A Time-Tested Business for Growing Long-Term Wealth

Timber has been one of the longest-running, safest ways to build wealth, with historical returns averaging around 12% to 14% per year...

Part of that increase comes straight from inflation. As prices in general go up, so does the price of lumber.

But the best growth comes from the growing trees themselves. Timber sells by the ton, so if you leave a tree for a year or two, it'll get bigger and you can sell it for even more.

Timberland isn't like an oil well... Cutting doesn't deplete the resource – you can just plant smaller trees, and they'll grow back.

If timber prices are low, you simply sit on your asset. You may not earn income that year, but as the trees grow and the underlying timberland increases in value, you're still building wealth.

Those benefits – like the extreme stability of this asset – accrue best to direct owners of timberland. But unless you plan on buying your own forest, most folks will be much better served by investing in timber through a real estate investment trust ("REIT").

That's what we're looking at today...

Rayonier (NYSE: RYN) started as a single pulp-and-paper mill in Shelton, Washington in 1926, originally working under the name Rainier, after the famous nearby mountain.

After some expansion, Rainier worked with DuPont to develop a wood fiber that could be used to make the fabric rayon. The pulp (the raw, wood-based material used to produce paper and other products) was named "rayonier," and the company changed its name soon after.

Today, Rayonier is a timberland REIT that owns 2.7 million acres of timber in the American South and Pacific Northwest, as well as New Zealand.

It cares for and harvests its timber forests at a "sustainable yield" of 11 million tons per year. That was worth $330 million in annual earnings before interest, taxes, depreciation, and amortization ("EBITDA") in 2021.

Rayonier is heavily focused on timberland management and harvesting. Of the $270 million in 2021 operating income, 62% came from harvesting and selling timber. The remaining 38% derived from real estate transactions. Rayonier's timber-REIT peers generate about 45% of EBITDA from timber, while dabbling in other areas like processing wood products into boards and pulp.

The company also earns higher profits per ton than its competitors. For the lumber linked to its Southern operations, Rayonier earns about $20 per ton, compared with less than $14 for industry giant Weyerhaeuser (WY).

Investments like REITs typically borrow to buy assets, rent them for less than the cost of capital, and pass on income to shareholders. It's important to watch just how much borrowing is going on. An over-leveraged balance sheet can mean trouble when the economy slows. Fortunately, that's not the case with Rayonier.

Rayonier has $1.2 billion in debt against $369 million in cash. (REITs typically don't hold much cash.) That's a reasonable leverage ratio of 3 times EBITDA.

The company has benefited amid soaring lumber demand with the red-hot housing and home-improvement markets.

What's more... as we noted above, inflation is great for timber and Rayonier. While lumber prices have come off their highs from last spring, they're still well above any level in the past five years.

Both consumer and producer inflation remain at the highest levels in 40 years. And with persistent inflation, Rayonier will continue to benefit by charging higher prices for its timber.

This can be seen in Rayonier's share performance...

Over the past 12 months, when inflation has really taken off, Rayonier's stock has risen about 25%. That's almost quadruple the 6.4% gain from the S&P 500 Index over the same period.

Rayonier shareholders also collect a lot of income...

As an REIT, Rayonier must pay the bulk of its income out as distributions to shareholders in return for paying no income tax. That currently amounts to a yield of 2.5% for investors. It has paid dividends since 1994 – even making payments throughout the pandemic when other companies halted them to preserve cash.

All told, inflation protection, a strong housing market, and a solid dividend payout all make Rayonier a strong investment today.

Sometimes investing is simple.