Rayonier (NYSE:RYN) is a real estate investment trust (REIT) that owns and operates timberland real estate.

In this segment from Industry Focus: Financials, host Michael Douglass and Motley Fool contributor Matthew Frankel discuss Rayonier's business, the pros and cons of investing in timber real estate, and the potential growth catalysts that could drive the stock higher.

A full transcript follows the video.

This video was recorded on June 4, 2018.

Michael Douglass: As I noted earlier, this first REIT, which is a timber REIT, comes to us courtesy of a listener question on the Industry Focus Twitter. For those interested, that's @MFIndustryFocus. If you ever have questions, pop over to there, or you can send us an email at industryfocus@fool.com. We love getting listener questions. We will dedicate whole episodes to them. Please, if you ever have a stock or an idea or just something that you've been kicking around, we love talking to folks via email, Twitter, carrier pigeon, whatever else works. Just reach out.

This first timber REIT is called Rayonier, that's ticker RYN.

Matt Frankel: This is a business you generally would not think of as being a REIT, because first of all, you don't rent out the timberlands. You use them to generate a product. But the rules are a little bit broader than rental income. Real estate activities are producing most of their income, so they qualify for REIT status.

Rayonier is a big, big owner of timberland. They own 2.6 million acres of timberland, primarily in three places. Most of theirs is concentrated in the southeast United States. They actually own a lot of land right near where I am right now. In the Pacific Northwest is the other one, and New Zealand is about a third of their income, as well. They have a pretty big international presence, which I think is actually where this question came from, about their international real estate.

Douglass: Yes. The International Theme Week has been the gift that keeps on giving, in a really good way. We've had a lot of great listener questions and we're trying to address as many of them as we can on the show. And yeah, as you noted, that New Zealand exposure was what put this on this one listener's radar.

It's interesting to me. Timber REITs are interesting if you want to invest in home construction. Rayonier primarily traffics in pulpwood, which is used for paper, and sawtimber, which is used for home construction. So, as home construction ramps up -- and, as a general rule, that's probably expected to happen, mostly because demand has stayed fairly flat, whereas home starts are still well below what we've seen historically. They've been depressed, basically, since the Great Recession and the financial crisis. So, as those continue to ramp up, what we'd expect to see is better sawtimber prices, which could benefit timberland REITs.

The other reason you might be interested in timber REITs is that they tend to be relatively lowly correlated with the rest of the market. If you're looking for a hedge, which is basically an asset class that will function very differently from most other stocks, then timberland REITs might be interesting for you.

On the flip side of that, I will add a note of caution, which is that timber is largely a commodity. For me, I'm usually a little bit concerned when you have a company that's pretty much wholly reliant on a commodity. Here's a thought experiment for you, just to explain this a little bit more. All REITs are dependent on something else. That's just part of the deal. But if you're Starbucks, and you're trying to build a Starbucks at a particular street corner, chances are good there are only a few buildings that are going to work for you, that have vacancy and that have the right traffic site and line of sight to the road, and things like that. A handful of building owners, perhaps just one REIT or two, will have some pricing power there, because Starbucks really wants to be on this particular street corner, in this particular area, in this particular zip code.

For something that's really more of a commodity, like timber, you can work with a lot of different providers. So, I do worry that their pricing power is really fairly weak, and that means that they're going to be largely dependent on broader market trends. So, things might be good a particular year or a few particular years, but the business is going to really struggle to function well in more difficult years. And that's compounded, of course, by interest rates. At the end of the day, if the economy is doing really well, then you would expect more home construction and things like that, home prices to go up. When the economy is doing poorly, they're going to get hit on the pricing side and on the demand side. So, for me, that's a big concern, when I think about this whole class of companies.

Frankel: Definitely. In other words, it's really hard to identify their competitive advantage from a product standpoint. Their advantage right now is scale and geographic diversity, things like that. But at the same time, is one company's timber really better than the other's? Not really. So, like Michael said, this is definitely a commodities play.

But, on the flip side, it is usually a very consistent source of income. It's a commodity that is generally always in demand, to one degree or another. Rayonier produce a pretty big yield. They produce 10 million tons a year of usable timber, that's on a sustainable basis. So, this is a great income play, not great for growth. Not great because you're levered to one commodity. I wouldn't put all my money in oil futures, either.

Douglass: [laughs] Right.

Frankel: It's the same idea. It has its pluses and minuses, just like everything else, but I would definitely call this much more of a pure income play.

Douglass: Yes. The dividend is about a 2.8% yield. It's well-covered. That's looking at an FFO or a dividend-payouts-to-FFO ratio. Things look very good there. And I will say, one thing that I'm really pleased by with Rayonier, and something I think they've done a good job with is looking at what's called higher and better use, HBU. That's this idea that, you might have some timberland that could one day be developed into a residential neighborhood or a shopping mall. So, you sell that property to the developer who's looking to do that so that you can then go buy a lot more timberland somewhere else. Because of course, land that's going to be useful for residential development or a shopping mall is going to transact for more than timberland.

When I mentioned earlier that first way that REITs can acquire new properties, which is by selling old properties and getting new ones, I said, generally speaking, you can't grow that way, because it's more or less a one-to-one kind of thing. Well, that's not necessarily true with timberland, actually. If you're selling these HBU parcels for a really significant markup, then there's this opportunity to acquire a lot more timberland for less. That's certainly a plus.

As for me, I'm not really a big commodities guy, so I tend to stay away from investments like this, personally.

Frankel: Yeah, I would agree. The other two we're about to talk about are much more growth plays and much less dependent on any one thing. That's where I lean. Actually, the next one we're about to talk about is one that I own personally.

Douglass: One more time, before we head on to it, the stock we were just talking about: Rayonier, ticker symbol RYN.

Matthew Frankel has no position in any of the stocks mentioned. Michael Douglass owns shares of SBUX. The Motley Fool owns shares of and recommends SBUX and TWTR. The Motley Fool has a disclosure policy.