CatchMark Timber Trust, Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good morning, and welcome to the CatchMark Timber Trust First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Davis, Chief Financial Officer. Please go ahead.

[Brian Davis:]

Thanks, Gary. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for first quarter 2017 the three month period ending March 31. I am Brian Davis, the Chief Financial Officer of CatchMark. Joining me are President and CEO, Jerry Barag; and Chief Operating Officer, John Rasor. During the course of 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 2016 annual report on Form 10-K and other reports that we file with the SEC. Today's presentation may also include certain non-GAAP measurements. Reconciliations of these measurements are included in our earnings release which is posted to our web site. John Rasor 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. Brian, thank you and I want to thank everybody for joining us today. CatchMark’s first quarter results met our expectations and put us very much on track for meeting our 2017 earnings guidance. In addition, we are particularly encouraged and excited by the joint venture with Missouri Department of Transportation and Patrol Retirement System at Dawsonville or MPERS which we negotiated during the quarter and closed last week. The MPERS transaction opens a new source of institutional capital to CatchMark and we hope sets the stage for expanding the channel for sourcing additional institutional capital on an ongoing basis. Yesterday, we also declared a $0.135 dividend per share payable on June 16. Maintaining healthy dividend overtime and providing a sustainable rate of return to shareholders remain our overriding objectives. In evaluating first quarter 2017 results against first quarter 2016, it is important to note that year-over-year comparisons for the first quarter are impacted by last year’s wet weather conditions which drove our strategic decision then to accelerate planned harvest volumes for the year by increasing timber sales during that quarter. This decision proves out to be wise and allowed us not only to take advantage of favorable pricing in the first quarter 2016, but also to opportunistically distributable additional volume. As weather patterns change, these conditions did not present themselves in this year’s first quarter. So as a result, the 2017 first quarter results paled somewhat in comparison to last year’s. In the first quarter, we generated revenues of $23.1 million compared to $27.2 million in the first quarter 2016 and realized adjusted EBITDA of $10.6 million compared to $16.1 million in the first quarter of 2016. These results were underpinned by the lower year-over-year harvest volumes in timber sales I just mentioned. Specifically, gross timber sales revenue decreased 6% as a result of a 14% decrease in harvest volume. Also during the quarter, we sold 2,800 acres of timberlands for $5.5 million. This disposition activity was less than last year’s first quarter but again we remain very much on track to deliver full year guidance expectations given identified transactions and letters of intent to meet our timberland sales objectives for the full year of 2017. Although we did not make any direct acquisitions during the quarter, we did negotiate a joint venture with MPERS to acquire more than 11,000 acres of prime timberlands in North Georgia known as the Dawsonville forest. This acquisition from Four-Star [ph] closed on April 25. Here are the key takeaways from this transaction. Dawsonville provides a new investment management platform for CatchMark’s future growth. It’s our first institutional joint venture and demonstrates access to new and important capital channel which confound future initiatives and enhance shareholder returns. Dawsonville is structured as a 50/50 joint venture with MPERS a leading public pension fund. CatchMark is the fiduciary for MPERS investment and manages the timberlands for a fee with an opportunity to earn and promote. With regard to MPERS, we view Dawsonville as the initial transaction in what will be an expanding relationship. The Dawsonville timberlands are high quality and well stocked. The merchantable inventory is strong at 51 tons per acre comprising 75% pinned by tonnage. The timberlands are located in a diverse and healthy mill market close to Atlanta and offer excellent HBU options for sale. The joint venture strategy calls for commencing timber harvest operations immediately and positioning the property to capitalize on strong local HBU sales market liquidating over a 10 year term. Total harvest volume is expected to be between 250,000 tons and 300,000 tons over the term of the venture. The transaction was funded through CatchMark's credit facility. Our share of assets and liabilities as well as income and expenses for the joint venture will be recorded using the equity method of accounting. Overall, we expect Dawsonville to deliver attractive returns in the mid-teens including management fees and the promote. This should prove highly accretive to earnings. And lastly and importantly, we see further opportunities to partner with other pension funds and institutions as these investors seek the diversification characteristics and income generating benefits timberland investments in joint ventures with best-in-class managers. Turning to our balance sheet, we continue to have ample liquidity and modest leverage. As of March 31, 2017, CatchMark had $174.3 million available under our credit facilities to help fund future growth and acquisitions and fund share repurchases as well as $7.7 million of cash on hand. Our investment strategy funds acquisitions with non-dilutive capital and enhances our ability to take advantage of a favorable acquisition market. We’ve repurchased $1 million of shares during the quarter at an average price of $10.60 under the $30 million stock repurchase program approved by the Board in August 2015. At the end of the quarter, we have an additional $19.8 million available to deploy under the program. During the quarter, we executed $70 million in interest rate swaps bringing our mix of floating to fixed rate debt into an approximate 50/50 balance. And we continue to explore opportunities to reduce interest rate exposure and extend debt maturities. From an operation standpoint, we delivered on our objectives very much in line with our business plan to meet harvest targets for the year. We are realizing anticipated incremental harvest gains from last year's Carolina Midlands acquisition as well as other recent timberland acquisitions. Delivered wood volume was 80% of our total volume during the quarter and grew by 16% year-over-year. This highlights the impact of how our delivered volume and growing key customer base have contributed to our goals of meeting expectations for predictability and stability of our volumes and corresponding revenues. We continue to deliver high productivity per acre and recent acquisitions have steadily improved our per acre stocking through strong productivity characteristics, which can enhance overall portfolio yields. Our average harvest mix continues to improve towards our target of 50/50 sawtimber to pulpwood. We remain totally committed to sustainable forest management practices, which support our long-term view for delivering durable earnings growth. As we look ahead to the remainder of the year, the housing market appears positioned for continued steady improvement. Overall, economic conditions seem pretty solid to support home buying and home building, which will fuel lumber consumption. Mortgage rates remain in a favorable range and the Federal Reserve's management of interest rate increases has been benign. Canadian lumber duties will provide some added ballast for U.S. lumber markets. But our overall pricing expectation for sawlogs and pulpwood remain cautiously subdued for the year as a result of supply-demand fundamentals. That said, we're confident of achieving pricing premiums above South-wide averages because of our favorable locations and mill market advantages. With respect to our acquisitions pipeline, we will continue to be very selective in approaching acquisition opportunities maintaining our criteria for prime stocking levels and sustainable harvest volumes over long-term holding periods. At present, we are evaluating multiple opportunities in the U.S. South, but mostly for smaller and midsize transactions. Relative to recent years, the overall market has been fairly quiet except for the notable transaction in Texas, which is getting a lot of attention. So, in summary, from our business plan perspective, it was a very good quarter – another very good water. We're very much on target to meet our earnings guidance for the full year. The Dawsonville transaction marks an extremely important milestone for CatchMark opening up a new capital channel through a joint venture with a leading pension plan sponsor. We think this relationship can be expanded and lead to additional capital sourcing from the institutional marketplace. Institutions are seeking to diversify investments and achieve attractive risk adjusted returns from income producing assets like well managed timberlands and CatchMark very much offers them that opportunity. To sum up, overall economy and the housing market appear to be on track for growth. Our balance sheet remains solid and provides the flexibility to support our strategic initiatives. Our operations continue to concentrate on taking advantage of our superior mill markets while improving harvest mix with the greater percentage of sawtimber and ensuring long-term productivity through sustainable management practices. The dividend yield is strong and covered and we remain committed to growing our dividend over time. We believe CatchMark continues to deliver on a compelling proposition for our stockholders offering a sustainable rate of return, a low risk profile and high quality of earnings. Thank you very much for listening today. And now John and Brian will join me to answer any of your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

Hey, good morning, guys.

[Jerry Barag:]

Good morning, Collin.

[Brian Davis:]

Good morning, Collin.

[Collin Mings:]

Maybe just to start, can we just maybe talk a little bit more about the joint venture, just walk us through how that came together and then the expected returns on that particularly given there, it sound to be like a management fee component as well as just the strategy here is more of a liquidating strategy, if you will.

[Jerry Barag:]

Yeah, so as you know and then you have duly noted, we've been working on the investment management strategy as a company for a little while now and this – the confluence of events kind of happen fairly. We have been in contact for some time with Missouri. And they had a very specific investment program that they were looking to execute on and the confluence of the opportunity as well as their ability to do things quickly presented the opportunity to put together that partnership pretty quickly. It is one leg of the stool of a bunch of different initiatives that we have in the investment management program. But because of the confluence of events, it came about pretty quickly and, quite frankly, went very, very easily. The good news is it's a non-exclusive relationship although we like what we see till now, they've been very easy to work with and we think that this is going to be a great productive relationship going forward. And as we mentioned in the comments, there is the ability to expand on this significantly. The transaction itself is – the fees you asked about. So the fees are going to be fairly typical for the type of transaction that this is in the institutional market, which is more of the liquidating investment than a long-term timberland investment, although it has many attributes of a long-term timberland investment including a lot of timber, great stocking, great inventory that we will be operating through for the next couple years. But given the proximity of the property itself to the suburbs of Atlanta, this is timberland that is likely going to move into the HBU market over the next decade and we will take advantage of those opportunities alongside Missouri first. And so, the way the future is structured is there is a management fee basically, a management – ongoing management fee and the promote on the backend based on performance over a reasonable hurting. And that has the opportunity to be a significant fee for the company and we think we have all the capabilities to maximize the operations of that, not only for CatchMark, but for MPERS and as a result of that, we will get a nice fee on the backend.

[Collin Mings:]

Okay. And then I guess just going through the – as far as any additional cost, I’m just trying to get at it – like from – move from a modeling standpoint and numbered standpoint, how to think about it, I know you put in the supplemental out there before I think it’s going to show up in the other income from a revenue standpoint for the management fee, but what sort of incremental expenses might be offsetting that?

[Jerry Barag:]

So, all of the property expenses and the management expenses of the property are passed through at the property level, so they are paid for by the property. And then our only real requirement with MPERS is to manage the property or manage the investment, the same way we would manage the investment if they weren't there. And then there's a minimal level of reporting that has to go back to them, but because we are a public company and we have most of what we do audited and overseen, they've been very happy with the level of financial information that we’re able to produce without any great effort.

[Collin Mings:]

So, it sound like there's no really incremental G&A associated with this?

[Jerry Barag:]

No, not all.

[Collin Mings:]

Okay. And then just the fact – again, going back to being a liquidating strategy, should we think of it being kind of a steady pace of land sales from this JV or is it backend loaded as far as the timing of the land sales within that 10-year time horizon or maybe to put it another way is there going to be a residual lack on year nine that you're going to have to sell or will it be just kind of a steady pace throughout the decade?

[Jerry Barag:]

No, there is more than likely going to be a steady pace. So, hypothetically what will happen is that we will harvest through the timber as the markets dictate and as we see fit and then as we harvest through that timber, the tracks that we operate on will then move into the HBU market, but it's not our intention that they'd be replanted and held for indefinite timber production because the likelihood is that the land value would be too high at that point [indiscernible] HBU market regardless.

[Collin Mings:]

Okay. And then again I get that there’s probably some sensitivity around it, may be putting a specific threshold that – its partners looking to achieve, but – and maybe same thing around the management fee, but how should be think about just in terms CatchMark, how that was underwritten as far as just returns you expect and maybe how that would compare to a traditional wholly-owned acquisition?

[Jerry Barag:]

The fees themselves will enhance the returns that CatchMark would have gotten on this transaction significantly and that is in capital letters significantly, okay. And so, yes, we’ve got confidentiality agreements with Missouri and it would be really untoward to be talking about the exact numbers, but it puts us in a range, I mean, they are a typical institutional investor and they have similar investment expectations to other pension funds and their return on this transaction will meet those returns and more probably if our projections and our expectations hold true and we will be rewarded for doing that.

[Collin Mings:]

Okay. And then maybe just taking a step back, just – Jerry maybe just remind us of how you think about overall returns that you're targeting on acquisitions right now, again whether or not it’s in a JV or a wholly-owned deal, what are you kind of targeting?

[Jerry Barag:]

We are targeting – basically there are two targets, one would be an ongoing – the annual cash EBITDA kind of returns, which need to be accretive to our capital and this transaction handling needs that. So, in a minimum it's going to be somewhere around 4.5% to 5% kind of cash returns, annual EBITDA returns. And then on an IRR basis, we look at depending upon the transaction itself from the sale of transaction, an IRR that is at a minimum, call it 8 to 8.5 and then quite frankly that is pretty far down on the low end of the range of what we would do and it goes – echoes up from there and this is a transaction given what it is that it will be double digits on an IRR basis.

[Collin Mings:]

Okay. Now, that’s helpful just to better frame this and I know investors just kind of want to get a hand on how to think about as you look at these JV deals, how you think about that versus what you do for your own balance sheet. Maybe switching gears, well, one more follow-up here, just as far as – as you’ve referenced in a press release and in the remarks, no additional acquisitions, is that a reflection on maybe deal flow, is it a reflection on being maybe a little bit more on the margin prudent with your cost of capital as you continue to work through some of these JV opportunities or was it just you kind of focused on getting this transaction across the board or the kind of problem that, you know, [indiscernible]?

[Jerry Barag:]

Yeah, it was more about deal flow, so really from call it the end of the third quarter of last year, really all the way through this year, what you’re seeing in terms of transactions have been mega deals, big, big deals. And that’s a binary outcome and quite frankly they are – the profile of those properties are such that we haven’t either been competitive or we haven’t chosen to participate in those processes. So it’s been a little bit quite from that standpoint. And again, I mean, we are being very thoughtful and very disciplined about the capital that we have and we're not in any particular rush to put the dollars out unless they're superior transactions. So – and I don't see any reason that we're going to change that approach right now.

[Collin Mings:]

Okay. And then now switching gears just to the market environment, there'd been some indications that maybe pulpwood pricing had been under some pressure in the U.S. South, maybe just an update what you're seeing arm in your wood baskets and kind of your outlook there?

[John Rasor:]

Hi, Collin. This is John.

[Collin Mings:]

Hi, John.

[John Rasor:]

Yes, pulpwood has been under some pressure, but we've held up reasonably well and we’re spot on on our plan for the year 2017, but certainly it's less than it was in the first quarter of 2016. But with our collaborative supply agreements and our business diversity, we're pretty confident that we're on plan.

[Jerry Barag:]

And I’d probably add Collin that some that weaknesses, especially in some of the markets has been the result of unplanned mill outages from explosions, it’s been a bad couple of months for pulp mill explosions.

[John Rasor:]

Yeah, I was going to add to that, Jerry, that – we've gone through a number of rolling planned outages, two unplanned outages that Jerry just referenced. Let me also add we are very encouraged by the kind of capital investment that's being made both on the pulp and paper and the wood products side of our business in our marketing areas. I know you heard – had other companies talking about it as well, but we think that bodes well going forward this year [ph].

[Collin Mings:]

Okay. And then maybe especially in context of kind of your – as you are look at investments now and kind of market conditions that have been, obviously, by and large, sawlog pricing has been flat or maybe even ticked down a little bit across the U.S. South based on some of the trade reports. Just curious your outlook as far as sawlog pricing through the remainder of this year and when as you're doing the underwriting, now do you expect to start to see a little bit more material lift?

[John Rasor:]

At this time, we’re seeing a flat outlook.

[Jerry Barag:]

Yeah, I mean, it's clearly we know we are operating in the better markets in the U. S. South, but there’s still have not been conditions present that have allowed us and others to increase prices. But we do know that that throughput and output is occurring at those mills. The capital programs, there’s been a significant number of capital programs that have happened in the market areas where we operate and that's still kind of percolating through in terms of the planned output and we know that those lumber manufacturers are very anxious to ramp up production at today's prices, which are crazy good for them. So there's a little bit of a timing aspect to this whole thing where they spent the capital, they're increasing production, they're going to be procuring more timber and John and his team have been working very diligently with some success in working with our key customer base to increase our penetration of the amount of timber that we can deliver to them. And so, we're confident that good things are going to happen. I mean this can’t – this period of supply-demand fundamentals that we are in which have favored the mill operators as opposed to landowners just really can't last forever and it's on the right track, it's on a trajectory and we're confident we're going to see price increases sooner in these markets that we operate in and then most of the other markets, but more importantly we're starting to see that – you now can look out and start to see that there is a tension that is going to start building that will allow landowners to increase prices.

[John Rasor:]

Jerry, I would add to that that we've maintained some encouraging stability here in the last three quarters of last year and going into this year. So I think that when we talk about a flat environment, we checked and crosschecked that and it very much is.

[Collin Mings:]

So kind of taking the – both of your comments together and I appreciate the color, there was basically flat at least through the remainder of 2017 and then you are a little more optimistic as we move into 2018, is that a fair way to tie that together?

[Jerry Barag:]

I think that's fair.

[Collin Mings:]

Okay. And then, just really one last one for me and I will jump back in the queue, just as you think about kind of what happened on the countervailing duty announcement, curious if you’ve seen any immediate response from your customers yet in terms of either they are trying to immediately rachet up production or anything else that they – that you've heard from them over the last – I guess about two weeks behind the countervailing duty announcement?

[John Rasor:]

Collin, it’s John. No, it specifically have not. Certainly, we talk about it every time we visit with them. I think they're going to manage their way through it pretty well and again it’s – we see it as a positive and it will trickle down to the stop before it’s over with.

[Jerry Barag:]

Yeah, I mean, we are in the South and believe me $500 1,000 board foot lumber prices for southern yellow pine is compelling enough reason for them to want to increase production. So there's plenty of catalysts there from their side to continue to move along and increase production and we welcome that and we encourage that.

[Collin Mings:]

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

[Jerry Barag:]

Thanks, Collin.

[Operator:]

The next question comes from Dave Rodgers of Baird. Please go ahead.

[Dave Rodgers:]

Yeah, good morning, guys. Just wanted to touch base, I guess, a little more on the joint venture. What – maybe in this terms of the strategy what made you want to do this one in the joint venture and sorry I did jump on the call a little bit late, but it sounds like the returns would have been good on a standalone basis, was it the timeframe you are comfortable, was it the pier – sales strategy that you thought that was better in a joint venture? And then, Jerry, maybe a second question to that is, as you look forward how do you think about buying contiguous parcels versus kind of opportunities like this in a joint venture versus wholly-owned?

[Jerry Barag:]

So, the answer to your question, Dave, and without getting too esoteric about it, we essentially did this transaction without any real leverage. I mean there's corporate financing that went into it, but we didn’t use leverage there. And the fact that we – the partnership with MPERS creates a level of leverage at the company level, although it's not like the traditional debt because it can’t foreclosed and it doesn't have fixed debt payments there, but it has the impact of enhancing the returns to the upside using their investment and the investment management fees that they end up paying us. And it was specifically tailored, this investment, it fit their guidelines, it fit our guidelines really well. And it just created a really nice opportunity compatible with both ways around. It is – as I’ve said, it's timberland investment and there's a lot of timber to harvest here. What differentiates this one is its location that we’ve all acknowledged that it’s unlikely that once we get through the harvest here that we would keep this in long-term production of timber because the markets are just changing that rapidly in suburban Atlanta that it will give us different opportunities. This isn't meant to be a huge portion of the business that we do, but we think it is an attractive and an opportunistic portion of the business. We think it’s a great investment and like I said given its characteristics having a partner there helping to enhance the returns that we would get from this investment have been a desirable thing.

[Dave Rodgers:]

And the latter half of the question, I guess in terms of how do you think about then going forward using capital and a joint venture with regard to assets that might be more contiguous or consistent with your own strategy versus maybe something that’s a little bit unique as a transaction.

[Jerry Barag:]

Right. So as I said earlier, this is one piece of a much larger strategy that we will employ. This one is kind of more of the targeted opportunistic type investment and there is also another portion of the strategy that will be more targeted towards what we do day-in, day-out on more core type properties and larger type properties and the benefit and the attraction to us of doing that is having access to capital to control larger transactions that by ourselves we would not be able to do. And that will give us access to those deals and it will also – the fee revenues that we generate from that activity will ultimately enhance the returns on the piece of those transactions that we retain as a company. So I think both strategies are prudent and we’re going to pursue that and possibly one or two others.

[Dave Rodgers:]

All right, thanks for that. And then I guess maybe as we move here into the second quarter, I know first quarter volumes were just a little weaker and you had already reference that. But as you look at the second quarter, any weather impacts, any impacts in the mill as you were just talking about, John that we should think about in terms of impacting you directly in terms of the amount of volume you can push into the market?

[John Rasor:]

I don’t think so, no.

[Dave Rodgers:]

Okay. So back to normalized trend in the second quarter?

[John Rasor:]

That’s our expectation. There are always challenges, but we think we got a good plan in place, it’s encouraging.

[Dave Rodgers:]

Okay. And then maybe going back to the tariff or tariff like discussion, that’s obviously impacted the deal flow in the market I’m assuming and that was the comment about slower since the end of the third quarter. How long do you think before that activity begins to resume? It didn’t sound like your comments, Jerry that you were overly optimistically you see that come back quickly but I don’t want to read too much into it.

[Jerry Barag:]

Are you talking about deal flow? Are you talking about timber sales?

[Dave Rodgers:]

Deal flows.

[Jerry Barag:]

Deal flow, that’s what I thought. So from a deal flow standpoint, there are still a lot of pent-up transaction volume that is going to – that we believe is going to break and come to the market. And I think sellers are being somewhat reserved about bringing too much, too fast to the marketplace because quite frankly there is not an unlimited amount of capital in the sector to clear all of these transactions. And so I think they are being very prudent and careful to neither transactions into the marketplace to get maximum attention and for them to have the best opportunity to generate the best sales price that they possibly can. And it’s probably as simple as that but the overall dynamic hasn’t changed. There is a lot of property that still has to come to the market and again as I said in the comments we are not impatient and we are not overreaching to try and commit the dollars that we have. We really want to be disciplined about this and get the best deals at the best prices that we possibly can to meet our objectives.

[Dave Rodgers:]

Okay, great. Thanks guys.

[Jerry Barag:]

Thanks, Dave.

[Operator:]

The next question comes from Albert Sebastian with Prospect Advisors. Please go ahead.

[Albert Sebastian:]

Good morning gentlemen and congratulations on a very good transaction.

[Jerry Barag:]

Thanks, Albert.

[Brian Davis:]

Thank you.

[Albert Sebastian:]

Couple of questions, $1,800 an acre, that seems like a pretty reasonable price for southern timberland particularly when you consider the most recent transaction by Rayonier. Is there a particular – and it doesn’t seem that really reflecting type of HBU component or the mitigation credit associated with the transaction. Is there a particular reason why you were able to get this at such a reasonable price?

[Brian Davis:]

Persistence. This was something that we had talked to Four-Star [ph] about quite a long time ago and Four-Star [ph] was liquidating their timberland assets in a strange way, this transaction just popped up and we were able to close it quickly and efficiently and they valued that. And so we were happy to do it.

[Albert Sebastian:]

Okay. And I guess are you in discussions with other pension institutions with regards to similar type of joint ventures.

[Jerry Barag:]

Yes.

[Brian Davis:]

Yes. I can’t really comment much more than that but we have spent a lot of time over the last six to nine months talking to pension funds and consultants and people and the institutional investment community about a more phoneless program.

[Albert Sebastian:]

And I think that Plum Creek was acquired - emerged with Weyerhaeuser. Did something similar to this, how does your joint venture and transaction compared to that one?

[Jerry Barag:]

So I think what you’re referring to - alluding to is the Twin Creeks joint venture that Plum Creek did before the merger where they took a significant amount of assets somewhere around $400 million of assets and contributed them into a joint venture with some pension funds and then decided that they would move forward to do a 10-year close in commitment to buy some other assets and manage to pull the assets. Some of the things that we are talking about have some similarities to that but then there are some significant differences in that. We are trying to get it so that it got the flexibility terms as a company so that there aren’t restrictions. We are much more of a growth company than either Plum Creek goes or warehouse is today given relative sizes. And so we understand the importance of the restrictions on pipeline and our ability to invest the capital that we have from our shareholders, and we want to do the job with that. And then we also want to be able to align interest with investors that invest alongside ketch mark probably without being divisive to Plum Creek and we want to align interest better with the investors on the other side. And we think if we do that the right way, that duration of the relationship doesn’t have to have the same kind of limits that Plum Creek willing to accept it that time.

[Albert Sebastian:]

My final question is about the mitigation credits. Can you give us some sort of idea in terms of the value of those credits and what maybe the contract value is on the 25% you see you have on the contract?

[John Rasor:]

This is John Rasor. The credits are a function of two different county projects involving reservoirs that are in the same water shed as these properties. So the improvements that were made on the properties called the mitigation banking if you will literally improved the banks [indiscernible]. Then gets sold into the market at opportune times and we get those credits from accounting when Army Corp of Engineers have signed off on the banking work and then we picked the time that we want to put the credits into the marketplace. So it’s schedule that fetch you out through that. I don’t have the specific dollars and the cents that are involved, but it’s several million.

[Albert Sebastian:]

Okay, good. Thank you gentlemen.

[Jerry Barag:]

Thanks, Albert.

[Operator:]

[Operator Instructions] The next question is a follow-up from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

Thanks. A few follow-ups from me, I guess first is just Brian, maybe talk us through the latest thinking as far as fixed versus floating rate debt. It looks like moved a little bit more towards the fixed during the quarter. Just update us there and any additional plans you might have on that front?

[Brian Davis:]

Sure. I think in the first quarter our total cost of debt was around 2.68% net of patronage of which nearly 50% of our debt is fixed, effectively 3% net of patronage. Specifically, in Q1, we executed on $70 million of fixed rate swaps in three separate transactions with effective rate of 3.5%. Details of that can be found on our Q. Your other question, philosophically we highly value the flexibility of our debt structure provides for us today in support corporate initiatives, but I’m not to say that we aren’t looking at strategies to extend our debt maturities or continue to actively manage our interest rate exposure. It’s just our bias as a growth company to value flexibility. Put it another way Collin, we recognize short end curve has moved in line with our expectations but we’ve also seen the 10 year treasury stay within a relatively narrow band over the last couple of years. So we benefitted on the short end of the curve without giving up too much on the longer end. So as we see it here today, we’re exploring keeping an eye on it but flexibility is key for us so hopefully that gives you some additional color.

[Collin Mings:]

That’s helpful. Just curious as going back to the word flexibility there, I’m just curious how the – what are you thinking in terms of flexibility by not having a higher mix. How that translated into more flexibility?

[Brian Davis:]

If you put in swap structures in place, you have mark-to-market issues and typically on a swap as you have an extended period of time you’re typically under water as that relates to that swap. So if you want to take a look at your balance sheet and you want the flexibility of moving assets around, you may put yourselves in a situation where you have to unwind swap transactions and that’s something that we really don’t want to maintain at this point in time.

[Collin Mings:]

Gotcha.

[Jerry Barag:]

So, we are swapping out certainly to a level that we think is going to be a permanent level of financing, minimum level of outstanding debt that we’re going to have but we don’t want to get too far down there because as Brian said we’ve got a lot of flexibility in our financing. We got the ability to pay down loan which we paid on line which we’ve done in the past and we want to be able to maintain that flexibility. Now, Collin, if we were a static company that we are not growing and just really kind of moving some things around in our own balance sheet, yes there would be greater bias but that’s not the type of company we are. So we have to maintain – we value that flexibility as necessary for us.

[Collin Mings:]

Okay. That’s helpful color there guys. Couple of other housekeeping ones. It looks like CapEx in the quarter was meaningfully above what it has been at least trending on a quarterly basis for the last few quarters. Anything driving that to normal noise and timing or anything we can highlight as it relates to that number?

[John Rasor:]

Yes, Collin, this is John. It’s all about reforestation and by the way it makes up most of our CapEx. And it’s about the planting season and reforestation to think about in terms when it occurs and it occurs in the fourth quarter and then the first quarter the following year. In 2015, we got hit start on the planting because you reach the right temperature and moisture conditions in the soil, you want to start planting as soon as you can to give them more time to get established. And so we had a nice head start in 2015 fourth quarter so we didn’t have as much to do in 2016 first quarter. Then with the additional acres that we have plant in the planting season between fourth quarter 2016 and first quarter 2017, we were delayed in getting started in fourth quarter 2016 because of the draught and high temperatures. So we had to make that up in the first quarter of 2017 to get all the planting done. And additionally, we had just over 1,000 acres of plantations that did not survive the drought conditions and we included that in the first quarter of this year and the replanting. So I hope that’s helpful and put accounts for that.

[Collin Mings:]

Okay. I really appreciate all the detail there. I guess going forward, how should we think about recognizing there is some maybe unusual aspect for this quarter. Remind me what you think in full year CapEx should be?

[Brian Davis:]

Right. Hi Collin, it’s Brian. Our guidance for the year is $4.5 million to $5.5 million really reflects the carryover that John was talking about. On a normalized basis, it will be about $4.5 million.

[Collin Mings:]

Okay. And then going back to the earlier questions as far as the timing as far as the volume, I think prior guidance was total range of 2.3 to 2.5, it sounds like based on the comments you’re still expecting to be in that range. Is that a fair takeaway?

[Brian Davis:]

[indiscernible]

[Collin Mings:]

Okay. Few more questions from me, one, just another housekeeping one. Just curious I know in the past we talked a little bit about the some of the real estate transactions where you’ve retained the right to hold on to the timber. And I was curious if there was any of that – the real estate transaction during the quarter and then I think it was $2.6 million or so of book value of merchantable timber last time that you were able to hold on to. Is that still a fair number as some of that book, if you will, some of that timber value been depleted?

[Brian Davis:]

As it relates to the HBU transactions that we’ve done in the first quarter Collin, the reservations were pretty immaterial around 30,000 tons associated with that. The HBU land sales this quarter is about 10 separate transactions, all 900 acres or below. The stocking levels on those were in the mid-20s, so that really reflects the lower cost basis associated with that.

[Jerry Barag:]

Also a higher percentage of hardwood within that stocking.

[Brian Davis:]

That’s correct.

[Collin Mings:]

Okay.

[Jerry Barag:]

The majority of these tracks of 10 transactions relatively higher percentage of them came from our legacy business.

[Collin Mings:]

Okay. And then as far as the aspect, as far as the harvest rights I think it was over 100,000 tons on some prior timber. Has the bulk of that still timber that you have on the balance sheet or some of that been sold off?

[Brian Davis:]

Collin, I don’t have that information in front of me, will have to follow-up with you on that.

[Collin Mings:]

Okay. And then my last one just going back to the earlier question as far as the mitigation, any sense not recognizing you guys didn’t have maybe the specific numbers in front of you as far as the value of some of the specific contracts. But is there a way to think about what those are going for in the marketplace generally?

[Jerry Barag:]

It’s very locally depended upon conditions and so it’s – the good news it’s all about the water shed where the property is located so the credits are only applicable within that water shed. So it’s a limited geography. And so the good news is that the property that we bought and we examined these market conditions pretty very extensively. They really aren’t – there is much in the way of competition for other mitigation. There is a couple of other things that are out there. So it’s really the credit themselves are going to get priced on the number of projects and the dream on what we have as a mitigation bank. We will clearly be the largest mitigation bank in that area.

[Brian Davis:]

I think that our pro forma was very much a conservative end of the market and there is plenty of breathing room here to deal with it.

[Collin Mings:]

Okay. Appreciate all the color guys. Will talk to you soon.

[Jerry Barag:]

Thanks, Collin.

[Brian Davis:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Barag for any closing remarks.

[Jerry Barag:]

Thank you everybody again for joining us for the first quarter and we will hopefully see you at the second quarter. Have a good afternoon.

[Operator:]

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