Welcome back, and thank you, dear reader for your patience. Investment markets in the past few years have been bizarre, to say the least, prompting a break from the sleepy investor relations of the past. Inverness has been researching manufacturing and customer services in the past year or so, and the long hiatus has been good. We think you will like where these next few posts will lead, particularly if you are a long-term or sustainability-oriented researcher or investor. Keep reading for more interesting research and ideas.

CatchMark Timber Trust is a real estate investment trust founded in Maryland in 2005 and headquartered in Atlanta, GA. The company owns and manages timberlands in the southern United States. As of December 31, 2021, CTT owned 370k acres, accounting for 14.6mm tons of saleable wood. With that timber, CatchMark manufactures pulp, paper, and wood products utilizing this harvestable 15mm tons. Of particular note to those readers looking for long-term and sustainable assets, CTT certainly takes a long view toward managing its assets, as a typical tree takes up to 10 years to mature.

This harvest segment accounts for approximately 70% of revenue, and with the price of lumber at $851 per 1000 ft. At about .1 pounds per cubic foot, one can math it out to an approximate value of $2.5 billion. These harvestable assets are not included on the balance sheet, other than in the form of the approximate $460mm in net PPE owned by the company. So, in Inverness’s opinion they constitute a nicely hidden asset, despite the recent attention paid during COVID to wood prices and the hot housing market.

The company does have a 16% revenue concentration in its Marht Timber agreements, with companies like WestRock required to purchase 370k tons, and Carolinas required to purchase 50k tons, locking in sales for 2022 of approximately 420k tons. The company sold to 61 customers in 2021, down from 74 in 2020 and 69 in 2019.

Competitively, owing to timber’s weight making some forms of shipment cost-prohibitive, and the specific locations in which it must be grown (large tracts of land, certain regions of the country, etc), wood products manufacturing facilities typically purchase within a 100 mile radius of the growing site. Thus, competition typically comes at times of land purchases or with government agencies owning land, where the company must then compete on price. CTT mitigates this risk by partnering with investors and utilizing its asset management arm to scout locations and successfully bid on desirable tracts. CTT does compete with Weyerhauser (WY), which owns 7 million acres in the southern US, as well as 4 more million in the PNW and Northeast.

Macroeconomically, CTT’s industry is quite cyclical, as you may have seen if you were paying attention to timber prices and the housing market in 2020-2022. The price of wood screamed higher in 2020 as people began their own DIY projects and home renovations, with some areas of the country seeing price spikes of 400% (!). That seems to have begun falling in recent weeks, down from highs in spring 2022.

Despite the screaming wood prices, CatchMark’s performance has been fairly flat, down 2% annually from 2019-2021. Basic measures of EBITDA have been in the $30-35mm range during the same period, which would be fine, but the Company has a boatload of debt on the books, about $300mm in 2021, pushing net leverage to about 7.7x. This is not great: banks in the private markets typically like to see leverage max out around 4-6x, with some asset base behind to support the company and their debt burden in a distressed scenario. CTT does have a decent asset base, as we have discussed.

The public markets are a little more forgiving with respect to debt burdens, with companies’ better access to capital markets enabling leverage to creep to 7-8-9x. However, as a conservative investor you might not really want to see your company saddled with a cash outflow (read: debt) burden nagging them for the next 7-8-9 years. But to each his own. CTT does pay a nice 3-4% dividend annually to satiate your need for income while you await the company’s debt repayment and for its trees to mature.

All in all, CTT exhibits a good dividend payment scheme despite the high debt burden. Despite the stiff competition, CTT will see continued growth as its asset management group continues to grow in its Southeast US forestry work, and demand for US construction morphs after COVID. We think the timber assets are a strong value-add to any portfolio focused on sustainability and long-term growth, and you should see it remain stable owing to its quiet REIT status.

Disclosure: Inverness Holdings holds a small interest in CTT as part of a long-term portfolio income strategy.

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