Rayonier Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2020, compared with the three months ended March 31, 2019. Rayonier is a timberland REIT with approximately 2.6 million acres owned or leased in the U.S. South, Pacific Northwest and New Zealand. Its segments are Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $259.1 million | $191.5 million | +35% |
| Operating income | $38.6 million | $38.5 million | Flat |
| Net income | $26.4 million | $27.8 million | -5% |
| Net income attributable to Rayonier | $25.9 million | $24.8 million | +4% |
| Diluted EPS | $0.20 | $0.19 | +$0.01 |
| Adjusted EBITDA | $47.1 million | $79.0 million | -40% |
| Cash provided by operations | $29.2 million | $70.9 million | -59% |
| Cash available for distribution | $27.2 million | $62.2 million | -56% |
Reported operating margin was approximately 14.9%, versus 20.1% in the prior-year quarter. Net income margin was approximately 10.2%, versus 14.5%. Results were materially affected by a $116.0 million timberland sale that generated a $28.7 million gain and was excluded from Adjusted EBITDA. Excluding the large disposition, real estate produced a $1.9 million pro forma operating loss.
- Southern Timber sales declined 13% to $53.0 million and Adjusted EBITDA declined to $33.3 million from $41.2 million, primarily due to lower pulpwood prices, volumes and non-timber income.
- Pacific Northwest Timber sales increased 51% to $31.1 million, and Adjusted EBITDA increased to $9.8 million from $3.1 million, despite lower delivered log prices.
- New Zealand Timber sales declined 34% to $37.5 million, while Adjusted EBITDA fell to $10.2 million from $22.0 million, reflecting COVID-19-related shutdowns, lower export demand, lower prices and reduced volumes.
- Trading sales declined 41% to $19.0 million and generated approximately breakeven operating results.
- Total other comprehensive loss was $127.3 million, principally from foreign-currency translation and cash-flow hedge losses. Rayonier’s comprehensive loss attributable to the company was $90.2 million, compared with comprehensive income of $18.7 million in Q1 2019.
Cash flow, liquidity and leverage
- Cash, cash equivalents and restricted cash ended the quarter at $132.8 million, including $132.4 million of unrestricted cash, compared with $70.0 million at December 31, 2019.
- Investing activities provided $74.7 million, primarily due to $115.7 million of net proceeds from the large timberland disposition. The company also spent $24.1 million on timberland acquisitions, $17.2 million on capital expenditures and $1.7 million on real estate development investments.
- Financing activities used $38.7 million, including $34.9 million of dividends and $3.2 million of share repurchases. The quarterly dividend was $0.27 per share.
- Gross debt was $1.057 billion and debt-to-capital was 43%, compared with 41% at December 31, 2019. Net debt to enterprise value was 23%, compared with 19% year-end.
- At March 31, 2020, the company had $116.5 million of available capacity under its revolving credit facility, net of letters of credit, and the New Zealand subsidiary had NZ$20.0 million available under its working capital facility.
- Rayonier was in compliance with debt covenants. Trailing twelve-month EBITDA to consolidated interest expense was 10.3x versus a 2.5x minimum; covenant debt represented 43% versus a maximum of 65%.
Material changes and unusual items
- In March 2020, Rayonier sold approximately 66,946 acres in Mississippi for approximately $116.0 million, recording a gain of approximately $28.7 million.
- COVID-19 disrupted Chinese export markets and caused a government-mandated shutdown of non-essential forestry activity in New Zealand late in the quarter. U.S. forestry operations continued because the forest products industry was designated critical infrastructure.
- Rayonier incurred $2.5 million of costs related to the planned Pope Resources merger, recorded in other operating expense. The transaction was expected to close on May 8, 2020, subject to required approvals.
- Derivative and foreign-exchange movements generated substantial other comprehensive losses. Derivative liabilities increased to $93.1 million from $11.9 million at year-end, primarily because of interest-rate hedge valuations.
- The company adopted the current expected credit-loss standard on January 1, 2020, with no material impact.
Guidance, outlook and risks
- Management expected 2020 capital expenditures of $60 million to $64 million, excluding strategic timberland acquisitions.
- Previously expected 2020 real estate development investments were $12 million to $15 million, net of reimbursements, but spending would be adjusted based on COVID-19 effects, market conditions and the timing of development sales.
- Expected 2020 dividend payments were approximately $139 million, assuming a $0.27 quarterly dividend and no material change in shares outstanding.
- Expected 2020 cash tax payments were approximately $2 million, primarily related to New Zealand, and mandatory pension contributions were estimated at approximately $3.6 million, of which $0.4 million had been paid by March 31.
- After quarter-end, Rayonier increased its revolving facility from $200 million to $300 million, extended the revolver maturity to April 2025 and the term credit agreement maturity to April 2028, and entered into a new $250 million five-year incremental term loan intended to fund the anticipated Pope Resources acquisition.
- Key risks include the duration and economic effects of COVID-19, timber prices and volumes, housing and construction demand, export-market disruption, New Zealand operating restrictions, foreign-exchange volatility, interest rates, access to capital, real estate demand and execution of the Pope Resources merger.
- Pending lawsuits and ordinary-course claims were not expected to have a material adverse effect. Outstanding financial guarantees totaled $6.7 million, comprising standby letters of credit and surety bonds.
Facts investors should verify
- Whether the Pope Resources merger closed as planned and the final acquisition financing, consideration and integration effects.
- The duration and financial impact of New Zealand’s COVID-19 restrictions and the pace of recovery in China and other export markets.
- Underlying operating performance excluding the $116.0 million large disposition and its $28.7 million gain.
- Liquidity after the additional $250 million term loan, acquisition funding, dividends, capital expenditures and potential timberland acquisitions.
- Changes in timber prices, harvest volumes, real estate sales, foreign-exchange rates and derivative valuations in subsequent quarters.