Rayonier: The Best-in-Breed Timber REIT?

We published our full, comprehensive research report in which we analyzed and evaluated Rayonier Inc. (NYSE:RYN), which was a former subsidiary of the old ITT Corp (NYSE:ITT). We concluded that while Weyerhaeuser Company (NYSE:WY) was the biggest Timber REIT, Rayonier Inc. (NYSE:RYN) generates the strongest profit margin of the big four Timber REITs (Rayonier, Weyerhaeuser, Potlatch and Plum Creek).  Despite the fact that Rayonier’s total net income of $284M over the last twelve months is within 22% of Weyerhaeuser’s $347M, Weyerhaeuser’s market capitalization of 14.4B is 2.35X that of Rayonier’s $6.1B.  We also find that Rayonier has less downside risk than Weyerhaeuser Company (NYSE:WY) because of its strong performing Performance Fibers Division, which generated an ample 32.5% operating margin in H1 2012.  Rayonier’s Performance Fibers business accounts for nearly 70% of its H1 2012 revenues versus 28% for WY.  Rayonier’s operating margin of 32.5% for its Performance Fibers division easily exceeds the 9% for WY’s Cellulose Fibers unit.  That means that even though RYN’s Performance Fibers H1 2012 revenue of $432.4M is less than the $932M of WY’s Cellulose Fibers revenue, RYN’s Performance Fibers operating income of $164.4M almost double WY’s $84M in Cellulose Fibers operating income. Plum Creek Timber Co. Inc. (NYSE:PCL) and Potlatch Corporation (NASDAQ:PCH) don’t have a specialty fibers business like Rayonier Inc. (NYSE:RYN) and Weyerhaeuser Company (NYSE:WY).

Sources: MRQ Reports for Rayonier and Weyerhaeuser

While Weyerhaeuser’s Timberland portfolio of 6.4M acres dwarfs the 2.4M acres of Rayonier, we can see that this segment has seen a significant decline in H1 2012 operating income for both firms. Potlatch Corporation (NASDAQ:PCH) has also seen a sharp decline in its H1 2012 operating income and Plum Creek bucked the trend with a 20.5% increase during the period, based on its ability to avoid the serious price declines for its timber resources products that Rayonier Inc. (NYSE:RYN), Weyerhaeuser Company (NYSE:WY) and Potlatch Corporation (NASDAQ:PCH) incurred.  PCL’s operating income also benefited from the fact that its sawlog volumes were at depressed levels last year and because it was able to accelerate harvesting of its pulpwood resources in the Southern US.

Sources: MRQ Reports for Rayonier, Weyerhaeuser, Potlatch and Plum Creek

In our full, comprehensive research report on Weyerhaeuser Company (NYSE:WY) , we could see that the real estate segment for these companies does not generate smooth results, due to the timing of the closure of real estate sales.  We use that perspective when evaluating the results of the real estate businesses of the timber companies because these results are heavily influenced by when these deals close.  During the first half of 2012, we see that Plum Creek Timber Co. Inc. (NYSE:PCL)’s declined by nearly a third, as it sold nearly 60M acres in Q2 2011 for conservation purposes and the Q2 2012 decline was partially offset by a 15M increase in Non-Strategic Real Estate acres sold in Q2 2012 versus Q2 2011.  Rayonier’s Real Estate operating income increased by 0.8% in H1 2012 versus H1 2011, and Weyerhaeuser Real Estate’s operating income was flat in the comparable period.  Potlatch saw its operating income for the period decline by one-third versus the prior year’s period, due to the absence of $14.3M million in revenues realized in Q2 2011 from the sale of non-strategic timberland and rural real estate assets in Idaho.

Sources: MRQ Reports for Rayonier, Weyerhaeuser, Potlatch and Plum Creek

In our full, comprehensive research report on Weyerhaeuser, we could see that the revenue generated by WY’s Wood Products Division in H1 2012 exceeded the revenue generated by Rayonier Inc. (NYSE:RYN), Potlatch, and Plum Creek; and furthermore, WY’s Wood Products Division’s revenue was 88% of the combined revenue of its three Timber REIT competitors.  The good news for WY’s Wood Products Division was that it enjoyed a 25% YTD increase in revenue versus last year at this time.  WY’s stakeholders should not be too quick to celebrate, since its competitors all generated revenue growth of 17-44% during that time period.  Furthermore, Weyerhaeuser’s operating margin for the segment was only 1.6%, and that trailed all of its competitors.

Sources: MRQ Reports for Rayonier, Weyerhaeuser, Potlatch and Plum Creek

We can see that Rayonier has a 3.27% dividend yield and it is the second highest dividend yield of its Timber REIT brethren.  Plum Creek Timber Co. Inc. (NYSE:PCL) has the highest yield (3.75%), Potlatch’s yield is 1bp behind Rayonier’s Inc. (NYSE:RYN), and Weyerhaeuser Company (NYSE:WY) has the lowest dividend yield, due to its 12 month run-up in price.  As these companies have converted from traditional corporate structures into real estate investment trusts for tax purposes, these companies are obligated to pay out 90% of the pro forma taxable income generated by the REIT subsidiaries in order to avoid corporate taxes on the REIT subsidiaries.  This tax status does not apply to taxable subsidiaries like its performance fibers business, its wood products business, nor its rural Higher and Better Use properties.  Still, we can see that part of the reason why Rayonier pays a generous dividend, is because its Performance Fibers business is a strong cash cow.

Source: Bloomberg LP

Rayonier is the only Timber REIT that has an equity/total capital ratio exceeding 50%.  That means that it is the only Timber REIT that has its stockholders’ equity exceeding its bonded debt.  Rayonier’s equity represents 57% of its total permanent capital versus 27.5% at Potlatch, 30% at Plum Creek, and 48.35% at Weyerhaeuser. Rayonier Inc. (NYSE:RYN) enjoys the highest profit margins in the industry, at nearly 17% versus less than 4% for WY, 4.4% for PCH, and 10.3% for PCL.  Rayonier’s industry-high profit margins and industry-low leverage ratio allows it to devote only 15.4% of its operating income to interest expenses, versus 20% for Potlatch, 62.5% for WY, and 66% for PCL.

Sources: MRQ Reports for Rayonier, Weyerhaeuser, Potlatch and Plum Creek

In conclusion, we at Saibus Research believe that Rayonier is the best-in-breed, with regards to the Timber REITs.  We like the fact that its high-performing Performance Fibers division generates such strong operating income margins and that it accounts for nearly 70% of RYN’s revenue.  We also like the fact that this business generates a high level of consistent and steadily growing revenue and operating income, and we believe that this insulates the company from the macroeconomic volatility that the other timber players face.  While we believe that WY may offer a higher potential nominal investment return rate than RYN, we also believe it entails more risk due to its heavy dependence on the performance of the housing market.  Plum Creek and Potlatch don’t have an equivalent specialty fibers business, and we find that RYN’s performance in its secondary business lines (Real Estate, Timberland Resources and Wood Products are comparable to its Timber REIT peers.  While we believe that the four Timber REITs are all fairly valued at this time, we believe that Rayonier offers the best risk/return prospects, due to the fact it has the lowest forward PE based on 2013 expected EPS, its strong profit margins, conservative financing structure, and potential growth from its secondary business lines.

Source: Bloomberg LP


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