Good morning. I'm Anthony Pettinari. I cover the timber REITs at Citi, and we're very pleased to welcome Mark McHugh, CFO of Rayonier, and he's joined by Collin Mings, VP of Capital Markets and Strategy. I think Mark's gonna give an introduction to the company, and then we'll move right into Q&A. I would just encourage those in the room, you know, you can ask questions on the mic or just raise your hand, and we'll do that. Mark.
Thanks, Anthony, for the introduction, thanks, everybody, for joining us today. I'm just gonna walk through a handful of slides, then we'll leave plenty of time for Q&A. I'm gonna be referencing the slide deck that's posted to our website under the Nareit conference presentation. You know, briefly on slide two, Rayonier at a glance. Rayonier is the second largest of the three timber REITs. We own or lease approximately 2.8 million acres across the U.S. South, U.S. Pacific Northwest, and New Zealand. That acreage generates a sustainable yield of roughly 11 million tons annually. We define sustainable yield as essentially the volume of timber that we can harvest into perpetuity.
It's really the concept of harvesting growth, and we believe it's a very important part of our investor disclosure, which I'll touch on more later. We've worked hard to grow our timberland footprint over the years. Since 2014, when we spun off our Performance Fibers manufacturing business, we've acquired roughly $2.3 billion worth of timberlands. That includes the Pope Resources merger in 2020. In addition to our core timber business, we also operate a value-added real estate platform. You know, essentially, when you own millions of acres of land like we do, invariably, some portion of that land is going to be more valuable to somebody else than it is to us as timberland.
We're typically selling, you know, 1%-2% of our southern land base into that HBU market annually, generally at premiums ranging from 50%-100% above timberland value. The pie chart on the bottom left there provides a breakdown of our 2022 Adjusted EBITDA. Last year, about 80% of our EBITDA came from our three core timber segments, with the balance coming from our real estate segment, that's pretty typical. Generally, that real estate segment will contribute 20%-30% of our overall Adjusted EBITDA. Essentially, all of our timberlands are third-party certified for sustainability. That's SFI in the United States and FSC and PEFC in New Zealand. In terms of our mission, it's pretty straightforward.
We want to provide industry-leading financial returns while being a responsible steward of the environment and a beneficial partner to the communities where we operate. Slide 3 provides a little bit more detail on our timberland portfolio. Again, essentially, all of our timberlands are located in what we, what we consider to be kind of investment-grade softwood-producing regions. We own or lease roughly 1.9 million acres in the U.S. South, spread across 8 states, roughly 475,000 acres in the Pacific Northwest, in Washington and Oregon, and about 420,000 acres in New Zealand, spread across five major resource units.
Like I said earlier, we are the second largest of the three timberland REITs. We like to think of ourselves as the largest or really the only pure-play timber REIT. We don't have any exposure to wood products manufacturing assets. Over the last three years, if you look at the breakdown of our Adjusted EBITDA, roughly 3-quarters of that has come from our timberland business, with the balance coming from our real estate operations. You can contrast that with the peer group, which is the converse of that. It's roughly 3-quarters of their EBITDA has come from wood products manufacturing and real estate businesses. Only about a quarter has come from timber harvest operations.
The reason we think that that's important is laid out on Slide five, and that's really the very differential volatility between timber businesses and lumber manufacturing. As you can see, over the last 20 years or so, the EBITDA margins in the timber segments of the peer group have averaged about 35% with pretty minimal volatility, and that compares with an average EBITDA margin for the lumber segments of those companies of 11% with significant volatility and several years in which profitability was actually negative or break even. You know, one of the things that we like about our portfolio, again, is that pure-play focus.
Lumber has had a very strong run over the course of the last few years in the wake of COVID, but it's historically been a very volatile business. We think one of the hallmarks of real estate investing and timberland investing, in particular, is really that safety and stability of cash flows, and so we really like that pure-play focus within our portfolio. On Page six, we highlight a few of the features of our portfolio that we think differentiate Rayonier from our peer group. First, in the upper left, you can see our sector-leading EBITDA per ton in the South, and that's really reflective of the markets in which we operate. Roughly 70% of our timberlands in the South are located in top-quartile markets from a pricing standpoint.
I recognize that the southern markets tend to be highly localized in terms of the supply-demand dynamics. There's a tendency to think of the U.S. South and cast it with a very broad brush. In reality, it's a series of micro markets with very differential supply-demand characteristics. Again, 70% of our lands are located in those top-quartile markets, which really shows up in that sector-leading EBITDA per ton. Last year, we generated about $25 per ton of EBITDA in the U.S. South. That compares to the peer group in the $13-$16 per ton range. We also have sector-leading HBU realizations. You know, we often say that the HBU business is all about premium.
If you're just, you know, selling land at timberland prices, you're not really generating any value add for your shareholders. We tend to focus very much on premium in that business, and again, you can see that we've led the peer set in terms of our value realizations and premium realizations in that sector. Thirdly, we have an improving harvest profile. Like I said earlier, we've been very acquisitive over the last decade, having acquired 2.3 billion acres of timberland. I'm sorry, $2.3 billion worth of timberland across all three of our geographies, and that's translated to an increase in our sustainable yield from about 10 million tons annually over the last five years, to projected to be 11 million tons annually over the next 5 years.
An increase of about 10% in that sustainable yield. Lastly, we have a unique exposure to the China export market among the peer set, and that's really driven by our footprint in New Zealand. You know, roughly 60% of the volume that's harvested in New Zealand goes export. Roughly 80% of that goes into the China market. We have a very unique access and exposure to that market. You know, China has been a bit challenged here of late, but it really has been the engine of growth in global fiber demand, as well as export demand over the last decade. We like our exposure to that market.
We expect it'll continue to be a major driver of global fiber demand going forward. Page seven highlights some of the strategic priorities that we have as a company. We updated these strategic priorities in 2014. We believe that they're every bit as relevant today as they were then. I won't go into all of these in detail, but I'll maybe just touch on a few highlights. First and foremost, we wanna manage our assets for the long term. Timberland is a very long-term business. When we plant seedlings in the ground, we're generally not going to harvest those trees for 25-40 years, depending on the region. We have to take a very long-term approach and focus with our business.
Second, we wanna grow our portfolio through disciplined acquisitions. Like I said earlier, we have been inquisitive over the years. We really focus on upgrading the portfolio, both through addition in acquiring lands, but also through subtraction, where we're, you know, divesting lands that we think are going to be lower value add over time. you know, thirdly, we're always looking for opportunities to optimize the value of our portfolio by monetizing higher and better use lands. So we're constantly looking across the portfolio, seeing where we have opportunities to realize, again, a higher value for that property to a third-party buyer than we feel it's worth within our portfolio as timberland.
You know, next priority, which is relatively new to our set of priorities, is to position the company for the low-carbon economy. You know, we've seen tremendous opportunities develop over the course of the last really, just the last few years, around what we broadly characterize as nature-based solutions, and I'll go into some more detail on that later. This is really you know, there's a increasingly optimistic view around the value of carbon that's embedded within the forest and our ability to monetize that value over time. Lastly, we want to be the industry leader in transparency and disclosure. I think we've really tried to set the bar for our sector from a disclosure standpoint. We're the only one of the timber REITs that discloses our sustainable yield.
We disclose that within each of our three geographies. Again, if there's a single data point you want to know about a timberland portfolio, it's that sustainable yield. Again, I think that we've really tried to lead the sector from a disclosure and transparency standpoint. Moving on to our capital structure on Page eight. You know, following the Pope Resources acquisition in 2020, we made a number of moves to improve our balance sheet and build acquisition capacity. We implemented an at-the-market equity offering program in late 2020. In 2021, amidst a very low interest rate environment, we took a number of debt actions, essentially restructured every tranche of debt within our portfolio, including issuing $450 million of senior notes.
These actions all sort of put us in a position to build acquisition capacity to effectuate a $450 million acquisition in the fourth quarter, which was a highly complementary set of assets in the U.S. South. You know, as we sit here today, our balance sheet capacity is obviously more limited, having done a large cash finance deal in the fourth quarter. We're comfortable with where we sit today. Our net debt to trailing Adjusted EBITDA is about 4.5 x. Our weighted average cost of debt, a cost across our debt portfolio, is 3.1%. Roughly 90% of that is fixed with a weighted average maturity of about six years.
We're investment grade-rated with a stable outlook by both agencies. Again, really, really like where we're at from a balance sheet standpoint, and particularly our cost of debt relative to a rising interest rate environment. We feel like we're in a very good position. As it relates to capital allocation on the following slide, you know, this highlights some of our capital allocation priorities over the last several years. Really, our mantra around capital allocation is to be nimble and opportunistic, with a view towards building long-term NAV per share over time. You know, to this end, we've often pivoted between different capital allocation priorities where we see the best available opportunity. We've bought back stock, we've issued stock.
Like I said earlier, we've been active under the ATM program over the course of the last couple of years, which has allowed us the ability to effectuate some significant acquisitions for the company. Of course, our dividend is also a key element of our capital allocation strategy. Current dividend is a $1.14 per share. Again, you know, we really try to approach capital allocation from the vantage point of being very flexible, opportunistic. We don't go into any given year with prescriptive metrics in terms of how much we want to deploy into acquisitions or buybacks. We really try to play the hand we're dealt, and with a view towards building that long-term NAV per share.
Page 10 highlights some of our ESG priorities. You know, a key element of our ESG story is really the fact that commercial forestry, at its core, is a nature-based climate solution. We estimate that our forests sequester nearly 15 million tons of CO2 equivalents annually. You know, in addition, much of that timber that we ultimately harvest goes into the manufacturing of solid wood products, which thereafter store carbon for decades. Of course, all of our timberlands are third-party certified for sustainability as well. On the social front, I note that safety remains a key priority for the company, and we've provided some stats around some of our safety figures as well as benchmarks.
We've really had a focus on improving safety for performance over the years. Lastly, I believe we demonstrate, you know, best-in-class governance practices, and really in particular, around board diversity. Approximately 60% of our board represents diversity in the form of gender, racial, or national origin diversity. Again, I think we've really taken a progressive approach from a governance standpoint. Before we open up to Q&A, I also just wanted to touch a little bit more broadly on nature-based solutions. Slide 11 lays out some of the key areas in which we're seeing opportunities develop around nature-based solutions. Yeah, I'd really kind of characterize this whole realm of nature-based climate solutions into three broad buckets.
You know, the first would be the ability to participate in the voluntary carbon market, and that's where we would undertake, you know, a carbon project on our footprint, either in the form of improved forest management or afforestation, towards generating carbon offsets that then we can monetize to third parties that are looking to offset their emissions footprint. You know, that would be one category of nature-based climate solutions. The second would include, you know, alternative land uses. For example, where we can lease land for carbon capture and storage, or solar installations or wind farms. We're seeing, you know, quite a bit of activity in all of those different realms today, particularly in the carbon capture and storage front.
The third would be just alternative uses of wood fiber, you know, for example, for bioenergy or biofuels, like sustainable aviation fuels manufacturing. All of these are fairly nascent in their kind of development stage, but we're seeing tremendous interest and activity on all of these fronts. Of course, you know, our core business, you know, harvesting timber for, you know, consumer products and construction-based materials, we believe at its core is a nature-based solution. We're seeing increased demand for things like mass timber, as well as increased demand for paper and wood-based products as an alternative to single-use plastics.
Again, a lot of activity on this in this arena right now, a lot of conversations ongoing, and we ultimately think that this is gonna be a major value driver for the company. Perhaps I'll pause there, and we can open it up to Q&A, either from Anthony or from the audience.
Great, Mark. Thanks for that overview. Again, if anyone has any questions, just, you know, raise your hand. you know, maybe we can start off with the nature-based solutions, and you identified kind of the three maybe channels or categories. Can you talk a little bit more about, I guess, first, the voluntary carbon market, and specifically your experience in New Zealand with credits-
Sure.
You know, maybe lessons learned or opportunities in the U.S., maybe long term?
Recognize that New Zealand is not a voluntary carbon market. It's a regulated carbon market. You know, New Zealand has a cap and trade system in place, a regulated Emissions Trading Scheme, whereby emitters are issued credits, and then they have to retire those credits. Those credits over time will reduce in volume to simulate investment in emission reductions over time. We've been a participant in that market really since its inception as a forestry owner there. Again, it operates very differently than the market in the United States, which is currently a voluntary market.
Where you see regulated emissions trading schemes, you tend to also see higher carbon credit prices. You know, one of the challenges in the U.S. voluntary market today is that there is just a wide array of perceived quality and credibility among different carbon projects. You know, there are carbon credits that trade for, you know, kind of mid-single digits per ton, and there are carbon credits that trade, you know, well in excess of $100 per ton, depending on, again, the perceived quality of that credit.
I think we're optimistic that over time, that market will, you know, develop a greater set of standards and consistency so that a credit is a credit, is a credit, and you can actually achieve scalability in that market. Suffice it to say, it is still a bit of the Wild West in the voluntary market, and there's a lot of concern around, you know, greenwashing and, you know, kind of fast-forward 3 or 4 years, you look back and say: Well, that project wasn't truly additional from a, you know, climate mitigation standpoint. You know, we're proceeding in that market very cautiously. Again, I think we're optimistic that it will continue to develop and evolve over time, and that we...
It will be a value driver for Rayonier. I'd say we're being very judicious about, you know, how we proceed in that market. We have not yet sold carbon credits into the voluntary market in the U.S., but it is something that we expect we'll do longer term.
In terms of the U.S. market, you know, do you have projects planned for the long term that you could potentially sell credits? Is it, you know, in terms of what allows the market to kind of, you know, is standardized, is it really standardizing around, like, a certain registry? What could the, you know, path over the next, like, 3-5 years look like?
Yeah, I mean, again, if you focus specifically on the voluntary market for forestry-related credits, I sort of subdivide that into probably three categories. You know, one would be, you know, some form of avoided deforestation or conservation. That's essentially where, you know, we were going to clear this forest, but now we're not, and we're going to get, you know, carbon offsets in exchange for that. You know, the second category would be what's called Improved Forest Management, and that's things. It can encompass things like extending the rotation age in a particular forest, or investing in more intensive silviculture to enhance growth rates and thereby enhance carbon sequestration.
The last would be afforestation, where you're buying, you know, bare pasture land or grazing land and planting trees that weren't there before. I'd say that, you know, in terms of the quality spectrum, there's increasing perceived quality along the way, with sort of avoided deforestation really having fallen out of favor from a credibility standpoint. Improved forest management, you know, candidly being a bit of a black box, where it can oftentimes be hard to really prove out the additionality. Afforestation, I think, really being the gold standard of forestry credits because it's clearly additional. There's no concerns around leakage because you're, you know, essentially planting trees that weren't there before. That carbon sequestration is clearly additional.
But again, it's a wide array of perceived quality in that market. And, you know, we're looking at projects, you know, primarily in the improved forest management and afforestation side of things. We have a number of pilot projects that are currently underway. Again, haven't yet sold any credits, but that's something that we certainly expect we will do longer term. You know, we're trying to make sure that anything that we do in that arena is, uh, beyond reproach and sort of meets that gold standard of quality.
Great. Just continuing with nature-based solutions, you know, the alternative land uses, I mean, there's CCS, there's wind, there's solar. Can you talk about what you're doing currently and maybe where the most opportunity is?
Yeah, it's interesting. I mean, we've seen, you know, just a lot of activity in that space, particularly in carbon capture and storage, and increasingly in solar as well. I mean, solar is far and away, I'd say, the most mature of those opportunities. You know, CCS is still, you know, very nascent. You know, there's been a lot of activity around locking up land to facilitate CCS, but there's a very long permitting process, and I believe there's only one or two sort of active CCS where actual injection is ongoing currently. Again, a lot of activity, but it's more, you know, forward-looking. It's trying to, you know, essentially secure the land to provide the pore space for that.
You know, again, going back 3 years ago, I would've said that. You know, that felt sort of very early stages, whereas, you know, we've gotten to the point now where we've executed our first, you know, large-scale CCS lease. We can't provide much in the way of detail on that because it's under a confidentiality agreement, but we are seeing a tremendous amount of inbound activity, you know, from players that are essentially looking to lock up the land base to support longer-term CCS projects.
Great. Maybe just rounding out nature-based solutions. In terms of alternative uses of wood fiber, you know, you identified biofuels. Can you talk about, you know, that impact to Rayonier?
Yeah, you know, again, still relatively early stages. You may have seen a couple of weeks ago, Drax put out a big announcement that they were looking to construct two BECCS facilities in the U.S. South, and actively evaluating, I think, an additional nine potential facilities. BECCS is bioenergy with carbon capture and storage. That's essentially where you're burning some form of wood fiber, wood waste, or wood pellets, for energy production, and then capturing the carbon at the site, and storing it underground.
That's thought to be a carbon-negative cycle because, you know, carbon is being sequestered as the trees grow, and then through that cycle of bioenergy with carbon capture and storage, you're then sort of permanently sequestering that carbon in the ground. So, you know, again, Drax had a significant announcement a couple of weeks ago where they're looking to build, you know, two of these facilities in the South with several additional ones under consideration. Each of those facilities would be a fairly significant consumer of some form of wood fiber or pulpwood, probably on scale with a large pulp mill. You know, again, we're excited about the prospects for that sector generating incremental demand for wood fiber.
I think sustainable aviation fuels is also one in which, again, the technology is still very much early stage and evolving, but wood fiber is thought of as being a viable feedstock and an elastic feedstock into SAF production. I mean, that's been one of the challenges with SAF, is just the limitations on feedstock availability. There's only so much used cooking oil, for example, that you can source within a, you know, radius of a SAF plant. You know, wood as well, as it relates to, you know, wood as a feedstock for SAF, it's not competitive with edible feedstock, for example, like corn.
Again, I think it's thought of as having some promising applications in the SAF arena, but still very early innings. Again, that's an area where we see, you know, tremendous growth potential over time. If you look at the commitments that have been made to SAF by the major airlines, I think the estimated demand is projected to be, you know, 3 billion gallons of SAF by 2030 off of a, you know, very small existing manufacturing base today. Again, we see a lot of potential opportunity there, but still early innings.
Great. Great. you know, Mark, maybe we can kind of walk through your regions and talk a little bit about sort of market dynamics, you know, who your customers are, kind of relative market health, you know, log trends, and then maybe the trends in the timberlands markets themselves. Maybe we can just start with the South.
Sure. Yeah, so in the U.S. South, you know, we clearly saw some price declines, you know, when we announced our first quarter earnings that, you know, year-over-year, you know, were more significant than perhaps people were expecting across the broader U.S. South. I note that we also saw, you know, much stronger price gains over the prior couple of years. You know, as I noted earlier, 70% of our lands in the South are located, in those top quartile markets from a pricing standpoint. We, we tend to look at what we refer to as a growth/drain ratio, and that's quite simply the volume of timber that is, you know, growing in a particular sourcing radius relative to the volume of timber that's being consumed.
What you want to see, you know, in a very strong market, is a one-to-one relationship where all the timber that's essentially being grown, is being consumed. When you see those, you know, tighter growth drain relationships, that tends to translate to much greater price elasticity. When you see kind of a spike in demand, for example, like we saw in the wake of COVID, that translated to very strong price momentum, in those markets. You know, conversely, when markets pulled back, we saw a sharper pullback, in those markets. Again, going back to what we talked about earlier, you know, on an absolute profitability basis, you know, we're still performing, you know, well above the U.S. South on average and above the peers, given where our footprint is located.
I think we've also seen, you know, greater price volatility. Some of the markets of late, just kinda given the broader macroeconomic environment, that's been prevalent.
The market for timberlands, or any kind of trends in timberland transactions that you've seen in the South, you know, recently?
Yeah, I mean, transaction values have held up remarkably well. You know, you would think that in a rising interest rate environment, that would generally put pressure on any kind of a DCF-based valuation. We've actually seen, amidst a rising interest rate environment, we've actually seen continued cap rate compression in the timberland asset class. And recognize that we value timber using a real DCF, using real discount rates. Obviously, that might be disconnected from where nominal rates are at any given point in time. I really think what's driving that cap rate compression in the timberland asset, you know, particularly in the U.S. South, is just the promise around nature-based solutions and kind of the embedded option value around nature-based solutions.
It's very hard today to, you know, underwrite a, you know, 30-year DCF like we would typically value timber. It's very hard to underwrite a 30-year DCF on, you know, carbon capture and storage opportunities or voluntary carbon market opportunities or, you know, SAF opportunities, because, you know, again, a lot of this is still in the, in the evolutionary stage here. That said, I think that there is a lot of optimism that will translate to meaningful increments to value over time. I think that that's ultimately being reflected in, you know, would-be buyers of timberland willing to accept a modestly lower, real discount rate than perhaps they were willing to accept, you know, 3, 4 years ago when these opportunities were, you know, kind of further off and, probably more speculative than they're viewed as being today.
In terms of, you know, buyers, are you seeing new kinds of buyers, or, you know?
I mean, we're both seeing new kinds of buyers as well as probably new kinds of capital underlying some of the traditional buyers. Recognizing that, you know, the TIMO players continue to be, you know, some of the major participants in both the buy and the sell side of timberland M&A. I think the nature of that capital has changed to some extent. A number of the TIMOs have raised, you know, carbon-focused funds, where they're seeking kind of a balanced return from your traditional timber activities, as well as some component of carbon sequestration. In addition, we've seen new entrants to the space. We, you know, we've seen some large tech companies make commitments to buying timberlands.
We've seen, you know, some large oil and gas majors make commitments to buying timberlands. We've also seen kind of a, you know, array of more kind of ESG-oriented investors, where they're looking, you know, to acquire the, a timberland as a, you know, kind of a biodiversity play or to generate, you know, longer term carbon sequestration to offset their existing emissions footprint. You know, yeah, I'd say that the universe of buyers has definitely expanded. There's a, you know, discernible trend towards, you know, kind of ESG-driven investment concerns, kind of going into that, kind of investment calculus as it relates to how people think about timberland.
Mark, you talked a little bit about capital allocation. I'm just wondering, you know, with your leverage where it is, can you talk about sort of ability to delever and maybe long-term priorities on capital allocation?
Yeah. I mean, certainly with where leverage is at today, we're a bit more constrained in terms of our capital allocation capacity. I mean, that said, you know, we've taken leverage up to this level twice in the last 7 or 8 years to facilitate large acquisitions. Each time we've done that, we've managed to bring it back within kind of our target credit metrics in relatively short order. you know, one of the unique attributes of Timberland is a, you know, in terms of the credit quality of the asset is, you know, we own millions of acres of land, and that land is infinitely divisible.
We have the ability to really dial in any you know, level of liquidity that we might want at any given point in time. As I said earlier, the timberland transaction market and land values have actually held up incredibly well amidst the macroeconomic headwinds that we've seen. We're always looking at opportunities to prune the portfolio of some of the, you know, kind of lower-tier assets within our portfolio. Certainly, in the wake of large acquisitions, we've oftentimes sold some tracts of land to partially fund those acquisitions. In 2016, we acquired a large portfolio in the Pacific Northwest.
We sold some lands, you know, roughly $120 million, if I remember correctly, of lands to partially fund that. After the Pope Resources acquisition in 2020, we sold our portfolio in Mississippi, which is also around $120 million worth of dispositions. That's something that we always have the ability to do, and, you know, given kinda how well land values have held up, that's certainly something that we're looking at, currently.
Great. Well, we're coming up on time, but Mark.