RAYONIER INC quarterly report, Q3 FY2020

Rayonier Inc. Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2020. The filing combines Rayonier Inc. and Rayonier, L.P.; Rayonier is a REIT whose operating business is conducted through the Operating Partnership. Rayonier owned 96.8% of the Operating Partnership at quarter-end.

Business Context

Rayonier owns or leases approximately 2.7 million acres of timberlands in the U.S. South, Pacific Northwest and New Zealand, and manages three private equity timber funds acquired with Pope Resources. Reportable segments are Southern Timber, Pacific Northwest Timber, New Zealand Timber, Timber Funds, Real Estate and Trading.

On May 8, 2020, Rayonier completed its acquisition of Pope Resources, adding approximately 124,000 acres of Pacific Northwest timberlands, three timber funds comprising approximately 141,000 acres, and additional real estate assets. The acquisition was funded with cash, equity and approximately $250 million of incremental term debt.

Financial Highlights

Metric	Q3 2020	Q3 2019	YTD 2020	YTD 2019
Sales	$198.9 million	$156.4 million	$653.6 million	$532.8 million
Operating income	$1.8 million	$11.0 million	$52.0 million	$80.9 million
Net income	$(9.5) million	$1.5 million	$17.4 million	$50.2 million
Net income attributable to Rayonier Inc.	$(0.8) million	$(0.4) million	$26.8 million	$43.1 million
EPS	$(0.01)	Nil	$0.20 basic; $0.20 diluted	$0.33 basic; $0.33 diluted
Adjusted EBITDA	$67.2 million	$43.2 million	$192.9 million	$182.8 million
Cash provided by operating activities	Not separately disclosed for the quarter	$138.0 million	$164.2 million

Q3 operating margin was approximately 0.9%, versus 7.0% in the prior-year quarter. Year-to-date operating margin was approximately 8.0%, versus 15.2% in the prior-year period. Q3 net margin was approximately negative 4.8%, versus positive 1.0% in Q3 2019.

Sales increased 27% in Q3 and 23% year to date, primarily due to the Pope Resources acquisition, higher Pacific Northwest volumes, stronger Southern Timber volumes, and increased real estate sales.
Adjusted EBITDA increased 56% in Q3 and 6% year to date, but GAAP earnings declined because of merger costs, casualty-related timber write-offs, higher depreciation and depletion, and higher interest expense.
Real Estate generated $197.4 million of year-to-date sales, including a $116.0 million large disposition of approximately 67,000 acres in Mississippi and a $28.7 million gain.
Q3 operating results included $6.0 million of Hurricane Laura timber write-offs in Southern Timber and $9.2 million of Oregon fire-related write-offs in Timber Funds.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $78.2 million at September 30, 2020, including $3.0 million held by Timber Funds, compared with $68.7 million at December 31, 2019.
Total debt, net of deferred financing costs, was $1.379 billion, including $1.318 billion excluding Timber Funds and $60.4 million of Timber Funds debt. Principal debt was approximately $1.370 billion.
Debt excluding Timber Funds increased primarily because of $250 million of incremental term debt used to fund the Pope Resources acquisition and assumed Pope Resources debt.
The revolving credit facility was increased to $300 million and had $279.1 million of available borrowing capacity at quarter-end, net of letters of credit.
Debt-to-capital was 40%, compared with 41% at year-end 2019; net debt to enterprise value was 26%, compared with 19%.
The Company was in compliance with all applicable debt covenants. The principal debt covenant ratios were materially favorable to requirements, including EBITDA-to-interest of 9.42x versus a 2.5x minimum.
Nine-month investing cash outflows were $184.8 million, including $231.1 million of net cash consideration for Pope Resources, partially offset by $115.7 million of large-disposition proceeds.
Nine-month financing cash inflow was $55.7 million, compared with a $125.2 million outflow in 2019, primarily because of increased borrowings.
Cash available for distribution, a non-GAAP measure, was $124.2 million for the first nine months, compared with $115.6 million in 2019.

Material Changes Versus the Prior Comparable Period

The Pope Resources acquisition added the Pacific Northwest timberlands, Timber Funds segment and related noncontrolling interests. Pope Resources contributed approximately $28.8 million of revenue from the acquisition date through September 30, 2020.
Pacific Northwest Timber sales increased 54% in Q3 and 49% year to date, reflecting higher volumes and sawtimber pricing from the acquired assets and improved domestic lumber markets.
New Zealand Timber sales declined 22% year to date, reflecting COVID-19 shutdown impacts, lower volumes, weaker export and domestic pricing, and foreign exchange effects.
Real Estate sales increased substantially because of the Mississippi large disposition and higher rural land sales.
Southern Timber operating income declined because of Hurricane Laura write-offs and lower non-timber income despite higher volumes and sawtimber pricing.
Corporate and other expense increased to $37.3 million year to date, including $16.4 million of Pope Resources merger integration and restructuring costs.
Interest expense increased to $28.5 million year to date from $23.6 million, reflecting higher debt balances following the acquisition.
Accumulated other comprehensive loss increased to $121.6 million attributable to Rayonier Inc., primarily due to losses on interest-rate hedges.

Guidance, Outlook, Risks and Unusual Items

Management expects continued strong Southern Timber sawtimber demand and pricing, although Hurricane Laura salvage volumes may be lower priced.
Pacific Northwest log demand and pricing are expected to remain strong. New Zealand operations were normalizing after the government-mandated shutdown, with modest improvements anticipated in export and domestic pricing.
Management reported strong demand and a favorable transaction pipeline in Real Estate.
Expected 2020 capital expenditures were $66 million to $69 million, excluding Timber Funds capital expenditures and strategic timberland acquisitions. Real estate development investments were expected to be $10 million to $12 million.
Expected 2020 dividend payments were approximately $145 million, assuming a quarterly dividend of $0.27 per share and no material change in shares outstanding. The filing does not provide formal EPS guidance.
COVID-19 remains a significant risk to timber harvesting, transportation, export demand, real estate activity, customer liquidity, capital access and operating costs. New Zealand operations had been shut down from March 25 through April 27, 2020.
Port Gamble environmental remediation liabilities were accrued at $11.7 million. Cleanup and monitoring may continue for several years, and natural resource damage costs could increase as restoration requirements become clearer.
The preliminary purchase price allocation for Pope Resources remains subject to adjustment, including for timberlands, debt, environmental liabilities, intangible assets and tax matters.
Outstanding guarantees included $0.9 million of standby letters of credit and $9.3 million of surety bonds. The $325 million of Senior Notes due 2022 are fully and unconditionally guaranteed by Rayonier Inc. and a subsidiary.
The Company established a $300 million at-the-market equity offering program in September 2020; no shares had been issued under the program by quarter-end.

Important Facts for Investors to Verify

Reconcile reported GAAP earnings with Adjusted EBITDA and CAD, particularly the treatment of merger costs, casualty write-offs and the large disposition.
Assess the sustainability of cash distributions against operating cash flow, planned capital spending, debt service and the expected approximately $145 million of 2020 dividends.
Review the final purchase price allocation for Pope Resources and any subsequent changes to acquired timberland values, depletion, debt and environmental liabilities.
Monitor the $325 million 2022 debt maturity, refinancing plans, interest-rate hedge losses and the transition of certain Timber Funds debt to variable rates in 2021.
Evaluate exposure to COVID-19, China export demand, housing and lumber markets, New Zealand exchange rates, hurricanes, wildfires and other casualty events.
Track Port Gamble remediation and natural resource damage negotiations because the recorded $11.7 million liability may not represent the ultimate cost.