Rayonier Inc. 2023 Q2 Form 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust structured as an UPREIT. The company owns or leases approximately 2.8 million acres across the U.S. South, Pacific Northwest and New Zealand and operates through five segments: Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the three and six months ended June 30, 2023, with comparative periods ended June 30, 2022. Rayonier owned 98.4% of Rayonier, L.P. at quarter-end.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $208.9 million | $246.3 million | $387.9 million | $468.4 million |
| Operating income | $20.1 million | $35.5 million | $30.7 million | $80.8 million |
| Net income | $19.1 million | $25.3 million | $26.5 million | $56.3 million |
| Net income attributable to Rayonier Inc. | $19.0 million | $24.1 million | $27.3 million | $53.4 million |
| Diluted EPS | $0.13 | $0.16 | $0.18 | $0.36 |
| Adjusted EBITDA | $69.2 million | $83.0 million | $124.0 million | $181.1 million |
| Cash available for distribution | Not provided for quarter | Not provided for quarter | $62.7 million | $119.5 million |
Q2 operating margin was approximately 9.6%, compared with 14.4% in the prior-year quarter. Six-month operating margin was approximately 7.9%, compared with 17.2% in the prior-year period. Net margin was approximately 9.1% in Q2 and 6.8% year to date, versus 10.3% and 12.0%, respectively, in the comparable periods.
- Cash provided by operating activities was $126.3 million for the first six months, down from $148.5 million.
- Investing cash outflows were $56.5 million, including $36.8 million of capital expenditures, $14.8 million of real estate development investments and $9.3 million of timberland acquisitions.
- Financing cash outflows were $91.0 million, including $85.2 million of common dividends and $1.6 million of distributions to operating partnership unitholders.
- Cash, cash equivalents and restricted cash totaled $93.4 million at June 30, 2023, including $88.4 million of unrestricted cash, versus $296.1 million at June 30, 2022.
- Total principal debt was $1.520 billion, with carrying value of $1.512 billion. Debt to total capitalization was 44%, compared with 43% at December 31, 2022.
- The company had $296.2 million available under its U.S. revolving credit facility, net of letters of credit, and NZ$20.0 million available under its New Zealand working capital facility.
- Debt covenants were satisfied, including trailing-12-month EBITDA to consolidated interest expense of 7.4x versus a 2.5x minimum and covenant debt to covenant net worth plus debt of 46% versus a 65% maximum.
- The quarterly dividend was $0.285 per share and per operating partnership unit. Management expects approximately $169 million of 2023 common-share dividends and $3 million of partnership distributions, assuming no material changes in outstanding securities or the dividend rate.
Material changes versus the prior comparable period
- Sales declined 15% in Q2 and 17% year to date, primarily from lower timber prices and volumes, weaker real estate activity and reduced trading volumes.
- Operating income fell 43% in Q2 and 62% year to date. Adjusted EBITDA declined 17% in Q2 and 32% year to date.
- Southern Timber benefited from acquisitions and higher harvest volumes, but lower stumpage prices reduced operating income. Q2 Adjusted EBITDA increased 13% to $43.6 million, while year-to-date Adjusted EBITDA declined 1% to $86.4 million.
- Pacific Northwest Timber reported a Q2 operating loss of $2.4 million versus income of $2.9 million and year-to-date Adjusted EBITDA of $14.0 million versus $35.8 million, reflecting weaker demand, prices and deferred harvests.
- New Zealand Timber operating income declined to $2.4 million in Q2 and $1.7 million year to date, driven by weaker Chinese demand, lower export prices, foreign exchange effects, reduced carbon-credit sales and cyclone-related impacts.
- Real Estate sales declined 7% in Q2 and 30% year to date. Year-to-date acres sold fell to 5,841 from 13,428, although weighted-average pricing increased to $7,028 per acre from $5,087.
- Interest expense increased to $12.5 million in Q2 and $24.2 million year to date due to higher average debt and interest rates.
- Interest and other miscellaneous income included net legal settlement recoveries of $11.4 million in Q2 and $20.5 million year to date, materially benefiting pre-tax income and Adjusted EBITDA reconciliations.
Outlook, commentary, risks and unusual items
- Management expects 2023 Southern Timber harvest volumes of 7.2–7.4 million tons, with lower quarterly harvests in the second half and modestly lower stumpage realizations than Q2.
- Pacific Northwest Timber harvest guidance is 1.4–1.5 million tons; management expects modestly higher delivered log prices in the second half based on improving end-market demand.
- New Zealand Timber harvest guidance is 2.3–2.5 million tons. Management expects somewhat lower delivered prices because of weaker demand and cyclone salvage supply, partly offset by lower port and freight costs.
- Carbon-credit expectations were tempered because of market volatility and limited first-half transaction activity, although management expects greater second-half activity.
- Real Estate results are expected to be weighted heavily toward the fourth quarter based on anticipated closings. Management stated that demand for higher-and-better-use properties and timberland assets remained strong despite higher interest rates.
- Expected 2023 capital expenditures are $83–$87 million, real estate development investments are $22–$25 million, and cash tax payments are $3.5–$5.5 million.
- Key risks include timber price and demand weakness, housing and lumber-market conditions, Chinese and broader Asian demand, foreign exchange volatility, interest-rate exposure, weather and casualty events, carbon-market volatility, real estate closing timing, and higher logging, transportation and freight costs.
- New Zealand’s subsidiary renewed its NZ$20 million working-capital facility on July 24, 2023, extending maturity to June 30, 2024.
- The company recorded a $2.3 million New Zealand timber write-off related to a casualty event. It also expects approximately $7.6 million of cash contributions during pension-plan settlement and approximately $1.3 million of 2024 contributions for the excess benefit plan.
- Port Gamble environmental and natural-resource-damage liabilities totaled $15.4 million at June 30, 2023. Management expects remediation over one to two years, with monitoring continuing for 15 to 20 years; future costs could increase as project scope develops.
- Outstanding standby letters of credit and surety bonds totaled $25.5 million. Management does not expect pending litigation, environmental matters or guarantees to have a material adverse effect, but environmental estimates remain subject to uncertainty.
Most important facts for investors to verify
- Whether timber prices and end-market demand, particularly in the Pacific Northwest and New Zealand, improve sufficiently to support management’s harvest and pricing outlook.
- The sustainability of the $0.285 quarterly dividend relative to CAD, which fell to $62.7 million year to date from $119.5 million.
- Liquidity and refinancing capacity as $499 million of principal debt matures in 2026–2027 and variable-rate exposure remains significant despite hedging.
- The timing and profitability of planned fourth-quarter real estate closings and the $22–$25 million 2023 development-investment program.
- The recurring versus nonrecurring nature of the $20.5 million year-to-date legal settlement recoveries.
- Potential changes to environmental remediation costs, pension settlement contributions, carbon-credit revenue and cyclone-related timber impacts.
- The company’s reported non-GAAP measures, including Adjusted EBITDA and CAD, against GAAP cash flow and earnings; management’s definitions may differ from those used by other companies.