Rayonier Inc. 2018 Form 10-K Summary
Business context and reporting period
Rayonier is a pure-play timberland REIT with approximately 2.6 million owned, leased or managed acres in the U.S. South, U.S. Pacific Northwest and New Zealand. Its reportable segments are Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the fiscal year ended December 31, 2018; fourth-quarter information is included but the filing is an annual Form 10-K rather than a quarterly filing.
Rayonier owned or leased approximately 2.2 million acres directly and consolidated its 77% interest in the New Zealand subsidiary. The Company remained in compliance with applicable REIT tests and maintained investment-grade ratings of BBB- from S&P and Baa3 from Moody’s, both with stable outlooks.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $816.1 million | $819.6 million | Down 0.4% |
| Operating income | $170.1 million | $215.5 million | Down 21.1% |
| Net income attributable to Rayonier | $102.2 million | $148.8 million | Down 31.3% |
| Diluted EPS | $0.79 | $1.16 | Down $0.37 |
| Adjusted EBITDA | $337.7 million | $290.5 million | Up 16.2% |
| Cash provided by operating activities | $310.1 million | $256.3 million | Up 21.0% |
| Cash available for distribution | $240.1 million | $188.7 million | Up 27.2% |
| Cash dividends paid | $136.8 million | $127.1 million | Up 7.6% |
Operating margin was approximately 20.8%, compared with 26.3% in 2017. Net income attributable to Rayonier represented approximately 12.5% of sales, compared with 18.2% in 2017. Adjusted EBITDA margin was approximately 41.4%, compared with 35.4% in 2017.
- Segment sales: Southern Timber $170.0 million; Pacific Northwest Timber $109.8 million; New Zealand Timber $249.0 million; Real Estate $138.6 million; Trading $148.8 million.
- Segment Adjusted EBITDA: Southern Timber $102.8 million; Pacific Northwest Timber $40.9 million; New Zealand Timber $90.8 million; Real Estate $123.4 million; Trading $1.0 million; Corporate and other negative $21.1 million.
- Timber volumes: Total timber sales volume was 9.70 million tons, up from 9.10 million tons. Southern volume increased 8%, Pacific Northwest volume 5% and New Zealand volume 5%.
- Balance sheet: Cash and cash equivalents were $148.4 million; total debt was $975.0 million gross, or $972.6 million net of deferred financing costs; total assets were $2.78 billion; and shareholders’ equity was $1.65 billion.
- Leverage: Debt to capitalization was 37%, debt to Adjusted EBITDA was 2.9x, net debt to Adjusted EBITDA was 2.4x, and net debt to enterprise value was 19%.
- Capital allocation: The Company invested $62.3 million in capital expenditures, $9.5 million in real estate development and $57.6 million to acquire approximately 30,000 acres of timberland. Debt repayments totaled $54.4 million.
- Dividend: The annual dividend increased to $1.06 per share from $1.00 per share. Management expected approximately $140 million of 2019 dividend payments, assuming a quarterly dividend of $0.27 per share.
Material changes versus the prior comparable period
- Sales were broadly stable because stronger timber results were offset by the absence of 2017 Large Dispositions, which contributed $95.4 million of prior-year Real Estate sales and $67.0 million of operating income.
- Operating income and GAAP earnings declined primarily because 2017 included the Large Dispositions and because 2018 had higher depreciation, depletion and amortization, costs and income taxes.
- Underlying Adjusted EBITDA improved substantially, led by higher timber volumes and prices, improved Pacific Northwest performance, stronger New Zealand Timber results and higher Real Estate profitability excluding Large Dispositions.
- Southern Timber sales increased 18% and Adjusted EBITDA increased to $102.8 million, despite essentially flat stumpage pricing.
- Pacific Northwest operating income increased to $8.1 million from $1.1 million, reflecting higher prices and volumes. Conditions weakened materially in the fourth quarter because of tariffs on log exports to China.
- New Zealand Timber sales increased 12% and Adjusted EBITDA increased to $90.8 million, supported by higher volumes, pricing and non-timber/carbon-credit income, partly offset by foreign exchange and higher forest management costs.
- Real Estate sales declined 33% because no Large Dispositions were completed in 2018, but Adjusted EBITDA increased 29% to $123.4 million. The weighted average price per acre increased to $4,121 from $2,502.
- Trading sales declined 2% and operating income declined to $1.0 million as volumes fell 7%, partially offset by higher prices.
- Cash flow strengthened: operating cash flow increased by $53.8 million, while investing cash usage declined by $102.4 million because of lower timberland acquisition spending.
- Fourth-quarter 2018 sales were $166.1 million and net income attributable to Rayonier was $2.0 million, compared with $239.7 million and $64.2 million, respectively, in fourth-quarter 2017. The comparison was significantly affected by the prior-year Large Dispositions.
Guidance, outlook, risks and unusual items
- 2019 operating outlook: Southern Timber harvest volume of 6.2–6.3 million tons with modest pricing improvement; Pacific Northwest volume of 1.3–1.4 million tons with meaningfully lower average sawtimber prices; and New Zealand volume of 2.7–2.8 million tons with continued strong demand and pricing, offset by higher shipping and logging costs.
- Real Estate: Management expects more normalized and uneven transaction activity following outsized 2018 results, while continuing to focus on Wildlight and other higher-and-better-use properties.
- 2019 spending: Capital expenditures were forecast at $65–$69 million, real estate development investments at $8–$11 million, pension contributions at approximately $1.4 million and cash income taxes at approximately $3 million.
- Market risks: Demand and pricing are exposed to housing and construction cycles, pulp and paper markets, Chinese tariffs, global trade policy, foreign exchange rates, interest rates and competition.
- Operational risks: Weather, fire, insects, disease, drought, hurricanes, harvest access, timber growth estimates and the availability and cost of third-party logging and transportation services could reduce harvest volumes or margins. Rayonier generally does not insure its timber against these losses.
- Real Estate and regulatory risks: Entitlements, permits, infrastructure, water availability, zoning, wetlands, environmental restrictions and opposition or litigation may delay or reduce the value of development projects.
- REIT and tax risks: Loss of REIT status could materially increase taxes and reduce cash available for distribution. Dividend levels are not guaranteed and may fluctuate.
- Unusual items: The Company completed settlement of a derivative shareholder lawsuit in 2018; insurance carriers funded the $1.995 million settlement payment. No material adverse impact from other pending claims was expected. The Company also recorded a $2.2 million favorable non-operating impact from foreign currency contracts.
- Debt and liquidity: Debt maturities include $325 million of Senior Notes due in 2022 and $650 million of term loans due in 2024 and 2026. The Company had $189.8 million of available capacity under its revolving credit facility, net of letters of credit, and was in compliance with all debt covenants.
- Accounting changes: The Company adopted revenue recognition guidance, restricted-cash presentation guidance and pension-cost presentation guidance in 2018. It expected the 2019 lease standard adoption to add right-of-use assets and lease liabilities of less than 5% of total assets, with no material earnings impact expected.
Most important facts for an investor to verify
- Reconcile GAAP earnings declines with the improvement in Adjusted EBITDA and Cash Available for Distribution, particularly the effect of prior-year Large Dispositions.
- Verify the sustainability of 2019 timber pricing and volumes, especially the impact of China tariffs on Pacific Northwest exports.
- Review the quality, timing and profitability of Real Estate transactions, including Wildlight, rather than relying on unusually strong or weak individual years.
- Assess debt maturities, covenant headroom, interest-rate hedges and the availability of the revolving credit facility.
- Confirm continued REIT qualification and the tax treatment supporting the dividend.
- Evaluate exposure to weather, fire, environmental restrictions, permitting delays, contractor availability, foreign exchange and international trade policy.
- Review the assumptions supporting merchantable timber inventory, sustainable yield and depletion rates; management estimated that a 3% change in standing merchantable inventory would change 2018 depletion expense by approximately $3.7 million.
- Note that management and Ernst & Young concluded internal control over financial reporting was effective as of December 31, 2018, and Ernst & Young issued an unqualified audit opinion.