CatchMark Timber Trust, Inc.
Q1 2018 Earnings Call Transcript

Published: 5 May 2018

[Operator:]

Hello, and welcome to the CatchMark Timber Trust First Quarter 2018 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I’d now like to turn the conference over to Brian Davis, Chief Financial Officer. Please go ahead, sir.

[Brian Davis:]

Thank you, Keith. Good morning, and thank you for joining us for a review of CatchMark Timber Trust results for first quarter 2018, the three-month period ended March 31. I am Brian Davis, the Chief Financial Officer of CatchMark. Joining me today on the call are President and CEO, Jerry Barag; Chief Operating Officer, John Rasor; and Senior Vice President of Forest Resource, Todd Reitz. During this call, CatchMark management will make forward-looking statements. These forward-looking statements are based on management’s current beliefs and the information currently available. CatchMark’s actual results will be affected by certain risks and uncertainties that are beyond its control or ability to predict and could cause our actual results to differ materially from expectations. For more information about the factors that could cause such differences, we refer you to our 2017 annual report, Form 10-K and other reports that we filed with the SEC. Today’s presentation may also include certain non-GAAP financial measures. Reconciliations of these measurements are included in our earnings release, which is posted on our website, and our Form 10-Q filed with SEC yesterday, May 3, 2018. John, Todd and I will join Jerry to answer any of your questions after his presentation. Now I turn over the call to Jerry Barag.

[Jerry Barag:]

Good morning, and thank you for joining us. CatchMark delivered another very solid quarter for the three-month period ending March 31. Our operations continue to perform very well, tracking our business plan for the year and enabling us to maintain a healthy dividend. And yesterday, CatchMark declared a quarterly cash dividend of $0.135 per share payable on June 15. First quarter results were driven by year-over-year increase in harvest volume, higher pulpwood pricing and a strong financial performance of the Dawsonville Bluffs joint venture. Our Coastal Georgia acquisition, completed last October, was operating on all cylinders and help drive higher harvest volumes. These timberlands are located in strong pulpwood and export log markets, and we were able to quickly and efficiently integrate them into our harvest operations to capitalize on the favorable local market dynamics. We also adjusted our overall harvest mix to capture favorable pulpwood pricing, which help to offset marginally lower net saw timber pricing as a result of a higher mix of chip-n-saw and increased haul cost due to weather-related events during the quarter. Highlights for the first quarter of 2018 included that we increased our timber sales by 13% year-over-year, primarily due to higher harvest volumes from recently acquired timberlands and those harvest volumes increased by 12%. We generated revenues of $24.1 million, a 4% increase year-over-year. We incurred a net loss of $3.4 million, primarily as a result of noncash depletion and interest expense. That also included a $1.4 million nonrecurring, noncash write-off of deferred financing cost related to the paydown of outstanding debt. We realized adjusted EBITDA of $14.9 million, a 40% increase year-over-year. We recognized $1.8 million in income from the unconsolidated Dawsonville Bluffs joint venture. We completed timberlands sales of approximately 2,200 acres for $4.3 million in proceeds, and we paid a dividend of $0.135 per share to stockholders of record on March 16, 2018. While we increased our harvest volumes year-over-year during the quarter, we were also able to strategically defer some harvest to future periods when we expect to capture better pricing. We continue to be encouraged by the manufacturing investments across the U.S. South either announced, underway or recently completed, which should lead to improved sawlog demand and pricing in the near future. Pent-up demand for housing continues to build from a period of sustained below-average new U.S. home construction, and recent activity suggest the building turnaround is well underway with housing starts at an 11-year high. The demand surge has encouraged enough homebuilding activity to measurably impact lumber capacity increases, which is ultimately the driver for timber consumption and pricing. Given current positive economic drivers, we are optimistic about future prospects in our markets, and we are positioned to take advantage of these positive trends as they further materialize. We also adjusted our harvest to capitalize on strong pulpwood market demand and higher pricing to help offset sawmill quotas resulting from continued high log inventories. Our timber sales rose 13% year-over-year, a $2.2 million increase. As discussed, a major contributor was the recent Coastal Georgia acquisition. We took advantage of its strong local pine pulpwood market, helping generate the overall above-plan harvest and above-plan pulpwood pricing. We also sold into that region’s very favorable local export markets for sawlogs. As noted, our sawtimber pricing was down slightly year-over-year as a result of higher mix of chip-n-saw to sawtimber and modestly higher haul cost. Our first institutional joint venture, Dawsonville Bluffs, was a big contributor this quarter as we executed on our investment strategy, exceeding original plan both in timing and returns to date. We recognized $1.8 million in income and received an operating cash distribution of $2.2 million from the joint venture, providing us greater flexibility in determining our overall harvesting operations and enabling harvest deferral decisions. For the quarter, our timberland sales completed and under contract were on target to meet plan for the year. So from an operations and tactical standpoint, the quarter was a huge success. We continue to deliver strong performance, meeting plan, taking advantage of delivered wood sales and nimbly adjusting our harvest to meet market demand and maximize future revenues. We also strengthened our balance sheet and maximized available capital to execute our growth strategy through future acquisitions and potential institutional joint ventures. In March, we completed a successful public capital raise of $72.5 million. Early in February, we mitigated exposure to rising interest rates by converting $50 million of outstanding debt from floating to fixed rate through execution of two interest rate swap transactions. As of March 31, we had $300 million available under our multi-draw term and revolving credit facilities for direct acquisitions of timberlands properties, joint venture investments and working capital needs. Although we did not complete any acquisition during the first quarter, we were extremely active in seeking to augment CatchMark’s timberland footprint, an essential and ongoing part of our strategy to provide durable long-term growth for our stockholders and maintain a strong dividend. In the wake of the highly successful Dawsonville Bluffs joint venture, we’re looking to secure new institutional joint ventures with leading investors. This initiative can expand our investment management business, accelerate growth from new capital sources and provide additional income streams from fees and promotes. We’re optimistic that these efforts will deliver results in the near term. We’re also seeing excellent acquisition opportunities from a pricing and return perspective in our very robust pipeline. These opportunities extend throughout the U.S. South as well as in the Pacific Northwest. By design, CatchMark’s solid balance sheet and strong capital position put us in an extremely favorable position to compete for deals that meet our growth objectives. So in summary, we’re executing on our plan both operationally and strategically, producing promised growth for our shareholders. CatchMark produced another strong quarter of performance, operationally meeting our plan and increasing harvest volumes from recent prime timberland acquisitions. At the same time, on an annual basis, we have been able to defer some harvest in anticipation of an improving demand and price environment for future timber sales. And Dawsonville Bluffs, in particular, has performed well ahead of expectations. Overall, our existing operations remain very much on target for the year. We remain committed and focused on continuing to assemble and expand the highest quality portfolio of timberlands in the industry. This will enable durable returns and long-term growth and stockholder value and support our dividend, and we look forward to meeting our objectives in the months ahead. Thank you for being on the call today. Brian, John and Todd and I will now take your questions. And I want to welcome some of the new analysts that have picked up coverage on CatchMark recently. Happy to have you join the call today.

[Operator:]

Thank you. We will now be in the question-and-answer session. [Operator Instructions] And this morning’s first question comes from Collin Mings with Raymond James.

[Collin Mings:]

Good morning, guys. First, I just wanted to discuss the deal pipeline. I guess, specifically, just can you talk about the decision? Looking back and kind of 4Q results, you guys recognized there kind of expense to over $1 million of corporate initiative costs, but there weren’t any sort of similar charges or expenses recognized here in 1Q. Can you maybe just discuss what drove the decision to expense what you did in the fourth quarter but not really have any incremental corporate initiative expenses here in the first quarter?

[Brian Davis:]

Sure, Collin. This is Brian. As we noted in our fourth quarter call, we have a conservative treatment of pursuit costs, and these costs are related to some opportunities that may close but there are degrees of uncertainty. And so it’s really a judgment call. So in the fourth quarter, we made the judgment that there was a degree of uncertainty associated with those transactions. In this quarter and our judgment, it was appropriate for us to capitalize those expenses at this point in time.

[Collin Mings:]

Okay. Maybe on that note, can you discuss kind of going through the Q? It doesn’t look like anything was formally – like any sort of formal deposit was placed at least at the quarter end, but you guys did spend $2.3 million of cash on timberland pursuit cost. So again, recognizing none of that appears to have been a deposit, can you just talk about what that $2 million-plus was spent on?

[Jerry Barag:]

Collin, we’re – company policy is we can’t discuss the specifics of any proposed transaction or any transaction that’s under review in a specific basis. I mean, I will tell you that there are multiple transactions in our pipeline that we continue to pursue. And if I have a high degree of optimism that they will translate into purchases, into invested capital for the firm. If I have any disappointment, it’s taking a little slower than what we would have expected, but it hasn’t changed our outlook on the ability to get some of these things closed.

[Collin Mings:]

Okay. Then, I guess, maybe just to clarify. At this point, if we sit here in early May, is there anything under contract or LOI? If not, what’s kind of the latest thinking as far as timing of maybe being able to announce something?

[Jerry Barag:]

Again, it’d be premature to tell you timing. But yes, we do have properties, and that’s plural under LOI.

[Collin Mings:]

Okay. And based on the prepared remarks, Jerry, it sounds like that it could be a combination when you say property of stuff through a JV partner as well as some wholly owned stuff.

[Jerry Barag:]

All of the above. We’re going to let you be Goldilocks, and we will bring you all the options, the three Bears. How’s that?

[Collin Mings:]

Fair enough, fair enough. All right. One more question for me, just kind of more operationally and then I’ll turn it over. Just your Initial guidance for Dawsonville was $5 million to $7 million as far as adjusted EBITDA. Here in the first quarter you’re basically there. Is there something that we should interpret of that kind of now rolling over and falling off over the remainder of the year? Or should we just consider that initial $5 million to $7 million guidance as it relates specifically to Dawsonville as stale at this point?

[Brian Davis:]

So it’s $5 million in the first quarter of this year. We gave guidance of $5 million to $7 million. What I would tell you is that $5 million to $7 million, we’re not changing that guidance. So we’re still going to operate in that range. I would expect more activity to occur in late third, likely fourth quarter as it relates to Dawsonville.

[Collin Mings:]

Okay. So maybe thinking about that, obviously, 1Q is pretty strong. It does sounds like it’s going to taper off as we think about kind of modeling the contribution in 2Q and then maybe some acceleration back as you think about the back half of the year. And then maybe at that point, we’ll have a better feel for how it might actually shake out for what it means for annual guidance. Is that fair?

[Brian Davis:]

Exactly.

[Collin Mings:]

All right. I’ll turn it over and get back in the queue. Thanks, guys.

[Operator:]

Thank you. And the next question comes from Craig Kucera with B. Riley FBR.

[Craig Kucera:]

Hey, good morning, guys. Thank you. I’m curious about the pricing environment on acquisitions that you’re seeing out there. Are you seeing any softness related to higher interest rates? Or are you seeing the inverse, maybe some tightening on the expectation for perhaps better sawtimber pricing in the future?

[Jerry Barag:]

Pricing for timberlands specifically has been just pretty darn flat. There doesn’t seem to be any fundamental pressure to propel prices higher, although there are expectations both in the U.S. South and in the Pacific Northwest of higher and robust prices. But those expectations were really built into prior quarter, prior year expectations for growth and prices. So it hasn’t developed into overall higher prices. Interest rates have not had any perceptible impact in a negative fashion on cap rates or product prices as well. So it’s just been flat prices for timberland with the expectation of higher prices for timber.

[Craig Kucera:]

Got it. And one more for me. I know you guys have sort of identified that a lot of timberland is likely to retrade here. Are you seeing any large portfolios out there? And kind of can you just give us an update on what you’re seeing in the marketplaces where lies some of those larger portfolios?

[Jerry Barag:]

Yes, there are and they’re coming, and there’s many of them yet to hit the market. But some of them are in final stages as we can tell of being brought to the market, and so I think you’ll see a fairly robust pipeline of offer deals between now and the end of the year. And then there’s many others. There’s many things that we’re working on that are actually off market, private deals. So as I’ve said before and as I continue to say, our pipeline is very full. It’s robust, and it’s a high-quality pipeline of high-quality products.

[Craig Kucera:]

Okay, thanks.

[Operator:]

Thank you. And the next question comes from Dave Rodgers with Baird.

[Dave Rodgers:]

Hi, good morning, guys. Jerry, I wanted to talk about sawtimber pricing and I guess notwithstanding your comments about haul costs and chip-n-saw in the mix. I think you also mentioned in your prepared comments just a higher overall inventory of saw logs kind of sitting out in the market, and I just wanted to ask with regard to your expectation for pricing to firm over the next year as the mill – as new mills are delivered. If everybody is seeing that the new mills are coming to market, wouldn’t we see a little bit of a holdback like you guys are talking about in the market broadly, not putting as much logs out there? So I guess just wanted to dovetail what you’re seeing today versus kind of how you see that evolving into next year’s new deliveries?

[Todd Reitz:]

Good morning, this is Todd. Yes, we’ve been seeing a lot all of the optimism out of there obviously around the announcements that are coming. And so you think about where projects have been either completed or on the cusp of over on the coast mid-Atlantic area, down the coastal range. You’re beginning to see a little bit of improvement in those areas. Anticipation for us is that as it moves across our portfolio, these improvements, these capital projects, that we will see similar improvement moving forward, so we would like to take advantage of that down the road and not have to force anything into the market right now. There’s better days ahead which we feel very optimistic that there are.

[Jerry Barag:]

Yes. I mean to answer some of the other parts of your question, I mean we haven’t seen any evidence in any large scale people are deferring harvest. I mean it’s prices in general, especially in Coastal Georgia or coming back through the south side of Georgia tend to be pretty good and I think people are taking advantage of pretty good. But as I said around the margin, we’re deferring some harvest. Just from a background standpoint, Dave, the very first big scale capital investments that have been made into the manufacturing sector are just now either have just been delivered and are just ramping up and starting operations. Most of that still has ways to go. I mean a lot of it is still under construction or it has yet to reach construction. And the big backlog there is equipment. I mean it’s hard to buy lumber manufacturing equipment today, especially kiln dryers, which seem to be a very popular capital program today at most of the mills. And so the implementation of some of this capacity increase is going to take some time for it to be – to really percolate down through the system and have a measured impact on timber procurement. But it’s there, and it’s going to keep going all the way through 2020 at this point when you look at the announcements.

[Dave Rodgers:]

That’s helpful. And then when you talk about kind of deferring at the margin, I don’t if there’s a way to measure that. I know that you guys always follow kind of good harvesting practices. So is it 1% on the margin that you can kind of hold back over a 12-month period? How do you think about that? And what’s the right amount?

[Jerry Barag:]

On an annual basis, we’ll look at our markets and move product around as needed to fit the demand we’re seeing. We can – think about it, we can flex our harvest on annual basis, call it 10%, up or down, move around with market dynamics and what we’re seeing out there.

[Dave Rodgers:]

And where would you be in that – within that 10% range now do you think?

[Jerry Barag:]

When we look at what we were doing year-over-year, coming out of 2017 to 2018, we backed off about that amount. So we’re right in that wheelhouse with the expectation and understanding though as well that while operationally we can do that, we have the flexibility in our programs that should something turn quicker, should there be an opportunity, we can be opportunistic with sales, and we can bring some of that volume back in.

[Dave Rodgers:]

That’s helpful. And maybe, Brian, is that again maybe the reason for not seeing the EBITDA guidance increases? Is the Dawsonville perhaps offsetting your election to just kind of defer some of that harvest?

[Brian Davis:]

That’s right. We talked about than when we gave guidance in February that we’re looking at a range of $42 million to $48 million. The strong performance associated with Dawsonville and what I’d really say is based upon the performance in first quarter for Dawsonville really became more of a risk-off opportunity, establishing $5.1 million in the quarter for Dawsonville with a $5 million to $7 million guidance. The opportunity for – in our business is actually when you defer harvest, you still – it’s really like deferring revenues into another period. And so from our standpoint, you’ve heard Jerry and Todd’s comment regarding the CapEx being delivered in the marketplace. We really feel that opportunity for us is in late 2018, early 2019, take advantage of some of those opportunities.

[Dave Rodgers:]

Thank you.

[Operator:]

Thank you. And the next question comes from Paul Quinn with RBC Capital Markets.

[Paul Quinn:]

Hi, thanks very much. Good morning, guys. Just a question. I talked to a number of people in timberland. Everybody is talking about the dirt of M&A deals out there, especially quality deals, and you guys, you don’t turn around on your call. You’re talking about the excellent M&A opportunities and a robust pipeline. What’s the major disconnect between the two?

[Jerry Barag:]

We’re better than everybody. It’s hard to say. I mean there have been opportunities out there. As I’ve said, several things that we’ve worked on and are working on are off-market private transactions that for whatever reason, we’ve been able to source and have gotten in front of. And then it’s probably our ability to look differently at some of the opportunities and converting those.

[Paul Quinn:]

Okay. And then just wondering if you’re surprised by the location of some of the sawmill capacity adds. I mean with sawlog cost being such a high component of the conversion cost of lumber, you would think, I mean, I guess, simply that people would locate these mills in very low cautious jurisdictions like upper Mississippi, but it seems to be residual takeaways, it seems to be a critical factor. What are you hearing from these underlying communities where they’re going to look locate these mills? Because they seem to be from the ads that I see located in areas that you guys are actually on timberland in.

[Jerry Barag:]

Yes. So what we hear about from everybody and it kind of makes sense is in spite of the possibility of cheap timber in some of those places, the fact that the employment base has essentially gone away, the skilled employment base has gone away from timber industry in those places because it’s been more than 10 years since mills in those areas shut down and the timber harvest has dissipated as a result of the lack of manufacturing activity. And they – I think most people view that as a big risk and a daunting challenge to go back into an area that has lost any kind of knowledge base around the timber industry and the forest products manufacturing industry and restart that. And it goes from logging to trucking to front end of the mill all the way through the manufacturing operations. And so labor, it’s really a labor issue and labor is also a big input – cost input into lumber manufacturing.

[Paul Quinn:]

And then just lastly, just on that labor point. Are you guys experiencing any – I mean you’re talking about the flexibility being able to move your harvest up and down 10%. Are you – have you got the labor flexibility to do that? And is there any geographic area that’s more difficult than others?

[Todd Reitz:]

Paul, this is Todd. Through the delivery model that we’ve developed and continued to grow, we’ve got some stable relationships there working with these producers. We’re not – we’re able to work also with independent buyers that can come in and out as needed as they’re buying tracks. So we’ve had flexibility there, but we’ve also secured and stabilized our overall harvest flows with the producers that we are contracting with. In addition to that, you have some solid fiber supply agreement customers with top of the class partners there. So very stable in that regard, and that adds some stability to what we’re doing going forward.

[Jerry Barag:]

I mean, essentially, Paul, in the places where we’re doing business, we’ve got a contractor base that we keep employed full time. And that works for them, and it works for us.

[Paul Quinn:]

All right. That’s all I had. Best luck guys.

[Operator:]

Thank you. [Operator Instructions] And we have a follow-up question from Collin Mings with Raymond James.

[Collin Mings:]

I guess, first off for me, just actually following up on one of Dave’s question. Again, you highlighted some of the issues dragging down the reported sawlog pricing, mix being one of them. But are you seeing wood baskets right now where you’re actively kind of registering pricing gains year-over-year at this point? Is there anything that you can point to in some of your operations where you’re actually able to charge more now on a per-ton basis than you were six months ago or a year ago?

[Todd Reitz:]

Colin, it’s Todd. If you think about overall in the coast, I touched on that a little bit. Those are really strong markets. You’re seeing some modest increases. If you look across the entire footprint, the key takeaways, you’re not seeing anything going down per se. It’s been pretty stable to little local market ticks here and there. But if there’s any real strength right now that we’re seeing, it’s more on the coastline area up in the South Carolina region, down the Coastal Georgia area. We’ve been really pleased with the results we’re seeing there and the activity.

[Collin Mings:]

And that’s helpful. And I guess maybe, is there a way, Todd, to maybe quantify that at all as far as in those wood baskets, the improvements you’re seeing?

[Todd Reitz:]

Sure. You compare it and think about TimberMart-South-type pricing, we’re outpacing that in both of those markets and really on pulpwood side as well as sawlog, chip-n-saw markets. You’re seeing a range of variance, if you will, say, $2 to $4 over TimberMart-South in some regards. In some cases, with specialized products, that can be as much as, say, $6.

[Jerry Barag:]

We’re making a conservative effort here to try and highlight that and put it into a digestible format because it’s – when you average it out across a large land base, it’s harder to see the current. We’re going to figure out how to isolate it and give you more visibility into it.

[John Rasor:]

It’s John. I would add a comment that this quarter, just the firmness of the pricing environment has felt better, and I think that’s going to translate into potential price recovery that everybody is talking about.

[Collin Mings:]

Okay, that’s helpful. And I guess, maybe one takeaway from using the TimberMart-South benchmark, maybe that GAAP, that relative pricing GAAP that you’re getting in those markets, has that maybe widened over the last year? So is that a fair takeaway?

[Todd Reitz:]

I would say that is, and we’re seeing the impact. To Jerry’s point, the coastal acquisition was really key for that because of the strength of the markets where that sits. So we’ve been able to capitalize on that, be it your traditional sawlog markets or utilizing the export markets as well.

[Collin Mings:]

Okay. And then maybe just update us on the expectation of pulpwood pricing. Again, you kind of touched on obviously the reported pricing, a little bit stronger this quarter but just expectations on the pulpwood side through the remainder of the year.

[Todd Reitz:]

Sure. We had a nice first quarter obviously, and you’re kind of in the midst of outage season right now. So I would anticipate we’ll see some seasonality throughout the year and probably flat year-over-year when it all averages out.

[Jerry Barag:]

I mean, Collin, there’s been a lot that people have talked about in terms lumber manufacturing capacity. There’s been a fair amount of OSB adding capacity as well, which is helping to push pulpwood prices in different places, and we’ve been a net beneficiary of that as well, places where we’re doing business.

[Collin Mings:]

Okay, all right. And then just maybe a couple more rapid fire follow-ups, just as we think about the external growth initiatives. Just remind us, Brian, following the equity offering in the quarter, just how you’re thinking about the capacity for external growth without additional equity, just again recognizing you may not want to use the full $300 million on the credit facility.

[Brian Davis:]

Yes. And just philosophically, Collin, we’ve talked about this in the past, how we think about that. Jerry, Todd and John have been talking about really strong markets in which we operate in. Our deliver wood model, sale supply agreements and our low cost of debt and low CapEx business, that gives us a lot of comfort regarding delivering leverage into the marketplace based upon those factors in order to support that debt. With that being said, we feel comfortable deploying $180 million to $230 million of capital into the marketplace for those types of deals. And as we’ve talked in the past, for the special transactions, we’d push that up a little bit more but that range seems to be a pretty good range.

[Collin Mings:]

Okay. And then going back to just a clarification, Jerry, that you have some properties under contract, both on a wholly owned and JV front. Can you maybe further if any of that that’s kind of actively under contract is in the Pacific Northwest as well?

[Jerry Barag:]

They’re not under contract. They’re under LOI. If they were under contract, I would announce it to you. Again, I can’t comment on specifics of anything, but we have been working actively both in the U.S. South and the Pacific Northwest.

[Collin Mings:]

Okay, all right. Fair enough. And then last one, just as you think about this pipeline and executing on deals, how should we think about the ability to leverage G&A? Has there been any additional thoughts about kind of growing the team or need to grow the team as you think about maybe bringing on more partners or again just maybe some of the incremental complexity that might occur as you take on more partners and just overall growth of footprint?

[Jerry Barag:]

There aren’t really big plans to grow the G&A. Hopefully, that isn’t an indication that you’re getting tired of us, some more new faces. But no, I mean we have – certainly at the senior level, we believe we have enough G&A or enough personnel to expand the platform significantly.

[Collin Mings:]

All right. I appreciate the patience of all my question this morning. I’ll talk you guys soon.

[Operator:]

Thank you. And as that was the last question, I would like to return the conference over to Jerry Barag for any closing comments.

[Jerry Barag:]

Thank you again everybody for joining us. Like I said, we’re pleased to have new participants on the call, and we look forward to seeing you again in a quarter from now.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.