Potlatch may boost dividends

In an effort to wrest more value from its vast timber holdings, Potlatch Corp. will convert into a real estate investment trust, company officials announced Monday.

Spokane-based Potlatch is following the lead of other timber companies in the decision.

Potlatch owns 1.5 million acres of timber in Idaho, the Midwest and the South, along with 14 plants that produce lumber, plywood, pulp and tissue paper. But like other diversified forest products companies, Potlatch finds itself in a version of “land rich, cash poor.” The company’s timber assets are appreciating rapidly in value, but the gain hasn’t been reflected in the Potlatch’s stock price.

“We believe the REIT conversion will unlock significant value for our shareholders,” Potlatch Chairman Penn Siegel told investors during a Monday morning conference call.

As a real estate investment trust, income from Potlatch’s timberland will be exempt from federal corporate income taxes, leaving more profits for shareholders.

The change will allow Potlatch, which employs about 2,000 people in Lewiston, to increase its annual dividend from about 60 cents a share to $2.60 a share, because of the tax savings, spokesman Mike Sullivan said. According to company projections, Potlatch’s annual dividend after the conversion will be approximately $76 million. Shareholders, however, must still pay normal taxes on their dividends.

Potlatch also plans to issue a special, taxable dividend to stockholders of its undistributed earnings and profits of approximately $440 million to $480 million in the first quarter of 2006.

Buying up more timberland is also in the company’s long-term plans, Siegel said during the conference call. After the conversion to the REIT, the lower corporate taxes will make it easier for the Potlatch to finance land purchases, he said.

The conversion must be approved by shareholders and will require IRS approval, but neither is considered a problem, according to Sullivan.

Potlatch will remain a publicly traded company after the REIT is created. “The difference is that all of the timberland assets will be in a separate basket,” Sullivan said.

The company’s 14 manufacturing operations – which produce lumber, plywood, particleboard, pulp and tissue products – will be placed in a separate subsidiary. Potlatch’s manufacturing end remains subject to normal corporate taxes, Sullivan said.

Potlatch will become the fourth timber company to convert to a REIT, joining Longview Fibre, Rayonier Inc. and Plum Creek Timber Co.

Potlatch began mulling the step in the mid-1990s, when it proposed converting its southern timberlands to a REIT. However, that plan, which included a merger with Memphis, Tenn.-based Anderson Tully, fell through.

Over the years, Potlatch has looked for other ways to tap the intrinsic value of its timberland. In 2002, the company announced a long-range deal with the Trust for Public Lands to sell the development rights on up to 600,000 acres of its Idaho timberland. Conservation easements have become popular across the West, as environmentalists look for ways to keep forests and farmland from being converted into luxury subdivisions, golf courses or strip malls.

The acreage will remain working forestland, benefiting loggers and wildlife, as well as hunters and hikers.