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, 2020 . 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 covers our dividend throughout the business cycle. We actively manage our timberlands to achieve an optimum balance among biological timber growth, current harvest cash flow, and responsible environmental stewardship. During the third quarter of 2021, we realized significant net timber sales price increases in ourU.S. South region, 8% for pulpwood and 11% for sawtimber as compared to the prior year quarter. As a result, we generated a 1% increase inU.S. South timber sales revenue despite an 11% decrease in harvest volumes due to persistent wet weather conditions and recent capital recycling dispositions. Our stumpage prices in theU.S. South region maintained significant premiums over South-wide averages, a result of our micro-market advantages, and our timberlands continue to maintain consistent productivity on a per-acre basis. 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 third quarter of 2021, we sold 1,000 acres of timberland for$2.1 million , or$2,029 per acre under our retail land sales program. Acres sold in the current quarter had lower average merchantable timber stocking than our portfolio average. 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, sub-optimal productivity characteristics, geographical procurement and operating areas, and/or timber reservation opportunities. We also continued to evaluate our portfolio for potential large dispositions under our capital recycling program whereby we sell blocks of timberland properties to generate proceeds to fund capital allocation priorities, including, but not limited to redeployment into more desirable timberland investments, paying down outstanding debt or repurchasing shares of our common stock. During the third quarter of 2021, we completed a large disposition of approximately 18,100 acres of primeOregon timberlands, the Bandon Disposition, for$100.0 million , or$5,536 per acre, under our capital recycling program. TheBandon property was purchased inAugust 2018 for$88.8 million , or$4,916 per acre. We recognized a gain of$23.4 million on the Bandon Disposition and used net proceeds of$95.4 million to pay down outstanding debt. With theBandon Disposition, we have concluded our capital recycling program involving large dispositions for now. We generated significant asset management fee revenue through our investment management business. We recognized asset management fee revenue of$3.0 million during the quarter, including incentive-based promotes from the Dawsonville Bluffs Joint Venture, which had a mitigation bank with a book basis of$2.1 million as ofSeptember 30, 2021 . In connection with the Triple T Exit, we entered into a transition services agreement pursuant to which we will continue to provide certain asset management services to the Triple T Joint Venture through the first quarter of 2022 in exchange for a$5 million service fee that was received onOctober 14, 2021 . We continue to execute our three-pillar strategy of owning and investing in prime timberlands located in leading mill markets, and optimizing harvest operations through delivered wood sales and opportunistic stumpage sales. Following the Bandon Disposition, we have further focused our ownership and operations on the nation's premier wood basket, theU.S. South, where we seek to expand our presence in superior mill markets where we already have strong local relationships, to strengthen our industry-leading Harvest EBITDA per acre while maintaining stable merchantable inventory per acre. Our strategic investment opportunities include direct acquisition of high-quality industrial timberland properties with a target average transaction size ranging from$5 million to$50 million and the development of new value creation opportunities such as carbon sequestration, wetlands mitigation banking, solar projects and other important environmental initiatives. 29 -------------------------------------------------------------------------------- Table of Contents We continue to have ample liquidity for growth initiatives and other capital allocation priorities. Our active debt and interest rate management strategy provides us attractive borrowing costs and staggered maturities. OnAugust 4, 2021 , we amended our credit agreement to, among other things, (i) establish a$68.6 million revolver feature on Term Loan A-3 and (ii) extend the maturity date of the existing Revolving Credit Facility fromDecember 1, 2022 toAugust 4, 2026 . This amendment allows us to deleverage by using proceeds from the Bandon Disposition to pay down our debt while improving available debt capacity for future growth, to extend our weighted-average life of debt, and to continue to improve our overall liquidity. OnOctober 14, 2021 , we further amended our credit agreement under which we are allowed to retain need proceeds from higher-and-better use timberland sales until it exceeds 3% of the aggregate value of our timberlands before any repayment of the outstanding debt is required. In addition to the$95.4 million debt repayment with net proceeds from the Bandon Disposition, onOctober 15, 2021 , we paid down an additional$40.0 million outstanding debt balance with proceeds received from the Triple T Exit and the transition services fees. During the third quarter of 2021, we paid$6.5 million of distributions to our stockholders, which were fully covered by net cash provided by operating activities. We did not repurchase any shares of our common stock under our SRP during the quarter.
Impact of COVID-19 On Our Business
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 and we are following all federal, state and local health department guidelines. The costs associated with these safety procedures were not material. The COVID-19 pandemic has not had a significant negative impact on our overall results. It is possible the COVID-19 pandemic, particularly considering variant strains of the virus, could further impact our operations and the operations of our customers and contractors as a result of quarantines, facility closures, illnesses, and travel and logistic restrictions. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the resumption of high levels of infection and hospitalizations, the resulting impact on our customers, contractors and vendors, remedial actions and stimulus measures adopted by federal, state and local governments, and the extent to which normal economic and operating conditions are impacted. Given the ongoing and dynamic nature of the circumstances, it is not possible to predict the future impact of the COVID-19 pandemic on our business. We believe we are well positioned to weather additional economic turmoil as a result of our deleveraging initiatives and other balance sheet strengthening undertaken over the last three years.
Timberland Portfolio
As of
Acres by state as of September 30, 2021 (1) Fee Lease Total Alabama 65,600 1,800 67,400 Georgia 221,100 12,000 233,100 South Carolina 69,600 - 69,600 Total 356,300 13,800 370,100
(1) Represents wholly-owned acreage only; excludes ownership interest in acreage held by joint ventures.
As of
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(in millions) Tons
Merchantable timber inventory (1) Fee Lease Total
Pulpwood 6.1 0.2 6.3
Sawtimber (2) 7.6 0.3 7.9
Total 13.7 0.5 14.2
(1)Merchantable timber inventory does not include current year growth. (2) Includes chip-n-saw and sawtimber.
In addition to our wholly-owned timberlands, we had the following investments in
joint ventures as of
As of
Dawsonville Bluffs Joint Venture Triple T Joint Venture
Ownership percentage 50.0% 22.0% (1)
Acreage owned by the joint venture - 773,600
Merchantable timber inventory (million (2)
tons) - 30.1
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 2021, WestRock is required to purchase a minimum of 380,800 tons of timber under the Mahrt Timber Agreements. For the nine months endedSeptember 30, 2021 , WestRock purchased 303,000 tons under the Mahrt Timber Agreements, which represented 12% 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 are party to a pulpwood supply agreement with IP (the "Carolinas Supply Agreement"). For full year 2021, IP is required to purchase a minimum of 88,600 tons of pulpwood under the Carolinas Supply Agreement. During the nine months endedSeptember 30, 2021 , we sold 68,700 tons under the Carolinas Supply Agreement, which represented 3% of our net timber sales revenue.
Liquidity and Capital Resources
Overview
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
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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 pay distributions to
stockholders and partially fund timberland acquisitions. Therefore, to the
extent that cash flows from operations are lower, whether as a result of a
reduction in anticipated harvest amounts or timber sales, decreases in asset
management fees or distributions from joint ventures, or otherwise, 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$75 million in shares of our common stock in at-the-market offerings or as otherwise agreed with the applicable sales agent, including in block transactions. These shares are registered with theSEC under our shelf registration statement. As ofSeptember 30, 2021 , we have not sold any shares of common stock under the distribution agreement.
Credit Facilities
The table below presents the details of each credit facility under the Amended Credit Agreement as ofSeptember 30, 2021 : (dollars in thousands) Outstanding Remaining Facility Name Maturity Date Interest Rate (1) Unused Commitment Fee (1) Total Capacity Balance Capacity Revolving Credit Facility 8/4/2026 LIBOR + 1.90% 0.30%$ 35,000 $ -$ 35,000 Multi-Draw Term Facility 12/1/2024 LIBOR + 1.90% 0.30% 150,000 - 150,000 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 (2) 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 $ 340,000 $ 253,619
(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.
(2)Term Loan A-3 has an 18-month revolver feature from
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 32 -------------------------------------------------------------------------------- Table of Contents 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.
On
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 2021 , we received patronage dividends of$4.1 million , including$3.9 million of standard patronage dividends and a$0.2 million special patronage dividend. 75% of the standard patronage dividends was received in cash and the remaining 25% was received in equity of the 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 nine months endedSeptember 30, 2021 , we accrued$2.7 million of patronage dividends receivable for 2021, approximately 75% of which is expected to be received in cash inMarch 2022 .
Debt Covenants
As ofSeptember 30, 2021 , the Amended Credit Agreement contains, among others, the following financial covenants which: •limit the LTV ratio to 50% at any time; •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
Share Repurchase Program
OnAugust 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 endedSeptember 30, 2021 , we did not repurchase any share of our common stock under the SRP. As ofSeptember 30, 2021 , we had 48.9 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 nine months endedSeptember 30, 2021 was$36.9 million ,$9.2 million higher than the nine months endedSeptember 30, 2020 . Cash provided by operating activities consisted primarily of receipts from customers for timber sales, timberland sales and asset management fees, reduced by payments for operating costs, general and administrative expenses, and interest expense. The increase in net cash provided by operating activities was primarily due to a$4.1 million increase in net proceeds from timberland sales, a$1.4 million increase in net timber sales, a$2.8 million decrease in cash paid for interest, and a$2.3 million 33 -------------------------------------------------------------------------------- Table of Contents decrease in general and administrative expenses, offset by a$0.8 million change in working capital due to timing of receipts and payments and a$0.6 million increase in other operating expenses. Net cash provided by investing activities for the nine months endedSeptember 30, 2021 was$103.6 million ,$92.0 million higher than the nine months endedSeptember 30, 2020 . Net cash provided by investing activities in the current year were generated primarily from large dispositions, including the Bandon Disposition that closed in the third quarter 2021. We received$85.9 million more in gross proceeds from large dispositions,$0.7 million more in cash distributions from the Dawsonville Bluffs Joint Venture, and incurred$0.4 million less in capital expenditures during the nine months endedSeptember 30, 2021 . Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$127.9 million as compared to$42.8 million for the nine months endedSeptember 30, 2020 . We paid down$102.7 million of our outstanding debt balance on the Term Loan A-3 and the Multi-Draw Term Facility with net proceeds received from large dispositions. We paid cash distributions of$19.7 million to our stockholders in the current year period, funded from net cash provided by operating activities. We paid$4.3 million in interest expense pursuant to the terms of our interest rate swaps, used$0.8 million to repurchase shares of our common stock for tax withholding purposes, and paid$0.3 million in deferred financing costs in connection with our credit agreement amendment inAugust 2021 . During the same period of 2020, we paid down$20.9 million of our outstanding debt balance on the Multi-Draw Term Facility, we repurchased$3.4 million of shares of our common stock, paid$2.9 million in interest expense pursuant to the terms of our interest rate swaps, and paid$1.0 million of deferred financing costs, of which$0.9 million was paid in connection with the amendment to our credit agreement inMay 2020 . 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 ofSeptember 30, 2021 , we had a cash balance of$24.6 million and had access to$253.6 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, revenues generated from environmental initiatives, and from other capital raising activities, including proceeds from secured or unsecured financings from banks and other lenders; and public offerings of equity or debt securities. Our principal demands for capital include operating expenses, interest expense on any outstanding indebtedness, repayment of debt, timberland acquisitions, certain other capital expenditures, and stockholder distributions. Access to borrowing capacity under our Amended Credit Agreement depends on continued compliance with debt covenants, which can be impacted by any reduction in the value of our timberlands and reductions in cash flows from operations.
Distributions
Our board of directors has authorized cash distributions quarterly. The amount of future distributions that we may pay will be determined by our board of directors as described in Overview section above. During the nine months endedSeptember 30, 2021 , we declared the following distributions: Declaration Date Record Date Payment Date Distribution Per Share February 11, 2021 February 26, 2021 March 15, 2021$0.135 May 6, 2021 May 28, 2021 June 15, 2021$0.135 August 5, 2021 August 31, 2021 September 15, 2021$0.135 For the nine months endedSeptember 30, 2021 , we paid total distributions of$19.7 million . The distributions were funded from net cash provided by operating activities.
On
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--------------------------------------------------------------------------------Table of Contents 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.
Selected operational results for the three months and nine months ended
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