Rayonier Inc. (RYN) Earnings Call Transcript & Summary

Good morning. I'm Collin Mings. I'm the timber REIT analyst here at Raymond James and very excited, again, to have back this year Rayonier, specifically Dave Nunes as well as Mark McHugh, CFO, are here to join us. A lot to discuss today between what's happening in the export markets, what's happening here domestically as well as in the case of Rayonier, right now in the middle of an acquisition of Pope Resources. So a lot to discuss today. So with that, Dave, I'll turn it over to you to go through the formal presentation. After that, we'll open it up for some Q&A. Dave?

Thanks, Collin. Great to be here, and welcome, everyone. We will fly through a number of slides here, and then I'll join Collin and Mark for some Q&A. So starting with Rayonier at a glance. We own 2.6 million acres in the U.S. and New Zealand. We have acquired $1.8 billion since 2011. One of the things that's somewhat unique to us is we're the only company that discloses our sustainable yield. This is the yield, the harvest yield that we can do into perpetuity, which we have measured at 10 million tons per year. You can see on the lower left there, the mix of our contributions by our 3 timber segments in the U.S. South, Pacific Northwest and New Zealand as well as our Real Estate segment. We're certified on all of our lands, either SFI in the U.S. or PEFC and FSC in New Zealand. And on the lower right there, really, our mission is about returns. We're not about being the biggest, we're about having the best returns. This map gives you a little bit of a layout of where our lands are located, and we'll touch on that a little bit deeper as we get into some of the other aspects of each of these portfolios, why where these lands are located is important. This is an aspect from a differentiation standpoint as to what we referred to in the industry as being a pure play. And this really gets to the lack of manufacturing assets. You can see our mix over the last few years of roughly 70-30 of timber versus nontimber, which for us is real estate. You can see that relative to the peers. And where this really comes into play as it relates to the volatility of cash flows, recognizing that our downstream manufacturing customers or in the case of our peers that are vertically integrated, you just have much more volatility in cash flows when you get into the manufacturing side. This looks at some of the portfolio highlights of Rayonier. In the upper left there, you can see that we have industry-leading U.S. South EBITDA per ton. I'll get on that -- a little bit on that later, but really, that translates to footprint. We're in stronger markets, all else being equal than our peers, and this equalizes for rate of harvest to look at that. On the upper right, this is something we've been working very hard at doing over the last number of years as we think about selling higher and better use real estate. This sector has had some practice in the past of selling timberland at timberland values to generate cash to fund dividends. We've had a focus of really trying to sell timberlands where we can get a meaningful lift over the timberland value. And you can see how this stacks up relative to our peers. On the lower left, you can see the rate of growth in our sustainable harvest over time. This is a function of a couple of things. First of all, the moves that we're making from an active portfolio management standpoint, both in trimming out some of the lower quality lands but also adding higher quality lands and then in productivity improvement that we've made on those lands. And then in the lower right there, you can see our exposure to China. This has certainly been an area that's had a lot of focus in recent months. We have the heaviest exposure in our New Zealand segment with just under 35% of our cash flow being exposed to China, and you can see how that compares to the Northwest as well as to the U.S. South. Our strategic priorities are simple. We established these after the spin-off of Rayonier Advanced Materials. They're as ever bit as consistent today as they were back in 2014 when we generated them. There's 5 key elements of this. The first is managing for long-term value. We're very focused on generating sustainable harvest and cash flows going forward. And looking at blending the mix of that biological harvest is cash flows and managing it sustainably. We're very focused on acquiring high-quality timberlands. We believe that all else being equal, you'd rather be in having higher productivity lands in better markets. When you plant a seedling, you don't really know what those markets are going to look like 20 to 40 years in the future. So all else being equal, we want to be in more productive sites and have more robust and diverse markets. And so it's something that we spend a lot of time focusing on. Optimizing portfolio value. This for us is having that active portfolio management on the timber side and then looking to monetize assets that we can get a higher value relative to that timber value. Focusing on quality of earnings. This is something that is really important to us. We -- some of this is also tied as well to the last item here on disclosure. We have really worked hard to set a higher bar for the industry on disclosure and having a high degree of transparency in all of the actions that we take. Collin touched on our recent acquisition of Pope Resources. This is just a little bit of a high-level summary from a review that we did back on January 15 when we rolled out the transaction. But just some high-level points on this. This is an asset that we think fits us very well. It's a very high-quality asset. It -- one of the features that we like about it the most is it's had a very high proportion of Douglas fir. Douglas fir is a higher-valued species. It brings our total Douglas fir percentage in the Northwest from 60% to 68%. It also allows us to increase our sustainable yield by 32% in the Northwest by the addition of these lands. They're also very complementary to the existing age class structure that we have. Also, from an operational standpoint, we think this will help us from a cost and cash flow standpoint. Pope's lands are much -- have much more gentle terrain and, therefore, have a lower proportion of cable logging, which is much more expensive. And because of this, we're able to generate -- we will be able to generate higher cash flow per ton and per acre off of those Pope lands and will also give us more optionality in soft markets to operate our overall portfolio more effectively. And then lastly, it will give us greater flexibility as we think about portfolio repositioning within the Northwest as well as other geographies in terms of selling lower-quality assets and retaining higher-quality assets. This transaction will be CAD accretive right out of the gate. It's going to -- we project that it will -- they will generate $38 million of incremental EBITDA over the first 5-year period. And then $25 million of incremental CAD. And so we like it from a financial metrics standpoint. And then lastly, one of the things that we're very excited about with this is it's the first use of an UPREIT transaction within the timber space. And this is something that we deal. There's a lot of potential for in this industry. There are a lot of private timber holdings out there for whom the owners wish to retain an investment in timber, but also want to have the flexibility to monetize that and do it in a tax-efficient manner. And I'd say this very much characterized a lot of the Pope Resources' unitholders so we're excited to be able to roll this out on this transaction. It's something that we hope to be able to build on in the future. So now we'll do a quick spin of our -- through our segments and just touch on some of the high-level takeaways within those. Starting with U.S. South, you can see here a map on the lower left of where our lands are situated, the age class profile and as well as the relative productivity of those lands. This chart is from a [ teaching ] that we did last September on the U.S. South in particular. And a couple of things to point out to this is that the U.S. South with added capacity on the manufacturing side has now reached a point where we're harvesting the same level that we were in the last peak in the housing cycle in 2005, but recognize that we also added about 1 billion tons of merchantable inventory, taking it from 3 billion to 4 billion tons. And so that's a really important point to note because that's really what has led to some of the softness in pricing that we've seen, particularly in recent years. And the map to the right looks at how that differential build in inventory has been distributed across the south. This is a really important point to recognize because it ultimately translates into different price elasticity depending on where your footprint is located. This takes that same information and breaks down the market into quartiles. And one of the things that we look at a lot when we look at our portfolio management activity is sort of where we want to be relative to these quartiles. You can see that the top quartile markets are along the Atlantic Coast followed by the Gulf Coast. And this is really a function of having robust pulp and paper demand in addition to sawtimber demand, and that's important. And so you can see on the right there, how that translates into individual markets. We're very fortunate in that 61% of our acreage in the south is in the top 2 markets, and that's why our EBITDA per ton is the highest. This chart looks at the recent change in capacity in the South. As we've seen more of this inventory in the South, we've seen as well as capacity reductions in Western Canada. We've seen more of this capacity move into the South. And this has been both within existing facilities as well as new facilities. And this has been a key point over the last few years that I think will benefit from both as a company and as a region. Our company has enjoyed record cash flow in the last 2 years in a row out of the U.S. South because of this. Shifting gears to the Pacific Northwest. It looks at our portfolio there. It's heavily concentrated in Washington with a little bit in Oregon. You can see the age class profile, which I'll touch on a little bit later with respect to the Pope acquisition. This looks at the addition of those Pope lands. You can see in the upper left, the impact on our sustainable yield. On the lower left, the productive -- percent of productive forest. In the West, you have a lot of lands that have regulatory set asides. And because there are fewer major rivers on the Pope lands, they have a much higher proportion of productive forest and bump our mixup a little bit higher. In the upper right, you can see the age class mix. And where we are most complementary between the 2 portfolios is in the 20 to 24 and 35-plus age groups. And those are key as we think about how we calculate the sustainable harvest. And then on the lower right, you see that species mix where we're adding Pope's portfolio, which has 83 Douglas fir. This last slide on the West just gives you a little bit of a historical perspective of both the role that the domestic and export markets play. And you can see how that pricing has behaved over time. The West, principally because of its greater access to export markets, has enjoyed more optionality on the market side. And you can see pricing has -- is very favorable relative to the last housing cycle. Switching to New Zealand. New Zealand, you can see where our assets are distributed there, the age class profile, again, on the lower right. One of the things that's different in New Zealand, we do an annual appraisal because of the accounting treatment down there. So you can see we've included that in this -- on the box on the left there. Those lands appraised for a little over NZD 5,000 per productive acre this last year. New Zealand has a mix of roughly [Audio Gap] half of our lands have volume that's sold into the export market. And then we complement that with third-party volume that really is designed to bring the cost of exporting down lower for our own property. Within that export mix, roughly 2/3 of it goes into the China market with the balance into Korea and India and other markets in the Pacific Rim. We get asked a lot of questions about why are you in New Zealand. And a lot of it has to do with the high degree of productivity on those lands. And this chart on the left looks at the productivity comparison between the U.S. South, the Northwest and New Zealand and then it overlays where those rotation ages are. And so you can see there, relative to the U.S. South and the Northwest, New Zealand has both a higher rate of productivity and does it with a lower rotation age, certainly than the Northwest. And then that gets translated on the chart to the right, on the plantation acre productivity through time. And so this is one of the reasons that New Zealand is such a strong asset. Now having said that, it makes up a little bit of that in the sense that timber is a taxable asset in New Zealand and the species radiata pine doesn't sell for as high a value than say what we do with Douglas fir. But nevertheless, it's still from a cash flow standpoint, our strongest kind of pound for pound geography. Shifting to real estate. We break our real estate down into 5 areas of focus. We have nonstrategic timberlands. These are timberlands that might be of lower quality or other reasons that we choose to sell those. We're looking really to monetize those from a capital recycling standpoint when we choose to make those sales. We then have areas of -- on the real estate side, where we'll put differing degrees of capital into the ground. We have a rural places product. And this is where we might have frontage to a road. We might invest a small amount in fencing access to that road and a relatively modest amount of capital for comparison to what we're able to sell that for. And then we have unimproved development, where we're making small investments over time in obtaining entitlements. And once those lands have obtained those entitlements, we sell those to downstream developers, typically homebuilders. And then the last category is improved development. And this is really done for our portfolio in 2 areas where we have a large block of land that we couldn't otherwise sell for higher and better use values, and I'll touch on that in a couple of slides later. And then the last piece is land resources. These are all the nontimber income type categories. This includes hunting, gravel, other minerals, billboards, B leases, a whole host of different nontimber income use. This is our portfolio on the Atlantic Seaboard, where we have roughly 200,000 acres between Savannah and Daytona Beach. We have segmented these lands over the years, and we really use that segmentation to focus on where our activities are generating the most value. You can see we've had a number of sales of some of these products, primarily in this unimproved development, where we've achieved some entitlements and are able to sell those lands at pretty attractive values relative to the underlying timber. This is a slide of our improved development projects. We have 2 of them. One is north of Jacksonville, Florida, that we call Wildlight. This is where our headquarters is now located. And this is a project where we've got 24,000-acre entitlement and we are really in the stage of trying to prove out that entitlement by doing some horizontal development and some lot -- finished lot development, where we're selling it to builders. The idea is that as this project grows, we'll have people step up and be willing to buy portions of that on an unimproved development standpoint where there's less capital involved, and ultimately, more absorption. The other project is south of Savannah. This is a project that we call Richmond Hill. And this is a project that has both an industrial park in it as well as a mixed-use portion of the property that has both residential and commercial. These are projects that are fairly long-term in nature, but we think that they're going to add a lot of value to the surrounding lands, and that's really the main reason that we're pursuing them. And then to finish off on the last slide here, this kind of gives you a sense of how our real estate strategy that we have put in place has affected the rates of -- the per-unit rates that we're able to get over time. And you can see that on the nonstrategic timberland sales as well as the rural sales and the development sales, the proportion of increase in terms of those unit values that we've been able to achieve. And so we're very excited about that. We really feel that this is part of what we're all about, which is getting higher returns ultimately from our asset base. So with that, I'll join these guys, and we'll go into some Q&A.

Thank you, Dave. One thing that I think clearly is on the minds of a lot of investors right now, and I think it was Slide 17 here, is talking about some of the exposure to the export markets, both through the Pacific Northwest as well as New Zealand operations. So any sort of update that you can provide us here as it relates to the impact of the coronavirus, what that's doing to log shipments into China? Any sort of indications as far as what's happening in pricing? There have been some mixed reports out there from some of the local media reports on New Zealand. So just curious what your take is.

Yes. So the China situation right now, I would say, certainly, for the short term, is going to be pretty challenging. Typically, what happens in China in the early part of the year, you had the Lunar New Year, production comes to a standstill. You have continuing volumes entering the country and adding to inventory. And then once work resumes, you see that inventory drawn back down. And so every year, we look pretty carefully at how those inventory patterns behave during that period of time. This year, with the coronavirus, what happened is a lot of those workers when -- during the Lunar New Year, they went home to visit families. They then had travel restrictions that prevented them from coming back to work. And so what we saw is a big spike in inventory in ports. And the mills that are using that would have been very slow to reopen and in some cases, still are not open. And so we've seen a big jump in inventory. We think that's going to take quite a while to sort of burn off once those mills get back up and running. It has been further complicated by the European spruce beetle epidemic, which is one of the things that a lot of the Central European countries have been doing is pushing a lot of wood into China, both in log and lumber form. So it's exacerbated that inventory situation that we typically see this time of year.

Maybe just digging a little bit deeper on that topic, just as we think about -- let's start in the Pacific Northwest. We've obviously seen an improving trend in terms of lumber pricing. So to what extent, maybe some product and some logs that had been going overseas, is there now more of a natural fit to kind of keep domestically given what's happening from a wood product standpoint? Maybe if you can just elaborate on that.

So if you think about the Northwest. The Northwest has different classes of export wood. Generally speaking, the highest, roughly 15% of Douglas fir is going to go into the Japan market. The balance of the volume that is coming out of the Northwest on the sawlog side, either can go into the China market or into the U.S. domestic market. And so we've seen that China market fluctuate anywhere from 0 to 30%. With the U.S.-China trade war and the imposition of countervailing tariffs, we saw that China volume really drop way off. Essentially, we're not shipping volume out of the Northwest right now into China. And so that has been a big impact. I think one of the more positive, more recent developments in the Northwest is the capacity that was shut down in Western Canada, the middle part of last year still had a lot of inventory in the pipeline. And that inventory in the pipeline really didn't burn off until the very end of last year. And so we really saw the Northwest market start to tighten up on the domestic side. And we saw that translate into stronger pricing late last year and early this year. And so I think right now, the Northwest is really much more of a domestic market. We have seen some recent indications that the tariffs will be relaxed or eliminated out of the U.S., but I think right now, we don't expect to see that translate into a meaningful bump in export volume because of the inventory situation in China, but the domestic market is pretty strong right now in part because of that, the time delay on the change in Canada.

Switching gears to talk about what you're seeing in New Zealand. Obviously, the China market is very important there as well. But on the most recent call, you gave some indication that there's a potential to move some of that volume around into other markets. Maybe just elaborate a little bit more on that and kind of what you've been doing just as fears around the coronavirus has picked up over the last several weeks.

So in the timber business, we like to describe sort of having the most optionality, all else being equal, as what you desire the most. And I think one of the things that we've done in New Zealand is worked hard to develop alternative markets over time and have a fairly diversified market base. So we have probably a bigger proportion of volume for the Korea market and the India market than most of our competitors. There are some landowners in New Zealand that have 100% of their export flowing into China, and they're probably the most impacted right now. So we and those that have customer base in places like Korea and India are pushing those markets as much as we can. And then the other thing, I think, is you're seeing harvest reductions to the extent people can. We have some levers that we can start to put on the brakes with respect to the rate of harvest in New Zealand. And some of this, if you think about those inventories in China as they fill up ports in China, they're also going to back up and fill up port storage space in New Zealand. And so there is a need to reduce harvest, and we're seeing that sort of across the board in New Zealand.

I do want to shift gears and talk a little bit about the Pope transaction. I do want to open it up to the audience to see if there's any questions before shifting gears here. No? Okay. Well, one of the other key things that you highlighted just earlier that's kind of new with Rayonier, if you will, over the last few months has been the announcement of the Pope transaction. You touched on some of the benefits. So maybe just elaborate a little bit more on the appeal of this particular transaction. In the past, Dave, I mean, you've made the point of in Rayonier's [Audio Gap] done some larger deals as well over the last few years, but a lot of the success has been more on the bolt-on, smaller transactions. And, I mean, push that back and look at 2019, you were successful across all regions, doing some of those smaller deals. So maybe just talk a little bit more about this transaction. And then along those lines, Mark, just maybe update us on the balance sheet because inherently, this transaction does lever up the balance sheet a little bit. So just latest thoughts on that front.

Yes. The Pope transaction, in my mind, anytime you do a company M&A deal, you introduce a lot of risk from an execution standpoint. And I think my familiarity with the Pope assets and the people having worked there for 17 years, and I was the CEO of the last 12 of those years, I know the people. I know the assets quite well. And I think that really helps de-risk some of this transaction from a cultural standpoint. I think that as you study the M&A space, where you seem to have the most issue is cultural blending of 2 companies. And so that important aspect of this transaction, I feel, is pretty positive, given how similarly these 2 companies are from a cultural standpoint. I touched earlier on a lot of the attributes of the portfolio. But I also think that Pope as a pure Northwest player, there's frankly things that we can learn from them and that they can learn from us. And I think that we're going to -- we're working really hard right now to try to isolate those areas and then leverage that expertise across both of the portfolios. And so I see this as somewhat of akin to a bolt-on type transaction, although it's a little larger than we typically deal with. And so we're excited to add those assets. We think it's a great fit to our assets. We know those assets. I know the assets and the people. And I'll let Mark speak to the balance sheet attributes. But again, we think that's very much within control.

Yes, sure. On the balance sheet side, Collin, as we stated when we announced the transaction, there are about $300 million of cash uses in the deal. That's between the LP and the GP cash consideration as well as the rollover of about $100 million of the Pope debt plus transaction fees and expenses. So pro forma rolling forward as of the 12/31 balance sheet, that translates to about 4.5x net debt to EBITDA, which I'd say is towards the higher end of where we've generally guided to wanting to manage leverage, too. So in the context of this, we have generally conveyed to the agencies that we will have a focus on some modest deleveraging in the near term. We think we have a lot of levers at our disposal to do that. We obviously always have the ability to sell assets to conduct some modest deleveraging. But suffice it to say, I think we're very comfortable with where the balance sheet is going to be. I think we have a lot of tools at our disposal to exercise some modest deleveraging.

One other component of the Pope transaction that I want to touch on, and again, Dave touched on it in the presentation, which is the OP unit structure and kind of bringing that into play here. From a real estate mindset as a REIT analyst, I mean, we've seen other REITs be successful as far as using that as a tool in their toolkit as far as equitizing the balance sheet and finding some deals. Maybe just any initial responses from potential sellers now that you're in the process of putting this in place or anything at a company level from an initiative standpoint of actually targeting, having a directed outreach effort, if you will, around the OP unit deals?

Yes, sure. I am happy to take that. I mean, I think it's a little early to have seen a lot of significant uptick in inbound interest on but look, it's something that we -- as a sector, we've talked about extensively in the past, and we are pleased to be the first timber REIT to actually pull this off. We do think that there are a pretty ample supply of would be sellers into a structure of this nature. To date, it's been somewhat untested. So it's a difference between sort of communicating a, "Hey, we think we could do this as opposed to we have the structure in place and could execute on it relatively quickly." So I'd say that we're optimistic about the new types of transaction opportunities that this could bring to the table for us. And again, we think it does offer would-be private sellers of timberland some unique tax advantages.

We are a little tight on time, but I would just want to quickly bring up ESG initiatives. You touched on it a little bit in your opening -- one of your opening slides there. We're talking more about that with the investment community. So just curious, in any particular point, I mean, one thing that Rayonier does that's different than some of the peers is actually providing a sustainable yield number, but also similar to peers, you have a lot of certifications related to the sustainability of the forest and how you manage the forest. So just anything that you would like to highlight in particular as far as ESG initiatives that Rayonier's focused on.

I mean I think for Rayonier, we're trying to be pretty thoughtful about how we go about our disclosure on ESG. I mean we're extremely in a long-term focused business, and we think that we want to have our disclosures tied to the way we operate the business, not necessarily kind of checking the box on what others think we should disclose. And I think, as Collin mentioned, the fact that we're the only ones disclosing our long-term sustainable harvest yield, that to me is a hugely important aspect of ESG. But on -- outside of that, one of the things that we're working on is trying to calculate what our carbon footprint is across the company. We currently do that in New Zealand, where we have an active carbon trading regime, but we're working at developing that for the United States as well and really trying to hone that ESG messaging around the things that we think are important for managing the business. So stay tuned. We're going to be rolling more of this out as this year progresses.

Dave, Mark, thank you both.