Rayonier: Settin' The Woods On Fire
Summary
- After a 37.1% increase in share price last year, stock in Rayonier (RYN) has climbed another 5.57% this year, while the overall REIT average has declined 10.5%.
- Rayonier recently climbed 27.6% in less than 3 months, from January 27 to April 20.
- This article takes a look at what is fueling this hot streak, "setting the woods on fire."
- This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »
MarioGuti/E+ via Getty Images
According to the Free Dictionary, the idiomatic expression "setting the woods on fire" means " To do wonderful or exciting things that cause a great or remarkable sensation; to become extremely popular, famous, renowned, etc." Well, literally speaking, the last thing Rayonier (NYSE:RYN) would want to do would be to set the woods on fire, because growing trees and selling timber is their business. But idiomatically, they most definitely are "setting the woods on fire" at the moment.
After a 37.1% increase in share price last year, stock in Rayonier has climbed another 5.57% this year, while the overall REIT average has declined 10.5%.
Rayonier recently climbed 27.6% in less than 3 months, from January 27 to April 20.
Seeking Alpha
Why is this company doing so well, when most are doing so badly? Is this success likely to continue?
Meet The Company
Rayonier
Founded in 1926, and currently headquartered in Wildlight, Florida, Rayonier went public in 1937, and converted to a REIT in 2004. This 96-year-old company owns 2.7 million acres of forest land, divided into three regions:
- U.S. South (67% of acreage),
- U.S. Pacific Northwest (18% of acreage), and
- New Zealand (15% of acreage),
sustainably yielding 11 million tons of logs per year.
Geographical distribution of RYN assets (Rayonier website)
The U.S. South region is by far the most profitable right now, where 4th quarter EBITDA surged 44% YoY (year-over-year), while the Pacific Northwest and New Zealand regions saw EBITDA slump by 8% and 41%, respectively.
The company also operates a real estate subsidiary called Raydient Places + Properties, that seeks to put their substantial acreage to its "highest and best use," or HBU. The real estate operation accounts for just over one-quarter of the company's EBITDA, and leads the Timber sector by a wide margin in real estate value per acre sold over the past two years.
Rayonier investor presentation Rayonier revenue mix (Rayonier investor presentation)
Over the past three years, Rayonier has generated 73% of its EBITDA from timber operations and 27% from other operations, while the other three Timber REITs have done just the reverse, averaging just 27% from timber, and 73% coming from other revenue sources. Thus, Rayonier is more of a "pure play" timber company than its REIT peers.
A full 60% of Rayonier's U.S. South region is situated in the top 3 markets in the booming Sunbelt markets of Jacksonville, Florida and vicinity.
Rayonier investor presentation
There are several tailwinds in the company's favor right now:
- The nationwide housing shortage creates favorable demand for RYN's product.
- A mountain pine beetle epidemic in the Pacific Northwest is crippling the supply of economically viable pine in British Columbia, driving up prices in that region.
- China needs more lumber than it can get, and that supply gap is growing every year, which benefits RYN's New Zealand region, whose European competitors are hampered by a spruce beetle epidemic.
In addition, the Russian invasion of Ukraine may well prove to be a tailwind for Timber REITs. Here is what Hoya Capital said in its recent sector report:
Amid the ongoing conflict with Russia - which is among the world's largest exporters of agriculture, gasoline, and timber products - the importance and value of North American production in these key commodities will become especially evident. . . Russia is . . . the world's largest exporter of lumber . . . and the seventh-largest exporter of forestry products.
How much that will affect RYN remains to be seen. The company notes that the market for timber is highly localized, with logs rarely transported over 100 miles. The other timber REITs would seem to benefit more, as they do more milling, and finished lumber can be transported much farther.
Doug Long, Senior V.P. of Forest Resources, said this about the company's U.S. South segment on the Q4 2021 earnings call:
Despite ongoing constraints on trucking availability, sawlog stumpage pricing rose 21% versus the prior year quarter. At nearly $31 per ton, fourth quarter pricing reflected the highest average Southern sawlog realizations we have registered since our separation into a pure-play timberland REIT in 2014. Improved pricing reflects strong demand from sawmills, the impact of weather-related constraint on supply, upward pressure on chip-n-saw pricing due to increased competition from pulp and pellet mills as well as export log demand in certain markets.
Growth Metrics
Here are the 3-year growth figures for FFO (funds from operations), TCFO (total cash from operations), and market cap.
| Metric | 2018 | 2019 | 2020 | 2021 | 3-year CAGR |
| FFO per share | $2.48 | $1.75 | $2.31 | $2.17 | -- |
| FFO per share Growth % | -- | (-29.4) | 32.0 | (-6.1) | (-4.35) |
| TCFO (millions) | $310.1 | $214.3 | $204.2 | $325.1 | -- |
| TCFO Growth % | -- | (-30.9) | (-4.8) | 59.2 | 1.59 |
| Market Cap (billions) | $3.58 | $4.23 | $4.01 | $5.77 | -- |
| Market Cap Growth % | -- | 18.2 | (-5.2) | 43.9 | 17.3 |
Source: Hoya Capital Income Builder, TD Ameritrade, CompaniesMarketCap.com, and author calculations
FFO/share growth has been on-again, off-again, with RYN gaining when the overall REIT market declined, and vice-versa. This kind of volatility is not unusual for Timber REITs.
Cash flow growth was negative in 2019 and 2020, before exploding last year, and market cap grew by almost the same percentage as the share price in 2021. The company issued 13.2 million shares in 2021 at $32.43, and bought back 4.7 million shares at $23.84. The net increase of 8.5 million shares represents a 6% increase in the share count.
Balance Sheet Metrics
Here are the key balance sheet metrics for RYN.
| Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
| RYN | 1.86 | 21% | 2.6 | BBB- |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
Like most Timber REITs, RYN has a solid Liquidity ratio, and carries quite a bit less debt than most REITs, compared to its assets and EBITDA, but RYN is not remarkable among Timber REITs in any of these regards.
All of RYN's debt is fixed-rate, with a weighted average interest rate of 2.7%.
Dividend Metrics
Despite its near-zero dividend growth rate, RYN is a better dividend payer than the average Timber REIT. That's not saying much, however, as Timber REITs pay considerably lower than the average REIT overall.
| Company | Div. Yield | Div. Growth | Div. Score | Payout Ratio | Div. Safety |
| RYN | 2.50% | 0.63% | 2.55 | 60% | C+ |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
In the table above, Dividend Score projects the Yield three years from now on shares purchased today, assuming the rate of dividend growth remains unchanged.
Valuation Metrics
Rayonier is the most "expensive" of all the Timber REITs, if judged by the Price/FFO ratio, and trades at a very high premium to NAV.
| Company | Div. Score | Price/FFO | Premium to NAV |
| RYN | 2.55 | 19.9 | 27.1 |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
This premium valuation benefits the company in important ways, if you are a growth investor. It makes share issuance accretive, and "expensive" REITs tend to outperform on total return.
What Could Go Wrong?
If rising interest rates cause demand for new homes in the U.S. to fall, then lumber prices could easily fall also.
Rayonier reports is Q1 2022 results on Wednesday, May 4. Since momentum and revisions seem to be factors fueling the recent share price Gains, any significant slow-down in growth rates, or moderation in guidance, could have an adverse effect on share prices.
Lumber prices have been quite volatile over the past two years, seesawing from a high near $1700 per board foot to a low of about $450 in 2021, before rising back to the current price just above $1000. Another major decline in lumber prices would put a sizable dent in RYN's revenues.
Hoya Capital
Because of their careful and sustainable reforestation of the planet, Timber REITs play an important role in combating global warming. However, mankind is losing that battle. As a result, there is a potent risk of wildfires, which could be devastating for RYN's product.
Investor's Bottom Line
The Seeking Alpha Quant ratings show RYN as a Buy, impressed by its momentum and recent revisions in earnings estimates, but the Wall Street analysts and Seeking Alpha authors are more skeptical, rating it Hold.
Seeking Alpha Premium
Hoya Capital said this in its latest sector report on Timber REITs:
We continue to view the more "vertically-integrated" timber REITs that also have lumber production capacity as a superior, more balanced longer-term option than pure-play timberland REITs, and as a better option than the richly valued farmland REITs.
The Street and Zacks rate RYN a Buy, while Ford Equity Research and TipRanks are Neutral.
Rayonier looks like a good investment for the long run, but I have my doubts about the short run, not just for RYN, but for REITs in general. From a technical standpoint, if the price on the Vanguard Real Estate ETF (VNQ) falls below the February low of $97.71, and it is testing that level right now, then it is probably headed into the $80's. This does not necessarily drag down the price of all REITs, as RYN's performance over the last few years graphically proves, but I don't like to bet on any individual company swimming against the tide.
At best, RYN is a long-term growth play. Short-term value investors will be repulsed by its low Yield and "expensive" valuation.
Rayonier reports its Q1 2022 results on Wednesday, May 4. I am tempted to call this company a Buy, but will wait until we hear from the company before taking that plunge.
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This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (6)
Ask any Mississippi boy if he's happy about what the timber companies are paying for raw material. Dismal offers. Bottleneck is in processing and transport.Similar but opposite to oil and gas. $100 oil doesn't help the refiners, only the E&P companies that produce crude.
