Source: Mickael Delcey.
Rayonier (RYN 1.57%) is, ostensibly, a lumber real estate investment trust (REIT). Historically, however, the company has spent far more time talking about its fibers business than its timberland. Management is finally doing something about that now that it's breaking itself in two, but what does that mean for you?
The big timberland players
Lumber is a great business. You own land, maintain it reasonably well, and let nature do the work of growing trees. Every time you chop one down, you plant a couple more. The best part is that lumber is good for the environment — wood based products are biodegradable and trees pull carbon dioxide out of the air as they grow. There's a lot of good reasons to like timberland owners.
The big players in the tree space are Weyerhaeuser (WY 1.49%), Plum Creek Timber (PCL +0.00%), and Rayonier. Weyerhaeuser owns around seven million acres and manages another 14 million in Canada, making it the biggest player in the space. Plum Creek, meanwhile, owns nearly seven million acres of timberland.
Rayonier is a relative sapling, with just 2.6 million acres worth of tree lands. But that hasn't been the company's defining feature. What differentiates Rayonier from Weyerhaeuser and Plum Creek is its fibers business, which accounted for about 60% of the company's sales last year. In fact, it was this business that allowed Rayonier to hold up better than its competitors during the housing crash.
Are fibers fit for a REIT?
That's well and good, but it begs the question: is this company really even a REIT? These businesses are intended to own property that is rented to others and pass that rental income on to shareholders. Lumber REITs already stretch that boundary a little, since they sell wood harvested on their land. Rayonier's processing of those trees into fibers -- though a good business -- pushed the envelope even further.
Source: Sean Mack.
Fortunately, Rayonier has answered the question for us, by splitting the company up.
That's a good move on multiple fronts. First, it will help the market better value each component based on their individual strengths. The impact of the housing bust had, indeed, caused the the timberland segment to drag down solid performance on the fiber side. Second, it takes away the risk of the company losing its REIT status at a time when the government is trying to find new sources of tax revenue.
What do you get, post split?
Shareholders, however, have to ask what they are getting. The fibers business is a large and vital player; the number one or two participant in two of its business lines and in the top five in the third. In other words, fibers looks like a pretty good business. But the lumber side lacks the scale of its closest competitors with both Plum Creek and Weyerhaeuser owning about twice as much timberland.
That provides Rayonier with more growth opportunities, but it limits the scale it brings to the bargaining table. Both Weyerhaeuser and Plum Creek both consummated large land purchases in 2013. Those deals cost $2.7 billion and $1.1 billion, respectively, and each involved over half a million acres of land.
While buying half a million acres of timberland would be a huge addition to Rayonier's land portfolio on a percentage basis, it might not be able to compete on that level financially as a stand alone entity. That said, this break up could put Rayonier's timberland in play with Plum Creek and Weyerhaeuser the most likely suitors.
Make sure you own what you really want
If you bought Rayonier for its fiber business, you should probably consider selling the lumber REIT. And if you owned Rayonier for its trees, think strongly about selling the fiber company. However if you liked Rayonier because it owned both, it might be time to make a switch to Weyerhaeuser, which still operates in both lines.
And, if you like the idea of owning timberland, you should spend some time thinking about Rayonier's scale. Compare it against Plum Creek and Weyerhaeuser and you might decide that these much larger players are better positioned to prosper over the long haul.
