Rayonier (RYN) and Weyerhaeuser (WY) recently spun-off businesses and that piked my interest to take another look at timber companies (spin-offs can frequently open up a margin-of-safety in both the parent and the child companies). WY has a vertically integrated structure (core timber business that feeds raw materials to both their wood products and Cellulose Fibers businesses). The real-estate portion was spun-off (“Reverse Morris Trust” transaction with TPH - Tri-Pointe Homes) as there was very little synergy with the rest of the business. RYN took a different route and became a pure timber REIT by spinning off its specialty cellulose fibers business (Rayonier Advanced Materials - RYAM).
Comparison of Financials:
Below is a look at the TTM numbers for Weyerhaeuser (new business- excludes real-estate), Rayonier (new business - excludes cellulose fiber business), and Plum Creek Timber (PCL):
- EV to revenue is 8.42 for PCL compared to 6.71 for new RYN and 2.97 for WY: ~65% undervaluation vs PCL and 55% undervaluation vs new RYN. The vast undervaluation is also due to the difference in businesses. WY’s wood products & cellulose businesses are lower-margin commodity businesses - 60% of EBITDA comes from this area. The timberland portion is comparable to PCL & RYN. WY Timberland revenue for 2013 was $2.14B.
- EV to EBITDA is 27.18 for PCL compared to 18.43 for new RYN and 13.3 for WY: ~51% undervaluation vs PCL and 28% undervaluation vs new RYN.
- Net Debt to EBITDA is 8.04 for PCL compared to below 2 for new RYN and 2.12 for WY: good opportunity for RYN & WY to leverage the balance sheet. The average REIT debt load is 8x EBITDA. WY is not yet a pure REIT and so the opportunity is more for RYN.
- Acreage is at around 8M for PCL vs 2.6M for new RYN and 6.2M for WY. Acreage is valued at $1,386 per acre for PCL, $1,807 for RYN, and $3,348 for WY. The higher valuation for RYN compared to PCL may be due to the fact that RYN has 200K acres in the coastal corridor covering Florida & Georgia which should earn a higher valuation compared to raw timberland. The valuation for WY is skewed because in addition to 6.2M acres owned they have long-term leases/licenses on an additional 14.6M acres. 13.8M acres is Canadian for which it has long-term renewable licenses and 0.7M acres is US with long-term lease.
WY Business Structure:
WY’s Cellulose Fibers business and the wood products businesses are both lower margin commodity businesses but they both contributed significantly to their EBITDA for 2013. 29% of sales are exports - so, a strong US dollar is detrimental to the business - the investment could act as a hedge against a drop in the US dollar, assuming they do not hedge against currency risks.
Out of the 2013 EBITDA of $1.561B, only $632M (~40%) comes from the timberland portion. The rest of the businesses are structured as Taxable REIT Subsidiaries (TRS). As such, there are limits to what can be received as dividends from the subsidiaries. So, funding WY dividends from the cash flow of these subsidiaries has limits. But, management says they plan to shoot to distribute 75% of Funds Available for Distribution (FAD).
Below is a look at WY's Funds Available for Distribution (FAD) for 2013 excluding real-estate:
A - 2013 EBITDA - $1.561B
B - Interest Expense - $343M ($4.891B long-term debt assumed at 7%)
C - Taxes - $50M (wild guess!)
Funds From Operations (FFO): $1.168B
CapEx: $283M
Adjusted Funds From Operations (AFFO): $885M
(AFFO is FFO minus CapEx) - Truer measurement of residual cash flow compared to FFO.
(AFFO is probably very close to WY’s definition of FAD and so we will go by that as an approximation)
Per share AFFO is $1.68 against dividend commitment of 88c for a payout ratio of ~52%. So, it looks like they have plenty of room to grow the dividend to their target range of ~75%.
Capex for 2014 is projected to be $390M and keeping everything else steady (to keep this analysis conservative) will still result in AFFO of ~$775M and AFFO will then be $1.48 and payout ratio of ~60% - still some room for dividend growth.
The analysis indicates there is room for very good dividend growth going forward.
Summary:
The comparative TTM financial analysis indicates significant undervaluation of WY compared to both PCL and RYN.
Also, it looks very probable that WY will be able to grow their dividend aggressively going forward.
