CatchMark Timber Trust, Inc. Class A

Good morning and welcome to the Catchmark Timber Trust first quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press stars and one on your touchtone phone. To withdraw your question, please press stars and two. Please note this event is being recorded. I would now like to turn the conference over to Ursula Godoy, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us for our review of Catchmark Timber Trust results for first quarter 2022. I am Ursula Godoy, Chief Financial Officer of Catchmark. Joining me today on the call are Chief Executive Officer Brian Davis and Chief Resources Officer Todd Rice. During this call, Catchmark management will make forward-looking statements. These forward-looking statements are based on management's current beliefs and the information currently available. Catchmark's actual results will be affected by certain risks and uncertainties that are beyond its control or ability to predict and could cause our actual results to differ materially from expectations. For more information about the factors that could cause such differences, we refer you to our 2021 Annual Report on Form 10-K and subsequent reports that we filed with the SEC. Today's presentation includes certain non-GAAP financial measures. Reconciliations of these measurements are included in our first quarter 2022 Earnings Release and Financial Supplement, which are posted on our website, and on Form 10-Q filed with the SEC yesterday, May 5, 2022. After our presentation, Brian, Todd, and I will be pleased to answer any of your questions. Now, I turn over the call to Chief Executive Officer Brian Davis.

Thank you, Ursula, and good morning, everyone. We appreciate you joining us today for our review of first quarter 2022 results. We had an exceptional start to the year. In the first quarter, Catchmark again demonstrated how our business model delivers consistently strong operating results. We are now focused on owning prime timberlands entirely in leading U.S. south mill markets, where our delivered wood sales, supplemented by opportunistic stumpage sales, again generated superior pricing, well above market averages, and registering significant year-over-year increases. Our net timber sales prices increased by 30% for salt timber year-over-year, a company record. Pulp wood pricing also increased a solid 8% year-over-year. We continue to achieve significant timber sales pricing premiums above market averages, 47% higher for salt timber and 37% higher for pulpwood. As a result, we generated 17% higher timber sales revenue year-over-year in the U.S. South, despite lower planned harvest volumes. And our industry-leading harvest productivity per acre held steady on an annualized basis as compared to our three- and five-year averages. These are great operating results. Retail land sales also made a major contribution to our first quarter results, and we are well on our way to meeting full-year guidance for timberland sales. From 11 retail land sales during the quarter, we received a total of $6.1 million in proceeds, more than 35% of our total timberland sales targets for the year. Demand has been strong, and we have been able to get strong pricing for acreage with stocking and productivity characteristics below our portfolio averages. Lower year-over-year investment management results were due to lower asset management fees associated with the Triple T exit as the related transition services agreement expired at the end of the quarter. But we continue to recognize income from the Dawsonville Bluffs joint venture, which is capitalizing on strong demand for its wetlands mitigation credits. Since 2017, when we acquired Dawsonville Bluffs, The market price for its mitigation credits has risen from approximately $30 per credit to $94 as of the first quarter, a 210% increase. For the quarter, we realized $3.2 million of net income, or 7 cents per share, achieved adjusted EBITDA 15% above the prior year quarter and produced a 34% increase in cash available for distribution year over year. Yesterday, we declared a cash dividend of $0.75 per share for common stockholders of record as of May 31, 2022, payable on June 15. We anticipate performance momentum in our operations from the first quarter to carry into coming quarters, especially in terms of salt timber pricing. For the full year, we now expect to achieve salt timber pricing approximately 20% above 2021 levels. based on strong demand for new housing, even in the rising interest rate environment. Although the economy presents a mixed picture of low unemployment and wage growth, countered by high inflation and rising interest rates, demand for new housing hasn't wavered despite increased mortgage rates. Builder backlogs are at or near all-time record highs, and new building permits and housing starts have not let up. Repair and remodeling activity has also remained resilient, This activity helps fuel saw log demand, particularly in our U.S. south markets, where new and expanding mills continue to come online as the regional population increases and requires more housing. On the supply side, tighter supply has resulted from various supply chain issues, including trucking availability and labor constraints. This challenging market environment has favored Catchmark since we reliably have been able to meet our mills' customer supply needs through our delivered wood sales models. Taking into account first quarter results and by increasing our soil timber mix to meet market demand, we are now on track to register a full-year weighted average pricing increase of 15% to 20% for our blended harvests up from the previous expectations of 10% to 15%. Our pulpwood pricing may pull back from recent highs as some mill customers have upgraded facilities to better utilize chip and saw instead of merchandising pulpwood. but we continue to expect to register price levels well above market averages for the PowerPoint category. In coming quarters, we also expect to make significant progress on our acquisition initiatives to help maximize both near-term cash flow potential and the long-term value of our timberlands. At present, we are primed to execute on accretive acquisitions, benefiting from our improved balance sheet and strong liquidity positions. we have focused on smaller bolt-on acquisitions in and around our existing markets where we can take advantage of our market presence to secure prime quality acreage. That enables us to find good value while enhancing our local footprint and market position. It also fits with our business strategy to expand ownership and operations in leading mill markets where we can better serve our customers and gain further efficiencies with our contractors. More than 60% of our timberlands are now in the top three markets, and 100% are in the top seven. So far, we have entered into purchase and sale agreements to buy more than 2,400 acres in two separate transactions, totaling about $5 million. The properties are located within existing operating footprints in two states, Alabama and South Carolina. These properties fit our acquisition target objectives with long-term accretive attributes. They will be funded with cash on hand and are expected to close by early in the third quarter. These timberlands have characteristics that feature a high allocation of pine plantations and good value compared to our underwriting metrics. We will continue to be deliberate and prudent in identifying acquisitions, whether under our small track program or larger acquisition strategy. We also continue to build our pipeline of environmental initiatives involving wetlands mitigation banking, carbon sequestration, and solar. With regard to wetlands mitigation banking, we are identifying properties for acquisition as well as looking to create new mitigation banking opportunities on our existing properties, similar to Dawsonville Bluffs. Meanwhile, we have identified 5% to 10% of our existing timberlands to be part of our carbon offset program. and we are pointing to a carbon credit issuance in the second half of the year. As previously detailed, we have signed a 4,000-acre lease with a solar developer and have option agreements on almost 8,000 acres with other solar developers. Taking our operating performance outlook and growth initiatives together, Catchmark continues to be very well positioned for successful 2022 performance. Overall, we are meeting our objectives, our prime timberlands, and leading U.S. south mill markets are continuing to generate superior pricing. We're executing on our discipline acquisition strategy, and we are moving forward to create additional revenue streams from environmental initiatives. These activities are designed to work together to grow durable cash flow and further enhance stockholder value. As I said, the year is off to a very good start for Catchmark. Now, Ursula will provide more detail on the first quarter results and discuss our capital position.

Thank you, Brian. In the first quarter, Catchmark's solid operating performance carried over from last year, driven by what has become a Catchmark hallmark, achieving timber sales pricing premiums significantly above market averages. We also had an excellent quarter for timberland sales, capturing strong pricing for assets with lower quality characteristics than our portfolio average. Adjusted EBITDA increased 15% year-over-year, Slightly lower year-over-year revenues, down 3%, resulted mainly from lower harvest volumes, primarily related to the sale of our Pacific Northwest timberlands in third quarter 2021. Our operations are now concentrated entirely in the U.S. South, where our timber sales revenue increased 17% year-over-year. Our significant increases in net timber sales prices have lessened the revenue impact of planned lower harvest volumes. For the quarter ended March 31st, 2022, cashmere generated revenues of $26.9 million compared to $27.7 million in first quarter 2021. Timber sales revenue total $17.7 million versus $20.1 million in first quarter 2021. As planned, total harvest volume decreased year over year by 11%, to approximately 470,000 tons. We captured significant net timber sales price increases year-over-year in the US South, 30% for saw timber and 8% for pulpwood. When compared to Timber Mart South US Southwide averages, saw timber and pulpwood stumpage pricing registered 47% and 37% premiums, respectively. We realized net income of $3.2 million compared to a $600,000 net loss in first quarter 2021. Adjusted EBITDA totaled $14.8 million compared to $12.9 million in first quarter 2021. Breaking out adjusted EBITDA by segments. For the first quarter, harvest EBITDA was $9.6 million compared to $8.9 million in first quarter 2021. an 8% year-over-year increase. Real estate EBITDA increased to $5.8 million year-over-year, up from $3.1 million in 2021. The increase reflects closing a greater percentage of our planned timberland sales in this year's first quarter, in the range of 35% to 40% of our full-year 2022 target. Pricing per acre sold was lower year over year due to significantly lower pine stocking levels on sold acres, but the sales represented strong relative value. Investment management EBITDA of $2.7 million compared to $3.8 million in 2021, resulting primarily from lower asset management fees related to the exit from the Triple T joint venture. The fees recognized from Triple T during the quarter were paid under a transition services agreement, which expired on March 31st. We recognized $600,000 of investment management EBITDA from the Dawsonville Bluffs joint venture and received $100,000 in operating distributions from the joint venture, which continues to capitalize on strong demand for its wetlands mitigation credits. We also paid a dividend of 7.5 cents per share to stockholders on March 15, 2022. Now, turning to review the company's capital position. After concluding the capital recycling program with last year's sale of the abandoned property in the Pacific Northwest, Catchmark has significantly improved its balance sheet and liquidity. During the first quarter, company leverage remained low and debt capital remained available and attractively priced despite the rising interest rate environment, which we have hedged against. More than 90% of our debt outstanding is protected. We are well positioned to move forward with our acquisition growth strategy, which is underway and should gain further momentum over the course of the year. As of March 31st, 2022, The company had over $250 million of borrowing capacity remaining under its credit facilities and over $27 million of cash on hand. There were no changes to the credit facilities during the quarter. Stockholders received a total of $3.6 million in dividend distributions, which were fully covered by net cash provided by operating activities and cash available for distribution. No share repurchases occurred during the quarter under the company's share repurchase program, which had $13.7 million remaining as of March 31, 2022. To sum up, we had a very strong first quarter. The balance sheet remains solid with excellent liquidity, and we will be able to fund our acquisitions comfortably as that program gains further momentum. Now, Todd will review harvest operations in timberland sales. Todd?

Thank you, Ursula, and good morning, everyone. Catchmark continues to benefit from our prime timberlands located in premier U.S. South Mill markets, achieving significant pricing premiums. The flexibility of our operating model using delivered wood and opportunistic stumpage sales helps control our supply chain and mitigate risk, and we continue to capitalize on market pricing tension to negotiate delivered and stumpage sales pricing increases. Strong demand for all products and low raw material inventories during the quarter maintained high pricing tension. We capitalized on the opportunity, registering the substantial delivered and stumpage sales pricing increases. Successful negotiations with many of our customers supported delivered price increases and helped offset rising cut-and-haul costs, allowing us to maintain stumpage margins. We offset logging contractor attrition from previous quarters with added stumpage sales, aided by favorable weather conditions and market demands. Mills were still playing catch up from fourth quarter 2021, which led to lumber pricing staying above $1,000 per thousand bore foot during most of the quarter. Strong first quarter production we achieved should help smooth out our production levels in coming quarters as we are on track to meet full year volume guidance. Strong macro demand fundamentals will continue to drive mill production needs and pricing for Chippensaw and Pinesaw timber products should remain robust in the second quarter. For the full year, we expect to achieve saw timber pricing approximately 20% above 2021, and going forward, we expect to continue to capture pulpwood prices above market averages. But we do not expect the trajectory of recent market pricing increases for pulpwood to continue. Increased supply due to spring and summer thinning and higher cutting haul costs will reduce pulpwood margins. Staying nimble, gauging product mix, and meeting changing market dynamics will continue to be the key to our success in maintaining our pricing premiums. Now let's review timberland sales. As planned, we executed on completing approximately 35% to 40% of our annual timberland sales target in the quarter, and timberland sales revenue increased 81% year over year from selling significantly more acres as compared to prior year quarter. We continued to generate strong relative pricing on land sales, taking advantage of robust buyer demand. The acres sold had a substantially lower average merchantable timber stocking than the company portfolio average. Reviewing the details. Catchmark sold 3,400 acres for $6.1 million compared to first quarter 2021 when we sold 1,800 acres for $3.4 million. The 8% lower year-over-year timberland sales price per acre was due to the lower productivity characteristics. For example, acres sold during the first quarter had pine stocking of only 3 tons per acre compared to 8 tons per acre in first quarter 2021. These acres sold in the first quarter also had only 37% pine plantation compared to our portfolio average of 72%. Given the strong land sales market and our current pipeline of transactions, we are on track and expect to complete 65% to 75% of target full-year sales by the end of the second quarter. As Brian has highlighted, we are off to an excellent start to the year. Brian, I turn it back over to you.

Thanks, Todd. The first quarter provides more evidence for how Catchmark's simplified and more focused business strategy is paying off in strong performance based on owning prime U.S. South Timberlands, operating in the nation's leading mill markets, effectively using our delivered model supplemented by opportunistic stumpage sales, and executing superior stewardship in managing our operations. Due to our carefully selected markets, we expect to continue to capture higher-than-average pricing, and due to our balance sheet, we will be able to demonstrate growth not only through product price appreciation, but also through disciplined acquisitions and environmental-related investments. With capital on hand and good liquidity, we are making progress on completing attractive acquisitions that fit our criteria with more to come, where our environmental initiatives are gaining traction. Together, all of these efforts are helping to maximize cash flow throughout the business cycle, seeking to capture the highest value per acre and to generate sustainable yields. Now, Ursula, Todd, and I will be pleased to take your questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dave Rogers with Baird. Please go ahead.

Yeah, good morning, everyone. Brian, I wanted to start with you on the acquisition side. It's good to see you guys back in that acquisition game on a wholly owned basis. Can you talk about how that pipeline is coming together and give us any maybe better visibility as you look beyond this current set of closings that, you know, kind of out toward the rest of the year and what that might look like?

Absolutely. Good morning, Dave. So there's really two parts as we think about our acquisition strategy. One is really the small track program, which we talked about end of last year going into this year, and the other is kind of off-market or bid opportunities that come to the marketplace. So we've been building this pipeline to get to the point where we're starting to have closings. These are the ones that we're reflecting in our earnings release today is really off-market, adjacent landowners, as we noted in our prepared remarks, high plantation, exceeding the 80% range, which is very creative relative to our market. From the standpoint, it has great operability, and it will really bolt on and really be seamless in our existing operations. And by really focusing on our acquisition strategy of being kind of threefold, one, near-term cash accretion opportunities, two, portfolio opportunities, and three, really, alternative income, meaning everything from mitigation bank credits solar, as well as carbon, we've been able to actually, you'd think that's a broad array, but it's actually very focused because we have very specific metrics we look at in each one of those categories. And so by virtue of spending a lot of time and making sure what really works for us in our market, especially when we said we're going to be solely focused in the U.S. South, what we've really seen, obviously, is a lot of activity on the small track program. These are 1,000 acres at a time. Really good bite size. We can provide liquidity for owners that are looking for exiting opportunities. And so from that standpoint, we like the pipeline that's being built there, and we think that can be very accretive. Now, obviously, it's not going to be the size and scale of some other transactions that we target in that $5 million to $50 million range. A lot of those are very competitive now in this marketplace. We've seen some deals go off. They're very high-quality opportunities. But for relative value, we're finding good value in this space today. And so we want to remain disciplined in what we're looking at. But overall, Dave, we're very excited about what we're seeing and the opportunities that we have. And really the hardest part we're going to have now, and this is a first world problem, is really managing the pipeline of all the opportunities that are coming our way.

Great. Thanks for the update on that, Brian. Maybe a question for Todd. You talked in the press release about kind of cost savings in the first quarter, and then you talked about a little bit of margin pressure on pulpwood, which sounded more seasonal than maybe secular. So with all that said, maybe an update on kind of where you feel like kind of the secular margin pressure is today, as you've talked about in the last couple of quarters, and any update on whether that's easing from a secular perspective versus seasonal?

Absolutely. So, you know, thinking around the pulpwood comments we had there, you know, recognize that, you know, Q1 was, as we've noted, was really strong for us, great opportunity kind of across the board with all products. But what we're seeing is the impact of really from a merchandising or utilization of product, which this is a really good thing when you think about capital that's come into the sawmills, utilization of the smaller saw timber stem. You know, at times we've talked about it, and we still move this product, super pulp stringer type wood. We've mentioned that before, which ends up going into the pulp category, which is just a larger stem of pulp wood that gets utilized, turned into lumber at some of these other producers. Well, we've had some customers that have gone in and retooled their facility. They actually are utilizing the chip and saw small log stem a little more effectively and efficiently now, so they're not having to purchase that smaller wood, and therefore they're that product that had previously been in our pulpwood category, if you will, will really show up more in our chip and saw and saw timber side. So it's more of a merchandising issue than it is, I would say, any major change in the marketplace. As far as just the seasonality of what we're doing right now, you start rolling into the time when we're getting into more thinning during this time of year, that has some added cost to it just due to handling and what have you there. So You know, no change in the overall market. You have a little more cost associated with the operation would have a little bit of an impact on the margin. Margins will still be very strong comparatively across the, you know, from what we see across the south. So no real issue there. It's more of just the merchandising and marketability of what we're working with today.

Appreciate that, Todd. Thank you. And then last question maybe for Ursula with a dovetail to Brian. You talked about 5% to 10% of the acreage, I think, set aside or thought about from the carbon offset program. One, where are those revenue streams today for carbon offset, and do you have a near-term goal for 22 or 23 that we should be thinking about from a revenue contribution standpoint?

So, hey, good morning, Dave. So as we're thinking through the carbon program at this time, we haven't monetized the program yet. You know, the 5% to 10% that we're talking about is really how we're looking at our entire portfolio and that there would be an opportunity to put that into the program. But we haven't seen that yet in 2022. At the time of guidance, we had come out and said, hey, you know, our expectation would be another six to nine months before we can see some of that. And we're still on track. for that. And so really it's more of a second half of the year than in the first half of 2022.

From a magnitude standpoint, Dave, it is more important by the incident of the action of executing on a carbon credit than the magnitude at this point in time. What's really more real and present is really mitigation bank credit activity along with solar projects. But again, the incident of actually executing on a carbon credit will be as important itself as the magnitude. Yeah, I think that's right. All right. Thanks, everyone. Thanks, Dave.

Thank you.

Our next question comes from Paul Quinn with RBC. Please go ahead.

Yeah, thanks very much. Morning, guys. Just trying to clarify this pulpwood chip and saw. As If saw mills retool to be able to use that chip and saw log, why aren't chip and saw prices moving up as a result of the increased demand?

Hey, Paul, good morning. Actually, we did see our chip and saw price go up very substantially. Part of our overall saw timber mix that we spoke of where we were showing the 20% kind of going for the year, and we were up actually 30% for the quarter, if you will. So it is showing up in there. And why I was saying this is a good thing is that we're better utilizing these stems that had been competing in that pulpwood arena, if you will, that are now really going to fall into the Chippensaw market for us at a much improved price point. So tension is there. Capital being placed is coming online. We're seeing the utilization rates go up. And all of those things coming together is what we're seeing drive the price improvements that we're experiencing at this point and feel like we can maintain going forward. The market will be there. Fundamentals are there. Everything pointing to, you know, duration and durability of it more so than just a one-off type of opportunity here. So all of these things coming together have been key for us.

Okay, great. And then either Brian or Todd, if you could give us some more details around the acquisitions that you acquired and you know, post the end of the quarter, you know, something around site index, tons per acre, those metrics.

Morning, Paul. This is Brian. You know, we're excited about these transactions. So it's interesting when you take a look at these small track programs, you're not going to run kind of a DCF. You're really looking at some of the quantitative and qualitative. And so what we would find is that A lot of these are going to be fitting into the ones that we just did that we announced is really going to be on the younger side, but has a high plantation. And so really we view these as long-term fitting inside of our portfolio from an H-class distribution standpoint. So they're not going to be 70 tons per acre. They're going to be likely below our portfolio average. But what they really represent is, again, H-class distribution, high pine convertible type of acres. very close to our haul zones or inside of our 38 miles. Site indices are going to be equivalent or better than what we currently have. I know that's not a lot of specifics that you can then put into your model, but from the standpoint, it doesn't really move the needle as it relates to our harvest tons, but it really does provide a creative type nature to our overall portfolio.

Okay. And then just maybe first, let's No share buybacks in the quarter. Is that saying basically that you've got better opportunities acquiring Timberland than investing in your own stock?

Yeah, that's correct. We didn't have any buybacks in the quarter. So it really just goes back to our capital allocation priorities. And so, you know, as you've heard the team say, you know, our acquisitions program starting to gain some traction. And really, as we look at the rest of the year, we, you know, want to make sure we continue to cover our dividend, you know, and have good liquidity in order to be able to execute on those acquisitions opportunities as we go along.

All right. Hey, thanks very much. Thanks, Paul.

Our next question comes from Anthony. Petnari with Citi. Please go ahead.

Good morning. Good morning. You know, 1Q results were extremely strong, and I think your, you know, full year adjusted EBITDA guidance is unchanged. I'm just wondering if you could talk about maybe the quarterly cadence as we think about the rest of the year. And, you know, I understood, you know, comments about kind of 2Q normalizing a bit, and maybe you were able to kind of pull forward some volumes in 1Q, but I Why shouldn't that guidance move to sort of the higher end of the range or even maybe above the range?

Hey, good morning, Anthony. So, yeah, you're right. I mean, you heard the team, and we're all extremely pleased, although I guess not surprised with what we've seen from a pricing perspective in what we've been able to achieve the quarter. You saw our volumes were actually ahead of what we had anticipated as well for Q1. I think at the time of guidance, we had said, hey, Q1 volumes will likely be the lowest, and yet we were able to find some good opportunities, take advantage of those, which really, as we think through the cadence for the year, Q1 is probably going to be our largest from a volume perspective. And so as we think through the rest of the year on volumes, it should be fairly evenly spread throughout the remainder of the year. That said, you know, you'd mentioned we're not really moving our guidance. And so, you know, even though those price increases that we've seen, you know, with 30% on saw timber, 8% in pulpwood, you know, it does give us a lot of confidence to say that we do anticipate our saw timber and weighted average prices to increase by call it 15 to 20% as compared to last year. And that's up from what we had initially anticipated on a pricing perspective, I think, we'd come out initially with 10% to 15%. So all of those things are positive, but it is still Q1. And as you know, it's both about pricing and volume. And from a volume perspective for the year, we still anticipate the same 1.6 to 1.8 million tons. So at this time, you know, we're not making any changes to the full-year target.

Anthony, this is Brian. Come see us in August. I will. I will.

Okay. I guess maybe just one last kind of follow-up, which is maybe related. I mean, you guys had a decade where I think saw timber prices were up maybe low single digits per annum. In 21 and sort of year-to-date, prices are up 20% plus. Lumber prices are triple what we think of as sort of maybe a normal price. I'm just wondering this kind of an inflection that we've seen in 21 and year to date. I don't know if you'd call it an inflection, but you know, Brian or Todd, is there anything that is really catalyzing this, whether it's just, you know, inventories have finally drawn down where there's tension or is there a new mill customers? I'm just wondering kind of stepping back if there's, you know, one or two things that really makes the market feel different, or is this just kind of, you know, lucky few quarters. Any perspective there?

This is Brian. I think the luck is the preparation meets opportunity part of this. We've been really talking about this for the better part of a decade. That goes along with the saying that it takes a while to be an overnight success. Sometimes I guess it is a decade. It's really been the macro aspects of this thing that everything from the mountain pine beetle, the redeployment of capital to the U.S. South, and strengthened housing. I mean, we've been needing all of these confluence of events. I mean, we have unemployment at 3.6%. You're getting wage growth. Consumer balance sheets are in great shape. We still have historically low rates. Even when you look back at 2004, 2005, 2006, those rates were hovering around, 10-year was around 4.5%. And so the demand side is really there. So that's why you're seeing the lumber side. They have capacity constraints. We've seen the, you know, they're still nowhere near the capacity which they had in 04, 05, 06. You are seeing consolidation in that space. But from the lumber side, you know, they're going to continue to have that demand. The second component of that is you touched on is really the improvement in the growth drain ratios in the markets we've been operating in. The markets we've been in have been a functional market for the past decade. And so for us, Todd and I were talking about this the other day, when you take a look at the heat maps that we publish in our IP, you've seen our markets really continue to improve. And we're sitting here for our markets, it's really a balance to a constrained marketplace. And so you combine that with the given ownership structure in the markets which we operate in, really, it is who's producing the majority. It's the old 80-20 rule. It's 80% of the production is controlled by 20% of the ownership, and that's really the TMOs and the corporates. And the rest is really small land ownership basis. So we're not expecting to see this wall of wood coming in. And so two years does feel like a trend make. Now, can I promise you 15% to 20% next year? You know, I sure hope so, but the future is not knowable, but I sure do like the winds that are back.

Got it. Got it. That's great perspective. I'll turn it over. Thanks.

Thanks.

Again, if you'd like to ask a question, please press star, then one at this time. Our next question comes from Buckhorn with Raymond James and Associates. Please go ahead.

Hey, thanks. Good morning. Fantastic quarter, and congrats on those pricing premiums. So, I mean, with the magnitude of premium you're achieving versus market-wide averages, I guess my first question is kind of, you know, What do you think in terms of the longer-term sustainability of those premiums as capital continues to come into the U.S. South? And I guess as you're looking at acquisitions in your market areas, are the sellers of those potential acquisitions pricing in or anticipating that those premiums would be sustainable as well? Are you having to underwrite those premiums into your bidding process?

Morning, Buck. So you've got a couple questions in there. One is on pricing and maintaining price premium. You know, when we measure price premium, that's relative to the U.S. South. And so we believe that there's an extended period of time where we'll be able to maintain price premiums. Will they be to the extent of where they are today? I mean, these are pretty exceptional premiums relative to what we've seen historically. But, you know, if you take a look at Mississippi, and we've looked at opportunities in Mississippi, there's a lot of wood there. And from a product price appreciation standpoint, and where the mill infrastructure is, and how long it takes to really build a mill, you know, that's a very difficult market to say I would want to be an owner in today outside of looking at it from a conservation standpoint or having a really, you know, 10-year viewpoint on it. Now, so as a result of that, from a price premium, I really like our markets. We talk about how 65% of our ownership base is in top three markets and 100% is in the top seven markets, and that's out of 22 markets in the U.S. South. And that's really measured by depth and breadth of market and supply, demand, and factors. And so we like where we are. We expect the premium to remain there, and there's no reason for it to change. The magnitude may narrow, but we don't see it really evaporating anytime soon. As it relates to M&A, It's really a cost of capital element to it. And so one question we get related to this as well is, what's our expectations as it relates to increasing interest rates? Well, Timberland is really an inflation hedge. And so what we've seen really the last two years, product price appreciation has outstripped inflation. Even though inflation this past year was exceptionally high, you still saw what we had in our product price appreciation. So really in our marketplace, it's really on a real basis. So what's the expectation of what's happening in real? We've seen some transactions go off in the U.S. South, and we've looked at those transactions. And, you know, there's always different factors. There's not one forest is a forest is a forest. Each transaction has its own unique attributes that go along with it. And so from the standpoint, pricing is a very important consideration, but also alternative income such as – development, recreational land sales, carbon, mitigation bank credits, and location from a development standpoint that we saw in the most recent transaction. Stocking levels have a very important consideration because that's really near-term cash flows that go along with it. So from a pricing standpoint, you really see it much more in the discount rate. And so how much can be attributed to price expectations, that is a contributing factor, But think about it, Mark. You've been following the space as well. We like the two points of the trend, but how much are we really going to be pricing in exponential increases of 10% to 20% each year for the next three years to put that in our pricing? I still believe that there's some conservatism as it relates to price expectations, but valuations remain fair for the type of assets that are going off. I know I just built you a watch on that answer, but I think it's important detail to make sure we communicate it. That's very helpful.

I appreciate the color. Thank you for that. And I guess my follow-up is kind of a more bigger picture. I'm wondering if you guys have thought through, you know, the impact later this year on maybe comparisons. If European wood imports into the U.S. South continue to dwindle just due to the fact of what's going on in Europe these days – you know, what's your thought in terms of could that add another layer of tightening to the market or at least improve or sustain the comparisons? Or how do you think of the impact of potentially reduced European wood imports?

Hey, Buck, it's Todd. Yeah, so, you know, it's one of those things that it's going to continue if that were to take place. You know, you continue to see this tension that we have in our markets and thinking about where we sit, how our mills are running, you know, does it If they're up to near capacity with the shifts they have in place, could they add another shift? Is there something else they can do to help fill in some of that void? Or if everybody feels they're maxed out, then you're going to continue to see the pricing tension that we currently have. And as you think about how we operate, how we're structured with our delivered wood model and all that, it's going to add some additional value to what we bring to the table as far as being able to continue to supply on a very consistent basis to the customers we're operating with. see that as a potential tightening down the road. We'll see how it all plays out, but we know the markets we're in now are running at a very high level, high rate of capacity, if you will. So it would be kind of more that overall number pricing improvement. I think we might see a curl due to that, but just from a supply and flow within the markets that we're in, we like where we are and feel they're running at a very efficient rate right now.

Okay. Thanks, guys. Thanks, Bob.

This concludes our question and answer session. I would like to turn the conference back over to Brian Davis for any closing remarks.

Thanks, Sarah. We really have a lot to celebrate, including our first quarter. While our results and outlook are noteworthy in and of themselves, we recognize there are bigger events in our lives, with high school and college graduation ceremonies, weddings, upcoming summer vacations, but most importantly, Mother's Day this weekend. So take the time to be present and celebrate these moments. Thank you, and we look forward to reporting our Q2 results in August.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.