Rayonier Inc. (RYN) Earnings Call Transcript & Summary

All right. I think we're ready to get started for the next presentation. Again, my name is Buck Horne. I'm the housing analyst as well as Timber REIT specialist for Raymond James, and thrilled to be able to bring back some very familiar faces to the Raymond James conference, some former alumni of Raymond James, Mark McHugh is the CFO of Rayonier; and Colin Mings is over there is also alumni of Equity Research at Raymond James. So they've got a lot of experience and know a lot more about trees than even I do. So with that, Rayonier has been a fantastic story in terms of its -- not only its performance and its returns to shareholders, but also just its environmental stewardship and the growth trajectory of the company. So a lot of good things to talk about is the U.S. South continues to get some traction and looks like more capital inflows are coming into the timber sector, improving valuations. And of course, the housing backdrop we think, continues to be a significant tailwind for wood demand and wood products. So we think it's a really strong multiyear tailwind. So with that, I'm going to turn it over to Mark roll through some slides and have some Q&A.

Great. Thanks, Buck. And first and foremost, it's just great to be back in person with our investors this week. I really appreciate being able to be back at the Raymond James conference. This is a conference that we participated in for a long time, and I always enjoy the dialogue here. I'll just start by giving a brief overview of Rayonier, who we are, and then I'll leave plenty of time for Q&A. Starting on Page 2 of our presentation. This is just Rayonier at a glance. Rayonier is the second largest of the 4 Timber REITs that exist. We own 2.7 million acres. We have a sustainable yield of about 11 million tons annually. Sustainable yield is essentially what we define is to be the volume of timber that we can harvest into perpetuity. It's really a concept of harvesting growth. Essentially, all of our timberlands are certified to various sustainability standards. In U.S., that's primarily SFI, New Zealand that's primarily FSC and PEFC. We also engage in a value-added real estate business. HBU, which stands for higher and better use, it refers to timberland that we sell into a kind of a premium valuation market. Really, the HBU business is part and parcel with timberland ownership. When you own millions of acres of timberland and variably some portion of that will be more valuable to an alternate user for some other purposes, whether it's to build a country home, own a hunting track. And when we can realize meaningful premiums to our timberland value, we will monetize acreage into that HBU business. We provide a breakdown of our 2021 EBITDA on this slide, $330 million, broken down roughly 75% in our timber segments, the U.S. South, Pacific Northwest and New Zealand. And the balance primarily coming from our Real Estate segment. Our mission is pretty simple. We want to generate industry-leading financial returns for our shareholders, while also being a responsible steward of the environment and a beneficial partner to the communities in which we operate. So we've really tried to incorporate not only the concept of realizing -- optimizing value for shareholders but also integrating ESG considerations into our strategic planning. Next slide provides an overview of our portfolio. We own 1.8 million acres in the U.S. South, roughly 400,000 acres in New Zealand and roughly 500,000 acres in the Pacific Northwest. We closed on the Pope Resources acquisition in 2020, which added about 125,000 acres to our Pacific Northwest portfolio, and we can talk about that transaction a little bit more later in the presentation. Like I said, we're second largest timberland REIT, but we like to think of ourselves as the largest pure-play timberland REIT. What do I mean by that? Essentially, we are only engaged in timberland and ancillary real estate businesses versus a peer group that the 2 largest of our peers have direct exposure to wood products manufacturing. The reason that we like our pure-play focus while lumber has certainly been a very strong business year of late, that business has historically been very volatile. And so as a REIT, with a shareholder base that likes the sustainability and predictability of cash flows, we like that pure-play timber focus. So again, 75% -- roughly 75% of our earnings over the last few years, our EBITDA has come from the timber business with the balance coming from real estate. And you compare that to the peer group, which is dominated by Weyerhaeuser, only about 1/4 of their EBITDA has come from timber and the vast majority of it has actually come from wood products manufacturing of late. Again, that's been a very strong business late, but it's also been very volatile historically. On a few portfolio highlights, Rayonier leads the U.S. South in terms of EBITDA per ton. The reason that we like to focus on EBITDA per ton instead of EBITDA per acre is EBITDA per acre can be heavily influenced by rate of harvest, whereas EBITDA per ton is really the unit where we're selling into the market our tons of timber. And so we feel like that EBITDA per ton is more reflective of kind of the portfolio quality, whereas EBITDA per acre. Again, if you're kind of modulating your harvest year-to-year, that can impact your EBITDA per acre. And so again, we saw a meaningful uptick in that EBITDA per ton in 2021. We've guided to another meaningful uptick in 2022. And again, we're best in class across the peer group in that metric. We also generate sector-leading HBU realizations. The HBU business is all about premium. If we sell timberland acres at timberland values and call that EBITDA and return that capital to shareholders, to be clear, that's a return of capital, not a return on capital. And so in our HBU business, we're really focused on maximizing premium. And as you can see, our HBU realizations likewise are leading the sector. We have an improving harvest profile. Last five years, we've harvested just under 10 million tons annually. We expect that, that will increase by about 10% over the next 5 years. And so that's -- that increase is really driven by 2 things, both the acquisitions that we've accomplished over the last several years, as well as improvements in productivity. One of the unique attributes of timberland is that, that productivity enhancement over time contributes to your return. And so if you think about it, relative to commercial real estate, your rents for an office building might go up, your square footage stays the same through productivity enhancements and some cultural investments and genetics investments, we've been able to increase that productivity on a per acre basis over time, and so that's contributing to the return. We also have a very unique exposure to the China export market. China has been really a huge part of the growth and kind of global trade flows and with fiber consumption across the world. And with our exposure in New Zealand, roughly 60% of our New Zealand volume goes export. The vast majority of that goes into China. And so we've really been able to participate in that growth in China with fiber demand. We also export out of the Pacific Northwest, both Japan and China. And then more recently, over the last few years, we've also built out a Southern export business. So almost 5% of our volume out of the U.S. South went export in 2021. That doesn't sound like a huge amount, but consider that the vast majority of volume that's going export is sawtimber. So when you think about our portfolio in the South, roughly 60% of the volume that we generate as pulpwood with 40% being sawtimber. And so it's really the 5% out of that 40% that's going export. And then when you consider that we're only exporting from markets at approximate to ports, we might have upwards of 20% or 30% of our volume in a particular market that's approximate to port that's going export. And so it really does help to tension up those markets that are sort of export capable. The next page is just an overview of our strategic priorities. We adopted a new set of strategic priorities in 2014, comparing with the spin-off of our Performance Fibers business. Much like the stability of our business and our business model, our strategic priorities haven't really changed much over the years. I won't go through all of these in detail, but I'll say they're largely focused on managing for a long-term. Again, timberland is a very long-term asset. And so we are always kind of looking to optimize returns on a long-term basis, growing through disciplined acquisitions optimizing value through HBU transactions as well as trying to be the sector leader in disclosure and transparency. I think if you look at our disclosure and kind of how that disclosure has evolved over the years, and we've really tried to kind of set a very high bar for the sector around our disclosure practices. I'd be remiss to not mention that we did recently add a new strategic priority, and that's to position the company for a low-carbon economy. Timberland is a very unique business, and it's one of the few assets that's actually carbon negative. And so on the path to net 0, it's going to require negative emissions. Timberlands are currently really the most available source of negative emissions today. And so we're doing a lot of work currently around trying to better understand the voluntary carbon market and really better position Rayonier to be able to take advantage of that longer term. We couldn't execute on our strategic priorities without a strong balance sheet. The next slide is an overview of our balance sheet. We're investment-grade rated by both Moody's and S&P, BBB- with Moody's and -- I'm sorry, BBB- with S&P, BAA3 with Moody's. We finished the year with a net debt-to-EBITDA of 3.1x. Now that's relative to a kind of long-term target up to 4.5x. And so we really do have quite a bit of balance sheet capacity and flexibility right now. Our weighted average cost of debt is 2.7%. Our weighted average maturity is about 7 years and 100% of our debt is fixed. And so we have a -- you feel like we're at a very advantageous position from a balance sheet perspective. And earlier this year, we refinanced some senior notes that came due in January. So we refinanced $325 million of senior notes with a $200 million term loan through the Farm Credit system as well as $125 million of cash on hand. So we really set up with a very long-dated and well-staggered maturity profile. Capital allocation strategy is really designed to be nimble and really designed to grow long-term NAV per share. We don't go into any given year, any given period with prescriptive targets around capital allocation, like acquisition targets. We really try to be responsive to the hand we're dealt and the market conditions at any moment in time. We both bought assets as well as sold assets through large dispositions. We bought back stock, and we've issued stock and obviously, with a pretty healthy spread between where we bought back stock and where we issued. Recently, we've been very active on our ATM program. In Q4, we issued $66 million of stock at a weighted average price of $39.70 per share, and that's allowed us to match funds what we think are some pretty attractive acquisitions. We did a $125 million acquisition, close on in the fourth quarter, 67,000 acres in Texas and Georgia. And so we've really been successful of late in deploying the ATM and match funding acquisitions that we think are kind of building NAV per share over time. So we really are sort of focused on growing accretively and doing that through kind of our capital allocation priorities. I'll cover our segments briefly, and then we'll kind of open it up to Q&A. This is just kind of a snapshot of our Southern portfolio and you can kind of see the earnings trend over there on the right. We obviously had a pretty meaningful uptick in EBITDA in 2021. Notably, 2021, we set a record for Southern Timber adjusted EBITDA. And our 2022 guide is 25% over 2021. So we're really seeing some very strong earnings momentum in the South right now. And really in the 20 years that I've been covering this sector, I haven't seen that type of earnings momentum in the South over that time period. So that's something that we're very excited about. What's driving that? We are located -- we're fortunate to be located in two of the strongest markets in the South, 60% of our acreage is located in Florida and Georgia, you can kind of see on the map there of 1.8 million acres in the U.S. South, about 1.1 million of those acres are in those -- are in that North Florida, South Georgia market. And as you can see, the chart on the right shows the weighted average composite stumpage price across the South by region. And you can see the top rated market Florida 1 and the third rated market, Georgia 2, are where the bulk of our timberlands are located. So that's really kind of driven the earnings momentum that we've seen in the South of late. What's driving that is really this new build capacity that's coming into the South. This is a -- this chart shows all the new build capacity announcements that have been made in the South, as well as that sort of trend in lumber capacity as well as production in the South. And you can kind of see going all the way back to 2009, we've seen a very steady year-over-year improvement in lumber production in the South, and that's really helped to correct this oversupply situation that we've seen that we see -- that we saw kind of build up in the wake of the global financial crisis. And so we really are sort of waiting for the Southern Timber price recovery has been a long time in the making. We've been hearing about it for a long time. We've been hearing this story about the transition of lumber capacity from BC in the wake of the mountain pine beetle epidemic into the U.S. South, and that was ultimately going to translate into price improvement. Now we really are finally seeing that play out. And so again, excited about the earnings momentum that we're seeing in the South. I'm real quick on the Northwest. We've similarly seen very strong EBITDA growth in the last couple of years. Part of that has been driven, like I said, about -- around the Pope acquisition, which we closed in 2020, a quick report card on the Pope acquisition. I thought it would be helpful to just kind of give a snapshot of where we stand as it relates to the 3 core businesses that we acquired with Pope. The chart on the upper right shows the EBITDA trajectory that we've seen in our Pacific Northwest Timber segment over the course of the last 2 years. And so since we closed the Pope transaction, we've roughly doubled both our EBITDA per acre and our EBITDA per ton. That's been driven both by price momentum in the Pacific Northwest as well as by the relatively attractive characteristics of the Pope portfolio. It's relatively flat land based. And so it enjoys more favorable cut and haul costs relative to the broader Pacific Northwest. The Timber Funds business, we made it clear from the outset of the Pope acquisition that we did not view that business as a long-term strategic fit for Rayonier. We're pleased that we were able to complete the exit of that business through several transactions. We sold our co-investment stake in Funds III and IV as well as the right to manage those funds to 1 buyer, and then we sold the assets of Fund II on 3 separate transactions. And in that Fund II business, we realized a carried interest of $14 million as well. So in total, we sold that business for $73 million, which compares favorably to our initial underwriting at the time of acquisition. But really, the Real Estate business has also been a great story. If you kind of look at the allocation of value that we made to that real estate business at the time of the acquisition, we estimated roughly $45 million of value. Since we closed the transaction, we've closed on $46 million worth of divestitures of real estate from that Pope portfolio, the largest of which was the Arborwood transaction that we closed late last year. And so we've already recouped more cash from those assets, and we had initially underwrote, and we still own -- the vast majority of those assets are still in the portfolio. Our New Zealand business, I'll cover real quickly just kind of going back to that export story around New Zealand. I mean, you can kind of see the breakdown between export domestic as well as our Trading segment. Roughly 82% of the volume that's going into the export market is going into China. So that's -- again, that's really kind of driving our exposure, the China export market. And again, while China can be volatile from time to time, really over the last decade has been a fantastic growth story for timber markets broadly and for Rayonier in particular. Kind of skip forward to our Real Estate business. Like I said, we break down our real estate transactions into these categories. Large dispositions or transactions that we sell into the market, really timberland values and timberland prices when we're looking to redeploy capital into a higher and better use for ourselves. And then we also sell nonstrategic lands from time to time. Really, the bread and butt of our Timberland business is this Rural category. That's the largely selling acreage to adjacent landowners or buyer who might want to own a property for hunting and recreation purposes. We're generally seeking to realize premiums in excess of 20% in that market. Unimproved development are properties that we think are ripe for development, but where we have not invested in horizontal infrastructure improvements. Those generally come at a higher value than our Rural sales. And finally, improved development is really kind of what we're doing in Wildlight and Richmond Hill, where we're actually investing in horizontal infrastructure improvements to add value to those parcels before sale. Our 2 main improved development projects are in Wildlife Florida, about 20 miles north of Jacksonville. We own -- really a story here is we own 24,000 acres within a 5-mile radius of that Wildlight project. And so we really kind of saw Wildlight as an opportunity to catalyze demand and enhance the value of our surrounding land holdings. Richmond Hill is a very similar story. We own a substantial land base in the immediate surrounding area. So that's more early innings relative to where we're at with Wildlight, but again, we're very excited about the growth prospects of Richmond Hill. And lastly, like I mentioned, we still own the bulk of this real estate portfolio that we acquired in the Pope transaction. We've sold out of that Kingston property, which was the Arborwood transaction, but we still hold parcels within Gig Harbor, Bremerton, Bainbridge Landing as well as Port Gamble, which is essentially an old mill town that we acquired through that acquisition as well. And so we still think that there are some meaningful development opportunities available to us within the Pope portfolio. So I'll pause there and then turn it over to Q&A.

Mark. So I guess just curious about your thoughts on just some recent developments, just internationally speaking. Obviously, there's a lot of headlines things have moved around a lot in the past couple of weeks. And certainly, our thoughts are with what's going on in Europe with the Ukrainians, of course. But what's happening in Russia, if Russia is taken out of the log in timber markets in terms of what they would normally send to Europe. How do you think that translates? How does that loss of European supply in the near term or intermediate term effect? What you guys might see in terms of export markets or even in U.S.?

Sure. I mean I don't think it will have a dramatic impact. Recognize that Russia is a relatively small exporter to Europe, but Europe is also a relatively small exporter to the U.S. And I think to the extent that you see the flow of lumber from Russia. You see that flow of lumber shut off going into Europe, that's going to create incremental demand for supply being created in Europe. And so I think that's likely to lead to fewer exports from Europe into the U.S., which I think will serve to further tighten and already very tight market. But again, we're not talking about huge numbers here. I think there's about 2 billion board feet of lumber that gets exported currently or last year, got exported from Russia into Europe. I think the other impact that we could see is obviously, as we see oil prices and fuel prices go up, diesel fuel is a meaningful cost input into our business, not necessarily direct cost input from Rayonier, but certainly one with the contracting force that we utilize for our logging and hauling operations. And so that can certainly put some pressure on the cost side.

And if Russia were to divert more to China, would that affect the New Zealand business or demand for the New Zealand logs?

I mean it certainly could, with the devaluation of the ruble, I expect that, that Russian product is going to be more cost advantageous in terms of their ability to export. But Russia also has logistical challenges in terms of their ability to ramp up production. Russia instituted a ban on log exports. It started in 2022. And so really, they're solely an exporter of lumber at this point. Really, that ban was designed to stimulate investment in production capacity within -- domestically within Russia and really do the conversion on the Russian side of the border as opposed to exporting logs and having that conversion occur on the China side of the border. And so I do think that as long as that holds, and the Russia does not relax that log export ban, you're still going to see the bulk of product flowing in, in the form of lumber. And I just don't know that they have a lot of capacity to ramp up production to kind of meet a higher need for -- or higher demand for lumber coming out of China.

Got you. Got you. Makes sense. You may have some questions? Feel free to jump in.

And recognize as well that New Zealand as well as the South and the Northwest, we're primarily exporting logs as opposed to lumber. And so at this point, the product that's coming in from Russia is not necessarily directly competitive with the logs that we're supplying. But it is a zero-sum game to some extent where wood flows either in log form gets converted in China or flows in, in lumber form for use in the various applications that they use it for in China.

Yes. And I understand China has got this issue now with, call it, the nematode parasite, something like that. So they banned a certain number of log exports.

Well haven't necessarily banned, and this is primarily as it relates to exports from the U.S. South. And they haven't banned those exports. They've really just put more stringent criteria on those exports. And they have banned them from certain ports. And so you're only allowed to go into certain ports, there's more stringent testing criteria. We feel as though we've been compliant with those China nematode restrictions from day 1. And so we think when the dust settles, this actually could help some of the larger exporters that have sort of essentially been playing by the rules from the start. But we're still sort of waiting for the dust to settle on that. But suffice it to say, it has been more complicated to export logs from the South into China, but we are still doing it.

Okay. Okay. Let's pivot to the U.S. South. I mean, because I think you did a great job of highlighting how much -- or that we're finally now at this point where we're getting some traction with log pricing in the U.S. South. Can you give us a context of whether it's the growth to drain ratio or what you're seeing in your markets? Are we at that point in terms of demand, whether it's new housing construction, repair and remodel, where we've kind of stabilized the kind of growth drain ratio. Is this kind of like the new floor for pricing? Does it get better from here? And how does that tend to work?

Buck, again, it is -- one of the themes that we've been talking about for a number of years now is that it's really differential across the South. There's a tendency to cast the U.S. South in a very broad brush. It's just 1 big homogenous region. In reality, it's a series of micro markets, each of which have very different growth drain, supply/demand and pricing characteristics. And so if you kind of go back to that chart that I showed in the U.S. South, and you look at the differential between the lowest market in the U.S. South is sort of in the $10 to $11 per ton composite stumpage price, whereas the best markets are in excess of $25 per ton. And so you literally have 2.5x differential between the price at which logs are trading in those different markets. And that really comes down to the fact that you can't transport a log much more than 100 miles economically. And so these are very locally geographic markets in terms of the ability to move wood fiber.

Okay. Questions. The balance sheet is just an impeccable shape. So first of all, congratulations on all the work you guys have done. But as you said and highlighted, you're probably below your target leverage ratios at this point. You're being rewarded with certainly investment-grade ratings at this stage of the game. You have a superior cost of capital to most of your competitors at this point. Now there is a lot of competitive capital in the private market chasing assets. Maybe that's the issue. I guess the question is about your M&A opportunities, does it make sense to get more aggressive into -- in terms of external growth mode and take advantage of your cost of capital at this point?

Yes. I mean, sure, we've been very active in the M&A market. Again, we closed the transaction in the fourth quarter of $125 million. Yes, I think that we've always believed we need to maintain discipline. And so I'd say that the timberland M&A market has definitely heated up. We're seeing some very strong prices being paid in that market. But we're still finding our spots. We've gotten blown out of water on some deals we bid on, and we've been successful in some other ones. And so right now, as we kind of look at those M&A opportunities, we continue to be disciplined. We continue to really try to find opportunities that we think are additive to our portfolio. But most importantly, we're trying to find opportunities that we think are going to allow for us to build NAV per share over time. And so it's really kind of playing that arbitrage between where we're able to issue capital particularly through our ATM program, the cost at which we're able to raise debt and then trying to find the right opportunities to deploy that capital.

And are you agnostic between regions, geographically? Or would you rather focus on the U.S. South at this point? Or how do you think about it?

Yes. I mean I'd say that in terms of where we focus our efforts, I'd say it's much more driven by where just deal volume exists. And so far and away, the U.S. South has the most volume of transaction activity followed by the Northwest, followed by New Zealand. And so that's invariably where we spend the most of our time is in the U.S. South, but that's obviously, I think, a good place to be spending time right now because we are seeing some real momentum in those markets.

Okay. Good. And we always get the questions about the carbon optionality of the Timber business and that there's so much that's still kind of, I guess, on the come in terms of developing these markets and trying to figure out what -- how to price this into the business, it doesn't seem like any of the Timber REITs are really getting any credit for that carbon optionality at this stage of the game. But how do you think about that in the next 5 or 10 years? Could these markets develop to where it makes sense to store and sequester carbon and not harvest trees? Or how do the economics of that work?

Yes. Absolutely. I mean, I guess, first, I made the point that I'm not sure that the Timber REITs aren't getting credit for that option. I think we're starting to see that sort of embedded within valuations to some extent, probably more so in the public market than in the private market right now. But we absolutely see it as a compelling growth opportunity for this sector. It remains very speculative. Again, I'd like to say when we value timberland assets, we're -- it's a price time following business. We can say with a high degree of scientific precision, how much volume we're going to be able to harvest off of an acre really into perpetuity, and we have some -- both historical and forecasted outlook on pricing. And so we're able to kind of build very detailed DCF models. With the carbon opportunity, again, it's much more challenging because we still don't know kind of the volume of carbon that you might be able to get credit for from an additionality perspective. And the price is a sort of ever-moving target. We've obviously seen very strong price momentum in some compliance markets, for example, in Europe and New Zealand. But the voluntary market, we've seen some price momentum there in the U.S., but I'd say it's not at a level that would really kind of incentivize different behavior certainly not in the part of a plantation forestry on, right? I think most of the carbon projects that you've seen to date have been in kind of lower productivity regions, non-planted forest hardwood type areas. But look, as that market evolves at a very basic level, I mean, if you look at all the net 0 commitments that have been made by governments and corporations. And if you look at kind of IPCC kind of path to net 0, there's going to be a significant need for negative emissions to get to a net 0 economy. If you just got orders of magnitude, the demand for carbon offsets in 2020 was about 100 million units. There are various forecasts out there, how that's going to grow. But there's, I think, a fairly credible forecast around kind of the IPCC path to net 0, it suggests you could see that grow to $1 billion -- $1.5 billion to $2 billion by 2030 into $5 billion to $10 billion by 2050. And so when you just kind of think of the magnitude of that growth and then you compare it to kind of where you're going to source those negative emissions. Forestry is far and away the most available source today, but there aren't sort of enough trees in the world to meet that demand. I mean, again, to put that in context, the global industrial roundwood harvest in 2019. Global industrial roundwood harvest was 2 billion cubic meters. And so again, there's this massive disconnect between the projected demand for negative emissions and the availability of those negative emissions. And really other technologies like direct carbon capture and storage, are going to require a much higher economic incentive in the form of higher carbon offset prices to really stimulate investment in those type of technologies. And so we think forestry is very well situated, but again that market has to evolve, I think we're still in the relatively early innings of this, but it could be game changing for this sector if some of these forecasts really materialize.

Absolutely. I think maybe time for one more. I was going to pivot to maybe HBU and just -- you've had just tremendous success with the Wildlight project in north of Jacksonville. [ They might have ] driven up north of [ $9.95 ] and stop by and seeing what they've been able to accomplish here and the amount of development that it's occurred there. It's just mind-blowing. And -- so I mean opportunities like that to replicate, I mean -- or do you -- can you continue to accelerate? It seems like homebuilder demand for those finished lots continues to improve as this housing recovery gains momentum. So what do you think about in terms of adding additional capital for developing residential lots into some of your HBU Resources?

Yes. I mean we're certainly not capital constrained in terms of our ability to do that. I'd say we're really more constrained in terms of the available land base. I mean, like I said, our 2 main projects in the U.S. South are Wildlight and Richmond Hill. And again, there's a cadence to these projects. You can't just sort of develop it all tomorrow, but to your point, I mean, it's remarkable kind of what our team has been able to achieve there. 5 years ago, that was just a big pine for us. And now it's looking like a real community. And so we think look, single-family homebuilder demand has been very strong. We've been very pleased with the progress on that project. Certainly, the absorption has been much quicker than we had sort of underwrote initially. And again, hopefully, this momentum continues because we've got a lot of land in that area, and we'd love to kind of continue to develop and realize value from that portfolio.

Very good. All right. I think that's all the time we got. So thanks, everyone, for joining us. Really appreciate it. Thanks, guys.

Thank you.