Q4 2023 Potlatchdeltic Corp Earnings Call

Participants

Wayne Wasechek; VP & CFO; PotlatchDeltic Corporation

Eric J. Cremers; President, CEO & Director; PotlatchDeltic Corporation

George Leon Staphos; Analyst; BofA Securities, Research Division

Anthony James Pettinar; Analyst; Citigroup Inc., Research Division

Ketan Mamtora; Analyst; BMO Capital Markets Equity Research

Matthew McKellar; Analyst; RBC Capital Markets

Kurt Willem Yinger; Analyst; D.A. Davidson & Co., Research Division

Mark Adam Weintraub; Analyst; Seaport Research Partners

Presentation

Operator

Yes, yes, good morning.
My name is Ralph, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Fourth Quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star the number one on your telephone keypad. If you would like to withdraw your question, press the star one again, thank you. I would now like to turn the call over to Mr. Wayne waste, Vice President and Chief Financial Officer, for opening remarks, you may proceed.

Wayne Wasechek

Good morning, and welcome to Potlatch Deltic's Fourth Quarter 2023 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic President and Chief Executive Officer. This call will contain forward looking statements. Please review the warning statements in our press release on the presentation slides and in our filings with the SEC regarding the risks associated with these forward-looking statements.
Also, please note that a reconciliation of non-GAAP measures can be found on our website, www.potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then I will review our fourth quarter results and our 2024 outlook for.

Eric J. Cremers

Thank you, Wayne. Good morning, everyone. We reported total adjusted EBITDA of 200 million for 2023 after the market closed yesterday. That is our fifth highest level of annual EBITDA on record since electing reached status in 2006. We accomplished this despite a relatively weak lumber pricing environment, which reflects our strength as a company created to our past accretive acquisitions and ability to identify and monetize rural acres that have a significant premium to timberland values.
Our Timberlands segment generated adjusted EBITDA of 151 million. In 2023, we harvested 7.7 million tons, which is a record annual harvest volume. This volume also reflects our first full year of operations with our CatchMark Timber lands that we acquired in September 2022.
Speaking of CatchMark, one of our operational highlights was the completion of the process of in-sourcing the management of CatchMark's timberlands earlier in 2023, enabling us to realize the final piece in our $21 million of annual cash synergies from the merger. Our Wood Products segment contributed 20 million of adjusted EBITDA in 2023. We shipped just over 1.1 billion board feet of lumber, which established a new record for the Company in annual shipment volume. Our Wood Products team had another strong year in terms of safety performance and successfully completed its capital project plan for the year. And speaking of our capital plan. We continue to remain on track with our $131 million project to modernize and expand our Waldo, Arkansas sawmill site preparation and civil work is well underway with the first phase of equipment installation scheduled to commence later in Q1. Project will increase the mill's annual capacity by 85 million board feet and significantly reduce cash processing costs. The existing mill will continue to operate during the project with approximately three weeks of downtime expected in the mid part of the year to tie in the new equipment followed by the anticipated completion of the project well before the end of 2024, our real estate segment had a strong year, contributing adjusted EBITDA of $68 million on the rural side of the business, we sold 18,000 acres at nearly $3,100 an acre. Our real estate team had a strong finish to 2023 by taking advantage of our in-depth stratification of CatchMark's timberlands earlier in the year. For 2023, nearly half of our rural business performance was attributable to the acquired CatchMark portfolio which is located in excellent real estate markets. Our real estate development business sold 128 residential lots in the small Valley master-planned community at an average price of $104,000 per lot in 2023. We also closed on multiple commercial sales, resulting in over $7 million in revenue at an average price of nearly $575,000 per acre. We had good absorption on our residential lot offerings for much of the year, but we have started to see modest signs of slowing in the take-up of our lot offerings by regional builders in Chenal Valley in the fourth quarter, our team also made good progress on natural climate solutions opportunities this year we are working through the final stages of the certification process on our nearly 50,000 acre southern timberland carbon credit project. We expect to begin premarketing efforts in the coming months with placement and sale of the credits in the marketplace. The second half of the year regarding solar developers have shown strong interest in solar opportunities, and we have continued to add to our inventory of solar options under contract, we signed up an additional solar option in Q4 and maintain a robust pipeline of potential additional solar deals. As a reminder, we have nearly $200 million on a net present value basis worth of solar land sale and lease options under contract representing less than 1% of our timberland acreage ownership. We are focused on assessing additional natural climate solutions opportunities and are optimistic about the growth potential in this area. Although it may take some time for these efforts to bear fruit, we believe that they will lead to an increase in demand for our rural land and drive up timberland values.
Moving to capital allocation, we returned 169 million of cash to shareholders in 2023. That amount included 25 million of share repurchases at an average price of $45 per share, which is well below our estimated net asset value. We have an additional $125 million remaining on our existing share repurchase authorization. We follow a disciplined capital allocation strategy and continually evaluate all of our capital allocation opportunities to grow shareholder value over time. Over the course of the year, we have remained very patient and very disciplined surrounding M&A activity, only pursuing opportunities that meet our stringent criteria and that we believe would increase shareholder value. To that end, we just acquired 16,000 acres in Arkansas for $31 million or about $1,900 per acre through a privately negotiated one on one transaction. These high-quality timberlands are well-stocked with an average age of approximately 25 years. The acquired land portfolio also has strong rural real estate potential, including solar land sale or lease opportunities. Our disciplined opportunistic and nimble approach with capital allocation also applies to identifying opportunities to capitalize on higher timberland valuations as a result, we have entered into an agreement with Forest Investment Associates to sell approximately 34,000 acres of plantation timberlands located in Arkansas and Alabama with an average age of less than four years for approximately 58 million or $700 an acre. This transaction is at a significant premium to our underlying timberland value and is non-dilutive given the young nature of these trees. This transaction is subject to customary closing conditions is expected to close in the second quarter of 2024. At the end of the year, we had 230 million of cash on the balance sheet and total liquidity of $529 million. In December, we refinanced our $40 million debt maturity at well below market rates, utilizing our existing forward-starting interest rate swaps and maintained our weighted average cost of debt at 2.3%. The lowest of the timber rates our strong balance sheet and significant liquidity provides us with flexibility and a solid platform to continue growing shareholder value.
Shifting to the housing market, demand for new single-family residential construction continues to remain resilient as single-family starts eclipsed over 1 million starts for the second consecutive month. While the multifamily sector has contracted driven by new supply coming into the market and the ongoing elevated interest rate environment. A higher proportion of new single-family residential construction is an important lumber demand driver as single-family starts typically consume three times the amount of wood versus multifamily single-family starts have been fueled by momentum with consumer consumer confidence, solid labor market and recently declining interest rates. These factors, coupled with a historically low level of existing home inventory for sale in the U.S. has prospective homebuyers looking to purchase a new home versus an existing home. That said, housing affordability continues to remain a headwind for the housing market, while 30-year fixed mortgage rates have fallen over 100 basis points after hitting a two decade high in October, bringing some more life back into the housing market. Further declines in interest rates are needed to spur incremental demand. Thankfully, many economists are predicting that the Fed will trigger multiple rate cuts in 2024, which would help alleviate affordability challenges.
Our longer-term outlook on housing fundamentals remains positive. We believe an underlying shortage of housing stock due largely to the combination of underbuilding after the great financial crisis and favorable demographics in the form of millennials will provide positive tailwinds to the housing market. We continue to expect that U.S. housing starts will return to levels above the long-term average of 1.8 million units per year once homes become more affordable.
Turning to the repair and remodel segment, demand in this market has remained steady, backed by strong consumer balance sheets and existing homeowners staying in their homes and fixing up versus moving up to a new home under the backdrop of a higher interest rate environment.
Anecdotally, we also will continue to experience strong home center takeaway with our activity up 12% year over year.
Looking at the longer term, Horizon, repair and remodel market fundamentals continue to remain favorable. Our optimism is supported by an aging housing stock the remote work evolution and high home equity levels.
And so in summary, the Company performed well in a challenging year and made substantial progress on its strategic goals while continuing to remain disciplined on deploying capital. We delivered solid financial results in spite of an economic environment with elevated inflation and high interest rates, which impacted lumber demand and prices. Potlatchdeltic continues to be very well positioned with an investment grade balance sheet and a portfolio of high-quality assets. We will continue to be disciplined stewards of our capital and remain committed to prioritizing investments in high-return capital projects, acquisition opportunities and returning capital to our shareholders through our quarterly dividend and share repurchase program. I will turn it over to Wayne to discuss our fourth quarter results and our 2024 outlook figures.

Wayne Wasechek

Starting with Page 4 of the slides. Adjusted EBITDA was 41 million in the fourth quarter compared to 56 million in the third quarter. The quarter-over-quarter decline in EBITDA was primarily due to lower lumber prices, lower index sawlog prices and seasonally lower harvest volumes in Idaho. These declines were offset in part by strong rural real estate sales. I will now review each of our operating segments and provide more color on our fourth quarter results. Information for our Timberlands segment is displayed on Slides 5 through seven. The segment's adjusted EBITDA decreased from $42 million in the third quarter to 33 million in the fourth quarter. Operationally, our timberlands team harvested 2 million tons, establishing a record for our fourth quarter harvest volume from our heart. Our sawlog harvest in Idaho was 328 million tons in the fourth quarter. This was down seasonally from 377,000 tons that we harvested in the third quarter. Our Idaho sawlog prices were 15% lower on a per ton basis in the fourth quarter compared to the third quarter. The decline in sawlog prices primarily reflects lower prices for index sawlogs. In the South, we harvested 1.7 million tons in the fourth quarter, favorable weather conditions and good execution by a seller, Southern Timberlands team were key to achieving our harvest level. Our Southern sawlog prices were 2% higher in the fourth quarter compared to the third quarter. The increase was primarily driven by a higher mix of log, larger diameter sawlogs and slightly higher hardwood sawlog pricing for wood products segment, which is covered on Slides 8 and 9 had negative adjusted EBITDA of $6 million compared to the third quarter. Lumber prices were lower and the charge to write down lumber inventories to net realizable value was $4 million higher. Our average lumber price realization decreased $66 per thousand board feet or 14% in the quarter. This price decrease is comparable to the Random Lengths framing lumber composite on a percentage basis, our average lumber price realizations per thousand board feet or $427 in October four and one in November and $417 in December. Lumber shipments increased 9 million board feet from 276 million board feet in third quarter to 285 million board feet in the fourth quarter.
Shifting to real estate on slides 10 and 11, the segment's adjusted EBITDA was 22 million in the fourth quarter compared to 14 million in the third quarter. Ebitda generated by rural sales increased sequentially due to the sale of more acres at a lower average price in the fourth quarter. Our real real estate performance this quarter is a testament to the robust real estate markets where the CatchMark properties are located and that were stratified earlier in 2023. Ebitda generated by our Chenal Valley master-planned community declined slightly in the fourth quarter. We closed the sale of 30 residential lots in the fourth quarter at a higher average price compared to 32 lots from the third quarter. Also in the fourth quarter, we generated nearly 1 million in commercial revenue, which was comparable to the third quarter.
Turning to capital structure, which is summarized on slide 12, our total liquidity was 529 million. This amount includes 230 million of cash on our balance sheet, as well as availability on our undrawn revolver. We refinanced our $40 million of debt that matured in December at an interest rate of approximately 2.5% after patronage credits from lenders to achieve the below market rate. We utilized a portion of our outstanding forward-starting interest rate swaps, which lowers our annual interest cost by approximately $500,000. We still have 200 million notional of forward swaps to deploy, which will help us keep our future borrowing costs low. As we previously highlighted in the third quarter call, we repurchased 12 million shares in the fourth quarter at an average price of $45 per share. For the full year, we repurchased 556,000 shares at an average price of $45 per share or 25 million in the aggregate. This leaves us with 125 million remaining on our 200 million share repurchase authorization. Capital expenditures were 75 79 million in the fourth quarter, which includes 59 million for our Waldo Arkansas modernization project. These total expenditures also include real estate development expenditures, which are included in cash from operations and our cash flow statement.
I will now provide some high-level outlook comments. The details are presented on Slide 13. We plan to harvest approximately 7.6 million tons in our Timberlands segment in 2024 with approximately 80% of the volume in the south harvest volumes in the north are planned to be comparable in the first quarter relative to the fourth quarter of 2023. We expect Northern sawlog prices to decline about 5% in the first quarter compared to the fourth quarter in the South, we plan to harvest approximately 1.5 million tons in the first quarter. We expect our Southern sawlog prices to decrease modestly, primarily due to seasonally fewer hardwood sawlogs in the mix. We plan to ship 1.1 billion board feet of lumber in 2020. For this level of expected shipments includes the impact of downtime at our Waldo, Arkansas sawmill for the modernization and expansion project. In the first quarter, we plan to ship 260 to 270 million board feet of lumber, which incorporates the effect of seasonally lower cap rates in our northern sawmills. Our average lumber price thus far in the first quarter is just slightly higher than our fourth quarter average lumber price. This is based on approximately 100 million board feet of lumber. As a reminder, at $10 per thousand board foot change in lumber price equals approximately 12 million of consolidated EBITDA for us on an annual basis 15 real estate, we expect to sell approximately 51,000 acres of rural land, which includes approximately 34,000 Southern acres to Forest Investment Associates, as Eric previously discussed. Also, we expect to sell 130 Chino Valley residential lots in 2024. Additional real estate details are provided on this slide. We estimate that interest expense will be approximately 1 million in the first quarter and approximately 9 million per quarter for the second, third and fourth quarters of 2024. Interest expense is lower in the first quarter than the other quarters because that is when we receive our annual patronage payments from the farm credit banks. Also these amounts are net of estimated interest income, which we expect to be lower in 2024 based on an estimated average cash balance over the course of the year.
Turning to capital expenditures, we are planning to spend 100 to 110 million in 2024, excluding timberland acquisitions. That estimate includes approximately 44 million for the final installment on the Waldo, Arkansas sawmill modernization and expansion project. Also, as Eric mentioned, we already successfully completed an attractive bolt-on timberland acquisition in Arkansas for 31 million this year. We used cash on hand closed this transaction. Overall, we expect our total adjusted EBITDA will be moderately lower in the first quarter relative to the fourth quarter. This is based on the overall expectation of slightly higher average lumber sawlog prices moderated by fewer rural real estate sales. We continue to remain bullish on industry fundamentals that drive demand in our business. Our integrated operating model and leverage to lumber prices are aligned with those fundamentals, and we are well positioned to continue growing shareholder value over the long term.
That concludes our prepared remarks. Rob and I would now like to open the call to Q&A.

Question and Answer Session

George Leon Staphos

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of George Staphos from Bank of America. Your line is open.
I everyone good morning. Thanks for the details. I guess first question I had is as we look towards resources and the there somewhat, I guess, reduction in harvest levels 1Q versus 2Q 4Q, is that purely seasonality and tough comps or there anything else that we should be mindful of relative to all the other detail that you've shared with us. And then I just want to make sure I understood. I from the slide deck, I think you have sawlog pricing down both in the north and the south in 1Q from 4Q. If that is the consideration with Harvest lower, should we expect that Timberland also is looking and lower EBITDA sequentially from Ford?
Okay.
Yes, this swing, yes, we are. It is seasonal on the volume side, both in the north and the south and keep in mind in the north, we have spring breakup, which definitely drops the harvest volume in the first quarter, and that also impact second quarter. But now Q4 to Q1, that's the main driver and then also the same thing in the South. There's just seasonal seasonal differences there as well. I think it's we're looking to harvest volumes that are consistent with seasonal norms on the volume side on the pricing side?
Yes.
When you look to the north, you've got a couple of factors there. One index sawlog pricing is down. You got to keep in mind that you have a one month lag there. So we're picking up pricing from December through February. So that's impacting the North plus combined with we have seasonal, seasonally heavier logs. So that's also bringing down the average price for the north in the South. We have it mostly a mix issue of less hardwood sawlogs in the mix. It's really a driving that decrease comparably, I would say prices are generally flat.
Okay.
I appreciate they won't. So it wouldn't be unreasonable to expect. We know resource we know from real estate will be lower we know timberlands will be lower wood products, current levels of pricing, recognizing that no guarantees. And obviously you hopefully you will have an inventory charge this quarter. Are you breakeven or better from what you can see given where price are right now, given where production will be or might that still be at a bit of a loss in the first quarter?
From what you can see right now?
No, George, this is Eric. I Our expectation is that our mills fact every one of them is as profitable out in Q1.
Okay, thanks.
For that, Eric.
And then one last question I had for you certainly seasonality, lower pricing. There were a lot of things that were headwinds that a lot of this wood product companies were facing in the fourth quarter. Your results weren't are that different than what we've seen elsewhere so far. And nonetheless, it was a bit of a bracket number in the quarter. Are there any other things aside from the current project of Waldo that you're considering in terms of improving on your cost performance and your normalized earnings outlook?
No matter the environment in terms of demand and pricing? And if so, what sorts of things might we be seeing from from Potlatch on that front in the next year or two?
Thank you.
Yes, I think so, George, this is Eric. I'll speak first and then Wayne can chime in after me. But I think if you look across the business units, so you start with Timberlands, we are expecting lower log and haul costs for the year. We have seen we have seen rates moderate, particularly in our northern region up and up in Idaho. So that will help provide a little bit of tailwind in wood products. We think that the outlook for pricing is favorable for us, given the supply and demand dynamic where you're seeing no closures. We've seen almost cash, 2.3 billion board feet leave the industry in the past 13, 14 months from lot of closures up in BC, the Pacific Northwest and also down in the down in the south. And we think the demand backdrop is improving as well. We talked about the shift towards single-family, and we also see, I would say growth in repair and remodel. But I see I see stability in repair and remodel, and I see less European imports this year. And if we can see interest rates come down in the back half of the year. And I think again, that supply demand backdrop is going to be is going to be favorable on the real estate side.
Yes, Q1 is going to be a little bit weak in real estate. Sales are always lumpy. Q2 is going to be huge with our RFIA. sale.
And just to just to comment on that real fast. You know, where we're selling those acres that we think somewhere between the 3.5% and 4% IRR to the buyer, and we're redeploying that capital into some of that anyway into the RidgeWorth acquisition, that's got an 8% IRR. So that's going to favorably impact the P&L as well. So some minor puts and takes along the way. But I think the big picture in my mind is that the backdrop for our business, which is really lumber demand, is favorable.
So on that front, just to finish up, you don't see any need for sort of and a structural or more project-specific cost out within Wood was really where I was going with that question, given what you can see given capacity coming out the backdrop and so on. That's really where I was going with that question.
Thank you.
Yes, yes. So we've really really got it's not just our Waldo project. We've also got a new, a long train going in at our Warren sawmill. We're putting in a new sawmill trim short line at our Warren mill and those projects are 15% to 20% kind of IRR projects, but they're going to take a year or two to get to get completed. So we're constantly looking for projects, frankly, capital projects and our mills offers us some of the highest returns for our in our capital allocation. So we're constantly looking at things and we do have a few projects underway, but they're going to they're going to take some time.
Thank you very much.
Your next question comes from the line of Anthony Pettinari from Citigroup. Your line is open.

Anthony James Pettinar

Good morning. For joining.
Hey, when you look at the log prices in 4Q and your expectations for 1Q, we're just wondering if you're seeing in the Southern region, any differential trends between Arkansas and then sort of the Georgia, South Carolina, Alabama footprint from CatchMark? And then I guess maybe a related question. Can you just remind us in terms of hardwood lumber or hardwood?
Sorry, hardwood logs, like what percentage of the harvest that would be? Or it seems like that impacted prices or mix. Can you just kind of maybe dimensionalize that a little bit?
Yes.
I think from a regional standpoint, on the timberland side, we have the markets are tend to be more tensioned in the Georgia, South Carolina markets. And with that, we saw earlier in the year. Prices drop a little more there earlier in the year with our mills taking economic downtime, delivery quotas. But we've seen that stabilize and all of our markets throughout the year and continuing to improve. So purely on a volume standpoint and are able to move volume. I think on a pricing standpoint, that's been relatively flat as we've progressed through the year. And as we head into Q. one and now with that as demand as we as demand improves, we would see, I think pricing improve in those more tension markets in the Southeast and where we've historically seen them. They're not as tension for us in a lot of the wood baskets in Arkansas and Alabama, Mississippi. So pricing may take a little more time to move there. But when when we do see demand pick up, I think that's where we'll see bigger price increases in that region.
Got it.
And then yes, on the mix side put in sort of good for good mix.
We have a the hardwood mix.
Yes, sir?
Yes.
On the hardwood mix, that's oh, I mean, it's probably in the neighborhood. It's only gone up a couple of percentage points, maybe five to 10 here in the quarter.
Got it. Got it. And then just shifting gears, you talked about I think monetization of the credit project, I think in the second half of the year. Just wondering if you could talk about sort of the activities that need to be completed in order to make that happen? And are you working with third parties or marketers registry is just sort of anything you can kind of share on on? Is it kind of time line. And yes, so we're deep into the process now, Anthony, that the first step really is to bring in an order that will do the math and prove out to the investing public, if you will, that the credits are for real and that's a rather lengthy process. And as you can imagine, in this kind of net zero environment that we're in the demand for these auditors is sky high, and it's not just for Timberland projects. It runs the gamut and how you get carbon out of the atmosphere. So these these folks these consulting firms are in very high demand. But if you want to have quality credits, you got to have monitored by an independent third party. That's got a good reputation and so that's the process that we're going through. We expect to have that process done by, I would say, perhaps early in the third quarter and shortly after we get them verified and we're going to we're going to put them out to bid and we've lined up Vera, which is one of the two large firms that sell carbon credits around the world great reputation. There are well entrenched in the European market, which is where we think our credits are going to have the most value. And so we expect to monetize those those credits shortly after they get, they get the audit come through. And so that's probably going to be in the third quarter as well.
Okay.
That's super helpful.
I'll turn it over again.

Ketan Mamtora

Your next question comes from the line of Ketan Mamtora from BMO Capital Markets. Your line is open.
Thank you, Tom. First question, can you talk a little bit about you now some of the capacity curtailments that we've seen in the US south on the sawmill side, I'm surprised that you're seeing capacity curtailments in the U.S. South and related to that any impact on your wood basket from the recent Arkansas mill shutdown announcement?
Now?
You know, that's I wouldn't say I'm a modestly surprised about the curtailments in the South. I mean, everybody talks about cheap fibers in the South. It's a great place to make lumber much better than up in BC and whatnot, Pacific Northwest. But when you get into some of these some of these specific wood baskets, like I think West Fraser, for example, they closed the mill down in Florida. That was a really tight wood basket, and that's a relatively small mill. And same thing when you look at I think Boise Cascade closed the mill in Alabama, West Fraser closed another one in Huttig, Arkansas. Those are smaller mills with tougher cost structures. I'm guessing that capital investment may not have happened over the years because the owners recognize that long term, the mills couldn't be competitive. And so yes, I'm not surprised I guess at the at the end of the day that some mills have closed in the south?
To answer the second part of your question, did the West Fraser mill and how to impact the US?
No, not not not at all from one of our competitors has got a large block of timberland near that mill and they are the primary supplier to Huttig. So no impact us.
Understood. Now that that's helpful.
And then can you talk a little bit about industrial on the M&A pipeline on the timberland side? Obviously, you did kind of a small bolt-on, but in general, kind of how does the pipeline look right now?
Yes. I'd tell you that the M&A market is really tight. I'd say typically 3 to 4 billion of timberland trades hands each year. And I think something like last year, maybe 1.5 traded hands. And I think sellers there are basically holding off some waiting for maybe housing and lumber prices to improve, perhaps interest rates to come down or frankly, maybe more importantly for carbon deals become more mainstream and carbon is having a bigger and bigger deal. I think that's one of the takeaways for this call. When you look at the transaction that we had with FIA. was with the ultimate as a European investor, not if it's going to own those trees, we sold trees that were, I think, 3.8 years old for $700 an acre. What was it? Five years ago, you buy average age timberland in the south for $700 an acre on carbon is having a bigger and bigger deal. And especially if you look at the large sums of capital that have been raised to pursue timberland for a carbon outcome.
I can I can reference a bunch of Oak Hill raised 1.8 billion. They bought 1.7 million acres from forest land. Manulife said it was raising 500 million for timber carbon offsets. Jpmorgan acquired Campbell Global at T-Mo, and then subsequently bought 250,000 acres for $500 million in the south Goldman Sachs and Apple just raised 200 million for a carbon offset funds. So, you know, I think people are holding off bringing their timberland to market, waiting for this capital to get raised and then waiting for it to desperately look for a home because that ultimately is going to push up timberland values.
Got it.
No, that's very helpful. And I'll turn it over to Larry.
Thanks.
Your next question comes from the line of Michael Roxland from Truist Securities. Your line is open.
Thank you, Eric. And no, we for taking my questions on the first question, just can you help me just understand what's happening with respect to margins in wood products. So just following up on what George was asking earlier, because when I look back historically, when there were a period of time, we had lower prices, lower volumes, just still managed to generate mid-single digit high single digit EBITDA margins. So I'm just wondering what is there something going on from a cost vantage point that's negatively impacting your performance in wood products?
Well, yes, certainly, Michael, there, as you know, in the inflationary environment we've seen over the past year or two of costs running sawmills have moved up meaningfully. And what you what you saw this past year and in particular in the fourth quarter is with the higher interest rates, demand has dropped and it dropped to the point where capacity utilization in the industry and is that the lowest it's been, I think since going back to 2013 is what I read the other day or whenever you get into a situation in a commodity industry where capacity utilization is at rock-bottom levels, you're going to see prices collapse as everybody tries to keep their mills running full and subsequently prices come down. I mean, I am happy that our lumber margins in Q4, while they're negative, I'm certainly not happy about that. If I strip out plywood, we were something like minus 1% in lumber and I think I've only seen one of our peers report so far and we did, I would say, meaningfully better than our than our peer. So it's a tough environment, right now, but I think the backdrop is for things to get much better.
Got it.
Thank you.
So that's actually that's actually coming mainly when you strip out plywood, actually, lumber is only minus what the margin was average was minus 1% for the quarter, Greg.
Got it.
Okay.
Thank you for that. On the functionality you mentioned also just dumb seeing a slower take-up, quite a large builders in 4Q. What are you seeing now from them? Has that accelerated because those rates have come down?
Some of the builders that have been reporting have been showing pretty pretty good demand in 4Q and the relative increase over 24. So I'm wondering if you've seen that reverse thus far in the quarter?
Yes, Michael, this Wayne?
Yes, we did have good absorption through most of the year ago, Q4. That's when we started to see modest signs of slowing there. I think is we have an outlook into 2024 right now where we're looking at about the same level of sales as we had in 23. So we're up we are heading into the year with kind of the same same view as coming out of Q4. Keep in mind, you should all this is one smaller market in Little Rock, Arkansas. It's not a robust real estate market for single-family residential as compared to other kind of broader Metro metropolitan areas in the South. And additionally, I think also keep in mind that national market or regional builders, they don't have the same balance sheet or tools available to offer incentives to homebuilders compared to large national builders. So these these regional builders and sort of maybe building eight homes, they might build six five and then the like large national homebuilders, they're not going to build as many spec homes and anticipating the sale upon completion. So I think that those kind of market dynamics play into it. I think given that they're not it's the same balance sheets as large homebuilders, that they're going to be a little cautious until rates start to move more.
Got it.
Thank you, Wayne. And then just one one last question. I'd love to get more of a strategic question. You've over the last 18 months or so. We've seen a number of mill closures, line closures you have in vivo events contending with a lot of its own problems there structuring and impact on the demand for pulpwood. So just think about pulpwood in general with the mill closures line closures and Aviva, I realize that's less valuable and saw timber, but nevertheless, nevertheless, helps with your cash flow. How do you think about your rotations, your harvest planning with pulp wood facing this hybrid where you have secular demand decline somewhere there?
Yes, certainly, that's an area we're focused on. I think with these announced closures. Now, as Eric mentioned earlier, we have we have not a direct impact to us and then you're going to break that down between volume and price. I think from a volume perspective, we continue to move volume and we have strong relationships with our customers, especially our large customers. And then also with our size and scale, we can move volume to alternative customers from a volume price and volume perspective, certainly we can move it, I think from a pricing dynamic, yes, clearly less demand with mill closures creates less demand and that that has an overall impact on the pricing environment. And that's what we've seen very kind of been flat there on the pulpwood side and heading into Q1, relatively flat still. So I think that's the near term. I think longer term where we have all we are very active in the market about what are some longer term opportunities right now there's we're in discussions with a lot of different producers, biomass producers that from biopower to pellets to biofuels and bioplastics, and that would utilize pulpwood. And I think those will create opportunities. Now this investment will take a bit of time, but we do believe that this will bring more demand and attention to certain wood baskets in the south guy.
Thank you.
Very much and good luck in 24.
Thanks.
Your next question comes from the line of Matthew McKellar from RBC Capital Markets. Your line is.

Matthew McKellar

Hi, good morning.
Thanks for taking my questions. I'm wondering, are you able to comment on what your forest carbon development pipeline looks like beyond this first project developing in the south? And maybe comment on how we should be thinking about the pace of project development and delivery Looking beyond 24?
Yes.
So we do we do have this first project well underway. It's just under 50,000 acres. We're pretty excited about it, Tom, because we've built up like three years of carbon credits in inventory. So the first sale is probably going to be close to $0.5 million of credits from We are building our pipeline. Um, we've got a number of acres that we think are the highest value and the best value for those acres it's going to be a carbon outcome and we want to see how this first project plays out. And right now, I think we're eyeing maybe another 100,000 acres that that could be well suited for carbon outcome. But of course, it all depends on the carbon price and the outlook for the carbon price. So the higher we see those prices go the more acres we're going to think about some have a better outcome for carbon versus traditional timber. So we'll have to see how that develops.
Okay, great. Thanks for that.
And then just one more for me. What's your sense here today where channel inventory levels sit for wood products as we ramp into the building season?
I think there are just rock bottom levels. They all I think what's changed over the past couple of years is especially with the price run-up that we saw back in 21 and 22, some dealers just don't want to carry inventories. They want just-in-time deliveries and which is generally why southern pine carries a premium over over SPF, um, and I think what's happened here recently is with the cold weather that's come across the U.S., a lot of job sites were shut down some. There's no activity. So dealers went to even lower levels. So I think where we're at right now is just at rock-bottom levels. So hopefully with this warmer weather that's showing up, we'll see some some some buying activity here.
Thanks very much.
I'll turn it back.
Thanks.

Kurt Willem Yinger

And again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Kurt Yinger from D.A.
Davidson. Your line is open.
Great.
Thanks, and good morning, Eric and Wayne.
Morning.
And I know that, John, the 34,000 acre disposition, you talked about the young age class profile. Just curious if you could provide any details on maybe harvest levels and any EBITDA contributions from that acreage over the past year or maybe what you're expecting in terms of a five-year plan or anything like that?
Yes. So that so that sale, which was 34,000 acres in total, was split roughly 80%, Arkansas, 20%, Alabama, as I mentioned, the trees were less than four years old, I think 3.8 years old, and they were in a traditional southern yellow pine plantation type type forestry. Some they're going to have virtually had we kept those trees. They would have virtually no impact to our harvest profile for the next 22 years. There would have been some thinning along the way at age 14 or 15. But given where pulp prices are, I don't think there's much much margin to it, so virtually no impact for 22 years. And then if you look out to when those trees would reach maturity, the impact is about 3 to 400,000 tonnes per year for about six years. So no impact really for 22 years and then it's 3 to 400,000 tonnes per year for about six years and then it drops to zero. So that was that was the trade-off here that makes sense.
Yes, it makes sense. Thanks for that. And then second question, we talked about kind of the solar opportunities for a couple of quarters now you have on one decent size sale around that. Just sort of curious how you think about that opportunity with some of the deals in the pipeline and in terms of timing and whether you think 2024 could be the year where the rubber really hits the road and we see some more material impacts from.
Yes, that's a great question, Kurt. I we did we did get another solar deal just signed up here is, as we mentioned earlier, our pipeline is big. The outlook for solar has never been greater in the if you look at what NextEra Energy says, which is a huge solar developer or RWE big German solar developer, everybody's talking about solar tripling between now and the end of the decade.
Now that being said and to put together a solar farm is a very complicated process. And that's why you you when you go to enter into an agreement with one of these developers, the first step for them is getting getting land under option. They need to know that they've got a home for their for their farm and it needs to meet certain attributes like close to high power transmission lines and whatnot, but they've got to then go find the equipment. They got to find the panels, which you know that now you have supply chain issues coming from China and you've got to negotiate offtake agreements that takes time from utilities. Just a lot of work goes into it. I don't expect 2024 is going to be the year for a lot of solar farms to have those options get exercised in our portfolio. I think 2025 is going to be a great year for us. But we'll see where things are at as we get to the end of the year and we'll give guidance and budget. I think our view is that those developers are going to pull the trigger starting in 25.
Got it.
And is it fair to say that, you know, your preference would still be to primarily lease in those deals as opposed to sell or I guess as you kind of look across the agreements and what that might entail, which way would you lean or which way, I guess would the economics point of view?
Yes, we would we would definitely prefer to lease. We like the long-term income stream. We like the those things are indexed back to inflation, CPI. What kind of what not. But I will tell you that there are some of those developers that refuse to enter into leases they have to buy. And certainly given all the prices, $10,000 an acre. What have you? We're happy to be up to be a seller if they refuse to lease. So either either way, it's a great outcome for us. But our preference is to lease.
Got it.
Okay.
Makes sense.
Appreciate the color.
Good luck here in Q1.
Yes.
Thank you.

Mark Adam Weintraub

Your next question comes from the line of Mark Weintraub from Seaport Global Your line is open.
Thank you. A couple of follow-ups on. So first on the solar, since we're just talking on that and you can kind of you throughout fine equipment offtake is there a permitting process that needs to happen? And does that tend to happen first? And then I would imagine you do the offtake second and then find the equipment third Is that sort of the order things would normally take?
Yes, I can't I can't answer that mark.
We're not in the development business, but I think certainly getting a permit is part of the part of the process to do you know if it's on any of the situations where you've got options in place and where things might stand on that permitting side is at our first window.
Yes, I don't I don't know where they're at with their permits. They tend to be a little quiet with that stuff. But what I what I do know is that when they when they get it when they get a property under option, let's say they get under option for four years. And as they get closer and closer to the end of the four years. Now bear in mind that they've been making option payments all along the way, right, that they're having to write a check every year to have the property under option. And what they don't want to have happen is they lose that that option because somebody else might pick it up. And in fact, at a higher price. In fact that that happened this past year, we had one expire and we went out and found another partner for the tract and they they put the land under option at a meaningfully higher price. So I think what happens is the pressure builds as you get to the end of the option period, and that's when they want to get all their ducks lined up to pull the trigger. That's typically how waste. But we don't have great insight as to what their what their plans are.
Fair enough. And since we're at kind of on the carbon type of topic, if you guys have anything on the CCS side, which obviously both some Warehouser and Rainier have talked about a fair bit or bit because of location and the such like? Is it likely a less bigger factor for you?
No, I don't. Well, it may be a little bit of a less bigger factor for us given where we're at in Arkansas, as opposed to you know, warehouse has got ground down in Louisiana, Texas, whatnot, but we definitely have projects underway in CCS, but we're under an NDA. So we can't really talk about them, but there's certainly a lot of work going on in that area. And, you know, I would expect over the coming quarters, we'll have we'll have more to say as things things come to fruition.
Okay, super. And then on wood products, you made a comment about being profitable in 1Q. Just wanted to clarify, was that EBITDA was that operating profit? And and does that build in the expectation which you laid out why you'd have it, but that lumber prices would probably be going higher? Or is that at where prices are today?
Yes.
No, I wouldn't. I would say it's a it's an EBITDA kind of a number. And yes, I think it's primarily driven by a by improved lumber prices.
Okay. And then and I guess kind of well, maybe one more on lumber, if I could. And then you talked about the significant reduction in cash costs related to Waldo. And I think you've talked about the specifics before, but can you remind us how much of that might show up this year? And then how much no additional arm would be still in up in the half for next year?
Well, I would I would say you know it, we're going to our shipments are going to be down at Waldo this year, and we just have way too much work going on. And I think it's something like 30 million feet, we're going to lose it at Waldo because of the project. So we're not going to see those benefits this year. It's going to be it's going to be next year and really it's going to be Q2 and Q3 that take the hit on shipments will start the year out. Just to give you a sense of that, we're going to start the year out with 51 million feet we expect in Q1 dropping to 41 in Q2 and then 19 million feet in two three and then up to 54 million feet in Q4 by the end of the year, we're only we only expect to be at about 80% of where the mill is going to get to eventually, and it's going to take us until probably Q3 of 25 and to where we've got the mill running at 100% of capacity and the bid group, who's our contractor for this project, they've done a number of mills, as you know, in the South. And they've got a lot of data on the ramp curve for four mills with projects like this brownfield expansions, but it's fairly well documented and surprisingly, the range is pretty tight on on like first quartile versus fourth quartile mill expansions like this. So we expect to be improving, but it's going to take a good a good year to get it fully ironed out.
Okay. And then Then lastly, maybe if you could help us a little bit. And so you're you sold some line at 1,700 explained why the price was low given the age class, you bought land at 1900 with a more even type age class. And you know, in the same time you've been talking about how you've been buying back stock in part, it's a big discount to NAV.
Yes, sort of those 1,700, CAD900 type numbers don't necessarily correspond to kind of how most of us are thinking on NAV. So you sort of explain the 700, maybe talk a little bit about the 1900 and then maybe where you talked about three years ago, maybe 1,700 was representative of an average age of class U.S. timberland holdings. Do you have a perspective on where that would be today?
I would I would tell you I would not characterize the acquisition that we made to 16,000 acres in Arkansas for 31 million or 1900 acre. That was not an even age for us. That was a mature forced average age 25. So we will be harvesting those trees, um, for them over the next four to five years from that was a privately negotiated transaction one-on-one. And we think we're going to earn a an 8% IRR on that project and which is unheard of in Timberland M&A circles. And we got that return because it was a privately negotiated transaction just like we did with Luther pretty much like we did with CatchMark pretty much like we did with Deltic way back when So Mark, I think to answer the second part of your question, where do I think timberland values are today? If we broaden even aged track to the market, what do I think we could get. I think it depends upon the individual area, but I'd say probably somewhere between 2,500 to 3,000 an acre, depending upon where it might sit from somewhere in that ZIP Code.
It, thank you for all the insight.
Yes, you're welcome.
At this time, I'm showing there are no more questions. I'll now turn the call back over to wean waste.
Thank you for your questions and your interest in PotlatchDeltic. That concludes our call.
This concludes today's conference call. Thank you for your participation. You may now disconnect.