Rayonier Loves Fibers And Trees

By Eric Fox | October 20, 2011 AAA

Rayonier (NYSE:RYN) plans to make substantial investments in the Performance Fibers and Forest Resources segments as the company looks to boost growth through 2016.

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Rayonier expects these investments and others to increase adjusted EBITDA growth to an 8-10% compound annual growth rate (CAGR) from 2011 to 2016. The company grew adjusted EBITDA at a 6% CAGR from 2006 to 2011.

Rayonier's Story
Rayonier is organized as an umbrella partnership real estate investment trust (UPREIT), with the company's business operations split between two subsidiaries. The timberland business is conducted by Rayonier Forest Resources, L.P., and earnings here are not subject to federal taxes as long as the company meets the required asset, distribution and other tests. The other businesses are held under Rayonier TRS Holdings Inc., and are subject to corporate level tax.

Another company with this structure is Investors Real Estate Trust (Nasdaq:IRET), which has operated as an UPREIT since 1997.

Forest Resources
Rayonier owns or leases approximately 2.7 million acres of timberland, with most of these holdings in the United States. The company is also part of a joint venture that owns timberland in New Zealand.

Rayonier expects Chinese demand for softwood to generate increased volumes in this segment through 2015. The company is also dependent on a rebound in the housing sector in the United States to boost prices for its products. The Forest Resources group generated sales of $105.2 million and adjusted operating income of $22.9 million in the six months ending June 30, 2011.

The company has spent $433 million to purchase timberland over the last year, including a recent acquisition in the Gulf Coast area, and it expects these purchases to eventually add $40 million in adjusted EBITDA.

Real Estate
The Real Estate segment handles the sale and development of timberland from Rayonier's portfolio that has migrated to a higher and better use. This reclassification is usually caused by population growth and results in a much greater value for land. Rayonier has identified approximately 200,000 acres in the coastal areas of Florida and Georgia that is in the higher and better use category.

The Real Estate segment accounted for sales of $25.8 million and adjusted operating income of $12.4 million in the six months ending June 30, 2011.

Performance Fibers
The Performance Fibers segment reported sales of $484 million and adjusted operating income of $146.8 million in the same six month period. The Performance Fibers business is divided into two sub segments. The Cellulose Specialties business is the larger of the two, with $386.2 million in sales, while the Absorbent Materials business reported $97.7 million of sales within this period.

Rayonier is planning to invest $300 million to convert all of its Absorbent Materials capacity in this business over to Cellulose Specialties production. The project is expected to be complete by 2013, and the pro forma adjusted EBITDA contribution from this expansion is estimated to be $52 million.

Dividend
Since Rayonier is an UPREIT, the company must distribute a minimum percentage of its taxable income to maintain this status. The company currently has an annual dividend of $1.60 per share and has grown this payout at a compound annual rate of 28% since 2006. This gives the stock a current yield of approximately 4%.

Other REITs have similar yields to Rayonier: Plum Creek Timber (NYSE:PCL) has a current yield of 4.7%, while Weyerhaeuser (NYSE:WY) has a 3.5% yield.

The Bottom Line
Rayonier is focusing on the Forest Products and Performance Fibers business as it tries to accelerate growth through 2016. This growth plan will require some substantial investments by the company and, if successful, will help support higher distributions in future years. (For additional reading, see The Power Of Dividend Growth.)

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