CatchMark Timber Trust: 5% Yield, Housing Industry Access
Summary
- CTT supplies timber to saw mills for use as lumber and paper products.
- 95% of its timberlands are located in high demand markets in the south.
- CTT's 5.3% yield is highest among timber peers.
- This article also details an attractive option trade yielding 9% in under six months.
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Housing stocks had been outperforming the market over the past year and in 2021 due to record low interest rates and pent-up demand. The recent rising rate scare has scaled them back somewhat, but the long-term outlook is still positive for the industry.
However, the problem for income investors is that homebuilder stocks generally don't offer attractive dividend yields. The top 5 dividend yields in the industry range from 1.2% to 2.8%, and that 2.8% is the only yield above 2%.
CatchMark Timber Trust (CTT) is a higher-yield alternative which you may want to consider. It's a REIT which "seeks to deliver consistent and growing per share cash flow from disciplined acquisitions and superior management of prime timberlands located in high demand U.S. mill markets."
CTT owns timberlands in Texas, Oregon and several southeastern states. Its biggest acreage is in Georgia, where it owns 250M acres. It also owns a 22% interest in the Triple T JV that has over 1M acres in Texas. Management has diversified the company's earnings, via adding an investment management segment to its Harvest and Real Estate operations:
(CTT Site)
Management has sought to diversify the company's earnings via a mix of Harvest, Real Estate, and Investment segment operations. The end uses of its timber cut across several industries, while the harvest mix is 58% pulpwood and 42% saw timber:
(CTT Site)
Its customer base includes some of the biggest players in the lumber, paper, and packaging industries, including International Paper, Georgia Pacific, and WestRock, with its top eight customers comprising 58% of annual timber sales:
(CTT Site)
In the U.S. South, 91% of CatchMark's total timberlands are located in three of the top five markets. This offers advantages in pulpwood and saw timber pricing, as well as in Site index, which is the height, in feet, of a softwood tree at age 25:
CatchMark's 2018 acquisition of 18,100 acres of prime Oregon timberlands diversified operations into a highly desirable wood basket with tight supply-demand dynamics and improves saw timber mix. This gave it exposure to Chinese, Japanese and Korean export markets, which buy approximately 10% of all log harvests.
(CTT Site)
Management's harvest productivity comparison study shows CTT harvesting over 5 tons/acre in 2020, vs. ~3.5 to 4 acres for its peers:
(CTT site)
Earnings:
Although 2020 was a challenging year for CTT, with flattish revenue and an -8.5% decline in adjusted EBITDA, Q4 '20 saw good growth in revenue, EBITDA, and Cash Available For Distribution.
Overall, CTT's CAD Dividend Payout Ratio rose a bit, to 75.52% in 2020, vs. 73.63%, but still had a comfortable cushion.
Harvest is CTT's largest segment, with 55% of segment adjusted EBITDA in 2020, followed by Real Estate, at 24%, and Investment Management, at 20.66%. Harvest EBITDA was roughly flat in 2020, while Real Estate slipped by -11%, and Investment Management fell by -24.72%:
JVs:
CTT has 2 JVs - Triple T in Texas and Dawsonville Bluffs in Georgia. Since its $1.39B 2018 acquisition, Triple T's merchantable inventory has improved from 38.7 million tons to 44.1 million tons, or ~14%. As the average age of pine plantation acres increases, the large component of highly-productive, middle-aged stands grow closer to maturity. Long-term stocking profile is expected to be accretive to CatchMark's existing portfolio.
Triple T renegotiated its wood supply agreement with Georgia-Pacific in second quarter 2020 to achieve market-based pricing on timber sales and facilitate recapitalizing the investment.
In 2020, Triple T paid Georgia-Pacific $145 million for the renegotiated wood supply agreement. CatchMark invested an additional $5 million in the Triple T joint venture on the same terms and conditions as its existing investment and the asset management agreement between CatchMark and Triple T was amended to increase CatchMark's fees through mid-year 2022.
Management engaged Perella Weinberg Partners and Raymond James to evaluate the available alternatives for recapitalizing the joint venture and expect to make significant progress during the year ahead. The hypothetical liquidation book value loss for Triple T decreased to $5M in 2020, after hitting $90M in 2019.
(CTT site)
Guidance:
In 2020, the company exceeded its high end target for Adjusted EBITDA by 4%, which also pushed its CAD 4% higher, and improved upon the implied CAD payout ratio.
Management issued the same $43 - $50M adjusted EBITDA guidance for 2021. They're estimating ~10% lower harvest volume, and an 85% - 90% saw timber mix for its Pacific Northwest operation, vs. its 89% mix in 2020.
(CTT site)
Dividends:
CTT isn't a dividend growth stock - management has kept the quarterly dividend at $.135 since Q2 2016. At $10.16, it yields 5.31%. It should go ex-dividend next on ~5/28/21.
Valuations:
CTT has by far the smallest market cap of its peer group. Although its dividend yield is higher than its peers, its valuations also are higher for the most part. Potlatch Deltec has the lowest valuations of the group.
Profitability and Leverage:
CTT's ROE and ROA have improved over the past three quarters but still remain negative, due to its negative net income. Its EBITDA margin improved, as did its Interest coverage, while its net debt/EBITDA leverage improved from the higher point it hit in Q3 '20.
CTT's net debt/EBITDA of 8.17X is much higher leverage than its peers, which have a range of 1.49 to 4.88X net debt/EBITDA, and sub-1X debt/equity, vs. 3.4X for CTT:
Debt and Liquidity:
Management shows a slightly higher debt leverage figure of 8.3X, with an average interest rate of 2.45%. 62% of CTT's debt was fixed, as of 12/31/20.
CTT had $162.8M in liquidity, as of 12/31/20, comprised of $12M in cash, a $35M letter Of credit, and $116M available on its credit facility:
Its earliest debt maturity isn't until 2024, when its acquisition facility and term loan come due:
(CTT site)
Performance:
Over the past year, CTT has lagged its peers, the ITB Homebuilders ETF, and the S&P 500 by a wide margin.
However, so far in 2021, CTT has outperformed two of its peers, in addition to the ITB Homebuilders ETF and the S&P 500, and has outperformed all entities in this table over the past month:
Analysts' Price Targets:
At its 3/4/21 closing price of $10.16, CTT was 7.6% below analysts' lowest price target of $11.00, and 13% below the $11.70 average price target.
Options:
If you're looking for a lower entry price for CTT, this August put-selling trade offers a $9.10 breakeven, which is 17% below the lowest price target of $11.00. The August $10.00 put strike has a $.90 bid, for a 9% yield in ~ 5 & 1/2 months, or 19.67% annualized.
You can see more details for this trade on our Cash Secured Puts Table.
Summary:
We like the idea of owning a piece of growing timberland via owning CTT, but the valuation, profitability and leverage comps vs. its peers aren't that appealing, as of yet.
However, we may take a small speculative position on CTT, via selling cash secured puts below its price, which would create an entry point closer to a 6% yield, and would also be considerably below its lowest price target. Since those trees keep growing, and builders keep building, we could see better times ahead for CTT.
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Comments (16)
Thanks for posting. I am a little pressed for time and unable to research this further:
In 2020, Triple T paid Georgia-Pacific $145 million for the renegotiated wood supply agreement.
Is the $145 million correct? If so, what were the prices they were receiving and what are the new prices they expect to receive?
From CTT 10K: "In June 2020, we invested an additional $5.0 million in the Triple T Joint Venture on the same terms and conditions as our original investment in connection with amendments to the joint venture agreement and asset management agreement. The proceeds of our additional $5.0 million investment, along with the proceeds from $140.0 million of borrowings under the Triple T Joint Venture’s secured, non-recourse credit facility, were used to make a payment of $145.0 million to GP in connection with an amendment to a wood supply agreement between the Triple T Joint Venture and GP. The supply agreement between the Triple T Joint Venture and GP was also extended by two years from 2029 to 2031, allowing for the Triple T Joint Venture’s harvest volume obligations to be further optimized to enhance and preserve long-term a"The new agreement allows Triple T to achieve market-based pricing on timber sales, vs. fixed pricing.
Thanks for reading and commenting,
DDS
It depends upon how much the rates rise.
A moderate rate rise shouldn't kill demand, which is strong at this point.
Thanks for reading and commenting,
DDS
If you don't have access....a few snippets (one might have expected the author of this SA piece to be aware of this, but perhaps not....)Timber growers across the U.S. South, where much of the nation’s logs are harvested, have gained nothing from the run-up in prices for finished lumber. It is the region’s sawmills, including many that have been bought up by Canadian firms, that are harvesting the profits.
--------------snip---------------
The problem for timber growers is that so many trees have been planted between the Carolinas and Texas that mills are paying the lowest prices in decades for logs.
-------------------snip------------------
The surplus of standing pine is such that growers, foresters and mill executives expect that even with mills sawing at capacity and new facilities coming online, it could be another decade, maybe two, before enough trees are felled to balance supply with demand. www.wsj.com/...
Yes, we're aware of the WSJ article, which reinforces CTT's advantage.
From our article: "In the U.S. South, 91% of CatchMark’s total timberlands are located in three of the top five markets. This offers advantages in pulpwood and saw timber pricing." CTT enjoys a 63% price advantage for pine pulpwood, a 31% premium for chip and saw pine, and a 9% premium for pine sawtimber in the Southern markets. There's a graph near the start of this article, which details these comps.
Thanks for reading and commenting.
DDS
Never say never, but they do have a steady track record: "management has kept the quarterly dividend at $.135 since Q2 2016."
Thanks for reading and commenting.
DDS