At the 2012 Invest for Kids conference, Alex Klabin of Senator Investment Group pitched an idea he calls ‘Pulp Friction’. Klabin’s pick, Rayonier Inc. (NYSE:RYN), is a timber REIT with performance fiber operations. Klabin says about Rayonier, "it has sex appeal...with the fiber segment having high margins and high barriers to entry and the REIT segment being like an annuity and inflation hedge."
For 3Q, the Rayonier posted EPS of $0.62, compared to $0.71 for the same quarter last year. Sales are expected to be up 5-7% in 2012, and up another 10% in 2013. Driving this increase will be elevated prices for cellulose products that are used in cigarette filters and a recovering housing market, as well as increased demand from China for lumber. Rayonier pays a solid timber REIT dividend that yields 3.6%, compared to the average dividend of the other three REITs' average yield of 3.3%.
Klabin's real catalyst for generating serious returns for Rayonier investors is the possible spin off of Rayonier's fiber business. The fiber business is generally a high margin-high barrier to entry industry and Klabin expects Rayonier’s fiber segment to grow EBITDA by 50% over the next couple years, from $400 million to $650 million. Driving a potential spinoff of its fiber business will be a ramp up in earnings in fiber segment. Consequently, Rayonier may blow its REIT test in a couple years, which is a test that REITs are required to pass to retain REIT status, and in its basic form states that only a certain portion of a REITs earnings can be derived from non-REIT operations.