Timber REIT Rayonier branches out to foster long-term earnings growth
By Darlene Bremer
One of only two publicly traded timber REITs in the U.S., Rayonier Inc. (NYSE: RYN) is an international forest products company with a long history of combining quality assets, people, products and performance. The company's roots extend back almost 80 years, and over that time it has undergone significant change en route to becoming the seventh-largest private timberland owner in the U.S. with close to 1.7 million acres in the Southeast and 368,000 acres in the Northwest (2.2 million acres total worldwide including New Zealand).
Rayonier's flagship specialty cellulose fibers mill in Jesup, Ga. |
In 1926, the Rainier Pulp and Paper Company was incorporated to take advantage of the West Coast's plentiful Western hemlock tree species for the production of a superior grade of bleached paper pulp. Public trading of the company began in 1937 on the New York Stock Exchange after the company re-incorporated simply as Rayonier. In 1938, Rayonier purchased its first timberlands on the East Coast. The company continued to purchase timberlands on both coasts and established pulp mills to process its product.
In 1968, Rayonier became ITT Rayonier, a wholly owned subsidiary of the international conglomerate ITT Corporation. Its first overseas purchase of extensive timberland in New Zealand was in 1992, and only two years later Rayonier once again became an independent public corporation in a spin-off from ITT and began trading on the NYSE under the RYN symbol. In 1999, Rayonier nearly doubled its U.S. timber holdings with the purchase of approximately 1 million acres in the Southeast, setting the stage for its eventual conversion to a REIT on Jan. 1, 2004.
RAYNONIER INC.
50 North Laura Street
Jacksonville, FL 32202
904-357-9100
www.rayonier.com
CHAIRMAN, PRESIDENT & CEO: W. Lee Nutter
SENIOR VICE CHAIRMAN & CFO: Gerald J. Pollack
• 52-WEEK HIGH: $55.00 (6/7/05)
• 52-WEEK LOW: $42.05 (6/14/04)
CORE MARKETS: The company owns 2.2 million acres of prime timberland and real estate in the U.S. and New Zealand and is
the world's leading producer of high-performance specialty cellulose fibers. |
In a move to increase shareholder value, Rayonier became the second of only two publicly traded U.S. timber REITs. "As a REIT, our income from U.S. timber sales are effectively taxed only at the shareholder level, allowing us to pass more cash to investors," Gerry Pollack, Rayonier's chief financial officer, says. After the conversion, the company increased its dividend from $1.08 per share to $2.24 and again in February 2005 to $2.48 per share.
The company has experienced growth in other financial areas as well. For example, Rayonier's total assets at year-end 2004 were $1.9 billion, up from $1.8 billion at year-end 2003. The company's market capitalization has grown from $1.5 billion in August 2003 prior to its announcement it would convert to a REIT to $2.7 billion today, while shareholders' equity grew from $711 million to $796 million. In addition, the share price of Rayonier stock at the end of 2003 was $41.51, while recently it has been trading in the $52 to $54 range.
"Our recent growth can be attributed to the market's positive response to our conversion to a REIT, improved pricing and demand for performance fibers, timber and wood products, and the potential of our higher-and-better use real estate properties," Pollack says.
Among the factors that make Rayonier an attractive investment to income-oriented investors are its stable cash flow and earnings, the growing popularity of holding timber assets as a long-term inflationary hedge, and the company's increasing dividend yield, according to W. Lee Nutter, president and chief executive officer.
"Our willingness to consider new strategies for increasing value is also attractive to investors who are looking for an innovative company," Nutter adds.
Innovative Focus
Rayonier's overall strategic focus is to emphasize delivering value to its shareholder on a long-term basis, to ensure that shareholders receive consistent dividend increases, and to provide an annual return to shareholders averaging 10 percent to 15 percent.
In the timberland segment of the business, Rayonier increases value, growth and cash flow through implementing cutting-edge silvicultural (forestry) practices, which include creating improved species, cloning, fertilization, and thinning for straighter, faster tree growth.
"Silvicultural practices generate a 1 percent to 2 percent increase per year in timber resources that can be removed, while still sustaining the forest," Nutter says. In addition, unlike most forest product companies, Rayonier sells its timber at auction to ensure it receives maximum value.
"From this timberland base, we sell a certain amount of timber each year for harvest by consumers such as pulp and paper companies and sawmills. We also sell timberland which has become more valuable for development, recreation, or conservation than for growing timber," Nutter says.
In addition to its timber activities, Rayonier manufactures high performance cellulose fibers which are used by customers in more than 50 countries in products such as textiles, cigarette filters, paints, impact-resistant plastics, film, digital display screens, pharmaceuticals, cosmetics and food products.
"Our performance fibers business is positioned in high-value niche markets which historically provide Rayonier with stable cash flow and earnings," Nutter says. Rayonier's two performance fiber mills in Georgia and Florida produce 720,000 tons per year of cellulose fiber. Supporting the mills is the Performance Fibers Research Center where the company's team of scientists uses state-of-the-art testing and pilot plant facilities to enhance customers' products and to process and develop new products for both existing and new markets.
For the performance fibers manufacturing segment, the company focuses on improving production efficiencies, incrementally increasing capacity and improving the product mix. "Through these continued improvements and by providing technically demanding, quality products, the company can consistently capture a larger share of the market and steadily increase cash flow and earnings," Pollack adds.
Rayonier recently formed a real estate subsidiary, TerraPointe™, to take advantage of the land development opportunities driven by the migration of baby boomers into the Southeast (where most of the company's U.S. timberland is located). Interest in higher-value properties has grown rapidly in recent years, providing the potential for Rayonier's real estate business to become an even more significant contributor to the company's earnings and cash flow.
"A large amount of our timberland holdings have much higher value for development, recreation or conservation than for growing timber," Nutter says. "This is especially true in the fast-
growing coastal counties along Interstate 95 between Savannah, Ga. and Daytona Beach, Fla., where we own 200,000 acres."
Analyzing Success
As a REIT with timber as its underlying asset, as opposed to buildings or hotels, Rayonier has flexibility to deal with economic downturns.
"If the economy is soft, we can delay cutting some trees. In a (non-timber) REIT, if space is not rented, the income is lost immediately and never recovered," Nutter says. But a timberland-holding REIT can delay immediate income and recover it when the trees are eventually cut in stronger economic times. "However, with us, the timber continues to grow, both in volume and value," Nutter adds.
According to industry analysts like Chip Dillon, managing director of North American paper and forest products for Citigroup Smith Barney, Rayonier was wise to convert to REIT status because more of the company's earnings and cash flow is reaching the investors' pockets on an after-tax basis. However, with stock prices recently hitting all-time highs, Smith Barney currently has a sell rating on Rayonier, based on its view of the stock's high valuation relative to underlying real estate values and the historically low intermediate-term interest rate environment.
"We estimate that Rayonier's underlying assets have a market value below the current $50 per share price and have also taken into account investors' frustration with the historically low yields on fixed-income securities and money market funds," Dillon says.
Although Dillon believes Rayonier is well run and managed responsibly, he says that the stock is now fully valued. "If we enter a period where interest rates continue to move toward historically normal levels, then all yielding investments are subject to downward pricing pressure," he says.
Another concern Dillon has is that, since timberland has been a very popular investment as of late, institutional investors such as pension funds have been generally paying ever higher multiples in an effort to diversify their portfolios. And since timber is a relatively illiquid asset, these funds will soon have to begin selling those investments. "This means that the underlying asset value could become adversely affected," Dillon says.
Other analysts, however, are rating Rayonier's stock a buy. Steve Chercover, research analyst for D.A. Davidson & Co., cites the creation of TerraPointe to unleash the potential of the company's real estate assets as a key reason for changing its rating on the company from neutral to buy.
"The effort to maximize the value of the company's 'real estate' potential is a natural extension of Rayonier's metamorphosis from a land-rich specialty pulp producer to a tax-efficient REIT," Chercover says.
Like many listed REITs, Rayonier's stock value per share has been appreciating at a substantial rate. The company's per share price has increased more than $10.00 per share since last summer.
What still makes the company an attractive investment going forward is that its timberland is concentrated in the rapidly growing Southeast and the company has outlined plans to unlock that value.
"The new revelation that the higher-and-better use land inventory totals 200,000 acres, with a minimum potential value of $7,000 per acre, indicates a net asset value of $67 per share," Chercover wrote in a recent report on Rayonier announcing his raised target price and upgraded rating.
Although he rates the stock as neutral, Mark Weintraub, forest and paper products analyst for Buckingham Research Group, recently raised the price target for Rayonier to $54 per share, up from $44, reflecting revised estimates of the value of Rayonier's timberland and real estate holdings. "The company's 12 percent total return to our target is not quite enough to justify a ratings upgrade, but the stock's 5 percent tax-advantaged yield makes the stock a good alternative for taxable investors," he says.
Because of its inherent longer-term focus, Pollack says, Rayonier is better able to make strategic plans and decisions that will enhance the company's value and shareholders' benefits. "It is our conservative outlook and approach that is more attractive to the long-term investor seeking more dependable earnings and cash flow returns," Pollack says.
To provide such steady increases of dividends over time and to grow the business, Rayonier acquires acreage while ensuring an adequate positive cash flow to maintain dividend payouts. For example, in 2003 Rayonier purchased 83,000 acres of timberland in Alabama. The transaction was largely financed through cash-on-hand, enabling the company to increase its asset base for
future dividend and earnings increases.
"It is the long-term value return of the asset that provides growing cash flow and earnings at a relatively moderate risk," Pollack adds.
Lee Nutter,
Chairman, president
and CEO of Rayonier |
Looking Forward
Rayonier's growth strategy is focused on increasing its underlying asset base and to further strengthen financial performance through asset acquisition to ultimately generate more cash for the shareholders.
"We plan to continue to acquire more timberland through cash or equity transactions and will continue to base our acquisition decisions on the company's longer-term view of the market," Nutter says.
What's in a Name?
In 1931, Rainier research scientists teamed up
with DuPont, the leading producer of rayon, and perfected the world's first pulp made from hemlock designed especially for the growing rayon industry. The company's name, Rayonier, comes from
the union of the word rayon and Mt. Rainier,
the 14,410-foot mountain visible from the
company's first mill site in Shelton, Wash. |
Becoming a REIT was part of the company's long-term strategy, and since REIT investors tend to value dividend yields rather than stock appreciation, converting to a tax-efficient REIT has enabled Rayonier to pass more cash to investors in the form of higher dividends. The company also believes that the mix of its businesses should also attract non-REIT investors interested in capital gains.
According to Korutz, Rayonier can improve its market position in the future by working to control and reduce manufacturing costs, improve efficiencies, and increase capital expenditures to improve the cost structure of the company.
"Low cost production is a key to the long-term success of any commodity manufacturer," he says. Korutz also advises that Rayonier continue to advance and focus on silviculture management and sustainable development to allow its underlying assets to
increase returns and value over time.
UPSIDE-DOWNSIDE
Samplings of what analysts are saying about Rayonier Inc.
D.A. Davidson & Co.
RATING: BUY (5/27/05)
12-Month Projected Target Price: $58.00
"The effort to maximize the value of the company's 'real estate' potential is a natural extension of Rayonier's metamorphosis from a land-rich specialty pulp producer to a tax-efficient REIT. The new revelation that the higher-and-better use land inventory totals 200,000 acres, with a minimum potential value of $7,000 per acre, indicates a net asset value of $67 per share."
Citigroup Smith Barney
RATING: SELL (5/25/05)
12-Month Projected Target Price: $47.00
"We rate Rayonier high risk but we could see our new $47 target prove to be too low (as well as our sell rating too conservative) should the U.S. dollar drop sharply, U.S. long-term interest rates stay at current levels (or fall further), or should the company's chemical cellulose operations see a greater-than-anticipated benefit from the closure of a competitor's mill. …We remain concerned that the market would demand a significantly higher dividend yield from Rayonier (causing the stock to drop) should either longer-term Treasury yields rise and/or investors demand a greater risk premium."
The Buckingham Research Group
RATING: NEUTRAL (5/10/05)
12-Month Projected Target Price: $54.00
"We view Rayonier as a good alternative for income-seeking, tax-paying investors. … Growth drivers include value unlocking through sale of high-value timberlands and potential increases in the dividend. Risks include a higher interest rate environment and a weaker housing market which could weigh down profits, reduce multiples (as alternative yield vehicles such as bonds become more attractive) and lower wood products pricing."
S&P Equity Research Services
RATING: HOLD (5/11/05)
12-Month Projected Target Price: $49.00
"With the shares trading near our 12-month target price (based on our dividend discount model and forward peer P/E analysis), we view the shares of this timber REIT as fairly valued. We see revenues and margins aided by higher prices for cellulose specialty fibers and steady demand for timber. We see lower real estate sales in 2005 and higher chemical and energy costs
in its performance fibers unit. Looking further out, we see the potential for a drop in timber prices and volumes, based on our expected 9.6 percent decline in housing starts in 2006." |
"To position itself for the future, Rayonier should look for
opportunities to raise liquidity through selling some of their underlying timberland assets in the current high price environment," Dillon says. The goal, of course, would be to enable the company to be in a better position to take advantage of what Citigroup Smith Barney expects will be better timberland prices in future years and buy more assets at reasonable prices.
As Rayonier continues to pursue strategic growth opportunities of timberland, enhance its market position as a provider of high-end performance fibers, optimize the use and allocation of cash flow, and use its status as a REIT to further unlock value for shareholders, the company will improve its long-term position and continue its steady march into the future.
Darlene Bremer is a regular contributor to Portfolio.
