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发帖数: 498 | 3 Rayonier's Mea Culpa Creates Long Opportunity
http://seekingalpha.com/article/2681755-rayoniers-mea-culpa-cre
Nov. 14, 2014 6:00 AM ET | 14 comments | About: Rayonier Inc. (RYN)
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Disclosure: The author is long RYN. (More...)
Summary
• On Monday Rayonier reported 3rd quarter results.
• It also announced five mea culpas.
• The takeaway for investors: who cares?
On Monday, along with announcing its 3rd quarter results, Rayonier (NYSE:RYN
) also announced:
1. That it had erred in its inventory as stated on the 2013 10-K.
2. That it had been harvesting at a rate higher than the sustainable rate
on its Pacific Northwest properties, and would henceforth lower the harvest
rate in the Pacific Northwest.
3. That it would reduce its dependence on non-strategic timberland sales
to generate cash.
4. That it would reduce its dividend from $.30 a quarter to $.25.
5. That because of the inventory error, it had under-reported its
depletion expenses for the 1st and 2nd quarters of 2014, and would take an
additional $2.6 million expense in the 3rd quarter to correct this.
For these grievous crimes, its market price dropped from $33.90 to $26.09
today, a 23% drop.
The inventory error on the 10-K amounted to a -10% overall error and was
caused by counting acres that, for either regulatory, environmental,
operational, or other reasons, could not be harvested. The error by region
is seen below.
Atlantic Region -8%
Gulf Coast Region -14%
Northwest Region -19%
New Zealand 0%
Total -10%
1. Withdrawing unavailable acres from an inventory is common practice in the
Northwest where it is mostly regulatory issues that make the timber
unavailable. It is less common in the Southeast where government regulations
rarely apply. Most likely, the 8% and 14% of acres in the Southeast are due
to areas of muck swamps or other areas inoperable most of the time. These
areas usually do not contain very much valuable timber anyway. My guess is
this is why Rayonier did not reduce its future harvest in these regions.
Forest inventories are statistical estimates. There is no one-size-fits-all
method on how to conduct a forest inventory, although most TIMOs and REITs
are going to a stand-level inventory done on a rolling five to ten year
cycle. In off-cycle years, growth and yield models are used to estimate
timber growth. These models also contain statistical errors. In my
experience, a good inventory could still be only accurate plus or minus 2.5%
to 5%. Even 10% is not out of the ordinary. Since the error Rayonier fest
up to was an acreage error, it is more likely to be accurate, but even so,
Washington regulatory rules are complex and convoluted and difficult to
accurately assess before a harvest. Again, I don't see much of an issue in
the Southeast.
Do I see this as a very bad thing? Not necessarily. Inventories are dynamic
things, always being updated and corrected for errors. As long as the error
does not affect you present or near-term operations, I see the above errors
as unfortunate but not fatal. If on the other hand, the Northwest error is
the sole cause of the reduced future harvest in Washington, then it is
material and should be taken seriously.
2. Harvesting timber at an unsustainable level is not necessarily a bad
thing. Let's look at some examples. If you own 100,000 acres of one-year old
timber, you certainly could not harvest at a sustainable rate. If you own
100,000 acres of 50-year old timber, would you cut it all in one year
because it was over mature? Would you harvest 1/35th each year and have your
last year's harvest be of 85-year old timber? This might work, but by 85
most timber is stagnating, suffering from insect and disease, and becoming
too large for mills to use.
In a perfect world, your 100,000 acres would be comprised of 2,857 acres in
each age class from one to 35. Few forests are comprised of perfectly even
age classes. If you own a forest skewed to older age classes, it only makes
sense to accelerate the harvest so the timber does not become over-mature.
The main question is when to slow the harvest down and work on getting to a
sustainable level. My guess is that Rayonier was surprised to find out they
had waited too long to slow down the accelerated harvest in Washington. An
inaccurate inventory could also have caused them to overestimate what could
be harvested. Rayonier was harvesting 1.8 million tons annually in
Washington. The new estimate of a sustainable harvest is 1.3 million tons
per year, a 27% drop. Again, this is also just an estimate. Is it bad? Yes,
but in my opinion, not fatal. My guess is that it was more of a surprise to
the new management.
3. Reducing reliance on non-strategic timberland sales is in my opinion a
positive. Timber REITs are in the business of owning and managing timberland
, not selling them. The term non-strategic timberland is a subjective
concept. Most of the time any acre is non-strategic if the company needs
cash. Selling timberland acres could be considered self liquidation if they
are not replaced by better or at least equal value timberlands. This is not
the same as selling real estate lands that are more valuable than
timberlands.
4. Reducing the dividend from $.30 to $.25 is certainly not a good thing.
However, with the recent spin-off of Performance Fibers, and the above
inventory and harvest questions, it is just prudent for management to back
off until they see how things shake out for the new company. Rayonier is not
the same company that it was a year ago and it needs to find a new balance.
In my opinion, a 17% drop in the dividend under the present circumstances,
although disappointing, is not fatal.
5. Depletion has always been a sore subject for me. In my opinion, depletion
, to a timber REIT, is totally inconsequential. It is a non-cash expense so
it does not affect any cash generating capability of the company. The bottom
line is that depletion is used to calculate net income for income tax
purposes. Since REITs do not pay income tax, who cares. So, I see the $2.6
million depletion expense as totally inconsequential.
I'll sum up my view on Rayonier's mea culpa as follows:
1. The inventory issue is unfortunate but not that important in the big
picture.
2. The harvest drop in Washington is unfortunate but not out of the
ordinary in the world of forest inventories and forests with older age
classes.
3. Reducing reliance on non-strategic timberland sales is a good thing.
4. Reducing the dividend is unfortunate but understandable.
5. Depletion, who cares.
Of all the things listed above, only numbers 4 and 5 were necessary from a
legal standpoint. Issues 1, 2, and 3 could have been handled as internal
management issues. It is only, in my opinion, because of Dave Nunes, the new
CEO's strong belief in transparency that they were reported. Had that not
been the case, I believe the 23% drop in unit price would not have been as
bad. I think transparency is good but sometimes too much is not.
Let's look at Rayonier's land holdings. Counting Rayonier's 65% interest in
300,000 acres in New Zealand, Rayonier owns about 2.6 million acres of land.
Using $1,800 per acre for southern timberlands, $3,000 per acre for
northwest timberlands, and $2,000 per acre for New Zealand lands, Rayonier's
timberlands are worth about $5 billion dollars, or about $39 per unit. Take
away the $605 million long-term debt and you get about $34 per unit.
So, if Rayonier shuts down today and sells itself on the open market, it
would be worth about $34 a unit. It is selling now for about $26. If I had a
little cash lying around, and was a long-term investor, I might be tempted
to pick up some RYN at $26 and get a 3.8% dividend to boot. | B**********g
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