Summary

Legitimate reasons exist for Weyerhaeuser's resistance to converting to a REIT.  In addition to restrictive income and asset tests, timber REITs - such as PCL and RYN - develop their capital allocation strategies with fewer options, through the business cycle, than does WY.  The requirement to pass on earnings to shareholders results in fewer retained earnings and deeper dependence on capital markets.

Analysis

Legitimate reasons exist for Weyerhaeuser's resistance to converting to a REIT.  In addition to restrictive income and asset tests, timber REITs - such as PCL and RYN - develop their capital allocation strategies with fewer options, through the business cycle, than does WY.  The requirement to pass on earnings to shareholders results in fewer retained earnings and deeper dependence on capital markets.  In the current business environment, this dependence is self-limiting.


The other side to this perspective is that this constraint is preferable to those with reduced faith in management teams generally to make consistently smart and income maximizing capital allocation decisions.  As one institutional investor indicated, "We'd rather force them to pay out now so we can make our own investment decisions."

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Analyses are solely the work of the authors and have not been edited or endorsed by GLG.