Timberland real estate investment trust (REIT) Rayonier (NYSE:RYN) turned in fourth-quarter earnings yesterday of $13.5 million, or $0.26 per share. This compares with its fourth quarter of 2003 quite favorably, when the company had earnings of $0.04 per share.
The moment I saw this, I knew what was coming. Reuters (NASDAQ:RTRSY) turned out to be my huckleberry, with a headline that simply blared: "Rayonier profit up nearly sevenfold." One would think if this is the end-all, be-all of a timber company that its stock would simply go bananas. A seven-fold increase is huge, right?
Sure. It's huge and largely irrelevant. Last year's fourth quarter was the last one before Rayonier converted to a REIT, so the company had charges of $0.03 per share, along with another $0.06 per share that it chose to forgo in timber sales that were pushed into the first quarter of this year to take advantage of the tax status of REITs. Add that up and you're at $0.13 per quarter, which meant that this past quarter's earnings were about twice last year's. This fits in with annual revenues of about double last year's, once certain charges and adjustments are made. There are other adjustments as well -- they're just not worth getting into.
I and several of my colleagues have described the ins and outs of timber companies before. Rayonier's REIT structure puts it into the same category as Plum Creek Timber (NYSE:PCL). REITs are tax-advantaged at the corporate level, as long as they pay out a minimum percentage of their taxable income each year. This number differs from GAAP net income numbers, and it's more important.
But timber REITs are different. Think about it. A commercial property REIT like Weingarten (NYSE:WRI) has a revenue stream that, while it varies, is pretty well fixed. Timber REITs could turn in nearly any level of earnings they want. All it requires is that they sabotage future earnings by mowing down acres of trees before they've matured. Timber is known as "stored value"; the longer a management company goes without cutting the trees down, the larger and more valuable they become.
So, earnings at Rayonier are up seven times. Let's say they actually were, without any adjustments. Can you come up with an argument why this might be a really bad thing? Unlike the commercial REITs or other companies, timber REITs that show a great deal of income may be doing so at the expense of future years' income. I'm not saying that it's better to see no income, but there is a context here that straight "how'd we do this quarter?" coverage sorely lacks.
Most of what forestry companies do involves waiting. Sure, they manage the land, do some maintenance, and plant trees, but then the 17-or-so-year cycle kicks in, and they wait for harvest time.
Rayonier's operating results were a mixed bag. The company had higher earnings from timber sales because of higher prices, but lower operating revenues from its high-performance fibers division because of higher component costs, including, you guessed it, wood. Rayonier also sold more of its land for development, a revenue stream that it calls "higher and better use." Simply put, if the revenue per acre for selling the land for development exceeds its expected revenues from growing timber, the company will sell.
Look, I'm not saying that earnings are meaningless at timber companies. But some further context is needed. A "blowout quarter" might not necessarily be a good thing.
See also:
- Mathew Emmert's "REITs With a Twist"
- Bill Mann's "A Tale of Timber and Love"
Bill Mann owns shares of Rayonier. For income-generating securities, Bill suggests that you take a free trial of Mathew Emmert's Income Investor newsletter.
