2023-09-13 11:04:26 ET
Summary
- The housing market is showing signs of turning around, driven by the resilience of the American consumer and the housing shortage.
- Rayonier, a timber REIT, may benefit from the recovery in the homebuilding space as it provides timber for the housing market.
- But this doesn't necessarily make it a prime prospect for investors interested in this space.
Sometimes, market conditions can change rather quickly. That seems to be the case in the housing market at this time. As I have written about and other articles, such as this one here and this one here , the homebuilding space is showing some signs of finally turning around. Frankly, this took me by surprise because I expected any real turnaround to not occur until at least next year and only after interest rates start falling. But it seems as though the resilience of the American consumer, combined with the housing shortage that exists right now, is overpowering the negatives like inflationary pressures and high interest rates that make borrowing in order to buy a property prohibitive.
While this is all good for companies that focus on the homebuilding space, it also should prove good for any of the companies that derive a large portion of their revenue from catering to those same companies. One such enterprise is Rayonier ( RYN ), a REIT that provides timber, not only for the housing market, but also for any other purpose that requires wood. Earlier this year, I ended up rating the company a ‘sell’ because of market conditions and because of how expensive shares were relative to performance. Since then, the stock has appreciated 3.9%. But that's lower than the 5.9% seen by the S&P 500 over the same window of time. Even though the stock has not declined, I have now decided to change my rating from the ‘sell’ to a ‘hold’ because, based on the data available, changing market conditions should prove bullish for the company from a fundamental perspective.
Times are changing
If you look at the most recent financial performance achieved by Rayonier, you can understand why I have not been the most bullish person when it comes to the company. Consider, for instance, the most recent quarter. This is the second quarter of the 2023 fiscal year. According to management, revenue came in at $208.9 million. That's 15.2% lower than the $246.3 million the company generated one year earlier. As you can see in the image above, there are many working parts to this company. But the key takeaway is that revenue fell across most of the sales categories for the company. The most notable declines, for instance, came from New Zealand timber, trading activities, and rural real estate sales. It would be helpful to take each of these in turn.
As you can see in the image above, total volume associated with the company's operations in New Zealand declined, with overall timber sales dropping from 703,000 tons in the second quarter of last year to 673,000 tons the same time this year. While domestic pulpwood managed to climb in price on a per ton basis, both domestic sawtimber and export sawtimber reported significant declines in revenue per ton. Management attributed this drop to weaker demand coming from China as China's economy continues to slow down. When it comes to rural real estate, a drop in demand led to the number of acres sold by the company dropping from 4,633 in the second quarter of last year to 3,411 acres this year. The picture's made even worse by the fact that the gross price per acre plunged from $5,054 to $4,582. And lastly, sales associated with the company's trading activities dropped, largely because of a 35.4% decline in the number of tons sold.
This drop in revenue for the company ended up having a major negative impact on its bottom line. Operating cash flow, for instance, declined from $98.8 million in the second quarter of 2022 to $62.3 million the same time this year. Though if we adjust for changes in working capital, it would have falling more modestly from $76.2 million to $70.2 million. CAD, or cash available for distribution, dropped from $55 million to $32.7 million. Meanwhile, EBITDA for the company declined from $83 million to $69.2 million. Also, for reference, in the chart below, I decided to provide financial results covering the first half of this year relative to the same time last year. What's noteworthy here is that the overall trend for the first half of the year is the same as it was for the second quarter on its own. So the second quarter was not a one time blip. These results can be seen in the first chart below.
In terms of the bigger picture, there are two things that we should focus the most on. First, we should address the China issue. Because even though China accounts for a relatively small portion of the company's sales, it is still large enough to impact the firm in a negative way as we have seen so far this year. Short term, it wouldn't be surprising to see continued pain for Rayonier when it comes to its operations in China. However, as the images below illustrate, between 2022 and 2032, the timber supply deficit in China is expected to continue growing.
Ultimately, this should prove bullish. But it could take a bit of time for the market to recover. The other focus has to be the housing market here in the US. As you can see in the first image below, management has maintained that the population adjusted housing start data has shown a general uptrend when it comes to housing starts. A lot of this upside recently has been driven by multifamily properties. But even single-family properties are doing well. Of course, it would be hopeful to get some more recent data. According to some results that I pulled from the Federal Reserve, total new privately owned housing unit permits have leveled off after previously declining. And in the second image below, we have actually seen some strength in single family housing permits. In fact, we have been on a consistent uptrend since January of this year and, in July, the 930,000 permits that were authorized came in higher than the 918,000 reported the same month last year. This seems to support my argument that the market truly is recovering.
Although this bodes well for Rayonier and its shareholders, this does not mean that I am turning bullish on the company entirely. Using guidance provided by management, as well as my own estimates, I figured that the enterprise should generate CAD of around $172.5 million this year and adjusted operating cash flow of $266.6 million. Management's own guidance implies EBITDA of $287.5 million.
Using these figures, as well as official results from 2022, I was able to create the chart above. As you can see, shares do look more expensive on a forward basis. But this is logical when you consider that there should be some lag between when a recovery begins and when it actually shows up in the data for a company such as Rayonier. Relative to similar firms, I found that its position is mixed. On a price to operating cash flow basis, for instance, it ended up being the cheapest of the group. But it switched to becoming the most expensive when we use the EV to EBITDA approach.
Company | Price / Operating Cash Flow | EV / EBITDA |
Rayonier | 17.0 | 21.1 |
Weyerhaeuser ( WY ) | 17.6 | 17.8 |
PotlatchDeltic Corp ( PCH ) | 19.0 | 18.3 |
Takeaway
At this point in time, it looks to me as though the housing market is staging a nice recovery. We are definitely in the early stages of that recovery, as I have written elsewhere before. But sometimes, getting in early before the turnaround can be recognized by everyone can make the most sense. Because of how the stock is priced on an absolute basis, shares are a bit lofty for me. But for those who want a longer term catalyst that involves both China and the US, this might not be a bad prospect to consider. Having said that, one good alternative might be for investors to just buy homebuilders themselves since, as I have demonstrated before, they are far cheaper than Rayonier currently is.
For further details see:
Rayonier: Expect Financial Performance To Start Improving