Rayonier Inc. (RYN) Earnings Call Transcript & Summary

Good morning. Welcome to Rayonier REITweek and Rayonier's virtual investor session. My name is Anthony Pettinari. I'm the timber REIT analyst at Citi, and I'm very pleased to host Rayonier's CEO, David Nunes; CFO, Mark McHugh; and VP, Collin Mings for this presentation. David will begin with an introduction of Rayonier, and we'll have time for Q&A. [Operator Instructions] So Dave, with that, I'll turn it over to you for your opening remarks.

Great. Thanks, Anthony. And I'll be -- for those on the line, I'll be referencing our May investor deck that's available on our website. I'm going to go through the first 7 pages of that deck pretty quickly, which provide an overview of Rayonier. And then after that, I'll turn it back over to Anthony, and we can get into questions that folks have submitted. And so with that, I'm going to turn over to the deck under the section Rayonier Today on slide -- beginning on Slide 3. And just to give you a sense of Rayonier to glance. We own 2.7 million acres in the U.S. and New Zealand. We have a sustained yield of 11 million tons annually. We define that as the amount of timber that we can harvest into [indiscernible] each year. We think that's a really important disclosure element so that you have a sense of the dependability of those cash flows. On the lower left of this slide, we look at fiscal year 2020 and the adjusted EBITDA of $267 million and the distribution of that between our 3 timber geographies in the U.S. South, U.S. Pacific Northwest and New Zealand, along with our real estate segment. Which, as you might imagine, has had pretty strong contributions over the last few years with all that's going on in the real estate side. We've been fairly busy on the acquisition side. We've added $1.7 billion of acquisitions since the spin-off, Performance Fibers business in 2014, culminating in the acquisition of Pope Resources in 2020. All of our lands are certified under third-party certification systems. In the U.S., we use SFI. And in New Zealand, we use FSC, PEFC. We have a pretty straightforward mission. We're really trying to provide industry-leading financial returns, but at the same time, being a responsible steward to the environment and a beneficial partner to the communities that we operate in. Slide 4 gives a rough breakdown of our geographic footprint. Our largest segment, by size, is the U.S. South, where we have 1.75 million acres, and we're in 8 states in U.S. South, with the biggest component of that being along the Atlantic Coast in Florida and Georgia. We are in the Pacific Northwest. We have about 0.5 million acres there, with the majority of that being in Washington state. All of that is west of the cascades, with the mix of Douglas fir and Hemlock being the primary species. And then we're the only company among the -- publicly traded companies that has a presence in New Zealand. We have a little over 400,000 acres in New Zealand. We're in 5 geographies there. And as we'll touch on, that's a pretty important element for both diversification of our portfolio as well as access to markets and differentiation relative to our peers. Slide 5 looks at Rayonier as a pure-play REIT. And we define this really as not having downstream manufacturing assets. And you can see where this shows up. This looks at the peers and a mix of timber, manufacturing and other cash flows. You can see for Rayonier, over the last 3 full years, we've had a 70-30 mix, 70% timber versus 30% others, whereas our peers are 39% timber and 61% other, with 2 of those peers having pretty substantial manufacturing assets. And where we think that's important is really around the volatility of cash flows. Manufacturing cash flows can be very strong, and they can be very weak. And managing that volatility could be challenging from a REIT governance standpoint in terms of maintaining your dividend. And so being just in the timber business as we are, as a pure play, gives us a lot more flexibility to both manage our portfolio, but also a much less volatile cash flow stream. Slide 6 looks at some of our key portfolio highlights. And in the upper left, we touch on the fact that we have sector-leading EBITDA per ton. And this is really a function of where our lands are located in the U.S. South. Over 60% of our lands are located in the top 2 geographic markets in North Florida and Coastal Georgia. And that really shows up on this EBITDA-per-ton metric. We also have had a growing harvest profile with the acquisitions that I referenced earlier. We've taken our sustained yield from just under 10 million tons to 11 million tons as we go over the next 5 of years. And so we're excited about that, both in terms of the growth across the 3 segments as well as the mix. We have very strong HBU realizations. This is largely a function of the footprint that we have, both in the U.S. South as well as in the Pacific Northwest. And certainly, the recent acquisition of resources with their portfolio in the West Puget Sound area helps that tremendously. And then lastly, we have a unique exposure to the China market. Our New Zealand operations, which have a much heavier component of export. And then within that export, export to China, we're able to capture a lot of the upside associated with that very key market. But we also supply China out of the Pacific Northwest and out of the U.S. South. And so overall, as a company, we're in that 13% to 14% of our total volume going into that important China market. We have 5 key strategic priorities, and these have really been pretty stable, as you might expect of a timber company. We have put these in place following the spin-off in 2014. And these are to manage for long-term value. We really are focused on this stems anywhere from managing around that long-term sustainable yield. We're always looking to balance those biological growth and cash flows with responsible stewardship over time. We have a bias towards acquiring high quality properties. When you plant timber seedlings in the ground, you don't really have a full view of markets when those things come to maturity and anywhere from 20 to 40 years. And so you want to be in the best markets that you could possibly be in. And so we look to be in the most productive markets -- most productive areas from a biological growth standpoint, but also the best markets. We're always looking to optimize our portfolio. We have a mantra of never being satisfied with that. And as a pure-play timber REIT, it gives us the flexibility to pull levers to move in and out of geographies as we see changes in the underlying market conditions. And we're free -- a little more free to do that than somebody that has downstream manufacturing assets. And that's something that we work very hard at doing. This is both capturing things like HBU, higher and better use value, but also moving in and out of timber geographies. We have a keen focus on the quality of earnings. We focus on -- we deemphasized the sale of nonstrategic timberlands to simply augment cash flow and support a dividend. And we really focus on supporting our dividend through harvest operations and rural land sales over time. And then lastly, we pride ourselves in having best-in-class stewardship and disclosure, and this is something that we feel is really important from an investor standpoint, especially now that we're in this ESG era. Having that transparency, we think is very important. Slide 8 looks at our capital structure and financial policy. This is before a recent -- a bond financing that we did earlier this spring. And so these have not been updated for that. But generally, we have a very competitive overall average cost of debt that through the end of the first quarter was 3.1% and a nice distribution of those maturities through time and puts us in a very good position. Our net debt to adjusted EBITDA target is less than 4.5x. And that's about where we are right now following the Pope transaction, where we saw a little bit of elevated debt. And then lastly, I'll touch on our approach to capital allocation. We believe in having a nimble approach to capital allocation, and we balance both investment in our business, where we're investing $35 million annually in silviculture and regeneration capital. I touched earlier on the acquisitions that we've done. We're always looking in acquisitions really across all 3 geographies. We have a bias towards finding smaller bolt-on transactions as opposed to looking for sort of the bigger home runs. We're much more of a believer in hitting singles on the acquisition side. We've been very active and I'd say nimble as it relates to both share buyback and equity issuance. We have repurchased 4.7 million shares over the last handful of years at an average price of $23.84. We've also issued 8 million shares at a price of $28.87. And more recently, with the Pope transaction, we had a combination of operating partnership units and Rayonier shares where we issued 11.6 million shares to complete that acquisition. Our dividend is fairly stable. We have -- we increased it 8% back in 2018. We're paying out $0.27 a quarter. And one of the things that's important is we exclude the reporting of large dispositions out of our adjusted EBITDA, so as to better accurately reflect the ongoing cash flow capabilities of the company. And then lastly, a pretty solid balance sheet, as I touched on earlier with the very low weighted average cost of debt and a nice extension of maturities. And so with that, I'm going to hand it back over to Anthony who will cover a number of questions.

Great. Great. Thanks, Dave. That was a very helpful overview. You talked about your 3 timberland regions. Maybe just digging a little bit deeper. Can you talk about price and volume trends in the South in sawlogs and pulpwood? And kind of the key drivers of your full year guidance for the south? And just maybe touch on the importance of the domestic U.S. housing market and how that's kind of translated to demand into the spring and south.

Yes. I think for the south, it's worth noting that there's an awful lot of focus around housing and sawlogs. But if you don't have a strong pulpwood market, you don't have a strong sawlog market. And I think that's a point that a lot of people miss. I think that the reason that our EBITDA per ton is so much higher than our peers is that our footprint is really located in much stronger pulpwood markets. And so if you think about that as a base level of demand, that has been behaving very consistently and sort of in a GDP growth type of manner with strong export flows as well. That provides a floor for pricing, and it keeps price tension into the grade so that when you end up in periods like we have had with stronger lumber pricing, we're going to see more price elasticity in the markets that we are in versus markets that are much more heavily dependent on sawlogs. And so that's sort of how we think about it. And I think that helps explain some of the differential. And just to kind of bring that home if you look across the U.S. South at the difference between the strongest markets and the weakest markets, there's about a 2x differential in the composite stumpage value between those markets. And that's really a function of that -- strength of that pulpwood market underpinning everything. And then more recently, we've seen a resurgence in log exports out of the south. That's really providing even additional tension, which, we think, ultimately, translates into better price elasticity for periods of stronger lumber. Moving to the Northwest, it's a very different dynamic. There, you don't have the same proportion of pulpwood you have in the south. The south might be a 60-40 mix of pulpwood and sawtimber. In the Northwest, it's more like 80-20 of sawtimber to pulpwood. And so in the Northwest, the market is much more heavily dependent on both the domestic housing market and then secondarily, the export market. And in the Northwest, we've seen also a lack of build and inventory. So in the south, following the global financial crisis, we saw a pretty substantial build in inventory. That was not uniform across the south, but it certainly contributed to some of the sluggishness in pricing that we've seen in some of the subsets of the south. In the Northwest, inventory levels stayed relatively stable. And so as we saw this resurgence in lumber pricing, we've seen much more price elasticity in the Northwest translate into stronger log pricing. And then as well, you see much more of a presence in, in particular, the China market that allows further tensioning in those log markets. And then thirdly, moving to New Zealand. New Zealand has roughly half of its volume go to the export market and half go into the domestic market. The domestic market in New Zealand is very strong right now. They've got a big housing growth boom as well as export lumber opportunities that buoy that market. And then on the export side, about 2/3 of that volume goes into the China market. And certainly, as we've seen in recent months, that China market has really taken off. We saw during the COVID period, the China market took an early retreat. And so New Zealand was negatively affected early part of last year. But as we've seen China come back on earlier than the rest of the global markets, we've really seen a big pickup in activity there. So that's a real quick flyover of the 3 geographies. They're all distinct. I think to me, this gets back again to portfolio, construction and diversification and it really helps us have a nice pattern of cash flow when you kind of marry all of those elements together.

Great. Great. And just maybe picking up on a few of those points. Maybe starting with the south. When you think about kind of the long-term drivers of price improvement in the south, is it safe to say that it's really those sawtimber inventory levels? And then if you could generalize what those inventory levels look like in your timberlands in the south maybe versus sort of a south-wide average or an industry-wide average? And then a related question. When you think about sawmill customers or potential customers putting in sawmill capacity or expanding existing capacity to take advantage of some of these recent historic price strength in lumber, what are you seeing? And has that surprised you versus a year ago or 2 years ago?

Okay. Yes, a lot to unpack there. First of all, on the inventory. We saw sawlog inventories in the south increased by about 1/3 since the global financial crisis. So we went from 3 billion tons to 4 million tons. But as I mentioned earlier, that was very differential. It affected more of the interior of the south and further for the west. And so in those markets, you have seen tremendous build in inventory. And we look carefully at growth/drain relationships. And if you look at the top quartile markets in the U.S. South, where we have over 60% of our footprint, the growth/drain relationship is evenly balanced at 1.0. And so there, you have that greater price elasticity. In the weaker markets, you've got growth/drain relationships in the bottom quartile that are about 2.3. And so those markets are so awash in wood right now that essentially manufacturers can pay whatever they feel like paying because there's so much excess supply of lumber -- or excuse me, of logs. So I think to your original question, that is going to play a big role in the ultimate performance of those various geographies. And it certainly influences some of our thinking and some of our recent moves. Following our Pope transaction, we sold out of the last of our ownership in Mississippi, which we think is a fine market from a growth standpoint. But it's got a lot if inventory that's going to keep pricing from moving. And then the last piece of this that plays a role is the role of exports. And we see exports as a nice incremental -- demand increment that's going to add that tensioning into that market and keep that price elasticity more reactive to changes in lumber prices. And so that's something that we're doing. We have a long history of looking at that, both in the Northwest and in New Zealand. We're trying to bring some of that to the south with our export -- expertise.

Got it. Got it. And then just on the sawlog side, with lumber at $1,500 triple year-over-year, are you seeing your sawmill customers in the South, are they adding shifts? Are they building greenfield mills? Like how has been the -- how is the pace of capacity expansions in the south been relative to your expectations? And what's the potential impact long term?

Yes. I think it's been relatively consistent with our expectations, but perhaps below the expectations of a lot of observers. And I say that because we recognize that when a greenfield mill gets announced, it's going to take a couple of years for that mill to get up and running. Once it's constructed, there's a long start-up curve in the sawmill business that's pretty sort of well established. And I think COVID has made that even more challenging. I think another thing that has surprised folks, but not really us as much as that I think people were assuming that a lot of this mill capacity would go automatically into these regions that had the most inventory build. But keep in mind that a sawmill, notwithstanding where lumber prices are today, but over the span of a sawmill's life, the role that residuals play in the overall profitability of that mill is very key. And you don't have good residuals without good downstream pulp and paper customers to sell those chips. And so we tend to see sawmills want to locate where they've got a good residual outlet for their residuals. And then secondly, sawmills today are increasingly more sophisticated. And so a lot of it gets down to where can I get labor and not just annual labor like in the past, but more sophisticated labor to deal with modern electronics of sawmills. And that tends to not be in some of these rural areas. You're going to have to import that labor, which is harder. So we tend to see the mills locating not in places that are very rural and had these big builds, but closer to urban areas where they have a better chance of getting labor. And then I think the last piece is access to both domestic lumber and export lumber opportunities. And I think for those reasons, we have tended to see more of the sawmill capacity added in areas that were already reasonably well balanced from a from a growth/drain standpoint. But with the caveat being that, that added capacity comes slower. I think the last piece to your question is that there are not a lot of -- there's only 2 firms left that really supply sawmill and they're very backed up. And so the queue for new sawmill greenfield mill is very long. And so I think that's why you're not seeing a lot of greenfield announcements. You're seeing most of this capacity come in the form of either restarts or incremental debottlenecking. And I think that's probably been a large part of the growth that we've seen in sawmill utilization. I think as we get past COVID, I think, we're going to start to see those utilization rates going up in sawmills. And I think you'll start to see the mills catching up with that demand, which is why you're seeing kind of lumber prices starting to tail up here more recently. But I think we still have ways to go. The demand's been pretty strong, and it's been -- the supply is just not caught up.

Great. Great. And then just touching on the China exports. Just as a little bit of background. I mean the Chinese instituted 25% tariffs on logs from the South, I think, in 2018. I think they're tariff waivers in place currently. Can you just talk about -- in your slide, you have the percentage of southern logs that are going to China, but just how that's changed since those tariff waivers were granted, what those exports could look like in 2021 or maybe on a trend basis, if you could just talk a little bit more about the China opportunity out of the south?

Yes. I think right now, the -- I'd caveat that with -- throughout kind of the global supply chain issues right now. It's all about sort of shipping capacity. And I think right now, the biggest bottleneck of growing southern log exports is container availability. In the Northwest, in New Zealand, log exports are shipped by breakbulk. And so you've got -- you're essentially competing for ships that carry grain and logs and other things. But in the south, it's a container [indiscernible] And so right now, there's a real container shortage, and there's a lot of the global supply chain kind of catching up with post-COVID market demand. And so right now, we could -- we probably have customers for 2x volume that we're shipping just because we don't have enough containers. But that said, I think we're still seeing pretty substantial growth rates in our southern exports, the waivers. Our customers are able to get waivers multiple months out in advance. And so we're seeing just a really strong demand. And I think another thing that we feel is important is that the price of logs in China is strong enough now where there isn't the motivation to crimp down on supply. And so we think that as we see the shipping kind of settled down, we'll probably see continued growth in that southern export volume into China. We have used our in-house capacity on the market -- on the log marketing side to really find and tailor our southern log exports into China for some of the same types of uses that we see in the U.S. have been a big use of Southern Yellow Pine in the U.S. is in the treated markets. And we're going after that same market in China. And so that's a market that I think the Southern Yellow Pine will have unique competitive capabilities towards.

Got it. Got it. And then just, again, going through the regions, can you talk a little bit about Pacific Northwest with specific reference to Pope, in terms of what that acquisition brought to the portfolio, I think, you've had it for -- or maybe closed a little over a year ago, how it's performed relative to expectations? And then just maybe briefly, if you could talk about potential portfolio actions that could be logical.

Sure. Sure. Yes. So we closed the Pope transaction in early May of last year. So we've had it under our belts now for about 13 months. And I think one of the big drivers was the optionality on the timber side. Pope had a much stronger mix of Douglas fir than Rayonier did. And it also was in gentler terrain, so much lower logging costs. And then thirdly, it had a very complementary fit in terms of the log markets that we currently serve. A lot of the customers that both Rayonier and Pope served sort of lie between the 2 ownership basis. And so we knew it would have some strengthening in that customer base. But it took our percentage of Douglas fir from 60% to 68% in our merchantable inventory, which is important. And then it also allowed us to lower our weighted average logging cost because Pope had a much higher proportion of ground-based logging. And so in that respect, I think, it's played out exactly as you might expect. It's allowed us the greater flexibility from a market reach standpoint, both in domestic markets as well as in export markets. Now I think the other thing that we're seeing is the real estate portfolio that Pope has is a strong portfolio in the West Puget Sound market. In the Puget Sound market, housing in King County or Seattle, has gotten very overheated and Kitsap County, where much of the Pope real estate assets lie. It's about a 2 for 1 relationship. And a few years ago, legislation was passed for passenger-only ferries into downtown Seattle. And that's -- what that's really helped to do is unlock a lot of the real estate potential, particularly in Kitsap County. And so we're seeing very strong demand for the projects that Pope has been working on for a number of years. And so we feel like that portfolio really fits us quite well. The third piece of the Pope portfolio is their timber fund business. And that's a portion of their portfolio that doesn't fit us as well. And we're looking at sort of strategic alternatives around that business. And so stay tuned. More developments on that front. But I think we're -- overall, we're very happy with how that's gone. Certainly, we've seen strong resurgence in log prices in the northwest that was well above where we were -- when we were looking at this in late 2019, early 2020. So we're -- we feel like we're at least on track, if not ahead of where we thought we'd be at this time.

Great. Great. Well, Dave, thank you very much. I mean that was an extremely helpful overview. I think we're in on the line. I want to thank you for your time, and thank you to Dave, Mark and Collin.

Thank you.