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Executives
Brian Davis - CFO
Jerry Barag - President and CEO
Todd Reitz - SVP, Forest Resources
John Rasor - President, Triple T Timberlands Analysts
Collin Mings - Raymond James
Paul Quinn - RBC Capital Markets Jerry Barag
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Now I'd like to spend some more time reviewing two other important transactions that we have not previously discussed on our calls. Bandon which we completed in late August and the southwest regional disposition which we entered into in late August. Bandon is our first transaction in the Pacific Northwest. We acquired from more than 18,000 acres of prime Oregon timberlands for $90 million. In keeping with our focus on premium quality and durable earnings potential, the acreage features quality stocking of 36 tons per acre and merchant inventory comprised of 87% commercial conifers, 77% Douglas fir. More than 90% of Bandon expected five years average harvest volume will keep sawtimbers, helping increase sawtimber share of our harvest.
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The southwest region disposition is a key part of our capital recycling strategy, following the Triple T and Bandon transactions. Scheduled to close before year-end, southwest disposition involves selling 56,000 acres in Texas and Louisiana and CatchMark will retain merchantable inventory for harvest on the sold acreage. over the next 18 to 24 months. ***
In terms of current transactional activity in timberlands, we see a bifurcated U.S. South just as reference. High quality properties attract strong bidding. Second tier properties take longer to clear and possibly aren't even selling. Lower projected sawtimber pricing growth is weighing on valuations in the region. In the Pacific Northwest, the transaction market remains robust supported by favorable underlying inventory and demand dynamics. ***
Paul Quinn Very great. Maybe we had a record drop of lumber in the quarter. Just wondering if you've seen any kind of -- or heard of any changes in some of the potential capacity adds that are coming in November space going forward in the U.S. South? Jerry Barag Yes. I mean, as an industry it's impacting different places differently and we know given the really strong prices for timber out in the West and the fall particularly in power prices in particular out in the West that it's gotten a little bit more dicey. As I noted in my comments, prices on Southern Yellow Pine, while it come down from big highs, are still -- on a trend line basis are it's still pretty attractive. And so the people that we're supplying, which again by design are in some of the better lumber production markets, and as a result, some of the better timber markets, they have not pulled back at all. We have seen no real impact of lower lumber prices on their current operating rates and their future plans for expansion in the south. Paul Quinn Okay. And just last year on Timberland values, I mean you guys are pretty. Just wondering if you are seeing any impact from rising interest rates, lower lumber and sort of this Chinese import tax issue on Timberland values? Todd Reitz The quick answer is no. It's still a little early for that to have gone through. As I've noted on previous calls, the big impact -- and it's challenge for the appraisal industry for valuations in general, is that the way the market operates is based on actual recorded sales and it doesn't really take into account no sales. And there have been quite a bit of no sales in weaker and weak Timberland markets. And so those comps really never make it to those appraisers and it's odd process probably a flawed process because of that. But what you've seen is where products have transacted have been in the more desirable market, the better operating market and prices have remained very consistent.
Executives
Michael Covey - Chairman and CEO
Jerry Richards - VP and CFO
Eric Cremers - President and COO Analysts
John Babcock - Bank of America Merrill Lynch
Paul Quinn - RBC Capital Michael Covey
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We expect lumber demand will continue to grow faster than supply and that industry operating rates will remain healthy. Factors on the demand side that give us confidence include a healthy rate of household formation, strong employment and wage growth, higher consumer and homebuilder confidence and the fact that houses remain affordable relative to historic levels. It's important to keep in mind that there been a significant amount of noise in the recent housing start statistics including the effect of two major hurricanes and torrential rainfall in Texas. The largest homebuilding market in the country, single family housing units which use about three times as much lumber as multi-family units are up almost 5% year-over-year. In addition, the repair and remodel market segments should remain strong through the old age of U.S. housing stocks and strong home prices. The repair and remodel segment has been growing in the mid to high single digits and accounts for about 40% of lumber demand which is a bit more in new home construction. On the supply side of the equation, it appears that Canadian producers have meaningfully reduced the supply overhang caused by transportation issues in the first quarter. Over the longer-term, fiber availability will constrain Canada's ability to supply the U.S. market. Continuing with a supply theme that is well documented, the lumber capacity additions in the U.S. south will be measured. There are only two major sawmill equipment suppliers and each is requiring deposits to secure a place in line. As we think about the demand and supply dynamics, fundamentals appear much stronger than the current lumber pricing environment. We expect improvement once we move past what is seasonally the weakest part of the year as well as recent weather disruptions. Field inventories are low which should support pricing recovery.
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John Babcock Okay. Thank you. And I was wondering more on the topic of lumber and pricing trends and the fundamentals there, if you could talk first about -- first of all about where inventory stand in the supply chain now versus where they were about a month or two ago? And then also just generally how market conditions look right now and what you think it will take for lumber prices to change directions? Eric Cremers Yeah, John. This is Eric. Our sense of it talking to our customers is that the inventories in the supply chain are relatively low levels, yet there's plenty of demand and order books are relatively strong. I think there was a Forest products conference that [indiscernible] had out in San Francisco here not too long ago and they reported that inventories were at incredibly low levels, a half months of supply compared to what typically might be one and a half months of supply. So our sense of it is that inventories are relatively low, which gives us optimism going forward that once the seasonal slowdown in housing turns the corner and demand picks back up again that order books with them being strong will get some firming of prices. You're also starting to see some curtailments out in the West, several mills have announced downtime which ought to help the supply demand balance. So like most pundits who were forecasting prices are up I think 10% Q1 versus Q4 that's roughly our outlook as well. So we think we're as Jerry said earlier, we're at or near the bottom in lumber prices and we think we're about to turn the corner.
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Paul Quinn Yeah, that's pretty helpful. Maybe just maybe on that timber, we've seen interest rates come up, what are you seeing in that market especially in the U.S.? Michael Covey Well, we just we just closed on a couple of thousand acre acquisition here a couple weeks ago and what I'd tell you discount rates are we got what we think we got a very attractive transaction here it was a 6% discount rate, but with some 1031 like kind exchange tax benefits it turns out to be about a 9% discount rate. So I don't know that anything is materially changed though if you compare to where we were a year or two ago. We also lost that transaction a couple of months ago that had what we think was a discount rate of 3.5 %. So timber still a highly sought after asset in the South in particular. Paul Quinn What is driving that strong demand in the U.S. I mean it's obviously got to be disappointing over the last decade. We haven't seen any material increase in sawlog prices on the selling of pine side, so what is driving that demand? Michael Covey Well, you're right. There haven't been any price increases over the last decade. It has disappointed industry observers. But we talked about a little bit earlier that there's a lot of mill capacity that's going to be coming online in the next those two, three, four years. Our estimates that sawlog demand is going to go up anywhere from 15 to 20 million tons per year that should put the South back into supply demand balance. And when that does you'll see price movements, the same opportunity isn't there on the West Coast or in other parts of the country. I think that's where the opportunity is in the U.S. South.
Brian Maguire -- Goldman Sachs -- Analyst Okay. That makes sense. Just one last one for me. The June housing starts where we don't want to make too much out of one month, a lot of noise in the numbers. But some people will call it out maybe impacts of higher lumber prices. Maybe given some of the home builders pause with caution, did you see any signs of that? Do you think with this correction back in lumber prices we might see some pickup back in that starts activity now? Doyle Simons -- Chief Executive Officer We've heard some of that. You've got to remember that only roughly 2% of the cost of a new house is attributable to lumber prices. So, while I think it may have some effect on the margin, both when it's up and when it's down, I don't think that's a big catalysts for what happens on the housing stats or housing sales numbers.
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Mark Weintraub -- Buckingham Research Group -- Analyst Okay. Thank you. Then obviously, lots of talk on trade wars and China in particular, as you think about potential implications for Weyerhaeuser, what would you highlight? Doyle Simons -- Chief Executive Officer Market has a lot of uncertainties, you very well know regarding trade policy in China tariffs. What I would tell you at this point is now the proposed tariffs on U.S. goods did not affect our export logs, thus far we've not seen any impacts to our business. If something does change, we'll figure out a way to manage through this. The bottom line is China does need to source some percentage of their logs from the United States on go-forward basis.
Randy Toth - Citigroup Global Markets, Inc. We’re hearing a lot of commentary from companies that we cover in regards to freight tightness and labor tightness. I just want to know how you guys think that might impact you in the 2018? Doyle Simons - President and Chief Executive Officer Yes, we like other companies are in fact seeing that type of tightness, as we mentioned in the fourth quarter, a real impact on wood products earnings as a result of transportation issues, specifically in rail out of Canada, but also in trucks out of Canada. And one mill, for example, that we have in Canada, shipments from rail were delayed by over two weeks and one much better from a rail perspective.
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Randy Toth Okay, thank you. And then can you talk a little bit about timber exports out of the U.S. South. I know, they grew quite a bit in 2017 although off a small base. How much are you guys participating in that, and do you think that growth is sustainable? Doyle Simons Yes. We are participating in that and it’s a key initiative for us. What we would tell you is, while you’re right, it is off a low base. We anticipate that in 2018, our shipments could be three times higher than they were in 2017. And our best guess now is the takeaway that will go into export markets would be the equivalent, just to try to dimension it a small sawmill in the U.S. and what they would use.
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Brian Maguire - Goldman Sachs & Co. LLC Okay. Just one on Southern log prices. It’s sort of an area we start off thinking, maybe this will be the year we start to see a little bit of tension in the market and prices start to pick up. And since it’s Groundhog Day today, I thought you maybe could give a little bit of an outlook on how you think that prices could go this year, if it’s going to be more of the same, or do you think maybe by the end of the year we could start to see some upward tilt on those prices? Doyle Simons Yes, it’s a great question, Brian, and I appreciate the color. Let me tell you how we’re thinking about it. And we do think there’s some potential for some pricing traction in 2018, and let me tell you why. Number one, it all comes down to housing demand, as I said, continues to grow. And we’re quite optimistic that housing will continue to grow and we’re especially encouraged about what we’ve seen in terms of the millennials finally starting to show up in the market and frankly, that’s what’s been missing. We also expect a strong year from repair remodeling and are projecting that to be up roughly 7.5%. Maybe even more importantly than that is that, there is a lot of capacity being added in the South, as you know. It seems like every week, there’s an announcement of new capacity that’s being added, or at least being considered. In terms of the numbers, about 1 billion board feet of new sawmill capacity came online in 2017. There’s another 2 billion board feet slated to come online in 2018 and 2019, and another 1 billion board feet on top of that, that’s currently under consideration. Just to put that in perspective that’s on a base of about 20 billion board feet in the South, so that’s a big increase. And to your point, we already are starting to see some benefits in certain markets, where additional capacity has come online. The third part of this is, of course, on the supply side and there is less lumber coming in from Canada, I think, that’s going to continue either as a result of the final duties, or negotiated agreements. Just to put that in perspective, that number went down from 33% in 2016, down to 30% in 2017. And as you look at just absolute lumber shipments from Canada, those were down over 5% in 2017 versus 2016. And then finally, as I mentioned earlier, we’re very encouraged by development of Southern export markets. We’re going to ship three times as much in 2018 as 2017, and as I mentioned, that should be equivalent to a small mill. So I think, all of those things are going to start to come together, and we are hopeful that we will start to see some pricing improvement as we move through 2018.
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Mark Connelly - Stephens, Inc. Good morning. Some of our clients tell us that they see hurricane rebuilds taking away from overall construction activity, because too much of the available labor in those markets is shifting away. Can you give us your thoughts on that and what do you see – how you see that the sort of labor construction thing playing out this year, because you’ve got a bigger [Multiple Speakers] assumption? Doyle Simons Yes, there’s no doubt that labor is the constraint. And as we talked to all of our customers, that’s the one thing we hear over and over. I think in some of the select markets, as you had indicated, some of the labor that would normally be used for new housing is being used for, call it, repair and remodeling as a result of the hurricane. So I think that will put a little bit of a damper on housing in those markets, maybe in the near-term. Longer-term, there’s a number of houses, as you know, that were completely destroyed. So those will end up in new housing. So I think, limited impact from hurricanes in terms of new housing starts in the short-term. Long-term, as we know, it always takes longer to rebuild from these things. But net-net, I think, that’s just going to be another positive for housing as we move forward.
*** Ketan Mamtora And then just turning to real estate. I mean are you seeing the stronger economy and stronger financial markets are creating any increase in interest for rural recreational land. And if that's the case, where is the interest strongest? Eric Cremers - President and Chief Operating Officer Well, I would say Ketan to address the second part of your question first. The interest is the strongest in Minnesota. You've got the twin cities with relatively high household income levels and the relative inaccess or inability to access lands to recreate on compared to the west. For example out here there was a lot of open land for people to recreate on, that’s government owned land that doesn't cost too many thing. So the demand is the strongest in Minnesota. And to answer the first part of your question, yes I think at these higher consumer confidence levels with people's 401(k) running sharply higher, I think demand for rural real estate is very strong. That said, we're going to continue to meet it out over time. We don't want to flood the market with property and compete against ourselves. So that's how we think about it.
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Chip Dillon And then last question, I guess for all three guys. When we look at -- I know it’s very early days, but we’ve seen a pretty meaningful lease off the base move in the 10 year long-term treasury rate. I don’t know if that’s having any influence, I mean 50 basis points isn’t huge. But is it had any influence in terms of what you see in terms of what private timberland transactions are going for at least in terms of the discount rates you used? Mike Covey - Chairman and Chief Executive Officer There have been so few transactions in the market certainly since we’ve seen a increase in the 10 year that we don’t have any evidence to answer your question either way. I wouldn’t -- you’ve got a mismatch there of maybe a little bit. This is very long-term asset class and I suppose there could be some pressure on discounted rates. But I think it’s pretty small. Chip Dillon And on that point, just could you tell what the supply situation is in terms of lands for sale. Do you find it to be as you look back over the last 10 years, Mike? Is the amount out there for sale tend to be more dried up or is it more increasing or about how do it normally is? Mike Covey I would characterize it as the larger transactions that have been happening, I think have been lower quality transactions in terms of -- there has been complex supply agreement surrounding the deals or geographies that aren’t as attractive. The smaller transactions that are in the 25,000 to 50,000 acre range, I think have been very good and price as well, just speaking largely of the south here. So there hasn’t been as much for sale recently as maybe there -- I think the market expected originally, so I think it’s been fairly quiet.
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Mark Weintraub Just following up first on the last question that Chip was asking, there really doesn’t seem to have been all that much activity in terms of the markets at least relative to some of the talks that there’d be a number of key modes where their funds were coming through the end of their 10 year lives or what have you. Do you have any color as to what maybe going on and why there have been it seems fewer parcel or larger parcels coming on? Mike Covey Well, there is a number funds that have matured, Mark, or are maturing. I think the team I was typically carving off 25,000 and 50,000 acre pieces and selling them rather than selling 250,000 acres at a time. That seems to be a trend that has occurred. But beyond that, I really don’t have insight to offer.
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Ketan Mamtora - BMO Capital First, I just want to go back to the lumber dispute. There was a lot of discussion over the past couple of weeks at a settlement that was likely. Any thoughts on that, what you guys are hearing. And then, if you don't get a settlement over the next few weeks, do you think lumber gets rolled into the broader NAFTA negotiations? And that could mean, it could take a pretty long time to get the settlement? Mike Covey - Chairman and CEO Well, there had been rumors that Secretary Ross and his Canadian counterpart had made some kind of a handshake deal on the Canadian lumber settlement, but I don’t think that there is any -- no substantiation to that those rumors that we’re not aware an agreement. As far as we know, the two governments continue to discuss the lumber trade case separate in the part from NAFTA, although as understanding that the administration would like to get this result before January of 2018 and kind of the commencement of NAFTA discussions. I have no idea of lumber will get rolled into NAFTA But I guess, we all say as hopeful as we are that we can see a solution, in our quarter based solution over the next few months. I’d also go back to 2006 in the last trade case, I think it took five years from imposition of duties in 2001 until the agreement was signed in ’06. So, this is not necessarily going to be quick.
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Paul Quinn - RBC And then, just overall, we're seeing in the South here, a sort of the continued discipline on the sawlog side. It looks like supply is going to be plentiful in the pulp long side. Just wondering why timberland pricing in the U.S. South continue to trade upward or trading in? And why you wouldn't see a lag down in those -- given the rising interest rate environment? Jerry Richards - VP and CFO So there is a lot of, that timberland pricing in U.S. South is justified by a forward price curve that anticipates price is moving higher. What would drive those prices higher, obviously increased consumption of sawlogs. Where we’re going to get that increased consumption? The increase still going in the U.S. South and we’ve talked about in prior year, but there is something like 12 million tons of incremental capacity going into our three states Arkansas, Alabama and Mississippi, a total of I don’t know 15-16 projects. So eventually that first quarter price curve will be realized, it’s just a question of when, I think not if.
Paul Quinn - RBC Okay. And then just looking at that last RISI timber report, they were mentioning some softness, potential softness in timberland values based off increased discount rates, and I guess, a disappointment in Southern sawlog pricing. You seem to suggest that timberland values are pretty steady right now, is that your expectation? Eric Cremers - President and COO Yes. I mean, just go look at that Rayonier transaction in the first quarter, Paul, I mean, it's -- that was a pretty good number and the stuff that we're seeing and we're competing in, we've seen no letup in pricing. Michael Covey - Chairman and CEO I think you always have to look at what was the quality and stocking of the timberland that was purchased. And I think high quality, well stocked Southern U.S. timberland continues to have benchmark prices that are in this $2,000 an acre kind of a range sometimes higher, sometimes a little lower. But we haven't seen any change.
Collin Mings, Raymond James 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. Jerry Barag, CEO Catchmark Timber Trust 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.
Paul Quinn - RBC Capital Markets
Okay. And then Mike you mentioned a number of timber sales that you’re taking a look at right now, is that -- would you describe the current market as more sales out there and what’s the general flavor in terms of competitive pressures?
Mike Covey - Chairman and CEO
I think that especially the southern timberland market is as competitive as it’s ever been at least in the last five years or six years that I can remember. Certainly since the downturn, I think we are seeing higher prices and more competitors than we’ve ever seen both from the suite of weak competitors as well as (indiscernible). And there are only a handful of properties for sale. There is -- I don’t know by handful there is probably half a million acres on the market and half a dozen transactions. So they are small, there is not many of them and they are extremely competitive.
Paul Quinn - RBC Capital Markets
I think that increased competition has pushed up transactions values. I mean we really haven’t seen that many transactions. I mean there was one closed I guess the Catchmark sale in Q1 that was over 2000. Is 2000 an acre now sort of the new norm in the US now?
Eric Cremers - President and COO
Well, the price per acre heavily depends on stocking and quality of the timber and proximity to markets. So it’s hard to just pick one number, but certainly the large Plum Creek transaction with (indiscernible) and the Catchmark transaction that was completed in Q1, those were approximately $2000 an acre which have been higher than what we’ve seen in the past. But you could also see something trade for $1500 an acre which might be an extraordinary price if it was poorly stocked. So it’s hard to say that 2000 is new norm.
Mike Covey - Chairman and CEO
Paul, I think part of what’s driving those higher prices that we are seeing is there is more conviction that there is going to be a housing recovery in the U.S. If you look at forward demand for lumber going up 4, 5, 6 billion board feet a year. Almost everybody agrees that’s got to come from the U.S. south. So price curves for saw logs in southern yield pine continue to strengthen. And with more conviction of there being a housing recovery, it’s pushing discount rates down. Those two combined factors and what’s driving those higher values.
Paul Quinn - RBC Capital Markets
Okay. And we are seeing some price appreciation in different parts of the U.S. south on the pine saw log side, but you are not seeing any in Arkansas. Is it more to do with just the growth versus drain ratio in that -- in your jurisdiction?
Eric Cremers - President and COO
It’s probably that, the growth versus drain, as well as just the dynamics of the sawmill and plywood capacity, that’s installed in the area. Ad I think as you go to coastal and central Georgia, the Carolinas, North Florida, parts of Texas there is just a more robust market for lumber and plywood producers than is south central Arkansas where we’ve seen a fair amount of idle capacity.
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Collin Mings - Raymond James
Okay. All right. And then just one other follow-up, just on the share repurchase. I’m just curious, I mean, some of your peers have gone as far as offered a specific trigger point on the share price that they see where they might get more aggressive. And I know that’s probably not something you guys would love to do but just can you talk a little bit more about maybe the dynamics where as you alluded to where that’s kind of the bottom of your capital allocation priorities. What might happen or what way you might see the move that up the stack a little bit? Particularly just give me some of the challenges as Mike you alluded to with how competitive it remains for Timberland acquisition. And again as I look your stock trading at discount to NAV, it seems like there is some value there and repurchasing your own timber, if you will this type of discount?
Mike Covey - Chairman and CEO
Well, we don’t dispute. We certainly believe, we traded at a discount to NAV and certainly in this market, perhaps buying our own trees through our own stock is one of the more attractive alternatives that we have for the use of capital, but I also think the landscape related with people who do share buybacks that have not got that right in hindsight. And our board has been very conscious about that. And I think it’s just as a matter of priority, kind of work through and said capital allocation to our wood products business, dividend increases and acquisitions are higher priorities in share back. That’s not that we’re going to rule them out but they are just at the bottom of the stack. Well, when moving to the top of the stack, obviously is a major retraction. I think in our share price for whatever reason -- for the below NAV than it is today and then certainly we do revisit with board.
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Executives Mark McHugh - SVP and CFO
Dave Nunes - President and CEO
Doug Long - SVP, U.S. Operations
Analysts
Collin Mings - Raymond James
Ketan Mamtora - BMO Capital Markets
Collin Mings ***
Mark, you've spent a lot of time discussing Timberland markets and just return to the asset class over time, just kind of against that backdrop, just maybe talk a little bit about what you're seeing in terms of deal flow. It looks like you guys made a total of about $7 million to $8 million in Timberland acquisitions during the quarter. Mark McHugh I guess, it had a very high level and I'll invite Doug or Dave to comment as well. I'd say we continue to see a pretty robust Timberland M&A market.
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But overall I'd say we continue to see a pretty steady pace of activity and just to be clear, I'd say the Timberland market as a whole doesn't tend to overreact to the noise that we see in the market around kind of monthly housing stats and things of that nature.
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Keep in mind, this is an asset class, it's underwritten on a 25-year to 50-year DCF assuming making assumptions regarding long-term sustainable harvest flows and trendline prices and so you know, we tend to not see the private market correct meaningfully relative to these statistics that we see coming on a regular basis. I'd say the China situation is certainly creating some noise in the market.
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But I'd say overall, discount rates, maybe there's been a bias towards seeking higher IRRs in transactions given the rise in interest rates, but again, Timberland tends to be valued on a real DCF basis and so while the overall interest rate environment fluctuates, it is certainly up over time. I wouldn't say people's view of real long-term discount rates have changed significantly. Ketan Mamtora ***
And then just turning to sort of U.S. south on the domestic side, have you seen with this sharp drop in lumber prices, have you seen any signs of people pulling back on these sawmill projects that have really come up quite a bit over the last 12 months? Are you seeing any signs of people either postponing it or pulling back? Or even sort of any signs of kind of caution on bidding for stumpage? Doug Long Yes, it's Doug again. So we haven't heard of anybody pulling back on their projects. Again, I think a lot of people feel that this is a short term thing and not the long term. So, I think they are continuing moving forward. And delay that we have heard of so far on the sawmills have been more around resourcing and getting equipments and people to work on the projects. So we haven't heard of anyone who specifically said they are pulling back based on kind of what we believe is going to be a short-term correction. On the stumpage side, as probably we have talked about for the last couple of quarters, we didn't see our southern stumpage prices run up with the lumbar. And we also haven't seen them go down with the lumber. So they haven't been correlated to lumber prices at all. And so, I guess while it would have been nice to see them run up with the lumber, the other side of equation they have been very stable and we have just continued moving forward with what's been going on for the rest of the year.
Ketan Mamtora And last question, there has been some press recently around reworking the Endangered Species Act. Do you think there was any possibility that the federal lands could be opened again on the Pacific Northwest for harvest I mean for most of us we haven't seen that at all in the last 25 to 30 years but do you think there is any possibility that could happen? David Nunes That would surprise us. I think that recognize that you have virtually no manufacturing capacity in place that could even handle that wood if it were to occur. And I think that we've just gone too far down that line you know from a policy standpoint. So I think that that's not something that we think is really on the horizon.
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Mark Weintraub Two quick questions one on the Timberland sales that you're seeing out there. Is this primarily an auction type processes or are you talking about more situations where it's you and maybe a contiguous owner et cetera? David Nunes It's really both. We're always in discussions with neighbors whether it's on the buy side or the sell side. Those are obviously logical situations and then there's always a decent mix of negotiated sales versus auction situations and different sellers have different preferences around doing that and it's our job to sort of understand both the landscape there in terms of properties that may or may not be for sale as well as the preference of those owners in terms of how they take it to market. Mark Weintraub And in those situations where it is more auction process, is there any shift that you could describe as to what seems to be going on in the processes relative to what we've been seeing in the last couple of years? I know that's a tough question to answer but any color you could give? David Nunes I am sorry, what do you mean by that Mark in terms of what's going on in those processes. I mean they remain very competitive I mean we certainly haven't seen demand for timberland properties trailing off and in fact we haven't been very successful in auction processes in the last couple years. Mark Weintraub And that's really what is trying to get out is I mean you haven't been very successful because it's been so competitive. Is there any reason to think that you're that much more likely to be successful in the auction type processes or I assume if it still remains very competitive. It's more likely you're going to be in the more private type of negotiated transactions? David Nunes I'd say the bulk of the activity that we have acquired has been and negotiated transactions. No question, that doesn't mean that we don't still take a crack at auctions and we have a low batting average there that we're proud of. You don't want to have a high batting average in auctions frankly.
Craig Kucera – B. Riley FBR Hey, good morning, guys. Thank you. I’m curious about the pricing environment on acquisitions that you’re seeing out there. Are you seeing any softness related to higher interest rates? Or are you seeing the inverse, maybe some tightening on the expectation for perhaps better sawtimber pricing in the future? Jerry Barag – President and Chief Executive Officer Pricing for timberlands specifically has been just pretty darn flat. There doesn’t seem to be any fundamental pressure to propel prices higher, although there are expectations both in the U.S. South and in the Pacific Northwest of higher and robust prices. But those expectations were really built into prior quarter, prior year expectations for growth and prices. So it hasn’t developed into overall higher prices. Interest rates have not had any perceptible impact in a negative fashion on cap rates or product prices as well. So it’s just been flat prices for timberland with the expectation of higher prices for timber. Craig Kucera Got it. And one more for me. I know you guys have sort of identified that a lot of timberland is likely to retrade here. Are you seeing any large portfolios out there? And kind of can you just give us an update on what you’re seeing in the marketplaces where lies some of those larger portfolios? Jerry Barag Yes, there are and they’re coming, and there’s many of them yet to hit the market. But some of them are in final stages as we can tell of being brought to the market, and so I think you’ll see a fairly robust pipeline of offer deals between now and the end of the year. And then there’s many others. There’s many things that we’re working on that are actually off market, private deals. So as I’ve said before and as I continue to say, our pipeline is very full. It’s robust, and it’s a high-quality pipeline of high-quality products.
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Paul Quinn – RBC Capital Markets Hi, thanks very much. Good morning, guys. Just a question. I talked to a number of people in timberland. Everybody is talking about the dirt of M&A deals out there, especially quality deals, and you guys, you don’t turn around on your call. You’re talking about the excellent M&A opportunities and a robust pipeline. What’s the major disconnect between the two? Jerry Barag We’re better than everybody. It’s hard to say. I mean there have been opportunities out there. As I’ve said, several things that we’ve worked on and are working on are off-market private transactions that for whatever reason, we’ve been able to source and have gotten in front of. And then it’s probably our ability to look differently at some of the opportunities and converting those.
*** Ketan Mamtora - BMO Capital Markets (United States) All right. That's helpful. And then, just turning to U.S. South, my final question. Do you still think that 1.3 million, 1.4 million housing starts is about where the inflection point is for Southern log pricing? Or there has been any rethink around that or maybe in terms of just lumber consumption in the U.S. South? Any thoughts there will be helpful. David L. Nunes - Rayonier, Inc. I think the message that we have been trying to communicate with investors is it really depends on the market that you're in. And recognize that the U.S. South really consists of a series of smaller markets and we believe that there are subsets within the South, particularly today, in that Atlantic coastal region where we are essentially at a fairly tensioned market where we see price elasticity such that when we have changes in lumber prices we see that translate more rapidly into changes in log prices, whereas in other parts of the U.S. South, we're not seeing that as much. We believe that the inflection point in some of the softer markets in the U.S. South is probably above the 1.5 million housing start level. So there will be parts of the U.S. South where you probably won't see meaningful price increases for a couple of years.
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Steven Pierre Chercover - D.A. Davidson & Co. Thanks. Good morning. So I too had a question on New Zealand. Only a couple years ago, the guidance for the region was less than $30 million at the high end and now the midpoint is triple that. So is that a function of increasing consolidation as you've increased your stake or is profitability changed that much? David L. Nunes - Rayonier, Inc. I think it's been a number of things, Steve. There has been modest increases in the footprint, but I'd say it's more driven by a combination of strong markets and favorable shipping, logistics costs. You had a period where we had an abundance of vessels that service the log trade, combined with low oil prices that translated in some of these periods record low shipping rates at a time when you had very strong demand across the spectrum. We saw as well increasing substitution within China, particularly on the plywood side, where we saw more radiata flowing into plywood, so that today roughly 30% of radiata goes into plywood. We also saw the ban on the harvest of native forests in China, due to overharvesting over a period of time. So that translated into a restriction on domestic supply at the same time that you had a strong growth in demand. And so the China market for logs has grown, while the domestic supply has shrunk and New Zealand has just been very well situated to compete in that market, both in terms of where those logs compete both geographically and product wise and then to combine that with very favorable shipping rates. So across that spectrum, I'd say it's a much heavier mix from a margin standpoint.
*** Mark Weintraub - The Buckingham Research Group, Inc. Okay. And any updated thoughts on Southern saw timber pricing and the outlook for next year. It does seem there's been an acceleration of capacity announcements for additional lumber. And just wanted to get your updated thoughts on where that supply-demand balance in saw timber is and when an inflection point might conceivably be reached and we get some improvement in pricing? Doyle R. Simons - Weyerhaeuser Co. Yeah, Mark. And we do think there's some potential for some pricing traction as we enter 2018, really driven by four things. Number one, as we mentioned, housing demand continues to grow and we are constructive on housing as we move into 2018. Secondly, as you just highlighted, more capacity is being added, and I'm particularly encouraged by number of recent announcements, ... . And all of that is on top of about 1.2 billion board feet of additional lumber capacity that's happening in 2017. ... The other thing I would point out – or two other things I'd point out is the Softwood Lumber Agreement. We do fundamentally believe there's going to be less lumber coming in from Canada, either as a result of final duties or hopefully a negotiated agreement. And then the final factor is we're really encouraged by the development of the Southern export markets. We are now shipping to India out of Charleston, South Carolina. We're shipping to China out of the Wilmington, North Carolina. We're continuing to work to develop exports out of other ports including some in the Gulf South. And while it's still early on that, those volumes as we've previously said could be equivalent to a small mill in the 2018 timeframe.
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Mark Connelly - Stephens, Inc. Thanks. Doyle, you said that the Southern land didn't get much damage from the weather. Do you have a sense of other people's Southern land? People we've been talking to don't seem to see a lot of damage in general. Doyle R. Simons - Weyerhaeuser Co. Yeah. I would agree with that, Mark. And talking to some of our competitors, I think, unlike some previous hurricanes where you've been around a long time as I have, there was extensive timberland damage. I think that was mostly avoided with these two hurricanes. So, I think from an overall timberland perspective, we were very fortunate as an industry.
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Paul Quinn - RBC Capital Markets Hey. Two questions. One on Timberland portfolio. You guys have done a number of things in the quarter – in the past, selling Uruguay, redeeming Twin Creeks, selling $100,000 in the U.S. South. What can we expect going forward here on your portfolio? And I'm specifically thinking about the North, which historically hasn't been part of the Weyerhaeuser portfolio? Doyle R. Simons - Weyerhaeuser Co. And so, Paul, what I'd tell you and what we've consistently said is we're constantly reviewing our overall Timberland portfolio. We do feel good about the moves we made, both through Uruguay and Twin Creeks, as Russell said earlier, to focus and simplify our portfolio. But we'll continue to look for ways to create value for our shareholders going forward, whether that's through potential acquisitions or potential dispositions from a portfolio perspective. Paul Quinn - RBC Capital Markets Okay. And then, maybe just a question on softwood lumber. Canadian companies seem pretty pessimistic on an agreement. In fact, West Fraser went as far as to say that Coalition seems unwilling to negotiate. I don't want you to get into negotiation on the call. But just from your perspective, what's stopping the agreement at this point? Doyle R. Simons - Weyerhaeuser Co. I'm not sure anything is necessarily stopping an agreement at this point, Paul. As we said, we continue to be hopeful that we will be able to reach an agreement with the Canadians. We're working very closely with the Coalition and the Department of Commerce. We fundamentally believe that a quota-based agreement is the best option going forward for all parties involved because of the certainty and the simplicity that it brings to the tables. So that's how we're thinking about it and we'll continue to pursue and hopefully be able to reach an agreement with the Canadians going forward.
Dave Nunes - President & CEO Before discussing our results for the quarter, I'd like to briefly address our recent equity offering and portfolio moves in the U.S. south. On March 16, we announced that company had entered into three transactions to acquire approximately 95,100 acres of high quality industrial timberlands located in Coastal Florida, Georgia and South Carolina. We recently closed on the transactions for a final aggregate purchase price of $214 million or roughly $2250 per acre. We're very excited about these acquisitions as they meaningfully increase our footprint in some of the strongest markets in the U.S. south. Further, these properties are highly productive with an average site index of 78 feet and average productivity of 4.7 tons per acre per year. Over the next five years we expect that these properties will contribute on average roughly 13 million of incremental adjusted EBITDA per year to our Southern Timber segment. So while these properties transacted at a relatively high per acre value reflective of their high quality, we expect them to generate a strong cash yield and an attractive long-term return for our shareholders.
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Mark Wilde - BMO Capital Market Okay. And then finally Dave if I could one of the trade papers recently had an article suggesting some cooling in the Southern timberland markets I assume you seen this and I wondered if you had any thoughts on that? Dave Nunes - President & CEO Our view is always been that it really is quality dependent and I think that you’re seeing a mix of quality assets there's plenty of deal flow right now but there's a mix of assets. Certainly at one end of the spectrum you have the transactions that we recently completed, that were very high quality assets in high quality markets. There are other assets that are going to be at lower quality and I think that depending on how you look at markets and which of those assets you're looking at, it’s going to color your view of markets. But I think we still are seeing strong market dynamics in terms of capital trying to get into the asset class and I don't know that we espoused to the markets cooling as much as we do really been driven by the quality of the assets that are out there.
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Steve Chercover - Davidson My last question again, forgive me if I might've missed it, but in southern sawtimber, the price is about as flat as a board. So when do you expect tension in that market that will help elevate prices? Dave Nunes - President & CEO I think it's quite variable. In our discussions with investors, we are focusing on the relative build in inventory across the U.S. south and we continue to believe and see that there is going to be very variable price elasticity going forward. And in some of our more tensioned wood baskets, we're experiencing that price elasticity now and in other wood baskets that are less tensioned, we're not. And I think it it's been to some degree exacerbated by the weather factors and the demand reductions associated with these two pulp mill incidents that Doug referenced that I think have exaggerated perhaps some of the effects. The La Niña conditions that have currently translated to a lot of dry weather in abundance of supply, as well as the demand reduction, neither of those two things are going to be long-term in nature.
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Chip Dillon - Vertical Research And then maybe lastly when you think about the 95,000 acres you bought they all seem to be relatively close to I95 and I know there is some very empty spaces still along the highway. But that doesn't mean that in five or 10 years whether it’s warehouses or other types of development could occur. Is there some optionality on these 95,000 acres in your mind, you might not have valued it as such when you made your deal, but do you think it's reasonable that if things progress that you could see some HBU potential among these acres? Mark McHugh - SVP & CFO I expect that we’re going to sell probably 20,000 to 30,000 acres a year into those HBU markets. And you kind of see the price premiums. I think the last couple years we've averaged 2500 to 2750 an acre, so that kind of gives you a sense as to our kind of run rate expectation for that business and I think it was generally kind of translate into a similar range to what we're forecasting for this year. And so as it relates to the upside potential in the recent acquisition you know it’s absolutely something that we see is creating some upside over time. We didn’t underwrite it into our acquisition underwriting. We didn’t need to. This was a property from a timber standpoint really supported the valuation without that but clearly these markets are again in that sort of path of growth in the I95 corridor and so we do see some upside there over time keeping in mind that because the timber value here is so high it’s sort of hurdle rate to actually sell into that HBU market is going to be materially higher as well. Dave Nunes - President & CEO Chip another thing to think about it is that there's a portion of those assets that actually have HBU value from an agricultural conversion and that's not something that you see very often, but it speaks to when you have site index that’s that high and you see surrounding lands that are in active agriculture, it’s suggestive of that.
Executives
Jerald Richards - VP and CFO
Michael Covey - Chairman and CEO
Eric Cremers - President and COO Analysts
Collin Mings - Raymond James
Chip Dillon - Vertical Research
Ketan Mamtora - BMO
Mark Weintraub - Buckingham Research
Paul Quinn - RBC Capital Markets
George Staphos - Bank of America
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Ketan Mamtora First question, can you talk a little bit about what you’re seeing on the M&A side? And how willing will you guys be to take up leverage for the right kind of opportunity? Michael Covey Well, the timberland M&A market was pretty active in 2016. They were setting aside the Weyerhaeuser, plum creek transaction, there were dozens of kind of smaller deals in that kind of $50 million to $500 million range. We are evaluated several of those and elected not to purchase any of them in 2016. So, I think the market has been pretty robust. We expect to continue with the kind of the maturing of some of the TIMO funds and need to for some of their investors to liquidate, and we expect to be more property on the market. Our debt enterprise level today is in the low 20% range. We feel like with we've got an untapped revolver of $250 million, which actually has an accordion on it we could expand, if needed. So, I think for the right opportunity, we'd certainly look for to continue to grow the Company.
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Mark Weintraub Thank you. With interest rates having crept up some of late and as you mentioned the TIMOs having property that's going to be coming to market the next year or so, are you sensing at all any change in the opportunities that might present themselves this year or next 12, 18 months? Or does it feel like the market in terms of the valuations is probably going to remain at the types of levels which up until now you've been very circumspect to get too aggressive on? Clearly you have found some, but in general you've been circumspect. Jerald Richards I think these timberland valuations continue to be quite strong regardless of the region of the country look at. It's very hard to create shareholder value at these kind of full prices that you have to pay for timberland to win. These auctions we've seen no softening of that. Timberland prices vary, but that's largely to do with the stocking and the quality of the timberland. But for well stock, good quality southern timberland I think deal metrics that are out there still very strong.
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Paul Quinn All right. And then just flipping over to softwood lumber because it's topical, what's the current status in negotiations right now? We've got a new U.S. government in. I guess there's not formal discussions between Canadian and U.S. governments at this point, but is the industry still talking? Are you hopeful for some kind of agreement in 2017? Michael Covey I think it’s a foregone conclusion that tariffs are going to be implemented later this spring. We view those as interims step to a negotiated agreement that establishes a quota on Canadian lumbers. And I think the industry is united in that and it's really important because it's one that allows the U.S. producers to invest and grow our lumber business here where is plenty of logs available, their housing starts to improving, there is a good demand for the product.
Executives Jerry Richards - Vice President and CFO Mike Covey - Chairman and CEO Eric Cremers - President and COO Analysts George Staphos, Bank - America, Merrill Lynch Collin Mings - Raymond James Chip Dillon - Vertical Research Mark Weintraub - Buckingham Research Mike Covey
We announced this morning that we have sold 172,000 acres of timberlands in Central Idaho for $114 million. As many of you know, Central Idaho is our realized strategic timberland holding based on productivity and location.
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This attractive sale provides the opportunity to take advantage of the dislocation in our public equity value. Our board is authorized to repurchase up to $60 million of our shares. Not only do we have a current opportunity to buy our shares at a discount in net asset value, we would get an immediate return of 4.4% which is the current dividend yield on our shares.
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Collin Mings
On Slide 5, you referenced that $2000 per acre appraisal for 350,000 acres of Northern Idaho Timberlands. Just curious, the teams thoughts about how appropriate or valid that appraisal, that data point would still be, given to your point about maybe hitting the lands more aggressively given the maturity profile of the acreage in Northern Idaho. How much comp is that or how much sense does that four-year old comp make at this point? Eric Cremers
Now in that appraisal, I’m sure the forecast or the appraisal assume that lumber prices were going to be moving higher and log prices along with it, and that’s exactly what happened. But if I had the guess, I’d say that appraisal is still very accurate and if we had another appraisal done today, it would be very consistent with the appraisal that was done back in 2012.
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Chip Dillon
When you look at the southern lands, I don't know if you would venture a guess here, but we saw recently, actually four state-pension plans step up and buy land across seven states. I am sure you are familiar with what I am talking about, at an implied value of $2150 per acre. Are there reasons why your lands in the South would be not comparable to those lands in terms of what you think the value would be? Jerry Richards
Well every acre in the south of course is - markets are different, and productivity of the acres is different. I think collectively as we look at the property, that was transacted, I think it was about 250,000 acres in five states. The side index was slightly higher than some of our land in general. Stocking level were perhaps slightly higher, some of it in the Carolina's and Georgia probably is in better stronger market than say Mississippi or Alabama. But on average I think our properties fairly comparable, perhaps slightly less but not much I think certainly – we said southern timberland roughly is worth $2000 in acre and I think ours would stack up comparable to that.
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Chip Dillon
And then last question is, as you've been involved with talking to folks involved in timberland, five years ago, our view was that, well it's inevitable that rates go up and the pension obligations need to be paid out, so there's going to be an overhang. I'm not so sure about the pension obligations, but what we do see, of course, is, not only continued low rates, but even negative rates in other parts of the world which makes, obviously, the current return on timberland just a tremendous positive relative to being a German pension plan and getting basically 20 basis points in a 10-year bond. With that backdrop, would you say that looking at various sales situations, that it's a lot more active on the buyer's side in U.S. timberland than say 2 to 3 years ago? Are you seeing more interest and, therefore, that what's makes you more of a seller than a buyer at this point? Jerry Richards
Well there’s two questions there. The reason that we are a seller is we felt that the best opportunity to buy timberlands was to buy our own trees that we think are dramatically undervalued when the stock went trading at in the $30 to $35 price range, when our net asset value is roughly $45 according to analysts. So the best opportunity for us is been to buy our own stock and in order to do that, we felt that it made sense to sell land. In terms of the number of – there’s certainly a number of properties that are going to be coming on to the market as some of these TIMO funds mature. We think that there is ready capital there to be deployed. I don’t think there is any more today than there was 3 years ago. I think the amount has been fairly stable.
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