Earnings Call Transcript - RYN Q1 2022

Operator, Operator

Welcome, and thank you for joining Rayonier's First Quarter 2022 Teleconference Call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr. Collin Mings, Vice President, Capital Markets and Strategic Planning.

Collin Mings, Vice President, Capital Markets and Strategic Planning

Thank you, and good morning. Welcome to Rayonier's investor teleconference covering first quarter earnings. Our earnings statements and financial supplement were released yesterday afternoon and are available on our website at rayonier.com. I would like to remind you that, in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws. Our earnings release and Form 10-K and 10-Q filed with the SEC list some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on page two of our financial supplement. Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measure in our earnings release and supplemental materials. With that, let's start our teleconference with opening comments from Dave Nunes, President and CEO. Dave?

Dave Nunes, President and CEO

Thanks, Collin. Good morning, everyone. First, I'll make some high-level comments before turning it over to Mark Mchugh, Senior Vice President and Chief Financial Officer, to review our consolidated financial results. Then we'll ask Doug Long, Senior Vice President, Forest Resources, to comment on our U.S. and New Zealand timber results. And following the review of our timber segments, Mark will discuss our real estate results, as well as our outlook for the remainder of 2022. Overall, we were very pleased with our strong start to 2022. For the first quarter, we achieved earnings per share of $0.20 and adjusted EBITDA of $98 million. First quarter adjusted EBITDA increased 41% versus the prior year quarter as record results in both our U.S. timber segments coupled with a very solid contribution from our real estate segment more than offset lower adjusted EBITDA from our New Zealand timber segment. Drilling down on our different operating segments, our southern timber segment generated adjusted EBITDA of $48 million for the quarter, which was 53% above the prior year first quarter and represented an all-time record quarterly result for this segment. We're very encouraged to see strong demand drive a 31% increase in net stumpage realizations while favorable logging conditions further contributed to a 25% increase in harvest volumes. These strong results in our southern timber segment are a testament to both the strength of our operating areas as well as our team's ability to capitalize on favorable market conditions. In our Pacific Northwest timber segment, we achieved adjusted EBITDA of $22 million, up 22% from the prior year quarter and likewise an all-time record result for this segment. The year-over-year increase was primarily attributable to 17% higher log prices, partially offset by a modest reduction in harvest volumes and higher costs. Our operations in the region continue to benefit from very favorable domestic lumber markets as well as healthy export market demand. Conversely, financial results in our New Zealand timber segment declined significantly versus the prior year quarter as higher pricing was more than offset by compressed margins due to significantly higher shipping costs, 14% lower production volumes, and unfavorable foreign exchange impacts. First quarter adjusted EBITDA on our New Zealand timber segment was $10 million, down from $21 million in the prior year quarter. In our real estate segment, we generated adjusted EBITDA of $25 million, up considerably from $5 million in the prior year period, as a significantly higher number of acres sold was partially offset by a modest decrease in weighted average prices due to the mix of acreage sold. Our team continues to do a tremendous job of capitalizing on strong demand for rural land as well as residential lots and commercial parcels within our development projects. With that, let me turn it over to Mark for some details on our first quarter financial results.

Mark Mchugh, Senior Vice President and Chief Financial Officer

Thanks, Dave. Let's start on page five with our financial highlights. Sales for the quarter totaled $222 million while operating income was $45 million and net income attributable to Rayonier was $29 million or $0.20 per share. Pro forma EPS was also $0.20 per share, as we had no pro forma items in the quarter. We generated first quarter adjusted EBITDA of $98 million, which was up considerably from the prior year period due to much higher contributions from both of our U.S. timber segments as well as our real estate segment. On the bottom of page five, we provide an overview of our capital resources and liquidity. Our cash available for distribution or CAD for the quarter was $65 million versus $47 million in the prior year period. The increase was primarily driven by higher adjusted EBITDA, partially offset by higher cash taxes, cash interest paid, and capital expenditures. Note the cash taxes were elevated in the first quarter due to the required timing of tax payments for our New Zealand subsidiary following the full utilization of its NOLs. A reconciliation of CAD to cash provided by operating activities, and other GAAP measures is provided on page seven of the financial supplement. Consistent with our nimble approach to capital allocation, we raised $30 million through our at-the-market equity offering program during the first quarter at an average price of $41.46 per share. As previously discussed, we view the ATM program as a cost-effective tool to opportunistically raise equity capital, strengthen our balance sheet, and match fund both acquisitions. We closed the first quarter with $257 million of cash and $1.3 billion of debt. Our net debt of $1 billion represented 14% of our enterprise value based on our closing stock price at the end of the first quarter. Looking ahead, we believe our balance sheet is well-positioned for a higher interest rate environment, following the steps we took in 2021 to extend our debt maturities and lower our average cost of debt. Currently, our weighted average maturity is roughly seven years. Our weighted average cost of debt is roughly 2.7%. And essentially all of our debt is fixed. I'll now turn the call over to Doug to provide a more detailed review of our first quarter timber results.

Doug Long, Senior Vice President, Forest Resources

Thanks, Mark. Good morning. Let's start on page eight with our southern timber segment. As Dave mentioned, we achieved record quarterly adjusted EBITDA in the first quarter of $48 million, which was $17 million above the prior year quarter. The year-over-year improvement was primarily driven by a significant increase in net stumpage pricing and higher harvest volumes, partially offset by higher costs and lower non-timber income. More specifically, volume climbed 25% during the first quarter as drier conditions enabled stumpage customers to ramp up production to meet strong demand, despite ongoing constraints on trucking availability. Sawlog stumpage pricing rose 29% versus the prior year quarter at over $35 per ton. First quarter pricing marks the highest average southern sawlog stumpage realization we have registered in over a decade. Improved pricing reflects strong demand from sawmills as the increased capacity that has been built over the past few years in several of our wood baskets continues to come online and benefit from strong lumber prices. Upward pressure on chip and saw pricing due to increased competition from pulp mills was also a positive contributor. Overall, weighted average stumpage prices improved 31% year-over-year. We continue to be very encouraged by customer demand and the pricing environment across our southern footprint. However, we have recently seen pricing gains moderate in some operating areas as mill inventories normalized with drier weather conditions resulting in more favorable logging conditions, which increased available supply in some markets. Southern log exports remain constrained by the pinewood nematode policies implemented by China earlier this year. Several exporters in the U.S. South have exited the market in response to these policies. We are still working with our valued customers in China to provide log shipments to specific ports for the customer assuming phytosanitary risks upon delivery. However, we have largely pivoted our U.S. South log exports to Vietnam and India for now. While we expect the limited policies to be a headwind over the near term, we believe that strong underlying demand, coupled with the breadth of our export capabilities, leaves us well-positioned longer term to supply logs for our customers in China and other parts of Asia through our U.S. South export program. Moving to our Pacific Northwest timber segment on page nine. We likewise set a new record with quarterly adjusted EBITDA of $20 million, which was $4 million above the prior quarter. The year-over-year increase was driven by higher stumpage realizations, partially offset by lower harvest volumes, higher costs, and slightly lowered non-timber income. Volume declined 6% in the first quarter as compared to the prior year quarter, primarily due to the timing of stumpage sales. Turning to pricing at roughly $106 per ton, our average delivered solid price during the first quarter was up 16% from the prior quarter as domestic sawmills benefited from strong lumber prices, and healthy export market demand provided incremental tension to the market. Meanwhile, pulpwood pricing increased 28% in the first quarter, relative to the prior quarter, as demand from pulp mills in the region remains quite variable with all mills operating near capacity. Page 10 shows results in key operating metrics for the New Zealand timber segment. Adjusted EBITDA in the first quarter of $2 million was $11 million below the prior year quarter. The decline in adjusted EBITDA was largely driven by higher freight and demurrage costs, lower harvest volumes, and unfavorable foreign exchange impacts, partially offset by higher carbon credit sales. Volume declined 14% in the first quarter as compared to the prior year quarter as production at the beginning of the year was deferred in response to port congestion and elevated log inventories in China. An average of $120 per ton in delivered prices for extra logs was down 5% in the first quarter, as compared to the prior quarter, but was down from the highs seen in the last three quarters of 2021. Improvement in export saw timber prices versus the prior period reflected our ability to pass on some of the higher freight and demurrage costs we were experiencing to our customers. Chinese log inventories remain elevated throughout the first quarter, but the pricing environment for pine logs appears to have stabilized and overall log inventory levels are slowly coming down. That said, off-take from ports remains relatively weak given the COVID-related lockdowns that have been imposed in parts of China. A significant level of uncertainty remains around the ongoing COVID-19 related disruptions in China, as well as the prospect of Chinese policymakers implementing new stimulus measures. However, we expect that as demand stabilizes, exports will ultimately lead to prices moving higher due to ongoing supply-side constraints, including the reduced flow of European logs to China, the continued ban on Australian log imports by China, and the ban on Russian log exports that commenced at the beginning of this year. Shifting to the New Zealand domestic market, demand has remained strong at the start of 2022. During the first quarter, average delivered sawlog prices in U.S. dollars decreased 6% from the prior year period to $76 per ton. However, excluding the impact of foreign exchange rates, domestic sawtimber prices actually improved 1% versus the prior year period. Average domestic pulpwood prices declined 13% as compared to the prior quarter, which is also driven in part by foreign exchange rates as well as less export competition. We resumed sales of carbon credits in New Zealand in early 2022, following a more than doubling of carbon credit pricing over the prior year. However, we subsequently paused sales as the war in Ukraine disrupted carbon markets globally in February, leading to a pullback in pricing. Pricing has since partially recovered to above 2021 average pricing. Moving ahead, we plan to remain optimistic in our sales of carbon credits depending on market conditions. Lastly, in our trading segment, we posted a slight operating profit in the first quarter. As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale for our sawtimber timber export business. I'll now turn it back over to Mark to cover our real estate results.

Mark Mchugh, Senior Vice President and Chief Financial Officer

Thanks, Doug. As detailed on page 11, our real estate segment delivered strong first quarter results. Real estate sales totaled $34 million on roughly 8,700 acres sold at an average price of just over $3,800 per acre. Real estate adjusted EBITDA in the first quarter was $25 million. Sales in the improved development category totaled $5 million, and in our wildlife development projects north of Jacksonville, Florida we closed on $3.6 million of sales during the quarter representing 52 residential lots for an average price of roughly $70,000 per lot. In our Richmond Hill Development project, which we have branded as Heartwood, we closed over $1 million of sales during the quarter including 10 residential lots at an average price of $44,000 per lot and a four-acre commercial property for $246,000 per acre. We've been encouraged by the activity within our Heartwood development project and are excited that Pulte Homes is set to open initial model homes there this summer, adding to the positive momentum surrounding this project. Much like wildlife, we expect that the Heartwood project will benefit from favorable migration and demographic trends impacting the local market area. Turning to the rural category, sales totaled nearly $17 million, consisting of approximately 4,800 acres at an average price of just under $3,600 per acre. Thus far in 2022, demand for rural land has remained healthy, as the space, privacy, and recreational opportunities offered by these properties continue to attract buyers. Despite the recent increase in interest rates, demand for rural land has held up well, and our team has built a solid sales pipeline for the balance of the year. Lastly, during the first quarter, we also closed on the sale of just under 4,000 acres of non-strategic holdings in Clallam County, Washington for roughly $11 million to a conservation-oriented buyer. Now moving on to our outlook for the balance of 2022. Following a solid start to the year, we are well on track to achieve our prior full-year adjusted EBITDA guidance of $310 million to $340 million. In our southern timber segment, we expect to achieve our full-year volume guidance and are encouraged by the year-over-year pricing gains that have been realized across our operating areas. Overall, we continue to expect a significant increase in full-year adjusted EBITDA from this segment as compared to the prior year. However, we anticipate lower quarterly harvest volumes for the remainder of the year as compared to the first quarter as we experienced above-average stumpage removals to start the year. Also, while we expect net stumpage realizations to remain well above prior year levels, we anticipate modestly lower weighted average prices for the remainder of the year as compared to the first quarter due to higher mill inventories, a higher proportion of thinning volume, and a less favorable geographic mix. In our Pacific Northwest timber segment, we expect to achieve our full-year volume guidance although we expect lower quarterly harvest volumes for the balance of the year following strong removals in the first quarter. We further expect that weighted average log prices will remain near first quarter levels for the balance of the year, driven by continued strong sawtimber demand and improving public markets. In our New Zealand timber segment, we expect to achieve our full-year volume guidance with increased quarterly harvest volumes for the balance of the year. While a significant level of uncertainty remains around the ongoing COVID-19 related disruptions in China, we expect that once demand stabilizes, constrained log supplies will drive export sawtimber prices higher. We further expect the domestic sawtimber and pulpwood pricing will remain relatively flat for the balance of the year. Consistent with our previous guidance, we anticipate a higher adjusted EBITDA contribution from this segment in the second half versus the first half of the year. In our real estate segment, we expect to achieve our full-year adjusted EBITDA guidance. Following strong real estate results in the first quarter, we anticipate lower quarterly results for the balance of the year. Overall, we remain intently focused on achieving significant premiums to standalone timberland values through the activities of our real estate platform. I'll now turn the call back to Dave for closing comments.

Dave Nunes, President and CEO

Thanks Mark. Over the last several years, we've taken deliberate steps to continually improve the quality and diversity of our portfolio as we look to grow cash flows and value per share over time. We believe active portfolio management, if done well, can create alpha for our investors. The acquisition of Pope Resources in 2020, as well as the numerous other acquisitions and dispositions our team has successfully executed since our separation into a pure-play timber REIT, have been made with an eye toward improving our land base and long-term financial profile. To this end, we were very pleased with the record quarterly adjusted EBITDA results posted by both of our U.S. timber segments to start 2022. We believe these results reflect not only improving market conditions but also the relative strength of the markets we operate in, as well as the quality of the people we have in place to capitalize on the opportunities afforded by our assets. As we look out over the balance of 2022, we are optimistic about the end market demand we are seeing while we are not immune from the supply chain and inflationary pressures that are impacting many parts of the global economy. Our team continues to be quite successful in navigating logistical challenges and recouping cost increases through higher log pricing. In addition to our strong financial performance to start the year, I'm also encouraged by the steps we're taking to prepare Rayonier for a low carbon economy. We believe that carbon represents a very significant opportunity for our sector, not only to be part of the solution to climate change but also to improve the economics of our forests. Ultimately, by using more wood and by substituting it for other more energy-intensive building products, such as concrete and steel, we have the potential to sequester more carbon and reduce net greenhouse gas emissions. We also believe forestry will play a key role in the voluntary carbon offset markets, and further view our land resources as a means to support other advancements designed to help combat climate change, such as renewable energy infrastructure and carbon capture and storage projects. In sum, 2022 is off to an encouraging start, and our team is actively taking steps to ensure we're well-positioned to generate industry-leading returns and build long-term value per share. To this end, following the actions we took in 2021 to strengthen our balance sheet and optimize our cost of capital, we believe we are well-positioned to execute on future high-quality growth opportunities. This concludes our prepared remarks, and I'll now turn the call back to the operator for questions.

Operator, Operator

Thank you. We will now begin the question and answer session. Our first question will come from Anthony Pettinari from Citi. Your line is open.

Anthony Pettinari, Analyst

Hi, good morning. I just wanted to follow up on trends in China in terms of off-take from ports and demand there. Is it currently deteriorating? Or is it stable or maybe improving a little bit? And then just kind of relatedly, you discuss the supply constraints, capacity constraints from Europe, from Russia, from Australia, which seems significant. I don't know if there's any way that you can kind of frame or quantify those supply constraints into China specifically. Thanks.

Doug Long, Senior Vice President, Forest Resources

Sure. This is Doug. Yes, at the end of April, log inventories at China's main ports were around 5.7 million cubic meters. That was down about 2% from March. However, the off-take from the ports does remain below what we would expect post Lunar New Year. Main construction projects are put on hold as COVID cases in China were on the rise. That's prompted Chinese authorities to impose lockdowns and travel restrictions. While log inventory levels remain elevated, we do expect consumption to pick back up and inventory levels to normalize as the pandemic situation improves, and lockdowns are lifted. The recent Chinese government stimulus measures, coupled with constraints on log imports into China that we noted in the prepared remarks, contribute to our expectation that the second half of the year will be relatively better for New Zealand operations. Right now, we're seeing removals from the ports at about 50,000 cubic meters per day, and that's down significantly from what we'd expect to see, probably half of what we would see during this time. So it is definitely off-take that is down from what we expect. A lot of that has to do with the COVID measures. But to the point, we're seeing the inventory going down. It's come down by 2%. Part of your question about Europe, we've seen supply come down about 50% over the same period last year from Europe, so significant reduction from there. Also, from South America, significant reductions are down over 80% over the same period due to the high freight rates we're seeing. So while off-take is down due to COVID lockdowns, we're also seeing decreased inbound logs to China and the additional constraints coming out of Australia and the log export ban out of Russia. So just a lot of factors have brought down the amount of wood coming in. We do believe that once lockdowns are lifted, that the slow down in log supply will take several months to correct. It's not just something you can switch on and off; it takes a while to build up those inventories again. So we believe the inventories in China will draw down quite quickly, and as that happens, we're looking at places like New Zealand going into winter, and their production will also be slower. Overall, we believe the second half of the year should be pretty good for us. China's promoting a significant stimulus package around $2.3 trillion to recover the economy after lockdowns, and they've said that's going to be through increased infrastructure investments, some further tax breaks, and reducing their bank reserve ratio to put more liquidity into the construction market. China's construction market employs about 25 million workers domestically, so infrastructure is a major lever they have to pull to try to improve conditions as they emerge from COVID lockdowns.

Anthony Pettinari, Analyst

Okay, that's very helpful. And then regarding potential further growth opportunities, after you've deleveraged post Pope, is it safe to say that you might be primarily focused on kind of bolt-ons in around kind of coastal southeast regions that you're already established? Is it possible to continue to grow in New Zealand or Pacific Northwest? Would you maybe look at other regions of the South or maybe further east in the South? I'm just wondering if you could talk about sort of the opportunity set and potential size of acquisitions that you might go after?

Dave Nunes, President and CEO

Sure. Anthony, this is Dave. I think that we're active pretty much all the time in all three of our geographies. We're active both in looking at bid properties as well as privately negotiated transactions. We first and foremost look for a complementary fit to our existing assets. Additionally, we also are looking at both cash available for distribution (CAD) and net asset value (NAV) accretion. I think that last point is important. We don't believe in just growth for growth's sake; we're looking to have that NAV accretion, and so that's one of the areas that kind of keeps us disciplined. But right now, it's a pretty active market. Our team is very busy, but we're also remaining pretty disciplined. There's a lot of buyers right now. You're seeing increased capital flowing into this asset class based on some of the inflationary pressures in the view of timber being an inflation hedge. You're seeing it also in the context of just general geopolitical risk and a flight to quality, flight to safety. And lastly, with rising lumber prices, you've got a number of integrated players that are bidding aggressively based on high lumber prices. So it's a pretty competitive market right now, but we're active across it.

Operator, Operator

Next from Mark Wilde from Bank of Montreal. You may proceed.

Mark Wilde, Analyst

Thanks. Good morning, Dave. Mark, Collin. I wondered, starting out, I mean, the pricing in the South was just remarkable this quarter. Dave, I'm just curious if you want to put any more color around that. And just any thoughts on whether this is indicative of a broader turn in the southern timber market? I think a lot of us have written about the market having been fairly depressed on a southward basis over the last 15 years.

Doug Long, Senior Vice President, Forest Resources

Sure, Mark, this is Doug. As we've been discussing for the past five years, we believe that the South is not a homogenous market. We are well-positioned with baskets with tightening growth ratios. During that time, we've made portfolio decisions to exit certain wood baskets that we believe will be fundamentally weaker for a long time, and grow in markets that are poised for tension in declining ratios. We believe that is starting to come to play, and as we've seen, we're talking about now for quite a while and saw the results in 2021 off those trends. I'll start at a high level and touch a bit more on the pricing realizations that we recorded in our supplemental data but, as discussed in our prepared remarks, we are really encouraged by the pricing gains we've seen over the past year. Stumpage pricing was up across each of our resource units in the south versus a year ago. The magnitude of year-over-year gains we've been able to post reflects the relative strength of specific markets that we're operating in. Public prices were higher, so it was about one as compared to a year ago. I really think the magnitude of year-over-year gains we've been able to post reflects the relative strength of specific markets that we're operating in, and across the U.S. South. Additionally, our team has done a nice job of bringing certain tracts to market at the right time to align with the weather conditions or localized supply-demand imbalances. So we're off to a very strong start to the year in 2022, and we think this positive momentum will continue as the mills ratchet up operations and COVID-related restrictions become less common. Many of our markets are positioned to maintain a pricing premium to the average staff as we move forward based on what we're seeing on the recent increases that we've had and capacity. Florida and Georgia had roughly a billion feet come online in 2020 and that's on top of an additional billion square feet that came between 2018 and 2020. So you're talking about the equivalent of 4 million tons per billion square feet to about 8 million tons of demand just in that corridor. This increase in sawlog demand in these markets has really created a world tension with basket repricing that has responded. Encouragingly in Alabama, we've added about another 6 million board feet since 2020, and we're seeing that market materially improve as well. The ratio margins in Alabama are so pricing has been a little more tempered, but still very favorable, and we’re seeing improvements. Further west in the Gulf states, Texas and Louisiana, some of the expansions have been a bit slower. We're tracking about another 500 million board feet of oncoming expansions or startups in that area too. So as you can hear, we think there’s been a lot of opportunities, a lot of movement, and some great growth in those wood baskets for us. The South, like we said, is not homogenous, but the ones we’re working in see improvements to go and are really seeing that come home here starting on the Atlantic coast and working its way across the Gulf. However, we’re seeing and fully expect to see some back and forth from our customers in areas particularly where the conditions are dry. That’s typical as you go through the cycle. There’s always that natural tension between buyers and sellers and the recent price fluctuations. But all that said, we think we’re working on a higher pricing base than we were a year ago. As it relates to our specific pricing results, as Mark mentioned in our prepared remarks, we expect some net stumpage realizations to remain well above prior levels. We do anticipate modestly lower weighted average prices for the middle of the year as compared to the first quarter. That’s due to some higher mill inventories and also simply a higher proportion of thinning volume and less favorable geographic mixes. A lot of that has to do with during the COVID disruptions and lack of truck drivers, we saw a lot of our wood that was closest to the mills being harvested and sent to the mills, and now we’re having to reach out further away, which is increasing costs.

Mark Wilde, Analyst

Okay. Then I wonder just kind of toggling over to the increase in inflation and increase in interest rates. How do you guys think about that impact kind of across your business? I think it has an effect in different dimensions?

Mark Mchugh, Senior Vice President and Chief Financial Officer

Yes. I mean, it’s certainly a complex issue, and we could probably talk the balance of the call on different aspects of that. I think as we think about how it relates to timberland values and transaction activities in timber, I’ll start by making two observations. First, timberland is generally viewed as a pretty effective inflation hedge, which contributes to capital flows into the asset class in inflationary environments. Second, and somewhat related to the first point, is that timberlands are generally valued on a long-range DCF basis using real rather than nominal discount rates. In the past 20 or 30 years, U.S. South timberland has consistently been valued at around a 2.5% EBITDA cap rate, irrespective of where interest rates have been at any given point in time. To some extent, I think this reflects the notion that timberland is expected to deliver a base real return plus some inflationary component of return over the long term. Ten-year tips yield is still hovering right around 0%, while the yield on 10-year treasuries has moved up to around 3% today. So, I’d argue that the real interest rates are still very low from a historical perspective. The values we’ve seen in the timberland transaction market would suggest that we’re seeing continued compression in discount rates for timberland assets, despite the inflationary environment and the higher interest rate environment we’re in today. I think it’s also important to note that we are seeing very strong pricing momentum and cash flow momentum in the south today. And as we talked about in the call, our composite stumpage pricing was up 30% on a year-over-year basis. In 2021, we had a record year for EBITDA in the south at about $120 million, and the midpoint of our guidance for full year 2022 is up about 25% from that. Obviously, we’ve gotten off to a really strong start here with Q1. So, if you’ve seen that we’re able to maintain this step change in pricing and cash flow, assuming that historical cap rate relationship persists, that suggests timberland values are poised to move up considerably, particularly for southern timberland values relative to any kind of legacy perspective. Traditionally, timberland has traded for $1,800 to $2,000 per acre. So that’s how I would address that as it relates to timberland values, obviously, it touches a lot of different aspects of our business as well. As we think about our balance sheet, as we noted in the prepared remarks, pro forma for the debt repayment early this year, our weighted average borrowing cost is roughly 2.7%, down from about 3.1% a year ago. We were able to lock in new long-term financing as well as restructure some of our existing debt on very favorable terms amid a much lower interest rate environment 12 to 18 months ago. Currently, we have no near-term maturities, or weighted average maturity, which has been extended to roughly seven years. And all of our debt is fixed until at least 2024, at which time only a small portion becomes unhedged. Even then, some even lower cost hedges will kick in as well. So there really isn’t much impact to our balance sheet over the near to medium term from higher interest rates. Overall, I think we’re in a really good spot in terms of where our balance sheet is, given the environment that we’re in.

Dave Nunes, President and CEO

Super, that’s a good summary, Mark. Very helpful. I will turn it over.

Operator, Operator

Our next question will come from Mark Weintraub with Seaport Research Partners. Your line is open.

Mark Weintraub, Analyst

Thank you. A couple of follow-on clarifications. Firstly, thanks for all the details on the regionally what’s going on in timber, drains and growth. So if you can just tell me, are there some areas where you operate, or what percentage of the areas where you operate would you say that drain has caught up to growth or is very close to it?

Mark Mchugh, Senior Vice President and Chief Financial Officer

Well, I’d say, Mark, if you think about the breakdown of the quartiles, we have over 60% in the top quartile, which has been balanced. When it’s balanced, we believe that ultimately translates to higher price elasticity in those regions, which are in kind of that coastal Georgia, Florida, South Carolina area where we’ve had very strong pricing response to rising lumber prices and that certainly contributed. Conversely, we have no land in the bottom quartile where you’ve got growth drain relationships in excess of two times. That’s really why you see our pricing gap out relative to broader average southern pricing markets, and it’s one of the things that we’ve been sort of pounding that message home for a number of years. The South is not homogenous, as Doug said. It’s very localized. We spent a lot of time trying to manage our footprint within that so that we’re positioned in some of those stronger markets.

Mark Weintraub, Analyst

Great. Second, thanks for sort of the color and light inflation. How does freight show up in your business? I realize it’s probably complicated, maybe varying from situation to situation, but how much of higher pricing that we’re seeing might be in part related to freight that you report, the higher prices you report?

Dave Nunes, President and CEO

Mark, just to clarify, are you talking about trucking or ocean freight?

Mark Weintraub, Analyst

Either or, but I was thinking more on the trucking side, but you bring up ocean freight. How would that be playing in as well?

Dave Nunes, President and CEO

Yes. The short answer on the trucking side, Mark, is that we report stumpage. So it’s net of the trucking in the South, or in the U.S. And so we’ll have delivered pricing that incorporates freight, but then we report that as net stumpage so that you can kind of see that on an apples to apples basis. In our export sales, we are selling that on a delivered basis. So we incur the export pricing, and that’s one of the reasons that you see a little more volatility out of New Zealand as you see freight rates move around a bit.

Mark Mchugh, Senior Vice President and Chief Financial Officer

We try to be pretty transparent around that in the supplemental materials, and we report our cutting haul costs by segment as well as our delivered volume by segment. You can back into our average cut and haul rates. Obviously, that’s going to vary, the mix of logging portion and the trucking portion by different regions. But it’s there in aggregate. We also report ocean freight costs where we’re doing exports, which at this point is all three of our segments.

Mark Weintraub, Analyst

Thanks for that clarification, because I really was also including the cut and haul. So the freight you’re referring to is just to the customer, but is there an element which you are picking up that gets captured in the cut and haul that is separate?

Mark Mchugh, Senior Vice President and Chief Financial Officer

No, I mean, again, in the South, we report stumpage prices. So that’s net of cut and haul. But some of that volume is delivered. So, on a top line basis, higher prices are going to reflect the increment of cut and haul. In the Pacific Northwest, we report delivered prices, but then you can kind of see the cut and haul and how that breaks down to a net stumpage realization. Yes, I'd say from a cost standpoint, New Zealand is clearly, you have the most moving pieces there because a lot of that volume is going export. Ocean freight costs, in particular, have moved up pretty considerably. We have certainly recouped those costs increases in the South and the Pacific Northwest, but in New Zealand, despite pretty high prices that have persisted for the last year, a lot of that was eaten up by higher ocean freight costs.

Mark Wilde, Analyst

Okay. And then, Dave, you mentioned integrated players bidding for timberland. Given what's going on with lumber, is that new, or are there some private players, etc., you're referencing? Or is that a changed dynamic? Because I hadn't heard that much about integrated players being aggressive in the bidding for timberland, but I could be wrong.

Dave Nunes, President and CEO

No, I think we've seen that over time on a fairly regular basis when you've got strong lumber cash flow. Lumber is a very cyclical business. As you've seen, you get to the tops of those cycles, you tend to see those players wait and secure more timberland for the future. That's been a pattern I've seen throughout my career. I just think right now, with the extraordinarily high lumber prices, you just have more players doing that.

Mark Wilde, Analyst

Okay. And then last, it seems that North American businesses did really well. I don't know if you’d characterize it as doing better than what you would have anticipated three months ago. On the flip side, New Zealand obviously struggles with what’s going on with China, etc. The question is, how dependent is making the guidance that indeed New Zealand gets better and China gets better? Or are you actually ahead of where you would have thought in North America, and it looks better at this juncture, providing at a minimum a cushion and frankly, upside? How would you characterize those two drivers from where you were three months ago?

Dave Nunes, President and CEO

Yes. I mean, all of the above. I would definitely say that we've gotten out of the gate very strong in the U.S. businesses. I'd certainly say that we're trending higher relative to our initial guidance in the South and the Pacific Northwest. Real estate obviously had a very strong Q1, and like we said in the prepared remarks, we feel comfortable that we're on pace to hit the adjusted EBITDA. Real estate's obviously always lumpy and transactions can come in and out of the pipeline. So we never want to get too aggressive in terms of our outlook on real estate this early in the year. In New Zealand, there are clearly still some headwinds. I mean, we had said even last quarter that we anticipated the second half of 2022 being stronger than the first half. Obviously, we’ve had some pretty significant COVID disruptions that affected our export business there. But we are relatively pleased with the Q1 result, all things considered. New Zealand's outcome will be contingent upon what happens in China and how that export market evolves during the year. At the end of the day, considering how these businesses are valued, I would trade EBITDA in New Zealand for EBITDA in the U.S. South any day because we are getting significantly more valuation leverage on those earnings. We are encouraged by how we started the year, especially because of the pricing momentum in the South, as it is our highest multiple business from a valuation standpoint. Our highest EBITDA to free cash flow conversion business across our portfolio. On balance, I think the year has started better than we anticipated. Obviously, we're ahead of most consensus estimates for Q1, but being just one quarter into the year, we've generally been reluctant to update our full-year guidance. Particularly this year, given that we still see some challenges in New Zealand.

Mark Mchugh, Senior Vice President and Chief Financial Officer

I'll say that. I just have that in New Zealand. We have seen domestically Q1 to Q2 prices rise with firm domestic demand against export uncertainty. So that's a good sign. As we discussed before, domestic pricing typically lags export pricing. New Zealand's back orders for lumber may be approximately 12 months, so some of these have a real long runway ahead of them in New Zealand. It’s not all dark; there are some bright spots in New Zealand domestically, as we talked about for when China comes out of COVID. I think there’s a real opportunity there.

Operator, Operator

Our next question will come from Buck Horne with Raymond James. Your line is open.

Buck Horne, Analyst

Hey, thanks. Good morning. I want to follow up. Given the competitive bidding environment you're seeing and the capital flowing into real estate, you mentioned kind of the diversifying mix of interested parties out there. I'm just wondering, are you beginning to see anyone pricing in carbon optionality into their underwriting? Or what kind of factor does carbon potential play into some of the bids you're seeing out there?

Dave Nunes, President and CEO

Yes, but I think generally, we'd say that it's not being explicitly factored into transactions. That said, I think it's contributing to some of the discount rate compression that we've seen. I think that in the markets that we operate in, and the people that we talk to, people are generally underwriting properties with timber valuations. I think where you're starting to see a little bit more carbon explicitly factored in is in some of the weaker markets that don't have the same optionality from a timber standpoint. But in terms of where we operate, where you've got strong timber markets, I'd say today it's not playing a meaningful role.

Buck Horne, Analyst

Got you. Okay, that's helpful. Thank you. And just curious not to make you speak too much at a turn on a competitor. But I was wondering if you've taken a look at the Weyerhaeuser tract in terms of the Carolinas, that transaction that was recently completed? Were you guys looking at that acreage or in the process, and any color you can provide on how you viewed that deal and the transaction price it went for?

Dave Nunes, President and CEO

Yes. I won't really comment on that specifically. I will just say that we look at everything. And so we see everything that's out there, and we're well aware of that. But I think from a confidentiality standpoint, we'll keep our observations to ourselves.

Mark Mchugh, Senior Vice President and Chief Financial Officer

What I would add to that, Mark, is that obviously that transaction that you're referring to came in at a very strong price, well over $3,000 an acre in the south, which is obviously well above any kind of average pricing you might see. But again, I think it's very reflective of what we've talked about considerably in the past. The U.S. South is not one big homogenous market. Different assets are located in different market areas with different growth rates and dynamics, different pricing dynamics, and different productivity characteristics. That property was a very high-quality property, and certainly the price was reflective of that quality.

Buck Horne, Analyst

Understood. That's helpful color. Thank you, Mark. Take care, guys.

Operator, Operator

Our next question will come from Paul Quinn with RBC Capital Markets. Your line is open.

Paul Quinn, Analyst

Yes, thanks very much. Morning, guys. So just question on overall guidance you gave for 2022 quarter ad timber volumes up 9% overall. Just wondering, given the very strong lumber environment which will probably lead to higher load pricing than we've seen in the U.S. South, whether there's any inclination to take those two guidance volumes up, especially in the U.S. South, inclusive of the Northwest, a bit higher than when you gave us last quarter.

Dave Nunes, President and CEO

I mean, look, we always try to be nimble and opportunistic as we flex volume to market conditions. That said, recognize that anytime we generally set our annual harvest targets at around our sustainable yield, subject to any kind of age class variation that we have in our portfolio. If you pull forward volume, you've got to pay that back at some point in the future. We feel as though we're in an inflationary timber price environment; we've obviously seen that here to start 2022. But I don't think that we'd be inclined to pull forward a lot of volume. Because, sitting here today, I don't think we see this trend reversing necessarily, and while it may seem like a great idea today, when next year we guide our volume down 5%, I'm sure that won't be well received. Thus, we generally operate at around that sustainable yield. More often than not, we're pulling back volume with a view that we're likely to see a near-term uptick in prices that we can recoup in a relatively short term, but pulling forward volume I think is always a little bit of a challenge relative to how that reflects in a longer-term outlook.

Paul Quinn, Analyst

Okay. If you're overriding future log prices that they maintain this upward momentum, what about real estate? Real estate markets across timber are strong for everybody; any idea of pulling forward opportunities there that might not present themselves in '23 or '24?

Dave Nunes, President and CEO

So if you break down our real estate portfolio, and first of all, touch on the improved development projects that we have. I think that's an area where buyers in this market, where you have very limited new sale inventory and you have a shortage of lots, we’re seeing essentially faster absorption than we had originally underwritten in those projects. Our challenge is to stay ahead of that by getting more lands entitled ahead of that demand. I think we have seen, in effect, a pulling forward of that demand in the improved development projects. And then as you shift to rural HBU sales, you have a mix, and keep in mind, we have a mix of properties that we have listed, and then we have unsolicited inquiries from properties that are not on the market. We tend to see an uptick in unsolicited offers in this market, and that’s natural. Our teams are used to that ebb and flow. There is probably an element to that that’s certainly present in these markets, and you see it both in the average pricing and the volume of activity.

Operator, Operator

Our next question will come from John Babcock with Bank of America. Your line is open.

John Babcock, Analyst

Good morning, and thanks for taking my questions. I'm really, really actually want to hear, actually, I think broadly could you talk about the extent to which the Russia-Ukraine conflict has impacted trade flows both in Europe and China? And also the extent to which there has been any sort of flow-through effect into the North American market?

Dave Nunes, President and CEO

Sure. At a really high level, Russia has supplied a couple of billion board feet of lumber into the European market, and as we see that get tightened and removed, it has the potential to offset a comparable 2 to 2.5 billion board feet of lumber exports into the U.S. So we have seen the beginnings of a slowdown in lumber exports from Europe into the U.S. as a result of that. So that ripple effect is starting to show up. I don't necessarily think you'll see a full elimination of European exports into the U.S., just because lumber prices are so strong. But that's one of the sort of second-order effects that we see. I think the other thing that you have in play is Russia is a very strong and leading supplier of lumber into the China market, and we don't anticipate that really changing. Russia, on their own, has implemented this year a ban on log exports. This is something they’ve been working on for several years; this started back in 2007 with an imposition of an export tariff. A few years ago, they announced the intention of cutting off all log exports, and they were roughly a 10% supplier into the China market, as was Australia. So when we talk about being bullish on China longer term, you’ve got two large historical suppliers, Australia and Russia, on the log side that aren't present. We’re pretty bullish about that. Additionally, the role that European logs and lumber have played coming into the Chinese market has been driven by salvage volume from Europe, and that salvage volume is now in decline. They've gone through their peak. That’s one of the reasons, as Doug mentioned, that you’ve seen a 50% decline in volumes coming out of Europe. It's because they’re on the downslope of that salvage volume. Then you also have the Russia-Ukraine war situation that’s providing more market opportunities in Europe. So we think we're pretty well-positioned for that, whether it's in the U.S., taking advantage of less supply going into China, or in our New Zealand markets.

John Babcock, Analyst

Okay. And then just as a clarification point. I mean, do you see any potential or risk that Russia ends up changing its policies? Given kind of what's going on today, do you think they'll still largely stick to their import/export policies as a potential?

Dave Nunes, President and CEO

I mean, it's hard to say. I think generally, this has been a path they've been on since '07. I'd be surprised if they reversed it, but who knows in this global market.

Mark Mchugh, Senior Vice President and Chief Financial Officer

Recognize, John, that the design of that policy is to stimulate lumber capacity on the Russian side of the border and to do the processing on that side of the border. Obviously, that would frustrate that objective to lift that ban.

Operator, Operator

Thank you. We are showing no further questions at this time.

Mark Mchugh, Senior Vice President and Chief Financial Officer

This is Mark Mchugh. I'd like to thank everybody for joining the call and please follow up with any questions. Thank you.

Operator, Operator

Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.