CatchMark Timber Trust, Inc. (NYSE:CTT)
Q2 2016 Results Earnings Conference Call
August 9, 2016 10:00 a.m. ET
Jerry Barag - President and Chief Executive Officer
Brian Davis - SVP & Chief Financial Officer
John Rasor - Chief Operating Officer
Collin Mings - Raymond James
Good morning and welcome to CatchMark Timber Trust Second Quarter 2016 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Davis, Chief Financial Officer. Please go ahead.
Thank you, Andrew. Good morning and thank you for joining us for a review of CatchMark Timber Trust results for the second quarter 2016. I am Brian Davis, the Chief Financial Officer of CatchMark. Joining me are President and CEO, Jerry Barag; and Chief Operating Officer, John Rasor.
During the course of this call, CatchMark management will make forward-looking statements. These forward-looking statements are based on management's current beliefs and the information currently available. CatchMark's actual results will be affected by certain risks and uncertainties that are beyond its control or ability to predict and could cause our actual results to differ materially from expectations. For more information about the factors that could cause such differences, we refer you to our 2015 annual Form 10-K and other reports that we file with the SEC.
Today's presentations may also include certain non-GAAP measurements. Reconciliations of these measurements are included in our earnings release which is posted on our Web site. John Rasor and I will join Jerry to answer any of your questions after his presentation. Now, let me introduce Jerry Barag.
Brian, thank you and good morning and let me thank everybody on the call for joining us today. I hope your summer has been going well. We have a lot of good news to cover this morning including continued strong revenue growth, new guidance for higher than previously forecasted full year 2016 results and our declaration of a third quarter dividend.
We think CatchMark's solid performance ties together with our assembling the highest quality of portfolio of timberlands in the industry, operating strategically and expeditiously to anticipate and meet market demand, managing harvest to insure durable earnings, and opportunistically acquiring timberlands with favorable productivity characteristics to maintain this momentum.
For the second quarter, we registered a series of year-over-year gains compared to second quarter 2015. We increased total revenues by 13%. Increased adjusted EBITDA by 9%. Increased gross timber sales revenue by approximately 12%, increased timber harvest volume by 7% and realized an increase in our average net price for pulpwood of 10%.
We also acquisition 51,700 acres of prime timberlands for $101.4 million in the company's single largest purchase since our IPO and we were operational on day one, executing on our forecast harvest plan for the property. During the quarter we sold 500 acres of timberlands for $800,000 and we paid a dividend of 13.5 cents per share on June '16, an 8% increase over the first quarter payout.
In all, it was a very active quarter and very good results. We have set the stage for our announcements yesterday of a 10% increase in adjusted EBITDA guidance for the full year 2016 and again declaring a third quarter dividend of 13.5 cents per share to stockholders of record on August 30, 2016, payable on September 16, 2016.
I will discuss the new guidance in a moment but looking at the results for the second quarter and first six months of the year in greater detail, CatchMark's revenues increased to $16 million for the three-months ended June 30, 2016, from $14.2 million for the three months ended June 30, 2015, due to an increase in timber sales revenue of $1.5 million and an increase in timberland sales revenue of $0.3 million. Gross timber sales revenue increased 12% as a result of a 7% increase in harvest volumes and increases in pulpwood pricing.
Net loss increased to $2.6 million for the three months ended June 30, 2016 from $2.3 million for the three months ended June 30, 2015, as a result of $0.6 million increase in interest expense, offset by $0.2 million decrease in operating loss. Revenues increased to $43.1 million for the six months ended June 30, 2016 from $34.4 million for the six month ended June 30, 2015 due to an increase in timber sales revenue of $5.9 million and an increase in timberland sales revenue of $2.7 million.
Gross timber sales revenue increased 23% as a result of a 22% increase in harvest volume, offset by slightly lower pricing. Net loss increased to $3.2 million for the six months ended June 30, 2016 from $3.1 million for the six months ended June 30, 2015, as a result of a $1 million increase in interest expense offset by a $0.9 million decrease in operating loss.
For the three months ended June 30, 2016, CatchMark's Adjusted EBITDA was $6 million, a $0.5 million increase from the three months ended June 30, 2015, primarily due to $600,0000 increase in net timber sales. For the six months ended June 30, 2016, adjusted EBITDA was $22.1 million, a $5.6 million increase from the six months ended June 30, 2015, primarily due to a $3.7 million increase in net timber sales, a $2.8 million increase in cash received from timberland sales, offset by a $0.4 million increase in G&A expenses and a $0.4 million increase in cash forestry management expenses. The fact that we had lower harvest volume in the second quarter 2016 compared to the first quarter 2016, reflects the conscious decision to take advantage of increased market demand and favorable pricing earlier this year. We decided to advance our harvest schedule and nimbly executed the plan despite wet weather conditions.
While pulpwood pricing was up during the second quarter compared to the year earlier, the lower sawtimber pricing we experienced during the first six months of the year was in line with the south-wide markets. That was coupled with a higher percentage of chip-n-saw in our sawtimber harvest mix, offset by better pricing realized from our newer properties. We anticipate overall pricing for our salt timber and pulpwood will remain steady and flat through the second half of 2016. The economy and housing markets appear to be on a delivered course for incremental improvement year-over-year, which should support measured increases in demand in our timber markets for the long term.
Now let me turn to our revised earnings guidance in the wake of the Carolinas Midlands transaction completed in mid-June, as well as other 2016 acquisitions which is focused on adding prime timberlands in excellent mill markets located in north and south Carolina as well as Georgia. Through the second quarter, we have acquired approximately 60,400 acres of timberlands with superior productivity characteristics and we have moved quickly to integrate their operations and move forward with the sustainable harvest schedules.
The total investment of these acquisitions was approximately $114 million. As a result, we have increased adjusted EBITDA guidance for the full year by 10%, now between $34 million and $37 million and we feel very confident about delivering within this narrower range. We now expect our 2016 harvest volume to total between 2.1 and 2.3 million tons, up from 1.9 to 2.1 million tons forecasted at the beginning of the year. We continue to improve our product mix and estimate our harvest mix for the full year will finish above the 40% level for sawtimber while our land sales forecast remains unchanged at $11 million to $13 million for the year.
Net loss is now projected at between $11 million and $12 million for the full year 2016, primarily from depletion expense driven by higher full year harvest volume. As noted this forecast results from successfully implementing our strategy to assemble quality timberlands with strong productivity attributes and improve our product mix to take advantage of current and projected market conditions. Our pipeline of potential deals remains robust and we will continue to be highly selective and patient in executing any purchases to satisfy our criteria for quality and sustainability.
We currently have approximately $200 million in borrowing availability and at present can comfortably accommodate about $100 million in new acquisitions. At our current share prices, we have no intention to raise public equity. The dividend increase implemented during the second quarter should continue to be covered fully with a reasonable payout ratio and I might emphasize that it is the highest risk adjusted dividend yield in the sector.
As you know, we are committed to increasing our dividend over time and fully cover our dividend with cash from operations. Future dividend increases will be driven by a combination of product pricing increases and acquisitions in accordance with our long term strategy for achieving sustainable harvest and durable earnings. With regard to our ongoing share repurchase program, during the second quarter, we repurchased 31,112 shares of common stock at an average price of $10.65 per share. As of June 30, 2016, we had utilized about 30% of the available funds authorized in the current program and have up to an additional $21.2 million for future repurchases.
Our stock continues to be attractively priced relative to the company's long-term prospects and we will continue to make purchases when the stock is trading at an appropriate discount.
So to sum up, our team at CatchMark remains very upbeat about our results and the company outlook. We have been confident and remain steadfast about our strategy which has been producing extremely solid earnings and growth in line with our expectations. The acquisition market propelled by [TIMO] [ph] sales, is providing excellent opportunities for timberland acquisitions that meet our quality profile. Carolinas Midlands was a superior transaction and will pay off quickly in delivering results for our shareholders.
As a result of quickly integrating our new holdings into operations, we have been able to raise our guidance for the year, and we have increased our dividend during the second quarter and plan a similar payout of the third quarter. It's all good news and we are on course to keep it coming. We are confident about delivering cash flow per share growth and a covered dividend that will result in superior stockholder value over the long-term.
Again, thanks for joining us this morning. Now, Brian, John and I will be happy to take your questions.
[Operator Instructions] The first question comes from Collin Mings of Raymond James. Please go ahead.
First question from me this morning, just on the softwood lumber dispute. I am just curious how you think about that, in terms of your business, how do you think the negotiations play out between the U.S. and Canada? How does that impact your customers and just the demand for your product?
Hi, Collin, John Rasor. We have been following it and while we don’t have any unique insight, it appears the governments are still talking and hopeful that there may be a settlement but I frankly don’t have any consensus as to what that settlement might look like at this point. We know that there is talk of it being fairly restrictive in terms of Canadian imports and our view would be if that’s the way it turns out, that’s probably good for us and good for the customers that we supply. Jerry, do you have anything you would add to that?
The only comment I would make, John, is compared to a lot of the other peers in the sector in the publicly traded companies, we probably are about as distant from the impact of that as anybody given our geography and the type of timber that we are supplying into those lumber mills. And so we are not nearly as concerned or activated about this on a day to day basis as we think, like I said, some of our other peer companies are.
Okay. That’s helpful. And anything, just one last follow up on that front. Just as far as response from customers, have any of your customers been more hesitant to want to commit to buying logs or adjust, or any feedback you are getting, I guess, from your customers on this window now as we wait for the standstill period that’s approaching in October? Any impact on the customer feedback from your standpoint?
Nothing really measurable, Collin, in terms of any of that as it relates to the Softwood Lumber Agreement. Of course, people are always cautious about inventories but we had been pretty steady state.
Yes. And quite frankly, from an operational standpoint, there's ebbs and flows that go in all the time through these markets. But we have been a significant beneficiary for the long-term of a lot of capital investment by the manufacturing company that are procuring our timber in our markets, both on the lumber side and on the pulp side.
Okay. Helpful color. Thanks guys. Switching gears, Jerry, just maybe can you talk a little bit more about deal pipeline? Do you have anything else under LOI right now as far as pricing, maybe on an apples to apples to basis, recognizing it's tough to do in timberland but how do you think timberland values have trended over the last years over the type of properties that you have been to acquire in the U.S. south.
So the pipeline remains very strong. It's punctuated by some very very large deals, the size of which we haven't seen in quite some time in the timberland sector and there is a queue of these large deals that seems to be lining up, waiting to go. And so as I said in my prepared comments, we are being very disciplined and very selective about what we want to do and quite frankly even though we have what most people would consider a large amount of capital available to us, it is small compared to the size of some of these deals and it is not our intention to just run out and deploy the capital that we have available.
So as I said, we are being selective about what's there. In terms of what's on the horizon, we have one smaller transaction that we have been working on that would be added as to our existing landholdings that we are looking at, and pricing is generally along the lines of what we have been doing -- where our pricing has been coming in for quite some time. With respect to the overall markets and pricing, I think what you are starting to see and I think that this is positive development for the timberland markets, but you are starting to see a divergence in pricing between really good properties in really good markets which those properties and those transactions have been able to maintain and hold existing level of pricing. And softer or weaker markets and less desirable properties, you are actually starting to see transactions come together at numbers that are lower than we have seen in quite some time in the timberland space.
So there seems to be an acknowledgement in the market today about quality and price for quality versus price for more average type of timberlands and I expect that that trend is going to continue.
Okay. And then maybe just following up on that front. Can you quantify or can you put a little bit more of [perimeters] [ph] around how you are thinking about that acquisition that sounds like you are pretty far down the road with. And just to clarify, would that be wholly-owned or is that something you are looking at potentially if you wanted the JV partnerships that you talked about before.
To the extent that we did only thing on a large scale, it would be in a JV partnership and we think that will probably the best use of our capital at this point if we can find the transaction that meets our quality characteristics as well as our return hurdles.
Okay. As far as the deal in the pipeline, do you have anything that you can give us at this point and how large that particular transaction might be?
I am sorry, you broke up a little bit but I think the answer is, it's a small transaction and like I said it's just a bolt-on to some of the property that we already own.
Okay. And then one last one from me and I will turn it over. Just in quarter recognizing there is only 500 acres, can you just maybe touch on the timberland you sold as the per acre pricing was a little bit light relative to what we have seen over the last couple of years for some of your line sales?
Sure, Collin. Relatively few acres, just over 500 and at that clearing price we had a timber reservation on at least one of the tracks, so when you factor that that again was a very good price for what we sold.
[Operator Instructions] And we have a follow-up from Collin Mings of Raymond James. Please go ahead.
I guess on the updated guidance, one thing I just wanted to clarify, was that really driven solely by the acquisition activity, it sounded like, in both the press release and in the prepared remarks. But was there anything from a core operations standpoint that maybe went into that upward revision into guidance?
Hey, Collin, this is Brian. Good morning. That was really driven by the closing of the Carolinas Midlands III transaction.
Okay. And then recognizing, kind of going back to the comments about the acquisition activity this year and recognizing you aren't providing 2017 guidance at this point. But is there a way, Brian or Jerry, maybe we should think about the increase of the run rate of harvest volumes coming of the portfolio now, post the acquisition activities in 2016.
There's to parts to that Collin. One, in our investor presentations we do give a five-year range of expected harvest volumes coming off of our properties. Two, we will be working over the next two quarters on our harvest planning activity and we will come out early part of next year providing for 2017 guidance. I should also note, we do provide [stacking] [ph] information regarding our harvest activity for material acquisitions which we have made.
Okay. And just to give it a little bit more color, Collin, I mean we have not hit quite our full run rate on the Carolina properties yet. And so we will have that probably over the next quarter or so, we will be up to the program right there.
Yes. I mean we are at 80% going into next week, got our entire customer base filled out. Really feeling good about the property and the mill markets there. And is Brian pointed out, we are probably 30% of the way through our modeling, growth yield modeling and our planning. For 2017, we have to hit some September dates with our fiber supply agreements. So as Brian pointed out, we will be fully prepared by the end of the quarter to know where we are going to be in 2017.
Okay. Then, John, maybe just if you could talk a little bit about the log pricing. Clearly, again, I recognize it jumps, moves around a little bit quarter-to-quarter and what shows up as far as saw log pricing. But maybe just talk a little bit more about what you are hearing from customers, overall pricing environment. In the U.S. south it continues to be pretty flattish as far as pricing. What are you hearing as far might be the catalyst to get a little bit more attention on pricing and start seeing some upward pressure. And then, across your different wood baskets, are there any regions right now where you are seeing materially better pricing then others.
Yes. And let me add to that. Clearly, the southeastern U.S., in our case Georgia, southeast Georgia particularly and into the Carolinas, is pricing at a higher point than our other properties by, in some cases, several dollars, when it comes to saw timber. And one to two dollars in terms of pulpwood. Flattish is probably the best word that any of us can use to describe what the environment is out there in terms of the sawtimber market. Both smaller and larger diameters, our customers are being very disciplined. But we are at a position where we are a key supplier with most of them. And so we anticipate being able to hold our own as we proceed to the rest of the year.
I will also point out that there we took the opportunity rather than push on the sawtimber markets too hard to do some additional pulpwood thinning over this last quarter. And as a result, we also got higher pricing with that. And so the timing of that, really offset whatever softness we had on the sawtimber side. But we think net-net, together they look pretty steady through the rest of the year.
Okay. That’s helpful. I appreciate the detail there, John. And then Jerry, just wanted to go back to, as far as deal pipeline, I know we have talked in the past about you guys really didn’t see a public offering as far as looking at potentially the Pacific northwest, if there is relative value there. Just related thoughts on opportunities in that region, would be helpful.
Sure. I mean it's no surprise that pricing, property pricing in the Pacific northwest has held up better than virtually any place in the country. And those markets continue to operate and perform really well in spite of the fact that you have had a significant change in the export volume that was going to the Pacific rim. It spears that the domestic market is, at least from a volume standpoint, had picked up the slack pretty well, prices are down year-over-year. But it settled into a range which seems to be operationally sustainable for going forward for the future and if we do see a pick up and demand from the Pacific Rim, I think you will see an upward bias in pricing in that region.
Having said that, everybody else also anticipates similar market situation and so property pricing itself hasn’t changed as much as we would have liked or expected it to change. But clearly, on a relative value standpoint, it is better today than it has been since the pricing of our IPO back in 2013. So we continue to look. We continue to monitor and I am not expecting that there is anything that’s immediately actionable. And if it is, it will be a deal.
Okay. And then just turning back to the balance sheet real quick. Brian, just curious, as you think about the current interest rate environment, the continued downward pressure on the 10-year this year. Just how do you think about, as far as debt maturities as well as just your, some of your exposure to floating rate debt. Clearly you have taken advantage of fixing some of the debt on your balance sheet but just what's the latest thought so far as maybe locking in some more longer term interest rate in context to the current environment.
We are actively exploring that right now, especially on the short-end of the curve as comprised relative to the 10-years are paying up for. Fixing out some of our long-term debt does make sense. We anticipate doing something within the next quarter. In regards to our maturities, we feel pretty satisfied with where we are, our term loan matures in 2024 and our medium-term, long-term debt matures in 2021. So we are pretty satisfied with where those maturities are and we don’t have any amortizations on those maturities.
And then just one last one for John from me. Just as far as you look across the U.S. south right now, just given your knowledge and connection really across the U.S. south footprint. Just curious if you are feeling anything as far as meaningful expansions of capacity or additions of shifts that might move the needle anywhere on the U.S. south, as you think about, just the demand environment out there.
Yes, thanks, Collin. That’s a great question as follow up to your earlier question because I did want to mention that we are pretty excited about the kind of capital investment that’s going in to a number of mills and several of our markets. We think it's going to bode well for the potential of increased production capacity once the markets are in a position to take that production. And that’s still ongoing through this quarter and we think that’s an awfully good sign here as we think about next year.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Barag, President and Chief Executive Officer, for any closing remarks.
Okay. Thank you, Andrew. Again, thanks everybody for being on the phone with us today. We are really pleased with our results and the direction the company is moving and we appreciate your participation and we will talk to you in a quarter.
The conference has now concluded. Thank you for attending today's presentation. You may disconnect.