Welcome and thank you for joining Rayonier's Third Quarter 2022 Teleconference Call. At this time, all participants are on a listen only mode. During the question and answer session, please press star one on your telephone keypad. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Collin Mings, Vice President, Capital Markets & Strategic Planning.
Thank you and good morning. Welcome to Rayonier's Investor Teleconference covering third quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier.com. I would like to remind you that in these presentations we include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release and Form 10-K and Form 10-Q filed with the SEC list some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page two of our financial supplement. Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measures in our earnings release and supplemental materials. With that, let's start our teleconference with opening comments from David Nunes, President and CEO. Dave?
Thanks, Collin. Good morning, everyone. First, I'll make some high-level comments before turning it over to Mark McHugh, Senior Vice President and Chief Financial Officer, to review our consolidated financial results. We'll ask Doug Long, Senior Vice President, Forest Resources, to comment on our U.S. and New Zealand timber results. Following the review of our timber segments, Mark will discuss our real estate results as well as our outlook for the remainder of 2022. Before discussing our results for the quarter, I'd like to first highlight the acquisitions in the U.S. South that we announced yesterday afternoon concurrent with our earnings release.
Specifically, we announced that we've entered into two separate agreements to acquire approximately 172,400 acres of high-quality commercial timberlands located in Texas, Georgia, Alabama, and Louisiana for an aggregate purchase price of $474 million from Manulife Investment Management, a leading timber investment manager. Approximately 80% of the acreage consists of fee ownership, while the remaining 20% consists of a long-term lease. We are very excited about these additions to our portfolio as they comprise a well-stocked and highly productive timberlands located in some of the strongest timber markets in the U.S. South. It's extremely rare to come across an acquisition opportunity with this unique combination of quality, scale, and fit with our existing portfolio. For the acquired fee lands, 72% are plantable with an average express site index of 73 feet.
This translates to a sustainable yield of approximately 670,000 tons per year or 4.8 tons per acre per year, which is well above industry average productivity levels. The fee properties also have a mature age class profile and an extraordinarily high level of merchantable timber inventory. The average plantation age is 18 years, and the average stocking is 54 tons per acre, of which 66% is grade product. Based on these factors, along with the expected contribution from the leased properties, we anticipate an annual average harvest level of approximately 860,000 tons from the acquisitions over the next decade and an increase in our U.S. South sustainable yield of 11% to 7 million tons per year.
In addition to strong productivity characteristics and inventory stocking, the properties are also located in some of the best markets in the US South. Specifically, based on TimberMart-South composite stumpage pricing, the acre-weighted average market ranking of the acquisitions is 4.9 out of 22 markets, representing an average composite price that is roughly 30% above the median composite price in the U.S. South in the third quarter of 2022. Putting all of this together, we expect that the acquisitions will contribute average annual adjusted EBITDA of roughly $25 million to our Southern Timber segment over the next 10 years, with additional upside potential from higher and better use real estate sales and natural climate solutions.
This represents a timber-only EBITDA multiple of 19x, which compares favorably with public market trading multiples, the implied multiple on the NCREIF Timberland Index, and multiples which we've seen other U.S. South assets transact recently. We expect to close the acquisitions before year-end, and we anticipate financing the acquisitions with cash on-hand as well as a $250 million term loan through the Farm Credit System. As discussed in the past, our strategy to acquire high-quality properties located in strong markets, as we believe this improves optionality and ultimately contributes to better long-term financial returns. Following these acquisitions, our U.S. South Timberland portfolio will total 2 million acres, of which 72% will be in the top quartile markets as measured by TimberMart-South composite stumpage pricing.
We believe that the U.S. South overall is well-positioned to capture increased market share of North American lumber production as well as global fiber and wood chip markets. We further believe that the strongest regional markets in the U.S. South are well-positioned to capture favorable relative pricing gains for both sawlog and pulpwood products going forward, given their competitive and diverse customer mix, balanced timber inventories relative to demand, and strong pricing tension. In sum, we believe that these acquisitions represent an excellent fit with our capital allocation strategy and a compelling use of our balance sheet capacity. We look forward to integrating the properties into our portfolio and managing them for long-term value creation. Now I'd like to switch gears and discuss our third quarter results.
We achieved earnings per share of $0.15 and adjusted EBITDA of $65 million in the third quarter. Adjusted EBITDA was 44% below the prior year quarter as two significant development transactions drove exceptionally strong Real Estate results in the prior year period. Notably, total adjusted EBITDA in our Timber segments increased 14% versus the prior year quarter as favorable results in our Southern Timber segment more than offset a lower contribution from our New Zealand Timber segment. Drilling down further on our operating segments, our Southern Timber segment generated adjusted EBITDA of $37 million in the third quarter, which was 50% above the prior year period. Weighted average net stumpage realizations increased by 18%, driven by strong demand for both pulpwood and sawtimber, while favorable logging conditions further contributed to a 27% increase in harvest volumes.
More broadly, our Southern Timber segment continued to benefit from our concentration and scale in some of the most tensioned log markets across the U.S. South, as well as strong contractor relationships, which have allowed us to successfully navigate a challenging supply chain and cost environment. In our Pacific Northwest Timber segment, we achieved adjusted EBITDA of $13 million, up 1% from the prior year quarter. The year-over-year increase was primarily attributable to 13% higher weighted average log prices, partially offset by higher costs and an 11% reduction in harvest volumes. Our operations in the region continued to benefit from favorable supply-demand dynamics as domestic lumber markets, export markets, and pulpwood markets competed for a limited supply of logs.
In sum, our U.S. timber segments continued to generate strong financial performance and pricing gains in the third quarter, driven by favorable end market demand as well as localized supply tension, and both segments remain on pace to achieve record full-year adjusted EBITDA. Conversely, our New Zealand timber segment continues to contend with a challenging operating environment, particularly in the export market. Third quarter adjusted EBITDA of $16 million declined 22% from the prior year period. While port inventories in China have gradually declined to a more normalized level, demand continues to be constrained by lockdown measures in response to COVID-19 outbreaks, as well as a slowdown in the construction market.
In our real estate segment, we generated adjusted EBITDA of $8 million, down from $64 million in the prior year period, as the prior year period benefited from the closing of two significant development transactions. While we expect that the timing of land sales will remain lumpy quarter to quarter, we remain encouraged by the continued strong pricing for rural land in our markets, as well as the positive momentum across both our Wildlight and Heartwood development projects. As Mark will discuss in greater detail later in the call, we remain on track to achieve our full-year adjusted EBITDA guidance of $310 million-$330 million, with our Southern Timber and Pacific Northwest Timber segments both expected to post record years in 2022. With that, let me turn it over to Mark for more details on our third quarter financial results.
Thanks, Dave. Let's start on page five with our financial highlights. Sales for the third quarter totaled $195 million, while operating income was $41 million and net income attributable to Rayonier was $21 million or $0.14 per share. On a pro forma basis, net income was $22 million or $0.15 per share after adjusting for a $1.1 million timber write-off related to a fire in Washington. Third quarter adjusted EBITDA was $65 million, down considerably from $115 million in the prior year period, which as Dave mentioned, was driven by an exceptionally strong real estate contribution in the prior year period. On the bottom of page five, we provide an overview of our capital resources and liquidity.
Our cash available for distribution, or CAD, for the first nine months of the year was $159 million versus $204 million in the prior year period. The decrease was primarily driven by lower adjusted EBITDA, higher cash interest paid, higher cash taxes, and higher capital expenditures. Note that cash taxes were elevated in the first nine months of the year due to the required timing of estimated tax payments for our New Zealand subsidiary following the full utilization of its NOLs in 2020. A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on page 8 of the financial supplement. We closed the third quarter with $261 million of cash and $1.3 billion of debt.
Our net debt of approximately $1 billion represented 18% of our enterprise value based on our closing stock price at the end of the third quarter. As Dave noted, we anticipate closing on a new five-year, $250 million term loan through the Farm Credit System in the fourth quarter to partially fund our pending acquisitions. The balance will be funded with cash on hand, including $16 million of restricted cash earmarked for like-kind exchange. We expect to swap a portion of the new term loan to fixed, taking into account the new term loan spread over SOFR, estimated patronage payments, and estimated swap rates. We expect that the all-in effective cost of the new term loan will be in the range of 4.5%.
On a pro forma basis, this should translate to a total weighted average cost of debt of approximately 3% and a weighted average maturity on our debt portfolio of approximately 6 years. Following the completion of the acquisitions, we expect to maintain liquidity of approximately $350 million, including $300 million from our revolving credit facility and approximately $50 million of remaining cash on hand. I'll now turn the call over to Doug to provide a more detailed review of our third quarter timber results.
Thanks, Mark. Good morning. Let's start on page 9 with our Southern Timber segment. Adjusted EBITDA in the third quarter of $37 million was $12 million above the prior year quarter. The year-over-year improvement was primarily driven by a significant increase in net stumpage pricing, higher harvest volumes, and higher non-timber income, partially offset by higher overhead and other costs. Strong customer demand and drier weather conditions across most of our operating areas allowed us to execute on our harvest plan, with volume increasing 27% versus the prior year quarter. Average sawlog stumpage pricing was roughly $33 per ton, a 19% increase compared to the prior year period. The improved pricing reflects robust demand from sawmills, which continued to benefit from healthy margins as well as competition for chip and saw volume from pulp mills.
Pulpwood net stumpage pricing also improved significantly from the prior year quarter, increasing 19% to nearly $23 per ton. This increase was driven by a favorable shift in our geographic mix versus the prior year period, coupled with strong end market demand and competition among mills to secure supply. Overall, weighted average stumpage prices improved 18% year-over-year to nearly $26 per ton. We continue to believe there has been a step change in log prices in many of our markets as compared to the past several years. That said, we have also seen our net stumpage realizations moderate in certain markets relative to early 2022 as mill inventories have normalized and higher costs have compressed margins on delivered log sales. As previously discussed, Southern log exports remain constrained by the pinewood nematode policies implemented by China earlier this year.
For now, our US South log export program has pivoted to Vietnam and India. While we are excited about the potential to further expand our presence in these markets over the long term, both are relatively small markets compared to China currently. Also of note, third quarter non-timber sales of $7 million were up over $1 million versus the prior year quarter. Moving to our Pacific Northwest Timber segment on page 10, adjusted EBITDA of $13 million was similar to the prior year quarter as higher net stumpage realizations and non-timber income were largely offset by lower harvest volumes and higher costs.
Volume declined 11% in the third quarter as compared to the prior year quarter due to constraints around contractor availability as we lost one crew to early retirement and let another crew go that was not meeting our safety expectations. At nearly $118 per ton, our average delivered solid price during the third quarter was up 10% from the prior year quarter, driven by continued strong demand from domestic lumber mills, as well as a favorable species mix with a higher proportion of Douglas fir volume. Meanwhile, third quarter pulpwood pricing of $51 per ton climbed 62% over the prior year quarter, reflecting strong end market demand coupled with supply constraints due to fewer residuals and increased competition from pulp mills for a limited supply of smaller-sized logs.
Overall, we've been very encouraged by the trajectory of pulpwood prices in the Pacific Northwest over the past several quarters. Moving to New Zealand, page 11 shows results in key operating metrics for our New Zealand Timber segment. Adjusted EBITDA in the third quarter of $16 million was $4 million below the prior year quarter. The decline in adjusted EBITDA compared to the prior year quarter was largely driven by lower net stumpage realizations and higher costs, partially offset by higher carbon credit sales, higher harvest volumes, and favorable foreign exchange impacts. Average delivered export sawtimber prices of $123 per ton declined 18% as compared to the prior year quarter, reflecting reduced demand from China.
While we've been encouraged by the gradual reduction of log inventory levels in China, offtake from ports has remained weak due to COVID-19 containment disruptions and weaker construction activity. Most sawmills are running well below capacity due to the lack of new orders and are reluctant to build inventory in the current market environment. Furthermore, the Chinese yuan has depreciated against the U.S. dollar, making all U.S. dollar-denominated imports, including our logs, more expensive. Collectively, these factors will likely continue to negatively impact export log demand in our New Zealand business for the balance of the year. Despite these near-term headwinds, we expect that log inventories in China will continue to normalize, which should ultimately translate to a gradual improvement in export pricing.
Longer term, we remain optimistic that ongoing supply-side constraints, including a reduced flow of European salvage logs into China, the continued ban on Australian log imports by China, and the ban on Russian log exports, which commenced at the beginning of this year, will collectively translate to a more favorable export market backdrop once demand picks back up. Shifting to the New Zealand domestic market, demand has remained relatively steady due to strong construction backlogs, although the framing and construction markets have started to cool more recently. Despite relatively favorable market conditions, domestic sawtimber prices declined 18% versus the prior year quarter, largely driven by a sharp decline in the New Zealand dollar, U.S. dollar exchange rate. Excluding foreign exchange impacts, domestic sawtimber prices decreased 8%, reflecting weaker competition from the export market.
Domestic pulpwood prices in New Zealand were likewise impacted by foreign exchange rates, declining 24% on a U.S. dollar basis compared to the prior year quarter. Excluding foreign exchange impacts, domestic pulpwood prices declined 14%, reflecting less competition from export markets for lower-quality logs. While log markets in New Zealand have been challenging, non-timber income in New Zealand, which primarily reflects carbon credit sales, has continued to bolster our financial results, delivering $6.4 million of revenue in the third quarter. Our decision last year to defer the sale of carbon credits has paid off as carbon pricing has increased above 2021 average pricing levels. Going forward, we plan to remain opportunistic in our sale of carbon credits, depending on carbon market conditions and our pricing expectations.
Lastly, in our trading segment, we posted a slight operating profit in the third quarter. As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale to our fee timber export business. I'll now turn it back over to Mark to cover real estate results. Mark?
Thanks, Doug. As detailed on page 12, following a strong first half of the year and consistent with our expectations, the contribution from our Real Estate segment was relatively light during the third quarter. Real Estate sales totaled $12 million on roughly 1,800 acres sold at an average price of nearly $5,100 per acre. Our Real Estate results also benefited from a $4.5 million gain attributable to Rayonier from the sale of a multi-family apartment complex in Bainbridge Island, Washington, which was held in a joint venture acquired as part of our merger with Pope Resources in 2020. In total, Real Estate segment-adjusted EBITDA in the third quarter was $8 million. Drilling down, sales in the improved development category totaled $2 million.
In our Wildlight development project, north of Jacksonville, Florida, we closed on $800,000 of sales during the quarter, consisting of 13 residential lots for an average base price of roughly $65,000 per lot. In our Heartwood development project, south of Savannah, Georgia, we closed on $1.5 million with sales during the quarter, consisting of 10 residential lots at an average base price of roughly $44,000 per lot, as well as a 15-acre commercial healthcare site for roughly $67,000 per acre. The sale of the healthcare site is notable as it is the first takedown by St. Joseph's/Candler for a multi-phase medical campus, which we expect will grow over time.
We believe collaborating with a high-quality healthcare provider early in the development of Heartwood offers a number of strategic benefits and will serve as another catalyst for this project. Overall, we are encouraged by the momentum that continues to build across our Wildlight and Heartwood development projects and expect that both projects will continue to benefit from favorable migration and demographic trends, as well as relatively affordable price points. Turning to the rural category, sales totaled $7 million, consisting of approximately 1,800 acres at an average price of roughly $3,800 per acre. While we are encouraged by the strong pricing and HBU premiums that we've continued to generate in our rural land sales business, we are starting to see indications that some rural buyers are hesitant to transact given the increase in interest rates and recent financial market volatility.
That said, we continue to see solid demand from cash buyers that are not reliant on mortgage financing. Overall, we continue to expect that the space, privacy, and recreational opportunities offered by rural properties will continue to attract buyers in a post-pandemic environment. Now moving on to our outlook for the balance of the year. As noted in our earnings release, we are on track to achieve our prior full-year adjusted EBITDA guidance of $310 million-$330 million. With respect to our individual segments, in our Southern Timber segment, we still expect full-year harvest volumes consistent with the 6.4 million-6.6 million ton range we provided in August.
While we remain encouraged by the step change in pricing that we've registered across most of our operating areas in the U.S. South, we expect that our weighted average log pricing will soften a bit in the fourth quarter as compared to the third quarter. Overall, we continue to expect record full-year adjusted EBITDA in our Southern Timber segment, with results in line with our prior guidance range of $156 million-$162 million. Note that this guidance does not reflect any contribution from the pending acquisitions that Dave discussed earlier. In our Pacific Northwest Timber segment, we now expect full-year harvest volumes toward the lower end of the 1.6 million-1.7 million ton range we provided in August.
While we have seen some pullback in log pricing in response to the decline in lumber prices, we expect continued favorable pricing for both pulpwood and sawtimber in the fourth quarter as compared to the prior year, albeit partially offset by ongoing cost pressures. Similar to our Southern Timber , we continue to expect a record year in our Pacific Northwest Timber segment, with adjusted EBITDA towards the higher end of our prior guidance of $59 million-$63 million. In our New Zealand Timber segment, we now expect full-year harvest volumes toward the lower end of the 2.6 million-2.7 million ton range we provided in August. As Doug discussed, while log inventory levels in China have been trending lower, demand remains constrained due to various headwinds.
Accordingly, we now expect full-year adjusted EBITDA toward the lower end of our prior guidance of $55 million-$60 million. In our real estate segment, we expect full-year adjusted EBITDA toward the lower end of our prior guidance range of $74 million-$79 million, primarily due to the delayed timing of a few transactions as well as a modest slowdown in rural land sales activity. I'll now turn the call back to Dave for closing comments.
Thanks, Mark. Overall, I'm encouraged by our third quarter results, particularly given the challenges presented by ongoing cost pressures, the recent slowdown in the U.S. housing market, and continued headwinds in China as it relates to our export business. Despite these challenges, our U.S. timber segments remain on track to deliver another record year in 2022. We believe these results continue to underscore the relative strength of the markets in which we operate, as well as our commitment to active portfolio management and the operational flexibility afforded by our pure-play timber REIT model. Moreover, we expect that our pending U.S. South acquisitions will further bolster our competitive positioning. Our southern timber segment has historically been the most stable component of our cash flow profile, and more recently has also been the fastest-growing component.
Despite the slowdown in the housing market over the near term, we believe the addition of significant lumber manufacturing capacity in the region leaves the U.S. South very well positioned for long-term pricing and cash flow growth, particularly in our core markets where we enjoy uniquely favorable supply-demand dynamics. As such, we're very excited to be in a position to deploy capital to meaningfully expand our presence and sustainable yield in the region. In addition to our focus on achieving important financial goals and ongoing portfolio management activities, we also continue to advance initiatives related to emerging opportunities associated with ecosystem services and natural climate solutions, as well as the disclosure of our environmental, social, and governance practices. To this end, we released our 2021 sustainability report and supplemental carbon report in August.
All said, I'm very pleased with how our team continues to come together to maximize the potential of our existing assets, evaluate and execute on growth opportunities, and navigate an ever-evolving economic landscape in an effort to build long-term value for our shareholders. This concludes our prepared remarks, and I'll now turn the call back over to the operator for questions.
Thank you, sir. At this time, if you would like to ask a question, you may press star one. To withdraw your questions, you may press star two. One moment, please, for the first caller. Anthony Pettinari from Citi, you may go ahead, sir.
Good morning. On the southern timberlands acquisitions, the 5% EBITDA yield that you estimate, does that assume a certain level of log price improvement over the next decade? You know, is it low single digits or maybe something higher given the strength that you've seen recently? Then I'm just wondering, is it possible to talk overall when you look at the overall timberlands market, sort of how timberland cap rates have responded to, you know, the higher rate environment, to the extent you have any sort of general observations there?
Yeah, sure, Anthony. This is Mark. I'll take that. I mean, as it relates to the forecast for EBITDA for the acquisitions, you know, we didn't assume any material price improvement from current levels. I mean, we've essentially modeled the acquisition on, you know, kind of a 2- or 3-year look back in terms of where average pricing has been, and then kind of rolled that forward more just sort of a base inflationary rate to kind of get to a nominal forecast. We haven't assumed any lift from current pricing. In fact, I think, you know, we modeled it, you know, below where current pricing has been in this year because that's obviously been significantly elevated relative to the prior couple years.
Okay.
As it relates to.
Yeah. Sorry, go ahead.
I'm sorry.
No, please go ahead.
I mean, as it relates to timber cap rates, you know, as we think about timber values and just kind of the impact of the current, inflationary environment, I guess I'd make a couple observations. You know, timberland is generally viewed as a very effective inflation hedge. And somewhat, you know, related to that is that, you know, timberlands are generally valued on a long-range DCF basis using, you know, real rather than nominal discount rates. I mean, if you look back over the last, you know, 20 or 30 years, US South timberlands have very consistently been valued at around a 2.5% EBITDA cap rate. And that's really been, you know, irrespective of where interest rates have been at any point in time.
You know, to some extent, you know, I think this reflects the notion that timberland is gonna deliver kind of a base real return plus some inflationary component of return over long-term. You know, to the extent that the higher rates, you know, we're seeing today are reflective of a higher inflation assumption, you know, I'd argue that that's not necessarily going to impact timberland cap rates, you know, to the same extent, certainly not on a one-to-one basis relative to market interest rates. You know, ten-year TIPS yield is currently around 1.5%. It's moved up significantly in the last couple of months, you know, but not significantly elevated, you know, from a longer-term historical perspective.
You know, I'd say that the values that we've seen in recent timberland transactions, you know, have certainly suggested that we have not seen an increase in cap rates. If anything, I think cap rates have continued to compress, and I think to some extent, you know, that's reflective of, you know, the perceived carbon optionality that's embedded within timberlands today.
Yeah. Anthony, if I could just tack on to that. I mean, you sort of hit on the key issue on this, which is, you know, really strong cash flow properties from this. That's based on, you know, strong markets, you know, really good productivity from both the soils and percent plantable, but then also very high stocking level at 54 tons per acre on the fee lands and then average age of 18. It's a very unique property in that respect. You end up, you know, that ends up driving out, you know, $145 of EBITDA per acre.
You know, that is substantially higher than our already sector-leading returns that we did last year of $68 of EBITDA per acre. With our anticipated 2022 performance, where we see a 30% improvement, that gets you to $89 of EBITDA per acre. You know, those compare to NCREIF averages over the last 5-10 years that are in the $45-$50. It's just very much a unique asset from a cash flow generating standpoint. You know, on adding on top of that is just the fit relative to our existing footprint, which gives us, you know, lower execution risk, lower overhead costs in terms of managing it.
You know, we really don't think you could have dialed in a better fit with our asset base and our, you know, desire to go after quality than this.
That's very helpful. Those log price assumptions on the acquisition seem very conservative given, you know, the strength that you're seeing in the South. Maybe if I could just sneak one last one in. On leverage, so you'll be below 4.5 turns on a pro forma basis, and you don't have any maturities for a number of years. I'm just wondering if you could talk about sort of capital allocation into 2023 and maybe the opportunity to deleverage, you know, given we may be in, you know, a tougher housing environment.
Yeah, sure, Anthony. This is Mark. I'll take that. You know, as we think about, you know, capital allocation going forward, you know, we're certainly going to be at a higher leverage level post these acquisitions than we've been at for the last, you know, 18 months or so. I'd say in the wake of the Pope Resources merger, you know, we had taken leverage up to a level that was actually above kinda where we're going with this transaction. We were able to de-lever pretty effectively thereafter through, you know, large dispositions as well as our at the market equity offering program that we put in place in late 2020.
You know, we continue to believe that we have a lot of levers at our disposal to manage the balance sheet. While we're gonna be more limited from a capital allocation capacity standpoint post these transactions, we still feel pretty good about where the balance sheet is at. Obviously, all of our debt was fixed. We're entering into a new $250 million term loan to partially fund this acquisition. Obviously in a higher interest rate environment, our weighted average cost of debt will go up modestly, you know, from 2.7% to around 3%. Still, you know, very attractive overall cost of debt and very, you know, still very attractive and conservative balance sheet from our vantage point.
I'd also add that we, you know, we have a fair bit of flexibility to kind of work on that, and that's something that's, you know, in our playbook in terms of things that we can do, levers we can pull to try to bring that down. It's part of the reason why we left some of that debt floating, you know, just giving ourselves a little bit of flexibility going forward.
Okay, that's helpful. I'll turn it over.
Thank you. Our next caller is Ketan Mamtora from BMO Capital Markets. You may go ahead, sir.
Thank you. Hi, Dave. Hi, Mark.
Good morning.
Hi, Ketan.
First question on China. The weakness that you are seeing, are you seeing signs of stabilization in terms of the demand trends you are seeing, or are you seeing trends worsening there?
Hi, Ketan. This is Doug Long. I'll take that one. You know, with the COVID lockdowns, it's very hard to basically focus on the trends that are happening because you never know at any point in time where things are going. We have seen a gradual reduction. You know, the current inventory is at 3.7 million cubic meters at the end of October, which is about 800,000 cubic meters less than September. We're kind of seeing a balance here now, which is good to see of the incoming and the outgoing, basically. Radiata pine inventory is around 2.8 million, which is about 70,000 cubic meters less than last month.
Like I said, it's fairly balanced, but demand has softened, you know, over the year, and it really does depend on where these lockdowns impact us or not. I'd say the COVID lockdowns are hard to predict, and they really do exacerbate the economic slowdown right now. We are at a supply balance right now, which is a good thing, and we do see it gradually coming down. I think that the good thing is that the incoming volume has actually been less than the demand, so we're seeing that balance come down. I think it's positive, and we're just waiting for this COVID lockdown to open up and hopefully see, you know, some restocking and things happen from there.
Got it. That's helpful, Doug. You know, switching to the M&A landscape again. In general, are you guys seeing kind of increased interest in sort of you know M&A sort of opportunity here? I mean, just yesterday there was a pretty big announcement of an acquisition focused mostly to capture the carbon offset market. Are you seeing signs that these kind of alternative revenue streams are starting to get priced into sort of valuation?
This is Dave. I don't think that we're explicitly seeing that priced into transactions as much. I do think that we are seeing an increased flow of capital into the space with that as a consideration. I think from our vantage point, we see that probably having more of an effect of having a compression in the discount rate to factor in that additionality that you have. Keep in mind, you know, carbon prices are still very low. You know, I don't think that they're high enough for folks to explicitly factor that in from a valuation standpoint.
I think more and more people are thinking about that as an option that they have going forward, as they look at new acquisition opportunities. We certainly do as well. I mean, we factor that into our thinking, but it's not really moving the needle from a pricing perspective at this juncture.
Yeah, Ketan, it's not really just, you know, the carbon value in forests. It's, you know, really the whole range of opportunities that exist around, you know, competition for land use and competition for fiber. You know, so be it, you know, solar installations or, you know, carbon capture and storage opportunities, you know, sustainable aviation fuels, you know, bioenergy, wood pellets. You know, just the whole range of opportunities that exist for timberlands, as we enter, you know, a trajectory towards a low carbon economy. You know, I think it's, we tend to kind of focus just on the carbon, but I think there are a whole range of other opportunities around ESG and decarbonization that have impacted timberland or the perception of timberland values.
No. Got it. That's very helpful. I'll turn it over.
Thank you. Once again, if you would like to ask a question, you may press star one. Mark Weintraub with Seaport Research Partners. You may go ahead, sir.
Thank you. First question, the $25 million EBITDA over the next 10 years, is that something you expect to be getting to pretty quickly, or is that something that's going to ramp up over time? Maybe similarly, in speaking to the harvest, the 860,000 tons on average over the next 10 years, similar. Is that something you expect to getting quickly, or is that something that ramps up over time?
Yeah, we would actually expect to get to that very quickly, Mark. These are very well stocked properties with a very mature age class and average plantation age of 18 years, which is kind of well above average. We would expect to get to that pretty much right out of the gate.
Okay, great. Has the harvest volumes been at those levels in the last couple of years, or is this a step up from where harvest levels had been?
I can't speak to where the harvest volumes have been. We don't generally. When we're underwriting timberland acquisitions, it tends to be very much forward-looking and not necessarily backward-looking. You know, generally speaking, though, when you see properties like this that are very well stocked, it's because they've been operating below a sustainable yield for some period of time to allow for that inventory stocking. I don't have a great sense of where they've been from a harvest standpoint over the last 3-5 years. We, you know, modeling kind of where the inventory stands today, we have a very good sense of where they'll be in the next 5-10 years.
Mark, that's another reason why it's important to understand sort of the markets that you're in. You know, sometimes you'll see a property that has higher stocking, but it might be for a very good reason that they've got weak markets. In this case, these are markets that we operate in currently. We're very familiar with them. We're very familiar with the downstream customers. You know, we have a lot of confidence from an execution risk standpoint on the ability to bring that volume to market. You know, that's where that familiarity is pretty important. Yeah, we're getting started. I wouldn't expect much this year because this isn't gonna likely close, you know, until pretty close to the end of the year.
Certainly, we expect to come out of the gates, you know, in 2023.
Great.
Yeah.
Zach, David?
I would just add to that, just since the announcement, we've seen quite a bit of interest already in wanting to know how we're gonna manage the property and if we're gonna have stumpage sales. 'Cause during the sales process, the harvest had been wound down. To Dave's point, there's not a lot of contracts to take over when we do close. There's already been significant customer demand in a very short period of time wanting to know when sales will resume off the property. I do believe to Mark's points earlier that, going into the new year, we'll be able to move pretty quickly.
That's helpful. That's exactly kind of what I was trying to understand. Lastly, if we think about this from a CAD perspective, if we start with our $25 million or so of EBITDA, as you think about the CAD, what are the offsets? What do I end up with as a likely CAD?
You know, Mark, I guess there are a couple different ways to look at that. I mean, obviously, you know, part of the transaction is being financed with a new $250 million term loan that will have sort of a known cost attached to that. The balance is being funded with cash on hand. You know, a couple ways that we kind of thought about the cash accretion, one way to look at it would just be to apply kind of an opportunity cost of that cash. You know, we could invest that cash into , and we'd get a known return on that, but we wouldn't get any, you know, inflation protection.
You know, another way to look at it is that, you know, cash on hand was largely raised through the ATM program at an average price of about $36.50 a share. So, you know, as we kind of thought about the CAD per share accretion, we really thought of that as equivalent, you know, to equity issuance, that a portion of the deal was essentially funded with equity issuance through the ATM program. On that basis, you know, it's modestly CAD accretive on a per share basis.
Okay. I assume relatively minimal capital type needs against the $25?
Yeah, I'd say that they're fairly typical for what we would see for a Southern timberland. It's gonna be in the range of kind of CapEx per acre that we would see for our existing portfolio. You know, perhaps a bit higher kind of at the front end because obviously when you're harvesting more heavily, you have higher reestablishment CapEx. But
Right.
Generally in line with the rest of our portfolio.
Right. One last one. On the ATM, are you able to execute on that immediately or does this transaction have to be closed before the ATM can be re-energized?
Well, I mean, essentially we had an ATM program authorization that was put in place in 2020 that we're largely through at this point. We've raised, you know, $299 million under the $300 million dollar authorization that we had in place at the time.
Okay. You'd have to, you know, have a new one. Can you share with us if you're planning to do another ATM and how you felt about that as a way of raising capital?
Yeah, I mean, I think from an SEC standpoint, I can't really comment on any, you know, prospective offerings.
Okay. Thanks so much.
Thank you. Our next caller is Paul Quinn with RBC Capital Markets. You may go ahead, sir.
Yeah, thanks very much. Morning, guys.
Good morning.
Hey, just a question around the acquisition, and congratulations. Just trying to break out this lease. My understanding is the South Georgia property has got 8 years left on the lease, so I'm just wondering where that additional 860,000 tons go for the next 10 years. What's the volume breakdown over the following 10 years?
Yeah, we haven't provided a specific, you know, volume breakdown. There could be some sensitivity around that specifically. Recognize that we provided some information around, you know, the value attribution to that lease. It was, you know, roughly 3.5 or 4% of the overall value in the transaction. I wouldn't say that it's a significant driver of EBITDA and cash flow, kind of given that value attribution to the lease.
Okay, the 3.5%-4% value attributed to the lease, how do you get to that?
If you look at the supplemental presentation that we put out, it provides some information in terms of the value ascribed to the lease versus the value ascribed to the fee properties. It's about $500 per acre that's in the lease and about $3,300 per acre that was in the fee properties.
Okay, that's helpful. Is the inventory stocking materially different in the lease stuff as opposed to the fee simple?
Yeah, the inventory stocking is different in the lease. I mean, generally speaking, when you have these long-term timberland leases, you know, you have to manage them to a certain, you know, kind of endpoint in terms of average plantation age or average stocking. But generally speaking, the fee properties, I would say, are much more heavily stocked than the lease properties.
Okay, great. That's all I had. Best of luck.
Yeah, Paul, that was one of the reasons that if you sort of spend some time in that supplemental deck, we wanted to make sure that we segregated the attributes of those, just so people could understand them a little bit better.
Yeah, it's really helpful. Thanks, guys.
Thank you. Our next caller is Buck Horne with Raymond James. You may go ahead, sir.
Hey, thanks. Good morning, guys. I was just wondering if you could maybe characterize how competitive the bidding process was for this particular deal, kind of what you were seeing out there in the marketplace. Was there anything specific to your bid, you know, that made it more or less attractive to Manulife?
I mean, that's. I can't speak for Manulife or their client base. I think that, you know, we had the benefit at some level of participating in a number of transactions this year and getting a sense based on our own bidding relative to successful bids as to where the market was. As you know, there were a couple of transactions by our peers that we looked at very closely. It's one of the reasons in our supplemental materials we've sort of laid some of that out on a side-by-side basis.
We had a general sense of kind of where the market was, and we always have, you know, some feel for where the capital flows look and where people have particular interests in particular geographies. You know, you look at a footprint of an asset, and you're gonna have a sense of what players might be interested in different pieces of that. You know, that's something that we do, you know, every time there's a transaction that's out there.
Okay.
I think it's fair to say, Buck, that this is a highly coveted asset. It's extraordinarily high quality asset, that, you know, I'm sure, many parties were interested in.
Yeah, I think from our standpoint, you know, it's easily a once-a-decade or once-a-couple-decade type of opportunity to have something that's that good of a fit with your existing footprint. You know, in our minds kind of it was, to Mark's point, probably the premier offering this year and was sort of well-regarded that way.
All right. Very helpful. Appreciate the color there. I'm curious, you know, how you're thinking about sawtimber pricing looking ahead versus the pulpwood market. Housing is probably in for a rough spell here with mortgage rates where they're at. Lumber prices seem to be relatively stable, but, you know, could, you know, could that lead to some softness in sawtimber pricing? I'm curious, you know, how you think pulpwood will hang, you know, or manage through this soft housing environment. Could it remain more resilient during this, you know, this tough economic period?
I'll take this. This is Doug. You're right. I mean, we've seen a little bit of softening in the lumber markets, but. There's a couple things. One, as we've talked about before, the fast increases that we've seen possibly in the lumber markets hasn't, you know, flowed all the way back to the timberland owners and vice versa. It's muted coming back down the other way. So it hasn't been a drastic, you know, swing like we've seen in lumber pricing. And, you know, there's a lag effect that does happen through there. But we have. You know, strong pulpwood markets can help provide a floor, kind of offset reduction in sawlog demand. And it's really due to that natural hedge of residuals.
If lumber demand slows down, there's fewer chips on the market and then we have, you know, opportunity from our pulpwood, kind of to your point. Another thing that's kind of new that we haven't seen in the past necessarily, and we've had kind of some reductions like this, and that's the strength in pellet demand. Just this year in 2022, it's expected to be up about 11% or 4.7 million tons, you know, across the globe, which is pretty significant. They're forecasting another 4 million tons in 2023. You know, a lot of growth in pellets and that's helping basically also to hedge some of the softness we're seeing.
For the first time we're seeing pellets exported from the U.S. South to Asia, and that's new this year, the first shipments of that. We're currently tracking about 3.2 million tons of new capacity builds in pellets in the U.S. South. You know, there's some underlying strength in there in the pulp that we believe that will help offset if there's any of that. But like I said, right now, we haven't seen any real structural shifts in sawlogs both in the Northwest or the South. We have seen some weakening pricing, but at the same point in time in the Northwest, we've seen pulp really climb and really is offsetting that sawlog pricing that we're seeing right now.
Buck, the other thing I'd add to that in the context particularly of these transactions is that keep in mind that, you know, the U.S. South has a material cost advantage relative to other producing regions for lumber. Even in a declining lumber environment, we feel that the U.S. South is very well positioned to gain market share. You know, we've tried to lay some of that out in our supplemental deck, looking at both that relative cost position, but also looking at scenarios where even with a substantial decrease in new home construction, you're still gonna see U.S. South softwood lumber production that was equivalent to where we were in the pre-pandemic level back in 2019.
That was something that gave us some comfort from a risk mitigation standpoint as we thought about those market conditions going forward.
Awesome. Appreciate it. Thanks, guys. Good luck.
Thank you. There are no further questions at this time. I'll now turn the call back over to Collin.
All right. This is Collin Mings. I'd like to thank everybody for joining us. Please contact us with any follow-up questions.
Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.