CatchMark Timber Trust, Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good day and welcome to the CatchMark Timber Trust releases third 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, Wendy, and good morning. Thank you for joining us for a review of CatchMark Timber Trust results for the third quarter 2015. 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 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 over the call to Jerry Barag.

[Jerry Barag:]

Thanks, Brian. Good morning and thank you all for joining us today in our review and analysis of CatchMark's third quarter 2015 performance. The CatchMark story since our IPO has been a story of growth. That growth momentum continued through the third quarter and we are confident that growth can be sustained going forward through implementation and execution of our operations and acquisition strategies. As noted before, we are keenly focused on ensuring sustainable growth for our stockholders, increasing revenues and increasing adjusted EBITDA per share. Our strong capital position, share repurchase program, acquisitions program and selective land sales should combine with our ongoing forest management and environmental stewardship to help strengthen CatchMark's already solid position. In turn, this will help prospects for maintaining growth, while enhancing dividends and shareholder value over the long term. In a moment I will review conditions in the timber markets, discuss our acquisitions pipeline, cover the land sales and update where we are with the share repurchase program. In particular, I want to highlight that we expect an active period for acquisitions between now and yearend. But first, let me review the significant year-over-year performance for the recent quarter ending September 30. Total revenues increased by 39% over third quarter 2014; adjusted EBITDA increased by 69%; gross timber sales revenues increased by 11%; gross timber sales volume increased by 12%; and we paid a $0.125 dividend on September 14. Looking more specifically at the financials. CatchMark's revenues increased to $17.6 million for the three months ended September 30, 2015, up from $12.7 million for the three months ended September 30, 2014, primarily due to increases in timber sales revenue and timberland sales. Gross timber sales revenues increased approximately 11%, primarily due to an increase in harvest volume as a result of incremental harvest on properties acquired in the past 12 months. Net loss increased to $1.9 million from $0.8 million, primarily due to a higher non-cash depletion expense as a result of our change in depletion methodology, which was put into effect during 2015. For the nine months ended September 30, 2015, revenues increased to $52 million compared to $33.4 million for the nine months ended September 30, 2014, primarily driven by increase in timber sale revenues and timberland sales revenue. Net loss increased to $5.1 million from $1.5 million for the nine months ended September 30, 2014, primarily due to higher non-cash depletion expense, as mentioned earlier. Now, turning to adjusted EBITDA. For the three months ended September 30, 2015, adjusted EBITDA was $8.8 million, a $3.6 million increase from the three months ended September 30, 2014, primarily due to a $2.9 million increase in net revenues derived from timberland sales. For the nine months ended September 30, 2015, adjusted EBITDA was $25.2 million, a $13.1 million increase from the nine months ended September 30, 2014, primarily due to a $6.3 million increase in net timber sales and an $8.1 million increase in net revenue from timberland sales. Taken together these results clearly deliver on our promise of growth and underpin our commitment to sustainably ensure high production levels overtime. And we delivered these results, despite a challenging harvesting environment brought on by extremes of dry and wet weather, as well as an absence of significant pricing momentum in the overall log sales markets. Nevertheless, our operations people are meeting our harvest targets and we continue to realize good margins on the timber that we are selling, specifically owing to the high-quality know markets in which we operate. Our pricing forecast hasn't changed much since the IPO, two years ago. We are not expecting near-term significant price increases, until there are better supply demand from incrementals in the markets, and that may still be a couple of years off. Our expectation is that demand levels in the ongoing housing market recovery will continue along a steadily improving path and may eventually accelerate, allowing timber and lumber markets to absorb additional capacity in the market and sustain modest pricing momentum. In the near-term although, although we anticipate sideways pricing, we expect to maintain our growth track by carefully managing our margins and production levels for our key customers. Part of growth equation is acquiring prime timberlands that fit our criteria for sustainable production and we've been very disciplined and prudent in our approach to underwriting those transactions. Through September 30, we've acquired approximately 17,600 acres of well-stocked timberlands for $28.4 million or $1,613 per acre. After a slow period during the first half of this year, our deal pipeline began to fill during the summer with a greater number of opportunities that meet our investment criteria. We continue to focus our attention on the best fiber markets with good inventory properties and a highly productivity growing capacity in the U.S. South, similar to the deals that we've been targeting since the IPO. With about $280 million in available capital from cash and various credit facilities on hand, we anticipate a busy November and December for augmenting our existing assemblages with the intention of integrating any acquisitions into our operations as quickly as possible. Opportunistically, we continue to sell select timberlands and our sales program is on track to meet our objectives for the year. During the third quarter, we sold about 5,600 acres for $10.3 million. In August, we announced a $30 million share repurchase program to take advantage of what we believe is an undervalued stock price. Benefiting from our strong balance sheet, we were able to reinvest in our business, generate shareholder returns and return cash to our shareholders. Through September 30, repurchases totaled $4.6 million for 448,000 shares at an average price of $10.21. And yesterday we announced a dividend of $0.1250 per share for stockholders of record on November 27, 2015, payable on December 14, 2015. Securing and growing this dividend remain the ultimate goal of our strategy. In conclusion, growth continues, revenues and adjusted EBITDA shows solid gains year-over-year. Our commitment to forest and environmental stewardship and ensuring durable production levels is paying off, as we integrate new acquisitions. We are benefiting not only from our focus on high-quality well-stocked timberlands, which we continue to deliver on our harvest goals; and the lower customer base, which is providing an outlook for our timber at good margins. We believe we can continue to deliver similar results with current market conditions and expect future increased demand in the ongoing housing recovery to support long-term growth. And our sound capital position with ample liquidity enables near-term acquisitions to support growth and maintain our momentum going well into next year. As the year moves quickly to a conclusion, our operating plan and strategies remain very much on target. Thank you, as always. And now Brian, John and myself will be happy to take any of your questions.

[Operator:]

[Operator Instructions] And we'll take our first question from Collin Mings with Raymond James.

[Collin Mings:]

First question just, I don't know if Jerry, if you can talk a little bit more about the current deal pipeline in a little bit more detail maybe the size of the deals? And then just as far as geographic location, are you still focused just on U.S. South or you're starting to see some more opportunities emerge in the Pacific Northwest?

[Jerry Barag:]

Sure. I'd be happy to. So the deal pipeline, I mean, as we've discussed in the previous quarter is the first half of the year was a little bit disjointed in terms of how the overall timberland markets operated in and the sales programs operated. Since the summer time, we've been able to build a fairly robust pipeline of transactions. Most of those have been private unmarketed transactions and very, very similar to the types of transactions that we were doing for the most part during 2014, so similar in size, similar in quality. And for the most part a 100% focused on the U.S. South. And as we said, we expect that given the activity that we've had and were able to put together during that period of time, we expect the period between now and the end of the year to be pretty busy for us in terms of finalizing and closing on some of those transactions. The pipeline of sales has been for the most part focused on the U.S. South and we've continued along that strategy. Although, given the significantly deteriorating conditions and pricing, as patterned out in the Pacific Northwest, we've started to notice that there may be something of a buying opportunity or an entry point opportunity for our company in the Pacific Northwest, and we're examining that as we speak. I mean, we haven't moved forward really on anything at this point, but it is in the investigation phase.

[Collin Mings:]

And then I guess just to the site that was in the pipeline currently, I mean, they're making back to last year. That was still a pretty wide range of yields that you were going after as far as from, call it, even $25 million to north of $100 million. Would you say most of the stuff in the pipeline are now maybe closer to that $25 million to $50 million buy side?

[Jerry Barag:]

That'd be exactly right.

[Collin Mings:]

And then switching gears just a little bit, as far as on the real estate sales activity on the quarter that was meaningfully higher than I was looking for. Just curious do you expect that to moderate into the fourth quarter or was there anything unusual what you guys sold in the quarter?

[Jerry Barag:]

It is higher than what will happen during the fourth quarter or our expectation what will happen during the fourth quarter. Activity picked up right at the end of the summer and we decided to take advantage of some of the increased activity and finalized our sales program for 2015. And that's really what you're seeing at this point.

[Collin Mings:]

Maybe Brian, just as it relates to kind of the prior guidance of adjusted EBITDA of $27 million to $31 million, just I think year-to-date you guys are right around what, $25 million? Is it safe to say just given kind of the run rate you guys are at that you're probably likely looking at the higher end of that guidance range or is there something unusual we should be looking for in the fourth quarter where that call back run rate would dip down?

[Brian Davis:]

As regarding to guidance, we have not updated our guidance, as its reflected within $27 million to $31 million, recognizing that we've done $25 million through nine months of this year, we're highly confident that we'll operate at the upper end of that range.

[Collin Mings:]

And then speaking just a little bit more broadly, as far as, there was dip in kind of the reported sawlog pricing during the quarter, just the dollar. But I think there is some concerns out there just given some of the production curtailments in the U.S. South. Can you maybe just speak to the price environment currently, what that decline during the quarter represents? And just how confident you are about being able to move the volume going into the yearend and early next year?

[John Rasor:]

The short answer is the September pricing was largely affected by more chip-n-saw making up mix. I think you noted that in your latest reported. When you look across our entire system, our pricing has been really flat. But from region to region there's quite a bit of diversity to say the least. The Southeast remains our Waycross area, if you will, remains our strongest pricing environment, the Southwest region meaning East Texas Louisiana, very good pricing. I'll speak to getting volume move over there in just a moment and our mark legacy properties and what we've added to that continue to perform very well, so that's where we were through the third quarter. Our biggest challenge as we look to the fourth quarter is not going to be pricing its going to be getting our volume moved over there in Louisiana and Texas and we've been hit again with near record rainfall again just this weekend, and we'll have to get dried out and push ahead. We've got a lot of wood to move, but they're locked in at really good prices.

[Collin Mings:]

It sounds like, John, that its more of an issue on kind of some of the weather issues out there than necessarily some of the mills taking some downtime or curtailing some production. Is that fair?

[John Rasor:]

That's absolutely fair.

[Collin Mings:]

One last one, then I'll turn it over to get back in the queue. But maybe just update us on -- we've talked on prior calls about potential JV partnerships. How are you looking at those currently? What's kind of the status of that plan? And then as you think about structuring a deal, a joint venture deal, how would you see it being maybe different than the transaction that Plum Creek announced a couple of months ago?

[Jerry Barag:]

So right now we haven't been in any great rush to get anything implemented. I mean, as you heard you in my comments, we still have access to a significant amount of capital that we need to get invested and want to get invested, and marketing conditions are such where we believe that that's highly accretive on a cat basis and an operating basis for us going forward. Having said that, it's still is one of the longer term goals to basically leverage out the amount of available capital, so that we continue investing activities and have access to what effectively is non-dilutive capital. And we have targeted and expect to do that through partnerships and accessing institutional capital in the appropriate way and the best way for CatchMark shareholders. In terms of how things might differ from Plum Creek transaction, quite frankly how we do this will probably differ somewhat significantly from what our understanding is of the way that they've implemented their transaction. I mean, first off, it's unlikely that we will take a large portion of our existing properties, which to be relevant and make it meaningful would require a significant commitment of our properties and effectively sell them into the joint venture. Maintaining control of our existing property base is a very high, supremely important condition for us to continue forward. So we'll be looking at things more on a prospective basis rather than trying to sell off a portion of our existing portfolio. Secondly is that from an investment management standpoint, because we will have removed the antagonistic nature of selling properties to our partner and then managing those properties going forward, we would expect that we will become the asset manager and align our interest along with those future investors that are coming from the institutional market, and we'll collect the investment management fees associated with that, without having to have an intermediary in between us. So that's hypothetically where we stand today. And we think that there's good reception on the institutional market for a product that looks like that and we continue to pursue it.

[Operator:]

We'll take our next question from Dave Rodgers with Baird.

[Dave Rodgers:]

I think you hit on most of the major issues, but wanted to just go a little deeper on a couple. One is on acquisition. I mean, give us a little bit better sense on in terms of, quality, just not there for you guys; competition just too much, because clearly you have the capacity to do it. And then I would say the second question around acquisitions is, I think you've said augment a couple of times in terms of augmenting the existing portfolio, as opposed to maybe kind of growing more through new parcel acquisitions that might be a new market. So just may be go a little deeper on those two issues, if you could, please?

[Jerry Barag:]

So I'll do it backward. So in terms of new markets, I think you will see before the end of the year that we'll be entering into one new market and creating a new base of operations. And we generally are very thoughtful about how we do that, because we need to have enough scale and size to justify the significant amount of activity that it takes for us to get a new market up and running, and so that's important to us. And it kind of builds out, at least the U.S. South operating plant that we've been talking about. And as I mentioned a little bit earlier, we are exploring and looking at, potentially investing in the Pacific Northwest, which would even be a little bit more significant in terms of our evaluation from an operating standpoint of how we would move forward. In terms of the overall pipeline and a deeper look into it, the general consensus among people in the U.S. South, call it, for almost all of 2015 now has been one that pricing has kind of gone sideways now for the better part of 12 months. And they're at long-term levels, at least in timberland owners' expectations, that are okay, they are not widely exciting. And as a result of that there was not a huge amount of incentive in motivation for a lot of people to bring properties to the market. So I would kind of characterize our efforts, as herein, as kind of prying out these properties from people that we're reluctantly selling. On the flip side, which you saw for certainly the first nine months of this year was very, very aggressive and heavy pricing on properties that were being sold in the Pacific Northwest. And a lot of that was being underpinned by those sentiment around continued exports to China, which obviously have changed course of direction over the course of 2015. And so there has been a lot of property sales activity, and a lot of activity that went on specifically from institutional owners in the Pacific Northwest selling into what they believed were very desirable pricing environment, as opposed to what we were seeing in the U.S. South. And so everything is kind of reorganizing now, because market conditions have changed in the Pacific Northwest and other conditions have changed all along the U.S. South. And so I think people are now settling into a new reality, a new normal. And when things stabilize like that, it generally is good. And we're optimistic that more properties will be coming to the market and we will have the ability to deploy more capital.

[Operator:]

We'll go next to Collin Mings with Raymond James.

[Collin Mings:]

Just a couple of follow-ups from me. I guess, just going back, just real quickly on the acquisition and acquisition pipeline, recognizing it can vary depending upon stocking levels. But just remind us a bit, that the types of initial kind of cash yields you're targeting on acquisitions in the U.S South?

[Jerry Barag:]

I mean for the most part, the cash yields would be on the low end, call it, 4.5%. On the high end, it would probably be as much as 6%. The transactions that we've done so far have all tended to be on the higher end of that range. And at those levels, given the cost of our debt and our capital structure, those transactions are immediately accretive to us.

[Collin Mings:]

I mean, as you think about potentially looking at opportunities in the Pacific Northwest, can you maybe touch on how yields out there would compare? And along those lines, just what type of scale do you think would be necessary for you to enter that market?

[Jerry Barag:]

The dynamics of the Pacific Northwest transaction are a little bit different than the U.S. South transaction for a couple of different reasons. The biggest of which is you really don't have a pulpwood market out there the same way you have a pulpwood market in the U.S. South. And you don't have a spinning rotation Pacific culture regime that goes on out there. I mean, really there you're buying inventory and you're distributing that existing inventory over long periods of time, when the rest of the forest is growing into maturity. And so cash returns tend to be a little bit higher out in the Pacific Northwest, but the incidence of growth in terms of the return year-over-year harvest tends to be more moderate than you see in the U.S. South transaction. The other thing is that the opportunity for HBU land sale business in the Pacific Northwest is pretty modest. I mean, land jurisdictions restrictions basically limit the amount that you get to sell into that market and profit from it. But it is a great cash flow profile for our business and some of our competitors, and that it tends to be very sustainable, very predictable over long periods of time. And the production volumes managed appropriately, have the ability to sustain themselves as well. And so at some level of parity between the U.S. South and the Pacific Northwest, there's almost a complementary effect there, but its very, very sensitive to the price per acre pay going into a transaction in terms of the result that comes out of it.

[Collin Mings:]

And then, as far as the size to have meaningful scale in the market?

[Jerry Barag:]

I don't think we would do anything out there that didn't start with, call it, $50 million of investment. And that is not a real tough hurdle to get over out there, because price per acre out there is roughly double what it is in the U.S. South, and so smaller acreages, and to get to a level of critical mass faster than they do in the U.S. South.

[Collin Mings:]

And then, maybe just remind us, either Jerry or Brian, just as far as what you think of as far as incremental acquisition activity to help lead to a dividend increase? How are you thinking about that right now?

[Brian Davis:]

Collin, it's been pretty consistent. We've always talked around the types of yields that Jerry talked about $75 million into closed acquisitions that were up and running, what we view our dividend policy relative to an increase at that point in time.

[Collin Mings:]

And then, just as far as the share repurchase activity during the quarter, should we think of that kind of when the share price of that, call it, the $10.25 or below is when you'd look to be active or was kind of the activity during the quarter just more of a function of there wasn't really a whole lot of traditional acquisitions to make, so you could kind of opted who's just going to buy on trees back?

[Jerry Barag:]

No, I mean in terms of the latter comment, Collin, nothing could be further from the truth. I mean as I started out my comments today and I'll reaffirm, our business and our focus is on growing this company and it's a growth story. When we started to see the weakness that occurred in our share price a couple of months ago, it became apparent to us that we would be best serve using some of our capital or a modest amount of our capital to repurchase shares and really protect our share price. And we think that we were very effective in doing that during the period of time where it was really under fire. But we have a limited amount of capital available to us to do that. And primarily our dry powder and our capital is meant to be and will be used on acquisitions as properties going forward.

[Collin Mings:]

And one thing I don't know, if Jerry or Brian, which one of you want to address this, but maybe just touch on -- I mean, maybe walk us through a little bit of the difference, because just from an OpEx standpoint during the quarter you guys basically bought timberland, it was very small, and bought timberland for call it, $1,900 an acre, but then you were effectively selling about 2,000 acres for right around $1,800 an acre. So maybe just walk us through some of the differences between kind of what you bought and why you paid $1,900 versus why you were selling something at a lower per acre value?

[John Rasor:]

I mean, the book we bought was much higher quality property, productivity was better and particularly the stock, and what we sold was something less than that. So that's the best way I could explain it briefly.

[Jerry Barag:]

I mean the biggest variable in the whole thing, Collin, would be the amount of stocking on the property that we're selling, which tends to be very modest and the property that we're buying tends to have excellent stocking.

[Collin Mings:]

And then really just kind of one last one from me. Just longer-term, clearly you guys in the prepared remarks and here in Q&A talked about just the kind of slow recovery in sawlog pricing on the U.S. South. It doesn't sound like you're expecting too much momentum on pricing going into 2016, recognizing you guys will issue '16 guidance early next year. But maybe just talk a little bit about expectation as far as sawlog price improvement, both in the South, what you think is reasonable to expect next year, another year of flat pricing or modest uptick? How are you thinking about '16? And then, as you've been doing your diligence on the Pacific Northwest, I'm curious to hear your thoughts as well on have we kind of reached the bottom as far as pricing in the Pacific Northwest or you think there could still be some downward pressure on market pricing in that region?

[Jerry Barag:]

In terms of the pricing forecast, we do believe 2016 is going to be, in general, flattish. And our focus here right now, and we think it's a well-placed focus, is really on maintaining and keeping the market share of timber that we have to distribute even with flat pricing. And that remains a bigger obstacle in today's market in the U.S. South than trying to grow pricing or trying to maintain pricing. Clearly, in the lumber markets, there has now been built in more than enough capacity to increase overall capacity from what it's been over the past couple of years. And that's created that along with macroeconomic conditions coming out of the curtailment of Chinese exports and the half of some additional imports coming from Canada have created a level of dislocation in the North American lumber markets that seems to be settling down pretty well and that's been short lived. But having said that, we expect that increasing demand in the housing market and increasing demand for wood products is kind of basically going to soak up the additional capacity that's been brought into the market, and as a result that's going to lead to for the most part flattish pricing during 2016. Now, assuming and we do believe that the housing markets will continue along the recovery path. And year-over-year, 2016 to 2017 we'll continue to see improvement and there will be more overall demand. We think that the pricing forecast beyond 2016 starts to turn positive again and we're optimistic about that. And then in terms of everything else, we could get surprised in terms of activity coming out of China and export volume back to China and a lot of other things, but it's very fundamental. Easiest way, we think, housing continues along its recovery, demand continuous to build and that's keeping the markets in a general relative level of equilibrium over the next year. With respect to the second part to your question, which is the Pacific Northwest, we think we've seen more or less a bottoming of prices and there is lots of indices that measure prices out there. The ones that we're looking at seem to show at this point that export log prices and domestic log prices in the Pacific Northwest have essentially converged on each other, which up until recently there was about $100 a 1,000 board foot premium for export logs to domestic logs. Having said that, it looks like this seems to be about the bottom and I think that that's a good thing. In terms of what we're looking at and projections that we've developed internally and that we've seen by some of the forecasting agencies is prices look to be stuck at the level that they're at for a couple of years out there. And that without the momentum of a robust export market out there, it'd be difficult to figure out how prices are going to grow significantly out there from a demand standpoint.

[Collin Mings:]

Actually just one more follow-up for me, just kind of as it relates to the commentary around volume. Just curious, I think as far as initial guidance, you guys were looking for 1.7 million or 1.9 million tons as far as harvest activity. Given kind of where we're trending year-to-date, is it safe to say that that's probably going to come in closer to the midpoint and with likely a mix of about, call it, 60% pulpwood?

[John Rasor:]

That's probably pretty close. I mean, we'll be watching this closely and that I would expect we should be able hit that, unless we get another blast of weather.

[Collin Mings:]

Well, I guess, John, just curious, what you're hearing too from your customers has given me the churn here at lumber pricing here over the last couple of weeks, the last month or so. Is there optimism that the lift in lumbar pricing is going to continue and some production is going to come back online or just maybe talk a little bit just briefly on what the customers that you're interacting with, what their outlook is for lumber pricing?

[John Rasor:]

Well, certainly the fact that southern yellow pine has trended up rather nicely over the last three weeks and have given a month of reasonable margin to work on now. So there's a much more positive attitude and also the fact that the wall of wood that had been speculated to be coming from Canada has not materialized. And as a result, I think the attitude that we're seeing is much more positive than it was just a few weeks ago.

[Operator:]

And it appears we have no further questions. I'd like to turn the call back to our speakers for closing remarks. End of Q&A

[Jerry Barag:]

Thank you everybody for joining us for the third quarter conference call. We look forward to talking to you all again after the New Year and report our yearend earnings.

[Operator:]

And this does conclude today's program. You may disconnect at this time. Thank you and have a great day.