Rayonier Inc. 10-Q Summary
Business context and reporting period
Rayonier Inc. is a timberland real estate investment trust operating through Rayonier, L.P. under an UPREIT structure. The filing covers the three and nine months ended September 30, 2022, with comparisons to the same 2021 periods. The company owned or leased approximately 2.7 million acres across the U.S. South, Pacific Northwest and New Zealand. Rayonier owned 97.9% of the Operating Partnership at quarter-end.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Sales | $195.3 million | $364.7 million | $663.7 million | $847.6 million |
| Operating income | $40.9 million | $123.3 million | $121.7 million | $236.2 million |
| Net income | $31.9 million | $110.5 million | $88.1 million | $189.0 million |
| Net income attributable to Rayonier Inc. | $20.6 million | $75.8 million | $74.0 million | $143.9 million |
| Diluted EPS | $0.14 | $0.53 | $0.50 | $1.03 |
| Adjusted EBITDA | $64.7 million | $114.6 million | $245.8 million | $279.4 million |
| Cash provided by operating activities | Not applicable | Not applicable | $209.9 million | $277.4 million |
| Cash Available for Distribution | Not applicable | Not applicable | $158.8 million | $203.9 million |
Q3 operating margin was approximately 20.9%, compared with 33.8% in the prior-year quarter. Nine-month operating margin was approximately 18.3%, compared with 27.9% in 2021. Net margin was approximately 16.3% in Q3 and 13.3% for the first nine months, versus approximately 30.3% and 22.3%, respectively, in the comparable 2021 periods.
At September 30, 2022, cash and cash equivalents totaled $261.8 million, including $260.9 million excluding Timber Funds. Total principal debt was $1.266 billion, and long-term debt, net of discounts and deferred financing costs, was $1.258 billion. Debt-to-capital was 40%, compared with 41% at December 31, 2021. The company reported $299.1 million of available borrowings under its revolving credit facility, net of letters of credit, and was in compliance with all debt covenants.
Total assets were $3.472 billion and shareholders’ equity was $1.825 billion at September 30, 2022. Cash, cash equivalents and restricted cash totaled $279.5 million. Nine-month capital expenditures were $48.2 million, real estate development investments were $10.9 million, and timberland acquisitions were $3.2 million.
Material changes versus the prior comparable period
- Sales declined 46% in Q3 and 22% year to date, largely because 2021 included Timber Funds activity, large timberland dispositions and higher real estate sales.
- Adjusted EBITDA declined 44% in Q3 and 12% year to date. The comparison was affected by the liquidation of the Timber Funds segment and the absence of 2021 disposition gains.
- Southern Timber results improved materially: Q3 sales increased 44% and year-to-date sales increased 42%, supported by higher volumes and stumpage prices.
- Pacific Northwest Timber sales increased 9% in Q3 and 11% year to date despite lower volumes, reflecting stronger delivered log pricing. A $1.1 million timber write-off related to a Washington fire reduced operating income.
- New Zealand Timber sales declined 4% in Q3 and 5% year to date. Lower export and domestic sawtimber prices, weaker Chinese demand, foreign exchange effects and higher freight costs reduced profitability.
- Real Estate sales declined to $12.4 million in Q3 and $81.0 million year to date, compared with $93.4 million and $178.4 million in 2021. The 2022 quarter included $16.0 million of equity income from a Bainbridge Island apartment complex sale, including an $11.5 million gain attributable to noncontrolling interests.
- Operating cash flow decreased $67.6 million year over year, while investing cash flow shifted from a $69.3 million inflow to a $55.9 million outflow because 2021 included significant disposition proceeds.
- Financing activities used $237.6 million in the first nine months, compared with a $47.7 million source in 2021, primarily reflecting debt repayment, dividends and reduced ATM equity proceeds.
Guidance, outlook, risks and unusual items
Management expects continued strong demand in Southern Timber and continued strong Pacific Northwest pricing, although cost pressures remain. New Zealand harvest volumes are expected to decline for the remainder of 2022 because export demand, particularly from China, remains constrained. Management expects some real estate transactions to move into early 2023 and expects higher interest rates to moderate demand for certain rural properties.
Expected 2022 capital expenditures were $78 million to $82 million, excluding strategic timberland acquisitions. Real estate development investments were expected to be $19 million to $21 million. Expected 2022 common-share dividends were approximately $165 million, based on a quarterly dividend of $0.285 per share. Management expected approximately $15 million of cash tax payments and no mandatory pension contributions.
On November 2, 2022, the company agreed to acquire approximately 172,400 acres of timberlands in Texas, Georgia, Alabama and Louisiana for approximately $474 million. The transactions were expected to close in the fourth quarter of 2022 and were expected to be funded with cash and incremental Farm Credit System borrowings.
Key risks include timber and real estate price volatility, housing and construction demand, Chinese and other export-market conditions, foreign exchange exposure, freight and logging costs, rising interest rates, the Russia-Ukraine conflict, climate and casualty events, environmental remediation and the continuing effects of COVID-19. Port Gamble environmental and natural resource damage liabilities totaled $10.9 million at September 30, 2022, with management noting that costs could increase as restoration scope develops.
The company used derivatives to hedge foreign exchange and interest-rate exposure. Interest-rate swaps covered $750 million of variable-rate U.S. debt, and foreign exchange contracts and options had notional amounts of $145 million and $66 million, respectively. Management stated that disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Whether the planned $474 million timberland acquisition closed on schedule and how it affected leverage and liquidity.
- The sustainability of Southern Timber pricing and volumes amid changing housing, pulp and lumber markets.
- The timing and profitability of deferred real estate transactions, particularly in a higher-rate environment.
- New Zealand export demand, Chinese construction activity, freight costs and NZ$/U.S. dollar movements.
- Cash Available for Distribution relative to dividends, partnership distributions, acquisitions and debt repayment.
- Debt maturities, variable-rate exposure, covenant headroom and the availability of the revolving credit facility.
- Potential changes to Port Gamble environmental and natural resource damage liabilities and other commitments.
- The effect of nonrecurring items, including the Bainbridge apartment sale, casualty write-off and the absence of Timber Funds and large-disposition activity, on recurring earnings.