Rayonier Stays Steady (RYN)

Rayonier (RYN), a leading timber REIT that I've held for quite some time, today reminded me of why I like this company, and of the place that it holds in my portfolio.

I bought Rayonier about a year and a half ago, and intended for it to be a steady yielder and slow grower for my portfolio, helping to balance my more volatile investments. As I wrote in my annual checkup on the company back in January, I was a little bit conflicted on my RYN hold because it grew much faster than I expected ... but I certainly didn't want to sell it.

Rayonier has a few things going for them, and a few ways in which this company can significantly diversify a portfolio. First is timber land, of course, and that's the heart of the company -- strong stewardship of slow-growth assets (trees) that have proven over the years to appreciate faster than most hard assets, and with very little correlation to the overall market or to other commodities.

But while it's wise to hold timber in any diversified portfolio, Rayonier has a few other things going for them as well -- they own a lot of land in the Southeastern US that is, thanks to rapid growth in Georgia and Florida, no longer entirely rural. They've focused in recent years on converting some of this land to "Higher and Better Use" (HBU) -- which usually means selling it for development, especially in the coastal areas on the FL/GA border. They lowered their guidance over the winter a little bit because they decided to take a more active role in developing their land instead of selling it wholesale to commercial developers and homebuilders. I think that probably makes for a higher upside in the long run, but it means that realizing gains from this land takes a little more time.

And the other big part of their business, the part that caught my attention again today, is specialty cellulose fibers. Rayonier is one of a relatively small number of companies that produce fibers that are used in a myriad of unexpected commercial activities, and that are derived from softwoods. That includes acetate and other films, many of which are used in things like LCD displays. It includes high performance absorbers that are used in commercial applications and in disposable diapers. And it includes filters for cigarettes, which is where today's news comes from.

Rayonier has signed a long term deal with a subsidiary of a big Chinese tobacco company to supply fibers to them for the next five years at about $100 million per year. That is part of a focus they've had recently to make this fiber business more predictable into the future by signing long term contracts to support their production goals.

Overall, 80% of RYN's fiber production is contracted out for the next five years -- which means that their earnings should be stronger (that adds up to $2 billion in revenue over five years, pretty significant for a sub-$3 billion company) ... and that they should be more predictable, helping to even out swings in the price of timber.

Just what you like to see in a hedging investment, or in a REIT ... solid tax-efficient yield of about 5%, solid growth, dependable trajectory. And no surprises. On top of a 40% rise in the share price over the past 18 months, that sounds pretty nice.

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Earnings updates

It's a very busy earnings week for me, and as luck would have it I'll be traveling for a week or so and won't be able to post for a while. Here are my quick thoughts on the companies that have reported recently:

Taser (TASR) this morning finally finished filling in and sealing over the hole they had dug for themselves over the past year or so. They are now building sales again, and you can practically taste the market's relief. Lawsuits are becoming a non-issue since Taser is handily winning all of them or having them summarily dismissed, but that's not enough to boost the shares -- what they need is a return to significant sales growth. It seems to finally be starting, so even though they missed estimates slightly the shares are rallying a bit on 30% sales gains and hopes for a return to TASR's perch as a fast-growing company with a monopoly on its core products. I've been patient with Taser even though it's well underwater for me, and I plan to continue to patiently watch as it returns to sales growth, hopefully some earnings growth, and a recovery of the stock's valuation.

Keppel Land was a little bit light on earnings yesterday, which brought the shares down and depressed parent Keppel Corporation (KPELY) , which I own, a bit as well. I just bought these KepCorp shares at pretty much their recent highs, and I knew it was earnings season so I was taking a risk ... the real news for Keppel, however, will come with tomorrow's release of earnings for the parent company and any updates to their guidance about yard expansion, size of the order book, or other commentary on the great market they're seeing for their deepsea drilling rigs. Could move either way on these earnings tomorrow, but in the long run I expect the shares to do very well even though they're not in the bargain bin.

Rayonier (RYN) reported earlier this week, and a quick look at the numbers made shareholders very nervous. Nothing to worry that much about, earnings were down fairly dramatically due to the timing of some land sales (they're not selling as much wholesale land now, they're trying to move up the development chain and get more value, which is taking more time), and to some other seasonal weakness in the business. RYN's earnings have never been all that consistent, but in the long term I'm happy to have a strong position in my portfolio in Rayonier as it represents investments in land and timber which should remain a good diversifier for me.

Radyne Corporation (RADN), which I bought about a year ago as Radyne Comstream, reported continued earnings growth as well -- I have some nervousness about holding this one because it has grown so fast, but I have to remind myself of what a bargain it was when I initially picked up shares. The Xicom merger is clearly working very well -- it might have nibbled at their margins a little, but sales and earnings growth have been very good, they're getting paid (receivables are dropping), and their order book has grown dramatically so they have a very solid backlog to supply. I'll be watching RADN to see if there's any weakness or overvaluation that might make me want to lighten my holdings a little, but I don't see that yet -- and even after this big merger and a year of torrid growth this is still a tiny $300 million company with a lot of room to grow its presence in the satellite telecom business.

And Gol Linhas Aereas Inteligentes (GOL) released earnings a couple days ago, too -- they beat the estimates of the Street by a little bit, though it didn't really impact the share price since expectations had been steadily gaining. The big impact of Varig's problems probably won't show on their earnings for a quarter or two, assuming they continue to gain market share as I expect, but they are still showing good steady growth in income, cost cutting, route expansion (just opened up to Chile), and they're getting more attention from US investors. GOL continues to look like a great long term story to me, though I wouldn't be surprised to see them temporarily lose altitude at some point after the remarkable six months they've had.

Akamai(AKAM) , Formfactor(FORM) , and MEMC Electronic Materials (WFR) are all reporting today, and Intuitive Surgical (ISRG) tomorrow -- all very strong performers over the past year with gains of well over 100% (though not all have gained quite that much for me, I bought ISRG fairly high). These companies have pretty huge expectations built in, but it seems to me that their markets are booming and they should have no trouble meeting those high expectations, or at least coming close. All still look like long term winners to me, though I am a little concerned about valuation with Akamai and, to a lesser degree, Formfactor. Not enough to sell out yet, but I will be looking closely at their results to see if I'm still willing to be that their growth is going to continue at these rapid rates.

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Annual Checkup -- RYN

Makes sense to take a closer look at Rayonier (RYN -- free RT quote) today, since they just released some news that got a little attention and gave the shares a little haircut. Rayonier is a big timber and fiber company that owns big swaths of land primarily in the Southeast US and in New Zealand. It's also structured as a REIT, much like Plum Creek, the other big US Timber play, and the current dividend is about 4.5%. It's also instructive to note, though it doesn't affect my tax-deferred holdings, that this dividend generally comes through as a long term capital gain for tax purposes, not taxable income as with most REIT dividends. I wrote tongue in cheek about Rayonier's silly little 3-2 split a few months ago, but everything I wrote about Rayonier when I covered them in more detail in the Summer still holds true -- it's just that the price has increased pretty significantly since I opened my position in March at a split-adjusted $28.67. So has it gone up too fast, especially considering today's news that they're shaving a few cents off their 05 guidance two weeks before earnings come out? I don't think so. The reduced guidance was just because RYN decided to develop some residential and commercial real estate on its own instead of selling the land, which is probably good for better long term earnings, and Rayonier is a long term core holding for me that nicely diversifies my portfolio. I plan to keep it and watch the dividends pile up over a long, long time -- timber has historically provided stock-like gains with bond-like volatility, and RYN gives me that as well as two kickers to ratchet up returns: HBU and fiber. Rayonier sells timberland that has a "higher and better use" (HBU), most of which is in the coastal areas of northern Florida and southern Georgia, and their fiber business continues to experience high demand as their high-tech fibers expand from diapers into all kinds of other surprising areas. Not much to dislike in the long term, though as it's already a sizable part of my portfolio (third biggest holding after GOOG and BRKB) I am not interested in investing more in RYN at this point even if the price seems reasonable.

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Rayonier falls -- Timberrrr! (RYN)

Just kidding.

Though you couldn't blame a soft-headed guy for looking at Rayonier's stock price today and wondering why on earth it fell more than 30%. After all, this is a great stock with an excellent dividend and this company owns mills and thousands and thousands of acres of forest -- that stuff is getting more valuable, not less.

In case you didn't notice, the key thing to note is that Rayonier (RYN -- get free real time quote from ADVFN) split today.

Which brings me to the meat of my Rayonier rant:

Before I get too far, let me reiterate: I really like this business (just as much as when I did my initial writeup here -- or even more, now that they've settled their New Zealand property deal), and I'm not selling. I just think the split is silly.

Why on earth did Rayonier put the energy and money into splitting their stock? It was trading at about $53, and today it's down around $35. What corporate or other purpose could that possibly serve? I know, it's not a big deal -- but this transaction is not free, either ... I'd rather see my company focus on business than micromanage the stock price like this.

And at the same time, Deutsche Securities coincidentally decides to initiate coverage with a buy?

How on earth does doing a confusing and pointless 3-for-2 exchange make a company more valuable to the extent that you want to begin covering it?

Prez and CEO Lee Nutter's quote was that "The stock split recognizes the appreciation in value of Rayonier's common shares since our last split in June 2003 and should further improve liquidity and trading volume." (AP story here). Since when do you have to "recognize" an increased share price by bumping the price back down to where it began?

And I wasn't aware that Rayonier had any liquidity or trading volume problems. This isn't a stock that it's difficult to trade -- if you place a reasonable order, you'll get it filled pronto. 250,000 shares change hands every day, which is plenty for this $2 billion company that's in a not-particularly-volatile business (if a tree takes at least 20 years to grow, do you really think it'll help you to trade in and out of this company three times a day?).

Is a slight increase in daily trading volume -- let me go out on a limb here and suggest that the increase in volume will exactly track with the decrease in share price -- going to help anyone?

No.

If anything, for those few people who remain mired in brokerage accounts which require you to pay per number of shares, this will hurt -- you'll be trading more shares for the same position in the company, so you might pay a little more. Helps the brokerage a bit, I suppose, but why should management care?

I assume that this is just one of the tried-and-true ways to boost the share price. There are still plenty of traders who believe that the price of a stock really matters -- haven't you been paying attention? Berkshire Hathaway and Google, among many others, should have disabused any long-term investor of the value of a stock split. As long as you're not treading water below $5 or in the stratosphere at several hundred dollars or more, why would it make a difference?

What matters is the value of the company, and what percentage of the company you're buying (and how much you're willing to invest in the company). For that, it shouldnt' matter at all what the share price is. It doesn't matter if I'm buying 2 shares of BRK.B or 20 shares of GOOG or 200 shares of SUNW -- it's the same amount of money (okay, roughly ... I didn't do the math).

Now, I do see some point to this when you get to BRK and GOOG land -- it's true that small investors might have trouble buying a single share of BRK, even the $3,000 B shares. And for those enrolled in plans like Sharebuilder where you add just a hundred dollars a month or some such thing, it's hard to include GOOG and it's $300 price.

But do you really think Rayonier's CEO particularly cares about those people? I don't.

And even if you accept the argument of the market that you need to do a split now and then to keep your share price in line with what people prefer to pay for stocks, there is certainly no point in splitting your shares when they have just barely squeaked above $50. And splitting 3 for 2? Why make this confusing for everyone? If you need to split, wait until you're well above $100 and split in half.

OK, rant over.

What mostly bothers me is that this announcement of a split overshadowed Rayonier's much more significant announcement made on the same day -- they have increased their dividend by almost 14%. That is big news, and, to be fair, I expect that news was the prime driver behind the stocks 4% tick up back in mid-September.

Now, RYN is down again a bit from those heady days when they announced their stock split and increased dividend last month -- not a big deal. Keep an eye out for the property sales they're making along the SE Georgia/NE Florida coast -- that's where people want to live, and Rayonier owns the land and is willing to sell at the right price. And watch that dividend -- trees take a long time to grow, and tree products are as valuable and irreplaceable as ever, I expect this little income producer will continue to kick out nice dividends, even though I don't expect many more years like this of 20% capital gains like this on top of that.

So buy up some more Rayonier ... I might, one of these days. But not because it's at $35 instead of $53 -- that matters not a whit.

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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

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