Rayonier Inc. 2019 Q3 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 filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $156.4 million | $200.9 million | $532.8 million | $650.0 million |
| Operating income | $11.0 million | $46.4 million | $80.9 million | $155.1 million |
| Net income | $1.5 million | $30.6 million | $50.2 million | $112.7 million |
| Net income attributable to Rayonier | $(0.4) million | $23.4 million | $43.1 million | $100.2 million |
| Diluted EPS attributable to Rayonier | Loss per share not reported | $0.18 | $0.33 | $0.77 |
| Adjusted EBITDA | $43.2 million | $83.3 million | $182.8 million | $287.9 million |
| Cash flow from operations | Not separately reported | Not separately reported | $164.2 million | $261.1 million |
Q3 operating margin was approximately 7.0%, compared with 23.1% in the prior-year quarter; nine-month operating margin was approximately 15.2%, compared with 23.9%. Adjusted EBITDA margin was approximately 27.6% in Q3 and 34.3% for the first nine months, versus 41.5% and 44.3%, respectively, in the comparable periods.
At September 30, 2019, cash and cash equivalents were $56.9 million, compared with $148.4 million at December 31, 2018. Total debt was $975.0 million, with $973.0 million reported net of deferred financing costs. Debt consisted of $350.0 million of term credit borrowings, $325.0 million of 3.75% senior notes due 2022 and $300.0 million of incremental term-loan borrowings due 2026. Approximately $198.4 million was available under the revolving credit facility, net of letters of credit, and the company was in compliance with its debt covenants.
Cash used in investing activities was $132.8 million, including $81.9 million for timberland acquisitions, $45.3 million of capital expenditures and $3.3 million of real estate development investments. Cash used in financing activities was $125.2 million, including $106.1 million of dividends, $12.7 million of share repurchases and $7.3 million distributed to the New Zealand minority shareholder. Nine-month adjusted cash available for distribution was $115.6 million, compared with $222.0 million in 2018.
Material Changes Versus the Prior Comparable Period
- Sales declined 22% in Q3 and 18% for the first nine months, primarily because of substantially lower Real Estate sales and weaker Pacific Northwest and New Zealand timber pricing.
- Q3 Real Estate sales fell to $9.2 million from $36.2 million, and nine-month sales fell to $52.7 million from $122.1 million. Management attributed the decline mainly to fewer acres sold; a strong fourth-quarter contribution was expected from transactions under contract or negotiation.
- Pacific Northwest Timber generated a Q3 operating loss of $3.6 million and a nine-month loss of $11.1 million, compared with operating income of $1.9 million and $12.2 million, respectively, in 2018. Harvest volumes and delivered log prices declined materially due to weak domestic and export markets, the U.S.-China trade dispute and competition from European salvage timber.
- New Zealand Timber operating income declined to $10.1 million in Q3 and $38.6 million for the first nine months, from $16.4 million and $50.1 million. Lower export and domestic sawtimber prices, a weaker New Zealand dollar and higher roading costs were key factors.
- Southern Timber was comparatively resilient: nine-month operating income increased to $45.8 million from $37.1 million, supported by higher volumes and non-timber revenue, although Q3 pricing and volumes were lower.
- Operating cash flow declined $96.9 million year over year, while timberland acquisition spending increased $42.9 million. Total debt was unchanged from year-end, but cash declined by $91.4 million.
- Accumulated other comprehensive loss increased to $63.2 million from a small balance at year-end, driven principally by foreign-currency translation losses and $42.6 million of cash-flow hedge losses, including $41.0 million related to interest-rate swaps.
Guidance, Outlook, Risks and Unusual Items
Management expected full-year Adjusted EBITDA toward the lower end of its prior guidance because of challenging export and domestic timber markets. Expected full-year harvest volumes were 6.0–6.1 million tons for Southern Timber, approximately 1.2 million tons for Pacific Northwest Timber and 2.7–2.8 million tons for New Zealand Timber. Management noted modest improvement in New Zealand pricing from mid-year lows but said pricing remained below first-half levels.
2019 capital expenditures were expected to be $65–$67 million, real estate development investments $7–$9 million net of reimbursements, and dividends approximately $139 million assuming a quarterly dividend of $0.27 per share. The filing does not provide a revised numerical Adjusted EBITDA guidance range.
Principal risks include timber price and volume volatility, housing and pulp-and-paper demand, weak export markets, the U.S.-China trade dispute, Chinese market conditions, foreign-exchange exposure, interest rates, wildfire and other operating risks, and the timing of real estate transactions. The company hedges a substantial portion of its variable-rate debt and selected New Zealand foreign-currency exposure.
The company adopted ASC 842 on January 1, 2019. The September 30 balance sheet therefore included $97.4 million of right-of-use assets and $88.4 million of long-term lease liabilities; prior periods were not restated. The company reported no subsequent events requiring recognition or disclosure, and management concluded that disclosure controls were effective.
Pending lawsuits and claims arising in the ordinary course of business were not expected to have a material adverse effect. Outstanding financial guarantees totaled $5.1 million, comprising $1.6 million of standby letters of credit and $3.5 million of surety bonds.
Investor Verification Checklist
- Verify the timing, pricing and closing probability of the real estate transactions expected to contribute in the fourth quarter.
- Monitor Pacific Northwest and New Zealand log prices, export volumes, Chinese demand and the effects of trade restrictions.
- Reconcile Adjusted EBITDA and adjusted cash available for distribution to GAAP results and assess the sustainability of the $0.27 quarterly dividend.
- Assess liquidity after timberland acquisitions, dividends, development spending and share repurchases, including available revolver capacity.
- Review debt maturities, interest-rate swap positions, covenant compliance and the $325 million senior-note maturity in 2022.
- Track foreign-currency translation and hedge losses, including approximately $2.5 million of net-of-tax AOCI losses expected to be reclassified into earnings over the next 12 months.
- Evaluate the impact of ASC 842 lease obligations and the company’s long-term timberland lease commitments.