The past year has been pretty awful for companies in the residential real estate industry. The rapid increase in interest rates threw a wet blanket on the entire sector. Mortgage originators have struggled with collapsing mortgage volume. Mortgage real estate investment trusts (REITs) have seen the value of their asset portfolios underperform Treasuries. Homebuilders have struggled with affordability issues.
That said, the homebuilding sector has been showing some signs of life, and the entire real estate sector might be bottoming. If a rebound in homebuilding is coming, then a big beneficiary will be timber REIT Weyerhaeuser (WY 1.24%).
Weyerhaeuser is highly levered to residential construction
Weyerhaeuser is one of the biggest private operators and owners of timberland in North America. Weyerhaeuser owns and operates 10.6 million acres of timberland in the U.S. and manages another 14.1 million acres in Canada. The company also manufactures wood products including structural lumber, oriented strand board, and engineered wood products. The company, which converted into a REIT in 2010, is highly levered to residential construction.
Residential construction (especially single-family residences) has been depressed ever since the residential real estate bubble popped in 2006. Part of this was due to overbuilding during the bubble years, but homebuilding collapsed in the Great Recession and has been slow to recover. According to some estimates, the U.S. has a housing shortage of 5.5 million to 6.8 million units. Housing starts are more or less near the average they have been since the 1950s, despite the population increasing 86% since 1960.
Homebuilding is an early-stage cyclical industry
Homebuilding is a classic early-stage cyclical industry, which means it is one of the first sectors to recover after a recession. This is because the Federal Reserve typically cuts interest rates during a recession, which makes housing more affordable. While the U.S. economy has yet to show much indication that it is in a recession, the last time the Fed hiked rates so dramatically (in the early 1980s) it triggered a nasty recession. The S&P SPDR Homebuilder ETF has outperformed the S&P 500 by 18 percentage points year to date.
Weyerhaeuser has an unusual dividend structure
Weyerhaeuser has an interesting dividend structure. The company pays a quarterly dividend, which is meant to be sustainable throughout the entire housing cycle. It then pays a special dividend at the beginning of the year to reflect the actual earnings of the company. In 2022, Weyerhaeuser paid four quarterly dividends of $0.18 a share and then paid a special dividend of $0.90 in February 2023. Based on the 2022 dividends, Weyerhaeuser has a dividend yield of 5.2%.
Weyerhaeuser is probably going through trough earnings for this housing cycle. The peak of this cycle was probably 2021, when the company paid $2.63 in dividends when you include the special dividend paid in early 2022. This would give the company a dividend yield of 8.6%. During 2021, lumber prices were considerably higher than today.
An investor buying Weyerhaeuser is making a bet that housing construction is about to turn around. The latest housing starts number showed a pickup in starts. Even if there isn't a recession, the long-awaited boom in home construction might still be around the corner. Investors who want to participate in the boom should take a look at Weyerhaeuser.