Rayonier (RYN) announced 4th quarter and 2012 year-end results on January 24. See the results here. Sales were $1,571 million, up 5.5% from 2011. Operating income was $411.5 million, up 15% from 2011, and net income was $278.7 million, up 1% from 2011. Adjusted EBITDA was $560 million, up 14% from 2011.
Cash provided by operations for 2012 was $445.9 million, up 3% from 2011. Total long-term debt was $1,120, up 37% from 2011 year-end. This is mainly due to the large capital project to expand cellulose specialty production capacity at the Jesup mill. Cash on hand is $280.6 million. Cash generation is covering Rayonier's dividend, which was $206.6 million in 2012, up 11% from 2011. Rayonier's dividend is 3.2% at this time.
When it comes to timber REITs, I prefer looking at EBITDA or cash from operations rather than net income or operating income because of the large non-cash expenses for depletion associated with timber. For those not familiar with timber depletion, I will give a brief overview. In a way, depletion is similar to depreciation. When you purchase timberland, you setup a depletion account in which you separate the value of the bare land and the timber. You divide the timber value by the timber volume and come up with a depletion rate. Some make it more complicated by separating the value into bare land, merchantable timber, pre-merchantable timber, and roads and other improvements. We will just use bare land and timber in the following example.
Suppose you bought 1,000 acres of southern pine timberland for $1,500 an acre, or $1,500,000. Let's say you allocate $500 per acre to the bare land, that is $500,000. The remaining $1,000,000 is allocated to the timber. If the timberland had 100,000 tons of merchantable timber, you divide $1,000,000 by 100,000 tons and get a depletion rate of $10.00 per ton. For each ton of timber that you harvest, you get to deduct $10 for depletion thus lowering your net income. If you sell your timber for a $10 stumpage, you would net $0 after depletion even though you still pocket the whole $10. If you sell your timber for a $20 stumpage, you would net $10 after depletion even though you still pocket the whole $20.
The depletion rate is updated annually by deducting harvested tons, adding in new growth, and adding any regeneration capital to the dollar amount. Bottom line is that for newly purchased timberland, the depletion rate is high, and for timberland owned for several years it gets lower. So new acquisitions show little net income and longer held properties show a higher net income, even if both properties are identical. The sole purpose of depletion, in my view, is to lower taxes on timber operations. This is good, however, it does muddy the net income and operating income number for timberland owners and hides the actual income being generated.
We will use EBITDA when talking about Rayonier's different business segments. As I have said in earlier articles, the four timber REITs, RYN, (PCL), (WY), and (PCH), have quite different mixes in their business segments. In 2012, Rayonier derived only about 20% of its EBITDA from timber, 7% from real estate, 2% from wood products, and 71% from performance fibers. Rayonier is classified as a timber REIT, however, it is really in the performance fibers business with a side of timber.
Housing starts for 2012 were 781,000, up 30% from 2011. Still, this is only about 50% of historic norms so there is tremendous upside for Rayonier's housing related businesses, namely timber and real estate, as the housing market continues to improve. Some are predicting another 30% increase in housing starts for 2013. I would have added wood products to that list buy Rayonier is exiting the wood products business by selling their sawmills to Interfor. The sale should close in Q1 2013. So only about 30% of Rayonier's business is housing related. Performance fibers, which is not housing related, accounted for a whopping 71% of 2012 EBITDA.
For 2012, EBITDA from Rayonier's performance fibers segment was up 19% from 2011. Prices were up 14% for cellulose specialties and down 15% for absorbent materials. Cellulose specialties accounted for 70% of 2012 production. In 2013, Rayonier will exit the absorbent materials business. When the Jesup mill expansion is completed, and comes on-line, the absorbent materials production capacity will have been converted to cellulose specialty production. This is by far Rayonier's primary business.
For 2012, EBITDA from Rayonier's timber segment was up 10% from 2011. Timber generated 20% of company EBITDA. This was with a 13% higher harvest volume. Prices were mostly unchanged or slightly down from 2011 levels. As I have said in the past, log prices have still not benefited much from the improvement in housing. This was true in 2012 but should improve in 2013 as housing starts and demand for lumber continues to climb. Export demand, particularly from China, was soft in 2012. Demand from both China and Japan is expected to improve in 2013, however, Rayonier has only minor exposure to the export market, with only 16% of their timberland in the Pacific Northwest.
Wood products EBITDA was up 130% from 2011 but only represented 2% of Rayonier's 2012 EBITDA. As I mentioned earlier, Rayonier is selling their wood products business to Interfor for $80 million. The sale should close in Q1 of 2013. With only two sawmills Rayonier was never a big player in the lumber business.
Real estate generated 7% of Rayonier's 2012 EBITDA. Rayonier's 2012 real estate EBITDA was down 32% from 2011. Sale acres were up 12% over 2011, however average price per acre was down. HBU sales represented about 53% of the acres sold with the remaining 47% being non-strategic timberlands.
For 2012, Rayonier's unit price has gone from $44.63 to $52.63, a 17.9% capital gain return. If you add a dividend of 2.7%, you get a total return of 20.6% for the year. That slightly beats the S&P 500 18.4% gain for 2012.
Using Jeff Williams' "Behind the Number Analysis", gives Rayonier seven passes, and two fails out of nine tests. All in all not a bad score.
1. Positive net income Pass
2. Positive operating cash flow Pass
3. Increasing year over year ROA Fail
4. Operation cash flow being greater than net income Pass
5. Decreasing total liabilities to total assets ratio Pass
6. Increasing current ratio Pass
7. Shares outstanding growth less than 2% Pass
8. Decreasing Gross Margin to sales ratio Pass
9. Sales growth % being larger than asset growth % Fail
I generally do not recommend stocks one way or another, I just report on their businesses and financial results. Rayonier has had a decent run-up in price in the last 12 months. With the improved housing market and Rayonier's new cellulose specialty capacity coming on in 2013, I think things are looking good for Rayonier in 2013. On the Charles Schwab website, Schwab, rates RYN a "Sell", Standard and Poor's, Ned Davis, and Market Edge rates RYN a "Hold" and Reuters rates it "Outperform".