POTLATCHDELTIC CORPORATION Forward-Looking Information
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, expected impacts of COVID-19 on our business and our ability to continue operations during the pandemic, fair value of hedging instruments and swaps, expected return on pension assets, recognition of compensation costs relating to our performance share awards (PSAs) and restricted stock units (RSUs), required contributions to pension plans, expected amortization of unrecognized compensation cost of PSAs and RSUs, amount of net losses on cash flow hedges expected to be reclassified into earnings in the next 12 months, expected tax payments and deferrals, anticipated share repurchases and dividend payments, anticipated cash balances, cash flows from operations and expected liquidity, potential uses of our credit facility, theU.S. housing market, home repair and remodeling activity, the lumber and log markets, expected harvest volumes, expected lumber shipments, expected rural real estate and residential real estate development sales, including the closing of the sale of approximately 72,000 rural acres in the fourth quarter of 2020, the average price per acre and developed lot, sufficiency of cash to meet operating requirements, 2020 capital expenditures and similar matters. Words such as "anticipate," "expect," "will," "intend," "plan," "target," "project," "believe," "seek," "schedule," "estimate," "could," "can," "may" and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, the following: • changes inthe United States and international economies; • changes in interest rates and discount rates;
• credit availability including homebuyers' ability to qualify for mortgages;
• availability of labor and developable land;
• changes in the level of residential and commercial construction and
remodeling activity;
• changes in tariffs, quotas and trade agreements involving wood products;
• changes in demand for our products and real estate;
• changes in production and production capacity in the forest products
industry;
• competitive pricing pressures for our products;
• unanticipated manufacturing disruptions;
• weather conditions, fires or other natural disasters;
• changes in the cost or availability of transportation;
• changes in principle expenses;
• impact of the recent coronavirus (COVID-19) outbreak on our business,
suppliers, consumers, customers and employees; and
• disruptions or inefficiencies in our supply chain and/or operations.
For a discussion of some of the factors that may affect our business, results
and prospects and a nonexclusive listing of forward-looking statements, refer to
Cautionary Statement Regarding Forward-Looking Information on page 1 and Risk
Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2019 and Risk Factors in Part II, Item 1A in this Form 10-Q.
Forward -looking statements contained in this report present our views only as of
the date of this report. Except as required under applicable law, we do not
intend to issue updates concerning any future revisions of our views to reflect
events or circumstances occurring after the date of this report.
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--------------------------------------------------------------------------------Our Company
We are a leading timberland real estate investment trust (REIT) with operations in seven states where we own approximately 1.8 million acres of timberland, six sawmills, an industrial grade plywood mill and real estate development projects. Our business is organized into three business segments: Timberlands, Wood Products and Real Estate. The Timberlands segment includes planting and harvesting trees and building and maintaining roads. The Timberlands segment also generates revenues from non-timber resources such as hunting leases, recreation permits and leases, mineral rights contracts, oil and gas royalties and carbon sequestration. The Wood Products segment manufactures and markets lumber and plywood.The Real Estate segment includes the sale of land holdings deemed non-strategic or identified as having higher and better use alternatives, master planned community development and a country club. Our Timberlands segment supplies our Wood Products segment with a portion of its wood fiber needs. These intersegment revenues are based on prevailing market prices and typically represent a sizeable portion of the Timberlands segment's total revenues. Our other segments generally do not generate intersegment revenues. In the discussion of our consolidated results of operations, our revenues and expenses are reported after elimination of intersegment revenues and expenses. In the business segment discussions, each segment's revenues and expenses, as applicable, are presented before elimination of intersegment revenues and expenses. The operating results of our Timberlands, Wood Products and Real Estate business segments have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, tariffs, quotas and trade agreements, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, lumber prices, weather conditions, disruptions or inefficiencies in our supply chain including the availability of transportation, the efficiency and level of capacity utilization of our Wood Products manufacturing operations, changes in our principal expenses such as log costs, asset dispositions or acquisitions, impact of pandemics, fires, other natural disasters and other factors.
Non-GAAP Measures
To supplement our financial statements presented in accordance with generally accepted accounting principles inthe United States (GAAP), we use certain non-GAAP measures on a consolidated basis, including Adjusted EBITDDA and Cash Available for Distribution (CAD), which are defined and further explained and reconciled to the nearest GAAP measure in the Liquidity and Performance Measures section below. Our definitions of these non-GAAP measures may differ from similarly titled measures used by others. These non-GAAP measures should be considered supplemental to and not a substitute for, financial information prepared in accordance with GAAP. Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance, allocating resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to, our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures. Our definition of EBITDDA and Adjusted EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income before interest expense, income taxes, basis of real estate sold, depreciation, depletion and amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses. See Note 5: Segment Information in the Notes to the Condensed Consolidated Financial Statements for information related to the use of segment Adjusted EBITDDA. 24 --------------------------------------------------------------------------------
Business and Economic Trends
The demand for timber is directly affected by the underlying demand for lumber and other wood products, as well as by the demand for pulp, paper and packaging. Our Timberlands and Wood Products segments are impacted by demand for new homes inthe United States and by repair and remodeling activity. The actions taken by various state and municipalities to contain and combat the outbreak and spread of the COVID-19 pandemic has introduced significant economic and business uncertainty, along with volatile financial market conditions during the first nine months of 2020 which is expected to continue into the future. Although the restrictions began to ease by the end of the second quarter, such directives are subject to change and may, depending on direction from governmental authorities and the pandemic's effects on the public, require us, our suppliers or our customers to limit or suspend operations. A housing construction slowdown in the spring due to social-distancing rules and delayed permits and inspections led to a massive destocking of lumber in the supply chain as well as significant curtailment of North American lumber manufacturing capacity. The atypical early spring pullback in lumber production coupled with strong demand led to an acute shortage that underpinned a historic run in lumber prices that began in the second quarter and peaked in September. While lumber prices have declined the last few weeks, we believe the demand for wood products remains strong driven by favorable industry fundamentals including the demand for new single-family homes, historically low mortgage rates, scarce re-sale housing inventory and old age housing stock. In our Wood Products segment, we shipped 291 million board feet during the third quarter of 2020. Our lumber order file extends into early November at strong prices. For the fourth quarter of 2020, we plan to ship 260 to 270 million board feet of lumber. In our Timberlands segment, harvest volumes were higher in the first nine months of 2020 due to favorable harvest conditions compared to the prior year. Approximately 70% of ourIdaho sawlog deliveries in the fourth quarter will benefit from being indexed to high lumber prices on an approximate six-week lag. Southern pine sawlog prices remain stable. We expect total harvest volumes to be between 1.3 and 1.4 million tons in the fourth quarter of 2020. OnJune 21, 2020 , we announced an agreement to sell approximately 72,000 acres of rural timberland inMinnesota toThe Conservation Fund for approximately$48.0 million in cash, subject to certain adjustments as defined in the agreement. The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2020. For the fourth quarter of 2020, we expect to sell 73,000 to 74,000 acres of rural land, including the 72,000-acreMinnesota transaction. Residential and commercial sales inChenal Valley mainly follow the national housing market trends but do experience microeconomic factors for the area including economic growth and the availability of builders, contractors and workforce to support development efforts. We anticipate selling 60 to 70 residential lots in the fourth quarter of 2020. Finally, we anticipate our current cash balances, cash flows from operations and our available sources of liquidity will be more than adequate to meet our cash requirements and allow us flexibility as we continue to focus on building shareholder value. AtSeptember 30, 2020 we had approximately$149.0 million in cash and cash equivalents and availability of$379.0 million on our revolving line of credit. 25
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Consolidated Results
The following table sets forth changes in our Condensed Consolidated Statements
of Operations. Our Business Segment Results provide a more detailed discussion
of our segments:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 Change 2020 2019 Change
Revenues $ 313,046 $ 226,302 $ 86,744 $ 703,481 $ 623,599 $ 79,882
Costs and expenses:
Cost of goods sold 182,039 182,634 (595 ) 503,921 512,522 (8,601 )
Selling, general and administrative
expenses 21,046 12,472 8,574 52,064 43,994 8,070
Gain on sale of facility - - - - (9,176 ) 9,176
203,085 195,106 7,979 555,985 547,340 8,645
Operating income 109,961 31,196 78,765 147,496 76,259 71,237
Interest expense, net (8,557 ) (8,475 ) (82 ) (20,594 ) (21,821 ) 1,227 Loss on extinguishment of debt
- - - - (5,512 ) 5,512
Pension settlement charge - - - (42,988 ) - (42,988 )
Non-operating pension and other
postretirement benefit costs (3,557 ) (935 ) (2,622 ) (10,670 ) (2,804 ) (7,866 )
Income before income taxes 97,847 21,786 76,061 73,244 46,122 27,122
Income taxes (16,840 ) (1,221 ) (15,619 ) (6,431 ) (1,860 ) (4,571 )
Net income $ 81,007 $ 20,565 $ 60,442 $ 66,813 $ 44,262 $ 22,551
Total Adjusted EBITDDA1 $ 135,386 $ 55,012 $ 80,374 $ 218,330 $ 132,344 $ 85,986 1 See Liquidity and Performance Measures for a reconciliation of Total Adjusted
EBITDDA to net income, the closest comparable GAAP measure, for each of the
periods presented.
Third Quarter 2020 Compared with Third Quarter 2019
Revenues
Revenues were
Cost of goods sold
Cost of goods sold decreased$0.6 million compared with the third quarter of 2019 due primarily to lower lumber shipments and reduced repairs and maintenance costs. These decreases were mostly offset by higher logging and hauling costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased$8.6 million compared with the third quarter of 2019 primarily as a result of a year-to-date adjustment to incentive compensation to reflect strong company performance. In addition, the third quarter of 2019 benefitted from the reversal of a workers' compensation reserve.
Non-operating pension and other postretirement benefit costs
Non-operating pension and other postretirement benefit costs increased$2.6 million compared to the third quarter of 2019. This increase was primarily because prior service credits of$1.9 million per quarter were fully amortized at the end of 2019. Non-operating pension and other postretirement benefit costs in 2020 were also impacted by a decrease in expected return on plan assets and the discount rate used to determine the benefit obligations.
Income taxes
Income tax expense was$16.8 million for the third quarter of 2020 compared with$1.2 million for the third quarter of 2019. Income taxes are primarily due to income from our taxable REIT subsidiaries (TRS). For the three months endedSeptember 30, 2020 , the TRS's pre-tax income was$65.2 million . For the same period in 2019, the TRS's income before income tax was$4.7 million . 26 --------------------------------------------------------------------------------
Total Adjusted EBITDDA
Total Adjusted EBITDDA for the third quarter of 2020 increased$80.4 million compared to the third quarter of 2019. The increase in Total Adjusted EBITDDA was driven primarily by historically high lumber prices. Refer to the Business Segment Results below for further discussions on activities for each of our segments.
Year to Date 2020 Compared with Year to Date 2019
Revenues
Revenues were$703.5 million , an increase of$79.9 million compared with the first nine months of 2019 primarily due to historically high lumber prices along with increased sawlog prices in the Northern region.
Cost of goods sold
Cost of goods sold decreased$8.6 million compared with the same period in 2019 primarily due to the temporary curtailment and reduced operating posture at our plywood facility during the second quarter of 2020 and because 2019 included approximately 1.5 months of activity related to the Deltic Medium Density Fiberboard (MDF) Facility. These decreases were partially offset by higher harvest volume and lumber shipments.
Selling, general and administrative expenses
Selling, general and administrative expenses increased$8.1 million compared with the first nine months of 2019 primarily as a result of higher incentive compensation related to strong company performance.
Gain on sale of facility
InFebruary 2019 , we sold our Deltic MDF facility toRoseburg Forest Products Co. for$92.0 million , before certain working capital adjustments, resulting in a$9.2 million pre-tax gain on sale.
Interest expense, net
Net interest expense decreased$1.2 million compared with the first nine months of 2019 primarily due to the refinancing of$150.0 million of 7.5% Senior Notes (Senior Notes) during the first quarter of 2019 and higher patronage dividends received during 2020.
Loss on extinguishment of debt
As part of the$150.0 million Senior Notes redemption during the first quarter of 2019 we incurred a redemption premium of$4.9 million and wrote off certain unamortized debt costs. Pension settlement charge InFebruary 2020 , we purchased a group annuity contract from an insurance company to transfer$101.1 million of our outstanding pension benefit obligation related to our qualified pension plans. This transaction was funded with plan assets. In connection with this transaction, we recorded a non-cash pretax settlement charge of$43.0 million .
Non-operating pension and other postretirement benefit costs
Non-operating pension and other postretirement benefit costs increased$7.9 million compared with the first nine months of 2019. This increase was primarily because prior service credits of$1.9 million per quarter were fully amortized at the end of 2019. Non-operating pension and other postretirement benefit costs were also impacted by a decrease in expected return on plan assets and the discount rate used to determine the benefit obligations.
Income taxes
Income tax expense was$6.4 million for the first nine months of 2020 compared with$1.9 million for the first nine months of 2019. For the nine months endedSeptember 30, 2020 , the TRS's income before income tax was$23.9 million , which included the pension settlement charge recorded during the first quarter. For the same period in 2019, the TRS's income before income tax was$5.3 million , which included the gain on sale of the Deltic MDF facility.
Total Adjusted EBITDDA
Total Adjusted EBITDDA for the first nine months of 2020 increased$86.0 million compared to the first nine months of 2019. The increase in Total Adjusted EBITDDA was driven primarily by historically high lumber prices during the third quarter of 2020. Refer to the Business Segment Results below for further discussions on activities for each of our segments. 27 --------------------------------------------------------------------------------
Business Segment Results
Timberlands Segment
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 Change 2020 2019 Change
Revenues1 $ 116,985 $ 98,809 $ 18,176 $ 266,755 $ 233,848 $ 32,907
Costs and expenses:
Logging and hauling 47,158 45,099 2,059 117,417 108,551 8,866
Other 8,539 9,063 (524 ) 24,107 24,257 (150 )
Selling, general and
administrative expenses 1,639 1,651 (12 ) 4,941 5,063 (122 )
Timberlands Adjusted EBITDDA2 $ 59,649 $ 42,996 $ 16,653 $ 120,290 $ 95,977 $ 24,313 1 Prior to elimination of intersegment fiber revenues of
million for the three months ended
million and
2019, respectively.
2 Management uses Adjusted EBITDDA to evaluate the performance of the company.
See Note 5: Segment Information in the Notes to Condensed Consolidated
Financial Statements.
Timberlands Segment Statistics
Three Months Ended September 30, Nine Months Ended September 30,
Harvest Volumes (in tons) 2020 2019 Change 2020 2019 Change
Northern region
Sawlog 554,845 529,030 25,815 1,291,632 1,227,451 64,181
Pulpwood 29,910 39,371 (9,461 ) 99,174 118,534 (19,360 )
Stumpage - 602 (602 ) 23,178 7,978 15,200
Total 584,755 569,003 15,752 1,413,984 1,353,963 60,021
Southern region
Sawlog 577,975 496,388 81,587 1,617,196 1,358,140 259,056
Pulpwood 462,571 475,313 (12,742 ) 1,201,904 1,190,486 11,418
Stumpage 65,085 58,659 6,426 255,553 123,815 131,738
Total 1,105,631 1,030,360 75,271 3,074,653 2,672,441 402,212
Total harvest volume 1,690,386 1,599,363 91,023 4,488,637 4,026,404 462,233
Sales Price/Unit ($ per ton)1
Northern region
Sawlog $ 131 $ 100 $ 31 $ 112 $ 95 $ 17
Pulpwood $ 42 $ 38 $ 4 $ 39 $ 40 $ (1 )
Stumpage $ - $ 5 $ (5 ) $ 14 $ 14 $ -
Southern region
Sawlog $ 44 $ 48 $ (4 ) $ 44 $ 47 $ (3 )
Pulpwood $ 29 $ 33 $ (4 ) $ 30 $ 33 $ (3 )
Stumpage $ 12 $ 13 $ (1 ) $ 9 $ 10 $ (1 )
1 Sawlog and pulpwood sales prices are on a delivered basis, which includes
logging and hauling costs. Stumpage sales provide our customers the right to
harvest standing timber. As such, the customer contracts the logging and hauling
and bears such costs.
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Timberlands Adjusted EBITDDA
The following table summarizes Timberlands Adjusted EBITDDA variances for the three and nine months endedSeptember 30, 2020 compared with the three and nine months endedSeptember 30, 2019 : (in thousands) Three Months Nine
Months
Timberlands 2019 Adjusted EBITDDA$ 42,996 $ 95,977 Sales price and mix 3,182 11,238 Harvest volume 12,843 13,107 Other revenue (309 ) (217 ) Logging and hauling costs per unit 411 (78 ) Forest management 533
260
Administrative, indirect and overhead costs (7 )
3
Timberlands 2020 Adjusted EBITDDA$ 59,649 $
120,290
Third Quarter 2020 Compared with Third Quarter 2019
Timberlands Adjusted EBITDDA for the third quarter of 2020 increased
• Sales Price and Mix: Sawlog prices in the Northern region increased 31.0%,
to
realizations on indexed sawlogs and an increase in cedar log prices in
of 2019 as timber supply constraints caused by wet weather drove up pricing
during the third quarter of 2019.
• Harvest Volume: We harvested 1.1 million tons in the Southern region during
the third quarter of 2020, which was up 7.3% compared to the third quarter
of 2019. The increase was primarily due to scaled back harvesting during the
third quarter of 2019 as Southern mill log inventories had shifted to high
levels after mill operations were impacted by wet weather conditions earlier
in 2019.
Year to Date 2020 Compared with Year to Date 2019
Timberlands Adjusted EBITDDA for the first nine months of 2020 increased
• Sales Price and Mix: Sawlog prices in the Northern region increased 17.9%,
to
on indexed sawlogs and an increase in cedar log prices in
sawlog pricing decreased 6.4% year on year as timber supply constraints
caused by wet weather drove up pricing during the nine months of 2019.
• Harvest Volume: We harvested 3.1 million tons in the Southern region during
the first nine months of 2020, which was up 15.1% compared to the first nine
months of 2019. The increase was primarily because 2019 was disrupted by wet
weather. Harvest volume increased in the Northern region compared to the
first nine months of 2019 as a result of favorable harvest conditions in the
first quarter of 2020.
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Wood Products Segment
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 Change 2020 2019 Change
Revenues $ 218,291 $ 143,643 $ 74,648 $ 489,507 $ 413,979 $ 75,528
Costs and expenses1
Fiber costs 72,239 67,579 4,660 196,201 205,594 (9,393 ) Freight, logging and hauling
17,677 19,769 (2,092 ) 48,601 53,722 (5,121 ) Manufacturing costs
45,893 45,224 669 132,848 137,745 (4,897 ) Finished goods inventory change
(1,595 ) 3,426 (5,021 ) (1,602 ) (453 ) (1,149 )
Selling, general and
administrative expenses 2,433 2,082 351 7,483 6,625 858
Other - (340 ) 340 196 (312 ) 508
Wood Products Adjusted EBITDDA2
1 Prior to elimination of intersegment fiber costs of
million for the three months ended
million and
2019, respectively.
2 Management uses Adjusted EBITDDA to evaluate the performance of the company.
See Note 5: Segment Information in the Notes to Condensed Consolidated
Financial Statements.
Wood Products Segment Statistics
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
Lumber shipments (MBF)1 291,391 298,807
(7,416 ) 823,597 809,733 13,864
Lumber sales prices ($ per MBF)
1 MBF stands for thousand board feet.
Wood Products Adjusted EBITDDA
The following table summarizes Wood Products Adjusted EBITDDA variances for the three and nine months endedSeptember 30, 2020 compared with the three and nine months endedSeptember 30, 2019 : (in thousands) Three Months Nine Months Wood Products 2019 Adjusted EBITDDA$ 5,903 $ 11,058 Lumber: Price 79,493 92,678 Manufacturing costs per unit (2,420 ) (2,409 ) Log costs per unit (4,486 ) 3,442 Inventory charge 3,479 3,479 Residuals, panels and other (325 ) (2,468 )
Wood Products 2020 Adjusted EBITDDA
Third Quarter 2020 Compared with Third Quarter 2019
Wood Products Adjusted EBITDDA for the third quarter of 2020 increased
•
the third quarter of 2020 as a result of the historic run in lumber prices
compared with
• Manufacturing Cost Per Unit: Reduced operating hours in the third quarter of
2020, particularly due to labor constraints, coupled with lower production
led to higher manufacturing costs per unit during the third quarter of 2020
compared to 2019.
• Log Costs Per Unit: Log costs were higher per unit in
quarter of 2020 due to higher lumber-indexed log prices.
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• Inventory Charge: Lumber inventory at the end of the third quarter of 2019
was written down
inventory charges at the end of the third quarter of 2020.
Year to Date 2020 Compared with Year to Date 2019
Wood Products Adjusted EBITDDA for the first nine months of 2020 increased
•
first nine months of 2020 as a result of the historic run in lumber prices
compared with
• Manufacturing Cost Per Unit: Higher manufacturing costs per unit year over
year was a result of reduced operating hours in 2020 due to labor related
constraints and lost productivity in April at two Arkansas mills due to
hurricane-caused power outages.
• Log Costs Per Unit: Log costs per unit were higher in 2019 both because wet
weather constrained log availability in the South and
with high cost lumber-indexed logs.
• Inventory Charge: Lumber inventory at the end of the third quarter of 2019
was written down $3.5 million to net realizable value. There were no
inventory charges at the end of the third quarter of 2020.
• Residual Sales, Panels and Other: A market curtailment and reduced operating
posture at our industrial grade plywood mill during the second quarter of
2020 along with lower residual sales during the first nine months of 2020
had a negative effect on Adjusted EBITDDA.
Real Estate Segment
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 Change 2020 2019 Change
Revenues $ 18,151 $ 18,863 $ (712 ) $ 42,225 $ 61,459 $ (19,234 )
Costs and expenses
Costs of goods sold 3,554 2,902 652 8,595 8,943 (348 )
Selling, general and
administrative expenses 1,131 1,283
(152 ) 3,568 3,819 (251 )
Real Estate Adjusted EBITDDA1
$ 14,678 $ (1,212 ) $ 30,062 $ 48,697 $ (18,635 )
1 Management uses Adjusted EBITDDA to evaluate the performance of the company.
See Note 5: Segment Information in the Notes to Condensed Consolidated
Financial Statements.
Real Estate Segment Statistics
Rural Real Estate Three Months Ended September 30,
2020 2019
Average Average
Acres Sold Price/Acre Acres Sold Price/Acre
Higher and better use (HBU) 1,599 $ 3,103 975 $ 3,225
Recreation real estate 1,201 $ 1,366 5,037 $ 1,261
Non-strategic timberland 8,248 $ 810 213 $ 906
Total 11,048 $ 1,202 6,225 $ 1,557
Nine Months Ended September 30,
2020 2019
Average Average
Acres Sold Price/Acre Acres Sold Price/Acre
Higher and better use (HBU) 4,486 $ 2,828 4,231 $ 6,363
Recreation real estate 4,297 $ 1,394 7,817 $ 1,281
Non-strategic timberland 12,241 $ 962 8,894 $ 820
Total 21,024 $ 1,449 20,942 $ 2,112
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Development Real Estate Three Months Ended September 30,
2020 2019
Lots or Acres Average Price/ Average Price/
Sold Lot or Acre Lots or Acres Sold Lot or Acre
Residential lots 26 $ 82,573 42 $ 110,504
Commercial acres - $ - 6 $ 512,506
Nine Months Ended September 30,
2020 2019
Lots or Acres Average Price/ Average Price/
Sold Lot or Acre Lots or Acres Sold Lot or Acre
Residential lots 66 92,256 93 $ 97,519
Commercial acres - $ - 6 $ 512,506 Real Estate Adjusted EBITDDA
The following table summarizes Real Estate Adjusted EBITDDA variances for the three and nine months endedSeptember 30, 2020 compared with the three and nine months endedSeptember 30, 2019 : (in thousands) Three Months Nine
Months
Real Estate 2019 Adjusted EBITDDA$ 14,678 $ 48,697 Rural real estate sales 3,596 (13,767 ) Development real estate sales (4,307 ) (5,467 ) Selling, general and administrative expenses 151
252
Other costs, net (652 )
347
Real Estate 2020 Adjusted EBITDDA$ 13,466 $ 30,062
Third Quarter 2020 Compared with Third Quarter 2019
Real Estate Adjusted EBITDDA for the third quarter of 2020 decreased
• Rural Real Estate Sales: The third quarter of 2020 included the sale of
approximately 8,100 acres of non-strategic timberlands in
conservation entity representing the third year of a five-year option. There
were no comparable transactions in the third quarter of 2019. Rural real
estate sales can vary quarter-to-quarter with the average price per acrefluctuating based on both the geographic area of the real estate and product
mix.
• Development Real Estate Sales: During the third quarter of 2020 we sold 26
residential lots at an average lot price of
compared to 42 lots at an average lot price of
quarter of 2019. The third quarter of 2019 also includes the sale of
approximately 6 acres of commercial land in
variety of factors including location within the developments.
Year to Date 2020 Compared with Year to Date 2019
Real Estate Adjusted EBITDDA for the first nine months of 2020 decreased
• Rural Real Estate Sales: The first nine months of 2019 included a 1,787 acre
sale in
first nine months of 2020.
• Development Real Estate Sales: During the first nine months of 2020, we sold
66 residential lots at an average lot price of
compared to 93 lots at an average lot price of
months of 2019. The first nine months of 2019 also included the sale of 6
acres of commercial land.
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Liquidity and Capital Resources
Changes in significant sources of cash for the nine months ended
Nine Months Ended September 30,
(in thousands) 2020 2019
Net cash provided by operating
activities $ 190,845 $ 105,427
Net cash (used in) provided by investing activities $ (28,265 ) $
22,187
Net cash used in financing activities $ (96,830 ) $
(111,265 )
Net Cash Flows from Operations
Net cash provided by operating activities increased$85.4 million compared to the first nine months of 2019. Changes in cash provided by operating activities was impacted by the following:
• Cash received from customers increased
significantly higher lumber prices in 2020 compared to 2019, increased
harvest activities and increased lumber shipments. These increases were
partially offset by the temporary curtailment of our industrial plywood mill
during the second quarter of 2020. Additionally, 2019 included an
rural land sale for
MDF facility prior to its sale.
• Cash payments to vendors increased
harvest activities and lumber shipments. The increase was partially offset
by the temporary curtailment of our industrial plywood mill during the
second quarter of 2020 and operations in 2019 included 1.5 months of
activity at the Deltic MDF facility prior to its sale.
• Net cash paid for interest decreased
patronage dividends from our lenders and lower net interest costs as a
result of refinancing our
quarter of 2019.
• Increased cash contributions for pension and other postretirement employee
benefits of
Net Cash Flows from Investing Activities
Changes in cash flows from investing activities were primarily a result of the following:
• We spent
equipment, timberlands reforestation and road construction projects during
the first nine months of 2020 compared to
nine months of 2019.
• We spent$4.7 million on timberland acquisitions during the first nine months of 2020 compared to$0.3 million during the first nine months of 2019.
• We received
sale in
quarter of 2020 related to the satisfaction of certain covenants associated
with the Deltic MDF facility sale.
Net Cash Flows from Financing Activities
Changes in cash flows from financing activities were primarily a result of the following:
• During the first nine months of 2020, we repurchased 489,850 shares of our
common stock totaling
totaling
our distributions to shareholders slightly from
nine months of 2019 to $80.4 million in the comparable 2020 period.
• In
with a
refinancing, we redeemed and paid all outstanding Senior Notes, including a
redemption premium of $4.9 million .
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Future Sources and Uses of Cash
We invest cash in maintenance and discretionary capital expenditures at our Wood Products facilities. We also invest cash in the reforestation of timberlands and construction of roads in our Timberlands operations and to develop land in our Real Estate development operations. We evaluate discretionary capital improvements based on an expected level of return on investment. We currently expect to spend a total of approximately$46.0 to$49.0 million for capital expenditures during 2020. We are deferring payments of approximately$4.0 million for our 2020 employer portion of social security payroll tax as allowed under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). These payments will be funded in 2021 and 2022 as required under the CARES Act. OnAugust 30, 2018 , the board of directors authorized the repurchase of up to$100.0 million of common stock with no time limit set for the repurchase. AtSeptember 30, 2020 , we had remaining authorization of$59.5 million for future stock repurchase under the 2018 Repurchase Program. Stock repurchases in the future will depend on a variety of factors including our cash position, alternative investment opportunities, our desired level of liquidity, debt covenant restrictions and our stock price. OnJune 21, 2020 , we announced an agreement to sell approximately 72,000 acres of rural timberland inMinnesota toThe Conservation Fund for approximately$48.0 million in cash, subject to certain adjustments as defined in the agreement. The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2020. Capital Structure (in thousands) September 30, 2020 December 31, 2019 Long-term debt $ 757,249 $ 756,469 Cash and cash equivalents (148,919 ) (83,310 ) Net debt 608,330 673,159 Market capitalization1 2,815,311 2,908,653 Enterprise value $
3,423,641 $ 3,581,812
Net debt to enterprise value 17.8 % 18.8 % Dividend yield2 3.8 % 3.7 % Weighted-average cost of debt, after tax3 3.3 % 3.3 %
1 Market capitalization is based on outstanding shares of 66.9 million and 67.2
million times closing share prices of
2020, and
2 Dividend yield is based on annualized dividends per share of
prices of
respectively.
3 Weighted-average cost of debt excludes deferred debt costs and credit facility
fees and includes estimated annual patronage credit on term loan debt.
Liquidity and Performance Measures
The discussion below is presented to enhance the reader's understanding of our operating performance, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures: Adjusted EBITDDA and Cash Available for Distribution (CAD). These measures are not defined by GAAP and the discussion of Adjusted EBITDDA and CAD is not intended to conflict with or change any of the GAAP disclosures described herein. Adjusted EBITDDA is a non-GAAP measure that management uses in evaluating performance, to allocate resources between segments, and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. This measure should not be considered in isolation from and is not intended to represent an alternative to our results reported in accordance with GAAP. Management believes that this non-GAAP measure, when read in conjunction with our GAAP financial statements, provides useful information to investors by facilitating the comparability of our ongoing operating results over the periods presented, the ability to identify trends in our underlying business and the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.
Our definition of EBITDDA may be different from similarly titled measures reported by other companies. We define EBITDDA as net income before interest expense, income taxes, basis of real estate sold, depreciation, depletion and
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--------------------------------------------------------------------------------amortization. Adjusted EBITDDA further excludes certain specific items that are considered to hinder comparison of the performance of our businesses either year-on-year or with other businesses.
We reconcile Total Adjusted EBITDDA to net income for the consolidated company as it is the most comparable GAAP measure.
The following table provides a reconciliation of net income to Total Adjusted EBITDDA for the respective periods:
Nine Months Ended
Three Months Ended September 30, September 30,
(in thousands) 2020 2019 2020 2019
Net income $ 81,007 $ 20,565 $ 66,813 $ 44,262
Interest expense, net 8,557 8,475 20,594 21,821
Income taxes 16,840 1,221 6,431 1,860
Depreciation, depletion and amortization 20,187 18,786 56,590 51,310
Basis of real estate sold 5,249 5,228 14,440 14,211
Loss on extinguishment of debt - - - 5,512
Pension settlement charge - - 42,988 -
Non-operating pension and other
postretirement benefit costs 3,557 935 10,670 2,804
Gain on sale of facility - - - (9,176 )
Gain on disposal of fixed assets (11 ) (198 ) (196 ) (260 )
Total Adjusted EBITDDA $ 135,386 $ 55,012 $ 218,330 $ 132,344
We define CAD as cash provided by operating activities adjusted for capital
spending for purchases of property, plant and equipment, timberlands
reforestation and roads and timberland acquisitions not classified as strategic.
Management believes CAD is a useful indicator of the company's overall
liquidity, as it provides a measure of cash generated that is available for
dividends to common stockholders (an important factor in maintaining our REIT
status), repurchase of the company's common shares, debt repayment, acquisitions
and other discretionary and nondiscretionary activities. Our definition of CAD
is limited in that it does not solely represent residual cash flows available
for discretionary expenditures since the measure does not deduct the payments
required for debt service and other contractual obligations. Therefore, we
believe it is important to view CAD as a measure that provides supplemental
information to our Condensed Consolidated Statements of Cash Flows. Our
definition of CAD may be different from similarly titled measures reported by
other companies, including those in our industry. CAD is not necessarily
indicative of the CAD that may be generated in future periods.
The following table provides a reconciliation of cash provided by operating
activities to CAD:
Nine Months Ended September 30,
(in thousands) 2020 2019
Cash provided by operating activities1 $ 190,845 $ 105,427
Capital expenditures (31,749 ) (39,143 )
CAD $ 159,096 $ 66,284
Net cash (used in) provided by investing activities2 $ (28,265 ) $ 22,187
Net cash used in financing activities $ (96,830 ) $ (111,265 ) 1 Cash from operating activities for the nine months ended
and 2019 includes cash paid for real estate development expenditures of
million and
2 Net cash from investing activities includes payments for capital expenditures
and acquisition of timber and timberlands, which is also included in our
reconciliation of CAD.
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Sources of Financing
Credit and Term Loan Agreements
AtSeptember 30, 2020 , our total outstanding net long-term debt was$757.0 million , of which$46.0 million matures inDecember 2020 . We expect to refinance the$46.0 million term loan debt at maturity. Included in total outstanding long-term debt was$693.5 million of term loan principal balances under our Second Amended and Restated Term Loan Agreement (Amended Term Loan Agreement) with our primary lender. Certain borrowings under the Amended Term Loan Agreement are at variable rates of one or three-month LIBOR plus a spread between 1.85% and 2.15%. We entered into interest rate swaps for these variable rate term loans to fix the interest rates. AtSeptember 30, 2020 there were no borrowings under our$380.0 million revolving line of credit and approximately$1.0 million of the revolving line of credit was utilized for outstanding letters of credit. As provided in the revolving line of credit agreement, borrowings may be increased by up to an additional$420.0 million . We may utilize borrowings under the credit facility to, among other things, refinance existing indebtedness and provide funding for working capital requirements, capital projects, acquisitions and other general corporate expenditures.
As of
Actual at
Covenant Requirement September 30, 2020
Interest coverage ratio ? 3.00 to 1.00 8.93
Leverage ratio ? 40% 21%
Contractual Obligations
In March 2020 , we entered into $653.5 million of forward starting interest rate
swaps. These forward starting interest rate swaps effectively hedge the
variability in future benchmark interest payments attributable to changes in
interest rates on future debt refinancing by converting the benchmark interest
rates to fixed interest rates on our anticipated future refinancing of $653.5
million of term loan debt maturing December 2020 through January 2029 . The fixed
interest rate components for these forward starting interest rate swaps range
from 0.85% to 1.17%. The variable rate component on these forward starting
interest rate swaps is one-month LIBOR. Accordingly, the forward starting rate
swaps were designated as cash flow hedges. In addition, these cash flow hedges
require settlement on the stated maturity date for each respective term loan
currently outstanding. See Note 9: Derivatives in the Notes to Condensed
Consolidated Financial Statements for additional information.
Other than these new forward starting interest rate swaps, there have been no
material changes to our contractual obligations during the nine months ended
September 30, 2020 outside the ordinary course of business.
Credit Ratings
Two major debt rating agencies routinely evaluate our debt and our cost of
borrowing can increase or decrease depending on our credit rating. Both Moody's
and S&P rate our debt investment grade. In
Off-Balance Sheet Arrangements
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.
Critical Accounting Policies and Estimates
There have been no significant changes during 2020 to our critical accounting policies presented in our 2019 Annual Report on Form 10-K.
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