Welcome to the 10:35 session at Citi's 2023 Global Property CEO Conference. I'm Anthony Pettinari with Citi Research. We're pleased to have with us Rayonier and CEO Dave Nunes. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or on the webcast, you can sign on to live Q&A and enter a code, GPC23 to submit any questions if you don’t want to raise your hand. Dave, we'll turn it over to you to introduce Rayonier, any members of the management team and provide opening remarks, and we'll jump into Q&A.
Thanks, Anthony. I think what I'll do is just give a brief, high-level review of Rayonier for those that may not be familiar with it. We're the last remaining pure-play timber REIT. We have 2.8 million acres in the U.S. and New Zealand. One of the distinguishing aspects of that is they're all pretty high quality lands, as well as markets in the U.S. South, where we have 1.9 million acres. About 0.5 million acres in the Northwest, and about 400,000 acres in New Zealand. We publish a sustainable yield, the only REIT that does that at 11 million tons annually.
This has been aided by a fair bit of acquisitions that we've done, $2.3 billion since 2014 when we emerged after the spin-off of a manufacturing business. One of the things that when I talk about being a pure-play that is distinguishing is the fact that roughly three-quarters of our cash flow or EBITDA comes from timber, whereas our peers are sort of flipped around the other way, with most of that coming on the manufacturing side. Some of the distinguishing features as you think about our portfolio, I think first and foremost is the high quality of the U.S. South portfolio with 72% in the top quartile markets.
That tends to translate into very high dollar per ton, which is what we think is of as the quality of markets. As we've seen the U.S. South gradually increasing market share on the lumber space, we expect to benefit from that. Secondly, our unique exposure as the only REIT based in New Zealand, where we're a fairly large landowner there. That gives us in addition to the exposure to the New Zealand domestic market, an excellent exposure to the China market, which is the largest market for forest products in the world. Despite some headwinds over the last couple of years, primarily because of COVID, that really helps fuel that engine.
Lastly is our real estate exposure. We've always had a strong rural real estate exposure primarily in our southern lands. We've augmented that over the last eight years by adding some improved development projects, one in north of Jacksonville, one south of Savannah. With the Pope Resources acquisition in 2020, we added some in the Northwest. You put all of that together, it makes that real estate segment really additive and distinguishes it relative to our peers. With that, Anthony, I'll just open it up to any questions that you or others might have.
Great. Great, Dave. Thank you for that overview. Maybe we could just start off, in the U.S. South, and I'm wondering if you could talk about kind of current market conditions for sawtimber in terms of price and demand, and then maybe taking a step back, what your full year guidance sort of assumes for how 2023 might play out in the South.
Yeah. I'll start on that, then I'll ask Mark to speak to the guidance. In the U.S. South, you have to keep in mind there's kind of two main drivers behind pricing. One is the foundational price that you get out of the pulpwood side of the market. For us, that's largely driven by containerboard. As containerboard has softened a little bit, we've seen some price softening in that, more downtime than we typically do this time of year. That's removed some of that price support on the pulpwood side. On the sawtimber side, as I touched on earlier, we've seen the South gain market share.
At the same time, with the pullback in housing and interest rates being where they are, we've seen that translate to lower operating rates in the U.S. South. We've seen some price moderation as a result of that. Again, going back to my earlier comment on being in the stronger markets, you know, we're protected by that because we're in markets that are relatively balanced. When I talk about strong markets, keep in mind the top quartile markets are balanced as in a 1-to-1 relationship between demand and the growth, what we call the growth-to-drain ratio. Conversely, the bottom quartile markets are over 2x the growth versus drain.
That's when you hear folks talking about not seeing any hope for prices rising anytime soon, it's 'cause they've got a lot of lands in those bottom quartile markets, and we're fortunate we don't have any of that. We tend to benefit more in that price elasticity in an upmarket.
Right. The full-year guidance.
Yeah, the full-year guidance for our Southern Timber segment we provided is $145 million to $160 million . I would note that, you know, the midpoint of that would be down modestly from last year. Of course, we did do a significant acquisition in the U.S. South in the fourth quarter as well. I guess another way to think about that is if you kind of think about the trajectory of Southern cash flows over the last few years, we have seen a market improvement in our portfolio in particular. I think that, like Dave said, you know, one of the things that is unique about our portfolio in the South is just the strength of the markets on which we operate.
You know, we've seen Adjusted EBITDA per acre in the U.S. South go from, you know, a range of kind of $50-$60 over the course of the last several years to, you know, last year it was $85 per acre. The midpoint of our guidance for 2023 would point to an Adjusted EBITDA per acre in the high $70s or around $80. You know, again, down modestly year-over-year, but still well above levels we've seen for the better part of the last, you know, five or 10 years.
Right. Dave, I'm curious, you know, you talked about the first quartile Southern markets where you're located versus maybe the fourth quartile Southern markets, which maybe are more inland, closer to places like maybe Arkansas or Tennessee. As you think about the next, you know, decade, would you expect those two quartiles maybe to that delta to maybe close a little bit in the sense that, you know, if I'm gonna build a brand-new sawmill, am I gonna go build it in Arkansas where the fiber is cheaper? Or do you think that delta is sustainable, or could it even grow in terms of sort of the at-relative attractiveness of your location?
Yeah, good question. When we started talking about this phenomenon, I don't know, maybe three or four years ago, at the time, we said that this imbalance was gonna get steeper. If you think about it in a like a classic supply curve sense, if you go back to the prior housing cycle, it was relatively balanced across the U.S. South. As you saw the relative inventory build, particularly in the interior parts of the South, you saw this starting to take effect. We got to a place a few years back where the difference between the top market and the bottom market was about a 2x in terms of stumpage. We said that curve's gonna get steeper, not flatter. Now it's about 2.5x.
It is playing out kind of the way we thought. The reason is that, there's lots of decisions that go into the sourcing of a mill. One of the key pieces of that is the quality of the residuals markets. Historically, sawmill profitability has been off their residuals. If you think about you're creating, you know, rectangular products out of a round log, you're gonna get a lot of residuals in that process.
If you don't have a good residual market like you have in a lot of those markets, and it's the same reason those markets are very poor performing from a timberland standpoint, is they don't have a good home for their pulpwood, and the pulpwood, you know, sells for a couple of dollars a ton in some of those markets, versus, you know, these coastal markets that we are more heavily in. Because of that's gonna dissuade some sawmill owners from wanting to locate in those markets. Secondly, is a labor statement. Sawmills used to be very labor-intensive. Now they've become much more technology-intensive, and you've got to import a lot of that skill set into mills.
If you're in a very rural area in some of these areas like Mississippi, Arkansas, you're gonna have a tougher time drawing that kind of talent. That's why you haven't seen, you put that in combination with the poor, pulpwood market or residuals markets for a sawmill, it's one of the reasons that you're not seeing the capacity immediately flow to those, to those lower-tier markets. I think it remains to be something that gets solved. You know, it may end up getting solved with things like pellets or other forms, but We think it's gonna take some time before that, corrects itself.
Maybe last question on the South from a log perspective. Can you talk about export exposure for the U.S. South and maybe the kind of the current, you know, Chinese tariffs and import constraints, and just maybe how that could play out?
Yeah. When exports emerged out of the South a few years back, they were really based on container backhauls, and the biggest port of that was Savannah, which we're tributary to, and to a lesser extent, Jacksonville for us. There's a couple of other ports in the U.S. South that also do exports. What happened more recently is China put an imposition around the pine nematode that was coming in from certain regions in the U.S. South. That is pretty much the combination of that and COVID has pretty much put a stop to the Chinese volume. We saw that Chinese volume really grow rapidly, and then it came to a virtual standstill.
Today, that market is really much smaller, and it's dominated by India and Vietnam, and it's still container-based. There have been a few folks that have experimented with break-bulk, but not with great results. We look at it more as, if we can find ways to tension the market further in a region that we know customers can afford to pay more, then, you know, we always wanna do that. That's been a practice in the Northwest. It's been a practice, you know, in the South, but on a much smaller scale.
Great. As we continue to kind of take a tour of your, of your timberlands, maybe, can you talk about Pacific Northwest in terms of current market conditions as well as maybe the full year guidance assumption?
Sure. The Northwest is a different animal than the South, in part because it generates a much higher proportion of sawtimber relative to pulpwood. Because of that, it tends to track with lumber. As we've seen lumber operating rates drop in the U.S., and as we've seen lumber prices come off, we've seen log prices kind of come back as well. One nice counter to that has been the re-emergence of the China trade as they've started to relax COVID restrictions. For us, we have an export facility in Port Angeles, which we acquired after we did the Pope transaction. It sits in between our legacy Rayonier holdings and the Pope holdings.
What it allows us to do is capture some upside on whitewood, in particular, going into that China market. So there's a little bit of put and take. I'd say in general, that Northwest market, you can think about that as more of a proxy to how lumber is behaving.
Got it. Got it. Rounding out the portfolio, can you talk about. Actually, can in terms of the full year assumptions or the full year guidance from Pacific Northwest, anything that you'd call out?
Yeah. The full year guidance is $42 million to $52 million Adjusted EBITDA, and that's relative to $64 million on 2022. Like Dave said, you know, that market tends to be much more correlated to what's going on in end market housing demand and lumber pricing. Again, we're anticipating a larger decline in that market relative to what we're seeing in the U.S. South, which is a more balanced mix of pulpwood and sawtimber, and has also benefited from, you know, the significant influx of new capacity in the South. We haven't really seen that trend bolster the Pacific Northwest. You know, again, I'd note that it's still sort of well above earnings that we had seen in years prior, but 2022, in particular, was obviously a very exceptional year.
Got it. Got it. Then finally, New Zealand, can you talk about the conditions there?
Sure. New Zealand historically has exports about half of its volume, and the vast majority of that goes to China. In rough order of magnitude, depending on the owner, it's 80%-90% of the exports end up going to China. When China had a zero-tolerance COVID policy, which essentially shut down a lot of the demand, they've just recently relaxed that, we've seen a nice uptick in that market on the export side. The domestic market there is also fairly healthy and driven by strong domestic housing. Not unlike the U.S., they've got a housing crunch where they need more housing, a lot of activity there.
I think the other thing about New Zealand to keep in mind is they have a regulated carbon credit market, and that's something that we take advantage of on an opportunistic basis. We have an inventory of those credits. Last year, we had particularly strong pricing. After not selling any in 2021, we sold about $20 million worth of them in 2022. That was a nice bit of added cash flow from a New Zealand segment standpoint last year.
Great.
On specific guidance, we're showing $58 million-$64 million for 2023 relative to about $54 million in 2022. Unlike the U.S. segments which we're, you know, projecting to be down year-over-year, New Zealand, we're actually expecting an uptick. That's really a function of, like Dave said, the relaxation of COVID restrictions in China and the pickup of economic activity there.
The other thing I'd add to that is a driver is also the ocean freight dynamic. We sell our export wood on a delivered basis. As we saw over the last 2 years with COVID, we had a big spike in shipping costs. We had a lot of congestion at the ports due to COVID. As we've seen both of those things relax, we've seen shipping rates drop dramatically. Even though prices are still kind of recovering, we've made up for a lot of that with lower delivery costs.
I know Chinese port inventories are something that you know, track regularly. Any kind of recent view on where those stand?
Every year following a Lunar New Year, you see a spike in inventories because you've got volume still flowing into the country without demand. This year we saw that go to roughly 5.3 million cubic meters, a little high relative to historical category or historical levels, post the Lunar New Year. What we really look for, though, is the mix of that in terms of the regions it's coming from, then we look at the daily offtake. When we were in the midst of the zero COVID policy, we were seeing the daily offtake in the 35,000 to 40,000 cubic meters a day. Now it's at about 75,000.
I'd say more of a normal run rate is 100,000 a day. We've made a lot of movement in the offtake, and that's gonna draw that inventory down quick, quicker. The other thing to note is the number two supplier behind New Zealand over the last couple of years has been Europe, and that's been salvage volume from a beetle there. As that salvage volume has dropped, as they've moved through the bulk of that, Last year, they were about at the level they were in 2019. We expect that to come down further. It puts more pressure on New Zealand as well as potentially U.S. supplies to supply the China market.
Great. Great. Maybe we can shift gears and talk about the kind of current market for Timberlands. Just, I guess the South is maybe the most active market that you participate in. Can you just talk about, you know, maybe dollar per acre values that you're seeing, you know, good quality industrial southern Timberlands transact at, maybe how that compares to the pre-pandemic period? Any kind of, like, recent trends in terms of valuations or volumes that you call out?
It's a hard question on a strict per acre sense because you're really comparing very different regions. If you look at NCREIF, which measures the private equity timber, the NCREIF, and that's done on an appraisal basis, not a transaction basis. You know, that value across the U.S. South was just a little over $2,000 an acre. If you think about that as an average value, and you go back to what I was describing earlier on these quartiles of markets, you know, you should expect to see bottom quartile markets be below that. They're not. In some cases, they're above that level, why is that occurring?
I think there's a couple reasons. One, I think we're seeing more compression of discount rates that are used in valuing timber associated with nature-based solutions and all of these prospective values of timber that are yet to sort of show up on the bottom line, but they're certainly showing up in terms of how people are thinking about underwriting those assets. On the other end of the spectrum, on the high-quality stuff, it used to be that you never saw lands that were sort of north of $2,500, and then we saw $3,000. Last year, we saw a few that were over $3,000. The one that we purchased was, you know, $3,300. Why is that occurring? Well, the biggest driver really is cash flow.
The lands that are in these higher quality markets are just generating fundamentally higher cash flow on either a per acre or per ton basis. That timber has generally tended to trade at a fairly stable EBITDA multiple level. If you have a region that's generating a substantial amount of excess EBITDA, you're gonna expect to see that show up in the valuation. We are seeing that. We're also on the high end of the quality spectrum, seeing it as well with respect to the nature-based solutions. I think it's playing a role in both good and bad markets. We still have a very strong bias of being in good markets.
We think that, you know, that solves your problems, whether the log market is a poor one or a strong one. You know, I'd rather be in a, in a balanced, strong market. That gives you a little bit of a flavor for kind of that range. It's a very wide range of, of valuations. You know, a year like last year where we saw a fair bit of activity, there were a lot of low-quality assets that came to market, and these would be assets that had, you know, either a poor mix of geography, or properties that had been harvested aggressively, and so they didn't have the stocking inventory.
The property that we bought, the part of the reason it was so valuable was that it was very heavily stocked. If you think about a, if you think about an average, if you think about an even distribution of a southern portfolio, your average age is gonna be about age 12 if you're harvesting on a sustainable level. The average age of the one that we purchased was 18. You've seen some that are six. That has a big bearing, when you sort of factor that in and compute the implied per acre value.
Just to emphasize that point, Anthony, if you look at the NCREIF index, which again just ticked above $2,000 per acre last year, you know, the EBITDA per acre on that portfolio in 2022 was about $55 per acre. If you look at the transaction that we announced in the fourth quarter, that we closed in the fourth quarter, we projected a 10-year EBITDA contribution from that asset that's on a per acre basis, you know, approximates just over $160 per acre. That's very similar to the projected EBITDA contribution on the transaction that Weyerhaeuser did in the Carolinas.
Again, very similar price per acre of about $3,300, very similar EBITDA contribution of about, you know, $160 per acre. Again, even though those assets came at a much higher price point on a per acre basis, with the cash-on-cash return, is actually much stronger than what we would see on again, some lower tier assets.
Again, comparing that NCREIF number, you know, our per acre EBITDA was $85 last year. It just sort of gives you a flavor, to compare that to.
Right. Just doing the math on that, I mean, is there a level of real return or cash-on-cash returns that you typically target for acquisitions in the South or?
I think to some degree it's gonna be driven. I mean, we certainly have a bias as a REIT towards properties that have a decent cash-on-cash yield. The particular transaction that we did last year was at 5%. I would characterize that as very high. It gets back to that, the average age being so much higher and the stocking being so much higher. It's not uncommon to see properties that have been harvested heavily be, you know, half of that or less. It varies, and it varies depending on the different buyers are gonna have different desires. There are some buyers on the private equity side that like younger properties where they'll just get all the upside on appreciation downstream.
Maybe it's hard to say, in terms of the buyers that are kind of driving this compression of discount rates, are these, you know, timberland owners like yourself who maybe see, you know, an opportunity in carbon? Are these new buyers in the timberland space? I don't know if you've seen-.
I think it's all of the above, Anthony. You have new players that are coming in on the private side and buying timber and competing with TIMOs, competing with REITs, players like IKEA is a good example. They're not alone. Even on the public side, you're seeing an increasing concentration of European and offshore investors in all the public company. You know, when I came to Rayonier, we had 3% or 4% offshore investors. Today, that's over 20%. You know, that plays a role in share price. It plays a role in what, you know, investors are looking to do.
I think we're seeing it both in a direct sense and an indirect sense through investors. I think the TIMOs are no different. The TIMOs are going through the same progression where they're getting more and more capital that's interested in those types of values, and so you're seeing them act accordingly.
Right. You, you referenced the recent acquisitions. Can you talk a little bit more about the Southern acquisition, you know, that package that was, I guess, announced in maybe November? Was that all in kind of top quartile lands, or how would you sort of characterize how that fits in your portfolio?
It was a mix of top quartile and second quartile markets. There were four geographies. Two of them were in the top quartile, two were, two fell outside of it. We did a weighted average of the markets, it was. Help me with that, Mark.
It was five out of 22 markets in the south. Again, the bulk of those were in the top quartile markets. Even the ones that weren't in top quartile markets were in sort of the upper end of the second quartile, so to speak. Again, very attractive markets that those lands were located in. Again, from an inventory stocking standpoint, we're pretty extraordinary. Again, the average age across that, average plantation age of about 18 years relative to, you know, if you're operating on a 25 year rotation and you had a perfectly even age class, you'd expect an average age of about, you know, 12 and a half years. You know, very well-stocked properties which are contributing to the, you know, sort of outsized cash flows, you know, particularly in the first decade.
Great.
We tend to look at properties that can improve our quality of our portfolio. We look at the stocking, we look at the site index, which is the height of a tree at age 25. We look at the % of plantations. You have a lot of wetlands in the south, so if you've got wetlands, you're not producing plantations out of those. Then we look at the markets. Then we look at the fit relative to our existing portfolio, and this just checked all the boxes. You look at the map and it's pretty obvious what a fantastic fit that is for our portfolio.
You know, we had spent a fair bit of time since the Pope transaction in 2020 creating balance sheet capacity for exactly this kind of opportunity. When this came and we assessed it, we realized that this just fits us like a glove and we need to be aggressive to go after this.
You've been net buyers in recent years. I mean, is there anything with valuations in the current market where you might, you know, take a pause or even become, you know, sellers? Then can you talk a little bit, I don't know, Mark, if you wanna touch on maybe capital structure and, you know, where leverage maybe should be for your portfolio, how high could you go for acquisitions and.
I think on the first part of that question, we have a point of view of always wanting to improve our portfolio, both by addition and subtraction. while we've acquired $2.3 billion of timber, we've also sold about half a billion dollars worth of timber. We're always looking for sort of peeling off, you know, lower, when we rank order all of our properties, we'll look at peeling off some of those lower quality properties, particularly in a strong market that's putting a lot of value on those.
We did one last year that was really predicated around carbon exposure in the Northwest on a property that was very expensive to operate, a lot of steep ground. It was ideal for a carbon play. That's where that ended up, transacting, in that nature. We're always looking at it, kind of from that perspective. I'll let Mark touch on the second piece of that.
On the balance sheet, you know, post the acquisition that we closed in Q4, we're sitting in net debt to EBITDA of about 4.5x , which is certainly at the, you know, upper end of our of our comfort zone, but certainly within that comfort zone. We generally communicated an EBITDA, sorry, net debt to EBITDA target of up to 4.5x . With all the, you know, debt activity that we conducted in 2021 and issuance under the ATM program, you know, prior to that acquisition, we were sitting at about just over 3x .
More limited from a balance sheet capacity standpoint right now, but still feel very good about where the balance sheet sits. You know, across the debt portfolio, weighted average cost of debt is about 3%, we're about 90% fixed, weighted average maturity of about 6 years. Again, feel very good about where the balance sheet sits.
Maybe just big picture question. I mean, does not having manufacturing assets or lumber assets, do you think it leads to better capital allocation decisions over the cycle, or maybe the same, or it just depends on the management team? I'm curious how the kind of pure-play model, when you think about kind of the timberland acquisitions.
Having grown up in the sawmill side of this business, and having seen integrated companies, I'd say there's very few that don't end up suboptimizing the management of timber, when it comes to mills. You know, mill success is a much shorter term equation. I think that it does a couple things for us. It gives us the freedom to move that portfolio around in a way that you wouldn't be able to with sawmills. Then I think too, it gives us a lot of flexibility as we sell wood into the market. Keep in mind, we have a very strict focus to be in these better markets.
We will take advantage of things like, you know, a period of high rains, where a lot of small, non-industrial private landowners can't access their properties, and we'll peel off sales to go into the market when the market is otherwise constrained. When you're integrated, you're not operating that way. You're trying to even flow things as much as you can to just sort of simplify things. We feel like we have a lot more levers to pull that allow us, at the end of the day, to have an incremental return lift over being integrated. There's the capital at play as well. You know, a sawmill needs to be replaced every 10 years, you've got a lot of CapEx, a lot of volatility of that earnings.
I know if you go back to the origins of the TIMO space starting, it really began with investors saying to the integrateds, you know, "We don't, we don't like the way you're managing these two businesses. Break them apart." You know, that. We still espouse to that point of view.
Great. Great. Maybe finally, you know, you talked about your experience with carbon and credits in New Zealand. Just wondering if you could maybe recap that. Then, you know, in the U.S., what is the long-term opportunity? Could you envision a day where you're maybe not harvesting on some of your land because you're getting paid for a carbon credit in the U.S.?
The biggest challenge with carbon is the idea of additionality, and that is proving that by managing the land differently, you're going to generate incremental carbon over what would otherwise be the case. New Zealand solved that in their regulated market by drawing an artificial line in the sand of 1990. Any timber that was established prior to 1990 doesn't count in their emissions trading scheme, which is their regulated carbon. Anything post 1990 gets carbon credits as trees grow. When you harvest them, you give credits back, and you end up with a small increment of what we call free carbon that you can trade. Switching to the US, the US does not have a regulated market. It's a voluntary market.
It's a series of voluntary markets. The challenge with the U.S. is, they're widely variable from a quality standpoint. Lots of them are based on what's called improved forest management. That's where you get into trouble from an additionality standpoint, is there have been a lot of carbon credits sold in the U.S. where somebody's selling a carbon credit on something that they wouldn't plan on operating anyway. When you look under the hood, they really don't have additionality. Those carbon credits have been the reason why the carbon price in the U.S. is so low. It's because the quality is so low.
We view that until and if the U.S. has a regulated market, there's a better, there's a better chance of having high quality carbon in afforestation type situations, where it's very clear that you're dealing with a situation where there wasn't timber there before. But there's only so much land that you can get from that. It's still a work in progress. I think you'll see carbon come into poor performing timber regions first and foremost. I think the carbon play in the U.S. is gonna take some time to sort all of this stuff out.
Great. Do you think that they will sort it out? I mean, is this a three-year thing or a 10-year thing or?
I think it's gonna, I think it's gonna be longer than three. I think you're gonna start to see examples. I think we've seen some examples of low quality carbon credits that just haven't penciled out or haven't passed the smell test. You're seeing a lot more reference to greenwashing. I think that as you see higher quality carbon projects, and I know, you know, we and our timber peers on the public side are all of one mind on this. We're all very guarded against lower quality carbon assets that sort of diminish from the sector. You know, we're kind of taking our time and making sure that what we have when we put one out there, it's gonna be credible.
Great. Great. Well, Dave, Mark, thank you for the update. This is great. Thank you.
Thank you.