CatchMark Timber Trust, Inc. (CTT) Earnings Call Transcript & Summary

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the joint PotlatchDeltic and CatchMark Investor Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer of Potlatch PotlatchDeltic for opening remarks. Sir, you may proceed.

Thank you, Rob. Before we start the call, I want to remind everyone that this call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC concerning the risks associated with these forward-looking statements. I'd like to welcome you to the joint PotlatchDeltic and CatchMark Investor Call and Webcast. With me in the room are Eric Cremers, President and Chief Executive Officer of PotlatchDeltic; and Brian Davis, President and Chief Executive Officer of CatchMark. This morning, PotlatchDeltic and CatchMark issued a joint press release announcing a business combination to further enhance our position as a leading timberland REIT and lumber manufacturer. We're excited to discuss the strategic and financial rationale of bringing these 2 great companies together. I'll now hand the call over to Eric to discuss the merger.

Thank you, Jerry. Good morning, and thank you for joining our call on short notice. I'm excited to be in Atlanta, Georgia this morning with Brian Davis to announce the merger of 2 great companies with a considerable history of timberland ownership. This combination will further diversify PotlatchDeltic as we will own nearly 2.2 million acres of timberland across 8 states. Importantly, approximately 70% of our timberland ownership will be in highly productive and strengthening Southern markets. CatchMark operates in some of the strongest markets in the U.S. South with a deep base of well-capitalized mill customers. We will also continue to produce about 1.1 billion board feet of lumber annually, along with 150 million square feet of industrial grade plywood in our Wood Products business. Upon completing the merger, we will still be the timber REIT with the most leverage to lumber prices, and we will continue to enjoy the upside from strong U.S. housing fundamentals. In addition, the combination will result in a diverse real estate portfolio with CatchMark's timberlands located close to large population centers. We plan to leverage our rural land sales expertise and strategy along with the CatchMark team's local market knowledge to maximize rural real estate sales opportunities. Increasingly, we are seeing interest in natural climate solution projects such as the attractive solar transaction we closed in the first quarter. The company will be headquartered in Spokane, Washington, and I will continue to serve as President and CEO, and Mike Covey will also remain Chairperson. We plan to maintain a regional office here in Atlanta. There are 3 major benefits to the combination of the companies that will provide meaningful CAD synergies going forward. First, there is an opportunity to reduce the cost of managing CatchMark's timberlands by in-sourcing those activities and managing them under the successful PotlatchDeltic model. Second, there is also an opportunity to reduce corporate overhead, which is currently required to run 2 separate stand-alone public companies. Third, we plan to use a portion of our existing interest rate swaps to refinance CatchMark's debt at lower rates. There are a series of slides accompanying this presentation, which provide more detail about the merger and outline the benefits. Let me offer some background on how we got here and then Brian will provide some comments on why he and the CatchMark Board feel this is the right combination for their organization. We approached CatchMark about combining our company several months ago. We had many discussions with Brian and his team to explore the merits of a merger, and we are pleased to have reached an agreement that benefits both companies. Under the terms of the transaction, CatchMark stockholders will receive 0.23 shares of PotlatchDeltic stock for each CatchMark share. This values the company at approximately $919 million based on PotlatchDeltic's closing share price on May 27, 2022, including approximately $273 million of CatchMark net debt. Importantly, this stock structure will provide stockholders of both companies with the opportunity to participate in the significant upside potential of this combination. We are confident that combining our complementary assets and operations will allow us to create stockholder value greater than what could be achieved by either company independently. The merger is expected to close in the second half of this year, subject to completion of customary closing conditions, including approval by CatchMark stockholders. We look forward to achieving the benefits of the combination. Now let me turn it over to Brian for some comments.

Thank you, Eric. I agree with Eric's comments wholeheartedly. We at CatchMark are excited about combining the 2 companies and unlocking value for our stockholders. Over the last 2 years, we set out to simplify our business, reduce leverage and position CatchMark for growth. We also developed a comprehensive plan to maximize value for our stockholders on a stand-alone basis. Our recent strong results highlighted those efforts. We also conducted a robust and competitive exploration process with several external parties, including PotlatchDeltic, having considered all the options that CatchMark Board and I are convinced that combination with PotlatchDeltic is the best path forward for our stockholders. I'm personally committed to work with Eric, the other senior executives and the Board of Directors to ensure we successfully execute on the potential of the merger to unlock value and capture the significant benefits of the combined company. Let me turn it back over to Eric for additional comments.

Well, thank you, Brian. We very much look forward to working with you to make the combined companies one of the nation's leading timber REITs. We are confident about the financial underpinnings of this merger and its benefits for the stockholders and employees of both companies. Excluding onetime costs needed to achieve the synergies and a full synergy run rate, we expect cash available for distribution or CAD per share will be modestly accretive in the first full year after the merger closes. As you can see on Slide 12, in our materials, we've identified an estimated $16 million of synergies that will lead to an increase in CAD. We are confident in our ability to attain these synergies, especially with Brian's knowledge and help. We will issue approximately 11.5 million shares of PotlatchDeltic's stock to CatchMark's stockholders to consummate the merger. Once the merger is complete, CatchMark stockholders will see their dividend increase approximately 35% and when you adjust PotlatchDeltic's current regular dividend for the exchange ratio. The addition of CatchMark's cash flows and the CAD synergies provide strong coverage for our attractive and growing dividend. Also, continued strong lumber prices mean there is a high potential that we will pay a special dividend in 2022. Before opening it up to questions, let me say again how excited we are to be combining 2 great companies that will offer investors more scale and liquidity, a larger geographic footprint more market diversity and a sustainable long-term value. For the employees of each company, there will be more opportunities for growth and advancement. We are also pleased to continue a strong presence in Atlanta and throughout the rural communities where both companies operate. We continue to have strong earnings from our core businesses here in the second quarter, and we expect to report another excellent quarter on our earnings conference call in July. Rob, we will now turn the call over for questions.

[Operator Instructions] And your first question comes from the line of Mark Weintraub from Seaport Research Partners.

So first question, as we think about the targeted $55 million of EBITDDA on a go-forward basis, including the synergies, how much, if any, is related to non-timber harvest type of monies in that $55 million?

Mark, this is Eric. It's typical of most timber REITs. It's roughly a 1/3, 2/3 split, 1/3 kind of the real estate side and 2/3 of the timber side. I see that in our business quite often. I see it in Rayonier's business quite often. That seems to be the typical split, and that's no different here.

Okay. And when we look at the harvest rates for this year, for CatchMark, which they provided in their guidance, is that kind of the sustainable harvest level? And maybe more specifically, is the harvest levels in that $65 million -- where is that kind of on a sustainable basis versus long-term? Is it right at it, a little low? Maybe if you could just talk a little bit about the harvest profile going forward.

Yes, Mark, it's a good question. So CatchMark's guidance is 1.6 million to 1.8 million tons per year. So we obtained their timber inventory detail as we are working through due diligence, and we completed an in-depth harvest schedule analysis as part of our due diligence. We think their harvest volume going forward will be in this 1.6 million to 1.8 million tons for about the next 10 years or so. And then it will drop just a little bit, maybe 100,000 tons or so for a few years, and then it will come back a few years down the road after that. So it will be in that ZIP code. There will be a dip in about 10 years, but it's a very modest dip.

Okay. And you mentioned accretive on a CAD basis in the first year -- to the extent you can provide more color on how you get to that, that would be great. And also, you said that, that sort of did not include onetime costs, if you could just sort of bracket the size of the onetime cash outflows, in particular, that would be helpful.

Yes. So Mark, as we look at the pro forma going forward after synergies, CAD is around $42 million per year on average. And if I think about the incremental shares that we're going to be issuing in the merger, 11.5 million shares, I think about our current run rate and our dividend [ $1.76 ], that's about $20 million per year and increased dividend payments to the shares will be issuing to CatchMark's stockholders. So if our average is $42 million going forward and our extra dividend is $20 million, so there's a net $22 million that's accretive across all 81 million shares.

Okay. So that sort of like an EVA-type calculation, just to clarify as opposed to a per share. Is that the way to think of that?

Yes. Yes.

Got it. Okay.

You asked a question about onetime cost. Jerry, you want that?

Yes. You bet. So Mark, in terms of onetime costs, the estimate is it's a range of somewhere between $25 million and $30 million and that includes investment banking and adviser fees for both companies, change in control payments. It also is -- has some offsets. When we think about refinancing CatchMark's debt. They have some interest rate swaps that are nicely in the money and they also have some patrons in form of equity that will be refunded over time as well.

Okay. And is that -- can you ballpark what those are? Is that relative to the $25 million, $30 million?

Yes. So the interest rate swap, I think the last valuation I saw was the end of April is about $12 million. And then the patronage that would come back is in the $4 million to $5 million range.

Okay. Great. And if I could sneak one last one in and then certainly hand over. But since you bought up on the refinance, could you kind of explain a little bit how you're going to use interest rate swaps and how that's going to be to the benefit of shareholders.

You bet, Mark. So if you recall, back in March of 2020, when financial markets were dislocated. We did a large interest rate swap that essentially locked in a whole series of future refinances for us into January 2029, just extraordinarily attractive levels. And we've had those swaps outstanding. And the value recently of the whole trade is between $90 million and $100 million, if they're in the money. So we have an opportunity here to pull a portion of the remaining swaps forward and actually apply those to the refinance of CatchMark's debt. And what that does at the end of the day is where you have -- when I go get quotes from farm credit system, I think about it net of patronage, the -- to get a fixed rate loan is probably on a 10-year basis is probably around 4% or so, maybe a little higher. Using these swaps will allow us to refinance at like about 2.35% just to give you the latest quote. So not only reduce CatchMark's interest expense run rate, but also we're also going to be able to refinance it well below market rates currently.

And so is that what -- because I think Eric had mentioned a $42 million CAD number when we were just having a quick conversation there, which is different, obviously, from the $55 million. Is that related to the difference between those 2 numbers? Or is there something else going on?

Yes. Yes. If I were to step back, Mark, make sure that we have all of the data points triangulated here, we have $16 million total of synergies, CAD synergies, about $13 million of that are cost synergies that Eric was touching on. So that's the SG&A reduction as well as timberland management. And then the $3 million would be roughly the interest savings here all in, and that gets you to the $16 million total CAD synergies.

Okay. Great. And I'm sorry, maybe I misheard, but had Eric mentioned a $42 million annual CAD number and maybe the other, I guess, was an EBITDDA number. How does that triangulate with the $55 million number?

Yes. So if I understand your question, Mark. So we -- obviously, there's some CapEx to reforest that deduct also there's interest expense. And so there's some moving parts. But I think about it, EBITDDA is $55 million on average for the first 5 years. CAD $42 million, maybe $44 million somewhere in that range on average for the first 5 years. And if you want to go through the details, I'd be happy to walk through that with you after the call.

Sure. I appreciate that. It was the EBITDDA and CAD. Got it.

Yes. Yes.

Your next question comes from the line of Kurt Yinger from D.A. Davidson.

Just wanted to start out on the decision to fund the deal with stock. I mean it looks like from a liquidity perspective, you would have been able to fund that equity portion with cash. Maybe you could just talk about the thought process around that decision.

Well, we probably could have found a way, Kurt, to finance it with stock, but the CatchMark shareholders, number one, they want to participate in the upside from this merger. Number two, it's great when you can use equity to finance a deal. It strengthens the balance sheet going forward. We've still got the best balance sheet in the industry that leaves us with a lot of dry powder to do more interesting things. And it was just the right capital allocation decision.