CATCHMARK TIMBER TRUST A The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I of this report, as well as our consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Overview We acquire and own prime timberlands located in high-demandU.S. mill markets. We manage our operations to generate highly-predictable and stable cash flow from sustainable harvests, opportunistic land sales and asset management fees that comfortably covers our dividend throughout the business cycle.
During the second quarter of 2020, we continued to actively manage our timberlands to achieve an optimum balance among biological timber growth, current harvest cash flow, and responsible environmental stewardship. We actively managed our log merchandising efforts together with delivered and stumpage sales to achieve the highest available price for our timber products.
We continuously assess potential alternative uses of our timberlands, as some of our properties may be more valuable for development, conservation, recreational or other rural purposes than for growing timber. In the second quarter of 2020, we capitalized on the value of our timberland portfolio by opportunistically monetizing timberland properties, including selling 1,100 acres of timberland for$1.7 million . In addition, during the first quarter of 2020, we completed a large disposition of 14,400 acres of timberland located inGeorgia for$21.3 million under our capital recycling program, using the net proceeds to pay down debt. When evaluating our land sale opportunities, we assess a full range of matters relating to the timberland property or properties, including, but not limited to inventory stocking below portfolio average, higher mix of hardwood inventory, poor productivity characteristics, geographical procurement and operating areas, and/or timber reservation opportunities.
We are continuing to actively pursue additional strategic investment opportunities in our target markets, including direct acquisition of high-quality industrial timberland properties, with our average transaction size ranging from 2,500 to 25,000 acres.
From time to time when we believe our stock is undervalued, we may take advantage of market opportunities by using our share repurchase program, or SRP, to buy shares and return capital to our stockholders. In the first half of 2020, we repurchased$2.0 million in shares under our SRP and, as ofJune 30, 2020 ,$13.7 million remains available under our current repurchase program.
OnJune 24, 2020 , we invested an additional$5.0 million in the Triple T Joint Venture on the same terms and conditions as our existing investment. In connection with this additional investment, we entered into amended joint venture and asset management agreements with the Triple T Joint Venture. The amended asset management agreement designatedBrian M. Davis , our Chief Executive Officer and President, as the "Key Man" and modified the asset management fee payable to us, as described in Note 4 -Unconsolidated Joint Ventures . The amended asset management agreement is expected to increase the asset management fee payable to us over the next two years. The amended joint venture agreement increased the 10.25% cumulative return on thePreferred Investors' interests in the Triple T Joint Venture's subsidiary REIT by 0.5% per quarter, subject to a maximum increase of 2.0% and subject to decreases in other circumstances. The proceeds of our additional$5.0 million investment, along with the proceeds from$140.0 million of borrowings under the Triple T Joint Venture's credit facility, were used to make a payment of$145.0 million to GP in connection with a renegotiated wood supply agreement between the Triple T Joint Venture and GP intended to achieve market-based pricing on timber sales, increase reimbursement for extended haul distances, provide the 31 -------------------------------------------------------------------------------- Table of Contents ability for the Triple T Joint Venture to sell sawtimber to other third parties, and expand the Triple T Joint Venture's ability to sell large timberland parcels to third-party buyers. The supply agreement between the Triple T Joint Venture and GP was also extended by two years from 2029 to 2031, with optimized harvest volume obligations to enhance and preserve long-term asset value.
Capital Activities
During the second quarter, we amended our credit agreement to reduce or remove certain restrictive financial covenants providing increased capacity for working capital or other purposes if needed under our Revolving Credit Facility, provide the ability to make additional investments in joint ventures during the year if we meet certain requirements, and to lower unused commitment fees (see Liquidity and Capital Resources - Amendment to Amended Credit Agreement below for additional information). During the three months endedJune 30, 2020 , we borrowed$5.0 million under our Multi-Draw Term Facility to fund the additional investment in the Triple T Joint Venture. We paid$6.5 million of dividends to our stockholders and repurchased$0.1 million of shares of common stock under our SRP at an average price of$7.76 per share during the quarter.
Impact of COVID-19 On Our Business
InMarch 2020 , theWorld Health Organization declared the coronavirus (COVID-19) outbreak a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. The COVID-19 outbreak is a widespread health crisis that has adversely affected the economies and financial markets of many countries, including theU.S. , resulting in an economic downturn that could affect demand for our products and impact our operating results. Economists expect the impact of the pandemic will continue to be significant during the remainder of 2020. The outbreak resulted in authorities implementing numerous measures to try to contain the virus, such as quarantines and shelter in place orders. During March andApril 2020 , most states issued executive orders requiring workers to remain at home, unless their work was critical, essential, or life-sustaining. While many of these executive orders have expired or been partially lifted, others remain in place and call for extended quarantines. These measures may remain in place for a significant period and adversely affect our business, results of operations and financial condition as well as the business, operations and financial conditions of our customers and contractors. We believe that, based on the various standards published to date, our business, particularly with respect to supplying raw materials to the forest products, paper and packaging industry, and the businesses of our customers are essential industries that have been allowed to remain open. Accordingly, COVID-19 has had a limited impact on our physical operations to date. We have implemented new procedures to support the health and safety of our employees, contractors and customers and we are following all federal, state and local health department guidelines. The costs associated with these safety procedures were not material. While the response to the COVID-19 pandemic began to impact our business toward the end of the first quarter of 2020 and continued through the quarter endedJune 30,2020 , we managed our harvest operations effectively through the pandemic during the second quarter, increasing total harvest volumes by 15% year-over-year and generating comparable timber sales revenue and Harvest EBITDA to prior year period. Projections under these circumstances are necessarily guarded and subject to change, but the COVID-19 pandemic is shifting demand patterns to favor pulp-related products. As such, we expect demand for pulp-related products, necessary for paper and packaging, to remain stable, and lumber demand related to the housing market to suffer at least in the short term. Although demand for sawtimber improved throughout the second quarter, the exact timing and pace of the recovery are uncertain as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others remain closed or are enforcing extended quarantines. However, given the ongoing and dynamic nature of the circumstances, it is not possible to predict how long the impact of the coronavirus outbreak on the economic environment and on our business will last or how significant it will ultimately be. A sustained decline in the economy as a result of the COVID-19 pandemic and the demand for timber could materially and adversely impact our business, results of operations and financial condition and our ability to make distributions to our stockholders. 32 -------------------------------------------------------------------------------- Table of Contents The ultimate risk posed by COVID-19 remains uncertain; however, reports as of the date hereof suggest that it poses a material risk to our business, results of operations and financial condition, including as a result of (1) declines in our harvest volumes due to (i) a deterioration in the housing market and a resulting decrease in demand for our sawtimber, (ii) a decline in production level at our customers' mills due to instances of COVID-19 among their employees or decreased demand for their products and (iii) the effects of COVID-19 on contract logging operations, transportation and other critical third-party providers; (2) the inability to complete timberland sales due to the inability of potential buyers to complete title searches and other customary due diligence, including as a result of state and local government office closures; (3) effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the company's financial reporting and internal controls; and (4) market volatility and market downturns negatively impacting the trading of our common stock. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. However, we are monitoring the progression of the pandemic and its potential effect on our financial position, results of operations, and cash flows. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. We are bolstered by our delivered wood model and fiber supply agreements, which provide a steady source of demand from reliable counterparties. With respect to liquidity, we believe we have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on-hand and borrowing capacity, necessary to meet our current and future obligations that become due over the next 12 months. We currently have no plans to reduce anticipated spending on capital investment projects. After our deleveraging initiatives and other balance sheet strengthening in 2019 and the first half of 2020, we believe we are well positioned to weather the economic turmoil. Timberland Portfolio As ofJune 30, 2020 , we wholly owned interests in 413,900 acres of high-quality industrial timberland in theU.S. South andPacific Northwest , consisting of 391,700 acres of fee timberlands and 22,200 acres of leased timberlands. Our wholly-owned timberlands are located within attractive fiber baskets encompassing a diverse group of pulp, paper and wood products manufacturing facilities. Our Southern timberlands consisted of 72% pine plantations by acreage and 53% sawtimber by volume. OurPacific Northwest timberlands consisted of 90% productive acres and 82% sawtimber by volume. Our leased timberlands include 22,200 acres under one long-term lease expiring in 2022, which we refer to as the LTC Lease. Wholly-owned timberland acreage by state is listed below: Acres by state as of June 30, 2020 (1) Fee Lease Total South Alabama 67,800 1,800 69,600 Florida 2,000 - 2,000 Georgia 232,300 20,400 252,700 North Carolina 100 - 100 South Carolina 71,400 - 71,400 373,600 22,200 395,800Pacific Northwest Oregon 18,100 - 18,100 Total 391,700 22,200 413,900
(1) Represents wholly-owned acreage only; excludes ownership interest in acreage acquired by joint ventures.
As of
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(in millions) Tons
Merchantable timber inventory: (1) Fee Lease Total
Pulpwood 7.2 0.4 7.6
Sawtimber (2) 8.6 0.3 8.9
Total 15.8 0.7 16.5
(1)Merchantable timber inventory does not include current year growth. Pacific
Northwest merchantable timber inventory is converted from MBF to tons using a
factor of eight.
(2) Includes chip-n-saw and sawtimber.
In addition to our wholly-owned timberlands, we had the following investments in
joint ventures as of June 30, 2020 (see Note 4 - Unconsolidated Joint Ventures
to our accompanying consolidated financial statements for further details):
As
of
Dawsonville Bluffs Joint
Venture Triple T Joint Venture
Ownership percentage 50.0% 22.0% (1)
Acreage owned by the joint venture - 1,091,600
Merchantable timber inventory (million (2)
tons) - 42.3
Location Georgia Texas
(1)Represents our share of total partner capital contributions. (2)Triple T considers inventory to be merchantable at age 12. Merchantable timber inventory does not include current year growth.
Segment Information
We have three reportable segments: Harvest, Real Estate and Investment
Management. Our Harvest segment includes wholly-owned timber assets and
associated timber sales, other revenues and related expenses. Our Real Estate
segment includes timberland sales, cost of timberland sales and large
dispositions. Our
Timber Agreements
A significant portion of our timber sales is derived from the Mahrt Timber Agreements under which we sell specified amounts of timber to WestRock subject to market pricing adjustments. For full year 2020, WestRock is required to purchase a minimum of 409,000 tons of timber under the Mahrt Timber Agreements. For the six months endedJune 30, 2020 , WestRock purchased 181,900 tons under the Mahrt Timber Agreements, which represented 11% of our net timber sales revenue. WestRock has historically purchased tonnage that exceeded the minimum requirement under the Mahrt Timber Agreements. See Note 7 - Commitments and Contingencies to our accompanying consolidated financial statements for additional information regarding the material terms of the Mahrt Timber Agreements. We assumed a pulpwood supply agreement with IP (the "Carolinas Supply Agreement") in connection with a timberland acquisition in 2016. For full year 2020, IP is required to purchase a minimum of 82,000 tons of pulpwood under the Carolinas Supply Agreement. During the six months endedJune 30, 2020 , we sold 31,500 tons under the Carolinas Supply Agreement, which represented 2% of our net timber sales revenue.
Liquidity and Capital Resources
Overview
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Cash flows generated from our operations are primarily used to fund recurring expenditures and distributions to our stockholders. The amount of distributions to common stockholders is authorized by our board of directors and is dependent upon a number of factors, including funds deemed available for distribution based principally on our current and future projected operating cash flows, less capital requirements necessary to maintain our existing timberland portfolio. In determining the amount of distributions to common stockholders, we also consider our financial condition, our expectations of future sources of liquidity, current and future economic conditions, market demand for timber and timberlands, and tax considerations, including the annual distribution requirements necessary to maintain our status as a REIT under the Code. In determining how to allocate cash resources in the future, we will initially consider the source of the cash. We anticipate using a portion of cash generated from operations, after payments of periodic operating expenses and interest expense, to fund certain capital expenditures required for our timberlands. Any remaining cash generated from operations may be used to partially fund timberland acquisitions and pay distributions to stockholders. Therefore, to the extent that cash flows from operations are lower, timberland acquisitions and stockholder distributions are anticipated to be lower as well. Capital expenditures, including new timberland acquisitions, are generally funded with cash flow from operations or existing debt availability; however, proceeds from future debt financings, and equity and debt offerings may be used to fund capital expenditures, acquire new timberland properties, invest in joint ventures, and pay down existing and future borrowings. From time to time, we also sell certain large timberland properties in order to generate capital to fund capital allocation priorities, including but not limited to redeployment into more desirable timberland investments, pay down of outstanding debt or repurchase of shares of our common stock. Such large dispositions are typically larger in size and more infrequent than sales under our normal land sales program.
Shelf Registration Statement and Equity Offerings
OnFebruary 28, 2020 , we filed a shelf registration statement on Form S-3 (File No. 333-236793) with theSEC , which was declared effective onMay 7, 2020 . Our shelf registration statement provides us with future flexibility to offer, from time to time and in one or more offerings, up to$600 million in an undefined combination of debt securities, common stock, preferred stock, depositary shares, or warrants. The terms of any such future offerings would be established at the time of an offering. OnMay 7, 2020 , we entered into a distribution agreement with a group of sales agents relating to the sale from time to time of up to$75 million in shares of our common stock in at-the-market offerings or as otherwise agreed with the applicable sales agent, including in block transactions. These shares are registered with theSEC under our shelf registration statement. As ofJune 30, 2020 , we have not sold any shares of common stock under the distribution agreement.
Amendment to Amended Credit Agreement
OnMay 1, 2020 , we entered into an amendment to our credit agreement dated as ofDecember 1, 2017 , as amended onAugust 22, 2018 ,June 28, 2019 andFebruary 12, 2020 with CoBank, which provided for, among other things: (1) the removal of the LTV ratio covenant reduction, from 50% to 45%, which would have otherwise been effective onDecember 31, 2021 ; (2) the removal of the minimum liquidity balance of$25.0 million , which enables us to draw down more proceeds for working capital or other purposes if needed under our Revolving Credit Facility; (3) a reduction in the Multi-Draw Term Facility commitment from$200 million to$150 million , which still provides us with ample capacity for future acquisitions while lowering our unused commitment fees; and (4) the ability to make additional investments in joint ventures during 2020 if we meet certain LTV ratio requirements.
The table below presents the details of each credit facility under the Amended
Credit Agreement as of
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(dollars in thousands)
Outstanding Remaining
Facility Name Maturity Date Interest Rate(1) Unused Commitment Fee Total Capacity Balance Capacity
Revolving Credit Facility 12/1/2022 LIBOR + 1.90% 0.35% $ 35,000 $ - $ 35,000
Multi-Draw Term Facility 12/1/2024 LIBOR + 1.90% 0.35% 150,000 34,086 115,914
Term Loan A-1 12/23/2024 LIBOR + 1.75% N/A 100,000 100,000 -
Term Loan A-2 12/1/2026 LIBOR + 1.90% N/A 100,000 100,000 -
Term Loan A-3 12/1/2027 LIBOR + 2.00% N/A 68,619 68,619 -
Term Loan A-4 8/22/2025 LIBOR + 1.70% N/A 140,000 140,000 $ -
Total $ 593,619 $ 442,705 $ 150,914 (1)The applicable LIBOR margin on the Revolving Credit Facility and the Multi-Draw Term Facility ranges from a base rate plus between 0.50% to 1.20% or a LIBOR rate plus 1.50% to 2.20%, depending on the LTV ratio. The unused commitment fee rates also depend on the LTV ratio.
Borrowings under the Revolving Credit Facility may be used for general working capital, to support letters of credit, to fund cash earnest money deposits, to fund acquisitions in an amount not to exceed$5.0 million , and for other general corporate purposes. The Multi-Draw Term Facility, which is interest only until its maturity date, may be used to finance timberland acquisitions and associated expenses, to fund investment in joint ventures, to fund the repurchase of our common stock, and to reimburse payments of drafts under letters of credit.
Patronage Dividends
We are eligible to receive annual patronage dividends from our lenders (the "Patronage Banks") under the Amended Credit Agreement. The annual patronage dividend depends on the weighted-average patronage-eligible debt balance with each participating lender during the respective fiscal year, as calculated by CoBank, as well as the financial performance of the Patronage Banks. InMarch 2020 , we received patronage dividends of$4.1 million , including$4.0 million of standard patronage dividends and a$0.1 million special patronage dividend. 75% of the standard patronage dividends was received in cash and the remaining 25% was received in equity in Patronage Banks. The equity component of the patronage dividend is redeemable for cash only at the discretion of the Patronage Banks' board of directors. The special patronage dividend was received in cash. For the three months endedJune 30, 2020 , we accrued$0.9 million of patronage dividends receivable for 2020. For the six months endedJune 30, 2020 , we accrued$1.8 million of patronage dividends receivable for 2020, approximately 75% of which is expected to be received in cash inMarch 2021 .
Debt Covenants
As ofJune 30, 2020 , the Amended Credit Agreement contains, among others, the following financial covenants which: •limit the LTV ratio to 50%; •require maintenance of a FCCR of not less than 1.05:1.00 at any time; and •limit the aggregate capital expenditures to 1% of the value of the timberlands during any fiscal year.
We were in compliance with the financial covenants of the Amended Credit
Agreement as of
Interest Rate Swaps
As of
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Share Repurchase Program
On August 7, 2015 , our board of directors approved a share repurchase program
for up to $30.0 million of our common stock at management's discretion (the
"SRP"). The program has no set duration and the board may discontinue or suspend
the program at any time. During the three months ended June 30, 2020 , we
repurchased 8,648 shares of our common stock at an average price of $7.76 per
share for a total of $0.1 million under the SRP, including transaction costs.
During the six months ended June 30, 2020 , we repurchased 304,719 shares of our
common stock at an average price of $6.53 per share for a total of $2.0 million
under the SRP, including transaction costs. All common stock purchases under the
SRP were made in open-market transactions and were funded with cash on-hand. As
of June 30, 2020 , we had 48.8 million shares of common stock outstanding and may
repurchase up to an additional $13.7 million under the SRP. We can borrow up to
$30.0 million under the Multi-Draw Term Facility to repurchase our common stock.
Management believes that opportunistic repurchases of our common stock are a
prudent use of capital resources.
Short-Term Liquidity and Capital Resources
Net cash provided by operating activities for the six months endedJune 30, 2020 was$20.0 million ,$2.8 million higher than the six months endedJune 30, 2019 . Cash provided by operating activities consisted primarily of receipts from customers for timber, timberland sales and asset management fees, reduced by payments for operating costs, general and administrative expenses, and interest expense. The increase was primarily due to a$3.6 million decrease in cash paid for interest as a result of lower average outstanding debt balance and lower interest rates, a$3.5 million higher working capital change ($2.0 million of which related to post-retirement benefits payable), and a$1.8 million increase in net timber sales, offset by a$3.7 million decrease in net proceeds from timberland sales,$1.5 million paid in connection with our former CEO's retirement, and a$0.3 million decrease in other revenues. Net cash provided by investing activities for the six months endedJune 30, 2020 was$12.5 million as compared to$4.0 million for the six months endedJune 30, 2019 . We received$15.6 million more in gross proceeds from large dispositions in the six months endedJune 30, 2020 . We invested an additional$5.0 million in the Triple T Joint Venture, incurred$1.6 million more in capital expenditures, and received$0.4 million less in cash distributions from the Dawsonville Bluffs Joint Venture during the six months endedJune 30, 2020 as compared to 2019. Net cash used in financing activities for the six months endedJune 30, 2020 was$34.7 million as compared to$16.0 million for the six months endedJune 30, 2019 . We paid down$20.9 million of our outstanding debt balance on the Multi-Draw Term Facility with net proceeds received from large dispositions. We paid cash distributions of$13.2 million to our stockholders during the first half of 2020, funded from net cash provided by operating activities. We repurchased$3.1 million of shares of our common stock using cash on-hand and paid$1.5 million in interest expense pursuant to the terms of our interest rate swaps during the six months endedJune 30, 2020 . Additionally, we paid$1.0 million in deferred financing costs during the first half of 2020, in which$0.9 million was paid in connection with the amendment to our credit agreement inMay 2020 . We also borrowed$5.0 million under our Multi-Draw Term Facility to fund the additional equity investment in the Triple T Joint Venture. We believe that we have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on-hand and borrowing capacity, necessary to meet our current and future obligations that become due over the next 12 months. As ofJune 30, 2020 , we had a cash balance of$9.4 million and had access to$150.9 million of additional borrowing capacity under the Amended Credit Agreement.
Long-Term Liquidity and Capital Resources
Over the long-term, we expect our primary sources of capital to include net cash
flows from operations, including proceeds from timber sales, timberland sales,
asset management fees, and distributions from unconsolidated joint ventures, and
from other capital raising activities, including large dispositions, proceeds
from secured or unsecured financings from banks and other lenders; and public
offerings of equity or debt securities. Our principal demands for
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capital include operating expenses, interest expense on any outstanding
indebtedness, repayment of debt, timberland acquisitions, certain other capital
expenditures, and stockholder distributions.
Contractual Obligations and Commitments
As of
Payments Due by Period
(in thousands) Total 2020 2021-2022 2023-2024 Thereafter
Debt obligations (1) $ 442,705 $ - $ - $ 134,086 $ 308,619
Estimated interest on debt
obligations (1) (2) $ 86,572 $ 7,163 $ 28,651 $ 28,604 $ 22,154
Operating lease obligations (3) $ 4,958 $ 611 $ 1,592 $ 882 $ 1,873
Total $ 534,235 $ 7,774 $ 30,243 $ 163,572 $ 332,646
(1)Represents respective obligations under our Amended Credit Agreement as of
June 30, 2020 , of which $408.6 million was outstanding under the term loans and
$34.1 million was outstanding under the Multi-Draw Term Facility.
(2)Amounts are before the consideration of patronage dividends and include the
impact of interest rate swaps. See Note 5 - Notes Payable and Lines of Credit
and Note 6 - Interest Rate Swaps to our accompanying consolidated financial
statements for additional information.
(3)Represents future payments for our office lease and timberland operating
lease. See Note 7 - Commitments and Contingencies to our accompanying
consolidated financial statements for additional information.
Distributions
Our board of directors has authorized cash distributions quarterly. The amount of future distributions that we may pay will be authorized by our board of directors. During the six months endedJune 30, 2020 , our board of directors authorized the following distributions: Declaration Date Record Date Payment Date Distribution Per Share February 13, 2020 February 28, 2020 March 16, 2020$0.135 May 4, 2020 May 29, 2020 June 15, 2020$0.135 For the six months endedJune 30, 2020 , we paid total distributions of$13.2 million , including$0.1 million paid to the limited partners of CatchMark Timber OP. The distributions were funded from net cash provided by operating activities.
On
Results of Operations Overview Our results of operations are materially impacted by the fluctuating nature of timber prices, changes in the levels and mix of our harvest volumes and associated depletion expense, changes to associated depletion rates, the level of timberland sales, management fees earned, large dispositions, varying interest expense based on the amount and cost of outstanding borrowings, and performance of our unconsolidated joint ventures. Timber sales volumes, harvest mix, net timber sales prices, timberland sales, large dispositions, and changes in the levels and composition for the three months and six months endedJune 30, 2020 and 2019 are shown in the following tables: Three Months Ended June 30, Change 2020 2019 % 38
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