CatchMark Timber Trust, Inc. (CTT) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the review of CatchMark Timber Trust's results for Third Quarter 2021. All participants will be in listen-only mode. . Please note this event is being recorded. I would now like to turn the conference over to Ursula Godoy. Chief Financial Officer of CatchMmark. Please go ahead.
Ursula Godoy-Arbelaez: Good morning. And thank you for joining us for our review of CatchMark Timber Trust results for third quarter 2021. I am Ursula Godoy, Chief Financial Officer of CatchMark. Joining me today on the call our Chief Executive Officer Brian Davis, and Chief Resources Officer Todd Reitz. During 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 risk 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 2020 annual report on Form 10-K and subsequent reports that we filed with the SEC. Today's presentation includes certain non-GAAP financial measures. Reconciliations of these measurements are included in our third quarter 2021 earnings release and financial supplement, which are posted on our website and on our Form 10-Q filed with the SEC yesterday November 04, 2021. After our presentation, Brian, Todd and I will be pleased to answer any of your questions. Now I turn over the call to Chief Executive Officer Brian Davis.
Brian Davis: Thanks, Ursula. Good morning, everyone. And thank you for joining us today for our third quarter review. A lot has happened since our last earnings call in the first week of August. The Bandon sale was finalized concluding our capital recycling strategy for large dispositions for now, and the Triple T exit was executed. The proceeds from these transactions were used to pay down debt and further strengthen our capital position. We continue to concentrate on optimizing our harvest operations, dealing successfully with wet weather challenges while maintaining our pricing advantages. And we refocused on expanding our presence in the premier U.S. South's new markets. The key takeaways today our CatchMark remains solidly on track to generate 2021 adjusted EBITDA at the top end of full year guidance. We also expect to exceed full year net income guidance, and after simplifying CatchMark's business and further strengthening our balance sheet over the last 20 months, we are well positioned for growth. Our harvest operations during the third quarter again delivered significantly higher year-over-year timber sales, pricing for both pulpwood and sawtimber. This is a direct result of our long standing and ongoing strategy to concentrate our investments in prime timberlands and the nation's leading middle markets using a delivered wood model supplemented by opportunistic stumpage sales. The higher pricing we captured, which also was well above market averages in the U.S. South helped make up for lower harvest volumes year-over-year in the region due to persistent wet conditions. The successful Bandon sale in the Pacific Northwest, which closed in August, registered a significant gain was a primary driver in achieving record quarterly net income and earnings per share. It also marks the end of our capital recycling program of large dispositions for now and our renewed focus on expanding operations and increasing scale in and around the leading U.S. South mill markets where we have achieved so much success. Proceeds from Bandon and the Triple T exit have been used to pay down debt and as a result of our capital position and credit facilities provide ample liquidity to pursue acquisitions, as well as revenue producing environmental initiatives. Let me emphasize, we are in a growth mode. Our objective is to be disciplined and prudent in securing acquisitions, which helps sustain our industry leading harvest EBITDA per-acre in market pricing premiums, while also maintaining stable per-acre merchantable inventory. The anticipated value realization of our environmental initiatives should capitalize on increasing market demand to meet climate challenges and we are already pursuing opportunities involving carbon sequestration mitigation bank credits and solar energy. We have already demonstrated a successful track record with mitigation bank transactions in our Dawsonville Bluffs joint venture. We have acquired and created nearly 500,000 credits. And we have sold to-date more than 50% of those credits for a total of $10 million. Buyers have included the Georgia Department of Transportation, Vulcan Materials, a publicly traded waste management service company in various counties and cities municipalities. From a go-forward operating perspective, economic and market fundamentals supporting our business growth remain strong, including housing, household formation, current product pricing and outlook in demand for wood products. The dynamics we have discussed before are in place, but we need the housing recovery to be sustained. Our U.S. South strategy is based on leveraging regional mill expansion and greenfield projects, which reinforce the region standing as a nation's leading timber baskets, serving an ongoing robust regional population expansion as well as other domestic and global markets. New mill capacity will create added demand for CatchMark harvests, and our prime timberlands are positioned to continue to capture pricing premiums through optimizing delivered sales and stumpage sales. In the third quarter, those pricing premiums for pulpwood and sawtimber were 38% and 16% respectively above timber mart South, South wide averages. Our stumpage prices were 8% and 11% respectively above the prior-year quarter. Strong pricing and both pulpwood and sawtimber in the U.S. South offset in 11% harvest reduction in the region due to wet weather conditions and resulted in a 1% increase in regional timber sales revenue year-over-year. Lower overall harvest volumes in the third quarter down 15% year-over-year. And timber sales revenues down 12% year-over-year resulted primarily from the Bandon large disposition and the U.S. South weather conditions. But a strong first half of the year, as well as a pickup in harvest activity in the fourth quarter, keep us on target for achieving the midpoint of our full year harvest plan. In the third quarter, we also sold 17% fewer acres year-over-year at comparable prices per-acre. But those timberland sales together with a sales completed in the first and second quarters already have exceeded the lower range of our full year guidance target totaling $13.1 million as of September 30. The sales combined with just under $1 million in land sales anticipated for the fourth quarter keeps us on track to achieve the midpoint of full year land sales guidance. Investment Management performance was also in line with guidance. Asset management fees were comparable year-over-year including a promote from the Dawsonville Bluffs joint venture for exceeding investment return hurdles as a result of strong mitigation bank credit sales. In connection with the recent Triple T redemption agreement, the asset management was by transition services agreement effective September 1, 2021 through March 31, 2022. Under the agreement CatchMark will provide transition services for a fee of $5 million. Taken altogether third quarter year-over-year results registered 10% lower revenue and 20% Lower adjusted EBITDA. This again was primarily due to timing of harvest and timberland sales, which were weighted to an exceptionally strong first half the year as well as the Bandon large disposition. The recognized $23.4 million gain from the $100 million Bandon sale 13% above the 2018 acquisition basis drove third quarter net income to $23.3 million a record and earnings to $0.48 cents per share also a record. During the quarter, we paid $6.5 million in distributions to stockholders, fully covered by net cash provided by operating activities. Bringing the year-to-date distributions total to set $19.7 million. Three weeks ago, we declared a $0.075 per share cash dividend for common stockholders of record as of November 30, payable on December 15. Following the Triple T redemption, the right sizing of CatchMark's annualized dividend rate prioritizes investing in growth to increase our earnings trajectory and net asset value over time. And we expect to maintain our historical payout ratios 75% to 85% of cash available for distribution. As we invest in future growth, we remain determined to generate predictable stable cash flow and deliver fully covered dividends our ongoing primary objectives. We're determined to maintain our course of a simplified strategy utilizing our strength and balance sheet to make solid and straightforward investments. Now Ursula will cover third quarter results and some more detail and discuss our strengthen capital position in line of the Bandon and Triple T transactions.
Ursula Godoy-Arbelaez: Thank you, Brian. Over the first nine months of 2021, our businesses have performed to plan. And as Brian emphasized, we're expected to meet full-year guidance in the upper range for adjusted EBITDA, while the successful Bandon sale sets us on an expected track to exceed net income guidance for the full-year. Quarter-after-quarter, our prime timberlands and leading U.S. South mill markets continue to capture pricing premiums above market wide averages, distinguishing our performance and superior management. And in particular, the third quarter delivered on this metric to. For the quarter ended September 30, 2021 CatchMark recognized record net income of $23.3 million or $0.48 per share, driven primarily by the gain from the Bandon large disposition. Revenues totaled $22.1 million compared to $24.6 million in the prior-year quarter. And adjusted EBITDA totaled $9.9 million, compared to $12.4 million in third quarter 2020. Timber sales revenue totaled $15.9 million versus $18.1 million in third quarter 2020. The result of lower harvest volumes due to wet weather conditions in the U.S. South and the Bandon disposition in the Pacific Northwest. Harvest volumes totaled 494,000 tons in the third quarter 2021 compared to 580,000 tons in third quarter 2020. Breaking out adjusted EBITDA by segments for the third quarter. Harvest EBITDA was $7.1 million, compared to $8.5 million in third quarter 2020. Real estate EBITDA of $2 million, compared to $2.3 million in third quarter 2020 due to selling fewer acres at a comparable per acre sales price. Investment management EBITDA of $3 million, compared to $3.7 million in third quarter 2020 due to a decrease in adjusted EBITDA from Dawsonville Bluff. Asset management fees were comparable year-over-year and included a $200,000 promote from Dawsonville Bluff for exceeding return hurdles on mitigation bank credit sales. This investment has been very successful with more mitigation bank credit sales to come. In connection with the Triple T redemption, the Triple T asset management agreement was terminated and replaced by a transition services agreement effective September 1, 2021. CatchMark received $5 million in cash in exchange for providing transition services through March 2022. The $5 million will be recognized as asset management fee revenue on a straight line basis over the term of the transition services agreement. In the third quarter, we also paid a dividend of $13.5 per share to stockholders on September 15, 2021, which was fully covered by cash flow from operations. Now, let's review CatchMark's recent activity to further strengthen the company's capital position. As we use the total of $135.4 million from the Bandon and Triple T transactions to pay down debt. Prior to the Bandon closing, we had amended our credit agreement to establish a $68.6 million revolver feature on Term Loan A-3 and extended the maturity date of the existing revolving credit facility from 2022 to 2026. The new revolver feature allowed us to retain its borrowing capacity after using $95.4 million of Bandon disposition proceeds to repay debt. Its terms also are consistent with our Term A-3 Loan and the funds can be used for future acquisitions. Overall, the amendment provides improved liquidity, greater flexibility, and increased balance sheet strength to maximize debt capacity for future growth. As of October 15, 2021 following the Triple T redemption, CatchMark had increased its liquidity to more than $278 million up from $180 million at the end of the second quarter. We had a cash balance of approximately $25 million, $150 million of borrowing capacity under the Multi-Draw Term Facility more than $68 million under our delayed Draw Term Loan and $35 million under the working capital facility. Our $300 million of debt outstanding has a very competitive costs at 2.92% with no near-term maturities, and we are well within our financial covenants. We may know share repurchases during the quarter, and $13.7 million remains available under CatchMark share repurchase program as of September 30, 2021. Coming out of the quarter, our liquidity gives us substantial capacity to execute on our growth strategy for acquisitions and environmental initiatives. We are well positioned to continue to cover our dividends from cash available for distribution and remain within our historical payout ratio of 75% to 85%. Now, Todd will review harvest operations in timberland sales. Todd?
Todd Reitz: Thank you, Ursula. The third quarter was highlighted by the Bandon sale shifted our entire focus back on U.S. South operations and successfully managing through weather challenges in the Southeast. The Bandon disposition marked the end of a successful investment in Pacific Northwest Timberlands. By the time of the sale closing on August 11, we had completed 90% of plant full year harvest in the region, with most of that occurring in the first half of the year. As such in the third quarter, timber sales revenue from the Pacific Northwest decreased 86% year-over-year due to the sale. In the U.S. South even with wet weather challenges leading to 11% lower year-over-year harvest volumes in the region, our pricing premiums above market averages in our leading middle markets continued to provide an advantage. CatchMark's U.S. South pulpwood and sawtimber stumpage prices were 8% and 11% respectively, above the prior-year quarter at 38% and 16% premiums to TimberMart-South south-wide averages. This allowed us to register a 1% increase in regional timber sales revenues year-over-year to $15.5 million despite the 11% decrease in harvest volumes. Importantly, we adapted quickly and effectively to meet changing customer needs and product mix given the challenging on the ground conditions. Recurrent rain events put extra pressure on production and customer raw material inventories adding pricing tension for spot market deals. Our delivered wood model gave us an edge in competition to meet logging capacity demands and managing expenses. Negotiated delivered wood sales price increases also helped us maintain stumpage values, compensating for higher logging and hauling rates driven by increased fuel and labor costs. We remain very well positioned in Superior markets with our Prime Timberlands and expect to have a solid fourth quarter. Weather conditions have improved and our mill customers are running very well with no mill closed for deliveries. Our exceptional first half of the year and current fourth quarter outlook keep us on course to achieve the midpoint of our full-year harvest volume guidance. At the same time, significant levels of new housing starts and home remodeling activity in the U.S. South have maintained robust demand for timber products in our premier mill markets. New sawmills also continue to come online setting the stage for what should be increased production levels in 2022, and supportive pricing levels for our harvest of sawtimber and pulpwood. In our existing Timberlands portfolio, we also are stepping up our environmental initiatives to secure mitigation bank credit opportunities, as we did with Dawsonville Bluffs, as well as entering the developing carbon sequestration and solar markets, helping address ongoing climate challenges is a high priority in our efforts to maximize growth, while at the same time sustainably managing our Timberlands to increase long-term productivity. Now let's review timberland sales, after an outsized second quarter, capitalizing on strong market demand, timberland sales activity in the third quarter that to CatchMark's total 2021 timberland sales above the lower range of full-year guidance. Through September 30, CatchMark had sold 7,100 acres for $13.1 million and expect to close on just under a million dollars of additional sales in the fourth quarter. In the third quarter, we sold 17% fewer acres year-over-year at a comparable price per acre to third quarter 2020, both 1,000 acres for $2.1 million compared to 1,200 acres for $2.4 million in the prior-year quarter. The acre sold had a lower average merchantable timber stocking than the portfolio average, 32 tons per acre versus 41 tons per acre, a higher margin 37% versus 21% in the prior-year quarter resulted from a longer haul period. Bandon large disposition for $100 million comprised 18,100 acres of wholly owned Timberlands in Oregon, over our ownership holding period, Bandon Harvest also recognized more than $26 million of gross timber sales revenues. In closing, we're having a busy fourth quarter with good visibility to achieve the midpoint of full-year harvest plan and last sales target and see good opportunities in our middle markets for 2022. Brian, back to you.
Brian Davis: Thanks, Todd. Overall, the third quarter maintained CatchMark's trajectory to meet full-year objectives. And we have made significant progress and clearing the way for a new phase of company growth and a strong capital position. As we approach year-end, we continue to focus on the simplified strategy established when I became CEO to own and invest in prime Timberlands, focusing on leading U.S. South new markets and continuing to optimize harvest operations. This strategy and its execution have reliably delivered strong revenue and adjusted EBITDA results for our shareholders, including achieving the highest harvest EBITDA per acre in industry while maintaining stable merchantable inventory per acre. With our capital recycling strategy of large dispositions concluded for now, and the Triple T exit, we're also positioned to ramp up our timberland investments in value realization of our environmental initiatives. CatchMark is very much in a growth mode, with a capital available to support a growing pipeline. We're currently reviewing approximately 130,000 acres of potential acquisitions. As noted in our last call, we're focusing in and around leading mill markets, where we already have an established presence. Looking to expand our scale through transactions in the $5 million to $50 million per transaction range, we will remain extremely disciplined in meeting strict underwriting criteria. Acquisitions will focus on a property's near-term cash accretion, or its long-term accretive portfolio attributes or a combination thereof, which can drive predictable and stable cash flows in our prime Timberlands portfolio. Of the investments, we're evaluating 60% are near-term cash accretive and the remainder have long-term accretive portfolio attributes. Our acquisition strategy also supports our industry leading harvest EBITDA per acre while maintaining stable merchantable inventory per acre. Our targets include a high allocation of pine plantations with strong site indices, which are more immediately harvestable with higher merchantable stocking levels, and an older average age. Properties which help balanced portfolio age class distribution and productivity, typically younger plantations, and environmentally focused alternative income opportunities related to carbon sequestration, wetlands mitigation bank credits, solar projects, and similar value creating initiatives. As we approach 2022, we're looking forward to making significant progress and executing on this growth plan to increase our cash flow from operations. We remain resolute in maintaining our course of a simplified strategy, utilizing our strengthened balance sheet to make solid and straightforward investments. And we will seek to continue to fully cover our dividend from cash flow from operations and build long-term value for our shareholders. All of us at CatchMark look forward to a very productive 2022 and it might be a little early, but this call also gives us an opportunity to wish you all a very happy and healthy holiday season ahead. Now Ursula, Todd and I will be pleased to take your questions.
Operator: We will now begin the question-and-answer session. The first question comes from Anthony Pettinari with Citi. Please go ahead.
Anthony Pettinari: Good morning.
Brian Davis: Good morning.
Anthony Pettinari: Brian or Todd, when you look at your 370,000 acres, is it possible to talk a little bit more about kind of the inventory levels on those lands? I'm just trying to get a sense of sort of sustainable harvest yield, and over the next few years, should it be sort of in line with recent volumes or maybe it can you go a little bit higher to take advantage of the strong pricing or do you need to rebuild some inventory, just kind of any general thoughts there?
Todd Reitz: Hi, Anthony, good morning, this is Todd. It will be very much in line with what we've seen in the past from a productivity level, you're going to be in that five tons per-acre. So when you think about total holdings and where we are and where the volume has come down, as we're looking into '22, and that 16 to 18 range, it's really being in line with the current acres available, not necessarily from a productivity per-acre if you will. Thinking about your question of could you surge if a market improved, you saw major changes here and there. There is a little room to do that. But really for us, it's maintaining where we are steady in these markets, and then as we look at acquisitions to build on that going forward.
Anthony Pettinari: Okay, that's very helpful. And then, you talked about being in growth mode, I'm just wondering if you can talk about sort of pricing that you're seeing for good quality industrial, Southern timber wins, what -- maybe where implied cap rates are, and how that's changed -- if it has changed from sort of pre-COVID period? Any thoughts there?
Brian Davis: Certainly. First of all, we really like our assets, where we're located day in the U.S. South. We've demonstrated some great success operationally on executing our strategy in those markets. We love our delivered wood system, high quality assets will always be high quality assets, as reflected in the productivity, while also maintaining that steady tons per-acre, which we maintain from an inventory standpoint. Now, we're looking at the $5 million to $15 million target range for us, and what I see today as a really competitive marketplace, even before the announcement from British Columbia talking about deferrals and implications associated with that and the positive influence as it relates to valuations in the U.S. South. I would have told you that the activity should be picking up as funds mature and fundamentals continued to improve. And what's interesting is that we're seeing value valuations inching up, reflecting demand from traditional buyers plus, potentially new investors looking to capitalize on the recognition, forestry as a positive role in the environment. Another way of saying how is carbon and mitigation bank credits and other avenues from an environmental standpoint being implied into valuations? What I'll tell you today is while it is inching up, there is this bias that people don't again attribute how much value is actually included from a carbon value or other aspects into their land values, but they believe they're bullish on it. And so while historical methods of DCF or some of the parts may be applied, carbon is a bit of a wildcard and still trying to be put into value today. But overall, high quality assets continue to trade well, but the competition for those assets have increased.
Anthony Pettinari: Okay, that's very helpful. I'll turn it over.
Brian Davis: Thank you.
Todd Reitz: Thanks.
Operator: . The next question comes from Buck Horne with Raymond James and Associates. Please go ahead.
Buck Horne: Hey, thanks. Good morning. And yes, congratulations on all the…
Brian Davis: Good morning Buck.
Buck Horne: Balance sheet. And certainly, congrats on the braves as well. So go braves.
Brian Davis: Appropriate. Absolutely, go braves has been a while.
Buck Horne: Totally. On the leverage, given all the progress you've made and improving liquidity and getting your coverage ratios in great shape here. As you go forward, and you're targeting this pipeline of acquisitions. Can you give us a framework for how you're thinking about what you're willing to take leverage back up to in this environment? How willing are you to use the balance sheet here? And can you still find deals in this competitive market that would not dilute the existing cash flow?
Ursula Godoy-Arbelaez: Yes, good morning, Buck. So, that's a great question. I mean, when you look at our leverage, we've been very consistent in how we view that. We've been very patient and disciplined in our efforts to continue to work it down over time. Our historical net debt to EBITDA has been in the call it $5 million to $11 million range, and we've averaged around 8x. And so we sit here today, right, our net debt EBITDA is in the lower end of that at 4.8x. Really, it's a direct result of the de-leveraging efforts here most recently, of course, with Bandon transaction as well as the Triple T redemption. So as we look forward, right, and you heard us talk about this on the prepared remarks, this team is focused on executing on our growth initiatives. And given the liquidity that we have now in the capital position. We feel very confidence that we have the sufficient capacity to find our near-term growth aspirations, which as you point out, it will likely increase our net debt EBITDA for a period of time versus the current levels. But ultimately, we see it as a much more long-term view. We sit here today. We don't have any maturities, near-term, or refinancing risk. Our cost of debt is very competitive at 2.92%. And we're in compliance with our financial covenants. So while you might see leverage going up slightly, as we fund those growth initiatives, we do believe that, again, we will operate inside of that historical range where we've been.
Brian Davis: Ursula just add on, when you talked about cash yields. I think Buck you had mentioned that, with that low cost of debt, and you're also looking our effective dividend yield as well. Obviously, we're not really interested in issuing equity at this point in time. We got sufficient capital, but even on all in cash basis, we're looking at somewhere in the three and a quarter range on historically financed acquisitions. And we can find transactions that are at or better. As we sit here today. Now markets, as I alluded to, will continue to evolve and may put some compression associated with those valuations. But from our perspective, we should be able to find transactions that are not diluted to our per share basis.
Buck Horne: Okay, that's helpful. And kind of you mentioned also that, I mean, there have been several new sawmill announcements certainly across the U.S. South capacity. Additions are coming so it seems. I'm just wondering, have there been any specific announcements you can point to directly tied to your acreage and wood baskets that you think could catalyze either harvest activity or pricing? And secondarily, I guess maybe further down the road, I'm wondering if you have any high level thoughts on this Canadian announcement about, what's coming out of British Columbia and how much harvesting they're deferring, and how that may catalyze more capital migration into the U.S. South?
Brian Davis: So I'll handle the BC conversation first, and then turn it back over to Todd as it relates to our macro markets. So going all the way back to our IPO, we really had a couple fundamentals that went along with this, one was the Canadian mountain pine beetle and its implications associated with production coming out of British Columbia in Canada, you combine that with the economy as well as housing starts. And we essentially we had everything in place. And at this point in time, we really need sustained housing to continue to create drains in our marketplaces. And from our vantage point, while it's, it hasn't been formally approved, but the bias there is clearly sent by the BC government that they're looking to maintain old forest. And so by extension, if you are capital deploy or sawmill or pulp mill, even if it doesn't come to fruition, your bias is going to be putting capital into the U.S. South for what we've seen, for the better part of five to 10 years now of capital coming in to the U.S. South from Canfor, West Fraser, as well as Interfor who's one of our bigger customers. And so on a long-term fundamental basis, we see that capital coming into the U.S. South that's where the supply is, and work that down and with additional capacity coming in, we think that really as a catalyst for one thing that we didn't foresee coming into our marketplace and that's a very positive aspect of it on top of the environmental issues. So Todd would talk a little bit more locally for us.
Todd Reitz: Sure. So really goes back even before this year, we had a lot of the capital coming to the Southeast and that was really across the board whether you're looking at new Greenfield, Brownfield or just overall production increases really dating back to '18, '19 all that coming online, we're beginning to see that now as far as new mills being real catalyst in and around us. I look at GP at Albany has been a really good one. You've had West Fraser that has increased production at multiple facilities as well as taking on an OSB customer earlier this year with merger and then you have all of the increases that Interfor has made production increases, you've had Canfor as well with some new announcements coming in. And so it's really a combination of all of those things coming together that's driving additional consumption, which we have seen drive into the price as well, which has really been, what we've been looking at and talking about for the last and really probably eight quarters or so about all of this coming online and really, really getting churned up. So additionally, on the fringes, you see where Rex Lumber had a facility over in Troy that's come online, so not only indirect with our ownership, but also on the fringes. So all of these things working in concert have been real catalyst for us on the price. Additionally, on the coast, you also have the export business that has picked up again here in the Southeast. And you're not seeing a lot of the issues around container availability and those things that you may see out on the West Coast here has been pretty steady and recent weather had all of that impacted. So we've seen that pricing improve there too. And while we're not huge contributors to the export side with our ownership and then where we sit, the tension that's there, the competitive nature of it would definitely are able to play off of that.
Buck Horne: That's great. That's fantastic color. I appreciate all that. So congrats and good luck.
Todd Reitz: Thanks.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Brian Davis for any closing remarks.
Brian Davis: Thanks, Drew. And thank you all today for joining us. We really appreciate your time and attention to our business. We hope you and yours have a great holiday season with your family and friends.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
