Back in Timber

Timberland is an asset class we have wanted to be in for a while as the continued strong demand for housing creates the needs for increased construction activity over the next few years.  Further, the south and southeast will need extra lumber for the hurricane rebuilding effort.  This is precisely where CatchMark’s land is located.

CTT’s new acquisition will make them the dominant timberland owner in Georgia which should fuel above market realizations on sawlogs and pulp.  New mills are opening up in the southeast which should end the bottle neck and restore the balance of negotiating power to the timberlands.  We anticipate this to lead to increased margins for CTT in 2018.

The acquisition appears pricey at $2901 per acre, but there is a vast amount of standing inventory equating 81 tons per acre.  Using 2nd quarter southeastern sawlog, chin-n-saw and pulp prices for pine, the standing inventory is worth about $1327 per acre.  Thus, CTT was really only paying $1574 per acre for the land.  This particular land is some of the most productive in the country with annual production of about 7.6 tons.  At current pricing the 7.6 tons of annual production would sell for roughly $124 so that is a 7.9% revenue cap rate on the cost of the land (excluding the cost of the existing inventory).

Depending on the margins CTT is able to realize, this could be quite accretive.  We also like the synergy benefits that come with growing a dominant market share in the region.  Due to the sheer weight of timber products, transportation is expensive, making it a regional business.  This reduces competition from distal timberlands and affords CTT a somewhat oligopolistic sales environment.

Due to the offering of 4 million shares, CTT’s market price dipped materially today, and I feel this was an opportunistic entry price.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

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