Surprise Surprise - REITs - Raynoier - RYN
You have to push yourself to look at all the “dark corners” of the market. I am not a fan of the REIT structure, but I forced myself to check them out. I was pleasantly surprised. I found two decent investment ideas that need more work, but deserve to be in my top 40.
Years ago I sat down with the CEO of a large hotel REIT. He described his ambitious plan to restructure the company. I asked him how he liked the REIT structure of forced dividend payouts. He said “it is a terrible structure, it makes everything more difficult, I curse it every day”. In effect what it really means, is you have to sell assets before you buy/build assets. The structure forces extreme discipline.
I was ready to hate everything in this sector, but then I tuned into Rayonier’s - RYN - $30 - early 2024 investor day. I was mesmerized.
Let’s try a new format for presenting ideas. I still will resist the effort to write long reports, but instead let’s hit the RYN highlights:
RYN has a high quality timber portfolio with over 70% is the US Southeast. It is more tied to paper/box production than homebuilding. Logs can also be exported out of Savannah.
RYN is a pure timber REIT, not tied to any of its own sawmills
RYN has a new CEO. He was a timber investment banker, but became CFO of RYN in 2014, and now takes over as CEO. I think he has a clear picture of how to build shareholder value.
RYN is tricky to value because 25% of EBITDA comes from land sales. RYN has built two very successful projects in Wildlight and Heartwood. I have heard the timber companies talk real estate development for 30+ years, but RYN has actually executed. Maybe these guys have the secret sauce?
There is real potential for solar and carbon capture business as the 2030 “net zero” targets approach.
The balance sheet is sound, divestments are in the pipeline, and you get paid a very safe 4% dividend to wait.
There is a great 3+ hour investor presentation that lays out the story. The new CFO wants to be the queen of disclosure.
Diamond Hill, Victory Sycamore, and T Rowe Price Mid-Cap Value are big owners
The negatives:
15% of timber assets are in New Zealand, with output going to China. If I were trying to add value, I would look to sell these assets.
15% of timber assets are in the Pacific Northwest where the real estate potential is not as clear, and the output is more tied to homebuilding.
The REIT structure is not ideal. It is hard to grow when your dividend payout is so high.
Box production has clear ties to economic cyclicality, but timber EBITDA has been steady with long-term contracts.
Never trust folk trying to sell you real estate, they alway tell you a happy story.
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I was also impressed by the Alexandria - ARE - $117 story. I heard these guys 10 years ago. It is a great story about building research labs for all the big pharma and biotech companies. This is not office space for accountants. It is hard to build a lab at home. ARE are some arrogant SOB’s, but they have the results to back it up. Again, the REIT structure is not ideal.
With a 4% yield, is this better than a utility? Enquiring minds want to know the answer. I am not sure yet.
Rayonier - RYN - $30 - 2 buys, 5 sells, 3.8% - timber
Alexandria Real Estate Equities - $117 - ARE - 9 buys, 4 sells, 4.4% - medical
Weyerhauser - WY - $31 - 7 buys, 5 sells, 3.0% - timber
PotlatchDeltic - PCH - $43 - 4 buys, 4 sells, 4.3% - timber
Cubesmart - CUBE - 3 buys, 11 sells, 4.2% - storage - maybe at $35
Empire State - ERST - $11 - 2 buys, 5 sells, 1.3% - NY office space - too scary for me, but interesting for risk takers
OUTFRONT Media - OUT - $16 - 3 buys, 4 sells, 7.6% - billboards - advertising on subways and buses, unexciting
Gladstone Land - LAND - $15 - 4 buys, 2 holds, 3.7% - farm land - too many sad stories about their 160 farms, great concept bad execution
Ryman Hospitality - RHP - $102 - 8 buys, 1 sell, 4.3% - resorts - well run, not chasing
Sun Communities - SUI - $125 - 9 buys, 5 sell, 3.0% - trailer parks - low end credit risk, needs more work
Stag Industrial - STAG -$40 - 4 buys, 9 sells, 3.6% - industrial, after the recession
VICI Properties - VICI - $31 - 20 buys, 3 sells - 5.3% - casinos - MGM too tricky a tenant.
If the great Gomer Pyle looked at REITs he would say “Surprise, Surprise”. If you ate too young to understand my cultural reference, get to work and pay your Social Security taxes to help us old folks.