Q1 2022 Rayonier Inc Earnings Call
Welcome and thank you for joining <unk> first quarter 2022 teleconference call. At this time all participants are in a listen only mode. During the question and answer session. Please press star one on your telephone Keypad. Today's conference is being recorded if you have any.
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Now I will turn the meeting over to Mr. Kelly, <unk>, Vice President capital markets and strategic planning.
Thank you and good morning, welcome to <unk> Investor teleconference, covering first quarter earnings our earnings statements and financial supplement were released yesterday afternoon and are available on our website at <unk> Dot com.
I would like to remind you that in these presentations. We include forward looking statements made pursuant to the safe Harbor provision of Federal Securities laws, Our earnings release and Form 10-K, 10-Q filed with the SEC list. Some of the factors that may cause actual results to differ materially from the forward looking statements we may make.
They are also referenced on page two of our financial supplement.
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 with that let's start our teleconference with opening comments from Dave Nunes, President and CEO Dave.
Thanks, Colin Good morning, everyone first I'll make some high level comments before turning it over to Mark Mchugh Senior Vice President and Chief Financial Officer to review our consolidated financial results. Then we'll ask Doug long Senior Vice President of Forest resources to comment on U S and New Zealand timber results and following the review of our <unk>.
Timber segments, Mark will discuss our real estate results as well as our outlook for the remainder of 2022.
Overall, we were very pleased with our strong start to 2022 for the first quarter, we achieved earnings per share of <unk> 20, and.
And adjusted EBITDA of $98 million first.
Adjusted EBITDA increased 41%.
<unk> the prior year quarter as record results in both our U S timber segments, coupled with a very solid contribution from our real estate segment more than offset lower adjusted EBITDA from our New Zealand timber segment.
Drilling down on our different operating segments, our southern timber segment generated adjusted EBITDA of $48 million for the quarter, which was 53% above the prior year first quarter and represented an all time record quarterly result for this segment were very encouraged to see strong demand.
<unk>, a 31% increase in net stumpage realizations, while favorable logging conditions further contributed to a 25% increase in harvest volumes.
These strong results in our southern timber segment are a testament to both the strength of our operating areas as well as our team's ability to capitalize on favorable market conditions.
In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $22 million up 22% from the prior year quarter and likewise, an all time record results for this segment.
The year over year increase was primarily attributable to 17% higher log prices.
Partially offset by a modest reduction in harvest volumes and higher costs.
Our operations in the region continue to benefit from very favorable domestic lumber markets as well as healthy export market demand.
Conversely financial results in our New Zealand timber segment declined significantly versus the prior year quarter as higher pricing was more than offset by compressed margins due to significantly higher shipping costs, 14% lower production volumes and unfavorable foreign exchange impacts.
First quarter adjusted EBITDA in our New Zealand timber segment was $10 million down from $21 million in the prior year quarter.
And our real estate segment, we generated adjusted EBITDA of $25 million up considerably from $5 million in the prior year period.
The significantly higher number of acres sold was partially offset by a modest decrease in weighted average prices due to the mix of acreage sold.
Our team continues to do a tremendous job of capitalizing on strong demand for rural land as well as residential lots and commercial parcels within our development projects with that let me turn it over to Mark for some details on our first quarter financial results.
Thanks, Dave let's start on page five with our financial highlights sales for the quarter totaled $222 million, while operating income was $45 million and net income attributable to rayonier was $29 million or <unk> 20 per share.
Pro forma EPS was also 20 per share as we had no pro forma items in the quarter.
We generated first quarter adjusted EBITDA of $98 million, which was up considerably from the prior year period due to much higher contributions from both of our U S timber segments as well as our real estate segment.
On the bottom of page five we provide an overview of our capital resources and liquidity, our cash available for distribution or <unk> for.
For the quarter was $65 million versus $47 million in the prior year period. The increase was primarily driven by higher adjusted EBITDA, partially offset by higher cash taxes cash interest paid and capital expenditures.
Note the cash taxes were elevated in the first quarter due to the required timing of tax payments for our New Zealand subsidiary following the full utilization of its Nols a reconciliation of <unk> to cash provided by operating activities and other GAAP measures is provided on page seven of the financial supplement.
<unk> with our nimble approach to capital allocation, we raised $30 million through our at the market equity offering program during the first quarter and average price of $41 46 per share as previously discussed we view the ATM program as a cost effective tool to opportunistically raise equity capital strengthen our balance sheet and match fund bolt on.
Acquisitions.
We closed the first quarter with $257 million of cash and $1 $3 billion of debt. Our net debt of $1 billion represented 14% of our enterprise value based on our closing stock price at the end of the first quarter. Looking ahead, we believe our balance sheet is well positioned for higher interest rate environment. Following the steps we took in 2021 to extend our debt mature.
<unk> and lower our average cost of debt currently our weighted average maturity is roughly seven years, our weighted average cost of debt is roughly two 7% and essentially all of our debt is fixed I will now turn the call over to Doug to provide a more detailed review of our first quarter timber results.
Thanks Mark.
Morning, let's start on page eight with our southern timber segment as Dave mentioned, we achieved record quarterly adjusted EBITDA in the first quarter, a $48 million, which was $17 million above the prior year quarter.
A year over year improvement was primarily driven by a significant increase in net stumpage pricing and higher harvest volumes, partially offset by higher costs and lower non timber income.
More specifically volume climbed 25% during the first quarter is drier conditions enabled stumpage customers to ramp up production to meet strong demand.
Despite ongoing constraints on trucking availability.
So all looks so much pricing rose, 29% versus the prior year quarter.
At over $35 per ton first quarter pricing marks the highest average southern saw log stumpage realizations, we have registered in over a decade.
Improved pricing reflects strong demand from sawmills as the increased capacity that's been built over the past few years and several of our wood baskets continues to come online and benefit from strong lumber prices.
Upward pressure on chip and sell pricing due to increased competition from pulp Mills was also a positive contributor.
Pulpwood pricing also improved significantly to over $24 per ton, increasing 41% from the prior year quarter, reflecting robust competition across several wood basket as customers look to secure supply and replenish low mill inventories.
Overall weighted average so much prices improved 31% year over year.
We continue to be very encouraged by customer demand and the pricing environment across our southern footprint.
But I have recently seen pricing gains moderate and some operating areas as mill inventories normalized with drier weather conditions, resulting in more favorable logging conditions, which increased available supply in some markets.
Southern log exports remain constrained by the Pinewood nematode policies implemented by China earlier this year.
Exporters' and yourself have exited the market in response to these policies.
We are still working with our valued customers in China to provide large shipments to specific ports for the customer assumes fido century risks upon delivery.
We have largely pivoted, our U S south log exports to Vietnam and India for now.
While we expect the NIM to policies will remain a headwind over the near term we believe the strong underlying demand coupled with the breadth of our export capabilities leave us well positioned longer term to supply logs to our customers in China and other parts of Asia. So our USL export program.
Moving to our Pacific Northwest timber segment on page nine we likewise set a new record with quarterly adjusted EBITDA of $22 million, which was $4 million above the prior year quarter. The.
The year over year increase was driven by higher stumpage realizations, partially offset by lower harvest volumes and higher costs and slightly lower non timber income.
Volume declined 6% in the first quarter as compared to the prior year quarter, primarily due to the timing of stumpage sales.
Turning to pricing at roughly $106 per ton our average delivered solid price during the first quarter was up 16% from the prior year quarter as domestic saw mills benefited from strong lumber prices and healthy export market demand, providing incremental tension to the market.
Meanwhile, pulpwood pricing increased 28% in the first quarter relative to prior quarter as demand from pulp mills in the region remains quite favorable with all of those operating your capacity.
Page 10 shows results and key operating metrics for New Zealand timber segment.
Adjusted EBITDA in the first quarter of $2 million was $11 million below the prior year quarter.
A decline in adjusted EBITDA was largely driven by higher freight and demurrage costs.
Lower harvest volumes and unfavorable foreign exchange impacts, partially offset by higher carbon credit sales.
Volume declined 14% from the first quarter as compared to prior year quarter as production at the beginning of the year was deferred in response to port congestion and elevated log inventories in China.
And nearly $120 per ton average delivered prices for export sawtimber were up 5% from the first quarter as compared to the prior year quarter.
But down from the highs seen in the last three quarters of 2021.
The improvement in export sawtimber prices versus the prior year period reflected our ability to pass on some of the higher freight and demurrage costs, we're experiencing for our customers.
Chinese log inventories remain elevated throughout the first quarter, but the pricing environment <unk> alpine logs appears to have stabilized and overall log inventory levels are slowly coming down.
That said offtake from ports remains relatively weak given the COVID-19 related lockdowns that have been imposed in parts of China.
This significant level of uncertainty remains around the ongoing COVID-19 related disruptions in China as well as the prospect of Chinese policymakers implementing new stimulus measures how's.
However, we expect as demand stabilizes exports ultimate prices will likely move higher due to ongoing supply side constraints and.
Cleaning the reduced flow of European logs in China. The continued ban on Australian log imports by China, and the ban on Russian log exports that commenced at the beginning of this year.
Shifting to the New Zealand domestic market demand has remained strong start 2022.
During the first quarter average delivered solid prices in U S dollars decreased 6% in the prior year period to $76 per ton. However.
However, excluding the impact of foreign exchange rates domestic cellphone prices actually improved 1% versus the prior year period.
Average domestic pulpwood prices declined 13% as compared to prior year quarter, which was also driven in part by foreign exchange rates as well as less export competition.
We resumed sales of carbon credits and as inland in early 2022, following a more than doubling of carbon credit pricing over the prior year.
However, we subsequently pass sales as the war in Ukraine disrupted carbon markets globally in February leading to a pullback in pricing.
Pricing has since partially recovered to above 2021 average pricing.
Moving ahead, we plan to remain opportunistic in our sales carbon credits depending on market conditions.
Lastly, in our trading segment, we posted a slight operating profit in the first quarter.
As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale to our fee timber export business.
I will now turn it back over to Mark to cover our real estate results Mark.
Doug as.
As detailed on page 11, our real estate segment delivered strong first quarter results real estate sales totaled $34 million on roughly 8700 acres sold at an average price of just over $3800 per acre real estate adjusted EBITDA in the first quarter was $25 million.
Sales in the improved development category totaled $5 million and our Wildlife development project North of Jacksonville, Florida, We closed on $3 $6 million of sales during the quarter, representing 52 residential lots for an average price of roughly $70000 per lot in our Richmond Hill development project, which we have branded as heartwood, we closed over one.
Of sales during the quarter, including 10 residential lots at an average price of $44000 per lot and a four acre commercial property for $246000 per acre.
We've been encouraged by the activity within our heartwood development projects and are excited that pulte homes is set to open initial model homes. There this summer adding to the positive momentum surrounding this project.
Much like wildlife, we expect that the heartwood project will benefit from favorable migration and demographic trends impacting the local market area.
Turning to the rural category sales totaled nearly $17 million consisting of approximately 4800 acres at an average price of just under $3600 per acre.
Thus far in 2022 demand for rural land has remained healthy as the space privacy and recreational opportunities offered by these properties continue to attract buyers. Despite the recent increase in interest rates demand for rural land has held up well and our team has built a solid sales pipeline for the balance of the year.
Lastly, during the first quarter. We also closed on the sale of just under 4000 acres of non strategic holdings in Collin County, Washington for roughly $11 million to conservation oriented buyer.
Now moving onto our outlook for the balance of 2022, following a solid start to the year, we are well on track to achieve our prior full year adjusted EBITDA guidance of $310 million to $340 million in our southern timber segment, we expect to achieve our full year volume guidance and are encouraged by the year over year pricing gains that have been realized across our operating areas.
Overall, we continue to expect a significant significant increase in full year adjusted EBITDA from this segment as compared to the prior year. However, we anticipate lower quarterly harvest volumes for the remainder of the year as compared to the first quarter as we experienced above average stumpage removals to start the year.
Also while we expect net stumpage realizations remained well above prior year levels, we anticipate modestly lower weighted average prices for the remainder of the year as compared to the first quarter due to higher mill inventories are higher proportion of thinning volume and a less favorable geographic mix.
In our Pacific Northwest timber segment, we expect to achieve our full year volume guidance, Although we expect lower quarterly harvest volumes for the balance of the year. Following strong removals in the first quarter. We further expect that weighted average log prices will remain near first quarter levels for the balance of the year driven by continued strong sawtimber demand and improving public markets.
And our New Zealand timber segment, we expect to achieve our full year volume volume guidance was increased quarterly harvest volumes for the balance of the year, while a significant level of uncertainty remains around the ongoing COVID-19 related disruptions in China, we expect that once demand stabilizes constrained log supplies will drive export sawtimber prices higher we further expect the domestic.
Soft timber and pulpwood pricing will remain relatively flat for the balance of the year.
Distant with our previous guidance, we anticipate a higher adjusted EBITDA contribution from this segment in the second half versus the first half of the year.
In our real estate segment, we expect to achieve our full year adjusted EBITDA guidance. Following strong real estate results in the first quarter, we anticipate lower quarterly results for the balance of the year overall, we remain intently focused on achieving significant premiums to standalone timberland values through the activities of our real estate platform.
I'll now turn the call back to Dave for closing comments.
Thanks Mark.
Over the last several years, we've taken deliberate steps to continually improve the quality and diversity of our timberland portfolio as we look to grow cash flows and value per share over time.
We believe active portfolio management, if done well can create alpha for our investors the acquisition of Pope resources in 2020 as well as the numerous other acquisitions and dispositions. Our team has successfully executed since our separation into a pure play timber REIT had.
<unk> had been made with an eye towards improving our land base and long term financial profile.
To this end we were very pleased with the record quarterly adjusted EBITDA results posted by both our U S timber segments to start 2022, we believe these results reflect not only improving market conditions, but also the relative strength of the markets. We operate in as well as the quality of the people we have in place to capitalize on.
The opportunities afforded by our assets.
As we look out over the balance of 2022, we are optimistic about the end market demand we are seeing.
While we are not immune from the supply chain and inflationary pressures that are impacting many parts of the global economy. Our team continues to be quite successful navigating logistical challenges and recouping cost increases through higher log pricing.
In addition to our strong financial performance to start the year I'm also encouraged by the steps, we're taking to prepare rainier for a low carbon economy. We believe that carbon represents a very significant opportunity for our sector not only to be part of the solution to climate change, but also to improve the economics of our forests.
Ultimately by using more wood and by substituting them for other more energy intensive building products, such as concrete and steel we have the potential to sequester more carbon and reduced net greenhouse gas emissions.
We also believe <unk> will play a key role in the voluntary carbon offset markets and further view our land resources as a means to support other advancements designed to help.
Combat climate change, such as renewable energy infrastructure and carbon capture and storage projects.
In sum 2022 is off to an encouraging start and our team is actively taking steps to ensure we are well positioned to generate industry, leading returns and build long term value per share to this and following the actions. We took in 2021 to strengthen our balance sheet and optimize our cost of capital. We believe we are.
We're well positioned to execute on future high quality growth opportunities.
This concludes our prepared remarks, and I'll now turn the call back to the operator for questions.
Thank you.
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Our first question will come from Anthony.
<unk> with Citi. Your line is open.
Hi, good morning.
I just wanted to follow up on <unk>.
Trends into China in terms of offtake from ports in demand. There is it currently deteriorating or is it stable or maybe improving a little bit and then just kind of relatedly you discussed the supply constraints capacity constraints from.
From Europe from Russia from Australia, which seems significant I don't know if there's any way that you can kind of frame.
Or quantify those supply constraints.
Into China, specifically thanks.
Sure. This is Doug yes at the end of April log inventories at China's main ports were around $5 7 million cubic meters that was down about 2% from March.
The off take from the ports does remain below what we would expect post lunar new year.
Man construction projects are put on hold as Covid cases in China, where on the rise that's prompted Chinese authorities imposed lockdowns and travel restrictions.
Log inventory levels remain elevated we do expect something to pick back up.
Tori levels to normalize as the pandemic situation improves and Lockdowns are lifted.
And the recent Chinese government stimulus measures, coupled with constrained some love logs in China that we noted in the prepared remarks do.
Do contribute to our expectation that the second year. The second half of the year will be relatively better for New Zealand operations.
Right now, we're seeing removals from the ports and about 50000.
Cubic meters per day, and Thats down significantly from what we would expect to see probably half of what we expect to see during the during this time. So it is it is definitely offtake is down four we'd expect to see a lot of it has to do with we believe the COVID-19 measures.
But to the point, we're seeing the inventory going down has come down 2% and part of your question. There about Europe , we've seen supply come down about 50% over the same period last year from Europe , So significant reduction from there.
Also from South America significant reductions down over 80% over the same period thats due to the high freight rates, we're seeing so while offtake as downpour it should be due to Covid Lockdowns. We're also seeing really decreased inbound logs to China.
And you have the additional.
Our strengths coming out of Australia and in the long export ban out of Russia. So just a lot of things that are brought down the amount of wood coming in we.
We do believe as Lockdowns are removed.
The slowdown in long supply will take several months to correct. So it's not just something you can turn on the switch and it comes back.
But what on the water. So it take a month at least in I think a lot of build those inventories you can get the wood on the water. So we do think the inventories in China will be drawn down quite quickly.
And as that happens we're looking at places like New Zealand going into winter time, and so theyre production will also be slower.
So really we do believe that second half of the year should be pretty good for us.
That is promoting significant stimulus package around $2 three trillion dollars to recover the economy. After lockdown and they have said is going to be through increased infrastructure investments. Some further tax breaks and reducing their bank reserve ratio to put more liquidity in the construction market.
And Chinese construction market in place about 25 million workers domestically.
So you have to think infrastructure that really big lever they have to pull to try to improve things as they get out of Covid lockdown.
Okay. That's very helpful. That's very helpful.
And then just regarding potential.
Further growth opportunities after you deleverage.
Post Pope.
Is it safe to say that.
Might be primarily focused on kind of bolt ons in around kind of coastal southeast regions that youre already established as it is it possible.
To continue to grow in New Zealand or Pacific Northwest would you maybe look at other regions of the south or maybe further east and the South I'm. Just wondering if you could talk about sort of the opportunity set.
And potential size.
Acquisitions that you might go after.
Sure Anthony this is Dave.
Thank you.
We're active pretty much all the time in all three of our geographies.
We're active both on looking at bid properties as well as <unk>.
As privately negotiated transactions and we first and foremost look for complementary fit to our existing assets.
Then we also are looking at both.
And NAV accretion and I think that last point is important.
We don't believe in just growth for growth's sake, we're looking to have.
We're looking to have that NAV accretion and so.
Our minds, that's one of the areas that kind of keeps us disciplined.
But right now it's a pretty active its pretty active market. Our team is very busy.
But we're also remaining pretty disciplined.
Lot of that.
There is a lot of.
Buyers right now Youre seeing increased.
Capital flowing into this asset class based on some of the inflationary pressures in the view of timber being an inflation hedge.
Or seeing you.
We're seeing it also in the context of just general geopolitical risks and a flight to quality flight to safety and then lastly, with with rising lumber prices you've got a number of integrated players that are that are bidding aggressively based on high lumber prices. So it's a pretty competitive market right now but.
We're active across it.
Okay.
Okay. That's very helpful I'll turn it over.
You'll hear from Mark <unk> with bank of Montreal, You May proceed.
Thanks, Good morning.
Colin.
I wonder if.
Starting out I mean, the pricing was in the South was just remarkable this quarter Dave.
Just curious if you want to put any more color around that and.
And just any thoughts on whether this is indicative of the above.
Broader turn in the southern timber market I think a lot of us are.
Written about the market having been.
Fairly depressed on a south wide basis over the last 15 years.
Sure Mark this is Doug.
As we've been discussing for the past five years, we believe it yourself is not a homogenous market now.
We are well positioned with baskets with tightened growth drain ratios.
During that time, we've made portfolio decisions to exit certain wood baskets that we believe will be fundamentally weaker for a long time and a growing markets that we are poised for mark attention due to declining growth drain ratios.
So we believe this is really starting to come come to play in and as we've seen them and talking about now for quite a while and solid results in 2021 also.
I'll start at a high level, and then touch a bit more on the pricing realizations that we reported in our supplemental data.
As discussed in our prepared remarks, we're really encouraged by the pricing gains we've seen over the past year or so so.
So all timber chipsoft pricing was up across each of our resourcing. It from the south versus a year ago. So it's been across the entire south that we've seen this but it has been different depending on the resource units were operating in.
Pulpwood prices were higher in all but one as compared to a year ago.
I really think the magnitude of year over year gains that we've been able to post reflect the relative strength of specific markets that we're operating in across U S. South.
In addition, our team has done a nice job, bringing certain track to market at the right time to align with the weather conditions or localized supply demand imbalances.
We're off to a very strong start here in 2022, and we think it's positive interim will continue as the mills ratchet up operations.
And I am COVID-19 related disruptions become less common.
Many of our markets are positioned to maintain our pricing premiums to south wide averages as we move forward based on what we're seeing on the recent increases that we've had in capacity.
We think about Florida and Georgia.
Roughly 1 billion board feet have come on line through 2020.
And that's on top of additional billion board feet that.
Between 2018 and 2020. So you are talking about them equivalent to 4 million tonnes per million board feet to about 8 million.
Tons of demand just in that Florida, Georgia market.
This increase solid demand in these markets is really create a little tension wood basket for pricing has responded.
And encouragingly in Alabama, we've added about another 600 million board feet since 2020, and we're seeing them in this market materially improve also.
The <unk> ratio is on large in Alabama, so pricing has been a little bit more tempered, but still very favorable and were seeing improvements.
And then finally, let me further west in the Gulf States, Texas, Louisiana, some capacity expansions have been a bit slower, but we're tracking about another 500 million board feet of oncoming expansions or startups in the near future in that area too.
So as you can hear we think theres been a lot of opportunities there are a lot of movement and some great growth in this.
Those wood baskets for us and so the sounds like we said is not modest but the ones that are working and we see improvements as we go and really seeing that come home here, starting on the Atlantic Coast and work its way across the Gulf.
Still we are seeing and fully expect to see some back and forth of our customers in areas, particularly as weather conditions dry.
And then there's typically to go through something.
And we think there's always that natural tension between buyers and sellers and there'll be some price fluctuations, but all that said, we think we're working off a higher pricing base than we were a year ago.
And as it relates to our civic pricing results Mark mentioned in our prepared remarks, we expect some net stumpage realizations to remain well above prior year levels, we do anticipate modestly lower weighted average prices for the vendor of the year as compared to first quarter and that's due to some higher mill inventories, but also simply higher proportion of thinning volume and less favorable geographic mix.
And a lot of that has to do with during the Covid disruptions and lack of truck drivers. We saw a lot of our wood that was closest to the mills being harvested and since the mills and now we have to reach out further some of the tracks are further way so with some increased cost in that.
Okay and then.
Wanted to just kind of toggle over to increase in inflation and increase in interest rates. How do you guys think about that impact.
Impact kind of across your business.
I think it hasnt affected many different dimensions.
Yes, I mean, it certainly is.
Sorry, Marc. This is this is Marc I think it certainly has a lot of different dimensions, and certainly we could we could probably talk to balance of the call on different aspects of that I mean, I think as we think about how it relates to timberland values and transaction activities in timber or transaction activity in the timberland space.
I guess I'd start by making two observations first timberland is generally viewed as a pretty effective inflation hedge which contributes to capital flows into the asset class in inflationary environments.
Second and somewhat related to the first is that timberlands are generally valued on long range DCF basis, using real rather than nominal discount rates.
If you look back over the last 20 or 30 years U S. South timberlands have pretty consistently been valued at around a two 5% EBITA cap rate.
And that's really been irrespective of where interest rates have been at any given point in time and to some extent I think this reflects the notion of timberland is expected to deliver a base real return.
Some inflationary component of return over the long term.
10 year tips yield is still hovering right around zero percent, while the yield on 10 year treasuries as moved up to around 3% today.
So I'd argue that real interest rates still very low from a historical perspective, and I certainly say that the values. We've seen in the timberland transaction market would suggest that we're seeing continued compression and discount rates for timberland assets kind of despite the inflationary environment and higher interest rate environment that we're in today I think it's all.
Also important to note and you asked the question about <unk>.
Rising prices in the South we are seeing very strong pricing momentum in cash flow momentum in the south today.
And as we talked about on the call is Doug just talked about our composite stumpage pricing was up 30% on a year over year basis relative to a year ago. So in 2021 and I'd put that in context of 2021, and we had a record year for EBITDA in the south of about $120 million.
And the midpoint of our guidance for full year 2022 is up about 25% from that and obviously, we've gotten off to a really strong start here with with Q1. So if you assume that we are able to maintain this step change in pricing and cash flow and if you assume that that historical cap rate relationship persists and that.
That timberland values are poised to move up considerably southern timberland values in particular.
Certainly relative to any kind of legacy perspective that all southern timberland trades at 18, two to $2000 per acre.
That's how I would address is as it relates to.
At CIT to timberland values, obviously, it touches a lot of different aspects of our business as well.
As we think about our balance sheet.
As we noted in the prepared remarks pro forma for the debt repayment early this year and our weighted average borrowing cost is roughly two 7% down from about three 1% a year ago, we were able to lock in new long term financing as well as restructure.
All of our existing debt on very favorable terms amid a much lower interest rate environment 12 to 18 months ago. Currently we have no near term maturities.
Like we said in the car our weighted average maturity has been extended to roughly seven years on all of our debt is fixed until at least 2024 at which time only a small portion becomes unhedged and even in some even lower cost hedges kick in as well. So there really isn't much impact to our balance sheet over the near to medium term from higher interest rates and overall I think we're in a really.
Good spot in terms of where the balance sheet is at kind of.
Given the environment that we're in.
Super that's a good summary, mark very helpful I'll turn it over.
Our next question will come from Mark Weintraub with Seaport research.
Your line is open.
Thank you a couple.
Follow on clarification.
Don Thanks for all the details on regionally whats going on timber drains in growth. So if you could just are there some areas where you operate.
Or what percentage of the areas, where you operate what would you say that.
Drain has caught up to growth or is very close to it.
Well, let's say.
Mark if you if you if you if you think about.
If you think about the breakdown of the quartile, we have we have over 60% in the top quartile, which has.
Of our southern holdings is balanced and when it's balanced we believe that that.
Ultimately translates to higher price elasticity and it's in those regions, which are in kind of that coastal that coastal Georgia, Florida, South Carolina area, where we've had very strong pricing.
Pricing response to rising lumber prices.
And that certainly contributed Conversely, we have no land in the bottom quartile, where you've got growth drain relationships in excess of two times and so that's really why you see our <unk>.
Pricing gap out relative to broader south wide.
Averages and it's one of the things that we've been sort of pounding that message home for a number of years now the south is not homogenous as Doug said, it's very localized and we spent a lot of time trying to manage our footprint within that so that we're positioned in some of those stronger markets.
Great.
Second.
Thanks for the color on the inflation, we're kind of how does freight show up in your business and I realize it's probably a complicated and there may be differences situations situation, but how much of higher pricing that we're seeing.
B in part related to freight.
That you report the higher prices you report.
Mark just to be just to clarify are you talking about trucking or ocean freight.
Yeah.
Either or but if you could.
I was thinking more on the trucking side, but you bring up the ocean freight how would that be playing in as well.
Short answer on the on the trucking side Mark is that we report stumpage. So it's net of.
The trucking and the south.
In the U S.
And so we will we will have we will have delivered pricing.
That incorporates <unk>.
Great, but then we report that as net stumpage. So that you can kind of see that on an apples to apples basis.
And then where we're involved in export sales.
We are selling that on a delivered basis. So we incur.
Export pricing and Thats one of the reasons that you see a little more volatility out of New Zealand as you see freight rates move around a bit and mark we try to be pretty transparent around that in the supplemental materials. I mean, we report are cut and haul costs.
By segment as well as our delivered volume by segment and so you can back into our average cut and haul rates, obviously, that's going to vary kind of that mix between.
Kind of the logging portion in the trucking portion by by different region.
But it's there in aggregate and then we also report the.
Ocean freight costs are port and ocean freight costs, where we're doing export which at this point is all three of our segments.
Thanks, a lot for that clarification, because I really was also including the cotton haul the freight you're referring to that is just due to the customer but there is there is an element is there an element, which you are picking up that gets captured in the cut and haul that separate.
No I mean again in the South we report stumpage prices and so that's net of cut and haul but some of that volume is delivered so it's going to on the topline basis, it's going to be a higher price is going to reflect the increment of cut and haul.
Civic Northwest report delivered prices, but then you can kind of see the cut and haul and how that works down to a net stumpage realizations.
I'd say from a cost standpoint, New Zealand is clearly the.
The most moving pieces there because a lot of that volume is going export.
<unk> freight costs in particular had moved up pretty considerably and so you had a very high level I would say we've.
Much more than recoup those cost increases in the south and the Pacific Northwest and New Zealand despite.
Pretty high prices that have persisted for the last year. It's obviously came off some in Q1 mutual at really high prices in <unk>.
Most of most of 2021, a lot of that was eaten up by higher ocean freight costs.
Okay.
And.
And then David you mentioned integrated players bidding for timberland.
Given whats going on with lumber is that.
Is that new or I mean, I assume those are some of the some private players et cetera youre referencing.
Is that a change dynamic because I haven't heard that much about integrated players being aggressive in the.
Bidding for timberlands, but I could be wrong I think we've seen I think we've seen that over time on a fairly regular basis, when you've got strong lump.
Lumber cash flow Lumbers, very cyclical business and as you've seen as you get to the top so those cycles you tend to see those players weighed in.
And secure more more timberland for the future and Thats.
That's been a pattern I have seen throughout my career I, just think right now with the extraordinarily high lumber prices you just got more players doing that.
Okay, and then last it seems that the.
The North American businesses.
It really well.
I don't know if you'd characterize it as it's doing better than what you would have anticipated three months ago I've been on the flip side, New Zealand, obviously struggles with what's going on with China et cetera.
And so the question Directionally is.
How.
Dependent is making the guidance that indeed, New Zealand gets better at China gets better or are you actually ahead of where you would have thought in North America and it looks better at this juncture that that provides at a minimum cushion and frankly.
Upside how would how would you kind of characterize those two drivers from where you were three months ago.
Yes, I mean, all of the above me I'd definitely say that we've gotten out of the gate very strong in the U S businesses I'd, certainly say that we're trending.
Higher relative to our initial guidance in the south and the Pacific Northwest.
Real estate, obviously had a very strong Q1 and like we said in the prepared remarks.
We feel comfortable that we're on pace to hit the adjusted EBITDA real estates, obviously always lumpy and transactions can come in and out of the pipeline and so we never want to get too aggressive in terms of our outlook on real estate. This early in the year.
In New Zealand.
Nearly still some headwinds there I mean, we had said even last quarter that we anticipated the second half of 2022 being stronger than the first half obviously, we've had some pretty significant COVID-19 disruptions that have impacted our export business there but.
But.
We were relatively pleased with the Q1 result, all things considered and New Zealand, though it will be kind of contingent upon what happens in China, and how that export market evolves. During the course of the year, but at the end of the day you kind of give just given how these different businesses are valued.
I'd trade EBITDA in New Zealand for EBITDA, and Eos out any day, because obviously, we're getting a lot more kind of valuation leverage on those earnings and so we're obviously very encouraged by how we started the year, especially encouraged by the pricing momentum that we've seen in the south because that's far and away our highest multiple business.
From a valuation standpoint, our highest probably EBITDA to free cash flow conversion business across our portfolio.
So on balance I think the year has gotten off to a better start than we anticipated.
Obviously.
We're ahead of most consensus estimates for Q1, but one quarter into the year. We've generally not we generally have been reluctant to kind of update our full year guidance.
Again, particularly this year given that we still see some challenges in New Zealand.
Alright, I'll say to that.
I would just add that in New Zealand.
We have seen domestically Q1 to Q2 prices.
Those with firm domestic demand and faces export uncertainty.
That's a good sign as we discussed before kind of domestic pricing typically lags export pricing in New Zealand back orders for lumber maybe approximately 12 months. So some of those have a real long runway ahead of them in New Zealand. So New Zealand not all dark there are some good there are some bright spots in New Zealand domestically and as we've talked about for when kind of comes out of Covid I think theres a real opportunity there.
Okay, and just make sure I understood that you I think you just mentioned that domestic usually lags export pricing in New Zealand, but it seems that this time around it's a leading.
That's correct at this point in time, we've seen firm domestic pricing.
And any thoughts as to why this time why we have this reversal, whereas it normally lags, but now seems to be leading.
As I mentioned, there is a major backlog of almost a year of lumber demand and so we see that some others out there procuring as much was I can't meet that construction very strong very strong domestic market in New Zealand right now very strong construction demand a lot of undergo housing also so they're seeing the same things we are in United States and other places.
Okay. Thanks very much.
Yeah.
Our next question will come from Buck Horne with Raymond James Your line is open.
Hey, Thanks, good morning.
And a follow up.
Given the competitive bidding environment youre seeing in the capital flowing into real estate, you mentioned kind of the diversified mix of of interested parties out. There I was just wondering are you beginning to see anyone.
<unk> in carbon optionality into their underwriting or what kind of factor is.
Carbon.
Potential.
<unk> into some of the bids youre seeing out there.
Yes look I think I think generally we'd say that it's not being explicitly factored into transactions that said I think it's contributing to some of the discount rate compression that we've seen I think in the markets that we operate in and the people that we talk to people are.
Italy underwriting properties with with timber valuations, I think where youre starting to see a little bit more.
Carbon explicitly factored in is in some of the weaker markets that don't have the same optionality from a from a timber standpoint, but in terms of where we operate where you've got strong timber markets I'd say today, it's not playing a meaningful role.
Got you Okay. That's helpful. Thank you.
And just curious.
That does make you speak too much out of turn on a competitor, but I was wondering if you had taken a look at the wire Hauser.
In terms of in the Carolinas that transaction that was recently completed where are you guys looking at that acreage or in the process.
Any any.
Color you can provide on how you viewed that that deal and the transaction price it went for.
Yes, I won't really comment on that specifically I will just say that we we look at everything.
We see everything that's out there and.
We're well aware of that and but I think from a from a confidentiality standpoint, we'll keep our our observations to ourselves.
What I'd add to that Buck this is mark.
Add to that is obviously that.
Transaction that you're referring to.
<unk> came in at a very strong price well over $3000 an acre in the south which is obviously well above any kind of average pricing you might see but again I think it is very much reflective of what we've talked about considerably in the past that.
The U S. South is not one big homogenous market different assets are located in.
Different market areas with different growth drain dynamics different pricing dynamics.
Different productivity characteristics that property was a very high quality property.
And certainly the price was reflective of that quality.
Understood. That's helpful color. Thank you Marc take care guys.
Our next question will come from Paul Quinn with RBC capital markets. Your line is open.
Yes, thanks very much good morning, guys. So just a question on <unk>.
Overall guidance you gave for 'twenty two a.
Quarter had timber volumes up 9% overall.
Just wondering given the very strong lumber environment, which will probably lead to higher log pricing that we've seen in the U S.
Whether there's any inclination to take those youre guidance volumes, especially in the U S South and Pacific Northwest up even higher than that then when you gave us last quarter.
I mean look we always try to be nimble and opportunistic as we kind of flex volume to market conditions that said recognize that anytime we generally said our annual harvest targets at around our sustainable yield subject any kind of age class variation that we have in our portfolio.
So if you pull forward volume you've got to pay that back at some point in the future and so.
It's.
We feel as though we're in an inflationary timber price environment. We've obviously seen that here to start 2022, but I don't think that we'd be inclined to pull forward.
Lot of volume because as we sit here today I don't think we see this trend reversing necessarily and so may seem like a great idea today, but then when next year, We guide our volume down 5%.
I'm sure that won't won't be well received and so we generally try to operate at around that sustainable yield and I think more often than not we're pulling back volume with a view that we're likely to see kind of a near term uptick in prices that we can recoup in a relatively short term basis, but pulling forward volume I think.
As always.
Little bit of a challenge relative to again kind of how that reflects in our longer term outlook.
Okay, well, I hope, you're right and future log prices.
<unk> maintained its upward momentum what about on real estate, though real estate markets across our crush of timber reads have been strong for everybody.
Pulling forward.
Opportunities are that might not present themselves in 'twenty, three or 'twenty four.
So so if you break if you breakdown.
If you break down our real estate portfolio and first of all touch on the improved development.
Projects that we have I think that scenario where buyers in this market, where you have very limited.
New sale inventory and you've got a shortage of lots, we're seeing essentially faster absorption than we had originally underwritten in those projects and so our challenge is to stay ahead of that.
By getting more lands entitled ahead.
Ahead of that demand. So I think we have seen an effect a pulling forward of that demand in the improved development projects and then as we as you shift to two rural.
<unk> sales you have a mix and keep in mind, we have we have a mix of of properties that we have listed and then we have unsolicited.
Inquiries.
From properties that are not on the market and we always have a blend of those two types of rural HBU sales and I'd say in this market. We see you tend to see an uptick in an unsolicited offers and that's that's natural and so our team our team is very used to that.
Ebb and flow and there's probably an element to that.
That's certainly present in these markets and you see it both in <unk>.
And the average pricing, but also in the volume of activity.
Great. Thanks for the help.
Yeah.
Once again, if you would like to ask a question at this time you can press star one and record your name when prompted our next question will come from John Babcock with Bank of America. Your line is open.
Good morning, and thanks for taking my questions I have been really really actually only one of your actually it. Thank you.
Just broadly could you talk about the extent to which the Russia, Ukraine conflict has impacted trade flows both in Europe , and China and also the extent to which there has been any sort of flow through effect into the north American market.
Sure.
A really high level.
You have.
You have Russia has supplied a couple of billion board feet of lumber into the European market as we see that.
Get tightened and removed.
That is more or less.
Has the potential to offset a comparable to $2 5 billion board feet of lumber exports into the U S. We have so we have seen the beginnings of a slowdown in lumber.
Exports from Europe into the U S. As a result of that so that ripple effect is starting to show up we don't necessarily think you'll see a full.
Elimination of European exports into the U S. Just because lumber prices are so strong, but thats one of the.
That's one of the sort of second order effects that we see I think the other the other thing that you have in play is Russia is a very strong.
And leading supplier of lumber into the China market, and we don't and we don't anticipate that really changing so theyre going to continue to maintain that market share Russia on their own.
Implement has implemented this year a ban on log exports. This is something that they've been working on a number of years that started back in 2007 with an imposition of an export tariff.
And then a few years ago, they announced the intention of cutting off all log exports and so thats something and they were roughly.
10% supplier into the China market.
Was <unk>.
<unk>, Australia, so when we talk about being bullish on China longer term, you've got you've got two large historical suppliers in Australia, and Russia on the log side that arent present, and so we're pretty bullish and another another element to the question is the role that European logs and lumber have played.
Coming into the China market and keep in mind that much of that has been driven by.
The salvage volume from from Europe in that salvage volume.
Is now in decline they've gone through their past the peak of it and Thats one of the reasons as Doug mentioned that Youre seeing a 50% decline in volumes coming out of Europe , it's because they're on the down slope of that that salvage volume and then in addition to that you've got the Russia, Ukraine War situation.
That's providing more market opportunities in Europe . So we think we're pretty well positioned for that.
Whether it's in the U S taking advantage of.
Less supply going into China or in our New Zealand markets.
Okay, and then just as a clarification point.
I mean do you see any potential risk that Russia ends up changing its policy is given kind of what's going on today or do you think they'll still largely stick to there.
Export policies as a potential <unk>.
I mean.
It's hard to say I think generally this has been a pat since they've been on this path.
Since since a seven I'd be surprised if they if they if they reversed it.
But.
Who knows in this.
In this global market and recognize John that the design of that policy was really to stimulate.
So.
Lumber capacity on the Russian side of the border and to kind of do the processing on that side of the border and so obviously that would frustrate that objective or are they to lift that ban.
Got it. Thank you that's all I have.
Thank you.
No further questions at this time.
This is mark Mchugh I'd like to thank everybody for joining the call and please follow up with any questions. Thank you.
Thank you that does conclude today's conference. Thank you for participating you may disconnect at this time.