Our earnings release and Form 10-K 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.
Adjusted EBITDA exceeded the prior year quarter by 71%, fueled by solid contributions across our timber segments as well as an outsized contribution from our Real Estate segment due to the closing of two significant development transactions.
Based on our performance over the first nine months of the year and our outlook for the balance of the year, we’re modestly raising our full year 2021 adjusted EBITDA guidance to a range of $320 million to $330 million.
In our Real Estate segment, we generated record adjusted EBITDA of $64 million, up from $22 million in the prior year period, as we closed on a $38 million Unimproved Development sale in Kingston, Washington, and a $25 million improved development transaction in our Belfast Commerce Park project south of Savannah, Georgia.
We believe, the successful sale of our co-investments in Funds III and IV, and as well as the properties in Fund II, represent a positive outcome for our shareholders as the wind down of the fund business allows us to simplify our operations, and allocate capital to other strategic priorities.
As Dave touched on, third quarter adjusted EBITDA of $115 million was considerably above the prior year period, as an exceptionally strong contribution from our Real Estate segment, and year-over-year improvements in the contributions from our Pacific Northwest and New Zealand Timber segments more than offset a modestly lower contribution from our Southern Timber segment.
In sum, we closed the third quarter with $420 million of cash and $1.4 billion of debt, both of which exclude cash and debt attributable to the Timber Funds segment, which is nonrecourse to Rayonier.
The improved pricing reflects strong demand from sawmills weather-related constraints on supply, upward pressure on ship and sell pricing, due to increased competition from pulp mills, and improved export log demand in certain markets.
Moving forward, we believe certain southern markets are poised for stronger pricing, and believe our results continue to underscore, the relative strength of local timber market dynamics, across our footprint in the region, including proximity to the dominant work serving log export markets.
However, we believe the reduced harvest of European spruce salvage logs, the continued ban on Australian log exports to China, and the ban on Russian log exports beginning in 2022, will support continued demand for logs from Pacific Northwest, particularly as inventory levels in China normalize.
That said, the availability of pulpwood has constrained pricing in some areas, and there has been upward pressure on hauling costs in areas that have been directly impacted by fires.
Average delivered prices for export sawtimber jumped 59% in the third quarter from the prior year to $150 per ton, reflecting solid demand from China, the ban on Australian log exports to China, and the reduced level European spruce salvage logs into China.
We generally expect that net stumpage realizations on export volume will decline in the fourth quarter as we’ve seen only limited relief in shipping costs.
Lastly, in our Trading segment, we generated breakeven results 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 feed timber export business.
As Dave mentioned earlier, excluding gain on the large disposition, third quarter real estate sales — third quarter real estate results that are record for pro forma sales, pro forma operating income, and adjusted EBITDA, since our separation into a pure-play timberland REIT in 2014.
The property was acquired through our merger with Pope Resources last year, and we are very pleased to have successfully completed the sale at an attractive value.
We are raising our full year adjusted EBITDA guidance to a range of $320 million to $330 million, which reflects a 5% increase at the midpoint from our previous guidance, and an 8% increase at the midpoint from the original 2021 guidance we’ve provided in February.
We expect that weighted average log pricing in the region will be lower in the fourth quarter, as compared to the exceptionally strong pricing realized during the third quarter, but will be fairly consistent with the pricing achieved, during the first half of the year.
While we expect continued favorable tailwinds in this business, we believe it’s prudent to remind everyone, that we do not expect these outsized results in 2021, to be repeated in 2022.
Further, we believe our focus on local timber market dynamics, and active portfolio management, leave us well positioned to navigate logistical challenges, and recoup the impact of cost increases in our log pricing.
Moving forward, our balance sheet is well positioned for future growth, particularly following the actions we have taken this year, to reduce leverage, extend our debt maturity profile, and optimize our cost of capital.
And so keep in mind, we opened up a new I-95 interchange that roughly bisected our ownership there, where we had the Belfast Commerce Center to the West, and our mixed-use community development project to the east.
And we think it not only is helpful as it relates to our business, and in accelerating the absorption of that, but we think it will have carry on beneficial effect to the Port Gamble asset that is to the north of that.
I’m just curious, Dave, the world has changed a lot, in the last 12 to 18 months.
And that with the idea being that as we proved out these projects, others would step up and be willing to take on other pieces, similar to the Arborwood transaction.
But even if you compare it to, say, going back to 2018, when we also had a very strong real estate year, we’ve sold far fewer acres in the premium realization, which is really where you get economic value in this real estate business.
one is, in talking with some of the big TIMO managers that feedback on getting around stumpage trends is actually a little more bullish than what’s showing up in TimberMart numbers or public company numbers like yours so far.
And a large amount of that was sawtimber volume swap on from our Northern part most Arkansas expiring timber deeds, which until now I’ve been uneconomic to harvest.
And as we’ve been talking about the relative strength of our footprint for a long time, we’re now seeing pricing above pre-GFC in select TMF regions such as along the Atlantic Coast, what we’ve talked about before, has been very strong.
So in that process, we have the ability to either at some point deferred, depending on what we think the outcome prices are going to be, but also we can adjust our prescriptions.
But also in the short term right now, we’re seeing higher log inventories that it will take a little while to wind down.
Okay.
So we think there’s been a last-minute push and there’ll still be volume coming in next year, but I do think it’s going to start to wind down from everything we’ve seen, both the infestation to slow down.
And Paul, consistent with what you’ve heard as well, keep in mind that the shelf life of the European spruce is much shorter than what we experienced in Western Canada.
And then just moving on to Southern Timber, just — and it’s been a busy morning.
Since it’s a competitive developing market, I won’t speak explicitly about Rayonier volume, other than just to say that we’re actually purchasing persisting from two ports in the south.
We continue to be encouraged by the demand for these logs as well as what the incremental tension is doing in pricing the mix in our coastal markets.
Yes, I was curious if you guys had any high-level thoughts about the announcement coming from the Canadian government yesterday that kind of surprised a lot of industry observers about some of the British Columbia acreage that is now looking to be set aside for kind of harvesting and what the potential implications might be on regions like the U.S.
And based on that, the Council of Forest Industries, indicated from their initial analysis that such deferrals would result in the closure of between 14 and 20 sawmills and two pulp mills.
So a potential reduction of, say, over 20% of the area, would likely have significant impacts on the industry, which currently exports about six billion board feet of lumber to the U.S.
So it’s, obviously, an evolving situation, and we’ll follow closely, but it does appear from what we’ve read so far and read through the street report that this is a net positive for both export operations, and lumber in the U.S.
But just based on the stuff that’s out there, even if it was at sort of half that level, you’re still talking about very substantial kind of overall impact to the North American lumber market.
If it was just half of what’s kind of I’ve mentioned there that’s been kind of proposed, you’re still talking about what’s equivalent to the what’s been export to the U.S.
I was wondering if you could just talk about a kind of, if there’s any theme or geographic regions, where you seem to be focusing more in on, in terms of where the best incremental opportunities for future acquisitions lie? What are the kind of things you’re looking for in terms of how to deploy your rapidly improving cost of capital here.
We’ve definitely seen the market in the Northwest, heat up in part because of strong lumber markets, and resurgent export markets.
We were still able to — in the deals that we’ve done this year, we’ve had a total of seven bolt-on transactions, two in New Zealand, and five in the U.S.
And that’s indicative of some of the capital flow attractiveness of the asset class, and we have to sort of, be prepared to respond to that.
I guess my question is, what is the visibility in terms of how long it could take for that inventory situation to normalize? Or is there any kind of like historical example that you’d point to, whether it’s a couple of quarters more or less.
And as I mentioned before, European increase lumber was constrained earlier in the year, but we really have seen a significant influx to that volume come in recently with that shipping cost being reduced for them.
That being said, we are seeing a significant reduction in logs been delivered to New Zealand ports, as forest owners are adjusting to this new higher inventory level as well as the pricing that’s coming from it.
So — but our team in New Zealand that is monitoring this, generally, is optimistic, that in a kind of Q1, Q2 time frame, we’ll start to see some improvement.
New Zealand did have a hard shutdown for a couple of weeks, that affected logging operations, and which extended even length or a period of time in certain areas.
I don’t know if it’s possible to parse out how much was weather versus trucking.
And so we’re working hard with our team to optimize our harvest operations, and how we work with that, and how to make sure we get the best utilization of the trucks that we do have access to.
Anthony, I’d also note that we reduced the volume guidance for the full year by about 250,000 tons at the midpoint, but we only kind of guided down on EBITDA very slightly.
Appreciate all the very well informed and thoughtful responses to the question.
And from what I’ve read on the strategic review reports, which is very fresh and recent, it appears that they’re going through analysis period, they said it could last through 2023.
This is still preliminary, but there’s a small amount of private land out of Vancouver Island, that will probably be in more demand.
Right.
I mean, I think we’re getting closer to that stage now, but I’d say it’s still going to be lumpy, and recognize that the entitlements — we’re going through an entitlement phase right now in Wildlight.
So we’re doing a similar model there in our Heartwood project, where we’re developing finished lots for the first increment of residential home sales.
And then lastly, coming back to Mark’s comment, escalating timberland value environment, and then we had a conversation on that, if we were to think about it in terms of just value per acre, again, a big picture concept.
But if you just look at the scale of what that could become, I think people aren’t necessarily underwriting explicit carbon volume, and prices into their DCF models, I don’t think — But I think, people view there as being kind of meaningful option value there, and so they’re willing to perhaps lower their discount rate on timberland acquisitions, on which they’re kind of valuing that stream of cash flows, excluding carbon value.
And what I’d add to that, Mark, is, keep in mind as well, that you have a fair bit of noise associated with stocking and age.
And then also, if you could — just talk about how meaningful fertilizer costs ultimately are relative to your cost base, that would be great.
This is an area where we’re spending a lot of time right now because we believe it represents a significant opportunity for our sector, not only to be part of the solution to climate change but also to improve the economics of forestry ownership, and incentivize greater investment, and the types of activities that are really going to enhance natural climate solutions.
It’s also worth noting that this doesn’t even take account of the other potential uses of wood fiber on the path to net 0, including biomass energy, sustainable aviation fuels, and mass timber.
As I mentioned before, we’ve looked at this, and we have opportunities to potentially reduce the rate in a given year, and maybe do multiple applications versus one application.