CatchMark Timber Trust, Inc.
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Welcome to the CatchMark Timber Trust Third Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Brian Davis, Chief Financial Officer. Please go ahead.

[Brian Davis:]

Thank you, Gary. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for the third 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 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 on 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:]

Thank you, Brian and thank you to everyone on the call for joining us today. Let me start out by highlighting the key takeaways from the third quarter and yesterday's earnings announcement. After very strong first and second quarters, CatchMark registered another solid result for the three-months ended September 30, increasing revenues, timber sales revenue and timber sales volume. The Carolinas Midlands III acquisition has been integrated quickly and is performing better than our expectations. We are on track to meet full year guidance despite recent wet weather challenges in Texas and Louisiana and we have declared a fourth quarter dividend in line with the third quarter payout. All of this comes as a result of prudently managing our harvest mix to deal with wet weather conditions as well integrating accretive acquisitions. Our entry and expansion into new mill markets has been a big plus since we have benefitted from some of the highest pulpwood pricing in the south. Our growth strategy is meeting our objectives including recurring dividends, high levels of sustainable productivity and revenue growth. So overall, we are very pleased with the outcomes and the outlook. Now let's examine the third quarter results in greater detail and let me provide some analysis. Net loss was $2.9 million or $0.07 a share on revenues of $18.3 million for the three months ended September 30, 2016. Revenues increased 4% year-over-year due to an increase in timber sales revenue of $3.4 million, offset by a decrease in timberland sales revenue of $2.4 million due to timing. Most of the increase in timber sales revenue can to attributed to higher volumes from recent acquisitions. We have harvested 553,800 tons in the third quarter, a 24% increase year-over-year and a 15% increase from the second quarter this year. During the third quarter, approximately 53% of our timber sales volume was derived from acquisitions completed since 2013. By selectively buying prime properties in premium mill markets, we also have been able to obtain superior pricing from our harvests. For example, our average net timber pricing for both saw logs and pulp held a premium over the timber mart sale [south light] [ph] average as a result of the markets that we are in. As I noted, the Carolina Midlands III acquisition is performing better than expected during the first four months of ownership and already has played a part in our recent gains. These results have reinforced our view about the benefits of operating in this new mill market, one of the best in the entire U.S. south and the integration of the operations has gone entirely as planned. Saw timber pricing has firmed but we see no immediate increases coming in saw timber prices and with confidence our mill markets support better supply demand dynamics than the majority of sub-markets across the U.S. south. And we have been able to execute effectively on delivered sales, carefully controlling the harvest and merchandizing to our advantage. Our pulpwood stumpage prices in particular benefitted from our presence in the South Carolina and coastal Georgia markets, which offered some of the highest pulpwood prices in the U.S. south during the quarter. We continue to see solid demand for pulpwood products from our customer base. The housing market continues to proceed through its recovery. We do not anticipate any demand spikes or declines, more of the same steady progress to support prices but not necessarily accelerate them yet. So our ability to match our harvest to demand and executing on merchandizing will continue to provide us an edge in delivering on our targets. Our decision to accelerate plant harvest timber sales volumes to earlier in the year, is paying off and meeting 2016 earning as objectives. Adjusted EBITDA of $7.2 million was in line with expectations but down year-over-year due to the timing of land sales. Timberland sales revenues decreased to $1.2 million compared to $3.6 million for the three months ended September 30, 2015, due to selling fewer acres in 2016. We sold 800 acres of timberland during the third quarter of 2016 versus 2000 acres in the third quarter of 2015, but we are on target to meet our timberland sales forecasts for the entire year. For comparison, year-over-year for the nine months ending September 30, we have sold approximately 6,300 acres of timberland for $10.7 million on 2016 versus 5,600 acres of timberland for $10.3 million in 2015. Overall, we managed through the operating challenges from what amounted to record rainfalls impacting our timberlands primarily in Texas and Louisiana. Though harvest volumes were below our forecast in this region because of the wet conditions, we were able to ship to more favorable pulpwood opportunities in this mill market and improved weather patterns should allow us to meet our full year targets in this region. Incidentally but importantly, from a risk management standpoint, hurricane Matthew had little impact on our timberlands in the Carolinas and Georgia since by design we were far enough inland to be insulated from coastal storm damage. While we focused on taking on the operations of recent acquisitions in the third quarter, we did not complete any new purchases. We continue to remain very disciplined and selective in evaluating and managing a robust pipeline for prime tracks and top mill markets that we believe can sustain long-term earnings. The balance sheet remains strong and gives us flexibility to move quickly on acquisitions. We execute at $45 million interest rate swap during the quarter, bringing total fixed rate debt to $80 of our $300 million outstanding with a weighted average interest rate of less than 3% before the impact of patronage dividends which effectively lower that rate even further. We have $200 million available under our various credit facilities to financial future acquisitions, which of course remains a very important component of our growth strategy. We made no share repurchases during the third quarter under our $30 million share repurchase program approved by the board in the summer of 2015. As of the end of the quarter, the company had up to $21.2 million remaining for share repurchases under this program. While our capital allocation strategy focuses on acquisitions and to a lesser extent opportunistic share repurchases, paying a meaningful and cover dividend with the opportunity to grow the dividend over time, remain a top priority. As we announced yesterday, a 13.5 cent dividend for shareholders of record on November 30 will be payable on December 16. In summing up, so far so good in 2016. And we take pride in what was accomplished during the third quarter, especially on the operations front, given the weather related issues. Revenues, harvest volumes and gross timber sales were all up. In a very short period of time, our biggest acquisition to date, Carolinas Midlands III, has successfully been integrated and we are especially pleased about the new mill markets that this acquisition has allowed us to expand into. We were very strategic in accelerating timber sales and timberland sales to earlier this year, anticipating changes in market dynamics and we are comfortably on course to meet our earnings guidance for the full year 2016. Careful market selection has positioned the company advantageously and Carolinas Midlands and other recent acquisitions have been consistent with our strategy of expanding the asset base through acquisitions of premier timberlands with sustainable growth characteristics and most importantly, long-term income generating potential. Our capital position remains strong and we are extremely well positioned to take advantage of what we anticipate to be excellent timberland buying opportunities in the near future. And we also remain in a position to cover our dividend and grow our dividend over time. So as we are again looking ahead to 2017, we intend to maintain our record of strategically managing our timberland operations to anticipate and meet shifting market dynamics. Also, selectively expanding our timberlands to provide sustainable growth while prudently stewarding our capital and in doing so, assembling consistently the highest quality portfolio of timberlands in the industry. This should all translate into increasing our dividend over time and higher shareholder value. Thanks, so much. And now John and Brian will join me to answer any of your questions.

[Operator:]

[Operator Instructions] The first question comes from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

First question is, just can you provide us an update on your progress towards establishing a joint venture partnership. I think you guys have talked about a lot of the path, and what is really the most likely structure at this point?

[Jerry Barag:]

Good morning, Collin, it's Jerry. Sure I am happy to. We are actively now in the market speaking to institutional investors and given the kind of the tempo of that business, the pace of it, this is a slow time of the year for actual allocations and commitments. But we expect that the pace of that will pick up early into 2017. And so we are on target to hopefully get something finalized and enacted towards the middle to third quarter of 2017. With respect to the structure, we have after a lot of consideration and thought around it, we have elected to move forward on a basis where we would do strategic joint ventures with groups of institutional investors. And that will all be done consistently with their investment and operating strategy. So there is no change in strategy, it's really just the addition of additional capital that would be non-dilutive to our shareholder base.

[Collin Mings:]

On that front, would you guys consider or are you considering as part of that structure to contributing some of your existing land, kind of a [Twin Creeks] [ph] type of strategy or is that on the table at this point?

[Jerry Barag:]

I think everything is on the table and that certainly is a possibility. But in comparison to [Twin Creeks] [ph], the amount of property that we necessarily might have to contribute, just give that relative size would be something significantly less.

[Collin Mings:]

Okay. And then as you kind of made a reference to in the sense of it being a slower time of the year as far as deals getting done, can you just update us on the acquisition pipeline and is there anything you expect to close before year-end?

[Jerry Barag:]

The pipeline, again there is the real pipeline of deals on the market and the anticipated pipeline which is either rumored or about to hit. And so as you accurately portrayed it, there is more of the emphasis right now is on clearing the decks of deals that have been offered earlier during 2016 and there is a number of those in progress. I would imagine that that the old TimberStar transaction which was [indiscernible], saw a third of the old TimberStar transaction which was offered earlier this year, is likely going to close in the near future and I can't tell you whether that’s going to be before the end of the year or right after the end of the year, but that’s the one that’s most imminent and that’s a fairly sizable transaction. And then there is a large west coast transaction that was offered by the Rosboro Timber and Lumber Company that more than likely will also close before the end of the year.

[Collin Mings:]

But to clarify, I guess, Jerry, in neither one of those you are a likely participant?

[Jerry Barag:]

We are not a participant in them, no.

[Collin Mings:]

And as far as, anything for your balance sheet, do you see anything that you might close on and you don’t have to get specific as far as deal terms of anything, but anything else in your pipeline? Specifically that you might close on or is it likely now, it's been quite an incremental acquisition activity likely to show up 2017?

[Jerry Barag:]

No, we have got a handful of smaller transactions that are very accretive and augment the existing asset base that we like very much and they are all, there are several of those that are in process. So it will be comparatively smaller amounts of money but there is still deal flow that’s coming through the system.

[Collin Mings:]

Okay. And then switching gears, Brian, can you just maybe update us on how you are thinking about the current mix of floating versus fixed rate debt, just following the swap you guys put in place during the quarter. And would it make sense to this point in the cycle, just to maybe ratchet up that mix of fixed rate debt even more.

[Jerry Barag:]

Well, just to provide you perspective, Collin. We have only seen the short-end of the curve increase about 10 basis points on one month LIBOR. But what we did see and why executed on the fixed rate swap was in August, you really saw the top end of the curve ratchet down by about 75-80 basis points and so paying up on the curve relative to where the short-term rates were, was really advantageous for us and obviously at a rate of 1.28% that fixes our floating rate through the end of our term-loan to 2024, was very advantageous. But as we sit here today, having $80 million of our debt fixed, we are not feeling any pressure at this point in time but obviously we will always be looking to be opportunistic and have our eye out regarding impacts of interest rate fluctuations.

[Collin Mings:]

Okay. And then just as you think about the recent sell-off in the stock and kind of going back to the conversation around it. Looking at joint ventures, looking at still some additional acquisition activity for your, directly for balance sheet. Just how our stock repurchases, factoring into that equation at this point, just given the sell-off and we are not too far away from kind of the average price that you guys have bought back stock at.

[Jerry Barag:]

So we have a fairly consistent approach to share repurchases and an algorithm that goes along with that. And so I think what people should anticipate is that it's more of the same. So, so far up until the very recent path, we have bought back a lot of shares of stock at somewhere around an average of around $10.30. And given where shares are today and where they have been for the last week or so, I think you can expect that same kind of results.

[Brian Davis:]

And Collin, not to be too technical but we operate in our, what's called a 10b5-1 plan, which allows our [indiscernible] to stay open a lot longer than maybe what some other share repurchase plans operate under.

[Collin Mings:]

Okay. So you are not subject to some of the same blackout periods that maybe some of your peers have talked about as it relates to share repurchase activity?

[Brian Davis:]

Correct.

[Operator:]

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

[David Rodgers:]

Maybe Jerry or John, just on timber pricing and you have some thoughts in your opening comments and I appreciate those. It seemed at the beginning of the year you had a much more opportunistic or optimistic tone about kind of where pricing might be headed. I don’t want to say today was more pessimistic but maybe realistic is the world. But can you give us kind of a sense on your outlook there and maybe any type of recovery in pricing that you do anticipate over a several year period.

[Jerry Barag:]

Hi, Dave, it's Jerry. Let me start and I then I am going to turn it over to John. I don’t think that with respect to 2016, our expectations of pricing are really much different than where we started the year. And we have talked about it in several of these earnings call, we made a strategic decision early in the year to frontload our harvest to the best extent that we could because we believe that given some weather related issues and spot market pricing that we would have the opportunity to generate the best revenue profile for the company by doing that. And the expectation at the beginning of the year that was that 2016, not necessarily in the pulpwood markets which have continued to perform very well, but saw timber markets. It was going to be a fairly flat pricing environment and so we wanted to take advantage of every single opportunity that we possibly can and I think we have executed that with near perfection. Now having said that, what's really changed is kind of the outlook for what pricing it's going to look like beyond 2016 and I think what you are seeing and some of the market backdrop that you are seeing is market expectations for 2017 continue to be in a persistently flat kind of range. John, you want to make some more comments?

[John Rasor:]

Well, certainly I agree with what Jerry just said. We are encouraged by the continuing good pulpwood demand we are seeing across our system. As to saw timber, we feel like our pricing is firm. Our volumes are committed to key customers in a way to try our sales to be a key supplier and being able to have an outlet is important in this market that we find ourselves in. I think I would also like to emphasize that we are now up over 60% of our timber sales being on a deliberate basis. We are controlling everything from the stump to the point of delivery and that gives us the opportunity to be particularly watchful around merchandizing and at the same time do a better job of controlling logistics. So right now we are feeling pretty confident about where we are.

[David Rodgers:]

And I guess maybe with the backdrop of those comments in terms of kind of timber pricing, what's happening or what do you think is going to happen in the acquisition market in terms of pricing. And I know each parcel is going to be different, each timberland is going to be different. But in the sense of kind of what do you expect to happen without any upward momentum in pricing here. Are you seeing transactions come in at lower prices than you would have anticipated? Is there still too much demand and you have got a disconnect between timber pricing and underlying land pricing? Any color on that would be helpful?

[Jerry Barag:]

So in general, I will tell you that there is very little fundamental upward pressure in pricing for timberland. And that’s in pretty much all the markets across North America. So primarily, where we would look or we would deal with, the U.S. south and the Pacific northwest. The markets are being pretty discriminating and realistic and as a result contrary to what we probably saw a decade ago which was all timberlands in the U.S. south was kind of homogenous and traded within a very tight band of prices. We are seeing people being much more discerning about timberlands and the future growth potential of those markets and of those specific lands. So it's beginning to develop or take hold that we are seeing a bifurcation in the markets where really high quality timberlands are essentially maintaining current levels of pricing. And I would expect that you are going to start to see some transactions of lesser quality timberland start to trade at what you would probably consider lower prices. I think that’s a healthy dynamic for the industry. I think it's been a long time coming but ultimately it has a positive implication for the markets and we think that over time it will become more and more evident to the market that quality of our timberlands because we do feel that we have the ability to differentiate ourselves amongst the peer set and the market in general with the quality of the assets of that we own.

[David Rodgers:]

Thanks for that. I guess on the JV front, have you thought like you have missed any transactions out in the market that you would like to participate in by not having the JV in place and really, I guess, then the follow up to that would be, is the JV issue really to deal with parcels of size or you just don’t have the liquidity to take it all down?

[Jerry Barag:]

I am going to answer them backwards, Dave. So I mean in large part, we think that there are attractive opportunities that are going to be there and that we need to right size our capital base to be responsive to what those opportunity is going to be. And just because of the dynamic of these expiring funds that have very large assets in them, a large part of by volume of the transactions that are going to be upcoming are going to be big deals and so average deal size is getting larger and we feel that we need to be responsive to that. With respect to whether or not we have missed anything that has been -- because we haven't had the JV platform up, there is probably, if I look back over the last 12 to 18 months, there is probably one transaction that we probably would have been anxious to do. But by and large, we have been involved in one way shape or form with every process and all the way through. And there hasn’t been anything that has traded at a price that we have been overly astounded with that we have missed owning.

[David Rodgers:]

And maybe just a last question, maybe Brian can address this one. But in terms of the price per sale on acreage during the quarter, just a little bit at the lower end of your range, I think historically but certainly not out of the realm of what we would expect. Any ideas on kind of where price per acre comes in overall for the year for the fourth quarter as you continue to close sales?

[Jerry Barag:]

I will turn that over to John to speak to the stocking levels of the merchandising associated with the land sales during the Q.

[John Rasor:]

Relatively few acres we did sell in the third quarter. We basically either had very little stocking and/or had been -- had recently been harvested it. So essentially you are looking at what the dirt bag it was and that said, a pretty nice premium to where it would be versus what we had in it.

[Operator:]

The next question is a follow up from Collin Mings with Raymond James. Please go ahead.

[Collin Mings:]

I just wanted to follow up, just combining your comments about the pricing environment with one of your peers kind of ratcheting down harvest activity recently because of market conditions. How does that factor into how you are planning for 2017 in terms of harvest levels?

[Jerry Barag:]

Collin we are a production and volume driven organization and we think that that and given the mandate and the objective of what we are supposed to be doing, is the right way to be managing things. And as John said, we have now gotten ourselves, and this has been a deliberate effort to do it, we have gotten ourselves to a point where we are touching 60% of our harvest that is on a delivered basis that goes through either long-term or shorter term supply agreements. We think that that is a key component to our strategy which is to deliver a consistent and reliable dividend which starts with a consistent and reliable cash flow, which starts with a consistent and reliable volume commitments that we make. And you know I would like to tell you that I have enough insight and that I am smart enough to figure out how to time all these markets perfectly and nobody is that good. And so we think from -- we think about things from a risk-adjusted return standpoint and a risk adjusted performance standpoint and that’s not going to change.

[John Rasor:]

I would add to that that once you build your momentum and establish yourself as a preferred supplier to your key customers, it's important to stay there and we have been successful in doing that. So as 2017 -- Brian, I don’t know if you want to make any comment on that or wait until we offer guidance.

[Brian Davis:]

We will continue operating with the parameters of superior risk-adjusted returns through consistent delivered volumes into our market places.

[Jerry Barag:]

Yes. And without being overly obvious about it, we think that when we establish those relationships with those clients that we are selling timber to, that we don’t want anybody to take our position away that having an outlet and having a preferred spot on the pile of timber that goes into a mill, has immense value in the short term and the long term.

[Collin Mings:]

And then I guess for, for maybe John, I am curious if you could weigh in on the impact your are hearing from your customers as it relates to the uncertainty surrounding the softwood lumber dispute and then combine that with kind of how you think about the outlook for 2017 with what, if any, impact you think a new deal or potential trade duties could have on the demand you see from your customers?

[John Rasor:]

I think it's going to be favorable. I think our view is that it's going to be managed trade in one form or another and the south remains the wood basket to go to and as lumber prices improve, we will benefit from them.

[Collin Mings:]

Okay. Anything in the short-term that you are hearing from your customers though, as it relates to situation in [indiscernible]?

[John Rasor:]

Nothing that I would put in a headline category.

[Jerry Barag:]

I mean listen Collin, it's for us and from a pricing standpoint, it all comes down to micro-market supply-demand characteristics and the procurement manager at every mill that we sell to, the first thing that he thinks about -- he doesn’t really think so much about what's happening with the softwood lumber agreement, he is worried about where he is getting his timber from and how much he is paying for it and that’s really local supply demand market characteristics. And so to the extent that the softwood lumber agreement changes those dynamics going forward, he will think about that but right now there is no indication that that’s going to have any near-term impact.

[Collin Mings:]

Okay. Just a quick modeling question just on the pulpwood, and I think you addressed this in some of the prepared remarks, but that’s trending higher year-to-date than I think maybe it would suggested earlier this year. Just how should we think about that pulpwood mix in the fourth quarter.

[John Rasor:]

You should see the saw timber mix move up as a percentage and I would expect at this point we are going to be somewhere around 60

[Collin Mings:]

Okay. That’s helpful. Two other quick ones for me. As we have talked about the JVs and the acquisition environment earlier. Just maybe update us on kind of the regional [bond] [ph] between the U.S. south or potentially looking at stuff in the Pacific northwest?

[Jerry Barag:]

You know I don’t think our opinion has changed since the last time we talked about, which is we are essentially at the point of indifference based on where we see transaction prices versus potential returns on those transactions and margins on the two areas. So I can't be more clear than that. We would be fairly indifferent as to where the transactions are. We are much more keyed in on how an individual transaction would contribute to the overall cash flow and sustainability of our harvest over time.

[Collin Mings:]

Okay. And then just on -- going back to today's question, just on the land sales activity. Just maybe update us on what you are seeing as far as demand for recreational land in your markets. I know, I mean as we think about like the Florida [indiscernible] here, for example, continuing to see some strength. Just curious how that in your regional footprint what that overall improving job numbers, things like that is factored into improvement in terms of demand for recreational and rural land.

[Jerry Barag:]

That continues to be good if not strong. And just to give you an indicator of that, we are already developing a pretty healthy book for 2017.

[Collin Mings:]

And in terms of, maybe recognizing all the nuances but kind of apples to apples pricing on recreational property. Is it flattish or are you actually seeing maybe some uplift in that?

[John Rasor:]

I would say maybe a slight uplift but it really depends on the terms of the sale in terms of whether you are reserving any timber or not. Whether it's been -- whether it's stocked with young age classes or something older but generally the market has been steady to good.

[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:]

Thanks, everybody for joining us again this quarter. We will talk to you after the holidays with our year-end earnings release next time in March and until then, thanks again.

[Operator:]

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