Q3 2023 Rayonier Inc Earnings Call
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[music].
Welcome and thank you for joining ran years third quarter 2023 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 objections you may disconnect at this time.
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 <unk> 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-K, 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 throughout these <unk>.
<unk>, 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 Nunez, Our CEO Dave.
Thanks, Colin and good morning, everyone.
Before reviewing our results for the third quarter I'd like to first discuss two announcements made concurrent with our earnings release yesterday afternoon.
The executive succession plan as well as a review of our initiatives to enhance shareholder value.
Then I'll provide some high level comments on the quarter before turning it over to Mark Mchugh, President and Chief Financial Officer to review our consolidated financial results. We'll then ask Doug long Executive Vice President and Chief Resource Officer to comment on our U S and New Zealand timber results and following the review of our timber segments Mark.
Who will discuss our real estate results as well as our outlook for the balance of the year.
As announced yesterday afternoon, I'll be retiring as chief Executive Officer of Rainier and a member of our board effective March 31 2024.
It's been an honor and privilege to lead Rainier over the last nine years.
We have remarkable people fabulous assets and have cultivated a culture like no other.
Since emerging from the spinoff of our specialty pulp manufacturing business in 2014, we have work to continuously improve the quality of our land and timber portfolio invested in our people and maintained a relentless focus on driving long term value for our shareholders to become the leading pure play timber REIT.
I'm very excited about the growth opportunities that lie ahead for the company and its next generation of leadership.
As part of a multiyear succession planning process, Mark will be assuming CEO responsibilities. Upon my retirement, while continuing his role as president.
Mark has served as our president since January of this year, while also maintaining his duties as our chief financial Officer, a position. He has held since December 2014.
Since bringing on Mark as our CFO nearly nine years ago. He has been an invaluable partner to me in running Rainier.
His relentless focus on capital allocation combined with his deep understanding of the history of the timber asset class.
And his financial acumen have helped us to become the company we are today.
He has also grown as a respected people leader during this time and has demonstrated that he is ready for this challenge. We are excited about the future of the company under his leadership.
I'd also like to congratulate April Tice, who will assume the position of senior Vice President and Chief Financial Officer effective April One 2024 April has served as our vice President and Chief Accounting Officer. Since April 2021, and has held multiple positions of increasing responsibility within the <unk>.
Finance and accounting Department since she joined Rainier in 2010.
Mark and I are confident that her appointment will translate into a seamless transition for our finance organization.
These announcements reflect the culmination of a well constructed succession plan that has been a priority of the board for the last several years and one that I believe leaves rainy are extremely well positioned for the future.
I'd now like to turn to another announcement, we released yesterday, which focuses on initiatives to enhance shareholder value as well as the steps that we have already taken to execute on this plan.
We began evaluating our asset base earlier this year looking for opportunities to reduce leverage through the sale of less strategic assets, while also allowing us to take advantage of the significant disconnect between private market timberland values and the valuation implied by the Companys share price.
This valuation disconnect has significantly widened since that time, which ultimately motivated us to commit.
Two a more transformational initiative to drive value accretion for our shareholders.
Specifically, we announced a plan to target $1 billion of select asset sales over the next 18 months in order to capitalize on the historically wide disconnect between public and private market timberland values reinforce the strength of our balance sheet and return meaningful capital to shareholders.
Pursuant to the plan, we are adjusting our leverage target to less than or equal to three times net debt to adjusted EBITDA, which will allow us to reduce our debt costs and enhance our future capital allocation flexibility. We are confident that this plan will generate significant value accretion for our shareholders while.
Also better positioning the company for the potential.
Of a higher for longer interest rate environment.
As an important first step and it fluctuated. This plan. We are pleased to announce that we have entered into an agreement to sell 55000 acres of timberland and southwest, Oregon for $242 million or <unk> $4400 per acre to Manulife investment management on behalf of clients.
<unk> to close in the fourth quarter of this year, the Oregon disposition will reduce our leverage and be immediately accretive to see a D per share. We originally acquired this property in 2016 with the intention to rebalance our age class profile in the Pacific northwest as well as to gain scale in southwest.
Oregon over time, however, the opportunity to increase our presence in the region has been limited by the highly competitive market for quality assets, coupled with a relatively limited deal flow in the area. As a result, we believe recycling capital out of this asset, albeit a high quality property.
And directing proceeds towards debt reduction is value enhancing for our shareholders.
We expect that the disposition of this property will have minimal impacts on our operating cash flow over the next decade due to its relatively young age class profile and will result in a more concentrated focus on our other Pacific northwest Timberland properties in Washington.
We plan to use a $150 million from the Oregon disposition to pay down our only floating rate debt. This will translate into interest savings of approximately $9 $3 million annually based on the current so for rate, making it immediately CAD accretive the.
The remaining proceeds from the disposition will be retained for future debt repayment or a return of capital to shareholders.
Pro forma for the disposition and application of proceeds leverage will decline to four two times net debt to pro forma adjusted EBITDA, our weighted average cost of debt will decline to approximately two 8% and 100% of our debt will be fixed until August 2024.
In addition, we expect that the disposition and application of proceeds will generate CAD per share accretion of approximately 6%.
As there remains a strong bid for timberland assets in the private market. We are in the process of identifying additional disposition targets and how best to achieve our new leverage targets, while also returning capital to shareholders.
We have posted a supplemental presentation to our website, which outlines our initiatives to enhance shareholder value provides additional details regarding the Oregon disposition and illustrates the disconnect. We currently see between timberland values implied in the public markets and private market.
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This plan underscores our keen focus on nimble capital allocation active portfolio management and prudent balance sheet management.
Now I will switch gears and discuss our third quarter results.
In the third quarter, we generated adjusted EBITDA of $79 million and pro forma net income of $19 million.
Or <unk> 13 per share.
The total adjusted EBITDA generated by our timber segments collectively increased 7% relative to the prior year quarter, driven by higher harvest volumes in our southern timber segment and higher carbon credit sales and our New Zealand timber segment.
In our real estate segment, we achieved adjusted EBITDA of $19 million up from $8 million in the prior year quarter.
Drilling down further on our operating segment results, our southern timber segment generated third quarter adjusted EBITDA of $38 million.
Up $1 million from the prior year period, the improvement versus the prior year period reflected a 21% increase in harvest volumes, primarily due to the acquisitions completed in late 2022, which more than offset a 17% decline in net stumpage realizations due to.
A weaker demand and drier weather conditions.
In our Pacific Northwest timber segment third quarter, adjusted EBITDA of $8 million was down $5 million from the prior year quarter, driven by a 6% reduction in harvest volumes and a 10% decline in domestic sawtimber prices overall market conditions in the region were softer than the prior year period due to <unk>.
Weaker domestic and export market demand.
Turning to our New Zealand timber segment third quarter, adjusted EBITDA of $24 million increased $8 million versus the prior year quarter. The improved results were primarily driven by higher carbon credit revenues as we capitalized on our significant uptick in New Zealand carbon credit pricing during.
The quarter, partially offset by lower net stumpage realizations, reflecting weaker export and domestic markets compared to the prior year period.
And our real estate segment, we generated third quarter, adjusted EBITDA of $19 million up $10 million from the prior year period, reflecting both a higher number of acres sold and stronger pricing.
As Mark will detail later in the call we are on track to achieve a higher.
And of our full year adjusted EBITDA guidance range achieved the higher end of our full year adjusted EBITDA guidance range of $275 million to $300 million.
With that let me turn the call over to Mark for more details on our third quarter financial results.
Thanks, Dave and thank you for the kind words earlier I'm truly honored that the board has entrusted me to lead <unk> into the future and I know that a very big shoes to fill it's been a privilege to work alongside you and the rest of the outstanding team at rainy or for the past nine years and I'm very excited about the opportunities that lie ahead.
That said, we still have one more earnings call and plenty of work to get done before you retire. So I will save the formal congratulations for next quarter's call, but I did want to take a moment to acknowledge the extraordinary leadership and commitment that you've given to this organization over the past decade. We appreciate you more than you know.
Now moving onto our financial highlights on page five of the supplement sales for the third quarter totaled $202 million, while operating income was $35 million and net income attributable trainee or was $19 million or <unk> 13 per share.
Pro forma EPS was also <unk> 13 per share as we had no pro forma items in the quarter adjusted EBITDA was $79 million in the third quarter up from $65 million 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 $114 million versus $159 million in the prior year period.
The decrease was driven by lower adjusted EBITDA higher cash interest paid and higher capital expenditures, partially offset by lower cash taxes.
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 $108 million of cash and $1 5 billion of debt at quarter end, our weighted average cost of debt was approximately three 2% and a weighted average maturity on our debt portfolio was approximately five years with no significant debt maturities until 2026.
Our net debt of approximately $1 4 billion represented 25% of our enterprise value based on our closing stock price at the end of the quarter.
Pro forma for the Oregon disposition and the planned pay down of debt our leverage ratio will decline by 0.7 turns to roughly four two times net debt to adjusted EBITDA, an important first step toward achieving our new credit ratio targets.
Following this debt Paydown, we will have no unhedged floating rate debt and our weighted average cost of debt will decline to approximately two 8%.
Within the supplemental presentation posted to our website, we detail the key aspects of the Oregon sale as well as provide a detailed review of our debt and interest rate swap maturity profile.
As Dave discussed earlier, we are adjusting our leverage target from less than or equal to four five times to less than or equal to 3.0 times net debt to adjusted EBITDA and were commensurately, reducing our net debt to asset value target from less than or equal to 30% to less than or equal to 20%.
With a long dated and well staggered debt maturity profile as well as a low cost primarily fixed rate debt structure, we can afford to be selective and opportunistic in achieving our enhanced leverage targets over the next 18 months.
I'll now turn the call over to Doug to provide a more detailed review of our timber results.
Thanks Mark.
Let's start on page nine with our southern timber segment adjusted EBITDA in the third quarter of $38 million was $1 million or 3% above the prior year quarter, driven by higher volumes and non timber income, partially offset by lower net stumpage pricing and higher costs.
Total harvest volume rose, 21% versus the prior year quarter, primarily driven by an increase in pine saw timber volumes from the successful integration of acquisitions, we completed in late 2022.
Average saw log stumpage pricing was $29 per ton, a 13% decrease compared to the prior year period.
The moderation in pricing reflected reduced market tension across our operating areas.
To drier weather conditions.
Softer demand from sawmills and less competition from pulp mills for chip and saw volume.
Meanwhile, pulpwood net stumpage pricing fell 27% versus the prior year quarter to roughly $17 per ton as weaker end market demand and drier weather conditions contributed to softer market conditions.
Overall weighted average stomach prices in the third quarter fell 17% versus the prior year quarter to roughly $21 per ton.
Market conditions, particularly for pulpwood.
Have been challenging this year as customers reduced operating rates to both destock finished product inventories and reduced production levels for a weaker end market demand environment.
However, we've been encouraged by recent improvements in mill operating rates.
Each have led to pricing stabilization across our U S south footprint.
We believe that the work we've done over the past several years, while strategically positioning our southern portfolio towards the most tension wood baskets will continue to be a competitive advantage.
Moving to our Pacific Northwest timber segment on page 10, adjusted EBITDA of $8 million was $5 million below the prior year quarter.
The year over year decrease was primarily driven by lower net stumpage realizations higher costs, lower harvest volumes and lower non timber income.
Volume decreased 6% in the third quarter as compared to the prior year period, primarily driven by a 27% reduction in pulpwood volume.
At $108 per ton average delivered domestic solid pricing in the third quarter fell 10% from the prior year period.
Primarily due to weaker demand from domestic lumber mills, coupled with reduced tension from export markets.
Meanwhile, at $33 per ton pulpwood pricing decreased 35% versus the prior year quarter as end market demand deteriorated relative to favorable market dynamics seen last year.
Moving to New Zealand page 11 shows results and key operating metrics for our New Zealand timber segment.
Adjusted EBITDA in the third quarter of $24 million was $8 million above the prior year quarter.
The increase in adjusted EBITDA compared to prior year period was driven by higher carbon credit sales.
This was partially offset by lower net stumpage realizations, lower harvest volumes and unfavorable foreign exchange impacts.
Average delivered export sawtimber prices of $95 per ton declined 23% compared to prior year quarter, primarily due to ongoing challenges in the Chinese property sector and a weaker Chinese currency.
However, export soft timber net stumpage realizations declined only 4% as port and freight costs fell significantly from the high levels experienced in the prior year period.
Further we are encouraged by the fact that softwood log inventories in China has steadily trended lower year to date and now sit at an estimated $2 7 million cubic meters. The lowest level, we've seen over the past three years that's despite.
The impact of increased volume from ongoing hurricane Gabrielle cellular operations.
Shifting to the New Zealand domestic market.
Third quarter average delivered solid prices fell 9% from the prior year period to $63 per ton and declined 7% when excluding foreign exchange impacts.
Third quarter non timber income in New Zealand of $16 million increased $9 million relative to the prior year period as we executed on the sale of carbon credits during the quarter after electing to defer sales earlier in the year amid extraordinary carbon market volatility.
While we expect to remain active in the New Zealand carbon market in the fourth quarter, we anticipate a markedly lower contribution from carbon sales relative to the third quarter.
Lastly in our <unk>.
Siding segment, we posted a slight operating loss in the third quarter.
As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale to our fee timber export business I'll now turn it back over to Mark to cover our real estate results.
Thanks, Doug as detailed on page 12, our real estate segment delivered strong third quarter results real estate sales totaled $31 million on roughly 4300 acres sold at an average price of $5800 per acre real estate segment adjusted EBITDA in the third quarter was $19 million.
Drilling down sales in the improved development category totaled $3 million and our Heartland development project South of Savannah, Georgia, we closed on $1 $8 million of sales during the quarter, consisting of 24 residential lots and average base price of $45000 per lot and a one acre quick service restaurant site for roughly $530000 per acre.
And our Wildlife development project North of Jacksonville, Florida sales consisted of a two acre convenience store site for $1 4 million or roughly $735000 per acre. We also generated $6 4 million of other revenue, which consisted of deferred revenue recognition recognition upon the completion of post closing.
<unk> obligations as well as lot revenue true ups in our wildlife and heartwood development projects.
Overall, we continue to believe that both our wildlife and heartwood development projects are well positioned and will continue to benefit from favorable migration and demographic trends relatively affordable price points and a diverse mix of residential commercial and industrial end uses that each helped to catalyze demand for one another.
Unimproved development sales during the quarter consisted of a 10 acre site in Nassau County, Florida for $114000 or roughly $11000 per acre.
Turning to the rural category third quarter sales totaled nearly $25 million consisting of approximately 3800 acres at an average price of roughly $5400 per acre key transactions included a 300 acre sale in Polk County, Texas for $6 $1 million or roughly $4900 per acre and a four.
<unk> hundred 60 acre sale in Walker County, Texas for $2 8 million or roughly $6100 per acre overall.
Overall, we are encouraged by the continued strong demand for rural land, despite the higher interest rate environment.
Lastly, during the third quarter, we also closed on $1 1 million of non strategic.
TJ timberland sales consisting of approximately 500 acres at an average price of roughly $2300 per acre.
Now moving onto our outlook for the balance of the year as Dave mentioned earlier, we are on track to achieve the higher end of our prior full year adjusted EBITDA guidance of $275 million to $300 million with respect to our individual segments and our southern timber segment, we expect full year harvest volumes consistent with the seven two.
Seven 4 million ton range, we provided in August while we remain encouraged by recent conversations with our customers and the stabilization in pricing we've seen across most of the 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 due to a shift in regional sales mix.
Overall, we expect to achieve full year adjusted EBITDA in our southern timber segment at the higher end of our prior guidance guidance range of $150 million to $155 million driven by improved outlook for non timber income.
In our Pacific Northwest timber segment, we expect full year harvest volumes toward the lower end of the one four to $1 5 million ton range, we provided in August.
Following a brief uptick in lumber pricing, which boosted log demand in the third quarter, we expect that fourth quarter weighted average delivered log pricing will decline modestly.
Oliver we expect that lower per unit cut and haul costs will translate to modestly improved net stumpage realizations versus first half levels.
Overall, we expect to achieve full year adjusted EBITDA in our Pacific Northwest timber segment towards the lower end of our prior guidance range of $30 million to $34 million due to continued softness in end market demand and lower anticipated harvest volumes.
And our New Zealand timber segment, we still expect full year harvest volumes in line with the two three to $2 5 million ton range, we provided in August.
We expect that exports saw timber pricing will increase modestly from third quarter pricing levels due to lower Chinese port inventories, but will remain below first half pricing levels due to continued weakness in end market demand.
Likewise in the domestic market, we expected sawtimber pricing will increase modestly from third quarter pricing levels, but remained below first half levels as elevated interest rates and New Zealand continue to constrain the residential construction market.
Turning to the carbon market, while we expect to remain active for the balance of the year. Following the recent improvement in New Zealand carbon credit pricing, we anticipate a significantly lower contribution from carbon credit sales relative to the third quarter.
Overall, we expect the New Zealand timber segment will generate full year adjusted EBITDA towards the higher end of our prior guidance range of 39% to $46 million driven by strong carbon credit sales.
And our real estate segment, we expect full year adjusted EBITDA towards the higher end of our prior guidance range of $90 million to $100 million as demand for timberland in rural HBU properties remains remarkably strong despite the higher interest rate environment.
As we previously communicated we expect significant transaction activity in the fourth quarter based on the anticipated timing of closings from our sales pipeline.
I'll now turn the call back to Dave for closing comments.
Thanks Mark.
I'd like to wrap up our prepared remarks by first acknowledging the pressure our stock has been under this year and in particular, the second half of the year in which our share price has declined by approximately 20%.
While we can point to a host of potential reasons for this such as continued macroeconomic headwinds softening markets for lumber and pulp or the recognition that interest rates will be higher for longer. The bottomline is we can't just sit on our hands as we have done in the past we plan to proactively respond to current market dynamics.
With a view toward building value per share, even if that means shrinking our portfolio over the intermediate term to this and the rollout of our initiatives to enhance shareholder value, which I touched on at the outset of the call is intended to capitalize on the current dislocation in the public markets as Ed.
Evidenced by the pricing of our pending Oregon sale. There is a wide disconnect between private market timberland values in the public market valuation of Rainier.
Our plan is to sell $1 billion worth of Timberland assets is designed to capture some of this value arbitrage and to use the proceeds to reduce future debt refinancing costs improve our debt metrics and return capital to shareholders.
The scale of our portfolio.
And our pure play timber REIT structure afford us the flexibility to pursue this plan and we are confident that we can execute on the objectives that we've laid out.
While the ambitious and scale. This initiative is entirely consistent with our longstanding commitment to nimble capital allocation and active portfolio management, both of which have always been key cornerstones of our strategy to create long term value for our shareholders importantly.
Importantly, compared to many other capital recycling initiatives companies undertake that ultimately proved dilutive to shareholders. We believe that we are uniquely positioned to engage in a process that will allow rainier to reallocate capital and reduce future debt refinancing costs in a manner that will be.
Accretive to both CAD and NAV per share fund.
Fundamentally while there continues to be challenges presented by the downward pressure on lumber prices rationalization of pulp production and an uncertain economic outlook, we are seeing encouraging signs of stabilization and improvement across many of the markets served by our timber operations we are fortunate.
<unk> to be in some of the most tension wood baskets in the U S south with 72% of our southern acreage located in top quartile markets. We think this provides for both downside protection and soft markets and stronger upside potential in rising markets.
Our Pacific Northwest timber segment, while facing near term market headwinds. Nevertheless is well positioned going forward with a heavier concentration in Washington, a strong Douglas fir mix and diversification across both domestic and export markets.
And our New Zealand timber segment, we expect to benefit from lower inventories of both logs and lumber in China, coupled with an improved demand trend over time.
Further the recent recovery in carbon credit pricing has positively impacted our operations during a time of market uncertainty in China, we expect.
To remain opportunistic on the sale of carbon credits in the future.
Meanwhile, the outlook for our real estate pipeline remains strong as there continues to be healthy demand for rural land based on positive population migration patterns as well as the fact that a significant component of the buyer pool for these properties are somewhat insensitive to interest rates.
As I discussed last quarter the absorption at both our wildlife and Heartwood development projects has exceeded our expectations and momentum has continued to build as we have shifted from finished lot sales to pod sales. These trends have translated into a healthy pipeline of real estate transactions expected.
Over over the next few quarters as well as the.
As the next several years overall, we are very optimistic about the long term value creation potential of our HBU real estate portfolio.
Lastly, the interest in the land based solutions offered by our Timberlands continues to grow and we've undertaken several important initiatives to advance the set of opportunities that is emerging we believe these emerging additional.
Additional and alternative uses for our lands will be increasingly important to the long term value proposition moving forward as we highlighted last quarter. We now have in place wind solar and carbon capture and storage leases and we expect these revenue streams to grow significantly over the next several years.
In sum despite the near term headwinds, we're facing in the disappointing and somewhat confounding stock price performance. We've experienced in recent months I can honestly say that I've never been more optimistic about the future of our land base and the team that we have in place to execute on our plan and create long term value for our shareholders.
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To this and we will be hosting an investor day in New York on February 28, 2024, which will detail our efforts to grow our land based solutions business and the cash flow potential of this business take a deeper dive on the progress and value creation potential of our real estate development portfolio and provide firm.
Other details on our progress towards achieving $1 billion.
Timberland dispositions so be on the lookout for more details regarding this event over the next several weeks.
This concludes our prepared remarks, and I'll now turn the call back over to the operator for questions.
Thank you.
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And our first question for today will come from Mark Weintraub of Seaport Research Partners. Your line is open Sir thank.
Thank you first Dave Congratulations I really appreciated your insights from your steadiness over the years I know youre going to be all for another call to so I'll just stop there and obviously congrats mark and on April.
So first question is.
So you are talking about $1 billion and asset sales.
Have you at this point identified what's likely going to be the acreage that's going to be a part of that program or is that more still a conceptual target at this juncture.
Hi, This is Dave and thanks for your opening comments in terms of that question I'd say that we're in the process of.
That identification.
It's part of the reason that we laid this out as an 18 month.
Exercise as it were.
We're not announcing this with a with a with a known set of targets, but we have a.
A pretty rich array of criteria that we use for all portfolio moves and so that's the way we're approaching it right now other than the fact that we've we've obviously closed on this or we've reached contract on this Oregon property that was laid out.
Okay, Great and can you share with us what some of those key criteria are and perhaps why 1 billion was the right number in your judgment for the program at this juncture.
Yeah, I'll touch on the first part and I'll, let mark kind of pick up on the scaling of the target, but we look at a lot of factors, we talk a lot about.
Understanding optionality, we look at log markets. We look at we look at cost we look at.
The attention the growth drain relationships.
Higher and better use land.
We look at we look at our scale in the region.
We look at.
We looked at alternative uses for land and so it's a pretty it's a pretty wide array of things that we will regularly consider when we think about portfolio moves. So all of that will kind of come into play and I'll, let mark touch on the second part of your question.
Yes sure Mark.
Just in terms of the sizing of that that asset disposition program. If you look at well first I'd start by saying that there were really two main objectives, one was to reduce leverage.
Just simply given the interest rate environment that we believe that it makes sense to maintain a lower leverage profile in the company in this environment and secondly, obviously, we see a significant disconnect between private market values and public market values today than we felt compelled to to capitalize on that.
So in terms of the sizing you know based on the midpoint of our 2023 EBITDA guidance and if you assume a pro forma adjustment for for dispositions, we would need to deploy about $600 million towards debt paydown to achieve our new leverage target of less than or equal to three times net debt to EBITDA. So that implies that there could be up to $400 million.
Dollars available for return of capital to shareholders of course, we could choose to delever beyond three times and our outlook for EBITDA could translate to more or less proceeds being applied towards debt paydown as we look to achieve that new target. It's also worth noting that as a REIT. We generally look to distribute 100% of our REIT taxable income to avoid.
Any corporate level tax and to the extent that we sell low basis assets. In this program that's going to generate significant re taxable income, which would also dictate a need for one or more special distributions and.
And so as we thought about kind of the overall sizing of that program towards kind of both achieving our leverage targets as well as capitalizing on that disconnect that felt like the right.
The right scale to proceed.
That makes it makes a lot of sense. So recognizing that you are there going to be some of the special distributions likely required would you be anticipating there'll be also cash available for share repurchase if they the stock remains depressed relative to your view of evaluation.
Yes, sure we'll look at both alternatives certainly and given the disconnect that we see today, we recognize the value accretion that can be realized through through share buybacks and so we will continue to evaluate both alternative forms of returning capital to shareholders really with a view towards building long term value per share just.
<unk> that some portion there may be a distribution requirement.
For certain portions of those assets that we may look to divest.
And just to confirm.
If you are selling core timberlands that that's considered good REIT income so for tax purposes. There. There would is it correct to say there would be no tax leakage.
If it's in the U S. I guess leakage, assuming you distribute I mean, we're required to distribute 90% of our REIT taxable income as a REIT.
To the extent that you retain that 10% you Yo corporate level taxation on that so it doesn't make sense to do that that leaves the tax leakage and so like I said earlier generally we are looking to distribute 100% of that that re tax taxable income, but yes portfolio dispositions like this would constitute good REIT taxable income right and of course that that's going to be.
<unk>.
The the REIT income as the game not the entire sale of the timberlands to.
That's correct, but recognize we have different basis and in different regions and different states and so depending on where we choose to proceed with dispositions there could be a differential level of of income associated with that there's not sort of one percentage that I could give you that wood.
Translate to what is the margin on kind of basis relative to sale value for.
I'll turn it over thanks, so much.
Thanks Mark.
The next question will come from Anthony Pettinari of Citibank. Your line is open.
Hello, Good morning.
Congratulations to Dave Mark in April on the transitions and.
Dave Thanks for your leadership really in the industry over the over the past decade. Thank you.
I guess, maybe just on the dispositions I think the sale in Oregon.
Really reduces your presence in the state.
And I'm just wondering if you could talk a little bit about the Pacific northwest.
Print, obviously with the pulp acquisition and I think mostly exiting Oregon.
How do you think you're positioned there.
With the remaining with.
With the remaining footprint.
We've always liked R. R.
Our footprint in Washington, and certainly the Pope.
The Pope transaction greatly strengthened that in a number of ways. The move that we did into southwest Oregon in 2016, when we acquired these assets was really designed.
To create a beachhead.
It was not considered kind of the the sufficient scale that we like to see but it was a nice beachhead in it and it had some nice age class complementing.
Ages relative to our then legacy holdings.
And as we discussed in the in the prepared remarks.
A there hasnt been less deal flow in that region and B.
It's just been at pretty strong pricing and so we've been unsuccessful and growing in that region and so that's that is why this this translated into a into a good candidate we still have a small holding in.
In northwest, Oregon, Thats tributary to Longview that we that we really like that.
That that market.
And.
And we think that our Washington Holdings, certainly have nice scale and now an improved Doug fir mix and lower operating cost with more ground based logging and so we think it will be we think it will be fine in terms of how that northwest portfolio performs.
Great Great and with the strategic initiatives can you talk about kind of the long term positioning of the dividend.
The dividend coverage and you know.
The strategic initiatives seem very logical in terms of taking advantage of the arbitrage between public and private markets, but I guess, just Devil's advocate looking back at some other timber owners.
Plum Creek would sell land and buy back stock and there was sort of <unk>.
Perception that they were selling land to support the dividend I'm. Just wondering if you could kind of talk about the dividend and stress testing it into <unk> into 'twenty four.
Yeah, I mean, just to start just to be just to be absolutely clear, we do not intend to include.
Proceeds received from this disposition program as part of our cash available for distribution, we obviously characterize.
Asset portfolio moves like this as large dispositions, which we specifically exclude from adjusted EBITDA and our calculation of cash available for distribution. So this is not a strategy of of churning land.
To generate otherwise unsustainable cash flow.
As it relates to the dividend funding, we've been very consistent in our message as well as our actions over the years.
Even during the pandemic when when visibility was very limited we maintained our distribution. We previously indicated that we expect our dividend this year to be modestly underfunded. However, with the actions that we've taken coupled with our updated outlook for EBITDA towards the higher end of the range, we've largely closed that funding gap on a pro forma basis.
As we said in the past our approach to the dividend is one that focuses on a payout ratio over time and not in a given quarter or even any given year. We're really focused on setting the dividend at a level that we believe can be sustained over the long term are recognizing that we're going to go through different business cycles and economic cycles from time to time.
We also want to have the ability to grow the dividend over time as the cash flow from our portfolio improves and we certainly see those opportunities over the longer term with growth in our land based solutions business in particular, the plan that we announced yesterday is very consistent with the goal of improving our cash flow profile over time, we expect to.
To complete this plan in a way that is going to be accretive to cash available for distribution and to that end as we noted in our prepared remarks and it illustrated in the presentation on the website, the Oregon disposition and the application of those proceeds is expected to generate <unk> 80 per share accretion of approximately 6% and we expect that these.
<unk> dispositions will generate further Saturday accretion, which will ultimately accrue to improving dividend funding capacity over time.
Yeah.
Okay. That's very helpful I'll turn it over.
The next question will come from Paul Quinn of RBC capital markets. Your line is open.
Yeah. Thanks, very much good morning, guys and congratulations Dave on the retirement Mark on the promotion.
Maybe just.
Taking a look at falling this Oregon transaction, you'll have no floating debt and stuff.
That cost is down at two 8% maybe you can just remind us of what you've got over the next couple of years in terms of refinancing.
Sure Paul I'll take that.
We posted a detailed presentation to our website in conjunction with the announcement of the the asset disposition and capital structure realignment plan that lays out our debt maturity profile as well as our swap maturity profile over the next several years and so just to be clear, we have 101 hundred $50 million of debt that is currently floating.
We intend to repay with the proceeds from the Oregon disposition, we have another $150 million of debt.
Its actually due 2028, but it becomes floating through a swap maturity next year. So August of 2024.
And that's the only floating rate debt exposure that we have.
Through 2025, so our next debt maturity is not until 2026, and so we really feel very well positioned in terms of our ability to to manage this targeted leverage reduction and really maintain a very low cost of debt along the way.
Okay. That's helpful. And then just trying to understand this.
These carbon markets in New Zealand.
It sounds like the pricing was a was quite variable and.
Maybe you could just remind us of.
What youre generating carbon credits and the volatility of that pricing over time.
Yeah. So first of all we have always sort of taken somewhat of an opportunistic approach on selling carbon.
Carbon credits in New Zealand, and There've been times, where we've sold none.
In a year, where we believe we believed the pricing would come up.
Part of the volatility that we reference for this year was there were some.
There were some government statements that earlier in the year that caused question as to the future of that carbon credit.
Scheme, and and that caused prices to really dropped dramatically.
In the earlier earlier this year.
Subsequent to that.
Comments were made that that had the reverse and brought back stability in the in the market and brought pricing back to where it was.
Late last year and it was it was really that event that that resulted in us kind of getting back into the market, particularly in the third quarter and.
Depending on depending on exchange rates were sort of seeing carbon.
Carbon pricing there that equates to you on a us dollar basis.
Sort of in that 35 to $40.
Per New Zealand unit, which roughly.
Waits too too.
A metric ton of <unk>.
Missions and so.
That's why we elected to get back into that market, but it's it's.
I don't know, Doug if there's any any more color that you'd you'd add to that.
I think he did a good job that Dave I'd, just say that like you mentioned earlier on there were some comments made them. There's an election year in New Zealand. So there were some comments made priority election that created some concern within the market but.
I think now we have seen there was a recommendation by the climate Commission on carbon pricing should look like and obviously with that.
That election coming up people are we're making different kind of bets on what might happen I think since we've seen the election finish in the comments we've heard from the parties afterwards that theres a lot more settling down in the.
Trajectory for those carbon pricing falls more was recognized at climate change Commission, which actually was higher pricing going forward them on kind of the levels there.
Okay, Great and then if we can.
Contrast that with what you're experiencing or what you're seeing in the north American market in terms of <unk>.
Curbing pricing and when do you expect to to monetize some of that.
Yes keep in mind that the in the North American market Youre dealing with voluntary markets and the pricing is substantially lower than than in the.
In the New Zealand market, which is a compliance market and I think that we are we are very much in a wait and see mode. In the U S. I think there's a lot of the carbon credits that are out in the market in the U S. Right now that have questionable.
Additionality, and hence are priced very low and I think youre not going to likely see that market.
Our firm up until we see a lot of those units.
Sort of go by the wayside, So we're continuing to work on.
On on carbon credit projects, but we feel like this this is a market that's going to take more time to develop.
Yeah, I would just add that with our experience over a decade in Louisiana with carbon obviously, a little bit different but still similar and we saw them pricing has gone from the very beginning $4 type of thing, but when it start up higher than that one to four and has gone back up to Dave mentioned more in the $40 range and so we've learned to be patient and trying to target. When we think is opportune time to enter and.
As we're waiting for more as more as Dave mentioned for kind of some of these lower quality credits to either be retired them about the system and start to see the value for the quality credits and we do have projects in place. We're looking at but at this point in time don't feel like it's the right time to enter.
Alright, that's all I had good luck on the asset sales.
Yeah.
Thanks, Paul.
The next question will come from K ton mom Tora of BMO capital markets.
Your line is open Sir.
Thank you and I'd like to offer my congratulations as well David we've always enjoyed.
Thoughtful responses and enjoyed deal.
And my congratulations as well.
Maybe two.
But on the on.
On the asset sale program are there any regions or wood basket.
You would think that you think are not part of this program are currently kind of just depends on what kind of <unk>.
Value.
Get out of or the potential sale from any of these wood baskets the regions.
Yes, I think right now our mindset is pretty open and we expect we expect both some inbound interest as well as our own internal assessment of things and I guess I'd go back to the range of of feed.
Features that we have have described in and certainly you know there's there's areas that the tick more of those boxes and others and that will factor very much into our thinking yes, I'd just add to that Keith.
We noted in our release that we expect to concentrate capital in markets with the strongest cash flow attributes and most favorable long term growth prospects and certainly one of the areas that we're seeing long term growth potential is really around this land based solutions business and particularly solar in Ccs.
Seeing potentially very meaningful opportunities there in the long term, but those opportunities are geographically concentrated in some select areas and so as we kind of think about where the growth is likely to come in in the business, particularly in the U S. South certainly there are specific areas that we would look to preserve them really to kind of capture that nature based.
<unk> upside over time.
Yeah.
Got it okay. So is it fair to say that you would also consider.
New Zealand as well as an option if they were to be the right value or is that out of bounds of this program.
Again, as Dave said, we're still going through the process of looking at which assets are going to best suit. Our objective. So we're not going to comment beyond that at this time.
Okay, No that's fair and then just second question Mark.
You talked about so I hope you're not.
<unk> 600 million that we'll get those out of the pro forma net leverage target.
You guys just talked about.
Should we be thinking about initial proceeds to all global debt repayment or are not necessarily it would it would depend following the 150 that you talked about already offer that doesn't depend on kind of what opportunities do you have is that if anything should we be thinking about it.
Yes, absolutely I mean, we've always.
Preached a nimble approach to capital allocation and we absolutely expect to stick with that during the course of this disposition program as I said earlier, we have $150 million of floating rate debt. That's currently far and away our most expensive debt in the portfolio, we expect to retire that immediately upon completion of the.
Oregon sale, we have another $150 million that will become floating next year, and so certainly that $300 million of floating rate exposure will be our highest priority for for repayment, but again as I said earlier, we don't have another debt maturity until 2026, and all of our debt will be fixed at very low rates through that period.
Time, so we have a lot of flexibility in terms of the timing of deployment of these proceeds in and we're going to of course.
Focus that allocation of proceeds on on.
Whatever way, we think is going to build value per share for our shareholders over this period of time.
Got it that's helpful I've done it or good luck.
Thanks.
The next question will come from Michael Rockland Trust Securities. Your line is open.
Hi, guys. This is Nick opportunity on for Mike We had conflicting calls today.
Thank you all for taking my questions and congratulations Dave.
Mark.
I was hoping you could comment on what's happened with pulpwood pricing, particularly in the <unk>.
South.
Just given the backdrop and some of the comments we've heard from the major type of players.
It's actually improving demand looking forward and.
In the face of.
Capacity closures or so economic downtime.
Against any stocking is included.
Could you just talk about how its played out during the quarter and how you maybe see it playing out into <unk>.
Sure. This is Doug I'll take that question. So as we discussed on our last call Hum.
While theres been some fluctuations kind of import pricing based on geography or harvest type of mix.
On apples to apples basis pricing appeared to bottom out in Q2.
We're increasing encouraged by some of the signs we're seeing in our price negotiations through Q3, and then really into Q4.
And so I think there has historically been the case, we're going to see a shift in volume that goes to our Gulf States from our Atlantic States in Q4, so that improvement pricing that you've seen some places will be moderated because of the shift in typically a lower price in the Gulf States, but overall, we feel like we kind of saw the bottoming in Q2 Q3 was was moving forward.
In the right direction, and we've seen them with some of the mill announcements you. You mentioned you know so the closures. We've also seen some of the current ones that are operating are you actually step back up and move from 60% to 100% capacity. So we've actually seen increased demand in some of our wood baskets with those with those closures and thankfully or direct exposure to the most of the mills.
Disclosures there was very limited and so we have seen the upside being portrayed in some of the mills that we do have closer relationships too.
Perfect. Thank you that's very helpful.
And then you guys touched on it.
Briefly during the call today, but can you give maybe.
A more detailed update on your land based solutions pipeline and any progress you made during the quarter.
Yeah sure happy to do that we're going to have our earnings call in February So I won't go too in depth, but we've continued negotiations with them counterparties both on the carbon capture storage as well as the solar that Mark mentioned.
And those continue to go well and extreme interest in those where we're pleased with where that process goes like I said, probably will talk more about this in February. So I don't have a lot to quote we have had them increase options on our solar. So we've increased another 2000 acres added over the quarter and our solar our solar business.
That's up to about 28000 acres are either leased or options. So we have had some move in our solar business.
Hey, guys just to reiterate that point, we do expect our land based solutions business and kind of the upside potential we see there as being a focal point of our Investor day that we announced for February 28 of next year.
So more to come on that front.
Perfect. Thank you.
That's it for me I'll turn it over thanks guys.
And our last question for today will come from Buck Horne of Raymond James Your line is open.
Thanks, Good morning, guys.
My questions are answered, but also congrats to everybody on the team and other promotions.
Thank you David for all the hard work for over the past decade, I'm just on the Oregon transaction.
Do you guys have any expectation for a taxable gain or loss versus your cost basis, and what you think the total IRR on that transaction versus the 2016 purchase is going to work out to be.
Yeah, well, we won't disclose the basis around that transaction until it's ready to close but there there will be a substantial gain.
On that on that transaction recognize that when we acquired that asset.
It was pooled with our broader portfolio in the Pacific northwest and so that won't necessarily be reflective of a book gain on that specific asset, but rather the pooling effect.
Combining that asset with the other lands in the Pacific Northwest and recognized as well that this was a subset of the broader acquisition of the menasha properties in 2016, and so we haven't provided any specific details around around the IRR on that.
Okay. That's helpful.
The balance of that the balance of that being in Washington, but.
Got it got it that's helpful.
And I guess.
Broader question about just longer term dividend sustainability.
I understand you're certainly going to be.
<unk> accretive paying down this first tranche of floating rate debt.
Depending on how you define it for the next tranche, that's certainly probably is cash flow accretive as well.
But then the rest of the pit the proceeds potentially paying down fairly low cost fixed rate debt and door.
So quite a few.
Large portion of those proceeds also go into special distributions.
You know I mean.
Help me reconcile.
The longer term.
Dividend sustainability.
Post.
The full disposition program.
Yes, so keep in mind keep in mind that a lot of this a lot of this design is really not necessarily around the.
<unk> existing.
That portfolio.
During COVID-19, we we restructured almost all of our our debt portfolio, extending the maturity and lowering our <unk>.
The cost and essentially other than this one tranche of floating.
It was all hedged and so we feel like we have a very attractive cost of debt. Today. The issue is is as that debt matures and we have to refinance it if we're still in a higher longer interest rate environment. It.
It will substantially change the character of of of <unk>.
<unk> net debt and so what we're trying to do by this measure is get out ahead of that and really <unk>.
Repair for that and have that flexibility and thats part of why we we plan to do this over 18 months, we do not have a gun to our head we're simply trying to do this in a very thoughtful and.
And deliberate way over over that over that time period.
And Doug I, just kind of add to that as we said in the prepared remarks, you know we expect to execute this plan in a way that will be accretive.
Accretive on a per share basis, and if you just look at the assets that we just sold in this Oregon transaction and EBITDA, we've generated over the last three years from that asset it's very much in line with what we're seeing in private market valuations at those asset level yields can be as low as 225, 3%.
And so as we're looking to.
Execute this disposition program like we said, we're going to be focusing on concentrating capital in markets that have the strongest cash flow attributes and really looking to divest of markets that have weaker cash flow attributes and so we do believe that this will be accretive to <unk> 80 per share as we move through this this program.
Alright, guys. Thanks, good luck.
Thanks Buck.
And that was our final question for today.
This is Collin mings I'd like to thank everybody for joining us please contact us with any follow up questions.
Thank you all for your participation on today's conference call at this time all parties may disconnect.