Rayonier Reports Second Quarter 2020 Results

Rayonier Inc. (“Rayonier”) reported second quarter net income attributable to Rayonier of $1.7 million, or $0.01 per share, on revenues of $195.6 million. This compares to net income attributable to Rayonier of $18.8 million, or $0.14 per share, on revenues of $184.8 million in the prior year quarter. The second quarter results included costs related to the merger with Pope Resources1 of $13.5 million. Excluding these merger-related costs, pro forma net income2 was $15.2 million, or $0.11 per share, versus $18.8 million, or $0.14 per share, in the prior year period.

Second quarter operating income was $11.7 million versus $31.4 million in the prior year period. The current quarter operating income included costs related to the merger with Pope Resources1 of $13.5 million and operating loss attributable to noncontrolling interest in Timber Funds of $2.0 million. Excluding these items, current quarter pro forma operating income2 was $27.2 million. Second quarter Adjusted EBITDA2 was $78.6 million versus $60.6 million in the prior year period.

Year-to-date cash provided by operating activities was $82.6 million versus $117.0 million in the prior year period. Cash available for distribution (“CAD”)2 of $79.7 million decreased $15.3 million versus the prior year period primarily due to lower Adjusted EBITDA2 ($13.9 million), higher cash interest paid ($1.7 million) and higher cash taxes paid ($0.4 million), partially offset by lower capital expenditures ($0.7 million).

“We successfully closed the acquisition of Pope Resources on May 8th, and as such, are reporting our financial results on a combined basis for the first time this quarter,” said David Nunes, President and CEO. “I am extremely proud of the collaboration, focus and dedication that our team demonstrated in successfully integrating Pope Resources into Rayonier amid very challenging market conditions. The vast majority of our integration efforts had to be conducted remotely due to travel restrictions, government-mandated stay-at-home orders and company-mandated work-from-home arrangements resulting from the COVID-19 pandemic. Nevertheless, our employees leaned heavily on technology to mitigate the physical distance created by these circumstances and were able to successfully work together towards closing the transaction and integrating our organizations in a seamless manner. The relative ease with which Pope Resources employees have transitioned to Rayonier is a true testament to the similarities in culture that we identified at the outset of the transaction.”

“The U.S. forest products industry has continued to operate as an essential critical infrastructure industry throughout the COVID-19 pandemic, while the New Zealand forest products industry was shut down for approximately one month from late-March to late-April,” continued Nunes. “We remain focused on optimizing production while implementing enhanced safety protocols to protect our employees, contractors and all other parties with whom they interact. Overall, I’m very pleased with how our team navigated the myriad of challenges associated with the pandemic to deliver strong operating results across our segments during the second quarter. Southern Timber Adjusted EBITDA declined 4% relative to a strong second quarter 2019, primarily due to substantial pipeline easement revenue in the prior year quarter. In Pacific Northwest Timber, Adjusted EBITDA improved 76% versus the prior year quarter as the acquisition of Pope Resources contributed an additional 55,000 tons of harvest volume in the current quarter. New Zealand Timber Adjusted EBITDA declined by 50% relative to the prior year quarter as the N.Z. government instituted strict lockdown measures during the quarter, resulting in a 23% reduction in harvest volumes. Real Estate delivered an exceptionally strong quarter with a significant increase in Adjusted EBITDA relative to the prior year quarter driven by several large transactions.”

Changes to Reportable Business Segments & Non-GAAP Measures

On May 8, 2020, Rayonier completed the previously announced acquisition of Pope Resources, a Delaware Limited Partnership (“Pope Resources”). As such, Pope Resources’ balance sheet and results of operations are included in our consolidated financial statements from and after the date of acquisition. The Pope Resources transaction added to our portfolio: (1) approximately 124,000 acres of timberlands in Washington, which have been integrated with our Pacific Northwest Timber segment, (2) ownership interests in three private equity timber funds consisting of approximately 141,000 acres as well as a fund management business that oversees these timber funds, which collectively comprise our new Timber Funds segment, and (3) a higher-and-better-use real estate pipeline consisting of rural and conservation land sale opportunities and high-potential improved development projects in the West Puget Sound area, which will be reflected in our Real Estate segment.

As a result of the Pope Resources acquisition, we have revised our reportable business segments, adding one additional segment, which we refer to as the “Timber Funds” segment. The Timber Funds segment represents the operations of the three private equity timber funds included in the transaction – Fund II, Fund III and Fund IV (collectively, the “Funds”). Rayonier owns 20% of Fund II, 5% of Fund III and 15% of Fund IV, and is also the managing member of the Funds. Despite not having a majority equity interest in the Funds, we are required to consolidate 100% of the Funds’ operating results, assets and liabilities into our financial statements due to our ability to control the Funds’ economic activities as the managing member. Accordingly, the Funds are fully consolidated into our financial statements, and the income (loss) attributed to third-party investors is reflected as an adjustment to income in our Consolidated Statements of Income and Comprehensive Income under the caption “Net loss (income) attributable to noncontrolling interests in consolidated affiliates.”

The Timber Funds segment also includes fees paid to Rayonier for managing the Funds, which consist of both fixed components based on invested capital and acres under management as well as variable components based on the harvest volumes of the Funds. These fees, which also represent an expense of the Timber Funds segment, are eliminated in consolidation.

In order to better reflect the proportionate economic contribution from the Timber Funds business in our non-GAAP measures, we have revised our definitions of pro forma revenues, pro forma operating income and Adjusted EBITDA to incorporate the pro rata (or “look-through”) contribution from each of the timber funds based on Rayonier’s respective ownership interest, as well as the full amount of management fees received by Rayonier for managing the funds. Additional details on the calculation of these non-GAAP measures can be found in our quarterly financial supplement as well as the schedules provided herein.

Southern Timber

Second quarter sales of $46.8 million increased $0.6 million, or 1%, versus the prior year period primarily due to higher volumes, partially offset by lower pipeline easement revenue. Harvest volumes increased 20% to 1.54 million tons versus 1.27 million tons in the prior year period, primarily due to strong pulpwood demand. Average pine sawtimber stumpage prices decreased 1% to $25.48 per ton versus $25.82 per ton in the prior year period as lower chip-n-saw prices were partially offset by higher prices for larger diameter sawlogs due to the resurgence in southern yellow pine exports to China. Average pine pulpwood stumpage prices decreased 7% to $15.94 per ton versus $17.16 per ton in the prior year period primarily due to an increase in available log supply resulting from drier ground conditions in the current quarter versus the prior year period. Overall, weighted-average stumpage prices (including hardwood) decreased 7% to $18.91 per ton versus $20.29 per ton in the prior year period, primarily driven by lower pulpwood prices coupled with a 5% increase in the pulpwood mix. Operating income of $11.2 million decreased $3.5 million versus the prior year period as lower non-timber income ($3.9 million), lower net stumpage prices ($2.1 million) and higher indirect and overhead expenses ($0.4 million) were partially offset by higher volumes ($2.6 million) and lower depletion rates ($0.3 million).

Second quarter Adjusted EBITDA2 of $26.4 million was $1.2 million below the prior year period.

Pacific Northwest Timber

Second quarter sales of $26.2 million increased $7.6 million, or 41%, versus the prior year period. Harvest volumes increased 54% to 385,000 tons versus 250,000 tons in the prior year period primarily due to comparatively light harvest activity in the prior year quarter coupled with 55,000 tons of incremental volume from the acquired Pope Resources timberlands. Average delivered sawtimber prices decreased 4% to $75.39 per ton versus $78.35 per ton in the prior year period due to a higher mix of chip-n-saw volume in the current quarter, partially offset by a higher percentage of Douglas-fir sawtimber. Average delivered pulpwood prices decreased 13% to $36.92 per ton versus $42.26 per ton in the prior year period due to the deterioration of pulp export markets, which resulted in market related downtime at domestic pulp mills. Operating loss of $6.7 million increased $2.9 million versus the prior year period due to higher depletion rates ($1.4 million), higher overhead and other costs ($1.1 million), lower net stumpage prices ($0.1 million), lower non-timber income ($0.1 million) and an increase in other variable costs ($0.2 million).

Second quarter Adjusted EBITDA2 of $3.9 million was $1.7 million above the prior year period.

New Zealand Timber

Second quarter sales of $41.8 million decreased $20.3 million, or 33%, versus the prior year period. Harvest volumes decreased 23% to 529,000 tons versus 684,000 tons in the prior year period, primarily due to the government-mandated shutdown of all non-essential activity in New Zealand (including the harvesting and transport of logs) from late-March through late-April. Average delivered prices for export sawtimber decreased 12% to $98.75 per ton versus $111.81 per ton in the prior year period, while average delivered prices for domestic sawtimber decreased 19% to $66.95 per ton versus $82.66 per ton in the prior year period. The decrease in export sawtimber prices was driven primarily by lower demand and the buildup of log inventories in China as a result of COVID-19 lockdowns. The decrease in domestic sawtimber prices (in U.S. dollar terms) was driven in part by the fall in the NZ$/US$ exchange rate (US$0.62 per NZ$1.00 versus US$0.67 per NZ$1.00). Excluding the impact of foreign exchange rates, domestic sawtimber prices decreased 12% versus the prior year period, generally following the negative trend in the export market. Operating income of $5.0 million decreased $7.8 million versus the prior year period as a result of lower volumes ($4.5 million), lower net stumpage prices ($3.4 million) and unfavorable foreign exchange impacts ($0.6 million), partially offset by lower depletion rates ($0.3 million), lower roading costs ($0.2 million), lower overhead costs ($0.1 million) and higher non-timber income ($0.1 million).

Second quarter Adjusted EBITDA2 of $9.9 million was $10.1 million below the prior year period.

Timber Funds

The Timber Funds segment generated second quarter harvest volumes of 90,000 tons, sales of $7.5 million and operating loss of $1.9 million. Adjusting for the portion of the Timber Funds segment attributable to noncontrolling interests and fee revenue to Rayonier, pro forma sales and pro forma operating income were $1.7 million and $0.1 million, respectively.

Second quarter Adjusted EBITDA was $0.7 million.

Real Estate

Real Estate Sales Category Reclassification

Effective April 1, 2020, the Company changed the composition of its Rural and Timberland & Non-Strategic sales categories to better align with the way management internally evaluates real estate sales. The Rural category now includes all real estate sales (excluding development sales) representing a demonstrable premium above timberland value. The Timberland & Non-Strategic category now includes all real estate sales representing little to no premium to timberland value. This category consists primarily of sales of property that management views as non-strategic to our long-term portfolio as well as sales of property for capital allocation purposes that do not fit the definition of a Large Disposition.3 All prior period amounts have been reclassified to reflect the new composition of these two sales categories. The Improved Development, Unimproved Development and Large Disposition categories remain unchanged, and this reclassification had no impact on overall segment results.

Second quarter sales of $50.0 million increased $27.5 million versus the prior year period while operating income of $24.8 million increased $9.4 million versus the prior year period due to a higher number of acres sold (20,310 acres sold versus 3,265 acres sold in the prior year period), partially offset by a decrease in weighted-average prices ($2,545 per acre versus $6,899 per acre in the prior year period).

Improved Development sales of $6.4 million included a $5.4 million sale in the Belfast Commerce Park development project south of Savannah, Georgia consisting of 119 acres at a price of $45,000 per acre in addition to $1.1 million of sales in the Wildlight development project north of Jacksonville, Florida consisting of 17 residential lots ($63,118 per lot or $367,466 per acre). This compares to prior year period sales of $0.2 million in the Wildlight development project, which consisted of six residential townhome lots ($28,750 per lot or $198,000 per acre).

Unimproved Development sales of $8.4 million consisted of a 570 acre sale in St. Johns County, Florida for $14,780 per acre. This compares to prior year period sales of $14.4 million, which consisted of a 784 acre sale in St. Johns County, Florida for $18,402 per acre.

Rural sales of $27.2 million consisted of 7,710 acres at an average price of $3,532 per acre. This compares to prior year period sales of $7.1 million, which consisted of 1,886 acres at an average price of $3,768 per acre.

Timberland and Non-Strategic sales of $9.6 million consisted of 11,907 acres at an average price of $807 per acre. This compares to prior year period sales of $0.8 million, which consisted of 594 acres at an average price of $1,373 per acre. Timberland and Non-Strategic sales in the quarter included several low-value, geographically-isolated parcels with limited plantability and long-term harvest potential.

Second quarter Adjusted EBITDA2 of $44.6 million was $26.3 million above the prior year period.

Trading

Second quarter sales of $24.3 million decreased $11.1 million versus the prior year period due to lower volumes and prices resulting from the government-mandated shutdown in New Zealand and lower export demand as a result of the COVID-19 pandemic. Sales volumes decreased 18% to 267,000 tons versus 325,000 tons in the prior year period. The Trading segment generated operating income of $0.1 million versus operating loss of $0.2 million in the prior year period.

Other Items

Second quarter corporate and other operating expenses of $20.9 million increased $13.2 million versus the prior year period, primarily due to costs related to the Pope Resources merger ($13.5 million), partially offset by lower overhead costs ($0.3 million).

Second quarter interest expense of $9.8 million increased $1.9 million versus the prior year period due to higher outstanding debt following the closing of the Pope Resources merger.

Second quarter income tax expense of $2.9 million decreased $0.6 million versus the prior year period as a result of lower taxable income. The New Zealand subsidiary is the primary driver of income tax expense.

COVID-19 Update & Revised Outlook

“As we continue to adapt to the impacts of the COVID-19 pandemic, our highest priority remains the health and safety of our employees and contractors, as well as their families and communities,” stated Nunes. “Overall, I am very pleased with the level of productivity and engagement that our employees have sustained over the last several months as we’ve operated under a work-from-home model for office employees and under enhanced safety protocols for field employees. This allowed us to remain nimble and respond to ever evolving market conditions as the economy emerged from the shutdown. In the midst of the pandemic, we also had to focus our efforts on the critical task of closing the Pope Resources acquisition as well as integrating Pope Resources’ assets and people into Rayonier. I want to commend and thank our entire team for their tireless efforts on both operating our business and successfully integrating Pope Resources during these extraordinarily challenging times.”

“Overall, we have been encouraged by the resiliency of our business and industry amid this pandemic. Housing construction and repair and remodeling activity have rebounded sharply, driving record highs for wood products prices throughout the U.S. Longer-term, we expect that this will translate to improved log prices, which tend to lag wood products pricing trends. Based on our current outlook for the balance of the year, we now anticipate full-year net income attributable to Rayonier of $38 to $43 million, EPS of $0.27 to $0.31, pro forma EPS of $0.17 to $0.21, and Adjusted EBITDA of $240 to $260 million. Our revised outlook for full-year Adjusted EBITDA reflects an anticipated partial-year contribution of $17 to $20 million from the acquired Pope Resources assets.”

“In our Southern Timber segment, we expect Adjusted EBITDA above our prior guidance and higher full-year harvest volumes of 6.0 to 6.2 million tons, primarily due to anticipated increases in export volume and strong sawtimber demand. We further expect that average pricing in Southern Timber will be relatively flat, as improved sawtimber demand driven by strong lumber pricing is generally expected to offset lower pulpwood pricing due to anticipated mill downtime, an increased supply of wood chip residuals and geographic mix. In our Pacific Northwest Timber segment, we expect Adjusted EBITDA above our prior guidance and higher full-year harvest volumes of 1.6 to 1.7 million tons due to incremental volume from the acquired Pope Resources timberlands. We further expect that Pacific Northwest sawtimber pricing will improve due to strengthening end markets and a higher-value species mix; however, we anticipate pulpwood pricing will be relatively flat and dependent on the duration of domestic mill curtailments. In our New Zealand Timber segment, we expect Adjusted EBITDA above our prior guidance and higher full-year harvest volumes of 2.3 to 2.5 million tons, primarily due to the shorter-than-anticipated shutdown of economic activity in New Zealand. We expect New Zealand pricing to remain relatively flat with higher seasonal demand offset by continued competition from alternative supply sources. In our Real Estate segment, we expect Adjusted EBITDA above our prior guidance due to continued strong demand for rural properties as well as an improved demand outlook for development properties.”

For the full second quarter results, click here.

About Rayonier

Rayonier is a leading timberland real estate investment trust with assets located in some of the most productive softwood timber growing regions in the United States and New Zealand. As of June 30, 2020, Rayonier owned or leased under long-term agreements approximately 2.7 million acres of timberlands located in the U.S. South (1.8 million acres), U.S. Pacific Northwest (507,000 acres) and New Zealand (416,000 acres). The Company also acts as the managing member in a private equity timber fund business with three funds comprising approximately 141,000 acres. On a “look-through basis”, the Company’s ownership in the timber fund business equates to approximately 17,000 acres. More information is available at www.rayonier.com.

Contact:

Mark McHugh – Investors & Media Contact – investorrelations@rayonier.com – (904) 357-9100

Source: Rayonier, Inc.