Weyerhaeuser doused speculation that the lumber producer will convert to a real-estate investment trust next year, sending the shares down...

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Weyerhaeuser doused speculation that the lumber producer will convert to a real-estate investment trust next year, sending the shares down the most in more than five years.

Chief Financial Officer Patricia Bedient, speaking Friday to investors in New York, said converting to a REIT next year wouldn’t be “tax-efficient.” But, she added, “That does not preclude the REIT option for Weyerhaeuser in 2010.”

Weyerhaeuser’s spinoff of its fine-papers business and the planned $6 billion sale of recycling and corrugated-packaging units has spurred speculation that the Federal Way company would convert to a REIT structure to reduce taxes on profit from timberlands.

Some investors hoped Chief Executive Officer Daniel Fulton, who took the helm in April, would expedite the 108-year-old company’s conversion to a REIT.

But Weyerhaeuser’s comments Friday pushed its stock down $5.11, or 7.6 percent, to $62.33. The stock is off 15 percent this year.

“It’s the REIT,” Longbow Research Analyst Joshua Zaret said, referring to the Friday stock plunge. “It’s delayed, relative to people’s expectations, by at least a year.

“There’s a realization that conversion is a complex move and that the company’s businesses need to come back to life before it can happen,” said Zaret, who is based in New York and rates the shares “buy.” He doesn’t own the shares.

As a corporation, Weyerhaeuser’s profit from tree harvesting and the sale of timberlands has been taxed at a corporate rate of as much as 35 percent. U.S. legislation recently passed as part of the farm bill will reduce that rate to about 17 percent, according to congressional aides, giving Weyerhaeuser a $182 million tax break.

As a REIT, however, the company could eliminate most or all income taxes by distributing profit to investors, as do REITs such as Seattle-based Plum Creek Timber and Spokane-based Potlatch, according to Robert Willens, a New York-based tax adviser. He said investors in REITS pay taxes of as much as 15 percent on those distributions.

“Weyerhaeuser has always said they couldn’t become a REIT because of the requirement to show the IRS that conversion was for business purposes and not tax avoidance,” he said. “That probably wouldn’t be any easier in 2010 than in 2009.”

Weyerhaeuser, which has slashed capital spending amid declines in U.S. lumber demand and housing construction, is weighing the benefits of a REIT structure, Bedient said.

By law, Weyerhaeuser must distribute its retained earnings and profit to shareholders by the end of the year in which it converts to a REIT, a figure it estimates will be about $6.5 billion and will be taxable, she said.

One option is to use stock for 80 percent of the value and borrow about $1.3 billion to pay the rest, bringing the company’s debt to more than $5 billion, she said. Another method is to spin off the timber business, and then create the REIT, Bedient said.

Given “challenging market conditions” that Weyerhaeuser expects next year, nontimber businesses may be unable to manage the debt burden that a conversion would create, Bedient said.

“For these reasons, REIT conversion in 2009 would not be tax-efficient,” she said, citing the debt issue.

In addition to lumber, Weyerhaeuser has investments in residential real-estate development and the production of wood pulp used to make disposable diapers and other consumer products.

Russell Croft, who helps manage $725 million at Croft-Leominster, said he was encouraged by comments from Weyerhaeuser executives Friday that the company will continue to sell noncore assets and trim head-office expenses. Conversion to a REIT will require that most of the company’s profit is generated from investments in forests.

“They’d be jumping the gun if they said today they were converting to a REIT in six months,” Croft said. “They need to continue to get rid of assets.”

Weyerhaeuser said Thursday that it was seeking strategic alternatives for its Westwood Shipping Line and four regional railroads.

It agreed in March to sell its corrugated packaging and recycling businesses to Memphis, Tenn.-based International Paper for $6 billion. The transaction is expected to close in the third quarter. Last year, Weyerhaeuser spun off its fine-paper business in a transaction that created Montreal-based Domtar.

Decreasing home construction and losses at Weyerhaeuser’s homebuilding unit led the company to report a worse-than-expected first-quarter loss of $148 million.