?
Weyerhaeuser’s (WY) December 2009 announcement regarding its board’s approval for conversion to a real estate investment trust (REIT) drew attention to the timber REIT sector, its financial performance through the economic cycle and its investment potential moving forward. This technical note is in response to questions received from subscribers and clients regarding the conversion of Weyerhaeuser and its inclusion in the FTR (“footer”) Index, the longest continuously published index for the timber REIT sector. The complete Note is available here.
Questions arose regarding the adding of Weyerhaeuser to the Index because the timing and nature of its REIT conversion differed from all previous cases. Unlike previous timber REIT conversions, Weyerhaeuser converts retroactively to tax year 2010. We detail our thinking for when to index Weyerhaeuser as a REIT to optimally satisfy investor needs related to benchmarking timber REIT financial performance.
Initiated in 2008, the Forisk Timber REIT (FTR) Index is a market capitalization weighted index of all publicly-traded timberland-owning REITs. The Index which presently includes Plum Creek (PCL), Rayonier (RYN) and Potlatch (PCH), provides a benchmark for a subset of institutional and retail timberland investors, particularly interested in tax efficient REIT structures.
With the payment of the special dividend in September 2010 and announcement of dividend guidance for 2011 in December 2010, Weyerhaeuser effectively completed all steps required for conversion to a REIT. The company has (1) operated as a REIT, with the ability to satisfy the IRS income and asset tests requirements for REITs, since January 1, 2010 and (2) provided dividend guidance as a REIT for the year 2011. Investors buying shares of Weyerhaeuser today now have better visibility about their investment and tax planning. Though there is no guarantee that the IRS will accept Weyerhaeuser’s REIT qualifications upon electing REIT status on its 2010 tax return in early 2011, we believe that company has established its ability to satisfy the asset and income tests for this year and, barring unforeseen complications, the company’s conversion remains a foregone conclusion. Thus the company is now a REIT from an investor’s perspective.
We therefore include Weyerhaeuser in the FTR Index on the first trading day of the new year on January 3rd, 2011.
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