Comments On Rayonier's 3rd Quarter Results

| About: Rayonier Inc. (RYN)

Rayonier (NYSE:RYN) announced 3rd quarter results on Thursday. Sales were $409 million, up 10% from Q2 and 6% from Q3 2011. Operating Income was $113 million, up 14% from Q2 and 5% from Q3 2011. Net income was $81 million, up 17% from Q2 but down 23% from Q3 2011. Third quarter 2011 included a one-time tax benefit of $16 million and a large non-strategic timberland sale.

Cash provided by Operations for 2012 year to date was $354 million, up 8% from 2011. Cash available for distribution for 2012 year to date was $261 million, also up 8% from 2011. Debt is up 19% year to date and the debt to capital ratio is 42%. Cash on hand is $215 million. Cash generation is easily paying Rayonier's dividend of $.44 a quarter. The dividend was just raised from $.40 last quarter.

As I have said in earlier articles, the four timber REITs, RYN, (NYSE:WY), (NYSE:PCL), and (NASDAQ:PCH), are quite different from each other. In 2012, Rayonier derived only about 19% of EBITDA from Timber, 6% from Real Estate, 1% from Wood Products, and 74% from Cellulose Fibers. By contract, Potlatch, who reported Tuesday, derived about 46% from Timber, 15% from Real Estate, and 39% from Wood Products.








Real Estate



Wood Products



Cellulose Fibers



Rayonier, although classified as a Timber REIT, is mostly in the Cellulose Fibers business. Because of this, they have the least exposure to the housing market of all the Timber REITs. Only about 26% of Rayonier's businesses, Timber, Real Estate, and Wood Products, are tied to the housing market. This is the lowest percentage of all the Timber REITs. This is the reason that Rayonier has fared better than the other Timber REITs during the housing downturn. This also means Rayonier has the least to gain from a housing recovery. In my last article, on Potlatch, I emphasized the significance of the Wood Products results to Potlatch and used them as evidence of the early stages of a recovering in the housing sector. With only 1% of Rayonier's business in Wood Products, it hardly has any significance to Rayonier. Also, as I said in the Potlatch article, lumber prices have not yet trickled down to log prices so the Timber segment is still not benefiting from this early recovery in housing. This is equally true for Rayonier's Timber segment.

When we talk about Rayonier, we should be more focused on Cellulose Fibers, its main business. Rayonier's Cellulose Fibers business starts with pulpwood and sawmill residues. It then converts them into wood pulp. At this point, the pulp can be used as fluff pulp, used in diapers and such, or made into paper. However, Rayonier further refines the wood pulp into Cellulose Specialty products, Acetate, Ethers, and High Strength Viscose used in filters, LCD screen, coatings, textiles, pharmaceuticals, tire cords, and other uses. This is the high end of the wood fibers business and Rayonier is a world leader. Prices and demand for Cellulose Specialty products are up for 2012 while fluff pulp prices are down. EBITDA for Cellulose Fibers is up 17% over Q2 and 27% over Q3 2011.

At the present time, Fluff Pulp is about 31% of Rayonier's Cellulose Fibers business. However, Rayonier is in the late stages of a major capital project converting 260,000 tons of fluff pulp capacity into 190,000 tons of Cellulose Specialty capacity. This project will cost $300 million, and is expected to be completed in mid 2013. Rayonier expects a 17% to 20% return on this investment. This will pretty much take Rayonier out of the fluff pulp business. Rayonier has already pre-sold about 90% of the new Cellulose Specialty capacity. This project is the reason for Rayonier's increased debt mentioned above.

In the Timber segment, export logs to China from Rayonier's Northwest lands are down over last year. The improvement in the China market expected in the 2nd half of 2012 has not materialized as of yet. Harvest volume in the Northwest is up about 15% on improved domestic demand. The Southern region has prices and volumes up slightly from 2011. EBITDA for Timber was up 20% over Q2 and up 7% over Q3 2011. Fifty-six percent of the operating income from the Timber segment came from the Pacific Northwest lands, 41% from the Southeast, and 4% from New Zealand.

A dry kiln fire at one of Rayonier's sawmills has sawmill production down and they expect about a $1 million write-off due to the fire. Real Estate is up 12% since last quarter but down 74% since Q3 2011 due to a large non-strategic timberland sale in 2011.

Rayonier's stock price is now at $48.87, up 10% from $44.42 on January 1, 2012, and yield is about 3.6%. The 52-week range is $38.16 to $51.87. Rayonier has the best, and I believe, the safest dividend of all the Timber REITs and the ability to continue raising dividends due to the strength of the Cellulose Fibers business and the coming improvement in Timber and Real Estate segments as housing continues to rebound.

Disclosure: I am long RYN, PCL, PCH. 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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Tagged: , REIT - Diversified, Earnings
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