SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2020
|☐||Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______. |
Commission File Number 001-36239
CATCHMARK TIMBER TRUST, INC.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(I.R.S. Employer Identification Number)|
5 Concourse Parkway, Suite 2650, Atlanta, GA
|(Address of principal executive offices)||(Zip Code)|
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class|| Trading Symbol||Name of exchange on which registered|
|Class A Common Stock, $0.01 Par Value Per Share||CTT||New York Stock Exchange|
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated flier, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer|
|Accelerated filer||☒||Non-accelerated filer|
|Smaller reporting company|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the Class A common stock held by non-affiliates of the registrant as of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $428.2 million, computed by using the closing price of the Class A common stock as of that date on the New York Stock Exchange of $8.85 per share.
As of February 25, 2021: 48,765,410 shares of the registrant's Class A common stock were outstanding
Documents Incorporated by Reference
Certain portions of the registrant’s definitive proxy statement filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 2021 annual meeting of the registrant’s stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K as indicated herein.
The following abbreviations or acronyms may be used in this document, including the consolidated financial statements and the notes thereto, and shall have the adjacent meanings set forth below:
|AFM||American Forestry Management, Inc.|
|ASC||Accounting Standards Codification|
|ASU||Accounting Standards Update|
|Common Stock||Class A common stock, $0.01 par value per share of CatchMark Timber Trust, Inc.|
|Common Unit||Common partnership unit of CatchMark Timber Operating Partnership, L.P. |
|Code||Internal Revenue Code|
|EBITDA||Earnings from Continuing Operations before Interest, Taxes, Depletion, and Amortization|
|FASB||Financial Accounting Standards Board|
|FCCR||Fixed Charge Coverage Ratio|
|FRC||Forest Resource Consultants, Inc.|
|GAAP||Generally Accepted Accounting Principles in the United States|
|GP||Georgia-Pacific WFS LLC|
|HBU||Higher and Better Use|
|HLBV||Hypothetical Liquidation at Book Value|
|IP||International Paper Company|
|IRS||Internal Revenue Service|
|LIBOR||London Interbank Offered Rate|
|LTIP||Long-Term Incentive Plan|
|LTIP Unit||Limited partnership unit of CatchMark Timber Operating Partnership, L.P. |
|MBF||Thousand Board Feet|
|MPERS||Missouri Department of Transportation & Patrol Retirement System|
|NYSE||New York Stock Exchange|
|Rabobank||Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A.|
|REIT||Real Estate Investment Trust|
|RSU||Restricted Stock Unit|
|SEC||Securities and Exchange Commission|
|SFI||Sustainable Forest Initiative|
|SOFR||Secured Overnight Financing Rate|
|SRP||Share Repurchase Program|
|TRS||Taxable REIT Subsidiary|
|TSR||Total Shareholder Return|
|VIE||Variable Interest Entity|
|WestRock||WestRock Company |
CATCHMARK TIMBER TRUST, INC.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS; RISK FACTOR SUMMARY
Certain statements contained in this Annual Report on Form 10-K of CatchMark Timber Trust, Inc. and subsidiaries (“CatchMark,” “we,” “our,” or “us”) may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, CatchMark, or the executive officers on CatchMark’s behalf, may from time to time make forward-looking statements in other reports and documents CatchMark files with the SEC or in connection with written or oral statements made to the press, potential investors, or others. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Securities Act and the Exchange Act.
Forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. However, the absence of these or similar words or expressions does not mean that a statement is not forward-looking. Forward-looking statements are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information.
Forward-looking statement in this report, include, but are not limited to, that we manage our operations to generate stable and predictable cash flow from sustainable harvests, opportunistic land sales and asset management fees to provide recurring dividends to our stockholders; that we are bolstered by our delivered wood model and fiber supply agreements, which provide a steady source of demand from reliable counterparties; that COVID-19 and actions taken in response thereto could adversely impact our business and the businesses of our unconsolidated joint ventures; property performance and anticipated growth in our portfolio; expected uses of cash generated from operations, debt financings and debt and equity offerings; expected sources and adequacy of capital resources and liquidity; our anticipated distribution policy; change in depletion rates, merchantable timber book value and standing timber inventory volume; anticipated harvest volume and mix of harvest volume; and other factors that may lead to fluctuations in future net income (loss). Forward-looking statements in this report also relate to the Triple T Joint Venture (as defined herein), including the expected benefits of the amended wood supply agreement between the Triple T Joint Venture and GP, including market-based pricing on timber sales, increased reimbursement for extended haul distances, the ability for the Triple T Joint Venture to sell timber to other third parties, the increased ability to sell large timberland parcels to third-party buyers, and an extended term with optimized harvest volume obligations to enhance and preserve long-term asset value.
We are subject to numerous risks and uncertainties that could cause our actual results and future events to differ materially from those set forth or contemplated in our forward-looking statements, including those summarized below. The following list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. This risk factor summary should be read together with the more detailed discussion of risks and uncertainties set forth under Item 1A — Risk Factors.
•The cyclical nature of the forest products industry could impair our operating results.
•Increased competition from a variety of substitute products could lead to declines in demand for wood products and negatively impact our business.
•Large-scale increases in the supply of timber may affect timber prices and reduce our revenues.
•Our cash distributions are not guaranteed and may fluctuate.
•If we are unable to find suitable investments or pay too much for properties, we may not be able to achieve our investment objectives, and the returns on our investments will be lower than they otherwise would be.
•We depend on external sources of capital for future growth, and our ability to access the capital markets may be restricted.
•We may fail to realize some or all of the anticipated benefits of the Triple T Joint Venture or those benefits may take longer to realize than expected. In addition, our actions and those of our joint venture partners could negatively impact our performance.
•We depend on FRC and AFM to manage our timberlands, and a loss of the services of one or both of them could jeopardize our ongoing operations.
•We depend on third parties for logging and transportation services, and increases in the costs or decreases in the availability of quality service providers could adversely affect our business.
•Our real estate investment activity is concentrated in timberlands, making us more vulnerable economically than if our investments were diversified.
•Our timberlands are located in the U.S. South and, to a lesser extent, in the Pacific Northwest, and adverse economic and other developments in these areas could have a material adverse effect on us.
•Our operating expenses may be a larger percentage of total revenues compared to larger public companies.
•We have recently experienced net losses and may experience losses again in the future.
•We are subject to the credit risk of our customers. The failure of any of our customers to make payments due to us could have an adverse impact on our financial performance.
•We are substantially dependent on our business relationship with WestRock, and our continued success will depend on WestRock’s economic performance.
•We intend to sell portions of our timberlands, either because they are HBU properties or in response to changing conditions, but if we are unable to sell these timberlands promptly or at the price that we anticipate, our land sale revenues may be reduced, which could reduce the cash available for distribution to our stockholders.
•Uninsured losses relating to the timberlands we own and may acquire may reduce our stockholders’ returns.
•Harvesting our timber may be subject to limitations that could adversely affect our results of operations.
•We face possible liability for environmental clean-up costs and wildlife protection laws related to the timberlands we acquire, which could increase our costs and reduce our profitability and cash distributions to our stockholders.
•The impacts of changes in climate conditions as well as governmental responses to such changes may affect our operations and plans for future growth activities.
•Our estimates of the timber growth rates on our properties may be inaccurate, which would impair our ability to realize expected revenues from those properties and could also cause us to incorrectly estimate our timber inventory and the calculation of our depletion expense.
•We may be unable to properly estimate non-timber revenues from any properties that we acquire, which would impair our ability to acquire attractive properties, as well as our ability to derive the anticipated revenues from those properties.
•Changes in assessments, property tax rates, and state property tax laws may reduce our net income and our ability to make distributions to our stockholders.
•Changes in energy and fuel costs could affect our financial condition and results of operations.
•The effects of the COVID-19 pandemic and the actions taken in response thereto may adversely impact our results of operations and financial condition and our ability to make distributions to our stockholders, as well as the results of operations and financial condition of our joint ventures.
•Our board of directors may change significant corporate policies without stockholder approval.
•Our board of directors may increase the number of authorized shares of stock and issue stock without stockholder approval, including in order to discourage a third party from acquiring our company in a manner that could result in a premium price to our stockholders.
•Certain provisions of Maryland law could inhibit changes in control of us, which could lower the value of our common stock.
•Our existing indebtedness and any future indebtedness we may incur could adversely affect our financial health and operating flexibility.
•Our financial condition could be adversely affected by financial and other covenants and other provisions contained in the documents governing our indebtedness.
•To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We also depend on the business of our subsidiaries to satisfy our cash needs. If we cannot generate the required cash, we may not be able to make the necessary payments on our indebtedness.
•An increase in interest rates would increase the cost of servicing our debt and could reduce our cash flow and our profitability.
•Our decision to hedge against interest rate changes may have a material adverse effect on our financial results and condition, and there is no assurance that our hedges will be effective.
•The phase-out of LIBOR could affect interest rates for our variable rate debt and interest rate swap arrangements and potential mismatches of newly adopted interest rates could potentially cause our hedges not to be effective.
•Failure to continue to qualify as a REIT would cause us to be taxed as a regular corporation, which could substantially reduce funds available for distributions to our stockholders and materially and adversely affect our financial condition and results of operations.
•The failure of Creek Pine REIT, LLC, the REIT subsidiary of the Triple T Joint Venture, to qualify as a REIT could cause us to fail to qualify as a REIT.
•Legislative or regulatory tax changes could adversely affect us, our stockholders or our customers.
•Future offerings of debt securities, which would be senior to our common stock, or equity securities, which would dilute our existing stockholders and may be senior to our common stock, may adversely affect the market price of our common stock.
•We depend on the efforts and expertise of our key executive officers and would be adversely affected by the loss of their services.
•If we fail to maintain an effective system of disclosure controls and procedures and integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on us.
•We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
•The market price and trading volume of our common stock may be volatile.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Accordingly, readers are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date that this report is filed with the SEC. We do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
CatchMark Timber Trust, Inc. ("CatchMark Timber Trust") (NYSE: CTT) owns and operates timberlands located in the United States and has elected to be taxed as a REIT for federal income tax purposes. CatchMark Timber Trust acquires, owns, operates, manages, and disposes of timberland properties directly, through wholly-owned subsidiaries, or through joint ventures. We strive to deliver consistent and predictable per-share cash flow growth from disciplined acquisitions, active management, sustainable harvests, and well-timed real estate sales. We intend to grow over time through selective acquisitions and investments in high-demand fiber markets and to efficiently integrate new acquisitions and investments into our operations. Operationally, we focus on generating cash flows from sustainable harvests and improved harvest mix on high-quality industrial timberlands, as well as opportunistic land sales, asset management fees and rent from hunting and recreational leases to provide recurring dividends to our stockholders. We continue to practice intensive forest management and silvicultural techniques that improve the biological growth of our forests.
We also seek to create additional value by entering into joint ventures with long-term, institutional equity partners to opportunistically acquire, own, and manage timberland properties that fit our core investment strategy. In April 2017, we entered into our first joint venture, the Dawsonville Bluffs Joint Venture, with MPERS. In July 2018, we entered into the Triple T Joint Venture with a consortium of institutional investors. Our joint venture platform drives growth through our fee-based management business that leverages our scale and timberland management efficiencies.
For the years ended December 31, 2020, 2019 and 2018, our revenues from timber sales, timberland sales, asset management fees, and other non-harvest related sources, as a percentage of our total revenue, are set forth in the table below:
|Timber sales||69 ||%||68 ||%||71 ||%|
|Timberland sales||15 ||%||17 ||%||18 ||%|
|Asset management fees||12 ||%||11 ||%||6 ||%|
|Other revenues||4 ||%||4 ||%||5 ||%|
|Total||100 ||%||100 ||%||100 ||%|
CatchMark Timber Trust was incorporated in Maryland in 2005 and commenced operations in 2007. CatchMark Timber Trust conducts substantially all of its business through CatchMark Timber Operating Partnership, L.P. (“CatchMark Timber OP”), a Delaware limited partnership. CatchMark Timber Trust is the general partner of CatchMark Timber OP, possesses full legal control and authority over its operations, and owns 99.82% of its Common Units. CatchMark LP Holder, LLC (“CatchMark LP Holder”), a Delaware limited liability company and wholly-owned subsidiary of CatchMark Timber Trust, is a limited partner of CatchMark Timber OP and owns 0.01% of its Common Units. The remaining 0.17% of CatchMark Timber OP's Common Units are owned by current and former officers and directors of CatchMark Timber Trust. In addition, CatchMark Timber Trust conducts certain aspects of its business through CatchMark Timber TRS, Inc. (“CatchMark TRS”), a Delaware corporation formed as a wholly owned subsidiary of CatchMark Timber OP in 2006. CatchMark TRS is a taxable REIT subsidiary. Unless otherwise noted, references herein to CatchMark shall include CatchMark Timber Trust and all of its subsidiaries, including CatchMark Timber OP, and the subsidiaries of CatchMark Timber OP, including CatchMark TRS.
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 Investment Management segment includes investments in and income (loss) from unconsolidated joint ventures and asset management fee revenues earned for the management of these joint ventures.
The following table presents operating revenues by reportable segment:
|Year Ended December 31, |
|Harvest||$||76,464 ||$||77,189 ||$||74,734 |
|Real Estate||15,642 ||17,572 ||17,520 |
|Investment Management||12,184 ||11,948 ||5,603 |
|$||104,290 ||$||106,709 ||$||97,857 |
Current Timberland Holdings
As of December 31, 2020, we wholly owned interests in 408,200 acres of high-quality industrial timberlands consisting of 16.6 million tons of merchantable timber inventory. Of the wholly-owned timberlands, 390,100 acres were located in four states in the U.S. South and 18,100 acres were located in Oregon. Our timberlands have been intensively managed for sustainable commercial timber production and are located within attractive and desirable fiber baskets encompassing a diverse group of pulp, paper and wood products manufacturing facilities.
In addition to our wholly-owned timber assets, as of December 31, 2020, we owned the common limited partnership interest in the Triple T Joint Venture, which owns 1.1 million acres of high-quality industrial East Texas timberlands with an estimated 44.1 million tons of merchantable timber inventory, and we owned a 50% membership interest in the Dawsonville Bluffs Joint Venture, which owns a mitigation bank with a book basis of $2.3 million as of December 31, 2020.
Please refer to Item 2 — Properties for more details on our timber and timberland properties.
Our Business and Growth Strategies
Our objective is to produce cash flow and value growth through the ongoing implementation of the following business and growth strategies:
Actively Manage Our Timberlands for Long-Term Results. We seek to maximize long-term returns by actively managing our timberlands to achieve an optimum balance among biological timber growth, current harvest cash flow, and responsible environmental stewardship. Further, we expect to continue making investments in forest technology, including improved seedlings, in order to increase the sustainable yield of our timberlands over the long-term.
Maximize Profitability on Timber Sales. We actively manage our log merchandising efforts together with delivered and stumpage sales with the goal of achieving the highest available price for our timber products. We compete with other timberland owners on the basis of the quality of our logs, the prices of our logs, our reputation as a reliable supplier, and our ability to meet customer specifications. We will continue to work diligently and proactively with our third-party contractors with a view towards optimizing our logging, hauling, sorting, and merchandising operations to extract the maximum profitability from each of our logs based on the foregoing considerations.
Pursue Attractive Timberland Acquisitions. We seek to identify and acquire high-quality industrial timberland properties, with our average deal size ranging from 2,500 to 25,000 acres. Critical evaluation of prospective property acquisitions is an essential component of our acquisition strategy. When evaluating acquisition opportunities, we assess a full range of matters relating to the prospective timberland property or properties, including, but not limited to:
•Local market dynamics (supply/demand balance);
•Predominantly softwood merchantable inventory mix;
•Merchantable inventory/mix (tons per-acre);
•Sustainable productivity (on a tons per-acre, per-year basis);
•Quality of existing and prospective customers; and
•Target cash yields (near-term/long-term).
We expect our transaction pipeline to continue to be driven by timber fund portfolio rebalancing and private owner liquidations.
We may enter into fiber supply agreements with respect to acquired properties in order to ensure a steady source of demand for our incremental timber production.
Opportunistically Sell Timberland Assets. 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. We intend to capitalize on the value of our timberland portfolio by opportunistically monetizing timberland properties. 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;
•Predominantly hardwood merchantable inventory mix; and
The close proximity of our existing timberlands to several major population centers provides us with opportunities to periodically sell parcels of our land at favorable valuations. We generally expect to sell approximately 2% of our fee timberland acreage on an annual basis pursuant to our land sales program, although such results may vary. We may also decide to pursue various land entitlements on certain properties in order to realize higher long-term values on such properties.
From time to time, we also sell blocks of timberland properties under a capital recycling program in order 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. 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. Timberland disposition opportunities under our capital recycling program are evaluated based in part on inventory stocking and mix profiles, productivity characteristics, geographical diversification and procurement and operating areas.
Create Value Through Joint Ventures. We seek to create additional value through institutional equity joint ventures to acquire, own, and manage timberland properties that meet our core investment strategy. The timberland properties acquired through the Triple T Joint Venture and the Dawsonville Bluffs Joint Venture fit our profile for high quality assets with excellent stocking. Additionally, we have established and expanded our investment management business by managing the day-to-day operations of both joint ventures and earning asset management fee income, which supports our dividend and growth strategy.
Practice Sound Environmental Stewardship. We remain committed to responsible environmental stewardship and sustainable forestry. Our wholly-owned timberlands and timberlands held by the Triple T Joint Venture, have been third-party audited and certified in accordance with the 2015-2019 SFI standards (extended through December 2021). SFI standards promote sustainable forest management through recognized core principles, including measures to protect water quality, biodiversity, wildlife habitat and at-risk species. Our timberlands are further managed to meet or exceed all state regulations through the implementation of best management practices as well as internal policies designed to ensure compliance. We believe our continued commitment to environmental stewardship will allow us to maintain our timberlands’ productivity, grow our customer base, and enhance our reputation as a preferred timber supplier.
Our long-term financing strategy seeks to maximize balance sheet liquidity and operational flexibility for the purpose of generating current income and attractive long-term returns for our stockholders. We intend to employ prudent amounts of debt and equity financing as a means of providing additional funds for the selective acquisitions of timber assets, to refinance existing debt, or for general corporate purposes. In particular, we seek to maximize balance sheet liquidity and flexibility by:
•Maintaining sufficient liquidity through borrowing capacity under our credit facilities and cash-on-hand;
•Minimizing the amount of near-term debt maturities in a single year;
•Maintaining low to modest leverage;
•Managing interest rate risk through an appropriate mix of fixed and variable rate debt instruments, either directly or using interest rate swaps, caps or other arrangements; and
•Maintaining access to diverse sources of capital.
We determine the amount of debt and equity financing to be used when acquiring an asset by evaluating terms available in the credit markets (such as interest rate, repayment provisions and maturity), our cost of equity capital, and our assessment of the particular asset’s risk. Historically, a significant portion of our debt has consisted of long-term borrowings secured by our timber assets.
We anticipate that we will continue to use a number of different sources to finance our operations and selective acquisitions going forward, including cash from operations, proceeds from asset dispositions, funds available under bank credit facilities (which may or may not be secured by our assets), co-investments through partnerships or joint ventures, potential future issuances of common or preferred equity or partnership interests in our operating partnership, or any combination of these sources, to the extent available to us, or other sources that may become available from time to time.
We executed the following transactions during the three years ended December 31, 2020:
We did not acquire any additional timberlands during 2020, consistent with our capital allocation priorities during the year. During the years ended December 31, 2019 and 2018, we acquired 900 acres and 18,100 acres of timberlands, respectively. The properties acquired are well stocked with merchantable timber inventory, located in high-demand mill markets, and complement our existing timberland portfolio. Together, they added 724,400 tons to our merchantable timber inventory, averaging 38 tons per acre, comprised of 89% pine plantations by acreage and 79% sawtimber by tons. Our timberland ownership expanded into the Pacific Northwest in 2018.
On July 6, 2018, we invested $200.0 million in the Triple T Joint Venture in exchange for a common limited partnership interest, exclusive of transaction costs. The Triple T Joint Venture acquired 1.1 million acres of East Texas industrial timberlands (the "Triple T Timberlands") for $1.39 billion. The Triple T Timberlands contained an estimated 38.0 million tons of merchantable timber inventory as of the date of acquisition. On June 24, 2020, we invested an additional $5.0 million of equity in connection with amendments to a sawtimber supply agreement between the Triple T Joint Venture and GP, as well as the joint venture agreement and asset management agreement. See Note 4 — Unconsolidated Joint Ventures of our accompanying consolidated financial statements for additional information.
During the years ended December 31, 2020, 2019, and 2018, we sold 9,300, 9,200, and 8,500 acres of timberland, respectively, in the U.S. South. These land sales represented approximately 2.3%, 2.2%, and 1.8%, respectively, of our average fee timberland acreage (based on average quarterly fee timberland acreage) for each year. For the years ended December 31, 2020, 2019, and 2018, the disposed timberlands had an average merchantable timber stocking of 26, 37 and 26 tons per acre, respectively, as compared to 42, 43 and 42 tons per acre for our U.S. South portfolio at the beginning of each respective year.
During the years ended December 31, 2020, 2019 and 2018, we completed large dispositions of 14,400, 14,400 and 56,100 acres of wholly-owned timberlands for $21.3 million, $25.4 million and $79.3 million, respectively. These large dispositions represented approximately 3.4%, 3.4% and 11.9% of our average fee timberland acreage (based on average quarterly fee timberland acreage) for each year. The net proceeds received from these large dispositions were used to pay down our outstanding debt. For the years ended December 31, 2020, 2019 and 2018,
the large dispositions had an average merchantable timber stocking of 29, 37 and 32 tons per acre, as compared to 42, 43 and 42 tons per acre for our U.S. South portfolio at the beginning of each respective year.
Mahrt Timber Agreements
We are party to a master stumpage agreement and a fiber supply agreement (collectively, the “Mahrt Timber Agreements”) with a wholly-owned subsidiary of WestRock. The master stumpage agreement provides that we will sell specified amounts of timber and make available certain portions of our timberlands to CatchMark TRS for harvesting. The fiber supply agreement provides that WestRock will purchase a specified tonnage of timber from CatchMark TRS at specified prices per ton, depending upon the type of timber product. The prices for the timber purchased pursuant to the fiber supply agreement are negotiated every two years but are subject to quarterly market pricing adjustments based on an index published by TimberMart-South, a quarterly trade publication that reports raw forest product prices in 11 southern states. The initial term of the Mahrt Timber Agreements is October 9, 2007 through December 31, 2032, subject to extension and early termination provisions. The Mahrt Timber Agreements ensure a long-term source of supply of wood fiber products for WestRock in order to meet its paperboard and lumber production requirements at specified mills and provide us with a reliable consumer for the wood products from its timberlands.
For the year ended December 31, 2020, WestRock purchased 409,000 tons under the Mahrt Timber Agreements, which exceeded the annual minimum requirement of 380,800 tons. WestRock has historically purchased tonnage that exceeded the minimum requirement under Mahrt Timber Agreements. See Note 7 — Commitments and Contingencies of our accompanying consolidated financial statements for additional information regarding the material terms of the Mahrt Timber Agreements.
We derived approximately 11%, 12%, and 17% of our net timber sales revenue from the Mahrt Timber Agreements in each of the years ended December 31, 2020, 2019, and 2018, respectively. For 2021, WestRock is required to purchase at least 380,800 tons and we are committed to make available for purchase by WestRock a minimum of 443,200 tons of timber under the Mahrt Timber Agreements.
Carolinas Supply Agreement
We assumed a pulpwood supply agreement with IP (the "Carolinas Supply Agreement") in connection with a timberland acquisition completed in 2016. The Carolinas Supply Agreement is effective through November 3, 2026 and requires us to sell agreed-upon pulpwood volumes to IP and IP is required to purchase these volumes at defined market prices.
We sold 73,200 tons of timber under the Carolinas Supply Agreement in 2020. We derived approximately 2%, 4%, and 5% of our net timber sales revenue from the Carolinas Supply Agreement in 2020, 2019, and 2018, respectively. For 2021, IP is required to purchase at least 65,500 tons and we are committed to make available for purchase by IP a minimum of 88,600 tons of timber under the Carolinas Supply Agreement.
Credit Risk of Customers
For the year ended December 31, 2020, our largest customer, WestRock, represented 15% of our total revenues. No other customer represented more than 10% of our total revenues. The loss of WestRock as a customer would have a material adverse effect on our operating results. We sold timber to 74 customers in 2020, compared to 69 in 2019 and 67 in 2018.
We are not aware of any reason why our current customers will not be able to pay their contractual amounts as they become due in all material respects.
We compete with various private and industrial timberland owners as well as governmental agencies that own or manage timberlands in the U.S. South and the Pacific Northwest. Due to transportation and delivery costs, pulp, paper and wood products manufacturing facilities typically purchase wood fiber within a 100-mile radius of their
location, which thereby limits, to some degree, the number of significant competitors in any specific regional market. Factors affecting the level of competition in our industry include price, species, grade, quality, proximity to the mill customer, and our reliability and consistency as a supplier. Also, as we seek to acquire timberland assets, we are in competition for targeted timberland tracts with other similar timber investment companies, as well as investors in land for purposes other than growing timber. As a result, we may have to pay more for the timberland tracts to become the owner if another suitable tract cannot be substituted. When it becomes time to dispose of timberland tracts, we will again be in competition with sellers of similar tracts to locate suitable purchasers of timberland.
Our harvest operations are affected by weather conditions, where wet weather could reduce our harvest volume but boost prices due to limited supply, while dry weather could suppress prices due to increases in supply.
See Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the impact of COVID-19 on our business.
See Item 1A — Risk Factors, Risk Related to Our Business and Operations for discussions of regulatory matters, including environmental matters that impact our business.
Human Capital Management
As of December 31, 2020, we had 25 employees, all of whom were full-time and based in the United States. We care about our employees and recognize that they are key to our success.
Protection from Harassment, Discrimination and Retaliation. We believe that all individuals should be treated with dignity and respect, and have adopted a Human Rights Policy that, among other things, includes a No Harassment Policy that does not tolerate discriminatory harassment of any sort, including based on race, color, religion, sex, national origin, age, disability, pregnancy, childbirth, or related medical conditions, gender identity, sexual orientation, genetic information, citizenship status, service member status or any other characteristic protected by federal, state or local anti-discrimination laws. We also value and protect an employee's right to raise workplace issues without concern for retaliation. We believe our employee relations are good and we have policies and procedures in place to quickly address and remedy employee grievances and any workplace disputes.
Diversity and Inclusion. We value diversity in the workplace. As of December 31, 2020, 50% of our executive officers were women and 48% of our total number of employees were women. Approximately 20% of our workforce is comprised of individuals that identify as a member of an ethnic or racial minority group.
Health and Safety. We are committed to providing and maintaining a safe and healthy workplace for all workers (including vendors, contractors, temporary employees and volunteers) as well as clients, visitors and members of the public. Risks and hazards to health and safety will be eliminated or minimized, as far as is reasonably practicable. We have adopted a Health and Safety Policy in furtherance of this commitment. During the year ended December 31, 2020, as a result of the COVID-19 pandemic, we implemented additional safety protocols to protect our employees and others, including protocols regarding social distancing, health checks and working remotely. Our experienced teams adapted quickly to the changes and have managed our business successfully during this challenging time.
Benefits, Training and Professional Development. We provide high-quality benefits to our employees, including healthcare and wellness initiatives, and a 401(k) plan with a generous company match, time-off for volunteering, and a charitable matching program. We also provide regular training and professional development opportunities for our employees. These include semi-annual, company-wide information security training programs, as well as personal coaching for all officers and executives, and opportunities to attend conferences and other events relevant to the timberland, forest products and REIT industries.
Scholarship Program. In 2020, we established the Willis J. Potts, Jr. scholarship program for our employees. This program was established to honor Willis J. Potts, Jr., who was a director on our Board beginning in 2006 and our
Chairman of the Board from 2013 until 2020, when he retired. This scholarship program is administered through our scholarship committee and awards are granted to non-officer employees and without regard to race, color, creed, religion, orientation, gender, disability or national origin.
Low Turnover Rate. We believe that all of our initiatives to make CatchMark an exceptional place to work have resulted in our low turnover rate, which was 3.92% in 2020 and averaged 3.92% annually over the past three years.
Access to SEC Filings and Other Information
Our website is www.catchmark.com. We make available on the Investor Relations section of our website, free of charge, our Annual Reports to Stockholders, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and Forms 3, 4 and 5, and amendments to those reports, as soon as reasonably practicable after filing such documents with, or furnishing such documents to, the SEC. Our documents filed with, or furnished to, the SEC are also available for review at the SEC's website at www.sec.gov.
We include our website addresses throughout this report for reference only. The information contained on our website is not incorporated by reference into this report.
ITEM 1A. RISK FACTORS
Below are some of the risks and uncertainties that could cause our actual results and future events to differ materially from those set forth or contemplated in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to our business, operating results, prospects and financial condition. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.
Risks Related to Our Business and Operations
The cyclical nature of the forest products industry could impair our operating results.
Our operating results are affected by the cyclical nature of the forest products industry. Our operating results depend on timber prices that can experience significant variation and that have been historically volatile. Like other participants in the forest products industry, we have limited direct influence over the timing and extent of price changes for cellulose fiber, timber, and wood products. Although some of the supply agreements we have or expect to enter into in the future fix the price of our harvested timber for a period of time, these contracts may not protect us from the long-term effects of price declines and may restrict our ability to take advantage of price increases.
The demand for timber and wood products is affected primarily by the level of new residential construction activity, repair and remodeling activity, the supply of manufactured timber products, including imports of timber products, and to a lesser extent, other commercial and industrial uses. The demand for timber also is affected by the demand for wood chips in the pulp and paper markets and for hardwood in the furniture and other hardwood industries. The demand for cellulose fiber is related to the demand for disposable products such as diapers and feminine hygiene products. These activities are, in turn, subject to fluctuations due to, among other factors:
•changes in domestic and international economic conditions;
•interest and currency rates;
•population growth and changing demographics; and
•seasonal weather cycles (for example, dry summers and wet winters).
Decreases in the level of residential construction activity generally reduce demand for logs and wood products. This can result in lower revenues, profits, and cash flows. In addition, increases in the supply of logs and wood products at both the local and national level can lead to downward pressure on prices during favorable price environments. Timber owners generally increase production volumes for logs and wood products during favorable price environments. Such increased production, however, when coupled with even modest declines in demand for these products in general, could lead to oversupply and lower prices. Oversupply can result in lower revenues, profits, and cash flows to us and could negatively impact our results of operations.
Increased competition from a variety of substitute products could lead to declines in demand for wood products and negatively impact our business.
Wood products are subject to increased competition from a variety of substitute products, including products made from engineered wood composites, fiber/cement composites, plastics and steel, as well as import competition from other worldwide suppliers. This could result in lower demand for wood products and impair our operating results.
Large-scale increases in the supply of timber may affect timber prices and reduce our revenues.
The supply of timber available for sale in the market could increase for a number of reasons, including producers introducing new capacity or increasing harvest levels. Some governmental agencies, principally the U.S. Department of Agriculture's Forest Service (the “U.S.D.A. Forest Service”) and the U.S. Department of the Interior’s Bureau of Land Management, own large amounts of timberlands. If these agencies choose to sell more timber from their holdings than they have been selling in recent years, timber prices could fall and our revenues could be reduced. Any large reduction in the revenues we expect to earn from our timberlands would reduce the returns, if any, we are able to achieve for our stockholders.
Our cash distributions are not guaranteed and may fluctuate.
Our board of directors, in its sole discretion, determines the amount of the distributions (including the determination of whether to retain net capital gains income) to be provided to our stockholders. Our Board will determine whether to authorize a distribution and the amount of such distribution based on its consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands, including HBU timberlands. In addition, our board of directors may choose to retain operating cash flow for investment purposes, working capital reserves or other purposes, and these retained funds, although increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Consequently, our distribution levels may fluctuate. Our failure to meet market expectations with regard to future cash distributions likely would adversely affect the market price of our common stock.
If we are unable to find suitable investments or pay too much for properties, we may not be able to achieve our investment objectives, and the returns on our investments will be lower than they otherwise would be.
A key component of both our business and growth strategies is to pursue timberland acquisition opportunities. Our ability to identify and acquire desirable timberlands depends upon the performance of our management team in the selection of our investments. We also face significant competition in pursuing timberland investments from other REITs; real estate limited partnerships, pension funds and their advisors; bank and insurance company investment accounts; school and university endowments; individuals; and other entities. The market for high-quality timberland is highly competitive given how infrequently those assets become available for purchase. As a result, many real estate investors have built up their cash positions and face aggressive competition to purchase quality timberland assets. A significant number of entities and resources competing for high-quality timberland properties support relatively high acquisition prices for such properties, which may reduce the number of acquisition opportunities available to, or affordable for, us and could put pressure on our profitability and our ability to pay distributions to stockholders. In addition, our future acquisitions, if any, may not perform in accordance with our expectations, due to lower merchantable inventory, lower product pricing or other factors. Finally, we anticipate financing these acquisitions through proceeds from debt or equity offerings (including offerings of partnership units by our operating partnership), borrowings, cash from operations, proceeds from asset dispositions, or any combination thereof, and our inability to finance acquisitions on favorable terms or the failure of any acquisitions to conform to our expectations could adversely affect our results of operations. We cannot assure you that we will be successful in obtaining suitable investments on financially attractive terms, that we will be able to finance the purchase of such investments or that, if we make investments, our objectives will be achieved.
We depend on external sources of capital for future growth, and our ability to access capital markets may be restricted.
Our ability to finance our growth is, to a significant degree, dependent on external sources of capital. Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our
control, including, without limitation, a decline in general market conditions, decreased market liquidity, increases in interest rates, an unfavorable market perception of our growth potential, including our joint venture strategy, a decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In addition, our ability to access additional capital may be limited by the terms of our bylaws, which restrict our incurrence of debt, in some circumstances, and by our existing indebtedness, which, among other things, restricts our incurrence of additional debt and, in some circumstances, the payment of dividends. Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us or at all, and the failure to obtain necessary capital could materially adversely affect our future growth.
We may fail to realize some or all of the anticipated benefits of the Triple T Joint Venture or those benefits may take longer to realize than expected. We also may encounter significant difficulties in managing the business and operations of the Triple T Timberlands for the Triple T Joint Venture. The future results of our company will suffer if we do not effectively manage the Triple T Timberlands on behalf of the Triple T Joint Venture or if we are not able to successfully recapitalize the Triple T Joint Venture.
Our ability to realize the anticipated benefits of the Triple T Joint Venture depends, in part, on our ability to successfully manage the business and operations of the Triple T Timberlands acquired by the Triple T Joint Venture. Following the consummation of the Triple T Joint Venture, the number of acres of timberlands under our management increased significantly. The management and operation of a newly-acquired business can be a complex, costly and time-consuming process. As a result, we are required to devote significant management attention and resources to managing the business practices and operations of the Triple T Timberlands for the Triple T Joint Venture. The failure to meet the challenges involved in the management of the business and operations of the Triple T Timberlands and to realize the anticipated benefits of the Triple T Joint Venture could cause an interruption of, or a loss of momentum in, our business activities or those of the Triple T Timberlands and could adversely impact our business, financial condition and results of operations. In addition, the overall management of the business and operations of the Triple T Timberlands may result in material unanticipated problems, expenses, liabilities, loss of customers and diversion of our management’s and employees’ attention. Furthermore, the Triple T Timberlands may have unknown or contingent liabilities that were not discovered during the course of due diligence. These liabilities could include exposure to unexpected environmental problems, compliance and regulatory violations, key employee and client retention problems and other problems that could result in significant costs to the Triple T Joint Venture.
The challenges in our ability to realize the anticipated benefits of the Triple T Joint Venture include the factors identified elsewhere in this annual report relating to the timberlands business, and include, but are not limited to:
•the Triple T Joint Venture’s dependency on, and obligations under, long-term third-party customer contracts;
•the right of the preferred investors to receive a preferred return and a return of capital before we receive our preferred return or any return of capital;
•our partners in the Triple T Joint Venture have significant governance rights, including major decision rights on management and operational matters, and we may arrive at an impasse with these partners relating to one or more of these matters;
•our asset management fees from the Triple T Joint Venture are subject to deferral if certain financial objectives are not obtained and are subject to decrease over time;
•our amended asset management agreement with the Triple T Joint Venture is subject to termination, including upon the failure of the Triple T Joint Venture to meet certain financial and operational performance objectives;
•volatility in the market prices of forest products;
•challenges in keeping existing customers and obtaining new customers;
•challenges in retaining, attracting and assimilating key personnel, including personnel that are considered key to the future success of the business of the Triple T Joint Venture;
•obligations and restrictions imposed by the financing arrangements of the Triple T Joint Venture; and
•challenges in keeping key business relationships in place.
Many of these factors are outside of our control, and any one of them could result in increased costs and liabilities, decreases in the amount of expected revenues, earnings, and cash flows, and diversion of management’s time and energy, which could have a material adverse effect on the business of the Triple T Joint Venture and/or us.
In addition, even if we are able to successfully manage the business and operations of the Triple T Timberlands, the full benefits of the transaction may not be realized if we are not able to successfully recapitalize the joint venture. These benefits may not be achieved within the anticipated time frame, or at all, and additional unanticipated costs may be incurred. If we are not able to successfully recapitalize the Triple T Joint Venture in a timely manner, we could lose some or all of our investment.
All of these factors could negatively impact the asset management fees we expect to earn from the Triple T Joint Venture, the value of our investment in the Triple T Joint Venture and the returns we anticipate receiving from the Triple T Joint Venture, all of which could negatively impact the price of our common stock, or have a material adverse effect on our business, financial condition and results of operations.
Actions of joint venture partners could negatively impact our performance.
We have entered into joint ventures (including the Triple T Joint Venture and the Dawsonville Bluffs Joint Venture) and may enter into additional joint ventures in the future, including, but not limited to, joint ventures involving the ownership and management of timberlands. Such joint venture investments may involve risks not otherwise present with a direct investment in timberlands, including, without limitation:
•the risk that a joint venture may not be able to make payments under, or refinance on attractive terms or at all, its financing arrangements, including secured financings pursuant to which defaults could result in lenders foreclosing on the joint venture's assets;
•the risk that a joint venture partner may at any time have economic or business interests or goals which are, or which become, inconsistent with our business interests or goals;
•the risk that a joint venture partner may be in a position to take actions that are contrary to the agreed upon terms of the joint venture, our instructions or our policies or objectives;
•the risk that we may incur liabilities as a result of an action taken by a joint venture partner;
•the risk that disputes between us and a joint venture partner may result in litigation or arbitration that would increase our expenses and occupy the time and attention of our officers and directors;
•the risk that no joint venture partner may have the ability to unilaterally control the joint venture with respect to certain major decisions, and as a result an irreconcilable impasse may be reached with respect to certain decisions;
•the risk that we may not be able to sell our interest in a joint venture when we desire to exit the joint venture, or at an attractive price; and
•the risk that, if we have a contractual right or obligation to acquire a joint venture partner’s ownership interest in the joint venture, we may be unable to finance such an acquisition if it becomes exercisable or we may be required to purchase such ownership interest at a time when it would not otherwise be in our best interest to do so.
The occurrence of any of the foregoing risks with respect to a joint venture could have an adverse effect on the financial performance of such joint venture, which could in turn have an adverse effect on our financial performance and the value of an investment in our company.
We depend on FRC and AFM to manage our timberlands, and a loss of the services of one or both of them could jeopardize our ongoing operations.
We are party to timberland operating agreements with FRC and AFM (together, our "Forest Managers"), which are renewable on an annual basis. Pursuant to these agreements, we depend upon our Forest Managers to manage and operate our timberlands and related timber operations and to ensure delivery of timber to our customers. To the extent we lose the services of our Forest Managers, we are unable to obtain the services of our Forest Managers at
reasonable prices, or our Forest Managers do not perform the services in accordance with the timberland operating agreements, our results of operations may be adversely affected.
We depend on third parties for logging and transportation services, and increases in the costs or decreases in the availability of quality service providers could adversely affect our business.
We depend on logging and transportation services provided by truck by third parties. If any of our transportation providers were to fail to deliver timber supply or logs to our customers in a timely manner or were to damage timber supply or logs during transport, we may be unable to sell it at full value, or at all. During the global financial crisis and subsequent downturn in U.S. housing starts, timber harvest volumes declined significantly. As a result, many logging contractors, particularly cable logging operators in the U.S. West, permanently shut down their operations. As harvest levels have returned to higher levels with the recovery in U.S. housing starts, this shortage of logging contractors has resulted in sharp increases in logging costs and in the availability of logging contractors. It is expected that the supply of qualified logging contractors will be impacted by the availability of debt financing for equipment purchases as well as a sufficient supply of adequately trained loggers. As housing starts continue to recover, harvest levels are expected to increase, placing more pressure on the existing supply of logging contractors. Any significant failure or unavailability of third-party logging or transportation providers, or increases in transportation rates or fuel costs, may result in higher logging costs or the inability to capitalize on stronger log prices to the extent logging contractors cannot be secured at a competitive cost. Such events could harm our reputation, negatively affect our customer relationships and adversely affect our business.
Our real estate investment activity is concentrated in timberlands, making us more vulnerable economically than if our investments were diversified.
We have only acquired interests in timberlands and expect to make additional timberlands acquisitions in the future. We are subject to risks inherent in concentrating investments in real estate. The risks resulting from a lack of diversification become even greater as a result of our strategy to invest primarily, if not exclusively, in timberlands. A downturn in the real estate industry generally or the timber or forest products industries specifically could reduce the value of our properties and could require us to recognize impairment losses from our properties. A downturn in the timber or forest products industries also could prevent our customers from making payments to us and, consequently, would prevent us from meeting debt service obligations or making distributions to our stockholders. The risks we face may be more pronounced than if we diversified our investments outside real estate or outside timberlands.
Our timberlands are located in the U.S. South and, to a lesser extent, in the Pacific Northwest, and adverse economic and other developments in these areas could have a material adverse effect on us.
Our timberlands are located in the U.S. South and, to a lesser extent, in the Pacific Northwest. As a result, we may be susceptible to adverse economic and other developments in these regions, including industry slowdowns, business layoffs or downsizing, relocations of businesses, changes in demographics, increases in real estate and other taxes and increased regulation, any of which could have a material adverse effect on us.
In addition, the geographic concentration of our property makes us more susceptible to adverse impacts from a single natural disaster such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding and other factors that could negatively impact our timber production.
As a relatively small public company, our general and administrative expenses are a larger percentage of our total revenues than many other public companies, which may have a greater effect on our financial performance and may reduce cash available for distribution to our stockholders.
Our total assets as of December 31, 2020 were $607.3 million and our revenues for the year ended December 31, 2020 were $104.3 million. Because our company is smaller than many other publicly-traded REITs, our general and administrative expenses are, and will continue to be, a larger percentage of our total revenues than many other public companies. If we are unable to access external sources of capital and grow our business, our general and administrative expenses will have a greater effect on our financial performance and may reduce the amount of cash flow available for distribution to our stockholders.
We have recently experienced net losses and may experience losses again in the future.
From our inception through the end of 2020, other than in 2014, we have incurred net losses. Historical net losses have generally been a result of non-cash charges, including depletion expense and HLBV losses allocated from the Triple T Joint Venture. If we are unable to generate net income in the future, and continue to incur net losses, our financial condition, results of operations, cash flows, and our ability to service our indebtedness and make distributions to our stockholders could be materially and adversely affected, which could adversely affect the market price of our common stock.
We are subject to the credit risk of our customers. The failure of any of our customers to make payments due to us under supply agreements could have an adverse impact on our financial performance.
Current and future customers who agree to purchase our timber under supply contracts will range in credit quality from high to low. We assume the full credit risk of these parties, as we have no payment guarantees under the contract or insurance if one of these parties fails to make payments to us. While we intend to continue acquiring timberlands in well-developed and active timber markets with access to numerous customers, we may not be successful in this endeavor. Depending upon the location of any additional timberlands we acquire and the supply agreements we enter into, our supply agreements may be concentrated among a small number of customers. Even though we may have legal recourse under our contracts, we may not have any practical recourse to recover payments from some of our customers if they default on their obligations to us. Any bankruptcy or insolvency of our customers, or failure or delay by these parties to make payments to us under our agreements, would cause us to lose the revenue associated with these payments and adversely impact our cash flow, financial condition, and results of operations.
We are substantially dependent on our business relationship with WestRock, and our continued success will depend on WestRock’s economic performance.
The Mahrt Timber Agreements we entered into with WestRock provide that we will sell specified amounts of timber to WestRock, subject to market pricing adjustments and certain early termination rights of the parties. The Mahrt Timber Agreements are intended to ensure a long-term source of supply of wood fiber products for WestRock, in order to meet its paperboard and lumber production requirements at specified mills and provide us with a reliable customer for the wood products from our timberlands. Our financial performance is substantially dependent on the economic performance of WestRock as a consumer of our wood products. Approximately 11% of our net timber sales revenue for 2020 was derived from the Mahrt Timber Agreements, which exceeded the minimum amount of timber that WestRock was required to purchase pursuant to the Mahrt Timber Agreements. If WestRock does not continue to purchase significantly more than the minimum amount of timber it is required to purchase from us, or if WestRock becomes unable to purchase the required minimum amount of timber from us, there could be a material adverse effect on our business and financial condition.
In addition, in the event of a force majeure impacting WestRock, which is defined by the Mahrt Timber Agreements to include, among other things, lightning, fires, storms, floods, infestation, other acts of God or nature, power failures and labor strikes or lockouts by employees, the amount of timber that WestRock is required to purchase in the calendar year would be reduced pro rata based on the period during which the force majeure was in effect and continuing. If the force majeure is in effect and continuing for 15 days or more, WestRock would not be required to purchase the timber that was not purchased during the force majeure period. If the force majeure is in effect and continuing for fewer than 15 days, WestRock would have up to 180 days after the termination of the force majeure period to purchase the timber that was not purchased during the force majeure period. As a result, the occurrence of a force majeure under the terms of the Mahrt Timber Agreements could adversely impact our business and financial condition.
We intend to sell portions of our timberlands, because they are HBU properties, in response to changing conditions or to fund capital allocation priorities, but if we are unable to sell these timberlands promptly or at the price that we anticipate, our land sale revenues may be reduced, which could reduce the cash available for distribution to our stockholders or our ability to fund new investments, the repayment of debt or the repurchase of our shares.
On an annual basis, we intend to sell approximately 2% of our fee timberland acreage, primarily timberlands that we have determined have become more valuable for development, recreational, conservation and other uses than for growing timber, which we refer to as HBU properties. We intend to use the proceeds from these sales to support our
distributions to our stockholders. From time to time, we also sell blocks of timberland properties under a capital recycling program in order 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. We may also sell portions of our timberland from time to time in response to changing economic, financial or investment conditions. Because timberlands are relatively illiquid investments, our ability to promptly sell timberlands is limited. The following factors, among others, may adversely affect the timing and amount of our income generated by sales of our timberlands:
•general economic conditions;
•availability of funding for governmental agencies, developers, conservation organizations, individuals and others to purchase our timberlands for recreational, conservation, residential or other purposes;
•local real estate market conditions, such as oversupply of, or reduced demand for, properties sharing the same or similar characteristics as our timberlands;
•competition from other sellers of land and real estate developers;
•weather conditions or natural disasters having an adverse effect on our properties;
•relative illiquidity of real estate investments;
•forestry management costs associated with maintaining and managing timberlands;
•changes in interest rates and in the availability, cost and terms of debt financing;
•impact of federal, state and local land use and environmental protection laws;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances, and the related costs of compliance with laws and regulations, fiscal policies and ordinances; and
•the potential need to delay sales in order to minimize the risk that gains would be subject to the 100% prohibited transactions tax.
In acquiring timberlands and in entering into long-term supply agreements, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond quickly to market opportunities could adversely impact our results of operations and reduce our cash available to pay distributions to our stockholders.
Uninsured losses relating to the timberlands we own and may acquire may reduce our stockholders’ returns.
The volume and value of timber that can be harvested from the timberlands we own and may acquire may be limited by natural disasters such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding, and other weather conditions and natural disasters, as well as other causes such as theft, trespass, condemnation or other casualty. We do not maintain insurance for any loss to our standing timber from natural disasters or other causes. Any funds used for such losses would reduce cash available for distributions to our stockholders.
Harvesting our timber may be subject to limitations that could adversely affect our results of operations.
Our primary assets are our timberlands. Weather conditions, timber growth cycles, property access limitations, availability of contract loggers and haulers, and regulatory requirements associated with the protection of wildlife and water resources may restrict our ability to harvest our timberlands. Other factors that may restrict our timber harvest include damage to our standing timber by fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding and other weather conditions and natural disasters. Changes in global climate conditions could intensify one or more of these factors. Although damage from such causes usually is localized and affects only a limited percentage of standing timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. Furthermore, we may choose to invest in timberlands that are intermingled with sections of federal land managed by the U.S.D.A. Forest Service or other private owners. In many cases, access might be achieved only through a road or roads built across adjacent federal or private land. In order to access these intermingled timberlands, we would need to obtain either temporary or permanent access rights to these lands from time to time. Our revenue, net income, and cash flow from our operations will be dependent to a
significant extent on the continued ability to harvest timber on our timberlands at adequate levels and in a timely manner. Therefore, if we were to be restricted from harvesting on a significant portion of our timberlands for a prolonged period of time, or if material damage to a significant portion of our standing timber were to occur, then our results of operations could be adversely affected.
We face possible liability for environmental clean-up costs and wildlife protection laws related to the timberlands we acquire, which could increase our costs and reduce our profitability and cash distributions to our stockholders.
Our business is subject to laws, regulations, and related judicial decisions and administrative interpretations relating to, among other things, the protection of timberlands, endangered species, timber harvesting practices, recreation and aesthetics, and the protection of natural resources, air and water quality that are subject to change and frequently enacted. These changes may adversely affect our ability to harvest and sell timber and to remediate contaminated properties. We are subject to regulation under, among other laws, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the National Environmental Policy Act and the Endangered Species Act, as well as comparable state laws and regulations. Violations of various statutory and regulatory programs that apply to our operations could result in civil penalties; damages, including natural resource damages; remediation expenses; potential injunctions; cease-and-desist orders; and criminal penalties.
Laws and regulations protecting the environment have generally become more stringent in recent years and could become more stringent in the future. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to the person’s negligence or fault. We may acquire timberlands subject to environmental liabilities, such as clean-up of hazardous substance contamination and other existing or potential liabilities of which we are not aware, even after investigations of the properties. We may not be able to recover any of these liabilities from the sellers of these properties. The cost of these clean-ups could therefore increase our operating costs and reduce our profitability and cash available to make distributions to our stockholders. The existence of contamination or liability also may materially impair our ability to use or sell affected timberlands.
The Endangered Species Act and comparable state laws protect species threatened with possible extinction. At least one species present on our timberlands has been, and in the future more may be, protected under these laws. Protection of threatened and endangered species may include restrictions on timber harvesting, road-building, and other forest practices on private, federal, and state land containing the affected species. The size of the area subject to restriction varies depending on the protected species at issue, the time of year, and other factors, but can range from less than one acre to several thousand acres.
The Clean Water Act regulates the direct and indirect discharge of pollutants into the waters of the United States. Under the Clean Water Act, it is unlawful to discharge any pollutant from a “point source” into navigable waters of the United States without a permit obtained under the National Pollutant Discharge Elimination System (“NPDES”) permit program of the U.S. Environmental Protection Agency (the “EPA”). Storm water from roads supporting timber operations that is conveyed through ditches, culverts and channels are exempted by EPA rule from this permit requirement and Congress amended Section 402(1) of the Clean Water Act in 2014 to prohibit the requirement of NPDES permits for discharge of runoff associated with silvicultural activities conducted in accordance with standard industry practice, leaving those sources of water discharge to state regulation. The scope of these state regulations vary by state and are subject to change, legal challenges and legislative responses. To the extent we are subject to future federal or state regulation of storm water runoff from roads supporting timber operations, our operational costs to comply with such regulations could increase and our results of operations could be adversely affected.
Changes in climate conditions and governmental responses to such changes may affect our operations or planned future growth activities.
There continue to be increased social concerns over climate change and environmental issues, as well as numerous international, U.S. federal and state-level initiatives and proposals to address domestic and global climate issues. These initiatives include proposals to regulate and/or tax the production of carbon dioxide and other greenhouse gases to facilitate the reduction of carbon compound emissions into the atmosphere and provide tax and other incentives to produce and use cleaner energy. Future legislation or regulatory activity in this area remains uncertain, and its effect on our operations is unclear at this time. We manage our timberland operations to be in compliance with applicable laws and regulations. However, it is possible that legislation or government mandates, standards or regulations intended to mitigate or reduce carbon compound or greenhouse gas emissions or other
climate change effects could adversely affect our operations. For example, such initiatives could limit harvest levels or result in significantly higher costs for energy, which could have an adverse effect on our results of operations.
Additionally, there is scientific research that emissions of greenhouse gases continue to alter the composition of the global atmosphere in ways that are affecting and are expected to continue affecting the global climate. Our operations and the operations of our contractors are subject to climate variations, which impact the productivity of forests, the frequency and severity of wildfires, the distribution and abundance of species, and the spread of disease or insect epidemics, which in turn may adversely or positively affect timber production. Over the past several years, changing weather patterns and climatic conditions due to natural and man-made causes have added to the unpredictability and frequency of natural disasters such as hurricanes, earthquakes, hailstorms, wildfires, snow, ice storms, the spread of disease, and insect infestations. Changes in precipitation resulting in droughts could make wildfires more frequent or more severe and could adversely affect timber production. Any of these natural disasters could affect our timberlands and our harvest operations which could have a material adverse effect on our results of operations.
Our estimates of the timber growth rates on our properties may be inaccurate, which would impair our ability to realize expected revenues from those properties and could also cause us to incorrectly estimate our timber inventory and the calculation of our depletion expense.
We rely upon estimates of the timber growth rates and yield when acquiring and managing timberlands. These estimates are central to forecasting our anticipated merchantable inventory, harvest volumes, timber revenues and expected cash flows. Growth rates and yield estimates are developed by forest statisticians using measurements of trees in research plots on a property. The growth equations predict the rate of height and diameter growth of trees so that foresters can estimate the volume of timber that may be present in the tree stand at a given age. Tree growth varies by soil type, geographic area, and climate. Inappropriate application of growth equations in forest management planning may lead to inaccurate estimates of future volumes. If these estimates are inaccurate, our ability to manage our timberlands in a profitable manner will be diminished, which may cause our results of operations to be adversely affected. Inaccurate estimates could also cause us to incorrectly calculate our depletion expense.
We may be unable to properly estimate non-timber revenues from any properties that we acquire, which would impair our ability to acquire attractive properties, as well as our ability to derive the anticipated revenues from those properties.
If we acquire additional properties, we likely will expect to realize revenues from timber and non-timber-related activities, such as the sale of conservation easements and recreational leases. Non-timber activities can contribute significantly to the revenues that we derive from a particular property. We will rely on estimates to forecast the amount and extent of revenues from non-timber-related activities on our timberlands. If our estimates concerning the revenue from non-timber-related activities are incorrect, we may not be able to realize the projected revenues. If we are unable to realize the level of revenues that we expect from non-timber activities, our revenues from the underlying timberland would be less than expected and our results of operations and ability to make distributions to our stockholders may be negatively impacted.
Changes in assessments, property tax rates, and state property tax laws may reduce our net income and our ability to make distributions to our stockholders.
Our expenses may be increased by assessments of our timberlands and changes in property tax laws. We generally intend to hold our timberlands for a substantial amount of time. Property values tend to increase over time, and as property values increase, the related property taxes generally also increase, which would increase the amount of taxes we pay. In addition, changes to state tax laws or local initiatives could also lead to higher tax rates on our timberlands. Because each parcel of a large timberland property is independently assessed for property tax purposes, our timberlands may receive a higher assessment and be subject to higher property taxes. In some cases, the cost of the property taxes may exceed the income that could be produced from that parcel if we continue to hold it as timberland. If our timberlands become subject to higher tax rates, such costs could have a material adverse effect on our financial condition, results of operations and ability to make distributions to our stockholders.
Changes in land uses in the vicinity of our timberlands may increase the amount of the property that we classify as HBU properties, and property tax regulations may reduce our ability to realize the values of those HBU properties.
An increase in the value of other properties in the vicinity of our timberlands may prompt us to sell parcels of our land as HBU properties. Local, county and state regulations may prohibit us from, or penalize us for, selling a parcel of timberland for real estate development. Some states regulate the number of times that a large timberland property may be subdivided within a specified time period, which would also limit our ability to sell our HBU property. In addition, in some states timberland is subject to certain property tax policies that are designed to encourage the owner of the timberland to keep the land undeveloped. These policies may result in lower taxes per acre for our timberlands as long as they are used for timber purposes only. However, if we sell a parcel of timberland in such states as HBU property, we may trigger tax penalties, which could require us to repay all of the tax benefits that we have received. Our inability to sell our HBU properties on terms that are favorable to us could negatively affect our financial condition and our ability to make distributions to our stockholders.
Changes in energy and fuel costs could affect our financial condition and results of operations.
Energy costs are a significant operating expense for our logging and hauling contractors and for the contractors who support the customers of our standing timber. Energy costs can be volatile and are susceptible to rapid and substantial increases due to factors beyond our control, such as changing economic conditions, political unrest, instability in energy-producing nations, and supply and demand considerations. Increases in the price of oil could adversely affect our business, financial condition and results of operations. In addition, an increase in fuel costs, and its impact on the cost and availability of transportation for our products and the cost and availability of third-party logging and hauling contractors, could have a material adverse effect on the operating costs of our contractors and our standing timber customers as well as in defining economically accessible timber stands. Such factors could in turn have a material adverse effect on our business, financial condition and results of operations.
The effects of the COVID-19 pandemic and the actions taken in response thereto may adversely impact our results of operations and financial condition and our ability to make distributions to our stockholders as well as the results of operations and financial condition of our joint ventures.
In December 2019, a coronavirus (COVID-19) outbreak was reported in China, and, in March 2020, the World Health Organization declared it a global pandemic. Since that time, the coronavirus has spread throughout the United States, including in the U.S. South and Pacific Northwest regions in which we and our joint ventures operate. In response, authorities have implemented numerous measures to try to contain and mitigate spread of the virus. These measures, which have included shelter-in-place and similar mandates for individuals and closure or curtailment of many businesses, have caused significant economic disruption as well as disruption and volatility in global capital markets, which could worsen. As a result, there have been periodic adverse effects on the demand for our timber and wood products and disruptions to our supply chain and the manufacturing, distribution and export of our timber and wood products, all of which could worsen in the future. The COVID-19 pandemic may further impact our business, results of operations and financial condition, and those of our joint ventures, including as a result of:
•declines in harvest volumes due to:
◦a deterioration in the housing market and a resulting decrease in demand for sawtimber;
◦a decline in production level at mills due to instances of COVID-19 among their employees or decreased demand for their products; and
◦the effects of COVID-19 on contract logging operations, transportation and other critical third-party providers;
•the inability to complete timberland sales due to state and local government office closures limiting the ability of potential buyers to complete title searches and other customary due diligence;
•effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the companies’ financial reporting and internal controls; and
•market volatility and market downturns negatively impacting the trading of our common stock.
While the COVID-19 outbreak continues to rapidly evolve, the extent to which it may further impact us is highly uncertain and will depend on future developments that cannot be predicted with confidence. Such developments include, but are not limited to, the future rate of occurrence or mutation of COVID-19, continuation of or changes in governmental responses to the coronavirus outbreak, the timing and effectiveness of treatment and testing options, including availability of a vaccine, and consequential restrictions, business disruptions and the effectiveness of responsive actions taken in the United States and other countries to contain and manage the disease. Given the ongoing and dynamic nature of the circumstances, it is not possible to predict how long the impact of the coronavirus outbreak will last or how significant it will ultimately be to our business and that of our joint ventures. 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, as well as the results of operations and financial condition of our joint ventures.
Risks Related to Our Organizational Structure
Our board of directors may change significant corporate policies without stockholder approval.
Our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. As a result, the ability of our stockholders to control our policies and practices is extremely limited. In addition, our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal and regulatory requirements, including the listing standards of the NYSE. A change in these policies could have an adverse effect on our financial condition, results of operations and cash flows, the trading price of our common stock, our ability to satisfy our debt service obligations, and our ability to make distributions to our stockholders.
Our board of directors may increase the number of authorized shares of stock and issue stock without stockholder approval, including in order to discourage a third party from acquiring our company in a manner that could result in a premium price to our stockholders.
Subject to applicable legal and regulatory requirements, our charter authorizes our board of directors, without stockholder approval, to amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock and to set the preferences, rights and other terms of such classified or unclassified shares. As a result, we may issue series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common stock. In addition, our board of directors could establish a series of preferred stock that could, depending on the terms of such series, delay, defer, or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders may believe is in their best interests.
In order to preserve our status as a REIT, our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price for our common stock or otherwise benefit our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT for U.S. federal income tax purposes. Unless exempted by our board of directors (prospectively or retroactively), no person may actually or constructively own more than 9.8% in value of the outstanding shares of our capital stock or more than 9.8% (by value or number of shares, whichever is more restrictive) of the outstanding shares of our common stock. This restriction may have the effect of delaying, deferring, or preventing a change in control of our company, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for our common stock or otherwise be in the best interest of our stockholders.
Certain provisions of Maryland law could inhibit changes in control of us, which could lower the value of our common stock.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting or deterring a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter may impose supermajority stockholder voting requirements unless certain minimum price conditions are satisfied; and
•“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of our board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, in the future, our board of directors may by resolution elect to opt into the business combination provisions of the MGCL and our board of directors may, by amendment to our bylaws and without stockholder approval, opt in to the control share provisions of the MGCL.
Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-current market price.
In addition, the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or that our stockholders may believe to be in their best interests. Likewise, if our board of directors were to opt in to the business combination provisions of the MGCL or the provisions of Title 3, Subtitle 8 of the MGCL, or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded by our board of directors, these provisions of the MGCL could have similar anti-takeover effects.
Risks Related to Our Debt Financing
Our existing indebtedness and any future indebtedness we may incur could adversely affect our financial health and operating flexibility.
We are party to a credit agreement dated as of December 1, 2017, as amended on August 22, 2018, June 28, 2019, February 12, 2020 and May 1, 2020 (the “Amended Credit Agreement”), with a syndicate of lenders, including CoBank, that provides for a senior secured credit facility of up to $593.6 million, which includes four term loan facilities totaling $408.6 million, a $35 million revolving credit facility (the “Revolving Credit Facility”), and a $150 million multi-draw credit facility (the “Multi-Draw Term Facility”). We had a total of $442.7 million outstanding as of December 31, 2020, of which $408.6 million were outstanding term loans, and $34.1 million was outstanding under our Multi-Draw Term Facility.
Our existing indebtedness and any indebtedness we may incur in the future could have important consequences to us and the trading price of our common stock, including:
•limiting our ability to borrow additional amounts for execution of our growth strategy, capital expenditures, debt service requirements, working capital or other purposes;
•limiting our ability to use operating cash flow in other areas of our business because we must dedicate a portion of these funds to service the debt;
•increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates;
•limiting our ability to capitalize on business opportunities, including the acquisition of additional properties, and to react to competitive pressures and adverse changes in government regulation;
•limiting our ability or increasing the costs to refinance indebtedness;
•limiting our ability to enter into marketing and hedging transactions by reducing the number of counterparties with whom we can enter into such transactions as well as the volume of those transactions;
•forcing us to dispose of one or more properties, possibly on disadvantageous terms;
•forcing us to sell additional equity securities at prices that may be dilutive to existing stockholders;
•causing us to default on our obligations or violate restrictive covenants, in which case the lenders or mortgagees may accelerate our debt obligations, foreclose on the properties that secure their loans and take control of our properties that secure their loans and collect net timber revenues and other property income; and
•in the event of a default under any of our recourse indebtedness or in certain circumstances under our mortgage indebtedness, we would be liable for any deficiency between the value of the property securing such loan and the principal and accrued interest on the loan.
If any one of these events were to occur, our financial condition, results of operations, cash flow and our ability to satisfy our principal and interest obligations could be materially and adversely affected.
Our financial condition could be adversely affected by financial and other covenants and other provisions under the Amended Credit Agreement or other debt agreements.
Pursuant to the Amended Credit Agreement, we are required to comply with certain financial and operating covenants, including, among other things, covenants that require us to maintain certain leverage, coverage and LTV ratios and a minimum liquidity balance and covenants that prohibit or restrict our ability to incur additional indebtedness, grant liens on our real or personal property, make certain investments, dispose of our assets and enter into certain other types of transactions. The Amended Credit Agreement also prohibits us from declaring, setting aside funds for, or paying any dividend, distribution, or other payment to our stockholders other than as required to maintain our REIT qualification if our LTV ratio is greater than 50%. We may only declare and pay distributions not required to maintain our REIT status if (i) our LTV ratio is less than 50%, (ii) we maintain a minimum fixed-charge coverage ratio of 1.05:1.00, and (iii) we limit our aggregate capital expenditures to 1% of the value of our timberlands during any fiscal year. Failure to comply with any of these covenants would likely result in us being prohibited from making any distributions.
The Amended Credit Agreement also subjects us to mandatory prepayment from proceeds generated from certain dispositions of timberlands or lease terminations, which may have the effect of limiting our ability to make distributions under certain circumstances. Provided that no event of default has occurred and the LTV ratio, calculated after giving effect to the disposition, does not exceed 42.5%, the mandatory prepayment requirement excludes (1) net real property disposition proceeds until the aggregate amount of such proceeds received during any fiscal year exceeds 2% of the bank value of the timberlands; (2) lease termination proceeds until the amount of such proceeds exceeds 0.5% of the bank value of the timberlands in a single termination or 1.5% in aggregate over the term of the facility; and (3) net real property disposition proceeds from large property dispositions, as defined, to the extent the proceeds are used within 270 days of receipt for acquisition of additional real property that will be subject to the lien of the Amended Credit Agreement. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. In addition, a breach of these covenants or other event of default would allow CoBank to accelerate payment of the loan. Given the restrictions in our debt covenants on these and other activities, we may be significantly limited in our operating and financial flexibility and may be limited in our ability to respond to changes in our business or competitive activities in the future.
Our ability to comply with these covenants and other provisions may be affected by events beyond our control, and we cannot assure you that we will be able to comply with these covenants and other provisions. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against collateral granted to them, if any, to secure the indebtedness. If our current or future lenders accelerate the payment of the indebtedness owed to them, we cannot assure you that our assets would be sufficient to repay in full our outstanding indebtedness, including the loans under the Amended Credit Agreement.
We may incur additional indebtedness which could increase our business risks and may reduce the value of your investment.
We have acquired, and in the future may acquire, real properties by borrowing funds. In addition, we may incur mortgage debt and pledge some or all of our real properties as security for that debt to obtain funds to acquire additional real properties. We may also borrow funds if needed to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income (determined without regard to the dividends-paid deduction and excluding net capital gain) to our stockholders. We may also borrow funds if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. Our bylaws do not limit us from incurring debt until our aggregate debt would exceed 200% of our net assets.
Significant borrowings by us increase the risks of a stockholder’s investment. If there is a shortfall between the cash flow from our properties and the cash flow needed to service our indebtedness, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of a stockholder’s investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages or other indebtedness contains cross-collateralization or cross-default provisions, a default on a single loan could affect multiple properties.
Our decision to hedge against interest rate changes may have a material adverse effect on our financial results and condition, and there is no assurance that our hedges will be effective.
We use interest rate hedging arrangements in order to manage our exposure to interest rate volatility. These hedging arrangements involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income that we may earn from hedging transactions may be limited by federal tax provisions governing REITs, and that these arrangements may result in higher interest rates than we would otherwise pay. Moreover, no amount of hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and financial condition.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We also depend on the business of our subsidiaries to satisfy our cash needs. If we cannot generate the required cash, we may not be able to make the necessary payments on our indebtedness.
Our ability to make payments on our indebtedness, including the loans under the Amended Credit Agreement, and to fund planned capital expenditures will depend on our ability to generate cash in the future. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We conduct our operations primarily through our subsidiaries. As a result, our ability to service our debt, including our obligations under the Amended Credit Agreement and other obligations, depends largely on the earnings of our subsidiaries and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Our subsidiaries are separate and distinct legal entities. In addition, any
payment of dividends, loans or advances by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and business considerations.
Additionally, our historical financial results have been, and we anticipate that our future financial results will be, subject to fluctuations. We cannot assure you that our business will generate sufficient cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including the loans under the Amended Credit Agreement, or to fund our other liquidity needs and make necessary capital expenditures.
If our cash flow and capital resources are insufficient to allow us to make scheduled payments on our debt, we may have to sell assets, seek additional capital or restructure or refinance our debt. We cannot assure you that the terms of our debt will allow for these alternative measures or that such measures would satisfy our scheduled debt service obligations.
If we cannot make scheduled payments on our debt:
•the holders of our debt could declare all outstanding principal and interest to be due and payable;
•the holders of our secured debt could commence foreclosure proceedings against our assets; and
•we could be forced into bankruptcy or liquidation.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.
A portion of our outstanding and potential future debt, including under the Amended Credit Agreement, bears or will bear interest at variable rates. As a result, an increase in interest rates, whether because of an increase in market interest rates or a decrease in our creditworthiness, would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. The impact of such an increase could be more significant for us than it would be for competitors that have less variable rate debt. Increases in interest rates would increase our interest cost, which would reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of high interest rates, we could be required to sell one or more of our investments in order to repay the debt, which sale at that time might not permit realization of the maximum return on such investments.
The phase-out of LIBOR could affect interest rates for our variable rate debt and interest rate swap arrangements.
LIBOR is used as a reference rate for our variable rate debt under the Amended Credit Agreement and for our interest rate swap arrangements. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear if LIBOR will cease to exist at that time, if a new method of calculating LIBOR will be established, or if an alternative reference rate will be established. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to U.S. dollar LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or if SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement. The Amended Credit Agreement and our interest rate swap agreements, which are used to hedge the floating rate exposure of the Amended Credit Agreement, provide that if LIBOR is no longer available, we must agree upon a benchmark replacement index with CoBank for the Amended Credit Agreement and Rabobank International for the interest rate swaps, and in the case of the Amended Credit Agreement, that replacement must be posted to the lenders and, unless the required lenders provide written notice that such replacement is not acceptable, such replacement shall thereafter become effective. In such circumstances, the interest rates on our variable rate debt under the Amended Credit Agreement and in our interest rate swap arrangements may change. The new rates may not be as favorable as those in effect prior to any LIBOR phase-out. In addition, the transition process may result in delays in funding, higher interest expense, additional expenses, and increased volatility in markets for instruments that currently rely on LIBOR, all of which could negatively impact our cash flow.
High mortgage interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income, and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable interest rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our net income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Federal Income Tax Risks
Failure to continue to qualify as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders and materially and adversely affect our financial condition and results of operations.
We believe that we have been organized, owned and operated in conformity with the requirements for qualification and taxation as a REIT under the Code and that our intended manner of ownership and operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes. Our qualification as a REIT depends upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets, and other tests imposed by the Code. We cannot assure you that we will satisfy the requirements for REIT qualification in the future. Future legislative, judicial or administrative changes to the federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to qualify to be taxed as a REIT for any taxable year, we will be subject to federal and applicable state and local corporate income tax on our taxable income, if any, determined without a dividends-paid deduction, and, possibly, penalties. In addition, we could not re-elect to be taxed as a REIT for the four taxable years following the year during which we failed to qualify (unless we were entitled to relief under applicable statutory provisions). To the extent we have taxable income, losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock.
The failure of Creek Pine REIT, LLC to qualify as a REIT could cause us to fail to qualify as a REIT.
On July 6, 2018, our operating partnership completed its investment in Creek Pine Holdings, LLC, which owns our interest in the Triple T Joint Venture. Because the Triple T Joint Venture's sole asset is its interest in Creek Pine REIT, LLC (“Creek Pine REIT”), we own an indirect interest in Creek Pine REIT. Creek Pine REIT elected to be taxed as a REIT beginning with its taxable year ended December 31, 2018. Equity in a REIT is a qualifying asset for purposes of the REIT asset tests, and dividends from a REIT are qualifying income for purposes of the REIT gross income tests. Creek Pine REIT is subject to the same REIT qualification requirements that apply to us. If Creek Pine REIT were to fail to qualify as a REIT, (i) Creek Pine REIT would become subject to U.S. federal and applicable state and local corporate income tax and (ii) our interest in Creek Pine REIT would cease to be a qualifying asset for purposes of our REIT asset tests, potentially causing us to fail to qualify as a REIT unless we could avail ourselves of certain relief provisions.
Legislative or regulatory tax changes could adversely affect us, our stockholders or our customers.
The federal income tax laws governing REITs and their stockholders, and administrative interpretations of those laws, may be amended at any time, possibly with retroactive effect.
The 2017 tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”) made numerous changes to the tax rules that may affect our stockholders and our customers and may directly or indirectly affect us. Many of the changes applicable to individuals apply only through December 31, 2025, including a deduction of up to 20% of ordinary REIT dividends for non-corporate taxpayers. The IRS has issued significant guidance under the TCJA, but guidance on additional issues, finalization of proposed guidance and possible technical corrections legislation may adversely affect us or our stockholders. Federal legislation intended to ameliorate the economic impact of the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), has been enacted, which makes technical corrections to, or modifies on a temporary basis, certain of the provisions of the Tax Cut and
Jobs Act, and it is possible that additional such legislation may be enacted in the future. In addition, further changes to the tax laws, unrelated to the TCJA, are possible.
You are urged to consult with your tax advisor with respect to the impact of the TCJA, the CARES Act, and any other regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
Even if we continue to qualify to be taxed as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flows.
Even if we continue to qualify to be taxed as a REIT for federal income tax purposes, we may be subject to some federal, state, and local taxes on our income or property. For example:
•In order to qualify as a REIT, we must distribute annually dividends equal to at least 90% of our REIT taxable income to our stockholders (determined without regard to the dividends-paid deduction and excluding net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on the undistributed income, including undistributed net capital gains.
•We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.
•If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
•If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain may be subject to the 100% “prohibited transaction” tax.
•Our taxable REIT subsidiaries will be subject to tax on their taxable income.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on stockholders’ investments.
As a REIT, we would be subject to a 100% tax on any net income from “prohibited transactions.” In addition, gross income from prohibited transactions would be excluded from both of the gross income tests. In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business unless we qualify for a safe harbor exception. Delivered logs, if harvested and sold by a REIT directly, would likely constitute property held for sale to customers in the ordinary course of business and would, therefore, be subject to the prohibited transactions tax if sold at a gain. Accordingly, we sell standing timber to CatchMark TRS under pay-as-cut contracts which generate capital gain to us under Section 631(b) of the Code (to the extent the timber has been held by us for more than one year), and CatchMark TRS, in turn, harvests such timber and sells logs to its customers. (Creek Pine REIT uses a similar structure.) However, if the IRS were to successfully disregard CatchMark TRS’ role as the harvester and seller of such logs for federal income tax purposes, our income, if any, from such sales could be subject to the 100% prohibited transaction tax. In addition, sales by us of HBU property at the REIT level could, in certain circumstances, constitute prohibited transactions. We intend to avoid the 100% prohibited transaction tax by satisfying safe harbors in the Code, structuring dispositions as non-taxable like-kind exchanges or making sales that otherwise would be prohibited transactions through one or more TRSs whose taxable income is subject to regular corporate income tax. We may not, however, always be able to identify properties that might be treated as part of a “dealer” land sales business. For example, if we sell any HBU properties at the REIT level that we incorrectly identify as property not held for sale to customers in the ordinary course of business or that subsequently become properties held for sale to customers in the ordinary course of business, we may be subject to the 100% prohibited transactions tax.
To maintain our REIT status, we may be forced to forgo otherwise attractive opportunities, which could lower the return on stockholders’ investments.
To qualify to be taxed as a REIT, we must satisfy tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our
business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Even though we intend to maintain our REIT status, our cash dividends are not guaranteed and may fluctuate.
Each year, REITs are required to distribute dividends equal to at least 90% of their REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gain. We have substantial net operating losses that, subject to possible limitations, will reduce our taxable income. In addition, capital gains may be retained by us but would be subject to income taxes. If capital gains are retained rather than distributed, our stockholders would be notified and they would be deemed to have received a taxable distribution, with a refundable credit for any federal income tax paid by us. Accordingly, we will not be required to distribute material amounts of cash if substantially all of our taxable income is income from timber-cutting contracts or sales of timberland that is treated as capital gains income. Our board of directors, in its sole discretion, determines the amount of quarterly dividends to be provided to our stockholders based on consideration of a number of factors, including but not limited to, tax considerations. Consequently, our dividend levels may fluctuate.
Generally, ordinary dividends payable by REITs do not qualify for reduced U.S. federal income tax rates applicable to “qualified dividend income.”
The maximum U.S. federal income tax rate for “qualified dividend income” for non-corporate U.S. stockholders currently is 20%. However, ordinary dividends, i.e., dividends that are not designated as capital gain dividends or qualified dividend income, payable by REITs (“qualified REIT dividends”) generally are not eligible for the reduced rates applicable to qualified dividend income and generally are taxed at ordinary income tax rates. However, non-corporate U.S. stockholders are entitled to a deduction of up to 20% of their qualified REIT dividends received in taxable years beginning before January 1, 2026, subject to certain limitations. Non-corporate investors may perceive investments in REITs to be relatively less attractive than investments in the stocks of other corporations whose dividends are taxed at the lower rates as qualified dividend income.
Our use of taxable REIT subsidiaries may affect the value of our common stock relative to the share price of other REITs.
We conduct a significant portion of our business activities through one or more TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying REIT income if earned directly by us. Our use of TRSs enables us to engage in non-REIT-qualifying business activities. However, under the Code, no more than 20% of the value of the assets of a REIT may be represented by securities of one or more TRSs. This limitation may affect our ability to increase the size of our non-REIT-qualifying operations. The taxable income of TRSs, including CatchMark TRS, is subject to federal and applicable state and local income tax. While we seek to structure the pricing of our timber sales to CatchMark TRS at market rates, the IRS could assert that such pricing does not reflect arm’s-length pricing and impute additional taxable income to CatchMark TRS or impose excise taxes. Our use of TRSs may cause our common stock to be valued differently than the shares of other REITs that do not use TRSs as extensively as we use them.
We may be limited in our ability to fund distributions on our capital stock and pay our indebtedness using cash generated through our TRSs.
Our ability to receive dividends from our TRSs is limited by the rules with which we must comply to maintain our qualification as a REIT. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from passive real estate sources including sales of our standing timber and other types of qualifying real estate income, and no more than 25% of our gross income may consist of dividends from TRSs and other non-real estate income. This limitation on our ability to receive dividends from our TRSs may affect our ability to fund cash distributions to our stockholders or make payments on our borrowings using cash flows from our TRSs. The net income of our TRSs is not required to be distributed, and income that is not distributed will not be subject to the REIT income distribution requirement.
There may be tax consequences to any modifications to our variable rate debt and interest rate swap arrangements to replace references to LIBOR.
The publication of LIBOR rates may be discontinued after 2021. LIBOR is used as a reference rate for our variable rate debt under the Amended Credit Agreement and for our interest rate swap arrangements. We may have to amend the Amended Credit Agreement and our interest rate swap agreements to replace references to LIBOR. Under current law, certain modifications of terms of LIBOR-based instruments may have tax consequences, including deemed taxable exchanges of the pre-modification instrument for the modified instrument. Proposed Treasury Regulations and Revenue Procedure 2020-44 would treat certain modifications that would be taxable events under current law as non-taxable events. Such guidance does not discuss REIT-specific issues of modifications to LIBOR-based instruments. It is not clear when the proposed Treasury Regulations will be finalized or what, if any, changes will be made to the proposed Treasury Regulations in final Treasury Regulations. We will attempt to migrate to a post-LIBOR environment without jeopardizing our REIT qualification or suffering other adverse tax consequences but can give no assurances that we will succeed.
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile.
The U.S. stock markets, including the NYSE, on which our common stock is listed under the symbol “CTT,” have experienced significant price and volume fluctuations. As a result, the market price of shares of our common stock is likely to be similarly volatile, and investors in shares of our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.
In addition to the other risks listed in this “Risk Factors” section, a number of factors (many of which factors may be amplified by the COVID-19 outbreak) could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock, including:
•the annual yield from distributions on our common stock as compared to yields on other financial instruments;
•equity or debt issuances by us, or future sales of substantial amounts of our common stock by our existing or future stockholders, or the perception that such issuances or future sales may occur;
•short sales or other derivative transactions with respect to our common stock;
•the ability of our share repurchase program to improve stockholder value over the long term;
•changes in market valuations of companies in the timberland, pulp and paper, homebuilding or real estate industries;
•increases in market interest rates or a decrease in our distributions to stockholders that lead purchasers of our common stock to demand a higher yield;
•fluctuations in general stock market prices and volumes;
•additions or departures of key management personnel;
•our operating performance and the performance of other similar companies;
•actual or anticipated differences in our quarterly operating results;
•changes in expectations of future financial performance or changes in estimates of securities analysts;
•publication of research reports about us or our industry by securities analysts or failure of our results to meet expectations of securities analysts;
•failure to qualify as a REIT;
•adverse market reaction to any debt securities or preferred equity securities we issue in the future or any indebtedness we incur in the future;
•strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;
•the passage of legislation or other regulatory developments that adversely affect us or our industry;
•speculation in the press or investment community;
•changes in our earnings;
•failure to continue to satisfy the listing requirements of the NYSE;
•failure to comply with the requirements of the Sarbanes-Oxley Act;
•actions by institutional stockholders or joint venture partners;
•changes in accounting principles; and
•general market, economic, industry and stock market conditions, including various factors that unrelated to our performance, such as the substantial disruption relating to COVID-19.
Many of the factors listed above are beyond our control. These factors may cause the price of our common stock to decline, regardless of our results of operations, business, or prospects. It is impossible to assure that the market price of our common stock will not fall in the future.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our cash flows, our ability to execute our business strategy and our ability to make distributions to our stockholders.
Future offerings of debt securities, or preferred equity securities, which would be senior to our common stock, may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by offering debt or preferred equity securities, including senior or subordinated notes and classes of preferred stock. Holders of our debt securities or shares of preferred stock will generally be entitled to receive interest payments or distributions, both current and in connection with any liquidation or sale, prior to the holders of our common stock. Future offerings of debt or preferred equity securities also may reduce the distributions that we pay with respect to our common stock. We are not required to offer any such additional debt or preferred equity securities to existing common stockholders on a preemptive basis, and we may generally issue any such debt or preferred equity securities in the future without obtaining the consent of our common stockholders. As a result, any such future offerings of debt securities or preferred equity securities may adversely affect the market price of the common stock or the distributions that we pay with respect to our common stock.
Increases in market interest rates may result in a decrease in the value of our common stock.
One of the factors that may influence the price of our common stock is our distribution rate on the common stock (as a percentage of the share price of our common stock) relative to market interest rates on interest-bearing securities such as bonds. We have declared and paid cash distributions in each quarter since the first quarter of 2014 and expect to continue to declare cash distributions in the future. If market interest rates increase, prospective purchasers of our common stock may desire a higher yield on our common stock or seek securities paying higher dividends or yields. Higher interest rates would not, however, result in more funds being available for distribution and, in fact, would likely increase our borrowing costs and might decrease our funds available for distribution, and therefore, we may not be able, or may not choose to, pay a higher distribution rate. As a result, if interest rates rise, it is likely that the market price of our common stock will decrease because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing securities rise.
General Risk Factors
We depend on the efforts and expertise of our key executive officers and would be adversely affected by the loss of their services.
We depend on the efforts and expertise of our Chief Executive Officer and President, our Chief Resources Officer and Senior Vice President, and our Chief Financial Officer and Senior Vice President to execute our business strategy, and we cannot guarantee their continued service. The loss of their services, and our inability to find suitable replacements, would have an adverse effect on our business.
In addition, our amended asset management agreement with the Triple T Joint Venture includes a “key man” provision requiring us to find a suitable replacement if Brian M. Davis, our Chief Executive Officer and President,
ceases to be employed by us. If we were to fail to find such suitable replacement within a one-year period, the Preferred Investors in the Triple T Joint Venture have the right to terminate the asset management agreement, which would have a materially adverse effect on our business.
If we fail to maintain an effective system of disclosure controls and procedures and integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on us.
We are required to report our operations on a consolidated basis in accordance with GAAP. If we fail to maintain proper overall business controls, our results of operations could be harmed or we could fail to meet our reporting obligations.
In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, which could have a material adverse effect on us. In the case of any joint ventures we might enter into but do not manage, we may also be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, overall business controls that are not under our control, which could have a material adverse effect on us. In addition, we rely on our Forest Managers and their systems to provide us with certain information related to our operations, including our timber and timberland sales. Although we review such information prior to incorporating it into our accounting systems, we cannot assure the accuracy of such information. If our Forest Managers’ systems fail to accurately report to us the information on which we rely, we may not be able to accurately report our financial results, which could have a material adverse effect on us.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include confidential information. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential information, such as personally identifiable information relating to financial accounts. Although we have taken steps to protect the security of the data maintained in our information systems, it is possible that our security measures and those of our information technology vendors will not be able to prevent the systems’ improper functioning or the improper disclosure of personally identifiable information, such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems and those of our information technology vendors could interrupt our operations, damage our reputation, or subject us to liability claims or regulatory penalties, any one of which could materially and adversely affect our financial condition and results of operations.
Economic conditions may have an impact on our business, our financial condition, and our ability to obtain debt financing in ways that we currently cannot predict.
Turmoil in the global financial system may have an impact on our business and our financial condition. Despite improved access to capital for some companies, the capital and credit markets continue to be affected by extreme volatility and have experienced disruption during the past decade. The health of the global capital markets remains a concern. We have relied on debt financing to finance our timberlands. As a result of the uncertainties in the credit market, we may not be able to refinance our existing indebtedness or to obtain additional debt financing on attractive terms. If we are not able to refinance existing indebtedness on attractive terms at its maturity, we may be forced to dispose of some of our assets. Disruptions in the financial markets could have an impact on our interest rate swap agreements if our counterparties are forced to default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, or other reasons. We may be materially and adversely affected in the event of a significant default by one of our counterparties. In addition, depressed economic conditions could influence the levels of home buying and consumer spending, which could reduce the demand for homes and other goods produced from our wood, which would have a material adverse effect on our financial condition. Our ability to make future principal and interest payments on our debt depends upon our future performance, which is subject to
general economic conditions; industry cycles; and financial, business, and other factors affecting our operations, many of which are beyond our control.
ITEM 1B.UNRESOLVED STAFF COMMENTS
As of December 31, 2020, we wholly owned interests in 408,200 acres of high-quality industrial timberland in the U.S. South and the Pacific Northwest, consisting of 386,500 acres of fee timberlands and 21,700 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 73% pine plantations by acreage and 54% sawtimber by volume. Our Pacific Northwest timberlands consisted of 90% productive acres and 82% sawtimber by volume. Our leased timberlands include 21,700 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 December 31, 2020 (1)
|67,400 ||1,800 ||69,200 |
|500 ||— ||500 |
|230,800 ||19,900 ||250,700 |
|69,700 ||— ||69,700 |
|368,400 ||21,700 ||390,100 |
|18,100 ||— ||18,100 |
|Total||386,500 ||21,700 ||408,200 |
(1) Represents wholly-owned acreage only; excludes ownership interest in acreage held by joint ventures.
As of December 31, 2020, our wholly-owned timber inventory consisted of an estimated 16.6 million tons of merchantable inventory with the following components:
Merchantable timber inventory (1)
|Pulpwood||7.2 ||0.3 ||7.5 |
|8.8 ||0.3 ||9.1 |
|Total||16.0 ||0.6 ||16.6 |
(1) Merchantable timber inventory includes 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 December 31, 2020 (see Note 4 — Unconsolidated Joint Ventures to our accompanying consolidated financial statements for further details):
|As of December 31, 2020|
|Dawsonville Bluffs Joint Venture||Triple T Joint Venture|
|Ownership percentage ||50.0%||22.0%|
|Acreage owned by the joint venture ||—||1,083,000|
|Merchantable timber inventory (million tons)||—||44.1|
(1) Represents our share of total partner capital contributions.
(2) Triple T considers inventory to be merchantable at age 12. Merchantable timber inventory includes current year growth.
Our methods of estimating timber inventory are consistent with industry practices. We must use various assumptions and judgments to determine both our current timber inventory and the timber inventory that will be available over the harvest cycle; therefore, the physical quantity of such timber may vary significantly from our estimates. Our estimated inventory is calculated for each tract by utilizing growth formulas based on representative sample tracts and tree counts for various diameter classifications. The calculation of inventory is subject to periodic adjustments based on statistical sampling of the harvestable timbered acres, known as timber sample cruises, actual volumes harvested and other timber activity, including timberland sales. In addition to growth, the inventory calculation takes into account in-growth, which is the annual transfer of the oldest premerchantable age class into merchantable inventory, which currently is 15 years after stand establishment in the South and 35 years after stand establishment in the Pacific Northwest. The age at which timber is considered merchantable is reviewed periodically and updated for changing harvest practices, advanced seedling genetics, future harvest age profiles and biological growth factors.
The graphs below present the number of acres of our timberland as of December 31, 2020 by age class:
(1) Acres presented in the graph includes fee timberland only and excludes 10,800 acres of non-forest land.
(2) Natural Pine and Hardwood represents acres that have been seeded by standing older pine trees near the site through the natural process of seeds dropping from the cones of the older trees. Natural pine sites generally include some mix of naturally occurring hardwood trees as well.
(3) Pine Plantation represents acres planted or to be planted with pine seedlings to maximize the growth potential and inventory carrying capacity of the soils. Pine Plantation acre inventory is devoted to pine species only.
(1) Acres presented in the graph includes fee timberland only and excludes 1,800 acres of non-productive forest land.
Forests are subject to a number of natural hazards, including damage by fire, hurricanes, insects and disease. Changes in global climate conditions may intensify these natural hazards. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of forest products. Because our timberlands are concentrated in the U.S. South and the Pacific Northwest, damage from natural disasters in those regions could impact a material portion of our timberlands at one time. Our active forest management should help to minimize these risks. Consistent with the practices of other timber companies, we do not maintain insurance against loss of standing timber on our timberlands due to natural disasters or other causes.
ITEM 3.LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NYSE under the symbol “CTT”.
As of February 25, 2021, there were 1,427 stockholders of record of our common stock.
Cumulative Total Shareholder Return
The following graph compares the cumulative total shareholder return on our common stock from December 31, 2015 to December 31, 2020 with the Russell 3000, which is a broad-based market index of issuers with similar capitalization; with the Russell Microcap Index, which is a broad-based market index of securities with the smallest market capitalization; and with the S&P Global Timber & Forestry Index, which is an industry specific market index of peer issuers. The graph assumes a $100 investment in each of the indices on December 31, 2015, and the dividends received are reinvested at month-end.
The data in the following table was used to create the above graph as of the respective dates:
|CatchMark Timber Trust, Inc.||$||100 ||$||104 ||$||127 ||$||72 ||$||123 ||$||107 |
|Russell 3000 Index||$||100 ||$||110 ||$||131 ||$||122 ||$||157 ||$||186 |
|Russell Microcap Index||$||100 ||$||119 ||$||133 ||$||114 ||$||138 ||$||166 |
|S&P Global Timber & Forestry Index||$||100 ||$||111 ||$||146 ||$||117 ||$||136 ||$||161 |
(1) Data points are the last trading day of each fiscal year.
Issuer Purchase of Equity Securities
During the fourth quarter of 2020, we did not repurchase any shares of our common stock under our SRP. See Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources section for further details about our SRP.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the five years ended December 31, 2020 should be read in conjunction with the accompanying consolidated financial statements and related notes in Item 8 — Financial Statements and Supplementary Data hereof. All amounts are in thousands except for per-share, tonnage, acreage, and per-acre data.
|As of December 31,|
|Cash and cash equivalents||$||11,924 ||$||11,487 ||$||5,614 ||$||7,805 ||$||9,108 |
|Total assets||$||607,328 ||$||663,865 ||$||804,772 ||$||740,158 ||$||709,824 |
|Outstanding debt||$||442,705 ||$||458,555 ||$||478,619 ||$||337,619 ||$||325,656 |
|Total liabilities||$||477,416 ||$||470,662 ||$||483,116 ||$||337,778 ||$||328,754 |
|Total stockholders’ equity||$||128,764 ||$||192,641 ||$||321,656 ||$||402,380 ||$||381,070 |
|Total equity||$||129,912 ||$||193,203 ||$||321,656 ||$||402,380 ||$||381,070 |
|Period - End Acres|
|Fee||386,500 ||410,200 ||432,900 ||479,400 ||467,500 |
|Lease||21,700 ||25,300 ||30,200 ||30,900 ||32,100 |
|Wholly-owned total||408,200 ||435,500 ||463,100 ||510,300 ||499,600 |
Joint venture interest (1)
|1,083,000 ||1,092,000 ||1,104,800 ||10,500 ||— |
|Total acres||1,491,200 ||1,527,500 ||1,567,900 ||520,800 ||499,600 |
|Year Ended December 31,|
|Total revenues||$||104,290 ||$||106,709 ||$||97,857 ||$||91,295 ||$||81,855 |
|Loss before unconsolidated joint ventures and income taxes||$||(12,154)||$||(4,977)||$||(15,090)||$||(14,648)||$||(11,070)|
|Net loss attributable to common stockholders||$||(17,508)||$||(93,321)||$||(122,007)||$||(13,510)||$||(11,070)|
|Net loss per share available to common stockholders, basic and diluted||$||(0.36)||$||(1.90)||$||(2.55)||$||(0.34)||$||(0.29)|
|Weighted-average common shares outstanding||48,816 ||49,038 ||47,937 ||39,751 ||38,830 |
Adjusted EBITDA (2)
|$||52,065 ||$||56,906 ||$||49,786 ||$||41,970 ||$||36,486 |
|Cash provided by operating activities||$||40,455 ||$||32,942 ||$||29,796 ||$||27,419 ||$||30,849 |
|Cash provided by (used in) investing activities||$||10,791 ||$||22,830 ||$||(212,514)||$||(68,416)||$||(144,765)|
|Cash provided by (used in) financing activities||$||(50,809)||$||(49,899)||$||180,527 ||$||39,694 ||$||114,999 |
|Cash dividends/distributions paid||$||26,263 ||$||26,269 ||$||25,601 ||$||21,349 ||$||20,382 |
|Cash dividends paid per common share/unit||$||0.54 ||$||0.54 ||$||0.54 ||$||0.54 ||$||0.53 |
|Investments in unconsolidated joint ventures||$||5,000 ||$||— ||$||200,000 ||$||10,539 ||$||— |
|Net proceeds from large dispositions||$||20,863 ||$||25,151 ||$||79,134 ||$||— ||$||— |
|Operating distributions from unconsolidated joint ventures||$||274 ||$||978 ||$||3,771 ||$||— ||$||— |
|Capital distributions from unconsolidated joint ventures||$||455 ||$||3,830 ||$||4,744 ||$||— ||$||— |
Timberland acquisitions(3) and earnest money paid
|$||— ||$||1,973 ||$||91,821 ||$||52,260 ||$||141,570 |
|Capital expenditures-other||$||5,527 ||$||4,178 ||$||4,571 ||$||5,617 ||$||3,195 |
|Selected Operating Data|
|Timber Sales Volume (tons) |
|Pulpwood||1,335,449 ||1,310,420 ||1,356,318 ||1,424,017 ||1,360,437 |
|985,914 ||932,653 ||818,606 ||927,191 ||867,055 |
|Total||2,321,363 ||2,243,073 ||2,174,924 ||2,351,208 ||2,227,492 |
|Timber Sales Volume (tons) |
|Pulpwood||1,321,567 ||1,301,931 ||1,356,128 ||1,424,017 ||1,360,437 |
|876,854 ||872,746 ||816,717 ||927,191 ||867,055 |
|Total||2,198,421 ||2,174,677 ||2,172,845 ||2,351,208 ||2,227,492 |
|Pulpwood||60 ||%||60 ||%||62 ||%||61 ||%||61 ||%|
|40 ||%||40 ||%||38 ||%||39 ||%||39 ||%|
|Delivered % as of total volume||62 ||%||71 ||%||80 ||%||74 ||%||64 ||%|
|Stumpage % as of total volume||38 ||%||29 ||%||20 ||%||26 ||%||36 ||%|
|Net Timber Sales Price ($ per ton) |
|Pulpwood||$||13 ||$||14 ||$||14 ||$||13 ||$||14 |
|$||23 ||$||24 ||$||24 ||$||24 ||$||24 |
|Gross sales ||$||15,642 ||$||17,572 ||$||17,520 ||$||14,768 ||$||12,515 |
|Basis of timberland sold||$||11,396 ||$||14,053 ||$||12,380 ||$||9,890 ||$||9,728 |
|Acres sold||9,300 ||9,200 ||8,500 ||7,700 ||7,300 |
|% of fee acres||2.3 ||%||2.2 ||%||1.8 ||%||1.7 ||%||1.7 ||%|
Price per acre (5)
|$||1,689 ||$||1,920 ||$||2,064 ||$||1,924 ||$||1,718 |
|Gross sales ||$||21,250 ||$||25,395 ||$||79,301 ||$||— ||$||— |
|Basis of timberland sold||$||19,589 ||$||17,190 ||$||79,524 ||$||— ||$||— |
|Acres sold||14,400 ||14,400 ||56,100 ||— ||— |
Price per acre (6)
|$||1,474 ||$||1,758 ||$||1,414 ||$||— ||$||— |
|Timber Sales Volume (tons) |
|Pulpwood||13,882 ||8,489 ||190 ||— ||— |
|Sawtimber||109,060 ||59,907 ||1,889 ||— ||— |
|Total||122,942 ||68,396 ||2,079 ||— ||— |
|Pulpwood||11 ||%||12 ||%||9 ||%||— ||%||— ||%|
|89 ||%||88 ||%||91 ||%||— ||%||— ||%|
|Delivered % as of total volume||97 ||%||88 ||%||— ||%||— ||%||— ||%|
|Stumpage % as of total volume||3 ||%||12 ||%||100 ||%||— ||%||— ||%|
|Delivered Timber Sales Price ($ per ton) |
|Pulpwood||$||29 ||$||32 ||$||— ||$||— ||$||— |
|Sawtimber||$||104 ||$||88 ||$||— ||$||— ||$||— |
|Direct Timberland Acquisitions|
|Gross acquisitions||$||— ||$||1,925 ||$||89,700 ||$||71,648 ||$||141,013 |
|Acres acquired||— ||900 ||18,100 ||30,600 ||81,900 |
|Price per acre ||$||— ||$||2,185 ||$||4,956 ||$||2,341 ||$||1,721 |
Joint Venture Timberland Acquisitions (1)
|Gross acquisitions||$||— ||$||— ||$||1,389,500 ||$||20,000 ||$||— |
|Acres acquired||— ||— ||1,099,800 ||11,031 ||— |
|Price per acre||$||— ||$||— ||$||1,263 ||$||1,813 ||$||— |
(1)Represents properties owned by Triple T Joint Venture in which CatchMark owns the common limited partnership interest and Dawsonville Bluffs, LLC, a joint venture in which CatchMark owns a 50% membership interest. CatchMark serves as the manager for both of these joint ventures.
(2)See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Adjusted EBITDA for the definition and information regarding why we present Adjusted EBITDA and for a reconciliation of this non-GAAP financial measure from net income (loss).
(3)Includes transaction costs.
(4)Includes chip-n-saw and sawtimber.
(5)Excludes value of timber reservation, which retained 132,200 tons, 14,700 tons, 29,700 tons, 22,600 tons, and 113,000 tons of merchantable inventory, respectively, for 2020, 2019, 2018, 2017 and 2016.
(6)Excludes value of timber reservations, which retained 56,300 tons, 47,300 tons, and 201,900 tons of merchantable inventory, respectively, for 2020, 2019 and 2018.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Selected Financial Data in Item 6 — Selected Financial Data above and our accompanying consolidated financial statements and notes thereto in Item 8 — Financial Statement and Supplementary Data. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
Our business strategy, built on investments in prime timberlands in high-demand mill markets and superior management, served us well during the unprecedented economic volatility of 2020 caused by the COVID-19 pandemic. During the year, we exceeded performance targets, maintained healthy liquidity and stable leverage and effectively managed our debt capital, all while making significant progress in furthering our long-term strategic objectives. Our fiber supply agreements, delivered wood model and opportunistic stumpage sales were primary performance drivers, generating stable and predictable cash flows from sustainable harvests that, combined with revenues from opportunistic land sales and active investment management, provided recurring dividends to our stockholders funded from cash from operations.
Our total harvest volume increased from the prior year, driven by higher stumpage sales volume in the U.S. South region and increased volume in the Pacific Northwest. Demand for pulp-related products remained strong and increased housing starts and robust repair and remodeling activity improved demand patterns for sawtimber products since the onset of the COVID-19 pandemic, supporting steady harvest volume flow to our mill customers. We actively managed our log merchandising efforts together with delivered and stumpage sales to achieve the highest available price for our timber products. Our realized stumpage prices continued to hold a significant premium over South-wide averages as a result of the strong micro-markets where we have selectively assembled our prime timberlands portfolio. Asset management fee revenues increased as a result of the asset management agreement amendment with the Triple T Joint Venture during the second quarter of 2020. Our capital recycling program, employing targeted large dispositions, continues to improve the quality of our timberland portfolio and strengthen our balance sheet through disciplined capital allocation to enable future investments in prime timberlands, furthering our growth strategy.
In June 2020, we invested an additional $5.0 million in the Triple T Joint Venture on the same terms and conditions as our original investment in connection with amendments to the joint venture agreement and asset management agreement. 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 secured, non-recourse credit facility, were used to make a payment of $145.0 million to GP in connection with an amendment to a wood supply agreement between the Triple T Joint Venture and GP. This amendment is intended to achieve market-based pricing on timber sales, increase reimbursement for extended haul distances, provide the 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 successful renegotiation of the GP wood supply agreement paves the way for generating improved joint venture performance going forward as well as enhancing long-term asset value. The supply agreement between the Triple T Joint Venture and GP was also extended by two years from 2029 to 2031, allowing for the Triple T Joint Venture’s harvest volume obligations to be further optimized to enhance and preserve long-term asset value.
The Dawsonville Bluffs Joint Venture completed the disposition of its timberlands during 2019. Life-to-date through December 31, 2020, we have recognized $5.0 million of income and received cash distributions of $14.1 million from the Dawsonville Bluffs Joint Venture, representing a return of our $10.5 million investment and cumulative preferred return of $3.6 million. In addition, we have earned $1.2 million in asset management fees from the Dawsonville Bluffs Joint Venture, including $0.9 million of incentive-based promotes for exceeding investment hurdles. As of December 31, 2020, the Dawsonville Bluffs Joint Venture had a mitigation bank with a book basis of $2.3 million. See Note 4 — Unconsolidated Joint Ventures to our accompanying consolidated financial statements for further details.
Over the last three years, we have undertaken a 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 2020, we completed large dispositions totaling 14,400 acres for $21.3 million, recognizing a gain of $1.3 million, and used the net proceeds to pay down our outstanding debt by $20.9 million.
We reduced our outstanding debt balance by $15.8 million from the end of 2019 as a result of repaying $20.9 million with net proceeds from large dispositions, offset by borrowing $5.0 million to fund our additional equity investment in the Triple T Joint Venture.
During the second quarter of 2020, we entered into an amendment to the Amended 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 and to lower unused commitment fees (see Liquidity and Capital Resources – Amendment to Amended Credit Agreement below for additional information).
During 2020, we paid $26.3 million of dividends to our stockholders and repurchased $2.0 million of shares of common stock under our SRP at an average price of $6.53 per share.
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 Investment Management segment includes investments in and income (loss) from unconsolidated joint ventures and asset management fee revenues earned for the management of these joint ventures. General and administrative expenses, along with other expense and income items, are not allocated among segments. For additional information, see Item 7 — Management Discussion and Analysis — Segment EBITDA below and Note 15 — Segment Information to our accompanying consolidated financial statements.
General Economic Conditions and Timber Market Factors Impacting Our Business
Our operating results are influenced by a variety of factors, including timber prices; the demand for pulp and paper products, lumber, panel, and other wood-related products; the supply of timber; and competition. Timber prices can experience significant variations and have been historically volatile. The demand for timber and wood products is affected primarily by the level of new residential construction activity, repair and remodeling activity, the supply of manufactured timber products including imports, and, to a lesser extent, other commercial and industrial uses. The demand for timber also is affected by the demand for wood chips in the pulp and paper markets and for hardwood in the furniture and other hardwood industries.
According to an advance estimate released by the Bureau of Economic Analysis, real gross domestic product ("GDP") increased at an annual rate of 4.0% in the fourth quarter of 2020, reflecting both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. Full year 2020 real GDP decreased by 3.5%. While most sectors experienced declines during 2020, residential fixed investment increased, mainly reflecting increased home improvement spending. The housing market improved with total housing starts estimated 1.4 million units, up 7.0% from 2019. We anticipate that the housing market will continue to improve in 2021, which we believe should lead to steady lumber demand and long-term higher pricing for timber products. We expect our 2021 timber sales volume to decrease to between 2.0 million to 2.2 million tons, reflecting consistent annual productivity on a per-acre basis.
Impact of COVID-19 On Our Business
In March 2020, the World Health Organization declared the coronavirus (COVID-19) outbreak a pandemic, and the President of the 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 the U.S. Economists expect the impact of the pandemic will continue to be significant in 2021.
The outbreak resulted in authorities implementing numerous measures to try to contain the virus, such as quarantines and shelter-in-place orders. During March and April 2020, most U.S. 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.
The COVID-19 pandemic had only a minimal impact on our overall results for 2020. We managed our harvest operations effectively through the pandemic, increasing total harvest volumes by 3% and generating comparable timber sales revenue and higher Harvest EBITDA versus the prior year. Projections under these circumstances are necessarily guarded and subject to change, but demand for pulp-related products has remained strong and demand patterns for sawtimber products have improved from the early days of the pandemic as demand and pricing for lumber has been strong due to increased housing starts and robust repair and remodeling activity. 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.
While we effectively managed its impact on our 2020 results, the ultimate risk posed by COVID-19 to our future performance remains uncertain. It continues to pose 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.
The longer-term consequences of the COVID-19 pandemic to the economy and our customers continue to be unknown; however, the approval and distribution of vaccines create a belief that the economy will begin to return to normal over the course of 2021. 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. After our deleveraging initiatives and other balance sheet strengthening in 2019 and 2020, we believe we are well positioned to weather the economic turmoil.
Liquidity and Capital Resources
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, 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 Offering
On February 28, 2020, we filed a shelf registration statement on Form S-3 (File No. 333-236793) with the SEC, which was declared effective on May 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. On May 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 the SEC under our shelf registration statement. As of December 31, 2020, we have not sold any shares of common stock under the distribution agreement.
On May 1, 2020, we entered into an amendment to the Amended Credit Agreement that provided for, among other things: (1) the removal of the LTV ratio covenant reduction, from 50% to 45%, which would have otherwise been effective on December 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 $150 million, which still provides us with ample capacity for future acquisitions while lowering our unused commitment fees; and (4) the ability to make additional investments in joint ventures during 2020.
The table below presents the details of each credit facility under the Amended Credit Agreement as of December 31, 2020:
|(dollars in thousands)|
|Facility Name||Maturity Date|
Interest Rate (1)
Unused Commitment Fee (1)
|Total Capacity||Outstanding Balance||Remaining Capacity|
Revolving Credit Facility
|12/1/2022||LIBOR + 2.20%||0.35%||$||35,000 ||$||— ||$||35,000 |
Multi-Draw Term Facility
|12/1/2024||LIBOR + 2.20%||0.35%||150,000 ||34,086 ||$||115,914 |
Term Loan A-1
|12/23/2024||LIBOR + 1.75%||N/A||100,000 ||100,000 ||— |
Term Loan A-2
|12/1/2026||LIBOR + 1.90%||N/A||100,000 ||100,000 ||— |
Term Loan A-3
|12/1/2027||LIBOR + 2.00%||N/A||68,619 ||68,619 ||— |
Term Loan A-4
|8/22/2025||LIBOR + 1.70%||N/A||140,000 ||140,000 ||— |
|$||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.
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.
In March 2020 and 2019, we received patronage dividends of $4.1 million and $3.3 million, respectively, on our patronage eligible borrowings. Of the total patronage dividends received in March 2020, $3.1 million was received in cash, including a $0.1 million special cash distribution, and $1.0 million 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' boards of directors. As of December 31, 2020, we have accrued $3.6 million of patronage dividends receivable for 2020, approximately 75% of which is expected to be received in cash in March 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 December 31, 2020.
Interest Rate Swaps
We enter into interest rate swaps to mitigate our exposure to changing interest rates on our variable-rate debts. Prior to October 2019, we had ten outstanding interest rate swaps with Rabobank, which effectively fixed interest rates on $350.0 million of our outstanding debt at 4.26%, inclusive of applicable spread but before considering patronage dividends. In October 2019, we terminated these interest rate swaps and entered into two new interest rate swaps with Rabobank with a total notional amount of $275.0 million. As of December 31, 2020, we effectively fixed interest rates on $275.0 million of our $442.7 million variable-rate debt at 3.98%, inclusive of applicable spread but before considering patronage dividends. See Note 6 — Interest Rate Swaps to our accompanying financial statements for further details on our interest rate swaps.
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 year ended December 31, 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 December 31, 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
For the year ended December 31, 2020, net cash provided by operating activities was $40.5 million, a $7.5 million increase from the year ended December 31, 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 $9.2 million decrease in cash paid for interest expense and a $2.3 million decrease in cash used for working capital due to timing of receipts and payments, offset by a $2.1 million increase in general and administrative expense (including $1.8 million paid in connection with our former CEO's retirement) and a $1.8 million decrease in net proceeds from timberland sales.
For the year ended December 31, 2020, net cash provided by investing activities was $10.8 million as compared to $22.8 million for the year ended December 31, 2019. We invested an additional $5.0 million in the Triple T Joint Venture in 2020, received $4.3 million less in gross proceeds from large dispositions and $3.4 million less in cash distributions from the Dawsonville Bluffs Joint Venture and incurred $1.3 million more in capital expenditures during