CatchMark Timber Trust, Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good morning, everyone and welcome to CatchMark Timber Trust First Quarter 2016 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Brian Davis, Chief Financial Officer. Sir, please go ahead.

[Brian Davis:]

Thank you, Jamie. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for the first quarter 2016. 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 2015 annual report, our Form 10-K and other reports that we filed with the SEC. 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. It’s beautiful day for an earnings call here in Atlanta. Thanks Brian and thanks to everybody for joining us today. We feel very upbeat coming out of the first quarter and we’re extremely pleased to have announced yesterday and 8% increase in our dividend for the second quarter. This declaration reflects confidence in the company’s long term cash flows and our commitment to delivering shareholder return. We’re also very excited by yesterday’s announcement involving the Carolina Midlands III acquisition scheduled to close late next month or early in the third quarter, which we believe will generate further accretive growth for our company and its shareholders. So in the next few minutes I want to review with you our outstanding 2016 first quarter results, provide some analysis on why we performed so well and give you our current take on the state of the transaction markets including a discussion of the Carolinas Midlands III transaction and other recent acquisitions. As we announced yesterday, CatchMark registered yet another strong quarter showing solid year-over-year increases in company revenues and adjusted EBITDA. These gains have been supported by our purposeful and consistent business strategy to assemble the highest quality Timberland’s portfolio to be nimble in taking advantage of market conditions and to manage our harvest targets to ensure long term sustainable earnings growth. In examining quarterly results highlights, revenues increased 34% over first quarter 2015. Adjusted EBITDA increased 47%, gross timber sales revenues increased 34%, total harvest volume increased 36% and average net stumpage prices for pulpwood increased 8%, good stuff. To give you more specifics on the gain in revenues and adjusted EBITDA, revenues increased to $27.2 million for the three months ended March 31, 2016, from $20.2 million for the three months ended March 31, 2015, due to an increase in timber sales revenues of $4.4 million and an increase in land sales revenues of $2.5 million. Over the same period adjusted EBITDA was $16.1 million, a $5.1 million increase from the three months ended March 31, 2015, primarily due to a $3.1 million increase in net timber sales and a $2.6 million increase in net revenue from land sales. Our net loss also decreased to $600,000 for the three months ended March 31, 2016, from $800,000 for the three months ended March 31, 2015, as a result of a $700,000 increase in operating income, offset by $0.5 million increase in interest expense. So let’s briefly analyze the results. The strong first quarter results were driven by activity generated during 2015 and carried over from that time period. We strategically took advantage of favorable overall pulpwood and sawtimber demand in our selected markets and opportunistically accelerated planned sales volumes to lower the risk for meeting our 2016 earnings objectives. To meet market demand both pine pulpwood and pine sawtimber harvest were above budget and volume and pricing relative to the markets and we were able to conduct harvest activities despite continuing wet weather conditions in some areas. For example, we accelerated the movement of additional pulpwood to several of our key customers in both the Texas and Georgia markets throughout the quarter. Notably, we also rapidly integrated fourth quarter acquisitions in South Carolina and the entire 2016 budget harvest for those properties is now either sold or under contract. In addition, we continue to increase the percentage of sawtimber in our harvest mix as a longstanding part of our strategic plan. Sawtimber represented 44% of the harvest mix in the first quarter of 2016, compared to 40% in the first quarter of 2015. As you know, our goal is to achieve an approximately 50-50 sawtimber pulpwood harvest mix and we've been steadily moving in that direction. On the Timberland acquisitions and sales front for the quarter, we closed on $12.2 million of Timberland purchases for approximately 8700 acres located in Georgia and South Carolina in two separate transactions. These were select high-quality acquisitions that complement our existing holdings with access to excellent no markets. I'll get into our big just announced news on the acquisitions front in just a moment. During the quarter we also completed $8.7 million in timberland sales, representing 5,000 acres and retained the harvest rates to approximately 100,000 tonnes of merchantable timber on the acreage sold, which has a book value of approximately $2.4 million. This activity puts us ahead of schedule on meeting our 2016 land sales targets. Yesterday we announced CatchMark single largest acquisition since the listing of our shares, the $102 million Carolinas Midlands III transaction. In a privately negotiated deal, we have agreed to acquire 51,700 acres in South Carolina from clients of Forest Investment Associates with a scheduled closing in the late second quarter or the early third quarter. Largely comprising prime quality pine plantations, the acquisition will compliment and expand our timber volume significantly in North Carolina and South Carolina to 69,300 acres. We allowed approximately 2.1 million tonnes to CathMark's merchantable inventory and we will add approximately 250,000 to 300,000 tonnes per year to our harvest volumes over the next decade. Beside the excellent soil quality and the above average growing potential of these timberlands, we especially like this transaction because of the strength of nearby middle markets and the assumption of existing long term supply agreements. These agreements with a leading investment great counterparty will provide us an assured outlet for our pine and hardwood pulpwood harvest, which we anticipate will account for approximately 50% of the total harvest from the property. The diverse regional wood products mills in the area of inter stable ownership and superior management in one of the Southeast strongest timber markets. At present we have a very active pipeline of high-quality offerings. I would characterize in fact as extremely robust, following what was a slow period last year. The activity is driven primarily by the liquidation of funds nearing the end of their durations and the Carolinas Midlands transaction is an example of that trend. Right now we're evaluating the suitability for CatchMark of an array of potential transactions of varying sizes; small, medium and large. In doing so we will remain highly selective in underwriting transactions to ensure any acquisitions meet our criteria for producing sustainable long term earnings from premier tracks in excellent no markets. From a capital standpoint, we're extremely well positioned to continue to make selective and accretive acquisitions due to our low leverage metrics and flexible balance sheet. As you all know, the ability to move quickly and capitalize on timberland purchases is a key part of our growth strategy to assemble the industry’s highest quality portfolio. In the wake of the Carolinas Midlands transaction, we remain positioned to execute additional transactions during the year with more than $200 million of liquidity. At the same time, we continue to evaluate multiple alternative sources for long-term capital to support our business strategy, which includes joint ventures with potential investors. Our strong capital position also supports our $30 million share repurchase program, which remains ongoing. CatchMark repurchasd over 240,000 shares of common stock for $2.5 million during the first quarter. At the end of the quarter, we had 38.8 million shares of common stock outstanding and can continue to execute on our share repurchase plans during the quarter. I would like to take the opportunity on today's call to highlight that our timberlands were recently audited and recertified to SFI standards. As you know we make a big deal about the sustainability of our timberland's which ties into durable earnings and the SFI results point to the soundness of our long term plan for responsible for its stewardship. Lastly and importantly, we announced yesterday that we will increase our quarterly dividend by 8% as a result of successfully expanding our ownership footprint, improving the overall quality of our holdings and maximizing results from our operations. On June 16, we will pay a $0.135 dividend per share for stockholders record as of May 27, 2016. Sustaining and growing the dividend while building shareholder value has been our overarching goal for the company and we think this latest increase our second sincere listing further validates our ongoing and consistent strategy. With regard to the markets pulpwood demand remained solid, which is an important driver for our business and we remain optimistic about housing. On employment as low, interest rates remain at historically low levels, wages have been edging up and high single family and multifamily rental rates are encouraging more home buying. Overall, we expect sawtimber pricing to rebound later in the year as improvements in the housing market spur greater buyer demand and we're well positioned to take advantage while constantly gauging our mill markets to match harvest with demand. In summing up the first quarter and more recent activity represent extremely good news for CatchMark. We're very pleased about the quarterly results and the implementation of our strategic direction. Revenue, adjusted EBITDA, gross timber sales and harvest volumes were all up. We took advantage of market dynamics to lower the risk for meeting our 2016 plan, accelerating timber sales and timberland sales without impacting long term sustainability. And our operations team deliberately in managing this process and capturing the opportunity. Our capital position remains strong and is facilitating high quality timberland purchases as new properties come to the market. As we integrate these purchases, we should see continued solid gains in all operating metrics in the coming quarters. Moving forward we remain highly selective about acquisitions to ensure that we meet our ongoing objective to expand the highest quality timberland portfolio in the industry and provide the sustainable growth our shareholder seek in dividends and shareholder value. Again, thank you very much for taking the time to join us this morning. John Rasor, Brian Davis and I will now be happy to take your questions.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from [Paul] from Raymond James. Please go ahead with your question.

[Paul:]

Hi, thank you and good morning up there in Atlanta, it was a very nice quarter, congratulations.

[Jerry Barag:]

Thanks Paul.

[Paul:]

Collin, by the way is on that other call which I'm sure you know about, but a few questions for you as it relates to the purchase from FIA, could you tell us how that transaction came together? Was it a marketed deal privately negotiated?

[Jerry Barag:]

Yes, I'm happy to do that Paul and thanks for joining us today. We have been in discussions with FIA and happily from the location standpoint, they are located close and we maintain a very collegial relationship with those guys. But late last year they approached us about the potential transaction and quite frankly they’re looking going forward given the significant slate of timberland transactions that both they and their competitors in the timber world have come into the market. They were monitoring our capital availability pretty closely and I think that they proactively decided that they wanted to make sure that they were able to conduct business with somebody who had capital availability, great process that would assure closing and they wanted to pin that down quickly rather than have somebody distracted by 10 other deals trying to catch closing on this deal. And so we think we fit the bill perfectly for them. It was a great sized transaction for us and it assured them a very quick, quiet and certain outcome and that’s the hallmark that we set at least in the acquisition market for ourselves.

[Paul:]

Sounds good and can you tell us a little bit about the yield that you expect, the cash yield from the harvest as well as any -- what the HBU prospects are for the property?

[Jerry Barag:]

Sure the yield is it’s in our range of what we look at probably a little bit above average the midpoint between 4.5% and 5.5% that's what we've been able to transact on really for the last several quarters, the last several years now. So it’s attractive from that standpoint. We’re able to generate that yield. This is a little bit of a different kind of transaction because we’re able to generate that kind of yield really without much in the way of HBU land sales, which with respect to this property are going to be inhibited a little bit because of the supply agreements that are there. So most of the return on this individual transaction is really just going to come from harvest revenue for a long time.

[Paul:]

Okay. Thank you. And then some of the smaller deals that you closed in the quarter if you could just give us some more color on how that all came together?

[John Rasor:]

Sure Paul well this is John. We closed some in our Central Georgia area that was purchased from [Ryanai] and they pulled up very nicely to our previous acquisitions in that vicinity. We also closed on two properties up in South Carolina that added to what we had already purchased there initially so about 17,000 some acre position and now with acquisition that Jerry has just described we’ll have a 67,000 acre footprint there and that’s a nice size to grow from.

[Jerry Barag:]

Right those first two Carolina deals one came from [Atimo] and one came from a private land owner, again both of those were privately negotiated deals and while the total number of acres over the last several quarters has been kind of small it’s been on the smaller side, I'm very proud of what we’ve been able to execute because we’ve slogged through sloppy transaction market and we’re able to produce some great acquisitions and for the most part they've all been private transactions.

[John Rasor:]

Paul I would add too there because Carolinas Midlands III acquisition is especially attracted to us because it’s well stopped, it’s got great productivity, side indexes and a very robust milling market. World-class pulp and paper mill that will be selling pulpwood into and a nice selection of name brand sawmill operators that we’ll be reaching out and we intend to be one of the key suppliers.

[Paul:]

Okay. Great sounds good. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Dave Rodgers from Baird. Please go ahead with your question.

[Dave Rodgers:]

Okay. Good morning guys. Maybe one for Brian and then one work my way over to John and Jerry but I guess I wanted to start with where you feel your capital availability is today? You put out a decent amount of money here in the quarter or at least committed to it, so starting with that and then I guess the second part of that second question is can you talk about the acquisition pipeline and how quickly we can see going through that availability?

[John Rasor:]

Certainly. Good morning, Dave. As it stands from a liquidity standpoint, we have a little over $200 million of capital available to us. We've been consistent in our view on deployment of capital. First and foremost we have a low cost of debt available to us with effective of cost of debt under 2% after the patronage. The types of acquisitions that we look at are very cash accretive and our underlying asset base provides the consistency and stability of cash flows, which allows us to really provide a lot of balance sheet flexibility to support additional acquisitions. As we sit here today, we have about $100 million we would be very comfortable deploying in capital and would push that leverage from that range for the right opportunity and when we talk about opportunities, I'll turn it over to Jerry to talk about our pipeline little bit more.

[Jerry Barag:]

Sure. So the pipeline really since the beginning of the year been growing and as in counterpoint to 2015, the slate of our offerings has been coming out has all been very high quality. And it's also not been concentrated in one region really as earlier quarters have been. So there has been a lot of activity in the Pacific Northwest on a relative basis. Prices have been higher than they have in the U.S. South. We're now seeing a full spectrum of offerings from coast-to-coast really and some outside of the more traditional timberland ownership markets, which would be the south and the Pacific Northwest. So we're seeing different kinds of offerings from the Appalachian regions and going into the Northeast, which are areas that we don't target but they are still part of the overall picture. The way I would characterize it is we're just seeing now the beginning of a long string and it will be a multi-year string of very large transactions that are going to be coming to the market as a result of the exploration of those large TIMO closed end funds that have about reach the 10-year mark. And we think that the sellers of that for the most part institutional investors that are being advised by the TIMOs are going to do that in a very orderly way and keep that structure to the overall marketplace that doesn't overwhelm the capacity of the market to clear these transactions. And so with respect to what we're doing, we're looking at what's out there, what's suitable for us given the high standards that we've demanded of ourselves in terms of the quality of the property and then matching that with our potential capital availability today and going forward.

[Brian Davis:]

And Dave, this is Brian just to clarify the liquidity position it was really post Carolinas Midlands III and to put that availability in which we frame for you in perspective relative to our current enterprise value, that still provide for an additional 10% to 15% growth of our business. And so it's a meaningful amount and we've been very disciplined and focused in our approach to delivering that capital into the marketplace for the types of acquisitions and smart capital deployment.

[Dave Rodgers:]

That's helpful and I guess Jerry maybe talk a little bit and Brian chip in if you want about the joint ventures and other capitals versus that you've talked about before now that the acquisition pipeline sounds like it's filling up or at least you expected to be pretty full this year.

[Jerry Barag:]

Sure. So we have been moving down that path and we continue to making inroads to do it. It's been a little bit the chicken or the egg and so having those things actually come to fruition it's somewhat dependent upon having real properties to transact on with some of these institutional inventors. And it's been elusive just because of the fact that doing all this in a blind pool or a blind kind of a concept, conceptual arrangement is tough to get done and so I think now people understand and it’s much more tangible seeing these transactions come into the market place that we will be able to execute and implement that kind of strategy. And we’ve made a lot of inroads. We’ve developed a lot of relationships that we think we’ll be able to capitalize on at this point.

[Dave Rodgers:]

Okay. That’s good. Maybe last one for me with regard to just timber pricing in the first quarter. I don't -- soft timber was a little bit weaker. I don't know if that was a function of the volume that you pushed into the first quarter just to take advantage of some things, but maybe talk a little bit about the volume pricing trade off in the first quarter if there was one and how we should think about that?

[John Rasor:]

Sure. Dave give you a little backdrop on that as you know, sawmill pine lumber prices went into a decline during the latter part of the year 2015 and we had some awfully good prices to walk in and so we took the opportunity to make sure that we got as much moved as we could in the fourth quarter. We had to do that around lot of the rain and record flooding particularly in Texas and West Louisiana and as a result of all that activity as Jerry mentioned in his remarks, some of that carryover into our first quarter and fortunately we still have the pricing locked in and we took advantage of it But at the same time pricing started into some decline in some areas. The mill inventories in the log yards are very healthy and our pricing will still grow to the market better. So we’re pleased that we were able to do that and get the year off to a good start. We’re not going to force saw timber into the East Texas area at the expensive price as we’ve got the optionality of focusing on pulpwood and pulpwood biddings and so we’ll do that in the foreseeable future and hope that the much healthier Southern plain lumber markets that have now put it back up very nicely will get some traction in terms of mill demand for our products. In Central Georgia one of our key customers has had dealing with improving some of their mill efficiencies and did take some production cutbacks not so much a function of the market as much as just wanting to get their mill in top shape or their mills in top shape. And lastly the mix of smaller diameter saw timber compared to larger diameter saw timber and shipment saw that make up the whole mix of our saw timber component depending on the percentage of each one of those product classes that will move our prices well. And so as we move around track to track and geographically at times we’ll be cutting heavier to a larger diameter versus a smaller diameter. So that’s going to be another factor in the pricing dynamics but as Jerry mentioned, we think there should be some optimism here going forward.

[Jerry Barag:]

Yeah we looked really late in 2015 and early at the beginning of the first quarter at the opportunity of de-risking this year's earnings and we made that decision and we executed upon it and as we sit here today we’re a 100% convinced that we made the right decision to do that. We do have optimism that the markets are going to continue to get better and move higher toward the end of this year, but given the opportunity that was presented to us earlier in the first quarter we took advantage of it and we’re happy with what we did.

[Dave Rodgers:]

Great. Thanks guys for the color.

[Operator:]

[Operator Instructions] And ladies and gentlemen at this time I'm showing no additional questions. I’d like to turn the conference call back over to Management for any closing remarks.

[Jerry Barag:]

Thank you. Again I’d like to thank everybody for joining us. It was an exciting first quarter for us. This has been an exciting day of announcing on a lot of key strategic initiatives that we've been working on for some time and thanks again for your participation. We’ll talk to you in a quarter.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.