Rayonier Inc. Form 10-Q Summary
Business context and reporting period
Rayonier Inc. is a timberland real estate investment trust operating through Rayonier, L.P. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The company managed approximately 2.7 million core timberland acres across the U.S. South, U.S. Pacific Northwest and New Zealand, plus three private timber funds acquired in the Pope Resources merger.
On May 8, 2020, Rayonier completed its acquisition of Pope Resources. The transaction added approximately 124,000 acres of Pacific Northwest timberlands, three timber funds representing approximately 141,000 acres, and additional real estate assets. The acquired results are included from the acquisition date.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $195.6 million | $184.8 million | $454.8 million | $376.3 million |
| Operating income | $11.7 million | $31.4 million | $50.2 million | $69.9 million |
| Net income | $0.5 million | $20.9 million | $26.9 million | $48.7 million |
| Net income attributable to Rayonier Inc. | $1.7 million | $18.8 million | $27.6 million | $43.5 million |
| Diluted EPS | $0.01 | $0.14 | $0.21 | $0.34 |
| Adjusted EBITDA | $78.6 million | $60.6 million | $125.7 million | $139.7 million |
| Cash provided by operating activities | Not separately reported | Not separately reported | $82.6 million | $117.0 million |
Operating margin declined to approximately 6.0% in the second quarter from 17.0% in the prior-year quarter and to approximately 11.0% year to date from 18.6%. The decline reflected lower timber pricing and volumes in New Zealand, merger-related costs, and higher depletion and overhead expenses. Adjusted EBITDA increased in the second quarter because of higher real estate activity and volume growth in the Pacific Northwest, but declined year to date due primarily to weaker New Zealand and Southern Timber results.
Real estate sales were $50.0 million in the second quarter and $168.6 million year to date, including a $116.0 million large disposition of approximately 67,000 Mississippi acres completed in March 2020. The disposition generated an approximately $28.7 million gain.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $94.8 million at June 30, 2020, including $7.0 million held by Timber Funds, versus $68.7 million at December 31, 2019.
- Six-month operating cash flow was $82.6 million, down $34.4 million year over year. Investing cash use was $170.8 million, driven principally by $231.1 million of net cash consideration for Pope Resources, partly offset by $115.7 million of large-disposition proceeds.
- Financing activities provided $114.9 million, including $320.0 million of debt issuance and $117.0 million of debt repayments. Dividends paid were $72.2 million.
- Total debt was $1.374 billion, including $1.313 billion excluding Timber Funds and $60.7 million of Timber Funds debt. Principal maturities include $25.0 million of Timber Funds debt in 2020 and $325.0 million of senior notes in 2022.
- The revolving credit facility was increased to $300 million and had $264.0 million of available borrowing capacity at June 30, 2020. The New Zealand subsidiary had NZ$20.0 million of additional available borrowing capacity.
- Debt-to-capital was 39%, compared with 41% at year-end 2019. Management reported compliance with all applicable debt covenants; consolidated EBITDA to interest expense was 9.8 times against a 2.5-times minimum.
- The quarterly dividend was $0.27 per share. Expected 2020 dividend payments were approximately $145 million, assuming no change in the dividend rate or share count.
Material changes versus the prior comparable period
- The Pope Resources acquisition added the Pacific Northwest timberlands, Timber Funds and real estate operations, and resulted in approximately $16.0 million of merger-related integration and restructuring costs in the first six months, including $13.5 million in the second quarter.
- Pacific Northwest Timber sales increased 41% in the second quarter, primarily from higher harvest volumes and acquired timberlands, but the segment remained loss-making with a $6.7 million operating loss.
- New Zealand Timber sales declined 33% in the second quarter and year to date, reflecting the COVID-19 shutdown, weaker export demand, lower log prices and unfavorable foreign exchange.
- Southern Timber sales were broadly stable in the second quarter, but operating income declined 24% because of lower stumpage prices and non-timber income. Year-to-date operating income declined 28%.
- Trading sales declined 31% in the second quarter and 36% year to date because of lower volumes and prices.
- Accumulated other comprehensive loss increased to $137.9 million from $31.2 million, primarily due to interest-rate hedge losses and foreign currency translation effects.
Guidance, outlook, risks and unusual items
- Management expected 2020 capital expenditures of $63 million to $66 million, excluding Timber Funds capital expenditures and strategic timberland acquisitions.
- Expected 2020 real estate development investments were $11 million to $13 million, including approximately $3.6 million of committed Wildlight and Richmond Hill spending.
- Management expected higher full-year Pacific Northwest and New Zealand harvest volumes, relatively flat Southern Timber pricing, improving Pacific Northwest sawtimber pricing, relatively flat Pacific Northwest pulpwood pricing, and continued demand for rural real estate.
- COVID-19 caused a New Zealand shutdown from late March through late April and reduced export demand, pricing and volumes. Future shutdowns, economic weakness, supply-chain disruption, customer liquidity issues and lower housing or timber demand remain material risks.
- The company recorded an $11.9 million environmental remediation liability related to Port Gamble, Washington. Cleanup and natural-resource-damage restoration were expected to occur over two to three years, with monitoring continuing for an additional 10 to 15 years; the liability could increase as the scope becomes clearer.
- Contractual cash obligations totaled approximately $1.839 billion, including debt, interest, leases, derivatives, environmental remediation and other commitments.
- Management reported no subsequent events requiring recognition or disclosure and stated that disclosure controls were effective as of June 30, 2020.
Most important facts for investors to verify
- Whether the preliminary purchase-price allocation for Pope Resources changes materially during the one-year measurement period.
- The pace and cost of merger integration, including whether additional restructuring charges will be incurred.
- Refinancing plans and terms for the $325 million of senior notes due in 2022 and the $25 million Timber Funds maturity in 2020.
- COVID-19 impacts on New Zealand operations, export markets, timber prices, housing demand and real estate sales.
- The potential increase in Port Gamble environmental and natural-resource-damage obligations beyond the recorded $11.9 million.
- Whether operating cash flow and cash available for distribution can support the expected dividend, required debt repayments, capital expenditures and development investments.
- The effect of substantial hedge losses, foreign exchange exposure and variable-rate debt on future earnings, cash flow and comprehensive income.