Please ensure Javascript is enabled for purposes of website accessibility

1 REIT Stock to Buy in 2021

By Brent Nyitray, CFA - Updated Jan 21, 2021 at 11:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Weyerhaeuser is a way for income investors to play a future housing boom.

The United States is currently experiencing a shortage of housing. Inventory sits at record lows as properties get snapped up by willing buyers almost as soon as they hit the market.

Housing starts are finally returning to normalcy after a decade of underperformance that started with the residential real estate bubble of 2006. Once the bubble burst, homebuilders were stuck with excess inventory, and buyers were reluctant to invest in new construction as prices fell. While the excess inventory was absorbed, new home construction lagged as builders remained cautious.

It appears that this slump is coming to an end. As home prices rise, builders are stepping up to provide the needed inventory. There is one real estate investment trust (REIT) that's particularly well-suited to capitalize on this phenomenon: Weyerhaeuser (WY -3.40%).

Picture of a house under construction

Image source: Getty Images.

Housing inventory is at a record low

According to the National Association of Realtors, housing inventory stood at 1.28 million units in November, which was down 10% from September and 22% from a year ago. The shortage of inventory drove the median home price up 14.6%. Compared to the current sales pace of 6.7 million units, the 1.28 million units represents a 2.3-month supply, which is a record low. Housing starts collapsed after the end of the 2006 residential real estate bubble. True, there was excess supply during that time period, but given record low supply numbers, we can pretty much say the excess inventory was taken up a long time ago.

While housing starts have been more or less stagnant over that time, one important variable has not, and that is the U.S. population. In 1960, the U.S. population was 181 million people. Today it is 331 million. Those people need a place to live, and construction hasn't kept up. Below is a chart of housing starts going back to the 1950s, along with a chart of the U.S. population. The current level of starts (about 1.5 to 1.6 million) is the historical average over the past 60 years.

US Housing Starts Chart

US Housing Starts data by YCharts

This lack of supply means that homebuilders will need to pick up the pace of construction in order to meet demand. The COVID-19 lockdowns have driven an exodus out of the cities, and the mass adoption of remote working means that the exurbs are once again in fashion. While limited land availability within reasonable commuting distances of the big cities was an issue several years ago, that concern is fading into the background.

Lumber prices are soaring

We are seeing evidence of increased demand in lumber prices, which are up smartly over the past six months. Note that the graph below is not for lumber prices, but for the Producer Price Index for Lumber and Wood Products. Actual prices for lumber futures are up 53% since June 30, 2020. The chart gives a good idea how lumber has increased over the past six months or so.

US Producer Price Index: Lumber and Wood Products Chart

U.S. Producer Price Index: Lumber and Wood Products data by YCharts.

Weyerhaeuser is the largest private owner of timberland in the United States. It owns 11 million acres in the U.S. and is licensed to operate on 14 million acres in Canada. The company operates 19 lumber mills, six mills for oriented strand board (an engineered product similar to particle board), and 18 distribution centers. About 85% of Weyerhauser's sales in 2019 went to housing and remodeling. Weyerhauser's portfolio also provides a source for additional income including surface and subsurface rights which include mineral rights, road right of way fees, and cell towers and renewable energy generation.

The company has also made a commitment to sustainability. ESG (environmental, social, and governance) researcher Sustainalytics rates Weyerhaeuser at 19 on its 100-point scale, a low risk rating that shows natural-resources companies don't have to have poor ESG scores.

Weyerhaeuser's railing-12-month adjusted earnings before interest, taxes, and depreciation and amortization (EBITDA) stood at $1.8 billion at the end of September. The company's enterprise value is $29.5 billion. It hasn't given guidance for 2021, but considering the increase in lumber prices and housing starts, we should see a rebound in earnings. Lumber prices bottomed around $280 in 2015, and Weyerhauser generated adjusted EBITDA of just about $1 billion. With lumber pushing $800, trailing-12-month EBITDA is $1.8 billion. 

The current dividend yield understates the potential income

The company has an unusual dividend structure. First, it pays $0.17 per share quarterly, which gives the stock a 2.1% yield at today's prices. That's intended to be sustainable under the entire business cycle. Weyerhaeuser will also pay a variable dividend starting in 2021, which should be payable in the first quarter of 2022. Weyerhaeuser's variable dividend will be a function of earnings. Between buybacks and dividends, the company intends to pay out 75% to 80% of funds available for distribution.

Funds available for distribution stood at just over $1 billion at the end of September 2020, which would translate to $1.375 per share. At the midpoint of guidance, this would mean an additional $0.39 per share in distributions, either via a variable dividend or buybacks. At recent prices, that would be a 3.3% yield. Most of those earnings were achieved with lumber prices about 40% lower than they are now.

The background for the housing sector has rarely been better. People are fleeing the cities and pursuing the white picket fence in the suburbs. The popular talking point that the millennial generation preferred urban, walkable environments is showing its age. With interest rates close to record lows, potential homeowners are looking to buy a house before rates rise. And we have a record low inventory of homes for sale.

After a long slumber, the housing sector is poised to be the engine of growth for the economy. Weyerhaeuser will be one of the prime beneficiaries of this phenomenon.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Weyerhaeuser Co. Stock Quote
Weyerhaeuser Co.
$36.93 (-3.40%) $-1.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.