CatchMark Timber Trust, Inc.
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Good day and welcome to the CatchMark Timber Trust Releases Second Quarter 2015 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Brian Davis, Chief Financial Officer. Please go ahead, sir.

[Brian Davis:]

Thank you, Henna. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for the second quarter 2015. I’m 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 2014 Form 10-K and other reports that we file with SEC. John Raiser and I will join Jerry to answer any of your questions after this presentation. Now I turn it over the call to Jerry Barag.

[Jerry Barag:]

Thanks Brian and good morning. We very much appreciate everybody on the call joining us today as we review another quarter of solid performance for CatchMark. Yesterday, we reported excellent year-over-year growth for the quarter ending June 30th, 2015. These results reflect the successful integration of properties acquired during the last year and the continued execution of management strategies to sustain durable gains on timberland holdings new and legacy. At CatchMark, our book remained ensuring sustainable growth for our shareholders and we continue to meet that goal and increase revenues and increase adjusted EBITDA. At the same time, we purchased nearly $30 million in high quality timberlands during the first six months of this year and our acquisition pipeline has recently return to close to 2014 levels after a slow period beginning at the end of last year and lasting into the second quarter of 2015. So we’re optimistic that we can secure additional acquisitions before year-end which comprise timberlands to meet our standards for quality and for sustainable earnings growth potential. And given our available capital resources and credit facilities, we are extremely well positioned to make substantial transactions if the right properties present themselves. I’ll give more comments about pipeline in a few minutes, but first let me review the significant year-over-year performance highlights for the quarter ending June 30th. For the second quarter 2015, we generated a 19% increase in total revenues over the second quarter 2014. We increased adjusted EBITDA by 10%, increased gross timber sales revenue by approximately 25%, increased total timber sales volume by 24% to nearly 450,000 tons. Realized an increase in average net prices for sawtimber by 8% and paid a dividend of $0.125 per share on June 15, 2015. And while on the subject of dividends, yesterday we declared a dividend of $0.125 per share to stockholders of record on August 28, 2015 payable on September 14, 2015. The results reflect how we’ve been able to put into operation expeditiously and effectively a strategic plan for harvesting and managing on an environmental and economically sustainable basis of the 139,000 acres of prime timberlands we have acquired since our IPO in December 2013. In particular, last year, we’re able to take advantage of excellent regional swap timber pricing dynamics associated with our delivered sales volumes in the U.S. South. Additionally, we benefited from stumpage sales with favorable pricing owing to challenging operating conditions resulting wet weather. The relatively strong recent jobs numbers, incremental progress in an improving economy and ongoing modest housing recovery will continue to support CatchMark’s timber sales markets. Pipe supplies and home sales and the evanesce pickup and demand should avoid homebuilding trends. Health demand driven by packaging, pellets and engineered wood products has also been a bright spot in markets where we do business registering year-over-year increases well above industry averages. So we feel good about the economic environment for at least the short to medium term. Looking more specifically at the financial results, CatchMark’s revenues increased to $14.2 million for the three months ended June 30, 2015, up from a $11.9 million for the three months ended June 30, 2014, driven primarily by an increase in timber sales revenue of $2.5 million. Gross timber sales revenues increased by 25% mainly due to a 24% increase in harvest volume as a result of incremental harvest on properties acquired during the last 12 months. Net loss increased to $2.3 million primarily due to higher depletion expense as a result of change in our depletion methodology effective in 2015. For the six months ended June 30, 2015, revenues increased to $34.4 million, up from $20.8 million for the six months ended June 30, 2014 driven by an increase in timber sales revenue of $7.5 million and increase in timberland sales revenue of $5.7 million and an increase in other revenues of $0.5. Gross timber sales revenue increased by approximately 41%, mainly due to a 42% increase in harvest volume as a result of the incremental harvest from properties acquired during the last 12 months. Net loss increased to $3.1 million, primarily due to a higher depletion expense as a result of the change and depletion methodology. Now turning to adjusted EBITDA, for the three months ended June 30, 2015, adjusted EBITDA was $5.5 million, a $0.5 million increase over the three months ended June 30th, 2014, primarily due to a $1.9 million increase in net timber sales. For the six months ended June 30, 2015, adjusted EBITDA was $16.5 million, a $9.5 million increase from the six months ended June 30, 2014, primarily due to a $5.5 million increase in net timber sales and $5.3 million increase in net revenue from timberland sales. As we’ve delivered these strong results, we’ve been able to maintain significant liquidity with nearly $300 million available today to take advantage of potential new acquisitions with the goal of further enhancing our platform. So far in 2015, we’ve been extremely disciplined, patient and measured in completing transactions. In fact, until recently there were not there many opportunities that met our criteria a much different climate than last year when we could be more active and strategic. In the second quarter, we purchased 9,700 acres of prime timberlands in two separate transactions for $12.8 million. That brings our total acquisitions for the year through June 30 to 17,400 acres paying out $27.9 million in five separate transactions. These 2015 acquisitions occurred in Georgia and Texas, where our holdings are already concentrated with access to excellent mill markets. The purchases have added 600,000 tons for the company’s merchantable inventory comprising 72% pine plantations by acreage and 56% sawtimber by tons. For now we will continue to focus our pipeline and acquisitions activity in the U.S. South where we still the best relative value both qualitatively and quantitatively in meeting our criteria for size, quality, stocking and return on equity. That story has not changed since our inception. As noted, CatchMark’s current acquisitions pipeline is steadily building again with a deeper flow of opportunities that we are pursuing vigorously. We’ve remained absolutely committed to exercising discipline and prudence in our due diligence and we’ll now move forward any purchases unless we are convinced that they need our objectives for the long term revenues and earnings from sustainable harvest which will propel dividend growth. As for timberland sales, we registered $600,000 in the sale of 258 acres during the second quarter. So to sum up, the implementation of our strategy is producing and meeting our objectives in advancing revenues and earnings for our stockholders now and in the future to environmentally and financially sound management practices. We’ve remained focus on expanding our platform to sound acquisitions of high quality timberlands available at a time when our ample liquidity puts us in an excellent position to execute transactions. And importantly, our dividend remains secure. The economy appears sound, the housing market continues its recovery and we are looking forward to continue solid results of the year progresses very much in line with our operating plan. Thanks as always, and now Brian, John and I will take your questions.

[Operator:]

Thank you [Operator Instructions] And we’ll take our first question from Collin Mings with Raymond James and Associates.

[Collin Mings:]

Hey, good morning, guys.

[Jerry Barag:]

Good morning, Collin.

[Collin Mings:]

I guess my first question just goes back to the deal pipeline, can you just talk maybe Jerry a little bit more about what you are seeing as far as entering your deal pipeline right now? And then are you spending any time at this point really looking at fully timber, the Calpers deal out there, are those just too larger deal for your guys really want to aggressively go after?

[Jerry Barag:]

Okay, let me take them one by one. So the deal pipeline has continued to expand, there is a lot of activity that’s actually out there. And what I - delay I would characterize it is that there seems to be a very good sense of discipline from a pricing standpoint going on in the U.S. South today. And as a result of that I think what you’ve heard is kind of been pun and tender the large in the some of the transactions that have been out there. Seller’s prices have been a little bit over exuberant compared to where buyers are able or willing to transact on things on these large transactions that have been in the U.S. South. There have been smaller transactions and as noted in my comments, we focus on several beginning at the year none of which in particular has been notable but there are all distinguished by the fact that they are added it to the platform at today and they are highly accretive and boat well for us. At least going into the third quarter, I would expect that we will continue on that route and we have certain other transactions that have been going around in the pipeline that will be fairly similar and representative of what was there. The two large transactions that characterize the U.S. South market during the first half of the year which would have been as you noted Collin on the fully transaction and the Calpers transaction are both still out there, I mean they are both still scrolling around. We do have enough liquidity to participate in those transactions or be a part of them if that makes sense. And essentially as we’ve explained before those are timberlands, they are good timberlands that have a lot of complexity around it and to the extent that anybody is able to figure out how to manage the complexity. And part of the complexity is price paradigm, they could be accretive and additive transactions to us. But as it right now, we are not overly optimistic that something like that is going to happen. There have been other larger transactions that have come on to the marketplace since then in the last couple of weeks in a lot of ways they are somewhat similar to the offerings that are out there and at a price and with appropriately structured they would be an interest to us. But right now, we’re just not seeing a whole lot of moment in that regard.

[Collin Mings:]

Okay, so Jerry, I guess to say some of the packages that move [ph] us examples come in back to the market with would be a better by size you guys in some of these then the two larger deals I referenced?

[Jerry Barag:]

From a size perspective, yes; from a quality perspective, it’s a little bit - there are a little bit different than some of the other transactions.

[Collin Mings:]

Okay, and then - well I guess the hall in that front just maybe talking about the acquisitions in the quarter, I mean 13 higher bucks in acres kind of a low what you’ve typically you’ve paying particularly in kind of you mid-size deals that you quote on last year. Was there something about these timberlands as far as productivity that was as good or there is something else driving kind of that lower than average per acre price?

[Jerry Barag:]

It’s been a confluence of events, some of it has been access issues, which as a result of being adjacent and correspond to properties that we own. We’ve been able to take advantage of securing access and being able to deal with that to some of the timberlands. And again it’s being the additive nature to from physical standpoint to what we own has a lot of to buy and purchase properties that are at lower price than what a large package would go. So from that standpoint, it’s been good. The qualities of those properties that we bought have been similar to everything else that we purchased and they are highly accretive and certainly if those numbers are highly accretive.

[John Rasor:]

Let’s say we’re off the market deal so to speak that we actually flushed out and we’ve spend some time helping the buyer get through the hurdles.

[Collin Mings:]

Okay, so we should necessarily see those is being a lower quality or lower productivity, it just got a more opportunistic if in the deal size?

[John Rasor:]

Yeah, exactly right. With lots of synergies to hope we already on, that’s really the driver.

[Collin Mings:]

Okay.

[John Rasor:]

Which I said either occasion to very classify.

[Collin Mings:]

Okay, and then just as far as on the whole deal front, can you maybe touch on - in the prepared remarks that pick up on any sort of update on potentially established synergy be this year, is that still something you are looking at or can you provide us an update on that?

[Jerry Barag:]

Yes, we’re still working through that and we have been basically in the structuring phase of that. And I think in September, you can probably look forward to us advancing that.

[Collin Mings:]

Okay, and then just curious I mean the stocks up pretty meaningfully today, but it is kind of sold off here since mid-July. I mean I am just curious Jerry how the management, the board is looking at maybe revisiting the idea of putting some sort of share repurchase authorization in place just to be opportunistic when the stock trades off, any update on that front?

[Jerry Barag:]

We continuously review the opportunity and the potential of doing a share repurchase and clearly at the levels that we dropped off on for the last couple of weeks if the much more compelling proposition for us. And so we are reviewing that again, that’s a little frustrating for us because from an operational standpoint, there is nothing going on or nothings indicate why there should be such weakness in our shares. And I think our board is addressing that appropriately and as we’ve done in the past then we didn’t expect to see these levels again. But we are I think will act appropriately in the best interest of the company.

[Collin Mings:]

Okay, and then I guess Brian, just quick one and I’ll turn it over. Just - there was no formal update to guide through there in the press release or on the call, should we still think about the guidance that was put forth in February is being fairly representative higher thinking about the business for the full year or does the recent acquisition change that at all?

[Brian Davis:]

Good morning, Collin. I know - guidance which we provided for in February I would still to need to utilize in.

[Collin Mings:]

Okay, and is -

[Brian Davis:]

That guidance do not include any projections associated with acquisitions.

[Collin Mings:]

Okay, should we just think of as far as the deal for the day just not really being enough to move the needle offside of that range or?

[Brian Davis:]

That’s correct, Collin. We’ve only made $27 million of acquisitions this year which Jerry and John have alluded to the value proposition associated with those acquisitions that they bring. They are not of the meaningful size and scale that would result and that’s changing our guidance which we provided for back in February.

[Collin Mings:]

Okay, but all of equal would be fair to say that it’s probably now skew that more towards the higher end of those ranges?

[Brian Davis:]

I would differ to our equity analyst to determine which range is will fall into.

[Collin Mings:]

Fair enough. And then just on - Brian just as you are thinking about the balance sheet’s capacity here just can you maybe update us fall in kind of the acquisition activity year-to-date assuming no JV capital or no additional equity, how much more debt capacity you think you have at this point?

[Brian Davis:]

Right, so as Jerry alluded to we have approximately $300 million equity just slightly 108, I think in your note, you’d indicated a sweet spot of $170 million to $185 million. That seems to be appropriate. But for the right opportunity our criteria, we would have the capacity in order to push up that leverage.

[Collin Mings:]

Okay, great, I’ll jump back in the queue guys. Thanks for all the detail.

[Brian Davis:]

Thanks Collin.

[Jerry Barag:]

Thank you, Collin.

[Operator:]

[Operator Instructions] And next we’ll go to Dave Rodgers with Robert W. Baird.

[David Rodgers:]

Yeah, good morning, guys.

[Jerry Barag:]

Good morning, Dave.

[David Rodgers:]

Maybe for Jerry or John to start off with, maybe kind of a little bit about the weather and the impact you might had in the second quarter, I don’t know if all was down a little bit sequentially, pulpwood was up, I don’t know if that was a weather issue or just a pricing issue, but I guess the comment would be or questions would be weather on any impacts on the second quarter, any impacts on the third quarter ability to harvest either for you or competitively?

[John Rasor:]

Hi Dave, this is John. I’ll be happy to feel that on question, I believe the second quarter was one of the quietest periods almost in history particularly over East Texas and into the Louisiana and down in Southeast Georgia as well. So yes, it did impact our pulpwood sawtimber mix, but we were able to move all of our targeted tons and still maintain good pricing. So I think it says a lot about two things, one the quality of our lands in terms of the topography and the operability, the relationships we built with the mills and the fact that we are able to move wood even during the difficult time. So we took advantage of all that and there is oath saying in the business a good fining never take that for us then we took the opportunity to do that and so you saw the pulpwood percentage up. We’ll be moving back end to heavier sawtimber mix as we move to rest of the year.

[David Rodgers:]

Great, that’s helpful. And Brian thanks for the additional detail of this quarter on which regard to the timber inventory on the acquisitions as well and the queue that that’s really helpful. And I guess I just wanted to go back a little bit to the asset sales, are you still feeling pretty good about the ability to kind of monetize on the HBU side, my guess is yes, but it’s been a little slower in the first half of the year, is that a timing issue, if you could give some more color on that would be great?

[Brian Davis:]

You know part of it is the timing issue, we did where the markets work is they tend to come out strong at the beginning of the year and then especially in the U.S. South, it’s hard to find a lot of people that want to go timber and walk through timberland in the middle of the summer and the heat. So it tends to fall off second to third quarter than of a build, we’re very confident about what’s been done year-to-date and what we have in the queue in terms of sales that have not yet close that will be rent on target for our projections for 2015.

[David Rodgers:]

Okay, great. Thanks, guys.

[Operator:]

And we’ll go back to Collin Mings.

[Collin Mings:]

Hey, thanks. Just a couple of follow-up from me, I guess just maybe John, just curious how you are thinking about the pending exploration of the lumber agreement and how that could impact your customers?

[John Rasor:]

I know that’s a hot topic right now and our point of view I think agrees with some others in the industry that have already said that an extension of the current agreement in some reasonably form would seem like a reasonable proposition. We know that people are taking to each other but they doesn’t seem to be an official storyline coming out the U.S. correlation at least not yet. So from our point of view, we think either way it goes and is in fact does expire, we have every reason to expect we can worth through that what’s hopefully minimal disruption. I mean if some additional Canadian lumber starts flowing in, obviously depending on how much that is, there is going to be an impact on lumber prices, but you would think that with the Canadian presence, that is across the south now particularly in our area that will be some wise mind thinking about where is the right balance with all of that rather than getting into some kind of protracted trades for that could be long sometime, would be very expensive. So we are prepared to deal with whatever works through it when you think all for mills that we’re supplying or in a cortile that they will be able to compete and we wouldn’t expect any significant disruption of our business.

[Jerry Barag:]

I mean in general Collin, we think stability in markets is a good thing and well the existing sulfur lumber agreement isn’t perfect. We do think that it has been effective in delivering that stability during dependency of the agreement and certainly is as a proxy going forward, we think it’s a good one.

[Collin Mings:]

Okay, alright, that’s helpful. And then I guess just going to the questions around pricing, maybe John if you could talk a little bit about any sort of regional variances between your different wood baskets in Georgia, Florida, Texas? And then if I kind of the second part of that question take the comment as a whole, should we be building in as we think about modeling the back half of this year some modest lift in pricing or just kind of a flattish type pricing environment?

[John Rasor:]

I would probably tend at this point and say more of a flattish type environment. I mean we gained, we said going into the year that we were going to be across with 5% on sawtimber where roughly half way there based on where we are now. You heard Jerry talked about 8% up year-over-year. So we’ve been taking advantage of the opportunities that have present themselves but clearly the mills have big log inventories now, they are healthy, the lumber markets can still stand some improvement then they are being very cautious about pricing commitments going forward. We’ve been able to hold our own, not to say we haven’t had some negotiations with some customers but any price movement that we had to take on the downside, we have been able to actually offset that by increasing our product mix getting into the all business and a couple of places that’s proving to be a nice offset to anything we give up on a sawtimber price. At the end of the day, volume is as you know is more important to us than that last dollar, but obviously we are going to protect every dollar we can too. So flattish would be how I would put it. I don’t see right now, I wouldn’t characterize that as a market itself ready to accept a lot of pushing on price. To your question around the regional differences, I did you know - why don’t we work from east to west starting with Southeast Georgia, the way crosses our big holding but we have complemented that now with some smaller acquisitions. That’s still our strongest market, sawtimber markets in around $34, chip-n-saw at $25, pine pulpwood call it $20 plus. Moving to what we call our self-sector region which is really our mark legacy first and then acquisitions that is built on to that continues to be we move our biggest share of our volume where pricing sawtimber up now at $27, chip-n-saw at $20, fine pulpwood depending on where we bounce 12.50 to 13.50 a ton. We more a lot of hardwood sawtimber there and we’re in the $25 to $26 range and hardwood pulpwood about $8. Looking at what we call Southwest which is Panola and the big Beauregard acquisition, good pricing on sawtimber, we’ve been able to hold that line at $32 to $34, chip-n-saw is running $18 to $20, pine pulpwood about $12. We haven’t been able to move much hardwood particularly hardwood pulpwood because it’s been so wet, but ones we get into that we would expect to see some pretty good hardwood pulpwood prices. Hardwood sawtimber generally launched pretty strong there, but until we start moving some here, I’d rather not speculate on the price but I can tell you it looks pretty healthy.

[Collin Mings:]

Okay, now that’s very helpful color, I appreciate all the detail there John. Going back to the commentary around the land sale that sounds like you guys are on track to kind of deliver on that $11 million of land sales this year from original guidance, but some of your peers have talked about just that there’s been kind of a pickup in demand recreational acreage, just any thoughts about being a more aggressive as you go into the back half of the year on the land sales font, or at this point are you going to trying to first on that land sales activity to 2016?

[Jerry Barag:]

You know we would probably agree with characterization, I mean there has been a lot more activity. And as I said, I tents to be a little bit seasonal and we’ve already seen the pickup for the caller before, so in season just by the nature how the stuff works, some of that will happen during 2014, some of that will slop over into 2016. But I would expect given the conditions that we’re seeing now that we came out in 2015 pretty strong in the first quarter and I would expect that you’ll see the same kind of thing in 2016.

[Collin Mings:]

Okay and then just on the deal pipeline, you talked about extensively earlier just to start that you are seeing a pickup activity, but any additional color on maybe how is coming to the market that wasn’t coming to the market as far as chemo or their private land owners that are starting to come back into the market with deals that interest you, any incremental color there would be helpful and just who is coming to the market now that with deals that interest you?

[Jerry Barag:]

Right, so I mean the color essentially is and what we are hearing , we are seeing a very large slate of deals that are focused on the Pacific Northwest. And with the - which we’re obviously not a player and but at some level we are kind of curious and it does have an impact on us. And you can imagine with some of the prices that have been announced and have been trading out on the Pacific Northwest, people have gotten pretty excited about selling property out there and the U.S. South markets have from a pricing standpoint have been pretty flat. And so when you look overall across the U.S. and North America, you are going to see a noticeable pickup in activity pipeline activity is going on in the Pacific Northwest. And if all clears at the kind of prices we are talking about, it’s paradigm for the markets out. It’s they are big, big prices. We think that there is compelling evidence that some of the transactions that have been sitting around in the U.S. South the bigger transactions are going to start to clear either they are going to clear, they are going to get pulled off the market. And again I think there has been people sitting on the sidelines and most of it has been institutional money that has been waiting to see directionally where prices are going to end up or where real trading prices are for some of this property and if increased at all which our perception is it really hasn’t because there’s been on real fundamental sales or evidence on any of the transactions out there, but that pricing has moved in any measurable form. And so ones I think ones that demonstrated Collin, we believe that there are liquidating funds, institutional investors some other people that have interest in selling land that will continue to bring property out to the marketplace and that’s kind occur here to people.

[Collin Mings:]

Okay and then just on that front, what is kind of the buy site you are targeting when we start to thinking about something that would be as we talked about early more in needle moving is a kind of the $25 million - $50 million deal or just how would you put some parameters around that?

[Jerry Barag:]

And you know honestly we’d like to do a couple of larger transactions, Collin if larger for us would be $50 million to $200 million kind of $75 million is a good sweet spot for us. And those are the kind of transactions that have been allusive or nonexistent so far this year. There is some larger transactions and then we continue to be successful in smaller transactions that’s just it’s a lot of effort to get scaled doing $10 million, $15 million at a time which is essentially what we’ve been doing so far this year.

[Collin Mings:]

Okay and then just one last housekeeping question from me, I don’t know if it’s possible to estimate. I know that you provide to be incremental volume associated with the acquisitions year-to-date, but how should we think about that in terms of kind of incremental sustainable harvest from that?

[John Rasor:]

I think we’ll be prepared to speak to that going forward, we’re currently modeling our entire portfolio on a growth and yield analysis [indiscernible] what we talk about.

[Collin Mings:]

Okay, fair enough. Thanks guys.

[Jerry Barag:]

Sure, thanks.

[Operator:]

And it appears there are no further questions in the queue. Mr. Jerry Barag, at this time, I would like to turn the conference back over to you for any additional or closing remarks.

[Jerry Barag:]

We just like to thank everybody for participating in the call today. We look forward to having another good quarter and expect to see all on the phone again next time.

[Operator:]

And this concludes today’s conference. Thank you for your participation.