Last Friday, Weyerhaeuser (NYSE: WY ) reported stronger-than-expected fourth-quarter sales and earnings, sending the stock up some 3%. This is obviously a positive for the timber company, which converted to real estate investment trust (REIT) status just last summer. Competitors Rayonier (NYSE: RYN ) and Potlatch (Nasdaq: PCN ) converted to REIT status in 2004 and 2006, respectively.
What to make of newly converted REITs? And is Weyerhaeuser a buy right now? I put those questions to REIT expert Ralph Block at the end of January. A former lawyer, Ralph is a leading expert on REITs, having literally written the book on investing in them: His fourth edition of his Investing in REITs is in the works right now. He is a former co-manager of the Undiscovered Managers REIT fund, and has been personally investing in REITs for more than 40 years.
I interviewed Ralph on a variety of REIT-related topics. What follows is an edited portion of our conversation about Weyerhaeuser; though he liked the business, he wasn't sold on its price.
Brian Richards: Weyerhaeuser is another company that has attracted a lot of interest from investors. It has a pretty large trading volume relative to most of the other REITs out there. So first part of the question: What is your opinion of companies that have just recently transformed into being REITs?
Ralph Block: A lot of it is company-specific. What I mean by that is if a company was a privately held real estate organization that is just now coming public and they have no public market experience -- experience has taught me to be very careful of those kinds of companies because a lot of these guys are smart real estate people, but they don't really understand public markets. And you know, they'll do a lot of dumb things and make a lot of people think they're just trying to be cheerleaders for their company, and they're trying to grow regardless of risk. It's always better in my opinion to wait a year or two before buying a brand-new company that becomes a REIT.
Brian: Any thoughts on Weyerhaeuser in particular?
Ralph: Weyerhaeuser is different because it's already been a public company [since the 1960s], and it's also different in the sense that it's a very unique "property-type," which is timber. And I think with oil prices doing what they're doing and food prices spiking, and copper prices going up -- I think a lot of people, they're worried about QE2 causing a lot of inflation, and what better inflation hedge than timber?
And so that's I think one of the reasons why there's a lot of interest in Weyerhaeuser now as a REIT, because it fits right into this concept of a global recovery and inflation hedge and that kind of thing. Now I looked at Weyerhaeuser, and it's the kind of REIT that I might like to own at some point, but the problem I have with Weyerhaeuser now is the valuation. I mean, earnings are still going to be kind of blah in 2011. Most of their timber is high-quality so it's got to go into houses as opposed to mixed up and made into pulp or paper. And so the housing market is probably going to be another year of not-so-good.
And their dividend yield ... I think the yield is around 2.8% on the pro forma dividend, and I think it's trading at [more than 35 times forward earnings]. So I mean --
Brian: It might be worth owning, but not at that level?
Ralph: If I could see it down at $16 or $17 instead of [in the $20s], you know, I'd certainly consider it. ... I could sure be wrong -- wouldn't be the first time -- but I will be patient on this one.
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