Q3 2021 CatchMark Timber Trust Inc Earnings Call
Good morning, and welcome to the review of catch more timber trust results for third quarter 2021.
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I would now like to turn the conference over to Ursula Godoy, Chief Financial Officer of Ketchmark.
Please go ahead.
Good morning, and thank you for joining us for our review of catchment can bear trust results for third quarter 2021.
I am also like well, the only chief financial officer of catch Mike joining.
Joining me today on the call are Chief Executive Officer, Brian Davis, Chief Resources Officer, Todd Reitz.
During this call catchment management will make forward looking statements. These forward looking statements are based on management's current beliefs and the information currently available.
That's why the actual results will be affected by certain risks and uncertainties that are beyond its control or ability to predict and could cause our actual results to differ materially from expectations.
For more information about the factors that could cause such differences. We refer you to our 2020 annual report on Form 10-K, and subsequent reports that we filed with the SEC.
Today's presentation includes certain non-GAAP financial measures.
Reconciliations of these measurements are included in our third quarter 2021 earnings release and financial supplement which are posted on our website.
And our Form 10-Q filed with the SEC yesterday November four 2021.
After our presentation, Brian Todd and I will be pleased to answer any of your questions.
Now I turn over the call to Chief Executive Officer, Brian Davis.
Thanks, Ursula and good morning, everyone and thank you for joining us today for our third quarter review.
A lot has happened since our last earnings call in the first week of August the Bandon sale was finalized concluding our capital recycling strategy for large dispositions for now and the Triple T X. It was executed the proceeds from these transactions were used to pay down debt and further strengthen our capital position.
We continued to concentrate on optimizing our harvest operations dealing successfully with wet weather challenges, while maintaining our pricing advantages and we refocused on expanding our presence in the Premier U S South no markets.
The key takeaways today are ketchmark remains solidly on track to generate 2021 adjusted EBITDA at the top end of full year guidance.
We also expect to exceed full year net income guidance and after simplifying catch merck's business and further strengthening our balance sheet over the last 20 months, we are well positioned for growth.
Our harvest operations during the third quarter again delivered significantly higher year over year timber sales pricing for both pulpwood and sawtimber.
This is a direct result of our long standing and ongoing strategy to concentrate our investments in prime timberlands in the nation's leading mill markets using a delivered wood model supplemented by opportunistic stumpage sales.
The higher pricing, we captured which also was well above market averages in the U S. L help make up for lower harvest volumes year over year in the region due to persistent wet conditions.
This successful Bandon Seo in the Pacific Northwest, which closed in August registered a significant gain and was the primary driver in achieving record quarterly net income and earnings per share.
It also marks the end of our capital recycling program of large dispositions for now and a renewed focus on expanding operations and increasing scale in and around the leading U S. South mill markets, where we have achieved so much success.
Proceeds from Bandon and the Triple T exit had been used to pay down debt and as a result of our capital position and credit facilities provide ample liquidity to pursue acquisitions as well as revenue producing environmental initiatives let.
Let me emphasize we are in a growth mode. Our objective is to be disciplined and prudent in securing acquisitions, which helped sustain our industry, leading harvest EBITDA per acre and market pricing premiums, while also maintaining stable per acre merchantable inventory.
The anticipated value realization of our environmental initiatives should capitalize on increasing market demand to meet climate challenges and we are already pursuing opportunities involving carbon sequestration mitigation bank credits and solar energy.
We have already demonstrated a successful track record with mitigation bank transactions and our Dawsonville bluffs joint venture, we have acquired and create a nearly 500000 credits and we have sold to date more than 50% of those credits for a total of $10 million.
Buyers are included the Georgia Department of Transportation Vulcan materials, a publicly traded waste management service company in various counties and cities municipalities.
From a go forward operating perspective, economic and market fundamentals supporting our business growth remained strong including housing household formation current product pricing and outlook and demand for wood products.
The dynamics, we have discussed before are in place, but we need the housing recovery to be sustained.
Our U S. Our strategy is based on leveraging regional mill expansion and Greenfield projects, which reinforced the region standing as the nation's leading timber basket, serving an ongoing robust regional population expansion as well as other domestic and global markets.
New mill capacity will create added demand for Ketchmark harvests and our prime timberlands are positioned to continue to capture pricing premiums through optimizing delivered sales and stumpage sales.
In the third quarter, those pricing premiums for pulpwood, and sawtimber were 38% and 16% respectively above timber Mart, south south wide averages.
Our stumpage prices were 8% and 11% respectively above the prior year quarter.
Strong pricing in both pulpwood and sawtimber in the U S South offset an 11% harvest reduction in the region due to wet weather conditions and resulted in a 1% increase in regional timber sales revenue year over year.
Lower overall harvest volumes in the third quarter down 15% year over year and timber sales revenues down 12% year over year resulted primarily from the Bandon large disposition in the U S. South wet weather conditions with a strong first half of the year as well as a pickup in harvest activity in the fourth quarter keep us on target for achieving the midpoint of our.
Full year harvest plan.
In the third quarter, we also sold 17% fewer acres year over year at comparable prices per acre, but those timberland sales together with the sales completed in the first and second quarters already have exceeded the lower range of our full year guidance target totaling $13 $1 million as of September 30th.
These sales combined with just under $1 million in land sales anticipated for the fourth quarter keeps us on track to achieve the midpoint of full year land sales guidance.
Investment management performance was also in line with guidance asset management fees were comparable year over year, including a promote from the Dawsonville bluffs joint venture, we're exceeding investment return hurdles as a result of strong mitigation bank credit sales.
In connection with the recent Triple T redemption agreement the asset management agreement was terminated and replaced by a transition services agreement effective September one 2021 through March 31 2022.
Under the agreement Ketchmark will provide transition services for a fee of $5 million.
Taken altogether third quarter year over year results registered 10% lower revenue and 20% lower adjusted EBITDA.
This again was primarily due to timing of harvest and timberland sales, which were weighted to an exceptionally strong first half of the year as well as the abandon large disposition.
The recognized $23 $4 million gain from the $100 million Bandon sale, 13% above the 2018 acquisition basis drove third quarter net income to $23 $3 million a record in earnings to <unk> 48 per share also a record.
During the quarter, we paid $6 $5 million in distributions to stockholders fully covered by net cash provided by operating activities, bringing the year to date distributions totaled $19 $7 million.
Three weeks ago, we declared a seven five cents per share cash dividend for common stockholders of record as of November 30th payable on December 15th.
Following the Triple T redemption, the right sizing of catch marks annualized dividend rate prioritize investing in growth to increase our earnings trajectory and net asset value over time.
And we expect to maintain our historical payout ratio of 75% to 85% of cash available for distribution.
As we invest in future growth, we remain determined to generate predictable stable cash flow and deliver a fully covered dividends are ongoing primary objectives. We are determined to maintain our course of a simplified strategy utilizing our strengthened balance sheet to make solid and straightforward investments now.
Now Ursula will cover third quarter results in some more detail and discuss our strengthened capital position in light of the Bandon and Triple T transactions.
Thank you Brian.
The first nine months of 2021, our businesses have performed to plan and as Brian emphasized we are expecting to meet full year guidance in the upper range for adjusted EBITDA.
While the successful Bandon sale sets us on unexpected track to exceed net income guidance for the full year.
What are they asking quarter, our prime timberlands in leading U S. South mill markets continue to capture pricing premiums above market wide averages.
English in our performance and superior management and.
And in particular, the third quarter deliver on this metric too.
For the quarter ended September 32021 catchment recognize record net income of $23 $3 million or <unk> 48 per share driven primarily by the gain from the bandon large disposition.
Revenues totaled $22 $1 million compared to $24 $6 million in the prior year quarter.
And adjusted EBITDA totaled $9 9 million compared to $12 $4 million in third quarter 2020.
Timber sales revenue totaled $15 $9 million versus $18 $1 million in third quarter 2020, the result of lower harvest volumes due to wet weather conditions in the U S south and abandon disposition in the Pacific Northwest.
Harvest volumes totaled 494000 tons in the third quarter 2021.
<unk> two 580000 times in third quarter 2020.
Breaking out adjusted EBITDA by segment for the third quarter.
Harvest EBITDA was $7 $1 million compared to $8 $5 million in third quarter 2020.
Real estate EBITDA of $2 million compared with $2 $3 million in third quarter 2020, due to selling fewer acres at a comparable per acre sales price.
Investment management, EBITDA of $3 million compared with $3 $7 million in third quarter 2020, due to a decrease in adjusted EBITDA from Dawsonville bluffs.
Asset management fees were comparable year over year and included a $200000 promote from Dawsonville bluffs for exceeding return hurdles on mitigation bank credit itself.
This investment has been very successful with more mitigation bank credit sales could come.
In connection with the Triple T redemption of Triple T asset management agreement was terminated and replaced by a transition services agreement effective September <unk> 2021.
<unk> received $5 million in cash in exchange for providing transition services through March 2022.
The $5 million will be recognized as asset management fee revenue on a straight line basis over the term of the transition services agreement.
In the third quarter, we also paid a dividend of $13 <unk> per share to stockholders on September 15, 2021, which was fully covered by cash flow from operations.
Now, let's review catch much recent activity to further strengthen the company's capital position as we used a total of 135 $4 million from the Bandon and Triple T transaction to pay down debt.
Prior to the band in closing we had amended our credit agreement to establish a $68 6 million dollar revolver feature on the term loan eight three and extended the maturity date of the existing revolving credit facility from 2022 to 2026.
The new revolver feature allowed us to retain its borrowing capacity after using 95 $4 million of abandon disposition proceeds to repay debt.
Times also are consistent with our time eight three loan and the funds can be used for future acquisitions.
Overall, the amendment provides improved liquidity greater flexibility and increased balance sheet strength to maximize debt capacity for future growth.
As of October 15, 2021.
Following the Triple T redemption catch Mark had increased its liquidity to more than $278 million up from $180 million at the end of the second quarter.
We had a cash balance of approximately $25 million.
$150 million of borrowing capacity under the multi draw term facility.
More than $68 million under our delayed draw term loan and $35 million under the working capital facility.
Yeah.
Our $300 million of debt outstanding has a very competitive cost at 292% with no near term maturities and we are well within our financial covenants.
No share repurchases during the quarter and $13 $7 million remains available under catch Mark share repurchase program as of September 32021.
Coming out of the quarter, our liquidity gives us substantial capacity to execute on our growth strategy for acquisitions and environmental initiatives. We are well positioned to continue to cover our dividend from cash available for distribution and remain within our historical payout ratio of.
75% to 85%.
Now Todd will review harvest operations in Timberland sales Todd.
Thank you Ursula.
The third quarter was highlighted by the Bandon sale shifted our entire focus back on U S South operations and successfully managing through weather challenges in the southeast.
<unk> disposition Mark the end of a successful investment in Pacific Northwest Timberlands.
The time of the sale closing on August 11th we had completed 90% of planned full year harvest in the region with most of that occurring in the first half of the year as such in the third quarter timber sales revenue from the Pacific Northwest decreased 86% year over year due to the sale.
In the U S south even with wet weather challenges, leading to 11% lower year over year harvest volumes in the region are pricing premiums above market averages and our leading mill markets continued to provide an advantaged.
<unk> pulpwood and sawtimber stumpage prices were 8% and 11% respectively above the prior year quarter at 38% and 16% premiums the timber Mart South South wide averages. This allowed us to register a 1% increase in regional timber sales revenues year over year to $15 5 million.
Despite the 11% decrease in harvest volumes.
Importantly, we adapted quickly and effectively to meet changing customer needs and product mix.
Given the challenging on the ground conditions.
Frequent rain events put extra pressure on production and customer raw material inventories, adding pricing tension for spot market deals.
Our delivered wood model gave us an edge in competition to meet logging capacity demands and managing expenses.
Negotiated delivered wood sales price increase was also helped us maintain stumpage values compensating for higher logging and hauling rates driven by increased fuel and labor costs.
We remain very well positioned in superior markets with our prime timberlands and expect to have a solid fourth quarter.
Weather conditions have improved and our mill customers are running very well with no mill quotas for deliveries.
Our exceptional first half of the year and current fourth quarter outlook keep us on course to achieve the midpoint of our full year harvest volume guidance.
At the same time significant levels of new housing starts and home remodeling activity in the U S. South have maintained robust demand for timber products and our Premier mill markets.
<unk> saw mills also continue to come online setting the stage for what should be increased production levels in 2022, and supportive pricing levels for our harvests, both sawtimber and pulpwood.
And our existing timberlands portfolio. We also are stepping up our environmental initiatives to secure a mitigation bank credit opportunities as we did with Dawsonville bluffs as well as entering the developing carbon sequestration and solar markets, helping address ongoing climate challenges is a high priority and our efforts to maximize growth while at the <unk>.
Same time sustainably managing our timberlands to increase long term productivity.
Now, let's review Timberland sales after an outsized second quarter capitalizing on strong market demand timberland sales activity in the third quarter lifted catch marks total 2021 timberland sales above the lower range of full year guidance through September 30, cash market sold 7100 acres for $13 one.
Million.
And expect to close on just under $1 million of additional sales in the fourth quarter.
In the third quarter, we sold 17% fewer acres year over year at a comparable price per acre to third quarter 2020.
1000 acres for $2 1 million compared to 200 acres for $2 4 million in the prior year quarter.
The acres sold at a lower average merchantable timber stocking than the portfolio average 32 tons per acre versus 41 tons per acre a higher margin, 37% versus 21% in the prior year quarter resulted from a longer hold period.
Bandon large disposition for $100 million comprised 18100 acres of wholly owned timberlands in Oregon over our ownership holding period Bandon harvest also recognized more than $26 million of gross timber sales revenues and.
In closing, we are having a busy fourth quarter with good visibility to achieve the midpoint of full year harvest plan in land sales target and see good opportunities in our mill markets for 2022, Brian back to you.
Thanks, Todd overall, the third quarter maintained catch marks trajectory to meet full year objectives, and we have made significant progress in clearing the way for a new phase of company growth and a strong capital position.
As we approach year end, we continue to focus on the simplified strategy established when I became CEO to own and invest in prime timberlands, focusing on leading U S South mill markets and continuing to optimize harvest operations.
This strategy and its execution have reliably delivered strong revenue and adjusted EBITDA results for our shareholders, including achieving the highest harvest EBITDA per acre in the industry, while maintaining stable merchantable inventory per acre.
With our capital recycling strategy of large dispositions concluded for now and the Triple T exit.
We are also positioned to ramp up our timberland investments in value realization of our environmental initiatives Ketch Mark is very much in a growth mode with the capital available to support a growing pipeline. We're currently reviewing approximately 130000 acres of potential acquisitions.
As noted in our last call, we are focusing in and around leading mill markets, where we already have an established presence looking to expand our scale through transactions in the 5 million to $50 million per transaction range.
We will remain extremely disciplined in meeting strict underwriting criteria.
Acquisitions will focus on our properties near term cash accretion or is long term accretive portfolio attributes or a combination thereof, which can drive predictable and stable cash flows and our prime timberlands portfolio.
Of the investments, we are evaluating 60% or near term cash accretive and the remainder have long term accretive portfolio attributes. Our acquisition strategy also supports our industry, leading harvest EBITDA per acre, while maintaining stable merchantable inventory per acre.
Our targets include a high allocation of pine plantations with strong site indices, which are more immediately harvestable with higher merchantable stocking levels and an older average age.
Properties, which are balanced portfolio age class distribution and productivity typically younger plantations.
And environmentally focused alternative income opportunities related to carbon sequestration wetlands mitigation bank credits solar projects and similar value creating initiatives.
As we approach 2022, we're looking forward to making significant progress in executing on this growth plan to increase our cash flow from operations, we remain resolute in maintaining our course of a simplified strategy utilizing our strengthened balance sheet to make solid and straightforward investments.
And we will seek to continue to fully cover our dividend from cash flow from operations and build long term value for our shareholders.
All of us at Ketchmark look forward to a very productive 2022, and it might be a little early for this call also gives us an opportunity to wish you all a very happy and healthy holiday season ahead, now Ursula Todd and I will be pleased to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Anthony Pettinari with Citi. Please go ahead.
Hi, good morning.
Good morning.
Brian or Todd.
You look at your 370000 acres is it possible to talk a little bit more about kind of the inventory levels on those lands I'm, just trying to get a sense of sort of sustainable harvest yield and over the next few years.
Should it be sort of in line with recent volumes or maybe can you go a little bit higher to take advantage of the strong pricing or do you need to rebuild some inventories just kind of any general thoughts there.
Hey, Anthony Good morning, this is Todd.
It'll be very much in line with what we've seen in the past from a productivity level youre going to be in that five tons per acre. So.
When you think about total holdings, and where we are and where the volume has come down as we're looking into 'twenty, two and that one six to one eight range is really being in line with the current acres available not necessarily from a productivity per acre if you will.
Thinking about your question of could you surge if a market improve you saw major changes here and there there's a little room to do that but really for us it's maintaining where we are steady in these markets and then as we look at acquisitions to build on that going forward.
Okay. That's very helpful. And then you talked about being in growth mode. I'm. Just wondering if you can talk about the sort of pricing that youre seeing for good quality industrial southern timberlands maybe.
Maybe where implied cap rates are and how that's changed if it has changed.
From sort of pre Covid period.
Any thoughts there.
Certainly.
First of all we really like our assets, where we're located today in the U S. South we've demonstrated some great success operationally on executing our strategy in those markets. We've ever delivered wood system are high quality assets will always be of high quality assets as reflected in our productivity, while also maintaining that steady.
Tons per acre, which we maintain from an inventory standpoint.
Now, we're looking at the $5 million to $15 million target range for us and.
What I, what I see today is a really competitive marketplace, even before the announcement from British Columbia talking about deferrals and implications associated with that and the positive influence as it relates to valuations in the U S. South I would've told you that the activity should be picking up as funds mature and fundamentals continue to.
Improve and what's interesting is that we're seeing value valuations inching up reflecting demand from traditional buyers plus potentially new investors looking to capitalize on the recognition forestry has a positive role in the environment.
Another way of saying how is carbon.
And mitigation bank credits and other avenues from a environmental standpoint being implied into valuations what I'd tell you today is while it is inching up there is bias that people don't can't attribute how much value is actually included from a carbon value or other aspects into their land values.
But they believe they are bullish on it and so while historical methods of DCF or some of the parts maybe applied carbon is a bit of a wildcard and still trying to be put into value today, but overall high quality assets continue to trade well, but.
The competition for those assets have increased.
Okay. That's very helpful I'll turn it over.
Thank you.
Again, if you have a question. Please press Star then one on a touchtone phone.
Next question comes from Buck Horne, with Raymond James and Associates.
Please go ahead.
Hey, Thanks, good morning, and congratulation on a button all the balance.
Balance sheet and certainly congrats on the Braves as well so brace.
Absolutely.
Absolutely go Braves, it's been a while.
Totally.
On the.
On the leverage.
Given all the progress you've made in improving liquidity and getting your.
Coverage ratio is in great shape here.
As you go forward and you're targeting this pipeline of acquisitions can you give us a framework for how youre thinking about what you are willing to take leverage back up to in this environment.
Yeah.
How willing are you to use the balance sheet here.
And can you still find deals in this competitive market that would.
Not dilute the existing cash flow.
Yes, good morning Buck.
So that's a great question I mean when.
When you look at our leverage we've been very consistent in how we view that we've been very patient and disciplined in our efforts to continue to work it down over time.
Our historical net debt to EBITDA has been in the call. It five to 11 range and we've averaged around eight times.
And so we sit here today, our net debt EBITDA is in the lower end of that at four eight times a.
A direct result of the deleveraging efforts here most recently of course with the Bandon transaction as well as our cup of tea redemption. So as we look forward right and you heard US talk about this in the prepared remarks. This.
This team is focused on executing on our growth initiatives and given the liquidity that we have now in the capital position, we feel very confident that we have the sufficient capacity to fund our near term growth aspiration, which as you point out.
Will likely increase our net debt EBITDA for a period of time versus the current levels, but ultimately we see it as a much more longer term view.
We sit here today, we don't have any maturity.
New York times or refinancing risk our cost of debt is very competitive at 292%.
And we're in compliance with our financial covenants. So while you might see leverage going up slightly as we fund those growth initiatives. We do believe that again, we will operate inside of that historical range, where we've been.
First of all I'll just add on when you talked about the cash yields I think Bob you had mentioned that.
With that low cost of debt and you are also looking at our effective dividend yield as well obviously, we were not really interested in issuing equity at this point in time, we've got sufficient capital, but even on an all in cash basis, we're looking at somewhere in the three and a quarter range on historically financed our acquisitions and we can find transactions that are <unk>.
At or better.
As we sit here today no markets as I alluded to we will continue to evolve and may put some compression associated with those valuations, but I think from our perspective, we should be able to find transactions that are not dilutive to a per share basis.
Okay. That's helpful.
And kind of you mentioned also that I mean, there have been several new saw mill announcements certainly across the U S. South capacity additions are coming so it seems I'm just wondering is.
Have there been any specific announcements you can point to directly tied to your <unk>.
Acreage in wood baskets that you think could catalyze.
Either harvest activity or pricing and secondarily I guess, maybe further down the road I'm wondering if you have any high level thoughts on this Canadian announcement about what's coming out of British Columbia, and how much harvesting there.
Deferring.
And how that May catalyze more capital migration into the U S South.
So I'll handle the BCE conversation first and then turn it back over to Todd as it relates to our micro markets. So going all the way back to our IPO. We really had a couple of fundamentals that went along with this one was the Canadian mountain pine beetle and its implications associated with the production coming out of.
British Columbia in Canada, you combine that.
With the economy as well as housing starts and where essentially we had everything in place but at this point in time, we really need sustained housing to continue to create drains in our marketplaces and from our vantage point wallets.
It hasn't been formally approved but the bias there is clearly sent by the BC government that they are looking to maintain.
Old forest and so by extension.
Your capital deploy or a saw mill our pulp mill.
Even if it doesn't come to fruition your bias is going to be putting capital into the U S. South is for what we've seen for the better part of five to 10 years now of capital coming into the U S. South from Cat four west Frasier as well as <unk> as one of our bigger customers and so on a long term fundamental basis, we see that capital coming into the U S.
So that's where the supply is and work that down and with additional capacity coming in we think that really is a catalyst for one thing that we didn't foresee coming into our marketplace and that's a very positive aspect of it on top of the environment environmental issues. So Dod talk a little bit more locally for us sure. So.
It really goes back even even before this year, we had a lot of the capital coming to the southeast and that was really across the board whether youre looking at new Greenfield brownfield or just overall production increases.
Really.
18, 19, all of that coming online, we're beginning to see that now as far as new mills being real catalyst in and around us.
I look at GP at Albany has been a really good one you've had less frazier that has increased production of multiple facilities as well as taking on in OSB.
Hum customer earlier this year with merger and then you have all of the increases that <unk> has made production increases you've had a cat.
<unk> as well with some new announcements coming in and so it's really a culmination of all of those things coming together Thats <unk>.
Driving additional consumption, which we have seen drive into the price as well, which has really been.
What we've been looking at and talking about for the last really probably eight quarters or so about all of this coming online and really really get turned up so additionally.
Additionally, on the fringes youll see where.
Rex lumber had a facility over to Troy Thats come online so not only indirect with our ownership, but also around the fringes. So all of these things working in concert have been a real catalyst for us on the price. Additionally on the coast. You also have the export business that has.
Picked up again here in the southeast and Youre not seeing.
A lot of the issues around container availability in those things that you may see out on the West coast here, it's been pretty steady in recent weather had all of that impacted so we've seen that pricing improved there too and while we're not huge contributors to the export side with our ownership and then where we sit the tension that's there the competitive nature of it.
We are able to play off of that.
That's great that's fantastic color I appreciate all that so congrats and good luck.
Thanks, Bob.
This concludes our question and answer session I would like to turn the conference back over to Brian Davis for any closing remarks.
Thanks drew and thank you all today for joining us we really appreciate your time and attention to our business. We hope you and yours have a great holiday season, with your family and friends.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
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