Rayonier Inc. (RYN) Earnings Call Transcript & Summary

All right. All good. I see our green lights on, so I'm going to go ahead and get started so we keep the trains running on time. I appreciate everybody's participation. My name is Buck Horne. I'm the Raymond James housing analyst, also covering all things, not only residential, but timber as well and happy to have the team from Rayonier to talk timber, trees and tariffs and all sorts of other fun stuff. I wish I had better news to report on the housing market, but it's been a slog and you've seen the turbulence in consumer sentiment and volatile mortgage rates and kind of seem to have kind of a housing starts pattern that seems kind of stuck in neutral at the moment. But with that all being said, we think it's created some interesting pricing dislocations in the timber REITs with stocks like Rayonier is trading north of 30% discounts to our estimated net asset value, one of the deepest discounts I think we've seen historically on record, quite frankly, for the stock. So really compelling value, interesting time to be taking about it. With that, I'm going to -- we've got Mark McHugh to my left, April Tice to his left and then Collin Mings over there. And we'll do some opening, I guess, presentation, and then we'll have time for Q&A. So let me turn it over to Mark.

Right. Thanks, Buck, for hosting us today. Thanks for everybody joining here at NAREIT as well as those joining on the webcast. I'm going to start by providing a high-level overview of Rayonier for those that are less familiar with the story, and then we'll leave plenty of time for Q&A. And as I flip through the slides here, I'm going to be referencing the investor conference presentation that's available on our website is the featured presentation. All right. So diving in on Page 3. Here, we provided a brief snapshot of where Rayonier is today. We are one of three publicly traded timber REITs, but we tend to think of ourselves as the only pure-play timber REIT. And that we don't have exposure to downstream wood products manufacturing assets. And that's generally going to translate to less cyclical volatility on our cash flows over time relative to the peers. The company was founded in 1926, so almost a 100-year history. Today, we own or lease about 2.5 million acres of timberland, generating a sustainable yield of about 10 million tons annually. Of course, we recently announced an agreement to sell our New Zealand business. So once this transaction closes, that will reduce our acreage by about 400,000 acres and our sustainable yield by about 2.5 million tons. The chart on the right here shows our adjusted EBITDA breakdown in 2024. As you can see, about 70% of our adjusted EBITDA came from our Timber segments with the balance of 30% coming from our Real Estate segment. And that's been pretty consistent over time, where typically, we're generating anywhere from 2/3 to 3/4 of our adjusted EBITDA from timber with the balance coming from real estate. That said, with the pending New Zealand disposition, we do expect that, that weighting will shift a bit heavier to real estate sales going forward. So that's a snapshot of where we are today. But I want to spend the next few minutes talking about how we see our business evolving into the future. And it starts with a couple of major trends that we believe are going to drive increased demand for land and timber over the long term. And the first is the energy transition. The need for renewable power and decarbonization solutions, it continues to grow. And that's especially true today with the rapid development and deployment of AI and the power-hungry data centers required to support this technology. So despite some near-term political uncertainty around renewable energy incentives, we do see this as a long-term secular trend that we think is going to drive increased demand for land-based solutions going forward. The second trend is the favorable long-term outlook for the U.S. housing market. As Buck discussed, we're certainly facing some near-term headwinds, but the U.S. housing sector remains significantly underbuilt. Depending on what study you look at, by most accounts, there's anywhere from 3 million to 6 million units of underbuilt supply in the market. So despite the challenging financing environment, although we currently find ourselves in, we do think that the long-term outlook and trajectory of housing starts will be quite constructive. So as these trends reshape our industry, they're also really reshaping how we think about our business and our portfolio. 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've become increasingly focused on maximizing the value of our portfolio and our lands in a multitude of different ways. And in particular, we think that over time, a small portion of our lands will become much more valuable for our alternative land uses such as land-based solutions as well as real estate development. So why does this matter? This next Slide 6 illustrates why we're so optimistic about these new opportunities. And what this chart shows is the potential value uplift that we believe can be achieved from transitioning land use. So for example, if you take an acre of U.S. South timberland that has an average value today of, say, $2,000 to $3,000 per acre. 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, that has the potential to lift the value of that acre by up to 10x. And lastly, if you're able to transition that acre into an improved development use, we think that, that has a potential to increase of value of that acre by up to 15x. So we see significant value creation potential from optimizing land use across the portfolio. And as we grow the number of acres within our portfolio that can be converted into these higher value uses, we really see this translating into significant value creation for us over the long term. So moving on to Page 7, we've laid out our vision for Rayonier. And it's really pretty simple. Our vision is to realize the full potential of our land resources and meeting the needs of society. And what that really means is that we want to be in a position to identify and execute on the highest value end use for every acre within our portfolio, whether that is timber production, land-based solutions or higher and better use real estate. And again, we think if we can achieve this, that there's tremendous value creation potential across the portfolio. So moving on to Slide 8. I want to briefly touch on some of our key competitive advantages. First, Rayonier has a best-in-class timberland portfolio located in some of the most attractive timber markets in the world. Second, we have a differentiated real estate platform with a demonstrated track record of optimizing HBU values and premiums across our footprint. And third, we believe our portfolio is uniquely well positioned to capture these transformative land-based solutions opportunities over time. So let me drill down into each of these in a bit more detail. Slide 9 provides an overview of our timberland holdings by region. As I noted earlier, we own or lease roughly 2.5 million acres on some of the most attractive softwood markets in the world. And that includes 1.8 million acres in the U.S. South, about 310,000 acres in the Pacific Northwest and about 410,000 acres in New Zealand. Now as it relates to our New Zealand portfolio, again, we announced an agreement earlier this year to sell this business. And we expect this transaction to close by the end of the year, which -- our portfolio will be exclusively focused in the U.S. and the U.S. South and the Pacific Northwest. So moving on. Another key feature of our portfolio is our concentration in some of the best markets in the U.S. South. As you can see on Slide 10, over 70% of our timberlands are located in the U.S. South, and the majority of these lands are located in top quartile markets as measure by TimberMart-South composite average pricing. The chart on the right here shows our EBITDA per acre performance relative to the NCREIF South Index. As you can see, over the past 6 years, our average EBITDA per acre has been over 40% higher than the NCREIF South Index. So again, this chart really highlights that relative quality differential of our Southern portfolio. 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 real estate business. Historically, we've sold anywhere from 1% to 2% of our Southern land annually, typically at premiums ranging from 50% to 100% above timberland value. And that really forms the core of that recurring HBU business. The next two categories, unimproved development and improved development. This is really the area where we see the most significant growth opportunity longer term. Unimproved development consists of properties where we've invested in entitlements and some land use planning. But we haven't made that next step of investing in horizontal infrastructure improvement. So we tend to do this in areas where we have high value lands, but they tend to be relatively isolated parcels. Alternatively, also within improved development, these are areas where we actually taking that next step and invested in horizontal infrastructure improvements. And we really do that in order to catalyze value creation across a very large footprint of land. And again, we only make those investments in areas where we tend to have large land holdings like Northeast Florida and Southeast Georgia. And so these are major categories that comprise our real estate business. Now moving on to our performance in the HBU business on Slide 12. The chart on the left here shows how our HBU values and premiums have evolved over the last decade. As you can see, we generated a significant increase in both our average HBU price per acre as well as a premium to NCREIF Index. So that value per acre went from about $2,800 per acre in the period from 2015 to 2017 to $4,500 per acre in this most recent period from 2021 to 2024. We also generated a significant increase in the premium. That premium went from 55% to almost 120% over the same time periods. We've also seen a significant uptick in the shift -- or I'm sorry, a shift in the mix of the development sales, those higher-value development sales. They've gone from just over 15% in 2015 to 2017 to about 44% in the last 4 years. And what's really driving this 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 120,000-acre development pipeline as well as a map of our holdings in Northeast Florida and Southeast Georgia. Again, we only pursue these improved development projects in areas that have both strong market-ready demand as well as areas where we have a significant land holding. And the two primary areas where we've done this are in Wildlight, our project north of Jacksonville, Florida, as well as Heartwood, our project south of Savannah, Georgia. So for example, in Wildlight, we own about 25,000 acres within a 5-mile radius of the epicenter of that project and about 50,000 acres within a 10-mile radius. So again, the strategy here is really about creating a catalyst for value creation and demand across a very large footprint of land. So now let's shift gears and talk about land-based solutions. This next slide illustrates the global path to achieve net-zero by 2050. And it shows what's going to be required in terms of reduction of carbon emissions as well as carbon offsetting. The reality is, as we all know, we're not currently on this path. And I don't think anybody knows exactly what this path is going to look like over the next 25 years. But what we do know is that there's significant global action underway currently to reduce carbon emissions. Over 70% of countries and over 50% of the 2,000 largest global companies have made net-zero commitments. And as a result, there's a tremendous amount of capital currently being put to work to decarbonize the economy and to create sources of renewable energy. So for example, between 2020 and 2030, utility scale solar capacity is projected to grow by 7x. Carbon capture and storage demand is projected to grow by 11x. And voluntary carbon market issuance is projected to grow by 6x. So it was a large owner of timberlands, which also comprise a massive carbon sink, we really think that this creates a significant opportunity for our company. So when we talk about land-based solutions, what exactly do we mean? Slide 15 provides an overview of how we broadly think about this business. We generally think of land-based solutions as falling into three categories. The first is alternative and additional land use. And so that would include things like leasing land for solar or leasing land for wind farms. I would also include leasing land and poor space for carbon capture and storage, which we tend to think of as an alternative land use -- I'm sorry, an additional land use because we continue to operate the surface for timber production. The second category would be carbon markets. And that would include regulated markets like the New Zealand emissions trading scheme that we participate in there, as well as voluntary markets where corporations can purchase carbon offsets to meet their net-zero claims. And that's primarily what we're dealing with here in the U.S. And the third category is fiber for bioenergy and biofuels. So that would include things like using wood fiber for bioenergy with carbon capture and storage or BEX or using wood fiber for the production of biofuels, such as sustainable aviation fuel SAF or green methanol. Long term, we actually think that all of these different categories present a pretty significant opportunity. That said, we really see solar and CCS as being the most meaningful near-term opportunities for Rayonier. So let me spend a few minutes and drill into those in a bit more detail. Slide 16 highlights our projected growth in utility solar development as well as the underlying land use math for utility solar. As you can see in the chart on the right, we're expecting about 30 to 35 gigawatts of new utility solar capacity additions per year through 2030. Now in terms of land use, each megawatt of utility solar capacity requires about 7 acres of land. So to put that in context, that pace of solar development translates into an incremental land use need of about 20,000 to 200,000 acres annually. Or that implies about 1.5 million acres through 2030 that will need to be converted into utility solar. So again, there's a big opportunity here for large land owners like us. Moving ahead to Slide 18. This chart shows here on the right how our pipeline of solar options has grown over the past few years. As you can see in 2021, we only had about 7,000 acres under option for solar development. At year-end 2024, that number had grown to about 39,000 acres. So we feel really good about how this pipeline is developing. Some of these options start converting into leases over the next few years, we really see that translating into pretty significant cash flow growth over time. So now let's shift gears and talk about carbon capture and storage. Slide 19 highlights our projected growth trajectory for CCS demand. As you can see, CCS demand in the U.S. is projected to grow from about 25 million tons today to over 300 million tons over the next decade. Of course, this is going to require a lot of suitable land and pore space, and that's really where we come in. I'm on Slide 20, we've outlined the key considerations for cost-effective CCS. So 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 to store the carbon. And you need access to pipeline infrastructure to move the liquefied carbon from the point of capture to the point of storage. And as you can see here, Rayonier's significant ownership across our land base that checks these 3 boxes. If you look at kind of where that demand exists, initial interest in our land has been within Louisiana and Texas primarily. But we've also seen more recently that interest expand to Alabama and Georgia. So again, very optimistic about how the pipeline is evolving here. Skipping ahead to Slide 22. Here, we've shown how our CCS leases have grown over the last couple of years. And this is something that, again, we're very encouraged by. Over the last 2 years we've gone from having essentially no acreage under CCS lease in 2022 to having over 150,000 acres at year-end 2024. So again, we're very encouraged by the interest that we've seen in our land base. And like solar, we're quite optimistic about the long-term cash flow growth potential of this business for us. On the interest of time, I won't go into detail on carbon markets and bioenergy here, but suffice it to say, we see meaningful longer-term opportunities here as well. Now with respect to carbon markets, I know that we continue to evaluate a range of opportunities. We're actively engaged on a handful of pilot projects that we expect will come to fruition over the next couple of years. So I'm going to skip ahead to Slide 28 now, and I'll touch briefly on some of the key results as it relates to our asset disposition program. So recall that in November 2023, we announced an asset disposition and capital structure realignment plan, along with a $1 billion disposition target. And there are really 2 key factors that drove us to this decision. First, we wanted to reduce our target leverage from 4.5x net debt-to-EBITDA to 3x net debt-to-EBITDA in anticipation of what we saw as a higher for longer interest rate environment at that point in time. Second, we felt that our stock was trading at a pretty wide disconnect relative to our view of private market value, and we wanted to take advantage of that arbitrage opportunity. Overall, we've been very pleased with how this program has evolved over the course of the last 18 months. To date, we've completed or announced about $1.4 billion worth of dispositions at multiples that are well in excess of where our stock has been trading over that period of time. So we really believe we've captured a significant value arbitrage opportunity here, and we've also generated significant CAD and NAV accretion along the way. So I'm just going to skip ahead now to Slide 32, and I will wrap up by just reiterating a few key elements of our strategy. Again, we have 3 key focus areas in our business. First, we're focused on continuing to optimize our core timber operations. Second, we're focused on growing our land-based solutions business with a near-term focus on solar and CCS and a longer-term focus on carbon markets and bioenergy. And third, we're focused on leveraging our real estate platform, really to maximize those real estate premium realizations across our land base. And ultimately, we believe as we execute on these strategies that this is really going to translate to value optimization and value creation across the portfolio. So that's a very quick flyover of our business, and I'm happy to open it up for questions.

Sounds good. Great overview. Thanks for the time, Mark. I want to back up a little bit to New Zealand and just talk through maybe just help us understand the background of that transaction, the thought process and rationale for why to exit New Zealand now. And of course, they freeze up a lot of capacity on the balance sheet. You're going to get a significant influx of cash from that. So what are the priorities for that capital allocation? Is it -- can you almost deploy almost all of it back into repurchases and win?

Great question. Just in terms of the strategic logic of divesting New Zealand, I'd start by saying that the collection of assets we have in New Zealand, it really is a strong set of assets. We've got a fantastic team in New Zealand managing those assets. But as we are looking at the best areas to potentially divest within the portfolio, we recognize that there's really not a lot of synergy between our New Zealand business. on the balance of our portfolio. It largely operated independently of our U.S. business. Again, we've got a great team there managing that asset, but we really didn't see the synergy in continuing to own it. It was also owned through a joint venture structure. So it had some governance complexities. And when you put that together, I think the U.S. public markets didn't really -- have never really fully appreciated that asset. I think it was a source of complexity in our story. Again, we're the only company that owns New Zealand timberland assets. And so I think it was a part of our portfolio that just wasn't that well understood. And so we ultimately determined that we would look at divestiture opportunities for that portfolio. We ultimately were able to secure a transaction that we thought made sense both for Rayonier as well as the New Zealand business and the buyer of that business. Again, we think that there are great longer-term opportunities there, but just didn't really fit with our portfolio or a public form of ownership. As it relates to how we intend to deploy that cash. You recall that we set out with a $1 billion disposition target, when we laid out the plan back in November of 2023. With the New Zealand transaction, we ultimately landed at total announced divestitures of $1.45 billion. And New Zealand was always going to be the big swing factor in terms of where that landed. And so we -- by the end of 2024, we had divested about $750 million of assets in the U.S. And so then when we announced New Zealand, that obviously took us well over that original target. I think we're encouraged by just the flexibility that's going to afford us going forward. After we closed New Zealand, before any special distribution associated with New Zealand, we expect to be sitting on roughly $1 billion of cash. And right now, we think share buybacks continue to be a very compelling opportunity and a very compelling use of capital given the disconnect that you alluded to earlier, by -- I think by your math, we're trading in excess of a 30% discount to a private market view of NAV. And so I'd say that, that's certainly the near-term priority. We announced on our last call that we have completed our -- last earnings call, we completed some buybacks through April. And we've also alluded to a 10b5-1 plan that we put in place to be able to kind of act opportunistically on that through different periods of time. And so again, very encouraged about the value creation opportunity there and I'd say buybacks continue to be a priority. But we're going to continue to be flexible and opportunistic as we think about capital allocation. I wouldn't foreclose acquisition opportunities. But again, it's the bar is relatively high right now, kind of given that opportunity on buybacks.

That makes sense. One of your competitors is out there were actually doing some acquisitions recently. And just maybe lay of the land in terms of -- I mean this disconnect in terms of pricing. I think the public market has a hard time seen through timber transactions and/or the effective pricing, you get a price per acre in one region, but it has it compared to another region and sometimes you get different stocking levels and weird comparisons out there. But what's a good basis or a thought process on where you think the private market is at? And what is it that the private market is seeing in the value of timber that the public market is not?

Yes. No, it's a great question. And look, when you're comparing public market valuations to the private market, it can always be a bit challenging because I think there tends to be the lowest common denominator tends to be per acre values. But recognize that those per acre values can range pretty widely depending on the quality of any individual attractive timberland. And so we -- on average, in the U.S. South, we tend to look to the NCREIF Index as being reasonably indicative of average quality Southern Timberland values. That's a private equity based index comprised of I think 8 million or 9 million acres, about $17 billion, $18 billion of value. So it is probably the most broad-based and kind of best reflection of a portfolio of average quality timberland because there is a reversion to the mean when you're talking about millions of acres. I think at year-end 2024, the average per acre value of the NCREIF Index sat just over $2,200 an acre. And as we kind of think about the relative portfolio quality, our relative portfolio quality as well as when we're looking at acquisitions. Again, there are a number of factors that go into that. It's where -- in what market those assets are located, like I said earlier, the majority of our assets are located in top quartile markets from a pricing standpoint. You'd also look at the productivity -- the underlying productivity of the land, which again can range from probably 3 tons per acre per year, probably up to 5 tons per acre per year for more product lands. So all those factor into kind of how to think about the per acre value of land. But by almost any measure, again, you'd kind of look at where the timber REITs are trading today, relative to any objective measure of where the private market is, and you'd say there's a pretty pronounced disconnect there. Again, it's going to vary pretty widely in the Northwest as well. But as we kind of look at our portfolio, we think: a, we have a well above average portfolio quality in the U.S. South. We think with the divestitures we've completed in the Northwest, we really brought up the average portfolio quality there as well. And then we have a real estate development business that we think has really grown in value over time also. And so like I said, we think that there's a pretty significant disconnect with where the stock price is trading right now, and we've been capitalizing on that through our buyback program.

Definitely agree. Let me go to the thought process around environmental climate change risk in terms of just managing timber. You absorbed the hurricane last year, and that created an influx of damaged trees and damaged sawlogs. And where are we at in terms of like the salvage activity and how do hurricanes play into your forecasting going forward and/or even fire risks? How do you manage for potential fire risks when you're managing millions of acres of forestry?

Yes, I'd say the biggest natural mitigant to any kind of casualty loss within a large portfolio of timberlands is just the geographic dispersion of those assets. When you hear a number like 1.8 million acres, you tend to think the scale of that is just being enormous, and you tend to think of these big blocked up chunks of land. And the reality is if you look at any large timberland owners portfolio and you actually look at a map of those lands, it more often looks like you've sprinkled sand on the map. And so these are quite geographically dispersed lands and acreage. And so we deal with casualty risk all the time. We deal with hurricanes. We deal with forest fires. But when we have had impacts, they've tended to be relatively minor. I think in the last 25 years, Rayonier's had 2 casualty events that were just over $10 million in aggregate each. And again, that's a 25-year history, $5 billion, $6 billion, $7 billion portfolio of lands. And so -- again, we deal with these risks. They're not unfortunately insurable risks, but they tend to be relatively minor in terms of how they actually impact us. You alluded to Hurricane Helene. We've certainly seen impacts from Hurricane Helene but they weren't direct impact. We actually had relatively minor direct impacts to our portfolio. The impacts that we've seen -- is just that caused a lot of devastation of timberlands in that area. And so what that's translated to is an elevated level of salvage volume in the market currently. There's a shelf life to the salvage volume. We tend -- when we have these casualty events, there tends to be a 6- to 9-month shelf life to go and salvage and harvest that timber. And then the longer-term impact is that, that timber has now come out of the market. It needs to be replanted. There's going to be a long period of time before it becomes harvestable again. So we'll often see a pretty meaningful bounce back when you kind of get through the salvage activities. But that's certainly what we've been contending with in Georgia here recently, but we do think that longer term, we're going to see those markets normalize.

Got you. We've got a minute left, so it's going to be a lighting round question for you on tariffs and impacts and things like that. I guess the question is related to -- let's -- we have duties coming theoretically, countervailing and antidumping, which should raise the production costs on Canadian produces. Potential Section 232 could be applied at some point, we'll see. But it feels like Canadian supply is going to be challenged in terms of lumber production, but that means there's just more production shifts to the U.S. South. When do you think we kind of reach an inflection point in terms of like seeing that increased production or taking advantage of the increased capacity in the U.S. South and having that actually translate to better pricing power for sawlogs and pulp?

I certainly think that the increase in duties, the countervailing and the antidumping duties that's expected to come into place later this year. That's expected to go from 14% currently, I think to roughly 30%. We certainly think that, that's going to have an impact on the market. And the net effect of that should be less lumber production in Canada and more lumber production in the U.S., which should bode well for demand for sawtimber and sawtimber prices. There's obviously talk of incremental tariffs around the Section 232 investigation. That remains to be seen, when or if those come into play. But kind of irrespective of the Section 232 tariffs, we do think that as these duties come into play later in the year that, that should be a tailwind for the -- for sawtimber prices.

Sounds good. We'll have to leave there. Thank you, everyone, for participating and joining. Thanks again to the Rayonier Team. Thank you.

Thank you.