Yahoo Finance PotlatchDeltic Corporation (NASDAQ:PCH) Q4 2023 Earnings Call Transcript
PotlatchDeltic Corporation (NASDAQ:PCH) Q4 2023 Earnings Call Transcript January 30, 2024
PotlatchDeltic Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Fourth Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Mr. Wayne Wasechek, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.
Wayne Wasechek: Good morning and welcome to PotlatchDeltic's fourth quarter 2023 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic's President and Chief Executive Officer. This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC regarding the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then I will review our fourth quarter results and our 2024 outlook.
Eric Cremers: Well, thank you, Wayne. Good morning, everyone. We reported total adjusted EBITDA of $200 million for 2023 after the market closed yesterday. That is our fifth highest level of annual EBITDA on record since electing REIT status in 2006. We accomplished this despite a relatively weak lumber pricing environment, which reflects our strength as a company created through our past accretive acquisitions and ability to identify and monetize rural acres that have a significant premium to timberland values. Our Timberlands segment generated adjusted EBITDA of $151 million in 2023. We harvested 7.7 million tons, which is a record annual harvest volume. This volume also reflects our first full-year of operations with our CatchMark Timberlands that we acquired in September 2022.
Speaking of CatchMark, one of our operational highlights was the completion of the process of insourcing the management of CatchMark's timberlands earlier in 2023, enabling us to realize the final piece in our $21 million of annual CAD synergies from the merger. Our Wood Products segment contributed $20 million of adjusted EBITDA in 2023. We shipped just over 1.1 billion board feet of lumber, which established a new record for the company in annual shipment volume. Our Wood Products team had another strong year in terms of safety performance and successfully completed its capital project plan for the year. Speaking of our capital plan, we continue to remain on track with our $131 million project to modernize and expand our Waldo, Arkansas sawmill, site preparation and civil work is well underway with the first phase of equipment installation scheduled to commence later in Q1.
The project will increase the mill's annual capacity by 85 million board feet and significantly reduced cash processing costs. The existing mill will continue to operate during the project with approximately three weeks of downtime expected in the mid part of the year to tie in new equipment, followed by the anticipated completion of the project well before the end of 2024. Our Real Estate segment had a strong year, contributing adjusted EBITDA of $68 million. On the rural side of the business, we sold 18,000 acres at nearly $3,100 an acre. Our real estate team had a strong finish to 2023 by taking advantage of our in-depth stratification of CatchMark's Timberlands earlier in the year. For 2023, nearly half of our rural business performance was attributable to the acquired CatchMark portfolio, which is located in excellent real estate markets.
Our real estate development business sold 128 residential lots in the Chenal Valley master planned community at an average price of $104,000 per lot in 2023. We also closed on multiple commercial sales, resulting in over $7 million in revenue at an average price of nearly $575,000 per acre. We had good absorption on our residential lot offerings for much of the year, but we have started to see modest signs of slowing in the take-up of our lot offerings by regional builders in Chenal Valley in the fourth quarter. Our team also made good progress on natural climate solutions opportunities this year. We are working through the final stages of the certification process on our nearly 50,000 acre Southern timberland carbon credit project. We expect to begin pre-marketing efforts in the coming months with placement and sale of the credits in the marketplace in the second half of the year.
Regarding solar, developers have shown a strong interest in solar opportunities, and we have continued to add to our inventory of solar options under contract. We signed up an additional solar option in Q4 and maintain a robust pipeline of potential additional solar deals. As a reminder, we have nearly $200 million on a net present value basis, worth of solar land sale and lease options under contract, representing less than 1% of our timberland acreage ownership. We are focused on assessing additional natural climate solutions opportunities and are optimistic about the growth potential in this area. Although it may take some time for these efforts to bear fruit, we believe that they will lead to an increase in demand for our rural land and drive up timberland values.
Moving to capital allocation. We returned $169 million of cash to shareholders in 2023. That amount included $25 million of share repurchases at an average price of $45 per share, which is well below our estimated net asset value. We have an additional $125 million remaining on our existing share repurchase authorization. We follow a disciplined capital allocation strategy and continually evaluate all of our capital allocation opportunities to grow shareholder value over time. Over the course of the year, we have remained very patient and very disciplined surrounding M&A activity, only pursuing opportunities that meet our stringent criteria and that we believe would increase shareholder value. To that end, we just acquired 16,000 acres in Arkansas for $31 million or about $1,900 per acre through a privately negotiated one-on-one transaction.
These high-quality timberlands are well stocked with an average age of approximately 25 years, acquired timberland portfolio also has strong rural real estate potential, including solar land sale or lease opportunities. Our disciplined, opportunistic and nimble approach with capital allocation also applies to identifying opportunities to capitalize on higher timberland valuations. As a result, we have entered into an agreement with Forest Investment Associates to sell approximately 34,000 acres of plantation timberlands located in Arkansas and Alabama with an average age of less than four years for approximately $58 million or $1,700 an acre. This transaction is at a significant premium to our underlying timberland value and is nondilutive given the young nature of these trees.
This transaction is subject to customary closing conditions and is expected to close in the second quarter of 2024. At the end of the year, we had $230 million of cash on the balance sheet and total liquidity of $529 million. In December, we refinanced our $40 million debt maturity at well below market rates utilizing our existing forward starting interest rate swaps and maintained our weighted average cost of debt at 2.3%, the lowest of the timber REITs. Our strong balance sheet and significant liquidity provides us with flexibility and a solid platform to continue growing shareholder value. Shifting to the housing market, demand for new single-family residential construction continues to remain resilient, as single-family starts eclipsed over 1 million starts for the second consecutive month, while the multifamily sector has contracted, driven by new supply coming into the market and the ongoing elevated interest rate environment.
A higher proportion of new single-family residential construction is an important lumber demand driver as single-family starts typically consume 3x the amount of wood versus multi-family. Single-family starts have been fueled by momentum in consumer confidence, a solid labor market and recently declining interest rates. These factors, coupled with a historically low level of existing home inventory for sale in the U.S. as prospective homebuyers looking to purchase a new home versus existing home. That said, housing affordability continues to remain a headwind for the housing market, while 30-year fixed mortgage rates have fallen over 100 basis points after hitting a two-decade high in October, breathing some more life back into the housing market, further declines in interest rates are needed to spur incremental demand.
Thankfully, many economists are predicting that the FED will trigger multiple rate cuts in 2024, which would help alleviate affordability challenges. Our longer-term outlook on housing fundamentals remains positive. We believe an underlying shortage of housing stock due largely to the combination of underbuilding after the great financial crisis and favorable demographics in the form of millennials will provide positive tailwinds to the housing market. We continue to expect that U.S. housing starts will return to levels above the long-term average of one million units per year once homes become more affordable. Turning to the Repair and Remodel segment. Demand in this market has remained steady, backed by strong consumer balance sheets and existing homeowners staying in their homes and fixing up versus moving up to a new home under the backdrop of a higher interest rate environment.
Anecdotally, we also continue to experience strong home center takeaway with our activity up 12% year-over-year. Looking at the longer-term horizon, repair and remodel market fundamentals continue to remain favorable. Our optimism is supported by an aging housing stock, the remote work evolution and high home equity levels. In summary, the company performed well in a challenging year and made substantial progress on its strategic goals while continuing to remain disciplined on deploying capital. We delivered solid financial results in spite of an economic environment with elevated inflation and high interest rates, which impacted lumber demand and prices. PotlatchDeltic continues to be very well positioned with an investment-grade balance sheet and a portfolio of high-quality assets.
We will continue to be disciplined stewards of our capital and remain committed to prioritizing investments in high-return capital projects, acquisition opportunities and returning capital to our shareholders through our quarterly dividend and share repurchase program. I will turn it over to Wayne to discuss our fourth quarter results and our 2024 outlook.
Wayne Wasechek: Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $41 million in the fourth quarter compared to $56 million in the third quarter. The quarter-over-quarter decline in EBITDA was primarily due to lower lumber prices, lower index sawlog prices and seasonally lower harvest volumes in Idaho. These declines were offset in part by strong rural real estate sales. I will now review each of our operating segments and provide more color on our fourth quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment's adjusted EBITDA decreased from $42 million in the third quarter to $33 million in the fourth quarter. Operationally, our Timberlands team harvested 2 million tons establishing a record for our fourth quarter harvest volume.
Sawlog harvest in Idaho was 328 million tons in the fourth quarter. This is down seasonally from 377,000 tons that we harvested in the third quarter. Our Idaho sawlog prices were 15% lower on a per ton basis in the fourth quarter compared to the third quarter. The decline in sawlog prices primarily reflects lower prices for index sawlogs. In the South, we harvested 1.7 million tons in the fourth quarter. Favorable weather conditions and good execution by a Southern Timberlands team were key to achieving our harvest level. Our Southern sawlog prices were 2% higher in the fourth quarter compared to the third quarter. The increase was primarily driven by a higher mix of larger diameter sawlogs and slightly higher hardwood sawlog pricing. The Wood Products segment, which is covered on Slides 8 and 9 had negative adjusted EBITDA of $6 million.
Compared to the third quarter, lumber prices were lower and the charge to write-down lumber inventories to net realizable value was $4 million higher. Our average lumber price realization decreased $66 per thousand board feet or 14% in the quarter. This price decrease is comparable to the random lengths framing lumber composite on a percentage basis. Our average lumber price realizations per thousand board feet were $427 in October, $401 in November and $417 in December. Lumber shipments increased 9 million board feet from 276 million board feet in the third quarter to 285 million board feet in the fourth quarter. Shifting to real estate on Slides 10 and 11. The segment's adjusted EBITDA was $22 million in the fourth quarter, compared to $14 million in the third quarter.
EBITDA generated by rural sales increased sequentially due to the sale of more acres at a lower average price in the fourth quarter. Our rural real estate performance this quarter is a testament to the robust real estate markets where the CatchMark properties are located and that were stratified earlier in 2023. EBITDA generated by our Chenal Valley master plan community declined slightly in the fourth quarter. We closed the sale of 30 residential lots in the fourth quarter at a higher average price compared to 32 lots in the third quarter. Also, in the fourth quarter, we generated nearly $1 million in commercial revenue, which was comparable to the third quarter. Turning to capital structure, which is summarized on Slide 12. Our total liquidity was $529 million.
This amount includes $230 million of cash on our balance sheet as well as availability on our undrawn revolver. We refinanced our $40 million of debt that matured in December at an interest rate of approximately 2.5% after patronage credits from lenders. To achieve the below market rate, we utilized a portion of our outstanding forward starting interest rate swaps, which lowers our annual interest cost by approximately $500,000. We still have $200 million notional of forward swaps to deploy which will help us keep our future borrowing costs low. As we previously highlighted in the third quarter call, we repurchased $12 million of our shares in the fourth quarter at an average price of $45 per share. For the full-year, we repurchased 556,000 shares at an average price of $45 per share or $25 million in the aggregate.
This leaves us with $125 million remaining on our $200 million share repurchase authorization. Capital expenditures were $79 million in the fourth quarter, which includes $59 million for our Waldo, Arkansas modernization project. These total expenditures also include real estate development expenditures, which are included in cash from operations in our cash flow statement. I will now provide some high-level outlook comments. The details are presented on Slide 13. We plan to harvest approximately 7.6 million tons in our Timberlands segment in 2024 with approximately 80% of the volume in the South. Harvest volumes in the North are planned to be comparable in the first quarter relative to the fourth quarter of 2023. We expect Northern sawlog prices to decline about 5% in the first quarter compared to the fourth quarter.
In the South, we plan to harvest approximately 1.5 million tons in the first quarter. We expect our Southern sawlog prices to decrease modestly, primarily due to seasonally fewer hardwood sawlogs in the mix. We plan to ship 1.1 billion board feet of lumber in 2024. This level of expected shipments includes the impact of downtime at our Waldo, Arkansas sawmill for the modernization and expansion project. In the first quarter, we plan to ship 260 million to 270 million board feet of lumber, which incorporates the effect of seasonally lower cut rates in our northern sawmills. Our average lumber price thus far in the first quarter is just slightly higher than our fourth quarter average lumber price. This is based on approximately 100 million board feet of lumber.
As a reminder, a $10 per 1,000 foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. Shifting to real estate. We expect to sell approximately 51,000 acres of rural land, which includes approximately 34,000 Southern acres to Forest Investment Associates, as Eric previously discussed. Also, we expect to sell 130 Chenal Valley residential lots in 2024. Additional real estate details are provided on the slide. We estimate that interest expense will be approximately $1 million in the first quarter and approximately $9 million per quarter for the second, third and fourth quarters of 2024. Interest expense is lower in the first quarter than the other quarters because that is when we receive our annual patronage payment from the Farm Credit banks.
Also, these amounts are net of estimated interest income, which we expect to be lower in 2024 based on our estimated average cash balance over the course of the year. Turning to capital expenditures. We are planning to spend $100 million to $110 million in 2024, excluding Timberland acquisitions. That estimate includes approximately $44 million for the final installments on the Waldo, Arkansas sawmill modernization and expansion project. Also, as Eric mentioned, we already successfully completed an attractive bolt-on Timberland acquisition in Arkansas for $31 million this year. We use cash on hand to close this transaction. Overall, we expect our total adjusted EBITDA will be moderately lower in the first quarter relative to the fourth quarter.
This is based on the overall expectation of slightly higher average lumber sawlog prices moderated by fewer rural real estate sales. We continue to remain bullish on industry fundamentals that drive demand in our business. Our integrated operating model and leverage to lumber prices are aligned with those fundamentals, and we are well positioned to continue growing shareholder value over the long-term. That concludes our prepared remarks. Rob, I would now like to open the call to Q&A.
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