Rayonier Inc. (RYN) Earnings Call Transcript & Summary

Good morning, and welcome to Citi's 2021 Virtual Global Property CEO conference. I'm Anthony Pettinari with Citi Research. And we're pleased to have with us Rayonier's CEO, Dave Nunes; and CFO, Mark McHugh. This session is for Citi clients only. So if media or other individuals are on the line, please disconnect. Disclosures are available on the conference website. And for those joining us, to ask management any questions, simply type them into the question box on the screen, and they'll come directly to us, and we'll do our best to ask them during the session. So Dave, with that, we'll turn it over to you for some introductory comments on Rayonier, and then we'll move into questions.

Great. Thanks, Anthony. And I'm just going to give a few minutes overview, and then we can kind of dive into some questions. First of all, for those of you that may not be familiar with Rayonier, we're the largest pure-play timber REIT. We have 2.7 million acres in the U.S. and New Zealand. When we're talking about pure play, we mean that really doesn't include manufacturing capacity. Two of our larger peers both have significant components of their cash flow that are in manufacturing. Timber cash flow, and the reason this is important, timber cash flow tends to be much more stable. And so our cash flow pattern over time tends to be more stable from that of our peers just because it's tied to timber. One of the things that's unique about Rayonier is, we are the only peer to disclose our sustainable harvest. For us, it's 11 million tons across our ownership. We disclose that for each of our 3 segments. And that essentially is the harvest that we could do in perpetuity. And so this kind of gets back to the spendability of those cash flows, in particular, as you think about funding a dividend as part of a REIT. One of the other things that's unique about Rayonier is, we're really noted for being in the strongest markets. If you look at our 3 operating segments, in the U.S. South, 61% of our ownership is in the top 2 markets according to the Timber Mart-South and these are in, of course, Georgia and Florida. And that really provides us sector-leading EBITDA per ton, which we think is the most important measure in the south. In the Pacific Northwest, we're dominated -- our 0.5 million acres there is dominated in the state of Washington, where we have nice optionality in both the domestic and export markets. And then we have lands in Oregon. All of our ownership in the Northwest is west of the Cascade Mountains. And so as such, higher values, stronger markets. And then we're the only timber REIT that has exposure in New Zealand. And New Zealand is really a remarkable market in the sense that it's got a very strong and balanced domestic and export mix. The export mix goes heavily into China. And New Zealand really gives us a lot of diversification in our cash flow and kind of unique exposure to the market. And speaking of China, we have a unique exposure to China really across our 3 markets. Our 2020 estimated volume to China about 40% of our volume from New Zealand goes there, about 10% from the U.S. South -- or excuse me, from the Pacific Northwest and 4% for the U.S. South to get a total of about 13% or 14% for last year. So we're very levered to that market. We use in-house export expertise to sell on a delivered basis. And so we really know that market, and we're able to flex volume there as we see opportunities. And then lastly, we mix our New Zealand export flows with third-party wood to really drive down our shipping cost and help us to compete as a really low delivered cost participant in that market. Another thing to note about Rayonier is our real estate platform. We have a very strong real estate platform that delivers the strongest premiums to timberland values in the sector. And that's really composed of kind of 3 areas. We have rural HBU sales. This is residential recreational properties. We've seen a big uptick in demand for this during the COVID period. And then we have unimproved development. And this is areas where we have invested in downstream entitlements that typically take many years to evolve, but that these are in strong enough markets, proven enough markets that we basically could sell those and let a buyer undertake the downstream development. And then in improved development category, that's where we choose to deploy development capital to entitled projects to catalyze future sales. And speed up absorption. We've got that going on in a couple of large projects, one North Jacksonville, Florida, and one South of Savannah, Georgia. Our dividend yield currently is 3.3%. It's a very safe and steady yield, as I mentioned earlier. We managed to fund it through all the disruptions associated with COVID. One of the big stories for us this last year was the acquisition of Pope Resources. This was a company that I had formerly run for about 12 years prior to coming to Rayonier in 2012. Pope brings a really strong addition to our portfolio. We add 124,000 acres of high-quality lands in Washington. We increased our Douglas fir in our inventory from 60% to 68%, and increased our sustained yield by 32%. And with the more gentle topography that Pope lands have, it really lowers our operating cost and gives us access to more ground-based logging. And so that really improves our EBITDA per ton, EBITDA per acre measures and just gives us a lot of market optionality. Pope also brings a complementary real estate platform with 2,000 acres in the West Puget Sound market spread across roughly a half dozen projects. They also have a private equity timber fund business with 141,000 acres and coinvestment in Timber Funds. And really just an outstanding team of folks, the vast majority of which have come over to Rayonier, and we've successfully integrated our teams. We funded this transaction with 70% equity and 30% debt using the upgrade structure, which is really the first time it's been used on the timber side. We're very excited about that, and we think that's a structure we can expand upon in the future. So in the end, it was a really good example of increasing the quality of our portfolio, increasing our downstream optionality. In the end, that's what you really want to have in owning timber properties is as much downstream optionality as possible. And more recently, one of the things we're really excited about is we just released our first ever comprehensive carbon report. And this report details our 2019 activity. As of the end of 2019, we have sequestered a total of 732 million metric tons of carbon across our land base. And then during 2019, we had a net sequestration of 5.7 million metric tons of CO2. And the way to think about that is that is net after our direct emissions of Scope 1, 2 and 3 as well as the carbon embedded in products that we harvested and transferred to our customers. The report also details the downstream use and continued sequestration of carbon in products over 100-year period, looking across 5 rotations. And I think it's a real key report. We're excited to talk to folks about it. And it really demonstrates how owning timberland in productive areas such as ours is part of a natural climate solution. So with that, I'll turn it back to Anthony to go to any questions.

Great. Great. That was a great overview. I guess maybe starting off, you talked about your 3 main regions: U.S. South, U.S. Pacific Northwest and New Zealand. Can you talk a little bit about how spring demand is shaping up? And maybe if we could start in the south. And I'm just curious, you talked about 60% plus of your Southern timberlands being in the top 2 markets. Is it possible to generalize how that sort of translates to demand and/or pricing versus the kind of south wide averages that we sometimes see for U.S. Southern Timberlands?

Yes. The way that we like to sort of talk about that is looking at growth to drain relationships. And in that the top quartile markets that you see in particular the Atlantic coastal area, they're balanced today with a growth to drain of 1.0. So that means you really are more subject to price elasticity up or down. Conversely, the lower-tier markets in the interior Gulf, those have growth to drain relationships in excess of 2x. So that's why those markets really are not going to be looking at any kind of price improvement for a long time. But what it means on those stronger coastal markets is, when we see strong lumber prices and we see export opportunities pick up, we see a pretty quick translation into pricing. And that's really what we've been experiencing during this spring selling season is kind of the confluence of all those factors.

Great. Great. And could you touch on Pacific Northwest operations? How domestic and export demand has been shaping up so far?

You bet. And for us, a big change this year versus last year has been the addition of -- with the added Douglas fir and the change in the mix of topography, you're going to start to see an improved cash flow metric for us overall in the Northwest. Douglas fir has a higher selling price. And with the lower logging cost, you're going to see that translate into those improved metrics. The other thing that's important about the Northwest is, Northwest today has been one of the beneficiaries of the trade dispute with Australia and China. And what that translates to is a higher demand for export logs out of the Northwest to make up for the Australian supply, which has been roughly 10% of the softwood log supply into China historically. And so for us, it improves the optionality for hemlock as well as Douglas fir. We're starting to see some nice price improvements on the export side, and that just adds additional tension into the domestic market. I'd say for the Northwest, on the domestic side, we've experienced very strong markets, while we've been in this a record high lumber pricing environment. You saw some of that towards the tail end of last year. We certainly continued with that this year. And now we have the added dimension of incremental export demand. And then kind of shifting to New Zealand. I'd say New Zealand, the story last year with New Zealand was that the market was essentially shut down for much of the first quarter. And so a lot of the stats around New Zealand are going to look better this year just because you're not dealing with the COVID-related shutdowns that we did last year. And so right now, the markets there are strong, both domestically and on the export side. We saw China come into the Lunar New Year with lower inventories than they typically had, had. And because they kept a lot of mills running to avoid COVID outbreaks from people returning home during holidays, we never saw the inventory spike the same way that they've done in prior years. And so we've seen very strong pricing in the China market. One of the offsets to that is, we've also seen a big spike in shipping rates. And so you've just got -- you've got general shipping congestion going into China that has eaten into some, but not all of that price increase.

Great. Great. And just following up on a few items there. I mean we talked about record lumber prices over $1,000, which is sort of maybe unimaginable levels. Understanding you're a little bit up the chain, how do you see lumber demand and maybe prices into the spring? And can you talk about what's caused this -- these record prices? And then are you seeing capacity expansion plans from sawmill customers or potential sawmill customers accelerate? And how could that impact your business in the South or the Northwest?

Yes. I think we're continuing to see -- part of the reason why lumber prices have been so strong as I think we just have not -- the lumber producers have not been able to fully meet that rise in demand. You've got strong repair and remodel as well as a surge in housing. And that's occurring while you're still having periodic disruptions associated with COVID. And so I think that's one of the reasons that we're going to see this -- these higher lumber prices persist for a while until we see more of this capacity come online and come online consistently. And keep in mind, when you have new lumber capacity, it typically takes a few years to get that capacity up to the rated level. And then I'm sure COVID has probably added additional complexities to that. We have seen some instances where we've seen mills that were shutdown that have been recently reopened. And every time that increment occurs, you're going to see additional pressure on log prices. And so to us, it kind of gets back to -- we pay a lot of attention to these regional growth to drain relationships and where that capacity is coming online. But I think right now, it's safe to say that all the lumber manufacturers are going as hard as they can, as much as they can to try to meet demand, but just not able to do that. And that's why you're seeing that -- those persistent high prices. And then as a timber owner, it's really a function of how tensioned your market is in terms of how much of that you're going to ultimately share. We obviously share more of it in our stronger markets than we do in our weaker markets.

Got it. Got it. And then you talked about Chinese demand with reference to New Zealand. I'm just wondering Chinese demand kind of with reference to the U.S., I think in 2018, China instituted some pretty steep tariffs on logs out of the U.S. South, lighter tariffs on logs out of the Pacific Northwest. Can you just talk about how those impact the business? And I think there's tariff waivers that have been granted out of the U.S. South. And what could Southern exports look like this year versus maybe the pretariff levels? And just if you could talk about the possibility that exports out of the south could further tension that market?

Yes. I think the export -- the tariff situation with the waivers has improved dramatically. And recently, those tariffs were extended another 6 months. And so what that does, is it gives customers the chance to be able to plan. It gives exporters a chance to be able to plan. And so combination of those tariff waivers and the Australian trade dispute have really helped increase the demand for Southern log exports. A portion of the -- a portion of that southern volume goes into the treated markets, just like it does here in the U.S. I'd say that niche market has been relatively independent. The piece that has increased the most is the piece that overlaps with Australia, which is more an appealing market. And keep in mind that the European beetle-damaged wood that's sort of flooding into that China market, that cannot be peeled. And so the peeling market is really home to the radiata, first and foremost, and to a lesser extent, Southern yellow pine. And so we're seeing a big increase in demand there such that we really -- we can't supply all the demand that we have. So we're trying to get as much of that flowing as we can. Also keep in mind that the southern volumes flow to Japan -- or excuse me, flow to China with containers. And so you're subject to some of the dynamics in the container trade as well as port congestion, both in the U.S. and in China. And so that's a governor to the level of increase. But I think, generally speaking, we expect to get volumes similar to what we were planning on for the implementation of these tariffs. And so we expect to see a pretty strong increase in 2021 relative to 2020, sort of in the neighborhood of maybe a 50% increase in volume. So we're pretty happy with it. And as I mentioned earlier, it's adding tension to an already fairly tensioned Southern wood basket for us.

Great. Great. And in terms of your harvest outlook for 2021, I think your guidance for U.S. South harvest is maybe at the higher end of your sort of sustainable yield range for the region. Can you just talk about kind of key assumptions behind your harvest outlook for 2021? Are there circumstances under which you'd flex harvest levels higher or lower? Constraints that you're seeing, whether it's contractors or freight or supply chain? Any comments there?

Yes. Some of our -- so keep in mind, our sustained yield ticked up this last year, and that's really a function of some of the acquisitions that we've deployed. I think that in terms of increasing harvest, keep in mind that if you do that, you're eventually going to have to pay that back. And so I think we would generally like to see much stronger log pricing to justify that. And so we generally have an operating run rate assumption that we're going to be more or less at a sustainable level in all our regions. That's how we generally approach it. This year is a little different in that we have cases like in New Zealand is a good example where we had to defer a lot of volume during the first quarter of last year when the market was shutdown. And so we're capturing some of that into 2021, is part of why we're seeing more volume there. And then on the Pacific Northwest, we have the addition of the Pope lands that's adding incremental harvest.

And Dave, can you just touch up on the current market conditions for timberland in terms of the level of activity, in terms of transactions that you're seeing in the market, dollars per acre kind of level of interest post COVID, whether COVID really impacted it positively or negatively? And then just sort of the level of returns that you're typically targeting or that you're seeing in Southern Timberlands and maybe the kind of the main drivers of that return?

Yes. So I will say that COVID did impact the flow of timberland transactions in the sense that you really could not get out and do confirmatory field due diligence. And so that slowed down certainly the larger deals. And so I'd say there is both a pent-up supply of those that wants to come to market and a pent-up demand for people wanting to get into it. And so that did have an impact. We saw that last year once kind of the COVID travel restrictions went in place, we saw that dry up. And for us, it really pushed all of our activity to smaller bolt-on transactions that were more in your backyard that you could more easily examine. In terms of demand, I think what you're continuing to see, you're continuing see investment capital flow into this asset class from a flight quality standpoint, increasingly an inflation hedge and I think that's true in both the private markets as well as in the public markets. And so I think that we're seeing strong demand. You're seeing that certainly in pricing out there in auction transactions, very strong pricing. And in terms of how we think about it in a return sense, this kind of gets back to what I was describing earlier. We look -- we try to look longer-term at the behavior of markets, and we try to look for where the level of risk is in a particular asset? And how much of the cash flow from that asset in a current market condition at a sustainable harvest, how much of that -- how much of does that constitute the overall purchase price? And I think where you see very different behavior across the timber acquisition space is people making assumptions around price improvement. And we have a certain viewpoint based on these growth to drain relationships, where that's -- areas where that's riskier and where it's less risky. And that's sort of how we approach it. So it's not as much about the return, it's also about the return and how sort of risky we view that return expectation being.

Is it possible to talk about where timberland properties are maybe most attractive or at least available if you compare the South and the Pacific Northwest and even throw New Zealand in there?

Generally speaking, there's more deal flow in the U.S. South, followed by the Northwest and followed by New Zealand. So New Zealand, for example, a geography we'd love to grow in, but it has pretty thin deal flow. The U.S. South, because of its scattered ownership, has pretty good deal flow, and there's always plenty of things to look at. But I think there, it really is a function of being discerning and looking for where you see complementary fits. We're big on looking for complementary fits to age class. That certainly was a big deal in the Pope transaction. And even in the U.S. South, we look for that. And then -- and then I think, secondly, kind of that level of market attractiveness. And we're not going to be as interested in properties that are in some of these markets that have a bigger inventory overhang. And we think that will impact returns for transactions in those particular markets.

And are you seeing TIMOs as sort of net buyers or net sellers in 2021? Is there any -- you have these fund expirations that sometimes kind of bring properties on the market, anything that you could generalize about what you expect this year?

It's hard to generalize. I mean I'd say that across the TIMO space, there are individual TIMOs that are going to be net sellers and some that are going to be net buyers. I think they are having differential experience in raising capital. And also keep in mind that I think we've seen a general trend for less comingled funds and more investor discretion situations. And so based on that, you've got to get investor approvals in buying. And then that really kind of gets down to your track record and your relationships with those investors. I don't think we're looking at a wave of selling out of TIMOs, like a lot of people have expected. I think TIMOs have done a good job of taking properties, big properties that were purchased a number of years ago and peeling off subsets to allow certain investors exit points. And I think we're going to continue to see a steady diet of that going forward. And now with some of these travel restrictions off, we expect to see more offerings certainly in the second half of this coming year because of that.

Great. Great. And then with regards to land use entitlements, I think you highlighted Wildlight and Belfast Commerce Park projects. Could you just talk about the kind of current entitlements pipeline? How many acres are maybe under review? And then the I-95 kind of coastal corridor and the attractiveness of that market, especially post COVID. It seems like everybody is moving to Florida. If you could just talk about that market from an HBU perspective and the opportunities there?

Yes. And so kind of unpacking that a bit and looking at our 2 big projects that I mentioned earlier in Jacksonville and Savannah. So these are projects that have existing entitlements. And so there, it's really a question of basically having subsets of those that you can either sell as a pod where the downstream buyer will do that development. We just announced a deal with Del Webb. They're going to put a Del Webb product for age restricted. And that's a case where they're buying an entitled piece within Wildlight, and they're going to be developing those lots themselves. There's other cases where we're selling finished lots, where we spend that capital and then are under contract with a buyer to do sort of quarterly closings based on the pace of their sales. And so we have a mix of both of those in each of those projects. And that's really going to be driven by the view of those builders in terms of their ability to move houses downstream. I think our Richmond Hill project in Savannah was benefited recently by the opening late last year of a new I-95 interchange. And what that does is it opens up to the West, it opens up our Belfast Commerce center, which is an industrial park, and we expect that that's going to increase the absorption out of that asset. And then to the East, it opens up our mixed-use and residential portion of that project. We have an operating middle school on land that we donated and an elementary school and a high school that are under construction that are going to start to create demand pull from a housing standpoint. So we're very excited about that particular market. And I think you'll see more activity there over the next few years. Moving away from those big projects, when we look across the U.S. South and to your Florida question, we do see stronger demand for rural HBU product. Right now, we have active listings in a lot of our markets that we consider ideal for that type of offering. And those -- we're having a hard time kind of keeping that pipeline restocked because sales have been very brisk. We generally have strong sales in that Florida, Georgia region as well as Louisiana, Texas. And so that's 1 of the reasons that you're seeing more interest, more pricing pressure and more of a contribution to our results out of those markets. And that's -- that really kind of gets back to that quality footprint. Now thinking longer term, this is where you look at that real macro features. And one of the things we look at, for example, is the amount of land we own around Jacksonville. It's a huge number of acres that's way out into the future. And so the key is to get entitlements starting on those assets so that by the time there is market-ready demand, you've got product to sell. And so we have a mix in our real estate activities of both selling things that are -- that we have entitled today, but also trying to build for the future and getting some of those future entitlements spread away.

Great. Great. And then maybe last, but definitely not least, on ESG, you talked about your sustainability report, which I would definitely encourage people to check out, it's excellent. And you outlined the carbon benefits of Timberland and the amount of carbon that you're storing. From a big picture perspective, can you talk about how Rayonier can -- how ESG can move the needle for Rayonier, whether it's your earnings or your share price? And then you have an experience with carbon tax credits in New Zealand. If you could talk a little bit about that? And do you see any possibility of some kind of program like that materializing in the U.S. or maybe being replicated by private markets?

Yes. I mean a lot to unpack there. I think looking at ESG, in general, I think there's an element of investors are wanting to see more balanced and more of a holistic approach in terms of how you run your business. And I think the combination of things like COVID, the climate, the sort of the growing risk of climate change and more recently, the social justice issues in the U.S. following the death of George Floyd, I think all of those things in concert with increasing pressure from European investors who've been sort of living the ESG movement for a number of years. All of those things are putting pressure from the investor side to look at companies differently, to demand more and different kind of information from companies. And I think for us, as we look at our business, we welcome that. I mean that -- we have a -- we take a very long-term approach to this asset. We're planning into the next century in terms of when we look at our harvest rotations. And we also feel very passionately about being kind of sector-leading as it relates to disclosure of our assets and transparency around our future harvest levels and cash flows. And so for us, I think the ESG pressures really don't change the way we operate. It just amplifies the information that we've been already putting out into the market. I think the area that's new is the whole kind of carbon arena. And our carbon report that we just released is the most extensive one yet. And that's still an area that's forming. You mentioned New Zealand, we have an active carbon trading scheme in New Zealand. And that essentially is a government-designed program to -- when you plant trees, you're getting carbon credits associated with the sequestration. When you harvest the trees, you give back some of those credits and you get to retain a small increment that you're able to monetize on the open market. And we have a kind of an outstanding finite amount of carbon credits in New Zealand that we can sell and we are selling those. We're metering those into the market as we see market opportunities. And the U.S. is a long way from kind of getting to that place. I think certainly, rejoining the Paris Climate Accord is a step in that direction. I think we're starting to see more experimentation by properties in the U.S. around paying for the sequestration of carbon. I think a lot of the traditional carbon markets in the U.S. have really been more tied to either areas that don't have good markets or that people are being encouraged to not harvest in exchange for carbon credits. And it's less clear that those will work in areas that already have for a strong sustainable harvest levels coming off, let's say, an industrially managed timber property. Those, I think, are all things that are yet to be resolved. We're certainly working on that with our industry association efforts and our peers to see if we can ultimately develop some sort of a carbon trading mechanism, but I think we're ways off. And I think that's going to take a while to develop. In the meantime, we're trying to disclose what that carbon sequestration that we're doing on a net sense. We don't have to talk about how long it's going to take us to get to net 0. We're already well past that. And we're just trying to educate folks on the role that timber can play. And another thing to keep in mind is there's the carbon element, but there's also the issue of using more wood. And I think that you're -- that's one of the reasons you're seeing more demand and more momentum around mass timber and cross-laminated timber. I think you're starting to see more of an awareness that more of that we can use, we're going to sequester more carbon from the atmosphere, and that's going to benefit sort of all participants in both our industry, but also in the broader economy relative to other building products. So I think it's both an awareness of wood, but also sort of trying to solve for some of these carbon challenges.

Great. Great. Well, Dave, that was an excellent overview. So thank you and Mark, for joining us, and we'll definitely have time to catch up on some of these issues over the course of the conference. But on behalf of everyone here at Citi Research, again, thank you, Dave and Mark from Rayonier, and we'll sign off now. Thank you.

All right. Thank you.