Rayonier Inc. (RYN) Earnings Call Transcript & Summary

Hi. I'm Anthony Pettinari from Citi. I'm the Timber REIT homebuilding and building products analyst here. And we're very pleased to welcome from Rayonier, CEO, Mark McHugh; CFO, April Tice and VP of Strategy and Capital Markets, Collin Mings. Mark, I think you're going to give us a quick introduction to Rayonier and we'll have definitely time for questions. So thank you.

Yes. Sounds good. Thanks, Anthony, for moderating today, and thanks to those who have joined us here in person as well as those joining over the webcast. As you know, we hosted an Investor Day a few months back during which we rolled out a lot of new information around our land-based solutions business as well as our real estate development platform. And so before we jump into Q&A, I'm going to provide a very high-level overview of Rayonier for those who are less familiar with our story and also highlight some of the key takeaways from our Investor Day presentation. So let's start with a brief snapshot of where we are today. Rayonier is one of three publicly traded Timber REITs. But we like to think of ourselves as the only pure-play Timber REIT. And I'll talk about what I mean by that and why we think it's important a little bit later. The company was founded in 1926. So almost a 100-year history. Today, we own or lease roughly 2.7 million acres of timberlands generating a sustainable yield of roughly 11 million tons annually. We define sustainable yield as the volume of timber that can be harvested into perpetuity. It's really the concept of harvesting growth. And we believe that this disclosure is a very important part of our commitment to transparency and sustainability. The chart on the right on Slide 3 shows our breakdown of adjusted EBITDA in 2023. As you can see, it was roughly 70% came from our Timber segments with the balance of 30% coming from our Real Estate segment. That's been pretty consistent over time. Typically 75% -- 70% to 75% of EBITDA coming from Timber, with the balance coming from real estate. So that's a snapshot of where we are today, but I want to spend most of the time today talking about where we see the business headed in the future. And it starts with a number of key trends that we believe are really reshaping our industry. The first is the low carbon economy transition. We view this as a secular trend that is going to continue to drive increased demand for land-based solutions, which I'll talk about later as well as renewable wood-based products. The second is the continued strength of the U.S. housing market. New home construction has proven to be remarkably resilient amid a higher interest rate environment. The housing sector remains significantly underbuilt. We expect that this strength will continue, particularly as mortgage rates begin to ease. We also see very favorable migration and demographic trends that are going to benefit. We believe our development projects going forward. So as these trends reshape our industry, they're also reshaping how we think about our business and our growth prospects. Increasingly, we've come to see ourselves as not just a timber company, but really more of a land resources company. And as a land resources company, we're really focused on maximizing the value of our portfolio in a multitude of different ways. And in particular, we expect that over time, a small portion of our lands will become much more valuable for land-based solutions and real estate development. So why does this matter? Slide 6 highlights why we're so excited about these new opportunities that we're seeing emerge from our legacy Timberland assets. What this chart shows is a potential value uplift that we can be -- that we believe can be achieved for these alternative uses. So for example, if you take an acre of U.S. South timberland it's worth, say, $2,000 to $3,000 per acre as Timberland and you're able to transition that acre into a carbon capture and storage lease. That has the potential to lift the value of that acre by up to 5x. If you're able to transition that acre into a solar lease or an unimproved development use, we believe that, that has a potential to lift the value of that acre by up to 10x. And if you're able to transition that acre into an improved development use, we believe that has the potential to lift the value of that acre by up to 15x. And so again, we see significant value creation potential from optimizing our land use. And particularly as we grow the number of acres in our portfolio that we believe are suitable for these alternative uses, we see real growth opportunity in the value of the company. So let's move on to why we believe Rayonier is uniquely well positioned to succeed and it really starts with our portfolio advantages. First, we have a best-in-class Timberland portfolio concentrated in some of the most attractive timber markets globally. Second, we have a differentiated real estate platform with a growing pipeline of high-value development opportunities. And third, our portfolio is very well positioned to capture these land-based solutions opportunities, which we again we believe are quite transformative for our sector. So now we drill down at each of these in a bit more detail. These next few slides provide some more information about our core timberland portfolio. Slide 8 provides an overview of our timberland holdings by region. As I noted earlier, we own or lease roughly 2.7 million acres in total and that includes roughly 1.9 million acres in the U.S. South, roughly 420,000 acres in the Pacific Northwest, roughly 420,000 acres in New Zealand. A key feature of our portfolio is our concentration in some of the strongest markets in the U.S. South. As you can see on Slide 9, over 2/3 of our timberlands are located in the U.S. South and 71% of our southern timberlands are located in top quartile markets as measured by TimberMart-South average composite pricing. And so this favorable market positioning translates to superior EBITDA per acre generation relative to the broader sector. Over the past 5 years, our average EBITDA per acre in the South has been roughly 35% higher than the NCREIF South Index. We view that index as a sort of a broad-based portfolio that's representative of average quality Southern Timberlands. So again, this chart really highlights that relative quality of our U.S. South portfolio. Slide 10 highlights the specific wood baskets that we operate in as well as the pricing differential that exists across different subregions in the U.S. South. As you can see, the average pricing in those top quartile markets is nearly 2x the average pricing in the bottom quartile markets. And this market positioning is really what's driving that much stronger EBITDA per acre generation for Rayonier relative to the peers. So now turning to our real estate platform. Slide 11 shows a range of real estate categories that we participate in. The first two nonstrategic and rural. These are really the bread and butter of our HBU business. Historically, we sold 1% to 2% of our Southern land base into these HBU markets annually. Typically at premiums ranging from 50% to 100% above timberland value. And again, this is really the core of our HBU business. The next two categories, unimproved development and improved development. This is really where we see the most significant growth opportunity. Unimproved development consists of properties where we've made investments in entitlements and land use planning. But we haven't taken that extra step and invested in infrastructure. These tend to be a high-value but relatively isolated parcels where we don't have significant adjacent landholdings. Conversely, improved development or where we likewise have invested in entitlements, but have taken that next step and invested in horizontal infrastructure improvements as well. We generally do this only in very select areas where we have significant adjacent landholdings. Really, the play here is to enhance the value of that broader portfolio. But again, these are the major categories of our real estate business. Now moving on to our performance in the HBU business. On Slide 12, this chart on the left here shows how our HBU values and premiums have evolved since 2015. As you can see, we generated a significant increase in our average HBU sales price per acre going from roughly $2,800 per acre in the period from 2015 to 2017 to roughly $4,100 per acre in the period from 2021 to 2023. We also generated a significant increase in the premium above the NCREIF index. So that went from roughly 55% to over 100% over those same time periods. We've also seen a significant shift in our mix towards higher value development sales. Those development sales comprise just 15% of our real estate revenue in 2015 to 2017, but increased to 44% in this most recent 3 year period. And what's really driving that mix shift is the momentum that we've gained in our Wildlight and Heartwood development projects. Slide 13 provides a high-level overview of our development pipeline as well as a map of our holdings in Northeast Florida and Southeast Georgia. As I noted earlier, we only pursue improved development projects in areas where we have significant adjacent landholdings. And the 2 primary areas where we've done that are Wildlight north of Jacksonville, Florida, and Heartwood south of Savannah, Georgia. For example, in Wildlight, we own roughly 25,000 acres within a 5-mile radius of that epicenter of the project. We own roughly 50,000 acres within a 10-mile radius. So again, our strategy here is really all about creating a catalyst for value creation across a very large footprint of land. So shift gears now and talk about land-based solutions. Slide 14 illustrates a global path to net 0 to limit global warming to 1.5 degrees. We're all familiar with this chart. It assumes 50% reduction in global emissions by 2030 and 90% reduction in global emissions by 2050 with a balance of roughly 5 gigatons of emissions assumed to be offset with some form of negative emissions. The reality is we don't know exactly what this path is going to look over the next 25 years. But what we do know is that there's significant investment currently underway to decarbonize the economy. Over 75% of countries and over 50% of the 2,000 largest global companies have made net 0 commitments. And as a result, there's a tremendous amount of capital being put to work to decarbonize the economy. So for example, between 2020 and 2030, we expect the utility scale solar capacity is going to grow by 7x. CCS demand is projected to grow by 11x. And voluntary carbon market issuance is projected to grow by 6x. And so as a large owner of timberlands, which also comprises essentially a massive carbon sync, we really see this as a significant opportunity for our sector and for Rayonier in particular. As when we talk about land-based solutions, what exactly do we mean by this? Slide 15 provides an overview of how we broadly think about this business. We generally think of land-based solutions is falling into 3 categories. The first category is alternative and additional land use. And that would include things like leasing land for carbon capture and storage or leasing land for solar or wind farms. The second category is carbon market. So that would include compliance markets like what we participated in New Zealand. The New Zealand emissions trading scheme as well as voluntary markets, which is primarily what we're dealing with in the U.S. where corporations are essentially purchasing offsets to meet their net 0 claims. And the third category is fiber for bio-energy and biofuels. And so that would include things like using wood fiber for bio-energy with carbon capture and storage or BEx as it's referred to or using wood fiber for the production of biofuels, like sustainable aviation fuel. Long term, we think that all of these land-based solutions are very promising. That's how we really see solar and CCS is the most promising near-term opportunities for Rayonier. So let me spend a few minutes diving into solar and CCS in particular. Slide 16 highlights the growth that's projected in utility-scale solar development. It's important to note that the cost of utility-scale solar has dropped considerably in the last 15 years, and it's now cheaper than most other forms of fossil fuel-based electricity generation. So as a result of this cost competitiveness, utility solar is already forecasted to grow at a pretty rapid pace even before the Inflation Reduction Act. Of course, with the IRA incentives now in place for solar development, we're now expecting even more robust growth, which is highlighted on this chart on Slide 16. So what does that mean in terms of land use. Slide 17 highlights the land use math for utility-scale solar development. To summarize, utility solar requires roughly 7 acres of land per megawatt of generation capacity. Annual capacity additions for utility solar are projected to be roughly 40 gigawatts over the next decade. So this implies an annual land need of roughly 275,000 acres or roughly 3 million acres in total by 2033. So again, a very significant land need for this utility-scale solar development. But what's uniquely exciting for Rayonier is really where this growth is occurring and utility solar. As you can see on Slide 18, roughly half of the growth in utility solar is expected in just 2 states in the U.S. South. I'm sorry, roughly half of the growth is expected in the U.S. South, and roughly 2/3 of the growth in the U.S. South is projected in just 2 states, and that's Florida and Georgia, where there's obviously plenty of sunshine, and we also have population trends that are driving increased demand for grid capacity. So if you look at the composition of our ownership, about 30% of our lands in the U.S. are located in Texas and Florida. So again, we believe that we're uniquely positioned to benefit from this growth in utility scale solar. So now let's shift gears and talk about carbon capture and storage. Slide 19 highlights the projected growth trajectory in CCS demand. And as you can see, CCS demand is projected to grow by roughly 14x to nearly 300 million tons over the next decade. And of course, this growth is going to require a significant need for land and port space, and that's really where we come in. On Slide 20, we highlight some of the key considerations that are required for cost-effective CCS. Essentially, you need 3 things for CCS to work. You need a concentrated source of high purity emissions that can be cost effectively captured. You need suitable geologic storage capacity where the liquefied carbon can be put into the ground. And lastly, you need access to pipelines and infrastructure in order to be able to move the liquefied carbon from the point of capture to the point of storage. And as you can see on this slide, Rayonier has significant ownership in Southeast Texas and Southwest Louisiana that checks these 3 boxes. Overall, we have roughly 400,000 acres of timberland in this area that we believe could be suitable for CCS longer term and we're also exploring a number of different opportunities in other areas of the U.S. as well. So in the interest of time, I'm not going to go into too much additional detail on carbon markets and bioenergy here today. But suffice it to say that while our near-term focus is on solar and CCS, we believe that there are very promising opportunities longer term in carbon markets and bioenergy as well. So let's skip ahead to Slide 23. Now we've gone through our portfolio advantages. I also want to drill down into what we see as our organizational advantages, which I believe are also very meaningful. There are 3 key advantages that I want to highlight. The first is our pure play Timber REIT structure and the flexibility that we believe it affords us. The second is our nimble approach to capital allocation, including the initiatives to enhance shareholder value that we announced last November. And the third is our culture in our ESG profile, which we believe are both very well aligned with our vision and strategy. So let's start with our pure-play structure. As I noted earlier, Rayonier is one of three publicly traded Timber REITs, but we're the only pure-play Timber REIT. And what I mean by pure play is that we don't have any exposure to downstream wood products manufacturing. We believe this provides a number of key benefits. First is much greater earnings stability. Timber cash flows have historically been very stable, whereas Wood Products cash flows have historically been very volatile. One of the hallmarks of Timberland investing is really that safety and stability of cash flows. And so we believe that the pure-play structure that we have is much better suited to provide this. The second is we believe our pure-play structure provides much greater optionality around how we manage our portfolio and how we manage our operations and that we're not beholden to feeding a mill system to sustain our business. And the third is a pure play with over 2/3 of our assets located in the U.S. South. We believe that we're uniquely well positioned to benefit from this land-based solutions upside because most of that activity is occurring in the U.S. South. So moving ahead to Slide 26. I'll touch briefly on our capital allocation philosophy. Our mantra on capital allocation has really been -- always been to be nimble and opportunistic with a view towards building long-term value per share. And as you can see here, we pivoted a number of different times as different opportunities become available. We've grown and improved our portfolio through acquisitions but we've also not been afraid to sell assets. We felt our capital could be better deployed elsewhere. We bought back stock. We've seen a big disconnect between our trading price and our view of NAV, but we've also issued stock through ATM program and we've seen value accretive growth opportunities available. We've increased leverage to pursue acquisitions and select growth opportunities. But we've also very carefully managed our balance sheet to maintain our investment-grade credit profile and a very low cost of debt. We also recently announced our $1 billion disposition plan, which was really designed to achieve 2 objectives. One was to achieve a lower level of leverage and what we expect is going to be a higher for longer interest rate environment, but also to capitalize on what we saw as an unprecedented disconnect between where the stock price of the company was trading relative to our view of intrinsic value. So again, we've been very nimble and opportunistic around capital allocation and balance sheet management. Slides 27 to 30 provide some highlights on our balance sheet and credit profile as well as an update on our disposition program. As of the end of the first quarter, our net debt to adjusted EBITDA was 4.1x, and our net debt to enterprise value is roughly 19%. As of the end of the quarter as well, we had a weighted average cost of debt of roughly 2.8%, which is 100% fixed. We have a weighted average maturity of roughly 5 years. So again, we feel like the balance sheet is in a very good position. As we discussed on our last earnings call, we continue to make progress on our disposition plan. Specifically, we've identified roughly 100,000 acres in the U.S. South, that we believe could be suitable for disposition longer term. We're actively marketing roughly 115,000 acres in the Pacific Northwest. And we've also engaged a financial adviser to assist in a review of strategic alternatives for our New Zealand portfolio. So again, we continue to make on that disposition plan. So moving ahead to Slide 31, I'll just touch on a few aspects of our ESG profile that I believe are important. And it really starts with our carbon footprint. Climate change is obviously top of mind for pretty much all companies today. Fortunately, at Rayonier, and fortunately, for our sector, we're not really focused on solving a big carbon emissions problem as we are focused on creating value from what is essentially a massive carbon synch. And that's really unique about our sector and our company. On the social front, we've been at the forefront of contractor safety. This is something that we decided to make a priority a number of years ago. We're really seeing some meaningful progress on this front. Last year, we saw a 50% year-over-year reduction in U.S. contractor recordable injury. So again, very proud of the progress we've made on this front. Lastly, on governance, I think we're in a very strong place. We employ best-in-class governance practices across the organization, including with respect to board independence, Board diversity and executive compensation. So again, we're very proud of our sustainability profile on the progress that we've made here over last several years. So putting all this together, we believe we're executing a clear strategy to drive long-term value per share and realize the full potential of our land resources. This strategy is really 3-pronged. We're focused on optimizing our core timber operations, to generate increased productivity and operational efficiencies across our land base. And we're focusing on growing our land-based solutions business with a near-term focus on solar and CCS and a longer-term focus on voluntary carbon markets and bio-energy. And lastly, we're focused on leveraging our differentiated real estate platform to create unique communities that we believe are going to add value, not just for the company, but for other stakeholders as well. So to wrap up, as we look to execute this strategy at our Investor Day in February, we also laid out long-term financial targets for both land-based solutions and real estate development. On our land-based solutions business, we've set a 2030 adjusted EBITDA target of $75 million and an interim 2027 target of $30 million. And the reason for that big lift beyond 2027 is really that permitting timetable associated with these projects. We're building up a significant pipeline of solar options and CCS leases currently, but we really don't start to see the meaningful lift in earnings until those solar options convert to leases, and those CCS leases convert to injection royalties, again, which we expect to occur as those permits are achieved over the next several years. On the real estate development front, given the lumpiness of real estate transactions rather than laying out these targets at a single point in time, we've laid them out in 5-year average. And likewise, we're expecting significant growth here over the next several years. Specifically, over 2026, to 2030, we expect average real estate development adjusted EBITDA of $40 million, and that's up roughly 40% from the prior period. So in total, if you put these 2 businesses together, we expect that they will combine to generate over $100 million of adjusted EBITDA by 2030, which is up from essentially nothing, just 6 or 7 years ago. So again, very excited about the growth opportunity here. So that's a quick flyover of both our existing businesses as well as the growth opportunities that we see in land-based solutions and real estate development. And so with that, we can open it up to Q&A.

Great. Thank you, Mark. So you are the only pure-play timber owner among Timber REITs. And I'm wondering if you can talk a little bit about kind of the level of demand and maybe sort of market values for timberland transactions over the last 2, 3 years and maybe also just in the context of kind of higher for longer rates potentially?

Yes. We've continued to see a very robust demand, particularly for higher quality timberland assets. If you kind of look just beyond the last 2 to 3 years, say, over the last 5 to 10 years, we've continued to see new entrants into the space. There continues to be a meaningful component of ESG or carbon driven investing in timberland assets. We've seen that universe of buyers expand to include not just the traditional private equity TMOs and Timber REITs, but also nontraditional buyers like large corporates as well as more kind of sustainability-focused funds as well as funds that have a unique carbon angle where funds are looking to invest in timberland assets solely for the generation of carbon offsets to either monetize or distribute in kind to their investors. And so again, I think it's really that optionality around timberland assets that has continued to drive demand. And to some extent, it's really expanded the universe of buyers that are interested in this asset class. So again, we continue to see, I'd say, very favorable pricing and a very favorable price trajectory for higher-quality timberland assets and particularly timberland assets that have that unique optionality attached to them.

And you operate in 3 kind of core timberlands regions. I'm wondering if you could just kind of recap the relative attractiveness of those regions and sort of the level of activity that you're seeing in each?

Yes. From a timberland M&A standpoint?

Yes. And then just sort of like the level of activity, maybe new buyers, pricing trends to the extent you're seeing anything?

I mean, without a doubt, the U.S. South is the largest and most liquid timberland M&A market followed by the Pacific Northwest and then followed by New Zealand. We don't see a lot of transaction activity in New Zealand. That said, because of that lack of transaction activity, we do think that there is scarcity value to timberland assets in New Zealand. And we've generally seen pretty favorable prices being paid when there have been larger portfolios transacted. Again, they're all very different markets. I'd say the -- most of the land-based solutions optionality is largely focused in the U.S. South, but not exclusively. I mean we have seen carbon projects undertaken in sort of noncore timberland geographies like the Northeast and we've also seen some projects undertaken in the Pacific Northwest. And so again, I'd say there are different drivers behind each of those market. Obviously, the Pacific Northwest is much more of a sawtimber oriented market with 80%, 90% of volume there generally going into solid wood product construction, whereas U.S. South is more balanced with kind of 50-50 between pulpwood markets and sawtimber. New Zealand also has the regulated emissions trading scheme. And so that's certainly driven some incremental buyer interest in that market for those that are looking to, again, generate carbon offsets within that New Zealand ETS. So overall, I'd say the demand across all 3 of those regions for high-quality timberland assets has continued to be very robust, but somewhat different universe of buyers that are interested in properties in those different areas.

Great. Great. And in terms of land-based solutions, you talked about this a little bit. But when I think about a solar project or a CCS project, can you give us a sense of sort of the general time frame to kind of get those permitted and completed. And then we have an election later this year. If you think about IRA incentives or sort of government incentives, how could that potentially impact land base solutions, if at all?

Yes. So we generally think of solar and CCS projects in particular, is kind of operating on a 3- to 5-year time table. Typically, again, we're entering into these solar options and CCS leases today and they're relatively modest option and lease payments associated with those transactions. But really, the big lift in earnings and cash flow comes when those solar options are converted to leases or those CCS leases convert to injection royalties. We generally think of that -- it's largely the permitting timetable that's the gating item there, and we generally think of that as a 3- to 5-year process. And again, it's relatively similar between solar and CCS currently. These classic injection wells that are required to be permitted by the EPA. It's a very protracted process. Now some of the states have taken -- have started to take primacy and permitting from the federal governments, for example, Louisiana has been granted primacy for permitting of classics injection wells. Texas is in that process. But we haven't yet seen kind of how that's going to translate to a reduction in that permitting time tip. So our general expectation when we enter into one of these transactions today is that it's going to be 3 to 5 years before we see that big lift in earnings. And again, that's why we've laid out 2030 adjusted EBITDA target for this business as well as an interim target of $30 million in 2027, because again, it's really beyond that kind of 3- to 4-year period that we start to see a more meaningful lift in earnings. As it relates to the IRA and kind of how we see the political process potentially impacting that. Look, there's always a chance that laws can be repealed. I mean our sense and the political analyst that we talked to have indicated that the reality is that it's very difficult to kind of roll back these incentives once they're out there and once corporates and governments have started making commitments and capital outlays on the basis of those incentives and recognize as well that a lot of those incentives have actually gone to red state. So Texas has been a major beneficiary of the Inflation Reduction Act. And so our general sense is, while there may be some talk about pulling back the Inflation Reduction Act that we generally expect that these incentives will stay in place and that they will continue to stimulate demand for some of these land-based solutions that are top of mind for us.

And maybe last quick question. You talked about demand for timberlands being very good. I assume that maybe extends to the kind of the rural land in your real estate development business. Can you just talk about those trends? And then in terms of like unimproved development, improved development, like what are you actually doing kind of on the ground? And is it significant capital?

Yes. So the general trend for rural land has continued to be pretty robust as well. We recognize that most buyers of large tracks of what we consider to be HBU property, and HBU is essentially anything that has a value that's meaningfully higher than what it's worth to us as Timberland. A lot of those tend to be cash buyers. So they're not reliant on mortgage financing. And so we've generally seen demand in that market hold up reasonably well. It appears that there's a fire alarm going on. Lets see if I can hold my concentration.

Well, we're coming up on time.

We have a safety-first culture at Rayonier's and it probably makes sense to terminate the presentation there. And thank you everybody for joining us.