CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(unaudited)
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 directly, through wholly-owned subsidiaries, or through joint ventures.
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
99.99%
of its common partnership units. CatchMark LP Holder, LLC (“
CatchMark LP Holder
”), a Delaware limited liability company and wholly-owned subsidiary of
CatchMark Timber Trust
, is the sole limited partner of
CatchMark Timber OP
and owns the remaining
0.01%
of its common partnership units. In addition, CatchMark Timber TRS, Inc. (“CatchMark TRS”), a Delaware corporation formed as a wholly-owned subsidiary of
CatchMark Timber OP
in 2006, is our 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.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of CatchMark have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Results for these interim periods are not necessarily indicative of results for a full year. CatchMark’s consolidated financial statements include the accounts of CatchMark Timber Trust and its subsidiaries, including CatchMark Timber OP, and the subsidiaries of CatchMark Timber OP, including CatchMark TRS, and any variable-interest entity in which CatchMark Timber Trust or CatchMark Timber OP was deemed the primary beneficiary. With respect to entities that are not variable interest entities, CatchMark's consolidated financial statements also include the accounts of any entity in which CatchMark Timber Trust, CatchMark Timber OP, or their subsidiaries own a controlling financial interest and any limited partnership in which CatchMark Timber Trust, CatchMark Timber OP, or their subsidiaries own a controlling general partnership interest.
All intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the audited financial statements and footnotes included in CatchMark’s Annual Report on Form 10-K for the year ended December 31, 2017.
Investments in Joint Ventures
For joint ventures that it does not control but exercises significant influence, CatchMark uses the equity method of accounting. CatchMark's judgment about its level of influence or control of an entity involves consideration of various factors including the form of its ownership interest; its representation in the entity's governance; its ability to participate in policy-making decisions; and the rights of other investors to participate in the decision-making process, to replace CatchMark as manager, and/or to liquidate the venture. Under the equity method, the investment in a joint venture is recorded at cost and adjusted for equity in earnings and cash contributions and distributions. Income or loss and cash distributions from an unconsolidated joint venture are allocated according to the provisions of the respective joint venture agreement, which may be different from its stated ownership percentages. Any difference between the carrying amount of these investments on CatchMark’s balance sheets and the underlying equity in net assets on the joint venture’s balance sheets is adjusted as the related underlying assets are depreciated, amortized, or sold. Distributions received
from unconsolidated joint ventures are classified in the accompanying consolidated statements of cash flows using the cumulative earnings approach under which distributions received in an amount equal to cumulative equity in earnings are classified as cash inflows from operating activities and distributions received in excess of cumulative equity in earnings represent returns of investment and therefore are classified as cash inflows from investing activities.
CatchMark evaluates the recoverability of its investments in unconsolidated joint ventures in accordance with accounting standards for equity investments by first reviewing each investment for any indicators of impairment. If indicators are present, CatchMark estimates the fair value of the investment. If the carrying value of the investment is greater than the estimated fair value, management assesses whether the impairment is “temporary” or “other-than-temporary.” In making this assessment, management considers the following: (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the venture, and (3) CatchMark’s intent and ability to retain its interest long enough for a recovery in market value. If management concludes that the impairment is "other than temporary," CatchMark reduces the investment to its estimated fair value.
For information on CatchMark’s unconsolidated joint ventures, which are accounted for using the equity method of accounting, see
Note 4
,
Unconsolidated Joint Ventures
.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, a new revenue recognition model that supersedes most revenue recognition guidance under U.S. GAAP. Under this ASU and subsequently issued amendments, an entity is required to recognize revenue to depict the transfer of promised goods or services to customers in an amount that it expects to receive for the goods or services. CatchMark adopted ASU 2014-09 and its amendments for the interim and annual periods beginning January 1, 2018 using the modified retrospective method. Management performed a comprehensive evaluation of the impact of the new standard across all revenue streams and determined that the timing of revenue recognition and its classification in CatchMark’s consolidated financial statements remain substantially unchanged; however, additional disclosures are required.
Under the new standards, CatchMark recognizes revenues when the following criteria are met: (i) persuasive evidence of a contract with a customer exists, (ii) identifiable performance obligations under the contract exist, (iii) transaction price is determinable for each performance obligation, (iv) the transaction price is allocated to each performance obligation, and (v) when the performance obligations are satisfied.
CatchMark derives a majority of its revenues from timber sales, timberland sales, recreational leases, and asset management fees.
CatchMark generates its timber sales revenue from delivered wood sales, stumpage sales, and lump-sum sales with retained economic interests. Revenue for timber sales is recognized when the risk of loss passes to the customer. Only one performance obligation is associated with timber sales and it is satisfied when timber is delivered to or severed by the customer in an amount that reflects the consideration expected to be received.
Contractual terms of each timber sale, including pricing and volume for the respective product, are negotiated and entered into by the field managers. In delivered wood sales, product pricing includes amount sufficient to cover costs of contracting third-party logging crews to harvest and haul timber to the customers. Revenue is recognized when timber is delivered to the customer and the sales volume/value is known when timber crosses the customers’ scale. Stumpage sales are typically executed using pay-as-cut contracts, where a purchaser acquires the right to harvest specified timber on a designated tract for a set period of time at agreed-upon unit prices. Revenue is recognized when timber is severed under pay-as-cut contracts. In a lump-sum sales contract with retained economic interests, CatchMark receives advance payments for the standing timber specified in the contract and the customer is responsible for cutting and hauling the timber. CatchMark satisfies its performance obligation when timber is severed, at which time revenue is recognized. Contract payments are generally due within a month from the date timber is harvested and/or delivered. The transaction price for timber sales is determined using contractual rates applied to harvest volumes.
|
|
(b)
|
Timberland Sales Revenue
|
Performance obligations associated with timberland sales are met when all conditions of closing have been satisfied, which generally occurs at closing. Revenue for timberland sales is recognized at closing when title passes, payments are received or full collectibility is probable, and control is passed to the buyer.
|
|
(c)
|
Recreational Lease Revenue
|
Recreational lease revenue is derived from the leasing of the right to use CatchMark’s timberland. The agreed-upon transaction price of a lease is generally paid in full at the beginning of the lease term and recorded as deferred revenue. Performance obligations associated with a recreational lease are generally met over the period of the lease term. Revenue is recognized evenly over the lease term as CatchMark has satisfied its performance obligation.
|
|
(d)
|
Asset Management Fee Revenue
|
Under asset management agreements with its unconsolidated joint ventures, CatchMark earns management fees for performing asset management functions, as further described in
Note 4, Unconsolidated Joint Ventures.
As asset management services are ongoing and provided on a recurring basis, the associated performance obligations are generally met over the service period at an agreed-upon price stated in the agreements. Revenue for asset management services is recognized at the end of each service period.
Reclassification
Certain prior period amounts have been reclassified to conform with the current period's financial statement presentation.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In January 2018, the FASB issued ASU 2018-01, Leases
(Topic 842):
Land Easement Practical Expedient for Transition to Topic 842,
to address concerns about the costs and complexity of complying with the transition provision of the new lease requirements under ASU 2016-02
.
The amendments in ASU 2018-01 permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 its land easements that exist or expired before its adoption of Topic 842 that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-10,
Codification Improvements to Topic 842, Leases
, to further improve existing guidance; and ASU 2018-11,
Leases (Topic 842)
:
Targeted Improvements,
to provide entities with relief from the costs of implementing certain aspects of ASU 2016-02. The standard requires a modified retrospective transition approach, but allows the entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest comparative period presented. ASU 2016-02 and its subsequent updates are effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. CatchMark is in the process of evaluating the impact ASU 2016-02 and its amendments will have on its consolidated financial statements. CatchMark anticipates recognizing a right of use asset and lease liability for its corporate office lease. CatchMark anticipates using both of the practical expedients.
In August 2017, the FASB issued ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities (Topic 815),
which amends the hedge accounting recognition and presentation requirements in ASC 815, "
Derivatives and Hedging
." ASU 2017-12 expands an entity's ability to hedge nonfinancial and financial risk components and reduces the complexity in fair value hedges of interest rate risk. It eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item when the hedged item affects earnings. ASU 2017-12 is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is
permitted in any interim period after issuance of ASU 2017-12. CatchMark adopted ASU 2017-12 on January 1, 2018 and the adoption did not have a material effect on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,
which expands the scope of ASC 718 to include share-based payments granted to non-employees in exchange for goods or services used or consumed in an entity’s own operations. This guidance aligns the measurement and classification for share-based payments to non-employees with the guidance for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods therein. CatchMark is currently assessing the impact ASU 2018-07 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820)
:
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,
which added new disclosure requirements, eliminated and modified existing disclosure requirements on fair value measurement to improve the effectiveness of ASC 820. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. CatchMark is currently assessing the impact ASU 2018-13 will have on its consolidated financial statements.
3. Timber Assets
As of
September 30, 2018
and
December 31, 2017
, timber and timberlands consisted of the following, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
(in thousands)
|
Gross
|
|
Accumulated
Depletion or
Amortization
|
|
Net
|
Timber
|
$
|
377,666
|
|
|
$
|
19,884
|
|
|
$
|
357,782
|
|
Timberlands
|
415,341
|
|
|
—
|
|
|
415,341
|
|
Mainline roads
|
1,438
|
|
|
717
|
|
|
721
|
|
Timber and timberlands
|
$
|
794,445
|
|
|
$
|
20,601
|
|
|
$
|
773,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(in thousands)
|
Gross
|
|
Accumulated
Depletion or
Amortization
|
|
Net
|
Timber
|
$
|
332,253
|
|
|
$
|
29,035
|
|
|
$
|
303,218
|
|
Timberlands
|
406,284
|
|
|
—
|
|
|
406,284
|
|
Mainline roads
|
1,349
|
|
|
604
|
|
|
744
|
|
Timber and timberlands
|
$
|
739,886
|
|
|
$
|
29,639
|
|
|
$
|
710,246
|
|
Timberland Acquisitions
On August 28, 2018, CatchMark acquired fee simple interests in approximately
18,100
acres of timberland in Oregon (the "Bandon Property") for
$89.7 million
, exclusive of closing costs. The acquisition was funded from a combination of cash on hand and borrowing
$89.0 million
under CatchMark's multi-draw term facility (see
Note 5, Notes Payable and Lines of Credit
). During the three and nine months ended September 30, 2017, CatchMark did
no
t complete any timberland acquisitions.
Timberland Sales
During the
three months ended
September 30, 2018
and
2017
, CatchMark sold approximately
1,900
and
230
acres of timberland for
$3.8 million
and
$0.3 million
, respectively. CatchMark's cost basis in the timberland sold was
$3.0 million
and
$0.2 million
, respectively.
During the
nine months ended
September 30, 2018
and
2017
, CatchMark sold approximately
7,200
and
7,000
acres of timberland for
$14.9 million
and
$13.7 million
, respectively. CatchMark's cost basis in the timberland sold was
$10.7 million
and
$9.2 million
, respectively. Land sale acreage by state is listed below:
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
Acres Sold In:
|
2018
|
|
2017
|
Alabama
|
800
|
|
|
1,900
|
|
Georgia
|
2,200
|
|
|
4,700
|
|
Louisiana
|
200
|
|
|
400
|
|
North Carolina
|
1,000
|
|
|
—
|
|
South Carolina
|
2,900
|
|
|
—
|
|
Texas
|
100
|
|
|
—
|
|
Total
|
7,200
|
|
|
7,000
|
|
On August 20, 2018, Catchmark entered into a purchase and sale agreement with Forest Investment Associates L.P. to sell approximately
56,000
acres of its wholly-owned timberlands located in Texas and Louisiana (the "Southwest Property") for an aggregate price of approximately
$80.4 million
. CatchMark will retain approximately
280,000
tons of merchantable inventory (
50%
sawtimber/
50%
pulpwood) to be harvested over the next 18-24 months. The closing of the sale is scheduled to take place before the end of 2018.
Current Timberland Portfolio
As of
September 30, 2018
, CatchMark directly owned interests in approximately
520,500
acres of timberlands in the U.S. South and the Pacific Northwest, approximately
490,200
acres of which were held in fee simple interests and approximately
30,300
acres were held in leasehold interests. A detailed breakout of land acreage by state is listed below:
|
|
|
|
|
|
|
|
|
|
|
Acres by state as of September 30, 2018
|
|
Fee
|
|
Lease
|
|
Total
|
South
|
|
|
|
|
|
|
Alabama
|
|
73,600
|
|
|
5,300
|
|
|
78,900
|
|
Florida
|
|
2,000
|
|
|
—
|
|
|
2,000
|
|
Georgia
|
|
261,400
|
|
|
25,000
|
|
|
286,400
|
|
Louisiana
|
|
20,600
|
|
|
—
|
|
|
20,600
|
|
North Carolina
|
|
600
|
|
|
—
|
|
|
600
|
|
South Carolina
|
|
78,100
|
|
|
—
|
|
|
78,100
|
|
Tennessee
|
|
300
|
|
|
—
|
|
|
300
|
|
Texas
|
|
35,500
|
|
|
—
|
|
|
35,500
|
|
|
|
472,100
|
|
|
30,300
|
|
|
502,400
|
|
Pacific Northwest
|
|
|
|
|
|
|
Oregon
|
|
18,100
|
|
|
—
|
|
|
18,100
|
|
Total
|
|
490,200
|
|
|
30,300
|
|
|
520,500
|
|
4. Unconsolidated Joint Ventures
As of September 30, 2018, CatchMark owned interests in
two
joint ventures with unrelated parties: the Triple T Joint Venture and the Dawsonville Bluffs Joint Venture (each as defined and described below). CatchMark accounts for these investments using the equity method of accounting.
Triple T Joint Venture
On July 6, 2018, CatchMark entered into a limited partnership agreement for TexMark Timber Treasury, L.P. (the “Triple T Joint Venture”) with a consortium of institutional investors (the “Preferred Investors”), including BTG Pactual Timberland Investment Group, Highland Capital Management, Medley Management Inc., and British Columbia Investment Management Corporation. CatchMark invested
$200.0 million
in the Triple T Joint Venture, equal to
21.6%
of the total equity contributions, in exchange for a common limited partnership interest in the Triple T Joint Venture. CatchMark, through a separate wholly-owned and consolidated subsidiary, is the sole general partner of the Triple T Joint Venture. The Preferred Investors invested
$725.9 million
in the Triple T Joint Venture, equal to
78.4%
of the total equity contributions. The Triple T Joint Venture limited partnership agreement provides for a term of
five
years (extendable, subject to certain approvals, to
seven
and
ten
years), a preferred return to the Preferred Investors in priority to CatchMark, a subsequent preferred return to CatchMark and, finally, participation by CatchMark and the Preferred Investors in remaining distributions in percentages equal to
50%
/
50%
or
80%
/
20%
, respectively, depending upon the outcome of certain contingencies.
Also on July 6, 2018, the Triple T Joint Venture completed an acquisition of
1.1 million
acres of prime East Texas timberlands (the “Triple T Timberlands”), for approximately
$1.39 billion
(the “Acquisition Price”), exclusive of transaction costs. The Acquisition Price was funded by
$925.9 million
of equity contributions from the Triple T Joint Venture partners and a
$600 million
seven
-
year term loan made pursuant to a credit agreement, dated July 6, 2018, between the Triple T Joint Venture and its affiliates and the lenders. Borrowings under the term loan bear interest at one-month LIBOR plus a margin determined based upon a LTV ratio and are secured by the assets of the Triple T Joint Venture and its subsidiaries.
CatchMark funded its
$200.0 million
equity contribution with borrowings under its multi-draw term facility (see
Note 5, Notes Payable and Lines of Credit
), including
$30.0 million
borrowed for an earnest money deposit made in May 2018 and
$170.0 million
borrowed on July 5, 2018.
CatchMark uses the equity method to account for its investment in the Triple T Joint Venture since it does not possess the power to direct the activities that most significantly impact the economic performance of the Triple T Joint Venture, and accordingly, CatchMark does not possess the first characteristic of a primary beneficiary described in GAAP. CatchMark has the ability to appoint the common board members of the Triple T Joint Venture, which provides CatchMark with significant influence over the Triple T Joint Venture. Accordingly, pursuant to the applicable accounting literature, it is appropriate for CatchMark to apply the equity method of accounting to its investment in the Triple T Joint Venture.
The Triple T Joint Venture agreement has liquidation rights and priorities that are significantly different from CatchMark's stated ownership percentage based on total equity contributions. The Preferred Investors are entitled to a minimum
10.25%
cumulative return on their equity contributions, plus a complete return of their equity contributions before any distributions may be made on CatchMark’s common limited partnership interest. As such, CatchMark uses the hypothetical-liquidation-at-book-value method (“HLBV”) to determine its equity in the earnings of the Triple T Joint Venture. The HLBV method is commonly applied to equity investments in real estate, where cash distribution percentages vary at different points in time and are not directly linked to an investor's ownership percentage. For investments accounted for under the HLBV method, applying the percentage ownership interest to GAAP net income in order to determine earnings or losses would not accurately represent the income allocation and cash flow distributions that will ultimately be received by the investors.
CatchMark applies HLBV using a balance sheet approach. A calculation is prepared at each balance sheet date to determine the amount that CatchMark would receive if the Triple T Joint Venture were to liquidate all of its assets (as valued in accordance with GAAP) on that date and distribute the cash to the partners based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the
end of the reporting period, after adjusting for capital contributions and distributions, is CatchMark's income or loss from the Triple T Joint Venture for the period.
Condensed balance sheet information for the Triple T Joint Venture as of September 30, 2018 is as follows:
|
|
|
|
|
|
As of
|
(in thousands)
|
September 30, 2018
|
Triple T Joint Venture:
|
|
Total assets
|
$
|
1,622,720
|
|
Total liabilities
|
$
|
755,875
|
|
Total equity
|
$
|
866,845
|
|
CatchMark:
|
|
Carrying value of investment
|
$
|
123,245
|
|
Condensed income statement information for the Triple T Joint Venture from July 6, 2018 (inception) to September 30, 2018 is as follows:
|
|
|
|
|
|
From Inception through
|
(in thousands)
|
September 30, 2018
|
Triple T Joint Venture:
|
|
Total revenues
|
$
|
28,255
|
|
Operating loss
|
$
|
(3,329
|
)
|
Net loss
|
$
|
(9,407
|
)
|
CatchMark:
|
|
Equity share of net loss
|
$
|
(76,755
|
)
|
CatchMark's equity share of the Triple T Joint Venture's net loss using the HLBV method is calculated as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Triple T Joint Venture:
|
|
|
Total equity as of September 30, 2018
|
|
$
|
866,845
|
|
Preferred Investors:
|
|
|
Equity in Triple T Joint Venture, beginning balance
|
$
|
725,866
|
|
|
Minimum preferred return as of September 30, 2018
|
$
|
17,734
|
|
|
HLBV distribution as of September 30, 2018
|
|
$
|
743,600
|
|
CatchMark:
|
|
|
Equity in Triple T Joint Venture as of September 30, 2018
|
|
$
|
123,245
|
|
Equity in Triple T Joint Venture, beginning balance
|
|
$
|
200,000
|
|
Equity share of Triple T Joint Venture's net loss
|
|
$
|
(76,755
|
)
|
Dawsonville Bluffs Joint Venture
In April 2017, CatchMark entered into a limited liability agreement for Dawsonville Bluffs, LLC (the “Dawsonville Bluffs Joint Venture”) with MPERS. The Dawsonville Bluffs Joint Venture acquired a portfolio of
11,000
acres of commercial timberlands located in North Georgia for an aggregate purchase price of
$20.0 million
, exclusive of transaction costs. CatchMark owns a
50%
membership interest in the Dawsonville Bluffs Joint Venture and MPERS owns the remaining
50%
interest. CatchMark shares substantive participation rights with MPERS, including management selection and termination, and the approval of material operating and capital decisions and, as such, uses the equity method of accounting to record its investment. Income or loss and cash distributions are allocated according
to the provisions of the joint venture agreement, which are consistent with the ownership percentages for the Dawsonville Bluffs Joint Venture.
Condensed balance sheet information for the Dawsonville Bluffs Joint Venture is as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
September 30, 2018
|
|
December 31, 2017
|
Dawsonville Bluffs Joint Venture:
|
|
|
|
Total assets
|
$
|
12,003
|
|
|
$
|
24,014
|
|
Total liabilities
|
$
|
641
|
|
|
$
|
660
|
|
Total equity
|
$
|
11,362
|
|
|
$
|
23,354
|
|
CatchMark:
|
|
|
|
Carrying value of investment
|
$
|
5,681
|
|
|
$
|
11,677
|
|
Condensed income statement information for the Dawsonville Bluffs Joint Venture is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Dawsonville Bluffs Joint Venture:
|
|
|
|
|
|
|
|
Total revenues
|
$
|
198
|
|
|
$
|
390
|
|
|
$
|
13,813
|
|
|
$
|
414
|
|
Net income (loss)
|
$
|
(19
|
)
|
|
$
|
(84
|
)
|
|
$
|
5,040
|
|
|
$
|
(339
|
)
|
CatchMark:
|
|
|
|
|
|
|
|
Equity share of net income (loss)
|
$
|
(10
|
)
|
|
$
|
(42
|
)
|
|
$
|
2,520
|
|
|
$
|
(169
|
)
|
During the three months and
nine months ended
September 30, 2018
, CatchMark received cash distributions of
$1.3 million
and
$8.5 million
, respectively, from the Dawsonville Bluffs Joint Venture. Of the
$8.5 million
of cash distributions received for the nine months ended September 30, 2018,
$3.6 million
was classified as operating distributions and
$4.9 million
was classified as return of capital in the investing section of the accompanying consolidated statement of cash flows.
Asset Management Fees
CatchMark provides asset management services to the Triple T Joint Venture and the Dawsonville Bluffs Joint Venture. Under these arrangements, CatchMark oversees the day-to-day operations of these joint ventures and their properties, including accounting, reporting and other administrative services, subject to certain major decisions that require partner approval. For management of the Triple T Joint Venture, CatchMark receives a fee equal to 1% per annum, subject to reduction and deferment in certain circumstances, of the Acquisition Price multiplied by
78.4
%, which represents the percentage of the total equity contributions made to the Triple T Joint Venture by the Preferred Investors. For management of the Dawsonville Bluffs Joint Venture, CatchMark receives a percentage fee based on invested capital, as defined by the joint venture agreement.
During the three months and nine months ended September 30, 2018 and 2017, CatchMark earned the following fees from these unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Triple T Joint Venture
(1)
|
$
|
2,675
|
|
|
$
|
—
|
|
|
$
|
2,675
|
|
|
$
|
—
|
|
Dawsonville Bluffs Joint Venture
|
$
|
23
|
|
|
$
|
40
|
|
|
$
|
84
|
|
|
$
|
69
|
|
|
$
|
2,698
|
|
|
$
|
40
|
|
|
$
|
2,759
|
|
|
$
|
69
|
|
|
|
(1)
|
Includes approximately
$119
of reimbursements of compensation costs for the three months and nine months ended September 30, 2018.
|
5. Notes Payable and Lines of Credit
As of
September 30, 2018
and
December 31, 2017
, CatchMark had the following debt balances outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Outstanding Balance as of
|
Credit Facility
|
|
Maturity Date
|
|
Interest Rate
|
|
Current Interest Rate
(1)
|
|
September 30, 2018
|
|
December 31, 2017
|
Term Loan A-1
|
|
12/23/2024
|
|
LIBOR + 1.75%
|
|
3.96%
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Term Loan A-2
|
|
12/1/2026
|
|
LIBOR + 1.90%
|
|
4.14%
|
|
100,000
|
|
|
118,809
|
|
Term Loan A-3
|
|
12/1/2027
|
|
LIBOR + 2.00%
|
|
4.24%
|
|
68,619
|
|
|
118,810
|
|
Term Loan A-4
|
|
8/22/2025
|
|
LIBOR + 1.70%
|
|
3.82%
|
|
140,000
|
|
|
—
|
|
Multi-Draw Term Facility
|
|
12/1/2024
|
|
LIBOR + 2.20%
|
|
4.40%
|
|
149,000
|
|
|
—
|
|
Total principal balance
|
|
|
|
|
|
|
|
$
|
557,619
|
|
|
$
|
337,619
|
|
Less: net unamortized deferred financing costs
|
|
$
|
(6,021
|
)
|
|
$
|
(7,531
|
)
|
Total
|
|
|
|
|
|
|
|
$
|
551,598
|
|
|
$
|
330,088
|
|
|
|
(1)
|
Represents weighted-average interest rate as of
September 30, 2018
. The weighted-average interest rate excludes the impact of the interest rate swaps (see
Note 6 - Interest Rate Swaps
), amortization of deferred financing costs, unused commitment fees, and estimated patronage refunds.
|
Credit Agreement Amendment
CatchMark is party to a credit agreement
dated as of December 1, 2017 (the “2017 Credit Agreement”) with a syndicate of lenders, including CoBank. On August 22, 2018, CatchMark and the lenders amended the 2017 Credit Agreement (the "2018 Amendment"), which expanded the total borrowing capacity by
$75 million
to
$643.6 million
, added a new
$140.0 million
seven
-year term loan (the “Term A-4 Loan”), and reduced the capacity under the
seven
-year multi-draw term credit facility from
$265.0 million
to
$200.0 million
. The 2017 Credit Agreement, as amended by the 2018 Amendment, provides for borrowing under credit facilities consisting of the following:
|
|
•
|
a continuation of a
$35.0 million
five
-year revolving credit facility (the “Revolving Credit Facility”);
|
|
|
•
|
a reduced
$200.0 million
seven
-year multi-draw term credit facility (the “Multi-Draw Term Facility”);
|
|
|
•
|
a continuation of a
$100.0 million
ten
-year term loan (the “Term Loan A-1”);
|
|
|
•
|
a continuation of a
$100.0 million
nine
-year term loan (the “Term Loan A-2”);
|
|
|
•
|
a continuation of a
$68.6 million
ten
-year term loan (the “Term Loan A-3”); and
|
|
|
•
|
a new
$140.0 million
seven
-year term loan (the "Term Loan A-4").
|
During the nine months ended September 30, 2018, CatchMark borrowed
$289.0 million
under its credit facilities to fund its investment in the Triple T Joint Venture and the acquisition of the Bandon Property.
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 Revolving Credit Facility bears interest at an adjustable rate equal to a
base rate
plus between
0.50%
and
1.20%
or a
LIBOR
rate plus between
1.50%
and
2.20%
, in each case depending on CatchMark’s LTV Ratio, and will terminate and all amounts outstanding under the facility will be due and payable on December 1, 2022.
The Multi-Draw Term Facility may be used to finance timber acquisitions and associated expenses, to fund investment in joint ventures, and to reimburse payments of drafts under letters of credit. The Multi-Draw Term Facility, which is interest only until its maturity date, bears interest at an adjustable rate equal to a
base rate
plus between
0.50%
and
1.20%
or a
LIBOR
rate plus between
1.50%
and
2.20%
, in each case depending on CatchMark’s LTV Ratio, and will terminate and all amounts outstanding under the facility will be due and payable on December 1, 2024.
CatchMark pays the lenders an unused commitment fee on the unused portions of the Revolving Credit Facility and the Multi-Draw Term Facility at an adjustable rate ranging from
0.15%
to
0.35%
, depending on the LTV Ratio.
CatchMark’s obligations under the credit agreement are collateralized by a first priority lien on the timberlands owned by CatchMark’s subsidiaries and substantially all of CatchMark’s subsidiaries’ other assets in which a security interest may lawfully be granted, including, without limitation, accounts, equipment, inventory, intellectual property, bank accounts and investment property. In addition, CatchMark's obligations are jointly and severally guaranteed by all of CatchMark and its subsidiaries pursuant to the terms of the credit agreement. CatchMark has also agreed to guarantee certain losses caused by certain willful acts of CatchMark or its subsidiaries.
As of
September 30, 2018
,
$86.0 million
remained available under CatchMark's credit facilities, consisting of
$51.0 million
under
the Multi-Draw Term Facility and
$35.0 million
under
the Revolving Credit Facility.
Patronage Refunds
CatchMark is eligible to receive patronage refunds from its lenders (the "Patronage Banks") under a profit-sharing program made available to borrowers of the Farm Credit System. CatchMark has received a patronage refund on its eligible patronage loans annually since 2015. Of the total amount received each year,
75%
was received in cash and
25%
was received in equity of the Patronage Banks. The eligibility remains the same under the 2017 Credit Agreement and the 2018 Amendment. Therefore, CatchMark accrues patronage refunds it expects to receive in 2019 based on actual patronage refunds received as a percentage of its weighted-average eligible debt balance. For the
three months ended
September 30, 2018
and 2017, CatchMark recorded
$1.0 million
and
$0.7 million
, respectively, in expected patronage refunds against interest expense on the consolidated statements of operations. For the
nine months ended
September 30, 2018
and 2017, CatchMark recorded
$2.2 million
and
$2.0 million
, respectively, in expected patronage refunds against interest expense on the consolidated statements of operations. As of
September 30, 2018
and
December 31, 2017
, CatchMark recorded the following balances related to the patronage refund program on its balance sheets:
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of
|
Patronage refunds classified as:
|
September 30, 2018
|
|
December 31, 2017
|
Accounts receivable
|
$
|
2,239
|
|
|
$
|
2,694
|
|
Prepaid expenses and other assets
(1)
|
1,499
|
|
|
831
|
|
Total
|
$
|
3,738
|
|
|
$
|
3,525
|
|
|
|
(1)
|
Represents
25%
of patronage refunds received as equity of the Patronage Banks.
|
Debt Covenants
CatchMark's credit agreement contains, among others, the following financial covenants that:
|
|
•
|
limit the LTV ratio to (i)
50%
at any time prior to the last day of fiscal quarter corresponding to the fourth anniversary of the effective date and (ii)
45%
at any time thereafter;
|
|
|
•
|
require that we maintain a FCCR of not less than 1.05:1.00;
|
|
|
•
|
require maintenance of a minimum liquidity balance of no less than
$25.0 million
at any time; and
|
|
|
•
|
limit the aggregated capital expenditures to
1%
of the value of the timberlands during any fiscal year.
|
CatchMark was in compliance with the financial covenants of its credit agreement as of
September 30, 2018
.
Interest Paid and Fair Value of Outstanding Debt
During the
three months ended
September 30, 2018
and
2017
, CatchMark made interest payments of
$4.4 million
and
$3.0 million
, respectively, on its borrowings. Included in the interest payments for the
three months ended
September 30, 2018 and
2017
were unused commitment fees of
$0.1 million
and
$0.1 million
, respectively.
During the
nine months ended
September 30, 2018
and
2017
, CatchMark made interest payments of
$10.0 million
and
$8.3 million
, respectively, on its borrowings. Included in the interest payments for the
nine months ended
September 30, 2018
and
2017
were unused commitment fees of
$0.2 million
and
$0.4 million
, respectively.
As of
September 30, 2018
and
December 31, 2017
, the weighted-average interest rate on CatchMark's borrowings, after consideration of interest rate swaps (see
Note 6 - Interest Rate Swaps
), was
4.27%
and
3.61%
, respectively. After further consideration of expected patronage refunds, CatchMark's weighted-average interest rate as of
September 30, 2018
and
December 31, 2017
was
3.47%
and
2.81%
, respectively.
The fair value of CatchMark's outstanding debt approximated its book value as of
September 30, 2018
. The fair value was estimated based on discounted cash flow analysis using the current market borrowing rates for similar types of borrowing arrangements as of the measurement dates.
6. Interest Rate Swaps
CatchMark uses interest rate swaps to mitigate its exposure to changing interest rates on its variable rate debt instruments. In August 2018, CatchMark entered into
three
separate interest rate swaps with Rabobank totaling
$150.0 million
. CatchMark had
ten
interest rate swaps outstanding as of
September 30, 2018
, with terms below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
Effective Date
|
|
Maturity Date
|
|
Pay Rate
|
|
Receive Rate
|
|
Notional Amount
|
2017 Rabobank Swap
|
|
3/28/2017
|
|
3/28/2020
|
|
1.800%
|
|
one-month LIBOR
|
|
$
|
30,000
|
|
2018 Rabobank Swap
|
|
9/6/2018
|
|
9/6/2020
|
|
2.796%
|
|
one-month LIBOR
|
|
$
|
50,000
|
|
2018 Rabobank Swap
|
|
9/6/2018
|
|
9/6/2021
|
|
2.869%
|
|
one-month LIBOR
|
|
$
|
50,000
|
|
2017 Rabobank Swap
|
|
3/28/2017
|
|
11/28/2021
|
|
2.045%
|
|
one-month LIBOR
|
|
$
|
20,000
|
|
2018 Rabobank Swap
|
|
2/28/2018
|
|
11/28/2022
|
|
2.703%
|
|
one-month LIBOR
|
|
$
|
30,000
|
|
2017 Rabobank Swap
|
|
3/23/2017
|
|
3/23/2024
|
|
2.330%
|
|
one-month LIBOR
|
|
$
|
20,000
|
|
2014 Rabobank Swap
|
|
12/23/2014
|
|
12/23/2024
|
|
2.395%
|
|
one-month LIBOR
|
|
$
|
35,000
|
|
2016 Rabobank Swap
|
|
8/23/2016
|
|
12/23/2024
|
|
1.280%
|
|
one-month LIBOR
|
|
$
|
45,000
|
|
2018 Rabobank Swap
|
|
2/28/2018
|
|
11/28/2026
|
|
2.884%
|
|
one-month LIBOR
|
|
$
|
20,000
|
|
2018 Rabobank Swap
|
|
8/28/2018
|
|
8/28/2027
|
|
3.014%
|
|
one-month LIBOR
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
350,000
|
|
As of
September 30, 2018
, CatchMark’s interest rate swaps effectively fixed the interest rate on
$350.0 million
of its
$557.6 million
variable rate debt at
4.26%
, inclusive of the applicable spread. All
ten
interest rate swaps qualify for hedge accounting treatment.
Fair Value and Cash Paid for Interest Under Interest Rate Swaps
The following table presents information about CatchMark's interest rate swaps measured at fair value as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Estimated Fair Value as of
|
Instrument Type
|
|
Balance Sheet Classification
|
|
September 30, 2018
|
|
December 31, 2017
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Prepaid expenses and other assets
|
|
$
|
7,049
|
|
|
$
|
2,935
|
|
Interest rate swaps
|
|
Other liabilities
|
|
$
|
(331
|
)
|
|
$
|
(559
|
)
|
As of
September 30, 2018
, CatchMark estimated that approximately
$1.0 million
will be reclassified from accumulated other comprehensive income to interest expense over the next 12 months.
During the
three months ended
September 30, 2018
and
2017
, CatchMark recognized a change in fair value of the interest rate swaps of approximately
$0.9 million
and
$0.5 million
as other comprehensive income and other comprehensive loss, respectively. During the
nine months ended
September 30, 2018
and
2017
, CatchMark recognized a change in fair value of the interest rate swaps of approximately
$4.3 million
and
$1.1 million
as other comprehensive income and other comprehensive loss, respectively. There was
no
hedge ineffectiveness on the interest rate swaps required to be recognized in current earnings.
During the three months ended
September 30, 2018
and
2017
, net payments of approximately
$56,000
and
$256,000
were made under the interest rate swaps, respectively. During the
nine months ended
September 30, 2018
and
2017
, net payments of approximately
$0.3 million
and
$0.8 million
were made under the interest rates swaps, respectively. Interest rate swaps payments were recorded as interest expense.
7. Commitments and Contingencies
Mahrt Timber Agreements
CatchMark is party to a fiber supply agreement and a master stumpage agreement (collectively, the “Mahrt Timber Agreements”) with a wholly-owned subsidiary of
WestRock
. The fiber supply agreement provides that WestRock will purchase specified tonnage of timber from CatchMark TRS at specified prices per ton, depending upon the type of
timber. The fiber supply agreement is subject to quarterly market pricing adjustments based on an index published by Timber Mart-South, a quarterly trade publication that reports raw forest product prices in
11
southern states. The master stumpage agreement provides that CatchMark will sell specified amounts of timber and make available certain portions of its timberlands to CatchMark TRS for harvesting. 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 CatchMark with a reliable customer for the wood products from its timberlands.
Timberland Operating Agreements
Pursuant to the terms of the timberland operating agreement between CatchMark and
FRC
(the "FRC Timberland Operating Agreement"), FRC manages and operates certain of
CatchMark
's timberlands and related timber operations, including ensuring delivery of timber to WestRock in compliance with the Mahrt Timber Agreements. In consideration for rendering the services described in the timberland operating agreement, CatchMark pays FRC (i) a monthly management fee based on the actual acreage that FRC manages, which is payable monthly in advance, and (ii) an incentive fee based on timber harvest revenues generated by the timberlands, which is payable quarterly in arrears. The FRC Timberland Operating Agreement, as amended, is effective through March 31, 2019, and is automatically extended for
one
-year periods unless written notice is provided by CatchMark or FRC to the other party at least
120
days prior to the current expiration. The FRC Timberland Operating Agreement may be terminated by either party with mutual consent or by CatchMark with or without cause upon providing
120
days’ prior written notice.
Pursuant to the terms of the timberland operating agreement between CatchMark and AFM (the "AFM Timberland Operating Agreement"), AFM manages and operates certain of CatchMark's timberlands and related timber operations, including ensuring delivery of timber to customers. In consideration for rendering the services described in the AFM Timberland Operating Agreement, CatchMark pays AFM (i) a monthly management fee based on the actual acreage that AFM manages, which is payable monthly in advance, and (ii) an incentive fee based on revenues generated by the timber operations, which is payable quarterly in arrears. The AFM Timberland Operating Agreement is effective through November 30, 2019, and is automatically extended for
one
-year periods unless written notice is provided by CatchMark or AFM to the other party at least
120
days prior to the current expiration. The AFM Timberland Operating Agreement may be terminated by either party with mutual consent or by CatchMark with or without cause upon providing
120
days’ prior written notice.
Litigation
From time to time, CatchMark may be a party to legal proceedings, claims, and administrative proceedings that arise in the ordinary course of its business. Management makes assumptions and estimates concerning the likelihood and amount of any reasonably possible loss relating to these matters using the latest information available. CatchMark records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, CatchMark accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, CatchMark accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, CatchMark discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, CatchMark discloses the nature and estimate of the possible loss of the litigation. CatchMark does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote.
CatchMark is
no
t currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on the results of operations or financial condition of CatchMark. CatchMark is not aware of any legal proceedings contemplated by governmental authorities.
8. Stockholders' Equity
Equity Offering
On June 2, 2017, CatchMark filed a shelf registration statement on Form S-3 (File No. 333-218466) with the SEC (the "Shelf Registration Statement"), which was declared effective by the SEC on June 16, 2017. The Shelf Registration Statement provides CatchMark with future flexibility to offer, from time to time and in one or more offerings, debt securities, common stock, preferred stock, depositary shares, warrants, or any combination thereof. The terms of any such future offerings are established at the time of an offering. In March 2018, under the Shelf Registration Statement, CatchMark issued
5.75 million
shares of its Class A common stock ("common stock") at a price of
$12.60
per share (the "2018 Equity Offering"). After deducting
$3.5 million
in underwriting commissions and fees and other issuance costs, CatchMark received net proceeds of
$69.0 million
from the 2018 Equity Offering. CatchMark used the net proceeds from the 2018 Equity Offering to pay down a portion of its outstanding debt.
9. Stock-based Compensation
Stock-based Compensation - Independent Directors
On June 25, 2018, CatchMark issued a total of
23,736
shares of common stock to its
six
independent directors,
4,154
shares of which were repurchased for estimated income tax payments. CatchMark recognized approximately
$0.3
million of fair value of the awards in general and administrative expenses for the nine months ended
September 30, 2018
.
Stock-based Compensation - Employees
During the three months ended September 30, 2018, CatchMark issued
11,361
shares of service-based restricted stock grants to certain non-executive employees.
A rollforward of CatchMark's unvested, service-based restricted stock awards to employees for the
nine months ended
September 30, 2018
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Underlying Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 31, 2017
|
278,633
|
|
|
$
|
11.05
|
|
Granted
|
84,361
|
|
|
$
|
12.85
|
|
Vested
|
(153,967
|
)
|
|
$
|
11.41
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
Unvested at September 30, 2018
|
209,027
|
|
|
$
|
11.51
|
|
Stock-based Compensation Expense
A summary of CatchMark's stock-based compensation expense for the three months and
nine months ended
September 30, 2018
and
2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
Stock-based Compensation Expense classified as:
|
2018
|
|
2017
|
|
2018
|
|
2017
|
General and administrative expenses
|
$
|
587
|
|
|
$
|
447
|
|
|
$
|
1,861
|
|
|
$
|
1,450
|
|
Forestry management expenses
|
23
|
|
|
240
|
|
|
310
|
|
|
575
|
|
Total
|
$
|
610
|
|
|
$
|
687
|
|
|
$
|
2,171
|
|
|
$
|
2,025
|
|
As of
September 30, 2018
, approximately
$2.7 million
of unrecognized compensation expense related to non-vested restricted stock and restricted stock units remained and will be recognized over a weighted-average period of
2.2
years.
10. Subsequent Event
Dividend Declaration
On November 1, 2018, CatchMark declared a cash dividend of
$0.135
per share for its common stockholders of record on November 30, 2018, payable on December 13, 2018.