CatchMark Timber Trust, Inc.
Q4 2018 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Good morning, everyone, and welcome to the CatchMark Timber Trust Fourth Quarter 2018 Earnings Call and Webcast. All participants today will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today’s event is being recorded. And with that, I’d like to turn the conference over to Brian Davis. Please go ahead.

[Brian Davis:]

Thank you, Brian. Good morning, and thank you for joining us for a review of CatchMark Timber Trust results for full-year 2018 and the three-month period ended December 31, 2018. I’m Brian Davis, the Chief Financial Officer of CatchMark. Joining me today on the call, our President and CEO, Jerry Barag; Senior Vice President of Forest Resources, Todd Reitz; and President of our Triple T Joint Venture, John Rasor. 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 on Form 10-K and subsequent reports that we file with SEC. Today’s presentation include certain non-GAAP financial measures. Reconciliations of these measurements are included in our earnings release, which is posted on our website. Todd, John and I will join Jerry to answer any of your questions after this presentation. Now, I turn over the call to Jerry Barag to cover full-year 2018 results, fourth quarter results and company guidance for the year ahead.

[Jerry Barag:]

Thanks, Brian. Good morning, everybody, and thank you for joining us. As we all know, the past six months have been somewhat volatile for the timber and wood products industry, and especially difficult for lumber manufacturers, with prices down 50% to 60% in certain lumber categories. This led to a challenging fourth quarter, particularly impacting owners of timberland in the Pacific Northwest. At CatchMark, by design, we have been able to navigate through this rough patch effectively unscathed, our pure play model circumventing lumber price volatility. The U.S. South micro-markets, where we are concentrated are steady and improving, driven by recent under way and announced mill expansions, which should result in future strengthening of unit prices. Furthermore, Southern yellow pine lumber prices have been less affected compared to other species and today stand at close to long-term trend prices. Quite frankly, our operations have remained unchanged during this period and so does our outlook for CatchMark-owned properties. Since CatchMark’s inception as a public company, we have steadily expanded assembling the industry’s consistently highest-quality timberland portfolio and consistently meeting our operating targets. We have reduced exposure to volatility through our pure play nature. We’re a timberland investor, not a lumber company. Our acquisitions have proved out by picking the right locations with proximity to the best mill markets. Our delivered wood sales strategy and fiber supply agreements continue to help base load and optimize our timber sales revenue through relationships with creditworthy counterparties. Our diversified cash flow streams have enabled to defer harvest to optimize future upside. We’ve managed our capital effectively to maximize growth, including entering into strategic joint ventures with institutional investors, and their new investment management business delivers asset management fees, helps protect against downside volatility, and provides opportunities to capture very attractive incentive fees. As a result of our business strategy, CatchMark is extremely well-positioned to generate and grow durable cash flows, always seeking to deliver reliable dividends over time. In 2018 specifically, we took bold and significant steps to execute our longstanding strategic initiatives to increase cash flow, expand our prime timberland portfolio in top mill markets, maximize results from harvest operations, and reinforce our capital position. In addition, we significantly advanced our investment management business, diversifying and solidifying our revenue streams, and again we met our company guidance for the year. In 2018, we increased timberlands managed by 200% to more than 1.5 million acres. That included investing $200 million in the Triple T joint venture, which has secured significant stable ongoing asset management fees, offers potential superior investment returns and attractive long-term sustainable growth from extremely high-quality Texas timberlands, and provides the opportunity for capturing performance-based incentive management fees. We further diversified assets and expanded sawtimber holdings by entering into the leading Pacific Northwest mill markets through the purchase of 18,000 acres of Prime Oregon Timberlands in the $89.7 million Bandon transaction. After the Triple T investment upgraded our regional portfolio, we rebalanced our holdings in Texas and Louisiana, and recycled capital to facilitate the Bandon purchase. That was accomplished with the sale of 56,000 acres of timberlands for $79.3 million in the Southwest disposition. We completed other HBU land sales of approximately 8,500 acres for $17.5 million, meeting our target for the year within the range of 1% to 2% of the acreage disposed. We raised $72.5 million of capital in an equity offering to pursue opportunities in a robust acquisition pipeline. We improved liquidity by increasing total borrowing capacity by $75 million to $644 million at year-end and secured a new seven-year $140 million term loan to replace existing debt, and we executed $200 million of interest rate swaps to mitigate exposure to rising interest rates. Looking specifically at full-year 2018 result highlights, we increased total revenues by 7% year-over-year. We increased adjusted EBITDA by 19%. We increased asset management fees to $5.6 million, which were primarily generated by Triple T during the second half of 2018. We also produced $2.6 million in income and received $8.5 million in distributions from the Dawsonville Bluffs joint venture; and during the year, we paid fully-covered dividends totaling $26 million, or $0.54 per share. CatchMark also incurred a net loss of $122 million for full-year 2018. These results were overwhelmingly due to losses allocated from the Triple T joint venture in accordance with GAAP rules. In meeting our guidance for 2018, we again effectively demonstrated our disciplined strategy for assembling the consistently highest-quality timberlands portfolio and ongoing operations excellence together to maximize cash flow and support our dividend through all phases of the business cycle. And yesterday, we declared a first quarter 2019 cash dividend of $0.135 per share for stockholders payable on March 15. Our dividend yield is the highest among timber REITs and continues to offer superior risk-adjusted coverage. In 2018, we completed an industry-leading investment, the Triple T joint venture and took the first step in entering the Pacific Northwest through the Bandon acquisition. Triple T, especially represents a significant expansion of our holdings and both investments are designed to register durable cash flow growth and support our dividend well into the future. They further enhance the quality of our prime timberlands in leading markets, reinforced by delivered wood sales strategy and fiber supply agreements, which meet our investment profile. Their premium stocking and productivity characteristics are in keeping with our stringent investment criteria, which are proved out in helping deliver superior results and enabling operation advantages throughout our portfolio. And these operating advantages continue to payoff in consistent and predictable cash flow. We operate in superior micro-markets, with proximity to leading mills and customers. We continue to benefit from executing on our delivered wood sales strategies in those mill markets, and we gain from our extensive long-term fiber supply agreements with creditworthy counterparties. By strategic design, the mill markets where we operate in the U.S. South continue to outperform South-wide averages. CatchMark’s average pine sawtimber stumpage price has maintained the premium over South-wide averages ranging up to 9% since the first quarter 2017. The premium has been even higher in the chip-n-saw category ranging from 20% to 40%. Delivered wood sales had been at the foundation of our management philosophy and we increased delivered wood sales as a percentage of total harvest from 74% in 2017 to 80% in 2018. Through our delivered wood sales strategy, we can keep better control of our supply chain and produce more stable and predictable cash flows. We also made a tactical decision earlier in the year to defer some harvests in anticipation of stronger future pricing. Our gross timber sales declined 3% year-over-year, as harvest volume declined 8% year-over-year, the result of these discretionary deferrals. But our per-ton pulpwood pricing increased about 6% to help offset the decline in harvest volume and our fourth quarter pine sawtimber stumpage price registered a $25 per ton compared to South-wide averages, which have tracked below $24 for the past eight quarters according to Timber Mart South. In addition, the significant new asset management fees from Triple T and execution of planned HBU timberland sales to dispose less productive holdings buttressed overall company performance during the year. The new asset management fees are notable in diversifying our revenue streams and provide a predictable and significant source of ongoing cash flow. In addition, we have the opportunity to earn attractive performance-based incentive fees going forward. Both our joint ventures in Triple T and Dawsonville Bluffs are operating to plan, and integration of Triple T operations has been efficient and well-managed meeting our performance objectives to date. With regard to Dawsonville Bluffs, we recognized $2.6 million of income during the year, generated primarily from the planned sale of HBU Timberland and mitigation bank credits. In addition, we received $8.5 million in distributions, as we moved to fully monetize this finite life $10 million investment ahead of schedule. In terms of adjusted EBITDA, Dawsonville contributed $6.8 million. Now turning specifically to CatchMark’s operating results for the three-month period ending December 31, 2018. We increased revenues 1% year-over-year. We generated adjusted EBITDA of $9.4 million, compared to $9.9 million in the fourth quarter 2017. we produced $2.8 million in asset management fees, primarily from Triple T. We completed timberland sales of approximately 1,300 acres for $2.6 million. We incurred a net loss of $32 million, primarily due to GAAP accounting losses allocated from Triple T, and we paid a dividend of $0.135 per share to stockholders of record on December 13, 2018. As a result of our plan to strategically defer harvests for an anticipated future stronger pricing environment, gross timber sales revenue in the fourth quarter decreased 20% from fourth quarter 2017 due to a 22% decrease in harvest volume. Timberland sales for the quarter were higher year-over-year due to selling more acres at a price per acre 26% above fourth quarter 2017. In the fourth quarter, CatchMark completed a series of coordinated transactions by closing on the sale of 56,000 acres of timberlands in Texas and Louisiana, the Southwest region disposition. As a part of the sale, we retained approximately 200,000 tons of merchantable inventory to be harvested over the next two years. Proceeds from the Southwest disposition were recycled to pay down debt used for last summer’s Bandon acquisition. As a result of these two transactions in Triple T, we improved the overall quality of our timberlands ownership in the Southwest and reduced their regional exposure to post the Triple T investment. We also redeployed capital to prime sawtimber holdings in the Pacific Northwest and we strengthened our overall capital position. Also in the fourth quarter, under our $30 million share repurchase program announced in August 2015, CatchMark repurchased close to 99,000 shares of common stock for approximately $1 million in open market transactions. As of December 31, 2018, CatchMark may repurchase up to an additional $18.7 million worth of shares under the program. Given the relative stability of our cash flow and recent steps taken to reduce debt, including the Southwest disposition, we’re very comfortable with our balance sheet. During the year, we raised $72.5 million in equity to support our investment pipeline. We refinanced existing debt, which was outstanding under our multi-draw facility, securing $140 million term loan. This refinancing improved our weighted average maturities and our first debt maturities are now not until 2024. After increasing our borrowing capacity to a total of $644 million, we had $165 million of dry powder at year-end, and we entered into $200 million of interest rate swaps to reduce exposure to potential rising interest rates. Approximately three quarters of our rate exposure was swapped to fixed rate as of year-end 2018. As a result, going into the new year, we have sufficient capacity and flexibility to continue our track record of growth through select acquisitions and joint venture investments at the appropriate time. Taken together, all the initiatives we completed last year, will help set the stage for growth in adjusted EBITDA for 2019, as well as in the future. And we believe that we are well-positioned to navigate through current economic volatility, stemming from general concern about the housing market and tariff and trade issues, as well as global uncertainty. Lumber mills in our micro-markets are operating at or near full capacity. Demand is good for finished lumber, supported by expected level of housing activity, including robust repair and remodel business. We also see no pullback in previously announced mill expansion projects in the US South and recent capital investments mills are beginning to payoff with improved production levels. That is beginning to drive increased log demand in our micro-markets across the region, another positive sign overall finished lumber inventories are light, which bodes well for mills to run at or near capacity levels with multiple shifts. Furthermore, Southern yellow pine lumber manufacturers are still able to produce lumber with comfortable margins based on current levels of finished lumber prices and timber input prices. Our pulp markets also remained strong across all products. As a result, our fiber supply agreement partners and other pulp customers appear well-positioned for steady production throughout the year ahead. Lastly, historically, weather conditions are supporting and even increasing timber prices in our market. Taking all factors into consideration, for full-year 2019 guidance, we anticipate adjusted EBITDA in a range of $52 million to $60 million, or 4% to 21% increase compared to full-year 2018. This increase will result primarily from earning a full-year of Triple T asset management fees of $11.5 million, as well as an increase in net timber revenue attributable to higher harvest volumes. Harvest volumes are anticipated in the range of 2.2 million tons to 2.4 million tons and increases our forecast to drive from Southwest disposition timber reservations, deferred harvest from last year and expected new harvest from the Bandon acquisition. Beginning in the second quarter, Bandon should also help increase the share of sawtimber and are mixed into a range of 40% to 50%. In the U.S. South, we also anticipate a slight increase approximately 1% in harvest volume as a result of our delivered wood sales and fiber supply agreements in select micro-markets. The timberland sales target of $16 million to $18 million remains consistent with past years within the range of 1% to 2% of fee acreage. We’ve also been delighted with Dawsonville Bluffs, which by year-end 2018 had generated adjusted EBITDA of $8.8 million. We anticipate Dawsonville generating an additional $3 to $5 million, surpassing our original investment of $10 million. Our outlook does not include potential contributions from future acquisitions and joint ventures, which we pursue as part of our ongoing growth strategy and does not include any potential capital recycling from dispositions. So in summary, CatchMark’s favorable guidance for the year ahead derives directly from the well formulated and consistently executed programs that deliver durable cash flow for our shareholders and support our dividend. They are

[Operator:]

We’ll now begin the question-and-answer session. [Operator Instructions] And it looks today’s first question will be from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

Thanks. Good morning, guys.

[Brian Davis:]

Good morning.

[Jerry Barag:]

Good morning, Collin.

[Collin Mings:]

To start, Jerry, do you have any other acquisitions or dispositions in the active pipeline right now? And just along those lines, how do you think about the potential to reduce leverage further here in 2019 with some additional capital recycling?

[Jerry Barag:]

Okay. So it is an easy answer to the first part of your question? No. We purposefully made a decision post the frenetic end of 2018 in closing Triple T, the Southwest disposition, and Bandon to make sure that we had appropriately integrated all of those changes into our portfolio. And so we have effectively stopped looking at acquisitions for the time being. And then, with the dislocation that happened in our share price, we didn’t think that it was a particularly opportune time to aggressively go and seek new investments. So having said that, from a capital standpoint, we are very, very focused right now on liquidity in particular, and the use of that liquidity, which we think would be best spent on a combination of paying down debt and some tactical share repurchases assuming our share price remains at a level that, I think, is unrealistically low and opportune for us to repurchase shares. So I think that will be certainly the focus of what we’re doing for the first six months of 2019, and we’ll continue to reevaluate that. Brian, do you have anything you want to add?

[Brian Davis:]

No, I guess, another point of emphasis here, Collin, is when we take a look at our guidance for 2019, which reflects the full-year impact associated with Bandon as well as Triple T, our leverage profile does naturally reduce from the levels we’re on a stated basis today, by another turn to turn in the quarter. So you put that on top of what Jerry is talking about an opportunity for us to review some capital recycling opportunities that would be on a CAD per share neutral basis that – and that would also maximize our asset realizations, you see some opportunities inside of our portfolio for additional leverage reduction.

[Collin Mings:]

Okay. So on balancing and and nothing under contract are really active right now on either the acquisition or disposition front, but just given where things stand, it sounds like the buyers would be – fear to go one way or the other, it would be – may be to sell something to – on the margin bring down leverage a little bit more, is that a fair recap?

[Jerry Barag:]

I think that is very accurate as the way we’re thinking about things.

[Collin Mings:]

Okay, that’s helpful. And then switching to Triple T, can you just provide us an update both operationally as well as any progress towards restructuring the sawtimber supply agreement or really any other value-creation event recognizing you guys are highly incentivized to unlock value in the first few years of that deal, so an update there again, both operationally as well as any sort of value creation activity would be very helpful?

[Jerry Barag:]

Yes. So John Rasor is here joining us today, and I’m going to turn over the specifics of that question to him. But he as well as everybody on the team involved with Triple T have done just a remarkable job of integrating 1.1 million acres into full operations, and I’m pleased to report that we are running at a full operational run rate at this point, and have been for some time. We’ve met all of the minimum deliveries or the expected deliveries to the supply agreement counterparties in the southwest, and it continues to go well there. It continues to improve and John will talk a little bit about that. With respect to the future opportunities that we identified when we purchased the Triple T property, we’re working towards that diligently. That was not meant to be an overnight process, it’s going to take a little bit of time. But we have begun the process of trying to get to an agreement that we think we will have the opportunity to add significant value to that property. John, why don’t you give a little bit more detail about that?

[John Rasor:]

Okay. I think the headline with property of this size and amount of volume that has to – have to move is best described as more than 400 truckloads a day to support the supply agreements and the additional sales we make into the market. And with the weather that has been absolutely historically epic over there, meaning it just does rain and rain and rain with the rainfall for the quarter being well over anything that anybody has seen previously, I am feeling like we met the challenge. As Jerry said, we satisfied both the big Georgia Pacific supply agreement requirements and the IP supply agreement requirements. That was quite an accomplishment, but the challenges we faced with the weather alone. I would add to that while we hit all the numbers on the volumes, we did come up short on the hardwood volumes, simply because we could not access the tracks. We will be prepared to get after that again in 2019, and you really only have about a three-month window over there in the Flatwoods of Texas to get into these bottom lands. And we intend to be fully prepared to take advantage of that opportunity as we look at 2019. Surely, the rain will be less by then. On the harvest revenue side, I can tell you pricing has been a bit less than we had expected, but we’re seeing some uplift now. So that we’re looking at a really good start in January and we see prices moving upward specifically around the prime pulp wood and the prime sawtimber products. Also our surface use income has been significant and better than we expected with the oil and gas activity that has become quite a component of our business that’s been value-added, and we will – we have started to implement a modest land sale program, and I’m very encouraged by the kind of pricing and interest we’re getting, so it was a tough six months, but we got there and we’re looking forward to 2019.

[Jerry Barag:]

Yes. So I will remind everybody that all of these things and all of the accomplishments that have happened over there are important. But from a cash flow standpoint, from an EBITDA standpoint to CatchMark, it’s really a barometer for what we expect to be able to move property value and NAV over time. The earnings that CatchMark receives on that property are essentially from the investment management fees. So realistically, changes in prices, changes in income for 2019 really won’t have any bearing on the EBITDA that CatchMark is going to get from its investment.

[Collin Mings:]

Okay. That’s a very helpful update guys. Two other quick ones from me, and I’ll turn it over. Just on CapEx, Brian, it looks like you guys came in a little bit below budget for 2018. How should we think about 2019 on the CapEx front? I apologize, if I just missed this in the guidance.

[Jerry Barag:]

It’s about $5 million to $6 million next year, we had a carryover from the fourth quarter to first quarter this year, so $5 million to $6 million in 2019.

[Collin Mings:]

Okay. And then on – just the cost side overall, it does look like G&A, forestry management fees and other operating expenses were all up notably sequentially in the fourth quarter. Again, not necessarily huge dollar amounts, but just collectively that was kind of a notable variance for us at least. Just anything, in particular,, which we should be mindful of?

[Jerry Barag:]

So in the Q4 and G&A, it included pursue costs about $150,000. I think that’s noted inside the adjusted EBITDA reconciliation line. As it stands with other operating expenses, we expense basis of timber related to lease terminations and timber deed expirations and casualty losses within the operating expense line item. In the fourth quarter, we had just under $600,000 of non-cash charges related to these activity. The corresponding entry reflecting these non-cash expenses can be found on our cash flow statement in the operating section. So those are the two notable areas, which you can – we can provide detail on.

[Collin Mings:]

Okay. I’ll turn it over to – back in the queue. Thanks, guys.

[Jerry Barag:]

Thank you.

[Brian Davis:]

Thanks, Collin.

[Operator:]

Next question will be from Anthony Pettinari with Citi. Please go ahead.

[Randy Toth:]

Good morning, guys. This is actually Randy Toth sitting in for Anthony. I guess, my first question is…

[Jerry Barag:]

Good morning.

[Randy Toth:]

…can you – good morning. Can you talk a little bit about your 2019 guidance and what baked in? I know you have $3 million to $5 million coming from Dawsonville, and I imagine around $11 million coming from Triple T. Just kind of the assumptions around pricing in the U.S. South?

[Jerry Barag:]

I’m going to let Todd answer that.

[Todd Reitz:]

Sure. So we’ll think about overall market conditions and where we’re coming out of 2018, we finished fourth quarter very strong. Had a nice run rate coming up to that point. As Jerry mentioned in his comments, some of that being weather-related. But the bigger takeaway and the stable steady part of this is that, we’re beginning to see build consumption improved, some of the capital improvements that have been initiated in late 2017 and 2018 are beginning to come online. So we’re seeing some of that demand pull. That being said, we’re anticipating some more stable view of pricing, if you will, going forward. So if we saw a 2% to 3% very modest uptick over the year, that would be what we’re looking at kind of going forward. Additionally, we have a little stronger mix of sawtimber in there. As Jerry mentioned, with Bandon coming on and we’re positioned to harvest this year going to be more in that 40% to 50% range. So some added value associated with that as well.

[Jerry Barag:]

Yes. And I’d probably like to remind everybody that a year ago when we did this call, I think, my exact words were that we would be disappointed if we didn’t see some modest improvement in prices over the operating areas where CatchMark owns its properties. And, in fact, we delivered that in spite of some headwinds that came from Southern yellow pine exports that were effectively derailed as a result of tariffs that were put on, particularly punitive tariffs from the U.S. South. And so we’re very proud at being able to do that. We certainly saw conditions strengthening and being able to do that. We think we delivered it. And I think we feel relatively confident that we will see some more strengthening going into 2019.

[Randy Toth:]

Okay, that’s helpful. And then just staying in the U.S. South, it’s quite a bit of capacity – sawmill capacity coming online over the next 12 to 24 months, especially in Alabama and Georgia. My question is, how will all of this capacity impact pricing for pulpwood because of the sawmill residuals? Just kind of curious how that relationship, how you think about that?

[Jerry Barag:]

Sure. So, you look at a lot of the customers where we’re operating and in general, they have a base load that is associated with raw logs that have to come in, pulpwood that has to come in. That component will be consistent. Pricing for that has been very, very stable. We see that being strong going forward and customers being well-positioned for that. As far as the residuals are concerned, that work that into their overall mix. And we think that we’re going to see some positive movement on the market going forward. Additionally, with our supply agreements, we have a strong position with our customers that are – that stable and set forth into the future, 10, 12 years of who are working with. That allows us to be a little bit insulated to any of the ups and downs, if you will, in the marketplace.

[Randy Toth:]

Okay, that’s helpful. Thank you. I’ll turn it over.

[Jerry Barag:]

Thank you.

[Operator:]

[Operator Instructions] Next question will be from Paul Quinn with RBC Capital Markets. Please go ahead.

[Paul Quinn:]

Yes, thanks very much. Good morning, guys.

[Jerry Barag:]

Good morning, Paul.

[Brian Davis:]

Good morning, Paul.

[Paul Quinn:]

Hey, just a question on 2018, just what was the quantify of harvest that you deferred? And it sounds like that you’re going to harvest a part of the deferral or all it from maybe you could just help me out in 2019?

[Jerry Barag:]

Sure. So, when you look at it as a year-over-year, call it, 150,000, 100,000 or so tons that we pulled back going into 2018. Going into 2019, we’re going to end up adding about that amount back in. So it’s kind of a rebalancing of where we work compared to previous. Again, it’ll be a regional difference with the Northwest coming in and then having the timber reservation coming out of the Southwest as well. So all of that will pretty much be brought back online throughout 2019.

[Paul Quinn:]

So the original reason for the deferral was to take advantage of higher timber prices down the round. Is the stuff that you’re coming in, but I guess, the increased harvest in 2019 as a result of deferral in 2018 on the regional mix, is that going to result in a higher price in the sort of 2% to 3% that you’re kind of expecting?

[Brian Davis:]

We would anticipate that going the modest increase throughout the year or potential for throughout the year, that’s correct.

[Paul Quinn:]

And just shifting now, we haven’t seen a lot of timberlands transactions. It seems like, I don’t know, a year-and-a-half, two years now, and we had a pretty steady increase in interest rates throughout 2018. Have you seen or you experience yourself changing – underwriting criteria around that?

[Jerry Barag:]

I think underwriting criteria has generally been somewhat stable, Paul. Now where the volatility has been, it’s been really out in the Pacific Northwest, where you’ve had a lot of volatility for the most part to the outside, but more recently to the downside in timber prices. And so, interesting there, since we closed on the Bandon transaction, there were two properties that were offered out in the Pacific Northwest. One of them actually transacted, the other one didn’t transact in that. That was the first time in quite sometime that property in Pacific Northwest failed to meet a clearing price. What we’re seeing going forward into into 2019 are a couple of things, couple of trends. One is, quality has become much more important even it was important previously. It’s become much more important. And so higher-quality property is the best properties are trading. And they are supporting floor pricing, number one. Number 2, it’s going to be an interesting transaction, because there still is seemingly a lot of pressure on the TIMOs who have a decade or so old investments that there is pressure for them to liquidate. But they have been cycling through their portfolio, selling the better properties as opposed to the weaker properties. And in the U.S. that’s getting harder to do, because you had seen a lot of transactions in the Pacific Northwest and that seems to be coming off given, I think, people’s anticipation that Pacific Northwest properties are going to at least flatten or potentially some of the valuations out there might fall. Interestingly, what we have heard at this early point in the year is, there may be a significant number of international transactions that happen or offerings that are coming from TIMOs this year. And so naturally, we won’t be a very active participant in things like that.

[Paul Quinn:]

All right. Thanks very much. Best of luck, guys.

[Jerry Barag:]

Thanks, Paul.

[Brian Davis:]

Thanks, Paul.

[Operator:]

Next question is a follow-up from Collin Mings. Please go ahead.

[Collin Mings:]

Thanks. A couple of housekeeping things from me here. Just as far as the timing of future losses associated with Triple T, can you just maybe give us some guidepost there and remind us what that should be, just given how that, at least from a net perspective kind of a big driver?

[Brian Davis:]

Certainly, Collin. So how we’re thinking about is about $25 million per quarter for Q1 to Q3 and then the remaining $15 million in Q4 2019.

[Collin Mings:]

And then, I apologize if I missed this, Brian. But as far as – have you quantified a G&A number for 2019? Again, I guess, you kind of give us some other puzzle pieces, but can you be a little more explicit there?

[Brian Davis:]

We’ll give you the corners to your puzzle, Collin. So we anticipate G&A to increase about 1% to 2% year-over-year, which includes about $2.6 million of equity compensation. One thing I should note as we kind of fill these things or other operating expenses expected to remain flat on a gross basis, even after backing out their other operating expense that we occurred in fourth quarter of this year, the real net increase is resulting from property taxes. And for – where we added for forestry management will increase year-over-year to about $7.3 million to $7.7 million as we allocate expenses of our management of our joint ventures from G&A into this line item. And this is inclusive approximately about $500,000 of equity compensation expense.

[Collin Mings:]

Okay, that’s helpful detail. And just going back to Paul’s question, as far as timberlands transaction markets. Jerry, just for our benefit, can you maybe just maybe clarify a little bit as far as some of the evolution in the market, if you will. How much of that is being driven by some of the potential bidders, not may be emerging as much as they would have a couple of years ago. Is it concerns around pricing and the trajectory of pricings, specifically in the Northwest, near-term or longer-term outlook for the U.S. South? Just curious maybe more simply is it the pool of potential buyers has changed or maybe has some of their underwriting and the environment changed where it has been impacted?

[Brian Davis:]

I think the answer is, yes, to all of the above. So the backdrop to the markets really starts with liquidity. And liquidity is, I would tell you, it was a big transaction year last year. So there is liquidity. It is coming from different places and it is – it’s spotty certainly, compared to what it used to be a decade ago. And that trend has been around for the last couple of years, and I don’t think that it is going to change. If you look at the buyers of property over the last year, over the last couple of years, it’s rotation in names, I mean, it’s different names than you would have likely seen a decade ago, and the philosophies around those transactions tend to be a little bit different. So, by and large, the – as I previously mentioned, higher-quality properties in really high-quality markets are the ones that are ultimately transacting. There have been some other transactions of lesser quality properties. And after being marketed for multiple times, some of those have begun to actually trade now. It was actually a trade of some Alabama property at the end of last year that transacted at just under $1,200 an acre. And interesting, it was a pretty similar price to the Triple T transaction, although, it was much worse mill markets, much less productive property than Triple T and a much different story. And so you may see some of that actually come to market and finally transact now in 2019. But I believe the real focus is going to be from the sellers. They’re going to be looking around their portfolio for properties in pockets of strength. And I think right now, they believe that those pockets of strength really are international properties, international investments that they’ve made. And that there’s probably more liquidity, especially in the TIMO market for international properties right now than domestic properties.

[Collin Mings:]

Along those lines, are you concerned, though, maybe some of these lower-quality properties clear the market just the impact that might have on timberland appraisals and just from that environment recognizing, again, you have Triple T out that, which at some point you device optionality around that. But just curious how you think this might actually built through from an appraisal standpoint in the marketplace?

[Brian Davis:]

Yes. As you point out, it really becomes an appraisal issue. The appraisal issue at least for us, the biggest outcome of that would be around the loan-to-value ratios or the coverage ratios that go with our debt. We think we’re comfortably insulated from it. And – but at the end of the day, we do believe that the appraisers and the market in general has made the distinction between lower-quality properties and higher-quality properties. And we’re not feeling much downward pressure if any on the types of properties that we own. I think it’s going to be a different state of properties, which ultimately may have an impact on the NCREIF Timberland Index, which should cause some interesting headlines. But operationally for us, I don’t expect there’s problems.

[Collin Mings:]

Okay. I appreciate all the extra color.

[Jerry Barag:]

Great. Thanks, Collin.

[Operator:]

At this time, this will conclude today’s question-and-answer session. I’d like to turn the conference back over to Jerry Barag for any closing remarks.

[Jerry Barag:]

Thanks, again, everybody for joining us for the fourth quarter. This call is always a marathon for us. And I appreciate everybody hanging in, and we will talk to everybody in 90 days.

[Operator:]

The conference has now concluded. We do want to thank everyone for attending today’s presentation. At this time, you may now disconnect.