Analysis Of Potlatch Second Quarter Results

Jul.28.12 | About: Potlatch Corporation (PCH)

Timber REIT Potlatch Corp. (NASDAQ:PCH) reported second quarter results of $5.08 million in net income on $117.54 million of revenues. Revenues were up 4.6% from last year but net income was down 40% from Q2 2011. Revenues by segment for the quarter were -1% for timber, -54% for real estate, and a plus 25% for wood products, compared with 2011. Operating income by segment was -11% for timber, -39% for real estate, and a plus 323% for wood products, compared with 2011.

Year to date, revenues were down -2% and net income down -37%, compared with 2011. Revenues by segment for the first half of 2012 were -13% for timber, -47% for real estate, and a plus 17% for wood products, compared with 2011. Operating income by segment for 2012 were negative -29% for timber, -33% for real estate, and a plus 196% for wood products, compared with 2011.

Timber REITS continue to struggle primarily due to the housing market. Because of low sawtimber prices, Potlatch has reduced its harvest levels for 2012 to 3.5 million tons. Future harvests are anticipated to be in the 4.6 million ton range. This planned reduction in harvest accounts for most of the negative numbers in the timber segment. Most of the weakness in sawtimber prices is in the Southeast where most of the deferred harvest is located. Prices in Idaho were actually up slightly, so more of the harvest has been shifted to the Northern region. In addition, second quarter is normally the weakest in the Northern region due to spring breakup that restricts logging.

Real estate was down year over year primarily due to a large non-strategic timberland sale in 2011. Non-strategic timberland sales are generally very lumpy. Fifty-five rural residential and development real estate transactions were closed in the second quarter.

The Wood Products segment was the bright spot showing some early signs of a coming recovery in the housing market. Stronger demand for lumber and plywood pushed prices up by about 17% over 2011 and 15% over first quarter 2012. Lumber and plywood shipments were also up by about 13% over 2011. Potlatch evidently saw this coming as it has been running its mills near capacity since the beginning of 2012.

Potlatch's stock price closed at $35.75 on July 25, up 14.2% from the beginning of the year. It continued to pay a $.31 dividend in Q2, about 3.5%. Long-term debt remains at about $345 million. Potlatch also has a large pension liability of $137 million. For the time being, Potlatch is living off of investments and borrowing, but seems to be managing.

All in all, Potlatch is in a holding pattern awaiting a recovery in the housing market. It has rightly reduced timber harvest levels awaiting better prices, particularly in the Southeast. Also, it has shifted harvest from the Southern to their Northern region where prices are stronger. Unlike many of its competitors, it is taking advantage of better lumber and plywood prices and demand and is running its mills at near capacity. Just a slight improvement in log and lumber prices would lead to a nice recovery for Potlatch.

As an aside, during the Q&A portion of the Potlatch earnings call, questions were asked about a large timberland transaction between Forest Capital Partners, a TIMO (Timberland Investment Management Organization), and John Hancock Timber Resource Group and Molpus Woodlands (both TIMOs). The transaction involved 1.9 million acres in five states. 25% of the acres were in the Southeast, 15% in the Lake States, and 59% in the Inland West, none was in the Pacific Northwest.

The price of the deal was speculated to be between $2.0 million and $2.5 million. If this is true, the price paid would represent a 25% to 50% premium over my estimates of average timberland prices by region. This shows that demand for timberland is high, even with the downturn in the housing market. TIMOs seem to have a large war chest of money aimed at investments in timberlands. For the last few years, the supply of investment grade timberlands on the market has been far below the demand.

Disclosure: I am long PCH.