Our bottom-up understanding of timberland investments and the forest products industry depends on the link between wood flows and cash flows, the theme of our annual investment conference. The (1) steady, localized harvesting and delivery of logs to (2) mills that manufacture the building and paper products demanded by consumers (3) generate the income that justifies, for private owners, replanting trees and managing their forests.  In this way, the flows of wood and cash from timber are renewable.

This cycle of cash from timberlands persists regardless the state of the economy. While the actual yields rise and fall at levels more comparable to long-term bonds than equities, their steady nature provides security for larger timberland portfolios and holdings. This same story supports the steady dividends historically paid by timberland-owning REITs. As noted in previous posts on timber REITs, these dividends attract investors and provide information.

At times, external forces interrupt the regular course of affairs and cause firms to adjust. In May 2020, in the midst of the COVID-19 market impact and recession, Weyerhaeuser (WY) suspended its dividend payments to shareholders to preserve cash. Then, on October 30^th, 2020, Weyerhaeuser reinstated its dividend, employing a new “two-tier” structure. When non-standard decisions get made in the industry, our phone starts to ring. Several investors and clients called to ask, “can you please walk me through Weyerhaeuser’s new dividend structure?” and other key changes to their balance sheet.

As a reminder, firms use cash flows to pay bills, meet obligations and help finance investments. For timber REITs, the obligations primarily comprise (1) debt service (interest payments on loans) and (2) dividend payments. Are these big obligations? In the case of Weyerhaeuser, dividends payments totaled ~$1 billion per year in 2018 and 2019.

Timber REITS do not make whimsical changes to dividend policies. In 2011, Potlatch (now PotlatchDeltic) implemented and executed a well-developed plan for temporarily reducing dividends that strengthened confidence in the business from shareholders during a period of stressed markets. Weyerhaeuser, in 2020 and facing tremendous uncertainty, took a prudent position to throttle back production, slow capital investment and suspend the dividend to preserve cash and manage debt.

Weyerhaeuser has done a lot to restructure its balance sheet, effectively rolling debt forward and taking advantage of favorable interest rates (swapping out higher rates and shorter maturities for lower rates and more time). While much took place in 2019, a few 2020 examples include:

• March 2020: Weyerhaeuser issued $750 million of 4.00% notes due in April 2030. A portion of this was used to redeem $569 million 4.70% notes due in March 2021.
• September 2020: redeemed $325 million of 3.25% notes due in March 2023.
• October 2020: notified holders of 4.625% notes due in September 2023 of plans to redeem the principal outstanding (~$500 million not including fees and penalties) in December.

 

As 2020 comes to a close, we look back on two quarters of robust housing and lumber markets. While parts of the U.S. economy struggled, these did not include home construction, residential real estate or solid wood products. Effective December 2020, Weyerhaeuser’s Board assessed the replenished coffers and declared a quarterly dividend of $0.17 per share (versus a prior dividend of $0.34 per share). For comparison as of November 20th, forward dividend yields by timber REIT were:

• Weyerhaeuser (WY): 2.37%
• Rayonier (RYN): 3.90%
• PotlatchDeltic (PCH): 3.54%
• CatchMark Timber (CTT): 5.50%

 

Weyerhaeuser also announced a new dividend framework “to enhance the company’s ability to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions.” This framework includes the (implied) $0.17 per share quarterly base ($0.64 per year) plus a potential and periodic variable supplemental cash payment that targets “total annual return to shareholders of 75 to 80 percent of annual Adjusted Funds Available for Distribution.”[1]

The supplemental, while preserving flexibility for management, does incur additional variability for shareholders, as available funds could be used for dividends or “opportunistic share repurchases.” And while implementing the structure now, the Company expects supplemental dividends to be announced annually, with the first payment made in Q1 2022.

The sentiment shared with me by investors can be summarized as:

• We like receiving dividends.
• We understand the need for flexibility in tough times.
• We prefer dividends to buybacks.
• We hope this structure is temporary.

 

During the quarterly call, Weyerhaeuser did indicate a plan to prioritize special dividends over buybacks. Also, sounding like reassurance to shareholders, the Company also indicated that special dividends could be scheduled mid-year as soon as 2021, effectively laying out a path, supported by a strengthened balance sheet, for normalizing and standardizing dividend policy over the next two years.

Click here to view the agenda and learn more about our annual “Wood Flows & Cash Flows” conference, held virtually on December 8^th. Topics include timberland investments, timber REITs, forest operations and the analysis and ranking of timber markets and wood baskets for investment applications.

 

[1] Thus, the phone calls. Also, for reference, Weyerhaeuser defines Adjusted FAD as “net cash from operations adjusted for capital expenditures and significant non-recurring items.”