DBRS Comments on Weyerhaeuser’s Proposed REIT Conversion

DBRS notes that today Weyerhaeuser Company (WY or the Company) announced that it intends to convert into a real estate investment trust (REIT), largely as a means of increasing the competitiveness of its timberlands business. Given the uncertainty regarding the closing and ultimate impact of the transaction on WY’s financial profile, a rating action is currently not warranted. DBRS will continue to monitor the progress of the planned conversion and determine the appropriate rating action, if any, once additional information is obtained. In particular, WY’s ultimate capital structure and financial policies with respect to dividend distribution will be key considerations.

The WY board of directors has not set a date for the conversion, but it is likely to occur at some point in 2010 depending on the state of the economy, tax policy changes and the distribution of profits required under tax laws for REIT election. The Company would be required to issue a special taxable dividend to stockholders of its undistributed earnings and profits by the end of the year of conversion, and the transaction requires shareholder, regulatory and other approvals. A significant portion of the planned special dividend – potentially as high as 90% – is likely to be paid in stock. Under this scenario, cash distributions would amount to roughly $600 million as WY’s accumulated earnings and profits are estimated at just under $6 billion (as of the beginning of 2010). The Company had roughly $1.7 billion in cash and equivalents at September 30, 2009, and has the ability to fund this internally if deemed appropriate. However, higher cash distributions (i.e., an 80%/20% stock-to-cash split) could reduce financial flexibility from either further reductions in cash or increased debt financing.

The conversion to a REIT would create a more tax efficient operating structure for WY and primarily benefit the competitiveness of its timberland business. WY owns approximately 5.7 million acres of forestlands that have a market value estimated by DBRS of over $12 billion. However, the Company’s Wood Products, Cellulose Fibers and Real Estate divisions are also expected to be included as part of the REIT structure, which would add earnings volatility relative to its comparatively stable timberlands business.

Notwithstanding the uncertainties related to the potential conversion to REIT status, the trend on WY’s ratings remains Negative. The Negative trend reflects the continuing deterioration of the Company’s credit metrics, which are weak for the current ratings. While DBRS believes that the North American building products sector is at the bottom of the cycle, a meaningful recovery is not expected until 2011 (DBRS had previously expected a recovery in 2010). As such, this poses a significant challenge for WY to stabilize its credit metrics, which is necessary to preclude further negative rating actions.

Notes:
The rating for Weyerhaeuser Real Estate Company is based on the unconditional guarantee for indebtedness provided by Weyerhaeuser Company.

All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating the Forest Products Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.

This is a Corporate rating.