CatchMark Timber Trust, Inc.
Q3 2014 Earnings Call Transcript

Published: 14 Nov 2014

[Operator:]

Good day and welcome to the CatchMark Timber Trust Releases Third Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. 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, Don. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for the third quarter. 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 our expectations. For more information about the factors that could cause such differences, we refer you to our 2013 Annual Report, our 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 turnover the call to Jerry Barag.

[Jerry Barag:]

Thanks Brian and good morning everybody. Third quarter results continued to be very strong and in keeping with our recent positive guidance. All of their metrics are up and up significantly. This will moderate as third quarter was particularly strong owing to seasonal pricing trends in what has shaped up to be a very strong year for CatchMark’s operating results. The product is integrating our new acquisition efficiently and skillfully exploiting market conditions to our advantage. Total revenues, adjusted EBITDA, gross timber sales revenues, total harvest volumes and net average prices for timber have all registered substantial increases. We believe that these results provide considerable support for our business strategy, which is clearly delivering on its promise to enhance long-term economically sustained harvest volumes, improved our product mix thereby providing durable earnings and helping us to grow our dividend. As we announced yesterday, company highlights for the third quarter includes total revenues increased to $12.7 million a 61% increase over third quarter 2013. Adjusted EBITDA increased more than fivefold by 566% to $5.2 million compared to third quarter 2013. Gross timber sales revenues increased by approximately 77% to $11.4 million resulting from new acquisitions and improved operation on legacy portfolio holdings. Total harvest volume increased by 62% to 396,000 tonnes compared to last year’s third quarter results. Taking advantage of exceptional market opportunities we have also realized increases in average net per tonne prices for pulpwood and sawtimber of 20% and 26% respectively, compared to third quarter 2013. And we paid a dividend of $0.125 per share to stockholders of record on August 29, 2014. With regard to our dividend, we announced yesterday that we will again pay $0.125 dividend on December 15th, to shareholders of record on November 26, 2014. Performance for the nine months ending September 30th was similarly strong compared to the first nine months of 2013. Revenues increased to $33.4 million from $24.5 million a year earlier. Gross timber sales revenue increased almost 50% for that period. Adjusted EBITDA was approximately $12.1 million about 8.5 million higher than the nine months ended September 30, 2013. These gains were also attributable to new acquisitions and improved harvest volumes from legacy holdings. Specifically from an operation standpoint we strategically accelerated harvest volumes to take advantage of favorable local market conditions and wet weather pricing. As a result the run rate for the third quarter was particularly outsized and such increases are not likely to register at such substantial levels on a regular basis, although we expect prices to remain strong on a relative basis. That said, where we see opportunity in future to take advantage of these regularly occurring but not necessarily predictable occurrences in the timber world. We can and will act nimbly to register gains for our shareholders. In the meantime, after quarter’s close we completed three major land acquisitions of approximately 77,000 acres in Georgia, Louisiana and Florida for total of $149 million. Each of these purchases are high quality timberlands and is expected to be accretive to earnings going forward. And just last week we closed on the previously announced land sale of approximately 2,900 acres in Georgia for $9 million. Our ability to acquire accretive acquisitions is supporting the increased harvest volumes and improving our product mix and diversifying our customer base. We’ve been able to bring new acquisitions up to operating run rates quickly, reinforcing our strategy of carefully selecting property in the best milling markets capable of being put into harvest production quickly. To-date in 2014, we purchased approximately 121,000 acres of prime timberlands exclusively located in the U.S. south, where we continue to see the best relative value across the United States. By increasing our timberland holdings by nearly 50%, these purchases have added 540,000 to 590,000 tonnes for our forecast annual harvest volumes. As a result we continue to make progress in improving our harvest mix towards 50% pulpwood and 50% sawtimber. We plan to continue to deploy our capital actively and selectively, seeking acquisitions with purposeful focus on south, in south markets where we’ve been buying. Our analysis indicates that properties in this region are best positioned to leverage current marketing conditions and to take advantage of the ongoing recovery. At this time we have no other pending transactions to announce. So to sum up, CatchMark’s had a very strong third quarter with significant increases across all of their benchmarks and puts us firmly on-track to significantly exceed the business plan objectives which we established at our initial public offering. These results reflect the fact that we have assembled highly productive and well stocked properties in healthy well diversified markets which should sustain earnings growth into the future. Our acquisitions are integrating and producing accretive earnings as planned and our legacy properties are outperforming expectations. We will continue to deploy capital in the south to leverage current favorable investment dynamics which we expect to persist into 2015 and beyond. And we will continue to process on applying prudent and accepted standards of environmental parts to take our stewardship to our timberlands to ensure the highest possible long-term deals for economic sustainability. I want to close by emphasizing that we reaffirming our most recent guidance for full year 2014. Finally, we continue to be focused on growing our dividend by increasing harvest volumes, improving our product mix which will ensure reliable earnings. Thank you. And now Brian, John and I are happy to take any of your questions. Question-and-Answer Session

[Operator:]

(Operator Instructions) We’ll go first to Collin Mings with Raymond James. Collin Mings - Raymond James Just a couple of quick questions here on your deal pipeline I know that you guys talked a little bit about the fact that you don’t have any pending acquisitions, but a couple of months ago you characterized it as being close to $500 million, where does that stand today and just maybe talk a little bit more about the deals you’re seeing and how that pipeline is shaping up going into 2015?

[Jerry Barag:]

The deal pipeline as you accurately categorized, have risen to a point of about $0.5 billion and that was through the summer and most of the third quarter. It has come down quite a bit at this point and we continue to have an active pipeline but the slate of offerings of marketed deals of publically marketed deals have slowed down significantly. And we think it’s a good time for us to take a breather as well given the fast pace of what’s going on at CatchMark during 2014 so far. And so our expectation is that there will be somewhat of a low for the next quarter possibly going into the first quarter of next year and we expect the pipeline to begin picking up again shortly after the beginning of the year and based on conversations we’ve had with potential sellers that seems fairly likely to occur. Collin Mings - Raymond James And then maybe if you guys can a little bit more just about that acquisition you did make in Louisiana, how was that sourced are there opportunities to walk some adjacent lands to it and then maybe just a housekeeping question as it relates to what do you think the pulpwood/sawtimber mix might be of that property?

[Jerry Barag:]

So the Beauregard transaction that you’re referring to in Louisiana was purchased from the same seller as the Waycross and Panola transaction that was from John Hancock Timberland Group institutional ownership, very high quality property, very solid and stable, know markets and good prices it’s literally just across the Sabine River from the other property that we purchased sale this year in Texas which is the Panola property although slightly different know markets and dynamics to the timberland. It’s very well stocked and I’m going to refer you to John Rasor in a second in terms of the pulpwood and sawtimber mix but it is on a comparative basis comparative to sawtimber.

[John Rasor:]

Yes following up John Rasor, Collin I don’t have that number right in front of me but it’s going to be additive to our sawtimber component and as Jerry said it’s very well stocked, the pricing environment there is similar to Panola, it will synergize nicely with focus already accomplished in Panola and give us the ability to not only expand into the Louisiana market but we can go back over into Texas and take advantage of opportunities there, it gives us a couple of more pulp mills to pulp and paper mills to market to in addition to and especially sound wood products manufacturing environment there in Southwest Louisiana. Collin Mings - Raymond James And then Brian, can you maybe just update us as far as the progress on rightsizing the credit facilities for the current size of the company, also just kind of factoring in the level of recent acquisitions how much more in acquisition activity would you feel comfortable in context of just your leverage?

[Brian Davis:]

And yes, a couple of things there. The winter commitments are in and we’re just bucking up the documentation and entire work we expect to close sometime in late November or early December and with the rightsizing of the debt facilities our current balance sheet will be more than double our current capacity and our current capacity there with our existing facilities about $125 million so Collin to answer your second question we really think about in terms of about $200 million of additional acquisition capacity to really be able support with our balance sheet today. Collin Mings - Raymond James One last one I’ll jump back in the queue just there has been a lot of conversation to tweak about the definition of merchantable Timber and kind of sustainable harvest run rates, can you remind us I guess first part of that is, how you define merchantable Timber and then by my math, and correct me if I’m wrong, factoring in the acquisitions of this year you’re right around 1.5 million to 1.6 million tonnes of kind of just a sustainable run rate as far as harvest activity between both pulpwood and sawtimber so really just a two-part question again I’ll jump back in the queue after that.

[Brian Davis:]

Sure Collin I’ll take the first part on and really your question is how do we think about merchantable timber inventory and then how do we think about sustainability from an environmental standpoint as well as from an economic standpoint. So, in simple terms merchantability means trees which have the size, quality, condition to be salable are included in merchantable inventory. In our operating areas merchantable inventory generally begins at H15 as pulpwood and as the merchantable Timber grows and economic material moves the pulpwood into sawtimber classifications. We have been very consistent in application of this methodology to be a little bit more specificity around it as of September 30th, our estimated merchantable Timber inventory is approximately 11 million tonnes before adding current year growth which would approximate current year’s harvest volumes. This estimate is derived using methods consistent with industry practice and is based on statistical methods and independent third-party field sampling also known Timber cruises which are completed at the time of acquisition in our 20% our existing timberlands on an annual basis. The estimated inventory volume includes Timber from environmentally sensitive areas where the timberlands are managing the matter consistent with best management practices, day force practice adds and SFI force asset management standard. Merchantable timber in defined areas of environmental sensitivity are excluded from harvest scheduling to assure our commitment to economic and environmental sustainability. As we go through the year to aggregate estimated volume of current Timber inventory is updated annually to reflect increases in merchantable Timber due to reclassification NIM growth to merchantable timber annual growth rate of merchantable timber the acquisition of additional merchantable timber as it reflect decreases due to timber harvest and land sales. I know that was a longwinded answer relative to merchantable timber inventory but that’s been a very specific topic recently and so as it relates to sustainability I’ll turn that over to Jerry.

[Jerry Barag:]

Sure so, first point I’d like to make is not for any reason related to the occurrences that went on this weekend in the timberland sector, but partly because of our recent IPO and partly because of our lending relationships and then fundamentally as part of our business practices what everybody should know and understand that CatchMark is that all of our inventory and our harvest scheduling is actually reviewed and audited independently and co-incidentally that’s happened at least twice by two different firms during the course of last year and that’s audited for current levels of inventory everything that we’ve acquired has gone through this double layer of checking that goes through FRC which is our external forestry consultant, as well as an independent audit when we do an appraisal for our lending agreements because our lenders audit that information as well. So that’s part of just the procedure that goes on around here and we’re very confident that our inventory levels and as I said that’s been verified by at least two independent firms on our behalf and behalf of their lenders and other constituents at least twice. Having said that, you also need to begin to separate this whole concept of sustainability from environmental sustainability and economic sustainability. And environmental sustainability is really covered and we subscribe to it and get audited on an environmental basis by SFI and the SFI standards and we’ve had the highest level of audit and the highest level of compliance with environmental sustainability during the duration of CatchMark and well prior to that and it is actually a requirement of the supply agreements that we have MeadWestvaco that we subscribe and maintain that level of sustainability on environmental standpoint. From an economic standpoint you probably heard us talk overtime about the importance and the thought process that we put into our harvest scheduling. And as I said that is a keystone of what we do as a company, because our mission here is not only to acquire great properties and that have, that are currently inventory debt at good levels but it’s just as important to us to be able to maintain that inventory because that allows us to maintain the overall harvest basically into perpetuity. And so as we’ve spoken about the high levels of productivity of our land really support our ability to sustainably grow and harvest timber into the future and that is a metric that is fundamental in our analysis and what we do. And again these harvest schedules are developed, review and audited by at least one probably two treachery consultants on each of our acquisitions and they provide for -- at the fundamental basis they provide for a very long-term consistent level of harvest and that’s our mission is to try and regulate what we do going forward so that we’re capable of maintaining that now. That doesn’t mean that on an operational standpoint we may accelerate and push harvest during certain quarters and even during certain annual production volumes. And then we would likely throttle those back but that’s the kind of levy that we want and we would do that in a method that would maximize shareholder value but we would not do that in a way that jeopardize the long-term production volume. Collin Mings - Raymond James Well I appreciate the detailed explanation but as far as a run rate going forward as I think about it at least over the near-term factoring in the recent acquisition, but that’s right around 1.5 million to 1.6 million tonnes, is that correct? Am I thinking about that right?

[Jerry Barag:]

That is correct Collin and we’ll also be updating our guidance and outlook for 2015 once we announce our earnings February of next year and that will be a component of that announces.

[Operator:]

(Operator Instructions) We’ll take our next question from Dave Rodgers with Baird. Dave Rodgers - Robert W. Baird First Jerry let’s start with you, maybe talk a little more about pricing. I know pricing throughout the Southeast has been fairly spotty this year particular. It was strong for you in the third quarter, can you talk about the trends that you’re seeing specifically for your markets into the fourth quarter now that we’re about half way through and whether you’re continuing to take advantage of that pricing?

[Jerry Barag:]

Sure I’ll start and then I am going to ask John Rasor to jump in on that, but thanks for the question Dave. So pricing did accelerate through from the spring and really into the beginning of the third quarter and from a pricing standpoint we need to think about it two different ways here. The first is on the pulp wood side because of the significance of the supply agreement that we have with MeadWestvaco what you need to understand is that pricing is where they served a quarter in arrears from when it actually happened. So the pricing on pulpwood is actually registered from the second quarter to spring when we had very significant wet weather conditions and pulpwood prices reacted to that in a positive way and so that’s helped to buoy the numbers on pulpwood for the third quarter. From a sawtimber standpoint there was a persistent -- the wet weather conditions create a persistent shortage of wood going into the third quarter for a lot of localized markets throughout the Southeast where milling activity has been sustained and being run on a good basis. And so capacity utilization has continued to grow in markets where operating timberland and the demand for that sawtimber got pretty hot during the third quarter and so we saw prices go up significantly. It’s tapered off marginally but as I have said in my comments earlier that those prices have remained in the markets where we’re doing business at generally pretty good numbers for us and certainly above what our expectations were going into 2014. John, would you like to comment more?

[John Rasor:]

I think the color I would add is that the biggest share of the uplift that we have received in pricing starting with our legacy Mark properties is really to the fourth quarter of last year and into the first quarter of this year and again the wet spring even carries that thing into the second quarter. So for example in March we had completely combined hardwood and pine numbers. But we started out very well on pine pulpwood as Jerry said that’s tapered off and we’re looking at something around $13 right now in the pulpwood markets that hardwood and pine combined and sawtimber we’ve seen a $2 lift combined sawtimber and chip-n-saw with our mark property since the beginning of this year. The outlook going forward appears very stable. Lumber markets in terms of pricing are still pretty good and we’re seeing run rates and incremental expansion in some of the areas that we are in. We’re particularly pleased with the way our new Oglethorpe acquisition is coming in which is going to complement to Mark, to give you a little more color on pricing Waycross pulpwood spend is as high as $18 and sawtimber $27. Panola doesn’t have nearly as strong a pulpwood market which we’ve held well at 850 a tonne and sawtimber at over $28, 28.57 to be exact. So right now our outlook for going forward is that it looks stable and potentially we see some uplift. Dave Rodgers - Robert W. Baird Brian, and maybe turning to you real quick on the adjusted EBITDA guidance for the year which I know you reaffirmed recently and adjusted but does that include contribution from the three assets you closed in October is that already reflected in the guidance and what was the contribution that you’d estimated from those three if it’s included if you have that?

[Brian Davis:]

So it does not include Beauregard, we made the announcement that Beauregard will be accretive in the first quarter of next year when we made the announcement associated with the EBITDA guidance adjusted, it does include Oglethorpe and Satilla River. We have not provided specificity around the contribution of each of those entities. Dave Rodgers - Robert W. Baird Last question, you talked about the acquisitions and the runway of about $200 million I guess maybe Brian, or Jerry you’ve also discussed in the past considering partnerships extending the runway for capital, are these at our existing assets that you would consider brining partners in, is that a strategy you would think about only with regard to new assets and I guess the part of that the longwinded question would be does the partner change kind of the target of our acquisition pipeline at all either in size or location and that more capital maybe came in to be a partner with you? Thank you.

[Brian Davis:]

So Dave I think all options are on the table I think we and the investment community would tell you that today we’ve assembled a pretty enviable collection of assets that would be highly desirable and in terms of accomplishing these partnerships and leveraging out our capital with public, private type partnerships we would consider bringing partners into the existing portfolio with the understanding that there is a good pipeline of similar quality assets on the horizon that we will be purchasing I mean clearly going forward I think there will be a bigger part of our operating strategy to utilize these partnerships to source capital and to spread out the amount of capital that we have over more transactions. I’m sorry, what the second part of your question, I just lost the second. Dave Rodgers - Robert W. Baird Does it change your view in terms acquisition?

[Brian Davis:]

That’s right. In terms of the acquisitions themselves we have gone into this fundamentally under the premise that we’re not going to change the way that we do business for partners and so they either need to subscribe to our investment and management philosophy which is really in some ways a little bit in opposition to the typical, the current markets of institutional investors which is more for growth and lesser for income. I mean we’ll continue to be an income-oriented investor and be able to produce cash flow that will ultimately allow us to increase the dividend at CatchMark and we think that, that is a great and appropriate investment strategy and we expect that there is going to be significant investor demand for that strategy as well.

[Operator:]

We’ll go next to Collin Mings with Raymond James. Collin Mings - Raymond James I just want to go back as far as just on the HBU land sales plot you guys just announced again a $9 million land sale that closed, how does that pipeline as far as the HBU opportunities a big way of either monetize some of your current holdings look like going into 2015 and I know 2015 guidance isn’t out there yet but how should we think about the type of generation from HBU land sales next year?

[John Rasor:]

Jerry, you want me to take that?

[Jerry Barag:]

Go ahead John.

[John Rasor:]

We continue to see strong interest in real recreational land and right now we’re looking at call it 40% of our expected land sales for 2015 are either already under contract or getting close to be. So, our outlook is pretty positive for that and we think we’ll have a lot of optionality around it. Collin Mings - Raymond James And then I guess on a run rate basis from a revenue standpoint what would be should we expect it to come down a little bit just given the unusual land sales you guys have really in the fourth quarter this year?

[John Rasor:]

I think Brian, what kind of range do you want to?

[Brian Davis:]

Collin, as we think about this and consistent with we said at the IPO we’re really looking at 1% to 2% repeat acreage annually and so we have grown substantially this year as a percentage of acreage as acreage goes so we would maintain that 1% to 2%. Collin Mings - Raymond James And then as a bigger picture question here some of your peers have shifted more to a focus of repurchasing shares versus buying timberland and just again recognizing particularly and given kind of your strategy and how important growth capital is right now but also recognizing your stock as we sit here right now is trading at a pretty meaningful discount to NAV, how do you even think about repurchasing shares is that something that would make sense to you and the Board at this point?

[Brian Davis:]

Clearly we have discussed it with our Board and we evaluated it and I’m not going to say that there isn’t a share price that we wouldn’t interested to a share purchase program, but at our current level we’re satisfied that the path that we’re on which is to use our capital for accretive acquisitions is really the best long-term use of that capital and we think that the relative fundamentals in the market the acquisition market today and how we’ve been able to deploy the capital will, excuse kind of we will pay dividends going forward into the future and we’re focused on that long-term strategy. And so for right now you haven’t seen us announced a share repurchase program and I wouldn’t expect it to happen in the future unless we start to see some kind of weakness in our share price. Collin Mings - Raymond James And then just as a follow-up it sounds like just from our prior comment that as you go into 2015 you’re expecting pretty flattish type sawlog pricing going into next year, as you think about the housing recovery is there a number as you kind of due diligent on your wood baskets and understand the production in those market that might lead to a little bit more momentum building in sawlog pricing as you guys are doing your multiyear forecast?

[Brian Davis:]

The consensus forecast seems to be for housing starts next year somewhere around 1.1 million starts per year and we think that we subscribe to that we think that is going to be a very achievable number and quite frankly I know from a attitude standpoint the market seems to be somewhat dismayed by the fact that we’re going to have a 10% increase in housing starts in the U.S. and to us we think that that really is a fairly good number and a good opportunity if it starts to move above that I think you’re going to start to see some larger outsize type pricing increases especially in the healthy markets that exist in the U.S. South. And so it’s a very hard to get data on local market basis but what I would tell you and give you a framework for analyzing this it is that we have about half of markets, half the submarkets that the lumber producing submarkets in the U.S. South today that are up and running and are healthy so they’re drawing from the wood baskets around them. The other half of the markets really are not they’re paired in different ways by the closure of mills that happened between 2007 and 2012. And so, all of that incremental demand that is coming in to the marketplace from increased housing activity is getting funneled into about half the markets in the U.S. South. And so it’s hard to make that prediction, but we know that that markets matter that it’s going to have a positive impact in a better manner than it would have had prior to the housing downturn, so 2006 and prior because all of that growth is getting funneled into the mills that are up and operating in those mills are joined from discrete wood baskets and that’s where we’re purposefully investing. Collin Mings - Raymond James And then just really two last question on my list here. One just kind of housekeeping, I don’t know if you guys have provided or would provide kind of what your average site index of your portfolio is in the U.S. South?

[Jerry Barag:]

I mean we have it, I mean it’s data that is captured in our GIS database, we cannot think about it in terms of site index which is a fairly obscure and kind of anecdotal number. The more important number for us is really productivity expressed by tonnes per acre per year sustainable harvest going forward and we have been very transparent and have been issuing that number basically on every acquisition that we do. But on a tonnes per acre per year basis we’re kind of at a run rate today that is somewhere around 4.5-4.7 tonnes per year which as our contention would be that that’s significantly above average quality timberlands in the U.S. South. Collin Mings - Raymond James And then just on, maybe about the timberland acquisition environment and the prices that we’re seeing out there right now, kind of been trading sort of ethanol at a real discount rate that you sense are being used through across the board as people don’t have acquisitions right now?

[Jerry Barag:]

It seems very acquisition-by-acquisition, I think from a market standpoint my categorization would probably tell you that there is the normal market and I would tell you that we’ve operated in that and which is in smaller transactions or moderate size transactions and real discount rates there are probably in the 5% to 5.5% range. And then for the last several years you’ve had this market where on large transactions limited number of large transactions which probably pushed those discount rates a little bit lower just from a supply and demand standpoint there has been a fewer number of those large transactions.

[Operator:]

(Operator Instructions) It appears there are no further questions at this time. I’d like to turn the conference back to Mr. Jerry Barag for any additional or closing remarks.

[Jerry Barag:]

Thank you Don, thank you everybody participating on the call. We hope you can join us again in the next quarter and we’ll talk to you then.

[Operator:]

This concludes today’s conference. Thank you for your participation.