Rayonier Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Rayonier is a pure-play timberland REIT operating five segments: Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the fiscal year ended December 31, 2019; it is an annual report rather than a quarterly filing. The Company owned, leased or managed approximately 2.6 million acres across the U.S. South, U.S. Pacific Northwest and New Zealand, including a 77% controlling interest in its New Zealand subsidiary.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $711.6 million | $816.1 million | Down 12.8% |
| Operating income | $107.0 million | $170.1 million | Down 37.1% |
| Net income | $67.7 million | $117.3 million | Down 42.3% |
| Net income attributable to Rayonier | $59.1 million | $102.2 million | Down 42.2% |
| Diluted EPS | $0.46 | $0.79 | Down $0.33 |
| Adjusted EBITDA | $247.8 million | $337.7 million | Down 26.6% |
| Cash provided by operations | $214.3 million | $310.1 million | Down 30.9% |
| Capital expenditures | $64.0 million | $62.3 million | Up 2.7% |
| Cash dividends paid | $141.1 million | $136.8 million | Up 3.1% |
Reported operating margin was approximately 15.0%, compared with 20.8% in 2018; net margin was approximately 9.5%, compared with 14.4%. Cash Available for Distribution was $149.4 million, while Adjusted CAD was $67.4 million after an $82.0 million mandatory debt repayment.
At December 31, 2019, cash and cash equivalents were $68.7 million, total debt was $1.057 billion, total equity was $1.538 billion and total assets were $2.861 billion. Debt to capital was 41%, debt to Adjusted EBITDA was 4.3x, net debt to Adjusted EBITDA was 4.0x and net debt to enterprise value was 19%. The Company had investment-grade ratings of BBB- from S&P and Baa3 from Moody’s, each with a stable outlook.
Material Changes Versus the Prior Comparable Period
- Southern Timber sales increased 14% to $194.1 million, driven by a 6% increase in harvest volume and higher non-timber income. Adjusted EBITDA increased to $119.7 million from $102.8 million.
- Pacific Northwest Timber sales fell 23% to $85.4 million. Harvest volumes declined 7%, prices weakened materially and the segment reported a $12.4 million operating loss versus $8.1 million of operating income in 2018.
- New Zealand Timber sales declined 3% to $241.9 million and Adjusted EBITDA declined to $75.8 million from $90.8 million, primarily due to lower export and domestic pricing, unfavorable foreign exchange and higher costs.
- Real Estate sales declined 46% to $74.9 million because the Company sold 17,151 acres versus 33,614 acres in 2018. Adjusted EBITDA fell to $59.5 million from $123.4 million.
- Trading sales declined 22% to $115.4 million, reflecting a 16% volume decline and lower average prices.
- The Company acquired approximately 71,000 acres of timberland for $142.3 million, compared with approximately $57.6 million spent on acquisitions in 2018.
- Cash declined by approximately $86.5 million, primarily because operating cash flow and financing proceeds did not cover timberland acquisitions, capital spending, dividends and other financing uses.
- Debt increased by approximately $82.0 million due to a draw on the revolving credit facility used in part to fund acquisitions.
Outlook, Risks and Unusual Items
For 2020, management expected Southern Timber harvest volumes of 6.3 to 6.5 million tons, with pricing slightly below 2019 levels; Pacific Northwest harvest volumes of 1.4 to 1.5 million tons with relatively stable pricing; and New Zealand harvest volumes of 2.6 to 2.7 million tons with lower average pricing. Management expected a significant increase in Real Estate Adjusted EBITDA, weighted toward the second half of the year. The outlook excluded the anticipated mid-year acquisition of Pope Resources.
Management forecast 2020 capital expenditures of $65 million to $69 million, real estate development investments of $12 million to $15 million, dividends of approximately $140 million assuming a quarterly dividend of $0.27 per share, approximately $3.6 million of pension contributions and approximately $2 million of cash income taxes.
- U.S.-China trade tensions, tariffs and reduced Chinese export demand pressured Pacific Northwest and Southern Timber pricing. Management expected potential improvement from the Phase 1 trade agreement but identified near-term coronavirus-related headwinds in China.
- New Zealand export markets faced competition from European salvage timber, while lower sulfur fuel requirements were expected to increase shipping costs.
- Key operating risks include cyclical housing, construction, pulp and paper and real estate markets; weather, fire, disease and natural disasters; contractor and transportation availability; foreign exchange movements; environmental and endangered-species restrictions; and changing trade and climate-related regulation.
- The Company does not maintain insurance for loss to its timber from fire and certain other natural causes.
- Rayonier entered into a definitive agreement in January 2020 to acquire Pope Resources for a combination of cash and equity, with closing expected in mid-2020. Completion and integration remained subject to approvals and other closing conditions.
- The Company adopted the new lease accounting standard in 2019, recognizing $99.9 million of right-of-use assets and $90.5 million of long-term lease liabilities at year-end.
- The critical audit matter was timber depletion, which depends on estimates of standing merchantable inventory, growth rates, harvestability and environmental restrictions. The Company recognized approximately $122 million of depletion expense in 2019.
Important Facts for Investors to Verify
- Reconcile the sharp declines in Real Estate, Pacific Northwest Timber and New Zealand Timber results with harvest volumes, prices, export exposure and the timing of land sales.
- Assess liquidity relative to the $82.0 million debt maturity in 2020, the $325.0 million senior notes maturity in 2022 and planned dividends, capital expenditures and acquisitions.
- Review the Pope Resources transaction terms, financing requirements, dilution, closing conditions and expected effect on leverage and the investment-grade ratings.
- Evaluate the sustainability of the $0.27 quarterly dividend against Adjusted CAD of $67.4 million after mandatory debt repayments and the Company’s acquisition strategy.
- Review timber inventory and depletion assumptions, including the sensitivity that a 3% change in estimated standing merchantable inventory would have changed 2019 depletion expense by approximately $3.4 million.
- Monitor China trade conditions, coronavirus-related demand effects, European salvage timber competition, New Zealand currency exposure and shipping costs.
- Confirm compliance with debt covenants, REIT qualification requirements, environmental obligations and the approximately $194.0 million of undiscounted operating lease obligations.