Rayonier (RYN) announced third quarter earnings which exceeded most expectations. EPS clocked in at $0.77 or 85% higher than last year, not including ‘09 special item gains. Performance YTD also zoomed higher by 66% over ’09, again before special item gains. In addition, Rayonier announced an 8% distribution increase last week to $2.16 a share annually. This is the fifth distribution increase since converting to a REIT in 2003.
For the full year ’10, management believes earnings will be around $2.20 per share, up 47% from comparable 2009 results. However, such good fortunes have been anticipated as indicated by the recent strength of share prices.
Rayonier is a timber REIT with a strong position in specialty wood fiber products. Rayonier is the global leader in manufacturing high performance fibers. These include absorbent material used in diapers and high-value wood fibers used in impact resistant plastics, LCD screens, and pharmaceuticals. While many look at Rayonier as a timber company, long-term growth and profitability will be generated from this high margin business.
Performance fibers are shipped to 40 international markets from the company’s two factories in Georgia and Florida, mainly to customers in Asia and Europe. Domestic and Canadian customers represent about 40% of shipments with China leading internationally with 21%. Many of these clients have used Rayonier as a preferred basic materials supplier for decades. Their international position should be enhanced by a continuing weak USD. While it may seem a bit odd, performance fiber raw materials are bought from third parties as the quality of in-house timber is not suited for this higher engineered product.
Timber and real estate sales make up the balance of Rayonier’s business. Rayonier owns or manages 2.4 million acres in the U.S. and New Zealand.
Although its main market of housing construction is way down, western timber stumpage pricing has been strengthening. Third quarter ’10 pricing averaged $343/mbf, a vast improvement over the bottom experienced in the second quarter ‘09 of $163/mbf. Western harvests have been averaging 42mmbf for the past 7 quarters; with a slight uptick during the most recent quarter. Southern harvests have not fared as well. Pricing has increased modestly in comparison and volumes have declined.
In Rayonier's third quarter conference call, management reiterated the strength in Western markets is directly related to increased export buying of timber, and specifically mentioned shipments destined for China. Management also reiterated its plan to reduce harvest by 30% due to weaker than historic pricing and soft demand.
As with most timber companies, real estate sales are a vital part of overall profitability and the past few years have been challenging. Rayonier owns 200,000 acres along the I-95 corridor in southeast Georgia and northeast Florida. Split between higher and better use offerings and rural offerings, pricing remain weak in both markets. Rural acreage volumes were the highest of any quarter over the past two years; however rural land sale prices per acre have declined by 40%, partially due to geographical mix.
Year-to-date 2010 revenues and operating profit by business segment are listed below:
Performance Fibers: $640 million revenues (+$50 million y/o/y), $152 million operating income (+$27 million y/o/y);
Timber: $143 million revenues (+$18 million y/o/y), $26 million operating income (+$27 million y/o/y);
Real Estate: $91 million revenues (+$1 million y/o/y), $52 million operating income (+$1 million y/o/y).
Structured as a timber REIT, Rayonier has the advantage of generating high shareholder distributions relative to income. In order to pass-through corporate tax liability to investors, management has to payout at least 90% of reported taxable income. According to the company, investor distributions are taxed at the investor’s personal capital gains rate. Rayonier offers a Dividend Reinvestment plan that requires a minimum of 1 share to enroll and supplemental direct investments can range from $50 to $5,000.
Trading at 20 times next year’s anticipated earnings of $2.50, and offering a 4.2% yield, Rayonier is certainly not value priced. With a continued improvement in global economic activity and some resemblance of a domestic construction market, Rayonier’s earnings should continue to grow in the high single digits. Distributions should also increase by 4% to 6% a year.
Over the longer-term, Rayonier should offer total returns of around 10% to 12% a year to new shareholders. While not a barn-burner, consistency in earnings and distribution growth should amply reward longer term investors.
More information can be found at the following:
SA April ’10 review
Third quarter Supplemental Presentation
Third quarter Conference Call
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.
Disclosure: Long Rayonier and have been a shareholder since 2003