Rayonier Inc. 2016 Form 10-K Summary
Business context and reporting period
Rayonier is a pure-play timberland real estate investment trust with approximately 2.7 million acres owned, leased or managed in the U.S. South, Pacific Northwest and New Zealand. It operates through Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading segments. The filing covers the fiscal year ended December 31, 2016; quarterly data is provided, but this is an annual Form 10-K rather than a standalone fourth-quarter filing.
Rayonier increased its ownership of the New Zealand joint venture from 65% to 77% in March 2016 and continued to consolidate the joint venture. Approximately 36% of 2016 consolidated sales originated from non-U.S. operations.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Sales | $788.3 million | $544.9 million | +44.7% |
| Operating income | $255.8 million | $77.8 million | +228.9% |
| Net income attributable to Rayonier | $212.0 million | $46.2 million | +359.2% |
| Diluted EPS from continuing operations | $1.73 | $0.37 | +1.36 |
| Cash provided by operating activities | $203.8 million | $177.2 million | +$26.6 million |
| Adjusted EBITDA | $239.7 million | $208.0 million | +15.2% |
| Adjusted CAD | $112.8 million | $(13.6) million | +$126.4 million |
| Cash and cash equivalents | $85.9 million | $51.8 million | +$34.1 million |
| Total debt | $1,061.9 million | $830.6 million | +$231.3 million |
Reported operating margin was approximately 32.4%, net income attributable to Rayonier margin was approximately 26.9%, and Adjusted EBITDA margin was approximately 30.4%. These margins were substantially affected by large timberland dispositions.
- Real Estate sales were $299.4 million, including $207.3 million from Large Dispositions; related operating income was $202.4 million, including $143.9 million from those dispositions.
- Southern Timber sales declined 4% to $132.9 million, with volume down 3% to 5.32 million tons and weighted-average stumpage prices down 2% to $20.18 per ton. Adjusted EBITDA declined to $92.9 million from $101.0 million.
- Pacific Northwest Timber sales declined 2% to $75.2 million, while operating income fell to a $4.0 million loss from $6.9 million of income. Higher depletion rates were the principal adverse factor. Adjusted EBITDA was $21.2 million.
- New Zealand Timber sales increased 7% to $172.5 million, and operating income increased to $33.1 million from $2.8 million, driven by stronger domestic and export pricing, favorable foreign exchange and higher non-timber income.
- Trading sales increased 33% to $108.3 million, primarily from higher volumes and prices associated with stronger Chinese demand; operating income increased to $2.0 million.
Liquidity, debt and capital allocation
- Debt to capital was 41%, debt to Adjusted EBITDA was 4.4x, net debt to Adjusted EBITDA was 4.1x, and net debt to enterprise value was 23% at year-end.
- Debt increased primarily because of a new $300 million, 10-year incremental term loan used to fund the Menasha acquisition, repay approximately $105 million of revolver borrowings and support general corporate purposes.
- The company had $169.6 million of available capacity under its $200 million revolving credit facility, net of letters of credit. Credit ratings were investment grade at BBB- from S&P and Baa3 from Moody’s, both with stable outlooks.
- Operating cash flow was $203.8 million. Investing cash use was $283.2 million, including $366.5 million of timberland acquisitions and $58.7 million of capital expenditures. Financing activities provided $114.4 million.
- Restricted cash was $71.7 million, primarily proceeds from real estate sales held for like-kind exchanges or in escrow.
- The quarterly dividend remained $0.25 per share, or $1.00 per share for 2016. Management expected approximately $123 million of 2017 dividend payments assuming the quarterly rate remained unchanged.
- The Board had authorized a $100 million share repurchase program; $99.3 million remained available at December 31, 2016. No discretionary repurchases were made under the program during the fourth quarter.
Material changes versus the prior comparable period
- Sales and reported earnings increased sharply, primarily because 2016 included $207.3 million of Large Disposition sales and $143.9 million of related operating income, compared with no Large Disposition sales in 2015.
- Underlying operating performance was mixed: New Zealand Timber and Trading improved materially, while Southern Timber weakened and Pacific Northwest Timber moved to an operating loss.
- Rayonier acquired approximately 111,000 acres for $366.5 million, including approximately 61,000 acres in the Pacific Northwest through the Menasha transaction. It also sold approximately 55,000 Washington acres and announced a 62,000-acre Alabama and Mississippi disposition, with $42 million scheduled to close in January 2017.
- The New Zealand JV was recapitalized and refinanced, reducing the effective rate on NZ$235 million of debt from approximately 6.5% to 3.3% and increasing Rayonier’s ownership to 77%.
- The pension plan was frozen effective December 31, 2016, with an enhanced 401(k) match planned in lieu of future pension accruals. The qualified pension plan was underfunded by approximately $31 million, and estimated 2017 required contributions were approximately $0.3 million.
- The company reported that internal controls over financial reporting and disclosure controls were effective. The SEC Division of Enforcement notified the company in July 2016 that its investigation related to the prior restatement had concluded, although related shareholder litigation remained pending.
Guidance, outlook, risks and unusual items
For 2017, management expected Southern Timber harvest volumes of 5.3 to 5.5 million tons, Pacific Northwest harvest volumes of 1.3 to 1.4 million tons, and New Zealand harvest volumes of 2.4 to 2.5 million tons. Management expected continued pricing pressure in parts of the U.S. South, modest Pacific Northwest sawtimber improvement, and continued strong New Zealand domestic and export demand. The company expected initial sales from the Wildlight mixed-use development project in 2017.
2017 capital expenditures were forecast at $62 million to $67 million, excluding strategic acquisitions. Real estate development investments were expected to be $15 million to $20 million, including approximately $6 million for the Wildlight headquarters building.
- Key market risks include timber price cyclicality, housing and construction activity, Chinese and other export demand, Canadian lumber imports, foreign exchange rates and interest rates.
- Weather, fire, insects, disease, drought, hurricanes and access restrictions can reduce harvest volumes and timber values. The company generally does not insure its timber against these losses.
- Real estate returns depend on obtaining land-use entitlements, permits, infrastructure approvals and favorable market conditions. Development may be delayed or opposed by governmental agencies, environmental groups or other parties.
- The company depends on third-party logging and transportation providers, and shortages or higher costs could reduce margins and limit harvest activity.
- The company faces ongoing securities litigation and derivative-related claims arising from the 2014 internal review and restatement. The filing states that the likelihood and amount of any material loss could not be estimated.
- REIT qualification is essential to the company’s tax profile. Loss of REIT status could result in substantial corporate taxes and reduce cash available for dividends.
- Large Dispositions, foreign exchange effects, favorable New Zealand pricing, deferred land-sale payments of $8.7 million and other non-recurring or unusual items materially affected 2016 results.
Important facts for investors to verify
- Separate recurring operating performance from the $207.3 million of Large Disposition sales and $143.9 million of related operating income.
- Reconcile Adjusted EBITDA and Adjusted CAD to GAAP results and assess whether the non-GAAP exclusions are appropriate for valuation and dividend sustainability.
- Review debt maturities, covenant compliance, interest-rate swaps and the increase in leverage following the Menasha acquisition.
- Assess Southern Timber pricing and harvest trends, Pacific Northwest depletion rates, and the sustainability of New Zealand pricing and export demand.
- Monitor Wildlight development approvals, investment requirements and the timing and profitability of future land sales.
- Review the status and potential financial exposure of shareholder litigation and indemnification obligations related to the 2014 restatement.
- Confirm continued REIT compliance, pension funding requirements, restricted-cash availability and the company’s ability to maintain the $1.00 annual dividend.