Rayonier Inc. (RYN) Earnings Call Transcript & Summary

Thank you, everybody, for joining us on this afternoon session. My name is Buck Horne. I'm the Raymond James Housing and Timber REIT analyst and also cover basically all things residential in our coverage. So really appreciative for the team from Rayonier for joining us, some friends and former colleagues of ours, Mark McHugh, the CFO of Rayonier; and Collin Mings, VP Investor Relations -- and a lot of other things going on. So we do appreciate the participation. Rayonier is the second largest Timber REIT in North America. And again, seeing a significant kind of disconnect between private market and public market valuations of timberland assets and we think opening up an increasingly intriguing window of opportunity to understand what investor expectations are around this. Obviously, there are some things happening around carbon optionality and carbon pricing and ancillary revenue. So timber has become an increasingly popular asset class for a variety of investors, but yet for various reasons, maybe housing related or whatnot, we've seen certainly a pullback in some of those public market valuations. So maybe we can explore that in more detail as we go. But we're going to do about 10 or 15 minutes of kind of intro to Rayonier 101 and then take some Q&A. So with that, Mark?

Yes. Thanks for the introduction, Buck, and thanks everybody for joining us today. Like Buck said, I'll walk through a handful of slides and just provide a very high-level overview of Rayonier and then we'll leave plenty of time for Q&A. The first slide here, Rayonier at a glance. Rayonier was founded in 1926, almost a 100-year history. Today, like Buck said, we're the second largest of the 3 Timber REITs. We own or manage approximately 2.8 million acres, spread across the U.S. South, U.S. Pacific Northwest and New Zealand. Those acres generate a sustainable yield of roughly 11 million tons annually. Sustainable yield we define is the volume of timber that we can harvest into perpetuity. It's essentially the concept of harvesting growth on a year-to-year basis, and we view that as an important part of our investor disclosure. In addition to our Timberland business, we also operate a value-added real estate platform. Invariably, when you own millions of acres of land, some portion of those lands may be more valuable to somebody else than they are to us is timberland. And so generally, we're seeking to realize a premium to timberland values through that business. So we report that activity through our real estate segment. And again, I've generally thought to sell roughly 1% to 1.5% of our land base in the U.S. South annually at premiums that have averaged 50% to 100% above timberland value. We're also engaged in a real estate development business. It's on a much smaller portion of our footprint. We have 2 active development projects, 1 in Wildlight, which is north of Jacksonville, Florida, and the other is Heartwood, South of Savannah, Georgia. Bottom left there, you can see a breakdown of our 2022 adjusted EBITDA. So roughly 80% of our adjusted EBITDA is contributed by our Timber segment with the balance roughly 20% coming from that real estate activity. Nearly 100% of our timberlands are sustainability certified in the U.S. through SFI, that's the Sustainable Forestry Initiative and in New Zealand through FSC and PEFC. And our mission is pretty simple. We want to be -- we want to provide industry-leading financial returns while being a responsible steward of the environment and beneficial partner to the communities where we operate, which are obviously a big part of our business as well. The next slide just shows a breakdown in some more detail as to where our timberlands are located. So we currently operate about 1.9 million acres in the U.S. South, roughly 475,000 acres in the U.S. Pacific Northwest and about 420,000 acres in New Zealand. And we also provide our sustainable yield by each segment as well. Like I said earlier, we're the second largest of the 3 Timber REITs, but we like to think of ourselves as the largest and now the only pure-play Timber REIT. So what do I mean by pure-play Timber REIT. It's essentially all of our activity within the company is Timberland as well as ancillary real estate businesses. We don't have any exposure to wood products manufacturing. So you can see in the last 3 years, roughly 3/4 of our adjusted EBITDA has come from our Timber segment with the balance coming from real estate activity. That compares to the peer group that it's totally generated about 1/4 of their adjusted EBITDA from timber operations with the balance coming from manufacturing and real estate. Obviously, lumber has had a pretty incredible run over the course of the last couple of years in the wake of the pandemic, we saw unprecedented lumber prices that were 2, 3x prior highs. And so that obviously contributed to that outsized contribution from manufacturing for the peer set there. But we think one of the hallmarks of real estate investing is safety and stability of cash flows and lumber manufacturing has historically been a very volatile business. And so again, we like our pure-play focus within the sector. On just a few portfolio highlights that we think differentiates Rayonier from the peer group. On the upper right there shows we have sector-leading EBITDA per ton in the U.S. South. And this is really a function of the market in which we operate. Roughly 70% of our lands are located in top quartile markets in the South, which we define by pricing, you calculate composite average stumpage price across different submarkets within the South. And again, 70% of our lands are located in markets with top quartile pricing. We also have sector-leading HBU realizations. Again, this is a big part of our business. The HBU business is all about premium. We're generally seeking to achieve meaningful premiums above timberland values. And you can see that our weighted average price realization on those real estate sales over the last couple of years has been in excess of $4,500 per acre. So again, very strong HBU realizations relative to the rest of the sector. We have an improving harvest profile, growing from about 10 million tons over the last 5 years, projected to be roughly 11 million tons over the next 5 years. And that's really a function of the M&A activity that we've conducted. We've done 2 sizable acquisitions in the last 3 or 4 years of Pope Resources as well as a large transaction in the U.S. South that we closed in the fourth quarter of last year as well as advancements in silvicultural technologies really contributed to that increasing our harvest profile. And lastly, we have a unique exposure to the China export market really through our New Zealand operations, over 50% of the volume that we harvest in New Zealand goes into that China market. China has historically been more volatile than our domestic business, but it's also been critical element of growth in global fiber demand. China has been the biggest driver of the growth in global fiber demand. So again, we like that exposure, and we also conduct some export activities out of the Pacific Northwest into China and out of the U.S. South into India and Vietnam primarily. This next slide just shows our strategic priorities. We revisited our strategic priorities in 2014. And really, they haven't changed too much sense, which I think is reflective of the stability of our asset class. And again, these are really designed to sustain into the long term. First and foremost is to manage for long-term value. A big part of this is making sure that we operate at or around our sustainable yield. Again, when you're operating outside of that sustainable yield, ultimately, you're going to have to pay that back at some point. So that's a critical element of managing for the long term is to -- again, that's sustainable yield disclosure and the way that we operate the portfolio around that. The second is to acquire high-quality timberlands. This has been a critical part of our growth strategy over the years. We tend to focus. We have a bias towards higher quality assets. You can see that with the transaction that we did in the South in the fourth quarter, which I'll go into some more detail on. The next is to optimize our portfolio value. We're really trying to find the highest and best use for every acre within the portfolio. And obviously, like Buck alluded to nature-based solutions. This opened up a whole new realm of opportunities. And so we're going through a land classification exercise now to kind of figure out which of our assets are situated to benefit from, for example, solar or wind or the whole range of opportunities that exist in that arena. Next is to focus on quality of earnings, like I alluded to, roughly 80% of our EBITDA last year came from timber harvest operations. We view the timber harvest operations as being a higher quality of earnings relative to real estate activity and certainly relative to lumber manufacturing. And so again, continuing to increase the proportion of our cash flow is coming from sustainable timber harvest activity has been something that's been a big focus for us over the years. The next priority is one that's relatively new to this, and that's to position the company for a low-carbon economy transition. We've seen, like I said, a range of opportunities to open up just around carbon capture and storage, leasing land for solar, leasing land for wind installations, selling fiber into alternative uses for bioenergy, for sustainable aviation fuels, manufacturing and also the voluntary carbon market is projected to grow exponentially over the course of the next 10, 20 years. And so really, we're taking a fresh look at our portfolio and the range of opportunities that timber can be used for or land can be used for. So all of these things, I think, really generates tremendous incremental demand for wood fiber, but more broadly, generate incremental demand for land use more generally. And so we're really trying to position the company to take advantage of those opportunities going forward. And lastly, we want to be best-in-class from a stewardship and disclosure standpoint. I think we really have set the bar around disclosure for our industry, and that's something that's very core to our belief around IR is making sure that we're being very transparent with investors, we're providing information that is useful and not only providing that information, but providing the tools to really process that information to make sure you can make assessments around absolute value and relative value within the industry. We have a conservative capital structure. We are investment grade rated BBB minus with S&P, BAA3 with Moody's, both with a stable outlook. We undertook a number of activities over the course of the last couple of years to build acquisition capacity. We -- in 2020, we put in place an aftermarket equity offering program. In 2021, we undertook a number of debt activities, including issuing a $450 million -- issuing $450 million of senior notes and really restructured almost every tranche of debt within our capital structure to lower the cost and extend the maturities. So as we sit here today, our weighted average cost of debt is about 3%. 90% of our debt is fixed, and our weighted average maturity is about 6 years. Really all those debt actions that we took and the ATM issuance that we undertook over the course of the last couple of years, built the acquisition capacity to allow us to do this Project Dionysus transaction that we closed in the fourth quarter. So that was about $450 million transaction for 138,000 acres of land in the U.S. South, very high-quality assets. Our approach to capital allocation and our mantra on capital allocation has always been to be nimble and flexible, really to kind of pivot to what we see as being the best opportunity to build NAV per share over time. As you can see, we've issued stock over the years, we issued stock to acquire Pope Resources in 2020. We've also bought back stock and the spread between where we've issued and where we bought is pretty significant. And so again, we're always looking to deploy capital into what we see as the best opportunity to build NAV per share over time. Obviously, the dividend is also a critical part of our capital allocation strategy. And so we currently have $1.14 per share dividend, which translates to about a 3.5% yield. Next slide provides an overview of some of our key ESG highlights. I think critical to our ESG strategy and our ESG positioning is that timberland and forestry ownership really is at its core is a nature-based solution. And so our assets as opposed to being a net emitter of carbon, we're actually a net sequester of carbon. And so our assets requested about 15 million tons of CO2 equivalent annually. And again, all of our timberlands are third-party certified for sustainability. So really, again, that carbon sequestration aspect of timberland is a big part of our ESG positioning. On the social front, safety has been a priority for the company for a number of years. We lay out some of the safety stats and some of the improvements in those stats that we've been able to realize over the last couple of years. And lastly, on the governance front, I really think we try to adopt a best-in-class approach to governance and particularly on the boardroom diversity front, I think we really show well there. And maybe I'll pause there, and we can turn it -- I've got some detail on some of the segments and recent acquisitions. So maybe we'll pause there and open it up to some questions. We've got plenty of time.

Yes. So I guess maybe back it up from a higher-level thought process as you mentioned that you are the pure-play timber REIT, and there's a strategy behind that your 2 peers, however, have gone with a slightly different philosophy, I believe there is some sort of operational and strategic benefits to maintaining a vertically integrated structure, maintaining some manufacturing capacity where if times are soft, they can feed their own logs into their own mills and maybe not feed those into a competitor's mills or maybe control their own destiny. How do you think through the advantages versus disadvantages of that throughout the cycle? And is there a point in time, I guess, where you might look at owning or operating your own sawmills?

Yes. I mean I think the trend in the industry has certainly been towards [disintegration ] over time. I mean if you go back 20 years ago, and you look at the top 20 owners of timberlands in the United States that would have been all vertically integrated paper and forest product manufacturer. IP, Weyerhaeuser, [indiscernible] Boise Cascade, West [ Beco ]. And really, the trend has been for all of those companies either divest their timberland to TIMOs or to convert to a REIT. And so you obviously saw Plum Creek initially convert from an MLP to REIT, followed by Rayonier and [indiscernible] and Weyerhaeuser. So if you look at the top 20 owners of timberland today. It's all the TIMOs and the REIT. And there are really no vertically integrated paper and forest product manufacturers with the exception of the 2 Timber REIT peers that are still in the lumber manufacturing business that own timberlands. Fundamentally, they're very different businesses that trade -- have very different kind of cash flow and volatility profile, very different kind of natural investor base, very different multiples associated with owning those assets. And so we long believed that our pure-play model is most attractive to investors to give them exposure to this asset class in a more pure form. Obviously, owning lumber mills is a different strategy that our 2 Timber REIT peers have undertaken. And again, it's really more of a function of the legacy of those companies in terms of having those mills. And look, I can certainly see some operational benefits from -- on the manufacturing side to controlling the fiber resource. But we really think the optionality of not having to feed mills really provides us with a lot more flexibility to manage our assets and to manage our portfolio without being sort of constrained by, again, needing to provide feedstock to lumber mills. Again, I think you can see that through our portfolio construction, we have, over the years, continued to deploy capital into what we see as being kind of higher-quality markets. I think it shows up in our EBITDA per acre and EBITDA per ton and the growth in those figures over time. And so again, I think we ultimately have a lot more optionality in terms of managing our portfolio, kind of where we're selling our fiber. We're not constrained by fiber supply agreements. We're not constrained by kind of having to feed lumber mills. And so again, we like our peer site focus.

That's good. Let's talk a little bit about the acquisition and this -- the deal. And maybe I think certainly caught some people's attention in terms of the price per acre on the headline basis, but as you highlighted, is an extremely well stocked portfolio. How competitive was that process? Do you think -- I mean -- or did you include any sort of underwriting for carbon optionality or ancillary revenue in terms of how you price out this asset? Or did some of the competitors pricing to that? Or how did that process unfold?

It's hard to speak to what competitors may have priced into their perception of value for that asset. What I'll say is we didn't explicitly factor in nature-based solutions or really any HBU optionality into our underwriting for that transaction. But that said, I think very broadly speaking, the timberland M&A market is pricing that in to some extent, not necessarily an underwriting a cash flow model that includes nature-based solutions in that model. But we've certainly seen -- amidst an increasing interest rate environment, we've continued to see cap rate compression within the timberland asset class. And I think that, that's really a function of the perceived option value around nature-based solutions. So again, it's -- we're not underwriting cash flow streams associated with, for example, voluntary carbon markets today. But we have seen discount rates and the discount rates that we need to underwrite an asset with to be successful and say an auction process, we have seen that continue to compress over time, which I think is reflective of the nature-based solutions optionality.

Any questions from anyone? Thinking through carbon capture sequestration a little bit further. Where are you guys at in terms of understanding your subsurface structures or geological formations and kind of opportunity in partnerships could that represent? And broadly, in general, how do you think about Climate Solutions as a kind of a business on top of Timber management?

Yes. On the carbon capture and storage, in particular, we certainly have land that we believe is suitable for carbon capture and storage. We have a number of active discussions underway currently regarding those types of opportunities. And so that's really an area where we've seen tremendous momentum really developed in the last years. Part of that is tax driven with the 45Q tax incentives. But I'd say it's certainly gained ahead of steam, and we're looking -- actively looking at a number of opportunities on that front. Most of those opportunities exist within our Texas and Louisiana footprint. But again, a lot of activity on that front currently. And again, more broadly, we're seeing tremendous activity kind of across the spectrum of nature-based solutions. But if you just look at the math around the need for negative emissions on the path to net zero translates into this rough math. I think the volume of carbon offsets originated in 2020 was about 100 million tons of offsets and demand flow into that market. That's projected to grow to 1.5 billion to 2 billion tons of demand by 2030 and the 5 billion to 10 billion tons of demand by 2050. And that's just based on the volume of net zero commitments that have been made by corporate and government. And so when you just kind of think about the magnitude of that need for negative emissions that demand for negative emissions, you really need a full range of opportunities to achieve that. Again, be it bioenergy production or sustainable aviation fuel production or again, reserving timber for carbon offset opportunities or afforesting land to grow, to generate additional sequestration that then you can monetize via carbon asset. So we're looking at all of those opportunities right now. I'd say that we're putting a lot of resources into better understanding all those things. And I'd say that they're all gaining pretty significant momentum here in the last couple of years.

[indiscernible]

Yes. I mean we generally talked about our comfort level from a net debt-to-EBITDA standpoint, being roughly 4.5x. That's roughly where we're at currently with the sizable acquisition that we completed in the fourth quarter. I mean I'd say we generally tended to operate more in the 3.5 to 4x range. Candidly, I don't think net debt-to-EBITDA is necessarily the right metric to focus on in terms of assessing the credit quality of a timberland company, but it's something that we do have to pay attention to in the context of the rating agencies and how they look at credits globally. But I'll say that the agencies are very comfortable with our leverage. I think we've proven time and again that we have a lot of levers at our disposal to manage that leverage. We took leverage up to about 5 times when we did the Menasha acquisition in 2016. We took it up to about 5x again when we did the Pope Resources acquisition in 2020. After both of those acquisitions, we were able to delever through a combination of organic cash flow growth, divestiture of some assets or issuance, more recently -- issuance under our ATM program. And so yes, I think we're very comfortable at the current level of leverage. Obviously, our capacity to pursue new capital allocation opportunities is more limited, where we are today relative to kind of where we were before we did a $450 million transaction in the fourth quarter. But again, a very comfortable level of leverage for us today.

[indiscernible]

Yes. I mean it depends on the region. It's very region-specific. So in the U.S. South, I'd say, generally speaking, 60% of our volume has gone into kind of pulp and paper end uses. So we just look at kind of the product mix within our harvest volume. Roughly 60% of our harvest in the South will be pulpwood with the balance being a combination of chip and saw and sawtimber, which is generally going into some form of solid wood product construction. In the U.S. -- I'm sorry, in the Pacific Northwest, that's going to be more like an 80% mix of sawtimber; 20% mix of pulpwood. And in New Zealand, it's similarly going to be probably 80%, 85% sawtimber with the balance coming from pulpwood. And then in terms of the end uses of lumber, actually new home construction is not the largest use of solid wood products, it's actually repair and remodel, but it's far and away the largest marginal driver. So again, changes in new home construction are generally going to contribute that change in overall lumber production much more so than the other components of lumber demand, which tend to be much more stable in nature.

[indiscernible]

It's absolutely an issue that's benefited us. And again, it's been a tail that's sort of taken quite a while to play out. So this mountain pine beetle infestation is now probably going on 15 plus years old from when it first started. And the expectation was always that, that was going to translate to a significant reduction in fiber availability in B.C. But what we saw is that the economic shelf life of beetle kill wood and B.C. proved to be much longer than what was originally anticipated. I think by most estimates to the outset of that -- the outset of that issue was that, that wood was going to be available for 6 to 8 years, proved to be available for more like 10-plus plus years. But we're certainly at a period of time now where we're seeing -- we've seen a dramatic reduction in the availability of fiber in B.C., and that's translated to a number of mill shutdowns in B.C. And really, that's also been the impetus for the big influx of new capacity into the U.S. South. So the U.S. South has actually been the biggest beneficiary of the mountain pine beetle epidemic and the closure of capacity in B.C., not the Northwest. Northwest was already pretty balanced from a growth drain ratio standpoint. And so the fiber supply there didn't really support much in the way of new build lumber mill capacity, whereas U.S. South still had quite a bit of inventory on the stump, particularly in the wake of the global financial crisis. And so we've seen roughly 7 million or 8 billion board feet of new lumber capacity come into the U.S. South, and that's been, I think, a big driver of the pricing improvement, the pricing gains we've seen in the U.S. South over the last few years. So it's certainly been a pretty significant impact. And I think it will continue to impact markets.

[indiscernible]

You're saying the environmental credits, you're referring to, like carbon offset? We would have to conduct that if we were to sell carbon offsets, we would have to conduct after a taxable REIT subsidiary. So we couldn't sell -- so that would be a prohibited transaction within the REIT. But we have a taxable subsidiary through which we can conduct that type of activity. But it would be a taxable business for us. So we -- it can be within a tax-free subsidiary. So it'd still be part of the company, but it would be a taxable operation that would exist within a subsidiary, not within the parent REIT.

Rick?

[indiscernible]

I think one of the elements -- and to the extent that -- it's hard to say that it's not recognize that perhaps underappreciated just the quality of our southern footprint in particular. I think that there is still this tendency to kind of consider the U.S. South as sort of one big homogenous region, and there's a -- Buck alluded earlier to the price we paid for this recent acquisition being kind of well above what we've seen for kind of average quality southern assets. But that's reflective of the fact that there's a very wide quality spectrum for Southern assets. And if you look at where our footprint in the South is located and if you look at kind of that quartile ranking of markets within the U.S. South, a slide in our investor deck that we referred to often the pricing in the top market, the composite stumpage pricing in top markets is 2.5x what it is in bottom quartile market. And so obviously, when you have that type of pricing differential, where your cost to market is very similar across those regions. That obviously translates into significantly higher EBITDA per acre, which then translates into significantly higher values per acre. But there's still this tendency to say, okay, every acre in the South is worth $2,000 per acre and not enough attention paid to kind of the quality differential that exists within the South. And so I'd say that, that's one thing that we're very proud of as it relates to our portfolio, we think is a big differentiator. I think it plays out just in the EBITDA growth that we've seen in the South relative to the peer set. If you look at, again, how our EBITDA per acre and EBITDA per ton has trended over the last few years, it's been well in excess of the U.S. South averages and the peers. And the other aspect of I think our asset class more broadly that is probably not fully appreciated is just the range of optionality that we expect to have around nature-based solutions. We're certainly seeing it reflected in private market M&A activity. I don't know that we've seen it reflected yet in public market valuations. [ Darryl ], last one.

[indiscernible].

So China obviously had a very stringent Zero-COVID policy that was in place last year, which translated to a number of protracted lockdowns, which certainly limited economic activity in China and similarly limited export optionality into that market. With China largely abandoning that Zero-COVID policy, we've certainly seen an uptick in activity there and pricing for export logs. And so I think that, that is a positive as we move into 2023 as it relates to that particular -- in that particular market. And in terms of the Russia issue. Russia put in place a log export ban that went into effect in 2022. So Russia is not exporting any log anymore. And really that -- the design of that ban was to simulate investment in manufacturing capacity on the Russian side of the border. They're obviously a big exporter of fiber and wood products to China, but they really wanted to do the value-add activity on the Russian side of the border. And so we've continued to see over the last decade, we've seen log exports from Russia to China decline, and we've seen lumber exports increase. Russia wasn't a big exporter of lumber or logs to other markets. I think that they only exported about 2 billion board feet of lumber to European markets. And so we haven't seen, for example, Russia-Ukraine conflict hasn't had a very significant impact on lumber trade flows, I don't think.

All right. We'll have to leave it there. Thank you, everyone, for joining. We appreciate it. We'll have a breakout downstairs.