Rayonier Inc. 2019 First-Quarter Form 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust with approximately 2.6 million acres owned or leased in the U.S. South, U.S. Pacific Northwest and New Zealand. Operations comprise Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The New Zealand operations are conducted through a 77%-owned subsidiary. This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $191.5 million | $203.2 million | Down 5.7% |
| Operating income | $38.5 million | $57.1 million | Down 32.5% |
| Net income | $27.8 million | $42.7 million | Down 34.9% |
| Net income attributable to Rayonier | $24.8 million | $40.5 million | Down 38.8% |
| Diluted earnings per share | $0.19 | $0.31 | Down $0.12 |
| Adjusted EBITDA | $79.0 million | $93.2 million | Down 15.2% |
| Cash provided by operating activities | $70.9 million | $78.2 million | Down 9.3% |
| Cash available for distribution | $62.2 million | $77.2 million | Down 19.4% |
Operating margin was approximately 20.1% in Q1 2019 versus 28.1% in Q1 2018. Net income attributable to Rayonier represented approximately 12.9% of sales versus 20.0% in the prior-year quarter. The effective tax rate was 12.7%, compared with 13.9%, reflecting the tax benefits associated with the company’s REIT structure.
At March 31, 2019, cash and cash equivalents were $154.6 million, or $164.5 million including restricted cash. Total debt was $975.0 million, with $972.7 million recorded net of deferred financing costs. The debt-to-capital ratio was 37%, and net debt to enterprise value was 17%. The company had $190.6 million of available capacity under its revolving credit facility, net of letters of credit, plus NZ$20.0 million available under its New Zealand working-capital facility.
Q1 investing cash outflows were $25.8 million, including $14.1 million of capital expenditures, $12.3 million for timberland acquisitions and $1.7 million of real estate development investments. Financing cash outflows were $37.9 million, including $34.9 million of dividends and $3.6 million distributed to the New Zealand minority shareholder. The quarterly dividend was $0.27 per share.
Material changes versus the prior comparable period
- Southern Timber sales increased 40% to $60.8 million and operating income increased to $21.5 million from $12.2 million, driven by 23% higher harvest volumes, modestly higher stumpage prices and higher non-timber income.
- Pacific Northwest Timber sales declined 35% to $20.5 million, and the segment reported a $3.7 million operating loss versus $4.7 million of operating income. Lower volumes and an 18% decline in delivered sawtimber prices reflected weaker export demand, softer U.S. lumber markets and uncertainty from the U.S.-China trade dispute.
- New Zealand Timber sales increased 8% to $57.1 million on 8% higher volumes, but operating income declined slightly to $15.7 million. Lower delivered prices, higher road maintenance and depletion costs, and unfavorable foreign exchange substantially offset volume growth.
- Real Estate sales declined 42% to $21.0 million, and operating income declined to $10.0 million from $28.1 million. The decrease reflected fewer acres sold and lower weighted-average prices, particularly lower non-strategic timberland sales.
- Trading sales decreased 18% to $32.1 million, while operating income increased to $0.5 million from $0.1 million due primarily to higher-margin third-party stumpage blocks.
- Other operating income declined to $35,000 from $1.4 million. The prior-year period included a $646,000 gain from selling unused Internet Protocol addresses and larger foreign-exchange-related gains.
- The company adopted ASC 842 lease accounting on January 1, 2019. The March 31, 2019 balance sheet includes $105.7 million of right-of-use assets and $95.0 million of non-current lease liabilities; prior periods were not restated.
Guidance, outlook, management commentary and risks
Management stated that the company was on track to achieve full-year 2019 Adjusted EBITDA guidance. Southern Timber was expected to achieve its full-year volume guidance, although quarterly harvest volumes were expected to decline after unusually high first-quarter removals. Pacific Northwest harvest volumes were expected to increase in the second half of the year, but pricing improvements depended largely on resolution of the U.S.-China trade dispute. New Zealand Timber volumes were expected to increase during the balance of the year, with relatively stable year-over-year pricing. Real Estate was expected to meet full-year Adjusted EBITDA guidance, although quarterly results may vary.
Expected 2019 capital expenditures were $67 million to $70 million, excluding strategic timberland acquisitions. Real estate development investments were expected to be $7 million to $10 million, net of anticipated reimbursements. Dividend payments were expected to total approximately $140 million, assuming a quarterly dividend of $0.27 per share. Cash tax payments were expected to be approximately $3 million, and mandatory pension contributions were approximately $1.3 million.
Key risks include timber prices and demand for lumber, pulp, paper and packaging; housing and construction activity; export exposure and the U.S.-China trade dispute; New Zealand dollar movements; weather-related harvest conditions; real estate market conditions; interest rates; and the timing and profitability of timberland and real estate transactions. The company uses interest-rate and foreign-currency derivatives but remains exposed to hedge effectiveness, counterparty and market risks.
At March 31, 2019, all applicable debt covenants were satisfied. Contractual financial obligations totaled approximately $1.39 billion, including $975.0 million of principal debt, projected interest, operating leases and other commitments. Outstanding guarantees consisted of $9.4 million of standby letters of credit and $3.3 million of surety bonds. Management did not expect pending lawsuits and claims to have a material adverse effect on financial position, results or cash flow.
Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Pacific Northwest pricing and volumes recover as expected, particularly in light of the U.S.-China trade dispute and lumber-market weakness.
- Whether Southern Timber’s unusually high first-quarter harvest volumes reduce subsequent quarterly volumes and affect full-year results.
- The timing, mix and margins of Real Estate sales, including Wildlight development activity and larger timberland dispositions.
- Progress toward full-year Adjusted EBITDA guidance and the assumptions underlying management’s non-GAAP measures.
- Cash generation relative to approximately $140 million of expected annual dividends, planned capital expenditures and potential timberland acquisitions.
- Debt maturity and refinancing exposure, including $325 million of Senior Notes due in 2022 and $650 million of term debt due thereafter.
- Effects of New Zealand currency movements, export pricing, hedging results and the 23% noncontrolling interest in the New Zealand subsidiary.
- The financial and reporting effects of the newly recognized long-term lease obligations under ASC 842.