| RAYONIER INC Item 1A RISK FACTORS Our operations are subject to a number of risks, including those listed below |
| When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in this report |
| If any of the following risks actually occur, our business, financial condition or operating results as well as the market price of our securities could be materially adversely affected |
| Business and Operating Risks The cyclical nature of our businesses could adversely affect our results of operations |
| Our financial performance is affected by the cyclical nature of the forest products and real estate industries |
| The markets for timber, real estate, cellulose specialties products and wood products are influenced by a variety of factors beyond our control |
| For example, the demand for real estate can be affected by changes in interest rates, local economic conditions and population growth and demographics; the demand for saw timber is primarily affected by the level of new residential and commercial construction activity, while supply of timber and logs has historically increased during favorable pricing environments |
| The global reach of our business, particularly our Performance Fibers business and our interest in the JV, causes us to be subject to unexpected, uncontrollable and rapidly changing events and circumstances in addition to those experienced in the US Adverse changes in the following factors, among others, could have a negative impact on our business and results of operations: • effects of exposure to currency other than the United States dollar; • regulatory, social, political, labor or economic conditions in a specific country or region; and • trade protection laws, policies and measures and other regulatory requirements affecting trade and investment, including loss or modification of exemptions for taxes and tariffs, and import and export licensing requirements |
| The forest products and real estate industries are highly competitive |
| Many of our competitors in the forest products businesses have substantially greater financial and operating resources and own more timberlands than we do |
| Some of our forest products competitors may also be lower-cost producers in some of the businesses in which we operate |
| In addition, wood products are subject to significant competition from a variety of non-wood and engineered wood products |
| We are also subject to competition from forest products, including logs, imported from foreign sources to the United States as well as to the export markets served by us |
| To the extent there is a significant increase in competitive pressures from substitute products or other domestic or foreign suppliers, our business could be substantially adversely affected |
| With respect to our real estate business, we are currently transitioning from a bulk land seller to obtaining entitlements and initiating improvements through partnerships with other developers |
| As a result, many of our competitors in this segment have greater experience in real estate development than we do |
| Changes in energy and raw materials prices could impact our operating results and financial condition |
| Energy and raw material costs, such as oil, natural gas, wood, and chemicals are a significant operating expense, particularly for our Performance Fibers and Wood Products businesses |
| The prices of raw materials and energy can be volatile and are susceptible to rapid and substantial increases due to factors beyond our control such as changing economic conditions, political unrest and instability in energy-producing nations, and supply and demand considerations |
| For example, oil and natural gas costs have increased substantially in recent years and we have recently experienced, at times, a limited availability of hardwood which has resulted in increased production costs for some Performance Fibers products |
| Increases in production costs could have a material adverse effect on our business, financial condition and results of operations |
| Our businesses are subject to extensive environmental laws and regulations that may restrict or adversely impact our ability to conduct our business |
| If regulatory and environmental permits are delayed, restricted or rejected, a variety of operations on our timberlands could be delayed or restricted |
| In connection with a variety of operations on our properties, we are required to seek 7 ______________________________________________________________________ [46]Table of Contents permission from agencies in the states and countries in which we operate to perform certain activities |
| Any delay associated with a filing could result in a delay or restriction in replanting, thinning, insect control, fire control or harvesting, any of which could have an adverse effect on our operating results |
| For example, in Washington State, we are required to file a Forest Practice Application for each unit of timberland to be harvested |
| These applications may be denied or restricted by the regulatory agency or appealed by other parties, including citizen groups |
| Appeals or actions of the regulatory agencies could delay or restrict timber harvest activities pursuant to these permits |
| Delays or harvest restrictions on a significant number of applications could have an adverse effect on our operating results |
| In addition, many of our capital projects require various environmental permits |
| Delays in obtaining these permits could have an adverse effect on our results of operations |
| Environmental groups and interested individuals may seek to delay or prevent a variety of operations on our timberlands |
| We expect that environmental groups and interested individuals will intervene with increasing frequency in the regulatory processes in the states and countries where we own, lease or manage timberlands |
| In Washington State, environmental groups and interested individuals may appeal individual forest practice applications or file petitions with the Forest Practices Board to challenge the regulations under which forest practices are approved |
| These and other challenges could materially delay or prevent operations on our properties |
| Delays or restrictions due to the intervention of environmental groups or interested individuals could adversely affect our operating results |
| In addition to intervention in regulatory proceedings, interested groups and individuals may file or threaten to file lawsuits that seek to prevent us from implementing our operating plans |
| Any lawsuit or even a threatened lawsuit could delay harvesting on our timberlands |
| Among the remedies that could be enforced in a lawsuit is a judgment entirely preventing or restricting harvesting on a portion of our timberlands |
| The impact of existing regulatory restrictions on future harvesting activities may be underestimated |
| Federal, state and local laws and regulations, as well as those of other countries, which are intended to protect threatened and endangered species, as well as waterways and wetlands, limit and may prevent timber harvesting, road building and other activities on our timberlands |
| The threatened and endangered species restrictions apply to activities that would adversely impact a protected species or significantly degrade its habitat |
| The size of the area subject to restriction will vary depending on the protected species at issue, the time of year and other factors, but can range from less than one to several thousand acres |
| A number of species that naturally live on or near our timberlands, including the northern spotted owl, marbled murrelet, bald eagle, several species of salmon and trout in the Northwest, and the red cockaded woodpecker, bald eagle, wood stork, red hill salamander, and flatwoods salamander in the Southeast, are protected under the Federal Endangered Species Act or similar state laws |
| As we gain additional information regarding the presence of threatened or endangered species on our timberlands, or if regulations become more restrictive, the amount of our timberlands subject to harvest restrictions could increase |
| Our manufacturing operations, and in particular our Performance Fibers and Wood Products mills, are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharge, water usage and waste handling and disposal |
| Many of our operations are subject to stringent environmental laws and regulations and permits which contain conditions that govern how we operate our facilities and, in many cases, how much product we can produce |
| These laws, regulations and permits, now and in the future, may restrict our current production and limit our ability to increase production, and impose significant costs on our operations with respect to environmental compliance |
| It is expected that, overall, these costs will likely increase over time as environmental laws, regulations and permit conditions become more stringent |
| We currently own or may acquire properties which may require environmental remediation or otherwise be subject to environmental and other liabilities |
| We currently own, or formerly operated, manufacturing facilities and discontinued operations, or may acquire timberlands and other properties, which are subject to environmental liabilities, such as cleanup of hazardous material contamination and other existing or potential liabilities of which we are not currently aware |
| While timberlands without any prior history of industrial development do not generally carry as high a risk of environmental contamination as current and former manufacturing operations, the cost of investigation and remediation of contaminated properties could increase operating costs and adversely affect financial results |
| Although we believe we have adequate reserves for the investigation and remediation of our current properties, there can be no assurance that actual expenditures will not exceed our expectations |
| Environmental laws and regulations are constantly changing, and are generally becoming more restrictive |
| Laws, regulations and related judicial decisions and administrative interpretations affecting our business are subject to change and new laws and regulations that may affect our business are frequently enacted |
| These changes may adversely affect our ability to harvest and sell timber, operate our manufacturing facilities and/or develop real estate |
| These laws and regulations may relate to, among other things, the protection of timberlands, endangered species, timber harvesting 8 ______________________________________________________________________ [47]Table of Contents practices, recreation and aesthetics, air and water quality, and remedial standards for contaminated property and groundwater |
| Over time, the complexity and stringency of these laws and regulations have increased markedly and the enforcement of these laws and regulations has intensified |
| We believe that these laws and regulations will continue to become more restrictive and over time could adversely affect our operating results |
| Development of real estate entails a lengthy, uncertain and costly approval process |
| Development of real estate entails an extensive approval process involving overlapping regulatory jurisdictions |
| For example, in Florida, real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (the “Growth Management Act”) and local land use and development regulations |
| In addition, in Florida, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact (DRI) application |
| Compliance with the Growth Management Act, local land development regulations and the DRI process is usually lengthy and costly and significant conditions can be imposed on a developer with respect to a particular project |
| Any of these issues can be expected to materially affect the cost and timing of our real estate development activities |
| Other issues affecting real estate development include the availability of potable water for new development projects |
| For example, in Georgia, the Legislature recently enacted the Comprehensive Statewide Watershed Management Planning Act (the “Watershed Management Act”), which, among other things, created a governmental entity called the Georgia Water Council which is charged with preparing a comprehensive water management plan for the state and presenting it to the Georgia Legislature for adoption no later than 2008 |
| It is unclear at this time what this plan will provide or how it will affect the cost and timing of real estate development along the I-95 “coastal corridor” in southern Georgia, where the Company has significant real estate holdings |
| Changes in the interpretation or enforcement of these laws, the enactment of new laws regarding the use and development of real estate, or the identification of new facts regarding our properties could lead to new or greater costs, delays and liabilities that could materially adversely affect our business, profitability or financial condition |
| Changes in demand for our real estate and delays in the timing of real estate transactions may affect our revenues and operating results |
| A number of factors, including changes in demographics, a slowing of commercial or residential real estate development, particularly along the I-95 “coastal corridor” in Florida and Georgia, could reduce the demand for such properties and negatively affect our results of operations |
| In addition, there are inherent uncertainties in the timing of real estate transactions that could adversely affect our operating results |
| Delays in the completion of transactions or the termination of potential transactions can be caused by factors beyond our control |
| These events have in the past and may in the future adversely affect our operating results |
| Our joint venture partners may have interests that differ from ours and may take actions that adversely affect us |
| We participate in a joint venture in New Zealand, and may enter into other joint venture projects; for example, as part of our real estate development strategy |
| A joint venture involves special risks such as: • not having voting control over the joint venture; • the venture partner at any time may have economic or business interests or goals that are inconsistent with ours; • the venture partner may take actions contrary to our instructions or requests, or contrary to our policies or objectives with respect to the investment; and • the venture partner could experience financial difficulties |
| Actions by our venture partners may subject property owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement or have other adverse consequences |
| We may be unsuccessful in carrying out our acquisition strategy |
| We intend to pursue acquisitions of strategic timberland and real estate properties |
| Our timberland and real estate acquisitions may not perform in accordance with our expectations |
| We anticipate financing any such acquisitions through cash from operations, borrowings under our credit facilities, proceeds from equity or debt offerings or proceeds from asset dispositions, or any combination thereof |
| Our inability to finance acquisitions on favorable terms or the failure of any acquisitions to perform to our expectations, could adversely affect our operating results |
| 9 ______________________________________________________________________ [48]Table of Contents Our failure to maintain satisfactory labor relations could have a material adverse effect on our business |
| Approximately 45 percent of our work force is unionized |
| These workers are almost exclusively in our Performance Fibers business |
| As a result, we are required to negotiate the wages, benefits and other terms with many of our employees collectively |
| Our financial results could be adversely affected if labor negotiations were to restrict the efficiency of our operations |
| Our inability to negotiate acceptable contracts with any of these unions as existing agreements expire could result in strikes or work stoppages by the affected workers |
| If the unionized employees were to engage in a strike or other work stoppage, or other employees were to become unionized, we could experience a significant disruption of our operations, which could have a material adverse effect on our business, results of operations and financial condition |
| We have a significant amount of debt and the capacity to incur significant additional debt |
| As of December 31, 2005, we had dlra559 million of debt outstanding |
| See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Financial Obligations and Off-Balance Sheet Arrangements for the payment schedule of our long-term debt obligations |
| We expect that existing cash, cash equivalents, marketable securities, cash provided from operations, and our bank credit facilities will be sufficient to meet ongoing cash requirements |
| Moreover, we have the borrowing capacity to incur significant additional debt and may do so if we enter into one or more strategic, merger, acquisition or other corporate or investment opportunities, or otherwise invest capital in one or more of our businesses |
| However, failure to generate sufficient cash as our debt becomes due, or to renew credit lines prior to their expiration, may adversely affect our business, financial condition, operating results, and cash flow |
| Weather and other natural conditions may limit our timber harvest and sales |
| Weather conditions, timber growth cycles and restrictions on access may limit harvesting of our timberlands, as may other factors, including damage by fire, insect infestation, disease, prolonged drought and natural disasters |
| We do not insure against losses of timber from any causes, including fire |
| The volume and value of timber that can be harvested from our timberlands may be reduced by fire, insect infestation, severe weather, disease, natural disasters, and other causes beyond our control |
| A reduction in our timber inventory could adversely affect our financial results and cash flows |
| A significant portion of the timberland that we own, lease or manage is concentrated in limited geographic areas |
| We own, lease or manage approximately 2dtta5 million acres of timberland and real estate located primarily in the United States and New Zealand |
| Approximately 1dtta6 million acres are located principally in Georgia, Florida and Alabama |
| Accordingly, if the level of production from these forests substantially declines, or if the demand for timber in those regions declines, it could have a material adverse effect on our overall production levels and our revenues |
| We are dependent upon attracting and retaining key personnel |
| We believe that our success depends, to a significant extent, upon our ability to attract and retain key senior management and operations management personnel |
| Our failure to recruit and retain these key personnel could adversely affect our financial condition or results of operations |
| Market interest rates may influence the price of our common shares |
| One of the factors that may influence the price of our common shares will be the annual dividend yield as compared to yields on other financial instruments |
| Thus, an increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the price of our common shares |
| REIT and Tax-Related Risks If we fail to qualify as a REIT or fail to remain qualified as a REIT, we will have reduced funds available for distribution to our shareholders because our income will be subject to taxation at regular corporate rates |
| We intend to operate in accordance with REIT qualifications under the Internal Revenue Code of 1986, as amended (the “Code”) |
| As a REIT, we generally will not pay corporate-level tax on income we distribute to our shareholders (other than the income of TRS) as long as we distribute at least 90 percent of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain) |
| Qualification as a REIT involves the application of highly technical and complex provisions of the Code, which are subject to change, perhaps retroactively, and which are 10 ______________________________________________________________________ [49]Table of Contents not entirely within our control |
| We cannot assure that we will qualify as a REIT or be able to remain so qualified or that new legislation, US Treasury regulations, administrative interpretations or court decisions will not significantly affect our ability to qualify as a REIT or the federal income tax consequences of such qualification |
| If in any taxable year we fail to qualify as a REIT, we will suffer the following negative results: • we will not be allowed a deduction for distributions to shareholders in computing our taxable income; and • we will be subject to federal income tax on our REIT taxable income at regular corporate rates |
| In addition, we will be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost, unless we are entitled to relief under certain provisions of the Code |
| As a result, our net income and the funds available for distribution to our shareholders could be reduced for up to five years or longer |
| If we fail to qualify as a REIT, we may need to borrow funds or liquidate some investments or assets to pay the additional tax liability |
| Accordingly, funds available for distribution to our shareholders would be reduced |
| The extent of our use of taxable REIT subsidiaries may affect the price of our common shares relative to the share price of other REITs |
| We conduct a portion of our business activities through one or more taxable REIT subsidiaries |
| Our use of taxable REIT subsidiaries enables us to engage in non-REIT qualifying business activities such as the production and sale of performance fibers and wood products, real estate development, sales and development of HBU property and timberlands (as a dealer), sales of logs and lump-sum sales of timber |
| Taxable REIT subsidiaries are corporations subject to corporate-level tax |
| Therefore, we pay income taxes on the income generated by our taxable REIT subsidiaries |
| Under the Code, no more than 20 percent of the value of the gross assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries |
| This limitation may affect our ability to increase the size of our taxable REIT subsidiaries’ operations |
| Furthermore, our use of taxable REIT subsidiaries may cause the market to value our common shares differently than the shares of other REITs, which may not use taxable REIT subsidiaries as extensively as we use them |
| Lack of shareholder ownership and transfer restrictions in our articles of incorporation may affect our ability to qualify as a REIT In order to qualify as a REIT, an entity cannot have five or fewer individuals who own, directly or indirectly after applying attribution of ownership rules, 50 percent or more of its outstanding voting shares during the last six months in each calendar year |
| Although it is not required by law or the REIT provisions of the Code, almost all REITs have adopted ownership and transfer restrictions in their articles of incorporation or organizational documents which seek to assure compliance with that rule |
| While we are not in violation of the ownership rules, we do not have, nor do we have any current plans to adopt, share ownership and transfer restrictions |
| As such, the possibility exists, however remote, that five or fewer individuals could acquire 50 percent or more of our outstanding voting shares, which could result in our disqualification as a REIT We may be limited in our ability to fund distributions using cash generated through our taxable REIT subsidiaries |
| Our ability to receive dividends from our taxable REIT subsidiaries is limited by the rules with which we must comply to maintain our status as a REIT In particular, at least 75 percent of gross income for each taxable year as a REIT must be derived from sales of our standing timber and other types of qualifying real estate income and no more than 25 percent of our gross income may consist of dividends from our taxable REIT subsidiaries and other non-qualifying income |
| This limitation on our ability to receive dividends from our taxable REIT subsidiaries may impact our ability to fund distributions to stockholders using cash flows from our taxable REIT subsidiaries |
| Despite these restrictions, we have the ability to transfer cash from our taxable REIT subsidiaries to our REIT through intercompany real estate sales |
| However, these transactions would be subject to federal income tax |
| The net income of our taxable REIT subsidiaries is not required to be distributed to us, and income that is not distributed will not be subject to the 90 percent income distribution requirement |
| Certain of our business activities are potentially subject to prohibited transactions tax |
| As a REIT, we will be subject to a 100 percent tax on any net income from “prohibited transactions |
| ” In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business |
| Sales of 11 ______________________________________________________________________ [50]Table of Contents performance fibers and wood products which we produce, sales of logs and lump-sum sales of timber, sales of timberlands or other real estate (as a dealer) and certain development activities relating to real estate, could, in certain circumstances, constitute prohibited transactions |
| We intend to avoid the 100 percent prohibited transactions tax by conducting activities that would otherwise be prohibited transactions through one or more taxable REIT subsidiaries |
| We may not, however, always be able to identify timberland properties that will become part of our “dealer” real estate sales business |
| Therefore, if we sell timberlands which we incorrectly identify as property not held for sale to customers in the ordinary course of business or which subsequently become properties held for sale to customers in the ordinary course of business, we face the potential of being subject to the 100 percent prohibited transactions tax |
| We will have potential deferred and contingent tax liabilities |
| We will be subject to a federal corporate-level tax at the highest regular corporate rate (currently 35 percent) on any gain recognized from a taxable sale of any asset which we held at January 1, 2004, the effective date of our REIT status election, that occurs within ten years of that date |
| However, we will be subject to such tax only to the extent of the difference between our tax basis and the fair market value of those assets as of January 1, 2004 (the “built-in-gain”) |
| Gain from a taxable sale of those assets occurring more than ten years after January 1, 2004 will not be subject to this corporate-level tax |
| In addition, the IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time we qualified as a REIT, in which case we will owe these taxes plus interest and penalties, if any |
| Moreover, any increase in taxable income for those years will result in an increase in accumulated earnings and profits, or E&P, which could cause us to pay an additional taxable distribution to our then-existing shareholders within 90 days of the relevant determination |
| Our cash dividends are not guaranteed and may fluctuate |
| Generally, REITs are required to distribute 90 percent of their taxable income |
| However, REITs are required to distribute only their ordinary taxable income and not their net capital gains income |
| Accordingly, we do not believe that we are required to distribute material amounts of cash given that substantially all of our taxable income is treated as capital gains income |
| Our Board of Directors, in its sole discretion, determines the amount of quarterly dividends to be provided to our stockholders based on consideration of a number of factors |
| These include, but are not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands including those timberland properties that have higher and better uses |
| Consequently, our dividend levels may fluctuate |
| When we sell real estate, we generally seek to match these sales with the acquisition of suitable replacement real estate |
| This allows us to claim “like-kind exchange” treatment for these transactions under section 1031 and related regulations of the Code |
| This matching of sales and purchases provides us with significant tax benefits, most importantly the deferral of any gain on the property sold until ultimate disposition of the replacement property |
| While we attempt to complete like-kind exchanges wherever practical, we will not be able to do so in all instances due to various factors, including the lack of availability of suitable replacement property on acceptable terms and inability to complete a qualifying like-kind exchange transaction within the timeframes required by the Code |
| The inability to obtain like-kind exchange treatment would result in the payment of taxes with respect to the property sold, and a corresponding reduction in earnings and cash available for distribution to shareholders as dividends |