Rayonier Inc. (RYN) Earnings Call Transcript & Summary

Good morning. My name is Anthony Pettinari. I cover the timber REITs at Citi, and we're very pleased to have with us Mark McHugh, CFO of Rayonier as well as Collin Mings, VP of Strategic Planning. I think the format is -- Mark is going to give some introductory comments on Rayonier and timber. And I have questions, and we definitely encourage folks in the room to jump in with questions as well. So Mark, Collin?

Yes, great. Thank you for joining us today. It's great to be back first in here at the REITweek conference in New York. I'm going to walk through some slides, like Anthony said, just providing a high-level overview of Rayonier and we'll try to leave plenty of time for Q&A. We posted a presentation to the website as well as to the REITweek conference app. So that's the presentation that we'll be working from. Slide 2 of that presentation provides an overview of Rayonier. Rayonier is the second largest of the 4 timber REITs. We own or lease approximately 2.7 million acres across the U.S. South, U.S. Pacific Northwest and New Zealand. We have a sustainable yield of roughly 11 million tons annually. We define sustainable yield as the volume of timber that we can harvest on an annual basis into perpetuity, potentially the concept of cutting growth and we think it's an important metric for investors to understand. We've worked hard to grow our footprint over the last several years since 2014 when we spun out our Performance Fibers, our manufacturing business. We've acquired $1.9 billion worth of timberlands, and that includes the Pope Resources acquisition that we closed in 2020. In addition to our core timber business, we're also involved in a value-added real estate platform where we're essentially selling timberlands that have a higher and better use than timber production, premium valuation of timber. And so that's a business that we're engaged in primarily in the South, selling 1% to 2% of our portfolio annually. The pie chart on the bottom of the Slide 2 provides a breakdown of our 2021 adjusted EBITDA. As you can see, roughly 70% of our EBITDA is generated from our timber segments, with the balance coming primarily from our real estate business. We're certified for sustainability by third-party organizations, SFI in the U.S. and FSC and PEFC in New Zealand. We also provide our mission statement here, which is really pretty straightforward. We want to provide industry-leading financial returns for our investors while serving as a responsible steward of the environment and a beneficial partner to the communities where we operate. Slide 3 provides a more detailed breakdown of our timberland assets. As you can see, we own 1.8 million acres in the U.S. South, roughly 490,000 acres in the U.S. Pacific Northwest. And we also have a portfolio in New Zealand comprised about 420,000 acres, of which about 70% is plantation. Slide 4 talks to the fact that we're a pure play timber REIT. So what do we mean by that? Like I said, we're the second largest of the 4 timber REITs, but we like to think of ourselves as the largest pure-play timber REIT and we don't have any exposure to downstream with product manufacturing operations. And with the recent announcement of the CatchMark acquisition by PotlatchDeltic, we expect [ we can be ] the only pure play timber REIT. So if you look at the breakdown of our EBITDA, essentially all of our EBITDA comes from timber and ancillary real estate businesses whereas the peer group -- over the last several years, amidst a very strong lumber market, only about 27% of their EBITDA in aggregate has come from timber harvest operations with the balance coming from wood products manufacturing and real estate. And the reason why we think it's important to note the we're pure play timber REIT is, lumber, while it's been on a tremendous run in the last 18 to 24 months, has historically been a very volatile business. And so we think one of the hallmarks of timber and more broadly, real estate investing is the safety and stability of cash flows. We think timber provides that lower products, again, has historically been much more volatile. We provided some key portfolio highlights on Slide 5. A few things are important to note about our portfolio. We lead the South -- the U.S. South in EBITDA per ton. We think EBITDA per ton is an important metric to focus on rather than EBITDA per acre. It really speaks to the underlying quality of markets and sort of it can account for differential rates of harvest amongst the peer group. We also have sector-leading HBU value realizations. And so you can see, over the last several years we've generated over $3,000 per acre in our HBU business, and that compares very favorably to the peer group. That business is really all about premium. And so we think about maximizing premium in that business and we think we've been very successful in that regard over the last several years. We have an improving harvest profile. So based on the -- investments that we've made as well as acquisitions, we're expecting to grow our harvest by roughly 5% over the next 5 years relative to the prior 5 years. We also have unique exposure to the China export market, which is primarily through our New Zealand operation. About 60% of our New Zealand volume goes into that export business and the vast majority of that, roughly 80% goes into the China market. And so that provides our primary exposure to that growing China export market, but we also do export some volume out of the Pacific Northwest and the U.S. South as well. Now moving on to Slide 6 provides an overview of our strategic priorities, and I'll try to go through these briefly. First and foremost, we want to manage for long-term value. And this is really about operating within our sustainable yield, not borrowing from the future and really trying to optimize the long-term value of the company rather than just short-term cash flows. We also want to remain acquisitive as it relates to growing our timberland portfolio. And so we think that we've been successful in that regard, but we've also been disciplined in really trying to focus on properties that are additive to our profile from an age-class standpoint and really kind of investing in markets that we know well and think we have a strong price trajectory going forward. We want to optimize our portfolio value. And this is really focused on kind of finding the highest and best use for every acre that we own. And whether it's non-timber revenues or whether it's selling land through our HBU business, again, it's really trying to find the best value for every acre that we own. The next, we want to focus on quality of earnings. And so what do we mean by this? It's really trying to increase the proportion of our earnings that are coming from sustainable harvest cash flows as well as high-quality HBU sales and not relying on nonstrategic land sales to augment cash flows on an ongoing basis. Next bullet here, position for low-carbon economy is a relatively new additions to this list. I think we added this for strategic priorities a couple of years back. There are a variety of burgeoning ESG-related opportunities in the timber space, be it carbon capture and storage, or voluntary carbon markets, and we're very focused from a strategic standpoint right now on positioning the company well to take advantage of those opportunities going forward. And lastly, we want to be best-in-class from a disclosure standpoint. We think we lead the sector in terms of the volume and quality of data that we put out on our timberland portfolio. Notably, we're the only company in the space that discloses our sustainable yield across each part of our 3 key operating segments. We also disclosed that data for major acquisitions that we make. So we think it's important to again understand that metric relative to focusing just on 5- and 10-year metrics, which can be misleading. We've done a lot of work on the balance sheet over the course of the last several years. And so if you look at kind of where we sit today, we have a net debt to EBITDA of approximately 3 times, weighted average cost of debt is 2.7%. 100% of our debt is fixed and weighted average maturity of just under 7 years, and we're investment grade rated with both the rating agencies with a stable outlook. So in late 2020, we put in place an ATM program. That has helped us to kind of manage leverage as well as match fund bolt-on acquisitions. We also took a number of debt actions in 2021, really restructured almost every component within our debt portfolio to lower our weighted average cost of debt, extend our maturities. And then we also issued $450 million of senior notes at a very attractive coupon of 2.75%. And so again, taking -- all that, we feel very good about where the balance sheet sits today and we feel as though we have ample capacity to pursue various capital allocation opportunities. As it relates to capital allocation, the next slide provides an overview of some of our key capital allocation priorities over the past several years. Our mantra around capital allocation has always been to be nimble and opportunistic with a view towards building long-term value per share over time. To this end, we often pivot between different capital allocation opportunities based on where we see the best return for our shareholders. For example, over the past year we've been pretty active under our ATM program and has been able to match fund some bolt-on acquisitions, which we believe will be accretive to NAV over time. Of course, the dividend is also a key element of our capital allocation strategy and we recently announced a 6% increase in our dividend to $1.14 per share annually. Page 9 provides an overview of our U.S. South portfolio, which is comprised of 1.8 million acres, generating a sustainable yield of 6.1 million to 6.5 million tons annually. As noted earlier, our Southern Timber segment is our largest segment, both by acreage as well as EBITDA contribution. We've recently seen strong EBITDA growth in our Southern Timber segment, which is encouraging because it's not only our largest segment, but also our highest multiple business. And so we're very encouraged by the cash flow growth that we've seen there of late. A key driver to that cash flow growth, if you flip to Page 10, is that we're concentrated in some of the strongest markets in the U.S. South. This slide provides a breakdown of the different TimberMart-South market defined regions as well as the average composite price within each of those regions. And so you can see, 73% of our land are located in the top quartile markets from a composite pricing standpoint. It's also important to note that the floating dots in that chart represents the year-over-year increase from 2020 to 2021 in that composite stumpage price. And you can see that not only are those strongest markets, meaningfully higher on an average composite pricing basis, but they've also seen the strongest year-over-year growth. And so we think this is really a story of the best markets getting better in the South. And fortunately, a lot of our lands are located in some of those top markets. What's driving this is if you look at Page 11, is really the significant growth that we've seen in lumber capacity across the U.S. South. Between the last decade, we've seen lumber capacity in the region grow from about 17.5 billion board feet to 25 billion board feet. So a very meaningful increase. This has really been a function of the migration of lumber capacity from D.C. where they've been impacted by the mountain pine needle epidemic. And really, as that capacity is shut down, we've seen new build capacity come into the south. And again, that has really served as a strong tailwind to pricing in the region. We really do feel as though we've turned the corner. This has been a story that's taking really a long time to play out because there is a long lead time to deciding new capacity and then building that capacity and getting that capacity ramped up. But we've now seen this meaningful lift in lumber capacity in the region, and that is really driving some strong pricing momentum. It's also important to note that, that new capacity hasn't all sort of flocked to the lowest cost log markets. Really, we've seen a lot of this new capacity going to markets that we're already reasonably well attention. That's really a function of lumber mills needing strong woodchip residual outlets. And so the pulp mill infrastructure in a market tends to drive a lot of the economics of sawmills. Sawmills have also been very focused on the availability of skilled labor. And so while you may expect that, that new capacity would have all gone to some of these more depressed log markets and for the inland South, we've actually seen quite a bit of that new capacity move into these coastal Atlantic markets as well. So overall, we remain very bullish about log pricing trajectory in some of these markets over time. Moving on to Pacific Northwest. As I said, we own 490,000 acres in the region. That includes 125,000 acres that we acquired in the Pope Resources transaction and our sustainable yield is 1.75 million tons to 1.85 million tons per year. If you look at Slide 13, this provides about a 15-year history of log demand and pricing in the Pacific Northwest. So you can see we've had a pretty strong trajectory over long period of time in log pricing in the region and a particularly strong trajectory in the last few years here. This is really a function of -- the markets in the Pacific Northwest have been relatively balanced from a growth drain ratio standpoint over time. We didn't really see the inventory build in the Pacific Northwest that we saw in the U.S. South. And so between the relatively favorable growth drain ratio as well as the optionality that we have to move into the export market. We've seen that those markets really remain pretty balanced and enjoy a strong price trajectory over the course of the last several years. Slide 14 is a quick report card on our Pope Resources acquisition, which, like I said, we closed in 2020. The pie chart on the left provides a breakdown of the enterprise value that we provided at the time of the announcement. Pope had, most of the value was in the fee timber business, but then they also had a timber fund private equity timber fund business. And then they had a real estate portfolio, which is comprised of some very high-value HBU land. So we acquired the fee timber portfolio for roughly $4,200 an acre based on this enterprise value breakdown. And you can see in the chart on the upper right, we've roughly doubled both EBITDA per acre and EBITDA per ton in our Pacific Northwest portfolio over the last couple of years. And this is really a function of very strong pricing in the Pacific Northwest as well as the very favorable action we use for that Pope Resources portfolio. It's on relatively flat land and so our cut-and-haul costs within that portfolio are quite a bit lower than our legacy portfolio, that really contributed to strong earnings growth in the Pacific Northwest for us. We set out of the gate with the timber funds business. We didn't view that as long-term strategic for Rayonier. So we were successful in exiting that business. Through the funds we sold our co-investment stage as well as the right to manage those funds. And then the Timber Fund II, we liquidated that fund and also realized a $14 million period interest incentive fee. And so all in, we realized total proceeds modestly in excess of how we've underwritten that asset. And really, we've had a significant series of wins in the real estate portfolio there. Our total allocation of value to that portfolio when we announced the acquisition was roughly $45 million. Over the course of the last 2 years, we've already realized $46 million of sales from that portfolio, and we actually still own the bulk of that original portfolio that we acquired. A big chunk of that was this Arborwood transaction that we announced last year. It was a single-family home project that we sold to a large homebuilder or a few large homeowners, I should say, for $37.5 million, which again was well in excess of how we had underwritten that asset. Turning to our New Zealand portfolio. We own roughly 419,000 acres in New Zealand, own or lease, actually a good portion of the acreage in New Zealand is leased, of which 297,000 acres are productive plantations and those plantations generate 2.4 million to 2.7 million tons per year of sustainable yield. As we discussed, our New Zealand portfolio really gives us, we think, attractive exposure to that China export market. But it also has tended to be more volatile than our U.S. Timber segment. So while we've seen tremendous growth in our New Zealand cash flows as well as the valuation of that asset over the last 6 to 7 years, it has tended to be a bumpy ride from time to time. Currently, we are seeing significant headwinds in China, really around the COVID lockdowns we've seen there and kind of the inventory build situation at the ports. But again, we still view that market as long term being very attractive. If you look at Slide 17, this provides an overview of China's timber supply deficit, which has really kind of grown exponentially over the course of the last couple of decades. China is massively net short wood fiber. And so we expect this is going to be a meaningful and growing importer of both log and lumber over time. And New Zealand has been one of the key suppliers on the log side. And so we really like our positioning in that market and the exposure that that gives us to that growing China export market. Slide 18 provides an overview of our real estate business as well as a breakdown of our key sales categories. Like I said, we generally seek to sell 1% to 1.5% of our Southern land base annually, typically at premiums in the range of 50% to 100% above timberland value. More recently, those premiums have been quite strong given the strength of the rural land sales market. Now the vast majority of the acreage that we sell into this market is into that rural and recreational category, but we also selectively pursue development projects in select markets. And so we have a high-value portfolio in North Florida as well as South of Savannah, Georgia. We provide an overview of those properties on Slide 19 and we've engaged in some limited development activity around the Town of Wildlight, which we started developing 5 years ago, and we're relatively early innings in our Richmond Hill project, which we just sort of initiated in the last 12 to 18 months. And the last slide just provides an overview of some of those Pope high-value real estate assets. And again, it's this Kingston project that we sold last year for $37.5 million. And so as I said, we still own a good portion of those real estate assets we acquired. So we still see considerable upside, certainly relative to our original underwriting around those assets as well. So I'll perhaps pause it and open it up to Anthony or to the floor for any questions.

Great. Thank you, Mark. We've seen some very large transactions in timberlands recently, not least of which was PotlatchDeltic and CatchMark, but also one of your large peers made a large acquisition in the Carolinas. Can you just talk about the kind of current market for U.S. timberlands, the kind of valuation and maybe price depreciation that you've seen compared to the pre-pandemic period and just a little more…

Yes. We discussed on our last earnings call that we really saw kind of a revaluation of southern assets, in particular. We saw that, that was largely underway. We've seen very significant growth in southern cash flow, certainly within our portfolio and within those stronger markets in which we operate. And again, that's a very high multiple business. Southern -- similar on assets has generally traded at an EBITDA cap rate in the range of 2.5% to 3%. And so as you imagine, there's quite a bit of valuation leverage to increase cash flow in that region. And given the magnitude, for example, 2020 was a record -- I'm sorry, 2021 was a record year for us in the U.S. South. And our -- the midpoint of our guidance for 2022 was 24% above 2021. So you just -- if you kind of think about the magnitude of that increase relative to legacy views, Southern timberland values, which generally has been in that $1,800 to $2,000 per acre range, we think that new normal is really moving more towards probably $2,300 to $2,600 per acre. We think some of these recent transactions have really demonstrated that. Obviously, the Weyerhaeuser acquisition was a uniquely high-quality property. But even the CatchMark acquisition came in a very strong, call it, $2,500-plus per acre. And so we think it's really demonstrating strong values and a strong demand for high-quality Southern timberland properties.

And you talked about southern log prices kind of turning a corner and you certainly outperformed the sort of south wide industry average. Can you talk about the inventory levels, this new sawmill capacity is kind of burning down some of these inventories finally. How is your land in Georgia and Florida positioned versus maybe other parts of the south from an inventory perspective?

Yes, I mean the inventory remains, I'd say, highly differential across the south. It's important to note that logs tend to travel less than 100 miles of their ultimate destination just because of the economics of moving logs by truck. And I'd say more often haul distances are in the 40 to 50 mile range. And so log markets tend to be highly localized. The supply-demand dynamics growth drain dynamics tend to be highly localized in nature. And so really some of the markets like North Florida, we never really saw a significant inventory build. But I think that, that's been sort of borne out in the pricing that we've seen. We've seen a much stronger price trajectory in North Florida relative to what we've seen in some of these inland markets, for example, Northern Mississippi, which is seeing much more muted growth. And so I think that the inventory issue, it will remain differential. And I think the markets where you see a very unfavorable growth drain ratios in excess of 2 times in some instances, those markets are probably going to remain challenged for some period of time because there hasn't been enough newbuild capacity moving into those markets to really work down that inventory in any meaningful way. And while we have seen a significant influx of new sawmill capacity in the south, again, it's important to note that you don't have a base load of pulpwood demand and wood chip residual demand. A lot of times, that will be a deterrent for a sawmill to enter into that market. So again, it really has been a story of the best markets getting better and some of those weaker markets really kind of treading water.

And then historically in the U.S. South, I mean, it has not historically been an export market. That's maybe changed recently somewhat, although with some choppiness. Can you talk a little bit about sort of maybe the long-term opportunity in exports from the U.S. South and maybe sort of where you are currently?

Yes. And I say the long-term opportunity continues to really be driven by the growth in China fiber imports. Again, we had that chart in the presentation that showed the growth in that market over the course of the last couple of decades, and we do expect that to continue to grow. And really, I mean, I'd say China was taking wood from wherever they can source wood from and they continue to do that. And so the U.S. South is certainly not the most economically advantaged exporter of wood to China. But it does have sort of a niche market for Southern Pine in China. And while we have seen some headwinds around just increase in -- by nematode restrictions, we do think that once the dust settles and once we see COVID lockdowns kind of continue to get lifted and that log demand into China continue to resume some level of normalcy, we do expect that, that southern export market will resume.

And then maybe a related question. Can you just remind us your New Zealand businesses exposure to China or how that's trended reasonably?

Roughly 60% of our New Zealand volume goes into the export market and upwards of 80% of that goes into the China market. And so the export business in New Zealand really is dominated by China.

Can you talk a little bit about decarbonization and with New Zealand, you've had some exposure to carbon credits. Can you talk about that? And then maybe opportunities in the U.S. as well long term?

Yes. So the New Zealand emissions trading scheme is a compliance market regulated by the government. And so it's -- we've been engaged in the carbon markets now for a number of years through our New Zealand portfolio. And we've seen a meaningful lift in pricing of carbon credits in New Zealand. We didn't sell any credits in 2021 because we expected a big lift in pricing, and we saw pricing roughly double during the course of the year, and we have resumed carbon credit sales in 2022. Our expectation in the U.S. is that we will not likely see a compliance market, certainly no time soon, given the fractured nature of the political system in the U.S. But we do see a lot of momentum behind the voluntary market. So that's really where we see the opportunity in the U.S., is to register carbon credits associated with our timberland assets and to find opportunities to monetize those credits. That said, the market is still in its infancy stages. I think that there's still a lot of evolution that needs to occur in that market and standardization of carbon credits and standardization of the different kind of registries and the nature of those credits, before we see the type of pricing lift that is really going to meaningfully change behavior for certainly for southern plantation assets. We just aren't in a carbon price that's really going to change behavior for managed forest. Most of the carbon credits that have been sold out of for us have been on lower quality lands that don't have very vibrant timber markets.

Got it. Can you talk a little bit about capital allocation? You obviously acquired Pulp, had a great experience with that. You've delevered -- you're in these 3 markets, prices have come up. Can you talk about relative priorities in terms of acquisitions or portfolio moves?

Yes. I mean we're always interested in growth opportunities in all 3 of our core geographies. I would say far and away the greatest volume of acquisition opportunities are -- we're in the South, you just see the most M&A activity within that region, followed by the Pacific Northwest and followed by New Zealand. And so again, we're always -- we potentially look at anything that comes to market within -- certainly within our market areas. But we find the most volume of opportunities within the U.S. South, but we'll continue to look for opportunities to grow each of our regions and we'll continue to employ a disciplined approach to that.

Do you see Pulp sized kind of acquisitions as being possible? I mean, historically, I think you've had more success with singles and doubles. Any broad thoughts there?

Yes. I mean, 6 or 7 years ago, we had 7 public timber companies. Obviously, Weyerhaeuser and Plum Creek merged. PotlatchDeltic merged. We acquired Pope Resources and Potlatch just announced an acquisition of CatchMark. So even assuming that acquisition closes, we'll have 3 public timber companies. And so we've obviously seen a shrinkage in the space. And obviously, the availability of public company M&A opportunities are relatively few and far between with the consolidation in the space. So I expect that on a going-forward basis, you'll see a lot more kind of singles and doubles, transactions in the, call it, 500 -- I'm sorry, $50 million to $200 million range as opposed to over $500 million type acquisitions.

And then when you look at the 3 regions and you look at the real estate business, is there an aspect of your business that you think that investors are not fully appreciating or sort of misunderstood or maybe where do you see the most opportunity relative to kind of the consensus for you to the extent there is one?

Yes, I think the part of the business that I would maybe argue 6 months ago, it was least understood, it was just the valuation leverage that we had to kind of this anticipated growth in southern cash flows. And I think that the market has perhaps gotten a little wider to that now with some of the recent deals that we've seen in the south and the very strong prices in which those transactions have traded. New Zealand has always been a market that it's hard to get your arms around value there. For that reason, we conduct an annual appraisal on our New Zealand assets for IFRS purposes. And so we actually disclosed the appraised value of that asset just because you see per acre values really kind of all over the map there based on the fee ownership versus leased acreage and based on the age, class of the assets acquired. And so again, to provide some clarity around that component of our portfolio, we do disclose that appraisal value. And then I think that the HBU business, again, I think we've been very successful in selling land at meaningful premiums to time on value. It was obviously realized significantly higher per acre values on our HBU sales than the peer set. But again, it is a very different business, and it's a harder business to kind of put per acre benchmark or kind of bifurcate HBU and say, okay, these 100,000 acres are HBU and then to apply a per acre metric to that. And so we tend to think of that as more kind of a perpetuity valuation business, if we're able to capture x dollars of premium annually across our portfolio. And we think that the land that we're selling is HBU today was not necessarily HBU 20 years ago and land that we're selling 20 years from now is not necessarily considered HBU today. So we think the path of growth will continue to move closer to some of our rural timberland properties, and that will continue to give us these higher value opportunities. And again, I think the positioning of our portfolio being primarily in the North Florida, South Georgia, that's also given us an outsized HBU opportunities.

Great. Well, Mark, Collin, thank you so much, and we'll have the opportunity to continue the conversation at the conference. So thank you.

Thank you.