Q3 2022 Rayonier Inc Earnings Call
Welcome and thank you for joining <unk> third 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. Collin Mings, Vice President capital markets and strategic planning.
Thank you and good morning, welcome to Rangers Investor Teleconference, covering third 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 provisions of Federal Securities laws, our earnings release and form 10.
And 10-Q filed with the SEC with 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 measures 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 our U S and New Zealand timber results and following the review of our timber segments, Mark will discuss our real estate <unk>.
<unk> as well as our outlook for the remainder of 2022.
Before discussing our results for the quarter I'd like to first highlight the acquisitions in the U S. South we announced yesterday afternoon concurrent with our earnings release.
Specifically, we announced that we've entered into two separate agreements to acquire approximately 172400 acres of high quality commercial timberlands, located in Texas, Georgia, Alabama, and Louisiana for an aggregate purchase price of $474 million for.
For Manulife investment management, a leading timber investment manager.
Approximately 80% of the acreage consists of fee ownership, while the remaining 20% consists of a long term lease.
We are very excited about these additions to our portfolio as they comprise a well stocked and highly productive timberlands located in some of the strongest market timber markets in the U S South.
It's extremely rare to come across an acquisition opportunity with this unique combination of quality scale and fit with our existing portfolio.
For the acquired fee lands, 72% or <unk> with an average express site index of 73 feet.
This translates to a sustainable yield of approximately 670000 tons per year or 4.8 tons per acre per year, which is well above industry average productivity levels.
The fee properties also have a mature age class profile and an extraordinarily high level of merchantable timber inventory.
The average plantation age is 18 years and the average stocking is 54 tons per acre of which 66% is great product.
Based on these factors along with the expected contribution from the leased properties. We anticipate an annual average harvest level of approximately 860000 tonnes from the acquisitions over the next decade.
And an increase in our U S south sustainable yield of 11% to 7 million tons per year.
In addition to strong productivity characteristics and inventory stocking. The properties are also located in some of the best markets in the U S South.
Specifically based on timber Mart, South composite stumpage pricing.
The acre weighted average market ranking of the acquisitions is four nine out of 22 markets, representing an average composite price that is roughly 30% above the median composite price in the U S. South in the third quarter of 2022.
Putting all of this together, we expect that the acquisitions will contribute average annual adjusted EBITDA of roughly $25 million to our southern timber segment over the next 10 years with additional upside potential from higher and better use real estate sales and natural climate solutions.
This represents a timber only EBITDA multiple of 19 X, which is which compares favorably with public market trading multiples the implied multiple on the ne creep Timberland index and multiples, which we've seen other U S south assets transact recently.
We expect to close the acquisitions before year end, and we anticipate financing the acquisitions with cash on hand, as well as a $250 million term loan through the farm credit system.
Yeah.
As discussed in the past our strategy to acquire high quality properties located in strong markets. As we believe this improves optionality and ultimately contributes to better long term financial returns. Following these acquisitions, our U S. South timberland portfolio will totaled 2 million acres of which.
72% will be in the top quartile markets as measured by timber Mart, South composite stumpage pricing.
We believe that the U S. South overall is well positioned to capture increased market share of North American lumber production as well as global fiber and wood chip markets.
We further believe that the strongest regional markets in the U S. South are well positioned to capture favorable relative pricing gains for both saw logs and pulpwood products going going forward, given their competitive and diverse customer mix balanced timber inventories relative to demand and strong pricing tension.
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And some.
We believe that these acquisitions represent an excellent fit with our capital allocation strategy and a compelling use of our balance sheet capacity, we look forward to integrating the properties into our portfolio and managing them for long term value creation.
Now I'd like to switch gears and discuss our third quarter results.
We achieved earnings per share of <unk> 15.
And adjusted EBITDA of $65 million in the third quarter.
Adjusted EBITDA was 44% below the prior year quarter.
As to significant development transactions drove exceptionally strong real estate results in the prior year period.
Notably total adjusted EBITDA in our timber segments increased 14% versus the prior year quarter as favorable results in our southern timber segment more than offset a lower contribution from our New Zealand timber segment.
Drilling down further on our operating segments, our southern timber segment generated adjusted EBITDA of $37 million in the third quarter, which was 50% above the prior year period.
Weighted average net stumpage realizations increased by 18% driven by strong demand for both pulpwood and sawtimber, while favorable logging conditions further contributed to a 27% increase in harvest volumes.
More broadly our southern timber segment continued to benefit from our concentration and scale and some of the most attention log markets across the U S south as well as strong contractor relationships, which have allowed us to successfully navigate a challenging supply chain and cost environment.
In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $13 million up 1% from the prior year quarter.
The year over year increase was primarily attributable to 13% higher weighted average log prices, partially offset by higher costs and an 11% reduction in harvest volumes.
Our operations in the region continued to benefit from favorable supply demand dynamics as domestic lumber markets export markets and pulpwood markets competed for a limited supply of logs.
In sum our U S timber segments continued to generate strong financial performance and pricing gains in the third quarter, driven by favorable end market demand as well as localized supply tension.
And both segments remain on pace to achieve record full year adjusted EBITDA.
Conversely, our New Zealand timber segment continues to contend with a challenging operating environment.
Particularly in the export market.
Third quarter, adjusted EBITDA of $16 million declined 22% from the prior year period.
While port inventories in China have gradually declined to a more normalized level demand continues to be constrained by lockdown measures in response to COVID-19 outbreaks as well as a slowdown in the construction market.
In our real estate segment, we generated adjusted EBITDA of 8 million.
Down from $64 million in the prior year period as the prior year period benefited from the closing of two significant development transactions.
While we expect that the timing of land sales will remain lumpy quarter to quarter. We remain encouraged by the continued strong pricing for rural land.
Our markets as well as the positive momentum across both our wildlife and heartwood development projects.
As Mark will discuss in greater detail later in the call. We remain on track to achieve our full year adjusted EBITDA guidance of $310 million to $330 million with our southern timber and Pacific northwest timber segments, both expected to post record years in 2022.
With that let me turn it over to Mark for more details on our third quarter financial results.
Thanks, Dave let's start on page five with our financial highlights sales for the third quarter totaled $195 million, while operating income was $41 million and net income attributable trading year was $21 million or <unk> 14 per share.
On a pro forma basis, net income was $22 million or <unk> 15 per share after adjusting for $1 $1 million timber write off related to a fire in Washington.
Third quarter, adjusted EBITDA was $65 million down considerably from $115 million in the prior year period, which as Dave mentioned was driven by an exceptionally strong real estate contribution in the prior year period.
On the bottom of page five we provide an overview of our capital resources and liquidity, our cash available for distribution or <unk>.
For the first nine months of the year was $159 million versus $204 million in the prior year period the.
The decrease was primarily driven by lower adjusted EBITDA higher cash interest paid higher cash taxes and higher capital expenditures note. The cash taxes were elevated in the first nine months of the year due to the required timing of estimated tax payments for our New Zealand subsidiary following the full utilization of its Nols in 2020.
A reconciliation of CAE to cash provided by operating activities and other GAAP measures is provided on page eight of the financial supplement.
We closed the third quarter with $261 million of cash and $1 $3 billion of debt. Our net debt of approximately $1 billion represented 18% of our enterprise value based on our closing stock price at the end of the third quarter.
As Dave noted, we anticipate closing on a new five year $250 million term loan through the farm credit system in the fourth quarter to partially fund our pending acquisitions the balance will be funded with cash on hand, including $60 million of restricted cash earmarked for like kind exchange.
We expect to swap a portion of the new term loan to fix taking into account the new term loan spread over silver estimated patronage payments and estimated swap rates, we expect that the all in effective cost of the new term loan will be in the range of four 5%.
On a pro forma basis. This should translate to a total weighted average cost of debt of approximately 3% and a weighted average maturity on our debt portfolio of approximately six years.
Following the completion of the acquisitions, we expect to maintain liquidity of approximately $350 million, including $300 million from our revolving credit facility and approximately $50 million of remaining cash on hand.
I'll now turn the call over to Doug to provide a more detailed review of our third quarter timber results.
Thanks, Mark good morning.
Let's start on page nine with our southern timber segment adjusted EBITDA in the third quarter of $37 million was $12 million above the prior year quarter.
Year over year improvement was primarily driven by a significant increase in net stumpage pricing higher harvest volumes and higher non timber income.
The offset by higher overhead and other costs strong customer demand and drier weather conditions across most of our operating areas allowed us to execute on our harvest plan with volume increasing 27% versus the prior year quarter.
Average saw log stumpage pricing was roughly $33 per ton, a 19% increase compared to the prior year period.
Prove pricing reflects robust demand from sawmills, which continued to benefit from healthy margins as well as competition for chip and saw volume from pulp mills.
Opened net stumpage pricing also improved significantly from the prior year quarter, increasing 19% to nearly $23 per ton.
This increase was driven by a favorable shift in our geographic mix versus the prior year period, coupled with strong end market demand and competition among mills just curious supply.
Overall weighted average stomach prices improved 18% year over year to nearly $26 per ton.
We continue to believe there has been a step change in log prices in many of our markets as compared to the past several years that said we have also seen our net stumpage realizations moderate in certain markets relative to early 2022 as mill inventories have normalized and higher costs have compressed margins on delivered log sales.
As previously discussed southern log exports remain constrained by the Pinewood named to policies implemented by China earlier this year for.
For now our U S. South log export program has pivoted to Vietnam, and India and while we are excited about potential to further expand our presence in these markets over the long term both are relatively small markets compared to China currently.
Also of note third quarter non timber sales of $7 million were up over $1 million versus the prior year quarter.
Moving to our Pacific Northwest timber segment on page 10, adjusted EBITDA of $13 million was similar to the prior year quarter as higher net stumpage realizations and non timber income were largely offset by lower harvest volumes and higher costs.
Volume declined 11% in the third quarter as compared to the prior year quarter.
Due to constraints around contractor availability as we lost one crew to early retirement and let another crew go that was not meeting our safety expectations.
At nearly $118 per ton our average delivered solid price during the third quarter was up 10%.
Our year quarter, driven by continued strong demand from domestic lumber mills as well as a favorable species mix with a higher proportion of Douglas fir volume.
Meanwhile, third quarter pulpwood pricing of $51 per ton climbed 62% over the prior year quarter, reflecting strong end market demand coupled with supply constraints due to fewer residuals and increased competition from pulp mills for a limited supply of smart sized logs.
Overall, we've been very encouraged by the trajectory of pulpwood prices in the Pacific northwest over the past several quarters.
Moving to New Zealand page 11 shows results and key operating metrics Pardon Zealand timber segment adjust.
Adjusted EBITDA in the third quarter of $16 million was $4 million below the prior year quarter.
The decline in adjusted EBITDA compared to the prior year quarter was largely driven by lower net stumpage realizations and higher costs, partially offset by higher carbon credit sales higher harvest volumes and favorable foreign exchange impacts.
Average delivered export sawtimber prices of $123 per ton declined 18% as compared to prior year quarter, reflecting reduced demand from China.
While we've been encouraged by the gradual reduction of log inventory levels in China Offtake from ports has remained weak due to COVID-19 containment disruptions and weaker construction activity.
Most of our mills are running well below capacity due to the lack of new orders and are reluctant to build inventory in the current market environment.
Furthermore, the Chinese one is depreciate against U S. Dollar they can all U S dollar denominated imports, including our logs more expensive.
Collectively these factors will likely continue to negatively impact export log demand and our New Zealand business for the balance of the year.
Despite these near term headwinds, we expect that log inventories in China will continue to normalize which should ultimately translate to a gradual improvement in export pricing.
Longer term, we remain optimistic that ongoing supply side constraints, including reduced flow of European salvage logs into China. The continued ban on Australian log imports by China, and the ban on Russian log exports, which commenced at the being of this year will collectively translate to a more favorable export market backdrop once demand picks back up.
Shifting to the New Zealand domestic market demand has remained relatively steady due to strong construction backlogs, although the framing the injunction markets have started to cool more recently.
Yes.
Despite relatively favorable market conditions domestic sawtimber prices declined 18% versus the prior year quarter, largely driven by a sharp decline in the New Zealand dollar U S dollar exchange rate.
<unk> foreign exchange impacts domestic software prices decreased 8%, reflecting weaker competition from the export market.
Domestic pulpwood prices and New Zealand were likewise impacted by foreign exchange rates declined 24% on a U S dollar basis compared to prior year quarter.
Excluding foreign exchange impacts domestic pulpwood prices declined 14%, reflecting less competition from export markets for lower quality logs.
While log markets and New Zealand have been challenging non timber income in Zeeland, which primarily reflects carbon credit sales has continued to bolster our financial results during $6 $4 million of revenue in the third quarter.
Our decision last year to defer the sale of carbon credits has paid off as carbon pricing has increased above 2021 average pricing levels.
Going forward, we plan to remain opportunistic in our sale of carbon credits, depending on carbon market conditions and our pricing expectations.
Lastly, in our trading segment, we posted a slight operating profit in the third quarter. As a reminder, our trading activities typically generate low margins and are partly designed to provide additional copies of scale trophy timber export business.
I will turn it back over to Mark to cover our real estate results.
Thanks, Doug as detailed on page 12, following a strong first half of the year and consistent with our expectations. The contribution from our real estate segment was relatively light during the third quarter real estate sales totaled $12 million on roughly 800 acres sold at an average price of nearly $5100 per acre are real estate resort.
<unk> also benefited from a $4 $5 million gain attributable to rayonier from the sale of a multifamily apartment complex in Bainbridge Island, Washington, which was held in a joint venture acquired as part of our merger with Pope resources in 2020.
In total real estate segment adjusted EBITDA in the third quarter was $8 million.
Drilling down sales in the improved development category totaled $2 million and our wildlife development project North of Jacksonville, Florida, We closed an $800000 of sales during the quarter consisting of 13 residential lots for an average base price of roughly $65000 per lot and our heartwood development project South of Savannah, Georgia.
We closed on $1 $5 million with sales during the quarter consisting of 10 residential lots at an average base price of roughly $44000 per lot as well as a 15 acre commercial health care site for roughly $67000 per acre.
The sale of the health care side is notable as it is the first takedown by St. Joseph Kandler for a multi phased medical campus, which we expect will grow over time, we believe collaborating with a high quality health care provider early in the development of Heartwood offers a number of strategic benefits and will serve as another catalyst for this project overall.
We are encouraged by the momentum continues to build across our wildlife and heartwood development projects and expect that both projects will continue to benefit from favorable migration and demographic trends as well as relatively affordable price points.
Turning to the rural category sales totaled $7 million, consisting of approximately 1800 acres at an average price of roughly $3800 per acre while we.
We are encouraged by the strong pricing and HBU premiums that we've continued to generate and our rural land sales business. We're starting to see indications that some real buyers are hesitant to transact given the increase in interest rates and recent financial market volatility that said, we continue to see solid demand from cash buyers that are not reliant on mortgage.
Financing overall, we continue to expect that the space privacy and recreational opportunities offered by rural properties will continue to attract buyers in a post pandemic environment.
Now moving onto our outlook for the balance of the year as noted in our earnings release, we are on track to achieve our prior full year adjusted EBITDA guidance of $310 million to $330 million with respect to our individual segments and our southern timber segment, we still expect full year harvest volumes consistent with a $6 4 million.
To $6 6 million ton range, we provided in August while we remain encouraged by the step change in pricing that we've registered across most of our operating areas in the U S. South we expect that our weighted average log pricing will soften a bit in the fourth quarter as compared to the third quarter.
Overall, we continue to expect record full year adjusted EBITDA in our southern timber segment with results in line with our prior guidance range of $156 million to $162 million note.
Note that this guidance does not reflect any contribution from the pending acquisition that Dave discussed earlier.
In our Pacific Northwest timber segment, we now expect full year harvest volumes toward the lower end of the $1 6 million to $1 7 million ton range. We provided in August while we've seen some pullback in log pricing in response to the decline in lumber prices. We expect continued favorable pricing for both pulpwood and sawtimber in the fourth quarter as compared to the.
Higher year, albeit partially offset by ongoing cost pressures similar to our southern timber segment. We continue to expect a record year in our Pacific Northwest timber segment with adjusted EBITDA towards the higher end of our prior guidance of $59 million to $63 million.
And our New Zealand timber segment, we now expect full year harvest volumes toward the lower end of the $2 6 million to $2 7 million ton range. We provided in August as Doug discussed while log inventory levels in China had been trending lower demand remains constrained due to various headwinds accordingly, we now expect full year adjusted EBITDA towards the lower end of our prior guidance.
<unk> of $55 million to $60 million.
Our real estate segment, we expect full year adjusted EBITDA towards the lower end of our prior guidance range of <unk> $74 million to $79 million, primarily due to the delayed timing of a few transactions as well as a modest slowdown in rural land sales activity.
Now I'll turn the call back to Dave for closing comments.
Thanks Mark.
Overall, I am encouraged by our third quarter results, particularly given the challenges presented by ongoing cost pressures. The recent slowdown in U S housing market and continued headwinds in China as it relates to our export business.
Despite these challenges our U S timber segments remain on track to deliver another record year in 2022.
We believe these results continue to underscore the relative strength of the markets in which we operate as well as our commitment to active portfolio management and the operational flexibility afforded by our pure play timber REIT model.
Moreover, we expect that our pending U S south acquisitions will further bolster our competitive positioning.
Our southern timber segment has historically been the most stable component of our cash flow profile and more recently has also been the fastest growing component.
Despite the slowdown in the housing market over the near term. We believe the addition of significant lumber manufacturing capacity in the region leaves the U S south very well positioned for long term pricing and cash flow growth, particularly in our core markets, where we enjoy uniquely favorable supply demand.
Mix.
As such we're very excited to be in a position to deploy capital to meaningfully expand our presence.
And sustainable yield in the region.
In addition to our focus on achieving important financial goals and an ongoing portfolio management activities. We also continue to advance initiatives related to emerging opportunities associated with ecosystem services and natural climate solutions as well as the disclosure of our environmental social and governance practices.
To this end, we released our 2021 sustainability report and supplemental carbon report in August .
All said I'm very pleased with how our teams continues how our team continues to come together to maximize the potential of our existing assets.
<unk> and execute on growth opportunities and navigate an ever evolving economic landscape in an effort to build long term value for our shareholders.
This concludes our prepared remarks, and I'll now turn the call back over to the operator for questions.
Thank you Sir at this time, if you would like to ask a question you May Press Star one to withdraw your question you May Press Star two one moment. Please for the first caller.
Anthony Pettinari from Citi. You May go ahead Sir.
Hi, good morning.
On the southern Timberlands acquisitions.
The 5% EBITDA yield that you estimate does that assume a certain level of log price improvement over the next decade is it low single digits or maybe something higher given the strength that you've seen recently.
And then I'm just wondering.
Is it possible to talk overall when you look at the overall timberlands market sort of how timberland cap rates have responded to that.
The higher rate environment.
He said you have any sort of general observation Sir.
Sure. Anthony this is mark I'll take that means it relates to the forecast for for EBITDA for the acquisitions, we didn't assume any material price improvement from current levels. I mean, we had essentially modeled the acquisition on kind of a two or three year look back in terms of where average pricing has been and then kind of Roe.
That forward more just sort of a basin inflationary rate to kind of get to a nominal forecast, but we haven't assumed any lift from current pricing and.
And in fact I think.
We modeled it below where current pricing is better than this year, because that's obviously been significantly elevated relative to the prior couple of years.
As it relates to him.
Alright, so it relates to timber I'm sorry.
So please please go ahead.
I mean as it relates to timber cap rates.
As we think about timber values and just kind of the impact of the current inflationary environment. I guess that makeup observations timberland is generally viewed as a very effective an inflation hedge.
And somewhat related to that is that timberlands are generally valued on a long range DCF basis, using real rather than the nominal discount rates I mean, if you look back over the last year and 20 or 30 years U S. South timberlands have had very 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 point in time.
So to some extent I think this reflects the notion that timberland is going to deliver kind of a base real return plus some inflationary component of return over long term. So you know to the extent that the higher rates. We're seeing today are reflective of higher inflation assumption I would argue that that's not necessarily going to impact timberland cap rates.
To the same extent certainly not on a one to one basis relative to market interest rates 10 year tips yield is currently around one 5% its moved up significantly in the last couple of months, but not significantly elevated from a longer term historical perspective, so I'd say that the values that we've seen in recent timberland transactions certainly suggested that we have not seen.
An increase in cap rates, if anything I think cap rates have continued to compress and I think to some extent that's reflective of.
The proceeds carbon optionality, that's embedded within the timberlands today, yes.
Yeah, and Anthony if I could just tack onto that I mean.
You sort of you sort of.
Hit on the key issue on this which is.
You know really strong cash flow.
Properties from this and that.
Based on strong markets.
Really good productivity from both the soils in percent planet will.
But then also very high stocking level at 54 tons per acre on the fee lands and an average age of 18. So it's it's a very unique property in that in that respect and you end up you know that ends up driving out.
$145 of EBITDA per acre and that is that is substantially higher than our already sector, leading returns that we did last year of 68.
Dollars of EBITDA per acre and with our anticipated 2022 performance, where we see a 30% improvement that gets you to $89.
EBITDA per acre and those compare to nee crieff averages over the last five to 10 years that are in the 45 to $50 and so.
It's just very very much a unique.
Asset from a cash flow generating standpoint, and then adding on top of that is just the fit relative to our existing footprint, which gives us lower execution risk lower lower overhead costs in terms of managing it and we really we really don't think you could have done.
Dialed in a better fit.
Fit with our asset base and our desire to go after quality than this.
Okay, that's very helpful.
The log price assumptions on the acquisition seems it seems very conservative given the strength that youre seeing in the south.
Maybe if I could just sneak one last one in on the on leverage so you'll be below four five turns on a pro forma basis and you don't have any maturities for a number of years, but I'm. Just wondering if you could talk about sort of capital allocation into 'twenty, three and maybe the opportunity to deleverage given you may begin.
But a.
Tougher housing environment.
Yes sure. Anthony This is a this is Marc I'll take that as we think about capital allocation going forward. You know, we're certainly going to be at a higher leverage level post these acquisitions and we've than we've been at for the last 18 months or so I'd say in the wake of the Pope resources merger, we had taken leverage up.
To a level that was actually above kind of where we're going with this transaction, but we were able to delever pretty effectively thereafter through large dispositions as well as our aftermarket equity offering program that we put in place.
And in late.
2020, so we continue to believe that we have a lot of levers at our disposal to manage the balance sheet.
And so while we're going to be more limited from a capital allocation capacity standpoint post. These transactions, we still feel pretty good about where the balance sheet is that obviously all of our debt was fixed and now we're entering into a new $250 million term loan to partially fund this acquisition.
Obviously at a higher interest rate environments, our weighed average cost of debt will go up modestly from two seven to around 3%, but still very attractive overall cost of debt and varies still very attractive and and conservative balance sheet from our vantage point.
I'd also add that we know we have fair bit of flexibility to kind of work on that and that's something that's that's in our in our playbook in terms of things that we can do leverage we can pull to try to bring that down as part of the reason why we left some of that debt floating just giving ourselves a little bit of flexibility going forward.
Okay. That's helpful I'll turn it over.
Thank you. Our next caller is Keaton Mem Dora from BMO capital markets. You May go ahead Sir.
Thank you Hi, David Hi, Mark.
Good morning, Chris first question.
On China.
The weakness that you are seeing are you seeing signs of stabilization in terms of the demand trends you are seeing or are you seeing trends worsening there.
Hi, Keith this is Doug long I'll take that one.
With the Covid Lockdowns is very hard to to basically focus on the trends that are happening because you never know at any point in time, where things are going but we have seen a gradual reduction you know the current inventories at $3 7 million cubic meters at the end of October which is about 800000 cubic meters less in September and so we're kind of seeing a balance here now which is which is good to see of the <unk>.
Coming in the outgoing basically and so radiata pine inventories around $2 8 million, which is about 70000 between years less than last month like I said, it's fairly balanced but the demand the demand has softened over the year and it really does depend on where these lockdowns impacts or not so I would say that the covered lockdowns are hard to predict and they really did exacerbate the economic slowdown.
Right now, but we are to supply balance right now, which is a good thing and we do see it gradually coming down so I think that the good thing is that the incoming volume has actually been less than the then the demand. So we're seeing that balance come down. So I think it's positive and we're just waiting for this COVID-19 lockdown to open up and hopefully see some restocking and things happen from there.
Got it that's helpful and then.
So the M&A landscape again, so you Chandra.
You guys seeing kind of increased interest.
And sort of you know.
M&A.
Start up opportunity I mean, just yesterday, there was a pretty big announcement of an acquisition.
Walk us mostly to the doctor the carbon offset market. So I wont seeing signs that these kind of alternative.
The new streams are starting to get priced in to talk about.
Uhm.
This is Dave I don't think that were explicitly seeing that priced into transactions as much I do think that we are seeing an increased flow of capital into the space with that is a consideration and so I think I think from our vantage point, we see that probably having more of a.
More of an effect of having a compression in the discount rate to two.
To factor in that that that additionality that you have and keep in mind, you know carbon prices are still very low and so.
I don't think that they're high enough for folks to to explicitly factor that in from a valuation standpoint, but I think more and more people are thinking about that.
As an option that they have going forward as they look at new acquisition opportunities and we certainly do as well I mean, we we factor that into our thinking but it's not it's not really moving the needle from a pricing perspective at this juncture and Keith and it's not really just the carbon value and for US. It's you know really.
A whole range of opportunities that exist around the competition for land use and competition for fiber so be it solar installations or carbon carbon capture and storage opportunities sustainable aviation fuels.
<unk> energy Wood pellets, you know, there's just a whole range of opportunities that exist for timberlands as we enter a trajectory towards a low carbon economy and so you know I think it's a we tend to kind of focus just on the carbon but I think there are a whole range of other opportunities around ESG and and.
And de carbonization that have impacted timberland or the perception of timberland values.
Got it that's that's very helpful I've got a door.
Thank you once again, if you would like to ask a question you May Press Star one Mark Weintraub with Seaport Research Partners. You May go ahead Sir.
Thank you first question the 25 million EBITDA over the next 10 years.
Is that something you expect to be getting to pretty quickly or is that something that's going to ramp up over time and maybe similarly is it.
And speaking to that.
Harvest the 860000 tons on average over the next 10 years similar or is that something you expect to getting quickly or is that something that ramps up over time.
Yeah, we would actually expect to get to that very quickly Mark. These are very well stocked properties with a with a very mature age class and average plantation age of 18 years, which is kind of well above well above average and so we would expect to get to that pretty much right out of the gate.
Great and has it been has the harvest volumes been at those levels in the last couple of years or is this a step up from where harvest levels had been.
I can't speak to where the harvest volumes have been we don't generally when we're when we're underwriting timberland acquisitions. It tends to be very much a forward looking and not necessarily a backwards looking and so generally speaking, though when you see properties. Like this that are you know very well stocked it's because they've been operating below a sustainable year yield.
For some period of time to allow for that inventory stocking. So again I don't have a great sense of where they've been from a harvest standpoint over the last three to five years, but we you know modeling kind of where the inventory stands today now we haven't.
A very good sense of where there'll be in the next five to 10 years and Marc that's a that's another reason why it's important to understand.
Sort of the markets that you're in you know, sometimes you'll see a property that has higher stocking, but it might be for a very good reason that they've got weak markets and in this case. These are markets that we operate and currently we're very familiar with them, we're very familiar with the downstream customers and so we have a lot of confidence from an execution risk standpoint on.
The ability to bring.
That volume to market and so.
That's that's where that familiarity is pretty important but.
Yeah, we're getting started and I wouldn't expect much this year, because this isn't going to likely close until pretty close to the end of the year.
But certainly we expect to come out of the gates.
You know.
In 2023.
Yeah exactly.
I would just add to that that just since the announcement, we've seen quite a bit of interest already in wanting to know how we're going to manage the property and if we're going to have a stumpage sales because during the sales process. The harvests have been wind down. So today's point, there's not a lot of contracts to take over only when we do close but theres already been a significant customer demand in a very short period.
I don't know when sales resume off the property. So I do believe to Mark's point earlier that going into the new year, we'll be able to move pretty quickly.
That's helpful. That's exactly kind of what I was trying to understand.
And then lastly, if we think about this from a.
Perspective, so if we start with our $25 million or so of EBIT.
As you think about the.
The C E D. What are what are the offsets and so what do I end up with that.
Lee.
<unk>.
You know Mark I guess, a couple of different ways to look at that I mean, obviously.
The transaction is being financed with a new $250 million term loan that will have sort of a known cost attached to that and the balance is being funded with with cash on hand.
A couple of ways that we kind of thought about the C 80 accretion accretion one way to look at it would just be to apply kind of opportunity cost of that cash we can invest that cash.
Into interest bearing securities and we'd get a known return on that but we wouldn't get any inflation protection you know another way to look at it is that cash on hand was largely raised through the ATM program at an average price of about $36 50 a share.
You know as we kind of thought about the C 80 per share accretion, we really thought of that is equivalent to equity issuance had a portion of the deal was essentially funded with equity issuance through the ATM program and on that basis, it's modestly accretive on a on a per share basis.
Okay and.
I assume relatively minimal.
Capital type needs against the 25.
Yeah, I'd say that they are fairly typical for what we would see for southern timberlands. So it's going to be in the range of you know the.
Capex per acre that we would see for our existing portfolio, so perhaps a bit higher kind of at the front end because obviously when you're when you're harvesting more heavily you have higher reestablishment cap capex, but generally in line with the rest of our portfolio.
One one last one on the ATM do you or are you able to execute on that immediately does this transaction have to be closed before the ATM it can be.
We reenergized.
Well essentially we had an ATM program authorization that was put in place in 2020.
That we're largely through it at this point, we've raised $299 million under the $300 million authorization that we had in place at the time.
Okay. So you would have to issue a new one.
Can you share with us if you're planning to do another ATM and how you felt about that as a way of raising capital.
Yeah, I mean, I think from an FCC standpoint, I can't really comment on any perspective.
Offerings.
Okay.
Thanks, so much.
Thank you. Our next caller is Paul Quinn with RBC capital markets. You May go ahead Sir.
Yes, thanks, very much guys.
Good morning.
Hey, just a question around the acquisition and congratulations but just trying to break out. This this lease my understanding of that C set Georgia property has got eight years left on the lease so just wondering where that.
That eight that additional 860000 tons go for the next 10 years.
What's the volume breakdown over the following 10 years.
Yeah, we haven't provided a specific.
Volume breakdown, there could be some sensitivity around that specifically, but recognize that is we provided some information around the value attribution to that lease and so it was you know roughly three and a half of 4%.
The overall value in the transaction and so I wouldn't say that it's a significant driver of EBITDA and cash flow kind of given that value attribution to the lease.
Okay, so that three 5% to 4% in value attributed to the lease how do you get to that.
If you look at the supplemental presentation that we put out it provide some information.
In terms of the value ascribed to lease versus the value ascribed to the fee properties. So it's about $500 per acre that's in the lease and about $3300 per acre that was in the fee properties.
Okay. That's helpful.
He said is the inventory stocking materially different and really stuff as opposed to fee simple.
Yes, the inventory stocking is different than the lease I mean generally speaking when you're when you have these long term timberland leases you have to manage them to a certain.
You know kind of endpoint in terms of average plantation age or or average stocking.
But generally speaking the fee properties I'd say are much more heavily stocked in the lease properties.
Okay, Great. That's all I had best of luck.
John Paul that was one of the reasons that we said if you if you sort of spent some time in that supplemental deck. We we we wanted to make sure that we segregated the attributes of those just so people could understand them a little bit better.
Yeah, that's really helpful. Thanks, guys.
Okay.
Thank you our next caller is Buck Horne with Raymond James You May go ahead Sir.
Hey, Thanks. Good morning, I was just wondering if you could maybe characterize how competitive the bidding process was for this particular deal kind of what you were seeing out there in the marketplace was there anything specific to your bid.
That made it.
More or less attractive to manulife.
I mean, that's I can't speak for Manulife.
Or there are their client base I think that you know we had the benefit at some level of participating in a number of transactions this year and getting a sense based on our own bidding relative to two successful bids as to where the market was and.
As you know there there were a couple of of of of transactions by our peers that we looked at very closely and it's one of the reasons in our supplemental materials, we've sort of laid laid some of that out on a side by side basis. So we had a we had a general sense of kind of where the market was and we were.
You always have some some feel for.
For Ware.
The capital flows look and where people have particular interests in particular geographies and you know you look at our footprint of an asset and youre going to have a sense of what players might be interested in different pieces of that.
And so that's something that we do.
Every time, there's a transaction that's out there.
But I think it's fair to say back then it was this is a highly coveted asset its extraordinarily high quality asset that you know I'm sure. Many parties we're interested in.
Yeah, and I think from our standpoint, you know, it's it's easily a once a decade or once a couple decade type of opportunity to have something thats that good of a fit with your existing footprint.
<unk> footprint in our minds kind of it was to Mark's point, probably the premier offering.
This year and was sort of well regarded that way.
Alright very helpful. I appreciate the color there.
Im curious how youre thinking about saw timber pricing looking ahead versus the pulpwood market housing is probably in for a rough spell here with mortgage rates, where they are at lumber prices seem to be relatively stable, but.
Good could that lead to some softness in.
Thought timber pricing and I'm curious you know how you think.
Pulp wood will.
Hang or manage through this the soft housing environment could it remained more resilient.
During.
This tough economic period.
Yeah I'll take this is Doug, yes, you're right I mean, we've seen a little bit of softening in the lumber markets, but it's there's a couple of things one is we've talked about before the.
Fast increases that we've seen possibly in laundry market Hasnt flowed all way back to the timberland owners and vice versa is muted coming back down the other way so it hasn't been a drastic swing like we've seen seen on lumber pricing and theirs.
There's a lag a lag effect that does happen through there, but we have a strong strong pulpwood markets can help provide a floor has offset reduction in saw log demand and it's really do that natural hedge with residual so if lumber demand slows down or fewer chips in the market and then we have opportunity from a pulpwood count to your point and another thing that's kind of new that we haven't seen the.
Past necessarily and we've had kind of some reductions like this and that's the strengthening pellet demand and I'm. Just just this year in 2022 as expected up about 11% or $4 7 million tons, you know across the globe, which is pretty significant and then they're forecasting another 4 million tons. In 2023. So I'm you know a lot of a lot of growth in pellets.
And that's helping basically also to hedge some of the softness we're seeing and for the first time, we're seeing them pellets exported from yourself to Asia and that's that's that's new this year. The first shipments of that and we're currently tracking about $3 2 million tonnes of new capacity builds in pellets in the U S South so.
There's there are some underlying strength in there and then the pulp, but we believe that will help offset if there is any of that but like I said right now and we haven't seen any any real structural shifts and saw logs both in the in the northwest or the south we have seen some some thinking of pricing, but the same point in time for the northwest we've seen pulp really climb.
And really is offsetting that salt life price weaknesses that we're seeing right now.
But the other thing I'd add to that in the context, particularly of of this these these transactions is that.
Keep in mind that the U S. South is a material cost advantage relative to other producing regions for lumber and so even in a declining lumber environment, we feel that the U S. South is very well positioned to gain market share and we've tried to lay some of that out in our supplemental deck looking at Boe.
That relative cost position, but also looking at scenarios, where even with a.
Substantial decrease in new home construction, you're still going to see you.
Youre still going to see U S. South our softwood lumber production that was equivalent to to where we were in the pre pandemic level back in 2019, and so that was something that gave us some comfort from a risk mitigation standpoint, as we as we thought about those as we thought about those market conditions.
Forward.
Awesome I appreciate it thanks, guys. Good luck.
Thank you there are no further questions at this time I will now turn the call back over to Colin.
Alright. This is Collin mings I'd like to thank everybody for joining us please contact us with any follow up questions.
Thank you. This concludes today's conference call you May go ahead and disconnect at this time.