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Timber REITs: Rayonier (RYN) Looking to Capitalize on Manufacturing Expertise

On January 7, 2011, Rayonier (RYN) announced the potential conversion of the existing fluff pulp fiber line at its Jesup, Georgia facility to produce cellulose specialties pulps. The company expects to complete its analysis by mid-year, when the board will decide on the project. If approved, the converted line would begin production in 2013 and boost cellulose specialties capacity nearly 40%. The conversion would help the firm capitalize on the surging demand and tight supplies in the broader cellulose specialties market (see “The Touch, the Feel – of Rayon?” at wsj.com on January 6, 2011).

Rayonier’s Performance Fibers segment has a total annual capacity of ~ 740,000 metric tons (MT) for both cellulose specialty fibers and absorbent materials. Cellulose specialties fibers (dissolving pulp) are used in the manufacturing of high value products like filters, LCD screens, pharmaceuticals, food additives, paints, tire cords and sausage casings and thus command premium prices. Absorbent materials, also known as fluff fibers, are mainly used for diapers and hygiene products.

Rayonier has long focused on the higher valued cellulose specialty fibers.  In 2009, Rayonier manufactured 734,000 MT of performance fibers of which 63% were cellulose specialties and 37% were absorbent materials. Rayonier exports 61% of its cellulose specialty fibers production, mostly through multi-year agreements. The firm already extended contracts for over half its volume into 2013 and 2014.

Rayonier’s Jesup facility has three mills, two of which exclusively produce cellulose specialty fibers.  The third, which produces fluff fibers, is being considered for conversion.  During the nine months ending September 30, 2010, Rayonier had total operating income of $225.29 million of which $152.16 million (67.5%) came from the Performance Fibers segment. Strong earnings from this segment helped Rayonier weather the housing downturn more effectively than other timber REIT. During 2010, Rayonier shares appreciated 24.67% and the firm increased its dividend.

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