Q3 2022 Potlatchdeltic Corp Earnings Call
Good morning, My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Potlatch third quarter 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would likely withdraw your question press the pound breast.
Press Star one again, thank you all.
I'd now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks, Sir you May proceed.
Thank you Lisa.
Good morning, and welcome to Potlatch <unk> third quarter 2022 earnings conference call joining.
Joining me on the call is Eric Cremers, Paul I, just don't think is president and Chief Executive Officer.
This call will contain forward looking statements. Please review the warning statements in our press release on the presentation slides and in our filings with the SEC regarding the risks associated with these forward looking statements.
Also please note that a reconciliation of non-GAAP measures can be found on our website at www Dot potlatch don't take dotcom.
I'll turn the call over to Eric for some comments and then I will review, our third quarter results and our outlook. Thank.
Thank you Jerry.
We reported third quarter total adjusted EBITDA of $101 million after the market closed yesterday.
That makes eight out of the last nine quarters that our quarterly EBITDA has exceeded $100 million.
We were having another really strong year with EBITDA of $522 million through the first three quarters.
Our financial results reflect the strength of our leverage to lumber strategy.
Our wood product segment, adjusted EBITDA was $31 million in the third quarter lumber.
Lumber prices were lower than.
And then last quarter as expected, but they're still at attractive levels.
Does it price has stabilized over the last couple of weeks. It has increased modestly to $494 per thousand board feet. After declining 12 weeks in a row.
Lumber futures are also back above $500 per thousand board feet.
We continue to expect that lumber prices will remain above long term averages.
We shipped 265 million board feet of lumber in the third quarter, which was 11 million feet more than we shipped in Q2 <unk>.
Transportation was a significant risk when we entered the third quarter, but availability of railcars and trucks has improved considerably.
We successfully completed the rebuild of our Ola, Arkansas sawmill and restarted the large log line on schedule in the third quarter.
The startup phase is underway and the mill is expected to reach its 150 million board feet annual capacity on a run rate basis.
By the end of 2022 as planned.
As a reminder, OLED rebuild also significantly lowers the mills cash processing costs and improves its log recovery.
Our timberlands segment generated adjusted EBITDA of $65 million in the third quarter, our southern Timberlands team continued to take advantage of favorable logging conditions and strong log demand, resulting in harvest volumes that exceeded our expectations.
Notably our team set a quarterly harvest record for our southern Timberlands business.
The addition of cash March timberlands will provide another boost in the fourth quarter.
Idaho harvest volumes were seasonally higher this quarter, but fell short of our plan, primarily due to contractor availability issues.
Our Idaho team is working hard to address the issues and they have a plan in place to reduce the harvest shortfall in the fourth quarter.
Our real estate segment had another solid quarter with adjusted EBITDA of $14 million.
On the rural side of the business, we sold 1600 acres at nearly $4000 an acre.
The development side of our real estate business remains strong.
Residential lot inventory in our small valley Master planned community remains at low levels and we continue to have good take up on our lot offerings.
We also completed over $6 million of commercial land sales in the quarter, which averaged $183000 per acre.
That is three quarters in a row that we have closed commercial sales and channel, resulting in total revenue $11 million, thus far this year.
Turning to housing we continue to believe that the backdrop is favorable over the long term. There is a fundamental shortage of housing stock due largely to the combination of under building after the great financial crisis and favorable demographics in the form of millennials, who are the largest demographic cohort in U S history.
While the rapid increase in mortgage rates has played a key role in slowing housing demand the fed's aggressive pace could turn into an easing cycle beginning as soon as mid 2023.
Lower demand should also result in home prices declining.
Acknowledging that it will take time, we expect demand to increase in U S housing starts to return to levels above the long term average of one 5 million units per year once homes become more affordable.
In the meantime, a number of housing units under construction in the U S remains elevated at one 7 million units in September .
The elevated level of housing units under construction supports lumber demand in the near term.
In addition, homebuyers and builders have ways to respond to affordability issues. For example, remote work opened the possibility to move to less costly parts of the country for a lot of people.
Builder concessions or a shift in product mix to smaller homes or fewer amenities are other examples.
Shifting to repair and remodel the largest market segment for lumber demand the underlying fundamentals continue to be favorable for a variety of reasons.
Existing U S housing stock remains the oldest in the history of the statistic in 42 years on average.
This is important because older homes are significantly smaller than new homes on average and the older homes typically need more repairs.
Mortgage rates mean that people are much more likely to stay in their existing homes.
Remodeling is a very attractive option for homeowners given record levels of home equity across the U S. A strong job market and the fact that consumer balance sheets remain in great shape in.
In addition, higher interest rates, usually have less of an effect on repair and remodel demand than other factors.
Pundits expect repair and remodel spending to continue to grow.
National Association of Homebuilders is forecasting a 7% increase in R&R spending in 2022, a 6% increase in 2023 and a 4% increase in 2024.
Harvard's leading indicator of remodeling activity report forecast R&R spending will be six 5% higher year over year in Q4 of next year.
Both forecasts imply a healthy lumber volume growth in the R&R segment, given much lower but still attractive lumber prices.
Our home center customer takeaway remains strong and we remain optimistic about lumber demand and the repair and remodel market segment.
Turning to cash Mark the merger closed on the 14th of September .
We continue to be excited about the strategic and financial benefits provided by the transaction.
While we only operated the timberlands for two weeks in the quarter, we were very pleased with log price realizations in harvest volumes.
Integration of the two companies is going faster than anticipated as we have already achieved CAD synergies of $15 million.
Also we now expect to achieve cost synergies of $21 million versus the 16 million target that we communicated when we announced the transaction at the end of May due to higher interest savings and planned.
The sharp rise in interest rates led to a significant increase in the value of our interest rate swaps, which allowed us to reduce the combined company's interest run rate by $8 $5 million annually.
Jerry will provide more color on the interest savings.
As discussed on last quarter's earnings call. We were the successful bidder on three bolt on timberland transactions earlier this year aggregating $101 million in total.
In total these transactions add approximately 46000 acres to our ownership in Mississippi, and Arkansas and the last of the three transactions closed earlier this month.
Given our strong results in the first half of the year, we expect to pay another special dividend this year.
While the amount depends on our performance for the remainder of the year, we expect the amount will be much lower than the $4 special dividend, we paid last year.
We will review the special dividend with our board in December .
On the theme of returning cash to shareholders. Our board approved a new $200 million share repurchase program in August .
We believe repurchasing stock at the current price level is very attractive and we look forward to our trading window opening in early November one week from today.
Finally, we remain committed to growing our regular dividends sustainably increasing our stable cash flows with the catch mark merger and the bolt on timberland transactions provides the opportunity to continue doing so now that said the relative attractiveness of deploying capital to repurchase shares.
Given the current steep discount to our estimated NAV will factor into our analysis with.
We typically review the regular dividend with our board in the fourth quarter.
At the end of Q3, we had $484 million of cash on the balance sheet and liquidity of nearly $800 million, our leverage remains low and our financial strength provides a solid platform for continued growth.
Regarding environmental social and governance reporting we published our third annual ESG report in May in our first carbon and climate report in September our team is currently working on developing a full ESG section of our website.
That's delta has a strong ESG story and we are committed to do our part to mitigate climate change and continue our legacy of responsibility across the ESG spectrum.
To wrap up my comments potlatch dealt it remains very well positioned and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value.
There is no doubt that new residential construction is weakening given affordability issues. Our view is that R&R spending will remain relatively strong over the next couple of years.
In addition, the housing construction downturn may prove to be relatively short lived.
I will now turn it over to Gerry to discuss our third quarter results and our outlook.
Thank you Eric Star.
Starting with page five of the slides adjusted EBITDA was up $101 million in the third quarter the.
The quarter over quarter decline in EBITDA was primarily due to lower lumber prices.
I'll now review each of our operating segments and provide more color on our third quarter results.
Information for our Timberland segment is displayed on slides six through eight.
The segment's adjusted EBITDA increased from $58 million in the second quarter to $65 million in the third quarter.
Our solid harvest in the north increased from 276000 tons in the second quarter to 459000 tons in the third quarter.
Our second quarter harvest was constrained by spring breakup and unseasonably wet weather in June our quarterly harvest volume is typically the highest in the third quarter as dry weather results in more favorable logging conditions.
Having said that our harvest fell short of plan in the third quarter, primarily due to log in haul contractor availability issues are northern team is working through those issues and they have a plan to make up as much as the harvest shortfall as possible in the fourth quarter.
Northern saw log prices were 25% lower on a per ton basis in the third quarter compared to the second quarter.
The decline in saw log prices, primarily reflects lower prices for indexed saw logs.
Our index prices reset on a one month lag, which means the second quarter index prices reflect much higher lumber prices in April and May.
In the South we harvested one 4 million tons in the third quarter compared to 1 million tons in the second quarter.
Relatively dry conditions and solid execution by our southern Timberlands team allowed us to continue to take advantage of strong saw log demand.
While it's not apparent from the rounded results on slide eight our southern saw log prices were 1% higher in the third quarter compared to the second quarter.
The <unk> increase was driven by two weeks of volume and Ketchmark stronger southern markets and a seasonally higher mix of hardwood saw logs.
As discussed on last quarter's earnings call, we expected southern yellow pine saw log prices to decline modestly and our legacy operations in the third quarter due to increased log availability.
The decline proved to be milder than we anticipated and pine saw log prices in our legacy wood baskets remain higher on a year over year basis.
Moving to wood products on slides nine and 10 adjusted EBITDA declined from $107 million in the second quarter to $31 million in the third quarter.
Our average lumber price realization decreased 34% from $865 per thousand board feet in the second quarter to $572 per thousand board feet in the third quarter Bye.
By comparison, the random lengths framing lumber composite price was 28% lower in the third quarter than the second quarter.
As a reminder, the lag we experienced between booking and shipping orders is not captured by the composite which is closer to a real time indication of price.
Our lumber prices were flat for much of the third quarter before declining about 10% in September our average lumber price realizations per thousand board feet were $590 in July $593 in August and $534 in September .
Lumber shipments increased 11 million board feet from 254 million board feet in the second quarter to 265 million board feet in the third quarter.
Our team worked hard to mitigate transportation issues to achieve that result.
Shifting to real estate on slides 11, and 12, the segment's adjusted EBITDA was $14 million in the third quarter compared to $22 million in the second quarter.
EBITDA generated by rural sales declined sequentially due to the mix and timing of transactions.
For example, second quarter results included a 10700 acre, Minnesota conservation transaction or just over $800 per acre while the third quarter consisted of the sale of only 600 acres in total.
As a reminder, the Minnesota sale I referenced as the last meaningful sale in that state as it culminated our long term strategy that created approximately $300 million of value for shareholders.
Business remained solid and our Chanel Valley Master planned community in Little Rock, Arkansas, as we generated $9 million of EBITDA in the third quarter.
Residential lot sales remained strong with 48 lots sold in the third quarter and we closed the sale of two more commercial real estate lots for an average price of $183000 per acre in the third quarter.
We have closed at least one commercial sale every quarter. This year for an average price of $275000 per acre.
Turning to financial items, which are summarized on slide 13, our total liquidity was $773 million.
This amount includes $484 million of cash as well as availability on our undrawn revolver.
We plan to refinance the $40 million of debt scheduled to mature in December 2022, we.
We have locked the refinance rate, which will reduce our interest rate approximately 100 basis points on this debt, resulting in lower annual interest expense of approximately $400000.
<unk> had $300 million of debt when the merger closed in September we used about half of our forward starting interest rate swaps to refinance 277 $5 million of <unk> debt at a fixed rate of one 8% net of patronage and we used cash to pay off the remaining $22 5 million.
Of Ketchmark step.
We also applied ketchmark interest rate swaps to reduce the interest rate on $150 million Potlatch Delta term loan by over 200 basis points.
Overall, the refinance and the use of Ketchmark swaps reduce the combined company's annual interest run rate by $8 $5 million.
That amount is significantly higher than the amount of interest savings that we expected when we communicated our CAD synergy target last may.
In aggregate the interest savings reduce our weighted average cost of our outstanding debt from three 1% to two 4%.
We've largely been precluded from discretionary share repurchases since our first quarter earnings call due to the Ketchmark merger and SEC rules.
We were required to suspend our <unk> one plan in August when a registration statement was declared effective we remain committed to repurchasing our shares at attractive prices and we look forward to our trading window reopening in early November .
We expect to pay another special dividend in December while the actual amount is dependent upon our financial performance for the rest of the year. We believe that this year's special dividend will be much lower than the $4 per share we paid in 2021.
Capital expenditures were $13 million in the third quarter that amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement and it excludes timberland acquisitions.
As Eric mentioned, we were the successful bidders on three bolt on timberland acquisitions in Mississippi, and Arkansas earlier this year for $101 million in the aggregate, we use cash close all three transactions, including $16 million to close the last of the three transactions in October .
I'll now provide some high level outlook comments. The details are presented on slide 14.
We expect to harvest one eight to $1 9 million tonnes in our timberlands segment in the fourth quarter.
Harvest volumes in the north are planned to be comparable to the third quarter. This was higher than typical for the fourth quarter as our team is working to reduce the third quarter harvest shortfall.
We expect northern saw log prices to decline about 25% in the fourth quarter.
In the South we plan to harvest, one 4 million tonnes in total in the fourth quarter.
This volume includes approximately 400000 tons of saw logs and pulpwood from the catch Mark acres.
We expect our southern saw log prices to increase modestly due primarily to a higher mix of ketchmark stronger southern markets.
We plan to ship 265 to 275 million board feet of lumber in the fourth quarter.
This assumes that the Ola, Arkansas sawmill startup remains on track.
Our average lumber price thus far in the fourth quarter is approximately 10% lower than our third quarter average lumber price. This is based on approximately 100 million board feet of lumber.
Our lumber spot prices, approximately 11% lower than our third quarter average lumber price in our prices started firming recently.
As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis.
Shifting to real estate, we expect to sell approximately 1500 acres of rural land and 20, <unk> all valid residential lots in the fourth quarter additional real estate details are provided on the slide.
Our total capital expenditures are planned to be in the range of $85 million to $90 million in 2022, excluding acquisitions.
This estimate includes approximately $18 million for the Ola rebuild which we expect will be reimbursed by insurance.
The estimate also includes $12 million deposit for the Waldo modernization and expansion project that we announced in June .
Overall, we expect our total adjusted EBITDA will be lower in the fourth quarter due to lower lumber and index saw log prices.
Having said that lumber prices remain at attractive levels, we are well positioned to continue growing shareholder value over the long term.
So that concludes our prepared remarks, Lisa I'd now like to open the call up to Q&A.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
If you have might withdraw your question press Star one again.
Your first question comes from the line of Mark Weintraub with Seaport Global.
As youre thinking about.
Capital deployment.
So you talked about Youre going to have a special dividend you talked about an appetite for share repurchase with the stock where it's at.
You've done a number of acquisitions are you still on the lookout is that still part of likely capital deployment in the next 612 months and then tying it all together what type of balance sheet or other metrics should we focus on and understanding.
What you're comfortably city and target type ranges are.
So hey, Marc Marc. This is this is Eric Yeah art, our appetite as we want it we want to continue to try to grow the company through timberland acquisitions, and you're right. We've been successful this year not just with Ketchmark, but also with the <unk>.
46000 acres and $101 million or so that we spent on the bolt ons what I'd tell you is that.
The timberland market is getting is getting.
Our opinion, a little bit overheated.
For example, we competed here recently in two different tracks we lost these deals.
One of them was attract in Georgia, we went to nearly $22 five times EBITDA.
And the other one was in Alabama, and we lost this one as well we went to 23 five times EBITDA. Both those both those transactions we went to the low end of our discount rate range.
We lost both of them and we were told we were in the middle of the pack of bidders. So that means people are paying north of 22, 23, 24 times EBITDA for for Timberland.
And that's the Max that we're going to go given our current discount rate range. So while we'd like to continue to grow and we will continue to compete and we'll try to take down timberland M&A, because we think it's a very attractive asset class. There is a point at which it no longer creates shareholder value.
And so in our mind, we're going to have to pivot here.
With our strong balance sheet with our.
Our cash that we have on our balance sheet, we're going to have to pivot into other capital allocation priorities and coincidentally.
Our average.
Analysts estimated NAV is.
<unk> is up around 63 Bucks a share.
As we sit here today, we're at I don't know $44 a share were trading dramatically below.
What people believe our NAV is and so it seems to us like it presents just a fantastic time, we honestly we've been waiting for this opportunity to step in and buy shares for some time now and we've said all along we want to buy stock when it's depressed not when its at fair value.
Well guess, what today, it's depressed and its time for us to step in and put our money where our mouth is.
And thats going to start happening about a week from today.
So I'm going to let Jerry answer the second question on balance sheet, but does that answer your question on the first half yes, that's super Thank you.
Yes, so mark picking up on the kind of the balance sheet part of that question and I would say overall really no shift or change given our posture in our metrics in terms of how we manage the balance sheet I mean at a high level, having strength and flexibility has served us well in the past and we plan to maintain that going forward and as a reminder.
Under our EBITDA leverage which is a key metric that we monitor and talk to our credit rating agencies with as EBITDA leverage and continue to expect to maintain that in the three five to four times range today, we find ourselves under one so a lot a lot of flexibility there.
But the long term goal through a cycle, which I should emphasize here really remains in that three five to four times range.
And we'd like to have a bit of cash again to be opportunistic and have some flexibility in the past we've talked about having a minimum of $100 million of cash on the balance sheet. So.
No changes there.
Okay Super that that's very helpful and obviously when you are talking about three five to four times, that's kind of over the cycle. So we can't necessarily look at the car into EBIT.
Which is presumably you have been at <unk>.
Extremely high level, so youre, presumably using.
Different numbers internally when you think about what that translates into in terms of our gross number is that fair.
That is spot on Mark we typically when I look at that three five to four times target, we're really modeling and stress testing our low point in the cycle kind of perspective, because we want to maintain.
Debt levels kind of under that range, even at a low point.
Okay. Thank you.
Your next question comes from the line of Kurt Yinger with D. A Davidson.
Great. Thanks, and good morning, everyone.
Good morning.
Just wanted to start out on the special dividend and Eric touched on it a bit in the prepared remarks, but I mean with three quarters in the books and some stability here in the lumber markets is there any way you could maybe help us quantify a range of what that might look like as well as how youre thinking about any discretionary component versus.
As share repurchases or other capital deployment opportunities.
Yeah, So I'll actually take that one Curt this is Jerry.
In terms of stepping back.
As a reminder for the group we mentioned this in the prepared comments, but we paid $4 per cent per share special dividend last year.
I think we've had a position at least last couple of quarters. It feels like we're who said this year's special dividend is going to be significantly lower.
And there's a number of factors that play in.
And first and foremost it's really important I think we must dimension between Eric and I are four times in the prepared comments Lee <unk>.
Priority that share repurchases and the and the attractiveness of share repurchases at the current discount that we trade and deviating a little bit here and I'll get back to the point of the question. We just put a new $200 million share repurchase authorization in place our window Reopens November one so to the degree we can shift capital to share repurchases from a special to agree with <unk>.
That discretion that makes all sense in the world to US again, given the discount that we trade at today.
When you go back to that $4 per share special dividend that we paid in December of 2021 I.
I mentioned this on last quarter's call, but there was a 40% discretionary component to that I mean overall the special dividend is primarily to protect our REIT status.
By kind of purging excess cash.
Cash from the taxable REIT subsidiary, but we also included a 40% discretionary component on top and now as a reminder, we're trading around $60 a share last year versus the 44 that Eric talks about today, so clearly that the capital allocation set of priorities have shifted.
And when you think about other moving parts in our Idaho solid prices when you step back for the full year are probably down about 30% year over year, So that's going to reduce.
Kind of the the amount that's needed for a special dividend lumber prices are down as well again.
It goes into the amount of cash that we have to purge of that taxable REIT subsidiary and we have also grown the regular dividend payout. For example, just with the shares we issued in the Ketchmark merger is up $20 million year over year and that effectively shifts.
Potentially would've been special dividend over into the regular dividend bucket. So for all those reasons.
It's hard to pin down a number exactly this year, we'll sit down with our board in early December .
When we review it but it feels like it's probably in the $1 per share range may be just a bit under $1 per share just to give some some benchmarks.
Got it okay.
That's all very helpful.
And then I guess in terms of.
Northern saw log prices for the Waldo project, you've used 500 box and we're about there now so they will just use that.
I mean, theres, some variability with the timing of indexing and logged density, but I guess, if you were to kind of use that $500 per thousand as Sean assumption is something in the $130 a ton ZIP code for northern saw logs kind of a reasonable starting point.
Yeah, and I guess to clarify Kurt I am assuming you are talking 2023 in its entirety and if thats the case that as a reasonable proxy.
Okay.
Got it and then lastly.
Log costs were a slight sequential benefit in wood products in Q3.
But maybe a bit less than I expected given the decline in your own Idaho realizations is that just a timing factor around when inventories were built at the mill and any thoughts around the benefits on the wood product side from at least the lower saw log costs in Idaho in Q4, and maybe even the early part of next.
Sure.
Yes, I would say Kurt the premise behind your question is spot on it's really all about timing and when you think about it.
There's seasonality around the log deck and when it gets built and when it gets torn down.
And a lot of the high price logs.
The mill has been.
The complex has been processing, even in the third quarter and are really purchased earlier in the year when lumber prices and index log prices were much higher.
Certainly a bit of relief as at averaging kind of takes place in that log deck is kind of torn down and we will start building that log deck in preparation for spring breakup here in fact, that's already in the works and well down the road so.
We're averaging lower priced logs into that log deck, so expectations youll see a little bit more price relief.
From a log cost standpoint.
<unk> in Q4.
And then you'd probably get to a new run rate as you think about your model and you move into 2023.
Got it Okay. That's super helpful. Appreciate the color and I'll turn it over thank you.
Thanks.
Your next question comes from the line of George Staphos with Bank of America Securities.
Thanks, very much Hey, Jerry Hey, Hey, Eric how are you.
Good quarter here.
Quick question for you on northern harvest.
And contractor availability what are your plans, how do you expect to be able to get more contractors and more production in the fourth quarter. If you can give a bit more color that'd be great.
You bet.
It feels so this is Jerry George.
It feels a lot like what we experienced in the south a year or two ago. When we had a contractor availability issues and are really starts with there isn't really much in the way of surge capacity. When you think about log and haul contractors I mean over time, we hear about tight labor markets.
It also feels like there's been a bit of migration as you know.
As the contractor workforce ages out so I think there's a challenge in kind of replenishing.
The folks that are working in that space. So you start with pretty tight surge capacity. Our team does a really good job over time managing in that tight environment, but when you layer on top of it things like equipment breakdowns of the contractors have and then all of a sudden supply chain issues and getting critical spare parts.
And delays it starts to have a kind of a ripple effect and then once you get behind without that surge capacity, it's really hard and quite frankly, it's impossible to get caught up so that's a bit of what the team was wrestling and came to the forefront.
In Q3.
Now in terms of what do you do to manage through that.
As a large player in Idaho that certainly helps because we have deep and long term relationships with some good quality contractors, so just really effectively managing and leveraging those relationships to make sure we get the.
Kind of the focus that we need and when I think about just in terms of some color on where do we think we'll land in the harvest in Idaho for the year.
We're about 200000 tons short against our plan year to date at the end of Q3.
The team if things weather holds and having said that it's gotten a little wet here either needs to dry out or freeze up.
Can't be in this middle ground, but if weather holds would probably make up about half of that shortfall and end up about 100000 tons short now I'll flip side is we're obviously running well ahead in the south so overall from a harvest volume standpoint, we're actually up.
Versus what we'd expected to start the year.
But aside from leveraging our relationships I mean does it mean that the incremental margin on those harvest when they do come in when they're on a production won't be maybe a little bit lower.
In terms of other incentives that you might be able to offer to get more availability I would imagine theres much but is there any sort of capital involved in doing that as well.
Just a couple of quick thoughts on that as well.
So in terms of cost I mean, the big story, when you think about log and haul costs. This year is really diesel.
Step back certainly our log and haul rates are up but that probably explains something on the order of 75% 80% of the increase in costs now having said that there is there is fairness.
The premise of your question, which is that rates have gone up as well because of tightness and thats true both in the south and in the north.
And you know what I would just add George is when you when you look at the fourth quarter.
We're targeting 450 to 500000 tons of saw logs more or less maybe a little bit of pulpwood. All we really need to do in Q4 is to do what we did in Q3.
In Q3 was a challenge for US no doubt, but we still got nearly 500000 tonnes in Q3. So all we got to do in Q4 as do the same thing. It's just that we typically build our log decks earlier in the year, we typically build in Q3 and this this year some of that slipped into Q4.
No thats, great Eric that makes sense.
One.
You sort of quick question kind of a bigger picture one, though so we tend to think about the fourth quartile.
Being roughly 500000 Bucks per board feet 500, farmer Bucks per thousand board feet.
And we tend to look at British Columbia is kind of setting that that point, how do you expect the fourth quartile to evolve over the next year or so recognizing it's hard to project that do you think it declined cyclically or do you think it hangs in at that level and why and then on repair model.
We understand given all your sources that you expect that that will remain pretty stout into 'twenty three 'twenty four but intuitively shouldnt, we expect repair model to drop a bit with housing starts since so much of a fair model comes from the activity that happens once somebody I shouldn't say housing starts but home purchases after the <unk>.
Person buys at home and starts remodeling and in that first year. Thanks, guys and good luck in the quarter.
Yes, Thanks, George So so your question on fourth quartile kind of the cost curve if you will.
How is it going to evolve over the next year or two I frankly don't think it's going to change a whole lot, we know where there are structural issues with.
With lumber in North America from a.
Cost standpoint, and.
And Thats, British Columbia, and increasingly the Pacific Northwest.
Harvest volumes are coming down over on the west side, roughly 10% over the next couple of years, it's not just British Columbia.
So frankly, it's going to stress mills for sure and you are seeing some curtailments right now up in BC in particular.
But it's not all these mill closures are not going to happen overnight. So if you ask me 10 years from now where do I think the cost curve is going to be it'll be maybe $4 $50 $500 for the fourth quartile segment, but in the next year or two I think it stays up in that $500 zipcode people or nobody likes to close a saw mill and let employees go in it disrupts the residual streams in that.
<unk> implications for both mills and.
And pellet mills and lots of things. So I don't think Youre Oscar changes materially over the next the next year or two.
Now with regard to repair and model, yes, sure Youre right.
As new home sales come down that is going to have a tendency that effect alone will tend to push down R&R, but I think more R&R expenditures are for when somebody buys an existing house.
Or is living in a house that they've kind of field trapped in for lack of a better word because they can't afford to move into a new house.
I don't think people typically go buy a new house and then say outlets remodel this brand new house that we just bought I think it tends to be more.
Alder more existing kind of houses if you will.
So yes, there is no doubt on the one hand fewer new home sales will put some downward pressure on R&R spending, but I think all of the other factors that we laid out between record home equity levels strong job market consumer balance sheets are in great shape, I think all of those factors outweigh.
The fact that new new residential starts are going to be coming down.
Yes, and I really meant to say existing home sales.
Trending lower having more of an effect on repair model, but your points about feeling trapped the age of the home stock and so on.
As important as well I'll turn it over thank you guys great. Thanks, guys.
Your next question comes from the line of Canton, <unk> with BMO capital markets.
Thank you Eric any delta inhibitor <unk>.
Channel inventories on the lumber side, both in retail as well as on the pro side.
Yes, I can talk about them in general Keaton.
We don't really track them.
Mostly we don't once they leave our mills and they go to customers.
Just anecdotal evidence that we pick up from talking to folks and our understanding is that there are at really low levels.
And the home center takeaway it's.
At or above pre pandemic levels. So our home center business is rock solid right now and our sense is that most of that.
Uptake that strength, if you will is coming from the pro contractor side as opposed to the DIY side.
But our view is that inventories throughout the channels are relatively low and especially in R&R demand remains very strong.
Got it that's helpful.
And then maybe switching to the real estate side and he can talk about.
The opportunity that you have.
On the catch Mark portfolio in terms of automated streams of revenue. If you can touch on touch upon solely out of that would be that would be helpful as well.
You bet, so I'll I'll take that one Katy this is Jerry in.
In terms of Ketchmark real estate opportunities. That's one of many reasons why we're really excited about having completed this deal.
As we laid out in our.
Kind of announcements slides back in May a lot of catch marks land is approximate to some large population centers and thats different than what we've had in our.
Rest of our southern acres and our legacy holdings. So that by itself, we think creates a lot of opportunities.
Trend, we've seen and we we closed to our knowledge is the first solar deal earlier this.
This year in the first quarter and that was very attractive certainly we see those kinds of opportunities in <unk> footprint as well.
And the other thing I would shares once we close the deal we did the same thing with Delta and it was the same thing with Lewter and which we closed last December as we go through and we actually take our team's expertise and knowledge.
And we go through and we stratify every one of those acres and that process is underway.
It will take probably our team probably six to nine months to really kind of go through the whole portfolio. It doesn't mean that we're not going to sell real estate offer Ketchmark land before then we will in fact.
<unk>.
Probably just under 1000 acres in the fourth quarter for example, here, but thats where were really kind of surface and start to gauge what is the magnitude of that opportunity above and beyond what <unk> was doing historically, so stay tuned we'll come back and provide an update as we complete that stratification process.
Okay. That's helpful. And then just one one other question.
What is the right way to think about our sustainable harvest and all that.
Catch Mark.
Completion, and if you can break that between the north and the south.
Yeah. So in terms of sustainable harvest I mean, one obviously, we've got a lot of moving parts. This year with $101 million of bolt on timberland transactions, we've got catch Mark.
In the midst and.
We're also in the in the throes of our budget process and as part of that would go back and we recalibrate our harvest plans going forward long term not just for next year or so.
<unk> step back in we'll provide guidance once we finish that process here when we released fourth quarter earnings, but give or take it's probably around 8 million tons again, the actual number will depend upon and I'll, probably a bit above 8 million tons, but.
But it will.
But it'll be we'll come back with that with that information and then you've seen the historical run rate in Idaho, we haven't added or subtracted from Idaho, So delta is going to be in the south.
Got it that's helpful is down into the black.
Thanks.
Your next question comes from the line of Mike <unk> with <unk> Securities.
Thanks, Erica Gary I appreciate you taking the questions.
First question just on catch Mark.
And while you've had some time to digest. The acquisition is there anything that you are not expecting.
Going into the transaction I guess from my background in the industry and certainly interactions with the company Cashbox has historically been I think somewhat aggressive with their home or their harvesting.
Level. So I'm wondering if there's anything that as you've had time to now go through and look at these more carefully whether things really did it hasnt worked out it could be just maybe one or two things that are off a little bit but.
Is there anything that you weren't expecting.
Now that you've closed the transaction.
Mike I would I don't I wouldn't say no to be honest with you.
Like we mentioned in our prepared remarks, the harvest volumes are coming in spot on.
And we talked about this when we announced the merger will be in this 161 8 million tons for the next who knows eight nine years. It will dip a 100000 tons or so as you get out into the future for a couple of years and then it comes right back. So we're not disappointed with the timber inventory pricing has met our expectations, it's kind of hit our merger mass.
If you will.
Frankly for the next three to four years as I recall, we really don't have much pricing increase in <unk> markets.
The real surprise I would say as Jerry talked about this is.
As our refinance opportunities of have only gone up compared to where they were before.
So I would I would say no. There are assets are good we'll see how the real estate stratification plays out, but I've got to believe with catch marks ground being closer to major metropolitan kind of urban areas.
Atlanta Columbia whatnot.
I I would have to believe the real estate opportunity is going to be better than what we initially thought to but we got to give the real estate team time to go through their stratification, but now we've been very pleasantly surprised so far.
Got you.
Last question is on lumber order files I think last quarter, you mentioned infrastructure you had a couple of weeks.
Shortening at all just given what's happening in housing.
No they really havent might fade there they are still in the one to two week kind of ZIP code kind of at the traditional levels.
I think it goes back to what I said before yes sure housing starts are under pressure, we all get that affordability is an issue.
But the R&R side of equation, we think is hanging in there just fine.
So I think those two maybe are canceling each other out.
Got it thanks very much.
Thanks.
Okay.
Your next question comes from the line of Paul Quinn with RBC capital markets.
Yeah. Thanks, very much good morning, guys, just a quick earning timberland markets. It sounds like you lost a couple of deals.
It seems like.
Timberland prices remaining strong despite rising interest rates and therefore discount rates why is that.
You know Paul I think people love the timber asset class number one this notion that it's a hedge against inflation.
Scarce resource.
I honestly think carbon is starting to get priced in to some of these evaluation models.
We haven't explicitly priced it into our model yet.
But I will tell you we are working on some carbon projects. So I would not be surprised if.
At some point in time in the future. There is a line item in our cash flow statement that says carbon I think the other thing it's kind of interesting is that non traditional buyers increasingly are showing up.
To bid on these these tracks and I'm I'm, referring to Apple I'm, referring to a key a key and now this is a furniture retailer Ikea now has I don't know nearly 150000 acres of southern timberland.
So I think the asset classes is increasingly attractive not just not just from carbon but also these other non traditional buyers.
And it's putting in one also you look at what's happening up in BC in the Pacific Northwest with harvest coming down the action is in the south and that so that's where most of the deals are happening.
Alright, and then specifically on carbon how are you going to monetize that or whats.
The framework, we should be thinking about if you wanted to.
Pencil for value and for carbon.
Well I would tell you that its very early stages number one but number two at this stage of the game carbon values don't compete with saw log values are not even remotely close but.
But I will tell you there are some tracks that maybe are not super highly attractive plantation style forestry, maybe like a hardwood stands for example.
Where carbon values could outpace.
What that hardwood value might be.
And it's too soon for me to say because we're at the early stages talking to a couple of different parties about monetizing some of this ground but.
We'll see how it plays out.
Okay, and then just switching over to real estate at a high level.
Are your expectations for 2023 in that portfolio.
So I appreciate the attempt Paul but like I said, we'll come back in our Q4.
Sure.
The release and we will provide guidance on 2023.
Historically rural and we've been in that 20000 acre range, that's certainly going to be lower because Minnesota as we mentioned last couple of quarters is essentially done.
So I don't know if its half a little more than half of that 20000.
As a decent placeholder at this point and then our average in all run rate for lot residential lot sales has been somewhere in the 150 160 Watt range now were 180 this year.
Obviously, and we still see some relative strength in that market, but b.
It would be a little premature to look forward to 2003 and say, we'll have a repeat at the 180 lot level.
Okay. That's helpful. Thanks, very much guys best of luck. Thank you. Thanks.
At this time I am showing there are no more questions I will now turn the call back over to Jerry Richards.
Alright, Thank you Lisa and thanks, everybody for your questions and your interest in Potlatch <unk> to recap our year to date 2022 results were very strong we look forward providing updates on the performance of our leverage to lumber strategy, our integration of catch Mark and our progress on increasing shareholder value.
Okay.
This concludes today's conference you may now disconnect.
[music].
Yes.