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Index to Financial Statements

As filed with the Securities and Exchange Commission on September 23, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-11

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

CATCHMARK TIMBER TRUST, INC.

(Exact Name of Registrant as Specified in Its Governing Instruments)

 

 

6200 The Corners Parkway

Norcross, Georgia 30092

(770) 449-7800

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Brian M. Davis

Senior Vice President and Chief Financial Officer

CATCHMARK TIMBER TRUST, INC.

6200 The Corners Parkway

Norcross, Georgia 30092

(770) 449-7800

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

With a Copy to:

 

Rosemarie A. Thurston

Lesley H. Solomon

Alston & Bird LLP

1201 West Peachtree Street

Atlanta, Georgia 30309

Phone: (404) 881-7000

 

Keith M. Townsend

C. Spencer Johnson III

King & Spalding LLP

1180 Peachtree Street N.E.

Atlanta, Georgia 30309

Phone: (404) 572-4600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the Securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities to Be Registered  

Proposed
Maximum
Aggregate

Offering Price (1)(2)

 

Amount of

Registration Fee

Class A common stock, $.01 par value per share

  $172,500,000   $23,529

 

 

(1) Estimated solely for purposes of determining the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Includes shares of common stock that the underwriters have the option to purchase solely to cover over-allotments, if any.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion,

Preliminary Prospectus dated September 23, 2013

            Shares

 

LOGO

Class A Common Stock

 

 

CatchMark Timber Trust, Inc. is a real estate company investing in timberlands that has elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We primarily engage in the ownership, management, acquisition and disposition of timberlands located in the United States. Prior to the commencement of this offering, we will be self-administered and self-managed and will be led by Jerry Barag, who will be elected as our Chief Executive Officer and President, and John F. Rasor, who will be elected as our Chief Operating Officer. Upon completion of this offering, we believe that we will be the only publicly traded REIT that is engaged exclusively in timberland ownership and management, without ownership of any forest products or other manufacturing operations. As of June 30, 2013, we owned interests in approximately 282,000 acres of timberland located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia.

We are offering            shares of our Class A common stock and expect the public offering price to be between $            and $            per share. We intend to list our Class A common stock on the New York Stock Exchange, or the NYSE, under the symbol “CTT.” Since our formation in 2005, we have completed two public offerings of common stock through which we raised approximately $298.7 million of gross proceeds. Currently, our common stock is not traded on a national securities exchange, and this will be our first listed public offering.

We are a Maryland corporation, and to assist us in qualifying as a REIT, among other purposes, our charter generally limits any person from beneficially or constructively owning more than 9.8% in value of the outstanding shares of our capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Investing in our common stock involves risks. Before buying any shares, you should carefully consider the risk factors described in “ Risk Factors ” beginning on page 15 .

 

 

 

     Per
Share
     Total  

Public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to us

   $         $     

 

 

We have granted the underwriters a 30-day option to purchase up to an additional         shares of Class A common stock from us on the same terms and conditions as set forth above if the underwriters sell more than         shares of Class A common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock on or about            , 2013.

 

 

RAYMOND JAMES

The date of this prospectus is             , 2013


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Index to Financial Statements

LOGO


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Index to Financial Statements

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     15   

FORWARD-LOOKING STATEMENTS

     40   

USE OF PROCEEDS

     42   

TRANSITION TO SELF-MANAGEMENT AND RECAPITALIZATION

     43   

DISTRIBUTION POLICY

     46   

CAPITALIZATION

     48   

DILUTION

     49   

SELECTED CONSOLIDATED FINANCIAL DATA

     50   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     53   

INDUSTRY AND MARKET OPPORTUNITY

     73   

BUSINESS AND PROPERTIES

     83   

MANAGEMENT

     93   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     102   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     106   

OPERATING PARTNERSHIP AGREEMENT

     110   

PRINCIPAL STOCKHOLDERS

     114   

DESCRIPTION OF CAPITAL STOCK

     116   

CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS

     122   

SHARES ELIGIBLE FOR FUTURE SALE

     127   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     130   

ERISA CONSIDERATIONS

     151   

UNDERWRITING

     154   

LEGAL MATTERS

     159   

EXPERTS

     159   

WHERE YOU CAN FIND MORE INFORMATION

     159   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

You should only rely on the information contained in this prospectus or in any free writing prospectus prepared by us in connection with this offering to which we have referred you. Neither we nor the underwriters have authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, as our business, financial condition, liquidity, results of operations, or prospects may have changed since such date.

 

 

We use market data and industry forecasts and projections throughout this prospectus. We have obtained substantially all of this information from a market study prepared by Forest Economic Advisors, LLC, a nationally recognized expert in the forest products industry. Such information is included herein in reliance on Forest Economic Advisors, LLC’s authority as an expert on such matters. See “Experts.” In addition, we have obtained certain market and industry

 

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data from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but the accuracy and completeness of the information are not guaranteed. The forecasts and projections contained in this prospectus are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We believe that the surveys and market research others have performed are reliable.

 

 

In this prospectus:

 

  Ÿ  

“our company,” “the company,” “we,” “us” and “our” refer to CatchMark Timber Trust, Inc., a Maryland corporation, and its consolidated subsidiaries after giving effect to the transition to self-management described elsewhere in this prospectus, except where it is clear from the context that the term only means the issuer of the shares of common stock in this offering;

 

  Ÿ  

“catchmark,” as used in the name of our company, is derived from a historical industry term used to describe a branding mark that is placed on the end of a log for ownership identification;

 

  Ÿ  

“chip-n-saw” refers to smaller sawlogs (typically 8 to 12 inches diameter-at-breast-height) processed on a machine known as a “chip-n-saw” that offers an economical way to obtain lumber from smaller logs and wood fiber for paper-making from the residual wood chips;

 

  Ÿ  

“fiber basket” refers to a timber-growing area and the wood-buying manufacturing facilities in such area;

 

  Ÿ  

“HBU” means higher-and-better use and refers to timberland properties that have a higher-value use beyond growing timber, such as properties that can be sold for development, conservation, recreational or other rural purposes at prices in excess of traditional timberland values;

 

  Ÿ  

“OSB” means oriented strand board, which is a structural wood panel manufactured with wood strands and heat-cured adhesives;

 

  Ÿ  

“pulpwood” refers to small logs (typically 4 to 8 inches diameter-at-breast-height), which are generally converted into wood chips for use in the production of pulp and paper products as well as OSB;

 

  Ÿ  

“sawtimber” refers to larger sawlogs (typically more than 12 inches diameter-at-breast-height) that are suitable for sawing into dimension lumber for use in housing construction, flooring, furniture, and many other applications;

 

  Ÿ  

“SFI” refers to the Sustainable Forestry Initiative, a sustainable forest management program;

 

  Ÿ  

“silviculture” is the art and science of controlling the establishment, growth, composition, health and quality of forests to meet diverse needs and values;

 

  Ÿ  

“stumpage” refers to standing timber (as opposed to cut logs) or the value of such standing timber; and

 

  Ÿ  

“TIMO” is an acronym for timberland investment management organization, which is an organization formed to acquire and manage timberland investments, generally on behalf of institutional investors.

 

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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our Class A common stock. You should read carefully the more detailed information set forth under the heading “Risk Factors” and the other information included in this prospectus. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters do not exercise their option to purchase up to an additional                  shares solely to cover overallotments, if any.

Our Company

CatchMark Timber Trust, Inc. is a real estate company investing in timberlands that has elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Prior to the commencement of this offering, we will be self-administered and self-managed. We primarily engage in the ownership, management, acquisition and disposition of timberlands located in the United States. Upon completion of this offering, we believe that we will be the only publicly traded REIT that is engaged exclusively in timberland ownership and management, without ownership of any forest products or other manufacturing operations.

The focus of our business is to invest in timberlands and to actively manage such assets to provide current income and attractive long-term returns to our stockholders. We generate recurring income and cash flow from the harvest and sale of timber, as well as from non-timber related revenue sources, such as recreational leases. When and where we believe it is appropriate, we also periodically generate income and cash flow from the sale of HBU lands. HBU refers to timberland properties that have a higher-value use beyond growing timber, such as properties that can be sold for development, conservation, recreational or other rural purposes at prices in excess of traditional timberland values. We also expect to realize additional long-term returns from the potential appreciation in value of our timberlands as well as from the potential biological growth of our standing timber inventory in excess of our timber harvest.

As of June 30, 2013, we owned interests in approximately 282,000 acres of timberland, consisting of approximately 245,700 acres held in fee-simple interests, or our fee timberlands, and approximately 36,300 acres held in leasehold interests, or our leased timberlands. Our timberlands are located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia within an attractive and competitive fiber basket encompassing a numerous and diverse group of pulp, paper and wood products manufacturing facilities. We believe that our timberlands are high-quality industrial forestlands that have been intensively managed for sustainable commercial timber production. As of December 31, 2012, our timberlands acreage consisted of approximately 75% pine stands and approximately 25% hardwood stands, and our timber inventory consisted of approximately 10.1 million tons of merchantable timber, including approximately 6.0 million tons of pulpwood, 2.1 million tons of chip-n-saw, and 2.0 million tons of sawtimber.

We will be led by Jerry Barag, who will be elected as our Chief Executive Officer and President, John F. Rasor, who will be elected as our Chief Operating Officer, and Brian M. Davis, our Senior Vice President and Chief Financial Officer. Collectively, these individuals have approximately 100 years of investment, financing and operating experience in the commercial real estate, timberland and forest products industries.

 

 

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Market Opportunity

We believe that timberlands represent a unique and attractive investment opportunity for the following reasons:

Compelling Industry Fundamentals. The decline in U.S. residential construction that occurred from 2006 to 2011 led to a sharp reduction in demand for solid wood products, which in turn led to significantly depressed sawtimber stumpage prices, particularly in the U.S. South. However, several key global supply-demand factors are expected to positively impact the North American market for timber and timberlands over the next several years and beyond. These factors include: (1) the mountain pine beetle epidemic in British Columbia, which has caused the loss of significant timber resources in that region; (2) major timber supply contractions in Eastern Canada resulting from environmental conservation initiatives by governmental authorities; (3) the significant increase in lumber and log exports to China from British Columbia and the U.S. Pacific Northwest; and (4) the recent upturn in U.S. residential construction and consequent strengthening of demand for solid wood products in the United States.

Fragmented Ownership and Robust Transaction Pipeline. Timberland ownership in the United States remains highly fragmented, which provides opportunities for consolidation and opportunistic timberland acquisitions. Further, a number of significant ownership positions acquired by timberland investment management organizations, or TIMOs, during the last decade are nearing fund maturities and are expected to liquidate over the next several years, potentially providing meaningful and attractive timberland acquisition opportunities in the future.

Renewable Resource that Increases in Volume and Value Over Time. Timber is a renewable resource that grows and, when properly managed, increases in volume and value over time. As timber grows, it increases in value at a compounding rate, as larger trees are more valuable than smaller trees (measured on a price-per-ton basis) because they can be converted into higher-value end-use products such as lumber and plywood.

Predictable Growth Rates and Harvest Yields. Advanced forest management technology allows timberland owners to predict with a reasonable degree of certainty the amount of timber that can be sustainably harvested from a particular timberland portfolio over an extended period of time. The predictability of timber growth rates and harvest yields allows for optimum long-term harvest planning. Growth rates can also be enhanced through active forest management and the use of advanced seedling technology.

Harvest Flexibility. Unlike most agricultural crops, timberlands generally do not need to be harvested within a specific timeframe. As a result, timberland owners have a degree of flexibility to adjust their harvest activities in response to market conditions—increasing harvests when prices are strong and deferring harvests when prices are weak. The ability to modulate harvest activities and store timber value “on the stump” is a unique attribute of this asset class.

Structural Supply Constraints. The supply of timber is limited, to some extent, by the availability of commercial quality timberlands, which is in turn limited by a variety of factors, including governmental restrictions on land use, alternate uses such as agriculture and development and the presence of merchantable species in desirable timber-growing climates. The supply of timber is also constrained by the time and capital required to establish new timberlands, as newly planted seedlings generally take 20 to 30 years to reach harvest maturity in the U.S. South (and even longer in other regions).

 

 

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Our Competitive Strengths

We believe that we distinguish ourselves from other timberland owners and managers through the following competitive strengths:

Experienced Leadership. Our senior executive team will be led by our Chief Executive Officer and President, Jerry Barag, who has a proven track record and substantial experience in both the timberland and commercial real estate industries. Mr. Barag has over 30 years of real estate and timberland investment experience, including expertise in acquisitions, divestitures, asset management, property management and financing. Our Chief Operating Officer, John F. Rasor, has over 45 years of experience in the timberland and forest products industries, including expertise in forest management, wood products manufacturing, fiber procurement and log merchandising, sales and distribution. Prior to joining our company, Messrs. Barag and Rasor most recently served as Principals of T-Star Investment Partners, LLC, or TimberStar Advisors, a timberland investment consulting firm based in Atlanta, Georgia, which they formed following their successful roles as Managing Directors of TimberStar Operating Partnership, LP and its affiliated entities, collectively TimberStar, a timberland investment joint venture among Messrs. Barag and Rasor, iStar Financial, Inc. and other institutional investors. While at TimberStar, they oversaw the acquisition of over $1.4 billion of timberlands in Arkansas, Louisiana, Maine and Texas. Prior to TimberStar, Mr. Barag held positions as Chief Investment Officer of TimberVest, LLC, or TimberVest, and Chief Investment Officer of Lend Lease Real Estate Investments, Inc., or Lend Lease, and Mr. Rasor had a 40-year career at Georgia-Pacific Corporation, including the role of Executive Vice President—Forest Resources, with responsibility for managing over six million acres of timberlands as well as several other business units.

Exclusively Invested in U.S. Timberlands. We do not own any pulp, paper or wood products manufacturing assets, which allows us to focus on optimal management of our timberlands and prevents us from being exposed to the risks inherent in direct ownership of forest products manufacturing operations. As such, we believe that, upon completion of this offering, we will be the only “pure-play,” publicly traded timber REIT in existence. Moreover, we believe that we will be the only publicly traded timber REIT that is invested exclusively in the U.S. South region (although we may pursue acquisitions in other regions over time).

Strategically Located in Competitive Fiber Basket. Our timberlands are strategically located in a competitive and dynamic U.S. South fiber basket. Our timberlands are located in close proximity to a variety of established wood products and pulp and paper manufacturing facilities, which provide a steady source of competitive demand for both pulpwood and higher-value sawtimber products. A combination of public, private and company-maintained roads provide convenient access to our timberlands for logging and forest management activities, while several major interstate highways and state roads provide efficient delivery routes to nearby manufacturers of lumber, plywood, engineered wood products, oriented strand board, pulp and paper.

Significant Volume Commitment through Fiber Supply Agreement. We benefit from an attractive long-term fiber supply agreement with MeadWestvaco Corporation, or MeadWestvaco, which covers a substantial portion of our anticipated annual harvest volume. The Mahrt Mill (located in Cottonton, Alabama) is one of the primary manufacturing facilities for MeadWestvaco’s Coated Board division, which produces paperboard for conversion into folding cartons and beverage carriers. The fiber supply agreement requires us to sell (through a taxable subsidiary) and requires MeadWestvaco to purchase a certain volume of pulpwood and other timber products annually. We believe that the fiber supply agreement is mutually beneficial, as it provides us with

 

 

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a stable demand outlet for a significant portion of our timber production at competitive prices, while providing MeadWestvaco access to a reliable source of fiber for a key manufacturing facility.

Scalable Infrastructure. We believe that our existing management organization, information technology and internal reporting systems can be deployed over a larger asset base without the need for significant incremental cost or personnel. We believe that our existing infrastructure and operating platform will facilitate our growth strategy by allowing us to quickly evaluate, execute and capitalize on timberland acquisition opportunities with only modest incremental costs.

Capital Available for Growth. Upon completion of this offering and application of the net proceeds therefrom, our debt to total market capitalization ratio will be approximately         %, assuming a public offering price of $         per share in this offering, which is the midpoint of the range set forth on the cover of this prospectus. We believe that our anticipated improved financial condition following the completion of this offering will enable us to access additional credit on more favorable terms, which will enable us to fund future timberland growth opportunities.

Our Business and Growth Strategies

Our objective is to maximize total returns to our stockholders through the ongoing implementation of the following business and growth strategies:

Actively Manage Our Timberlands for Long-Term Results. We intend to actively manage our timberlands to maximize long-term returns by achieving an optimum balance among biological timber growth, generation of current cash flow from harvesting, and responsible environmental stewardship. Upon completion of this offering and under our new management, we intend to (1) implement a revised business strategy that will increase our annual harvest volume based on a sustainable harvest plan to support a distribution to our stockholders and (2) establish annual HBU sales targets in the range of 1% to 2% of our fee timberland acreage, which will further augment our anticipated stockholder distributions. Further, we expect to continue making investments in forest technology, including improved seedlings, in order to increase the sustainable yield of our timberlands over the long-term.

Maximize Our Profitability on Timber Sales. We actively manage our log merchandising efforts and stumpage sales with the goal of achieving the highest available price for our timber products. We compete with other timberland owners on the basis of the quality of our logs, the prices of our logs, our reputation as a reliable supplier and our ability to meet customer specifications. We will continue to work diligently and proactively with our third-party contractors to ensure that we optimize our logging, hauling, sorting and merchandising operations to extract the maximum profitability from each of our logs based on the foregoing considerations.

Pursue Attractive Timberland Acquisitions. We intend to selectively pursue timberland acquisition opportunities. Due to the expected liquidation of the ownership positions of a number of TIMOs over the next several years, we expect there will be a robust supply of attractive timberlands available for sale. Generally, we expect to focus our acquisition efforts in the most commercially desirable timber-producing regions of the U.S. South and U.S. Pacific Northwest, although we may also pursue opportunistic acquisitions outside of these regions. Further, we expect to focus our acquisition efforts on properties that can be immediately accretive to our cash available for distribution. We may also enter into additional fiber supply agreements with respect to acquired properties in order to ensure a steady source of demand for our incremental timber production.

 

 

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Opportunistically Sell HBU Lands. We continuously assess potential alternative uses of our timberlands, as some of our properties may be more valuable for development, conservation, recreational or other rural purposes than for growing timber. We intend to capitalize on the value of our timberland portfolio by opportunistically monetizing HBU properties. The close proximity of our existing timberlands to several major population centers (including Columbus, Georgia, Atlanta, Georgia and Montgomery, Alabama) provides us with opportunities to periodically sell parcels of our land at favorable valuations. We generally expect to monetize 1% to 2% of our fee timberland acreage on an annual basis pursuant to our land sales program, although such results may vary. We may also decide to pursue various land entitlements on certain properties in order to realize higher long-term values on such properties.

Practice Sound Environmental Stewardship. We will remain committed to responsible environmental stewardship and sustainable forestry. Our timberlands are third-party audited and certified according to the SFI in accordance with the 2010-2014 SFI standard. SFI standards promote sustainable forest management through recognized core principles, including measures to protect water quality, biodiversity, wildlife habitat and at-risk species. We believe our continued commitment to environmental stewardship will allow us to maintain our timberlands’ productivity, grow our customer base and enhance our reputation as a preferred timber supplier.

Timber Agreements

A substantial portion of our timber sales are derived from our master stumpage agreement and fiber supply agreement with MeadWestvaco under which we sell specified amounts of timber to MeadWestvaco, which we refer to as the timber agreements. Approximately 54% of our net timber sales revenue for 2012 was derived from the timber agreements. The initial term of the timber agreements is from October 9, 2007 through December 31, 2032, subject to extension and early termination provisions. See “Business and Properties—Timber Agreements” for additional information regarding the material terms of the timber agreements.

Summary Risk Factors

An investment in shares of our Class A common stock involves various risks. You should consider carefully the risks discussed below and under the heading “Risk Factors” beginning on page 15 of this prospectus before purchasing our Class A common stock. If any of these risks occur, our business, prospects, financial condition, liquidity, results of operations and ability to make distributions to our stockholders could be materially and adversely affected. In that case, the trading price of our Class A common stock could decline and you could lose some or all of your investment.

 

  Ÿ  

The forest products industry is cyclical in nature, and unfavorable changes in market conditions could impair our operating results.

 

  Ÿ  

We have not paid cash distributions to our stockholders since our inception, and our cash distributions are not guaranteed and may fluctuate.

 

  Ÿ  

We depend upon our relationships with MeadWestvaco and Forest Resource Consultants, and any change in the financial health of these companies could impact our performance.

 

  Ÿ  

We have completed only two significant acquisitions of timberland properties and may be unsuccessful in executing our investment strategy.

 

 

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  Ÿ  

We depend on external sources of capital for future growth, and our ability to access the capital markets is unproven.

 

  Ÿ  

As a relatively small public company, our operating expenses are a larger percentage of our total revenues than many other public companies.

 

  Ÿ  

Continued economic weakness from the severe recession that the U.S. economy recently experienced may materially and adversely affect our financial condition and results of operations.

 

  Ÿ  

Our real estate investment activity is concentrated in timberlands, making us more vulnerable economically than if our investments were diversified.

 

  Ÿ  

Our timberlands are located in Georgia and Alabama, and adverse economic and other developments in that area could have a material adverse effect on us.

 

  Ÿ  

Prior to the commencement of this offering, we will have only recently completed our transition to self-management, and therefore we will not have a track record with our new management team.

 

  Ÿ  

In connection with our transition to self-management, we and CatchMark Timber Operating Partnership, L.P., which we refer to as our operating partnership or CatchMark Timber OP, will enter into a transition services agreement, which we refer to as the transition services agreement, and a sublease for office space with Wells Real Estate Funds, Inc., or Wells REF, and the termination of these agreements or the failure of these entities to perform under these agreements could adversely impact our operations.

 

  Ÿ  

We have experienced aggregate net losses available to our common stockholders, including approximately $47.0 million between January 1, 2010 and June 30, 2013, and we may experience future losses.

 

  Ÿ  

We had approximately $132.4 million of consolidated indebtedness outstanding as of June 30, 2013, which could adversely affect our financial health and operating flexibility.

 

  Ÿ  

Our financial condition could be adversely affected by financial and other covenants and other provisions under the CoBank loan described herein or other debt agreements.

 

  Ÿ  

Increases in interest rates could increase the amount of our debt payments and hinder our ability to pay distributions to our stockholders.

 

  Ÿ  

Certain provisions of Maryland law could inhibit changes in control of us, which could lower the value of our Class A common stock.

 

  Ÿ  

Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which could substantially reduce funds available for distributions to our stockholders and materially and adversely affect our financial condition and results of operations.

 

 

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  Ÿ  

Because we have a large number of stockholders and our shares have not been listed on a national securities exchange prior to this offering, there may be significant pent-up demand to sell our shares. Significant sales of our Class A common stock, or the perception that significant sales of such shares could occur, may cause the price of our Class A common stock to decline significantly.

Recapitalization

Prior to the commencement of this offering, we intend to effectuate a                 -to-one reverse stock split of our common stock. We then intend to declare a stock dividend pursuant to which each then outstanding share of our common stock will receive:

 

  Ÿ  

one share of our Class B-1 common stock; plus

 

  Ÿ  

one share of our Class B-2 common stock; plus

 

  Ÿ  

one share of our Class B-3 common stock.

In connection with this stock dividend, we intend to designate our then-outstanding common stock as “Class A common stock.”

In this prospectus, we refer to these transactions as the “Recapitalization,” we refer to our Class B-1 common stock, Class B-2 common stock and Class B-3 common stock collectively as our “Class B common stock,” and we refer to our Class A and Class B common stock collectively as our “common stock.” Subject to the provisions of our charter, shares of our Class B-1, B-2 and B-3 common stock will convert automatically into shares of our Class A common stock          months following the listing,          months following the listing and          months following the listing, respectively. Therefore, all shares of our Class B common stock will have automatically converted into shares of our Class A common stock by the date that is          months following the listing.

Our Class B common stock will be identical to our Class A common stock except that (1) we do not intend to list our Class B common stock on a national securities exchange and (2) shares of our Class B common stock will convert automatically into shares of our Class A common stock at specified times. As of September 6, 2013, without giving effect to the Recapitalization, we had approximately 31.7 million shares of common stock outstanding. As of             , 2013, the aggregate number of shares of our common stock outstanding (including all shares of our Class A and Class B common stock) immediately following the Recapitalization will be approximately              million. Of this amount, approximately             million shares will be Class A common stock (representing 25% of our total outstanding common stock) and approximately              million shares will be Class B common stock (representing 75% of our total outstanding common stock). See “Shares Eligible for Future Sale” and “Transition to Self-Management and Recapitalization.”

Distribution Policy; Tax Character of Distributions

The Internal Revenue Code of 1986, as amended, or the Code, generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and imposes tax on any taxable income retained by a REIT, including capital gains. To satisfy the requirements for qualification as

 

 

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a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for such purposes.

We expect to derive most of our REIT taxable income from investments in our timberlands, including the sale of standing timber through pay as cut contracts. Provided we have held our timberlands for more than one year, we expect that the income from our timber-cutting contracts generally will be treated as long-term capital gain. Distributions of such capital gain to our stockholders generally will be taxable to stockholders that are individuals, estates or trusts at a maximum U.S. federal income tax rate of 20%, as compared to the maximum 39.6% individual tax rate that applies to ordinary REIT dividends. Both ordinary dividends and capital gain dividends are included in net investment income, which is subject to an additional 3.8% unearned income Medicare tax in the case of high-income U.S. individuals, estates and trusts.

The terms of our current credit agreement prohibit us from declaring, setting aside funds for, or paying any dividend, distribution, or other payment to our stockholders other than as required to maintain our REIT qualification if our loan-to-value ratio, or LTV ratio, is greater than or equal to 40%. So long as our LTV ratio remains below 40% and we maintain a minimum fixed-charge coverage ratio of 1.05:1.00, we have the ability to declare, set aside funds for and pay dividends or distributions, or make other payments to our stockholders from operating cash flows on a discretionary basis. The amount of distributions that we may pay to our common stockholders will be determined by our board of directors in its sole discretion and is dependent upon a number of factors, including, but not limited to, our financial condition, our capital requirements, our expectations of future sources of liquidity, current and future economic conditions and market demand for timber and timberlands, and tax considerations.

Restrictions on Ownership of Our Common Stock

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Code, among other purposes, our charter generally prohibits, with certain exceptions, any stockholder from beneficially or constructively owning, applying certain attribution rules under the Code, more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock, or 9.8% by value of the outstanding shares of our capital stock. Our board of directors may, in its sole discretion, waive (prospectively or retroactively) the 9.8% ownership limits with respect to a particular stockholder if it receives certain representations and undertakings required by our charter and is presented with evidence satisfactory to it that such ownership will not then or in the future cause us to fail to qualify as a REIT. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Certain Relationships and Related Transactions

Wells Capital, Inc., or Wells Capital, a subsidiary of Wells REF, was our initial sponsor. Prior to the commencement of this offering, we will become self-managed by terminating our amended and restated advisory agreement, or the advisory agreement, with Wells Timberland Management Organization, LLC, which we refer to as our advisor or Wells TIMO. We will also hire certain individuals to serve as our management team, including individuals who are currently employed by Wells REF, such as Brian M. Davis, who currently serves as and will continue to serve as our Senior Vice President and Chief Financial Officer. Leo F. Wells currently serves as our Chairman of the Board and President and Douglas P. Williams currently serves as one of our directors and our Executive Vice President, Secretary and Treasurer. Messrs. Wells and Williams serve as

 

 

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officers and directors of other affiliates of Wells REF and they will continue to serve as our officers until our transition to self-management, when they will resign from these positions. Wells REF, which is owned by Mr. Wells, owns all of our preferred stock, which we have agreed to redeem in connection with the closing of this offering. Messrs. Wells and Williams have agreed to resign as directors of our company effective immediately prior to the effectiveness of the registration statement relating to this offering.

We have entered into the master self-management transition agreement, or master agreement, with Wells REF and Wells TIMO, which provides the framework for our separation from Wells REF and its affiliates and our transition to self-management. As a result, we and our operating partnership will enter into two agreements with these entities to provide services to us on a temporary and non-exclusive basis. These agreements include a transition services agreement for eight months and a month-to-month office sublease for our corporate headquarters for up to five months. Pursuant to the transition services agreement, we will pay Wells REF a consulting fee equal to $22,875 per month. We will also reimburse Wells REF for expenses it incurs in connection with the services provided, excluding its administrative services expenses such as personnel and overhead costs. The office sublease will provide for monthly base rent of $5,961, which will not be payable for the months of November and December 2013, plus additional costs for various space-related services.

All of the special partnership units of our operating partnership are held by Wells TIMO. Pursuant to the master agreement, Wells TIMO has agreed that upon the termination of the advisory agreement, the special partnership units will be automatically redeemed for no consideration. The 200 common partnership units held by Wells TIMO in our operating partnership will be purchased by CatchMark LP Holder, LLC, which we refer to as the limited partner or CatchMark LP Holder, our newly formed subsidiary, for $1,312, based on our estimated per share value as of September 30, 2012.

All related person transactions must be approved or ratified by a majority of the disinterested directors on our board of directors. For more information about our relationship with Wells REF and its affiliates, see “Certain Relationships and Related Transactions.”

Following the completion of this offering, we will have no continuing affiliations with Wells Capital, Wells REF, Wells TIMO or Mr. Wells, other than the transition services agreement and sublease described in this prospectus.

Background and Corporate Information

We are a Maryland corporation formed in September 2005, and we have been publicly registered and subject to Securities and Exchange Commission, or SEC, reporting obligations since the effectiveness of our first public offering in 2006. We were initially formed as Wells Timberland REIT, Inc. and were sponsored by Wells Capital, a wholly owned subsidiary of Wells REF, and advised by Wells TIMO, a wholly owned subsidiary of Wells Capital. We expect to complete our transition to self-management prior to the commencement of this offering and to take additional actions in connection with our separation from Wells REF and its affiliates immediately following the closing of this offering. On September 18, 2013, we filed an amendment to our charter with the State Department of Assessments and Taxation of Maryland effecting a change of our name from Wells Timberland REIT, Inc. to CatchMark Timber Trust, Inc. Our principal executive office is currently located at 6200 The Corners Parkway, Norcross, Georgia 30092, and our telephone

 

 

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number is (770) 449-7800. We maintain an internet website at www.catchmarktimber.com that contains information concerning us. The information included or referenced on, or otherwise accessible through, our website is not intended to form a part of or be incorporated by reference into this prospectus.

Our Corporate Structure

We own substantially all of our properties and other investments through our operating partnership. Our operating partnership was formed in November 2005 to acquire properties on our behalf. We are the sole general partner of our operating partnership and own approximately 99.99% of its common units. CatchMark LP Holder will be the sole limited partner of our operating partnership following its purchase of the common partnership units held by Wells TIMO, which will occur upon termination of the advisory agreement. Following this transaction, the limited partner will own the remaining approximately 0.01% of the common units.

This structure will facilitate our ability to take advantage of the tax benefits associated with an UPREIT, or Umbrella Partnership Real Estate Investment Trust. The UPREIT structure is used because a contribution of property directly to a REIT is generally a taxable transaction to the contributing property owner. In an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of his property may transfer the property to the UPREIT in exchange for common units in the UPREIT and defer taxation of gain until the seller later sells his common units or causes our operating partnership to redeem his common units. Using an UPREIT structure may give us an advantage in acquiring desired properties from persons who may not otherwise sell their properties because of unfavorable tax results. At present, we have no plans to acquire any specific properties in exchange for common units of our operating partnership.

CatchMark Timber TRS, Inc., or CatchMark Timber TRS, is a wholly owned subsidiary of our operating partnership. We have elected to treat CatchMark Timber TRS as a taxable REIT subsidiary, or TRS. A TRS is a fully taxable corporation. A TRS may earn income that would not be qualifying REIT income if earned directly by us. Our use of a TRS enables us to engage in certain business activities, such as the sales of delivered logs and HBU properties, which if conducted by us directly could give rise to income potentially subject to the 100% penalty tax or constituting nonqualifying gross income for purposes of the REIT gross income tests.

 

 

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The following diagram reflects our organizational structure following completion of this offering.

 

LOGO

 

 

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The Offering

Class A common stock offered by us

                 Shares (plus up to          shares that we may issue if the underwriters exercise their overallotment option in full)

Common stock to be outstanding after this offering:

 

Class A common stock

             shares (1)

 

Class B-1 common stock

             shares (2)

 

Class B-2 common stock

             shares (2)

 

Class B-3 common stock

             shares (2)

 

Conversion rights

Subject to the provisions of our charter, shares of our Class B-1, B-2 and B-3 common stock will convert automatically into shares of our Class A common stock          months following the listing,          months following the listing and          months following the listing, respectively.

 

Dividend rights

Our Class A common stock and our Class B common stock will share equally in any dividends authorized by our board of directors and declared by us.

 

Voting rights

Each share of our Class A common stock and each share of our Class B common stock will entitle its holder to one vote per share.

 

Use of proceeds

We intend to use approximately $         million of net proceeds received from this offering to redeem the outstanding shares of our Series A and B preferred stock held by Wells REF, and $         million to repay a portion of the amounts outstanding under our term loan with CoBank ACB.

 

Risk factors

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 15 and the other information in this prospectus for a discussion of factors you should consider before investing in our Class A common stock.

 

Proposed NYSE symbol

We intend to have our Class A common stock listed on the NYSE under the symbol “CTT.”

 

(1) Excludes              shares of Class A common stock issuable upon exercise of the underwriters’ overallotment option,              shares of Class A common stock available for future issuance under our long-term incentive plan and              shares of Class A common stock underlying options granted under our long-term incentive plan as of June 30, 2013.
(2) Excludes              shares of Class B-1, B-2, and B-3 common stock available for future issuance under our long-term incentive plan and              shares of Class B-1, B-2 and B-3 common stock underlying options granted under our long-term incentive plan as of June 30, 2013.

 

 

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Summary Consolidated Financial Data

The summary consolidated financial and operating data set forth below as of December 31, 2012 and for the years ended December 31, 2012, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The audited consolidated financial statements have been audited by Deloitte & Touche LLP, an independent registered public accounting firm. The financial and operating data as of June 30, 2013 and for the six months ended June 30, 2013 and 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full year, and the historical results presented below are not necessarily indicative of the results to be expected in any future period.

Because the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes, you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the related notes, included elsewhere in this prospectus. The share and per-share information set forth below does not give effect to the Recapitalization.

 

    Six Months Ended June 30,     Year Ended December 31,  
    2013     2012     2012     2011     2010  

Statements of Operations Data:

         

Total revenues

  $ 16,640,210      $ 26,178,157      $ 44,199,779      $ 40,017,827      $ 47,582,144   

Net loss

    (4,550,657     (3,718,373     (8,870,732     (11,945,363     (15,809,720

Net loss available to common stockholders

    (4,735,760     (3,904,384     (9,244,724     (13,502,038     (19,518,100

Per-share data—basic and diluted:

         

Net loss available to common stockholders

    (0.15     (0.12     (0.29     (0.47     (0.86

Weighted-average common shares outstanding

    31,775,958        31,869,820        31,854,556        28,489,080        22,806,619   
    Six Months Ended June 30,     Year Ended December 31,  
    2013     2012     2012     2011     2010  

Other Data:

         

Adjusted EBITDA (1)

  $ 2,808,337      $ 10,893,922      $ 15,468,471      $ 7,169,366      $ 10,509,644   

Capital expenditures—excluding acquisitions

    370,653        450,365        530,741        530,927        1,040,927   

Capital expenditures—acquisitions

    317,455        1,133        22,523,861        1,095,623          

Cash flows provided by (used in):

         

Operating activities

    2,409,573        8,833,647        11,425,870        4,572,131        5,154,517   

Investing activities

    9,133        3,710,824        (18,342,419     (536,033     (937,989

Financing activities

    (282,324     (1,802,340     11,288,668        (5,976,092     (1,064,439

 

 

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    June 30, 2013  
    Historical     As  Adjusted (3)  

Balance Sheet Data:

   

Cash and cash equivalents

  $ 13,357,474      $                        

Restricted cash and cash equivalents

    1,352,822     

Total assets

    347,247,801     

Total liabilities

    140,443,615     

Total stockholders’ equity

    206,804,186     

Outstanding debt

    132,356,123     

Outstanding long-term debt

    132,356,123     

Ratio of total debt to market capitalization (2)

   

 

(1) See “Selected Consolidated Financial Data” for the definition of Adjusted EBITDA, for information regarding why we present this non-GAAP measure and for a reconciliation to net loss.
(2) Each $1.00 increase or decrease in the assumed public offering price of $             per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase or decrease the pro forma amount of debt and market capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated expenses of the offering payable by us.
(3) As adjusted to give effect to this offering and the use of the net proceeds from this offering as set forth in “Use of Proceeds.”

 

 

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RISK FACTORS

An investment in shares of our Class A common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our business and an investment in shares of our Class A common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, financial condition, results of operations and our ability to make distributions to our stockholders could be materially and adversely affected. In that case, the trading price of shares of our Class A common stock could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements.”

Risks Related to Our Business and Operations

The cyclical nature of the forest products industry could impair our operating results.

Our operating results are affected by the cyclical nature of the forest products industry. Unlike other REITs that are parties to leases and other contracts providing for relatively stable payments over a period of years, our operating results depend on prices for timber that can experience significant variation and that have been historically volatile. Like other participants in the forest products industry, we have limited direct influence over the timing and extent of price changes for cellulose fiber, timber, and wood products. Although some of the supply agreements we have or expect to enter into in the future fix the price of our harvested timber for a period of time, these contracts may not protect us from the long-term effects of price declines and may restrict our ability to take advantage of price increases.

The demand for timber and wood products is affected primarily by the level of new residential construction activity, the supply of manufactured timber products, including imports of timber products, and, to a lesser extent, repair and remodeling activity and other commercial and industrial uses. The demand for timber also is affected by the demand for wood chips in the pulp and paper markets and for hardwood in the furniture and other hardwood industries. The demand for cellulose fiber is related to the demand for disposable products such as diapers and feminine hygiene products. These activities are, in turn, subject to fluctuations due to, among other factors:

 

  Ÿ  

changes in domestic and international economic conditions;

 

  Ÿ  

interest and currency rates;

 

  Ÿ  

population growth and changing demographics; and

 

  Ÿ  

seasonal weather cycles (for example, dry summers and wet winters).

Decreases in the level of residential construction activity generally reduce demand for logs and wood products. This can result in lower revenues, profits, and cash flows. In addition, increases in the supply of logs and wood products, at both the local and national level, during favorable price environments also can lead to downward pressure on prices. Timber owners generally increase production volumes for logs and wood products during favorable price environments. Such increased production, however, when coupled with even modest declines in demand for these products in general, could lead to oversupply and lower prices. For example,

 

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wood products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products. Oversupply can result in lower revenues, profits, and cash flows to us and could negatively impact our results of operations.

We have not paid cash distributions to our stockholders since our inception and our cash distributions are not guaranteed and may fluctuate.

Our board of directors, in its sole discretion, determines the amount of the distributions (including the determination of whether to retain net capital gains income) to be provided to our stockholders and has not authorized a cash distribution since our inception. Our board will determine whether to authorize a distribution and the amount of such distribution based on its consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands, including those timberlands that have higher-and-better uses. In addition, our board of directors may choose to retain operating cash flow for investment purposes, working capital reserves or other purposes, and these retained funds, although increasing the value of our underlying assets, may not correspondingly increase the market price of our Class A common stock. Consequently, our distribution levels may fluctuate. Our failure to meet the market’s expectations with regard to future cash distributions likely would adversely affect the market price of our Class A common stock.

In addition, we have provided an estimated range of our initial cash distribution in the section entitled “Distribution Policy.” We do not intend this estimate to be a projection or forecast of our actual results of operations or our liquidity. Our estimates may not prove accurate and actual distributions may be significantly less than our estimated range.

We are substantially dependent on our business relationship with MeadWestvaco, and our continued success will depend on its economic performance.

We entered into the timber agreements with MeadWestvaco in connection with the acquisition of our timberlands. The timber agreements provide that we will sell (through CatchMark Timber TRS) specified amounts of timber to a subsidiary of MeadWestvaco, subject to market pricing adjustments and certain early termination rights of the parties. The timber agreements are intended to ensure a long-term source of supply of wood fiber products for MeadWestvaco in order to meet its paperboard and lumber production requirements at specified mills and provide us with a reliable customer for the wood products from our timberlands. Our financial performance is substantially dependent on the economic performance of MeadWestvaco as a consumer of our wood products. Approximately 54% of our net timber sales revenue for 2012 was derived from the timber agreements, which significantly exceeded the minimum amount of timber that MeadWestvaco was required to purchase pursuant to the timber agreements. If MeadWestvaco does not continue to purchase significantly more than the minimum amount of timber it is required to purchase from us, or if MeadWestvaco becomes unable to purchase the required minimum amount of timber from us, there could be a material adverse effect on our business and financial condition.

In addition, in the event of a force majeure impacting MeadWestvaco, which is defined by the timber agreements to include, among other things, lightning, fires, storms, floods, infestation, other acts of God or nature, power failures and labor strikes or lockouts by employees, the amount of timber that MeadWestvaco is required to purchase in the calendar year would be reduced pro rata based on the period during which the force majeure was in effect and continuing. If the force majeure is in effect and continuing for 15 days or more, MeadWestvaco would not be required to

 

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purchase the timber that was not purchased during the force majeure period. If the force majeure is in effect and continuing for fewer than 15 days, MeadWestvaco would have up to 180 days after the termination of the force majeure period to purchase the timber that was not purchased during the force majeure period. As a result, the occurrence of a force majeure under the terms of the timber agreements could adversely impact our business and financial condition.

We have completed only two significant timberland property acquisitions and may be unsuccessful in executing our investment strategy.

We have completed only two significant acquisitions of timberland properties and we intend to pursue investments in strategic timberlands when market conditions warrant. Our ability to identify and acquire desirable timberlands depends upon the performance of our management team in the selection of our investments. As with any investment, our future acquisitions, if any, may not perform in accordance with our expectations. In addition, we anticipate financing such acquisitions through proceeds from equity or debt offerings (including offerings of partnership units by our operating partnership), borrowings, cash from operations, proceeds from asset dispositions, or any combination thereof. Our inability to finance future acquisitions on favorable terms or the failure of any acquisitions to conform to our expectations, could adversely affect our results of operations.

We depend on external sources of capital for future growth and our ability to access the capital markets is unproven.

Our ability to finance our growth is dependent to a significant degree on external sources of capital and as a company that expects to list on the NYSE, our ability to access the capital markets is unproven. Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our control, including, without limitation, a decline in general market conditions, decreased market liquidity, increases in interest rates, an unfavorable market perception of our growth potential, a decrease in our current or estimated future earnings or a decrease in the market price of our common stock. In addition, our ability to access additional capital may be limited by the terms of our bylaws, which restrict our incurrence of debt, and by our existing indebtedness, which, among other things, restricts our incurrence of debt and the payment of dividends. Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us, and the failure to obtain necessary capital could materially adversely affect our future growth.

As a relatively small public company, our operating expenses are a larger percentage of our total revenues than many other public companies.

Our total assets as of June 30, 2013 were $347 million and our revenues for the six months ended June 30, 2013 were $16.6 million. Because our company is smaller than many other publicly traded REITs, our operating expenses are, and we expect will continue to be, a larger percentage of our total revenues than many other public companies. If we are unable to access external sources of capital and grow our business, our operating expenses will have a greater effect on our financial performance and may reduce the amount of cash flow available to distribute to our stockholders.

Continued economic weakness from the severe recession that the U.S. economy recently experienced may materially and adversely affect our financial condition and results of operations.

The U.S. economy is still experiencing weakness from the severe recession that it recently experienced, which resulted in increased unemployment and a decline in timberland values.

 

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Although the U.S. economy has emerged from the recent recession, high levels of unemployment have persisted, and timberland values have not fully recovered to pre-recession levels and may not for a number of years. If the economic recovery slows or stalls, we may continue to experience downward pressure on the amounts we are able to charge our customers.

We are dependent on Forest Resource Consultants to manage our timberlands.

We and CatchMark Timber TRS are parties to a timberland operating agreement with Forest Resource Consultants, Inc., or FRC, which we renew on a yearly basis. Pursuant to this agreement, we depend upon FRC to manage and operate our timberlands and related timber operations, and to ensure delivery of timber to MeadWestvaco and other timber purchasers. To the extent we lose the services of FRC, are unable to obtain the services of FRC at a reasonable price or FRC does not perform the services in accordance with the timberland operating agreement, our results of operations may be adversely affected.

Our real estate investment activity is concentrated in timberlands, making us more vulnerable economically than if our investments were diversified.

We have only acquired timberlands and expect to make additional timberlands acquisitions in the future. We are subject to risks inherent in concentrating investments in real estate. The risks resulting from a lack of diversification become even greater as a result of our strategy to invest primarily, if not exclusively, in timberlands. A downturn in the real estate industry generally or the timber or forest products industries specifically could reduce the value of our properties and could require us to recognize impairment losses from our properties. A downturn in the timber or forest products industries also could prevent our customers from making payments to us and, consequently, would prevent us from meeting debt service obligations or making distributions to our stockholders. The risks we face may be more pronounced than if we diversified our investments outside real estate or outside timberlands.

Our timberlands are located in Georgia and Alabama, and adverse economic and other developments in that area could have a material adverse effect on us.

As of the date of this prospectus, all of our timberlands are located in Georgia and Alabama. As a result, we may be susceptible to adverse economic and other developments in this region, including industry slowdowns, business layoffs or downsizing, relocations of businesses, changes in demographics, increases in real estate and other taxes and increased regulation, any of which could have a material adverse effect on us.

In addition, the geographic concentration of our property makes us more susceptible to adverse impacts from a single natural disaster such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding and other factors that could negatively impact our timber production.

Prior to the commencement of this offering, we will have only recently completed our transition to self-management, and therefore we will not have a track record with our new management team.

Prior to the commencement of this offering, we will complete our transition to self-management and hire a management team and other employees to run our company. Two of our executive officers, Jerry Barag (who will become our Chief Executive Officer and President) and John F. Rasor (who will become our Chief Operating Officer and Secretary) had no affiliation with us or Wells TIMO until they commenced providing consulting services to us in August 2013. As a result, we have a limited track record with the new members of our management team and we may experience difficulties in integrating these individuals into our company. In addition, two of our three

 

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executive officers have not previously served as executive officers of a publicly traded company. If our management team does not perform as we expect, our results of operations will suffer.

Our results of operations could be negatively impacted by our transition to self-management and the listing of our shares on the NYSE.

Following our transition to self-management, we will no longer bear the costs of the various fees and expense reimbursements previously paid to Wells TIMO; however, our expenses will include the compensation and benefits of our officers, employees and consultants, as well as overhead previously paid by Wells TIMO. Furthermore, these employees will be providing us services historically provided by Wells TIMO. We cannot assure you that, following our transition to self-management, we will be able to provide those services at the same level as were previously provided to us, and our costs for these services may be greater than these costs were prior to our transition to self-management. In addition, there may be unforeseen costs, expenses and difficulties associated with providing those services on a self-managed basis. We will also be obligated to incur additional costs when we list our shares of common stock on the NYSE upon the completion of this offering, such as listing fees and other compliance costs. If the expenses we incur as a result of our transition to self-management and the listing of our shares of common stock on the NYSE are higher than we anticipate, our results of operations may be adversely affected.

In connection with our transition to self-management, we and our operating partnership will enter into a transition services agreement and an office sublease with Wells REF for Wells REF to provide services to us, and the termination of these agreements or the failure of Wells REF to provide these services could adversely impact our operations.

In connection with our transition to self-management, we and our operating partnership will enter into a transition services agreement with Wells REF for Wells REF and its affiliates to provide services to us that enable us to operate as an independent company. This agreement requires Wells REF to provide services to us that include accounting, financial reporting, investor relations and stockholder support, information technology services, various administrative functions and other services for eight months. Our operating partnership is also entering into a sublease with Wells REF pursuant to which Wells REF will sublease our corporate headquarters to us for up to five months. The early termination of these agreements or the failure of Wells REF to provide these services to us could adversely impact our operations.

A large portion of Wells REF’s income is derived under a consulting agreement with Columbia Property Trust, Inc., or Columbia. Columbia is a mature real estate investment program sponsored by Wells REF that reported $5.6 billion of assets as of June 30, 2013. Effective February 28, 2013, Columbia transitioned to self-management and no longer relies on Wells REF other than for consulting and investor relations services, which services are performed pursuant to agreements that expire on December 31, 2013. Wells REF does not expect to receive significant compensation from Columbia beyond December 31, 2013. Wells REF does not expect to replace that income from other sources. There is no guarantee that Wells REF will continue to have the financial resources to continue to provide services to us. A decline in the level of service provided by Wells REF could impair our operating results and could ultimately have an adverse effect on the value of our Class A common stock.

We depend on the efforts and expertise of our key executive officers and would be adversely affected by the loss of their services.

We depend on the efforts and expertise of our Chief Executive Officer, our Chief Operating Officer and our Chief Financial Officer, to execute our business strategy and we cannot guarantee their continued service. The loss of their services, and our inability to find suitable replacements, would have an adverse effect on our business.

 

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Index to Financial Statements

If we fail to maintain an effective system of disclosure controls and procedures and integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on us.

We are required to report our operations on a consolidated basis under GAAP. If we fail to maintain proper overall business controls, our results of operations could be harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, which could have a material adverse effect on us. In addition, we will have to modify our disclosure controls and procedures and internal controls in connection with our transition to self-management, which may increase the risk to us of experiencing a significant deficiency or material weakness in our internal controls or failing to maintain effective disclosure controls and procedures. If we fail to establish and maintain such new controls effectively, we may experience inaccuracies or delays in our financial reporting. In the case of any joint ventures we might enter into, we may also be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputation damage relating to, overall business controls, that are not under our control which could have a material adverse effect on us. In addition, we rely on FRC and its systems to provide us with certain information related to our operations, including our timber sales. Although we review such information prior to incorporating it into our accounting systems, we cannot assure the accuracy of such information. If FRC’s systems fail to accurately report to us the information on which we rely, we may not be able to accurately report our financial results, which could have a material adverse effect on us.

If issues arise during the planned transition to a new vendor of certain of our information technology systems, including our accounting technology, our operating results and ability to manage our business effectively could be adversely affected.

In connection with our transition to self-management, we intend to implement a new information technology system which includes new accounting software. As we implement the new system, we may experience temporary interruptions or failures in our systems that could adversely impact our operating results and our ability to report accurate financial results in a timely manner. There is no assurance that the new systems will operate as designed, which could result in an adverse impact on our operating results, cash flows and financial condition.

We have experienced aggregate net losses attributable to our common stockholders, including approximately $47.0 million between January 1, 2010 and June 30, 2013, and we may experience future losses.

We had net losses attributable to our common stockholders of approximately $4.7 million, $9.2 million, $13.5 million and $19.5 million for the six months ended June 30, 2013 and for the years ended December 31, 2012, 2011 and 2010, respectively. If we continue to incur net losses in the future or such losses increase, our financial condition, results of operations, cash flow and our ability to service our indebtedness and make distributions to our stockholders would be materially and adversely affected, any of which could adversely affect the market price of our Class A common stock.

 

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Index to Financial Statements

We are subject to the credit risk of our customers. The failure of any of our customers to make payments due to us under supply agreements could have an adverse impact on our financial performance.

Current and future customers who agree to purchase our timber under supply contracts will range in credit quality from high to low. We assume the full credit risk of these parties, as we have no payment guarantees under the contract or insurance if one of these parties fails to make payments to us. While we intend to continue acquiring timberlands in well-developed and active timber markets with access to numerous customers, we may not be successful in this endeavor. Depending upon the location of any additional timberlands we acquire and the supply agreements we enter into, our supply agreements may be concentrated among a small number of customers. Even though we may have legal recourse under our contracts, we may not have any practical recourse to recover payments from some of our customers if they default on their obligations to us. Any bankruptcy or insolvency of our customers, or failure or delay by these parties to make payments to us under our agreements, would cause us to lose the revenue associated with these payments and adversely impact our cash flow, financial condition and results of operations.

We intend to sell portions of our timberlands, either because they are HBU properties or in response to changing conditions, but if we are unable to sell these timberlands promptly or at the price that we anticipate, our land sale revenues may be reduced, which could reduce the cash available for distribution to our stockholders.

On an annual basis, we intend to sell approximately 1% to 2% of our fee timberland acreage, specifically timberlands that we have determined have become more valuable for development, recreational, conservation and other uses than for growing timber, which we refer to as HBU properties. We intend to use the proceeds from these sales to support our distributions to our stockholders. We may also sell portions of our timberland from time to time in response to changing economic, financial or investment conditions. Because timberlands are relatively illiquid investments, our ability to promptly sell timberlands is limited. The following factors, among others, may adversely affect the timing and amount of our income generated by sales of our timberlands:

 

  Ÿ  

general economic conditions;

 

  Ÿ  

availability of funding for governmental agencies, developers, conservation organizations, individuals and others to purchase our timberlands for recreational, conservation, residential or other purposes;

 

  Ÿ  

local real estate market conditions, such as oversupply of, or reduced demand for, properties sharing the same or similar characteristics as our timberlands;

 

  Ÿ  

competition from other sellers of land and real estate developers;

 

  Ÿ  

weather conditions or natural disasters having an adverse effect on our properties;

 

  Ÿ  

relative illiquidity of real estate investments;

 

  Ÿ  

forestry management costs associated with maintaining and managing timberlands;

 

  Ÿ  

changes in interest rates and in the availability, cost and terms of debt financing;

 

  Ÿ  

impact of federal, state and local land use and environmental protection laws;

 

  Ÿ  

changes in governmental laws and regulations, fiscal policies and zoning ordinances, and the related costs of compliance with laws and regulations, fiscal policies and ordinances; or

 

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  Ÿ  

it may be necessary to delay sales in order to minimize the risk that gains would be subject to the 100% prohibited transactions tax.

In acquiring timberlands and in entering into long-term supply agreements, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond quickly to market opportunities could adversely impact our results of operations and reduce our cash available to pay distributions to our stockholders.

Large-scale increases in the supply of timber may affect timber prices and reduce our revenues.

The supply of timber available for sale in the market could increase for a number of reasons, including producers introducing new capacity or increasing harvest levels. Some governmental agencies, principally the U.S.D.A. Forest Service and the U.S. Department of the Interior’s Bureau of Land Management, own large amounts of timberlands. If these agencies choose to sell more timber from their holdings than they have been selling in recent years, timber prices could fall and our revenues could be reduced. Any large reduction in the revenues we expect to earn from our timberlands would reduce the returns, if any, we are able to achieve for our stockholders.

Uninsured losses relating to the timberlands we own and may acquire may reduce our stockholders’ returns.

The volume and value of timber that can be harvested from the timberlands we own and may acquire may be limited by natural disasters such as fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding, and other weather conditions and natural disasters, as well as other causes such as theft, trespass, condemnation, or other casualty. We do not intend to maintain insurance for any loss to our standing timber from natural disasters or other causes. Any funds used for such losses would reduce cash available for distributions to our stockholders.

The forest products industry and the market for timberlands are highly competitive, which could force us to pay higher prices for our properties or limit the amount of suitable timberlands we are able to acquire and thereby reduce our profitability and the return on an investment in us.

The forest products industry is highly competitive in terms of price and quality. We have only made two significant timberland property acquisitions. To the extent that we have access to capital to make acquisitions, we will be competing for timberlands with other entities, including traditional corporations and REITs, forestry products companies, real estate limited partnerships, pension funds and their advisors, bank and insurance company investment accounts, individuals, and other entities. Many of our competitors have more experience, greater financial resources, and a greater ability than we do to borrow funds to acquire properties. In recent years, the timberland investment business has experienced increasing competition for the purchase of timberlands from both commercial and residential real estate developers as a result of urban and suburban expansion. We expect this trend to continue. Many real estate developers have substantially greater financial resources than our company. In addition, many developers tend to use high relative amounts of leverage to acquire development parcels, which we may not be willing or able to incur. Purchases of timberland parcels for development not only reduce the amount of suitable timberland investment properties, but also tend to separate larger, existing timberlands into smaller units, which have reduced economies of scale and are less desirable for harvesting and the future marketability of the property for timber harvesting or other uses. Competition from real

 

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estate developers and others limits the amount of suitable timberland investments available for us to acquire, and any increase in the prices we expect to pay for timberland may reduce the returns, if any, we are able to achieve for our stockholders.

Harvesting our timber may be subject to limitations that could adversely affect our results of operations.

Our primary assets are our timberlands. Weather conditions, timber growth cycles, property access limitations, availability of contract loggers and haulers, and regulatory requirements associated with the protection of wildlife and water resources may restrict our ability to harvest our timberlands. Other factors that may restrict our timber harvest include damage to our standing timber by fire, hurricane, earthquake, insect infestation, drought, disease, ice storms, windstorms, flooding and other weather conditions and natural disasters. Changes in global climate conditions could intensify one or more of these factors. Although damage from such causes usually is localized and affects only a limited percentage of standing timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited. As is common in the forest products industry, we do not maintain insurance coverage for damage to our timberlands. Furthermore, we may choose to invest in timberlands that are intermingled with sections of federal land managed by the U.S.D.A. Forest Service or other private owners. In many cases, access might be achieved only through a road or roads built across adjacent federal or private land. In order to access these intermingled timberlands, we would need to obtain either temporary or permanent access rights to these lands from time to time. Our revenue, net income, and cash flow from our operations will be dependent to a significant extent on the continued ability to harvest timber on our timberlands at adequate levels and in a timely manner. Therefore, if we were to be restricted from harvesting on a significant portion of our timberlands for a prolonged period of time, or if material damage to a significant portion of our standing timber were to occur, then we could suffer an adverse impact to our results of operations.

We face possible liability for environmental clean-up costs and wildlife protection laws related to the timberlands we acquire, which could increase our costs and reduce our profitability and cash distributions to our stockholders.

Our business is subject to laws, regulations, and related judicial decisions and administrative interpretations relating to, among other things, the protection of timberlands, endangered species, timber harvesting practices, recreation and aesthetics and the protection of natural resources, air and water quality that are subject to change and frequently enacted. These changes may adversely affect our ability to harvest and sell timber, and remediate contaminated properties. We are subject to regulation under, among other laws, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the National Environmental Policy Act, and the Endangered Species Act, as well as comparable state laws and regulations. Violations of various statutory and regulatory programs that apply to our operations could result in civil penalties; damages, including natural resource damages; remediation expenses; potential injunctions; cease-and-desist orders; and criminal penalties.

Laws and regulations protecting the environment have generally become more stringent in recent years and could become more stringent in the future. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to the person’s negligence or fault. We may acquire timberlands subject to environmental liabilities, such as clean-up of hazardous substance contamination and other existing or potential liabilities of which we are not aware, even after investigations of the properties. We may not be able to recover any of these liabilities from the sellers of these properties. The cost of these clean-ups could therefore increase

 

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our operating costs and reduce our profitability and cash available to make distributions to our stockholders. The existence of contamination or liability also may materially impair our ability to use or sell affected timberlands.

The Endangered Species Act and comparable state laws protect species threatened with possible extinction. At least one species present on our timberlands has been, and in the future more may be, protected under these laws. Protection of threatened and endangered species may include restrictions on timber harvesting, road-building, and other forest practices on private, federal, and state land containing the affected species. The size of the area subject to restriction varies depending on the protected species at issue, the time of year, and other factors, but can range from less than one acre to several thousand acres.

The Clean Water Act regulates the direct and indirect discharge of pollutants into the waters of the United States. Under the Clean Water Act, it is unlawful to discharge any pollutant from a “point source” into navigable waters of the United States without a permit obtained under the National Pollutant Discharge Elimination System permit program of the Environmental Protection Agency, or the EPA. Storm water from roads supporting timber operations that is conveyed through ditches, culverts and channels are exempted by EPA rule from this permit requirement, leaving these sources of water discharge to state regulation. The scope of these state regulations vary by state and are subject to change, and the EPA’s exemption has recently been subject to legal challenges and legislative responses. To the extent we are subject to future federal or state regulation of storm water runoff from roads supporting timber operations, our operational costs to comply with such regulations could increase and our results of operations could suffer.

We may be unable to obtain accurate data on the volume and quality of the standing timber on a property that we intend to acquire, which may impair our ability to derive the anticipated benefits from the timberlands.

The quality and reliability of data concerning timberlands varies greatly. Professional foresters collect data on species, volumes, and quantities of timber on a particular property by conducting “cruises” through the property. During these cruises, foresters sample timber stands at specified intervals and locations that have been pre-determined by forest statisticians. A cruise that is poorly designed or executed can result in misleading data. In addition, errors in compiling the data may lead to erroneous estimates of the volume and quality of the timber on a particular property. The latest inventory data available at the time of a timberland transaction may be based on cruises that are more than one year old. Timberland cruises are time-consuming and expensive, and, as a result, are usually not conducted on an annual basis. Consequently, timber inventories are often updated without a cruise by subtracting out the volume of timber that was harvested (usually an accurate number) and by adding in the volume of estimated tree growth (usually a less accurate number than the removal number). We may not be able to require an adjustment to the property purchase price from the seller if a post-acquisition cruise reveals a significant difference in timber volumes or quality from the pre-acquisition data. If we are unable to obtain or develop accurate and reliable data related to the timberlands in which we invest, then our assumptions, forecasts, and valuations relating to those timberlands will be inaccurate. As a result, we may not be able to realize the anticipated returns from those timberlands or to sell the property for the price that we anticipated, which could negatively impact our financial condition and results of operations.

Our estimates of the timber growth rates on our properties may be inaccurate, which would impair our ability to realize expected revenues from those properties.

We rely upon estimates of the timber growth rates and yield when acquiring and managing timberlands. These estimates are central to forecasting our anticipated timber revenues and

 

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Index to Financial Statements

expected cash flows. Growth rates and yield estimates are developed by forest statisticians using measurements of trees in research plots on a property. The growth equations predict the rate of height and diameter growth of trees so that foresters can estimate the volume of timber that may be present in the tree stand at a given age. Tree growth varies by soil type, geographic area, and climate. Inappropriate application of growth equations in forest management planning may lead to inaccurate estimates of future volumes. If these estimates are inaccurate, our ability to manage our timberlands in a profitable manner will be diminished, which may cause our results of operations to be adversely affected.

Changes in assessments, property tax rates and state property tax laws may reduce our net income and our ability to make distributions to our stockholders.

Our expenses may be increased by assessments of our timberlands and changes in property tax laws. We generally intend to hold our timberlands for a substantial amount of time. Property values tend to increase over time, and as property values increase, the related property taxes generally also increase, which would increase the amount of taxes we pay. In addition, changes to state tax laws or local initiatives could also lead to higher tax rates on our timberlands. Because each parcel of a large timberland property is independently assessed for property tax purposes, our timberlands may receive a higher assessment and be subject to higher property taxes. In some cases, the cost of the property taxes may exceed the income that could be produced from that parcel if we continue to hold it as timberland. If our timberlands become subject to higher tax rates, such costs could have a material adverse effect on our financial condition, results of operations and ability to make distributions to our stockholders.

Changes in land uses in the vicinity of our timberlands may increase the amount of the property that we classify as HBU properties, and property tax regulations may reduce our ability to realize the values of those HBU properties.

An increase in the value of other properties in the vicinity of our timberlands may prompt us to sell parcels of our land as HBU properties. Local, county and state regulations may prohibit us from, or penalize us for, selling a parcel of timberland for real estate development. Some states regulate the number of times that a large timberland property may be subdivided within a specified time period, which would also limit our ability to sell our HBU property. In addition, in some states timberland is subject to certain property tax policies that are designed to encourage the owner of the timberland to keep the land undeveloped. These policies may result in lower taxes per acre for our timberlands as long as they are used for timber purposes only. However, if we sell a parcel of timberland in such states as HBU property, we may trigger tax penalties, which could require us to repay all of the tax benefits that we have received. Our inability to sell our HBU properties on terms that are favorable to us could negatively affect our financial condition and our ability to make distributions to our stockholders.

We may be unable to properly estimate non-timber revenues from any properties that we acquire, which would impair our ability to acquire attractive properties, as well as our ability to derive the anticipated revenues from those properties.

If we acquire additional properties, we likely will expect to realize revenues from timber and non-timber-related activities, such as the sale of conservation easements and recreational leases. Non-timber activities can contribute significantly to the revenues that we derive from a particular property. We will rely on estimates to forecast the amount and extent of revenues from non-timber-related activities on our timberlands. If our estimates concerning the revenue from non-timber-related activities are incorrect, we will not be able to realize the projected revenues. If we are unable to realize the level of revenues that we expect from non-timber activities, our revenues

 

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Index to Financial Statements

from the underlying timberland would be less than expected and our results of operations and ability to make distributions to our stockholders may be negatively impacted.

Actions of a joint venture partner could reduce the returns on our joint venture investments and adversely affect our results of operations.

We may participate in joint venture transactions from time to time, including but not limited to joint ventures involving the ownership and management of timberlands. Any joint venture involves risks including, but not limited to, the risk that one or more of our joint venture partners takes actions that are contrary to our agreed upon terms, our instructions to them or to our policies or objectives, any one of which could cause adverse consequences for us.

The impacts of any climate-related legislation or regulation remain uncertain at this time.

There are several international, federal and state-level proposals addressing domestic and global climate issues. Generally, such proposals in the United States could impose regulation or taxation on the production of carbon dioxide and other “greenhouse gases” in an attempt to reduce emissions to the atmosphere, and provide tax and other incentives to produce and use more “clean energy.” Any future legislative and regulatory activity in this area could, in some way, affect us, but it is unclear at this time whether any such impact would be positive, negative or significant.

If we sell properties and provide financing to purchasers, defaults by the purchasers would decrease our cash flows and limit our ability to make distributions to our stockholders.

In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our financial performance. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or our reinvestment of such proceeds in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced, or otherwise disposed of.

Any international investments we make will be subject to changes in global market trends that could adversely impact our ability to make distributions to our stockholders.

We may determine to acquire timberlands located in timber-producing regions outside the United States. These international investments could cause our business to be subject to unexpected, uncontrollable and rapidly changing events and circumstances in addition to those experienced in U.S. locations. Adverse changes in the following factors, among others, could have a negative impact on our business, results of operations, and our financial condition:

 

  Ÿ  

effects of exposure to currency other than U.S. dollars, due to having non-U.S. customers and foreign operations;

 

  Ÿ  

potentially adverse tax consequences, including restrictions on the repatriation of earnings;

 

  Ÿ  

regulatory, social, political, labor or economic conditions in a specific country or region; and

 

  Ÿ  

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.

 

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Risks Related to Our Organizational Structure

Our board of directors may change significant corporate policies without stockholder approval.

Our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. As a result, the ability of our stockholders to control our policies and practices is extremely limited. We could make investments and engage in business activities that are different from, and possibly riskier than, the investments and businesses described in this prospectus. In addition, our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal and regulatory requirements, including the listing standards of the NYSE. A change in these policies could have an adverse effect on our financial condition, results of operations, cash flows, per share trading price of our Class A common stock and ability to satisfy our debt service obligations and to make distributions to our stockholders.

Our board of directors may increase the number of authorized shares of stock and issue stock without stockholder approval, including in order to discourage a third party from acquiring our company in a manner that could result in a premium price to our stockholders.

Subject to applicable legal and regulatory requirements, our charter authorizes our board of directors, without stockholder approval, to amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock and to set the preferences, rights and other terms of such classified or unclassified shares. As a result, we may issue series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common stock. In addition, our board of directors could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders may believe is in their best interests.

In order to preserve our status as a REIT, our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price for our common stock or otherwise benefit our stockholders.

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT for federal income tax purposes. Unless exempted by our board of directors (prospectively or retroactively), no person may actually or constructively own more than 9.8% of the outstanding shares of our capital stock or more than 9.8% (by value or number of shares, whichever is more restrictive) of the outstanding shares of our common stock. This restriction may have the effect of delaying, deferring or preventing a change in control of our company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our common stock or otherwise be in the best interest of our stockholders.

 

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Index to Financial Statements

Certain provisions of Maryland law could inhibit changes in control of us, which could lower the value of our Class A common stock.

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting or deterring a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

  Ÿ  

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter may impose supermajority stockholder voting requirements unless certain minimum price conditions are satisfied; and

 

  Ÿ  

“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of our board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, following our opt out, in the future, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and our board of directors may, by amendment to our bylaws and without stockholder approval, opt in to the control share provisions of the MGCL.

Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then current market price.

In addition, the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or that our stockholders may believe to be in their best interests. Likewise, if our board of directors were to opt in to the business combination provisions of the MGCL or the provisions of Title 3, Subtitle 8 of the MGCL, or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded by our board of directors, these provisions of the MGCL could have similar anti-takeover effects. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”

 

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Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions that you do not believe are in your best interests.

Maryland law provides that a director or officer has no liability in that capacity if he or she satisfies his or her duties to us. As permitted by the MGCL, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

  Ÿ  

actual receipt of an improper benefit or profit in money, property or services; or

 

  Ÿ  

a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter obligates us to indemnify our directors and officers for actions taken by them in that capacity to the maximum extent permitted by Maryland law. The indemnification agreements that we will enter into with our directors and certain of our officers will also require us, to indemnify these directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholder may have more limited rights against our directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited. In addition, we are obligated to advance the defense costs incurred by our directors and our officers, and may, in the discretion of our board of directors, advance the defense costs incurred by our employees and other agents, in connection with legal proceedings.

Risks Related to Our Debt Financing

We have a substantial amount of indebtedness outstanding, which could adversely affect our financial health and operating flexibility.

In September 2012, we borrowed approximately $133.0 million from CoBank to refinance the outstanding loan balance and to partially fund a property acquisition related to a portion of our timberlands that we held pursuant to a ground lease. As of June 30, 2013, the CoBank loan had a principal balance of approximately $132.4 million, which we must repay on or before August 11, 2018. The CoBank loan is secured by, among other things, a first priority security interest in our timberlands. We intend to repay approximately $         of the CoBank loan using the proceeds of this offering.

Our substantial indebtedness and any indebtedness we may incur in the future could have important consequences to us and the trading price of our Class A common stock, including:

 

  Ÿ  

limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, execution of our growth strategy or other purposes;

 

  Ÿ  

limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service the debt;

 

  Ÿ  

increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates;

 

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  Ÿ  

limiting our ability to capitalize on business opportunities, including the acquisition of additional properties, and to react to competitive pressures and adverse changes in government regulation;

 

  Ÿ  

limiting our ability or increasing the costs to refinance indebtedness;

 

  Ÿ  

limiting our ability to enter into marketing and hedging transactions by reducing the number of counterparties with whom we can enter into such transactions as well as the volume of those transactions;

 

  Ÿ  

forcing us to dispose of one or more properties, possibly on disadvantageous terms;

 

  Ÿ  

forcing us to sell additional equity securities at prices that may be dilutive to existing stockholders;

 

  Ÿ  

causing us to default on our obligations or violate restrictive covenants, in which case the lenders or mortgagees may accelerate our debt obligations, foreclose on the properties that secure their loans and take control of our properties that secure their loans and collect rents and other property income; and

 

  Ÿ  

in the event of a default under any of our recourse indebtedness or in certain circumstances under our mortgage indebtedness, we would be liable for any deficiency between the value of the property securing such loan and the principal and accrued interest on the loan.

If any one of these events were to occur, our financial condition, results of operations, cash flow and our ability to satisfy our principal and interest obligations could be materially and adversely affected.

Our financial condition could be adversely affected by financial and other covenants and other provisions under the CoBank loan or other debt agreements.

The CoBank loan agreement requires compliance with certain financial and operating covenants, including, among other things, covenants that require us to maintain certain leverage and coverage ratios and covenants that prohibit or restrict our ability to incur additional indebtedness, grant liens on our real or personal property, make certain investments, dispose of our assets and enter into certain other types of transactions. The CoBank loan also prohibits us from declaring, setting aside funds for, or paying any dividend, distribution, or other payment to our stockholders other than as required to maintain our REIT qualification if our LTV ratio is greater than or equal to 40%. So long as our LTV ratio remains below 40% and we maintain a minimum fixed-charge coverage ratio of 1.05:1:00, we have the ability to declare, set aside funds for, pay dividends or distributions, or make other payments to our stockholders from operating cash flows on a discretionary basis after making scheduled payments of principal and interest on the loans and funding certain reserve accounts. These provisions could limit our ability to make distributions to our stockholders, obtain additional funds needed to address cash shortfalls or pursue growth opportunities or transactions that would provide substantial returns to our stockholders. The restrictions in the CoBank loan agreement may also prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. In addition, a breach of these covenants or other event of default would allow CoBank to accelerate payment of the loan. If payment is accelerated, our assets may not be sufficient to repay such debt in full and, as a result, such an event may have a material adverse effect on our financial condition. Given the restrictions in our debt covenants on these and other

 

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activities, we may be significantly limited in our operating and financial flexibility and may be limited in our ability to respond to changes in our business or competitive activities in the future.

We may incur additional indebtedness which could increase our business risks and may reduce the value of your investment.

We have acquired, and in the future may acquire, real properties by borrowing funds. In addition, we may incur mortgage debt and pledge some or all of our real properties as security for that debt to obtain funds to acquire additional real properties. We may also borrow funds if needed to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow funds if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. Our bylaws do not limit us from incurring debt until our aggregate debt would exceed 200% of our net assets.

Significant borrowings by us increase the risks of a stockholder’s investment. If there is a shortfall between the cash flow from our properties and the cash flow needed to service our indebtedness, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of a stockholder’s investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages or other indebtedness contains cross-collateralization or cross-default provisions, a default on a single loan could affect multiple properties.

Our decision to hedge against interest rate changes may have a material adverse effect on our financial results and condition, and there is no assurance that our hedges will be effective.

We have used interest rate hedging arrangements in the past in order to manage our exposure to interest rate volatility, and may in the future do so again. These hedging arrangements involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income that we may earn from hedging transactions may be limited by federal tax provisions governing REITs, and that these arrangements may result in higher interest rates than we would otherwise pay. Moreover, no amount of hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and financial condition.

High mortgage interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income, and the amount of cash distributions we can make.

If mortgage debt is unavailable at reasonable interest rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans become due, or of being unable to refinance on favorable

 

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terms. If interest rates are higher when we refinance the properties, our income could be reduced. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

Increases in interest rates could increase the amount of our debt payments and hinder our ability to pay distributions to our stockholders.

We have incurred significant indebtedness that accrues interest at a variable rate, and we may incur additional debt in the future. Interest we pay under the CoBank loan and any other debt we incur will reduce our operating cash flows and hinder our ability to make distributions to our stockholders. Additionally, if we incur additional variable-rate debt, increases in interest rates would increase our interest cost, which would reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of high interest rates, we could be required to sell one or more of our investments in order to repay the debt, which sale at that time might not permit realization of the maximum return on such investments.

Economic conditions may have an impact on our business, our financial condition, and our ability to obtain debt financing in ways that we currently cannot predict.

Turmoil in the global financial system may have an impact on our business and our financial condition. Despite improved access to capital for some companies, the capital and credit markets continue to be affected by extreme volatility and have experienced disruption during the past several years. The health of the global capital markets remains a concern. We have relied on debt financing to finance our timberlands. As a result of the uncertainties in the credit market, we may not be able to refinance our existing indebtedness or to obtain additional debt financing on attractive terms. If we are not able to refinance existing indebtedness on attractive terms at its maturity, we may be forced to dispose of some of our assets. Disruptions in the financial markets could have an impact on our interest rate swap agreements if our counterparties are forced to default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, or other reasons. We may be materially and adversely affected in the event of a significant default by one of our counterparties. In addition, depressed economic conditions could influence the levels of consumer spending and reduce the demand for goods produced from our wood, which would have a material adverse effect on our financial condition. Our ability to make future principal and interest payments on our debt depends upon our future performance, which is subject to general economic conditions; industry cycles; and financial, business, and other factors affecting our operations, many of which are beyond our control.

Federal Income Tax Risks

Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders and materially and adversely affect our financial condition and results of operations.

We believe that we have been organized, owned and operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, and that our intended manner of ownership and operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for federal income tax purposes. Our qualification as a REIT depends upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets, and other tests imposed by the Code. We cannot assure you that we will satisfy

 

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the requirements for REIT qualification in the future. Future legislative, judicial or administrative changes to the federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.

Stockholders should be aware that qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. In 2012, we entered into an option agreement with a prospective buyer relating to the sale of a timberlands parcel and received a substantial option premium in connection therewith. If that option were to lapse unexercised, we would be required to include the premium in gross income. While an existing IRS regulation purports to treat premium income from a lapsed option on real estate as nonqualifying gross income for REIT purposes, at the time we entered into the option agreement, we obtained an opinion from one of our tax advisors concluding that if the option lapsed unexercised, the premium income more likely than not would be treated as gain from the sale of real property, and therefore qualifying income, for purposes of the 75% and 95% gross income tests. Such opinion is based, in part, on the subsequent enactment of a statutory provision which treats income from the lapse of an option on property as gain from the sale of a capital asset if the underlying property is a capital asset. If the option were to lapse unexercised, a court were to disagree with such opinion and the resulting nonqualifying gross income caused us to fail to satisfy either or both gross income tests, we would not lose our REIT status if we reasonably relied on a reasoned opinion of our tax advisor, and instead we would be subject to a tax equal to the amount by which such nonqualifying gross income causes us to fail the gross income tests, multiplied by a fraction intended to reflect our profitability. We believe this reasonable cause exception should apply in that event, although there can be no assurance that the IRS or the courts would agree.

If we fail to qualify as a REIT for any taxable year, we will be subject to federal and state income tax on our taxable income, if any, at corporate rates and, possibly, penalties. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. To the extent we have taxable net income, losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends-paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock.

Even if we continue to qualify to be taxed as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flows.

Even if we continue to qualify to be taxed as a REIT for federal income tax purposes, we may be subject to some federal, state, and local taxes on our income or property. For example:

 

  Ÿ  

In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income (including net capital gain), we will be subject to federal and state corporate income tax on the undistributed income.

 

  Ÿ  

We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

 

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  Ÿ  

If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other nonqualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

 

  Ÿ  

If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain may be subject to the 100% “prohibited transaction” tax.

 

  Ÿ  

Our taxable REIT subsidiaries will be subject to tax on their taxable income.

Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on stockholders’ investments.

As a REIT, we would be subject to a 100% tax on any net income from “prohibited transactions.” In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business. Delivered logs, if harvested and sold by a REIT directly, would likely constitute property held for sale to customers in the ordinary course of business and would, therefore, be subject to the prohibited transactions tax if sold at a gain. Accordingly, under the timber agreements, we sell standing timber to CatchMark Timber TRS, Inc., under pay as cut contracts which generate capital gain to us under Section 631(b) of the Code (to the extent the timber has been held by us for more than one year), and CatchMark Timber TRS, in turn, harvests such timber and sells logs to MeadWestvaco. This structure should avoid the prohibited transactions tax, and we use a similar structure for the sale of delivered logs to other customers. However, if the Internal Revenue Service, or the IRS, were to successfully disregard CatchMark Timber TRS’ role as the harvester and seller of such logs for federal income tax purposes, our income, if any, from such sales could be subject to the 100% penalty tax. In addition, sales by us of HBU property at the REIT level could, in certain circumstances, constitute prohibited transactions. We intend to avoid the 100% prohibited transaction tax by satisfying safe harbors in the Code, structuring dispositions as non-taxable like-kind exchanges or making sales that otherwise would be prohibited transactions through one or more TRSs whose taxable income is subject to regular corporate income tax. We may not, however, always be able to identify properties that might be treated as part of a “dealer” land sales business. For example, if we sell any HBU properties at the REIT level that we incorrectly identify as property not held for sale to customers in the ordinary course of business or that subsequently become properties held for sale to customers in the ordinary course of business, we may be subject to the 100% prohibited transactions tax.

The taxable income of CatchMark Timber TRS is subject to federal and applicable state and local income tax. While we seek to structure the pricing of our timber sales to CatchMark Timber TRS at market rates, the IRS could assert that such pricing does not reflect arm’s-length pricing and impute additional taxable income to CatchMark Timber TRS.

To maintain our REIT status, we may be forced to forgo otherwise attractive opportunities, which could lower the return on stockholders’ investments.

To qualify as a REIT, we must satisfy tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

 

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Even though we intend to maintain our REIT status, our cash dividends are not guaranteed and may fluctuate .

Generally, REITs are required to distribute 90% of their ordinary taxable income. We have substantial net operating losses that, subject to possible limitations, will reduce our taxable income. In addition, capital gains may be retained by us but would be subject to income taxes. If capital gains are retained rather than distributed, our stockholders would be notified and they would be deemed to have received a taxable distribution, with a refundable credit for any federal income tax paid by us. Accordingly, we will not be required to distribute material amounts of cash if substantially all of our taxable income is income from timber-cutting contracts or sales of timberland that is treated as capital gains income. Our board of directors, in its sole discretion, determines the amount of quarterly dividends to be provided to our stockholders based on consideration of a number of factors, including but not limited to, tax considerations. Consequently, our dividend levels may fluctuate.

Our use of taxable REIT subsidiaries may affect the value of our common stock relative to the share price of other REITs.

We conduct a portion of our business activities through one or more taxable REIT subsidiaries, or TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying REIT income if earned directly by us. Our use of TRSs enables us to engage in non-REIT-qualifying business activities. However, under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities of one or more TRSs. This limitation may affect our ability to increase the size of our non-REIT-qualifying operations. Furthermore, because the income earned by our TRSs is subject to corporate income tax and is not subject to the requirement to distribute annually at least 90% of our REIT taxable income to our stockholders, our use of TRSs may cause our common stock to be valued differently than the shares of other REITs that do not use TRSs as extensively as we use them.

We may be limited in our ability to fund distributions on our capital stock and pay our indebtedness using cash generated through our TRSs .

Our ability to receive dividends from our TRSs is limited by the rules with which we must comply to maintain our status as a REIT. In particular, at least 75% of gross income for each taxable year as a REIT must be derived from passive real estate sources including sales of our standing timber and other types of qualifying real estate income, and no more than 25% of our gross income may consist of dividends from TRSs and other non-real estate income. This limitation on our ability to receive dividends from our TRSs may affect our ability to fund cash distributions to our stockholders or make payments on our borrowings using cash flows from our TRSs. The net income of our TRSs is not required to be distributed, and income that is not distributed will not be subject to the REIT income distribution requirement.

We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.

At any time, the federal income tax laws governing REITs or the administrative and judicial interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative and judicial interpretation, or any amendment to any existing federal income tax law, regulation or administrative or judicial interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative and judicial interpretation.

 

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Risks Related to this Offering

Because we have a large number of stockholders and our shares have not been listed on a national securities exchange prior to this offering, there may be significant pent-up demand to sell our shares. Significant sales of our Class A common stock, or the perception that significant sales of such shares could occur, may cause the price of our Class A common stock to decline significantly.

As of             , 2013, we had approximately                 million shares of common stock issued and outstanding after giving effect to the Recapitalization, consisting of approximately                 million shares of our Class A common stock and                 million shares of our Class B common stock.

Prior to this offering, our common stock was not listed on any national securities exchange and the ability of stockholders to liquidate their investments was very limited. Upon completion of this offering and the listing,                 shares of our Class A common stock will be freely tradable. As a result, there may be significant pent-up demand to sell shares of our common stock. A large volume of sales of shares of our Class A common stock (whether they are Class A shares that are issued in the offering, Class A shares that are held by our existing stockholders upon the closing of the offering, or Class A shares created by the automatic conversion of our Class B shares over time) could decrease the prevailing market price of our Class A common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our Class A shares are not affected, the mere perception of the possibility of these sales could depress the market price of our Class A common stock and have a negative effect on our ability to raise capital in the future.

There is currently no public market for our shares of Class A common stock, and we cannot assure you that a public market will develop.

Prior to this offering, there has been no public market for our shares of Class A common stock, and we cannot assure you that an active trading market will develop or be sustained. In the absence of a public trading market, a stockholder may be unable to liquidate an investment in our Class A common stock. The public offering price for our Class A common stock will be determined by agreement among us and the underwriters, and we cannot assure you that our Class A common stock will not trade below the public offering price following the completion of this offering. Whether a public market for shares of our Class A common stock will develop will depend on a number of factors including the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance and general stock and bond market conditions. If a robust public market for our Class A common stock does not develop, you may have difficulty selling shares of our Class A common stock, which could adversely affect the price that you receive for such shares.

Although our Class B common stock will not be listed on a national securities exchange following the closing of this offering, sales of such shares or the perception that such sales could occur could have a material adverse effect on the trading price of our Class A common stock.

After giving effect to this offering and the Recapitalization, approximately                 million shares (or                 million shares if the underwriters exercise their overallotment option in full) of our common stock will be issued and outstanding, of which approximately                 million, or     % (    % if the underwriters exercise their overallotment option in full), will be shares of our

 

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Class B common stock, which is divided equally among our Class B-1, Class B-2 and Class B-3 common stock. Although our Class B common stock will not be listed on a national securities exchange, it is not subject to transfer restrictions (other than the restrictions on ownership and transfer of stock set forth in our charter); therefore, such stock will be freely tradable. As a result, it is possible that a market may develop for shares of our Class B common stock, and sales of such shares, or the perception that such sales could occur, could have a material adverse effect on the trading price of our Class A common stock.

Additionally, all of our Class B common stock will be converted into Class A common stock over time. As a result, holders of shares of Class B common stock seeking to immediately liquidate their investment in our common stock could engage in immediate short sales of our Class A common stock prior to the date on which the Class B common stock converts into Class A common stock and use the shares of Class A common stock that they receive upon conversion of their Class B common stock to cover these short sales in the future. Such short sales could depress the market price of our Class A common stock and limit the effectiveness of the Recapitalization as a strategy for limiting the number of shares of our common stock held by our stockholders prior to this offering that may be sold shortly after this offering.

Future conversions of our Class B common stock could adversely affect the market price of our Class A common stock.

Following the Recapitalization, we will have                 million shares of each of our Class B-1, Class B-2 and Class B-3 common stock outstanding. Although our Class B common stock will not be listed on a national securities exchange, our Class B-1 common stock, Class B-2 common stock and Class B-3 common stock will convert automatically into Class A common stock months, months and months, respectively, following the listing. We cannot predict the effect that the conversion of shares of our Class B common stock into our Class A common stock will have on the market price of our Class A common stock, but these ongoing conversions may place constant downward pressure on the price of our Class A common stock, particularly at the time of each conversion.

The market price and trading volume of our Class A common stock may be volatile.

The U.S. stock markets, including the NYSE, on which we intend to have our Class A common stock listed under the symbol “CTT,” have experienced significant price and volume fluctuations. As a result, the market price of shares of our Class A common stock is likely to be similarly volatile, and investors in shares of our Class A common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. We cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future.

In addition to the risks listed in this “Risk Factors” section, a number of factors could negatively affect our share price or result in fluctuations in the price or trading volume of our Class A common stock, including:

 

  Ÿ  

the annual yield from distributions on our Class A common stock as compared to yields on other financial instruments;

 

  Ÿ  

equity issuances by us, or future sales of substantial amounts of our Class A common stock by our existing or future stockholders, or the perception that such issuances or future sales may occur;

 

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  Ÿ  

short sales or other derivative transactions with respect to our Class A common stock;

 

  Ÿ  

conversions of our Class B common stock into shares of our Class A common stock or sales of our Class B common stock or the perception that such sales may occur;

 

  Ÿ  

changes in market valuations of companies in the timberland or real estate industries;

 

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increases in market interest rates or a decrease in our distributions to stockholders that lead purchasers of our Class A common stock to demand a higher yield;

 

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fluctuations in stock market prices and volumes;

 

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additions or departures of key management personnel;

 

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our operating performance and the performance of other similar companies;

 

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actual or anticipated differences in our quarterly operating results;

 

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changes in expectations of future financial performance or changes in estimates of securities analysts;

 

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publication of research reports about us or our industry by securities analysts or failure of our results to meet expectations of securities analysts;

 

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failure to qualify as a REIT;

 

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adverse market reaction to any indebtedness we incur in the future;

 

  Ÿ  

strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

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the passage of legislation or other regulatory developments that adversely affect us or our industry;

 

  Ÿ  

speculation in the press or investment community;

 

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changes in our earnings;

 

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failure to satisfy the listing requirements of the NYSE;

 

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failure to comply with the requirements of the Sarbanes-Oxley Act;

 

  Ÿ  

actions by institutional stockholders;

 

  Ÿ  

changes in accounting principles; and

 

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general market conditions, including factors unrelated to our performance.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our cash flows, our ability to execute our business strategy and our ability to make distributions to our stockholders.

 

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If securities analysts do not publish research or reports about our business or if they downgrade our Class A common stock or our sector, the price of our common stock could decline.

The trading market for our Class A common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control analysts. Furthermore, if one or more of the analysts who do cover us downgrades our shares of common stock or our industry, or the stock of any of our competitors, the price of our shares could decline. If one or more of these analysts ceases coverage of our company, we could lose attention in the market, which in turn could cause the price of our shares of common stock to decline.

Future offerings of debt securities, which would be senior to our common stock, or equity securities, which would dilute our existing stockholders and may be senior to our common stock, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by offering debt or equity securities, including medium term notes, senior or subordinated notes and classes of preferred or common stock. Debt securities or shares of preferred stock will generally be entitled to receive interest payments or distributions, both current and in connection with any liquidation or sale, prior to the holders of our common stock. We are not required to offer any such additional debt or equity securities to existing common stockholders on a preemptive basis. Therefore, offerings of common stock or other equity securities may dilute the holdings of our existing stockholders. Future offerings of debt or equity securities, or the perception that such offerings may occur, may reduce the market price of our common stock or the distributions that we pay with respect to our common stock. Because we may generally issue any such debt or equity securities in the future without obtaining the consent of our stockholders, you will bear the risk of our future offerings reducing the market price of our common stock and diluting your proportionate ownership.

Increases in market interest rates may result in a decrease in the value of our Class A common stock.

One of the factors that may influence the price of our Class A common stock will be our distribution rate on the Class A common stock (as a percentage of the share price of our Class A common stock), relative to market interest rates. We have not paid any cash distributions prior to the commencement of this offering, although we expect to declare cash distributions in the future. If market interest rates increase, prospective purchasers of our Class A common stock may desire a higher yield on our Class A common stock or seek securities paying higher dividends or yields. Higher interest rates would not, however, result in more funds being available for distribution and, in fact, would likely increase our borrowing costs and might decrease our funds available for distribution, and therefore we may not be able, or may not choose to, pay a higher distribution rate. As a result, if interest rates rise, it is likely that the market price of our Class A common stock will decrease, because potential investors may require a higher dividend yield on our Class A common stock as market rates on interest-bearing securities, such as bonds, rise.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In particular, statements pertaining to our capital resources, property performance, distribution policy and results of operations contain forward-looking statements. Likewise, all our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategies, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

  Ÿ  

the cyclical nature of the forest products industry;

 

  Ÿ  

our history of not paying cash distributions and the fact that our future cash distributions are not guaranteed and may fluctuate;

 

  Ÿ  

our dependence on MeadWestvaco;

 

  Ÿ  

our ability to successfully execute our investment strategy;

 

  Ÿ  

our dependence on and access to external sources of capital for future growth;

 

  Ÿ  

our large percentage of operating expenses to total revenues compared to many other public companies;

 

  Ÿ  

economic conditions;

 

  Ÿ  

our dependence on Forest Resource Consultants to manage our timberlands;

 

  Ÿ  

our concentration on timerlands and lack of diversification;

 

  Ÿ  

adverse economic conditions and other developments in Georgia and Alabama where our timberlands are located;

 

  Ÿ  

our lack of a track record with our new management team;

 

  Ÿ  

our transition to self-management;

 

  Ÿ  

the risk that the transition services agreement and office sublease are terminated;

 

  Ÿ  

our ability to retain our key executive officers;

 

  Ÿ  

failure to maintain an effective system of disclosure controls and procedures and integrated internal controls;

 

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  Ÿ  

the transition to a new vendor of certain of our information technology systems, including our accounting technology;

 

  Ÿ  

the fact that we have recently experienced net losses attributable to our common stockholders and may continue to do so;

 

  Ÿ  

the credit risk of our customers;

 

  Ÿ  

our ability to sell portions of our timberlands;

 

  Ÿ  

changes in timber prices and the impact on our revenues;

 

  Ÿ  

our exposure to uninsured losses;

 

  Ÿ  

the competitive timberland industry, which could force us to pay higher prices for our properties;

 

  Ÿ  

limitations on our ability to harvest timber;

 

  Ÿ  

potential liability for environmental clean-up costs and wildlife protection laws;

 

  Ÿ  

our inability to obtain accurate data on the volume and quality of the timber we intend to acquire;

 

  Ÿ  

our estimates of timber growth rates may be inaccurate;

 

  Ÿ  

changes in assessments, property tax rates and state property tax law;

 

  Ÿ  

our indebtedness;

 

  Ÿ  

the financial and other convents contained in the documents governing our indebtedness;

 

  Ÿ  

increases in interest rates;

 

  Ÿ  

certain provisions of Maryland law could inhibit changes in control of us;

 

  Ÿ  

our failure to qualify as a REIT; and

 

  Ÿ  

the other factors identified in the section entitled “Risk Factors.”

For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section above entitled “Risk Factors.” You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us (or to third parties making the forward-looking statements). We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus, except as required by applicable law.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering, after deducting the underwriting discount and estimated expenses of the offering payable by us, will be approximately $         million (or approximately $         million if the underwriters exercise their overallotment option in full), assuming a public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus.

We intend to use approximately $         million of net proceeds received from this offering to redeem the outstanding shares of our Series A and B preferred stock currently held by Wells REF. We have the option to redeem the shares of Series A and B preferred stock at any time for a purchase price equal to $1,000 per share plus accrued dividends. Dividends accrued on the shares of Series A and B preferred stock issued from 2007 to 2009 at a rate of 8.5% per annum until May 2011 and, as a result of a waiver provided by Wells REF, have accrued since May 2011 at a rate of 1.0% per annum. Upon the closing of this offering, we anticipate that there will be no shares of Series A or B preferred stock outstanding. See “Description of Capital Stock” for more information.

We intend to use approximately $         million of the net proceeds received from this offering to repay a portion of the amounts outstanding under our term loan with CoBank ACB, or the CoBank loan. The CoBank loan bears interest at an adjustable rate based on the one-, two-, or three-month LIBOR plus an applicable margin ranging from 2.00% to 2.75%, or the LIBOR Rate, that varies based on the loan-to-value ratio, or our LTV ratio, at the time of determination. The weighted average interest rate on the CoBank loan, after consideration of an interest rate swap, was 2.63% as of June 30, 2013. As of August 31, 2013, the outstanding balance of the CoBank loan was approximately $132.4 million, all of which was outstanding under the CoBank term loan. On August 11, 2018, all outstanding principal, interest and any fees or other obligations on the CoBank loan will be due and payable in full. We used the amounts that we borrowed under the CoBank loan to repay other indebtedness and for general corporate purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview” for a further discussion of the terms of our CoBank loan.

Each $1.00 increase or decrease in the assumed public offering price of $         per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated expenses of the offering payable by us.

 

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TRANSITION TO SELF-MANAGEMENT AND RECAPITALIZATION

Transition to Self-Management

Prior to the filing of the registration statement of which this prospectus is a part and in connection with our transition to self-management, we changed our name to CatchMark Timber Trust, Inc. and our subsidiary operating partnership changed its name to CatchMark Timber Operating Partnership, L.P. In addition, we entered into a consulting agreement with Jerry Barag, John F. Rasor and certain entities they control pursuant to which they have agreed to provide us with consulting services in connection with the operation of our business. On or about November 1, 2013, we will terminate the consulting agreement and hire Messrs. Barag and Rasor, who will become our Chief Executive Officer and President and our Chief Operating Officer and Secretary, respectively. Messrs. Barag and Rasor have extensive experience in the timber and forest products industries.

In September 2013, we began the process of transitioning to a self-managed company. We were originally formed in 2005 by Wells Capital, a wholly owned subsidiary of Wells REF, and we are currently externally advised by Wells TIMO, a wholly owned subsidiary of Wells Capital, pursuant to the advisory agreement. On or about November 1, 2013 and prior to the commencement of this offering, we will terminate the advisory agreement and become self-managed. Following the completion of this offering, we will have no continuing affiliations with Wells Capital, Wells REF, Wells TIMO or Mr. Wells, other than the transition services agreement and sublease described below, which relate primarily to temporary support services.

We and our operating partnership have also entered into the master agreement with Wells REF and Wells TIMO, which provides the framework for our separation from Wells REF and its affiliates and our transition to self-management. As provided by the master agreement, we have also entered into a preferred stock redemption agreement with Wells REF, Leo F. Wells and Douglas P. Williams. Pursuant to the preferred stock redemption agreement, we have agreed to redeem the outstanding shares of our Series A and Series B preferred stock held by Wells REF for $         upon the closing this offering, and Messrs. Wells and Williams have agreed to resign from their respective officer positions on or about November 1, 2013 and from our board of directors immediately prior to the effectiveness of the registration statement relating to this offering.

Other than the payments made to Wells REF for certain services necessary for the operation of our business to be provided to us on a temporary basis to assist with our transition to self-management and the payments to Wells REF under a temporary sublease of office space, there will not be any consideration paid to Wells REF or its affiliates in connection with our transition to self-management. In addition, we will purchase the common partnership units held by Wells TIMO in our operating partnership upon the termination of the advisory agreement and redeem the Series A and Series B preferred stock held by Wells REF upon completion of this offering.

Set forth below are the actions and transactions that we expect to occur on or about November 1, 2013 and prior to commencement of this offering in connection with our transition to self-management:

 

  Ÿ  

the advisory agreement with Wells TIMO will be terminated;

 

  Ÿ  

we will hire up to eight employees of Wells REF who are primarily dedicated to providing services to our company;

 

  Ÿ  

Mr. Wells will resign as Chairman of the Board and President and Mr. Williams will resign as Executive Vice President, Secretary and Treasurer;

 

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  Ÿ  

our board of directors will elect Mr. Barag to serve as our Chief Executive Officer and President and Mr. Rasor to serve as our Chief Operating Officer and Secretary;

 

  Ÿ  

we and our operating partnership will enter into a transition services agreement with Wells REF, or the transition services agreement, pursuant to which Wells REF and its affiliates will provide us with consulting, support and transitional services at the direction of our officers and other personnel until June 30, 2014;

 

  Ÿ  

our operating partnership will enter into a sublease agreement with Wells REF pursuant to which we will sublease office space from Wells REF on a month-to-month basis until March 31, 2014;

 

  Ÿ  

the common partnership units held by Wells TIMO in our operating partnership will be purchased by our newly formed subsidiary for $1,312; and

 

  Ÿ  

we will redeem the special partnership units held by Wells TIMO in our operating partnership in exchange for no consideration.

Following the completion of the actions and transactions described above, we will be a self-administered and self-managed company.

Set forth below are the additional actions that we expect to occur upon the completion of this offering in connection with our further separation from Wells REF and its affiliates:

 

  Ÿ  

the shares of our Series A and B preferred stock held by Wells REF will be redeemed for $         with a portion of the net proceeds of this offering; and

 

  Ÿ  

Messrs. Barag and Rasor will be elected to our board of directors to fill the vacancies created by the resignations of Messrs. Wells and Williams.

Recapitalization

Prior to the commencement of this offering, we intend to effectuate a             -to-one reverse stock split of our outstanding common stock. We then intend to declare a stock dividend pursuant to which each then outstanding share of our common stock will receive:

 

  Ÿ  

one share of our Class B-1 common stock; plus

 

  Ÿ  

one share of our Class B-2 common stock; plus

 

  Ÿ  

one share of our Class B-3 common stock.

In connection with this stock dividend, we intend to designate our then-outstanding common stock as “Class A common stock.”

Our Class B common stock will be identical to our Class A common stock except that (1) we do not intend to list our Class B common stock on a national securities exchange and (2) shares of our Class B common stock will convert automatically into shares of our Class A common stock, pursuant to provisions of our charter, on the following schedule:

 

  Ÿ  

     months following the listing, in the case of our Class B-1 common stock;

 

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  Ÿ  

     months following the listing, in the case of our Class B-2 common stock; and

 

  Ÿ  

     months following the listing, in the case of our Class B-3 common stock.

On the             month anniversary of the listing, all shares of our Class B common stock will have converted into our Class A common stock. The terms of our Class A and Class B common stock are described more fully under “Description of Capital Stock” in this prospectus.

The Recapitalization also will have the effect of changing the total number of outstanding shares of our common stock. As of             , 2013, without giving effect to the Recapitalization, we had approximately              million shares of common stock outstanding. As of             , 2013, after giving effect to the Recapitalization, we would have had an aggregate of approximately              million shares of our Class A and Class B common stock outstanding, divided equally among Class A, Class B-1, Class B-2 and Class B-3. All of these shares, except for certain shares described in “Shares Eligible for Future Sale” and as otherwise provided in the restrictions on ownership and transfer of stock set forth in our charter, will be freely tradable upon the completion of this offering. Of this amount, approximately              million shares will be Class A common stock and approximately              million shares will be Class B common stock (representing 75% of our total outstanding common stock).

The Recapitalization will be effected on a pro rata basis with respect to all of our stockholders. Accordingly, it will not affect any stockholder’s proportionate ownership of our outstanding shares. We will not complete this offering unless we complete the Recapitalization. Unless otherwise indicated, all information in this prospectus gives effect to, and all share and per share amounts have been retroactively adjusted to give effect to, the Recapitalization. Unless otherwise indicated, share and per share amounts have not been adjusted to give effect to any exercise by the underwriters of their option to purchase up to an additional              shares of our Class A common stock solely to cover overallotments, if any.

 

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DISTRIBUTION POLICY

We intend to make regular quarterly distributions to holders of our common stock commencing with the completion of this offering. Although we have not previously paid distributions, we intend to pay a pro rata initial distribution for the period commencing on the completion of this offering and ending December 31, 2013 and regular quarterly distributions for fiscal years thereafter.

Timberlands represent a distinctive asset class that offers multiple means of value creation and return generation. Specifically, timberlands generally do not need to be harvested within a specific timeframe, which provides timberland owners a degree of flexibility to either harvest timber and generate current cash returns, or defer harvest and accrue returns in the form of biological growth and inventory appreciation. Historically, we have not paid a cash distribution to our common stockholders and, therefore, our operating strategy was generally not driven by specific cash flow targets (other than those required to comply with the terms of the CoBank loan) or distribution requirements. We also deferred significant harvest volume on our fee timberlands.

Upon completion of this offering, however, our new management team intends to implement a revised business strategy designed to increase our annual harvest volume based on a sustainable harvest plan in order to support a distribution to our common stockholders. We expect that a significant portion of any increased harvest volume will likely be sold to MeadWestvaco pursuant to the timber agreements, although we will also market and sell a portion of any increased volume to other third-party timber purchasers. Given the large number of forest products manufacturing facilities within a serviceable distance of our timberlands, our existing customer relationships and generally improving conditions in our end-markets, we believe that demand for our timber products will be sufficient to support our increased harvest volume. However, MeadWestvaco is not obligated to purchase additional volume under the timber agreements, and there can be no assurance that MeadWestvaco or other customers will purchase additional timber to support our revised business strategy. In addition, pursuant to our revised business strategy, we intend to establish annual HBU sales targets to further augment our stockholder distributions. Generally, we expect to monetize approximately 1% to 2% of our fee timberland acreage on an annual basis pursuant to our land sales program, although these results may vary and we may not ultimately be successful in generating land sales at these levels.

If we are successful in the execution of our revised business strategy following this offering, we expect that our initial quarterly distribution to common stockholders will be between $         per share and $         per share, or an annual distribution rate of approximately     % to     %, based on an estimated public offering price of $         , which is the midpoint of the price range set forth on the cover of this prospectus. If we are unable to sell our increased harvest volume or execute on our land sales program, we may not be able to generate cash returns necessary to support our estimated initial distribution range and our actual distribution may be lower than such range. Although we believe this estimated distribution range is based on reasonable assumptions regarding our anticipated revised harvest and HBU strategies, reflects our best currently available estimates and judgments, and presents, to the best of management’s current knowledge and belief, the expected course of action and the expected future financial performance of the company in order to form a reasonable basis for setting the initial distribution, no assurance can be given that the estimates will prove accurate, and actual distributions may be significantly different from our estimated range. The assumptions set forth above and used in determining our estimated range of initial distributions are not intended to be a projection or forecast of our actual results of operations or our liquidity and have been made for the sole purpose of estimating the range of our initial quarterly distribution rate.

 

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We cannot guarantee that our board of directors will not change our distribution policy in the future. The amount of distributions that we may pay to our common stockholders will be determined by our board of directors in its sole discretion and is dependent upon a number of factors, including, but not limited to, our financial condition, our capital requirements, our expectations of future sources of liquidity, current and future economic conditions and market demand for timber and timberlands and tax considerations. For more information regarding risk factors that could materially and adversely affect us and the payment of distributions, see “Risk Factors” beginning on page 15. If our operations do not generate sufficient cash flow to enable us to pay our intended or required distributions, we may be required to reduce our distributions or fund our distributions from working capital, borrowings or additional equity raises, or we may make a portion of required distributions in the form of a taxable stock dividend. However, we have no intention to use the net proceeds from this offering to make distributions nor do we intend to make distributions using shares of our common stock. Under certain circumstances, agreements relating to our indebtedness could limit our ability to make distributions to our common stockholders. Under our existing credit agreement, we may declare and pay distributions so long as our LTV ratio remains below 40% and we maintain a minimum fixed-charge coverage ratio of 1.05:1.00. This requirement has restricted our ability to pay cash distributions in the past. In addition, our charter allows us to issue preferred stock that could have a preference on distributions. We intend to redeem all of our currently outstanding shares of Series A and Series B preferred stock with a portion of the proceeds of this offering. We currently have no intention to issue any new shares of preferred stock, however if we issue any preferred stock in the future, the distribution preference on the preferred stock could limit our ability to make distributions to our common stockholders.

U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT net taxable income, excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income including net capital gains. See “Material U.S. Federal Income Tax Considerations.” We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements, and we may need to borrow funds to make some distributions.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2013 on a historical basis and on an as adjusted basis to give effect to this offering and the use of the net proceeds from this offering as set forth in “Use of Proceeds.” You should read this table together with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus. All information in the following table, including the historical information, has been adjusted to reflect the Recapitalization, which will be effected prior to the closing of this offering.

 

     As of June 30, 2013  
     Historical       As Adjusted    

Note payable and line of credit

   $ 132,356,123      $     

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 100,000,000 shares authorized:

    

Series A preferred stock, $1,000 liquidation preference; 27,585 shares issued and outstanding, historical, no shares issued and outstanding, as adjusted (1)

     36,612,667     

Series B preferred stock, $1,000 liquidation preference; 9,807 shares issued and outstanding, historical, no shares issued and outstanding, as adjusted (1)

     12,172,491     

Class A common stock, $0.01 par value; 900,000,000 shares authorized; shares issued and outstanding, historical,                shares issued and outstanding, as adjusted

    

Class B-1 common stock, $0.01 par value, no shares issued and outstanding, historical,                shares issued and outstanding, as adjusted

         

Class B-2 common stock, $0.01 par value, no shares issued and outstanding, historical,                shares issued and outstanding, as adjusted

         

Class B-3 common stock, $0.01 par value, no shares issued and outstanding, historical,                shares issued and outstanding, as adjusted

         

Additional paid-in capital

    

Accumulated deficit and distributions

     (144,041,796  

Accumulated other comprehensive income (loss)

     861,780     
  

 

 

   

 

 

 

Total stockholders’ equity

     206,804,186     
  

 

 

   

 

 

 

Total capitalization

   $ 339,160,309      $                
  

 

 

   

 

 

 

 

(1) All of the outstanding shares of Series A and Series B preferred stock are owned by Wells REF. Pursuant to our preferred stock redemption agreement with Wells REF, we will redeem all of the outstanding shares of Series A and Series B preferred stock for an aggregate price equal to $             upon the completion of this offering.

Each $1.00 increase or decrease in the assumed public offering price of $            per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase or decrease the pro forma amount of each of the note payable and line of credit, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $            million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated expenses of the offering payable by us.

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

Our historical net tangible book value as of June 30, 2013 was approximately $158 million, or $4.98 per share, which represents $         per share as adjusted for the Recapitalization we intend to effect prior to the closing of this offering. Our net tangible book value per share is a mechanical calculation using amounts from our consolidated balance sheet and is calculated as total book value of our assets minus total liabilities and preferred equity outstanding, divided by the total number of shares of common stock outstanding as of June 30, 2013. It assumes that the value of our timber assets and related assets and liabilities diminish predictably over time as shown through the depletion and amortization. Timber and timberland values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share.

After giving effect to the sale of the                shares of our Class A common stock we are offering at the public offering price of $            per share, and after deducting the underwriting discount and our estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been approximately $            million, or $            per share. This represents an immediate increase in pro forma net tangible book value of $            per share and an immediate dilution of $            per share to new investors. The following table illustrates this calculation on a per share basis:

 

Public offering price per share of Class A common stock

      $                

Pro forma net tangible book value per share of Class A common stock as of June 30, 2013

   $        

Increase per Class A share attributable to this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share of common stock after this offering

     
     

 

 

 

Pro forma dilution per share to new investors

      $     
     

 

 

 

If the underwriters exercise their overallotment option in full, pro forma as adjusted net tangible book value will increase to $            per share, representing an increase to existing holders of $             per share, and an immediate dilution of $            per share to new investors.

The table and calculations above are based on                shares of our common stock outstanding as of June 30, 2013, as adjusted to give effect of the Recapitalization, and exclude                 shares of our common stock reserved for future issuance under our long-term incentive plan as of June 30, 2013.

The information in the preceding table has been calculated using an assumed public offering price of $             per share, which is the midpoint of the range set forth on the cover of this prospectus. A $1.00 increase or decrease in the assumed public offering price per share would increase or decrease, respectively, the pro forma as adjusted net tangible book value will increase $             per share, representing an increase to existing holders of $             per share, and an immediate dilution of $             per share to new investors, in each case calculated as described above and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial and operating data set forth below as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus and have been audited by Deloitte & Touche LLP, an independent registered public accounting firm. The selected consolidated financial and operating data set forth below as of December 31, 2010, 2009 and 2008 and for the years ended December 31, 2009 and 2008 have been derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated financial and operating data as of June 30, 2013 and for the six months ended June 30, 2013 and 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial and operating data set forth below as of June 30, 2012 have been derived from our unaudited consolidated financial statements not included in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full year, and the historical results presented below are not necessarily indicative of the results to be expected in any future period.

Because the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes, you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the related notes, included elsewhere in this prospectus. The share and per-share information set forth below does not give effect to the Recapitalization.

 

    Six Months Ended June 30,     Year Ended December 31,  
    2013     2012     2012     2011     2010     2009     2008  

Statement of Operations Data:

             

Total revenues

  $ 16,640,210      $ 26,178,157      $ 44,199,779      $ 40,017,827      $ 47,582,144      $ 52,245,649      $ 48,271,055   

Net loss

    (4,550,657     (3,718,373     (8,870,732     (11,945,363     (15,809,720     (19,948,257     (53,274,682

Net loss available to common stockholders

    (4,735,760     (3,904,384     (9,244,724     (13,502,038     (19,518,100     (23,588,636     (56,317,035

Per-share data—basic and diluted:

             

Net loss available to common stockholders

    (0.15     (0.12     (0.29     (0.47     (0.86     (1.36     (6.01

Weighted-average common shares outstanding

    31,775,958        31,869,820        31,854,556        28,489,080        22,806,619        17,306,701        9,370,776   
    Six Months Ended June 30,     Year Ended December 31,  
    2013     2012     2012     2011     2010     2009     2008  

Other Data:

             

Adjusted EBITDA (1)

  $ 2,808,337      $ 10,893,922      $ 15,468,471      $ 7,169,366      $ 10,509,644      $ 13,738,972      $ 10,830,037   

Capital expenditures—excluding acquisitions

    370,653        450,365        530,741        530,927        1,040,927        1,022,994        1,505,876   

Capital expenditures—acquisitions

    317,455        1,133        22,523,861        1,095,623                        

Cash flows provided by (used in):

             

Operating activities

    2,409,573        8,833,647        11,425,870        4,572,131        5,154,517        5,029,535        (6,593,970

Investing activities

    9,133        3,710,824        (18,342,419     (536,033     (937,989     (1,646,784     3,000,109   

Financing activities

    (282,324     (1,802,340     11,288,668        (5,976,092     (1,064,439     (1,865,964     6,239,172   

 

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    June 30,     December 31,  
    2013     2012     2012     2011     2010     2009     2008  

Balance Sheet Data:

  

           

Cash and cash equivalents

  $ 13,357,474      $ 18,311,104      $ 11,221,092      $ 6,848,973      $ 8,788,967      $ 5,636,878      $ 4,120,091   

Restricted cash and cash equivalents

    1,352,822        2,599,924        2,050,063        6,762,246        7,852,763        7,955,701        7,331,910   

Total assets

    347,247,801        340,264,436        350,260,242        345,322,607        360,491,122        371,571,157        390,986,924   

Total liabilities

    140,443,615        124,139,714        140,173,053        155,514,335        199,831,437        244,046,346        298,712,216   

Total stockholders’ equity

    206,804,186        216,124,722        210,087,189        189,808,272        160,659,685        127,524,811        92,274,708   

Outstanding debt

    132,356,123        118,397,219        132,356,123        122,025,672        168,840,592        216,841,297        274,332,679   

Outstanding long-term debt

    132,356,123        118,397,219        132,356,123        122,025,672        168,840,592               208,600,930   

 

(1) Adjusted EBITDA is a non-GAAP measure of our operating performance and cash-generating capacity. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and eliminations described in the table below. EBITDA is defined by the SEC; however, we have excluded certain other expenses due to their noncash nature, and we refer to this measure as Adjusted EBITDA. As such, Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA should not be viewed as an alternative to net income or cash from operations as a measurement of our operating performance, as it excludes certain expenses related to fixed-asset investments required to generate revenues. Due to our significant amount of debt, management views operating income as the most appropriate earnings measure of our underlying timber operations. Management considers Adjusted EBITDA to be an important measure of our financial condition and cash-generating ability due to the significant amount of fixed assets subject to depletion and the significant amount of financing subject to interest and amortization expense. Our CoBank loan agreement contains a minimum debt service coverage ratio based, in part, on Adjusted EBITDA since the measure is representative of adjusted income available for interest payments.

Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations period over period and would ordinarily add back non-cash expenses such as depletion and amortization as well as items that are not part of normal day-to-day operations of our business such as interest expense and income taxes. By providing this non-GAAP financial measure, together with a reconciliation, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Our competitors may define Adjusted EBITDA differently, and as a result, our measure of Adjusted EBITDA may not be directly comparable to Adjusted EBITDA of other companies. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA is a supplemental measure of operating performance that does not represent and should not be considered in isolation or as an alternative to, or substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

 

  Ÿ  

Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

  Ÿ  

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  Ÿ  

Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt; and

 

  Ÿ  

Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; and

 

  Ÿ  

Although depletion is a non-cash charge, we will incur expenses to replace the timber being depleted in the future and Adjusted EBITDA does not reflect any cash requirements for such expenses.

Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. We further believe that our presentation of these GAAP and non-GAAP financial measurements provide information that is useful to analysts and investors because they are important indicators of the strength of our operations and the performance of our business.

 

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For the six months ended June 30, 2013, Adjusted EBITDA was approximately $2.8 million, an approximately $8.1 million decrease from the six months ended June 30, 2012, primarily due to an approximately $8.2 million decrease in net revenues from timberland sales.

For the year ended December 31, 2012, Adjusted EBITDA was approximately $15.5 million, an approximately $8.3 million increase from the year ended December 31, 2011, primarily due to an approximately $8.7 million increase in revenue from timberland sales during 2012, offset by an approximately $0.7 million decrease in net timber sales and an approximately $0.4 million increase in advisor fees and expense reimbursements. Our reconciliation of net loss to Adjusted EBITDA for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 follows:

 

    Six Months Ended
June 30,
    Year Ended December 31,  
    2013     2012     2012     2011     2010     2009     2008  

Net loss

  $ (4,550,657   $ (3,718,373   $ (8,870,732   $ (11,945,363   $ (15,809,720   $ (19,978,257   $ (53,274,682

Add:

             

Depletion

    4,293,257        5,474,288        11,677,229        11,759,282        14,338,444        17,443,684        21,513,106   

Unrealized gain on interest rate swaps that do not qualify for hedge accounting treatment

    (128,934     (451,716     (847,743     (531,512     (2,271,093     (3,319,234     3,144,022   

Interest expense (a)

    1,742,766        2,256,754        4,289,204        5,938,800        11,416,655        13,992,243        25,257,254   

Amortization (a)

    238,262        370,696        2,007,239        684,857        1,415,608        1,636,393        6,924,855   

Basis of timberland sold

    1,213,643        6,962,273        7,187,733        1,172,241        1,392,900        3,228,363        2,568,538   

Basis of casualty loss (b)

                  25,541        91,061                        

Basis of timber on terminated lease (c)

                                26,850        705,780          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 2,808,337      $ 10,893,922      $ 15,468,471      $ 7,169,366      $ 10,509,644      $ 13,738,972      $ 10,830,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For the purpose of the above reconciliation, amortization includes amortization of deferred financing costs, 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.
(b) Represents the basis of timber lost due to tornado, fire and insect infestation.
(c) Represents the basis of timber remaining on leased timber tracts at the time of termination of the applicable lease.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this prospectus. Our results of operations and financial condition, as reflected in the accompanying financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors. You should read the following discussion with “Forward-Looking Statements,” “Business and Properties” and the consolidated financial statements and related notes included elsewhere in this prospectus.

Overview

We primarily engage in the ownership, management, acquisition and disposition of timberland properties located in the timber-producing regions of the southeastern United States. We have elected to be taxed as a REIT for federal income tax purposes. As of June 30, 2013, we owned interests in approximately 282,000 acres of timberland located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia. Based on acreage, our timberland inventory consisted of approximately 75% pine and approximately 25% hardwood as of December 31, 2012.

The focus of our business is to invest in timberlands and to actively manage such investments to provide attractive long-term returns to our stockholders. We generate recurring income and cash flow from the harvest and sale of timber, as well as from non-timber related revenue sources, such as recreational leases. When and where we believe it is appropriate, we also periodically generate income and cash flow from the sale HBU lands. HBU refers to properties that have a higher-value use beyond growing timber, such as properties that can be sold for development, conservation or recreational and other rural purposes at prices in excess of traditional timberland values. We also expect to realize additional long-term returns from the potential appreciation in value of our timberlands as well as from the biological growth of our standing timber inventory in excess of our timber harvest. Approximately 54% of our net timber sales revenue for 2012 was derived from the timber agreements, under which we sell specified amounts of timber to MeadWestvaco, subject to market pricing adjustments. The initial term of the timber agreements is from October 9, 2007 through December 31, 2032, subject to extension and early termination provisions. See “Business and Properties—Timber Agreements” for additional information regarding the material terms of the timber agreements.

On September 28, 2012, we acquired approximately 30,200 acres of timberland, which we refer to as the Saunders property, for a purchase price of approximately $20.8 million, exclusive of closing costs. Prior to the acquisition, we held a long-term leasehold interest in the Saunders property, which is located within our timberlands. In addition, we paid approximately $2.0 million to buy out a third-party’s interest in approximately 14,200 acres of timberland, including 12,700 acres within the Saunders property and 1,500 acres where we continue to hold long-term leasehold interests. We will also make annual payments on approximately 7,400 acres of the Saunders property at a per-acre rate equal to the then-current lease rate to the seller through May 2022. The acquisition was funded with cash on-hand and debt financing. See “Liquidity and Capital Resources.”

Transition to Self-Management

In September 2013, we began the process of transitioning to a self-managed company, and prior to the commencement of this offering, we will be self-managed. Following the completion of this offering, we will have no continuing affiliations with Wells Capital, Wells REF, Wells TIMO or Mr.

 

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Wells, other than the transition services agreement and sublease, which relate primarily to temporary support services. We and our operating partnership entered into the master agreement, which provides the framework for our separation from Wells REF and its affiliates and our transition to self-management. In connection with the master agreement, the advisory agreement will terminate on November 1, 2013, and immediately following its termination, we and our operating partnership will enter into the transition services agreement with Wells REF, pursuant to which Wells REF and its affiliates will provide us with consulting, support and transitional services at the direction of our officers and other personnel until June 30, 2014. In consideration for the services rendered under the transition services agreement, we will pay Wells REF a consulting fee equal to $22,875 per month. The transition services agreement may be terminated at an earlier date by either party under certain circumstances; however, if we terminate without cause prior to June 30, 2014, Wells REF shall be entitled to payment of the consulting fee through June 30, 2014. Our operating partnership will also enter into a sublease agreement with Wells REF pursuant to which we will sublease office space from Wells REF on a month-to-month basis until March 31, 2014 for $5,961 per month, which will not be payable for the months of November and December 2013. We have the ability to terminate the sublease prior to the expiration of its term, and cease monthly rent payments by providing 10 days’ prior written notice to Wells REF. See “Transition to Self-Management and Recapitalization—Transition to Self-Management” for more details regarding the transactions and arrangements pursuant to the master agreement. The early termination of these agreements or the failure of these entities to provide these services to us could impact our operations. Wells REF is largely dependent upon the fees and other compensation that it receives from the public real estate investment programs it sponsors (including us) to conduct its operations. Although we expect Wells REF to have the financial resources to continue to provide services to us, there is no guarantee that Wells REF will be able to do so during the entire eight-month period of the transition services agreement. A decline in the level of service provided by Wells REF could impair our operating results and could ultimately have an adverse effect on the value of your investment.

Operating Strategy

Our operating strategy entails funding expenditures related to the recurring operations of our timberlands, including interest on outstanding indebtedness and certain capital expenditures (excluding timberland acquisitions), with operating cash flows; assessing the amount of operating cash flows that will be required for additional timberland acquisitions; and distributing residual operating cash flows, if any, to our stockholders. Our operating and financial plans for 2013 were established to meet volume obligations under the timber agreements, to meet the debt service requirements of our debt facility, and to continue to maximize the production capacity and long-term value of our timberlands. We continue to practice intensive forest management and silvicultural techniques that increase the biological growth of the forest. We intend to capitalize on the operational flexibility afforded to timberland owners in order to take advantage of then-prevailing market prices, including, but not limited to, adjusting harvest levels in context of supply and demand for wood in the local wood markets. We plan to harvest approximately 0.9 million tons of timber in 2013, down modestly from the 1.1 million-ton harvest in 2012.

Prior to the commencement of this offering, we will complete our transition to self-management, which will impact our future results of operations in the following ways:

 

  Ÿ  

We have incurred and expect to continue to incur significant general and administrative expenses in connection with negotiating and executing the master agreement, the preferred stock redemption agreement, the transition services agreement, the sublease, employment agreements and various other agreements related to our transition to self-management.

 

  Ÿ  

As a self-managed company, we intend to utilize a different accounting system, which we expect will result in increased general and administrative expenses during the short-term implementation phase and reduced general and administrative expenses thereafter.

 

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  Ÿ  

Our general and administrative expenses will increase as a result of the employment-related costs and other costs we will incur as a self-managed company, which will be at least partially offset by the elimination of the advisory fees and expenses we currently pay to Wells TIMO as an externally managed company. The net effect of our increased employment-related costs and the elimination of the advisory fees and expenses we currently pay to Wells TIMO is not expected to be material.

In addition, we intend to list our shares on the NYSE upon completion of this offering and will be obligated to incur additional costs, such as listing fees and other compliance costs.

Our most significant risks and challenges include our ability to access a sufficient amount of capital that will allow us to further grow and diversify our portfolio of timberlands, to fund the expenses associated with being a self-managed and listed company, and to repay or refinance our outstanding debt facility. To the extent that significant capital is not raised, we may not be able to achieve sufficient economies of scale and diversification to guard against the general economic, industry-specific, financing, and operational risks generally associated with individual investments, operate as a self-managed company or repay the CoBank loan. Although we believe that our timberlands are well-positioned to weather current market conditions, we are not immune to the adverse effects of a prolonged downturn in the economy, weak real estate fundamentals, or disruptions in the credit markets. Such conditions would likely adversely affect the value of our portfolio, our results of operations and our liquidity.

Our Harvest and HBU Strategies

Timberlands represent a distinctive asset class that offers multiple means of value creation and return generation. Specifically, timberlands generally do not need to be harvested within a specific timeframe, which provides timberland owners with a degree of flexibility to either harvest timber and generate current cash returns, or defer harvest and accrue returns in the form of biological growth and inventory appreciation. Historically, we have never paid a cash dividend to our common stockholders. As a result, our historical operating strategy was generally not driven by specific cash flow targets or distribution requirements (other than those required to comply with the terms of the CoBank loan), which afforded us the opportunity to undertake a strategic repositioning of our timberlands, improve our overall portfolio quality and position our timberlands to generate higher sustainable yields.

Upon completion of this offering, we intend to implement a revised business strategy that will increase our annual harvest volume based on a sustainable harvest plan in order to support a dividend payment to our stockholders. We expect that a significant portion of any such increased harvest volume will likely be sold to MeadWestvaco pursuant to the timber agreements, although we will also market and sell such volume to other third-party timber purchasers. Given the large number of forest products manufacturing facilities within a serviceable distance of our timberlands, our existing customer relationships and generally improving conditions in our end-markets, we believe that demand for our timber products will be sufficient to support our increased harvest volume.

Pursuant to our revised business strategy, we also intend to establish annual HBU sales targets to further augment our stockholder distributions. Generally, we expect to monetize approximately 1% to 2% of our fee timberland acreage on an annual basis pursuant to our land sales program, although such results may vary. Given the proximity of our timberlands to several major population centers and recreational areas, our relationships with major land brokers and buyers in the region and our historical track record of HBU land sales, we believe that demand for our HBU properties will be sufficient to generate annual HBU sales volume in the range of 1% to 2% of our fee timberland acreage at commercially attractive prices.

 

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We believe that our revised harvest and HBU strategies, as well as the considerations upon which these strategies were formulated, are generally consistent with the strategies considered and employed by other publicly-traded timber REITs, although specific cash flow targets and overall earnings composition by business segment among these companies may differ materially from ours.

Our Timberlands History

We acquired the significant majority of our timberlands from MeadWestvaco in October 2007. MeadWestvaco (and its predecessor companies) had gradually accumulated the properties throughout the 1950s to 1970s in an effort to secure a captive source of fiber for its pulp and paper operations in the region. Thus, while our timberlands had been professionally managed for commercial timber production for several decades, the forest management strategy under MeadWestvaco’s ownership was generally oriented towards shorter-rotation pulpwood production to supply its mills. When we acquired our timberlands in 2007, we immediately undertook a strategic repositioning of the properties designed to transition toward a more value-oriented product mix of pulpwood, chip-n-saw and sawtimber. To this end, we initiated a comprehensive thinning regime on our pine plantation properties to reduce stand density and optimize long-term sawtimber potential. Moreover, we continued a progressive replanting program (originally initiated by MeadWestvaco in the early 2000’s) utilizing improved mass-controlled pollination, or MCP, seedlings, which have demonstrated materially higher growth potential relative to traditional, unimproved seedlings. As part of our repositioning strategy, we also deferred significant harvest volume on our fee timberlands. Overall, these initiatives have led to an improved inventory profile and are expected to enhance the long-term value potential of our timberlands.

General Economic Conditions and Timber Market Factors Impacting Our Business

As measured by the U.S. gross domestic product, or real GDP, the U.S. economy increased at an annual rate of 2.5% in the second quarter of 2013, according to the Bureau of Economic Analysis. The increase in real GDP in 2013 primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, non-residential and residential fixed investment that were partly offset by negative contributions from federal government spending. While we believe the U.S. economy is likely to continue its recovery, we expect the recovery will maintain a moderate pace with fiscal policy presenting the biggest variable in the outlook. Given the ongoing uncertainty surrounding the debt ceiling, the U.S. economy is expected to finish 2013 on a slow pace. However, assuming lawmakers can reach agreement on the debt ceiling and authorize at least temporary spending measures to keep the government running after October 1, 2013, the U.S. economy is expected to accelerate in 2014, with real GDP averaging close to a 2.7% growth rate.

Timberland operating performance is influenced by a variety of factors, including changes in timber prices; the demand for pulp, paper, lumber, panel, and other wood-related products; the supply of timber; and competition. Average timber prices in the U.S. South showed positive growth in the second quarter of 2013 compared to the second quarter of 2012.

Pine pulpwood and hardwood pulpwood prices increased approximately 12% and 12%, respectively, for the six months ended June 30, 2013, as compared to the six months ended 2012 primarily due to an extremely wet spring and strong demand from paper mills. When lumber markets are weak and lumber mills slow down production, they produce fewer by-products, which are a cheap source of chips for paper mills and pellet producing facilities. These facilities must then purchase more pulpwood in the timber market to make up for the shortfall, which leads to

 

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increased demand and prices for pulpwood. These factors kept pulpwood prices high throughout the summer of 2013. We expect pine pulpwood prices, which continue to remain attractive by historical standards, to remain steady through the remainder of 2013.

Pine chip-n-saw and sawtimber prices increased approximately 7% and 7%, respectively, for the six months ended June 30, 2013, as compared to the six months ended 2012 as a result of improvements in the lumber and wood products markets, which are coming off decade lows. The demand for lumber, panel and other wood-related products is largely affected by the level of new residential construction activity and repair and remodeling as residential housing is the most important end-use for market for timber. The number of housing starts, which is generally considered to be a leading indicator of the general U.S. economy and the most important indicator of demand for timber, increased approximately 20.9% through July 2013 as compared to 2012. The residential remodeling market index published by the National Association of Home Builders rebounded back up to the post-2004 peak reached at the end of 2012. Due to this increase in residential construction and in remodeling activity, we believe there will be modest improvements in sawtimber and chip-n-saw prices during the remainder of 2013 and the full year 2014.

In addition, in recent years, the demand for North American log and lumber exports in China has increased dramatically and is expected to remain strong for the foreseeable future. Furthermore, the supply of wood products to the North American market by Canada, which has historically been a major supplier to the market, is expected to be constrained by several key developments in Canada, including the mountain pine beetle epidemic in British Columbia and governmental restrictions on timber harvest in Eastern Canada. Therefore, if a supply-demand imbalance were to develop in the North American wood products market, we believe it would cause an increase in the prices for timber and timberlands.

Results of Operations

Our results of operations are typically materially impacted by the fluctuating nature of timber prices, changes in the levels and composition of our harvest volumes, the level of timberland sales, changes to associated depletion rates and varying interest expense based on the amount and cost of outstanding borrowings. In addition, our results of operations for the historical periods presented may not be indicative of our future results of operations to the extent our future results of operations are impacted by our transition to self-management as discussed above.

 

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Comparison of the six months ended June 30, 2013 versus the six months ended June 30, 2012

The following table shows the timber prices, harvest volumes and changes in the levels and composition of each for our timberlands for the six months ended June 30, 2013 and 2012.

 

     Six Months Ended June 30,      Change  
     2013      2012      %  

Timber sales volume (tons)

        

Pulpwood

     314,877         302,781         4

Sawtimber (1)

     142,004         165,459         (14
  

 

 

    

 

 

    

 

 

 
     456,881         468,240         (2 )% 
  

 

 

    

 

 

    

 

 

 

Net timber sales price (per ton) (2)

        

Pulpwood

   $ 11       $ 10         12

Sawtimber

     20         20         (2

Timberland sales

        

Gross sales

   $ 1,853,321       $ 10,552,180      

Sales volumes (acres)

     877         5,802      

Sales price (per acre)

     2,113         1,819      

 

(1) Includes sales of chip-n-saw and sawtimber.
(2) Prices per ton are rounded to the nearest dollar and shown on a stumpage basis (i.e., net of contract logging and hauling costs) and, as such, the sum of these prices multiplied by the tons sold does not equal timber sales in the accompanying consolidated statements of operations for the six months ended June 30, 2013 and 2012.

Revenue. Revenues decreased to approximately $16.6 million for the six months ended June 30, 2013 from approximately $26.2 million for the six months ended June 30, 2012 due to a decrease in timberland sales revenue of approximately $8.7 million and a decrease in timber sales revenue of approximately $0.9 million. Timberland sales revenue decreased due to selling fewer acres. Timber sales revenue decreased primarily due to lower harvest volumes. Details of timber sales by product for the six months ended June 30, 2013 and 2012 is shown in the following table:

 

     For the Six
Months Ended

June 30, 2012
     Changes attributable to:     For the Six
Months Ended

June 30, 2013
 
        Price      Volume    

Timber sales (1)

          

Pulpwood

   $ 8,216,617       $ 344,703       $ (138,176   $ 8,423,144   

Sawtimber (2)

     6,068,079         24,115         (1,096,242     4,995,952   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 14,284,696       $ 368,818       $ (1,234,418   $ 13,419,096   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Timber sales are presented on a gross basis.
(2) Includes sales of chip-n-saw and sawtimber.

Operating expenses . Contract logging and hauling costs decreased to approximately $7.0 million for the six months ended June 30, 2013 from approximately $7.8 million for the six months ended June 30, 2012 as a result of a decrease of approximately 10% in delivered wood volume. Depletion expense decreased by 22% to approximately $4.3 million for the six months ended June 30, 2013 from approximately $5.5 million for the six months ended June 30, 2012 due to a 2% decrease in harvest volumes and a lower blended depletion rate. Our blended depletion rate was lower in 2013

 

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due to a decrease in harvests of timber from leased tracts as a percentage of our total harvest to 45% in 2013 from 72% in 2012. As a result of an acquisition of approximately 30,000 acres of timberland during 2012 where we previously held leasehold interests, approximately 12% of our merchantable timber inventory was recategorized as fee timber, which is depleted at much lower rates than timber from leased tracts. Cost of timberland sales decreased due to selling fewer acres of timberland in the first half of 2013 as compared to the first half of 2012. Land rent expense decreased to approximately $0.6 million in 2013 from $1.0 million in 2012 primarily due to expiration of leases and the acquisition described above. General and administrative expenses increased by $0.3 million primarily due to an increase in legal fees. Forestry management fees and other operating expenses were comparable to the first six months of 2012.

Future contract logging and hauling costs and depletion expense are expected to fluctuate with harvest volumes. Cost of timberland sales is directly correlated to the number of acres sold. Forestry management expense and land rent expense will vary based on the number of acres under management.

Advisor fees and expense reimbursements . Advisor fees and expense reimbursements for the six months ended June 30, 2013 were comparable to that for the six months ended June 30, 2012. As discussed above, we are transitioning to self-management. However, we currently have no paid employees and are externally advised and managed by Wells TIMO. Effective July 1, 2013, we entered into our amended and restated advisory agreement with Wells TIMO, under which the monthly advisor fee payable by us is equal to one-twelfth of 1% of the aggregate value of our interest in properties and joint ventures as established in connection with the most recent estimated valuation conducted pursuant to applicable Financial Industry Regulatory Authority rules, which we refer to as our assets under management. Upon the sale or acquisition of any properties for an amount greater than $5 million in aggregate, our assets under management shall be adjusted according to terms of our amended and restated advisory agreement. However, aggregate advisor fees payable for fiscal year 2013 shall not exceed 1.0% of our assets under management as of September 30, 2012. Our amended and restated advisory agreement eliminates the requirement to reimburse administrative service expenses incurred by Wells TIMO in fulfilling its duties as advisor, including personnel costs and our allocable share of other overhead of Wells TIMO. All other terms are materially consistent with our advisory agreement in effect through June 30, 2013. In connection with our transition to self-management, we will terminate the advisory agreement on or about November 1, 2013, and we and our operating partnership will enter into the transition services agreement with Wells REF and a sublease with Wells REF. See Note 9 to the accompanying unaudited consolidated financial statements as of and for the period ending June 30, 2013 for additional information regarding fees incurred in connection with the advisory agreement.

Interest expense . Interest expense decreased to approximately $1.7 million for the six months ended June 30, 2013 from approximately $2.0 million for the six months ended June 30, 2012 primarily due to lower interest rates, offset by higher principal balances outstanding on our debt facility.

Net loss . Our net loss increased to approximately $4.6 million for the six months ended June 30, 2013 from approximately $3.7 million for the six months ended June 30, 2012, primarily as a result of a higher operating loss. Our operating loss increased due to a decrease in net timberland sales revenue of approximately $2.5 million, offset by an increase in net timber sales revenue of approximately $1.1 million. We sustained a net loss for the six months ended June 30, 2013 primarily as a result of incurring an operating loss of approximately $2.8 million and interest expense of approximately $1.7 million. Our net loss per share available to common stockholders

 

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for the six months ended June 30, 2013 and 2012 was $0.15 and $0.12, respectively. We anticipate future net losses to fluctuate with timber prices, harvest volumes, timberland sales and interest expense based on our level of current and future borrowings.

Comparison of the year ended December 31, 2012 versus the year ended December 31, 2011

Timber prices, harvest volumes and changes in the levels and composition of each for our timberlands for the years ended December 31, 2012 and 2011 is shown in the following table:

 

     Years Ended December 31,      Change  
     2012      2011      %  

Timber sales volume (tons)

        

Pulpwood

     697,307         969,549         (28 )% 

Sawtimber (1)

     358,683         306,063         17   
  

 

 

    

 

 

    

 

 

 
     1,055,990         1,275,612         (17
  

 

 

    

 

 

    

 

 

 

Net timber sales price (per ton) (2)

        

Pulpwood

     10         9         11

Sawtimber

     21         20         1   

Timberland sales

        

Gross sales

     10,972,440         1,740,586      

Sales volumes (acres)

     6,016         1,125      

Sales price (per acre)

     1,824         1,547      

 

(1) Timber sales are presented on a gross basis.
(2) Includes sales of chip-n-saw and sawtimber.

Revenue. Revenues increased to approximately $44.2 million for the year ended December 31, 2012 from approximately $40.0 million for the year ended December 31, 2011 due to an increase in timberland sales revenue of approximately $9.2 million, offset by a decrease in timber sales revenue of approximately $5.0 million. Timberland sales revenue increased due to selling more acres of timberland. Timber sales revenue decreased primarily due to reductions in harvest volumes, as planned.

Details of timber sales by product for the year ended December 31, 2012 and 2011 is shown in the following table:

 

     For the
Year Ended

December 31,
2011
     Changes attributable to:     For the
Year Ended

December 31,
2012
 
        Price      Volume    

Timber sales (1)

          

Pulpwood

   $ 25,205,706       $ 805,073       $ (7,973,642   $ 18,037,137   

Sawtimber (2)

     10,328,210         232,443         1,912,746        12,473,399   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 35,533,916       $ 1,037,516       $ (6,060,896   $ 30,510,536   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Timber sales are presented on a gross basis.
(2) Includes sales of chip-n-saw and sawtimber.

 

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Operating expenses. Contract logging and hauling costs decreased to approximately $15.8 million for 2012 from approximately $20.1 million for 2011 as a result of a decrease of approximately 22% in delivered wood volume. Depletion expense decreased by 1% to approximately $11.7 million in 2012 from approximately $11.8 million in 2011 due to a 17% decrease in harvest volumes, offset by a higher blended depletion rate. Our blended depletion rate was higher in 2012 due to an increase in our sawtimber harvest in 2012 and an increase in harvests on leased tracts as a percentage of our total harvest from 38% in 2011 to 54% in 2012. Sawtimber carries significantly higher depletion rates than pulpwood, and timber on leased tracts are depleted at much higher rates than fee timber. Cost of timberland sales increased to approximately $7.8 million in 2012 from approximately $1.3 million in 2011 due to selling more acres of timberland. Forestry management fees decreased to approximately $2.3 million for the year ended December 31, 2012 from approximately $2.6 million for the year ended December 31, 2011 primarily due to a decrease in incentive fees incurred under the timberland operating agreement with Forest Resource Consultants, Inc., which are based on net revenue. Land rent expense decreased to approximately $1.6 million in 2012 from $2.2 million in 2011 primarily due to expiration of leases and the acquisition of approximately 30,000 acres of timberland where we previously held leasehold interests. Other operating expenses increased by approximately $0.1 million to approximately $2.8 million in 2012 from approximately $2.7 million in 2011 primarily due to an increase in property taxes.

Advisor fees and expense reimbursements . Advisor fees and expense reimbursements increased to approximately $3.7 million for 2012 from approximately $3.3 million for 2011 as a result of using different methodologies to determine the amounts due under our advisory agreement and its amendments, which was effective through June 30, 2013. Beginning with the second quarter of 2012, advisor fees and expense reimbursements were determined under Amendment No. 2 to our advisory agreement, which limited the amounts of advisor fees and expense reimbursements to the lesser of (1) 1.0% of assets under management as of the last day of the quarter less advisor fees paid for the preceding three quarters, and (2) free cash flow (as defined) for the four quarters then ended in excess of an amount equal to 1.25 multiplied by our interest expense for the four quarters then ended. From the second quarter of 2011 to the first quarter of 2012, advisor fees and expense reimbursements were determined under Amendment No. 1 to our advisory agreement, or Amendment No. 1, that limited the amounts of advisor fees and expense reimbursements to the least of (1) an asset management fee equal to one-fourth of 1.0% of assets under management plus reimbursements for all costs and expenses Wells TIMO incurred in fulfilling its duties as the asset manager; (2) one fourth of 1.5% of assets under management, or (3) free cash flow (as defined) in excess of an amount equal to 1.05 multiplied by interest on outstanding debt. In the first quarter of 2011, advisor fees and expense reimbursements of approximately $1.6 million were determined under our advisory agreement. In connection with our transition to self-management, we will terminate the advisory agreement on or about November 1, 2013, and we and our operating partnership will enter into the transition services agreement with Wells REF and a sublease with Wells REF. See Note 9 to the accompanying unaudited consolidated financial statements as of and for the period ending June 30, 2013 for additional information regarding fees incurred in connection with the advisory agreement.

Interest expense. Interest expense decreased to approximately $5.0 million for the year ended December 31, 2012 from approximately $5.4 million for the year ended December 31, 2011 primarily due to lower principal balances outstanding on our debt facilities, offset by an increase in noncash interest expense due to a non-recurring write-off of approximately $1.3 million of deferred financing costs in connection with paying off the Mahrt loan.

Interest rate risk instrument. Our loss on an interest rate swap that does not qualify for hedge accounting treatment decreased by approximately $0.3 million to approximately $0.1 million in

 

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2012 from approximately $0.4 million in 2011. The loss was primarily due to the fact that the variable interest rate incurred on the Mahrt loan was lower than the contractual interest rate of the related interest rate swap during the year ended December 31, 2012. The decrease in the loss was primarily due to a decrease in the length of time remaining under the swap contract and changes in the outlook of future market interest rates.

Net loss. Our net loss decreased to approximately $8.9 million for the year ended December 31, 2012 from approximately $11.9 million for the year ended December 31, 2011, primarily as a result of an approximately $2.4 million improvement in operating loss, an approximately $0.4 million decrease in interest expense, and an approximately $0.3 million decrease in loss on interest rate swap. Our operating loss improved due to an increase in net timber and timberland sales revenue of approximately $2.0 million and an approximately $0.6 million decrease in land rent expense. We sustained a net loss for the year ended December 31, 2012 primarily as a result of incurring interest expense of approximately $5.0 million in connection with borrowings used to finance the purchase of our timberlands and an operating loss of approximately $3.7 million. We opted to leverage acquisition of our timberlands with substantial short-term and medium-term borrowings as a result of sourcing this acquisition in advance of raising investor proceeds under our non-listed, public offerings. Our net loss per share available to common stockholders for the years ended December 31, 2012 and 2011 was $0.29 and $0.47, respectively.

Comparison of the year ended December 31, 2011 versus the year ended December 31, 2010

Timber prices, harvest volumes and changes in the levels and the composition of each for our timberlands for the years ended December 31, 2011 and 2010 is shown in the following table.

 

     Years Ended December 31,      Change  
     2011      2010      %  

Timber sales volume (tons)

        

Pulpwood

     969,549         1,219,056         (20 )% 

Sawtimber (1)

     306,063         328,684         (7
  

 

 

    

 

 

    

 

 

 
     1,275,612         1,547,740         (18
  

 

 

    

 

 

    

 

 

 

Net timber sales price (per ton) (2)

        

Pulpwood

   $ 9       $ 11         (13 )% 

Sawtimber

     20         21         (2

Timberland sales

        

Gross sales

   $ 1,740,586       $ 2,267,887      

Sales volumes (acres)

     1,125         1,173      

Sales price (per acre)

     1,547         1,933      

 

(1) Includes sales of chip-n-saw and sawtimber.
(2) Prices per ton are rounded to the nearest dollar and shown on a stumpage basis (i.e., net of contract logging and hauling costs) and, as such, the sum of these prices multiplied by the tons sold does not equal timber sales in the accompanying consolidated statements of operations for the years ended December 31, 2011 and 2010.

Revenue. Revenues decreased to approximately $40.0 million for the year ended December 31, 2011 from approximately $47.6 million for the year ended December 31, 2010 due to decreases in timber sales, timberland sales, and other revenues of approximately $5.9 million, $0.5 million, and

 

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$1.2 million, respectively. Revenue from timber sales decreased due to planned reductions in harvest volumes. Revenue from timberland sales decreased as a result of selling fewer acres and reserving more timber on timberland sold during 2011 as compared to 2010. Other revenue decreased due to approximately $1.1 million of funds received from the Biomass Crop Assistance Program, or BCAP, during 2010; no funds were received from BCAP in 2011.

Details of timber sales by product for the years ended December 31, 2010 and 2011 are shown in the following table:

 

     For the
Year Ended

December 31,
2010
     Changes attributable to:     For the
Year Ended

December 31,
2011
 
        Price     Volume    

Timber sales (1)

         

Pulpwood

   $ 30,257,406       $ (389,371   $ (4,662,329   $ 25,205,706   

Sawtimber (2)

     11,146,913         (350,049     (468,654     10,328,210   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 41,404,319       $ (739,420   $ (5,130,983   $ 35,533,916   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Timber sales are presented on a gross basis.
(2) Includes sales of chip-n-saw and sawtimber.

Operating expenses. Contract logging and hauling costs decreased approximately 5% to approximately $20.1 million for the year ended December 31, 2011 from approximately $21.1 million for the year ended December 31, 2010 due to an approximately 11% decrease in delivered wood volume, offset by a 7% increase in our logging rate. Logging rate increased due to higher fuel cost. Depletion decreased to approximately $11.8 million for the year ended December 31, 2011 from approximately $14.3 million for the year ended December 31, 2010 due to lower harvest volumes. Cost of timberland sales decreased to approximately $1.3 million in 2011 from approximately $1.6 million in 2010, primarily as a result of selling fewer acres and reserving more timber on timberland sold in 2011. Forestry management fees decreased approximately $0.2 million primarily due to a decrease in incentive fees as a result of lower net operating revenue. Other operating expenses decreased by approximately $0.3 million due to lower timber taxes as a result of harvest reduction.

Advisor fees and expense reimbursements. Advisor fees and expense reimbursements decreased approximately $2.8 million to approximately $3.3 million for the year ended December 31, 2011 from approximately $6.1 million for the year ended December 31, 2010 due to Amendment No. 1 that limited the amounts of advisor fees and expense reimbursements to the least of (1) an asset management fee equal to one-fourth of 1.0% of assets under management plus reimbursements for all costs and expenses Wells TIMO incurred in fulfilling its duties as the asset manager; (2) one quarter of 1.5% of assets under management , or (3) free cash flow (as defined) in excess of an amount equal to 1.05 multiplied by interest on outstanding debt. From the second quarter of 2011 to the fourth quarter of 2011, we incurred approximately $1.7 million of advisor fees and expense reimbursements pursuant to Amendment No. 1, which became effective on April 1, 2011, a decrease of approximately $3.0 million from the same period in 2010. In connection with our transition to self-management, we will terminate the advisory agreement on or about November 1, 2013, and we and our operating partnership will enter into the transition services agreement with Wells REF and a sublease with Wells REF. See Note 9 to the accompanying unaudited consolidated financial statements as of and for the period ending June 30, 2013 for additional information regarding fees incurred in connection with the advisory agreement.

 

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General and administrative expenses. General and administrative expenses of approximately $2.1 million for the year ended December 31, 2011 was approximately $0.1 million higher than that in 2010 primarily due to an increase in bank fees.

Interest expense. Interest expense decreased to approximately $5.4 million for 2011 from approximately $8.6 million for 2010, primarily as a result of lower principal balances outstanding on our debt facilities and a lower weighted-average interest rate.

Interest rate risk instruments. We recognized a loss on our interest rate swaps that do not qualify for hedge accounting treatment of approximately $0.4 million for the year ended December 31, 2011 compared to a loss of approximately $1.8 million for the year ended December 31, 2010. The loss was primarily due to the fact that the variable interest rate incurred on the Mahrt loan was lower than the contractual interest rate of the related interest rate swap during the year ended December 31, 2011. The decrease in the loss was primarily due to a decrease in the notional amounts under the respective swap contracts, changes in market interest rates, and changes in the outlook of future market interest rates.

Net loss. Our net loss decreased to approximately $11.9 million for the year ended December 31, 2011 from approximately $15.8 million for the year ended December 31, 2010, as a result of decreases in interest expense and loss on interest rate swaps of approximately $3.1 million and $1.4 million, respectively, offset by an approximately $0.6 million increase in operating loss. We sustained a net loss for the year ended December 31, 2011, primarily as a result of incurring an operating loss of approximately $6.1 million, interest expense of $5.4 million in connection with borrowings used to finance the purchase of our timberlands, and incurring a loss on interest rate swaps of approximately $0.4 million related to our hedging of interest rate risk. Our net loss per share available to common stockholders for the years ended December 31, 2011 and 2010 was $0.47 and $0.86, respectively.

Quarterly Financial Information

Presented below is a summary of the unaudited quarterly financial information for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011:

 

    2013     2012     2011  
    First
Quarter
    Second
Quarter
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
    First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

Revenues

  $ 7,387,791      $ 9,252,419      $ 7,885,864      $ 18,292,293      $ 8,934,702      $ 9,086,920      $ 9,376,809      $ 10,863,457      $ 9,462,391      $ 10,315,170   

Operating income (loss)

  $ (1,196,915   $ (1,617,420   $ (2,177,228   $ 523,104      $ (226,147   $ (1,819,328   $ (2,814,639   $ (631,895   $ (733,032   $ (1,892,639

Net loss

  $ (1,986,734   $ (2,563,923   $ (3,254,067   $ (464,306   $ (2,519,815   $ (2,632,544   $ (4,473,926   $ (2,346,944   $ (2,120,571   $ (3,003,922

Net loss available to common stockholders

  $ (2,078,868   $ (2,656,892   $ (3,347,108   $ (557,276   $ (2,613,807   $ (2,726,533   $ (5,388,321   $ (2,793,780   $ (2,219,534   $ (3,100,403

Basic and diluted net loss per share available to common stockholders (1) (2)

  $ (0.07   $ (0.08   $ (0.11   $ (0.02   $ (0.08   $ (0.09   $ (0.20   $ (0.10   $ (0.08   $ (0.10

 

(1) The sums of the quarterly amounts do not equal loss per share for the years ended December 31, 2012 and 2011 due to the increases in weighted-average shares outstanding over the years.
(2) Amounts adjusted for all periods presented to reflect impact of additional shares of common stock issued and outstanding as a result of stock dividends.

Liquidity and Capital Resources

Overview

From 2007 through the first quarter of 2012, we raised gross proceeds of approximately $307.2 million through the issuance of shares of our common stock in our non-listed public offerings and our offering to non-U.S. persons, which we refer to as the 2010 German offering, and approximately $43.6 million through the issuance of our preferred stock to Wells REF.

 

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On September 28, 2012, we entered into a first mortgage loan agreement, or the CoBank loan, with a syndicate of banks with CoBank ACB, or CoBank, serving as administrative agent. The CoBank loan amended and restated the five-year senior loan agreement for $211.0 million entered into on March 24, 2010 and its amendments, or the Mahrt loan. Proceeds from the CoBank term loan facility of $133.0 million, or the CoBank term loan, were used to pay off the outstanding balance of the Mahrt loan, fund costs associated with closing the CoBank loan, and partially fund the Saunders property acquisition.

Under the CoBank loan, we can initially borrow up to $148.0 million in principal, including the CoBank term loan and up to $15.0 million through a revolving credit facility, or the CoBank revolver. During the term of the CoBank loan, we also have the ability to increase the amount of the CoBank term loan by up to $50.0 million, or the CoBank incremental loan. The CoBank loan is secured by a first mortgage in our timberlands, a first priority security interest in all of our bank accounts, and a first priority security interest on all of our other assets.

The CoBank loan bears interest at an adjustable rate based on the one-, two-, or three-month LIBOR plus an applicable margin ranging from 2.00% to 2.75%, or the LIBOR Rate, that varies based on the loan-to-collateral-value ratio, or our LTV ratio, at the time of determination. As of July 31, 2013 and June 30, 2013, the outstanding balance of the CoBank loan was approximately $132.4 million, all of which was outstanding under the CoBank term loan. We intend to pay down the majority of the outstanding principal balance of the CoBank loan with the proceeds of this offering. On August 11, 2018, all outstanding principal, interest and any fees or other obligations on the CoBank loan will be due and payable in full.

The CoBank loan is subject to mandatory prepayment from proceeds generated from dispositions of timberland and lease terminations. The mandatory prepayment excludes (1) the first $4.0 million of cost basis of timberland dispositions in any fiscal year if (a) our LTV ratio calculated on a pro forma basis after giving effect to such disposition does not exceed 40%, and (b) such cost basis is used as permitted under the CoBank loan; and (2) lease termination proceeds of less than $2.0 million in a single termination until aggregate lease termination proceeds during the term of the CoBank loan exceeds $5.0 million. We may make voluntary prepayments at any time without premium or penalty. As of June 30, 2013, our LTV ratio was approximately 33%.

The CoBank loan prohibits us from declaring, setting aside funds for, or paying any dividend, distribution, or other payment to our stockholders other than as required to maintain our REIT qualification if our LTV ratio is greater than or equal to 40%. So long as our LTV ratio remains below 40% and we maintain a minimum fixed-charge coverage ratio of 1.05:1.00, we have the ability to declare, set aside funds for, pay dividends or distributions, or make other payments to our stockholders from operating cash flows on a discretionary basis. The amount of distributions that we may pay to our common stockholders will be determined by our board of directors and is dependent upon a number of factors, including, but not limited to, our financial condition, our capital requirements, our expectations of future sources of liquidity, current and future economic conditions and market demand for timber and timberlands, and tax considerations.

We expect our primary sources of future capital will be derived from the operations of our timberlands, proceeds from the CoBank revolver and the CoBank incremental loan. The amount of cash available for distribution to stockholders and the level of discretionary distributions declared will depend primarily upon the amount of cash generated from our operating activities, our determination of funding needs for near-term capital and debt service requirements, expectations of future cash flows and the amount of proceeds we raise in this offering.

 

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Short-Term Liquidity and Capital Resources

Net cash provided by operating activities for the six months ended June 30, 2013 and 2012 were approximately $2.4 million and $8.8 million, respectively, and for the years ended December 31, 2012, 2011 and 2010 were approximately $11.4 million, $4.6 million and $5.2 million, respectively. Net cash flows for each of these periods was primarily comprised of net cash receipts from timber and timberland sales and recreational leases in excess of payments for operating expenses, interest expense, advisor fees and expense reimbursements, forestry management fees, and general and administrative expenses. We intend to use the majority of future cash flows from operating activities, after payments of operating expenses and interest expense, to fund certain capital expenditures, to pay down existing borrowings to lower our debt-to-net assets ratio and to pay distributions to our stockholders.

Net cash provided by investing activities for the six months ended June 30, 2013 and 2012 were approximately $9,133 and $3.7 million, respectively, and net cash used in investing activities for the years ended December 31, 2012, 2011 and 2010 were approximately $18.3 million, $0.5 million and $0.9 million, respectively, which reflects investments in timber and timberland assets net of amounts released from lender-required escrow accounts.

Net cash used in financing activities for the six months ended June 30, 2013 and 2012 was approximately $0.3 million and $1.1 million, respectively, and net cash provided by (used in) financing activities for the years ended December 31, 2012, 2011 and 2010 was approximately $11.3 million, $(6.0) million and $(1.1) million, respectively. Change in cash from financing activities during the respective periods represented cash received from our public offerings through February 2012 net of payments of commissions and fees, proceeds from our credit facilities ($133.0 million in 2012 and $211.0 million in 2010) net of payment of financing costs and repayments of debt, offset by cash used for redemptions of our common stock and Series A and Series B preferred stock.

We expect to utilize the residual cash balance of approximately $13.4 million as of June 30, 2013 to satisfy current and future liabilities and fund future capital expenditures.

We believe that we have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on-hand, and borrowing capacity, necessary to meet our current and future obligations that become due over the next twelve months.

The CoBank loan contains, among others, financial covenants which:

 

  Ÿ  

limit our LTV ratio to 45% at the end of each fiscal quarter and upon the sale or acquisition of any property; and

 

  Ÿ  

require a fixed-charge coverage ratio of not less than 1.05:1.00 at the end of each fiscal quarter.

As of June 30, 2013, we believe we were in compliance and expect to remain in compliance with the financial covenants of the CoBank loan. Additionally, the CoBank loan requires funding of an account under the control of CoBank equal to approximately six months of interest on the CoBank loan during any time the LTV ratio is 35% or greater, or approximately three months of interest if the LTV ratio is less than 35%.

 

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Long-Term Liquidity and Capital Resources

Over the long-term, we expect our primary sources of capital to include net cash flows from operations, including proceeds from strategic property sales and proceeds from secured or unsecured financings from banks and other lenders. Our principal demands for capital include operating expenses, interest expense on any outstanding indebtedness, certain capital expenditures (other than timberland acquisitions), repayment of debt, timberland acquisitions and stockholder distributions.

In determining how to allocate cash resources in the future, we will initially consider the source of the cash. We anticipate using a substantial portion of cash generated from operations, after payments of periodic operating expenses and interest expense, to fund certain capital expenditures required for our timberlands. Any remaining cash generated from operations may be used to pay distributions to stockholders and partially fund timberland acquisitions. Therefore, to the extent that cash flows from operations are lower, timberland acquisitions and stockholder distributions are anticipated to be lower as well. Proceeds from future debt financings may be used to fund capital expenditures and to pay down existing and future borrowings.

As of June 30, 2013, our debt-to-net-assets ratio, defined as our total debt as a percentage of our total gross assets (other than intangibles) less total liabilities, was approximately 45%. Our debt-to-net-assets ratio will vary based on our level of current and future borrowings, which will depend on the level of net cash flows from operations; however, we expect our debt-to-net-assets ratio to decrease as a result of paying down our existing borrowings from the net proceeds raised in this offering. Accordingly, before additional borrowings, principal payments, timberland acquisitions or dispositions, we expect our debt-to-net-assets ratio to decrease in the future.

Contractual Obligations and Commitments

As of December 31, 2012, our contractual obligations are as follows:

 

     Payments Due by Period  

Contractual Obligations

   Total      2013      2014-2015      2016-2017      Thereafter  

Debt obligations (1)

   $ 132,356,123       $       $       $       $ 132,356,123   

Estimated interest on debt obligations (1) (2)

     27,258,004         4,985,060         10,532,612         9,945,148         1,795,184   

Operating lease obligations (3)

     6,546,920         875,946         1,456,619         1,342,006         2,872,349   

Other liabilities (4)

     1,150,000         163,889         289,183         244,408         452,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 167,311,047       $ 6,024,895       $ 12,278,414       $ 11,531,562       $ 137,476,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents respective obligations under the CoBank Loan as of December 31, 2012.
(2) Amounts include impact of interest rate swaps. See “—Quantitative and Qualitative Disclosure About Market Risk” for more information regarding our interest rate swaps.
(3) Includes payment obligation on approximately 7,300 acres that are subleased to a third-party.
(4) Represents net present value of future payments to satisfy a liability assumed upon acquisition of timberland.

Portfolio Information

As of June 30, 2013, we owned approximately 282,000 acres of timberland located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia. Of the approximately 282,000 acres, we owned fee-simple interests in approximately 245,700 acres

 

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and leasehold interests in approximately 36,300 acres. As of December 31, 2012, our timberlands acreage consisted of approximately 75% pine stands and approximately 25% hardwood stands, and our timber inventory consisted of approximately 10.1 million tons of merchantable timber, including approximately 6.0 million tons of pulpwood, 2.1 million tons of chip-n-saw and 2.0 million tons of sawtimber.

Election as a REIT

We have elected to be taxed as a REIT under the Code, and have operated as such beginning with our taxable year ended December 31, 2009. To qualify to be taxed as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted taxable income, as defined in the Code, to our stockholders, computed without regard to the dividends-paid deduction and by excluding our net capital gain. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify to be taxed as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for that year and for the four years following the year during which qualification is lost, unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes.

Inflation

In connection with the acquisition of our timberlands, we entered into the timber agreements with MeadWestvaco. The timber agreements provide that we will sell to MeadWestvaco specified amounts of timber subject to quarterly market pricing adjustments and monthly fuel pricing adjustments, which are intended to protect us from, and mitigate the risk of, the impact of inflation. The price of timber has generally increased with increases in inflation; however, we have not noticed a significant impact from inflation on our revenues, net sales or income from continuing operations.

Application of Critical Accounting Policies

Our accounting policies have been established to conform to GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied or different amounts of assets, liabilities, revenues, and expenses would have been recorded, thus resulting in a different presentation of the financial statements or different amounts reported in the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

A discussion of the accounting policies that management deems critical because they may require complex judgment in their application or otherwise require estimates about matters that are inherently uncertain, is provided below.

 

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Timber Assets

Timber and timberlands, including logging roads, are stated at cost less accumulated depletion for timber harvested and accumulated amortization. We capitalize timber and timberland purchases. Reforestation costs, including all costs associated with stand establishment, such as site preparation, costs of seeds or seedlings, planting, fertilization and herbicide application, are capitalized. Timber carrying costs, such as real estate taxes, insect control, wildlife control, leases of timberlands and forestry management personnel salaries and fringe benefits, are expensed as incurred. Costs of major roads are capitalized and amortized over their estimated useful lives. Costs of roads built to access multiple logging sites over numerous years are capitalized and amortized over seven years. Costs of roads built to access a single logging site are expensed as incurred.

Depletion

Depletion, or costs attributed to timber harvested, is charged against income as trees are harvested. Fee-simple timber tracts owned longer than one year and similarly managed are pooled together for depletion calculation purposes. Depletion rates are determined at least annually by dividing (a) the sum of (1) net carrying value of the timber, which equals the original cost of the timber less previously recorded depletion, and (2) capitalized silviculture costs incurred and the projected silviculture costs, net of inflation, to be capitalized over the harvest cycle, by (b) the total timber volume estimated to be available over the harvest cycle. The harvest cycle for our timberlands is 30 years. Our methods of estimating our timber inventory are consistent with industry practices. We must use significant assumptions and judgments to determine both our current timber inventory and the timber inventory that will be available over the harvest cycle; therefore, the physical quantity of such timber may vary significantly from our estimates. Our estimated inventory is calculated for each tract by utilizing growth formulas based on representative sample tracts and tree counts for various diameter classifications. The calculation of inventory is subject to periodic adjustments based on sample cruises, actual volumes harvested and other timber activity, including timberland sales. In addition to growth, the inventory calculation takes into account in-growth, which is the annual transfer of oldest pre-merchantable age class into merchantable inventory. The age at which timber is considered merchantable is reviewed periodically and updated for changing harvest practices, future harvest age profiles and biological growth factors. The capitalized silviculture cost is limited to the expenditures that relate to establishing stands of timber. For each fee-simple timber tract owned less than one year, depletion rates are determined by dividing the acquisition cost attributable to its timber by the volume of timber acquired. Depletion rates for lease tracts, which are generally limited to one harvest, are calculated by dividing the acquisition cost attributable to its timber by the volume of timber acquired. Net carrying value of the timber and timberlands is used to compute the gain or loss in connection with timberland sales. No book basis is allocated to the sale of conservation easements.

Evaluating the Recoverability of Timber Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our timber assets may not be recoverable. When indicators of potential impairment are present that suggest that the carrying amounts of timber assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. Impairment losses would be recognized for (1) long-lived assets used in our operations when the carrying value of such assets exceeds the undiscounted cash flows estimated to be generated from the future operations of those assets, and (2) long-lived

 

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assets held for sale when the carrying value of such assets exceeds an amount equal to their fair value less selling costs. Estimated fair values are calculated based on the following information in order of preference, dependent upon availability: (1) recently quoted market prices, (2) market prices for comparable properties or (3) the present value of undiscounted cash flows, including estimated salvage value. We intend to use one harvest cycle for the purpose of evaluating the recoverability of timber and timberlands used in our operations. Future cash flow estimates are based on probability-weighted projections for a range of possible outcomes and are discounted at risk-free rates of interest. We consider assets to be held for sale at the point at which a sale contract is executed and the buyer has made a nonrefundable earnest money deposit against the contracted purchase price. We have determined that there has been no impairment of our long-lived assets to date.

Allocation of Purchase Price of Acquired Assets

Upon the acquisition of timberland properties, we allocate the purchase price to tangible assets, consisting of timberland and timber, and identified intangible assets and liabilities, which may include values associated with in-place leases or supply agreements, based in each case on our estimate of their fair values. The fair values of timberland and timber are determined based on available market information and estimated cash flow projections that utilize appropriate discount factors and capitalization rates. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The values are then allocated to timberland and timber based on our determination of the relative fair value of these assets.

Intangible Lease Assets

In-place ground leases with us as the lessee have value associated with effective contractual rental rates that are below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place lease and (2) our estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining term of the lease. The capitalized below-market in-place lease values are recorded as intangible lease assets and are amortized as adjustments to land rent expense over the weighted-average remaining term of the respective leases.

Revenue Recognition

Revenue from the sale of timber is recognized when the following criteria are met: (1) persuasive evidence of an agreement exists, (2) legal ownership and the risk of loss are transferred to the purchaser, (3) price and quantity are determinable, and (4) collectability is reasonably assured. Our primary sources of revenue are recognized as follows:

 

  Ÿ  

For delivered sales contracts, which include amounts sufficient to cover costs of logging and hauling of timber, revenues are recognized upon delivery to the customer.

 

  Ÿ  

For pay as cut contracts, the purchaser acquires the right to harvest specified timber on a tract, at an agreed-upon price per unit. Payments and contract advances are recognized as revenue as the timber is harvested based on the contracted sale rate per unit.

 

  Ÿ  

Revenues from the sale of HBU timberland and nonstrategic timberlands are recognized when title passes and full payment or a minimum down payment is received and full collectability is assured. If a down payment of less than the minimum down payment is received at closing, we will record revenue based on the installment method.

 

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  Ÿ  

For recreational leases, rental income collected in advance is recorded as other liabilities in the accompanying consolidated balance sheets until earned over the term of the respective recreational lease and recognized as other revenue.

In addition to the sources of revenue noted above, we also may enter into lump-sum sale contracts, whereby the purchaser generally pays the purchase price upon execution of the contract. Title to the timber and risk of loss transfers to the buyer at the time the contract is consummated. Revenues are recognized upon receipt of the purchase price. When the contract expires, ownership of the remaining standing timber reverts to us; however, adjustments are not made to the revenues previously recognized. Any extensions of time will be negotiated under a new or amended contract.

Related-Party Transactions and Agreements

Prior to our transition to self-management, we engaged Wells TIMO and its affiliates to perform certain services under agreements that require us to pay fees and reimbursements to Wells TIMO or its affiliates, advisor fees and expense reimbursements, disposition fees, and reimbursements of organization and offering costs. In connection with our transition to self-management, we and our operating partnership will enter into a transition services agreement with Wells REF pursuant to which Wells REF and its affiliates will provide us with consulting, support and transitional services until June 30, 2014. Our operating partnership will also enter into a sublease agreement with Wells REF pursuant to which we will sublease office space from Wells REF on a month-to-month basis until March 31, 2014. See the section entitled “Certain Relationships and Related Transactions” and Note 12 to our accompanying audited consolidated financial statements as of and for the period ending December 31, 2012 for a detailed discussion of our related-party agreements and transactions. For the six months ended June 30, 2013 and the year ended December 31, 2012, the aggregate amount of fees and expense reimbursements incurred pursuant to related-party transactions and agreements with our advisor and any affiliate of our advisor by us (including fees or charges paid to our advisor and any affiliate of the advisor by third parties doing business with us) was approximately $2.4 million and $4.3 million respectively.

Commitments and Contingencies

We are currently subject to certain commitments and contingencies with regard to certain transactions. Refer to Notes 1, 6 and 9 of our accompanying unaudited consolidated financial statements as of and for the period ending June 30, 2013 for further explanation. Examples of such commitments and contingencies include:

 

  Ÿ  

MeadWestvaco Timber Agreements;

 

  Ÿ  

FRC Timberland Operating Agreement;

 

  Ÿ  

Advisory Agreement, as amended; and

 

  Ÿ  

Structuring Agent Agreement.

Following completion of this offering, we will be subject to certain commitments and contingencies with regard to certain transactions. Examples of such commitments and contingencies include:

 

  Ÿ  

MeadWestvaco Timber Agreements;

 

  Ÿ  

FRC Timberland Operating Agreement;

 

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  Ÿ  

Transition Services Agreement;

 

  Ÿ  

Sublease Agreement; and

 

  Ÿ  

Structuring Agent Agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition or changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Quantitative and Qualitative Disclosure About Market Risk

As a result of entering into our loan agreements, we are exposed to interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we have entered into interest rate swap agreements, and may enter into other interest rate swaps, caps, or other arrangements in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes; however, certain of our derivatives may not qualify for hedge accounting treatment. All of our debt was entered into for other than trading purposes. We manage our ratio of fixed- to floating-rate debt with the objective of achieving a mix that we believe is appropriate in light of anticipated changes in interest rates. We closely monitor interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.

As of June 30, 2013, we had approximately $132.4 million outstanding on the CoBank loan, which matures on August 11, 2018 and bears interest at an adjustable rate based on one-, two-, or three-month LIBOR Rate plus a margin ranging from 2.00% to 2.75% based upon the then-current LTV ratio.

The Rabobank Forward Swap entered into on October 23, 2012 became effective on March 28, 2013. Under the Rabobank Forward Swap, we pay interest at a fixed rate of 0.9075% per annum and receive variable LIBOR-based interest payments from Rabobank on $80.0 million between March 28, 2013 and September 30, 2017. As of June 30, 2013, the weighted-average interest rate of the CoBank loan, after consideration of the Rabobank Forward Swap, was 2.63%.

Approximately $80.0 million of our total debt outstanding as of June 30, 2013 is subject to an effectively fixed-interest rate when coupled with the Rabobank Forward Swap. As of June 30, 2013, this balance incurred interest expense at an average rate of 2.9075%. A change in the market interest rate impacts the net financial instrument position of our fixed-rate debt portfolio; however, it has no impact on interest incurred or cash flows. As of June 30, 2013, after consideration of the Rabobank Forward Swap, approximately $52.4 million of our total debt outstanding is subject to an effectively variable-interest rate. This balance incurred interest expense at an average rate of 2.2% as of June 30, 2013. A 1.0% change in interest rates would result in a change in interest expense of approximately $0.5 million per year. The amount of effectively variable-rate debt outstanding in the future will be largely dependent upon the level of cash from operations and the rate at which we are able to employ such proceeds toward repayment of the CoBank loan and acquisition of timberland properties.

 

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INDUSTRY AND MARKET OPPORTUNITY

The following information is derived from a market study prepared by Forest Economic Advisors, LLC, or FEA. The forecasts and projections are based on FEA’s experience and expertise within the forest products industry and other sources, although there is no assurance that any of the projections will be accurate. We believe that the study is reliable, but we have not independently verified the information in the study nor have we verified any underlying assumptions relied upon therein. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

According to data from the Federal Reserve and the U.S. Department of Commerce, the logging and wood products manufacturing sectors contributed over $33 billion to U.S. GDP in 2011, and the paper and paperboard sectors contributed an additional $42 billion.

According to FEA’s analysis, in 2012, approximately 49% of the total U.S. softwood and hardwood timber harvest was comprised of larger diameter sawlogs used in the production of lumber and veneer products such as plywood. Another 44% of the timber harvest was comprised of smaller diameter pulpwood, which has two main end-use markets—paper products and OSB, a structural panel primarily used in construction. The following chart illustrates the estimated total U.S. timber harvest by end-use:

 

LOGO

As important as sawlogs and veneer logs are on a volume basis, they are even more important on a value basis. For example, over the past ten years, softwood sawlog prices (per green ton) have exceeded pulpwood prices by a factor of 4.4x on average in the U.S. South. Thus, sawlogs and veneer logs represent the majority of income derived from U.S. timberlands.

 

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Demand Overview

Residential housing is the most important end-use market for timber. Overall, FEA estimates that approximately two-thirds of the total U.S. softwood sawtimber harvest by volume is processed into products that are either primary inputs for residential construction in North America such as dimension lumber, structural wood panels and engineered wood products, or used to make complementary products such as furniture and cabinets.

New Residential Construction

U.S. housing starts are generally considered the most important indicator of demand for timber. In order to forecast wood products consumption from projected new housing starts, FEA considers a number of factors, including the projected composition of housing starts (single-family vs. multi-family) and projected average new home size, to derive a forecast for total square footage of residential construction. An estimate of the quantity of lumber and wood panels used per square foot of floor space is then applied to derive aggregate wood products demand from residential construction.

Over the last six years, the U.S. housing sector has experienced its worst downturn in 70 years, as housing starts averaged slightly above 750,000 per year over such period. This is in contrast to 1.5 million starts per year between 1959 and 2000 and 1.8 million starts per year between 2001 and mid-2007. The following chart illustrates historical annual U.S. housing starts and housing starts per thousand of population:

 

LOGO

Over the long term, housing starts are generally driven by demographics. FEA’s analysis of Census Bureau demographic data suggests that the U.S. housing sector is currently underbuilt relative to underlying demand by approximately 2.7 million housing units on a cumulative basis, which FEA projects will increase to approximately 3.5 million housing units by 2015. The

 

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following chart illustrates FEA’s estimate of the historical and projected cumulative over/under-building of conventional U.S. housing units:

 

LOGO

According to FEA’s estimates, U.S. housing starts are likely to return to a multi-year average of close to 1.5 million within the next several years. FEA believes this estimate is conservative, considering housing starts averaged 1.5 million between 1959 and 2000 when the U.S. population ranged from 177 million to 282 million, as compared to a 2012 population of 314 million and a projected 2020 population of approximately 334 million. FEA’s demographics analysis also suggests trendline demand for housing of approximately 1.5 million starts per year from 2010 to 2020. FEA’s housing starts forecast is based upon U.S. population trends and projections created by the U.S. Census Bureau, historical household formation trends, estimated population growth, including immigration, and assumptions regarding other housing trends such as second home purchases and inventory removals.

FEA forecasts 2013 U.S. housing starts of approximately 950,000, including 630,000 single-family starts. By 2017, FEA projects U.S. housing starts will reach approximately 1.83 million, including 1.34 million single-family starts. This represents an increase in total housing starts and single-family housing starts of approximately 93% and 113%, respectively, relative to 2013 levels.

The following chart illustrates historical and FEA-projected U.S. housing starts:

 

LOGO

 

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Other End-Uses

Aside from new housing, the main end-use markets for U.S. wood products consumption include residential improvements, industrial production and non-residential construction. The following chart provides a breakdown of average wood products consumption by end-use market between 2000 and 2010:

 

LOGO

Residential Improvements

Existing home sales are a key driver of residential improvements, as approximately three-quarters of all residential improvements are made within two years of the purchase of a home. Other factors such as general economic conditions, credit availability and income growth also drive residential improvement expenditures, all of which are expected to improve over the next several years. As a result, FEA projects strong growth in residential improvement expenditures over the 2010 to 2020 timeframe.

The following chart illustrates historical and projected U.S. residential improvement expenditures:

 

LOGO

 

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Industrial Production

Since the recession officially ended in mid-2009, industrial production has grown at an average rate of 4.1% annually, compared to average GDP growth of 2.2% annually over the same time period. Over the next several years, FEA projects that growth in industrial production will roughly track real GDP growth, suggesting increased consumption of wood products for industrial uses.

North American Lumber Consumption Expected to Increase

North American lumber consumption plunged from a peak of 75.8 billion board feet, or BBF, at the height of the housing boom in 2005 to 41.8 BBF at the bottom of the housing downturn in 2010, a decline of approximately 45%. This decline was driven primarily by reduced lumber consumption for new residential construction. Demand has since recovered modestly, and FEA forecasts 2013 lumber consumption of approximately 48.5 BBF. Going forward, FEA projects that lumber consumption will rise rapidly over the next several years as housing construction returns to normalized levels, reaching 67 BBF by 2017, an increase of nearly 40% relative to 2013 levels. The following chart illustrates historical and projected lumber consumption in North America by end use:

 

LOGO

On balance, FEA forecasts average domestic lumber consumption of approximately 60 BBF per year over the next five years, approximately 25% higher than the current level of domestic consumption, due to significant improvements in end-use market conditions. By comparison, during the period from 1995 to 2000, when housing starts averaged 1.52 million per year and residential improvements grew at a solid but restrained pace, lumber consumption averaged approximately 58 BBF. Since that time, U.S. single-family homes have increased in size, other end-use markets (most notably the industrial segment) have grown, and residential improvement expenditures are trending upward. Due to the similarity in end-use markets, FEA also expects the wood panels sector to experience strong growth in the range of 25% to 45% over the next five years. Overall, FEA projects that the significant increase in lumber and wood panels consumption will drive strong incremental demand for sawtimber.

Net Exports of Logs and Lumber Expected to Remain Strong

North American log and lumber exports have increased sharply in recent years due to strong demand from China. The main end uses of wood products in China are for concrete forming, furniture, interior applications and packaging. A number of social factors have driven a significant increase in demand for such products in China. Over the past 10 years, approximately 300 million

 

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Chinese citizens have migrated from rural areas to urban areas, creating the need for an estimated 15 to 20 million new housing units per year. While demand in China has grown rapidly, supply has been relatively constrained. Since China’s domestic timber resources are not nearly sufficient to satisfy its growing demand for wood products, over 80% of its log and lumber supply comes from foreign imports, which have also been limited by a variety of factors. Russia, a logical supplier to the Chinese market, imposed an export tax in 2006 that greatly reduced the price-competitiveness of its export logs. New Zealand, another logical supplier to the Chinese market, is approaching the limits of what it can supply with regard to the sustainability of its timber resource and its port capacity. As a result of these demand drivers and offshore supply constraints, the supply of wood products to China from North America (primarily from the U.S. Pacific Northwest and British Columbia) has surged. The following charts illustrate the growth in log exports from the U.S. Pacific Northwest and lumber exports from British Columbia in recent years:

 

LOGO

In 2013, FEA estimates that China alone will account for approximately 1.0 BBF of log exports from the U.S. Pacific Northwest and approximately 4.4 BBF of lumber exports from British Columbia. This compares to virtually no export demand from China prior to 2008. Overall, the export demand generated by China in 2013 represents the demand equivalent of roughly 450,000 U.S. single-family housing starts (based on average lumber consumption of approximately 15,000 board feet per single-family start and average log-to-lumber recovery rates in the U.S. Pacific Northwest of approximately 2.3x).

Ongoing political factors are expected to further increase Chinese demand for North American wood products. The Chinese government recently increased its target for affordable housing to 7.5 million starts per year. Additionally, Russia’s lack of investment in transportation and logging infrastructure will further limit its ability to supply Chinese markets with wood products going forward. As a result, FEA predicts North American lumber exports will remain strong for the foreseeable future, although exports are expected to taper as domestic demand strengthens and anticipated price increases reduce the competitiveness of export products.

 

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The following chart illustrates historical and projected North American lumber exports:

 

LOGO

Supply Overview

Canada has historically been a major supplier of wood products to the North American market, particularly the United States. Between 2000 and 2010, British Columbia accounted for approximately 23% of aggregate North American lumber production and Eastern Canada accounted for an additional 24%. By contrast, Canada accounted for only 17% of total North American lumber consumption over the same time period, as the significant majority of its lumber production is exported, both to the United States and offshore. Thus, Canada is an integral source of lumber supply for both the United States as well as other global markets. The following charts illustrate the breakdown of North American lumber production by region versus the breakdown of North American lumber consumption between the United States and Canada for the 2000 to 2010 period:

 

LOGO   LOGO

While the demand for wood products and corresponding demand for timber in North America is projected to increase significantly from current levels over the next several years, FEA anticipates that the supply response will be constrained by several key developments in Canada. These developments include the mountain pine beetle epidemic in British Columbia and governmental restrictions on timber harvest in Eastern Canada. FEA projects that the combined

 

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impact of these developments will lead to a reduction in Canada’s sustainable annual softwood timber supply of 22 million cubic meters relative to its most recent peak harvest of 169 million cubic meters in 2004, a decline of 13%. These major developments impacting Canadian wood products supply are discussed further below.

Mountain Pine Beetle Infestation in British Columbia

Approximately one-third of British Columbia’s timber resource is comprised of Lodgepole Pine. Since 1999, British Columbia’s pine inventory has been devastated by an infestation of the mountain pine beetle that has been concentrated in the Interior of the province. When the current epidemic started, the British Columbia Interior was estimated to hold approximately 1.35 billion cubic meters of mature pine timber susceptible to the mountain pine beetle. As of year-end 2012, the British Columbia Ministry of Forests estimates that approximately 723 million cubic meters, or over 50%, of this pine inventory had been killed by the mountain pine beetle. A pine tree killed by the mountain pine beetle is estimated to be commercially viable for 8-12 years after its mortality. Therefore, the full supply-side impact of the mountain pine beetle epidemic (1) has yet to be fully realized, (2) will become increasingly pronounced over the next several years, and (3) will persist for several decades as the forest regenerates (as it typically takes in excess of 75 years for a pine tree to reach economic maturity in British Columbia). The following chart illustrates the estimated inventory of live and dead pine in British Columbia by years since mortality:

 

LOGO

By 2020, FEA estimates that the total pine timber inventory in British Columbia will have been reduced from 1.35 billion cubic meters to 890 million cubic meters, of which 311 million cubic meters will be more than 12 years beyond mortality and no longer commercially viable for most applications. This represents a reduction in British Columbia’s commercially valuable pine inventory of approximately 57% and a reduction in British Columbia’s total commercially available timber inventory of approximately 15%.

The mountain pine beetle infestation peaked in 2005 to 2007, and management of the epidemic has largely taken on elements of a salvage operation. In response to the beetle epidemic, British Columbia increased its annual allowable cut, or AAC, significantly between 1999 and 2007 in order to extract maximum economic value from its dead pine inventory. This elevated AAC remained in effect as the U.S. housing market experienced an unprecedented downturn, which further exacerbated the supply-demand imbalance in the North American solid wood products market. However, as a large and increasing share of British Columbia’s timber inventory becomes commercially unviable, FEA expects that policymakers will need to significantly reduce the AAC in the province.

 

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At the peak of the housing boom, the AAC in the British Columbia Interior was approximately 64 million cubic meters, and the total timber harvested nearly matched that level. The AAC then rose to 68 million cubic meters by 2007 due to the need to harvest fiber while it was still commercially viable. As this salvage operation winds down, FEA expects that the AAC will decline dramatically to reflect the smaller inventory of viable trees. By 2017 to 2020, FEA projects that the AAC in the British Columbia Interior will be down to approximately 50 million cubic meters (a decline of over 25% from the 2007 AAC), and the actual timber harvest is expected to be even lower due to the severely limited inventory of live Lodgepole Pine. This reduced availability of fiber is expected to lead to a proportionate reduction of lumber production capacity in the region. On balance, FEA projects that peak-to-peak lumber production in the British Columbia Interior will decline from 15.1 BBF in 2006 to 11.8 BBF by 2018, which represents a decline in regional supply of approximately 22% and a decline in aggregate North American supply of approximately 5%. This reduction in lumber supply represents the demand equivalent of roughly 220,000 U.S. single-family housing starts.

The following chart illustrates the historical and FEA-projected total AAC in British Columbia from 1990 through 2020:

 

LOGO

Harvest Restrictions in Eastern Canada

Policymakers in Eastern Canada have implemented policies to reduce its AAC as a result of environmental, social and political factors. In the mid-1990s, Ontario restricted logging north of the 49 th parallel in an effort to protect portions of the boreal forest located in the province, resulting in a reduction to its AAC of approximately 6.0 million cubic meters between 1993 and 1996. In the mid-2000s, the Coulombe Commission in Quebec determined that the province had been harvesting timber at an unsustainable rate, resulting in a reduction to its AAC of approximately 6.1 million cubic meters.

Quebec is expected to further reduce its available supply of timber in the future. In 2013, Quebec implemented a forest management regime that calls for longer harvest rotations, which FEA expects will lower Quebec’s AAC by approximately 11.5% in 2013 and beyond. Similar to Ontario, Quebec has also called for additional protections for the boreal forest located north of the 49 th parallel as part of its Plan Nord. Based on current implementation expectations, FEA estimates that Plan Nord will reduce Quebec’s AAC by an additional 6% from 2016 to 2020 (however, if implemented in full, FEA estimates that Plan Nord could reduce Quebec’s AAC by as much as 25% during this period). On balance, FEA estimates that Quebec’s AAC will be less than 20 million cubic meters during the 2016 to 2020 period, a decline of over 35% from the average

 

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AAC of 30.6 million cubic meters that prevailed during the 2000 to 2004 period. As a result, FEA projects that peak-to-peak lumber production in Quebec will decline from 8.2 BBF in 2004 to 5.6 BBF by 2018, which represents a decline in regional supply of over 30% and a decline in aggregate North American supply of nearly 4%. This reduction in lumber supply represents the demand equivalent of roughly 175,000 U.S. single-family housing starts.

The following chart illustrates the historical and projected AAC in Ontario and Quebec:

 

LOGO

Potential Impact of Imports

FEA anticipates that, given the various demand drivers and supply constraints detailed above, North American lumber mills will not be able to meet domestic production needs as end-markets continue to recover. While increased imports may address some of this incremental demand, FEA generally believes that a meaningful increase in U.S. imports (outside of Canada) would likely require very high lumber prices. FEA’s analysis suggests that would-be importers would require sustained spruce-pine-fir, or S-P-F lumber prices in excess of $550 per MBF in order to meaningfully enter the market, given their marginal cost of supplying such products to the United States. By comparison, a domestic S-P-F lumber price of $550 per MBF would represent a premium of over 30% above the average S-P-F lumber price during the period from July 2012 to June 2013. Thus, while an increase in imports could conceivably address excess demand and lead to a softening of the domestic market, the mere fact that imports could competitively enter the market from a pricing standpoint would likely be a sign that the underlying North American wood products markets (and corresponding timber markets) are extremely strong.

Conclusion

FEA anticipates that the projected supply-demand imbalance that is developing in the North American wood products market will drive meaningfully higher product prices for solid wood products, which, in turn, will drive higher prices for timber and timberlands. FEA believes the U.S. South is best positioned to supply North America’s growing timber demand, particularly given the meaningful secular supply constraints in Canada. The U.S. South has abundant and fast-growing fiber resources, a competitive wood-processing industry and sits in close proximity to a substantial portion of the U.S. residential construction sector (as the U.S. South region has historically accounted for roughly 50% of total U.S. housing starts). While the U.S. Pacific Northwest will also benefit from these trends, continued log export demand and longer harvest rotations may limit fiber availability and potential production gains in the region’s wood products manufacturing facilities, thereby driving incremental demand for domestic production toward the U.S. South.

 

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BUSINESS AND PROPERTIES

Our Company

CatchMark Timber Trust, Inc. is a real estate company investing in timberlands that has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Prior to the commencement of this offering, we will be self-administered and self-managed. We primarily engage in the ownership, management, acquisition and disposition of timberland properties located in the United States. Upon completion of this offering, we believe that we will be the only publicly traded REIT that is engaged exclusively in timberland ownership and management, without ownership of any forest products or other manufacturing operations.

The focus of our business is to invest in timberlands and to actively manage such assets to provide current income and attractive long-term returns to our stockholders. We generate recurring income and cash flow from the harvest and sale of timber, as well as from non-timber related revenue sources, such as recreational leases. When and where we believe it is appropriate, we also periodically generate income and cash flow from the sale of HBU lands. HBU refers to timberland properties that have a higher-value use beyond growing timber, such as properties that can be sold for development, conservation, recreational or other rural purposes at prices in excess of traditional timberland values. We also expect to realize additional long-term returns from the potential appreciation in value of our timberlands as well as from the potential biological growth of our standing timber inventory in excess of our timber harvest. For each of the three years ended December 31, 2012, our revenues from timber sales, timberland sales and non-timber related sources, as a percentage of our total revenue, are set forth in the table below:

 

     2012     2011     2010  

Timber sales

     69     89     87

Timberland sales

     25     4     5

Other revenues

     6     7     8
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100

As of June 30, 2013, we owned interests in approximately 282,000 acres of timberland, consisting of approximately 245,700 acres held in fee-simple interests, or our fee timberlands, and approximately 36,300 acres held in leasehold interests, or our leased timberlands. Our leased timberlands include approximately 20,900 acres under one long-term lease expiring in 2022, which we refer to as the long-term contract or LTC lease, and approximately 15,400 acres under multiple, single-rotation leases expiring between 2013 and 2019, which we refer to as the private land management or PLM leases. Our timberlands are located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia within an attractive and competitive fiber basket encompassing a numerous and diverse group of pulp, paper and wood products manufacturing facilities. We believe that our timberlands are high-quality industrial forestlands that have been intensively managed for sustainable commercial timber production. As of December 31, 2012, our timberlands contained approximately 10.1 million tons of merchantable timber inventory.

 

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The following is a breakdown of the acreage distribution of our timberlands by type and our merchantable timber inventory by product category, in each case for the year ended December 31, 2012:

 

LOGO   LOGO

Market Opportunity

We believe that timberlands represent a unique and attractive investment opportunity for the following reasons:

Compelling Industry Fundamentals. The decline in U.S. residential construction that occurred from 2006 to 2011 led to a sharp reduction in demand for solid wood products, which in turn led to significantly depressed sawtimber stumpage prices, particularly in the U.S. South. However, several key global supply-demand factors are expected to positively impact the North American market for timber and timberlands over the next several years and beyond. These factors include:

 

  Ÿ  

Mountain Pine Beetle Epidemic in British Columbia. British Columbia has historically accounted for nearly one-quarter of North American lumber production. Since 1999, a major infestation of the mountain pine beetle in the British Columbia Interior has caused the loss of over half of the commercially valuable pine timber inventory in the province. According to FEA, the epidemic is ultimately expected to lead to a reduction in British Columbia’s lumber production potential of 3.3 BBF from peak levels, which represents the demand equivalent of roughly 220,000 U.S. single-family housing starts.

 

  Ÿ  

Major Timber Supply Contractions in Eastern Canada. Eastern Canada has historically accounted for roughly one-quarter of North American lumber production. Ongoing environmental conservation initiatives by governmental authorities in Quebec have led to significant reductions in the allowable annual timber harvest in the region. According to FEA, these harvest restrictions are ultimately expected to lead to a reduction in Eastern Canada’s lumber production potential of approximately 2.6 BBF from peak levels, which represents the demand equivalent of roughly 175,000 U.S. single-family housing starts.

 

  Ÿ  

Significant Increase in Lumber and Log Exports to China. Over the last five years, there has been a significant increase in the export of lumber and logs to China from British Columbia and the U.S. Pacific Northwest, respectively. According to FEA, in 2013, the aggregate estimated export demand for North American logs and lumber from China represents the demand equivalent of roughly 450,000 U.S. single-family housing starts.

 

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  Ÿ  

Recent Upturn in U.S. Residential Construction. Wood products demand from residential construction and related expenditures comprises roughly two-thirds of the total U.S. softwood sawtimber harvest by volume. The ongoing recovery in the U.S. residential construction sector is expected to drive significantly improved domestic demand for solid wood products and, in turn, sawtimber as U.S. housing starts return to an estimated trendline level in the range of 1.5 million annually. FEA projects that total housing starts and single-family housing starts in the United States will increase by approximately 900,000 and 700,000, respectively, between 2013 and 2017.

Fragmented Ownership and Robust Transaction Pipeline. Timberland ownership in the United States remains highly fragmented, which provides opportunities for consolidation and opportunistic timberland acquisitions. Further, a number of significant ownership positions acquired by TIMOs during the last decade are nearing fund maturities and are expected to liquidate over the next several years, potentially providing meaningful and attractive timberland acquisition opportunities in the future.

Renewable Resource that Increases in Volume and Value Over Time. Timber is a renewable resource that grows and, when properly managed, increases in volume and value over time. As timber grows, it increases in value at a compounding rate, as larger-diameter trees are more valuable than smaller-diameter trees (measured on a price-per-ton basis) because they can be converted into higher-value end-use products such as lumber and plywood. Pine timber in Alabama and Georgia generally becomes merchantable after 11 to 15 years as pulpwood, which is used in the manufacturing of pulp and paper products as well as OSB and certain biomass applications. After 16 to 22 years, trees generally reach chip-n-saw size and can be used for a broader range of products, including 2x4 lumber. After 23 years, trees generally begin to reach sawtimber size and can be used for higher-value products, including dimension lumber, plywood and veneer products. Thus, the value of a timberland property is significantly impacted by its stage of biological growth, and assuming that timber prices remain constant and no trees are harvested or damaged, a timberland property should become more valuable each year as its trees reach economic maturity.

Predictable Growth Rates and Harvest Yields. Advanced forest management technology allows timberland owners to predict with a reasonable degree of certainty the amount of timber that can be sustainably harvested from a particular timberland portfolio over an extended period of time. The predictability of timber growth rates and harvest yields allow for optimum long-term harvest planning. Growth rates can also be enhanced through active forest management and the use of advanced seedling technology, which, together with active harvest planning, can lead to improved economic returns on timberland investments. Silviculture is the art and science of controlling the establishment, growth, composition, health and quality of forests to meet diverse needs and values. Timberland owners can apply a wide range of silvicultural treatments to improve the growth rates of trees and the quality of the wood that such trees produce, including fertilization and herbaceous weed control.

Harvest Flexibility. Unlike most agricultural crops, timberlands generally do not need to be harvested within a specific timeframe. As a result, timberland owners have a degree of flexibility to adjust their harvest activities in response to market conditions. When market conditions are weak, timberland owners have the ability to defer harvest and allow the trees to continue to grow and further appreciate in value before harvesting at some later date. Conversely, when market conditions are favorable, timberland owners have the ability to accelerate harvest volume and capitalize on strong product pricing. This ability to modulate harvest activities and, when appropriate, store timber value “on the stump” is a unique attribute of this asset class.

 

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Structural Supply Constraints. The supply of timber is limited, to some extent, by the availability of commercial quality timberlands, which is in turn limited by a variety of factors, including governmental restrictions on land use, alternate uses such as agriculture and development and the presence of merchantable species in desirable timber-growing climates. The supply of timber is also constrained by the time and capital required to establish new timberlands, as newly planted seedlings generally take 20 to 30 years to reach harvest maturity in the U.S. South (and even longer in other regions). While advancements in silviculture, the conversion of agricultural lands to timber production, and deferred harvesting can lead to timber supply increases, any such increases are generally offset over time by the ongoing conversion of timberlands to alternate uses, increased governmental regulation and restrictions on timber harvesting, and periodic casualty losses. Therefore, we generally believe that the finite and shrinking supply of commercial quality timberlands in North America should contribute to favorable supply-demand dynamics over the long-term.

Our Competitive Strengths

We believe that we distinguish ourselves from other timberland owners and managers through the following competitive strengths:

Experienced Leadership. Our senior executive team will be led by our Chief Executive Officer and President, Jerry Barag, who has a proven track record and substantial experience in both the timberland and commercial real estate industries. Mr. Barag has over 30 years of real estate and timberland investment experience, including expertise in acquisitions, divestitures, asset management, property management and financing. Our Chief Operating Officer, John F. Rasor, has over 45 years of experience in the timberland and forest products industries, including expertise in forest management, wood products manufacturing, fiber procurement and log merchandising, sales and distribution. Prior to joining our company, Messrs. Barag and Rasor most recently served as Principals of TimberStar Advisors, a timberland investment consulting firm based in Atlanta, Georgia, which they formed following their successful roles as Managing Directors of TimberStar, a timberland investment joint venture among Messrs. Barag and Rasor, iStar Financial, Inc. and other institutional investors. While at TimberStar, they oversaw the acquisition of over $1.4 billion of timberlands in Arkansas, Louisiana, Maine and Texas. Prior to TimberStar, Mr. Barag held positions as Chief Investment Officer of TimberVest and Chief Investment Officer of Lend Lease, and Mr. Rasor had a 40-year career at Georgia-Pacific Corporation, including the role of Executive Vice President—Forest Resources, with responsibility for managing over six million acres of timberlands as well as several other business units.

Exclusively Invested in U.S. Timberlands. We do not own any pulp, paper or wood products manufacturing assets, which have historically exhibited significantly higher earnings volatility relative to timberlands. We believe that managing timberlands as a standalone investment allows us to focus on optimizing long-term value and stockholder returns. In contrast, we believe that managing timberland assets as a captive source of fiber supply for integrated manufacturing operations may lead to suboptimal asset management decisions that potentially diminish long-term value. For these reasons, many integrated forest products companies have divested their timberlands over the last decade. Upon completion of this offering, we believe that we will be the only “pure-play,” publicly traded timber REIT in existence. Moreover, we believe that we will be the only publicly traded timber REIT that is invested exclusively in the U.S. South region (although we may pursue acquisitions in other regions over time).

Strategically Located in Competitive Fiber Basket. Our timberlands are strategically located in a competitive and dynamic U.S. South fiber basket. Our timberlands are located in close proximity to a variety of established pulp, paper and wood products manufacturing facilities, which provide a steady source of competitive demand for both pulpwood and higher-value sawtimber products. A

 

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combination of public, private and company-maintained roads provide convenient access to our timberlands for logging and forest management activities. Our timberlands are also located in close proximity to several major interstate highways and state roads (including Interstate 85 to the north, Interstate 75 to the east, U.S. Highway 82 and State Highways 62 and 52 to the south, and U.S. Highway 231 to the west), which provide efficient delivery routes to nearby manufacturers of lumber, plywood, engineered wood products, oriented strand board, pulp and paper.

Significant Volume Commitment through Fiber Supply Agreement. We benefit from an attractive long-term fiber supply agreement with MeadWestvaco, which covers a substantial portion of our anticipated annual harvest volume. The Mahrt Mill (located in Cottonton, Alabama) is one of the primary manufacturing facilities for MeadWestvaco’s Coated Board division, which produces paperboard for conversion into folding cartons and beverage carriers. The fiber supply agreement requires us to sell and requires MeadWestvaco to purchase a certain volume of pulpwood and other timber products annually. We believe that the fiber supply agreement is mutually beneficial, as it provides us with a stable demand outlet for a significant portion of our timber production at competitive prices, while providing MeadWestvaco access to a reliable source of fiber for a key manufacturing facility.

Scalable Infrastructure. We believe that our existing management organization, information technology and internal reporting systems can be deployed over a larger asset base without the need for significant incremental cost or personnel. We believe that our existing infrastructure and operating platform will facilitate our growth strategy by allowing us to quickly evaluate, execute and capitalize on timberland acquisition opportunities with only modest incremental costs to us. In addition, we maintain relationships with numerous third-party vendors, including logging contractors, timberland consultants, timberland brokers, forest management firms and professional service providers, which expand our geographic reach and allow for cost-effective acquisition, integration and property management solutions.

Capital Available for Growth. Upon completion of this offering and application of the net proceeds therefrom, our debt to total market capitalization ratio will be approximately     %, assuming a public offering price of $         per share in this offering, which is the midpoint of the range set forth on the cover of this prospectus. We believe that our anticipated improved financial condition following the completion of this offering will enable us to access additional credit on more favorable terms, which will enable us to fund future timberland growth opportunities.

Our Business and Growth Strategies

Our objective is to maximize total returns to our stockholders through the ongoing implementation of the following business and growth strategies:

Actively Manage Our Timberlands for Long-Term Results. We intend to actively manage our timberlands to maximize long-term returns by achieving an optimum balance among biological timber growth, generation of current cash flow from harvesting, and responsible environmental stewardship. Upon completion of this offering and under our new management, we intend to (1) implement a revised business strategy that will increase our annual harvest volume based on a sustainable harvest plan to support a distribution to our stockholders and (2) establish annual HBU sales targets in the range of 1% to 2% of our fee timberland acreage, which will further augment our anticipated stockholder distributions. We may, from time to time, choose to temporarily harvest timber at levels above or below our estimated sustainable yield for a variety of reasons, including as a response to market conditions or as a means to improve long-term productivity of certain timber stands. Further, we expect to continue making investments in forest technology, including improved seedlings, in order to increase the sustainable yield of our timberlands over the long-term.

 

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Maximize Our Profitability on Timber Sales. We actively manage our log merchandising efforts and stumpage sales with the goal of achieving the highest available price for our timber products. We compete with other timberland owners on the basis of the quality of our logs, the prices of our logs, our reputation as a reliable supplier and our ability to meet customer specifications. We will continue to work diligently and proactively with our third-party contractors to ensure that we optimize our logging, hauling, sorting and merchandising operations to extract the maximum profitability from each of our logs based on the foregoing considerations.

Pursue Attractive Timberland Acquisitions. We intend to selectively pursue timberland acquisition opportunities. Due to the expected liquidation of the ownership positions of a number of TIMOs over the next several years, we expect there will be a robust supply of attractive timberlands available for sale. Generally, we expect to focus our acquisition efforts in the most commercially desirable timber-producing regions of the U.S. South and U.S. Pacific Northwest, although we may also pursue opportunistic acquisitions outside of these regions. Further, we expect to focus our acquisition efforts on properties that can be immediately accretive to our cash available for distribution. We may also enter into additional fiber supply agreements with respect to acquired properties in order to ensure a steady source of demand for our incremental timber production.

Opportunistically Sell HBU Lands. We continuously assess potential alternative uses of our timberlands, as some of our properties may be more valuable for development, conservation, recreational or other rural purposes than for growing timber. We intend to capitalize on the value of our timberland portfolio by opportunistically monetizing HBU properties. The close proximity of our existing timberlands to several major population centers (including Columbus, Georgia, Atlanta, Georgia and Montgomery, Alabama) provides us with opportunities to periodically sell parcels of our land at favorable valuations. We generally expect to monetize 1% to 2% of our fee timberland acreage on an annual basis pursuant to our land sales program, although such results may vary. We may also decide to pursue various land entitlements on certain properties in order to realize higher long-term values on such properties.

Practice Sound Environmental Stewardship. We will remain committed to responsible environmental stewardship and sustainable forestry. Our timberlands are third-party audited and certified according to the SFI in accordance with the 2010-2014 SFI standard. SFI standards promote sustainable forest management through recognized core principles, including measures to protect water quality, biodiversity, wildlife habitat and at-risk species. Our timberlands are further managed to meet or exceed all state regulations through the implementation of Best Management Practices as well as internal policies designed to ensure compliance. We believe our continued commitment to environmental stewardship will allow us to maintain our timberlands’ productivity, grow our customer base and enhance our reputation as a preferred timber supplier.

Timber Agreements

In connection with the acquisition of our timberlands, we entered into the master stumpage agreement and the fiber supply agreement with MeadWestvaco, which we refer to as the timber agreements. The master stumpage agreement provides that we will sell specified amounts of timber and make available certain portions of our timberlands to CatchMark Timber TRS for harvesting. The fiber supply agreement provides that MeadWestvaco will purchase specified tonnages of timber from CatchMark Timber 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 adjustments based on an index published by Timber Mart-South, a quarterly trade publication that reports stumpage product prices in 11 southern states. The initial term of the timber agreements is October 9, 2007 through

 

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December 31, 2032, subject to extension and early termination provisions. For the years ended December 31, 2012, 2011, and 2010, approximately 54%, 58%, and 61%, respectively, of our net timber sales revenue was derived from the timber agreements. For 2013, we are required to make available for purchase by MeadWestvaco, and MeadWestvaco is required to purchase, a minimum of approximately 0.6 million tons of timber at fiber supply agreement pricing.

MeadWestvaco can terminate the timber agreements prior to the expiration of the initial term if we replace Forest Resource Consultants, Inc. as our forest manager without the prior written consent of MeadWestvaco, except pursuant to an internalization of our management functions. We do not plan to remove or replace Forest Resource Consultants, Inc. as a result of our transition to self-management. We can terminate the timber agreements if MeadWestvaco (1) ceases to operate the Mahrt Mill for a period that exceeds 12 consecutive months, (2) fails to purchase a specified tonnage of timber for two consecutive years, subject to certain limited exceptions or (3) fails to make payments when due (and fails to cure within 30 days). In addition, either party can terminate the timber agreements if the other party commits a material breach (and fails to cure within 60 days) or becomes insolvent.

In addition, the timber agreements provide for adjustments to our and MeadWestvaco’s 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.

Timber Inventory

Our methods of estimating our timber inventory are consistent with industry practices. We must use various assumptions and judgments to determine both our current timber inventory and the timber inventory that will be available over the harvest cycle; therefore, the physical quantity of such timber may vary significantly from our estimates. Our estimated inventory is calculated for each tract by utilizing growth formulas based on representative sample tracts and tree counts for various diameter classifications. The calculation of inventory is subject to periodic adjustments based on sample cruises, actual volumes harvested and other timber activity, including timberland sales. In addition to growth, the inventory calculation takes into account in-growth, which is the annual transfer of the oldest pre-merchantable age class into merchantable inventory. The age at which timber is considered merchantable is reviewed periodically and updated for changing harvest practices, future harvest age profiles and biological growth factors.

Timber Losses

Forests are subject to a number of natural hazards, including damage by fire, hurricanes, insects and disease. Changes in global climate conditions may intensify these natural hazards. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of forest products. Because our timberlands are concentrated in the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia, damage from natural disasters could impact a material portion of our timberlands at one time. Our active forest management should help to minimize these risks. Consistent with the practices of other timber companies, we do not maintain insurance against loss of standing timber on our timberlands due to natural disasters or other causes.

HBU Land Sales

Large tracts of timberland often contain areas that can provide a greater economic value if they are used for purposes other than growing trees. These areas may include lakefront and riverfront acreage, acreage in proximity to urban areas, acreage that is attractive to developers and acreage that has conservation value. We have implemented a program designed to regularly identify and

 

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sell HBU lands within our portfolio. Some of these lands, especially those that include waterfront acreage, may have restrictions and limitations on timber harvesting that otherwise make them relatively unattractive to us as timberlands. The sale of HBU lands will generate short-term income returns, which we may distribute to our stockholders or reinvest in replacement timberlands. Distributions to stockholders would provide greater cash to those investors on a short-term basis, but could potentially reduce the level of returns in future years, as we would have fewer acres to harvest and fewer acres from which we could expect to receive appreciation returns. Conversely, our reinvestment in replacement timberlands would reduce the level of short-term returns, but would provide the potential for greater long-term returns from timber harvests and future sales of such properties. During the five years ended December 31, 2012, we have sold, on average, approximately 1.2% of our fee timberland acreage annually (measured based on annual HBU sales and beginning of year fee timberlands acreage for each year).

We also may pursue, if and as available to us, opportunities to “swap” certain HBU lands for other timberlands in like-kind exchange programs that provide favorable tax treatment. Depending on the relative values of timberland and HBU land in the area, we would expect to receive several timberland acres for each HBU acre that we are able to exchange.

Several large timberland owners have found that, on average, HBU lands comprise approximately 10% to 20% of their total timberland holdings, although such results can vary significantly among individual timberland portfolios. Many of these large landowners have been selling their HBU lands, which should generally reduce the risk that we acquire timberlands that include a high percentage of HBU lands. As a result, we will generally seek to pay timberland prices, rather than HBU land prices, for additional properties that we acquire, which should also reduce our reliance on HBU land sales to generate attractive investment returns on our potential future timberland acquisitions.

Recreational Leases

We lease certain access rights to portions of our timberlands to individuals for recreational purposes. These operating leases generally have terms of one year with certain provisions to extend the lease agreements for another one-year term. As of August 31, 2013, approximately 248,000 acres, or 97%, of our available-for-lease timberlands had been leased through the end of May 2014 for recreational purposes.

Competition

We compete with various private and industrial timberland owners as well as governmental agencies that own or manage timberlands in the U.S. South. Due to transportation and delivery costs, pulp, paper and wood products manufacturing facilities typically purchase wood fiber within a 100-mile radius of their location, which thereby limits, to some degree, the number of significant competitors in any specific regional market. Factors affecting the level of competition in our industry include price, species, grade, quality, proximity to the mill customer, and our reliability and consistency as a supplier.

Property Taxes

In 2012, we incurred approximately $1.1 million in property taxes for our timberland properties, representing a rate between 2.3% and 3.4% of assessed value. We will receive all 2013 assessment notices and property tax bills during the fourth quarter of 2013 and expect an approximate 4% increase in our property tax liability as compared to 2012.

 

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Regulation

Our business is subject to laws, regulations, and related judicial decisions and administrative interpretations relating to, among other things, the protection of timberlands, endangered species, timber harvesting practices, recreation and aesthetics and the protection of natural resources, air and water quality that are subject to change and frequently enacted. These changes may adversely affect our ability to harvest and sell timber, and remediate contaminated properties. We are subject to regulation under, among other laws, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the National Environmental Policy Act, and the Endangered Species Act, as well as comparable state laws and regulations. Violations of various statutory and regulatory programs that apply to our operations could result in civil penalties; damages, including natural resource damages; remediation expenses; potential injunctions; cease-and-desist orders; and criminal penalties.

Laws and regulations protecting the environment have generally become more stringent in recent years and could become more stringent in the future. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to the person’s negligence or fault. We may acquire timberlands subject to environmental liabilities, such as clean-up of hazardous substance contamination and other existing or potential liabilities of which we are not aware, even after investigations of the properties.

The Endangered Species Act and comparable state laws protect species threatened with possible extinction. At least one species present on our timberlands has been, and in the future more may be, protected under these laws. Protection of threatened and endangered species may include restrictions on timber harvesting, road-building, and other forest practices on private, federal, and state land containing the affected species. The size of the area subject to restriction varies depending on the protected species at issue, the time of year, and other factors, but can range from less than one acre to several thousand acres.

The Clean Water Act regulates the direct and indirect discharge of pollutants into the waters of the United States. Under the Clean Water Act, it is unlawful to discharge any pollutant from a “point source” into navigable waters of the United States without a permit obtained under the Environmental Protection Agency’s, or EPA, National Pollutant Discharge Elimination System permit program. Storm water from roads supporting timber operations that is conveyed through ditches, culverts and channels are exempted by EPA rule from this permit requirement, leaving these sources of water discharge to state regulation. The scope of these state regulations vary by state and are subject to change, and the EPA’s exemption has recently been subject to legal challenges and legislative responses. To the extent we are subject to future federal or state regulation of storm water runoff from roads supporting timber operations, our operational costs to comply with such regulations could increase and our results of operations could suffer.

Employees

We currently have no direct employees. However, prior to the commencement of this offering, we will transition to self-management and will hire up to eight salaried employees from Wells REF and expect to hire additional employees over time as needed. Two of our employees, our Chief Executive Officer and our Chief Operating Officer, have served as consultants to our company since August 2013. The remaining employees that we expect to hire, including our Chief Financial Officer, were employees of Wells REF and its affiliates and previously provided services to us under the advisory agreement with Wells TIMO. Our forest management, harvesting and log transport operations are conducted by independent contractors.

 

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Legal Proceedings

The SEC is conducting a non-public, formal, fact finding investigation regarding Wells Investment Securities, Inc., or WIS, the former dealer-manager for our previous non-listed public offerings, and our company. The investigation relates to whether there have been violations of certain provisions of the federal securities laws regarding valuation, potential distributions, marketing and suitability.

We have not been accused of any wrongdoing by the SEC. We also have been informed by the SEC that the existence of this investigation does not mean that the SEC has concluded that anyone has violated any laws or regulations or that the SEC has a negative opinion of any person, entity or security. We have received a formal subpoena for documents and information and we have been cooperating fully with the SEC. We cannot reasonably estimate the timing of the conclusion of the investigation, nor can we predict whether or not the investigation might have a material adverse effect on our business.

 

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MANAGEMENT

Directors and Executive Officers

Our board of directors consists of five members, including a majority of directors who are independent within the meaning of the listing standards of the NYSE. Prior to the completion of this offering, we expect that our board of directors will increase the size of the board to six members and elect one additional independent director. Each director will serve until the next annual meeting of our stockholders and until his successor has been duly elected and qualified. The next election of our board members is anticipated to be held at our annual meeting in 2014.

In connection with our transition to self-management and our separation from Wells REF, our two directors affiliated with Wells REF are resigning from their roles with our company. Leo F. Wells, III provided notice of his resignation as Chairman of the Board and President, to be effective upon our transition to self-management, which we expect to occur on November 1, 2013, prior to the commencement of this offering, but will remain a director until the effectiveness of his resignation as a director described below. Douglas P. Williams also provided notice of his resignation as Executive Vice President, Secretary and Treasurer, effective upon our transition to self-management. We expect that upon our transition to self-management Jerry Barag will be elected as our Chief Executive Officer and President and John F. Rasor will be elected as our Chief Operating Officer and Secretary. Messrs. Wells and Williams provided notice of their resignations as directors, to be effective immediately prior to the effectiveness of the registration statement relating to this offering. From the effectiveness of the registration statement until the preferred stock redemption, our board of directors will be comprised of three directors. Effective upon the preferred stock redemption, Messrs. Barag and Rasor will be elected as directors to fill the vacancies created by the resignations of Messrs. Wells and Williams. All of the outstanding shares of Series A and Series B preferred stock are indirectly owned by Wells REF, which is wholly owned by Mr. Wells. We expect that the preferred stock redemption will occur upon the closing of this offering. Messrs. Wells and Williams did not have any disagreements with management on any matters related to our proposed transition to self-management, this offering or our operations, policies or practices.

The table below sets forth certain information about our officers and directors:

 

Name

   Age     

Position(s)

Officers and Directors Following the Completion of the Offering:

Jerry Barag (1)

     54       Chief Executive Officer, President and Director

John F. Rasor (2)

     70       Chief Operating Officer, Secretary and Director

Brian M. Davis

     44       Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary

Donald S. Moss

     77       Director (3)

Willis J. Potts, Jr.

     67       Director (3)

Henry G. Zigtema

     61       Director (3)

Officers and Directors Resigning Prior to the Effectiveness of the Registration Statement:

Leo F. Wells III (4)

     69       Chairman of the Board and President

Douglas P. Williams (5)

     62       Executive Vice President, Secretary, Treasurer and Director

 

(1) We expect that Mr. Barag will be elected as Chief Executive Officer and President upon our transition to self-management and as a director upon the preferred stock redemption.

 

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(2) We expect that Mr. Rasor will be elected as Chief Operating Officer and Secretary upon our transition to self-management and as a director upon the preferred stock redemption.
(3) Our board of directors has determined that this director is an independent director within the meaning of the NYSE listing standards.
(4) Mr. Wells has provided notice of his resignation as Chairman of the Board and President, to be effective upon our transition to self-management, and as a director, to be effective immediately prior to the effectiveness of the registration statement relating to this offering.
(5) Mr. Williams has provided notice of his resignation as our Executive Vice President, Treasurer and Secretary, to be effective upon our transition to self-management, and as a director, to be effective immediately prior to the effectiveness of the registration statement relating to this offering.

Jerry Barag is expected to be elected as our Chief Executive Officer and President upon our transition to self-management. We also expect that he will become a director upon the preferred stock redemption. Mr. Barag has served as our consultant since August 2013. Mr. Barag brings over 30 years of real estate, timberland and investment experience, including expertise in acquisitions, divestitures, asset management, property management and financing. Since September 2011, Mr. Barag has served as a Principal with Mr. Rasor of TimberStar Advisors, an Atlanta-based timberland investment consulting firm, where he specialized in acquiring and managing timberlands in the United States. From 2004 to September 2011, he served as Managing Director of TimberStar, a timberland investment joint venture among Messrs. Barag and Rasor, iStar Financial, Inc. and other institutional investors. While at TimberStar, he oversaw the acquisition of over $1.4 billion of timberlands in Arkansas, Louisiana, Maine and Texas. From 2003 to 2004, he served as Chief Investment Officer of TimberVest, LLC, or TimberVest, an investment manager specializing in timberland investment planning. Prior to joining TimberVest, Mr. Barag served as Chief Investment Officer and Chairman of the Investment Committees for Lend Lease, a subsidiary of Lend Lease Corp., a construction, development and real estate investment management advisory company traded on the Australian Securities Exchange. Mr. Barag received his Bachelor of Science from The University of Pennsylvania, Wharton School. Our board of directors has determined that Mr. Barag’s extensive experience acquiring and managing timberlands and commercial real estate will enable him to effectively carry out his duties and responsibilities as director.

John F. Rasor is expected to be elected as our Chief Operating Officer and Secretary upon our transition to self-management. We also expect that he will become a director upon the preferred stock redemption. Mr. Rasor has served as our consultant since August 2013. Mr. Rasor brings over 45 years of experience in the timberland and forest products industries, including expertise in manufacturing, fiber procurement and log merchandising, sales and distribution. Since September 2011, Mr. Rasor has served as a Principal with Mr. Barag of TimberStar Advisors. From 2004 to September 2011, he served as Managing Director of TimberStar. During his 40-year career with Georgia-Pacific Corporation, or Georgia Pacific, from 1996 to 2003, Mr. Rasor served as an Executive Vice President of Georgia-Pacific, where he was responsible for all of Georgia-Pacific’s timberland and the procurement of all the wood and fiber needed to operate Georgia-Pacific’s mills. He also played a key role in the separation of Georgia-Pacific’s timberland assets into a separate operating entity in 1997 that subsequently merged with Plum Creek Timber Company, Inc. in 2001. Following the separation of Georgia Pacific’s timberland assets, Mr. Rasor assumed responsibility for several of Georgia Pacific’s building products business units and staff positions in addition to serving as a member of the Executive Management Committee of the company. Mr. Rasor attended Willamette University and the University of Oregon. Our board of directors has determined that Mr. Rasor’s extensive experience in the forest products industry, including the management of timberland operations and the procurement of wood fiber, will enable him to effectively carry out his duties and responsibilities as a director.

Brian M. Davis was appointed as our Senior Vice President and Chief Financial Officer in March 2013 and as our Assistant Secretary in August 2013. Mr. Davis has served as Senior Vice President and Chief Financial Officer of Wells TIMO since March 2009 and as Vice President from

 

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October 2007 through March 2009. From March 2013 to September 2013, he was Senior Vice President and Chief Financial Officer of Wells Core Office Income REIT, Inc., or Wells Core. From February 2012 to September 2013, Mr. Davis served as the Chief of Strategic Product Management for Wells REF with responsibility for the strategic planning, development and leadership of the corporate finance organization. In addition, Mr. Davis served as Senior Vice President of Wells Capital, Inc., or Wells Capital, from February 2013 to September 2013. From 2000 until joining Wells REF in 2007, Mr. Davis worked at Atlanta-based SunTrust Bank, where he held various positions including client manager for the Asset Based Lending Group, where he was responsible for the origination and structuring of asset-based lending relationships developed from SunTrust’s existing client base and prospects. Mr. Davis previously held positions with CoBank of Denver, Colorado, as Capital Markets Officer from 1998 to 2000, and with SunTrust as Portfolio Manager for the AgriFoods Specialty Lending Group from 1994 to 1998. Mr. Davis received his Bachelor of Business Administration and Master of Business Administration from Ohio University.

Donald S. Moss  has served as one of our independent directors since 2006. Mr. Moss is also an independent director of Piedmont Office Realty Trust, Inc., or Piedmont REIT, a publicly held REIT. He was employed by Avon Products, Inc. from 1957 until his retirement in 1986. While at Avon, Mr. Moss served in a number of key positions, including Vice President and Controller from 1973 to 1976, Group Vice President of Operations—Worldwide from 1976 to 1979, Group Vice President of Sales—Worldwide from 1979 to 1980, Senior Vice President—International from 1980 to 1983 and Group Vice President—Human Resources and Administration from 1983 until his retirement. Mr. Moss was also a member of the board of directors of Avon Canada, Avon Japan, Avon Thailand and Avon Malaysia from 1980 to 1983. Mr. Moss is a past president and former director of The Atlanta Athletic Club, a former director of the Highlands Country Club in Highlands, North Carolina and the National Treasurer and a director of the Girls Clubs of America from 1973 to 1976. Mr. Moss attended the University of Illinois where he majored in Business. Our board of directors has determined that Mr. Moss’s experience serving as a director for other organizations, including several REITs, has provided him with the business management skills and real estate knowledge desired to effectively carry out his duties and responsibilities as director.

Willis J. Potts, Jr. has served as one of our independent directors since 2006. From 1999 until his retirement in 2004, Mr. Potts served as Vice President and General Manager of Temple-Inland Inc., a major forest products corporation, where he was responsible for all aspects of the management of a major production facility, including timber acquisition, community relations and governmental affairs. From 1994 to 1999, Mr. Potts was Senior Vice President of Union Camp Corporation, where he was responsible for all activities of an international business unit with revenues of approximately $1 billion per year, including supervision of acquisitions and dispositions of timber and timberland, controllership functions and manufacturing. From 2004 to 2007, Mr. Potts served as the chairman of the board of directors of the Technical Association of the Pulp and Paper Industry (TAPPI), the largest technical association serving the pulp, paper and converting industry. From 2006 to 2012, Mr. Potts served on the Board of Regents of The University System of Georgia. Mr. Potts also serves as a director of J&J Industries, a privately held carpet manufacturing company. Mr. Potts received a Bachelor of Science degree in Industrial Engineering from the Georgia Institute of Technology. He also completed the Executive Program at the University of Virginia. Our board of directors has determined that Mr. Potts’ extensive experience in the acquisition and disposition of timber and timberland, combined with his experience serving as a director of, and otherwise managing, organizations engaging in these activities, enable Mr. Potts to effectively carry out his duties and responsibilities as director.

Henry G. Zigtema has served as one of our independent directors since September 2012. Mr. Zigtema is an adjunct professor of accounting at Oglethorpe University and serves on the President’s Advisory Board at Oglethorpe. Prior to his retirement in 2006, Mr. Zigtema spent 28 years with Ernst & Young LLP, or Ernst & Young, and its predecessor firm, Arthur Young and

 

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Company. From 2001 to 2006, Mr. Zigtema was the Southeast Area Tax Managing Partner for Ernst & Young’s Real Estate Practice. During his career, Mr. Zigtema served in several key positions, including Area Director of Tax, Plains State Area Industry Leader for Telecommunications, Oil and Gas, and Real Estate as well as a National Office Partner for Strategic Business Services. Mr. Zigtema served as the tax engagement partner or client service partner for a wide variety of clients, including multinational companies such as Sprint, Zion’s Bank, US Bank, Piedmont REIT, Columbia Property Trust, Inc., or Columbia, various publicly traded REITs in the retail, office, apartment and mortgage spaces, as well as a number of private clients. Past board of director involvement includes Maur Hill Prep School, Kapaun Mt. Carmell High School, St. Thomas Aquinas School, Wichita State Accounting Conference Committee, Sedgewick County Zoo and Ronald McDonald House. Mr. Zigtema is currently the chair of the Finance Committee for the Robert W. Woodruff Library. Mr. Zigtema has contributed to various Ernst & Young publications and was a member of the National Association of Real Estate Investment Trusts, or NAREIT. Mr. Zigtema holds a Bachelor of Arts degree in mathematics from Texas Christian University and a Juris Doctorate degree from Southern Methodist University. He also completed non-degree accounting classes at the University of Texas at Dallas. Mr. Zigtema is a Certified Public Accountant with permits to practice in Georgia, Kansas and Texas and is an inactive member of the Texas Bar. Our board of directors has determined that Mr. Zigtema’s extensive accounting and tax background and experience serving as a director for other organizations enable Mr. Zigtema to effectively carry out his duties and responsibilities as director.

Corporate Governance Profile

We have structured our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of our corporate governance structure include the following:

 

  Ÿ  

our board of directors is not staggered, with each of our directors subject to re-election annually;

 

  Ÿ  

prior to the completion of this offering, our board of directors intends to increase the size of the board to six and elect one additional independent director, at which point four members of our six-person board will have been affirmatively determined by our board of directors to be independent for purposes of the NYSE’s listing standards and Rule 10A-3 under the Exchange Act;

 

  Ÿ  

at least one of our directors qualifies as an “audit committee financial expert” as defined by the SEC;

 

  Ÿ  

we have opted out of the Maryland business combination and control share acquisition statutes; and

 

  Ÿ  

we do not have a stockholder rights plan.

Board Committees

Our board of directors has established three standing committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. The composition of each committee complies with the listing requirements and other rules and regulations of the NYSE. All members of the committees described below are independent as such term is defined in the NYSE’s listing standards and as affirmatively determined by our board of directors.

 

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Audit Committee

Our Audit Committee is comprised of Messrs. Moss, Potts and Zigtema (Chairman), each of whom is an independent director. Mr. Zigtema is designated as the Audit Committee financial expert. The Audit Committee operates under a written charter approved by the board of directors, a copy of which is available on our website, www.catchmarktimber.com . Pursuant to the Audit Committee’s charter, the Audit Committee’s primary function is to assist our board of directors in fulfilling its responsibilities by:

 

  Ÿ  

selecting the independent auditors to audit our financial statements;

 

  Ÿ  

reviewing with the independent auditors the plans and results of the audit engagement;

 

  Ÿ  

approving the audit and overseeing our independent auditors and reviewing the financial information to be provided to our stockholders and others;

 

  Ÿ  

reviewing the independence of the independent public accountants;

 

  Ÿ  

considering the adequacy of fees;

 

  Ÿ  

reviewing the system of internal control over financial reporting which our management has established and our audit and financial reporting process;

 

  Ÿ  

overseeing our compliance with applicable laws and regulations; and

 

  Ÿ  

establishing procedures for the ethical conduct of our business.

Compensation Committee

Our Compensation Committee is comprised of Messrs. Moss (Chairman), Potts and Zigtema, each of whom is an independent director. The Compensation Committee operates under a written charter approved by the board of directors, a copy of which is available on our website, www.catchmarktimber.com . Pursuant to the Compensation Committee’s charter, the Compensation Committee’s primary function is to assist our board of directors in in fulfilling its responsibilities with respect to the compensation of our Chief Executive Officer and our other executive officers and the administration of our compensation plans, programs and policies. For additional information about the Compensation Committee’s processes and the role of executive officers and compensation consultants in determining compensation, see “—Executive Officer and Director Compensation.”

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee is comprised of Messrs. Moss (Chairman), Potts and Zigtema, each of whom is an independent director. The Nominating and Corporate Governance Committee operates under a written charter approved by the board of directors, a copy of which is available on our website, www.catchmarktimber.com . Pursuant to the Nominating and Corporate Governance Committee’s charter, the Nominating and Corporate Governance Committee’s primary functions are to:

 

  Ÿ  

identify individuals qualified to serve on the board of directors and recommend that the board of directors select a slate of director nominees for election by the stockholders at the annual meeting;

 

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  Ÿ  

develop and recommend to the board of directors a set of corporate governance policies and principles and periodically re-evaluate such policies and guidelines for the purpose of suggesting amendments to them if appropriate; and

 

  Ÿ  

oversee an annual evaluation of the board of directors and each of the committees of the board of directors.

Corporate Governance Guidelines

We expect that our board of directors, upon the recommendation of the Nominating and Corporate Governance Committee, will adopt amended and restated corporate governance guidelines, which will become effective upon the commencement of this offering, establishing a common set of expectations to assist the board of directors in performing its responsibilities. The corporate governance guidelines, a copy of which will be available on our website, www.catchmarktimber.com , will address a number of topics, including, among other things, board membership criteria, selection of directors, size of the board, independence requirements, term limits, director compensation, self-evaluations, director access to management and independent advisors and related party transactions.

Code of Ethics

We have adopted a Code of Ethics that applies to all of our executive officers and directors, including, without limitation, our principal executive officer and principal financial officer. Our Code of Ethics may be found at www.catchmarktimber.com.

Executive Officer and Director Compensation

Compensation of Executive Officers

Prior to our transition to self-management, we did not employ and did not pay any compensation to any of our executive officers and did not have any employees. In connection with, and effective upon, the completion of our transition to self-management, we will employ our executive officers, including the following persons who we expect to be our “named executive officers,” or NEOs:

 

  Ÿ  

Jerry Barag, Chief Executive Officer and President;

 

  Ÿ  

John F. Rasor, Chief Operating Officer and Secretary; and

 

  Ÿ  

Brian M. Davis, Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary.

Our compensation committee has retained FPL Associates L.P. as its compensation consultant to, among other things, (1) assist in developing compensation objectives for our NEOs, other officers and independent directors; (2) analyze trends in compensation in the marketplace generally and among our peers specifically; and (3) recommend the components and amounts of compensation for our executive officers, Chairman of the Board and independent directors. Our compensation committee, based on recommendations of our compensation consultant and discussions with our management, will determine the compensation levels for our executive officers, including our NEOs, Chairman of the Board and independent directors that are intended to reward such individuals while closely aligning their interests with those of our stockholders. See “—Compensation of Directors” below for a discussion of the compensation program for our independent directors. We anticipate that our board of directors will approve an amended and restated long-term incentive plan in order to attract and retain qualified independent directors, employees, officers and consultants considered essential to our long-term success.

 

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In addition, we expect to enter into employment agreements with each of our NEOs upon the completion of our transition to self-management.

Compensation of Directors

We have provided below certain information regarding compensation paid to our directors during fiscal year 2012.

 

Name

   Fees Earned
or Paid in
Cash ($)
     Restricted
Stocks
Award
($) (8)
     Option
Awards

($) (9)
     Total
($)
 

Leo F. Wells, III (1)(2)

   $       $       $       $   

Jess E. Jarratt (1)(3)

   $       $       $       $   

E. Nelson Mills (1)(4)

   $       $       $       $   

Michael P. McCollum (5)

   $ 12,500       $       $       $ 12,500   

Donald S. Moss

   $ 61,000       $ 10,000       $       $ 71,000   

Willis J. Potts, Jr.

   $ 57,750       $ 10,000       $       $ 67,750   

George W. Sands (6)

   $ 56,250       $ 10,000       $       $ 66,250   

Henry G. Zigtema (7)

   $ 22,250       $ 25,000       $       $ 47,250   

 

(1) Directors who were also executive officers of our company or our affiliates did not receive compensation for services rendered as a director.
(2) Leo F. Wells, III was elected to our board of directors on March 16, 2012. Mr. Wells has agreed to resign from our board of directors immediately prior to effectiveness of the registration statement relating to this offering.
(3) Jess E. Jarratt resigned from our board effective June 11, 2012. Mr. Jarratt did not have any disagreements with management on any matters related to our operations, policies or practices.
(4) E. Nelson Mills resigned from our board effective February 27, 2013 in connection with the transition to self-management of Columbia, a former affiliate of Wells REF, for which he serves as Chief Executive Officer. Mr. Mills did not have any disagreements with management on any matters related to our operations, policies or practices.
(5) Michael P. McCollum resigned from our board effective June 30, 2012. Mr. McCollum did not have any disagreements with management on any matters related to our operations, policies or practices. Mr. McCollum previously received 2,000 shares of restricted stock award under our independent directors compensation plan. As of the effective date of Mr. McCollum’s resignation, approximately 333 shares of restricted stock award were vested and approximately 1,667 shares were forfeited.
(6) George W. Sands resigned from our board of directors effective March 31, 2013 in connection with the transition to self-management of Columbia, for which he serves as a director. Mr. Sands did not have any disagreements with management on any matters related to our operations, policies, or practices.
(7) Henry G. Zigtema was elected to our board of directors on September 14, 2012.
(8) Reflects the dollar amounts recognized for financial statement reporting purposes of restricted stock received pursuant to our amended and restated independent directors’ compensation plan. The per-share value for all shares issued through December 31, 2012 was estimated at $10.00. The shares of restricted stock vest in thirds on each of the first three anniversaries of the date of grant.
(9) Reflects the dollar amounts recognized for financial statement reporting purposes, computed in accordance with the accounting standard for share-based payments. See Note 9. in the accompanying audited consolidated financial statements as of and for the period ending June 30, 2013 for an explanation of the valuation model assumptions used. We granted 22,000 options to purchase shares of common stock, all of which had vested by August 2011 and remained exercisable as of December 31, 2012. The exercise price of all outstanding options is $10.00 per share.

Cash Compensation

We pay each of our independent directors:

 

  Ÿ  

an annual retainer of $20,000;

 

  Ÿ  

$2,000 per regularly scheduled board meeting attended;

 

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  Ÿ  

$1,500 per regularly scheduled committee meeting attended (committee chairpersons receive an additional $500 per committee meeting for serving in that capacity); and

 

  Ÿ  

$250 per special board meeting attended whether held in person or by telephone conference.

When a committee meeting occurs on the same day as a board meeting, an additional fee is not paid for attending the committee meeting.

All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board of directors.

Amended and Restated Independent Directors Compensation Plan

Our board of directors has adopted the independent directors’ compensation plan, or the director plan, which operates as a sub-plan of our long-term incentive plan

Our board of directors or a committee of its independent directors administers the director plan, with sole authority to select participants, and determines the types of awards to be granted and all of the terms and conditions of the awards, including whether the grant, vesting, or settlement of awards may be subject to the attainment of one or more performance goals. No awards will be granted under the director plan if the grant, vesting, and/or exercise of the awards would jeopardize our status as a REIT under the Code, or otherwise violate the ownership and transfer restrictions imposed under our charter. Unless determined by our board of directors or a committee of our independent directors, no award granted under the director plan will be transferable except through the laws of descent and distribution.

The director plan, as amended in 2009, provides that each independent director elected or appointed to our board on or after November 13, 2009 shall receive a grant of 2,500 shares of restricted stock upon his or her initial election or appointment. Upon each subsequent re-election to the board, each independent director will receive a subsequent grant of 1,000 shares of restricted stock. The shares of restricted stock vest in thirds on each of the first three anniversaries of the date of grant. As of December 31, 2012, we had granted 16,000 shares of restricted stock to our independent directors, 4,000 shares of which had vested and approximately 1,667 shares of which were forfeited upon the resignation of an independent director from our board.

Prior to November 2009, each independent director received a grant of options to purchase 2,500 shares of our common stock upon his election to our board. The initial grant of options was non-dilutive with an exercise price of $10.00 per share. Upon each subsequent re-election of the independent director to the board, he received a subsequent grant of options to purchase 1,000 shares of our common stock. The exercise price for the subsequent options was the greater of (1) $10.00 per share or (2) the fair market value of the shares on the date of grant. Of the options granted, one-third were immediately exercisable on the date of grant, one-third became exercisable on the first anniversary of the date of grant, and the remaining one-third became exercisable on the second anniversary of the date of grant. The stock options will lapse on the first to occur of (1) the tenth anniversary of the date of grant, or (2) the removal for cause of the independent director as a member of the board of directors. No option issued may be exercised if such exercise would jeopardize our status as a REIT under the Code. The independent directors may not sell, pledge, assign, or transfer their options other than by will or the laws of descent or distribution or (except in the case of an incentive stock option) pursuant to a qualified domestic relations order. We granted 22,000 options to purchase shares of our common stock to our independent directors, all of which had vested by August 2011. No options had been exercised as of December 31, 2012.

 

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Compensation Committee Interlocks and Insider Participation

We formed a compensation committee of our board of directors in August 2013. There are no interlocks or insider participation as to compensation decisions required to be disclosed pursuant to SEC regulations.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transition to Self-Management

Prior to the commencement of this offering, we will become self-managed by terminating the advisory agreement with Wells TIMO and hiring certain individuals currently employed by Wells TIMO or Wells REF, as well as hiring a Chief Executive Officer and President and Chief Operating Officer and Secretary not affiliated with Wells TIMO, which we refer to collectively as our transition to self-management. Wells TIMO is indirectly wholly owned by Wells REF, which is wholly owned by Leo F. Wells. In addition, we intend to redeem all of the outstanding shares of Series A and Series B preferred stock held by Wells REF with a portion of the proceeds of this offering, which we refer to as the preferred stock redemption. Mr. Wells will continue to serve as our Chairman of the Board and President until our transition to self-management and as one of our directors until immediately prior to effectiveness of the registration statement relating to this offering. Following our transition to self-management and the preferred stock redemption, we will not have any ongoing related party relationship with Wells TIMO, Wells REF, Mr. Wells or their affiliates, except for the transactions and relationships described below, which relate primarily to temporary support services that will facilitate our transition to a self-managed company.

Interests of Wells REF

Preferred Stock Redemption. As of June 30, 2013, approximately $36.6 million of our Series A preferred stock (including accrued but unpaid dividends) and $12.2 million of our Series B preferred stock (including accrued but unpaid dividends) were outstanding, all of which is owned by Wells REF. Dividends accrued on the shares of Series A and B preferred stock issued from 2007 to 2009 until May 2011 at a rate of 8.5% per annum and, as a result of a waiver provided by Wells REF, have accrued dividends since May 2011, at a rate of 1.0% per annum. If authorized by our board of directors and declared by us, accrued dividends on the preferred stock are payable on September 30 of each year. The preferred stock is not convertible into shares of our common stock. If we are liquidated or dissolved, Wells REF would be entitled to receive the issue price of $1,000 per share plus any accrued and unpaid dividends, whether or not declared, before any payment may be made to the holders of our common stock or any other class or series of our capital stock ranking junior on liquidation to the preferred stock.

We have entered into a preferred stock redemption agreement with Wells REF, pursuant to which we will redeem all of the outstanding Series A and Series B preferred stock with the proceeds from this offering for an aggregate price of $        . Mr. Wells and Douglas P. Williams have agreed to resign as directors of the company effective immediately prior to the effectiveness of the registration statement relating to this offering. Pursuant to the preferred stock redemption agreement, we will not fill the vacancies created by the resignations of Messrs. Wells and Williams until the preferred stock redemption, and our board of directors will reelect Messrs. Wells and Williams if the preferred stock redemption does not occur within 10 days of their resignations.

Office Sublease. Effective upon our transition to self-management, our operating partnership will sublease approximately 5,723 square feet of office space from Wells REF. We expect that the sublease will provide for monthly base rent of $5,961, which will not be payable for the months of November and December 2013, plus additional costs for various space-related services. We also expect that the sublease will provide for an initial term of five months, expiring on March 31, 2014, subject to our ability to terminate the sublease earlier upon providing not less than 10 days’ prior written notice to Wells REF.

Transition Services Agreement. We and our operating partnership will enter into a transition services agreement with Wells REF that will be effective upon our transition to self-management.

 

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Pursuant to the transition services agreement, Wells REF and its affiliates will provide consulting, support and transitional services to us to assist our company in becoming self-managed. Specifically, these services will include, without limitation, consulting with respect to administrative functions, information technology services, financings, leases and other contracts, assisting with accounting and record-keeping functions, providing investor relations and stockholder support, assisting with the listing process and the transition of each of these services to our company. For these services, we will pay Wells REF a consulting fee equal to $22,875 per month for eight months. The transition services agreement may be terminated at an earlier date by either party under certain circumstances; however, if we terminate without cause prior to June 30, 2014, Wells REF shall be entitled to payment of the consulting fee through June 30, 2014. We will also reimburse Wells REF for expenses it incurs in connection with the services provided, excluding its administrative service expenses such as personnel and overhead costs.

Interests of Wells TIMO

Purchase of Common Partnership Units . Effective upon our transition to self-management, our newly formed subsidiary will purchase the 200 common partnership units held by Wells TIMO for $1,312, reflecting a per unit purchase price based on our estimated per share value of our common stock as of September 30, 2012.

Redemption of Special Partnership Units. The terms of our operating partnership agreement provide that the special partnership units, all of which are held by Wells TIMO, are to be automatically redeemed by our operating partnership upon termination of our advisory agreement for an amount equal to the percentage of net sales proceeds that would have been distributed to Wells TIMO if all of our operating partnership’s assets had been sold for their appraised value and all of our operating partnership’s liabilities had been satisfied in full according to their terms. Pursuant to the master agreement entered into on September 18, 2013, Wells REF agreed that upon the termination of the advisory agreement, the special partnership units held by Wells REF will be automatically redeemed for no consideration.

Interests of Wells REF’s Employees

Certain individuals who currently serve or who we expect will serve as our officers or directors following our transition to self-management have material financial interests in our transition to self-management. In particular, Brian M. Davis, a key employee of Wells REF, currently serves as our Chief Financial Officer. The terms of Mr. Davis’ employment agreement have not yet been finalized. Mr. Davis has resigned or will resign from his roles with Wells REF in connection with the commencement of his employment with our company.

Certain Relationships and Related Transactions Prior to Transition to Self-Management

Our Relationships with Wells TIMO and Wells Capital

Until our transition to self-management, which will occur prior to the commencement of this offering, our day-to-day operations will continue to be managed by Wells TIMO under the supervision of our board of directors, pursuant to the terms and conditions of our advisory agreement. Wells TIMO is wholly owned by Wells Capital, Inc., or Wells Capital, which is directly owned by Wells REF and indirectly owned by Mr. Wells. In addition, Messrs. Wells, Williams and Davis, executive officers of our company, are also officers of Wells Capital and its affiliates. Pursuant to the master agreement, we agreed with Wells TIMO that the advisory agreement will terminate on the self-management transition date. We will no longer bear the cost of the advisor fees and other amounts payable under the advisory agreement following its termination. Until the termination of our advisory agreement, we will continue to be obligated to pay advisor fees and expense reimbursements and real estate disposition fees.

 

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We are also party to a structuring agent agreement with Wells Germany GmbH, which is majority owned by Wells REF. Pursuant to the structuring agent agreement, we paid structuring fees to Wells Germany of $0.20 per share sold in our 2010 German offering. The agreement expired upon the conclusion of the 2010 German offering provided, however, that with respect to the ongoing services contemplated by the parties, the structuring agent agreement will terminate upon the earlier of (1) a liquidity event, such as the completion of this offering, or (2) December 31, 2018.

Our Relationship with WIS

Mr. Wells indirectly owns 100% of WIS, which served as the dealer manager for our previous non-listed public offerings. WIS was entitled to receive selling commissions and dealer manager fees in connection with shares sold pursuant to our non-listed public offerings (excluding shares sold pursuant to the distribution reinvestment plan). All of the selling commissions and approximately 50% of the dealer manager fees were reallowed to participating broker-dealers. We were also obligated to reimburse WIS for certain organization and offering expenses.

The following table summarizes the compensation we paid and expenses we reimbursed to Wells TIMO, WIS and their affiliates from January 1, 2010 through June 30, 2013.

 

     Six Months
Ended
June 30,
2013
     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
     Year Ended
December 31,
2010
 

Advisor fees and expense reimbursements

   $ 2,381,608       $ 3,720,000       $ 3,324,154       $ 6,130,749   

Disposition fees

     26,187         219,449         29,968         15,570   

Selling commissions

             246,546         3,421,576         2,914,743   

Dealer-manager fees

             71,057         950,727         796,822   

Other offering costs

             48,752         654,136         550,958   

Structuring agent fees

                             176,166   

Total

   $ 2,407,795       $ 4,305,804       $ 8,380,561       $ 10,585,008   

As of June 30, 2013, fees and reimbursements accrued but not yet paid (and not forgiven) were approximately $1.6 million, representing advisor fees due to Wells TIMO.

Our Relationship with Wells REF

As described above under “Transition to Self-Management—Interests of Wells REF,” in connection with our separation from Wells REF and its affiliates, we will redeem all of the outstanding Series A and Series B preferred stock with a portion of the proceeds from this offering. From January 1, 2010 to June 30, 2013, we redeemed approximately $7.2 million in shares of our Series A and Series B preferred stock held by Wells REF. During the same period, Wells TIMO forgave approximately $27.3 million of fees and expenses we otherwise owed to Wells TIMO pursuant to the terms of the advisory agreement.

Related-Party Transaction Policy

We expect that our board of directors will adopt amended and restated corporate governance guidelines that will become effective upon the commencement of this offering. We expect that these guidelines will provide that all related party transactions must be reviewed and approved by a majority of our disinterested directors in advance of us or any of our subsidiaries entering into the transaction. However, if we or any of our subsidiaries enter into a transaction without

 

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recognizing that such transaction constitutes a related party transaction, the approval requirement will be satisfied if such transaction is ratified by a majority of our disinterested directors promptly after we recognize that such transaction constituted a related party transaction. Disinterested directors are directors that do not have a personal financial interest in the transaction that is adverse to our financial interest or that of our stockholders. The term “related party transaction” refers to a transaction required to be disclosed by us pursuant to Item 404 of Regulation S-K (or any successor provision) promulgated by the SEC.

Our charter, from inception through August 9, 2012, and our corporate governance guidelines, as amended effective August 9, 2012, contained or contain the following additional policies applicable to the related-party transactions described above. All of the transactions described above were approved in accordance with the policies set forth below:

 

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Advisory Agreement . Our board of directors is required to evaluate the performance of Wells TIMO before entering into or renewing an agreement to perform our day-to-day activities, or an advisory agreement. Our board of directors must monitor Wells TIMO to assure that our administrative procedures, operations and programs are in the best interests of our stockholders and are fulfilled. Each contract for the services of our advisor may not exceed one year, although there is no limit on the number of times that the contract with a particular advisor may be renewed.

 

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Advisory Compensation . Our independent directors are respo