Rayonier Inc. 2017 Form 10-K Summary
Business context and reporting period
Rayonier is a pure-play timberland real estate investment trust with five reportable segments: Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. As of December 31, 2017, it owned, leased or managed approximately 2.6 million acres in the U.S. South, U.S. Pacific Northwest and New Zealand. The filing covers the fiscal year ended December 31, 2017; quarterly data identifies fourth-quarter 2017 sales of $239.7 million and net income attributable to Rayonier of $64.2 million.
Rayonier held a 77% controlling interest in its New Zealand joint venture and consolidated its results, with the remaining 23% reported as noncontrolling interest.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | $819.6 million | $815.9 million | Up 0.5% |
| Operating income | $215.5 million | $255.8 million | Down 15.8% |
| Net income attributable to Rayonier | $148.8 million | $212.0 million | Down 29.8% |
| Diluted EPS | $1.16 | $1.73 | Down $0.57 |
| Adjusted EBITDA | $290.5 million | $239.7 million | Up 21.2% |
| Cash provided by operating activities | $256.3 million | $203.8 million | Up $52.5 million |
| Cash and cash equivalents | $112.7 million | $85.9 million | Up $26.7 million |
| Total debt | $1,028.4 million | $1,065.5 million | Down $37.1 million |
Operating margin was approximately 26.3%, compared with 31.3% in 2016. Net income attributable to Rayonier margin was approximately 18.2%, compared with 26.0%. Adjusted EBITDA increased primarily because of stronger New Zealand Timber, Pacific Northwest Timber and Trading results, partly offset by lower Real Estate and Southern Timber contributions.
- Southern Timber sales were $144.5 million, operating income was $42.2 million and Adjusted EBITDA was $91.6 million. Harvest volume was 5.31 million tons; weighted-average stumpage prices declined 4% to $19.41 per ton.
- Pacific Northwest Timber sales were $91.9 million, operating income was $1.1 million and Adjusted EBITDA was $33.1 million. Higher sawtimber prices drove a return to operating profitability.
- New Zealand Timber sales were $247.6 million, operating income was $72.5 million and Adjusted EBITDA was $109.0 million. Higher prices, volume, land sales and favorable foreign exchange were key contributors.
- Real Estate sales were $183.0 million, including $95.4 million from Large Dispositions. Operating income was $116.0 million, including $67.0 million from those dispositions.
- Trading sales were $152.6 million, operating income was $4.6 million and log trading volume increased 24% to approximately 1.41 million tons.
Cash flow, capital allocation, debt and liquidity
- Operating cash flow was $256.3 million. Capital expenditures were $65.3 million, real estate development investments were $15.8 million and timberland acquisitions were $242.9 million.
- Cash Available for Distribution was $188.7 million, or $1.47 per outstanding share based on year-end shares, before considering other capital allocation requirements. The filing reports quarterly dividends of $0.25 per share and total 2017 dividends of $1.00 per share.
- Financing cash flow was a use of $6.9 million, reflecting $127.1 million of dividends and $36.8 million of net debt repayments, partly offset by $152.4 million of net proceeds from a 5.75 million-share equity offering.
- Debt to capital was 38%, debt to Adjusted EBITDA was 3.5x, net debt to Adjusted EBITDA was 3.2x and net debt to enterprise value was 18%.
- The company had $139.6 million of available borrowing capacity under its revolving credit facility, net of letters of credit. Credit ratings were BBB- from S&P and Baa3 from Moody’s, both with stable outlooks.
- Restricted cash was $59.7 million, primarily proceeds held for like-kind exchange transactions and escrow. The company stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Sales were broadly flat, but reported operating income and net income declined because 2016 included $207.3 million of Large Disposition sales and $143.9 million of related operating income, compared with $95.4 million and $67.0 million, respectively, in 2017.
- Underlying operating momentum improved in several timber businesses. New Zealand Timber Adjusted EBITDA rose $50.7 million, Pacific Northwest Timber rose $11.9 million and Trading rose $2.6 million; Southern Timber declined $1.3 million.
- New Zealand Timber benefited from a 14% increase in harvest volume and higher domestic and export sawtimber prices, especially from Chinese demand.
- The company acquired approximately 109,533 acres for $242.9 million, compared with approximately 110,727 acres for $366.5 million in 2016.
- Rayonier issued 5.75 million common shares for net proceeds of $152.4 million to fund part of the 2017 timberland acquisitions.
- The company repaid approximately $31.5 million of secured mortgage notes in August 2017 and reduced total debt despite acquisition spending.
- A retrospective classification change moved certain non-timber income and related costs into Sales and Cost of Sales; the change did not affect operating income, net income, balance sheets or cash flows.
- Retained earnings included a $14.4 million cumulative-effect reduction from early adoption of accounting guidance for intra-entity transfers of assets other than inventory.
Guidance, outlook, risks and unusual items
- For 2018, management expected Southern Timber harvests of 5.8 to 6.0 million tons, generally flat pricing, Pacific Northwest harvests of 1.3 to 1.4 million tons with higher sawtimber prices, and New Zealand harvests of 2.5 to 2.7 million tons with continued strong pricing.
- Management expected additional residential and commercial closings at the Wildlight mixed-use development. 2018 capital expenditures were forecast at $64 million to $69 million, real estate development investments at $7 million to $10 million, dividends at approximately $129 million and cash income taxes at approximately $2.3 million.
- Key risks include cyclical housing, construction, pulp and paper and real estate markets; timber price and volume volatility; hurricanes, fire, drought, insects and other natural events; reliance on third-party logging and transportation providers; foreign exchange, export-market and trade-policy exposure; and changes in interest rates.
- Real estate entitlement and development may be delayed or made more costly by permitting, zoning, water availability, environmental regulation, political opposition and litigation.
- The company does not insure its timber against fire and similar losses. Timber inventory, growth and sustainable-yield estimates are subject to modeling uncertainty.
- The company’s qualified pension plan was underfunded by approximately $29 million, with estimated 2018 contribution requirements of approximately $2.9 million.
- Shareholder securities litigation was settled in 2017 through a $73 million settlement fund funded by insurance carriers. A separate derivative action remained pending, and the company stated that the ultimate outcome and potential expenses could not be estimated.
- Rayonier reported effective internal controls and received unqualified audit opinions from Ernst & Young on both the financial statements and internal control over financial reporting.
Facts investors should verify
- Reconcile recurring timber and real estate performance separately from the $95.4 million of 2017 Large Disposition sales and related $67.0 million gain.
- Assess whether New Zealand pricing, Chinese export demand and favorable currency effects are sustainable.
- Review acquisition returns, depletion assumptions and the expected $13.5 million increase in 2018 depletion expense from 2017 acquisitions.
- Evaluate leverage, debt maturities, covenant headroom, floating-rate exposure and the availability of the revolving credit facility.
- Monitor Wildlight development spending, entitlement progress, closings and outstanding letters of credit and surety bonds.
- Review pension funding requirements, derivative and foreign exchange exposures, environmental contingencies and the unresolved derivative litigation.
- Consider the effects of REIT qualification, tax-law changes and the company’s ability to maintain its dividend while funding acquisitions and development.