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MERGER WITH POPE RESOURCES | 9 Months Ended
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Sep. 30, 2020
Business Combinations [Abstract] |
MERGER WITH POPE RESOURCES | MERGER WITH POPE RESOURCES On May 8, 2020, Rayonier Inc. and Rayonier, L.P. acquired Pope Resources in connection with the Mergers. Pope Resources was a master limited partnership that primarily owned and managed timberlands in the U.S. Pacific Northwest. Pope Resources also managed and co-invested in three private equity timber funds and developed and sold real estate properties. The merger added approximately 124,000 acres of high-quality, predominantly Douglas-fir timberlands to our Pacific Northwest timberland portfolio as well as a private equity timber fund business with three funds comprising approximately 141,000 acres. Additionally, we believe the Mergers augmented our higher-and-better-use real estate pipeline with rural and conservation land sale opportunities and high-potential improved development projects in the West Puget Sound area. Under the merger agreement, each outstanding unit representing limited partnership interests of Pope Resources was, at the option of its holder, exchanged for either: • 3.929 shares of Rayonier Inc. common stock • 3.929 units representing limited partnership interests of Rayonier, L.P. • $125.00 in cash Holders of Pope Resources units who did not make a valid election received shares of Rayonier common stock. The elections were subject to proration to ensure that the aggregate amount of Rayonier shares and Rayonier, L.P. units, on the one hand, and cash, on the other hand, issued in the merger equaled the amounts issued as if every Pope Resources unit converted into merger consideration received 2.751 shares of Rayonier common stock or Rayonier, L.P. units and $37.50 in cash. Upon consummation of the merger, all outstanding Pope Resources restricted units were converted into equivalent equity awards with respect to Rayonier common shares. Pope Resources directors and some executive employees of Pope Resources held restricted Pope Resources units that were subject to accelerated vesting in connection with the merger. Since a portion of these Pope Resources units relate to services rendered to Pope Resources prior to the merger, a portion of the replacement Rayonier restricted stock awards’ fair value is included in the consideration transferred. See additional details about the replacement restricted stock awards in Note 18 — Incentive Stock Plans. The following table summarizes the total consideration transferred by Rayonier in the merger (dollars in thousands, except per share and per unit data):
Cash consideration: |  |
Pope Resources units outstanding as of May 8, 2020 | 4,366,636 |  |
Less: Pope Resources units held by us | (114,400) |  |
Units outstanding, net | 4,252,236 |  |
Cash consideration (per Pope Resources unit) | $37.50 |  |
Cash consideration for elections |  | $159,463 |
General partner interest |  | 10,000 |
Repayment of Pope Resources debt |  | 65,943 |
Prepayment penalty and accrued interest on Pope Resources’ debt |  | 2,275 |
Closing costs paid on behalf of Pope Resources |  | 9,637 |
Cash consideration transferred |  | $247,318 |
Equity consideration: |  |
Rayonier common shares issued | 7,181,071 |  |
Rayonier share price (a) | $24.01 |  |
Equity consideration for elections |  | $172,418 |
Pope Resources replacement awards (b)(c) |  | 222 |
Equity consideration transferred |  | $172,640 |
Redeemable Common Unit consideration: |  |
Redeemable Common Units issued | 4,446,153 |  |
Rayonier share price (a) | $24.01 |  |
Redeemable Common Unit consideration transferred |  | $106,752 |
Fair value of Pope Resources units held by us (d) |  | $11,211 |
Total consideration |  | $537,921 |
(a)The closing price of Rayonier common stock on the NYSE on May 7, 2020. (b)See Note 18 — Incentive Stock Plans for additional details. (c)Represents the fair value of Rayonier replacement restricted stock awards for restricted Pope Resources units held by employees that relate to pre-merger services rendered to Pope Resources. (d)Based on the closing price of Pope Resources units on the NASDAQ on May 7, 2020. The following table contains the amounts of cash transferred in the merger and net cash consideration shown in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2020:
| September 30, 2020
Cash consideration transferred | $247,318 |
Less: Cash assumed in merger | (16,250) |
Net cash consideration shown in the Consolidated Statements of Cash Flows | $231,068 |
We recognized approximately $2.5 million, $13.5 million, and $0.4 million of merger-related costs that were expensed during the first, second and third quarters of 2020, respectively. See Note 20 — Charges for Integration and Restructuring for descriptions of the components of merger-related costs. The acquisition of Pope Resources has been accounted for as a business combination under ASC 805, Business Combinations, (“ASC 805”). Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date. Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Pope Resources is preliminary and will be completed as soon as practicable, but no later than one year after the consummation of the transaction. Pursuant to ASC 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional amount adjustments during the reporting period in which the adjustments are determined. We will also be required to record, in the same period's financial statements, the effect on earnings of changes in depletion, depreciation, amortization, or other income effects, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Our consolidated financial statements as of and for the nine months ended September 30, 2020, include results of operations for Pope Resources from May 8, 2020 through September 30, 2020. The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Those estimates and assumptions are subject to change as we obtain additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date). The most significant open items necessary to complete are related to timberlands, property, plant and equipment, higher and better use timberlands and real estate development investments, long-term debt instruments, environmental liabilities, intangible assets and tax related matters. The preliminary fair value estimates were generally based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in ASC 820, Fair Value Measurement, (“ASC 820”) with the exception of certain long-term debt instruments assumed in the merger that can be valued using observable market inputs and are therefore Level 2 measurements. See Note 16 — Fair Value Measurements for further information on the fair value hierarchy. The following summarizes the fair value methodology utilized in our preliminary fair value estimates for significant assets and liabilities: Income Approach — Estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flows are discounted at rates of return that reflect the relative risk of achieving the cash flows and the time value of money. This approach was primarily used to value acquired timberlands in both our Pacific Northwest and Timber Funds segment. Cost Approach — Estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. This approach was primarily used for property and equipment. Market Approach — Estimates fair value for an asset based on values of recent comparable transactions. This approach was primarily used to value higher and better use timberlands and real estate developments investments, certain land and building assets and long-term debt instruments. The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary estimates of fair value as of May 8, 2020, and is as follows (in thousands):
| Core Timberlands |  | Timber Funds |  | Total
Timberland and Real Estate Business |  |  |  |  |
Cash | $7,380 |  |  | $8,870 |  |  | $16,250 |
Accounts receivable | 2,265 |  |  | 1,794 |  |  | 4,059 |
Other current assets | 651 |  |  | 499 |  |  | 1,150 |
Timber and Timberlands | 515,541 |  |  | 471,900 |  |  | 987,441 |
Higher and Better Use Timberlands and Real Estate Development Investments | 27,722 |  |  | — |  |  | 27,722 |
Property, plant and equipment | 8,307 |  |  | — |  |  | 8,307 |
Other assets | 4,297 |  |  | — |  |  | 4,297 |
Total identifiable assets acquired | $566,163 |  |  | $483,063 |  |  | $1,049,226 |
Accounts payable | 274 |  |  | 293 |  |  | 567 |
Current maturities of long-term debt | — |  |  | 25,084 |  |  | 25,084 |
Accrued interest | 244 |  |  | 275 |  |  | 519 |
Other current liabilities | 7,203 |  |  | 1,940 |  |  | 9,143 |
Long-term debt | 53,502 |  |  | 35,759 |  |  | 89,261 |
Long-term environmental liabilities | 11,000 |  |  | — |  |  | 11,000 |
Other non-current liabilities (a) | 4,051 |  |  | — |  |  | 4,051 |
Total liabilities assumed | $76,274 |  |  | $63,351 |  |  | $139,625 |
Net identifiable assets | $489,889 |  |  | $419,712 |  |  | $909,601 |
Less: noncontrolling interest | (3,307) |  |  | (368,373) |  |  | (371,680) |
Total net assets acquired | $486,582 |  |  | $51,339 |  |  | $537,921 |
(a)Other non-current liabilities includes a $4.0 million deferred income tax liability resulting from the preliminary fair value adjustment to Pope Resources’ assets and liabilities. These estimated fair values are preliminary in nature and subject to adjustments, which could be material. We have not identified any material unrecorded pre-merger contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Our valuations will be finalized when certain information arranged to be obtained has been received and our review of that information has been completed. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation. In September 2020, fires in Oregon burned approximately 6,700 acres of land owned by ORM Timber Fund II, which we manage and in which we hold a 20% ownership interest, and approximately 400 acres of land owned by ORM Timber Fund IV, which we manage and in which we hold a 15% ownership interest. As a result, we wrote off $8.8 million and $0.4 million of non-salvageable timber basis in Timber Fund II and Timber Fund IV, of which $1.8 million and $0.1 million was attributable to Rayonier, respectively. The amounts of these write-offs are based on preliminary fair value estimates of the underlying basis in the respective Funds’ timberlands and are subject to adjustments, which could be material. Once the purchase price allocation is finalized, the amounts of the write-offs will more than likely change. The amount of revenue of Pope Resources included in our Consolidated Statements of Income and Comprehensive Income from the date of the merger to September 30, 2020 is approximately $28.8 million. The net income effect resulting from the merger with Pope Resources for the three and nine months ended September 30, 2020 is impracticable to determine, as we immediately integrated Pope Resources into our ongoing operations. Pursuant to ASC 805, unaudited supplemental pro forma results of operations for the three and nine months ended September 30, 2020 and 2019, assuming the acquisition had occurred as of January 1, 2019, are presented below (in thousands, except per share and unit amounts):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Sales | $198,975 |  |  | $184,300 |  |  | $684,900 |  |  | $613,800 |
Net income (loss) attributable to Rayonier Inc. | ($342) |  |  | ($7,975) |  |  | $28,317 |  |  | $25,722 |
Basic earnings (loss) per share attributable to Rayonier Inc. | — |  |  | ($0.06) |  |  | $0.21 |  |  | $0.19 |
Diluted earnings (loss) per share attributable to Rayonier Inc. | — |  |  | ($0.06) |  |  | $0.21 |  |  | $0.19 |
Net income (loss) attributable to Rayonier, L.P. | ($353) |  |  | ($8,235) |  |  | $29,240 |  |  | $26,560 |
Basic earnings (loss) per unit attributable to Rayonier, L.P. | — |  |  | ($0.06) |  |  | $0.21 |  |  | $0.19 |
Diluted earnings (loss) per unit attributable to Rayonier, L.P. | — |  |  | ($0.06) |  |  | $0.21 |  |  | $0.19 |
The unaudited pro forma results include certain pro forma adjustments to net earnings that were directly attributable to the acquisition, assuming the acquisition had occurred on January 1, 2019, including the following: •additional depletion expense that would have been recognized relating to the basis increase in the acquired Timber and Timberlands; •adjustment to interest expense to reflect the removal of Pope Resources debt and the additional borrowings we incurred in conjunction with the acquisition; and •a reduction in expenses for the three and nine months ended September 30, 2020 of $0.4 million and $31.6 million, respectively, for acquisition-related transaction costs. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

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