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, 2021 . Overview We acquire and operate prime timberlands located in leadingU.S. mill markets. We actively manage our timberlands to achieve an optimum balance among biological timber growth, current harvest cash flow, and responsible environmental stewardship. During the period endedJune 30, 2022 , we continued 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. After completing the disposition of ourPacific Northwest timberlands and exiting the Triple T joint venture in the second half of 2021, we refocused our ownership and operations on the nation's premier wood basket, theU.S. South. We have sought to expand our presence in superior mill markets where we already have strong local relationships to strengthen our Harvest EBITDA while maintaining stable merchantable inventory per acre. During the second quarter of 2022, we acquired 1,300 acres of timberland inAlabama for$2.2 million , exclusive of transaction costs. OurU.S. South timber sales revenue decreased 10% during the second quarter of 2022 as compared to the prior year period as a result of planned harvest volume reductions, offset by a 10% increase in average blended sales pricing. Our sawtimber stumpage price increased 21% while pulpwood stumpage price decreased 5% from the second quarter of 2021. OurU.S. South stumpage prices continued to maintain significant premiums over South-wide averages a result of our local market advantages. In the second quarter of 2022, we sold 5,700 acres of timberland for$8.8 million , or$1,564 per acre, under our retail land sales program. Acres sold in the current quarter were comprised of approximately 46% pine plantation, which was significantly lower than our portfolio average.
During the second quarter of 2022, we paid
Proposed Merger with PotlatchDeltic
OnMay 29, 2022 , we entered into the Merger Agreement with PotlatchDeltic and Merger Sub. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Company Merger, each issued and outstanding share of our Common Stock, other than Excluded Shares, will be converted into the right to receive 0.230 shares of common stock of PotlatchDeltic plus the right to receive cash in lieu of fractional shares of common stock of PotlatchDeltic (the "Merger Consideration"). At the effective time of the Partnership Merger, each of the issued and outstanding Common Units, other than Excluded OP Units, will automatically be converted into the right to receive the Merger Consideration. Our outstanding debt balances will become immediately due and payable upon the completion of the Mergers. It is expected that PotlatchDeltic will refinance or repay all amounts due under the Amended Credit Agreement at closing. We expect the Mergers to close in the third quarter of 2022. Please refer to Note 1 - Organization to our accompanying consolidated financial statements for further details about the Merger Agreement and the Mergers.
As of
The discussion included below reflects our business as a stand-alone company without regard to the Merger Agreement or the Mergers.
Timberland Portfolio
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As of June 30, 2022 , we owned 348,100 acres of high-quality industrial
timberland in the U.S. South. Our timberlands are located within an attractive
fiber basket encompassing a diverse group of pulp, paper and wood products
manufacturing facilities. Our timberlands consisted of 72% pine plantations by
acreage and 55% sawtimber by volume.
Acres by state as of June 30, 2022 Total
Alabama 65,900
Georgia 218,000
South Carolina 64,200
Total 348,100
As of
(in millions)
Merchantable timber inventory (tons) (1) Total
Pulpwood 5.9
Sawtimber (2) 7.3
Total 13.2
(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 owned a 50% membership interest in Dawsonville Bluffs as ofJune 30, 2022 (see Note 4 - Unconsolidated Joint Venture to our accompanying consolidated financial statements for further details).
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 2022, WestRock is required to purchase a minimum of 371,100 tons of timber under the Mahrt Timber Agreements. For the six months endedJune 30, 2022 , WestRock purchased 169,000 tons under the Mahrt Timber Agreements, which represented 11% of our net timber sales revenue. 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 2022, IP is required to purchase a minimum of 50,000 tons of timber under the Carolinas Supply Agreement. During the six months endedJune 30, 2022 , we sold 16,700 tons under the Carolinas Supply Agreement, which represented 1% 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 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
have also sold 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 not part
of core operations, are infrequent in nature, and may or may not have a higher
or better use than timber production or result in a price premium above the
land's timber production value. Large timberland disposition opportunities under
our capital recycling program have been evaluated based in part on inventory
stocking and mix profiles, productivity characteristics, geographical
diversification and procurement and operating areas. We currently have no plans
to complete additional large dispositions under our capital recycling 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 the ability 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$75 million in shares of Common Stock in at-the-market offerings or as otherwise agreed with the applicable sales agent, including in block transactions. These shares are registered with theSEC under our shelf registration statement. As ofJune 30, 2022 , we have not sold any shares of common stock under the distribution agreement.
Credit Facilities
The table below presents the details of each credit facility under the Amended Credit Agreement as ofJune 30, 2022 : (dollars in thousands) Outstanding Remaining Facility Name Maturity Date Interest Rate (1) Unused Commitment Fee (1) Total Capacity Balance Capacity Term Loan A-1 12/23/2024 LIBOR + 1.75% N/A$ 84,706 $ 84,706 $ - Term Loan A-2 12/1/2026 LIBOR + 1.90% N/A 89,706 89,706 - Term Loan A-3 (2) 12/1/2027 LIBOR + 2.00% 0.20% 68,619 - 68,619 Term Loan A-4 8/22/2025 LIBOR + 1.70% N/A 125,588 125,588 - Multi-Draw Term Facility 12/1/2024 LIBOR + 1.90% 0.20% 150,000 - 150,000 Revolving Credit Facility 8/4/2026 LIBOR + 1.90% 0.20% 35,000 - 35,000 Total$ 553,619 $ 300,000 $ 253,619 27
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(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 through
Borrowing under 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 Common Stock, and to reimburse payments of drafts under letters of credit. The revolver feature of Term Loan A-3 may be used solely to finance timberland acquisitions and associated expenses. 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.
Patronage Dividends
We are eligible to receive annual patronage dividends from 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 2022 , we received patronage dividends of$3.6 million on our patronage eligible borrowings. Of the total patronage dividends received inMarch 2022 ,$3.5 million was standard patronage dividends and$0.1 million was special patronage dividends. Approximately 87% of the standard patronage dividends was received in cash and the remaining 13% 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 six months endedJune 30, 2022 , we accrued$1.3 million of patronage dividends receivable for 2022, approximately 75% to 85% of which is expected to be received in cash inMarch 2023 . Debt Covenants
As of
•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 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 endedJune 30, 2022 , we did not repurchase any share of Common Stock under the SRP. As ofJune 30, 2022 , we had 49.2 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 Common Stock. To date, all share repurchases under the SRP have been funded with cash on-hand. Short-Term Liquidity and Capital Resources 28 -------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities for the six months endedJune 30, 2022 was$26.2 million ,$3.8 million lower than the six months endedJune 30, 2021 . Cash provided by operating activities consisted primarily of proceeds from timber sales, timberland sales, and asset management fees, reduced by payments for operating costs, general and administrative expenses, and interest expense. The decrease in net cash provided by operating activities was due to a$4.7 million increase in general and administrative expenses primarily due to merger-related costs, a$4.0 million decrease in asset management fees, and a$2.9 million decrease in net timber sales, offset by a$3.9 million increase in net proceeds from timberland sales, a$2.2 million change in working capital due to timing of receipts and payments (including$3.2 million of accrued general and administrative expenses related to the Mergers), a$1.0 million decrease in cash interest paid, and a$0.7 million decrease in other operating expenses. Net cash used in investing activities for the six months endedJune 30, 2022 was$5.3 million as compared to$4.3 million provided by investing activities for the prior year period. We incurred$3.0 million of capital expenditures and used$2.3 million to acquire 1,300 acres of timberland inAlabama during the six months endedJune 30, 2022 . In the prior year period, we received$7.3 million in gross proceeds from large dispositions and incurred$3.3 million of capital expenditures. Net cash used in financing activities for the six months endedJune 30, 2022 was$10.2 million ,$13.8 million lower than the six months endedJune 30, 2021 , primarily due to making no debt repayments and lower cash distributions in the current year period. We made$7.3 million of cash distributions during the six months endedJune 30, 2022 , which was fully funded from net cash provided by operating activities, as compared to$13.1 million in the prior year period. In 2021, we also paid down$7.3 million of our outstanding debt balance on the Multi-Draw Term Facility with net proceeds received from large dispositions. 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, 2022 , we had a cash balance of$33.7 million and had access to$253.6 million of additional borrowing capacity under the Amended Credit Agreement.
Long-Term Liquidity and Capital Resources
We expect the Mergers to close in the third quarter of 2022. In the event that the Mergers do not close or do not close in the timeframe currently contemplated, 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 six months endedJune 30, 2022 , we declared the following distributions: Declaration Date Record Date Payment Date Distribution Per Share February 10, 2022 February 28, 2022 March 15, 2022$0.075 May 5, 2022 May 31, 2022 June 15, 2022$0.075
For the six months ended
Results of Operations
Overview
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Table of Contents 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 contract logging and hauling costs and depletion expense, changes to associated depletion rates, the level of timberland sales, management fees earned, large dispositions, general and administrative expenses, varying interest expense based on the amount and cost of outstanding borrowings, and performance of our unconsolidated joint venture. Selected operational results for the three months and six months endedJune 30, 2022 and 2021 are shown in the following table (dollar amounts in thousands, except for per-acre/per-ton amounts):
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