Potlatch Corporation's (PCH) CEO Mike Covey on Q1 2016 Results - Earnings Call Transcript

| About: Potlatch Corporation (PCH)

Potlatch Corporation (Holding Company) (NASDAQ:PCH)

Q1 2016 Results Earnings Conference Call

April 26, 2016, 12:00 PM ET


Jerry Richards - Vice President and CFO

Mike Covey - Chairman and CEO

Eric Cremers - President and COO


George Staphos, Bank - America, Merrill Lynch

Collin Mings - Raymond James

Chip Dillon - Vertical Research

Mark Weintraub - Buckingham Research


Good morning. My name is Angie and I will be your conference operator today. At this time, I would like to welcome everyone for the Potlatch First Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Jerry Richards

Thank you, Angie and good morning. Welcome to Potlatch's investor call and webcast, covering the sale of our Central Idaho Timberlands in our first quarter 2016 earnings.

With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer. This call will contain forward-looking statements. Please review the warning statements in our press release on the presentation slides and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that reconciliation of non-GAAP measures can be found on our website at www.potlatchcorp.com.

I will now turn the call over to Mike for some comments and then I will cover our first quarter results and outlook.

Mike Covey

Thanks Jerry and good morning.

We announced this morning that we have sold 172,000 acres of timberlands in Central Idaho for $114 million. As many of you know, Central Idaho is our realized strategic timberland holding based on productivity and location.

The rational for acquiring the Central Idaho property in 2007 was based on generating returns from both the traditional resource business, as well from real estate sales and development. The timberland thesis is played out as planned generating a resource EBITDA of around $4 million per year.

However the real estate market in the McCall area has declined significantly since 2008 due to the recession and the bankruptcy of the Tamarack ski resort. Prices for recreational undeveloped real estate tracks 20 acres in size and larger have dropped up to 90%, which significantly affected the real estate opportunity. We do not expect the real estate market in Central Idaho to recover anytime soon.

The Central Idaho timberlands are attractive but are worth much less per acre as illustrated by the metrics disclosed on Page 5 of the supplemental slides. The inside index or timber growing productivity of the land is much higher in Northern Idaho. This is part of the reason why stocking levels of our Northern Idaho timberlands are nearly 2 times that of Central Idaho on a per acre basis.

In addition, the truck-haul distance is shorter in Northern Idaho which results in much higher stumpage values in Central Idaho. For these reasons, our Northern Idaho property generates a $117 of EBITDA per acre, which is over 5 times that of Central Idaho.

As you know, we had an appraisal completed in 2012 when log prices were much lower that concluded the 352,000 core acres of our ownership in Northern Idaho were worth of $2,000 per acre.

This attractive sale provides the opportunity to take advantage of the dislocation in our public equity value. Our board is authorized to repurchase up to $60 million of our shares. Not only do we have a current opportunity to buy our shares at a discount in net asset value, we would get an immediate return of 4.4% which is the current dividend yield on our shares.

Our stock prices increased approximately 30% since the middle of February and 13% year-to-date. We will consider many factors including our view on future lumber and log prices that agreed on which our shares traded at discount NAV, and returns that could be generated by alternative uses of cash as part of executing our share repurchase authorization.

The sale will also allow us to reduce leverage which is an important part of our goal to retain our investment grade rating. We plan to use $42.6 million of the proceeds to pay off our 5.9% Minnesota tax exempt bonds.

Turning to economic factors, we continue to expect housing starts to increase to at least 1.2 million starts units this year. The year began well with actual housing, up about 15% in the first quarter on a year-over-year basis.

Mild winter weather in some regions allowed builders to ramp up activity early. This has been helpful given well publicized construction labor constraints and low inventories of housing stock.

We are encouraged with lumber prices increased about $30 per 1,000 board feet over an 11 week period in the first quarter. As a top-10 lumber manufacturer in the United States, our sales force participates in the lumber market daily.

We believe the lumber inventory levels in the supply chain remain low which provides the opportunity for lumber prices to increase further as we move into the hard of the building season, this spring.

The Canadian dollars has strengthened almost 10% against the U.S. dollar so far this year. That benefits lumber manufacturers located in the United States that are reversing some of the competitive advantage that is accrued to Canadian producers over the last year.

Our wood product segment returned to profitability in the first quarter. Resource and real estate continue to be steady contributors.

In summary, factors that drive our earnings have improved and we expect to post better results in 2016 than we did last year. The sale of the Central Idaho property provides the ability to return capital to shareholder tax efficiently and made progress on our goal of reducing leverage.

I'll now turn it back to Jerry who will discuss the quarterly results and then we will take questions.

Jerry Richards

Thanks Mike.

Beginning with Page 8 of the slides accompanying in this call, our net income was $200,000 or $0.00 per diluted share in the first quarter. This compares to net income of $3.5 million or $0.09 per diluted share in the fourth quarter. The decline in earnings was largely due to seasonally lower harvest volumes.

On the right hand side of Slide 8, we have added new disclosure of EBITDA for Northern and Southern resource. This is part of our ongoing effort to add disclosure useful to the investment community, and we plan to continue to provide this EBITDA breakdown in the future.

I’ll now review the results of our operating segments. Information for our resource segment is displayed on Slide 9 through 11. Operating income for the segment was $10.2 million in the first quarter compared to $16.1 million last quarter.

We harvested 925,000 tonnes in the first quarter which is 18% lower than the harvest volume in the fourth quarter but is 50,000 tonnes higher than the range we discussed on last quarter's call.

Turning to Slide 10, we delivered 367,000 tonnes of sawlogs in the north in the first quarter. This is lower than the 452,000 tonnes of sawlogs that we delivered in the first quarter of 2015.

As we discussed on the fourth quarter earnings call, it was an unseasonably warm winter in Idaho which resulted in sawlog deliveries being lower than planned in the North. All in activities have resumed earlier than normal in the second quarter due to conditions remaining warm and logging roads drying out. As a result, we expect to make up the shortfall in sawlog volume in the North in the second quarter.

Northern sawlog prices declined 6% on a per ton basis in the first quarter. This was due to seasonally heavier logs due to higher moisture content.

As discussed in prior quarters, log prices are set on a dimensional basis in Idaho, not based on weight. The price of sawlogs was flat on a dimensional basis in Idaho in the first quarter compared to the fourth quarter.

Moving to the south on Slide 11. Harvest volume exceeded our plan in the first quarter despite heavy rains that periodically interrupted operations. Our team did a good job taking advantage of market demand and available logging capacity.

Sawlog prices in the south declined 7% and pulp wood prices declined 2%, both due primarily to a seasonally lower volume of hardwood logs in the sales mix.

Results for the wood product segment are displayed on Slides 12 and 13. As Mike mentioned in his comments, wood products returned to profitability in the first quarter and this is the second quarter in a row in which the segments results have improved.

Operating income was $1 million in the quarter compared to an operating loss of $1.3 million in the fourth quarter. Our average lumber prices increased 3% in the first quarter. Lumber shipments were 2% lower in the quarter.

Our St. Mary's Idaho’s sawmill took 11 days of downtime in the quarter due to log shortages caused by unseasonably warm winter. This negatively affected earnings, particularly given the strong increase in lumber prices in the quarter.

Shifting to our real estate segment on Slides 14 and 15, operating income was $2.1 million in the first quarter, down slightly from the $2.5 million earned in the fourth quarter. Our sales volume is typically the lightest during the winter months. While acre sold were down 24% in the first quarter relative to the fourth quarter, a larger proportion of the first quarter of the sales mix was comprised of properties with a lower cost basis.

Turning to the Central Idaho sale. We estimate that the transaction will result in a cash tax refund that will add $10 million to the proceeds we received last week. As Mike mentioned in his comments, we plan to repay our $42.6 million Minnesota tax exempt bonds which bare interest of 5.9%. We have provided notice of redemption and expect repayment to occur in June.

As a result of the repayment, we expect interest expense to decline $1.3 million this year and $2.5 million per year through the third quarter of 2026.

Speaking of interest expense, it was unusually low in the first quarter. We received the full amount of our foreign credit patronage distribution of $2.2 million this quarter. Patronage is akin to co-op dividend and is based on the amount of interest that we paid at the Farm-credit banks.

The distribution was much higher this year because 2015 was the first full year that our acquisition financing was outstanding and it was received a quarter earlier than expected.

Capital expenditures were $3.2 million in the first quarter. We continue to expect the capital expenditures will be $19 million for the year.

Now I’d like comment on our outlook which is summarized on Slide 17. We planned to harvest approximately 850,000 tonnes in the second quarter with about 55% of the volume in the south and 45% of the volume in the north.

Sawlogs are expected to comprise approximately 45% of the second quarter harvest in the south including stumpage, and 90% of the second quarter harvest in the north. We expect stumpage volume in the south in the second quarter to be comparable to the first quarter.

Estimated harvest volume for the second quarter includes the ketchup in Idaho sawlog volumes that are referred to earlier and takes into effect the Central Idaho timberland sale. We harvested 222,000 tonnes off of the Central Idaho timberlands in 2015.

As a result of the sale, we expect that our harvest will decline approximately 200,000 tonnes in 2016 to 2 million tonnes in the northern region and 4.2 million tonnes in total for the full year.

We expect Northern sawlog prices to increase up to 10% in the second quarter to reflect higher lumber prices on a lag basis and due to seasonally wider logs resulting from lower moisture content.

In the south, we expect sawlog prices to increase 2% and pulpwood prices to increase 1% in the second quarter due to a seasonal increase in the volume of hardwood logs in the sales mix.

At this seasonally lower volumes and higher prices, we expect resource earnings to be up slightly in the second quarter compared to the first quarter.

Turning to wood products, we expect lumber shipments to increase 7% sequentially to $174 million board feet in the second quarter. Our forecast assumes that the average lumber price realized will be 10% higher in the second quarter.

Spot prices thus far in April have been about 7% higher than the average lumber price that we realized in the first quarter. Wood products earnings would increase to $5 million to $7 million in the second quarter at these volumes and prices.

I will now shift to real estate. We plan to report a book loss on the Central Idaho timberland sale of $49 million before tax in real estate results in the second quarter. Givensthat the real recreational real estate market in Central Idaho continues to be depressed, the timberland sale will not cause the number of acres sold by real estate to decline to any noticeable extend over the next several quarters.

Excluding the Central Idaho transaction, we expect real estate to sell about 4,000 acres in the second quarter at an average price of $1,400 dollars per acre. We estimate that land basis in the quarter will be 25% to 30%.

We expect that corporate expenses will be $9 million and that interest expense will be little over $8 million in the second quarter.

Income taxes in the second quarter expected to include a tax benefit of $30 million related to the Central Idaho transaction. The tax benefit includes a cash tax refunded $10 million and it removal of a $3 million differed tax liability.

We estimate that the book loss in the sale will be $36 million net of the tax benefit for $0.87 per diluted share. Excluding the transaction, we estimate that the consolidated effective tax rate will be in expense of 35% to 40%, a pre-tax earnings in the second quarter. This is higher than the 10% to 15% rate we expect for the full year because of the seasonally low harvest and improving wood products earnings in the second quarter.

To summarize, we expect better results from recurring operations in the second quarter despite at being our seasonally weakest quarter. We are encouraged by the recent improvement of lumber prices and look forward to redeploying the capital unlocked by the Central Idaho transaction.

That concludes our prepared remarks. Angie, I would now like to open the call up to Q&A.

Question-and-Answer Session


[Operator Instructions] Your first questions comes from the line of George Staphos, Bank of America, Merrill Lynch.

George Staphos

Hi everyone, thanks for the details. Congratulations on the quarter progress. I only had a couple of questions. First thing, can you comment on what kind of activity you are seeing early in 2Q in terms of lumber pricing, where you think customers' inventories are? And, recognizing this is one of the great unknowables in life, what do you make of the slowdown we have seen in housing activity, whether it's permits or starts. I think, even in the case, Schuyler, was a little bit less in terms of growth this month than had been expected. And whether you are seeing any kind of change in field activity and I had a follow-on.

Eric Cremers

Hi George, thanks, this is Eric. We had seen a nice run in lumber prices here over the past couple of months but $30 to $1000 or so, and we think that's due to a number of factors including relatively mild weather. There has been some good housing data if you go back past this most recent set of data.

We’ve seen a weaker U.S. dollar, we’ve seen some curtailments by an Eastern Canadian manufactures and there’s relatively lean inventory throughout the distribution system.

So we had seen a real nice run in lumber prices. Our expectation from here is for continued very modest gains in pricing. We are not really yet to the heart of the building season and with the U.S. dollar continuing to be relatively weak, we think that bodes well for the future.

But we don’t have huge expectations for price increasing going forward throughout the modest. I think this relates to your questions on the recent housing data, frankly the housing data is always volatile month-to-month and there is no doubt that there is labor issues, finding labor to build houses is also lot of availability issues that we hear builders speak out from time to time. But we think the housing market continues to grind its way higher and most pundits are forecasting housing starts between $1.2 million and $1.3 million this year which is a relatively healthy increase over the last year.

So we are relatively optimistic going forward.

George Staphos

And Eric, you have not seen, what I heard from you is you have not seen any change in the market that would be reflected or reflective of the slowdown in the macro data which again as you point out is pretty noisy. So it's been pretty much steady as you go into the second quarter from your 1Q run rates, would that be fair?

Eric Cremers

I think George, we did see a little bit of a hiccup when that housing data came out. I mean if you’re a lumber buyer out there in the marketplace, you might have paused for a while before getting back into the market to buying lumber.

So there was a little bit of pause. Prices did well over a little bit. But I would not say precipitously.

George Staphos

Okay. Two questions, not to overstay my welcome, then I'll turn it over. On inventories, recognizing this is not a quantified or precise testament, if you had to index normal inventories at your customers or the distributors and broadly at 100, where would you say inventories are right now, at least from your trade checks?

And then, on leverage, it's nice to see you repaying these notes, what other activity would you remind us of that you have in mind relative to maturities you have coming up into 2019? Thank you.

Eric Cremers

Why don’t I – I’ll take the first question and then I’ll let Jerry speak to the second question. So your question regarding inventory, is that lumber inventory deal?

George Staphos


Eric Cremers

We’re talking about log inventories at mills.

George Staphos

I was really referring more to lumber inventories at dealers.

Eric Cremers

It’s hard to get good data on where things stand out in the distribution network. Our general feeling is that dealers have learned to operate with very low inventories. It's more of a just in time kind of a business. So any change in the outlook or demand or lumber or housing starts, shows up very rapidly in the form of price increase or decrease.

So I think it's fair to say that that inventories are – they’re relatively low levels. Although we think they’re going to continue to be a low levels at the foreseeable future.

Jerry Richards

So George in terms of your question on leverage as Mike mentioned this morning. One of our objective is to retain our investment grade rating with one of the agencies that rates us. And I think over time our goal would be to pay down more debt but we don’t have anything to announce this morning beyond repayment of the 42.6 million Minnesota bonds that we already announced.

George Staphos

Jerry, do you think more of the maturity being contended with by 2019 will be dealt with through land sale or do you think the cycle will provide the additional pricing and cash flow to be able to deal with maturity at that point in time? Or how much do you think you will wind up refinancing?

Jerry Richards

Yes, hard to predict at this point. George in terms of what proportion of those 2019 maturities we would refinance as opposed to paying off. I mean we certainly continue to be very encouraged by housing markets in the macro kind of tailwinds if you will behind us. So time will tell in terms of what that mix ends up being.

George Staphos

Okay. Fair enough. Thank you, guys.


Your next question comes from the line of Collin Mings of Raymond James.

Collin Mings

Good morning, guys. First question for me, just to clarify, just given the comments that you guys made regarding the recent move in the stock, to be clear, would you be buying back stock at today's price?

Jerry Richards

Collin we still think that we trade at a significant discount in net asset value based on estimates like you and other analyst. We think discount is still attractive and that was the thesis behind the land sale. This was - maybe not the land sale everybody expected, but strategically we think it's the one that made the most sense. Came as capital to put in the market and began to execute on our share repurchase which we intend to begin shortly after the open window - window opens in a couple of days.

Collin Mings

Okay. Thanks for the clarification there. Next question, as it relates to the land sale, how does that really impact? Or have you analyzed exactly the impact on that harvest run rate? You have talked before about cutting somewhere between 4 million to 4.8 million tons per year over the next few years, depending upon market conditions. Does that reset that run rate a little bit lower or was this land really productive enough to even move the needle?

Jerry Richards

Every acre of land contributes to that base land harvest of 4 million to 4.8 million that you referenced. So we said in the call script, that we'd be dropping harvest level about 2,000 tons a year post sale here.

So correspondingly then we would think of the harvest range to be in reset between 3.8 million tons to say 4.6 million tons because of this land sale. And I also remind you that for some time we stated that we’ve harvesting in Idaho a very over-mature forest which has been certainly the thing to do financially.

But as the years go by, we’ll begin to start ratcheting down the harvest levels in Northern Idaho as we near the completion of that process and hopefully our Southern Idaho timberlands will kick in the gear and we can make up the difference there.

That’s why the range sits between 3.8 million and 4.6 million. With that expectation this year, we'd reiterate that we expect our harvest 4.2 million tons.

Collin Mings

Okay. Again helpful on that front and that leads me to my next question. On Slide 5, you referenced that $2000 per acre appraisal for 350,000 acres of Northern Idaho Timberlands. Just curious, the teams thoughts about how appropriate or valid that appraisal, that data point would still be, given to your point about maybe hitting the lands more aggressively given the maturity profile of the acreage in Northern Idaho. How much comp is that or how much sense does that four-year old comp make at this point?

Eric Cremers

Collin, this is Eric. I was the CFO way back when we had that appraisal done. As you may recall we had that appraisal because our revolver was collateralized and we had no choice but to go to go do an appraisal and put some acres in the collateral pool.

We think those acres are representative of what our North Idaho pool of acres look like. We choose those 352,000 acres specifically because we thought they were the corest of the corest of the core of this Company’s Timberland. In other words, we’re going to have those acres with us to the bit of end so to speak.

Not for any other reason like they were super well stocked or super high index or anything like – loaded with HBU or anything like that. They were just good acres that we knew were going to be with us for the wrong haul.

Now in that appraisal, I’m sure the forecast or the appraisal assume that lumber prices were going to be moving higher and log prices along with it, and that’s exactly what happened. But if I had the guess, I’d say that appraisal is still very accurate and if we had another appraisal done today, it would be very consistent with the appraisal that was done back in 2012.

Collin Mings

So would it be fair to think then Eric, that maybe some of the trade-off has occurred as we've had a higher lumber-price environment which obviously has led to higher log price in the region, maybe offset by the fact that you have been relatively more aggressive at harvesting some of that land. Is that a fair way to think about it?

Eric Cremers

Yes, I think that’s the fair way to think about it.

Collin Mings


Mike Covey

Just somewhat clear there, that revolver is no longer collateralized. So there hasn’t been a need to refresh the appraisal.

Collin Mings

Understood, okay. And then one other one for me and then I will turn it over. As you think about this transaction, should we think about another proportionate shift within your kind of your HBU development rule nonstrategic buckets or, as you think about this acreage that was sold, although not all nonstrategic before this announcement or this deal getting completed, how should we think about how that moves those buckets around that you have highlighted before?

Jerry Richards

Collin, this is Jerry. In terms of the affect on our HBU buckets, of the 172,000 acres that we sold, roughly 60,000 were in the HBU and the rest was just in core timberlands.

And then when you think the affect on the categories, there is a little bit of reduction in each one but nothing real significant. We’ll provide more updated information on that later today when we file our 10-Q.

Collin Mings

Okay. Very helpful, I'll turn it over. Thank guys. And thank you for the new disclosures as well.


Your next question comes from the line of Chip Dillon, Vertical Research.

Chip Dillon

Good morning, gentlemen. First question is on the timing of the sale of the Idaho lands. Was the tenure situation and built-in profits taxes and all that, did that have a bearing on the timing of this sale at all and it does it help you or hurt you that it is post that 10-year point?

Jerry Richards

So Chip, this is Jerry. I'll take that one. In terms of the tenure built-in gains make sure we’re all level set. That did expire January 1, 2016. This particular property because of the HBU component and the historical accounting really was high basis. So I think the built-in gains task would have applied but probably in a lesser degree than if we just sold another piece of property in the past.

Chip Dillon

Okay, maybe I will ask it differently. You sold it for what you sold it for. You're going to get a $10 million refund check from the government. Would that refund check have been any different if this had closed prior to this year?

Jerry Richards

There would have been an affect Chip because not all of those acres were in our taxable REIT subsidiary, some were in the REIT, and those would have been subject to built-in gains tax. However given the basis, it would not have been significant or as significant as some of our other acres would have been.

Chip Dillon

So you're saying, if I hear you right, that there's really no difference as to whether you sold it in 2014 or today assuming the price is the same. Is that a fair, there is no tax differential between selling it this year and selling it last year?

Jerry Richards

I think it’s fair to say Chip that the tax differential would not have been overly material.

Chip Dillon

Okay. Got you, all right. But, to the extent it is not really material, to the extent there is a difference, is it better now or was it worse to wait?

Jerry Richards

In terms of – when you think about the tax component of this, that doesn’t really drive the timing. I think if you step back, we first started talking about this arbitrage opportunity. The combination of factors are stock price that run down, we had very strong private market valuations for timberlands and that really kind of kicked off the strategy if you will to sell timberlands and then buy our own trees at a very cheap price.

So I think that’s probably the backdrop I would focus on. As I’ve said, this became the most attractive piece of property from a strategic stand point as Mike already commented on this morning.

Chip Dillon

Okay. And then, on the last questions, and I appreciate the help here, I know in the K, I believe, it said you guys owned a total of 791,000 acres in Idaho. So you take away this one 172, I believe it is, you are down to 619.

The way I should think about it is that the appraisal acres done back in 2012 would have been over half of that 619. In other words, you appraised, I think you said, 352 which means, and I know you have probably sold some acres here and there, but the remainder that was not appraised would be 267. And it's your belief that that 267 is comparable to what was appraised. Is that all fair?

Jerry Richards

Yes, that’s all fair. We sold very few acres in Northern Idaho, so I think that’s fair.

Chip Dillon

Okay. And again, the acquisition was done back in 2007; I guess that was before the Clearwater split. Do you remember what the thought was when you did that? There was this belief that the recreational activity in Idaho was going to pick up. Was that a big part of that decision? And you guys might not have even been there, so I don't know if you can even answer that, but what do you recall the decision process there?

Jerry Richards

Certainly I was here in fullness. Our thought in 2007 is, Idaho was one the fastest growing states in the country, the Boise metropolitan area was a very robust market. This Tamarack ski resort had just opened, it had big headliners behind it, Andre Agassi and Steffi Graf were part of a new Fairmount Hotel there and prices were going through the roof.

The core timberland was good and we felt that there was going to be a recreational real estate market that made sense for us and certainly we were the largest land owner at Idaho already and so we bought the property and paid about $1200 in acre for it.

And shortly after that, the whole world changed with the financial recession and real estate market fell out from underneath this. The core real estate – the core timber properties that had been true to form since the start we thought would make about $4 million a year when we bought it, and that’s held true.

But the real estate market just totally collapsed. And we think that one day that will recover in Central Idaho, still a very desirable area. And the Tamarack resort will probably work its way through bankruptcy but we think that timeline is very long and it made no sense to wait. So we thought we unloaded the property today.

Chip Dillon

Thanks, that's very helpful. When you look at the southern lands, I don't know if you would venture a guess here, but we saw recently, actually four state-pension plans step up and buy land across seven states. I am sure you are familiar with what I am talking about, at an implied value of $2150 per acre. Are there reasons why your lands in the South would be not comparable to those lands in terms of what you think the value would be?

Jerry Richards

Well every acre in the south of course is - markets are different, and productivity of the acres is different. I think collectively as we look at the property, that was transacted, I think it was about 250,000 acres in five states. The side index was slightly higher than some of our land in general. Stocking level were perhaps slightly higher, some of it in the Carolina's and Georgia probably is in better stronger market than say Mississippi or Alabama.

But on average I think our properties fairly comparable, perhaps slightly less but not much I think certainly – we said southern timberland roughly is worth $2000 in acre and I think ours would stack up comparable to that.

Chip Dillon

Okay, that’s great. And then last question is, as you've been involved with talking to folks involved in timberland, five years ago, our view was that, well it's inevitable that rates go up and the pension obligations need to be paid out, so there's going to be an overhang.

I'm not so sure about the pension obligations, but what we do see, of course, is, not only continued low rates, but even negative rates in other parts of the world which makes, obviously, the current return on timberland just a tremendous positive relative to being a German pension plan and getting basically 20 basis points in a 10-year bond.

With that backdrop, would you say that looking at various sales situations, that it's a lot more active on the buyer's side in U.S. timberland than say 2 to 3 years ago? Are you seeing more interest and, therefore, that what's makes you more of a seller than a buyer at this point?

Jerry Richards

Well there’s two questions there. The reason that we are a seller is we felt that the best opportunity to buy timberlands was to buy our own trees that we think are dramatically undervalued when the stock went trading at in the $30 to $35 price range, when our net asset value is roughly $45 according to analysts.

So the best opportunity for us is been to buy our own stock and in order to do that, we felt that it made sense to sell land.

In terms of the number of – there’s certainly a number of properties that are going to be coming on to the market as some of these TIMO funds mature. We think that there is ready capital there to be deployed. I don’t think there is any more today than there was 3 years ago.

I think the amount has been fairly stable. There’s been for high quality property and if you think broadly about specific northwest to the south, I mean if it goes into an auction for that, I think you can expect to have multiple bidders for every transaction and sellers get full value for the property. With discount rates, we think are still between 5% and 6%.

Chip Dillon

Okay. That's helpful. Thanks very much guys.


Your final question comes from the line of Mark Weintraub of Buckingham Research.

Mark Weintraub

Thank you. First a quick one. Do you happen to have the EBIT contribution last year from the Central Idaho properties?

Eric Cremers

Yes. Let me, why don't you go and ask another question Mark and I will look that up real quick.

Mark Weintraub

Sure, okay. And then, obviously this is a significant move on that private market public market arbitrage fund, are you contemplating additional timberland sales or are you-- essentially you looked through the portfolio, this is the one that made the most sense at this juncture and this phase of the strategy is complete.

Jerry Richards

I think its really the later, this one made the most sense. I think this phase of the strategy is complete, we’ll execute on our $60 million share repurchase. We’ll pay down the $42 million in debt and we’ll see where the stock sits when that process is complete, which will take several months given the trading volume of our stock.

And if we get to that point and we find that our stock is still dramatically undervalued, and we haven’t found another way to raise funds, then we’ll revisit it again.

Mark Weintraub


Eric Cremers

So Mark, in terms of EBIT for Central Idaho last year it was a negative 2 million.

Mark Weintraub

So from an earnings perspective, while the harvest is going down by 10%, presumably the EBIT that one may expect from the properties relative to what you were previously doing, might not change at anything or even go up a little bit?

Eric Cremers

Yes, I think it would go up a little bit.

Jerry Richards

Harvest is going down about 5% not 10%.

Mark Weintraub

Okay. I thought it was 2.2 million going to 2 million. Did I mishear that?

Mike Covey

For the North you’re right, for the North you’re right it is 10%.

Mark Weintraub

Okay. I'm sorry. I was just talking about the North. Got it. Thank you.


At this time, there are no further questions. I would like to turn the call back to management for any additional or closing remarks.

Mike Covey

Okay. Thank you, Angie. And I certainly appreciate all of the interest in Potlatch and look forward to talking to you again next quarter.


Thank you for participating in today’s conference call. You may now disconnect your line at this time. And have a wonderful day.

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