Rayonier Inc. REIT

Welcome and thank you for joining Rainier's second quarter 2020 teleconference call. At this time, all participants are in a listen-only mode. During the question and answer session, please press star 1 on your touchtone phone. 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. Mark McHugh, Senior Vice President and CFO. Sir, you may begin.

Thank you and good morning. Welcome to Rainier's Investor Teleconference covering second quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rainier.com. In these presentations, we include forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Our earnings release and SEC filings list some of the factors that may cause actual results to differ materially from the forward-looking statements that we may make. They are also referenced on page 2 of our financial supplement. Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measure in our earnings release and supplemental materials. With that, let's start our teleconference with opening comments from Dave Nunes, President and CEO. Dave?

Thanks, Mark, and good morning, everyone. First, I'd like to point out that we are conducting this call from multiple locations, so bear with us as we move from speaker to speaker in addressing your questions. I will begin the call by making some high-level comments before turning it back over to Mark to review our consolidated financial results. Then we'll ask Doug Long, Senior Vice President, Forest Resources, to comment on our U.S. and New Zealand timber results. And following the review of our timber segments, Mark will discuss our real estate results as well as our outlook for the remainder of 2020. Before discussing our results for the quarter, I'd like to briefly update everyone on our ongoing response to the COVID-19 pandemic. We continue to contend with the challenges associated with the COVID-19 pandemic. Here at Rainier, we have responded by prioritizing the health and safety of our employees and contractors as well as their families while working to ensure business continuity. In mid-March, we implemented a work from home model for all U.S. office employees and instituted enhanced safety guidelines for field employees in an effort to do our part as a company to mitigate the spread of COVID-19. These measures have largely been effective in stemming the spread of this virus within our employee and contractor workforce and have allowed us to continue to supply our customers with logs and other products. Given the current state of the pandemic, we anticipate remaining in this mode in many of our locations through at least the end of the year and will likely not fully reopen our offices until a vaccine has been implemented or the number of new cases has dramatically subsided. In New Zealand, the government instituted a more stringent lockdown measure across a broader range of businesses, including forestry, beginning in late March and lasting through late April. which served to effectively end community spread of infections there. As a result, the New Zealand economy has fully reopened and our offices there are now operational. I'm very proud of how our employees have stepped up to keep our business running amid this pandemic while observing the necessary social distancing and safety protocols to mitigate the further spread of COVID-19. While this has been extremely disruptive to all aspects of life, I believe we are managing through it very well. With the closing of the Pope Resources transaction on May 8th, this quarter marks the first quarter that we are reporting the combined results of the two companies. Our team did a great job of both closing this transaction on an accelerated timeframe and in developing a thoughtful integration plan that effectively blended the best practices and considerable talent within each organization. All this work had to be completed under social distancing protocols associated with COVID-19, which is a tribute to the dedication and professionalism of both organizations. It also reinforced the strong cultural fit between our respective companies and we're all very excited about the future prospects of the combined organization. With that, I'd now like to switch gears and briefly discuss our quarterly results. For the second quarter, we reported adjusted EBITDA of $79 million and pro forma net income of $15 million or 11 cents per share. Overall, I'm pleased with how our team navigated very challenging market conditions amid the COVID-19 pandemic to deliver strong operational results across all segments. This is a tribute to both the diversity of our market exposure across our various segments, as well as the dedication of our outstanding employees. Our southern timber segment reported adjusted EBITDA of $26 million for the quarter, slightly below the prior year strong quarter, which was driven by substantial pipeline easement revenue. Second quarter results were aided by both volumes that were up 20% relative to the prior year quarter and stronger saw log markets towards the end of the quarter, driven by strong lumber pricing and resurgent export markets. Our southern timber segment continues to enjoy very high margins and relatively low cash flow volatility. In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $4 million, up substantially from the prior year quarter on the strength of significantly higher volumes from Rainier legacy lands, as well as the addition of 55,000 tons of volume from the Pope Resources assets. We further enjoyed much stronger Log prices towards the end of the quarter driven by stronger lumber pricing, a resumption of normalized log export activity, and the improved species mix from the poke resources acquisition. In our New Zealand timber segment, we reported a adjusted EBITDA of $10 million, which is roughly half the level of our prior year quarter. The primary driver was a 23% reduction in volume based on the loss of over a month's worth of production associated with the strict New Zealand government lockdown measures put in place to contend with the impacts of COVID-19. Log pricing for both export and domestic markets was also off due to both the buildup of log inventories in China and a weaker New Zealand dollar. Lastly, our real estate segment, as anticipated last quarter, reported very strong second quarter adjusted EBITDA of $45 million, driven by the sale of 20,000 acres comprising of a mix of rural, development, and non-strategic parcels. We continue to be encouraged by the stability and demand across all sales categories within our real estate segment. With that, let me turn it back over to Mark to review our financial results as well as some changes that we've made to our financial disclosures this quarter.

Thanks, Dave. Before discussing our results for the quarter, I'd like to briefly comment on our recent acquisition of Pope Resources as well as some changes that we implemented this quarter to our business segments and non-GAAP measures. As Dave noted, we completed our acquisition of Pope Resources during the second quarter. The aggregate consideration paid by Rainier to acquire all of the outstanding limited partnership units and general partnership interests of Pope consisted of $170 million of cash, 7.2 million common shares of Rainier, and 4.5 million operating partnership or OP units of Rainier LP. We also assumed or repaid approximately $110 million of legacy Pope debt. The Pope Resources transaction added to our portfolio approximately 124,000 acres of timberland in Washington, co-investments in three private equity timber funds, a fund management business that oversees these private equity timber funds, and an attractive pipeline of HBU opportunities in the West Puget Sound area. As a result of the Pope Resources acquisition, we have revised our reportable business segments, adding one additional segment, which we refer to as the timber fund segment. This segment reflects the operations of the private equity timber funds and fund management business acquired as part of the POPE transaction. As communicated in our earnings release, despite not having a majority interest in the three private equity timber funds, as the managing member of the funds, we are required to consolidate 100% of the fund's operating results, assets, and liabilities. As such, all three timber funds are fully consolidated into our financial statements and the income or loss attributed to third-party investors is reflected as an adjustment in our income statement under the caption net income or loss attributable to non-controlling interests and consolidated affiliates. Since we are required to consolidate the timber funds in our financial statements, we implemented changes to certain non-GAAP measures in order to better reflect the proportionate financial contribution from this business to Rainier. Specifically, we have revised our definitions of pro forma revenues Proforma Operating Income, and Adjusted EBITDA to incorporate the look-through contribution from each of the three timber funds based on Rainier's respective ownership interest, as well as the full amount of management fees received by Rainier for managing the timber funds. We believe that these changes will provide our investors and analysts with more useful information to assess the economic value of and contribution from the timber funds business to Rainier. I'd also like to highlight that this is our first quarter reporting under the UpREIT structure, which we put in place to facilitate the Pope Resources acquisition. As noted earlier, we issued 4.5 million OP units of Rainier LP as consideration in the acquisition. These OP units are generally considered to be economic equivalents to Rainier common shares, and the number of such units outstanding will be reflected on the cover of our 10Q and within our financial reports going forward. Also, because these units are registered securities, we will be reporting the financial results of Rainier LP within our quarterly SEC filings going forward. Please note that the only significant difference between the financial reports of Rainier Inc. and those of Rainier LP relates to the adjustment in Rainier Inc.'s income statement under the caption, net income attributable to non-controlling interests in the operating partnership. Lastly, we also communicated in our earnings release that effective April 1st, We changed the composition of our real estate sales categories to better align with the way we evaluate real estate sales internally. The rural category now includes all real estate sales, excluding development sales, representing a demonstrable premium above Timberland value. The Timberland and non-strategic category now includes all real estate sales representing little to no premium to Timberland value. This category consists primarily of sales of property that management views as non-strategic to our long-term portfolio, as well as sales of property for capital allocation purposes that did not fit the definition of a large disposition. In summary, we revised these categories to place a greater emphasis on premium rather than end use, which more closely aligns with how we manage the business internally. All prior period amounts have been reclassified to reflect the new composition of these sales categories. Note that the improved development, unimproved development, and large disposition categories were unchanged, and this reclassification had no impact on consolidated segment results. I'll now switch gears and provide an overview of our second quarter results, starting on page five with our financial highlights. Sales for the quarter totaled $196 million, while operating income was $12 million, and net income attributable to Rainier was $2 million, or one cent per share. On a pro forma basis, net income was $15 million, or 11 cents per share. The pro forma adjustment for the second quarter consisted of approximately $13 million of costs related to the merger with Pope Resources. Second quarter adjusted EBITDA of $79 million was well above the prior year quarter adjusted EBITDA of $61 million, primarily due to much stronger results in our real estate segment, partially offset by significantly lower results in our New Zealand timber segment due to the COVID-19 shutdown. On the bottom of page five, we provide an overview of our capital resources and liquidity at quarter end, as well as a comparison to year end. Our cash available for distribution, or CAD, for the first half of the year was $80 million compared to $95 million in the prior year period, primarily due to lower adjusted EBITDA, higher cash interest paid, and higher cash taxes paid, partially offset by lower capital expenditures. A reconciliation of CAD to cash provided by operating activities and other gap measures is provided on page 8 of the financial supplement. We closed the quarter with $88 million of cash and $1.3 billion of debt. both of which exclude cash and debt attributable to the timber fund segment, which is non-recourse to Rainier. Our quarter end debt balance reflects the credit facilities that we closed in April, which were used to fund the Pope Resources acquisition. Our net debt of $1.2 billion represented 26% of our enterprise value based on our closing stock price at quarter end. I'll now turn the call back over to Doug to provide a more detailed review of our timber results.

Thank you, Mark. Good morning. Let's start on page 9 with our southern timber segment. Adjusted EBITDA in the second quarter of $26 million, with $7 million and $1 million unfavorable compared to the prior quarter and the prior year quarter, respectively. Second quarter harvest volume, approximately 1.5 million tons, was 17% lower compared to the prior quarter, but 20% higher compared to the prior year quarter. Both 2020 and 2019 experienced a reduction in volume in the second quarter, following comparatively strong volumes in the first quarter of each year. For the first half of the year, volume of 3.4 million tons was 5% higher in the same period in the prior year as we pulled forward some pulpwood production to meet strong demand during the early stages of the COVID-19 pandemic. The average fine pulpwood stumpage price of $15.94 per ton was flat compared to the prior quarter and 7% unfavorable compared to the prior year quarter. Pulpwood demand remained strong into the second quarter which resulted in stable pricing compared to the prior quarter. The decline in price relative to the prior year quarter was driven by increased availability of log supply due to drier ground conditions. The average pine salt timber stomach price of $25.48 per ton was 5% and 1% unfavorable compared to the prior quarter and the prior year quarter respectively. At the onset of COVID-19 and into the second quarter, We experienced uncertainty in lumber markets as well as an increase in pulpwood volumes. This resulted in an increased mix of chip and saw logs at lower pricing, which is partially offset by higher pricing for larger diameter saw logs due to the resurgence of exports to China. Second quarter non-temporary income of $5 million was $4 million below the prior year quarter due to a reduction in pipeline easement revenue. It's important to note that this comparison is being made against a record high year for our non-temporary income business in 2019. Now moving to our Pacific Northwest timber segment on page 10. Adjusted EBITDA of $4 million was $6 million unfavorable compared to the prior quarter, but $2 million favorable compared to the prior year quarter. This was largely volume driven, as second quarter harvest volume of 385,000 tons was 19% below the prior quarter, but 54% higher compared to the prior year quarter. Of the 385,000 tons of harvest volume in the second quarter, 55,000 tons represented volume from the newly acquired Pope Resources Timberlands. The decrease in volume compared to the prior quarter was driven by the addition of stumpage sale volume in the first quarter to capture strong pricing. The increase in volume compared to the prior year quarter was primarily due to the comparatively light harvest activity in the prior year quarter coupled with 55,000 tons of incremental volume from the acquired Pope Resources Timberlands. The average delivered salt timber price of $75.39 per ton was flat compared to prior quarter and 4% unfavorable compared to prior year quarter. Market uncertainty lingered through much of the second quarter as a result of COVID-19, as well as weaker export market demand through the excess supply of European spruce, which put pressure on sales for prices. It's worth noting that we did see demand pick up considerably towards the end of the quarter in both the domestic and export markets. The average delivered pulpwood price of $36.92 per ton was 3% and 13% unfavorable compared to the prior quarter and the prior year quarter, respectively. The increased supply of pulpwood chips on the open market combined with market-related downtime at domestic pulp mills continue to keep pulpwood prices low. Page 11 shows results in key operating metrics for our New Zealand timber segment. Adjusted EBITDA in the second quarter of $10 million approximates the prior quarter and was $10 million unfavorable compared to the prior year quarter. The second quarter harvest volume of 529,000 tons was 10% higher than the prior quarter, but 23% lower than the prior year quarter. After over a month of no production during the government-mandated lockdown, we were permitted to resume production on April 28th. At the same time, China was emerging from its COVID-19 lockdowns and demand surged as mills restocked log decks. During the last two months of the second quarter, our team did an incredible job of safely resuming production to 110% of plan in order to meet pent-up export and domestic demand, thereby delivering exceptional results under these circumstances. The average delivered export salt timber price of $98.75 per ton was 4% favorable compared to the prior quarter due to the pickup and export demand, but 12% unfavorable compared to the prior year quarter as the COVID-19 pandemic weighed heavily on pricing in both China and New Zealand. The average domestic salt timber price of $66.95 per ton in U.S. dollar terms was 4% and 19% unfavorable compared to the prior quarter and the prior year quarter, respectively. Compared to the prior quarter, the variance was largely due to changes in the New Zealand-U.S. exchange rate, whereas compared to the prior year quarter, the lower pricing generally followed export market trends due to COVID-19. Excluding the impact of foreign exchange rates, domestic pricing in New Zealand dollars was 1% favorable compared to the prior quarter and 12% unfavorable compared to the prior year quarter. The average domestic pulpwood price of $32.10 per ton was 5% and 18% unfavorable compared to the prior quarter and the prior year quarter, respectively, which was driven by the same factors as domestic salt timber. I'll now briefly discuss the results from our newly created timber fund segment. Highlighted on page 12, the timber fund segment generated consolidated EBITDA of $2 million in the second quarter on harvest volume of 90,000 tons. Adjusted EBITDA, which reflects the look-through contribution from the funds, with $700,000. Lastly, in our trading segment, we generated adjusted EBITDA of $100,000 in the second quarter, which is $100,000 and $300,000 favorable compared to prior quarter and the prior year quarter, respectively. I'll now turn it back over to Mark to cover our real estate results. Mark?

Thanks, Doug. As highlighted on page 13, our real estate segment delivered strong results in the second quarter. Sales totaled $50 million on roughly 20,000 acres sold at an average price of over $2,500 per acre. Adjusted EBITDA for the quarter was $45 million. Sales in the improved development category totaled $6 million, highlighted by the sale of a 119-acre industrial site in our Richmond Hill development project south of Savannah, Georgia, for $5 million, or $45,000 per acre. Due to post-closing infrastructure obligations, we only recognize $3.5 million as revenue from this sale and our second quarter results. We also closed on the first 17 residential lots in the forest park phase of our wildlife development project north of Jacksonville, Florida for $1 million or $63,000 per lot. Sales in the unimproved development category totaled $8 million, which consisted of a 570 acre sale in St. Johns County, Florida at a price of approximately $15,000 per acre. In the rural category, sales totaled $27 million on roughly 7,700 acres sold at an average price of $3,500 per acre, including a 4,500-acre sale for $17 million, or $3,700 per acre, and a 2,800-acre sale for $9 million, or $3,250 per acre. Both of these sales were in St. Johns County, Florida. Lastly, sales in the Timberlands and non-strategic category totaled $10 million, consisting of roughly 12,000 acres at an average price of $800 per acre. Sales in this category consisted primarily of several low-value, geographically isolated parcels in Georgia. Now moving on to our outlook. As communicated on our first quarter earnings call, we are updating our full year guidance to reflect a partial year contribution from the newly acquired Pope Resources assets, as well as our improved outlook with respect to market conditions for the balance of the year. Page 15 of our financial supplement provides our updated financial guidance by segment for 2020 and Schedule G of our earnings release provides a reconciliation of our adjusted EBITDA guidance to Net Income Attributable to Rainier and EPS. We now anticipate full year Net Income Attributable to Rainier of $38 to $43 million, EPS of $0.27 to $0.31, Performant EPS of $0.17 to $0.21 and adjusted EBITDA of $240 to $260 million. Adjusted EBITDA reflects an anticipated partial year contribution of $17 to $20 million from the acquired Pope Resources assets. With respect to our individual segments, we now expect that our southern timber segment will achieve full year harvest volumes of 6 to 6.2 million tons with higher adjusted EBITDA of $104 to $109 million. The improved outlook is driven by increases in export volume and stronger saw timber demand. We expect that weighted average pricing in the U.S. South will remain relatively flat as improved saw timber demand roughly offsets lower pulpwood pricing due to anticipated mill downtime, an increased supply of wood chip residuals, and geographic mix. In our Pacific Northwest timber segment, we now expect full-year harvest volumes of 1.6 to 1.7 million tons and higher adjusted EBITDA of $30 to $32 million, which reflects the estimated partial-year contribution from the acquired Pope Resources timberlands. We further expect some strengthening of Pacific Northwest saw timber pricing due to improving end markets and a higher value species mix. We anticipate that pulpwood pricing will be relatively flat and dependent on the duration of domestic milk curtailments. In our New Zealand timber segment, we now anticipate higher harvest volumes of 2.3 to 2.5 million tons and higher full year adjusted EBITDA of 50 to 56 million dollars. The increase in both volume and adjusted EBITDA is attributable to the shorter than anticipated shutdown of economic activity in New Zealand, as well as strong demand following the shutdown. We anticipate relatively flat pricing through the second half of the year, with seasonal demand offset by continued competition from alternative supply sources. In our real estate segment, we expect to achieve full-year adjusted EBITDA of $77 to $83 million due to continued strong demand for rural properties, as well as an improved Demand Outlook for Development Properties. Lastly, we expect that our new timber fund segment will contribute full-year adjusted EBITDA of $3 to $4 million. I'll now turn the call back to Dave for closing comments.

Thanks, Mark. As we've all seen, the COVID-19 pandemic presents an unprecedented challenge for the global economy. And while we're partially recovered from the depths of the economic slowdown, we're still a long way from a full recovery. While we're very encouraged by the resiliency that our business has exhibited over the past several months, we also expect some continued volatility in end markets as the pandemic evolves. Nevertheless, I continue to believe that Rainier is very well positioned to weather this storm. I'm heartened to see the dedication and adaptability that our people have demonstrated throughout the COVID-19 pandemic, and I'm further extremely confident in the strength of our balance sheet As a pure play timber REIT, we enjoy strong margins and substantially less volatility than downstream manufacturing businesses, and we have a geographically diverse portfolio that further mitigates our exposure to any single region or product category. I want to reiterate how proud I am of how our employees have responded and continue to manage through this crisis with poise and determination. I feel very fortunate to be surrounded by such exceptional talent and dedication at all levels of our organization. Despite the significant challenges ahead, we remain keenly focused on executing against our strategic priorities and achieving our mission of generating industry leading returns and building long term value per share. We will continue to leverage the diversity and optionality of our portfolio and harness the power We will now begin our formal question and answer session. If you would like to ask a question, please press star 1 on your touchtone phone. Only record your first and last name. To withdraw your question, you may press star 2.

The first question is coming from Anthony Pettinari of Citi. Your line is open.

Good morning. This is actually Randy Tolson. Can you just talk about drivers of the full year harvest expectations, especially in the U.S. South? I think in the release there was mention of increased export volume being the primary driver. Can you just touch on your expectations for U.S. health exports for the year and maybe remind us how that compares to annual numbers we saw before the tariffs?

Thank you. Sure, this is Doug. The increase in the south is a combination of both export and we've seen increased demand for domestic lumber. And that increased demand is going to drive the saw log demand for us. So, you know, a lot of increase is in the domestic side for lumber, but then on the margins would be the increase on the export side. With respect to exports, and that's just due to the leverage of where our land base is, in Q1, exports were fairly calm. The US-China trade war was still in people's minds and the COVID impacts in China. But as we got through phase one, we saw tariffs being put in, restrictions being released on the tariffs on a monthly basis. So there was waivers being allowed. And so we were able to ramp up our export volumes. And I'm not going to go into our specific volumes that we have, but shipments from the US South increased over 100% between Q1 and Q2. And we're seeing similar increases out of the US South as we go forward. So demand for sudden yellow pine in China has definitely grown and is strong. And one of the good things about the sudden yellow pine is it's used in treating and other products that typically don't compete with the European spruce or the radiated pine in New Zealand. So we've continued to see strong demand and look forward to more of that as we go forward in the second half of the year. Thanks, Doug.

And then just maybe switching gears, with the poke field now closed, you've had those timberlands for a couple of months now.

Can you talk about what type of land sales you could see and how you're planning on deleveraging maybe the timeline there? Any detail there would be helpful.

Yeah, sure. Recognize that we had the large disposition in the first quarter. This year in Mississippi for $116 million. And really, as we started out the year with the announcement of Pope, we had anticipated that that was going to comprise the bulk of our deleveraging, kind of needed to stay within the credit metrics of where we wanted to be. Obviously, that was before the pandemic, which put some pressure on EBITDA and thus leverage. So, you know, I think with where we sit today, I mean, if you look at just the midpoint of our EBITDA guidance, I think that puts us at about 4.8 times net debt to EBITDA for the year, but obviously that reflects only a partial year contribution from the Pope assets. If you normalize Pope at more of a full year run rate, we're probably closer to four and a half times. So I'd say clearly towards the higher end of where we'd like to be, but that said, I think that we would expect to deliver largely through organic cash flow growth as we return to a more normalized Operating environment, of course, we always have the flexibility to execute additional asset sales if we think that that's necessary and appropriate at any point in time. But again, I think that we'd like to see cash flow grow from here as we return to more normalized operations.

Okay. Thanks, Mark. I'll turn it over.

The next question is coming from Mark Wilde, BMO Capital Markets. Your line is open.

Hey, it's Jesse Barone on for Mark. Just starting, what are you guys seeing in China? What are inventory levels like? How has demand progressed as you went through Q2 and into Q3?

Sure, I'll take that, Justin. This is Dave. Keep in mind that when we came out of the Lunar New Year and we were in the midst of the COVID pandemic, The inventories in China jumped to a record high level of 7 million cubic meters in Q1. And so as we've seen the Chinese economy reopen, that's come down considerably. It's dipped to as low as just under 4 million cubic meters. Our estimate right now is that it sits at about 4.4 million cubic meters. One of the things that we track is a ratio of supply to demand as measured in months. And we're currently sitting at about 1.9 months. And we feel that that's a pretty, we like to see it in that range. We feel that's a pretty stable part of the market or environment. Having said that, keep in mind there has been a tremendous amount of rain in China, as well as flooding. And that's disrupted both construction projects and more recently ports. And so that's overlaying an otherwise fairly positive environment. Mills, to our understanding, are still operating at about a 60% capacity. So we feel the combination of the mills kind of ramping back up, them getting through the rainy period, that they're dealing with right now, and the fact that inventories are relatively imbalanced, we generally see a stronger second half of the year.

Great. That's super helpful. Just one other from me.

Any updated thinking around the timber funds business?

I know you guys have said before that you weren't really looking to grow the business, but now that you actually own it, any updated thinking around there? Thanks.

No, I mean, we still continue to keep all our options on the table with respect to that. Mark walked you through how we're handling the pro forma contribution of the business, and I'd say more to come on that in the future.

All right, I'll turn it over. Thanks, guys.

The next question is coming from Kurt Yinger, D.A. Davidson. Your line is open.

Yeah, good morning, everyone, and appreciate you taking my questions. First off, I just wanted to start off, I mean, could you talk a little bit about the impact of having Pope in the mix and what that will kind of look like for your average realizations in the Pacific Northwest?

I'll take that a little bit and then Doug can touch on that afterwards. Keep in mind that for Pope, it does a number of things. First of all, they have a heavier mix of Douglas fir in their merchantable timber inventory. Generally speaking, you've got more optionality around Douglas fir from a market standpoint. You've got a You've got deeper exposure, say, to the Japan market as well as the domestic market. And then two, keep in mind that the Pope lands have a more gentle topography. And so the instance of more expensive cable logging is much, much lower on Pope. And so that brings down your Your login costs considerably. And then in general, the Pope lands are slightly closer to customers and so the hauling costs are different. So the OBT rates for Pope are considerably lower than they are on the Rainier portfolio. And then in addition, we do serve some similar customers and so it gives us some added volume with respect to serving those customers and exposure. So we're really excited about what it does from a market perspective. And then also with respect to the real estate side of the business, it's very similarly structured and run to how we treat our real estate business in the Jacksonville and Savannah area. And so we're looking forward to sort of combining that and just adding An additional strong market that the Puget Sound region represents.

Got it. Okay. Sorry, go ahead.

This is Doug. Dave's familiar with POPE. He did a great job with it. I'd just say, you know, one thing I would add is over a quarter of a quarter, from last year to this year, we saw a pretty big increase in our chip and saw volume just regarding the stands we're harvesting in. which you would expect to bring down our average pricing for salt timber, but given the increase, you know, mix and things that Dave just talked about with Pope, we had flat pricing overall, so it just shows that it adds to that contribution.

Okay, perfect, thanks. And, you know, as we start looking ahead to 2021 with the full year of Pope, I mean, any noteworthy differences between the impact that's kind of assumed in the second half guide versus what we might think about

I recall that when we announced the transaction, we estimated a five-year average annual EBITDA contribution of $38 million. Obviously, with just the timing of the year that we closed the transaction, as well as doing so in the midst of the COVID-19 pandemic, We're not going to get a prorated contribution of that magnitude. But all things considered, I think the assets are operating very well. I think our longer-term expectations haven't really changed meaningfully. And again, I think we're pretty positive on the outlook for that business and those assets in particular. Recognize as well that going into the year, we didn't obviously control the operation of those assets up until the date of acquisition. and so you know they had harvested I'd say a higher proportion of their annual plan than the proportion of the year that we were actually through and so you know so again just another reason that the prorated contribution this year is not going to be reflective of what we would expect the run rate contribution to be.

Okay thanks Mark and then my last one could you just remind us how to think about the real estate segment at a high level kind of year in year out and I realize that It's lumpy, and maybe some of the stuff you have going on down in Florida makes it tougher to think about that in the near term. But any sort of long-term thoughts there?

I'll start with that, and Mark can chime in afterwards. I think at one level, and Mark kind of touched on this a little bit in the way we've restructured the sales categories. Our focus is really on generating premium. Historically, the sector has had a period where a number of players have sold Timberland at Timberland value to simply generate cash to fund a dividend that otherwise can't be funded with normal operations. We decidedly stepped away from that practice, de-emphasized that, and really put much more emphasis on premium. And so we still have sales in our non-strategic category that are either lower quality assets or assets that we will sell for capital allocation purposes. But in terms of how we think about the real estate segment, how we operate it, it's just really all about premium. And you can see that if you look deeper into some of the data in our IR deck. And then within the real estate segment, we kind of have three broad areas. The first is our rural sales and we're particularly encouraged by how we see that playing out. We see that potentially as one of the benefits of the COVID We have a number of product types that we're very encouraged by how that has been developing. And we really see that as a stable baseline of a real estate business. Moving up the food chain, we have unimproved development. This is where we have made some investments in entitlements to allow for downstream development. We typically sell the project once those entitlements have been reached. and it's essentially selling the land at an unimproved level but with those added entitlements and so a relatively modest amount of capex involved. And then we have three, we have, then we move to sort of the highest level within our real estate segment and that's the improved development and we really have three project areas there and these are areas where we have a lot of surrounding land and we feel there's value in investing in getting those catalyzed to improve the broader absorption. And we talk about these a lot. These are the Wild Light Florida project. This is 20 miles north of Jacksonville that we started about four years ago. And keep in mind that to date, only about 260 net acres have been absorbed within that project. And we have 25,000 acres within a five mile And so we see that as a project that's going to have a lot of room to grow over the years and decades ahead. And then moving north, we have our Richmond Hill project that's just 20 miles south of Savannah, fairly similar to Wild Light in terms of strong schools, a growing area. We've made Some good initial sales there, and we've made a lot of progress in getting public infrastructure projects completed this year. We have a new I-95 interchange that's under construction. We have a new elementary school that's under construction, and a high school that's under construction on our project, a two-mile parkway, water and sewer utilities. And those are really all designed to help open up more of that project. And again, like wildlife, within a five-mile radius of this project, we have roughly 20,000 acres. And then our third improved development project is associated with the Pope assets. And these assets are all in the West Puget Sound area, roughly 30 miles northwest of Seattle. And in particular, these projects have benefited from a a new Kingston passenger-only ferry service into downtown Seattle. And so once we saw that ferry service open up, we've seen improved demand coming over into Kitsap County where that's located. And so we've got two projects there that fit within our improved development category. One is called Arborwood, right near Kingston, roughly two miles from Kingston. And then the other is the historic mill town of Port Gamble. And we're very excited about both these projects. They're in earlier stages of development, certainly relative to our Florida and Georgia projects, but very similar characteristics. So we're excited about those. And that gives you just sort of a little bit of a sense of how we approach those. But again, I think that if I leave you with one thing, it's focus on premiums.

That's excellent. Appreciate the color, Dave. I'll turn it over.

Paul Quinn, RBC Capital Markets. Your line is open.

Yeah, thanks very much. Good morning, guys.

Good morning.

Hey, I appreciate the revised guidance and, you know, knowing that we're at record lumber prices, just wondering how that is tracking through to your log sales and what's embedded in the revised EBITDA guide, you know, considering the mixed changes quarter over quarter.

Sure, this is Doug. I'll start with that. You know, increase in log prices typically lags The lumber price rallies and what we saw is sawmillers really started getting confidence in the current lumber rally in June. And so while Southern Yale Pond pricing was up 17%, you know, at the end of Q2, it's really jumped 34% since then. So as we all know, it's had a big jump and Doug's fur lumber rally was a bit slower, but has done the same thing since then. And so we're pretty optimistic about that. And, you know, with that, once the Once we saw those curtailed mills get confidence, we saw them come back to full production across the board in the South and Northwest. And they really got that confidence for repair and remodeling. And then housing construction restrictions were relieved as part of COVID. And so in Pacific Northwest, where that supply and demand ratio is more tensions, and as Dave mentioned, we saw export markets pick back up, we saw lumber price increases translate back to the stump more rapidly. But with the southern mills now mainly back at full production, we're seeing that pricing tension in some southern wood baskets also, particularly those near active export markets. And that's making it back to stumpage now too. So I won't go into civics of price premiums because we're currently in negotiations across the Pacific Northwest and the South, and I don't want to tip our hands to our expectations. But as you mentioned, our guidance has been updated to reflect the signals that we're seeing in those markets.

Yeah, that's helpful. And, you know, you guys just closed on Pope, which is going to take a little while to digest and assimilate. And balance sheet seems to be a little heavy.

Is it fair to say that you'll be a little quieter on the M&A front going forward here?

Yeah, I think certainly we're towards the upper end of our targeted debt capacity. And so I absent the ability to grow with equity, I think we are going to certainly be a little pickier as we think about acquisitions going forward. Generally, right now, it's a quieter period. I think with COVID travel restrictions, you're not seeing as many offerings out on the market because it's difficult for people to do some of that confirmatory due diligence. We're still looking at all the things that are out there, but I'd say that's a fair assumption that we're being just a little pickier right now until we get the balance sheet to a little more comfortable level.

So that's not to suggest you weren't picky in the past, but I'll leave it there. Best of luck.

Thank you. Our next question is from Mark Weintraub with Seaport. Mark, your line is open.

Thank you. Just following up actually on the last question and just getting a clarification, and maybe I misheard, but I thought you had indicated in prepared comments that you were assuming relatively flattish U.S. salt timber prices through the back half of the year, and then it sounded though In the answer to the last question that you were beginning to see evidence of maybe log pricing in the U.S. South having a more positive bend, maybe I misheard, or would that show up more likely next year? Maybe start there.

Yeah, no, thanks. I'll clarify that. So we're actually seeing expectations of increased price for saw logs. But what we think is that on average, our composite average price in the South is going to be relatively flat. So that's what we're referring to on the kind of flat for the year. And the reason for that is if you look back over previous years, typically as we go into the second half of the year, we have increased harvest out of our kind of Gulf states and particularly our Arkansas area where prices are much lower. And so we see pulpwood prices in particular go down significantly. We also typically, because it's drier time of the year, have about a 5% increase in thinning volumes. So it's tapered to pulpwood. So the comment is basically that we're going to see increased salt timber prices from what we're seeing, but that's going to be helping to offset the volume geographic mix that we're going to have as we shift smaller volume to lower-priced regions in the Gulf states, as well as the increased percentage of thin volume of pulpwood. So we're looking at that average composite price being relatively flat. So that's kind of the differentiation there.

Got it. Okay, thank you. And then just tying this – And then I know, Dave, in the press release you talk about this, you know, the lag between the strength in wood products and you'd expect that to translate to improved log prices over time. And I assume that is part of, Mark, when you make the comment about getting to debt targets, you expect cash flow growth to more normalized type levels. And I assume that is An important part of the equation, A, just get confirmation on that and to the extent that you're comfortable giving any sense of magnitude, that would be helpful. And then B, are there any other significant drivers in getting to the more normalized level of cash flow when you think about your leverage targets over time that we should be cognizant of?

Yeah, sure, Mark. I'm happy to take that. I think there are a few components of that. I mean, certainly growth in pricing is an element of what we see as getting to a normalized level of cash flow. We recognize as well, I mean, there was lost volume that occurred this year, particularly in Q2 around the COVID-19 pandemic. And so Certainly in the Pacific Northwest timber segment and New Zealand, Pacific Northwest, because of the mid-year Pope acquisition in New Zealand, because of the shutdown in which we weren't really moving any log volume, we're going to end the year, even the updated guidance that we provided, which is up from the last guidance, is going to be below our long-term sustainable yield. And so I think that we have the opportunity for cash flow growth, both from a pricing improvement, but as well as just returning to more of a normalized level of harvest activity, because certainly this year is not going to be there across the portfolio. Okay, thanks so much.

Thank you. Our next question now from John Babcock with Bank of America. Sir, your line is open.

Good morning and thanks for taking my questions. Just quickly here and kind of following on the question I guess that Paul was asking, as you look at future Timberland acquisitions and now with the close of the Pope transaction, how does this change your emphasis on M&A in the Northwest and also in kind of the U.S. South and generally the mix that you're looking at there?

Yeah. I would say that we don't have a prescribed view around portfolio mix. I think at all times we're looking for properties that have a complementary fit from an age class perspective with our existing asset base. And so that holds true really in all geographies and we're always looking for properties that have a nice fit. And then lastly, it's that ability to find things that we feel like we can buy at competitive rates. We have a higher proportion of transactions that we do on a negotiated basis as opposed to through auctions. And so we're always looking at things that may not necessarily be out there in the market. And then lastly, we have a regular program of smaller bolt-on transactions that are often brought forward by local geographies that they see a property they're familiar with that has a nice fit with our existing asset base. We've had a steady stream of those over the past number of years.

And then the next question, I mean, the up-REIT structure is not one that we typically see, you know, at least among many publicly traded stocks. And so I want to get your sense, I mean, do you intend to keep this sort of entity structure going forward? What's the longer-term plan with that?

Yeah, John, so when we laid this out, it was really designed to be used We set it up that way. We set it up to be investor friendly. It's designed to allow for investors of a particular company. And if you take Pope Resources, for example, We have roughly 4.5 million OP units and these were unit holders of Pope who chose to take a portion of their consideration with those OP units and recognize that going forward they have thus deferred the capital gains from that transaction And then when they choose to exchange those OP units for Rainier shares in the future, they at that point recognize the capital gain treatment. And so it gives those investors a tremendous amount of flexibility going forward to defer or to manage at an individual investor level when they take the capital gains tax liability associated with that transaction. and we think that that's very attractive to other timber owning organizations where you might have different points of view from different investors and so it's our hope that we can over time grow this part of the business by being able to offer to those owners the ability to take these OP units and recognize that that for many timber owners, they've owned these lands for long periods of time and some of them just don't want to sell. They'd like to retain that optionality. So holding those OP units allows you to, in effect, recognize a value for those, a current value for those in exchange for Rainier OP units, but at the same time, retain all the optionality that you would have had you kept those assets in the first place. And then I think lastly, keep in mind that most owners of Timberland don't have a deeply diversified portfolio. And so one of the things that the OP units offers is essentially the ability to more broadly diversify. And I think that certainly is the case within the POKE resources portfolio. unit holders. Thinking about Rainier, we've got a very diversified mix of assets and markets between the U.S. South, the Pacific Northwest, and New Zealand. And now those Pope Resources unit holders that selected the OP units as part of that transaction, they now have a commensurate ownership across all of those diversified wood baskets. So we're pretty excited about it. There were some costs to get this kind of up and running. But now that it's up and running, we're excited about trying to grow it with other assets. And it gives us as Rainier the opportunity to do that in a manner that doesn't increase our debt load per se. It's another form of growing through the use of our equity. We look at it as an additional tool in our tool chest, and we're excited to have it in play now.

Okay. Thanks for that detail there. And then just last quick question here. You know, might you be able to provide the earnings contribution from Pope in the Pacific Northwest in the last quarter?

Yeah, it was roughly $2 million. Of EBITDA? It's roughly $2 million of EBITDA. That's correct. Yeah. It was a bit lower than that, probably, you know, like one and a half, one and a half to two.

All right. Thank you. That's all.

John, just real quick on that point. Recognize that, like we said, when we announced the transaction, those assets have a higher contribution margin because of, like Dave talked about earlier, because of the lower operating costs, lower OBT costs, as well as a higher mix of Doug Furr, you're going to get a higher contribution per ton from those Pope Resources assets than we had in the legacy portfolio. So again, we expect it's going to be a pretty meaningful contributor going forward.

Okay. Thank you.

As I have no further requests, I'd like to turn it back to management for closing remarks. Thank you.

Yeah, sure. This is Mark McHugh. Thank you all for joining us today and feel free to follow up with me with any questions.

The conference is now concluded. Thank you for your participation. Please go ahead and disconnect. Thank you very much.