Rayonier Inc. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Rayonier Inc. is a REIT operating through Rayonier, L.P., which owns substantially all assets and incurs substantially all debt. Rayonier owned 98.4% of the Operating Partnership at quarter-end. The company managed approximately 2.8 million timberland acres across the U.S. South, Pacific Northwest and New Zealand, through Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading segments.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Sales | $201.6 million | $195.3 million | $589.5 million | $663.7 million |
| Operating income | $35.4 million | $40.9 million | $66.1 million | $121.7 million |
| Net income | $22.7 million | $31.9 million | $49.3 million | $88.1 million |
| Net income attributable to Rayonier Inc. | $19.2 million | $20.6 million | $46.6 million | $74.0 million |
| Diluted EPS | $0.13 | $0.14 | $0.31 | $0.50 |
| Adjusted EBITDA | $78.9 million | $64.7 million | $202.9 million | $245.8 million |
| Cash flow from operations | Not separately provided | Not separately provided | $208.9 million | $209.9 million |
| Cash Available for Distribution | Not separately provided | Not separately provided | $113.5 million | $158.8 million |
Q3 operating margin was approximately 17.6%, versus 20.9% in the prior-year quarter. Nine-month operating margin was approximately 11.2%, versus 18.3% in the prior-year period. Adjusted EBITDA margin was approximately 39.1% in Q3 and 34.4% for the nine months.
- Cash and liquidity: Cash and cash equivalents were $107.8 million at September 30, 2023, compared with $114.3 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $109.6 million.
- Debt: Principal debt was $1.519 billion, with carrying value of $1.511 billion. Debt-to-capital was 44%, compared with 43% at year-end 2022. The company had $296.2 million available under its revolving credit facility, net of letters of credit.
- Covenants: The company was in compliance with all applicable debt covenants. Trailing-twelve-month EBITDA to consolidated interest expense was 6.9x against a 2.5x minimum; covenant debt to covenant net worth plus debt was 46% against a 65% maximum.
- Cash uses: Nine-month investing cash outflows were $79.7 million, including $53.1 million of capital expenditures, $18.8 million of real estate development investments and $14.0 million of timberland acquisitions. Financing cash outflows were $134.2 million, including $127.6 million of common dividends.
- Dividend: The quarterly dividend remained $0.285 per share. Full-year 2023 common-share dividends were expected to total approximately $170 million, assuming no change in the dividend rate or share count.
Material changes versus the prior comparable period
- Q3 sales increased 3%, but nine-month sales declined 11% because of lower timber and trading volumes and lower timber prices. Q3 and nine-month operating income declined 14% and 46%, respectively.
- Q3 net income attributable to Rayonier declined 7%; nine-month attributable income declined 37%. The nine-month comparison was affected by the prior-year $16.0 million equity gain from the Bainbridge Landing apartment sale and the 2023 $20.5 million net recovery from legal settlements.
- Southern Timber: Q3 sales declined 1% and operating income declined 17% as stumpage realizations fell, despite a 21% increase in harvest volume. Nine-month operating income declined 19%; Adjusted EBITDA was broadly flat at $124.2 million.
- Pacific Northwest Timber: Q3 operating income shifted to a $0.6 million loss from $2.2 million of income. Nine-month operating loss was $6.5 million versus $11.7 million of income, reflecting weaker demand, pricing and volumes.
- New Zealand Timber: Q3 operating income increased to $17.6 million from $9.3 million, primarily from higher carbon credit sales. Nine-month operating income declined to $19.3 million because of weaker timber prices, foreign exchange, lower volumes and a $2.3 million casualty-related timber write-off.
- Real Estate: Q3 sales increased to $31.2 million from $12.4 million, but operating income declined because the prior-year quarter included an $11.5 million gain attributable to noncontrolling interests. Nine-month sales were approximately flat, while operating income declined 49%.
- Adjusted EBITDA: Q3 increased 22% year over year, led by Real Estate and New Zealand Timber. Nine-month Adjusted EBITDA declined 17%, primarily due to Pacific Northwest Timber, Real Estate and lower timber pricing.
- Interest expense increased $3.5 million in Q3 and $10.3 million year to date, primarily due to higher average debt and higher weighted-average interest rates.
Outlook, risks and unusual items
- Management expects higher full-year 2023 Southern Timber non-timber income, driven by Land-Based Solutions businesses.
- Pacific Northwest Timber is expected to experience continued soft end-market demand through year-end.
- New Zealand Timber is expected to remain active in the carbon market, but management expects carbon sales to contribute less than in Q3.
- Management expects a significant fourth-quarter Real Estate contribution based on expected transaction closings. Demand for higher-and-better-use properties and timberland assets reportedly remained strong despite higher interest rates.
- On November 2, 2023, the company announced an agreement to sell approximately 55,000 Oregon timberland acres for $242 million. The transaction was expected to close in Q4 2023, with $150 million of proceeds expected to repay the unhedged portion of the 2022 Incremental Term Loan.
- Defined benefit pension plan lump-sum distributions began October 31, 2023. The company expects approximately $7.6 million of cash contributions during the settlement process and approximately $1.3 million of 2024 contributions for the terminated excess benefit plan. Settlement is expected by the end of Q2 2024.
- Port Gamble environmental and natural-resource-damage liabilities totaled $15.7 million at September 30, 2023. Cleanup and restoration are expected over one to two years, with monitoring continuing for 15 to 20 years; future costs could increase as the project develops.
- Outstanding guarantees totaled $27.4 million, consisting of $3.8 million of standby letters of credit and $23.6 million of surety bonds.
- Key operating risks include timber price and demand weakness, housing and pulp-and-paper market conditions, foreign exchange movements, interest rates, weather and casualty events, carbon credit pricing, real estate transaction timing, environmental remediation and pension settlement costs.
- Management projected 2023 capital expenditures of $83 million to $87 million, real estate development investments of $20 million to $23 million, and cash tax payments of $5 million to $7 million.
Investor verification priorities
- Verify the closing, proceeds and debt-repayment application for the Oregon timberland disposition.
- Assess whether weak timber demand and prices persist, particularly in the Pacific Northwest and New Zealand.
- Review the sustainability and timing of carbon credit sales and their effect on New Zealand Timber results.
- Reconcile reported Adjusted EBITDA and Cash Available for Distribution to GAAP results, including the impact of legal settlement recoveries and other exclusions.
- Monitor leverage, interest expense, variable-rate debt exposure and the $296.2 million of revolving-credit availability.
- Evaluate expected fourth-quarter Real Estate closings and the effect of higher interest rates on future demand.
- Track pension plan settlement contributions, Port Gamble remediation costs and other guarantees or contingencies.