That’s Billion Dollars, With a “B”

Most dividend announcements are in the range of pennies to several dollars, so when a company declares a special dividend of USD 5.6 billion, it tends to grab your attention, and that of shareholders.

As one of the last steps on the path to becoming a real estate investment trust (REIT), Weyerhaeuser announced that the ex‑dividend date for its USD 5.6 billion special dividend will be 20 July 2010. Weyerhaeuser expects to pay the special dividend, which includes a regular third quarter dividend of approximately USD 11 million on 01 September 2010 to shareholders of record on 22 July 2010.

Shareholders can elect stock or cash for the special dividend, with the total cash payment limited to 10 percent, or $560 million, of the total distribution. If cash elections exceed the approved amount, shareholders will receive a pro-rata amount of their distribution in cash and the remaining portion in stock.

Weyerhaeuser reported in December 2009 that it would convert to a real estate investment trust (REIT). A company makes a REIT election when it files the tax return for the effective year. Weyerhaeuser intends to make the REIT election when it files its 2010 tax return in 2011. The election would be effective beginning 01 January 2010.

Congress created REITs in 1960. The Tax Reform Act of 1986 allowed REITs to own and manage their properties. To qualify as a REIT in the United States, a company must invest at least 75% of total assets in real estate and it must distribute at least 90% of taxable income as dividends to shareholders. In addition, 75% of the pretax income must come from real estate property, and no more than 25% can come from manufacturing (including home building). A key advantage of being a REIT is that the company essentially avoids paying corporate income tax (instead, profits are distributed to shareholders).

To satisfy one of the Internal Revenue Service requirements for REIT election, Weyerhaeuser declared the special dividend of USD 26.47 per share, based on 211.6 million shares outstanding. Shareholders can elect stock or cash for the special dividend, with the total cash payment limited to 10%, or USD 560 million, of the total distribution.

Weyerhaeuser intends that the cash and stock portions of the dividend will be treated as a taxable dividend to its shareholders for 2010 federal income tax purposes.

In addressing shareholders in April, Dan Fulton, president and chief executive officer said, “We’ve determined that a REIT structure best supports our strategic direction. It’s a structure that allows us to maintain ownership and management of our core land and timber assets, and operate our other businesses within the overall structure of a Timber REIT, and its taxable subsidiaries… A REIT structure enhances our options, but does not affect the day-to-day realities of our business operations. Tax efficiency in our Timberlands ownership is essential, but product quality, cost control, superior logistics, and outstanding customer satisfaction are equally essential to achieving success.”

At least as far back as 2006, analysts were suggesting that Weyerhaeuser might seriously consider converting to a REIT. Plum Creek Timber was an early convert, switching from a limited partnership to REIT in 1999. Rayonier switched to a timberland REIT in 2004; Potlach made the change in 2006.

In Canada, income trusts have served a similar, though more flexible function as REITs in the United States. Acadian Timber Corporation, Canfor Pulp Income Fund, SFK Pulp Fund, and TimberWest Forest Corporation are examples of income trusts.

In announcing quarterly earnings earlier this year, Canfor noted that changes are in the works in Canada. “Legislation to tax distributions made by publicly traded income trusts similar to distributions made by corporations will become effective on January 1, 2011. The legislation provides for the conversion of specified trusts into a corporation on a tax-free rollover basis. The Fund has reviewed its options and intends to present a proposal for unitholders’ approval at the annual general meeting on April 27, 2010 involving an internal restructuring under which unitholders will hold their beneficial interest in the Partnership through a corporation rather than a trust.”

Times change, things change, and then they change again; but the initial outlook for the “new” Weyerhaeuser seems to be positive.