Rayonier (RYN) David L. Nunes on Q2 2016 Results - Earnings Call Transcript

| About: Rayonier Inc. (RYN)

Rayonier, Inc. (NYSE:RYN)

Q2 2016 Earnings Call

August 04, 2016 10:00 am ET

Executives

Mark McHugh - Senior Vice President and Chief Financial Officer

David L. Nunes - President, Chief Executive Officer & Director

Douglas M. Long - Senior Vice President - U.S. Operations

Christopher T. Corr - Senior Vice President, Real Estate and Public Affairs

Analysts

Chip Dillon - Vertical Research Partners

Mark William Wilde - BMO Capital Markets (United States)

Collin P. Mings - Raymond James & Associates, Inc.

Paul Quinn - RBC Capital Markets

Mark Weintraub - The Buckingham Research Group, Inc.

George Leon Staphos - Bank of America Merrill Lynch

Daniel Rohr - Morningstar Research

Operator

Welcome and thank you for joining Rayonier's Second Quarter 2016 Teleconference Call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Mr. Mark McHugh, Senior Vice President and CFO. Sir, you may begin.

Mark McHugh - Senior Vice President and Chief Financial Officer

Thank you, and good morning. Welcome to Rayonier's investor teleconference covering second quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier.com.

I would like to remind you that in these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of Federal Securities Laws. Our earnings release and Form 10-K filed with the SEC lists some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page two of our financial supplement.

Throughout these presentations we will also discuss non-GAAP financial measures which are defined and reconciled to the nearest GAAP measures in our earnings release and supplemental materials.

With that, let's start the teleconference with opening comments from Dave Nunes, President and CEO. Dave?

David L. Nunes - President, Chief Executive Officer & Director

I will make some overall comments before turning it back over to Mark to review our financial results, then we'll ask Doug Long, our Senior Vice President U.S. Operations to comment on U.S. Timber results. I'll discuss New Zealand Timber results and following the review of our Timber segments Chris Corr, Senior Vice President of Real Estate will discuss our Real Estate results.

For the second quarter, we reported pro forma net income of $9 million or $0.07 per share. In our Southern Timber segment following a very strong first quarter timber volumes declined in line with our expectations and average prices were modestly lower due primarily to geographic mix.

In our Northwest Timber segment continued headwinds in export markets coupled with a reduction in local sawmill capacity resulted in lower volumes. Although we saw a material improvement in price relative to Q1.

In our New Zealand Timber segment, we reported a record quarter as the region continues to benefit from strong demand from China for Radiata pine logs, strong local markets and reduced costs. As expected, our pro forma Real Estate segment results were relatively light this quarter due to the timing of anticipated closings, but we're expecting a strong second half of the year based on our current pipeline of transactions.

Overall we were pleased with our results. While we continue to experience a slower than anticipated recovery in U.S. saw log prices the high quality and diversity of our portfolio allowed us to achieve a solid quarter that puts us well on pace to achieve our prior full year adjusted EBITDA guidance.

With that let me turn it back over to Mark to review our financial results.

Mark McHugh - Senior Vice President and Chief Financial Officer

Thanks, Dave. Let's start on page five with our financial highlights. Sales for the quarter totaled $262 million while operating income was $122 million and net income was $110 million or $0.89 per share. Pro forma net income was $9 million or $0.07 per share. Pro forma items this quarter included $600,000 of cost related to shareholder litigation and a $101 million gain from a large disposition.

Second quarter adjusted EBITDA of $45 million was below last quarter, primarily due to lower volumes in our Southern and Pacific Northwest Timber segments. This decline in volumes was expected as we experienced extraordinarily high volumes in Q1 due to accelerated stumpage removals in the U.S. South as discussed last quarter.

On the bottom of page five, we provide an overview of our capital resources and liquidity at quarter-end as well as a comparison to year-end. Our cash available for distribution or CAD for the first six months was $57 million compared to $54 million in the prior-year period, primarily due to higher adjusted EBITDA. A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on page nine of the financial supplement.

We closed the quarter with $130 million of cash and roughly $1.05 billion of debt. Our quarter-end debt balance reflects the incremental term loan that we closed in the second quarter which was used to fund the Menasha acquisition. At quarter-end our net debt of $923 million represented 22% of our enterprise value based on our closing stock price on June 30.

During the quarter, we entered into $100 million interest rate swap to fix the rate on the remaining portion of our $300 million incremental term loan. With this swap in place we've now fixed the rate on all of our term loan debt and roughly 98% of our total debt. Overall taking account of estimated patronage payments and interest rate swaps, our debt balances have a weighted average interest rate of 3.3% and a weighted average maturity of about 7.5 years. We're very pleased with our current capital structure and believe it positions us well for the future.

I'll now turn the call back to – or over to Doug to review our U.S. Timber results.

Douglas M. Long - Senior Vice President - U.S. Operations

Thanks, Mark. Good morning. Let's start on page 10 with the Southern Timber segment. Adjusted EBITDA in the second quarter of $22 million was $11 million unfavorable to first quarter and $3 million unfavorable to the same period in the prior year due primarily to decrease volume. As communicated on our last call, we fully expected a decrease in volume following the extremely high level production in the first quarter. In addition we experienced significant rainfall in the Southwest which caused several interruptions in harvest activity in that region.

Prime pulpwood prices of $18.31 per ton in the second quarter were 3% below the first quarter and 4% below the same period in the prior year. This smallest reduction in pricing was largely due to geographic mix as well as the inclusion of some salvage volume and additional pending (06:00) sales in the quarter.

Pine grade prices of $27 per ton in the second quarter were essentially flat to the first quarter and 1% below the same period in the prior year. Overall sawtimber pricing has been relatively flat during the year with period difference largely attributable to geographic mix.

Now moving to the Pacific Northwest Timber segment on page 11. Adjusted EBITDA in the second quarter of $4.8 million was $1.2 million unfavorable compared to the first quarter due primarily to a 19% reduction in volume in response to soft market conditions. Favorable sawtimber prices in the second quarter compared to the first quarter helped to partially offset the reduced volume. The average sawtimber price of $74.54 per ton was 10% higher than the first quarter due to a higher mix of Douglas-fir plus the introduction of higher priced sawtimber from our new Oregon acquisition. The harvesting began in June. Initial product prices for our new Oregon markets have been in line with our expectations.

Compared with the prior-year quarter, adjusted EBITDA of $4.8 million was $200,000 favorable primarily due to a 7% increase in volume. Partially offsetting the increase in volume were lower pulp and sawtimber prices which were down 1% and 3% respectively versus the prior-year quarter.

Now Dave will review New Zealand Timber results. Dave?

David L. Nunes - President, Chief Executive Officer & Director

Thanks, Doug. Page 12 shows results and key operating metrics for our New Zealand Timber segment. Overall, we are very pleased with the performance of our New Zealand Timber segment, which experienced its strongest quarter-to-date since we began consolidating the JV into our financial results in 2013. Compared to the prior year quarter, adjusted EBITDA increased to $16 million from $6 million on the strength of higher domestic and export product prices, as well as volumes that were 7% higher relative to the prior year quarter. Export prices increased 13% compared to the prior year quarter due to increased demand for Radiata pine logs from China, while domestic prices increased 7% in U.S. dollar terms compared to the prior year quarter as a result of strong local demand for construction materials.

While we anticipate some minor seasonal price declines in China in the third quarter, we believe export log prices will remain relatively stable over the balance of the year as current softwood log inventories in China are just under 3 million cubic meters, or roughly 1.6 months of demand. New Zealand also continues to benefit from favorable freight costs due to low oil prices and ample shipping capacity. In our Trading segment, sales volumes were 37% higher compared to the prior year period, while average prices increased 11%. The increase in both volume and price was primarily due to stronger demand from China.

I'll now turn it over to Chris to cover Real Estate.

Christopher T. Corr - Senior Vice President, Real Estate and Public Affairs

Thanks, Dave. Moving on to page 13, sales from the Real Estate segment in the second quarter totaled $137 million on roughly 58,000 acres sold. Excluding the large disposition of 55,000 acres in Washington, sales in our core Real Estate business were relatively light totaling $8 million on 2,900 acres sold. As discussed last quarter these lower results for the second quarter were expected based on the timing of anticipated closings for the year. In the rural category, sales totaled $7 million on approximately 2,700 acres at an average price of $2,711 per acre. This includes a single sale in Texas of almost 900 acres at $3,100 per acre. In the non-strategic and timberland categories, sales totaled $500,000 on 252 acres at an average price of $2,161 per acre.

Looking ahead, we expect the remainder of the year to be dominated by a few larger HBU opportunities that are currently in our pipeline. We are still solidly on track to achieve our full year guidance and expect a comparatively strong third quarter. Overall, we remain highly focused on unlocking the value of our HBU development and rural properties, specifically early infrastructure investments in our Wildlight project north of Jacksonville, are proceeding on plan, and we're encouraged by the market interest that we're seeing there. The Wildlight Elementary School broke ground this spring, and our new Rayonier office building is also well underway. We look forward to reporting on the progress of this project in the quarters ahead.

I will now turn the call back over to Mark.

Mark McHugh - Senior Vice President and Chief Financial Officer

Thanks, Chris. As we look into the second half of the year, we anticipate continued strength in New Zealand export and domestic markets, and improved Real Estate results due to a strong pipeline of closings. Based on our year-to-date results and our outlook for the second half of the year, we expect that we'll comfortably achieve our prior full year adjusted EBITDA guidance of $195 million to $215 million. As a reminder, due to depletion pulling with respect to the Menasha acquisition that closed in the second quarter, we expect that the per ton depletion rate in the Pacific Northwest segment will roughly double in the second half of the year, which will drive approximately $10 million of incremental depletion expense relative to our original guidance. With respect to real- estate activity, despite a comparatively light first half of the year, we still expect to achieve our full-year adjusted EBITDA guidance for this segment with Q3 anticipated to be the strongest quarter of the year based on our current pipeline of closings.

I'll now turn the call back to Dave for closing comments.

David L. Nunes - President, Chief Executive Officer & Director

Thanks, Mark. Concurrent with our first quarter earnings release, we announced a series of strategic and financial transactions that repositioned our Pacific Northwest portfolio, and established a strong capital structure to support future growth. We're very pleased to have closed these transactions during the second quarter, and proud of the tireless efforts of our team to integrate the newly-acquired Menasha properties into our Pacific Northwest operations. In addition to the many portfolio moves we've made over the past two years, we've undertaken initiatives to streamline our operations and improve decision-making. We're pleased with the progress we've made to-date in improving on the ground operational execution across our business units, and believe we're starting to see some of this progress in our strong year-to-date performance. We're solidly on track to achieve our full-year adjusted EBITDA guidance for 2016, and we're optimistic about our outlook for 2017 and beyond.

As we stated in the past, capital allocation will continue to be a chief priority for our board and senior leadership team. We're confident that the moves we've made to-date will contribute to long-term value creation for our shareholders, and we look forward to continuing to evaluate all opportunities to enhance shareholder value through prudent, disciplined and flexible capital allocation. Lastly, I'd also like to remind you that we'll be hosting an Investor Day in Amelia Island, Florida, on Wednesday and Thursday, November 9 and November 10. We look forward to showcasing portions of our Southeast timberland portfolio, introducing you to more of our team of Timber and Real Estate professionals, and introducing the work we're doing at Wildlight to unlock value in our land portfolio. We'll be contacting you soon with more information on this event.

I'd like to now close the formal part of the presentation, and we'll turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We have our first question from Chip Dillon of Vertical Research Partners. Sir, your line is now open.

Chip Dillon - Vertical Research Partners

Hi. Good morning, guys.

David L. Nunes - President, Chief Executive Officer & Director

Good morning, Chip.

Chip Dillon - Vertical Research Partners

First question is on the Pacific Northwest segment volumes. If you could just review for us the impact, you mentioned the $10 million depletion impact in half the year from the acquisition of Menasha. What kind of volume impact should we expect there?

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah, Chip. Last quarter we had indicated on that relative to our prior guidance of 1.2 million tons for the year that we anticipated with the Menasha, the combination of the Menasha acquisition, the Washington disposition would revise our volume guidance to 1.3 million tons for the year, and we haven't changed that guidance.

Chip Dillon - Vertical Research Partners

Okay. And as we think about, (14:45) get this right. So year-to-date, just looking at your slide here, you're at about 600,000-ton. So the way to think about it is that it would have about a 700,000-ton impact. So it's basically a 200,000-ton a year increase.

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah. Really that was the guidance for just for 2016. We could go back, I can walk you back through kind of some of the guidance we gave longer term. And again it was different relative to sort of our outlook for the next five years versus long-term sustainable yield.

Chip Dillon - Vertical Research Partners

No, that's okay. I'm sure we can go back and see that. That's fine. And then if you could talk a little bit about what is going on with China. That sounds great that you're seeing a boost there. And is that something that is surprising to you versus say six months ago, five months ago? And do you think it's sort of a sugar high, maybe government spending induced demand, or do you think there's something more sustainable there?

David L. Nunes - President, Chief Executive Officer & Director

Well, I would say that it's a mix. I mean, if you break down the market, there's a couple of things going on. First of all – and there's both some demand elements and some supply elements. On the supply side, there historically has been a fairly decent volume of softwood harvest in the Northeastern part of China, adjacent to the Russian border. And that's an area that's been widely reported as having suffered overharvesting, and they've really ratcheted the harvesting back on that rather dramatically. And that historically has fed into domestic processing of both sawtimber and plywood. And so while the construction market is down, and that's what I think a lot of press coverage gets done certainly as it relates to U.S. exports, as the domestic new construction has come down, so too has the supply and it somewhat offsets that.

The other important thing to recognize is that the fit-out market is a big part of the market for Radiata pine, and that really ties to the inventory of completed apartments. And there still is a large inventory of those. That feeds, for us, the plywood sector where over 30% of Radiata goes into plywood. And so I think that's the piece that's probably been very – as expected, has continued to be strong. As we saw a limited build in inventory around the Chinese New Year, we expected that that would translate into stronger pricing. So there's certainly – we've continued to expect strong performance. I think the other factor to keep in mind is that you've got freight rates have played a big role. Freight rates have come up a little bit recently, but they're still down considerably from the past. That's been driven both by oil pricing as well as the availability of ships. And so you put all that together, and it worked out to be a very strong quarter for us in New Zealand.

Chip Dillon - Vertical Research Partners

Gotcha. And then just a follow up, a quick one for Mark. You've obviously done a lot of work to get the debt totally fixed. I guess, you say you're 98% fixed, which some people would say, rates may go negative, what are you doing, I think you're – I would take the opposite view. I think it's admirable. You mentioned the seven-and-a-half year average maturity. Any potential in the next 12 months, 24 months to extend that maturity, especially if finance rates stay where they are?

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah. We're pretty comfortable with our maturity profile, and really we have three primary tranches of debt now. We have the two farm credit term loans, one of which expires in 2026. The other one is 2024. And then we have the notes outstanding that mature in 2022. So we've really got a nicely stacked maturity profile with really – our major maturity is in 2022, 2024 and 2026. So probably not much of an opportunity to extend it much beyond that, but we feel good about where we stand.

Chip Dillon - Vertical Research Partners

Okay. And then last quick question, is I know you guys have a little bit of land I think in Arkansas, not a lot, but obviously you do benefit from the pellet plants going in there. Is it a major factor one way or the other, whether or not the announced pulp mill there gets actually built?

Douglas M. Long - Senior Vice President - U.S. Operations

This is Doug. You're right. We have a few timber deeds (19:47) in the Arkansas area, but not much of our state. And really where that pulp mill is going to be located at, it wouldn't have much impact on us. So it would be a good thing if something were to happen, but we're not counting on that. And those timber deeds expire in the next few years, so by the time a pulp mill was built we probably wouldn't realize much impact.

Chip Dillon - Vertical Research Partners

Okay. Thank you.

Operator

Our next question is from Mark Wilde of BMO. Sir, your line is now open.

Mark William Wilde - BMO Capital Markets (United States)

Good morning.

David L. Nunes - President, Chief Executive Officer & Director

Good morning, Mark.

Mark William Wilde - BMO Capital Markets (United States)

Dave, I wondered just if you could share some thoughts with us on this U.S./Canadian lumber trade case, and the impact to Rayonier. Have you done any kind of work in terms of sensitivities on increased demand in the Southern U.S. or increased lumber prices?

David L. Nunes - President, Chief Executive Officer & Director

Yeah. I mean, we're monitoring it. I think like a lot of people, we've noted the higher volumes of wood coming in from Canada this year into the U.S. market, and you certainly see that when you look at operating rates of mills. I think that given that we're not a lumber producer, we have a little bit more of an indirect bearing on this issue. I think that we certainly expect to see some impact with duties once the one-year timeframe has come up, and we still kind of look more on a longer-term sense that as you see housing pick back up you're going to have to rely more on Southern capacity to meet that. And so we've really been positioning ourselves more for some of those mid-term type price improvements where we expect to see more that elasticity. I don't know, Doug, if you want to add anything more from your perspective.

Douglas M. Long - Senior Vice President - U.S. Operations

No, I would agree with you. I mean, we have seen quite a bit of wood, as everyone knows, flowing down from Canada. And just that's kind of had – our domestic sawmill customers, in particular, approach the market very cautiously, so it's kind of kept ahead with a bit on saw log pricing. And kind of like Dave said, as we look at things, we could see potentially the more wood flowing in over the next quarter, but over the long run I think Dave hit the nail on the head that we're looking further out at the recovery and what things happen. So we can typically (22:22) evaluate our markets and seek to optimize the shareholder value by adjusting harvest either up or down to match market conditions. So we're watching it very closely, and it's just something that we have to keep a constant eye to and evaluate as we go forward.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And then, Dave, you've been there about two years now. Just I wonder as you've gotten more familiar with the Rayonier portfolio, whether you've seen more opportunities or whether there's been any kind of change in your view about sort of where opportunities exist within the portfolio, whether it's for higher and better use or rural land sales or whatever?

David L. Nunes - President, Chief Executive Officer & Director

Yeah. And you're right. I just passed my two-year mark, and it's still a learning process I think to some degree, getting a full understanding of markets and portfolios. But I continue to be pleased with the overall quality and diversification of the portfolio. And I think this quarter's a great example of that. New Zealand really came through for us, and it's a great example of being in strong softwood growing markets and having diversity of markets. And so that proved out. I think as we look at our timberland portfolio, we're focused a lot on looking at near term and mid-term growth and drain dynamics to see where we've got markets that we'd like to add assets to, as well as areas where we may want to shrink our footprint. I think that our team has done a very good job, and disciplined job of really understanding where we have good markets to enter. And I think the Menasha acquisition's a great example of that. That was a deal that introduced us to some very strong domestic markets in Oregon. And it diversified our species mix to a heavier mix of Douglas fir. And from a portfolio standpoint, you couldn't ask for much more. So we're pleased with that.

And as it relates to part of the question on HBU, I think that again, we have a pretty good model there. We under the leadership of Doug and Chris, our teams are working very well together in identifying properties that makes sense to sell. I think one of the things that we've done maybe differently from the past is we've focused more on some of the qualitative attributes of properties that we're looking to sell, and specifically looking for properties that are below average quality from a timber standpoint, but that might offer some HBU opportunity, and getting those out of the portfolio to improve the quality of the timberland portfolio through subtraction. And so we've done that on a lot of small sales, and we're happy with some of that change. But I think we have a good model and we are starting off I think with a really strong portfolio, and now the emphasis is really to continue to make it better.

Mark William Wilde - BMO Capital Markets (United States)

Okay. I'll turn it over. Thanks, Dave.

Operator

Thank you. Our next question is from Collin Mings of Raymond James. Your line is now open.

Collin P. Mings - Raymond James & Associates, Inc.

Good morning, guys. You touched on just your saw log pricing in the U.S. South being negatively impacted by the mix in the quarter. Can you maybe expand on this? And maybe just given some of the data out there indicating that there was a year-over-year downtick at pricing in 2Q, walk us through some of the different variances you're seeing across your different wood baskets in the south.

Douglas M. Long - Senior Vice President - U.S. Operations

Sure. Collin, this is Doug. I'll go ahead and take a swing at that for you. Yeah, as we talked about relatively across south, we've seen things fairly on even trends, but what we did have for ourselves in this past quarter, due to a lot of the wet weather that happened particularly on the Texas markets and things like that, our production of sawtimber in that area went significantly down, and particular in our larger ply log sized things. So that's kind of what the geography mix had this issue for us there. Overall on pricing, as we said, we really haven't seen any major changes for the saw log or chip and saw prices. They've been kind of hanging out here, as I mentioned before. I think due to that SLA agreement and what's going on, folks have been very cautious about how they're going to approach things, and so we've seen things pretty much just moderated and standing at the current pricing.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. And then, I mean, just from a different wood basket perspective, no part of your footprint in the U.S. South that you're seeing relatively better trends in right now?

Douglas M. Long - Senior Vice President - U.S. Operations

On sawtimber, no, not particularly. It's been fairly constant across the board. Really what's driven our things is just some of that wet weather created a difference in mix harvest for us, and so we had significantly less sawtimber coming out of that Texas-Louisiana market.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. And then, I think, going back to Mark's question just as far as everyone started the year pretty upbeat, that there would be more deal flow in the timberland space. So just maybe update us on what you're seeing as far as opportunities, Dave, to maybe recycle some more capital. And then going back to that portfolio refinement question, is there anything maybe on the scale of what you did with FIA that you're actually looking to maybe sell or dispose off to free up some more capital right now?

David L. Nunes - President, Chief Executive Officer & Director

Well, we generally aren't going to get too specific on active M&A discussions, whether it's on the sell-side or the buy-side. But I'd say, that generally this year has played out consistent with what we thought it would. It has been a very strong year from a deal flow standpoint in all the geographies that we work in. And our team has been extremely busy looking at a number of different properties to add to the portfolio. I think that this is where the discipline of kind of understanding what you want comes into play. And we've been pretty careful to make sure that the things that we're adding we're adding for the right reasons. We've been looking at things like, in that Western acquisition areas to even out our aged class distribution. The cash flow attributes of the properties are also very important. And as I said, we put a lot of effort into understanding growth drain dynamics as we look at opportunities. So I think one of the things about the heavy deal flow is, it's just allowed us to be a lot more selective than you might be in other years, and pickier about the types of things that we really go after.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. And then one last one and I'll turn it over. Just going back to, Dave, your comments as well as Chip's question, just the difference in trends that you're seeing as far as the export markets that relates to the Pacific Northwest, versus the strength you're seeing in New Zealand. Is that driven, just to clarify, more driven by the type of demand you're seeing out of China for particular species, or is it a function of some of the currency and shipping rate dynamics you talked about?

David L. Nunes - President, Chief Executive Officer & Director

I think it's both. And recognize, again, that the China, in a real broad-brush sense, the China market has two primary markets. There's the new construction market and the fit-out market. And the Pacific Northwest tends to compete more heavily in the new construction market. And so that's generally been a negative because that market it has declined some. Then I think the other factor that you have is, the currency has made imported lumber a lot more competitive out of both Canada as well as Russia. So that's one of the reasons that you see a divergent behavior in terms of export markets between the Northwest and New Zealand, whereas New Zealand, as I said earlier, has a much heavier reliance on plywood and that fit-out market. And it competes also in some slightly different geographic markets within China. So that's, again, it really gets back to that diversity comment that we made earlier. China is a very big place, and it's got very, very different markets, and so those two – the Northwest and New Zealand really compete kind of differently.

Collin P. Mings - Raymond James & Associates, Inc.

Great. I appreciate the extra color, Dave. I'll turn it over.

Operator

Thank you. Our next question is from Paul Quinn of RBC Capital Markets. Your line is now open, sir.

Paul Quinn - RBC Capital Markets

Yeah. Thanks very much, and good morning, gentlemen.

David L. Nunes - President, Chief Executive Officer & Director

Good morning, Paul.

Paul Quinn - RBC Capital Markets

Thought I'd ask a couple of easy questions. One on just the Real Estate guidance; I guess that guidance on sales remains at $70 million to $80 million for the year, and I guess you're just over $21 million year-to-date, which suggests the back-half is somewhere around $55 million. And how would you split that between Q3 and Q4, is that 60% in Q3 and 40% in Q4?

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah. I mean, the guidance that we're giving is relative and kind of looking at the quarter-over-quarter trends, we're expecting Q3 will be the heaviest of the year.

Paul Quinn - RBC Capital Markets

Okay. And then...

Mark McHugh - Senior Vice President and Chief Financial Officer

We try not to give too much precision around this, Paul, just because this is heavily driven by timing of closings, and whether deal tips on one side of 9/30 (32:22) or not can sort of drive that. So we try not to get overly specific, but we do expect that Q3, if you kind of just stacked up the quarters and you've got sort of two in the bag, that Q3 will be the heaviest of the year.

Paul Quinn - RBC Capital Markets

Okay. And then just on this issue of soft sort of Pacific Northwest, but strong New Zealand on the log side, and the idea that Pacific Northwest goes more in new construction and New Zealand the Radiata goes more into the fit-out markets. Is that suggesting that Chinese new construction is slowing, and that's going to hurt your fit-out demand down the road, or is that Q3 is going to be reasonable and then Q4 you might see a slowdown?

David L. Nunes - President, Chief Executive Officer & Director

Well, I think our understanding is there's still a pretty large inventory of apartments that sort of ties into that fit-out market. It's obviously differential city-by-city, but we don't expect – we expect that that's going to keep that fit-out market busy for some time. And then the other thing on the new construction is, keep in mind that while the activity is down, so too is that domestic supply, which has been a competition for imports. And so while you've seen that new construction activity come down, that reduction in supply has had an offsetting effect.

Paul Quinn - RBC Capital Markets

Okay. And just to follow up on that, just a (33:45) reduction in Chinese supply, has that been offset by the increased Russian imports?

David L. Nunes - President, Chief Executive Officer & Director

I think Russia has certainly participated in it. Russia's issues are really around infrastructure, and right now it's an interplay between a currency that's in their favor and poor infrastructure, which is not. And so Russia – we continue to believe that Russia does not have a strong ability to overwhelm that market, but they are certainly a meaningful contributor both on the log and lumber side.

Paul Quinn - RBC Capital Markets

All right. That's all I had. Best of luck in going forward.

David L. Nunes - President, Chief Executive Officer & Director

Thanks.

Operator

Thank you. Our next question is from Mark Weintraub from Buckingham Research. Your line is now open, sir.

Mark Weintraub - The Buckingham Research Group, Inc.

Thank you. I think through the first four months of this year, lumber production in the U.S. was actually flat, and all the increase was in Canada. I don't know, did you either have data as to what's happened in the more recent months, and/or just a view from what you're seeing from the field as to whether or not that continues to be the case?

Douglas M. Long - Senior Vice President - U.S. Operations

Hey, Mark. This is Doug, again. I don't have data for that, but kind of the field intelligence we've had is, it's been a similar trend basically that, as I mentioned before, just the domestic mills have been very cautious as there's been more and more wood coming across from Canada. So we've seen production at definitely at reduced capacities some of (35:20) those mills are able to produce at.

David L. Nunes - President, Chief Executive Officer & Director

And you see that, Mark, in some of the published operating rates of mills in Canada versus either the U.S. South or the Pacific Northwest.

Mark Weintraub - The Buckingham Research Group, Inc.

Interesting, the lumber prices still have, even through production hasn't moved that much it would seem in the U.S., prices have been going up. And typically there tends to be a relationship to sawtimber, maybe after a lag with lumber. Any color, any thoughts as to whether that will resume, or whether because of maybe more standing inventory on the ground, it's going to play out a bit differently than we've normally seen?

David L. Nunes - President, Chief Executive Officer & Director

I think we have a few things going on there. You're right in the sense that lumber prices are stronger than some of that kind of underlying factors, but I think you have a couple things going on. One, we've seen stronger repair and remodel activity. And two, we've seen a modest increase in the proportion of single-family starts. And so those have been positive.

As it relates to the broader question around sawtimber, I think it really gets to geographic specifics. And one of the things that we try to look at in our most recent investor deck is the differential growth in inventory across the South. We looked at Timber Mart-South data and essentially created a build in inventory by the Timber Mart-South regions. And you can see that just like pricing behavior, that build in inventory has been very differential. And I think that leads to differential pricing behavior and it certainly has had I think an impact both in sawtimber pricing and as well as kind of how we see those growth drain dynamics playing out over the next few years.

Mark Weintraub - The Buckingham Research Group, Inc.

Just to confirm, because that really was exactly where I was trying to get my arms around. I do think an answer to a prior question you suggested there wasn't at least currently, much differentially you were seeing in the U.S. South from one local market to the next. Was that accurate?

David L. Nunes - President, Chief Executive Officer & Director

Well I think some of that statement was our own portfolio, and I think that we're fortunate in that we're located in I think some generally stronger areas, but if you look across the broader U.S. South portfolio, you look at the data that we had provided, you do have some regions that had quite a bit more inventory build and so I think you're going to see different pricing in those geographies. So again, our comments were really more in terms of our own pricing around the markets that we're in, but we're not in all the markets.

Mark Weintraub - The Buckingham Research Group, Inc.

Okay. Thank you.

Operator

Thank you. Our next question is from George Staphos, of Bank of America Merrill Lynch. Your line is now open, sir.

George Leon Staphos - Bank of America Merrill Lynch

Thanks. Hi everyone, good morning. Appreciate all the details and taking my questions. Maybe last question for me on the Pacific Northwest versus New Zealand questions that were discussed earlier. Is there a species in the Northwest that would compete against Radiata pine? Would Hemlock do well in the fit-out markets? Just trying to get a sense, recognizing that currency is a factor here as well, is there anything that we could supply into that market longer term?

David L. Nunes - President, Chief Executive Officer & Director

Well I think there certainly is overlap in all of these markets. I don't mean it to be sort of very black and white. But Hemlock and Douglas-fir tend to have slightly better structural characteristics than Radiata, and so they naturally flow more into the solid sawn product, whereas Radiata is an ideal specie for plywood and that's probably the main difference.

George Leon Staphos - Bank of America Merrill Lynch

Okay.

David L. Nunes - President, Chief Executive Officer & Director

And I think in solid sawn wood, you're going to see some overlap of the various species, but I think that plywood difference is probably the thing to keep in mind the most.

George Leon Staphos - Bank of America Merrill Lynch

You need kind of a lighter wood I guess, is that right David?

David L. Nunes - President, Chief Executive Officer & Director

It's not that it's lighter. It's just that it's better suited to that market or put another way, it's less well suited to the heavier structural demands of solid sawn wood – of larger cut solid swan wood.

George Leon Staphos - Bank of America Merrill Lynch

Okay. Thanks for that. Next question I had. You talked about Southern prices being down from a mix standpoint. And you gave us a lot of detail around that. And we appreciate it. To the extent that availability improved, do you think that that's going to put further downward pressure on pricing? Or will there be some sort of offset to that additional supply on price as we look out to third quarter and fourth quarter in the South on saw logs?

David L. Nunes - President, Chief Executive Officer & Director

I mean to some extent, you have to really get back to the fact that you're dealing with a lot of micro markets. And so it's going to be market-by-market based. And this really gets back to what I was talking about earlier with Mark Weintraub's question on looking across the South at where we see build in inventory.

George Leon Staphos - Bank of America Merrill Lynch

Okay. So at this juncture, it's indeterminate and it's going to be market-by-market. It doesn't sound like you'd be expecting much in the way of inflation over the rest of the year though in the South until October. Would that be fair?

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah. That's right, George. We're guiding to relatively flat prices through the balance of the year. And part of that, again, is driven by the softwood lumber agreement and the uncertainty around that and sort of just the behavior of mills going sort of into that.

David L. Nunes - President, Chief Executive Officer & Director

And you also see that, George, in some of the recent data on permits is generally trailing some of the earlier projections around housing starts for the year. And so I think that this is shaping up to be yet another year where housing starts are kind of moving along at a fairly modest improvement relative to the past.

George Leon Staphos - Bank of America Merrill Lynch

Understood. A couple last ones, and I'll turn it over and I'll ask them in sequence here, just for time efficiency. One, your land values in Real Estate were actually quite good relative to what we had plugged in for our model. You mentioned, I think you said you sold 9,000 acres in Texas. And I think the price was around $3,000 an acre. If you can comment a bit on what the attributes of that land were. If you had already previously, I missed it. That's number one.

Number two. If I look at the Southern results that you posted, just curious why there was a bigger negative effect on EBITDA from volume mix than that which you showed on the revenue line, if I'm reading it correctly, for the South? And then lastly at 3 million cubic meters, is that a level of inventory in China that gets you sufficient pricing tension? Where – a quarter or two down the road where should we begin to worry if there's a threshold of inventory in the log decks in China that you would guide us to? Thank you, guys. And good luck in the quarter.

Christopher T. Corr - Senior Vice President, Real Estate and Public Affairs

Hey, George. To answer the first question related to the Texas deal, it was actually 900 acres, not 9,000.

George Leon Staphos - Bank of America Merrill Lynch

Okay. Sorry.

Christopher T. Corr - Senior Vice President, Real Estate and Public Affairs

And the price is – yeah. No, no.

George Leon Staphos - Bank of America Merrill Lynch

Just misspoke there.

Christopher T. Corr - Senior Vice President, Real Estate and Public Affairs

900 acres. Sure. $3,100 an acre. Good pricing. It's in Texas, north of Houston, so the attributes in terms of value is that this is good ranch land, rural recreation land. I think the buyer was unsolicited and their intent is to use it for their own recreational purposes so it's just about that in Texas where sometimes wealth is counted in acres, we get strong buyers like this. So that's the story on that one.

Mark McHugh - Senior Vice President and Chief Financial Officer

And hey, George. This is Mark. I wasn't clear on the second question, it was in relation to the kind of the volume impact on EBITDA.

George Leon Staphos - Bank of America Merrill Lynch

Yeah. If I understood it correctly it looked like you had $1 million effect on EBIT in the South from volume and on EBITDA it was more like $2.2 million. I was just curious why that was the case. Not trying to be pedantic, there's more of a nit type of question. And the last one was on log decks in China.

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah. It probably just had to do – I need to follow up on that to get into the details, but it probably just has to do with differential on depletion rates in different geographies.

David L. Nunes - President, Chief Executive Officer & Director

Yeah. If we're comparing over Q1 – is it Q2 or Q...

George Leon Staphos - Bank of America Merrill Lynch

I think it's your year-on-year chart in 2Q.

David L. Nunes - President, Chief Executive Officer & Director

Okay. I'll follow up.

George Leon Staphos - Bank of America Merrill Lynch

Okay. We can follow up. I don't want to take away from the call. And then the last thing on the log decks?

David L. Nunes - President, Chief Executive Officer & Director

Yeah. So recognize that the inventory figures in China really are a compilation (44:45) of many, many different ports. And I think the key is not just the total, but the key is really what that translates to in terms of months of supply and we generally feel that anything under two months of demand is going to translate to stable pricing and if you get below – we feel like if you get below 1.3 months of demand then you're going to see a really strong pricing. We're sitting right now at about 1.6 months sort of right in the middle of that range and so we generally feel that that historically, that has tended to support fairly stable pricing. And so that's what really gives us the confidence to make comments that we see the second half of the year being relatively stable. So it's – the total volume is important but it's also really important to understand some of those demand characteristics and what that ratio looks like.

George Leon Staphos - Bank of America Merrill Lynch

Thank you for all the color and also the great supplemental pack. I'll turn it over. Good luck in the quarter.

David L. Nunes - President, Chief Executive Officer & Director

Thanks.

Operator

Thank you. We have another question from Daniel Rohr of Morningstar, Incorporated. Your line is now open, sir.

Daniel Rohr - Morningstar Research

Good morning. You mentioned the diversity of end markets in China with the Pacific Northwest being tied to new construction and New Zealand tied more to the fit-out market; very, very helpful stuff. Just wanted to dig into that a little bit more. So when I look at the data through June, residential floor space starts in China are up 14% year-to-date, which is pretty much the same rate we're running at in the first quarter. So my question is how much lag we traditionally see between Real Estate starts and associated with demand?

David L. Nunes - President, Chief Executive Officer & Director

That's a hard one, Dan. I don't have a sense of where that translates.

Daniel Rohr - Morningstar Research

Okay.

Mark McHugh - Senior Vice President and Chief Financial Officer

And then keep in mind, it's not just – with the solid sawn wood it's not just residential starts as much as it is just broader infrastructure development.

Daniel Rohr - Morningstar Research

Okay.

David L. Nunes - President, Chief Executive Officer & Director

Keeping in mind that a lot of that sawn wood is used for concrete forms.

Daniel Rohr - Morningstar Research

Yeah. I guess my theory was that possibly some of the tepid demand we're seeing for Pacific Northwest logs might be attributable to what we're seeing in Chinese industrial production and associated pallet demand? I don't know if pallets are a major end use for what you guys are shipping out of the Pacific Northwest?

David L. Nunes - President, Chief Executive Officer & Director

No. That's too low value to a product.

Daniel Rohr - Morningstar Research

All right.

David L. Nunes - President, Chief Executive Officer & Director

You'll see maybe more of that in other sort of off-species. I think the Northwest has probably had – a fair bit of this has probably been tied to currency as well.

Daniel Rohr - Morningstar Research

Okay. Okay. All right. Thank you very much.

Operator

Thank you. We have a follow-up question from Chip Dillon at Vertical Research Partners. Your line is now open, sir.

Chip Dillon - Vertical Research Partners

Yes. Hi. I just had a general question about you gave a great slide on your M&A acquisition strategy or timberland acquisition strategy. When you look at today's like interest rate environment, if you were to debt finance timberland sort of at some of the asking prices you're seeing in areas that might be of interest to you, would you say the spread looks good to you, or it's not very favorable? How do you sort of compare the cap rates and the returns you're seeing with the financing costs?

Mark McHugh - Senior Vice President and Chief Financial Officer

Yeah. I mean we continue to think that in the M&A market sort of the going rate from a DCF, a discount rate standpoint, is in probably the 5% to 5.5% range. And that could swing on – 5% to 5.5% real, which would be net of inflation. And the deals I'd say that we're more focused on tend to be deals that are delivering the majority of that or vast majority of that in cash flow. And so we're frequently looking at deals that have relatively strong cash yields relative to that discount rate. Certainly with where we're able to finance in the debt markets today, there is a pretty healthy spread, call it, 200 basis points to 300 basis points to our debt financing rates.

David L. Nunes - President, Chief Executive Officer & Director

But it's certainly to your question, in an all debt financed transaction, it's going to impact that maturity profile of properties that you go after.

Chip Dillon - Vertical Research Partners

Meaning that the way you would finance it will be similar to a function of how you see the timber harvest slowing?

David L. Nunes - President, Chief Executive Officer & Director

Right.

Chip Dillon - Vertical Research Partners

I see. Okay.

David L. Nunes - President, Chief Executive Officer & Director

It's got to be able to cover that debt load.

Chip Dillon - Vertical Research Partners

Yep. Understood.

Mark McHugh - Senior Vice President and Chief Financial Officer

But I would say we really look at that in a portfolio sense and not on a deal-by-deal basis.

Chip Dillon - Vertical Research Partners

I see. Thank you.

Operator

Thank you. We have another follow up question from Mark Wilde of BMO. Sir, your line is now open.

Mark William Wilde - BMO Capital Markets (United States)

Yeah. I think you might have answered a big part of my question when you answered Chip's. I was just curious with these very low interest rates whether you're seeing any kind of downward pressure on discount rates?

David L. Nunes - President, Chief Executive Officer & Director

I'd say that they've held relatively firm in the last – probably in the last 18 months. Again, what we've seen is differential discount rates for different quality transactions. Again, I think on average, across the U.S. South we think the going rate is in that 5% to 5.5% real, but we've seen people pay up for very high quality properties. Likewise, we've seen some no sales and some transactions that certainly traded above that just relative to the risk of the particular portfolio or the inventory mix and the maturity of the age class.

Mark William Wilde - BMO Capital Markets (United States)

Okay. Mark, I know over time there have been points where a lot of the activity with the TIMOs has come from kind of offshore money and with rates so low over in Europe right now, are you getting a sense that the TIMOs are seeing more offshore money coming in?

David L. Nunes - President, Chief Executive Officer & Director

I think that's probably true, Mark in both the private equity as well as some of the public equity. I mean I think you're seeing more of it as well in the context of investors into the timber REIT space, but I think that we're continuing to see fairly healthy demand for timber from offshore capital for all of the reasons that you would expect, sort of flight to quality, the low interest rates in Europe as an example. You're seeing yield, people coming here for safe yield, and so I don't think we've seen any dissipation of that type of capital flow.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And then last question, kind of along the same lines. Dave a while back you mentioned to me that you thought that actually discount rates were still wider down in New Zealand. Have you seen any tightening there?

David L. Nunes - President, Chief Executive Officer & Director

New Zealand has less deal flow certainly than the U.S. And so you don't have as many data points. I think that there have been some recent transactions in New Zealand where we've seen lower discount rates than what you typically see in a lot of appraisals. So I think one of the things to keep in mind with New Zealand though is that a lot of the land in New Zealand is tied up in long-term leases or in forestry rights. And so those leases, I think, tend to contribute to a higher blended discount rate in New Zealand, relative to say, to the U.S.

Mark William Wilde - BMO Capital Markets (United States)

Okay, that's helpful. (43:13)

David L. Nunes - President, Chief Executive Officer & Director

That's an important play.

Operator

Thank you. We have one last question from Collin Mings of Raymond James. Your line is now open, sir.

Collin P. Mings - Raymond James & Associates, Inc.

Thanks. Just two quick follow ups. First, Mark, recognizing your commitment to maintaining an investment grade rating, just maybe talk about your appetite for additional share repurchases here? Obviously the stocks moves nicely this year, just how are you thinking about that, no shares were repurchased during the quarter?

Mark McHugh - Senior Vice President and Chief Financial Officer

I think last quarter you had asked a question, Collin, kind of what our available capacity was for capital allocation, and we had indicated that we felt it was in the range of $50 million in order to sort of stay comfortably within the metrics that have been prescribed by the rating agencies to maintain the investment grade rating. That hasn't really changed. We haven't – we didn't do any share repurchase in the last quarter, or announce any acquisitions, so I would say that, that sort of volume of capacity is likely around the same.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. And just (54:19), in my math, you guys are still trading below NAV, but the stock is up again nicely year-to-date. Should be continue to think about you may be holding that dry powder a little bit more for acquisitions at this point?

Mark McHugh - Senior Vice President and Chief Financial Officer

Again I think what we've always said about capital allocation is it's going to be flexible and opportunistic. We are going to take advantage of what we see as the best available opportunities to maximize long-term shareholder value. So we don't put sort of hard limits on where we would buy back stock. We don't sort of put hard limits on what we want to acquire in any given period. We really just try to look at our available capacity, the market dynamics that we are seeing both in the stock as well as in the M&A market and just be very flexible and opportunistic.

David L. Nunes - President, Chief Executive Officer & Director

And I think to reiterate some of the discussion from last quarter, the Menasha acquisition is a great example of that. It was a very high quality property. And because of its scale and other attributes, it required a fair bit of creativity and flexibility. And we brought in a partner to break it up. And then we also sold the land in Washington to help fund it. And so that's an example of where the opportunity itself influenced our manner in going after it.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. And actually my second question was actually going back to Menasha. Just as far as all the export conversation this morning, a lots focused on China this morning. But as you incorporate the Menasha timberland, should we expect to see some increase in your export activities to Japan? Is there an opportunity there, just given the Douglas-fir mix of that property?

David L. Nunes - President, Chief Executive Officer & Director

Yeah. I think there's definitely some opportunities there. Coos Bay is not as big of a port as something to Washington ports as it relates to volume going into Japan. But you're right on the species. In a species sense, there's more opportunity. I think the other thing to keep in mind though is that that domestic market's a very strong market. And it's a very tensioned market. And so you've got a decent amount of competition between the export markets and the domestic markets in that geography. And we look at it as just having really nice optionality. And so that is one of the things that we'll be looking at over time as just the ability to penetrate that Japan market a little bit more out of Coos Bay. But it's not to the same degree as say the Longview market.

Collin P. Mings - Raymond James & Associates, Inc.

Great. Thanks, Dave.

Operator

Thank you. We show no further questions at this time.

Mark McHugh - Senior Vice President and Chief Financial Officer

All right, well thank you for joining the call. This is Mark McHugh. If you have any follow-up questions, please contact me.

Operator

This concludes today's conference. Thank you so much for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!