Rayonier (RYN)
Bought March 10, 2004 at $43.79
Peter Lynch
wrote that you should never invest in something you can't draw with a crayon on a napkin. While I think that's a little simplified, I'm going to start each company-specific post from here on with a single sentence that summarizes why I like this company or investment:
Timber is historically the single best low-volatility and low-stock-correlation investment available to individual investors, and Rayonier makes money primarily from timber land ownership and management.
Rayonier is basically a timber and pulp company, but it's a bit more complicated than that brief description conveys. As one of the two major real estate investment trusts (REITs) that primarily holds timber land -- the other being Plum Creek Timber (PCL) -- it is one of the few ways to invest in this sector without owning a paper company or being a huge institutional investor who can buy your own chunk of the Pacific Northwest.
I bought Rayonier a few months after they converted to a REIT in 2004, largely as an investment in the long term value of timber and timber land as commodities. Rayonier and Plum Creek both looked attractive, but I liked the diversity of Rayonier's timber portfolio and businesses (more on that in a moment), and the fact that they were and are a smaller company with less attention from Wall Street. I also thought they had a stronger chance of raising their dividend moving forward, and because REITs are so often priced as simple income investments based on yield, that is always important. PCL is a good company, too, as far as I can tell, and it's certainly a larger company that has a broader portfolio of land holdings spread across the US (Rayonier is more focused on the Southeast, though they also own a lot of timber in Washington State and New Zealand).
There are several folks who have enumerated the value of investing in timber as a way to diversify holdings, since average returns are comparable to the stock market but with very little correlation to the market's movements (meaning that both the stock market and investments in a broad timber portfolio over a long term return about the same rate, but they don't move together so not all of your investments are going up or down at the same time). A couple of articles along those lines from investment advisers are available here and here
A lot of the recent discussion and renewed popularity of Timber as an investment class came after the stock market meltdown, not surprisingly, and I think one of the best articles about timber investing was written by Paul Sturm in SmartMoney about four years ago. In my opinion this article remains as informative and useful as it was then.
More recent writeups on Rayonier and other timber companies are available from the Fool, too, with coverage by Matthew Emmert, Bill Mann and Rich Smith.
The Rayonier and Plum Creek REITs are about as close as you can get to a pure play on the value of timber and timber land if you're a small individual investor like me -- there are several firms that set up timber partnerships or special investment packages for institutional investors, but that's for the cravat and cufflink set. And I'd just as soon stay away from the paper producers and other forest products companies like Boise Cascade or Weyerhauser -- for the most part, they're heavily in debt and reliant on specific sectors of the market, or have much more complex structures than we need, or just simply have different priorities and have stock market histories that don't particularly track to the value of their timberland holdings. More on Rayonier's non-timber business in a moment, but in general I'd rather focus on owning the land and the trees and managing the sales of timber than worry about whether Staples or OfficeMax is going to buy a big order of paper this month.
Since REITs must by law disburse the vast majority of their earnings to shareholders in the form of dividends, the dividends should in most cases be a good measure of the company's stability and ongoing performance -- Rayonier's dividend is at about 4.5% now, and Plum Creek's is at 4%. In my opinion that is indicative of the small differences in their holdings, and of the fact that Plum Creek is a bigger, older REIT that perhaps deserves a small premium.
And now some good news: Remember the warnings about different tax treatment for REITs? Usually, REIT dividend income is taxable at your income rate just like bond coupon payments or your paycheck -- REITs aren't included in the list of companies that benefit from the dividend tax cut to 15%.
But I said good news, right? Well, the good news is that for the most part, timber and land sales are classifiable as long term capital gains -- after all, what could be longer term than the 15-80 years that it takes a tree to reach logging maturity? -- so you'll usually find that a large portion, if not all, of the dividend from RYN is taxable as long term capital gains at, again, the friendly 15% rate. And last year, at least, about a third of the dividend was classified as return of capital, which is not taxed at all.
So unlike other REITs, this one's fine to hold in your taxable accounts and needn't be banished to the IRA.
At the top I said that Rayonier was a little different than PCL, and a little more than just a timber land bank -- how so?
Well, Rayonier has been around for more than 75 years, and they just recently converted to REIT status to maximize their after-tax performance for investors. During that time they have grown not only a huge portfolio of land, but a very strong business in high-end fiber production.
You see, Rayonier is really two companies -- one company owns and manages more than two million acres of land in the US and New Zealand (including selling parcels of land whenever it's deemed to be worth more for another purpose), and the other produces and markets what they call "performance fibers" -- ranging from the stuff that makes pampers so magically absorbent to acetate, filters and chemical ingredients and high-tech fibers that I can't pretend to understand. Sales are much higher for the fibers segment, at close to $600 million last year, but margins are much higher for timber, so timber and real estate brought in the lions share of earnings even though their sales were about half that of the fiber division.
So this diversity of businesses provides some limited diversification, bringing some growth and performance even when timber values are cyclically low.
And Rayonier is also very focused on "HBU", by which they mean "High and Better Use" as a property management concept. In terms that make sense to me, this means that if they can sell the land for less than they project earning through management and sales of the timber they could grow there, they will sell it and invest in more timber land that is less expensive and, presumably, in lower demand for other uses.
Why is that important for Rayonier, and how does that make them stand out? The way I see it, this might have a huge impact on the bottom line in the coming years -- Rayonier's holdings are focused primarily in the Southeastern United States, especially Georgia, Alabama and Florida. The area they are primarily targeting for High and Better Use -- which is something like 5% of their holdings right now -- is mostly in or near the high-growth coastal corridor of northern Florida and Southern Georgia, from Daytona to Savannah.
Timber holdings there have some competitive advantage in their proximity to end users or mills, but the price of developable land is so much higher than they paid, or could receive, for general timberland that even small marginal land sales can make a big impact on the bottom line. They are managing this very well, in my opinion, and according to their presentations this HBU property might make up as much as 25% of their holdings when you include more rural areas and the areas where better use might be conservation.
So this HBU aspect of Rayonier's strategy can provide a nice kicker to timber and fiber earnings and make continued dividend increases possible (divvy has gone up more than 10% this year), even when other aspects of the business might be stagnant. But it's just a small portion of the business, so not everything is riding on a continuation of the real estate boom in the Southeast.
This is a long term holding for me and it occupies a unique portion of my asset allocation pie that I don't see doing much trading in. While I fully expect Rayonier to fluctuate, I'm not watching it as closely as I do my more volatile stocks. I do not intend to sell unless there is a management problem, which for me generally means either that management embarks on a grand new strategy that I don't agree with, or they become justifiably tainted with fraud allegations, neither of which seems likely to me. Otherwise, I'm holding this as a way to diversify my portfolio with the commodities of timber and land (and a nice dividend), and hope that management can juice the returns a little bit above and beyond the performance of those commodities through growth in the fiber business and continued solid "HBU" land management.
If you'd like to see a different perspective, a guy at Kiplinger's thought RYN was overvalued and in trouble over a year (and 25%) ago.
technorati tags: timber, rayonier, ryn, pcl
Bought March 10, 2004 at $43.79
Peter Lynch
wrote that you should never invest in something you can't draw with a crayon on a napkin. While I think that's a little simplified, I'm going to start each company-specific post from here on with a single sentence that summarizes why I like this company or investment:Timber is historically the single best low-volatility and low-stock-correlation investment available to individual investors, and Rayonier makes money primarily from timber land ownership and management.
Rayonier is basically a timber and pulp company, but it's a bit more complicated than that brief description conveys. As one of the two major real estate investment trusts (REITs) that primarily holds timber land -- the other being Plum Creek Timber (PCL) -- it is one of the few ways to invest in this sector without owning a paper company or being a huge institutional investor who can buy your own chunk of the Pacific Northwest.
I bought Rayonier a few months after they converted to a REIT in 2004, largely as an investment in the long term value of timber and timber land as commodities. Rayonier and Plum Creek both looked attractive, but I liked the diversity of Rayonier's timber portfolio and businesses (more on that in a moment), and the fact that they were and are a smaller company with less attention from Wall Street. I also thought they had a stronger chance of raising their dividend moving forward, and because REITs are so often priced as simple income investments based on yield, that is always important. PCL is a good company, too, as far as I can tell, and it's certainly a larger company that has a broader portfolio of land holdings spread across the US (Rayonier is more focused on the Southeast, though they also own a lot of timber in Washington State and New Zealand).
There are several folks who have enumerated the value of investing in timber as a way to diversify holdings, since average returns are comparable to the stock market but with very little correlation to the market's movements (meaning that both the stock market and investments in a broad timber portfolio over a long term return about the same rate, but they don't move together so not all of your investments are going up or down at the same time). A couple of articles along those lines from investment advisers are available here and here
A lot of the recent discussion and renewed popularity of Timber as an investment class came after the stock market meltdown, not surprisingly, and I think one of the best articles about timber investing was written by Paul Sturm in SmartMoney about four years ago. In my opinion this article remains as informative and useful as it was then.
More recent writeups on Rayonier and other timber companies are available from the Fool, too, with coverage by Matthew Emmert, Bill Mann and Rich Smith.
The Rayonier and Plum Creek REITs are about as close as you can get to a pure play on the value of timber and timber land if you're a small individual investor like me -- there are several firms that set up timber partnerships or special investment packages for institutional investors, but that's for the cravat and cufflink set. And I'd just as soon stay away from the paper producers and other forest products companies like Boise Cascade or Weyerhauser -- for the most part, they're heavily in debt and reliant on specific sectors of the market, or have much more complex structures than we need, or just simply have different priorities and have stock market histories that don't particularly track to the value of their timberland holdings. More on Rayonier's non-timber business in a moment, but in general I'd rather focus on owning the land and the trees and managing the sales of timber than worry about whether Staples or OfficeMax is going to buy a big order of paper this month.
Since REITs must by law disburse the vast majority of their earnings to shareholders in the form of dividends, the dividends should in most cases be a good measure of the company's stability and ongoing performance -- Rayonier's dividend is at about 4.5% now, and Plum Creek's is at 4%. In my opinion that is indicative of the small differences in their holdings, and of the fact that Plum Creek is a bigger, older REIT that perhaps deserves a small premium.
And now some good news: Remember the warnings about different tax treatment for REITs? Usually, REIT dividend income is taxable at your income rate just like bond coupon payments or your paycheck -- REITs aren't included in the list of companies that benefit from the dividend tax cut to 15%.
But I said good news, right? Well, the good news is that for the most part, timber and land sales are classifiable as long term capital gains -- after all, what could be longer term than the 15-80 years that it takes a tree to reach logging maturity? -- so you'll usually find that a large portion, if not all, of the dividend from RYN is taxable as long term capital gains at, again, the friendly 15% rate. And last year, at least, about a third of the dividend was classified as return of capital, which is not taxed at all.
So unlike other REITs, this one's fine to hold in your taxable accounts and needn't be banished to the IRA.
At the top I said that Rayonier was a little different than PCL, and a little more than just a timber land bank -- how so?
Well, Rayonier has been around for more than 75 years, and they just recently converted to REIT status to maximize their after-tax performance for investors. During that time they have grown not only a huge portfolio of land, but a very strong business in high-end fiber production.
You see, Rayonier is really two companies -- one company owns and manages more than two million acres of land in the US and New Zealand (including selling parcels of land whenever it's deemed to be worth more for another purpose), and the other produces and markets what they call "performance fibers" -- ranging from the stuff that makes pampers so magically absorbent to acetate, filters and chemical ingredients and high-tech fibers that I can't pretend to understand. Sales are much higher for the fibers segment, at close to $600 million last year, but margins are much higher for timber, so timber and real estate brought in the lions share of earnings even though their sales were about half that of the fiber division.
So this diversity of businesses provides some limited diversification, bringing some growth and performance even when timber values are cyclically low.
Why is that important for Rayonier, and how does that make them stand out? The way I see it, this might have a huge impact on the bottom line in the coming years -- Rayonier's holdings are focused primarily in the Southeastern United States, especially Georgia, Alabama and Florida. The area they are primarily targeting for High and Better Use -- which is something like 5% of their holdings right now -- is mostly in or near the high-growth coastal corridor of northern Florida and Southern Georgia, from Daytona to Savannah.
Timber holdings there have some competitive advantage in their proximity to end users or mills, but the price of developable land is so much higher than they paid, or could receive, for general timberland that even small marginal land sales can make a big impact on the bottom line. They are managing this very well, in my opinion, and according to their presentations this HBU property might make up as much as 25% of their holdings when you include more rural areas and the areas where better use might be conservation.
So this HBU aspect of Rayonier's strategy can provide a nice kicker to timber and fiber earnings and make continued dividend increases possible (divvy has gone up more than 10% this year), even when other aspects of the business might be stagnant. But it's just a small portion of the business, so not everything is riding on a continuation of the real estate boom in the Southeast.
This is a long term holding for me and it occupies a unique portion of my asset allocation pie that I don't see doing much trading in. While I fully expect Rayonier to fluctuate, I'm not watching it as closely as I do my more volatile stocks. I do not intend to sell unless there is a management problem, which for me generally means either that management embarks on a grand new strategy that I don't agree with, or they become justifiably tainted with fraud allegations, neither of which seems likely to me. Otherwise, I'm holding this as a way to diversify my portfolio with the commodities of timber and land (and a nice dividend), and hope that management can juice the returns a little bit above and beyond the performance of those commodities through growth in the fiber business and continued solid "HBU" land management.
If you'd like to see a different perspective, a guy at Kiplinger's thought RYN was overvalued and in trouble over a year (and 25%) ago.
technorati tags: timber, rayonier, ryn, pcl
This article posted by One Guy @ 7/18/2005 10:20:00 AM 0 comments
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