Business Context and Reporting Period
Rayonier Inc. is a timberland real estate investment trust operating through Rayonier, L.P. under an UPREIT structure. The Company owns or leases approximately 2.8 million acres across the U.S. South, Pacific Northwest and New Zealand. Operations include Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. This combined, unaudited Form 10-Q covers the three months ended March 31, 2023, with comparison to March 31, 2022.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $179.1 million | $222.0 million | Down 19% |
| Operating income | $10.6 million | $45.3 million | Down 77% |
| Net income | $7.4 million | $31.0 million | Down 76% |
| Net income attributable to Rayonier Inc. | $8.3 million | $29.3 million | Down 72% |
| Diluted EPS | $0.06 | $0.20 | Down $0.14 |
| Adjusted EBITDA | $54.7 million | $98.1 million | Down 44% |
| Cash provided by operating activities | $64.0 million | $49.7 million | Up $14.3 million |
| Cash available for distribution | $30.0 million | $64.5 million | Down 54% |
Operating margin was approximately 5.9% in Q1 2023 versus 20.4% in the prior-year quarter. Adjusted EBITDA margin was approximately 30.5% versus 44.2%. The quarter included a $9.1 million net recovery associated with a legal settlement and a $2.3 million New Zealand timber write-off related to a casualty event.
- Cash and cash equivalents were $98.8 million at March 31, 2023, compared with $114.3 million at December 31, 2022; cash, cash equivalents and restricted cash totaled $103.7 million.
- Total principal debt was $1.522 billion, with $1.514 billion reported net of discounts and financing costs. Debt to capitalization was 44%, and net debt to enterprise value was 22%.
- The Company had $296.2 million of available borrowings under its U.S. revolving credit facility, net of outstanding letters of credit, and NZ$20.0 million available under its New Zealand working capital facility.
- Management reported compliance with all applicable debt covenants. Actual trailing-twelve-month EBITDA to consolidated interest expense was 8.1x against a 2.5x minimum; covenant debt to covenant net worth plus debt was 45% against a 65% maximum.
- Investing cash uses were $32.2 million, including $18.7 million of capital expenditures, $8.7 million of timberland acquisitions and $7.8 million of real estate development investments. Financing cash uses were $43.1 million, including $42.1 million of common-share dividends.
Material Changes Versus the Prior Comparable Period
- Southern Timber sales declined 6% to $71.8 million and Adjusted EBITDA declined 12% to $42.8 million, primarily due to lower stumpage prices and higher depletion and other costs.
- Pacific Northwest Timber sales declined 26% to $34.4 million. The segment reported a $3.5 million operating loss versus $6.6 million of operating income in Q1 2022, reflecting lower volumes, weaker domestic sawtimber prices and higher costs.
- New Zealand Timber sales declined 14% to $44.1 million and reported a $0.7 million operating loss versus $5.4 million of operating income. Drivers included weaker Chinese demand, lower export prices, Cyclone Gabrielle-related production disruptions, unfavorable foreign exchange and the casualty-event write-off.
- Real Estate sales declined 52% to $16.3 million and Adjusted EBITDA declined to $6.6 million from $24.7 million. Acres sold declined to 2,087 from 8,734, although weighted-average price per acre increased to $6,200 from $3,815.
- Interest expense increased to $11.7 million from $8.3 million because of higher average debt and interest rates. Income tax expense decreased to $1.0 million from $5.5 million, reflecting the REIT structure and lower New Zealand-related taxable income.
- Operating cash flow increased despite lower earnings, primarily because of favorable working-capital changes. Cash available for distribution declined substantially after capital expenditures and working-capital adjustments.
- Accumulated other comprehensive income decreased to $20.9 million from $35.8 million, primarily due to cash-flow hedge losses and foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- Management described first-quarter conditions as challenging, citing weaker timber end-market demand, macroeconomic headwinds, softer pulp and lumber demand, weaker Chinese demand and reduced export-market competition.
- For 2023, capital expenditures are expected to be $85 million to $87 million, excluding strategic timberland acquisitions. Real estate development investments are expected to be $25 million to $28 million, net of community development bond reimbursements.
- Expected 2023 common-share dividends are approximately $169 million, assuming a quarterly dividend of $0.285 per share. Expected cash tax payments are $5 million to $7 million, primarily related to New Zealand.
- Management stated that existing cash, operating cash flow, the remaining ATM capacity, potential large dispositions and revolving credit facilities should be sufficient for expected requirements over the next 12 months and longer term.
- The $300 million ATM program had approximately $270.7 million of capacity remaining at March 31, 2023. Only nominal issuance occurred in Q1 2023.
- Key exposures include timber prices and volumes, housing and pulp-and-paper demand, real estate demand and mortgage rates, foreign exchange, variable interest rates, weather and natural disasters, logging and transportation costs, and environmental liabilities.
- The Company had $15.5 million of accrued Port Gamble environmental and natural-resource-damage liabilities at March 31, 2023. Management expects cleanup and restoration over one to two years, with monitoring continuing for 15 to 20 years, and noted that costs could increase as restoration scopes develop.
- The defined benefit pension plan was terminated effective February 28, 2023. Management expects approximately $7.6 million of cash contributions during the settlement process and anticipates non-cash pension settlement charges in 2023 and 2024; the settlement is expected to be completed by the end of Q1 2024.
- Foreign currency and interest-rate derivatives are used for hedging rather than speculation. A hypothetical one-percentage-point change in interest rates would affect annual interest expense by approximately $1.5 million based on the reported debt profile.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether weaker timber prices and demand persist, particularly in U.S. sawtimber and pulpwood markets and New Zealand export markets.
- The timing and profitability of future real estate transactions, including Wildlight and Heartwood, given the sharp year-over-year decline in acres sold.
- Progress toward the 2023 capital expenditure and real estate investment budgets and the effect on cash available for distribution.
- Debt refinancing and interest-rate exposure, including variable-rate maturities beginning in 2025 and the expiration of certain interest-rate swaps in 2024.
- The final amount and timing of pension settlement charges and required cash contributions.
- Potential changes to Port Gamble environmental and natural-resource-damage obligations and other contingencies.
- The impact of the $9.1 million legal-settlement recovery and the $2.3 million casualty-event write-off when evaluating recurring operating performance.
- The Company’s ability to maintain its dividend and meet total future cash commitments of approximately $2.2 billion, including debt, interest, leases, development, derivative and environmental obligations.