Rayonier Inc. ($RYN)

Thanks for joining us for the Rayonier session. My name is Buck Horne. I'm the housing and timber analyst for Raymond James and really happy to be able to introduce and host this session. To my left, Mark McHugh, CEO, Rayonier. Wayne Wasechek is the CFO, formerly of PotlatchDeltic, but now appointed to the Rayonier seat. And then to his left, Collin Mings, VP of IR. So lots of interesting things happening. And of course, most importantly, I think, is the stock price is the most compelling thing I can think of, which I continue to advocate and believe is one of the most deeply discounted value opportunities among all REITs, among all property types. So -- let's get the update from Mark, and then we'll dive into some Q&A. So with that...

Great. Thanks for the introduction, Buck, and thank you for hosting us today. I'm going to start off by providing a high-level overview of Rayonier for those that are less familiar with the story, including some highlights of our recent merger with PotlatchDeltic, which we closed just about 4 months ago now, and then we'll open it up to Q&A. Also, just for reference for those in the room as well as joining virtually, I'm going to be speaking to the presentation that was posted to the IR section of our website earlier this week under the heading Featured Presentation. All right. So let's start on Page 4, which lays out the rationale for our recent merger of equals with PotlatchDeltic. And really, the key theme here is that we believe that this combination creates a stronger enterprise that will be able to realize benefits that neither of the companies could have achieved independently. On our timber business, the combined company will enjoy much larger scale as well as significantly enhanced diversification. In Wood Products, we're adding a very well-positioned, low-cost lumber manufacturing business. It really provides us with upside to the housing cycle longer term. On real estate and land-based solutions, we really see an opportunity here to share best practices across the newly combined organization and really leverage our resources over a much larger footprint of land. And then just as it relates to our future strategic flexibility as a combined company, we feel like the larger scale will just offer us a lot more optionality in terms of how we optimize the portfolio going forward. Moving over to the financial benefits. We're targeting annual run rate synergies of $40 million, which we expect will come primarily through optimization of overhead costs. The combined company is also very well positioned post closing with a strong balance sheet and significant capital allocation flexibility. And lastly, we expect that our increased market cap post closing should translate to a better trading liquidity and improved cost of capital over time. So again, really see a lot of benefits and upside potential from the merger going forward. Slide 5 provides an overview of our leadership team following the merger. The new team that we've assembled here reflects top talent from both organizations. And I'm really pleased with how this group has come together and was really able to hit the ground running following the closing of the transaction back in January. Slide 6 provides an overview of the pro forma asset profile of the combined company. We now own approximately 4.1 million acres of timberland, including roughly 3.2 million acres spread across the U.S. South and just over 900,000 acres in the Northwest, which are primarily in Idaho and Washington. In addition, we own 6 sawmills with total capacity of 1.2 billion board feet annually as well as plywood facility that's co-located with our sawmill in Idaho. On the real estate side, we now have 3 real estate development projects with the addition of Chenal Valley. And we're also really looking forward to the opportunity to leverage what we see as a best-in-class HBU platform over a much larger footprint. And lastly, within land-based solutions, the combined company now has 80,000 acres under option for solar development as well as about 154,000 acres under lease for carbon capture and I'd also note that post-closing, about 3/4 of our combined portfolio is in the U.S. South. So we see significant potential to expand this land-based solutions business over time, given that the vast majority of activity within land-based solutions is occurring in the U.S. South. On Slide 7, we've highlighted some of the key trends that we see driving value creation opportunities within our land portfolio. And they generally center around transitioning land use towards a higher-value purpose, and that can include rural HBU, real estate development or land-based solutions. Rural HBU is a business that's long been part of our strategy to optimize portfolio value. We generally sell anywhere between 1% to 1.5% of our Southern acreage annually into these HBU markets, typically at premiums ranging from 50% to 100% above timberland value. That's a business that's been pretty consistent and a steady contributor to cash flow for us over time. The land-based solutions and real estate development, these are really where we see the most significant growth opportunity for the company longer term. Our land-based solutions business includes activities such as leasing land for utility solar development, leasing land or really the pore space underneath the land for carbon capture and storage as well as monetizing carbon stored in standing timber through the carbon offset market. Our real estate development business involves investing in entitlements and horizontal infrastructure improvements in very select areas within our portfolio. And really, those investments are designed to catalyze demand in those areas, significantly enhance the value of those lands as well as our surrounding land holdings. And this next slide illustrates why we're so excited about these new growth opportunities. What this chart shows is a potential value uplift per acre that we believe can be achieved by transitioning land use into one of these alternative uses. So for example, if you take an acre of U.S. South timberland that has a value of, say, $2,000 to $3,000 per acre, and you're able to transition that acre into a carbon capture and storage lease. We think that has the potential to increase 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 increase the value of that acre by up to 10x. And if you're able to transition that acre into an improved development use, like what we're doing in Wildlight, Heartwood and Chenal Valley, that has the potential to increase the value of that acre by up to 15x. So we see significant value creation potential from optimizing land use across the portfolio, especially as we grow the number of acres within the portfolio that can be converted into these higher value uses. And again, we also see the opportunity set really expanding here following the completion of the merger. Slide 9 provides an overview of the combined company's timberland portfolio. Again, roughly 3.2 million acres in the U.S. South and about 930,000 acres in the Northwest. And as you can see from this visual, the portfolio is very well diversified geographically in both regions. As we discussed extensively in the past, timber supply-demand dynamics are highly localized in nature. So we think the combined company shareholders will benefit from both the geographic and end market diversification impact of this merger. Skipping ahead to Slide 13, we provided a snapshot of the combined company's wood products manufacturing operations. In total, we have roughly 1.2 billion board feet of lumber capacity across 6 sawmills, which positions the company as a top 10 lumber producer in the United States. Of course, Rayonier didn't own any manufacturing assets prior to the merger, but we're really excited about the opportunity to integrate this very large-scale, low-cost manufacturing platform into our portfolio. We really see this platform as another tool in our capital allocation toolkit with which we can optimize portfolio value over time. Skipping ahead to Slide 16, I'll just touch briefly on our real estate business and some of the trends that we've been seeing here. Over the last decade, both Rayonier and PotlatchDeltic have seen significant increases in our HBU value realizations. And both companies have also seen a shift in their sales mix towards these much higher value development sales. So we're certainly encouraged by the fact that land values have continued to appreciate despite some of the challenges that we've seen in our core timber markets in the past couple of years. And again, we're really excited about the opportunity to combine these portfolios and leverage this best-in-class HBU platform over the much larger footprint. Skipping ahead to Slide 18. Here, we provide an overview of some of our focus areas within the land-based solutions business. We've been working very hard over the last few years to really build a pipeline of opportunities within land-based solutions. And we're optimistic that this pipeline is going to translate to meaningful cash flow growth in the coming years. As I noted earlier, we have roughly 80,000 acres under option for solar development and over 150,000 acres under lease for carbon capture and storage. So as we see some of these solar options begin to convert into long-term leases, as we get closer to injection royalties on some of those carbon capture and storage leases, we expect that this will translate to significant cash flow growth on a per acre basis relative to what we're able to achieve through our timber operations. We also see a lot of upside potential in carbon markets. Key buyers of carbon offsets are increasingly looking for very large-scale projects to achieve their net zero ambitions. And so we feel like following the merger, we're much better positioned as a potential supplier of choice into this market. Lastly, I'll just wrap up with some of our capital allocation priorities following the closing of the merger. One of the key factors that really allowed this merger to come together is that both companies shared a very similar philosophy around capital allocation. Our mantra around capital allocation at Rayonier has always been to be nimble and opportunistic with a view towards building long-term value per share. And that's absolutely going to remain our approach going forward. More specifically, we plan to focus on maintaining our investment-grade credit ratings, returning capital to shareholders through a sustainable dividend that grows over time, repurchasing our shares opportunistically when we see that disconnect between our share price and our view of private market intrinsic value and investing in accretive growth opportunities, but only if and when it makes sense to do so. As it relates to share buyback, I'd note that we repurchased about $31 million worth of shares in the first quarter, and we've continued to be active in buybacks in the second quarter under a 10b5-1 program. As we discussed on our first quarter earnings call, we really see share buybacks as one of the most compelling capital allocation opportunities available to us today, just given that ongoing disconnect between our stock price and our view of private market value. So we expect to continue to be active on that front. So in closing, I'll just reiterate, we believe we're very well positioned following the merger to create value for shareholders over the long term. Merger integration is going quite well. I think we're making very good progress towards achieving our synergies targets, and we're really excited about the future opportunities that we'll have as a combined company. Again, I appreciate your interest in Rayonier and happy to open it up to Q&A.

Yes. All right. Great overview, Mark. Thanks. Appreciate that. So let's start with kind of the merger. I just kind of -- as you've had a few months here post closing to kind of learn and really dive into the Potlatch assets and the asset base and obviously, you've highlighted quite a few of the higher and better use and the land solutions opportunities. But yes, what's -- is there -- is it -- are you seeing anything that you didn't know about already or things that kind of surprise you to the upside in terms of potential optionality or opportunities, whether that's enhanced solar, carbon capture or is it potential revenue synergies that you see between the portfolios? Is there anything you've learned post integration?

Yes. I wouldn't say that there have been any big surprises either to the upside or to the downside following the closing. We did quite a bit of due diligence and the lead up to the announcement of the transaction. We certainly knew the company and the assets quite well. We're both in -- essentially, we're in the same businesses, continue to be in the same businesses but again, very excited about the opportunity to integrate the portfolios. You really see a lot of opportunity around adoption of best practices across the combined organization, really leveraging resources over a much larger footprint. And again, we think the synergies are pretty -- will be pretty compelling over time.

Yes. Great. Let's get a quick operating update on kind of what was happening in Georgia maybe with the -- there were some fires down there that were nearby some of your acreage. Was anything damaged or can you maybe compare and contrast what you think salvage operations might look like relative to -- because last year -- or let me, just 2 years ago now, we had that hurricane that came through and created quite a bit of salvage wood and that kind of influenced the pulpwood market. But yes, what's the status of kind of the fire situation in Georgia? Is that contained? And how do you think that impacts the salvage timber?

Yes, it is contained at this point. And just for context, I mean, the impact of the fires will be significantly less than the impact of the hurricanes we saw a couple of years back, just in terms of the magnitude of salvage volume that will come to market. Invariably, you have these types of casualty events from time to time. We deal with a number of fires every year. I think over the course of the 25 year -- last 25 years in Rayonier's history, we've had kind of 2 casualty events that have risen to the level of kind of $10 million or so of casualty loss. So in the grand scheme of things relative to the size of the company, these tend to not be very material events. We did announce we had about 10,000 acres that were impacted by the fires, and we will be conducting salvage operations on those stands. But we don't really see the overall market impact as being nearly as extensive as what we saw with the hurricanes a couple of years back.

Got it. Got it. Maybe just a quick kind of commodity price, lumber price update. It feels like lumber prices are holding in better than I think many expected. And we've actually seen a steady increase in lumber despite what's been pretty choppy housing market activity. So it feels like things are getting better. But are you back in the black in terms of lumber operations and manufacturing costs? Any challenges, whether it's fuel related or energy cost ahead of you? And kind of what have you learned, I guess, as you kind of integrated those operations post closing?

Yes. I mean we're certainly in the black. I mean we were in the black in Q1 and lumber prices have improved in Q2 relative to Q1. And so I'd say that the demand environment has continued to be pretty tepid, but the supply side of the equation has improved considerably. Just with the duties and tariffs on Canadian lumber imports to the U.S., that is certainly having the effect that was intended, and we have seen lumber prices improve and more of that market share is going to U.S. lumber producers. And so yes, we think that, that business is performing reasonably well. And like you said, we have seen lumber prices improve markedly from where we were 6, 9 months ago.

And how does that flow through to your Idaho operations in terms of potential upside? How does that pricing contract your Idaho logs are, I think, indexed and linked to the lumber prices?

Yes, I'll let Wayne touch on that.

Yes, you're right, Buck. So our -- we own over 300,000 acres in Idaho. And of our sawlogs that we sell, about 75% of those sawlogs are indexed to lumber. So currently, in this pricing environment, as pricing improves, yes, our indexing arrangement is more favorable and pricing, we do see pricing go up. And as we compare our Northwest operations compared to our operations in the South, we're much more heavy weighted towards higher-value sawlogs versus pulpwood. So well over 90% of our sawlogs in the Northwest is sawlogs. So certainly be favorable as we are in this stronger pricing environment.

Can you give us a rough order of magnitude sensitivity, like so if lumber prices were to continue an upward trajectory, every $10, $20, $30 increase, what does that do in terms of your -- holding all else equal, what does that do in terms of EBITDA sensitivity?

Yes. I think overall, it's about a $10 change in lumber price would equal upwards of $15 million in EBITDA on an annual basis. So if you think about our Wood Products business, as Mark mentioned, we have about 1.2 billion board feet of shipments and production every year. So $10 is -- that's $12 million in EBITDA just for wood products alone. So yes, that can certainly have a dramatic impact fairly quickly on pricing. And given our cost structure, that pricing change is a complete flow-through on margin.

Got it. Got it. I think there was -- going back to the land-based solutions briefly, there was a period of time not long ago where with one big -- some of the incentives, tax incentives for solar and wind and things like that were kind of rolling off. But it feels like the demand for energy of all types seems to be pretty insatiable here. So -- but have you had any regulatory impact? Are there puts and takes in terms of demand for solar leasing? Or is it just all kind of incrementally good at this point? How does that flow through right now?

No. I mean we've certainly seen puts and takes. I mean, like you said, the One Big Beautiful Bill Act did roll back some of the incentives for renewable energy, particularly solar. We never had a very significant business in wind, but the 45Q tax credits remained in place for carbon capture and storage and so look, solar continues to be, from a cost standpoint, one of the most cost-effective means of new electrical generation. And so we think that there will be continued momentum behind utility solar development kind of irrespective of the government incentives that are in place. And against that backdrop, we've obviously seen an explosion in demand for electricity just given the incremental needs of data centers and AI. And so again, some puts and takes there, but overall, still a very positive and favorable trajectory for that business.

And right now, you're mainly -- you're generating some revenue through some of these land options, but you're not fully getting the -- it's not fully integrated and getting the full royalty payments yet. But when do some of those contracts potentially start actually getting up to full value?

Yes. Most of these solar options have -- they typically have a 5- to 7-year term. We've really been building up that option portfolio. Over the last 3 or 4 years, I think 2021 was the first year that we saw any kind of step-up in that solar option portfolio. And so it's really going to be over the course of the next couple of years that we start to see a more regular turnover of those options or maturity of those options and conversion into leases. And so I think the next few years will be pretty telling in terms of what does that option to lease conversion ratio look like? And what can we expect in terms of the long-term cash flow growth from that business. I think we said on the last call, we have about 35,000 acres under option that will mature in the next few years. And so again, I think we'll have a much better visibility and data points around that option to lease conversion rate.

Got it. Got it. kind of wanted to also get your opinion on kind of the state of the pulpwood market. It's a key component of anybody that's operating in the U.S. South and the pulp and paper industry has been a challenge for many, many years, but it feels like there's maybe some alternative uses or whether it's a biocarbon or biomass or there's various engineered products that are being made with some of that pulpwood now. But do you feel like there's a stability kind of or we're getting to kind of a supply-demand equilibrium for pulp anytime soon? And what do you think about things like biocarbon?

Yes. I think we're certainly in a better place from a supply-demand equilibrium in just pulp and paper markets. With that said, we have seen a number of closures in the last decade, and that's translated to a pretty meaningful reduction in pulpwood demand in the U.S. South. And so like you said, we're very much focused right now on new market development. We see opportunities in bioenergy and wood pellets manufacturing and biocarbon and also in just carbon offset markets where you're essentially monetizing stored carbon and timber through that carbon offset market. So the pulp and paper market is going to continue to evolve the way that it has been to some extent. Graphic papers, printing and writing papers have been in a steady state of decline for a number of years now. We think the packaging side of the equation has stabilized. We've seen some mill shutdowns, but we're now seeing some investments in some of those remaining mills. And so we think that, that market is in a better state of equilibrium. But again, like you said, very much focused on new market development for pulpwood and wood chip residuals at this point.

Got it. Let me shift gears to capital allocation, just balance sheet management. You've highlighted the priorities, maintain that investment-grade rating, maintain the dividend sustainability. But it's hard to ignore the valuation disconnect here in terms of what the private market seems to be valuing timberland at versus what's implied in your current stock price and inflation adjust your price per acre. I mean I don't know if we've seen land in the U.S. trade at these levels that's implied by your stock price. So how does that -- how do you balance that opportunity in your own shares here with obviously the balance sheet like maybe just characterize what kind of dry powder you think you have out there, what kind of runway you have potentially for reinvesting in your portfolio or disposing of certain assets? Or how do you think about all those opportunities?

Yes. I mean, look, maintaining our investment-grade credit rating and protecting the balance sheet is always going to be top of mind. And we've identified a targeted leverage level of less than or equal to 3x net debt to over the cycle EBITDA. I don't argue that we're below mid-cycle EBITDA right now. So potentially some incremental capacity above and beyond kind of 3x on a trailing basis. But we have been very active in the buyback market as well. Like I said, we repurchased about $31 million worth of shares in Q1. It's worth noting as well in Q1, we were kind of frozen out of the buyback market for a good portion of the quarter. We couldn't be active while the merger was pending. So we closed the merger on January 30. By the time we closed the merger, we were kind of in a blackout period for Q1 earnings. And so really, that level of activity that you saw in Q1 was really more reflective of just half of the quarter. And so that gives you some indication of just kind of a pace of buyback activity that we've been on. We're operating under a 10b5-1 program right now. So obviously, when the stock price moves to a lower point, we're buying back more. When it moves up, we're buying back less. But we do continue to see that as a very compelling opportunity, and we continue to be active in that market.

And the 3x number in terms of debt to EBITDA, I mean, that's pretty conservative relative to industry, whether it's different property sectors. I know timber is generally a lower cash yield asset class, but it's a very conservative target. But what's the rationale behind that particular threshold? And/or do you have potential flexibility to kind of go above that from time to time?

I mean we set that new threshold when we embarked on this asset disposition and capital structure realignment plan back in November 2023. And really, the rationale was we've obviously seen interest rates increase pretty significantly, and we are looking at the prospect of -- we've been very active refinancing when interest rates were very low. So both PotlatchDeltic and Rayonier had a weighted average cost of debt that was in the range of 2.5%, but we were looking at the prospect of refinancing that debt at 5%, 5.5-plus percent. And so we want to be mindful of just managing cash flow, kind of the cost of our debt relative to the underlying cash yield on the asset that we're primarily invested in, which is timberland. And so we do think a lower level of leverage is prudent in this interest rate environment. With that said, I mean, we certainly have the flexibility to go above that for a period of time if we see a very compelling opportunity.

And maybe just talk a little bit just the state of the transaction market in terms of who's out there buying timber, who's still interested. It feels like we've had a couple of years of fairly depressed transaction activity in the overall market. But are you seeing any upticks of different categories of buyers, whether they're TMOs or other institutional funds? Or who's out there potentially interested in adding to timberland these days?

I think it's really the same cast of characters that have been active in that market. With that said, I'd say we've increasingly seen interest from more kind of conservation or sustainability-oriented investors. Those tend to be the types of investors that are underlying some of these TMO, timberland investment management organizations. These are private equity vehicles that manage timberland assets. A lot of their underlying investors have some kind of sustainability angle. The transaction market has been pretty quiet here for the last 6 months or so. I do anticipate that it will pick up in the back half of the year. There are a number of larger portfolios that are going to be coming to market in the back half of the year. So I think we'll have some better data points just around M&A activity and kind of that bid-ask spread in the market in the back half of the year.

Okay. We've got a couple of minutes here. I'll open it up if anybody wants to chime in any quick questions off the top of your heads. Anybody? Okay. No worries. No worries. We'll just keep going here. Fuel costs, energy prices, diesel, log and haul costs, is that potentially any impact here in the upcoming quarters? How are you thinking the flow-through of kind of the energy price spike?

Certainly, that does have an impact. I think when we look at our businesses, not as meaningful on the wood products side, probably more in our timberlands business as it relates to where we do have delivered volume, so on log and haul costs, you think about diesel associated with that. So certainly, we do see that, but we're also very proactive on trying to pass as much of that incremental cost on to customers, and that's where we're very focused on that. So we do see that depending on where longer-term diesel prices go, and that will kind of ripple through. But again, we try to offset most of that as a pass-through.

And just kind of going back to the transaction market. Just can you go characterize -- I mean, I know these numbers, but for the audience that may be out there is not as familiar with how transaction pricing and the private markets has been trending here. Is there a range that you're seeing for U.S. South Timberland? What's a reasonable market average kind of cost per acre and maybe what you're seeing in the Pacific Northwest? Because I can tell you, the way we do the math, your portfolio is basically trading like implied $1,850 per acre or something like that or maybe even $1,900 per acre with 0 value ascribed to lumber manufacturing. So how does that compare to what you'd see in the private market?

Yes. I mean that's probably 0 value ascribed to lumber manufacturing and 0 value ascribed to our real estate development portfolio. I'd argue it's trading at well below that level with any reasonable assumption of value around those 2 businesses. In the private market, again, you have to be careful to look at any single transaction because there is a wide array of quality that you see in the private market. But in general, that range tends to be probably $1,500 per acre on the low end up to upwards of $3,000 per acre in the U.S. South. for higher-quality properties. I think the NCREIF index is a reasonably good indicator of average quality timberland in the U.S. South. I think it comprises about 9 million acres of institutionally managed timberland assets in the U.S. South. And I believe that today is at around $2,300 an acre. So that gives you an idea of kind of what the private market or appraisal value of Southern Timberlands on average is today.

Right. Right. All right. That's our time. Thanks again, guys. Really appreciate the update. Thanks, everybody, for joining.