Weyerhaeuser’s announcement Sunday, that it was exploring “strategic alternatives” for its homebuilding and real estate business unit, Weyerhaeuser Real Estate Co. (WRECO), touched off a wave of speculation about possible buyers or merger partners, as well as about Weyerhaeuser’s motivation for putting for-sale signs on WRECO’s five home-building companies.
Those companies—Seattle-based Quadrant Homes, Phoenix-based Maracay Homes, Houston-based Trendmaker Homes, Los Angeles-based Pardee Homes, and Washington, D.C.-based Winchester Homes—collectively operate in 23 markets in 10 states, according to Metrostudy, a sister company of Builder.
WRECO closed 2,659 homes in fiscal 2012, generating $870 million in revenue, Weyerhaeuser reported in its annual report. Those dollar sales represented a relatively modest 13.3 percent increase over the previous year compared to other big builders’ performances.
The builders' aggregate average closing price was $376,000, down 6.5 percent. While that decline negatively impacted WRECO’s gross margins, the business unit’s pretax income still rose by 81 percent to $105 million, accounting for 13 percent of Weyerhaeuser’s total pretax income last year.
Meanwhile WRECO’s land sales jumped 188 percent to $193 million. In total, WRECO’s revenue last year equaled 15 percent of Weyerhaeuser’s total revenue.
Assuming Weyerhaeuser decides to sell or spin off WRECO, it could follow one of several scenarios:
•Sell WRECO as a whole. This would seem to be the least likely option, say long-time industry veterans who spoke on background with Builder. “They would be looking for two times [revenue], and that would be a big check for anyone to write,” says one source.
Still, there might be some companies willing to pay that bounty. Brookfield Residential was posited as a possible candidate, as was William Lyon Homes, which recently went public and has the backing of hedge-fund manager John Paulson. Other private equity investors also could be lurking on the sidelines ready to pounce if the price is right.
•Sell WRECO in pieces. This is where the speculation game kicks into higher gear.
Many factors come into play when one tries to pair buyers and sellers: market overlap, the compatibility of products, prices, operational systems, personnel, and so forth. But the real value of a builder today is its land. Home building operations are hungry for finished lots and WRECO controls 12,000, according to Metrostudy.
But the five builders under WRECO’s umbrella also have value beyond their lots. They are fairly well branded in their respective markets and could offer buyers turnkey expansion opportunities, as well as a chance for an existing builder to quickly boost its market share.
Standard Pacific Homes, as well as other builders eager to tap into the rebounding California and Nevada markets, might be interested in Pardee, whose 2012 closings ranked second in San Diego, ninth in Riverside/San Bernardino, and 10th in Las Vegas.
In the Phoenix market dominated by big builders, Maracay should be highly valued. It closed 450 homes last year and is on pace to close between 550 and 600 in 2013, says CEO Andy Warren. The same is true of Winchester, which ranked seventh in closings in the D.C. market, and controls more than 2,400 lots in suburban Maryland alone, according to Metrostudy.
•Spin off WRECO into a public company. Weyerhaeuser isn’t blind to the fact that homebuilders are suddenly hot commodities among private equity and stock investors. A number of prominent builders launched public stock offerings during the last year, and several more are said to be ready to pull that trigger. WRECO, a profitable business with good local branding and a national footprint that encompasses the best markets in the country (with the exception of Florida), might be what many investors in this space are seeking.
While clearly WRECO could be sold, Weyerhaeuser also has made clear that it might hold onto the businesses. Dan Fulton, Weyerhaeuser’s outgoing president and CEO, said during a teleconference call with analysts Monday that the company would not comment about WRECO’s future until the exploratory process is completed. Fulton also said there was no timetable for that process.
One industry watcher points out that Weyerhaeuser, in its announcement about WRECO, did not say whether it had hired an outside financial or investment advisor for its strategic exploration. “That’s highly unusual, and makes you wonder just how serious Weyerhaeuser really is about selling or spinning off this business,” the insider says.
This source speculates that Weyerhaeuser’s announcement about WRECO’s possible selloff could be a trial balloon to determine how it might value a spinoff. And Weyerhaeuser—as a Real Estate Investment Trust that is required to distribute at least 90 percent of its taxable income to shareholders annually—might prefer the equity it receives from a spinoff rather than the taxable income that selling off WRECO would create.
Forest Products Focus
A number of recent announcements also seem to signal that Weyerhaeuser wants to focus more on its core business, forest products.
For example, Fulton will serve as executive vice chairman until his retirement, at age 65, in October. Fulton ran WRECO between 2001 and 2008 (when he was promoted to chief executive) and his experience is rooted in real estate. His replacement as Weyerhaeuser’s president and CEO, Doyle Simons, 49, comes from a forest products background.
More evidence of Weyerhaeuser’s focus on its tree-centric core businesses can be found in its $2.65 billion deal to buy Longview Timber LLC and its 645,000 acres of timberlands in Washington and Oregon from Brookfield Asset Management. That deal expands Weyerhaeuser’s timber holdings in the Pacific Northwest by one-third to 2.6 million acres and its total holdings to 7 million acres.
To finance this deal, Weyerhaeuser intends to raise about $2.45 billion through a combination of new debt and equity by offering 38 million shares of common and mandatory convertible stock.
John Caulfield and Teresa Burney are senior editors for Builder.