As I mentioned in my first article, Understanding Investments in Timber REITs, each of the four Timber REITS, Plum Creek (PCL), Potlatch (PCH), Weyerhaeuser (WY), and Rayonier (RYN), are quite different from each other. Today I thought we'd look at Rayonier. Because I am a dividend growth investor, I'll be focused on the safety of Rayonier's dividend which is $.40 per quarter, or about 3.7%. The data in this article comes from Rayonier's 2011 10K, the 2012 Q1 10K, Google Finance, and Rayonier's website.
Rayonier owns 2.4 million acres of timberland in 11 states, plus a 26% interest in 310,000 acres in New Zealand. Rayonier generates income from these timberlands through the sale of logs, mineral leases, recreational leases, and other miscellaneous uses. In addition, Rayonier has a wholly owned taxable REIT subsidiary that does real estate, and owns and operates three lumber mills in Georgia, and two pulp mills one in Georgia and one in Florida.
Rayonier has four main businesses, Timber, Real Estate, Performance Fibers, and Lumber. In addition they have a small Log Trading business. Rayonier is less a Timber REIT than a Forest Products Company. Only about 21% of Rayonier's EBITDA in 2011 came from its timberland REIT operations. A full 67% came from its Performance Fibers, 11% came from Real Estate, and the remaining 1% from Lumber and Log Trading. All of these last three are in its wholly owned taxable REIT subsidiary.
This means that Rayonier pays corporate income taxes, like any other C-corp, on all but the 21% generated by the timber operations. I suppose that is still better than nothing. I don't mean to criticize Rayonier for this, I just mean to point out to the reader that Rayonier is not a pure timber play, nor is it what may first come to mind when you hear the term Timber REIT.
Rayonier 2011 EBITDA
Forest Resources (REIT activity)
The timberlands are divided into the Northern Region, Atlantic Region, and the Gulf States Region. The Northern Region consists of New York State and Washington State. The Atlantic Region consists of Florida and Georgia. The Gulf States Region encompasses seven states from Alabama through Texas. The Northern Region is actually composed of two very different geographic areas. Both differ as to timber species, topography and markets. The New York acres are about 5% of the total. Major species in New York are maple, cherry, birch, and white pine. These acres are located in the Adirondacks near the Canadian border. The other, Washington State, has about 16% of Rayonier's total acres.
Washington has good exposure to the Asian export log market. Major species are western hemlock and Douglas-fir. Rayonier has increased harvest levels in Washington to take advantage of the export markets. The Atlantic and Gulf States Regions are more uniform as to species, topography and markets, although differences do exist. Major species in the Southeast are loblolly and slash pine. In New Zealand, the major species is radiata pine. About 35% of the New Zealand harvest is sold into the Asian export market.
The China log market has been slow since 4th quarter 2011 but is expected to pick up again the second half of 2012. Other than this, timber markets are still depressed as the housing market is still in the doldrums. However, small positive signs are pointing to a slow steady improvement over the next few years.
Other than Washington, where Rayonier increased harvest to take advantage of the China market, harvest levels have been scaled back in other areas. In the Southeast, pulpwood has been favored over sawtimber to take advantage of stronger pulp markets. Interestingly, Rayonier makes its manufacturing businesses compete on the open market against other timber buyers for Rayonier timber. This insures that Rayonier gets the best prices for its timber.
Of the 2.4 million acres, Rayonier has identified about 200,000 acres as having HBU (higher and better use) values. About 100,000 acres have been identified as having development potential and 39,000 acres have been entitled. The rest are identified as having recreational, conservation, and rural residential value. Most of the 100,000 acres of development land lies along the I-95 corridor from Savannah Georgia to Daytona Beach Florida. These are probably the best real estate lands of any Timber REIT. In addition, the Real Estate segment also sells non-strategic timberlands. The real estate business, like timber, has also been depressed since the housing crash.
Performance Fibers sits at the high end of the pulp market. They make cellulose specialty products like acetate, ethers, and high strength viscose as well as absorbent materials like fluff pulp. These are used in products like cigarette and other filters, LCD screens, plastics, coating, pharmaceuticals, tire cords, and other uses. Fluff pulp is used in baby diapers and such. A major capital project is under way to convert the remaining absorbent materials capacity to cellulose specialties and exit the fluff pulp market. The cellulose specialty products market is quite good. Rayonier raised prices about 12% for 2012. About 85% of the new capacity has already been pre-sold.
Rayonier also runs three sawmills in Baxley, Swainsboro, and Eatonton, Georgia. Total capacity is about 370 million board feet. They also run a small log trading business in Washington.
Financial Highlights ($Millions)
Diluted EPS (dollars)
Cash provided by Ops
Cash used in Investing
Long Term Debt
2012 is projected to be very similar to 2011 with some improvements due to price increases in Performance Fibers. Sales were down slightly in Q1 2012 due to scheduled down time for maintenance and capital improvements in the pulp mills. Cash used for investing was up in 2011 due to a large timberland acquisition, ($320 million) and the on-going capital spending on the pulp mill conversion from fluff pulp to cellulose specialty. Long term debt is up for the same reasons.
Dividends seem quite safe due to the strength of the Performance Fibers business. Performance Fibers are carrying the business right now, but when housing recovers Timberlands and Real Estate are poised to add considerably to Rayoniers' bottom line.
Market capitalization is $5.2 billion with debt of about 0.9 billion. The dividend is 3.7% with the 5 year dividend growth rate of 3.4%. In my estimate the US timberlands are worth about $3.9 billion and a rough estimate of the value of the mills is about $2.0 billion. Rayonier is trading at a P/E of about 19.6 so Rayonier is not exactly undervalued. However, I believe Rayonier is a well run company with good assets, a safe dividend, and allot of upside as the economy improves.