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Morningstar | Demographics Bode Well for Real Estate Development Opportunities in Rayonier's Southern Acreage

Rayonier's timberland holdings give the firm significant leverage to U.S. housing. We expect housing starts to rise over the next several years as favorable demographics and fading financial constraints catalyze stronger household formation. U.S. lumber consumption should surge accordingly. With lumber imports from Canada unlikely to return to historical norms due to the mountain pine beetle's devastation of British Columbian forests, U.S. lumber production will need to rise faster than U.S. lumber demand, supporting domestic log prices.Rayonier's 2.5 million-acre timberland portfolio comprises 2.2 million acres in the United States and roughly 290,000 acres in New Zealand. The bulk of Rayonier's U.S. timberland is in the South: 1.8 million acres. We see room for profit growth for this acreage from comparably weak prevailing levels, as rising U.S. lumber demand and Canadian supply shortfalls push prices moderately higher. The region's favorable demographics also bode well for real estate development opportunities, a far more lucrative business than logging. In particular, we see significant upside in holdings along the I-95 corridor stretching from Savannah, Georgia, to Daytona Beach, Florida.The balance of Rayonier's U.S. holdings are in Washington state and Oregon, a region home to the country's most productive and valuable timberland, and the only region that can serve Asian markets. Surging Chinese demand meant Pacific Northwest log prices were far quicker to recover in the wake of the financial crisis than Southern prices. Rayonier's New Zealand business is even more leveraged to China. Looking ahead, we expect the end of China's credit-fueled and investment-led growth model will weigh on demand and prices for exported logs. For the Pacific Northwest acreage, U.S. housing will reclaim its pre-eminent position of importance. Overharvesting in Washington state by the prior management team would have limited Rayonier's ability to respond to a housing recovery in the years to come, but recent deals have restocked Rayonier's regional merchantable inventory.