Rayonier Inc. 10-Q Summary
Business Context and Reporting Period
Rayonier Inc. is a timberland real estate investment trust structured as an UPREIT, with substantially all operations conducted through Rayonier, L.P. The company manages approximately 2.6 million core timberland acres across the U.S. South, U.S. Pacific Northwest and New Zealand, in addition to timber funds, real estate development and log trading activities. This unaudited combined Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $364.7 million | $198.9 million | $847.6 million | $653.6 million |
| Operating income | $123.3 million | $1.8 million | $236.2 million | $52.0 million |
| Net income | $110.5 million | $(9.5) million | $189.0 million | $17.4 million |
| Net income attributable to Rayonier Inc. | $75.8 million | $(0.8) million | $143.9 million | $26.8 million |
| Diluted EPS | $0.53 | $(0.01) | $1.03 | $0.20 |
| Adjusted EBITDA | $114.6 million | $67.2 million | $279.4 million | $192.9 million |
| Cash provided by operating activities | — | — | $277.4 million | $138.0 million |
Consolidated operating margin was approximately 33.8% in the third quarter and 27.9% for the first nine months, compared with approximately 0.9% and 8.0%, respectively, in the prior-year periods. The improvement primarily reflected higher timber pricing, real estate gains, timber fund transactions and the absence of 2020 merger and casualty-related charges.
- Third-quarter sales increased 83% year over year; nine-month sales increased 30%.
- Third-quarter sales growth was led by Timber Funds sales of $94.5 million and Real Estate sales of $93.4 million, including $87.1 million of Fund II timberland dispositions and $20.0 million of large dispositions, respectively.
- Timber segment pricing improved substantially, particularly New Zealand export sawtimber and Pacific Northwest sawtimber. Southern Timber volumes declined because of wet weather and trucking constraints.
- Cash, cash equivalents and restricted cash totaled $481.6 million at September 30, 2021, including $49.2 million restricted for Timber Fund distributions. Unrestricted cash excluding Timber Funds was $419.6 million.
- Total debt principal excluding Timber Funds was $1.376 billion, including $325.0 million of 3.75% senior notes due 2022, $450.0 million of 2.75% senior notes due 2031, $550.0 million of variable-rate term debt and $51.4 million of New Zealand shareholder loans.
- Debt to capitalization was 42%, compared with 39% at December 31, 2020; net debt to enterprise value was 15%, compared with 23% at year-end.
- The company had $299.1 million available under its $300 million revolving credit facility and was in compliance with all applicable debt covenants. Actual EBITDA-to-interest coverage was 11.6x versus a 2.5x minimum requirement.
- Capital expenditures were $47.5 million and timberland acquisitions were $51.9 million during the first nine months. Dividends paid on common shares totaled $114.3 million.
Material Changes Versus the Prior Comparable Period
- Timber pricing increased across the principal operating regions. New Zealand Timber sales rose 50% year to date and operating income rose to $48.0 million from $21.1 million.
- Pacific Northwest Timber returned to profitability, with nine-month operating income of $5.3 million versus a $9.5 million loss in 2020.
- Southern Timber operating income increased to $47.1 million from $31.4 million, despite lower harvest volumes.
- Real Estate operating income increased to $112.8 million from $61.1 million. However, real estate sales declined to $178.4 million from $197.4 million because the prior-year period included a $116.0 million large disposition, versus $56.0 million in 2021.
- Timber Funds operating income improved to $44.8 million from a $14.3 million loss, primarily because of the $87.1 million Fund II disposition, a $36.0 million related gain and a $3.7 million gain on the sale of Fund III and Fund IV interests and management rights.
- Corporate and other expense declined to $22.3 million from $37.3 million, principally because 2020 included $16.4 million of Pope Resources merger-related costs.
- The company issued $450 million of 2.75% senior notes due 2031, repaid $250 million of incremental term debt, prepaid $100 million of another term loan and repaid $45 million of NWFCS debt. It also issued $166.5 million of net equity proceeds under its ATM program during the first nine months.
- The company sold Fund III and Fund IV interests and management rights in July 2021. Fund II asset liquidation was substantially completed after quarter-end through additional sales on October 5 and November 1, 2021.
Guidance, Outlook, Risks and Unusual Items
- Southern Timber full-year harvest guidance was reduced to 5.7–5.8 million tons because of weather and trucking constraints; management expects improved pricing to largely offset lower volumes.
- Pacific Northwest Timber harvest guidance remained 1.7–1.8 million tons. Fourth-quarter log pricing is expected to be lower than in the third quarter but generally consistent with first-half pricing.
- New Zealand Timber harvest guidance was reduced to 2.5–2.6 million tons because production lost during the August COVID-19 shutdown is not expected to be fully recovered. Fourth-quarter export pricing is expected to decline because Chinese log inventories remain elevated.
- Following a strong third quarter, management expects relatively light real estate closings for the remainder of the year.
- Expected 2021 capital expenditures were $72–$75 million, real estate development investments were $13–$15 million, common-share dividends were approximately $153 million, and cash tax payments were approximately $8 million. No mandatory pension contribution was required.
- Key risks include timber price and volume volatility, housing and lumber market conditions, weather and wildfire exposure, trucking and ocean freight costs, COVID-19 disruptions, New Zealand/U.S. dollar exchange rates, interest rates, environmental remediation and real estate development execution.
- Port Gamble environmental and natural resource damage liabilities totaled $11.0 million at September 30, 2021. Cleanup is expected over two to three years, with monitoring continuing for an additional 10 to 15 years; management indicated the estimate could increase as restoration plans develop.
- Contractual cash obligations totaled approximately $1.861 billion, including debt, interest, leases, development commitments, environmental remediation and other commitments. The $325 million senior notes due 2022 are a significant near-term maturity, although management expects to use a future $125 million incremental term-loan advance to refinance part of this obligation.
- Pending lawsuits and claims arising in the ordinary course were not expected to have a material adverse effect, but the company retains risk under large-deductible insurance arrangements and outstanding guarantees.
Most Important Facts to Verify
- Whether the unusually strong 2021 earnings improvement is sustainable after excluding Fund II dispositions, large real estate dispositions, the Fund III and IV sale gain and other unusual items.
- The refinancing or repayment plan for the $325 million of senior notes due 2022 and the timing of any draw under the $200 million incremental term-loan facility.
- Actual fourth-quarter timber prices and volumes, particularly Southern Timber production and New Zealand export pricing.
- The effect of completing Fund II liquidation on future revenue, earnings, cash distributions and assets under management.
- Progress and potential cost changes associated with Port Gamble environmental and natural resource damage obligations.
- Real estate closing activity and development investment requirements after the strong third quarter.
- Changes in foreign exchange, freight, demurrage and other operating costs affecting New Zealand Timber and Trading results.