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Rayonier Inc. is a US$3.8b mid-cap, real estate investment trust (REIT) based in Yulee, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I’ll take you through some of the things I look at when assessing RYN.
Funds from Operations (FFO) is a higher quality measure of RYN’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For RYN, its FFO of US$310m makes up 147% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether RYN has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take RYN to pay off its debt using its income from its main business activities, and gives us an insight into RYN’s ability to service its borrowings. With a ratio of 32%, the credit rating agency Standard & Poor would consider this as significant risk. This would take RYN 3.14 years to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.
Next, interest coverage ratio shows how many times RYN’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 9.67x, it’s safe to say RYN is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at RYN’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In RYN’s case its P/FFO is 12.31x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
As a REIT, Rayonier offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in RYN, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for RYN’s future growth? Take a look at our free research report of analyst consensus for RYN’s outlook.
- Valuation: What is RYN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RYN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.