Q2 2020 Rayonier Inc Earnings Call
Welcome and thank you for joining rainy years second quarter 2020 teleconference call.
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Meeting over to Mr., Mark MCU, Senior Vice President and CFO, Sir you may begin.
Thank you and good morning, welcome terrain years Investor teleconference, covering second quarter earnings our earnings statements and financial supplement released yesterday afternoon are available on our web site at Rainier Dot com.
And these presentations. We include forward looking statements made pursuant to the Safe Harbor provisions Federal Securities laws, our earnings release. It FCC filings list. Some of the factors that may cause actual results to differ materially from the forward looking statements that we may make their also reference on page two of our financial supplement throughout these presentations.
We will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measure in our earnings release and supplemental materials would that started teleconference with opening comments from Dave Nunez, President and CEO Dave.
Thanks, Mark and good morning, everyone first I'd like to point out that we are conducting this call from multiple locations. So bear with us as we move from speakers speaker in addressing your question.
I will begin the call by making some high level comments before turning it back over to Mark to review our consolidated financial results. Then we'll ask Doug long Senior Vice President Forest resources to comment on our U.S. and New Zealand timber results and following a review of our timber segments, Mark will discuss our real estate results.
As well as our outlook for the remainder of 2020.
Before discussing our results for the quarter I'd like to briefly update everyone on our ongoing response to the coven 19 pandemic.
We continue to contend with the challenges associated with that Cobot 19 pandemic cure Rainier. We have responded by prioritizing the health and safety of our employees and contractors as well as their families. While working to ensure business continuity in mid March we implemented a work from home model for all U.S.
Plus employees and instituted enhance safety guidelines for field employees in.
In an effort to do our part as a company to mitigate spread up cobot 19.
These measures have largely been effective and stemming the spread of this virus within our employee and can contractor workforce and have allowed us to continue to supply our customers with logs and other products.
Given the current state of the pandemic, we anticipate remaining in this mode in many of our locations through at least the end of year and will likely not fully reopened our offices until a vaccine has been implemented or the number of new cases has dramatically subsided.
In New Zealand government instituted a more stringent lock down measure across a broader range of businesses, including forestry beginning in March in late March and lasting through late April which served to effectively and community spread of infections. There as a result, the New Zealand economy has fully.
We reopened and our offices there are now operational.
I'm very proud of how our employees have stepped up keep our business running amid this pandemic, while observing the necessary social distancing in safety protocols to mitigate the further spread of cobot 19.
While this has been extremely disruptive to all aspects of life I believe we are managing through it very well.
[noise] with the closing of the Pope resources transaction on May eight this quarter marks the first quarter that we're reporting the combined results of the two companies our team did a great job. Both closing this transaction on an accelerated timeframe and in developing a thoughtful integration plan that effectively.
And then it's the best practices and considerable talent within each organization. All this work had to be completed under social distancing protocols associated with Covidien 18, which is a tribute to the dedication and professionalism of both organizations.
It also reinforce the strong cultural fit between our respective companies and we're all very excited about the future prospects of the combined organization.
With that I'd now like to switch gears and briefly discuss our quarterly results.
For the second quarter, we reported adjusted EBITDA of $79 million and pro forma net income of $15 million or 11 cents per share.
Overall, I'm pleased with how our team navigated very challenging market conditions amid the covert 19 pandemic to deliver strong operational results across all segments. This is a tribute to both the diversity of our market exposure across our various segments as well as the dedication of our outstanding employees.
Our southern timber segment reported adjusted EBITDA of $26 million for the quarter slightly below the prior year strong quarter, which was driven by substantial pipeline easement revenue.
Second quarter results were aided by both volumes that were up 20% relative to the prior year quarter and stronger saw log markets towards the end of the quarter driven by strong lumber pricing and resurgent export markets.
Our our southern timber segment continues to enjoy very high margins and relatively low cash flow volatility.
In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $4 million up substantially from the prior year quarter on the strength of significantly higher volumes from Rainier legacy land as well as the addition of 55000 tons of volume from the Pope resources assets.
We further enjoyed much stronger.
Log prices towards the end of the quarter driven by stronger lumber pricing, a resumption of normalized log export activity and the improved species mix from the Coke resources acquisition.
And our New Zealand timber segment, we reported adjusted EBITDA of $10 million, which is roughly half the level of our prior year quarter. The primary driver was at 23% reduction in Boston based on the loss of over amongst worth of production associated with the strict New-zealand government lockdown measures put in place to contend with the impacts.
Covered 19.
Log pricing for both export and domestic markets was also all due to both the buildup of log inventories in China any weaker Zealand dollar.
Lastly, our real estate segment as anticipated last quarter reported very strong second quarter, adjusted EBITDA of $45 million driven by the sale of 20000 acres comprising of a mix of rural development and non strategic parcels.
We continue to be encouraged by the stability and demand across all sales categories within our real estate segment with that let me turn it back over to Mark to review, our financial results as well as some changes that we've made to our financial disclosures this quarter.
Thanks, Dave before discussing our results for the quarter I'd like to briefly comment on our recent acquisition of Pope resources as well some changes that we implemented this quarter to our business segments and non-GAAP measures as as Dave noted, we completed our acquisition of Pope resources during the second quarter the aggregate consideration paid by Rainier.
To acquire all the outstanding limited partnership units and general partnership interest to poke consisted of $170 million, a cash 7.2 million common shares of Rayonier and 4.5 million operating partnership or LP units of Rainier LP. We also assumed are repaid approximately $110 million of legacy.
Okay.
The Pope resources transaction added to our portfolio approximately 124000 acres of timberland in Washington Co investments in three private equity timber funds fund management business that overseas. These private equity timber signs and and an attractive pipeline of HQ opportunities in the west Puget Sound area.
As a result at the Pope resources acquisition, we've revised our reportable business segments, adding one additional segment, which we refer to as the timber funds segment.
This segment reflects the operations of the private equity timber funds and fund management business acquired as part of the Pope transaction.
As communicated in our earnings release, despite not having a majority interest in the three private equity timber funds as the managing member of the funds we're required to consolidate 100% of the funds operating results assets and liabilities as such all three timber funds are fully consolidated into our financial statements and the income or loss attributed to third party and.
Masters is reflected as an adjustment in our income statement under the caption net income or loss attributable to non controlling interests and consolidated affiliates.
Since we are required to consolidate the timber funds and our financial statements, we implemented changes to certain non-GAAP measures in order to better reflect the proportionate financial contribution from that this business to Rainier, specifically, we've revised our definitions of pro forma revenues pro forma operating income and adjusted EBITDA to incorporate the look through contribution.
From each of the to three timber funds based on Rayoniers respective ownership interest as well as the full amount of management fees received by Rainier for managing the timber funds.
We believe that these changes will provide our investors and analysts with more useful information to assess the economic value and contribution from the timber funds business to Rainier.
I'd also like to highlight that this is our force first quarter reporting under the Upreit structure, which we put in place to facilitate the Pope resources acquisition.
As noted earlier, we issued 4.5 million LP units of Rainier LP as consideration and the acquisition.
These oh peanuts are generally considered to be economic equivalents to rein your common shares and the number of such units outstanding will be reflected on the cover of our 10-Q and within our financial reports going forward.
Also because these units are registered securities we will be reporting the financial results of Rainier LP within our quarterly SEC filings going forward. Please note that the only significant difference between the financial reports of Rainier Inc. and those are Grenier LP relates to the adjustment in Rainier inks income statement under the caption net income attributable to not can.
Growing interest in the operating partnership.
Lastly, we also communicated in our earnings release that effective April 1st we change the composition of our real estate sales categories to better align with the way, we evaluate real estate sales internally. The rural category. Now includes all real estate sales, excluding development sales, representing a demonstrable premium above timberland value the timberland and non struck.
As a category now includes all real estate sales representing little to no premium to timberland value. This category consists primarily of sales of property management views as non strategic to our long term portfolio as well as sales of property for capital allocation purposes that did not fit the definition of a large disposition.
In summary, we revise these categories to placing greater emphasis on premium rather than end use which more closely aligns with how we manage the business internally all prior period amounts had been reclassified to reflect the new composition of the sales categories note that the improve development unimproved development and large disposition categories were unchanged and this re.
Classification had no impact on consolidated segment results.
I'll now switch gears and provide an overview of our second quarter results starting on page five with our financial highlights.
Sales for the quarter totaled $196 million, while operating income was $12 million and net income attributable to Rainier was $2 million for one cent per share on a pro forma basis net income was $15 million or 11 cents per share the pro forma adjustment for the second quarter consisted of approximately $13 million of costs.
Related to merger with hope resources.
Second quarter, adjusted EBITDA of $79 million was well above the prior year quarter, adjusted EBITDA of $61 million, primarily due to a much stronger results in a real estate segment, partially offset by significantly lower results in our New Zealand timber segment due to the cobot 19 shutdown.
On the bottom of page five we provide an overview of our capital resources and liquidity at quarter end as well as a comparison to your Ed our cash available for distribution or C.A.D. for the first half of the year was $80 million compared to $95 million in the prior year period, primarily due to lower adjusted EBITDA higher cash interest paid and high.
Your cash taxes paid partially offset by lower capital expenditures a reconciliation of see 80 to cash provided by operating activities and other GAAP measures is provided on page eight of the financial supplement.
We closed the quarter with $88 million of cash and $1.3 billion of debt, both of which exclude cash and debt attributable to the timber fund segment, which is non recourse to rainier our quarter run debt balance reflects the credit facilities that we closed in April which were used to fund the Pope resources acquisition, our net debt of $1.2 billion represent.
26% of our enterprise value based on our closing stock price at quarter end.
I'll now turn the call back over to Doug to provide a more detailed review of our temporary results.
Thank you Mark good morning.
Let's start on page nine with our southern timber segment.
Adjusted EBITDA in the second quarter $26 million was $7 million and $1 million unfavorable compared to the prior quarter the prior year quarter, respectively.
Second quarter harvest volume, approximately 1.5 million tonne was 17% lower compared to prior quarter, but 20% higher compared to prior year quarter.
2020, and 2019 experienced a reduction in volume and the second quarter following comparatively strong volumes in the first quarter of each year.
For the first half of the or volume of 3.4 million tons was 5% higher and the same period in the prior year as we pulled forward some pulp production to be strong demand during the early stages of because at 19 pendant.
The average pine pulpwood stoppage price a $15.94 per tonne was flat compared the prior quarter and 7% unfavorable compared to the prior year quarter.
Oh, what demand remains strong into the second quarter, which result in stable pricing compared to prior quarter.
The decline in price relative to prior year quarter was driven by increased availability of log supply due to dry or ground conditions.
The average pine sawtimber, so much price of $25.48 per tonne was 5% and 1% unfavorable compared to prior quarter in the prior year quarter, respectively.
At the onset of 719 and into the second quarter, we experience uncertainty in lumber markets as well as an increase in pulp with volumes.
This resulted in increased mix it shouldn't sawlogs at lower pricing, which was partially offset by higher pricing or larger Daimler sawlogs through the resurgence of exports to China.
Second quarter non interest income of $5 million was $4 million below the prior year quarter due to reduction and pipeline isn't revenue.
It's important to note. This comparison is being made against a record high year or an entrepreneur income business in 2000 my team.
Now moving from Pacific Northwest timber segment on page 10.
Adjusted EBITDA of $4 million was $6 million on favorable compared to prior quarter, but $2 million favorable compared to prior year quarter.
This was largely volume driven a second quarter harvest line 385000 times.
19% per quarter.
4% higher compared to the prior year quarter.
Of the 385000 tons of harvest volume in the second quarter.
85000 tons represented volume from the newly acquired hope resources similar.
The decrease in volumes.
There was driven by the addition of stumpage sales volumes in the first quarter capture strong pricing.
The increase in volume compared to prior year quarter was primarily due to the comparatively late harvest activity in the prior year quarter, coupled with 55000 pounds of incremental volume from the acquired cookies furnace timberlands.
The average deliver customer price of $75.39 per ton.
Flat compared to prior quarter, and 4% unfavorable compared to prior year quarter.
Market uncertainty linger through much of the second quarter as a result of covered 19 as all the weaker export market demand.
That's the part of European spruce, which put pressure on sulfur prices.
It's worth noting that we didn't see demand pick up considerably towards in the quarter in both the domestic and export markets.
The average delivered price of $36 in a two cents per tonne was 3% and 13% unfavorable compared the prior quarter and the prior year quarter respectively.
The increase supply pulpwood chip.
Let me open market.
Combined with market related downtime at domestic pulp mills continue to keep pulpwood prices low.
Page 11 should result in key operating metrics party dealing timber segments.
Adjusted EBITDA for the second quarter of $10 million approximates the prior quarter and was $10 million on favorable compared to the prior year quarter.
Second quarter harvest line of 529000 tons.
10% higher than the prior quarter, but 23% lower than the prior year quarter.
After over a month, but no production during the government mandated lockdown.
And then to resume production on April 28.
At the same time, China up with emerging from its covert lock them in.
And demand surge as north restock long.
During the last two months in the second quarter. Our team did an incredible job of safely resuming production, 110% of plan in order to meet and export and domestic demand, thereby delivering exceptional results under these circumstances.
The average delivered exports multiple price of $98.75 per tonne was 4% favorable compared to prior quarter through the pickup in export come in but 12% unfavorable compared to prior year quarter. The cover 19 pending that weighed heavily on pricing in both China and the dealer.
The average domestic sawtimber price of $66.95 per tonne U.S. dollar terms was 4% and 19% unfavorable compared to our quarter the prior year quarter, respectively.
Compared to prior quarter. The variance was largely due to changes in New Zealand U.S. exchange rate.
Yes, compared to prior year quarter, lower pricing generally follow export market trends due to cover 19.
Excluding the impact of foreign exchange rates domestic pricing in New York dollars was 1% favorable compared to the prior quarter and 12% unfavorable compared to prior year quarter.
The average domestic pulpwood price of $32 intensity per tonne was 5% and 18% unfavorable compared to prior quarter in the prior year quarter, respectively, which was driven by the same factors as domestic sawtimber.
I'll now briefly discuss the results from our newly created timber fund segments.
I laid on page 12 smartphone segment, Jared consolidated EBITDA of $2 million, the second quarter harvest volume of 90000 tons.
Adjusted EBITDA, which reflect the look through contribution from the funds with $100000.
Lastly, in our training segment generated adjusted EBITDA of $100000 and the second quarter, which is $100000 and $300000 favorable compared to prior quarter the prior year quarter, respectively.
I'll now turn it back over to Mark to cover our real estate results Mark.
Thanks, Doug.
As highlighted on page 13, our real estate segment delivered strong results in the second quarter sales totaled $50 million roughly 20000 acres sold at an average price of over $2500 per acre adjusted EBITDA for the quarter was $45 million sales in the improved development category totaled $6 million highlighted by the sale.
The 119 acre industrial sites in our Richmond Hill Development project, South of Savannah, Georgia for $5 million for $45000 per acre.
Due to post closing infrastructure obligations, we only recognize $3.5 billion as revenue from the sale and our second quarter results.
We also closed on the first 17 residential lots in the Forest Park phase of our Wildlight development project North of Jacksonville, Florida for $1 million for $63000 per lot.
Sales in the unimproved development category totaled $8 million, which consisted of a 570 acres sale in St. John's County, Florida at a price of approximately $15000 per acre.
In the rural categories sales totaled $27 million on roughly 7700 acres sold an average price of $3500 per acre, including a 4500 acre sale for $17 million were $3700 per acre and a 2800 acre sale for $9 million or 30 to 50 per acre. Both of these sales were in St. John's County, Florida.
Lastly, sales in the timberlands and non strategic category totaled $10 million, consisting of roughly 12000 acres at an average price of $800 per acre.
Sales in this category consisted primarily of several low value geographically isolated parcels in Georgia.
Now moving on to our outlook as communicated on our first quarter earnings call. We're updating our full year guidance to reflect a partial year contribution from the newly acquired resources assets as well as our improved outlook with respect to market conditions for the balance of the year.
Page 15 of our financial supplement provides our updated financial guidance by segment for 2020 and schedule GE of our earnings release provides a reconciliation of our adjusted EBITDA guidance to net income attributable to Rayonier S.
We now anticipate full year net income attributable to rainier of $38 million to $43 million.
Yes of 27 to 31 cents pro forma EPS of 17 to 21 cents and adjusted EBITDA of $240 million to $260 million. Adjusted EBITDA reflects an anticipated partial year contribution of $17 million to $20 million from the acquired Pope resources assets.
With respect to our individual segments, we now expect that our southern timber segment will achieve full year harvest volumes of six to 6.2 million tons with higher adjusted EBITDA of $104 million to $109 million. The improved outlook is driven by increases in export volume and stronger sawtimber demand, we expect that weighted average pricing in the.
South will remain relatively flat as improved sawtimber demand roughly offset lower pulpwood pricing due to anticipated mill downtime, an increased supply of what chip residuals and geographic mix.
Our Pacific Northwest timber segment, we now expect full year harvest volumes of 1.6 to 1.7 million tons and higher adjusted EBITDA of $30 million to $32 million, which reflects the estimated partial your contribution from the acquired hope resources Timberlands. We further expect some strengthening of Pacific northwest sawtimber pricing due to improving end March.
Kits and a higher value species mix, we anticipate that pulpwood pricing will be relatively flat and dependence on on the duration of domestic mill curtailments in.
And our New Zealand timber segment, we now anticipate higher harvest volumes of 2.3 to 2.5 million tons and higher full year, adjusted EBITDA of $50 million to $56 million. The increase in both volume and adjusted EBITDA is attributable to the shorter than anticipated shutdown of economic activity in New Zealand as well as strong demand following the shutdown.
We anticipate relatively flat pricing through the second half of the year with seasonal demand offset by continued competition from alternative supply sources.
And our real estate segment, we expect to achieve full year adjusted EBITDA of $77 million to $83 million due to continued strong demand for rural properties as well as an improved demand outlook for development properties.
Lastly, we expect that our new timber funds segment will contribute full year, adjusted EBITDA of $3 million to $4 million.
I'll now turn the call back today for closing comments.
Thanks, Mark as we've all seen the cobot 19 pandemic presents an unprecedented challenge for the global economy, and while were particularly well were partially recovered from the depth of the economic slowdown we're still a long way from a full recovery.
While we're very encouraged by the resiliency that our business has exhibited over the past several months. We also expect some continued volatility in end markets as the pandemic evolves.
Nevertheless, I continue to believe that Rainier is very well positioned to weather the storm I'm heartened to see the dedication and adaptability that our people have demonstrated throughout the covert 19 pandemic and I'm further extremely confident in the strength of our balance sheet liquidity position and financial flexibility as a pure play timber.
Right.
Enjoy strong margins and substantially less volatility than downstream manufacturing businesses, and we have a geographically diverse portfolio that further mitigates our exposure to any single region or product category.
I want to reiterate how proud I am a power employees have responded and continue to manage through this crisis with poised and determination I feel very fortunate to be surrounded by such exceptional talent and dedication to all levels of our organization. Despite the significant challenges ahead, we remain keenly focused on X.
Accusing against our strategic priorities and achieving our mission of generating industry, leading returns and building long term value per share.
We will continue to leverage the diversity and optionality of our portfolio and harness the power of our culture and dedication of our employees to achieve these results.
This now concludes our prepared remarks, and I'll turn it back over to the operator for questions.
We will now begin or single question answer session. If you would like to ask a question. Please press star.
So.
First.
Your question.
Just first question is coming from.
Citi. Your line is open.
Good morning, that's exactly.
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The drivers of the full year <unk>.
Lastly in the you Oh.
I think in relief there with the increase volley.
I've heard you touched on sorry.
But.
For the year, let me remind us how that compares to annual numbers, we thought before that there. Thank you.
Sure. This is Doug the increase.
South is a combination of both export and we've seen increased demand for domestic lumber and that interest mentalist north of drive the solid demand for so a lot of increase on isn't the domestic side for lumber, but then on the margins would be the increase on the export side.
With respect to exports and that's just did a little leverage where land bases in Q1 exports were fairly home, yes, trying to trade, where we're still in People's minds, and the cobot impacts in China, but as we got through phase one we saw no tariffs the equipment.
Restrictions being released on the tariffs on a monthly basis. So there was waivers being allowed and so we were able to ramp up our export volumes and I'm not going to our specific volumes that we have but them shipments from yourself increased over 100%. During Q1 in Q2, and we're seeing similar increases yourself as we go forward. So the man for southern yellow Pine in China has definitely grown in history.
Wrong and when the good things about single upon its used in treating another part of that typically don't compete with the European spruce, whether they got upon in New Zealand. So we've continued to see strong demand and look forward to.
More of that is good for the second half year.
Thanks.
That's maybe switching gear with the Popeil now close you've had the timberland for a couple of months now.
Our.
Land, So you could see and how you're planning on de lever going into the timeline there.
Well there would be helpful.
Yes, sure recognize that we on we had the large disposition in the first quarter of this year in Mississippi for $116 million and really as we.
Started out the year with the announcement of Oh, we had anticipated that that was going to comprised the bulk of our de leveraging kind of needed to stay within the.
The credit metrics of where we wanted to be obviously that was before the pandemic, which puts some pressure on on the on EBITDA and thus leverage so.
I think with where we sit today I mean, if you look at.
The midpoint of our EBITDA guidance relative to quarter end debt I think that puts us at about 4.8 times net debt to EBITDA for the year, but obviously that reflects only a partial year contribution from the Pope assets. If you normalized hope it more of a full year run rate will probably closer to four and a half tightened so I'd say clearly towards the higher end of where.
We'd like to be but that said I think that we would expect to de lever largely through organic cash flow growth as we returned to more normalized operating environment of course, we always have the flexibility to execute additional asset sales, if we think that thats necessary and appropriate at any point in time, but again I think that we'd like to see cash flow growth from here as we were.
Turning to a more normalized operations.
Okay. Thanks.
The next question is coming from Mark Wildey.
Okay capital markets. Your line is open.
Hey, it's just the brown on for Mark are just starting kind of what are you guys seeing in China or whatever inventory levels like healthy demand kind of progress as we went through Q2 Q3.
Sure I'll take that Justin this is Dave.
Yeah, the keep in mind that win.
When we came out of the.
The lunar new year, and we were in the midst of the co bid.
Pandemic the inventories in China jumps to a record high level of 7 million cubic meters in Q1, and so as we've seen the Chinese economy reopened.
Thats come down considerably.
Dipped to as low as.
Just under 4 million cubic meters. Our estimate right now is that it sits at about 4.4 million cubic meters. One of the things that we track is a ratio of of of supplied to two demand as measured in months and we're currently sitting at about 1.9 months and we feel that that's up.
Pretty we'd like to see it in that range, we feel that's a pretty stable.
Part of the market or environment.
Having said that keep in mind. There is there has been tremendous amount of of rain in China as well as flooding and that's disrupted Bose.
Construction projects and more recently ports and so.
That's that's over lot overlaying and otherwise fairly.
A positive environment.
Mills to our understanding are still operating at about a 60% capacity so.
We feel the combination of the mills kind of ramping back up get them getting through the rainy period.
They're dealing with right now and the fact that inventories are relatively imbalanced.
We generally see a stronger second half of the year.
Great. That's super helpful. Just one other from me.
Kinda any updated thinking around the timber funds business I know you guys have said before the youre really looking to grow the business.
But now that you actually own it kind of any updated thinking or other things.
No I mean, we still continue to keep all our options on the table with respect to that Mark Mark walk you through how we're handling the.
The pro forma contribution.
Of the business and I'd say more more to come on that in the future.
All right I'll turn it over since goes.
The next question is coming from Kurt.
Hey, Davidson your line is open.
Good morning, everyone and I appreciate you taking my questions.
First off I just wanted to start off could you talk a little bit about the impact of having opened the mix and what that what kind of look like for your average realizations in the Pacific Northwest.
Yeah, all all Oh, I'll take that a little bit and then Doug Doug can touch on that.
Afterwards.
Keep in mind that the for Pope it doesn't number of things first of all.
They have a heavier mix of Douglas fir and in their merchantable timber inventory and so.
Generally speaking you've got more optionality around Douglas for from a market standpoint, you've got a you've gotten deeper exposure say to the to the Japan market as well as.
The domestic market and then.
To keep in mind that the Pope the Pope plans.
Have a more gentle topography and so the.
The incidence of more expensive.
Cable logging is much much lower on Pope.
And so that brings down youre your logging cost considerably and then in general the plans are slightly closer to customers and so the hauling costs are different so that the the obesity.
Rates for for poker considerably lower than they are on the Rainier portfolio.
And then in addition.
We do serve some some similar customers and so it gives us some added volume.
With respect to serving those customers and exposure. So we're really excited about what it does from a marketing perspective, and then also with respect to the real estate side of the business, it's very similarly structured and run to how we.
Treat our real estate business in the in the Jacksonville, and Savannah area and so.
We're looking forward to sort of combining that and just adding.
An additional strong market the Puget sound region.
Represents.
Got it okay.
Sorry go ahead.
Now I'll say this is Doug Dave Smith posted a great job with that I'd, just say one thing I would add is.
Over quarter over quarter, we know from last year. This year, we saw a pretty big increase in our chip N saw volume I'm just regarding off stands for harvesting in which you would expect to bring down our average pricing for salt timber, but given the increased.
Next the things that they just I'll call. It <unk>, we had flat on pricing overall, so just shows that it adds that contribution.
Okay perfect. Thanks, and you know as we start looking ahead to 2021 with the full year to Pope I mean, any noteworthy differences between the impact it's kind of assumed in the second half guide.
Versus what we might think about on an annualized basis.
Yes, I recall that when we when we announced the transaction we estimated a five year average.
Annual EBITDA contribution of $38 million, obviously with just the timing of the year that we closed the transaction as well is doing so in the midst of the coven 19 pandemic.
We're not going to get a pro rated contribution of that magnitude, but the all things considered I think the assets are operating very well I think our longer term expectations haven't really changed meaningfully and again I think we're pretty positive.
On the outlook for Ah for that business and those assets in particular, you know recognized as well that going into the year. We didnt, obviously control the operation of those assets you know up until the data acquisition.
So they had harvested I'd say, a higher proportion of their annual plan.
Then the proportion of the year that we're actually through and so.
Again, just another reason that the pro rated contribution this year is not going to be reflective of what we would expect the run rate contribution to be.
Okay. Thanks, Mark and then my last one.
Could you just remind us how to think about the real estate segment at a high level, what kind of year in your out and I realize it's lumpy and.
Maybe some of the stuff going on down in Florida.
You know makes it.
Tougher to think about that in the near term, but any sort of long term thoughts there.
Yeah, I'll start with that and the and Mark.
And can chime in afterwards.
I think at one level and mark kind of touched on this a little bit and and the way we've restructured.
The sales categories. Our focus is really on on generating premium and historically the sector has had.
A period, where a number of players have sold timberland that timberland value to simply generate cash to fund.
Dividends otherwise.
Can be funded with normal operations that we we decidedly stepped away from that.
Back to deemphasize that really put much more emphasis on on premium and so.
We still have sales in our non strategic category that are either lower quality assets or assets that we will sell for capital allocation purposes, but in terms of how we think about real estate segment. How we operate it's just really all about premium and you can see that if you. If you look deeper into some of the.
And our IR deck, and then within the within the the real estate segment, we've kind of have three.
Broad areas. The first is our rural sales and.
And we're particularly encouraged by.
How we see that.
Playing out.
We see that potentially as one of the benefits of.
The coated.
Environment, where people are looking to get out of more urban areas, we have strong demand in.
In Florida, Texas, and Louisiana in particular in that rural.
Category, and we have enough number of product types that.
We're very encouraged by how that has been developing and we really see that as a stable baseline number real estate business and then.
Kind of moving up the food chain, we have unimproved development and this is where we have made some investments in infrastructure and or excuse me investments and entitlements.
To allow for downstream development and we typically sell the project once those entitlements have been.
Has been reached and it's essentially selling the landed and improve level, but with those added entitlements and so a relatively modest amount of capex involved and then we have three we have.
We have then we move to sort of the highest level within our real estate segment and that's the improved development and we really have three project areas. There and these are areas, where we have a lot of surrounding land and we feel there's value in investing.
In getting those catalyzed to improve the broader absorption and we talked about these a lot easier. The Wildlight, Florida project. This is 20 miles north of Jacksonville that we've started.
About four years ago.
And keep in mind that.
To date only about 260 net acres had been absorbed within that project and we have 25000 acres within a five mile radius of that project and so we see that as as a project that's going to.
Have a lot of a lot of room to grow over the years and decades ahead, and then moving north we have our Richmond Hill project, that's just 20 miles south of Savannah.
Fairly similar to two wildlight in terms of strong schools a.
Growing area we've made.
Some some good initial sales there and we've made a lot of progress and getting public infrastructure projects completed this year, we have a new.
I 95 interchange that's under construction, we have a new elementary school, that's under construction and a high school that's under construction on our project.
A two mile Parkway water and sewer utilities and those are really all designed to help open up.
More of that project and again like Wildlight within within a five mile radius of this project, we have roughly 20000 acres and then our third.
Our third improved development project is is associated with the Pope assets and these assets are all in the west Puget Sound area, roughly 30 miles northwest of Seattle.
And in particular.
These projects have benefited from a.
A new Kingston.
Passenger only ferry.
[music].
Service into downtown Seattle, and so once we saw that that ferry service open up we've seen improved demand coming over into Kitsap County, where that's located.
And so we've got two projects there that that fit within our improved development category. One one is called or would right near Kingston, roughly two miles from Kingston and then the other is the historic.
Miltown, a port Gamble.
And we're very excited about both these projects there in earlier stages of development, certainly relative to our our Florida, and Georgia projects, but very similar.
Characteristics. So we're excited about those and and.
And that gives you just sort of a little bit of a sense of how we approach those but again I think the if a leave you with one thing its focus on premiums.
That's excellent appreciate the color, Dave I'll turn it over.
Paul Quinn RBC capital markets.
Yes, thanks, very much morning, guys.
Good morning.
Hey, I appreciate the revised guidance and you know knowing that were were at record lumber prices just wondering how that.
Tracking through your two year log sales and what's what's embedded in.
In the in the revised EBITDA guide.
Considering the that makes changes quarter over quarter.
Sure. This is Doug I'll start with that.
No increase in log prices typically lags the lumber price rally and what we saw solid is really started getting confident number rally in June.
So while southern yellow pine pricing was up 17% now at the end of Q2, it's really jumped 34% since I was well know had a big jumps and Doug for lumber rally was a bit slower, but something thanks and then.
And so we're pretty optimistic about that and no with that once the once you sell the script count Mills get confident we saw them come back to full production across the board will soften northwest and they really got that office repair remodeling and then housing restriction housing construction restrictions were relieved.
As part of co that so.
West where that supply and demand ratio is more attention and as Dave mentioned, we saw export markets picked back up we sell them or price increases translate back to the stump more rapidly.
Let them with the southern mill now minute back at full production, we're seeing it pricing tension and some southern wood baskets also kicked it doesn't your active export market and that's making it back to stumpage now too so.
No I want to one of price premium because we're currently in negotiations across the northwest South and I don't want to our answer expectations, but as you mentioned our guys has been updated to reflect things that we're seeing in those markets.
Okay. That's helpful and you know you guys just closed on Pope.
And take a little while to digest and in that simulate and.
Alex he seems to be a little heavy as it is it fair to say that you'll be a little quite or on the M&A front going forward here.
Yeah, I think I think certainly.
Were were towards the upper end of our targeted.
That ends.
Soon so.
Absent.
Absent the ability to to sort of grow with with equity I think we're going to certainly be a little pick your as we think about acquisitions going forward.
Generally right now it's a quieter period, I think with Covance travel restrictions, you're not seeing as many.
Offerings out on the market because it's difficult for people to do some of that confirmatory.
Due diligence we're still looking.
At all the things that are out there, but I'd say, that's a fair assumption that were being.
Just a little a little pick your right now until we get the.
The balance sheet to a little more comfortable level.
Sure. So that's not to suggests you weren't picking the past, but oh I'll leave it there.
Yes look.
Thank you. Our next question is from Mark Weintraub.
Mark Your line is open.
Thank you just what just following up actually on the last question and just getting a clarification and maybe I Miss heard but I thought you had indicated in his prepared comments that you're you're assuming relatively flattish U.S. sawtimber prices through the back half of the year and then it sounds as though.
And there the answer to last question that you are beginning to see evidence of maybe I'll log pricing in the U.S. out having a more positive Ben.
Maybe I missed heard or is that would that show up more likely next year maybe start there.
Yes, no. Thanks, I'll clarify that so we're actually seeing expectations of increased price for sawlogs, but what we think is that on average our composite average price in the south is going to be relatively flat. So that's what we're referring to on the kind of flat there.
And the reason for that is if you look back over previous years typically as we go into the second half year.
We have increased harvests out of our kind of Gulf States, particularly our Arkansas area, where prices are much lower and so we see pulpwood prices. A particular go down significantly. We also typically because start time of year have about a 5% increase and lending volume. So tigger pulpwood. So the comment is basically that we're going to see increased sawtimber prices, what we're seeing but that's going to helping the.
Offset the the volume geographic mix that we're going to have as we shifts more volume to a lower priced regions in the Gulf States as well as the increase percentage of thin volume of pulpwood. So well look at the average composite price being relatively flat that's kind of differentiation there.
Got it okay. Thank you and then just tying that.
And then I know Dave in your in the press release, you talk about that you know the lag between the strength in wood products and you'd expect that to translate to improved log prices over time and I I assume that is part of Mark when you make the comment about.
Getting to that targets, you expect cash flow growth to more normalized type levels and I I assume that is an important part of the equation aid just get confirmation on that and to the extent that you are comfortable giving any sense of magnitude that would be helpful. And then b are there any.
There are significant drivers in getting to the more normalized level of cash flow that when you think about your your leverage targets overtime that we should be cognizant off.
Yeah sure Mark I'm happy to take that on I think there are few components of that I mean, certainly growth in pricing is an element of what we see is getting to a normalized level of cash flow you have a recognized as well I mean, there was lost volume that occurred this year, particularly in Q2 around the cover 19 pandemic and so.
No.
Certainly in the Pacific Northwest timber segment, and New Zealand Pacific Northwest because of the mid year, Pope acquisition, and New Zealand because of the shutdown of which we weren't really moving any log volumes.
We're going to end the year, even even the updated guidance, we provided which is up from the last guidance is going to be below our long term sustainable yield and so I think that we had the opportunity for cash flow growth both from a pricing improvement, but well just returning to more of a normalized level of harvest activity. Because certainly this year is not going to be there across the portfolio.
Okay. Thanks much.
Thank you. Our next question now from John Fab with Bank of America, Sir Your line is open.
Hi, good morning, Thanks for taking my questions.
Just quickly here and kind of falling on the question I guess that Paul was asking as you look at a future timberland acquisitions and now with that close it post transaction.
Does this change your emphasis on.
M&A in the northwest and also in kind of the U.S. out and Jim, but generally the mix, which are looking out there.
Yeah.
I would say that we don't have a prescribed a view around.
Polio mix I think it at all times, we're looking for.
Looking for properties that have a complimentary fit from an age class perspective.
With our existing asset base and so.
That that holds true really in all geographies and we're always looking for for properties that have a nice fit and then.
Lastly, it's that ability to to find things that.
We feel like we can buy at competitive rates, we have a higher proportion of.
Of transactions that we do on a negotiated basis as opposed to through.
Through auctions and so we're always looking at things.
The may not necessarily be out there in the market but.
And then and then I think lastly, we have a we have a regular program of smaller bolt on transactions that are that are often.
Brought forward by local geographies.
That they see a property they're familiar with that has nice fit with our existing asset base and we have we've had a steady stream of those.
Over the past number of years.
Okay, and then Thats question I mean, they operate structure is not one that we typically see if you don't that we just among many publicly traded stocks and so I wanted to get your sense. I mean do you intend to keep this sort of entity structure going forward, what's the longer term plan with that.
Yeah, John So when we when we laid this out it was really designed.
To be used.
Across multiple transactions going forward and so we set it up that way, we set up to be.
Investor friendly it's designed to allow for.
Investors have a particular company and if you take Pope resources for example.
We have a roughly four and a half million Oh.
Oh P units and these were these were a unit holders of Pope who chose to two to take a portion of their consideration with those ob units and recognize that going forward.
They have they have thus deferred the capital gains from that transaction and then when they choose to exchange those opie units for Rainier shares in the future. They at that point recognize the capital gain treatment and so it gives those investors a tremendous amount of flexibility going forward.
To defer or to manage.
At an individual investor level, when they take the capital gains.
Tax liability associated with that.
Transaction, and we think that that's very attractive to other.
Timber owning organizations, where you might have different points of view from different.
Investors and so.
Our it's our hope that we can overtime grow this.
As part of the business by being able to offer to those owners the ability to.
To take these LP units and recognize that that.
For many timber owners.
Owned these lands for long periods of time and.
Some of them just don't want to sell they'd like to retain that optionality. So so holding those LP units allows you to two in effect recognize a value for those a current value for those in exchange for Rainier LP units, but at the same time retain all the optionality that you.
Would have.
As you kept those assets in the first place and then I think lastly.
Keep in mind that most most owners of timberland don't have a deeply diversified portfolio and so one of the things that the LP units offers is essentially the ability to too.
More broadly diversified I think that certainly is the case within the the poke resources.
Unit holders thinking about Rainier, we've got a very diversified mix of assets and markets between the us out the Pacific Northwest and New Zealand and now those Pope resources unit holders that selected.
The LP units as part of that transaction. They now have a commensurate ownership across all of those diversified wood basket. So we're pretty excited about it.
There were some there were some cost to get this kind of up and running and net but now that it's up and running.
We're excited about trying to try to grow it with other.
Assets in it and it gives us as as Rainier the opportunity to do that in a manner that doesn't increase our debt load per se. It's another it's another form of growing through the use of our equity. So we look at it as an additional tool in our tool chest and we're excited to have it and play now.
Okay.
Thanks, a lot detailed there and then just last quick question here might you be able to provide the earnings contribution from Pope in the Pacific Northwest and last quarter.
Yeah. It was it was roughly on roughly $2 million.
Well the EBITDA.
It was roughly $2 million of EBITDA that's correct.
Yeah.
I think it was a fun.
Yes, it was a bit lower than that probably like one and a half when an attitude.
Alright, Thank you that's fine.
Thanks, John just real quick on that point right recognize that like we said when we announced transaction that those assets have a higher contribution margin and because of like Dave late Dave talked about earlier because of lower operating costs, lower Ob Ti cost as well as a higher mix of Doug fir, you're going to get a higher.
You should per ton from those Pope resources assets, and we had and legacy portfolio. So again, we expect is going to be a pretty meaningful contributor going forward.
Okay. Thank you.
As I have no further request I'd like to turn it back to management for closing remarks. Thank you.
Yeah sure. This is mark MCU. Thank you all for joining us today and feel free to follow up with me with any questions.
Conference has now concluded. Thank you for your participation. Please go ahead and disconnect. Thank you very much.
Thank you for your participation conference is concluded. Please go ahead and disconnect. Thank you very much.