PotlatchDeltic - Earnings Call - Q3 2019

Transcript

Speaker 0

Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Third Quarter twenty nineteen 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.

Thank you. I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Speaker 1

Thank you, Lindsey, and good morning. Welcome to PotlatchDeltic's investor call and webcast covering our third quarter twenty nineteen earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer and Eric Kremmers, President and Chief Operating 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 concerning the risks associated with these forward looking statements.

Also, please note that a reconciliation of non GAAP measures can be found on our website at www.potlatchdeltic.com. I'll now turn the call over to Mike for some comments, and then I will cover our third quarter results and our outlook.

Speaker 2

Thanks, Jerry, and good morning. We generated adjusted EBITDA of $55,000,000 in the third quarter. This is almost 50% lower than our adjusted EBITDA in the third quarter of twenty eighteen and reflects weak lumber prices that have persisted longer than any of us expected. Having said that, Wood Products results improved modestly this quarter and the segment set quarterly lumber production shipping lumber production and shipping records. We remain optimistic about the outlook for this business.

Wood Products remains on track to complete its elevated capital project plan as well. We recently completed replacement of five batch dry kilns with two new continuous dry kilns our Warren Arkansas sawmill and finished installation of a new kiln at our St. Marys, Idaho sawmill. Notable projects for the rest of the year include a green stacker and expanded rail spur at our Waldo, Arkansas sawmill. As a reminder, we plan to spend just under $40,000,000 of capital in this segment in 2019 and the primary benefits of these projects are expanded capacity and improved grade realization.

In Timberlands, we mentioned on prior calls this year that we shifted some of our Idaho volume to the second half of the year because customers in the region entered the spring breakup period with higher than normal log inventories. Log deliveries are on track through October and we expect to meet our Idaho harvest volume for the full year. By contrast, we now expect our Southern harvest volumes to fall short this year. Rainfall was double normal levels in our Arkansas operating areas in the first half of the year, which restricted the supply of sawlogs and constrained our ability to harvest, particularly in the Southeastern Corner of Arkansas, where we have low lying land close to the Mississippi Delta. The resulting mill log shortages caused pine sawlog prices to increase to ten year highs.

As operating conditions improved in the third quarter, there was an overwhelming supply response by non industrial landowners to take advantage of the attractive prices. This resulted in an acute shortage of logging contractors and ultimately led to high mill log inventories. We've now seen pine sawlog prices decline back to normal, and we have limited opportunities to catch up on our planned harvest for the year given that mill log decks are now full. We believe that this situation is unique to this year and with the unprecedented rainfall in Arkansas, we expect our harvest levels to return to normal higher levels in 2020. On a positive note, the higher than expected Southern sawlog prices this year have offset the effect of lower harvest volumes on our Southern Timberlands EBITDA.

Real estate performance has been strong this year and the segment is on pace to exceed its planned adjusted EBITDA by approximately $20,000,000 The segment has done a particularly good job identifying and executing on rural land sales sourced from legacy Deltic timberlands. Looking forward, we continue to be encouraged by U. S. Housing market fundamentals, and we expect lumber prices to improve as we approach the twenty twenty spring building season. A meaningful increase in new orders reported by homebuilders earlier this year is translating into higher single family housing starts.

September was the second month in a row where single family starts were above 900,000 units. This is important as single family unit uses approximately three times the lumber as a multifamily unit. Further evidence that U. S. Housing starts are improving include new building permits about 10% above the current level of starts.

Homebuilder sentiment has increased four months in a row and is at the highest level since early twenty eighteen. And large homebuilders have reported strong new orders for the third quarter. The current level of U. S. Housing starts have only recovered to a level that has been typical in normal recessions.

We expect that the underbuilt situation will be exacerbated as millennials who are the largest demographic cohort are just starting to enter the prime home buying years. Turning to lumber supply, there have been several capacity curtailment or closure announcements, which are estimated to be over 2,000,000,000 board feet in aggregate. It has been our view that the full effect of these decisions on lumber shipments would not be felt until the fourth quarter of twenty nineteen because it would take time for the affected mills to work through their log inventories. Potlatch Deltic is well positioned to benefit from recovery in these lumber prices. Our balance sheet remains strong and provides the flexibility to grow shareholder value.

We returned $106,000,000 to shareholders in the first nine months of twenty nineteen. We did not purchase any shares in the third quarter. While we still trade at a discount to net asset value, our stock price is 17% above the average price at which we repurchased shares in the first half of the year. And I'll turn it back to Gerry to discuss the quarter and our outlook, and then we'll take questions.

Speaker 1

Thanks, Mike. Starting with Page four of the slides, total adjusted EBITDA was $55,000,000 in the third quarter compared to $49,000,000 in the second quarter. The sequential increase in EBITDA is due primarily to seasonally higher harvest volumes and higher lumber shipments, partially offset by the fact that real estate sold fewer acres of rural land in the third quarter. I'll now review each of our operating segments and provide more color on third quarter results. Information for our Timberland segment is displayed on Slides five through seven.

The segment's adjusted EBITDA was $43,000,000 in the third quarter compared to $26,100,000 in the second quarter. We harvested 529,000 tons of sawlogs in the North in the third quarter. This was up seasonally from the 325,000 tons that we harvested in the second quarter. Northern sawlog prices were 7% higher on a per ton basis in the third quarter compared to the second quarter. The price increase reflects the lagged effect of slightly higher lumber prices on index volume and the seasonal decrease in the density of logs.

In the South, the 1,000,000 tons harvest in the quarter was lower than we planned. The higher than normal mill log inventories in the third quarter that Mike touched on constrained our ability to catch up on our first half harvest shortfall. Our pine sawlog prices increased as much as 14% at their peak as extraordinarily wet weather constrained the supply of logs. The elevated prices carried into the third quarter and have resulted in a positive $5,000,000 effect on adjusted EBITDA for the first nine months of the year. Southern pine sawlog prices have dropped back to longer term averages entering the fourth quarter.

Turning to Wood Products on Slides eight and nine, adjusted EBITDA was $5,900,000 in the third quarter. This is an improvement of 7,900,000 relative to the second quarter. Lower log and manufacturing costs on a per unit basis more than offset the effect of weaker lumber prices, which resulted in improved margins. As Mike mentioned, our Wood Products segment set lumber production and shipping records in the third quarter. We are on track to ship approximately 1,100,000,000 board feet of lumber for the full year.

Turning to real estate on Slides ten and eleven, the segment's adjusted EBITDA was $14,700,000 in the third quarter compared to $31,300,000 in the second quarter. As a reminder, we closed two large rural sales last quarter, including the sale of former Deltic Timberlands for $11,000 per acre. The segment closed a $3,000,000 sale of commercial property in Chenal Valley in the current quarter. Shifting to financial items, which are summarized on Slide 12, we ended the quarter with $95,000,000 of cash. We plan to refinance the $40,000,000 term loan scheduled to mature in the fourth quarter.

The new loan will mature in November 2029 and we have effectively locked the rate. Interest savings will be modest relative to the variable rate on the existing term loan. Capital expenditures were $16,400,000 in the third quarter. Note that this amount includes $1,300,000 of real estate development expenditures, which are included in cash from operations in our cash flow statement. We continue to expect that total capital expenditures, including real estate development will be in the range of $65,000,000 to $70,000,000 for 2019.

I'll now provide some high level outlook comments. The details are presented on Slide 13. Harvest volumes in the North are expected to be seasonally lower in the fourth quarter compared to the third quarter. We expect Northern sawlog prices to decrease modestly in the fourth quarter due primarily to seasonally heavier logs. While harvest volumes in the South are anticipated to be higher in the fourth quarter than the third quarter, it will not be enough to make up the shortfall relative to our annual plan.

As a result, we believe that Southern harvest volumes will fall about 450,000 tons short of plan this year and return to more normal higher levels in 2020. We expect the shortfall to be comprised of about 70% sawlogs and 30% pulpwood. We expect Southern sawlog prices to be lower in the fourth quarter due to slightly lower pine sawlog prices and a seasonally lower mix of hardwood sawlogs. We expect average fourth quarter lumber prices to be flat compared to the third quarter and to ship approximately two ninety million board feet of lumber in the fourth quarter. Shifting to real estate, the segment is expected to wrap up a strong year by selling approximately 3,000 acres of rural land and 50 Chenal Valley lots in the fourth quarter.

Overall, we estimate that fourth quarter total adjusted EBITDA will be lower than third quarter due to a seasonal decrease in harvest volumes and lower real estate sales activity. That concludes our prepared remarks. Lindsay, I'd now like to open the call to Q and A.

Speaker 0

Our first question comes from John Babcock with Bank of America Merrill Lynch. Your line is now open.

Speaker 3

Hey, good morning, Dash, afternoon. Just want to start out, how does the pullback in harvest volumes for the third quarter Pile Etch's plans kind of as you're looking out over the next couple of quarters and obviously also some carryover from what happened in the first half of the year?

Speaker 4

Well, over the next couple of quarters, so we have our plan that's established already for Q4 and that guidance is in the supplemental materials that we put out. Next year, as Mike mentioned in his comments, our harvest plan with our current acreage is roughly 6,000,000 tons per year, six, six point two somewhere in that zip code. We have not developed our formal operating plan yet for next year. So I don't want to be committed to those numbers, but we expect to get back to that operating plan next year.

Speaker 3

Okay. Thank you. And then next, I guess I was just wondering a little bit on kind of the solid prices. You saw a little bit of an uptick during the quarter. What drove And also while it sounds like some new supply has kind of come into the market, is there any potential that you see for Southern sawlog prices to start ticking up?

Or do you expect it kind of remain around this kind of lower level for a period of time?

Speaker 4

So there's two different reasons to talk about here. One is the North and one is the South. Yes, clearly in the North, saw a 7% rise in our sawlog prices in the Northern region. Some of that was due to the higher lumber prices. Random lengths was up 4% quarter over quarter.

So that played a role in our higher sawlog prices in the North. And then we also have the weight factor. Our logs are drier in Q3 than they are in Q2. And so on a per ton basis, even though the volume is the same on a per ton basis, pricing will move up favorably. So that contributed about 3% of the overall 7% change in Northern sawlog prices.

So going to the South, it's a little bit different in the South. In Q3, we get more hardwood in Q3. This year our mix of hardwoods was 8% compared to just 1% in Q2 this year. So that did provide positive uplift to sawlog prices in the South. And we also had that wet weather spillover effect.

Prices were really strong in Q1 and Q2 and they continued onward into Q3. But they have since rolled over and gotten back down, as Mike mentioned, to more normal levels. We're now back down to the $43.44 dollars a ton for Southern Yellow Pine. Is helpful?

Speaker 3

Yes, that is actually. And then kind of the next question is more on the lumber side of things. I guess, first of all, just confirm, was that 2,000,000,000 board feet number that you mentioned, was that across North America or was that kind of region specific? And then the next question is really just at this point, do you foresee further mill curtailments or do you think that the market is getting into more supply and demand balance?

Speaker 4

Well, the $2,000,000,000 is really the number that's kind of happened so far. And it's a lot of that is up in BC, but there's it's not just up in BC, there's also mills on the West Side that have closed down. I think GP had a mill issue, Swanson, Stimson, all three of those companies have reported mill closures or curtailments. You've also seen a pullback in the South. GP just announced a mill over in South Carolina that they're going to idle.

The Conifex mill is down. I think Rex Lumber is idling. So all told, the number is really probably higher than 2,000,000,000. It could be as high as 3,000,000,000, 3,500,000,000 board feet. It's just some of that is permanently closed and some of it is curtailed.

Speaker 3

Okay. And then expectations for kind of further mill curtailments from here?

Speaker 4

Yes, it's hard to say. It all depends on pricing. I think the worst mills in the industry have already washed out. If prices move up, I would expect less curtailment. But if prices continue to languish, I'm hearing rumors that mills in Eastern Canada are really suffering right now.

Who knows if something could happen there. So it really just depends on what happens to pricing going forward.

Speaker 3

Okay, great. And then last question before I turn it over, if you could just kind of comment on inventories, lumber inventories to the chain, that would be great. Thanks.

Speaker 4

Yes. So lumber inventories, we don't track them ourselves. It's anecdotal what we hear from our customers. It's what we see in pundit reports. FDA had a webinar, I don't know, couple of weeks ago.

They highlight the fact that lumber inventories are pretty low levels throughout the channel. Customers seem to have found a way to live operating with low levels of inventory, particularly in this environment when they can place a phone call and get wood delivered on very short notice. So that may be a more permanent operating posture of the industry. It's just they've learned to run with low inventories.

Speaker 0

Our next question comes from Keaton Mamtora with BMO Capital Markets. Your line is now open.

Speaker 5

Thank you. Good afternoon, everyone. First question, on this beetle outbreak that we are seeing in some parts of Europe, are you seeing more are you seeing signs of more lumber coming into The U. S. From Europe?

Speaker 4

No, Ketan, I've heard a lot about the beetle issue in Central Europe. And I think if you look at imports into The US, frankly from countries other than Canada, I think year to date they're down like 4% or 5%. So it's not like we're seeing a flood of this wood hit The US shores. I've heard anecdotally some of it may be showing up in the Northeast, but it's certainly not showing up in the overall industry wide data.

Speaker 2

But it is I think there's a lot of evidence that wood is flowing to other parts of the world, both particularly in Asia.

Speaker 4

Yes, particularly China.

Speaker 5

Got it. Okay. And then turning to lumber, some of these wider Southern Yellow Pine grades have come under a lot of pressure. What is driving that? I mean, 2x4 is also I mean, it's not been great, but it seems like the wider grades have come under a lot more pressure.

Why what do you think is driving that?

Speaker 4

I'm sorry, did you say wider widths? Yes. So why is it under a lot of pressure right now, Keaton, and it's couple of different things. One is that rain in the southern region has kind of moved out. And so now the lower lying elevation stands are accessible.

Those tend to be bigger trees. They tend to produce more wides. So number one, the overall mix from the South has kind of increased to wides. But then number two, you're also at a time of year where seasonally treaters back off their purchases. They won't come back into the market in a meaningful way until, say, first quarter of next year when they begin getting ready for the deck building season, if you will.

So a lot of it is just seasonal weakness.

Speaker 5

Got it. That's helpful. And then just turning to the hardwood lumber markets, they have come under a lot of pressure as well. Can you just talk about kind of what you guys are seeing and sort of implications for hardwood timber owners? And if you can just remind me kind of how much hardwood you have in your mix and whether this creates any opportunities for you guys?

Speaker 4

Well, yes, so the hardwood lumber business has come on a lot of pressure and a lot of that hardwood lumber was previously on a boat to China. So those tariffs have really done a number on hardwood lumber exports. Our overall hardwood mix is roughly I don't know, this year it's going be like 4% of our Southern harvest volume. That's lower than it might normally be. It normally would be in the, who knows, 8% to 10% kind of a range.

So certainly less demand is not good for hardwood. But we think once the tariff issue is resolved, those exports will continue and prices will firm up.

Speaker 5

Got it. And then just last one from my side, kind of what you're seeing in terms of activity in the timberland markets?

Speaker 2

Kietan, it's been a quiet year by and large with not a lot of activity from T Mo's or REITs or private landowners this year. Most things other than the Michigan transaction, the warehouse are executed to lime timber, but it's been kind of small sales in the 20,000 to 50,000 acre size range. There seems to be no price change from what we can see. Prices have held up relatively steady, but not a lot of volume.

Speaker 5

Thank you. Very helpful. Good luck into 2020.

Speaker 1

Thank you. Thanks.

Speaker 0

Our next question comes from Collin Mings with Raymond James. Your line is now open.

Speaker 6

Thanks. Good morning, guys.

Speaker 1

Good morning. Good morning.

Speaker 6

First question for me, going back to Wood Products and your outlook for that segment. Just maybe can you update us on where your lumber realizations actually stand quarter to date relative to 3Q? Maybe just expand a little bit more on the factors leading you to expect flat pricing. I'm just trying to reconcile some of the positive commentary on kind of supply demand dynamics with the guidance slide here.

Speaker 4

Yes. So where we're at quarter to date, Colin, is we're down slightly, very modestly 1% or 2%. Our product mix is more skewed to factors that are not working right now, things like timbers, seasonal weakness in timbers. We have economy grade is under a fair bit of pressure. So we're down slightly kind of quarter to date.

Our expectation is flat to maybe even up a couple of percent. It does feel to us like things are starting to firm. Just here in the last week or so talking to the sales force, it feels like things are getting better. So there's cross currents taking place here, but it feels to us like things have bottomed and maybe getting a little bit better.

Speaker 2

And also Colin, I'd just add that the headline information about lumber prices are largely skewed towards SPF, which have been quite strong. And Southern Yellow Pine has kind of not participated in that party very much.

Speaker 4

Well, other thing to add to that Colin, is that a lot of what you're hearing about is lumber futures, which there's a big disconnect between futures, which are $40 to $50 higher than where cash markets are today. Now those futures are at a would to be delivered at a point in time into the future, whether it's December or January or February. So something's got to happen, either futures prices are going to have to come down or cash prices are going to have to come up.

Speaker 2

The other thing to kind of note, Colin, I think going forward, especially since the merger is we're more of a Southern Yellow Pine company than we used to be. So it matters to us more than it used to.

Speaker 6

Just sticking Wood Products, just again recognizing you aren't providing any formal guidance for 2020 at this juncture, but maybe just update us on how you're thinking about further non maintenance capital going into kind of your Wood Products segment just given obviously the reset in pricing relative to eighteen months ago. And clearly, you have done a lot over the last couple of years now on kind of lowering the cost structure, making your mills more efficient. So just trying to get a sense of how you're thinking about that going forward relative to the last couple of years.

Speaker 4

Yes. So Colin, highlighted it's early for us. We're not done generating our plan yet for next year. I I can we do have a couple of meaningful projects in Wood Products. We're going to put in a new debarking operation at our Ola sawmill.

And we're also going to put in a new stacker at our St. Mary's sawmill. Those pieces of equipment are on order and they're to be delivered on first half of next year. So we're committed to those. It's really premature for us to comment beyond those two because I just don't know.

Speaker 2

One thing we are encouraged about Colin is the capital work that we've done this year, which a lot of it's pointed at more production capacity with more dry kilns. We should see a meaningful uptick in our production next year, in the range of 3% to 5%. And we look for better lumber markets next year, I think, as we sit here today. So I think those will be positive trends for our Wood Products business.

Speaker 6

Helpful there as well. And then just maybe sticking with capital allocation and kind of following up on an earlier question just on the Timberland markets. Just maybe just update us on the appetite here for bolt on acquisitions. Clearly, to start the year, Mike, you're pretty adamant that the best opportunity out there was to repurchase shares just given the disconnect between where the stock price was compared to your NAV, but obviously didn't buy any shares in 3Q. Just maybe talk a little bit more about the appetite there for acquisitions just again to the point that maybe it's been a quieter year on the transaction market as a whole though.

Speaker 2

We have seen a nice movement in our stock price, think up 17% since the first half of the year when we purchased shares. So our the attractiveness of buying timberlands has improved relative to what our stock price was in the first half of the year. So I think we're we've always been interested in small bolt on deals and they're probably even more attractive now as the stock repurchase opportunity and we think about it opportunistically is not as attractive as it was. We've returned a lot of capital to shareholders in the last eighteen months or so and both in the form of the dividend and the stock repurchase, we contributed to our pension plan. We did a $44,000,000 E and P purge to complete the merger.

And so we still have some dry powder left. And as we sit here today, I think bolt on acquisitions would rise higher in the stack of priorities than where it's been in the first half of the year.

Speaker 4

Yes. And Colin, just to highlight that, we just recently consummated a transaction in one of our Southern states. It was a it's not a big deal, it's $9,000,000 but it's land that's in our operating area. It was purchased with a discount rate around 7.5%. It came with it ten thirty one tax benefits.

So we'll look for opportunities like that where we can earn outsized returns on our M and A activity.

Speaker 6

Very helpful color. I'll turn it over. Thank you.

Speaker 0

Our next question comes from Chip Dillon with Vertical Research. Your line is now open.

Speaker 7

Hi, good morning and afternoon. Thank you for all the details. My main question has to do with as you look out to 2020 and 2021 and we think about modeling the real estate segment, obviously this year you ended up with more sales than you had planned earlier in the year. How do you think next year will unfold? And then secondly, if on a separate note, if you could update us on how we should think about the number of lots that you still have left and how could we see those sales flow through?

And assume that we have a decent market for land next year and the year after.

Speaker 2

Well, I'll take the first part, Chip, and Eric can talk about the lot sales. But we've since prior to the merger and really since the merger, we've kind of said we're going to sell roughly 20,000 acres a year of rural land that has an attractive premium to what its underlying timberland value is. And that's obviously going to be lumpy. Some years are going be slightly higher, some will be a bit lower, but I don't expect any change in that from where we sit today. One of the real kind of gems out of the merger with Deltic has been a larger rural land sale opportunity at higher prices and more acres that are suitable than what we expected when we did our due diligence.

So I think we're encouraged about that. And I'll let Eric speak to the lot sales in Chenal.

Speaker 4

Yes. So Chip, regarding lot sales, so Chenal, as you may recall, a master plan community with total development size of 4,600 lots. Of the 4,600, 3,000 have been sold. So we have about 1,600 yet remaining. And in a typical year, we're going to sell about 150 lots in Chenal.

So if you just do the simple math, it's about a ten, eleven year kind of a runway. I'm sure there's going to be periods of time where we'll exceed that and there'll be periods of time when recessionary type of year will be on the low end of that. But there's strong demand for lots in Chenal. Our pricing is coming in ahead of what we had planned for the year. And we're optimistic about that business.

Speaker 2

There's also a nice commercial plot of land there in Chenal Valley that is I think we're 800 acres or so. I'm not sure exactly what the total is, but we'll continue to that's going to be very lumpy of course. But as we get more rooftops established the Chenal Valley residential area, it's just going to put more demand on the retail and commercial space. So that will kind of go hand in hand.

Speaker 4

Yes. I mean that commercial business, Chip, so similar to residential, there was 800 commercial acres at the start and there's about three seventy acres remaining. That acreage, although it's lumpy, it has a really nice sticker price to it. So the $3,000,000 that we generated in Q3 in commercial in Chenal was for six acres. So that's $500,000 per acre.

And I can assure you, like Mike said, there's the more Chenal gets built out, the more demand for that commercial land is going to increase. And we've got more commercial deals that are in the pipeline, but it's a very lumpy business.

Speaker 7

And on that, the 500,000 type property, what kind of who's buying that? Is that for retail or shopping malls or for what kind of what's going in on those lands?

Speaker 4

Yes, it's kind of all the above. It's banks, it's restaurants, there's a manufacturer, there's a school, there's a church, it's multi family hotels. I mean it runs the gamut. I mean this is the place to live in Little Rock, Arkansas.

Speaker 7

Got you. Got you. Okay. That's super helpful. And then just on a separate note, to follow-up a little bit about your timber sales effort.

Are there any mills that have either been shut down that you are concerned about coming back or new ones that are starting up that could impact you in the next year or two? And then I guess as a side note, if you see another jump in prices, let's say in Southern Arkansas, are you concerned about another situation where the private owners kind of crowd you guys out?

Speaker 4

So yes, what happened in Q3 was a bit unusual. Mean prices really, really did spike up into the low 50s. That stimulated a lot of gatewood, non industrial private landowner wood to come to market. We were very surprised by that. Frankly, it caught us a little off guard.

Q3 is normally a time of year when we really get after hardwoods because that's when the place dries out. But that contractor capacity was not available to us in Q3 because Southern Yellow Pine prices were so high. I really expect things to go back to normal. I mean we're already seeing prices back down to where they were pre-twenty nineteen, where Southern Yellow Pine logs are in the kind of $43.44 dollars a ton range. And I don't expect this to happen again.

And regarding your earlier question there, mill start ups, there's nothing that I see on the horizon that's going to dramatically change the equation. The Conifex mill in El Dorado is down right now. That could start back up again. But I think if it did start back up again, you wouldn't see a big move in sawlog prices.

Speaker 2

Most where we've got the most optimism, Chip, is in Alabama. We've got a GP at Talladega started a new mill. The Westerville company has got one under construction in Southern Alabama. So that market is going to be a little tighter than the rest of the South sooner.

Speaker 7

And that's Southern Alabama, right?

Speaker 2

Well, the GP Talladega is more Northeastern Alabama and the Thomasville location for Westervelt's in the Southwest Corner of Alabama.

Speaker 7

Okay, got you. Thank you.

Speaker 0

Our next question comes from Mark Weintraub with Seaport Global. Your line is now open.

Speaker 8

Thank you. First question was on the real estate business where it looks like it's been quite strong. Were you largely selling forward because of the strength? Or were you actually also getting better pricing than you would have anticipated?

Speaker 4

No, I don't know that we were selling forward. I mean these were deals that just naturally came together in the third quarter. One particular transaction was Minnesota where we had a large $4,000,000 sale with mining company there. And in that particular transaction, this mining company had an option to buy that land from us since 2012. And they've been paying us 2 and $325,000 per year to have that option to buy those 3,000 acres.

And as their project has progressed, they're getting more and more optimistic about their mining project coming to fruition and they needed to have the acres to trade to the state to show conservation ground. So this was just a matter of it naturally came together and really was nothing regarding timing, was nothing unusual there.

Speaker 8

Okay. Maybe I misunderstood. I thought that part as you had noted in your initial comments that acreage sold was higher than you'd originally anticipated. I thought that was in part because the market was strong. Was I misinterpreting that?

Speaker 4

No. I think we were planning on selling these acres in Q4. It just came together in Q3. And I mean the market for rural acres is definitely strong. You've got a stock market that's at high levels, you've got unemployment at low levels, consumer confidence is generally pretty high.

The business in general is very strong. But we did execute the transaction in Q3 and it was planned to be executed in Q4.

Speaker 8

Okay. Thank you. And just coming back to the question on the farmer wood that came out in the third quarter. Was the surprise for you that the pricing had gone up so much for Southern sawlogs in that region? Or was it that there was as much wood as came to market that responded to the stronger pricing?

Speaker 4

I think it was a little bit of both. Mean we actually the rain started in the first half of the year but it continued on into Q3. Tropical storm Barry blew through Arkansas in I think July. So unprecedented rainfall led to unprecedented prices. And it was just the perfect storm for higher log prices.

I think we were surprised by the amount of gatewood that quickly came to market. And that gatewood was on ground, it was at a higher elevation than what we were trying to harvest on our ground. So contractors could not go work on our property in that Southeast Corner of Arkansas because that lower elevation land was relatively speaking underwater. Whereas the Gatewood was at a higher elevation and contractors could go work.

Speaker 8

Okay. And then lastly, one thing that obviously is important is to recognize you guys are a net buyer of sawlogs in the South. Now are shifts in where pricing is by region, etcetera, does that affect mix in ways that impact your profitability? Or when we see or is it really just about where the spread between lumber and overall Southern sawlog pricing is that's going to drive your profitability on a in a given time period?

Speaker 2

It's the latter. The mix feature kind of ebbs and flows month to month or week to week. But the latter point that you made is the more important one and that's the spread between lumber and log prices, which still is attractive.

Speaker 8

Super. Thank you.

Speaker 2

You bet.

Speaker 0

Our next question comes from Paul Quinn with RBC Capital Markets. Your line is now open.

Speaker 9

Yes. Thanks very much. Good afternoon, I guess, or good morning to you guys. I guess, start on Wood Products. Congratulations on the record lumber production.

What should we be modeling in here for 2020? Is that kind of a 1,200,000,000 board foot number?

Speaker 4

No. So Paul, it's Eric. Yes, I think Mike alluded to it earlier. We have got a good track record here. Every year we get about 3% to 5% higher volumes out of our mills.

And although it's early and we're not giving guidance yet on next year, I would subtly say that I think our back of the envelope math suggests that another 4% increase in production is in the making.

Speaker 9

Okay. And then in terms of the CapEx that you put in margin improvement, would be sort of a rule of thumb on how much more margin you've got given the CapEx that you've done this year and intend to do next year?

Speaker 4

Well, that's a really difficult question to answer, Tom. We've developed our capital plans for next year. I would reiterate that all the projects that we've done in our mills, the large projects have got returns anywhere from I'm looking at a piece of paper, the lowest one is 16% IRR

Speaker 1

and the

Speaker 4

highest one is 48%. So these are all projects with quick three, four year kind of paybacks attached to them.

Speaker 9

Okay. Then just shifting over to real estate. Just and I guess I'm glomming on a prior question, but just how sustainable is the current strength in the real estate? Do you feel strong about the next number of years going forward?

Speaker 4

Yes, I do. It's hard to predict too far out given that everybody talks about a recession being right around the corner. But as Mike said, we still got 200 and some thousand acres of rural acreage that we intend to sell, and we sell about 20,000 acres a year. So that's a good ten year runway with those acres. And then as I talked about Chenal, we've got fifteen years worth of lots left at Chenal or ten to fifteen years worth of lots left at Chenal at our current pace and we've got plenty of commercial acres as well.

So I really don't see real estate slowing down anytime soon except if there's a recession.

Speaker 9

All right. That's all I had. Best of luck guys. Thanks.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Kurt Yinger with D. A. Davidson. Your line is now open.

Speaker 10

Yes. Good morning, everyone. Just on the Wood Products, how do you think about capacity creep versus the need to really put capital to work to keep growing that capacity? And then if we were to think about kind of a base annual capital need there, how does that compare to where you expect to come in over 2019?

Speaker 4

Well, I'll take the second question first, which is capital plans. There's no doubt 2019 was an elevated capital spending plan for our company. We had just completed the merger with Deltic. There were a number of pent up projects at those mills and that caused us to elevate our capital plans in 2019. So I would expect capital plans to come down in 2020, although we haven't finished developing our plans yet.

I do think that ultimately it's going to come down. So your other question was regard capacity. We run our mills as hard as we can as long as we have variable margin. That's the way most people in the industry do it. And as long as there's variable margin, it makes sense where you can find attractive projects with good returns to continue to expand capacity.

So So I think we our plans are to continue to push our mills as hard as we can assuming we can find attractive projects. Does that answer your question on capacity?

Speaker 10

Yes. No, absolutely. That's really helpful. And then just lastly, obviously, this year is going to be different from an EBITDA perspective versus 2018. But how do you guys think about maybe a target leverage range or perhaps you approach it in a different way?

Any color there would be helpful.

Speaker 1

You bet, Kurt. So this is Jerry Richards. So in terms of target leverage, what we talk about typically is EBITDA leverage somewhere around four times. I would describe that as a conservative target. And as we look at even with a lower twenty nineteen EBITDA, we're still certainly within the balance of kind of that target.

Speaker 10

Great. Thank you very much. I'll turn it over.

Speaker 0

At this time, I'm showing there are no more questions. I'll now turn the call back over to Jerry Richards.

Speaker 1

All right. Thank you, Lindsay, and certainly appreciate everybody's interest in PotlatchDeltic and your participation in the call. I'll be available for the detailed modeling questions the rest of the day and hope everybody has a good day.

Speaker 0

This concludes today's conference call. You may now disconnect.