CatchMark Timber Trust, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day, and welcome to the CatchMark Timber Trust Third 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, Rachael. Good morning, and thank you for joining us for a review of CatchMark Timber Trust results for third quarter 2017, the three-month period ending June 30. 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 Forestry Operations, Todd Reitz. 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 and our Form 10-Q filed with SEC yesterday November 2, 2017. John Rasor, Todd Reitz, 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. Thank you, Brian, and thanks to all of you on the call for joining us this morning. In the third quarter CatchMark delivered another solid result overcoming hurricane related operational issues in our regions. As a consequence we remain on track to meet our results and targets for 2017. And, recent fourth quarter acquisitions will keep us on a continued growth path for 2018. With regards to the hurricanes, we avoided any measurable loss of standing timber. Severe weather related flooding and road damage temporarily affected transportation operations at some of our locations and resulted in some mill customer downtimes. But our operations bounced back quickly without any substantial loss of momentum and any necessary catch-up is occurring in the fourth quarter. That all keeps us on course to achieve earnings guidance for the year. And yesterday, we declared a $0.0135 dividend per share payable on December 15. Our steadfast commitment to maintain a healthy dividend over time remains our overriding goal together with realizing capital appreciation and providing shareholders with a superior rate of return. Two recent acquisitions, which closed after the quarter ended as well as the Dawsonville Bluffs joint venture completed in April, promised to continue our growth trajectory next year. The October acquisitions align totally with our strategy to aggregate the highest quality timberlands in the industry and expand our presence in key mill markets. And, most importantly, they very much meet our objectives for securing long-term growth in generating income and value gains for our shareholders. In those transactions, we acquired a total of 19,564 acres of prime timberlands located in Central South Carolina and Coastal Georgia for total of $54.2 million. Predominantly pine plantations in total they contain approximately 1.4 million tons of merchantable timber featuring superior stocking and benefit from premier growing conditions. In the larger Coastal Georgia acquisition, we acquired not only an extremely attractive property with exceptional attributes, but also these timberlands provide us direct access to rapidly developing export markets in the U.S. South. Encompassing 72% pine plantations and averaging an outstanding 81 tons per acre, which is twice the U.S. South average inventory level Coastal Georgia is expected to add approximately 110,000 tons per year to our harvest productivity over the next decade. Pricing achieved for harvest of pulpwood, chip-and-saw, and sawtimber on these timberlands are well above regional averages. The average age of the pine plantation is 19 years, which is also significantly higher than the 12 year U.S. South average, and carries an impressive site index of 85 feet versus the regional average of 65 to 70 feet. Notably, the acquisition expands our positioning in one of the most productive wood baskets in the U.S. South increasing our regional holdings by 36%. It also provides synergies and pricing power, haul distances and management. In addition, the proximity to a significant number of local mill customers and export markets within a 60 mile radius enhances the merchant ability of their harvest. And, the transaction included a very favorable long-term supply agreement. The second acquisition, Carolina Midlands V complements and expands our holdings in South Carolina where we made a major acquisition last year. It comprises high quality, heavily stock, southern pine timberlands close to a strong coastal mill market and we estimated it contains approximately 206,000 tons of merchantable timber comprised of 94% pine plantations or convertible natural pine stands by acreage and 65% chip-and-saw or sawtimber by tons. CatchMark funded these transactions through proceeds from a follow-on offering for 4.6 million shares which raised $56.8 million on October ‘17. The proceeds were used to repay indebtedness incurred on our multi-loan - or multi-draw term facility to acquire Carolina Midlands V three weeks ago, and then to acquire Coastal Georgia this past Tuesday. In addition to helping fund the October transactions, the equity offering help set the stage for additional accretive acquisitions and potential joint ventures, which we are pursuing. Now looking specifically at third quarter results, we generated revenues of $18.6 million slightly higher compared to third quarter 2016 results, and realized adjusted EBITDA of $7.1 million comparable to results in the third quarter of 2016. Gross timber sales revenue increased by approximately 7% over third quarter 2016, primarily due to a 9% increase in harvest volume. Increases in year-over-year harvest volumes and timber sales revenue resulted primarily from the successful integration of last year’s timberland acquisitions in South Carolina. We sold 233 acres of timberland during the quarter, increasing the total acres sold for the first nine months of the year to 7,047 for total proceeds of $13.7 million. This almost achieves our full-year plan since we’re just short of our $14 million to $16 million target range at the end of the quarter. And, we paid a dividend of $13.5 per share to stockholders on September 15, 2017. During the quarter our teams in the field quickly surmounted any hurricane related operational slowdowns. Although slowdowns in harvesting operations resulted in slightly lower than plant harvest volumes for the quarter, we expect to make those up before the end of the year. Ongoing mill market quotas and high inventories presented other temporary challenges. Nevertheless, our harvest supply agreements and delivered wood sales model continue to help generate higher harvest volumes during the quarter, and we also continue to realize higher stumpage prices in South wide market averages, because of their locations and quality harvest. Year-over-year timber agreement volumes increased 23% and delivered volumes increased 11% in the quarter. Dawsonville, our first institutional joint venture with Missouri PERS is executing operationally according to plan and is expected to be a healthy contributor to earnings. With regard to liquidity and borrowing capacity, as of September 30, 2017, CatchMark had a $163.3 million of borrowing capacity under our credit facilities and the cash balance of $11.8 million. During the quarter, we did not repurchase any shares under the share repurchase program and we may purchase up to an additional $19.8 million of shares under that program at the end of the quarter - as of the end of the quarter. We will continue to be opportunistic in making any share repurchases. We also continue to address opportunities to extend our current debt maturities and increase capacity on our credit facilities. As discussed, the follow-on offering was used to fund strategic acquisitions which were accretive and enhance our existing portfolio by adding extremely high quality timberlands. It also represents a measured step towards lowering our leverage and provides a runway for additional acquisitions and growth, including investing with institutional partners and strategic joint ventures. Looking at the acquisition pipeline and our strategy, there is no change in what we are looking for, Georgia and coastal Carolina Midlands V speak to the prime stocking, sustainable harvest volumes, and earnings durability that we are seeking. We are seeing a more robust pipeline of potential acquisitions in the second half of the year, and opportunities appear to be expanding further as we look ahead to next year. Our focus continues on the U.S. South, but we also continue to review opportunities in the specific northwest. This trajectory for timber market product prices appears to be generally favorable, thanks to solid economy and upticks in the housing market as well as for the beginning of the rebuilding efforts following recent hurricane events. Recent investments and announcements regarding future investments and manufacturing capacity as well as increasing demand from both domestic and foreign customers bode well in the U.S. South. This should lead to a firming in prices in our regional markets with room to grow at current pricing levels. In the meantime, we expect to maintain our edge in achieving pricing above South-wide averages, because of our favorable timberland locations, mill market advantages, supply agreements, and delivered wood sales model. So, to sum up, the quality and location of our timberlands as well as our delivered sales model continues to service well and has helped overcome hurricane and temporary market related issues during the quarter. Our operations emphasis will remain focused on further taking advantage of and expanding supply agreements and local market relationships to augment delivery opportunities, cushion us from market risk and provide a catalyst for stronger earnings as market conditions get better. The fourth quarter acquisitions enhanced the opportunities for us to execute on this track, helping improve our per-acre stocking, and our expected over portfolio yields. And, we will be focused from now until the end of year on successfully integrating these timberlands into our operations. Our strategic acquisitions objectives remained focused on identifying timberlands like coastal Georgia and Carolina Midlands V, which can help CatchMark achieve the highest productivity per-acre compared to the rest of the industry. At present we see good potential for making additional acquisitions given our pipeline and we are actively pursuing new strategic joint ventures with institutional partners. And, we remain fervently committed to sustainable forest management practices for helping deliver durable earnings growth for shareholders and to support our dividend. That superior and sustainable rate of return for stockholders supports everything we do in CatchMark, operations, capital allocation strategy, and acquisitions, it’s all about providing solid dividend and building long-term value. Thanks very much for joining us this morning. And, now Brian, John, Todd and I will join me to answer 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:]

Just to start off with maybe just - can we talk a little bit more about the deal pipeline, Jerry? Do you actively have anything else under LOI or anything else you would expect to close by year end?

[Jerry Barag:]

Nothing by year end, no. The pipeline itself is pretty broad, and we have number of new transactions that have recently just come on to the marketplace that we’re evaluating, I wouldn’t imagine that bidding is going to occur significantly before the end of the year on some of these transactions and they would look to be, if we’re successful kind of first quarter closing.

[Collin Mings:]

Okay, that’s helpful. And, then maybe just a context to that and going back to prepared remarks just the latest update on additional joint venture deals, anything else you see coming together over the next quarter or two, as it specifically relates to the JV platform?

[Jerry Barag:]

We are working our hardest and continue to make progress on that, and I think that’s kind of the timeline that I personally would set for a goal for the company to have something to be able to announce that’s further along those lines during that period of time.

[Collin Mings:]

Okay. So, as we think about that maybe some point in the first half of ‘18, we might see an additional JV deal, is that a fair way to think about it?

[Jerry Barag:]

I think that’s fair, yes.

[Collin Mings:]

Okay. And, then just turning to operations, John, as you think about your different wood baskets and are budgeting for 2018, what type of move, if any, are you expecting on sawlog pricing next year, just from a budgeting standpoint, in the conversations you’re having with your customers?

[Todd Reitz:]

Hey Collin, this is Todd. Right now as Jerry touched on, there’s a lot of positive news out there with all the investments and everything. But again micro-market business, we anticipate that being very steady to flat moving into the first quarter of the year consistent from where we are today.

[Jerry Barag:]

Collin, I’m sure it hasn’t been lost on you. The list of capital projects in the manufacturing sector, both capital capacity expansions and retail mills continues to grow. And quite frankly, as of yesterday there was another big announcement from Interfor that they’re going to spend call it over $100 million on their existing system to say increase capacity and that one directly relates to us, because pretty much their entire U.S. system touches our timberlands in one way shape or form and they are a major customer, so that’s very exciting for us, we think it has ultimately a very positive impact on what will happen in the future.

[Collin Mings:]

Okay, that’s helpful. And, just maybe along those lines, any thoughts just as it relates to the CBD and AD determinations that were finalized yesterday, and how do you expect your customers to respond to that?

[Jerry Barag:]

It just keeps going, I mean, there really isn’t a whole lot of change to this, you can read between the lines here, but almost all of the Canadians saw millers continue to redirect capital into the U.S. South from a manufacturing capacity and that is a clear indication that their expectation is that at the end of this process that demand and production and capacity is going to be moving from Canada in one way, shape or form to the U.S. South.

[Collin Mings:]

Okay. One more issue I wanted to touch on and then I’ll turn it over and jump back in at the queue, but just turning to the balance sheet Brian, just following the equity raise, how much capacity do you have, do you think in terms of incremental debt as you look at future growth, and then maybe just expand on Jerry’s comments around looking at options to extend maturities or increased borrowing capacity if you could?

[Brian Davis:]

Absolutely, so Jerry alluded to, we have got about $175 million in total capacity today as a result of the equity raise pairing it with the [indiscernible] transaction. Today, we would have about $80 million to $130 million of capacity that we easily use to either in the form of direct investments or in joint ventures. As it relates to our existing credit facilities, yes, we are looking to extend our maturities, we are still very satisfied with our maturity stack today, you’re looking at 19, 21 and 24, we are looking at pushing a lot of those out, bifurcating some of the outstanding debt under the multi-draw term facility and pushing that out anywhere between 7 to 10 years, and really giving us a nice staggered debt maturity ladder associated with that. And, the other opportunities that we have is really to improve some of the general terms conditions under our credit facilities, we are excited about those, and we are working hard to make them much more borrower friendly.

[Collin Mings:]

Okay, and to clarify two points they regardless of sort of adjustments to the borrowing facility or borrowing capacity just from a leverage ratio standpoint $80 million to $130 million roughly how much capacity is from a leverage metric standpoint, you feel like, you’d feel comfortable deploying, is that a fair way to think about it?

[Brian Davis:]

It’s triangulated, so there is a leverage standpoint, there are types of assets which you would be acquiring relative to the cash flow generation capabilities from those assets and then you have a total capacity element at $175 million using $130 million, it leaves you not as much liquidity as maybe one would want to have. And, so if we look at refinancing our existing credit facilities maybe we can increase some of that headroom which will provide us additional flexibility and capacity.

[Collin Mings:]

Got you, in other words, at this point $80 million to $130 million, but if you increase some of your borrowing capacity overall maybe you push that range of what you’d be willing to play up a little bit on the margin?

[Brian Davis:]

And, it has to be paired up with the right type of asset too, Colin, a right opportunity.

[Collin Mings:]

Okay, all right, I’ll turn it over and jump back in the queue. Thanks guys.

[Jerry Barag:]

Thank you.

[Operator:]

[Operator Instructions] At this time I see no additional questions.

[Jerry Barag:]

Okay. Well, thank you everybody for joining us this quarter. And, we look forward to seeing you after the end of the year for our year end results.

[Operator:]

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