Timberlands are an essential natural resource. They supply lumber for building products and other vital resources. They also help absorb greenhouse gas emissions. In the U.S., forest lands offset about 11% of the country's greenhouse gas emissions.
Because of their importance to the economy and ecosystem, forestlands must be under good management. One of the leading owners and managers of forestland is Rayonier (NYSE: RYN). Here's a closer look at this timberland-focused real estate company.
Rayonier is a timberland REIT. The company owned 2.7 million acres of forestland in the U.S. and New Zealand as of November 2020. Approximately 1.75 million acres were in the U.S. South (Texas, Oklahoma, Arkansas, Louisiana, Alabama, Georgia, South Carolina, and Florida). The company also owned 507,000 acres in the Pacific Northwest (Oregon and Washington) and 416,000 acres in New Zealand.
The REIT generates 100% of its earnings from managing its timberlands. About 70% of its EBITDA comes from its three forest resources segments (U.S. South, Pacific Northwest, and New Zealand) by harvesting and selling timber. The other 30% comes from real estate operations. These activities include selling:
- Timberlands to other operators and investors.
- Land for higher and better uses (HBU) like housing developments.
- Access to its properties for hunting, beekeeping, and extracting other natural resources like minerals and energy.
The company operates two real estate subsidiaries (Raydiant Places + Properties and Olympic Property Group) to maximize its land's HBU value.
Rayonier also manages three private-equity timber funds it assumed via the acquisition of Pope Resources in 2020. Rayonier has a weighted average coinvestment interest of 12% in the funds, which hold 141,000 acres of timberlands, giving it "look through" ownership of 17,000 acres. The funds generate some asset management fees while providing it with access to institutional capital to finance growth.
While Rayonier is one of four timberland REITs, it's the best pure play on timber. Its peers -- Weyerhaeuser (NYSE: WY), PotlatchDeltic (NASDAQ: PCH), and Catchmark Timber Trust (NYSE: CTT) -- only get 51% of their EBITDA from their timber segments on average versus 70% for Rayonier. Meanwhile, they generate a meaningful portion of their EBITDA (between 18% and 43%) from wood products manufacturing and other businesses like investment management, along with 13% to 27% from their real estate operations.
Rayonier used to be a more diversified forest products company. However, it spun off its cellulose fibers business, Rayonier Advanced Materials (NYSE: RYAM), in 2014 and sold its wood products business in 2013. Those exits enabled the company to focus all its attention on maximizing the value of its timberlands.
This concentration has paid dividends over the years. The company has generated more EBITDA in the U.S. South per ton sold than its peers, and it captured a sector-leading HBU value for the real estate acreage it's sold. That has enabled it to create more value from its land position than its peers. Meanwhile, the company has significant exposure to high-value export markets thanks to its operations in the Pacific Northwest and New Zealand.
Timber prices ebb and flow with supply and demand. That was the case in 2020 as demand soared due to strong housing and home renovation markets because of the COVID-19 outbreak. The company expected its full-year adjusted EBITDA to be modestly above the high end of its guidance range. Driving that view was strong demand and pricing for sawlogs, as well as strong demand for real estate. Those factors more than offset the effect of a hurricane in the U.S. South, wildfires in the Pacific Northwest, and COVID-related impacts in New Zealand.
One of the biggest recent developments for Rayonier was its acquisition of Pope Resources in 2020. The REIT paid $656 million for the timber partnership, including the assumption of debt. The deal added 125,000 acres of high-quality timberlands in the Pacific Northwest to Rayonier's portfolio. It also provided it with a private-equity timber fund business with $545 million of assets under management, including 141,000 acres of timberland in the Pacific Northwest. The transaction not only enhanced its timber portfolio but should also boost its earnings and cash flow.
The company also fine-tuned its portfolio in 2020 by selling 67,000 acres in Mississippi at the end of March for $116 million and 11,907 acres of nonstrategic timberland for $9.6 million during the first and second quarters. These sales helped fund the acquisition of Pope Resources.
Rayonier stock price
Rayonier's pure-play focus on maximizing the value of its timberlands has paid dividends for shareholders over the last several years.