Puget Sound residents know Weyerhaeuser’s home-building arm as Quadrant, the region’s largest homebuilder until the recession knocked it from that perch.
Yet the real center of gravity for Weyerhaeuser’s single-family home-construction business these days is the Sun Belt, where it operates under names like Pardee, Trendsetter and Maracay.
Thousands of empty lots in markets like San Diego and Las Vegas are the big prize as Weyerhaeuser considers whether to sell or spin off the homebuilder while the housing market is back on the upswing.
This coming Friday’s
earnings report is unlikely to cast much new light on the mid-June announcement that the company is exploring “strategic options” for Weyerhaeuser Real Estate Co. (WRECO), the nation’s 18th-largest homebuilder.
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The option Weyerhaeuser eventually selects will be set by incoming president and CEO Doyle Simons, who takes office Aug. 1.
Analysts say shedding the unit for a potential price of $2.5 billion or more would fit right in with the Federal Way-based company’s strategy of stripping down to a single concept — tree farming.
“With housing demand recovering from very depressed levels & builders scrambling for building lots, Weyerhaeuser’s timing could prove opportune,” Deutsche Bank analyst Mark Wilde recently wrote to investors.
Alternatives for Quadrant and its affiliates include a sale, a merger with another homebuilder, or perhaps a spinoff to form an independent company that could later take advantage of investors’ appetite for housing stocks with an initial public offering.
This year has already brought a bumper crop of homebuilder IPOs — raising more than $1 billion for three builders, some with less output than Quadrant. At least two more homebuilder IPOs are in the pipeline.
Cranking up the machinery for a spinoff and IPO is a slow process, however, and enthusiasm for 2013’s homebuilder-stock offerings has already dampened.
Many analysts think Weyerhaeuser would have been smart to divest WRECO during the last housing boom, says Steve Chercover, senior research analyst at D.A. Davidson.
“It would have probably been the right thing to do then,” he says.
But at the time Weyerhaeuser was saddled with a large, struggling paper division and “gaining most of its profits from home building.”
Locally, Quadrant was the region’s top homebuilder until 2010, when it was displaced by national builder D.R. Horton’s local division, according to the Puget Sound Business Journal’s rankings.
Since the middle of the last decade, Weyerhaeuser has shed its paper mills, a shipping line, short-haul railroads, building-material sales outlets and many other assets unconnected to harvesting and processing trees — except the home-building operation that earlier provided such a useful counterbalance to its other problems.
Now that unit may be up for grabs, as Weyerhaeuser tries to match the pure-play, timber-focused, real-estate investment trusts such as Plum Creek and Potlatch, which Chercover calls “as pure as they can be.“
Investors look to REITs for a large stream of dividends, while a home-building company — even one that owns plenty of buildable land — constantly ties up a lot of capital in construction costs.
“WRECO will probably prosper better on its own or in conjunction with another company where the shareholders aren’t going, ‘Hey, that’s my dividend you’re spending,’ ” Chercover says.
Weyerhaeuser doubled down on timberlands last month when it paid $2.65 billion for 645,000 acres previously owned by Longview Fibre.
But it quickly announced a stock sale to cover that, rather than leaving the impression it has to shed WRECO to make the Longview payment.
That leaves analysts pondering which way Weyerhaeuser will choose to go.
“Merger with another builder will be the best-case scenario,” says Chercover. He adds that spinning WRECO off as a stand-alone company would mean ramping up new corporate infrastructure.
Another option is an outright sale. What is WRECO worth?
Deutsche Bank’s Wilde, noting that about two-thirds of WRECO’s “strong” inventory of buildable lots is in sought-after parts of California like San Diego, estimates the company’s tracts alone could be worth between $2.7 billion and $3.35 billion.
That’s a chunk of change for any existing homebuilder, even industry big shots like D.R. Horton, which has a market capitalization of $7.1 billion and assets of $3.7 billion.
Nonetheless, a rival builder could find it appealing to acquire such a portfolio of buildable parcels across more than 20 markets in one fell swoop, while removing a competitor for customers and future land, suggests John McManus, who writes a column for Builder magazine’s website.
Another scenario sketched by some observers is a split-up of WRECO, with different markets sold to different players. That might bring the highest price for some markets or brands, but it’s also more complex and risky, says Chercover.
There’s yet another option, he says: “They can do nothing, if they wish.”
Whatever direction the company chooses, it may take awhile.
“They tend to be very deliberate,” says Chercover, who’s covered Weyerhaeuser for 14 years. “Nothing rash will happen.”
Wilde concurs, writing to investors that “part of Mr. Simons’ challenge will be to remake a corporate culture that is too often insular and slow-moving.”
Rami Grunbaum: 206-464-8451 or firstname.lastname@example.org