Close-up View of Large Cords of Wood from Deforestation of Beautiful Evergreens During the Winter Season HorizontalGetty
Year-to-date shares in CatchMark Timber Trust (CTT) have returned over 40% (glad that we slapped a Strong Buy rating on the company) and this pick has proven to be one of the fastest climbers in our “New Money Portfolio”. Timber prices have followed spot lumber higher, recovering from the December drawdown, and while critics might blame fears on economic sentiment (that the U.S. is heading late cycle) home-builders have rallied strongly. While the trend’s been stark since June 2018, I think the entire group is due for a bit of a catch-up rally.
Helping make that case for Catchmark is a $79 million sale of 56,000 acres in Texas and Louisiana to Forest Investment Associates; additionally, concerns over the high Ebitda (earnings before interest, depreciation and amortization) multiples; and percentage of sales generated through land sales. Long story short, I still see upside.
Timberland Multiples & CatchMark Timber Trust Valuation
Timberland has always been expensive on an underlying cash flow basis. Expected cash return yields have been about 3.8% over the past decade, with 20% of that being invested back into the business via replanting or silviculture. Property sales via higher value opportunities (i.e., real estate development), productivity gains, and expected long-term real price growth (expected return above inflation), add the value to get to a normalized 7%-8% expected return.
Bearish research often highlights low cash returns (true of nearly any rural land asset, such as farmland, and grazeland), and like gold, investors often treat timber as a store of value with a small cash kicker component. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), Ebitda multiples for timberland have averaged 36x over the last 25 years and are broadly in line with that long-term average today. Average 2018 valuation is about $1,750 per acre.
NCREIF is just one source. Ebitda multiple valuation is a large secondary component of private timberland valuation alongside net asset value. But investors have to remember both factors have nuances in their calculation. Ebitda must include sustainable harvesting practices, and net asset value has to include a factor for overall acreage quality (stocking levels, site index, average age). After all, Ebitda can fall in times of building merchantable inventory (underharvesting), or increase in periods of overharvesting where lands are exploited unsustainably.
So then, how does this look for CatchMark?
For the full-year 2018, CTT’s total revenues increased 7% to $97.9 million (compared to 2017), and adjusted Ebitda increased 19% to $49.8 million ($42.0 million for 2017). The gross timber sales revenue of $69.5 million was a 3% less than 2017, due to a lower U.S. South harvest volume – primarily from management strategically deferring harvests, and mitigated by a 6% improvement in per-ton pulpwood pricing and an increase in delivered wood sales as a percentage of total harvest, up to 80% in 2018.
Notable initiatives last year helped CatchMark’s results, improved its capital structure, and supported long-term growth objectives. Included were investing $200 million in the Triple T joint venture to secure interests in 1.1 million acres of high-quality Texas timberlands with long-term, sustainable growth potential – and expectation of unlocking further value through greater operating efficiencies and new tactical strategies; expanding CatchMark’s investment management platform through Triple T, which generates significant asset management fees and the opportunity to earn outsized returns; and diversifying assets and expanding sawtimber holdings by entering the Pacific Northwest through a purchase of 18,100 acres of prime Oregon timberlands in the $89.7 million Bandon transaction.
Jerry Barag, CatchMark’s President and CEO, said: “In meeting our guidance for the year, CatchMark effectively demonstrated how our disciplined strategy for assembling the highest quality timberlands and ongoing operational excellence together can maximize cash flow through all phases of the business cycle, including during recent record lumber market volatility, and achieve gains from increased productivity. Our advantages include operating in superior micro markets, executing on our delivered wood sales strategy, and benefiting from fiber supply agreements… We expect…our rigorous land management practices to deliver increased, sustainable harvest yields as well as a consistent dividend supported by operating cash flows for years to come.”
And while I think CatchMark has potential issues in justifying the current dividend payout – given the poor equity valuation, there is some clear value here. Share price total return in 2019 was over 40%, with a 5.44% dividend yield.
I see greater downside risk at peers like Weyerhaeuser, exposed to downstream manufacturing operations at risk in a bearish scenario (housing demand collapse). And while I have some late cycle economic concerns, I view timberland exposure as a great uncorrelated asset play, that most portfolios deserve some sort of exposure to – and at this valuation, CatchMark gets our BUY rating (we downgraded from Strong Buy based on valuation).
Portions of this article appeared in the February issue of my Forbes newsletter, with contributions by Michael Boyd.
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