Rayonier Beats Despite Lower Profits

JACKSONVILLE, Fla. ( TheStreet) -- Rayonier ( RYN) got a boost in Tuesday trading after the real estate investment trust topped Wall Street's earnings expectations despite a decline in the line item.

Rayonier, which manages timberland and the production and sales of forest products and specialty cellulose fibers and fluff pulp, said its fourth quarter net income came in at $59 million, or 72 cents per share, down from year-earlier earnings of $98 million, or $1.21 per share.

Excluding one-time items related to the sale of a portion of its interest in a New Zealand joint venture and eligibility for fuel-related tax credits, Rayonier's pro forma net income in the recent quarter would have been $35 million, or 43 cents per share.

Results beat analysts' consensus call for earnings of $31.6 million, or 39 cents per share. Analysts typically exclude such extraordinary items when forecasting estimates.

"In timber, we aligned our harvest to take advantage of stronger export and stumpage markets while holding off volume in less attractive markets, allowing our inventory value to build," said Rayonier CEO Lee M. Thomas. "In performance fibers, we had another record year driven by strong demand for our high purity cellulose specialties products and improved pricing for absorbent materials."

Looking forward, Thomas said he expects timber sales to improve in 2011 "reflecting continued export demand for sawlogs from our Washington property and strong pulpwood demand in the Southeast."

Rayonier forecast full-year earnings-per-share in a range of $2.50 to $2.70, higher than Wall Street's consensus for 2011 EPS of $2.46.

Rayonier's fourth-quarter timber sales fell $1 million year-over-year to $34 million, though operating income in the business segment was flat at $7 million.

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Sales in the REIT's real estate segment fell $6 million to $5 million, while operating income in the unit declined by $4 million to $1 million.

Performance fiber sales fell $8 million to $233 million though the business' operating income rose $4 million to $62 million. The improvement in operating income reflects a favorable shift in cellulose specialties sales mix offset in part by an increase in wood, chemical and transportation costs, Rayonier said.

Rayonier increased its quarterly dividend by 8% to 54 cents per share in the recent quarter. The higher dividend was paid on Dec. 31.

Earlier this month, analysts from Credit Suisse downgraded Rayonier to underperform, from neutral, citing valuation.

The analysts said Rayonier was a well-run company that has managed its business well but had become overvalued as speculative investors ran up rayon prices.

Rayonier was recently listed on TheStreet's list of 10 Top Buy-Rated Real Estate Stocks for 2011.

The list was based on equity research firm Keefe, Bruyette & Woods' best buy-rated REIT picks for this year.

KBW set a price target of $57 for Jacksonville, Fla.-based Rayonier, an international forest products company which is engaged in activities associated with timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp.

Timber REIT peer Plum Creek Timber ( PCL) was recently upgraded to neutral, from underperform, by analysts at Zacks Investment Research who had a $42 price target on the stock.

Analyst Meena Goyal noted that "we are changing our long-term recommendation for Plum Creek from Underperform to Neutral as we anticipate it to perform in line with the broader market."

Goyal said that Plum Creek's diversified timber and land base allow it to benefit from large economies of scale. Plum Creek is the largest publicly traded timber REIT.

"In addition, the upsurge in demographic trends driving housing markets and demand for real estate properties across the country provides a strong economic backdrop for the company to demonstrate solid financial performance in the future," the analyst added. "However, the cyclical nature of the business, cutthroat competition, and strict environment policies undermines its growth potential."

Rayonier has a market cap of around $4.5 billion, and a current dividend yield of around 3.8%.

Timber REITs outperformed both the overall equity REIT market and the S&P 500 in 2010, though Rayonier outpaced the group with a total return of 29.8%. Timber peer Potlatch ( PCH) returned 6.7% while Plum Creek returned just 2.3%.

KBW noted that timber REITs limited harvest volumes as much as 30% below sustainable outputs in 2010 as a means of maximizing trees rather than selling into a depressed market. As such, the research firm expects 25% growth in EBITDA for the year despite profits remaining 50% below peak levels in 2005 and 2006.

KBW analyst Sheila McGrath said November housing starts -- which ticked up a better-than-expected 3.9% to a seasonally adjusted annual rate of 555,000 yet remain 5.8% below year-earlier rates -- need to reach 1 million "before we see a meaningful increase in sawlog pricing." Housing starts fell 4.3% in December.

With the supply of unsold new-home inventories near 10-months, she doesn't expect a housing recovery until 2012, meaning 2011 estimates are still too high and are likely to decline, and that dividend payments are likely to remain under pressure.

In early December analysts from Stifel Nicolaus initiated coverage of the forestry products and timberland REIT with a buy rating and $60 price target. Wells Fargo initiated coverage of Rayonier in the week prior, also giving it a buy rating and $60 price target.

On Jan. 4, 2011 Rayonier director Paul Kirk sold 1,000 company shares at $55.62 per share for $55,620.

-- Written by Miriam Marcus Reimer in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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