CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022 (UNAUDITED)
1. Organization
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 99.76% of its Common Units, directly and indirectly through CatchMark LP Holder, LLC, a Delaware limited liability company and wholly-owned subsidiary of CatchMark Timber Trust. The remaining 0.24% 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.
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 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 and any VIE in which CatchMark is deemed the primary beneficiary. With respect to entities that are not VIEs, CatchMark's consolidated financial statements also include the accounts of any entity in which CatchMark owns a controlling financial interest and any limited partnership in which CatchMark owns a controlling general partnership interest. In determining whether a controlling interest exists, CatchMark considers, among other factors, the ownership of voting interests, protective rights, and participatory rights of the investors. All intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the audited financial statements and notes included in CatchMark’s Annual Report on Form 10-K for the year ended December 31, 2021.
Earnings Per Share Attributable to Common Stockholders
Basic earnings (loss) per common share is calculated as net income (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share equals basic earnings (loss) per common share, adjusted to reflect the dilution that would occur if all outstanding securities convertible into common shares or contracts to issue common shares were converted or exercised and the related proceeds are then used to repurchase common shares. For the three months ended March 31, 2022, CatchMark's basic weighted-average common shares were the same as the diluted weighted-average common shares, exclusive of approximately 411,000 anti-dilutive shares. These anti-dilutive shares included unvested shares of service-based restricted stock, LTIP Units, and contingently issuable securities. Vested Common Units have been excluded from the computation of earnings per common share because all income attributable to the Common Units has been recorded as noncontrolling interest and excluded from net income attributable to common stockholders. All potentially dilutive securities outstanding during the three months ended March 31, 2021 were anti-dilutive as a result of incurring net loss for the respective period.
Segment Information
CatchMark primarily engages in the acquisition, ownership, operation, management, and disposition of timberland properties located in the United States, either directly through wholly-owned subsidiaries or through equity method investments in affiliated joint ventures. CatchMark defines operating segments in accordance with ASC Topic 280, Segment Reporting, to reflect the manner in which its chief operating decision maker, the Chief Executive Officer, evaluates performance and allocates resources in managing the business. CatchMark has aggregated those operating segments into three reportable segments: Harvest, Real Estate and Investment Management. See Note 10 — Segment Information for additional information.
Recent Accounting Pronouncement
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires acquiring entities to recognize and measure contract assets and contract liabilities in a business combination. This ASU is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022. CatchMark is currently assessing the impact ASU 2021-08 will have on its consolidated financial statements.
3. Timber Assets
As of March 31, 2022 and December 31, 2021, timber and timberlands consisted of the following, respectively:
| | | | | | | | | | | | | | | | | |
| As of March 31, 2022 |
| (in thousands) | Gross | | Accumulated
Depletion or
Amortization | | Net |
| Timber | $ | 167,861 | | | $ | 4,149 | | | $ | 163,712 | |
| Timberlands | 296,159 | | | — | | | 296,159 | |
| Mainline roads | 1,055 | | | 904 | | | 151 | |
| Timber and timberlands | $ | 465,075 | | | $ | 5,053 | | | $ | 460,022 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| (in thousands) | Gross | | Accumulated
Depletion or
Amortization | | Net |
| Timber | $ | 185,449 | | | $ | 18,260 | | | $ | 167,189 | |
| Timberlands | 298,777 | | | — | | | 298,777 | |
| Mainline roads | 1,052 | | | 888 | | | 164 | |
| Timber and timberlands | $ | 485,278 | | | $ | 19,148 | | | $ | 466,130 | |
Timberland Sales
During the three months ended March 31, 2022 and 2021, CatchMark sold 3,400 and 1,800 acres of timberland for $6.1 million and $3.4 million, respectively. CatchMark's cost basis in the timberland sold was $4.0 million and $1.9 million, respectively.
Timberland sales acreage by state is listed below:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| Acres Sold In | | 2022 | | 2021 |
| Timberland Sales | | | | |
| Alabama | | 300 | | | 1,100 | |
| Georgia | | 700 | | | 700 | |
| South Carolina | | 2,400 | | | — | |
| Total | | 3,400 | | | 1,800 | |
Current Timberland Portfolio
As of March 31, 2022, CatchMark directly owned interests in 365,300 acres of timberlands in the U.S. South, 352,500 acres of which were fee-simple interests and 12,800 acres were leasehold interests. Land acreage by state is listed below:
| | | | | | | | | | | | | | | | | | | | |
| Acres by state as of March 31, 2022 | | Fee | | Lease | | Total |
| Alabama | | 65,100 | | | 1,800 | | | 66,900 | |
Georgia | | 220,200 | | | 11,000 | | | 231,200 | |
South Carolina | | 67,200 | | | — | | | 67,200 | |
| Total | | 352,500 | | | 12,800 | | | 365,300 | |
4. Unconsolidated Joint Venture
Dawsonville Bluffs Joint Venture
CatchMark formed the Dawsonville Bluffs joint venture with MPERS in 2017 with each owning a 50% membership interest. CatchMark uses the equity method of accounting to account for its investment in the Dawsonville Bluffs joint venture. During the three months ended March 31, 2022 and 2021, CatchMark recognized $0.5 million and $0.6 million of equity income, respectively, from the Dawsonville Bluffs joint venture. CatchMark received cash distributions of $0.1 million for the three months ended March 31, 2022 and did not receive any cash distribution in the prior year period. As of March 31, 2022, the carrying value of CatchMark's investment in the Dawsonville Bluffs joint venture was $1.8 million. The Dawsonville Bluffs joint venture had a mitigation bank with a book basis of $1.9 million remaining in its portfolio.
Asset Management Fees
CatchMark provides asset management services to the Dawsonville Bluffs joint venture. Under the arrangement, CatchMark oversees the day-to-day operations of the joint venture, including accounting, reporting and other administrative services, subject to certain major decisions that require partner approval. For management of the Dawsonville Bluffs joint venture, CatchMark receives a fee based on invested capital, as defined by the joint venture agreement. Additionally, CatchMark receives an incentive-based promote earned for exceeding investment hurdles.
During the quarter ended March 31, 2022, CatchMark provided transition services to the Triple T joint venture under an agreement entered in October 2021. Under the transition services agreement, which was effective September 1, 2021 through March 31, 2022, CatchMark provided such services in exchange for a one-time payment of $5.0 million received in October 2021. This service fee was recognized as asset management fee revenue on a straight-line basis over the term of the transition services agreement. As of March 31, 2022, CatchMark has earned the service fee in full and the transition services agreement has expired.
During the three months ended March 31, 2022 and 2021, CatchMark earned the following fees from its unconsolidated joint ventures:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | | 2022 | | 2021 |
| Triple T joint venture | | $ | 2,143 | | | $ | 3,112 | |
Dawsonville Bluffs joint venture (1) | | 36 | | | 6 | |
| | $ | 2,179 | | | $ | 3,118 | |
(1)Includes $31,000 of incentive-based promote earned for exceeding investment hurdles for the three months ended March 31, 2022.
5. Notes Payable and Lines of Credit
Amended Credit Agreement
As of March 31, 2022, CatchMark was party to a credit agreement dated as of December 1, 2017, as amended on August 22, 2018, June 28, 2019, February 12, 2020, May 1, 2020, August 4, 2021 and October 14, 2021 (the “Amended Credit Agreement”), with a syndicate of lenders including CoBank, which serves as the administrative agent. The Amended Credit Agreement provides for borrowing under credit facilities consisting of the following:
•a $84.7 million ten-year term loan (the “Term Loan A-1”);
•a $89.7 million nine-year term loan (the “Term Loan A-2”);
•a $68.6 million ten-year term loan (the “Term Loan A-3”);
•a $125.6 million seven-year term loan (the "Term Loan A-4");
•a $150.0 million seven-year multi-draw term credit facility (the “Multi-Draw Term Facility”); and
•a $35.0 million five-year revolving credit facility (the “Revolving Credit Facility”).
As of March 31, 2022 and December 31, 2021, CatchMark had the following debt balances outstanding:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | Current Interest Rate (1) | | Outstanding Balance as of |
| Credit Facility | | Maturity Date | | Interest Rate | | | March 31, 2022 | | December 31, 2021 |
| Term Loan A-1 | | 12/23/2024 | | LIBOR + 1.75% | | 2.21% | | $ | 84,706 | | | $ | 84,706 | |
| Term Loan A-2 | | 12/1/2026 | | LIBOR + 1.90% | | 2.36% | | 89,706 | | | 89,706 | |
| Term Loan A-4 | | 8/22/2025 | | LIBOR + 1.70% | | 2.16% | | 125,588 | | | 125,588 | |
| Total principal balance | | | | | | | | $ | 300,000 | | | $ | 300,000 | |
| Less: net unamortized deferred financing costs | | (1,630) | | | (1,753) | |
| Total | | | | | | | | $ | 298,370 | | | $ | 298,247 | |
(1) As of March 31, 2022. 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 dividends.
As of March 31, 2022, CatchMark had $253.6 million of borrowing capacity remaining under its credit facilities, consisting of $150.0 million under the Multi-Draw Term Facility, $68.6 million under Term Loan A-3, and $35.0 million under the Revolving Credit Facility.
The Multi-Draw Term Facility may be used to finance timberland acquisitions and associated expenses, to fund investment in joint ventures, to fund the repurchase of CatchMark's common stock, 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.
Through February 2023, CatchMark may reborrow under the revolver feature of Term Loan A-3 using borrowing mechanics substantially similar to those that apply to the Revolving Credit Facility with the same pricing and maturity
date as the existing Term Loan A-3. Borrowings under the revolver feature of the Term Loan A-3 may be used solely to finance acquisitions of additional real property and pay associated expenses. The Term Loan A-3 bears interest at an adjustable rate equal to a base rate plus 1.00% or a LIBOR rate plus 2.00%, and will terminate and all amounts outstanding under the facility will be due and payable on December 1, 2027.
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 August 4, 2026.
CatchMark pays the lenders an unused commitment fee on the unused portions of the Multi-Draw Term Facility, Term Loan A-3, and Revolving Credit Facility at an adjustable rate ranging from 0.15% to 0.35%, depending on the LTV ratio. For the three months ended March 31, 2022 and 2021, CatchMark recognized $0.2 million and $0.1 million of unused commitment fees as interest expense on its consolidated statements of operations, respectively.
CatchMark’s obligations under the Amended 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, these obligations are jointly and severally guaranteed by CatchMark and all of its subsidiaries pursuant to the terms of the Amended Credit Agreement. CatchMark has also agreed to guarantee certain losses caused by certain willful acts of CatchMark or its subsidiaries.
Patronage Dividends
CatchMark is eligible to receive annual patronage dividends 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 dividend on its eligible patronage loans annually since 2015. Therefore, CatchMark accrues patronage dividends it expects to receive based on historical patronage dividend rates. For the three months ended March 31, 2022 and 2021, CatchMark accrued $0.6 million and $0.9 million, respectively, as patronage dividends receivable on its consolidated balance sheets and as an offset against interest expense on the consolidated statements of operations.
In March 2022, CatchMark received patronage dividends of $3.6 million on its patronage eligible borrowings. Of the total patronage dividends received, $3.1 million was received in cash and $0.5 million was received in equity of the Patronage Banks.
As of March 31, 2022 and December 31, 2021, the following balances related to the patronage dividend program were included on CatchMark's consolidated balance sheets:
| | | | | | | | | | | | | | |
| (in thousands) | | As of |
| Patronage dividends classified as: | | March 31, 2022 | | December 31, 2021 |
| Accounts receivable | | $ | 629 | | | $ | 3,392 | |
Prepaid expenses and other assets (1) | | 4,774 | | | 4,311 | |
| Total | | $ | 5,403 | | | $ | 7,703 | |
(1)Represents cumulative patronage dividends received as equity in the Patronage Banks.
Debt Covenants
The Amended Credit Agreement contains, among others, the following financial covenants, which:
•limit the LTV ratio to no greater than 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 no greater than 1% of the value of the timberlands during any fiscal year.
The Amended Credit Agreement permits CatchMark to declare, set aside funds for, or pay dividends, distributions, or other payments to stockholders so long as it is not in default under the Amended Credit Agreement. However, if CatchMark has suffered a bankruptcy event or a change of control, the Amended Credit agreement prohibits CatchMark from declaring, setting aside, or paying any dividend, distribution, or other payment other than as required to maintain its REIT qualification. The Amended Credit Agreement also subjects CatchMark to mandatory prepayment from proceeds generated from dispositions of timberlands or lease terminations, which may have the effect of limiting its ability to make distributions to stockholders under certain circumstances.
CatchMark was in compliance with the financial covenants of the Amended Credit Agreement as of March 31, 2022.
Interest Paid and Fair Value of Outstanding Debt
During the three months ended March 31, 2022 and 2021, CatchMark made the following cash interest payments on its borrowings:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (in thousands) | 2022 | | 2021 |
| Cash paid for interest | $ | 1,600 | | | $ | 2,300 | |
Included in the interest payments for the three months ended March 31, 2022 and 2021, were unused commitment fees of $0.2 million and $0.1 million, respectively.
As of March 31, 2022 and December 31, 2021, the weighted-average interest rate on CatchMark's borrowings, after consideration of its interest rate swaps (see Note 6 — Interest Rate Swaps), was 3.80% and 3.77%, respectively. After further consideration of expected patronage dividends, CatchMark's weighted-average interest rate as of March 31, 2022 and December 31, 2021 was 2.95% and 2.92%, respectively.
As of March 31, 2022 and December 31, 2021, the fair value of CatchMark's outstanding debt approximated its book value. 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. As of March 31, 2022, CatchMark had two outstanding interest rate swaps with terms below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollar amounts in thousands) | | | | | | | | Notional Amount |
| Interest Rate Swap | | Effective Date | | Maturity Date | | Pay Rate | | Receive Rate | |
2019 Swap - 10YR | | 11/29/2019 | | 11/30/2029 | | 2.2067% | | one-month LIBOR | | $ | 200,000 | |
2019 Swap - 7YR | | 11/29/2019 | | 11/30/2026 | | 2.0830% | | one-month LIBOR | | 75,000 | |
| | | | | | | | | | $ | 275,000 | |
As of March 31, 2022, CatchMark’s interest rate swaps effectively fixed the interest rate on $275.0 million of its $300.0 million variable-rate debt at 3.95%, inclusive of the applicable spread and before consideration of expected patronage dividends. The 2019 swaps contain an other-than-insignificant financing element and, accordingly, the associated cash flows are reported as financing activities in the accompanying consolidated statements of cash flows.
All of CatchMark's outstanding interest rate swaps during the three months ended March 31, 2022 and 2021 qualified 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 March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Estimated Fair Value as of |
| Instrument Type | | Balance Sheet Classification | | March 31, 2022 | | December 31, 2021 |
| Derivatives designated as hedging instruments: | | |
| Interest rate swaps | | Prepaid expenses and other assets | | $ | 2,951 | | | $ | — | |
| Interest rate swaps | | Other liabilities | | $ | — | | | $ | (14,277) | |
During the three months ended March 31, 2022 and 2021, CatchMark recognized a change in fair value of its interest rate swaps of $17.3 million and $15.7 million, as other comprehensive income, respectively.
During the three months ended March 31, 2022 and 2021, CatchMark reclassified $0.1 million and $0.3 million from accumulated other comprehensive income to interest expense related to the off-market swap value at hedge inception. These reclassifications were netted with the market value adjustment to interest rate swaps in the consolidated statements of comprehensive income.
Pursuant to the terms of its interest rate swaps, CatchMark paid $1.4 million during the three months ended March 31, 2022 and 2021, respectively. All amounts were included in interest expense in the consolidated statements of operations.
As of March 31, 2022, CatchMark estimated that approximately $1.3 million will be reclassified from accumulated other comprehensive income as an offset to interest expense over the next 12 months.
7. Commitments and Contingencies
Mahrt Timber Agreements
In connection with its acquisition of timberlands from WestRock in 2007, CatchMark entered into 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 CatchMark 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 CatchMark with a reliable customer for the wood products from its timberlands.
WestRock can terminate the Mahrt Timber Agreements prior to the expiration of the initial term if CatchMark replaces FRC as the forest manager without the prior written consent of WestRock, except pursuant to an internalization of the company's forestry management functions. CatchMark can terminate the Mahrt Timber Agreements if WestRock (i) ceases to operate the Mahrt mill for a period that exceeds 12 consecutive months, (ii) fails to purchase a specified tonnage of timber for two consecutive years, subject to certain limited exceptions or (iii) fails to make payments when due (and fails to cure within 30 days).
In addition, either party can terminate the Mahrt Timber Agreements if the other party commits a material breach (and fails to cure within 60 days) or becomes insolvent. In addition, the Mahrt Timber Agreements provide for adjustments to both parties' obligations in the event of a force majeure, which is defined to include, among other things, lightning, fires, storms, floods, infestation and other acts of God or nature.
For 2022, WestRock is required to purchase, and we are required to make available for purchase to WestRock, a minimum of 371,100 tons of timber under the Mahrt Timber Agreements. For the three months ended March 31, 2022, WestRock purchased 70,000 tons under the Mahrt Timber Agreements, which represented 8% of CatchMark's net timber sales revenue.
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, 2023, 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 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, 2022 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.
Obligations under Operating Leases
CatchMark's office lease commenced in January 2019 and expires in November 2028 and qualifies as an operating lease under ASC 842. As of January 1, 2019, CatchMark recorded an operating lease ROU asset and an operating lease liability of $3.4 million on its balance sheet, which represents the net present value of lease payments over the lease term discounted using CatchMark's incremental borrowing rate at commencement date. CatchMark’s office lease contains renewal options; however, the options were not included in the calculation of the operating lease ROU asset and operating lease liability as it is not reasonably certain that CatchMark will exercise the renewal options. CatchMark recorded $110,400 and $110,400 of operating lease expense for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, CatchMark paid $108,000 and $105,000, respectively, in cash for its office lease, which was included in operating cash flows on its consolidated statements of cash flows.
CatchMark had the following future annual payments for its operating lease as of March 31, 2022:
| | | | | |
| (dollar amounts in thousands) | Required Payments |
| Required payments | |
| 2022 | $ | 318 | |
| 2023 | 435 | |
| 2024 | 447 | |
| 2025 | 459 | |
| 2026 | 472 | |
| Thereafter | 942 | |
| $ | 3,073 | |
| Less: imputed interest | (441) | |
| Operating lease liability | $ | 2,632 | |
| |
| Remaining lease term (years) | 6.7 |
| Discount rate | 4.58 | % |
CatchMark holds leasehold interests in 12,800 acres of timberlands under a long-term lease that expires in May 2022 (the “LTC Lease”). The LTC Lease provides CatchMark access rights to harvest timber as specified in the LTC Lease, which is, therefore, a lease of biological assets, and is excluded from the scope of ASC 842.
As of March 31, 2022, CatchMark had $242,000 of remaining future lease payments under its LTC Lease.
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 not 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.
8. Noncontrolling Interests
CatchMark Timber Trust is the general partner of CatchMark Timber OP and owns 99.76% of its Common Units directly and indirectly. The remaining 0.24% of the Common Units are owned by current and former officers and directors of CatchMark (the "Limited Partners").
CatchMark Timber OP issues LTIP Units to certain officers, directors, and employees of CatchMark. LTIP Units are a class of units structured to qualify as “profits interests” for federal income tax purposes that, subject to certain conditions, including vesting, are convertible by the holder into the Common Units. The LTIP Units initially have no value and are not at parity with the Common Units with respect to liquidating distributions. Regular and other non-liquidating distributions are made by CatchMark Timber OP with respect to unvested LTIP Units as provided in the applicable award agreement for such units. Upon the occurrence of specified events, the LTIP Units can over time achieve partial to full parity with the Common Units.
Vested LTIP Units that have achieved full parity with the Common Units are automatically converted into the Common Units on a one-for-one basis. Vested LTIP Units that have not achieved full parity with the Common Units may convert into the Common Units on less than a one-for-one basis based on relative capital accounts. Limited partners holding Common Units, including those converted from LTIP Units, have the option to cause CatchMark Timber OP to redeem such units after the units have been held for one year. Unless CatchMark Timber Trust exercises its right to purchase the Common Units in exchange for shares of its common stock, CatchMark Timber OP would redeem each such unit with cash equal to the value of one share of CatchMark Timber Trust's common stock.
CatchMark recognizes noncontrolling interests associated with the Common Units held by the Limited Partners and the LTIP Units in an amount equal to the cumulative compensation cost of such units. Upon any forfeiture of the LTIP Units, the associated noncontrolling interests is reclassified to additional paid-in capital. Upon the conversion of the LTIP Units to Common Units, noncontrolling interests is adjusted so that the book value of each newly converted Common Unit equals the book value of an existing Common Unit. Noncontrolling interests is subsequently adjusted by allocations of earnings and distributions paid.
For the three months ended March 31, 2022 and 2021, CatchMark recognized $0.3 million and $0.2 million in stock-based compensation expense, respectively, related to the Common Units held by the Limited Partners and the LTIP Units as noncontrolling interests. In January 2022, as the result of forfeitures of 105,862 performance-based LTIP Units, $0.7 million of cumulative compensation costs related to such forfeited LTIP Units previously recognized as noncontrolling interests was reclassified to additional paid-in capital. During the three months ended March 31, 2022, no LTIP Units were converted to Common Units.
9. Stock-based Compensation
Long-Term Incentive Plans
On June 24, 2021, CatchMark's stockholders approved a long-term incentive plan (the "2021 Incentive Plan") at its 2021 annual meeting of stockholders. The 2021 Incentive Plan replaced CatchMark's 2017 long-term incentive plan. The 2021 Incentive Plan allows for the award of options, stock appreciation rights, restricted stock, RSUs, deferred stock units, performance awards, other stock-based awards, LTIP Units or any other right or interest relating to stock or cash to the employees, directors, and consultants of CatchMark or its affiliates. A total of 2.0 million shares of CatchMark's common stock were reserved and available for issuance pursuant to awards granted under the 2021 Incentive Plan. As of March 31, 2022, 1.2 million shares of CatchMark's common stock remained available for issuance under the 2021 Incentive Plan.
Service-based Restricted Stock Grants to Employees
On February 18, 2022, CatchMark granted 182,794 shares of service-based restricted stock to its employees and officers, which will vest in equal installments over a four-year period. The fair value of $1.5 million was determined based on the closing price of CatchMark's common stock on the grant date and is amortized evenly over the vesting period.
A rollforward of CatchMark's unvested, service-based restricted stock awards to employees for the three months ended March 31, 2022 is as follows:
| | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value | |
| Unvested at December 31, 2021 | 373,047 | | | $ | 10.62 | | |
Granted | 182,794 | | | $ | 8.02 | | |
| Vested | (130,886) | | | $ | 10.84 | | |
| Forfeited | (5,500) | | | $ | 9.49 | | |
| Unvested at March 31, 2022 | 419,455 | | | $ | 9.43 | | |
Performance-based Grants and Forfeitures
On January 20, 2022, the Compensation Committee of the CatchMark's board of directors (the "Compensation Committee") determined that performance-based grants issued pursuant to CatchMark's 2019 executives' LTIP with a performance period from January 1, 2019 through December 31, 2021 were not earned. As a result, 105,862 LTIP Units issued thereunder were forfeited and the remaining unamortized cost of $144,000 associated with these grants was expensed in the first quarter of 2022.
On March 2, 2022, CatchMark granted 358,454 shares of performance-based LTIP Units to its executive officers and 232,222 shares of performance-based restricted stock to its executive officers and eligible officers (the "2022 Performance-based Grant"). The issuance represents the maximum number of LTIP Units or shares of restricted stock that could be earned based on the relative performance of CatchMark's TSR against pre-established benchmarks over a three-year performance period from January 1, 2022 to December 31, 2024. The Compensation Committee will determine the earned awards after the end of the performance period, and the earned awards will vest in two equal installments in the first quarter of 2025 and 2026. The total compensation cost of the 2022 Performance-based Grant was $2.1 million and will be amortized over a weighted-vesting period of 3.4 years. The fair value of each LTIP Unit and share of restricted stock was calculated using Monte-Carlo simulation with the following assumptions:
| | | | | |
| Grant date CTT closing price (March 2, 2022) | $ | 7.89 | |
| Weighted-average fair value per granted LTIP Unit/share | $ | 3.62 | |
| Assumptions: | |
| Volatility | 43.15 | % |
| Expected term (years) | 3.0 |
| Risk-free interest rate | 1.65 | % |
A rollforward of CatchMark's unvested, performance-based LTIP Units grants for the three months ended March 31, 2022 is as follows:
| | | | | | | | | | | | |
| | Number of Units | | Weighted-Average Grant Date Fair Value | |
| Unvested at December 31, 2021 | 505,908 | | | $ | 6.52 | | |
Granted | 358,454 | | | $ | 3.62 | | |
| Vested | — | | | $ | — | | |
| Forfeited | (105,862) | | | $ | 8.13 | | |
| Unvested at March 31, 2022 | 758,500 | | | $ | 4.92 | | |
A rollforward of CatchMark's unvested, performance-based restricted stock grants for the three months ended March 31, 2022 is as follows:
| | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value | |
| Unvested at December 31, 2021 | 67,769 | | | $ | 6.14 | | |
Granted | 232,222 | | | $ | 3.62 | | |
| Vested | — | | | $ | — | | |
| Forfeited | — | | | $ | — | | |
| Unvested at March 31, 2022 | 299,991 | | | $ | 4.19 | | |
Stock-based Compensation Expense
A summary of CatchMark's stock-based compensation expense for the three months ended March 31, 2022 and 2021 is presented below:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | | 2022 | | 2021 |
| General and administrative expenses | | $ | 680 | | | $ | 512 | |
| Forestry management expenses | | 171 | | | 107 | |
Total (1) | | $ | 851 | | | $ | 619 | |
(1)The three months ended March 31, 2022 and 2021 includes $0.3 million and $0.2 million of stock-based compensation recognized as noncontrolling interest, respectively.
As of March 31, 2022, approximately $7.3 million of compensation expense related to unvested restricted stock and LTIP Units remained to be recognized over a weighted-average period of 2.8 years.
10. Segment Information
As of March 31, 2022, CatchMark had the following reportable segments: Harvest, Real Estate and Investment Management. Harvest includes wholly-owned timber assets and associated timber sales, other revenues and related expenses. Real Estate includes timberland sales, cost of timberland sales and large dispositions. Investment Management includes investment 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. Asset information and capital expenditures by segment are not reported because CatchMark does not use these measures to assess performance. CatchMark’s investments in unconsolidated joint ventures are reported separately on the accompanying consolidated balance sheets. During the periods presented, there have been no material intersegment transactions.
The following table presents revenues by reportable segment:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (in thousands) | 2022 | | 2021 |
| Harvest | $ | 18,693 | | | $ | 21,211 | |
| Real Estate | 6,070 | | | 3,357 | |
| Investment Management | 2,179 | | | 3,118 | |
| Total | $ | 26,942 | | | $ | 27,686 | |
Adjusted EBITDA is the primary performance measure reviewed by management to assess operating performance. The following table presents Adjusted EBITDA by reportable segment:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (in thousands) | 2022 | | 2021 |
| Harvest | $ | 9,611 | | | $ | 8,927 | |
| Real Estate | 5,752 | | | 3,144 | |
| Investment Management | 2,733 | | | 3,820 | |
| Corporate | (3,250) | | | (2,954) | |
| Total | $ | 14,846 | | | $ | 12,937 | |
A reconciliation of Adjusted EBITDA to GAAP net income (loss) is presented below: | | | | | | | | | | | |
| Three Months Ended March 31, |
| (in thousands) | 2022 | | 2021 |
| Adjusted EBITDA | $ | 14,846 | | | $ | 12,937 | |
| Subtract: | | | |
| Depletion | 4,149 | | | 7,725 | |
Interest expense (1) | 2,111 | | | 2,342 | |
Amortization (1) | 423 | | | 633 | |
Depletion, amortization, and basis of timberland and mitigation credits sold included in income from unconsolidated joint venture (2) | 64 | | | 88 | |
Basis of timberland sold, lease terminations and other (3) | 4,040 | | | 1,966 | |
| Stock-based compensation expense | 851 | | | 619 | |
Post-employment benefits (4) | 8 | | | 16 | |
Other (5) | 16 | | | 99 | |
| Net income (loss) | $ | 3,184 | | | $ | (551) | |
(1)For the purpose of the above reconciliation, amortization includes amortization of deferred financing costs, amortization of operating lease assets and liabilities, amortization of intangible lease assets, and amortization of mainline road costs, which are included in either interest expense, land rent expense, or other operating expenses in the accompanying consolidated statements of operations.
(2)Reflects our share of depletion, amortization, and basis of timberland and mitigation credits sold of the unconsolidated Dawsonville Bluffs joint venture.
(3)Includes non-cash basis of timber and timberland assets written-off related to timberland sold, terminations of timberland leases and casualty losses.
(4)Reflects one-time, non-recurring post-employment benefits associated with the retirement of our former CEO, including severance pay, payroll taxes, professional fees, and accrued dividend equivalents paid in installments over agreed-upon periods of time.
(5)Includes certain cash expenses paid, or reimbursement received, that management believes do not directly reflect the core business operations of our timberland portfolio on an on-going basis, including costs required to be expensed by GAAP related to acquisitions, transactions, joint ventures or new business initiatives.
11. Subsequent Event
Dividend Declaration
On May 5, 2022, CatchMark declared a cash dividend of $0.075 per share for its common stockholders of record on May 31, 2022, payable on June 15, 2022.