Potlatch Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

Key Takeaways

  • Negative Sentiment: Q1 adjusted EBITDA was $30 million, down from $41 million in Q4, primarily due to fewer rural real estate transactions.
  • Positive Sentiment: The Wood Products segment broke even in Q1 versus a $6 million loss in Q4, driven by a ~4% increase in average lumber prices and strong shipment volumes.
  • Positive Sentiment: The $131 million Waldo, Arkansas sawmill modernization and expansion remains on schedule and within budget for early Q3 startup, adding 85 million board feet of annual capacity and projected to generate ~$25 million in incremental EBITDA.
  • Positive Sentiment: Natural Climate Solutions initiatives grew with solar land sale and lease option contracts valued at nearly $200 million NPV (aiming for >$300 million by year-end) and a carbon credit project targeting >500,000 credits in year one at $20–30/ton.
  • Positive Sentiment: Real Estate segment will benefit from a planned Q2 sale of 34,000 acres of Southern timberlands for $58 million, expected to significantly boost rural land EBITDA.
AI Generated. May Contain Errors.
Earnings Conference Call
Potlatch Q1 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlodgeDeltic First Quarter 2024 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.

Operator

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

Speaker 1

Good morning, and welcome to PotlatchDeltic's Q1 2024 Earnings Conference Call. Joining me on the call is Eric Kremers, PotlatchDeltic's President and Chief Executive Officer. This call will contain forward looking statements. Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC regarding the risks associated with these forward statements. Also, please note that a reconciliation of non GAAP measures can be found in the appendix to the presentation slides and on our website at

Speaker 2

www.hotlatchdeltic.com.

Speaker 1

I'll turn the call over to Eric for some comments and then I will review our Q1 results and our outlook. Well, thank you, Wayne, and good morning, everyone. Looking at our Q1 results, we reported total adjusted EBITDA of $30,000,000 after the market closed yesterday. I'm pleased with the solid operational performance delivered by our team despite market and weather related challenges during the quarter. Our Timberlands segment generated adjusted EBITDA of $35,000,000 in the Q1.

Speaker 1

We harvested 1,900,000 tons achieving the upper range of our Q1 harvest plan. Our Wood Products segment's adjusted EBITDA was breakeven in the Q1 compared to a loss of $6,000,000 in the 4th quarter. The year kicked off to a challenging start for lumber markets as severe weather across the country restricted construction activity in January. Despite this difficult start to the typical inventory building season, lumber prices modestly trended upward throughout the Q1, driving the improvement in our Wood Products results. As for our elevated 2024 capital plan, we are approaching the final phases of our $131,000,000 Waldo, Arkansas Sawmill Modernization and Expansion project.

Speaker 1

Vertical construction and equipment installation is well underway with project completion continuing to remain on track and within budget for start up early in Q3. Following completion of the project, we anticipate a ramp up in production through Q4 and into next year. Based on other brownfield additions in the industry we have seen, we expect it will take 6 to 12 months to reach the mill's new capacity of 275,000,000 board feet per year. As a reminder, the project will increase the mill's annual capacity by 85,000,000 board feet. It will improve recovery by 6% and reduce cash processing costs by about 30%.

Speaker 1

Once the ramp up phase is completed, we expect the mill to generate approximately $25,000,000 of incremental EBITDA annually. Our Real Estate segment generated $6,000,000 of adjusted EBITDA in the Q1. On the development side of the business, we sold 24 residential lots at an average price of about $120,000 per lot in our Chenal Valley master plan community in Little Rock, Arkansas. On the rural side of our real estate business, we completed the sale of 1800 acres at nearly $3,100 an acre. It's important to note that the volume of transactions in rural real estate can fluctuate significantly from quarter to quarter.

Speaker 1

Although we experienced a subdued level of rural real estate transactions in this period, we expect the sales pace to accelerate as we move through the Q2. The interest in our rural land remains quite high. The highlight of our anticipated rural real estate activity in the upcoming Q2 includes the previously announced deal to sell 34,000 acres of Southern Plantation Timberlands, which have an average age of just under 4 years for a total of $58,000,000 or $1700 per acre. Now let me transition to our emerging natural climate solutions business. Our collaboration with solar developers continues to grow as evidenced by the optioning of an additional solar deal in the Q1.

Speaker 1

Currently, our option contracts for solar land sales and leases are valued at nearly $200,000,000 on a net present value basis, representing roughly 1% of our total timberland ownership. Additionally, we are in the process of finalizing negotiations on several more lease options. At the end of 2024, we expect to have approximately 30,000 acres of solar land sale and lease options under contract valued at over $300,000,000 on a net present value basis. Our Southern Timberland Carbon Credit Initiative continues to move forward. We're anticipating generating in excess of 500,000 carbon credits in the 1st year with an estimated 100,000 credits each year for at least a decade thereafter.

Speaker 1

The extensive scope and high quality nature of these credits necessitates a thorough verification process, which is lengthy and complex. We have initiated preliminary marketing activities and are targeting placement and sale of credits in the market towards the end of the year. Nonetheless, the completion of this project timeline is heavily dependent on various third parties involved in the accreditation process. We've also identified potentially valuable prospects in carbon capture and storage as well as bioenergy. These opportunities along with other natural climate solutions are currently under discussion with various other parties.

Speaker 1

Although they are not imminent, we are optimistic as to their potential value. Furthermore, we continue to believe that all of these natural climate solutions capital allocation opportunities to grow shareholder value over time. Timberland M and A was our main priority during the quarter. As we previously announced, in Q1, we acquired 16,000 acres of high quality mature timberlands in Arkansas through a privately negotiated 1 on 1 transaction for $31,000,000 or about $1900 per acre. Also the acquired Timberland has strong rural real estate potential including solar opportunities.

Speaker 1

We employ stringent criteria when evaluating Timberland M and A and for this particular transaction, we expect to achieve an approximate 8% real IRR, which is well above our cost of capital. We did not purchase any shares in the Q1. However, share remain an important component of our capital allocation strategy, especially when we are trading well below our estimated NAV. We consistently assess and prioritize our capital allocation options taking into consideration the economic backdrop. We have $125,000,000 remaining on our $200,000,000 share repurchase authorization.

Speaker 1

Turning our attention to the U. S. Housing market, existing home inventories for sale continue to persistently hover at historically low levels. The scarcity in this segment of the market poses challenges in meeting housing demand. However, new housing has emerged with an affordability advantage over existing housing.

Speaker 1

Large homebuilders are enticing buyers with rate buy down incentives, making new home construction more financially attractive, especially given today's mortgage rate environment. Consequently, new single family residential construction demonstrated resilience by maintaining over 1,000,000 starts for the 5th consecutive month, providing some level of stability to the market. In addition, homebuilder confidence has been steady and in positive territory in spite of the recent uptick in mortgage rates. Nonetheless, new residential construction continues to underperform as challenges in the economy persist, driven by the uncertainty of inflation in the direction of interest rates. In particular, the multifamily segment of new residential housing has been under pressure, in large part due to excessive financing costs.

Speaker 1

The timing and pace of potential rate cuts by the Federal Reserve add to the level of uncertainty. However, we anticipate that once rate cuts begin to decline once rates begin to decline possibly later this year, it will likely spur pent up housing demand ultimately benefiting lumber markets. Longer term, we retain a positive outlook on housing fundamentals and underlying shortage of housing stock, which some pundits estimate of 4,000,000 units and favorable demographic trends will provide tailwinds to the housing market. We continue to expect that U. S.

Speaker 1

Housing starts will return to levels above the long term average of 1,500,000 units per year once mortgage rates decline and homes become more affordable. Turning to the repair and remodel segment, demand in this market appears to have moderated somewhat with some weakness in the DIY segment. That said, our home center business remains solid. The overall resilience in the repair and remodel market is underpinned by several factors, including strong consumer balance sheets, record home equity levels across the U. S, steady labor markets and existing homeowners staying in their homes due to the prevailing higher interest rate environment.

Speaker 1

Looking ahead, long term trends indicate that the fundamentals of the repair to model market will be favorable. This optimism is bolstered by an aging housing stock leading to increased repair activity as well as elevated home equity levels and the ongoing prevalence towards remote work. In closing, we remain committed to enhancing operational and financial performance across all of our business segments. As part of this commitment, we are diligently focused on completing our strategic modernization and expansion project at the Waldo Sawmill on schedule and within budget. Also, returning capital to our shareholders remains a core tenant of this strategy.

Speaker 1

With our investment grade balance sheet and ample liquidity, we possess the flexibility and a solid foundation to continue creating long term shareholder value. I will now turn it over to Wayne to discuss our Q1 results and our outlook. Thank you, Eric. Starting with Page 4 of the slides, adjusted EBITDA was $30,000,000 in the first quarter compared to $41,000,000 in the 4th quarter. The sequential quarter over quarter decline in EBITDA resulted from fewer rural real estate sales, partially offset by improved Wood Products segment results stemming from higher average lumber prices.

Speaker 1

I will now review each of our operating segments and provide more color on our Q1 results. Information for our Timberland segment is displayed on slides 5 through 7. The segment's adjusted EBITDA increased from $33,000,000 in the 4th quarter to $35,000,000 in the 1st quarter. EBITDA benefited from improved per unit log and haul costs and seasonally lower forest management costs, which more than offset a decline in Idaho sawlog prices. Our sawlog harvest volume in Idaho is 327,000 tons in the first quarter, which is consistent with our 4th quarter harvest volume.

Speaker 1

Harvest volumes in the Q1 were adversely impacted by mild winter weather limiting available holidays. Our Idaho sawlog prices were 5% lower on a per ton basis in the Q1 compared to the 4th quarter. The price decline is primarily a result of the effect of seasonally heavier logs. Turning to the South, we harvested 1,600,000 tons in the 1st quarter. This level of activity slightly exceeded our Q1 plant harvest volume as we benefited from favorable logging conditions.

Speaker 1

Additionally, demand for sawlogs and pulpwood in the south generally remained stable throughout the quarter. Our Southern sawlog prices were 3% lower in the Q1 compared to the 4th quarter. The decline was primarily driven by a seasonally lower mix of hardwood sawlogs and higher mix of smaller diameter softwood sawlogs. Moving to Wood Products on Slides 89, adjusted EBITDA increased from a loss of $6,000,000 in the 4th quarter to breakeven in the Q1. Higher average lumber prices and lower per unit cash processing costs drove the improvement.

Speaker 1

Our average lumber price realizations increased $15 per 1,000 board feet or approximately 4% in the quarter. This price increase is comparable to the Random Lengths Framing Lumber Composite on a percentage basis. Our lumber prices increased each month during the quarter. Specifically, our average lumber price realizations per 1,000 board feet were $405 in January, dollars 4.27 in February and $4.43 in March. Lumber shipments in Q1 totaled 271,000,000 board feet compared to 285,000,000 board feet in Q4 of last year.

Speaker 1

The sequentially lower shipment volume in Q1 was influenced by seasonal factors, but nonetheless marks the company's 2nd highest Q1 shipment volume on record. Shifting to Real Estate on Slides 1011, the segment's adjusted EBITDA was $6,000,000 in the first quarter compared to $22,000,000 in the 4th quarter. EBITDA generated by our rural real estate business decreased due to the sale of fewer acres. EBITDA generated by our Chennala Valley master plan community declined primarily due to the lack of commercial land sales this quarter. Commercial sales tend to be lumpy, but our pipeline of potential future land sale opportunities continues to remain attractive.

Speaker 1

We closed on the sale of 24 residential lots in the Q1 at a 12% higher average price than in the 4th quarter due to a different mix of lot price points. Turning to capital structure, which is summarized on Slide 12, our total liquidity was $479,000,000 This amount includes $180,000,000 of cash on our balance sheet as well as availability on our undrawn revolver. This level of liquidity is after utilizing cash on hand to acquire 16,000 acres of bolt on timberlands in Arkansas for $31,000,000 as Eric previously discussed. We have $176,000,000 of debt that is scheduled to mature in October November this year. Our decision to pay off a portion or refinance all of this debt will occur later this year.

Speaker 1

We still have $200,000,000 of notional forward swaps valued at $36,000,000 on our balance sheet, which we can deploy to issue debt at below market rates. Capital expenditures were $14,000,000 in the Q1. That amount includes real estate development expenditures which are included in cash from operations in our cash flow statement. For the full year, we continue to expect CapEx spend of $100,000,000 to $110,000,000 excluding potential Timberland acquisitions. That estimate includes approximately $44,000,000 for the final installments on the Waldo, Arkansas Sawmill Modernization Expansion Project.

Speaker 1

Harvest Harvest volumes in the North are planned to be seasonally lower in the 2nd quarter compared to the 1st quarter due to spring breakup. We expect sawlog prices to increase approximately 6% in the 2nd quarter due to resetting the price of index volume to reflect improved Q1 lumber prices and seasonally lighter logs. In the South, we plan to harvest approximately 1,400,000 tons in the 2nd quarter. We expect our southern sawlog prices to decrease modestly, primarily due to seasonally smaller sawlogs in the mix. We plan to ship 275,000,000 to 285,000,000 board feet of lumber in the 2nd quarter.

Speaker 1

Our average lumber price thus far in the 2nd quarter is flat compared to our Q1 average lumber price. This is based on approximately 115,000,000 board feet of lumber. As a reminder, a $10 per 1,000 board foot change in lumber price equals approximately $12,000,000 of consolidated EBITDA for us on an annual basis. Shifting to real estate, we expect to sell approximately 43,000 acres of rural land, which includes the sale of 34,000 Southern Acres for $58,000,000 as Eric previously mentioned. Additionally, we expect to sell approximately 24 Chenoa Valley residential lots in the Q2.

Speaker 1

Additional real estate details are provided on the slide. Overall, we expect our total adjusted EBITDA will be higher in the 2nd quarter, primarily attributable to more rural land sales, driven by the Southern land sale to FIA. That concludes our prepared remarks. Dee, I would now like to open the call to Q and A.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Anthony Pettinari from Citi. Please ask your question.

Speaker 1

Good morning.

Speaker 2

Good morning, Anthony.

Speaker 3

Hey, obviously, lumber prices are pretty dynamic and it's early in the year. But I'm just wondering, as you think about the kind of cash flow that you could generate this year and with the spending on Waldo, can you just talk a little bit more around kind of capital allocation and supporting the dividend, potential opportunities to delever at a time when the stock does seem like it's trading at maybe near record discount to NAV. Just wondering if you could talk a little bit more about that, given it seems like there's a few options here.

Speaker 1

Yes. Thanks for the question, Anthony. So regarding capital allocation, I mean, I think 1st and foremost, we're going to protect our balance sheet. We're going to maintain investment grade status. But moving beyond that, as a REIT, we view our dividend as sacrosanct or nearly sacrosanct.

Speaker 1

So that's always going to be the highest priority for us. I will say that as our stock drifts lower in a tough lumber market environment, share repurchases look more attractive to us than otherwise. But I would also say that we're constantly thinking about M and A. And in the Q1, we completed what we call Project Ridgewood, our $31,000,000 acquisition in Arkansas. And I think that kind of pushed share repurchases to the back burner a little bit.

Speaker 1

We also like investing in our mills quite a bit. We like Wood Products CapEx. Obviously, it might not feel good doing it right now and we're in such a tough lumber price environment, but lumber prices are they're historically very volatile and this too shall pass. The industry cannot continue to run at breakeven or for a lot of mills below breakeven levels. So continuing to keep our fleet of mills as 1st or second quartile mills is always going to be our objective assuming we can find projects to generate the needed returns.

Speaker 1

So, I think that's CapEx is always given strong consideration amongst our capital allocation levers. Regarding debt pay down, I think it all comes down to what our refinance costs are going to be and how do those refinance costs compare to other options that we have. We're just now really getting into those discussions with our banking partners. And so it's a little premature to speak to delevering at this point. And we also have those, as Wayne mentioned, we still have $200,000,000 of swaps sitting on our balance sheet that we can deploy to bring down our borrowing costs.

Speaker 1

So it's a little bit premature to talk about delevering at this point, but certainly that'll be in the mix of our capital allocation decisions.

Speaker 3

Got it. Got it. That's very helpful. And then just picking up on one thing you mentioned, I mean, if you're running EBITDA breakeven in lumber, presumably there is a lot of other producers who are burning cash here. And obviously not asking you to speak for other competitors here, but I'm just wondering if you are surprised that we haven't seen more capacity curtailments in lumber year to date.

Speaker 3

Are you starting to see them? And just any kind of industry dynamics that would keep some of this capacity on maybe for longer? Is there an import dynamic? I'm just wondering if you could talk generally about the supply side of supply demand in lumber?

Speaker 1

Yes, that's a great question, Anthony. So capacity utilization across the industry, I think it's running in the high 70% kind of range, which is frankly quite low. It hasn't been this low since, I don't know, 2012, 2013 something like that. Relative to demand, there is a lot of excess supply in the industry, particularly in Southern Yellow Pine where we've seen a lot of new capacity come online. So far this year, we have seen 9 mills close-up and several were in BC, but you also had some in the Pacific Northwest and then you had some in the South.

Speaker 1

But given where we sit today with pricing, where it's at today, and I've seen cost curves for the industry, there's no doubt that there are a lot of mills that are hemorrhaging cash right now. And so I would not be surprised if we see more curtailments in the coming months, especially when you take into consideration the fact that duties are going up on Canadian lumber from 8% to 14% here in just a couple of months. So there's still more pain yet to be felt. So yes, to answer your question, I'm almost certain there'll be more curtailments. Everybody's got to make their own decision, but nobody likes hemorrhaging cash, that's for sure.

Speaker 1

Got it. Got it. That's very helpful. I'll turn it over.

Operator

Our next question comes from the line of Ketan Mamtora from BMO Capital Markets. Please ask your question.

Speaker 4

Thank you and good morning everyone.

Speaker 1

Good morning,

Speaker 4

Chris. Maybe can you talk a little bit about sort of your operating rate in lumber in the Q1? And perhaps talk about sort of how your order books are trending thus far, given that we are pretty close, if not already in the busiest time of the year?

Speaker 1

Yes. So, Ketan, we've been running our mills as hard as we possibly can, producing as much volume as we can and it's because we've got good efficient mills. Now you might look at it and say, wow, you had breakeven EBITDA, why would you bother running so hard? But you have to take it one step further because there are administration costs running your mills. If you look at each mill individually, each mill individually can make money.

Speaker 1

But then you add up the earnings from those individual mills and they have to offset administration costs. After you offset those administration costs, we ran at a breakeven level in the Q1. So the point is that the mills themselves are individually are doing just fine, barely doing just fine. But in this environment, it still makes sense for us to run as hard as we can. Now I will say, our mills are better than a lot of mills.

Speaker 1

And I generally know where they sit on the cost curve as it relates to industry wide competition. And I know that there are a lot of mills that are not covering their cash variable costs. And those are the mills I'm sure the owners are having tough discussions about what to do. So for us, we're continuing to run as hard as we can, but I'm sure it's a different discussion at other mills.

Speaker 4

Got it. That's helpful. And how are your order books for this time of the year, Eric, in lumber?

Speaker 1

I would say our order books are they're adequate. They're not what will generally happen is when we have a point of view that markets are going to get better, we'll keep our order book short, basically saving lumber that we can sell what we think is going to be at a higher price. When prices are really strong, we'll tend to extend our order books and sell lumber out as much as, I don't know, 4 weeks out into the future. Today, our order books are relatively short. And the reason it's short is not necessarily because of lack of demand.

Speaker 1

It's because our sense is that things are bottoming, and we want to save lumber to sell at a future higher price. Does that make sense?

Speaker 4

It does. No, that's helpful. And then just one last one from me. I want to come back to capital allocation again. You talked about sort of during Q1, you were going through the asset purchase and to that to some degree that sort of push the share repurchases to the back burner.

Speaker 4

So as we sort of think about as you move past that, how do you approach that? And I'm just curious, how does this sort of the net leverage, which is of course driven by depressed lumber prices, which is sitting at 5x right now. How does that sort of influence sort of your decision as you think about share repurchases in particular?

Speaker 1

Yes. So, Keith, when we started out the year, We were pretty optimistic on where markets were headed. You think back, I think the market was expecting 6 interest rate cuts by the Federal Reserve by the end of the year. Suddenly that went to 3 interest rate cuts. Last I heard, we were down to maybe 1 interest rate cut perhaps in December.

Speaker 1

And I don't know, after some employment cost index data this morning, we may be at 0 cuts for the year. So what kind of an economic environment are we in? Is this we're going to have a hard landing, we're going to have a soft landing, is there going to be no landing? It's really murky what the outlook for the economy is right now. And so it's hard to have a lot of conviction about where markets are headed with this kind of a backdrop.

Speaker 1

So, I think that's one of the factors that weighed into the discussion. The Board meets every quarter to talk about share repurchases and certainly that'll be a topic of conversation at an upcoming board meeting. Now I would also tell you that what we look at, we don't we think about our 5 year plan, our 5 year model for what our dividend ought to be and what leverage ought to be. There are going to be periods of time where markets are blowing and going like they were during COVID and there are going to be periods of time where the industry gets stressed and we get stressed like we are right now. This too shall pass.

Speaker 1

I do think markets are going to get better. I do think lumber markets are going to get better. I do think supply is going to come down. I do think demand is going to come back. Capacity utilization in the industry will come back and earnings are going to come back to our wooden products business.

Speaker 1

And I would also add that as I think about interest coverage and leverage and all that, our current forecast has our cash balances running higher than where they are today by the end of the year. So I feel pretty good about where we're at in the environment. The only question I have is where is the economy headed? It's very, very unclear at this stage.

Speaker 4

That's fair. And do you still have a 10b5-1 program in place, Eric?

Speaker 1

Yes, we still have 1 in place.

Speaker 4

Okay, perfect. I'll turn it over. Thanks for all the clarifications.

Speaker 1

Yes, thanks.

Operator

Our next question comes from the line of Mark Cointreau from Seaport Research Partners. Please go ahead.

Speaker 5

Thank you. First question, so in the slides, it indicates you're expecting higher lumber prices 2QV, 1Q. You mentioned that they're, to date flat and presumably the spot is lower than where it was on average. So that seems to convey some optimism that there's going to be some improvement. Can you kind of just clarify because that'd be pretty soon?

Speaker 5

Totally understand the conversation about why we're at lows or toward lows over the cycle. What gives the confidence that we're going to get some improvement hopefully sooner rather than later?

Speaker 1

Yes, we do expect prices to improve and we do think we're feeling some weakness right now, particularly in multifamily. We've seen project finance costs move up. Also R and R and treated markets in particular in the South is under a bit of pressure. I think the one thing that gives me hope or optimism Mark is that, we are moving into the spring demand build time of the year. Markets haven't completely fallen out of bed.

Speaker 1

Demand has not fallen completely out of bed. Single family starts are hanging in there at over a million as we said for several months in a row now. I think Home Depot said their comp store sales are going to be down 1% for the year. I think Lowe's was maybe -2% to -3% for the year. So things haven't completely fallen out of bed.

Speaker 1

And as we get into the summertime and people start taking on more and more repair and remodel projects, I think demand will come back and there's an opportunity for prices to move higher. It's just it's hard for me to see prices not getting better, given that so many mills across North America are below breakeven right now.

Speaker 5

Totally understood. But just so there's nothing though that you're seeing right in this moment. I'm over reading it if I conclude that you're seeing something that's going to lead to like a near term improvement necessarily. The reasons you gave all very valid, although the timing I guess unclear on most of them or am I missing something?

Speaker 1

Yes. I mean our forecast as things dip in May and then they come back in June. We'll see.

Speaker 5

Okay. And then second, kind of on the almost the flip side of this is nice to see Solog prices expected to be up 6%. I guess the strength that we've seen in the West, I would have thought there would have been a bigger increase given the way it lags through. Maybe if there's just a word on the dynamics or if there's something that's going on there that wouldn't be obviously apparent.

Speaker 1

Yes. I mean looking at the north on the sawlog prices, I think it did actually trend pretty close to where we see the when you lag the random lengths to where we came out, I think it paralleled fairly close actually. So, really the story was for the quarter just the dynamics around heavier logs. It was really the density issue more than the indexing pricing itself.

Speaker 5

Yes. Wayne, I apologize. I meant the 2nd quarter outlook, the 6% improvement when I would have thought you would have been positioned for a bigger increase given what happened in like inland hemlock and etcetera over and then the lag. I apologize, if we can take this offline and go through it. Yes.

Speaker 1

Well, yes, I mean as it looks for the outlook where we head into Q2, I think there is again you've got the seasonal lighter log mix. There is an improvement, but I think the other consideration is there is the lag there, but you also have to think about where spring breakup is and there's no hauling in that period as well. And so the timing of the lag is a bit extended. So I think that factors in. Okay.

Speaker 5

And then lastly, so when is the FIA sale expected to be completed?

Speaker 1

2nd quarter? Yes.

Speaker 5

Can you give us kind of more specifically within the quarter? Is that very soon or it might be toward the end of the quarter?

Speaker 1

I mean mid to later in the quarter is the expectation.

Speaker 5

Okay, great. And then

Speaker 1

presumably,

Speaker 5

does that then is that likely to put share repurchase more to the front burner given, I guess you've given the explanation in the Q1 that you had the acquisition and now the share price is lower and you'd have the money coming in or I mean is the consideration of how things work with the refi need to be kept in, as a part of the equation as well? How would you have us kind of understand your sentiment on priorities as that $58,000,000 comes in?

Speaker 1

I think that clearly moves the likelihood of share repurchase a little bit more forward. But you got to remember there's a couple of other big factors that are in the back of our minds. One is the Waldo startup. How does that go? Because we've seen some mills in the south have disastrous startups and others have gone well.

Speaker 1

We expect ours to go well, but that remains a little bit of an unknown. I'd also like to see lumber markets improve. We'll see how that goes. And then part of it's going to be what happens with the refinance equation, what happens to our view on our expected borrowing costs. So there's a couple of moving pieces there, but certainly all things equal completing the FIA sale will de risk things for us.

Speaker 4

Okay. Appreciate that. Thank you.

Operator

Our next question comes from the line of Matthew McElher from RBC Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my questions.

Speaker 2

Good morning.

Speaker 6

First, I think last quarter you talked about modest signs of slowing and take up of lots in Chanel Valley. Your guidance for 24 lots in Q2 and 130 lots for 2024 seems to imply a significant pickup in sales in the second half of the year. Can you just talk about the visibility you might have to stronger sales in Q3 and Q4?

Speaker 1

Yes, Matt, this is Wayne. We the timing of our outlook on real estate lots is really driven off of inventory availability. So we expect to bring more lots to market in the later half of the year. I mean, we try to we really closely manage our CapEx for real estate. We don't try to get out over our skis and create excess inventory.

Speaker 1

So we really try to stay just in front of demand. And yes, our outlook for the rest of the year is when we were bringing a couple sub developments to the market. Those will be completed here in the coming months and then be available for market later this year. So that's really a it's a lot availability and what we're bringing to market and that's what's driving the timing.

Speaker 6

Great. Thanks for the detail there. And then I was wondering if you could just provide a bit more commentary on the state of the timberlands markets for M and A. Maybe just what you're seeing, whether there's been any changes in sentiment in the markets and what have you maybe since your last update?

Speaker 1

Yes. So I think the best way to describe it is that the market is relatively quiet right now. I would say in general, dollars 3,000,000 to $4,000,000,000 to $4,000,000,000 of timberland changes hands each year and we'll see where we wind up this year. But I think it's going to wind up being a relatively light year. So far, the trade rags in the industry have highlighted

Speaker 2

the fact that, we've had 4 busted deals in the industry so far this year, deals that did not get done.

Speaker 1

Now I would Now I would also say that they were generally speaking, from what I know about them, they were very low quality deals. So it's no surprise that they didn't get done. But I do think demand for high quality timberland remains quite high. And it's just that right now there isn't a lot of high quality timberland on the market. So we'll see how the market shakes out, but I think there's no doubt demand is still out there.

Speaker 6

Great. Thanks for that. That's all on my end. I'll turn it back. Thanks.

Speaker 1

Thanks.

Operator

Our next question comes from the line of Nikko Pizzini from Truist Securities. Please ask your question.

Speaker 2

Hi, guys. This is Nico on for Mike Ruxlin today.

Speaker 1

Good morning, Justin.

Speaker 7

Good morning.

Speaker 2

Good morning. First off, can you talk about any early indications on demand for carbon credits realizing that you're a little ways away from actually placing in the market? And then has that changed at all since you began pursuing forced carbon credits?

Speaker 1

No. Our carbon credit deal, it's going to be a voluntary project and we've had price discussions with our broker and with the party that we think is going to wind up buying them and we think the price talk is still in this $20 to 30 a ton range and we feel pretty good about it.

Speaker 7

I don't know, Wayne, do you have anything to add to that?

Speaker 1

Yes. No, I think, again, it's more of the updates we gave in the past, we're still on track and moving the project forward, trying to target later this year, but we'll see it's a complex and we're developing high quality credits and that takes time and we're also dependent on third parties that are involved in the accreditation process. So ultimately that will drive completion. But yes, definitely we think there's strong demand there.

Speaker 2

Understood. Thank you for that. And then just realizing that so far solar and carbon credits seem to be the more mature NCS initiatives, not just for pyroelectric in the industry. Is there any can you give any update or maybe an estimate of when we might see those other initiatives come into play like bioenergy or carbon capture sequestration?

Speaker 1

Yes. I mean, certainly, we're in the early innings on biomass, maybe brine lithium. We're looking at carbon storage and sequestration. Those are we're developing all those opportunities. We continue to make progress.

Speaker 1

I think it's difficult to put an exact timeframe on where we would see monetizing some of these type of projects, but we're all we're very active in each one of those and pursuing each of those opportunities with outside parties. We were under some NDAs as it relates to CCS as we continue to look at that opportunity. I think we estimate on CCS, we may have around or up to about 150,000 acres that are suitable for CCS. And we're active in looking at that geological formations that I think will support CCS. So we're active in all those areas and aggressively pursuing each of those opportunities.

Speaker 2

Got it. Thank you, guys. I'll turn it over. Thanks.

Operator

Our next question comes from the line of George Staphos from Bank of America. Please ask your question.

Speaker 7

Hi, thanks everybody. Good morning.

Speaker 2

Good morning.

Speaker 1

I just

Speaker 5

want to come how are

Speaker 7

you doing? So the harvest levels in the Q1 were a touch better I think than your initial guidance. Was that just a weight issue or are there other things that were driving the slightly better harvest profile? And then maybe staying on that same topic, as we look to the South and again, we all know that these are local markets. We can't look monolithically.

Speaker 7

Nonetheless, pricing remains relatively flat in the South. It's been relatively flat for a long time. When do you see the inflection coming in timber pricing in the South?

Speaker 1

Yes, George. So your first question on harvest volume, yes, we were, I would say, slightly ahead in the South this Q1 compared to what we had planned and we had just favorable harvest conditions and we took advantage of those conditions and it drove a slight uptick in our harvest volume, but we continue to maintain our overall outlook for harvest volumes for the year, somewhere around probably $1,600,000 Yes. So no real change there. I think it's just taking advantage of conditions when you can. And as far as pricing is concerned, yes, I think you're right.

Speaker 1

We've been in a pretty stable environment. I think that's our near term outlook both on the demand side and the pricing side. Even when we look across kind of digging deeper into both of our markets, whether that's kind of on the Gulf South side or the Southeast, I think we see pricing relatively stable across the board. When that can turn, yes, I think as markets continue to tension, especially in the southeast side where we see a premium because markets are more tension. I think when lumber demand picks up those tension markets, you'll see a bigger increase in pricing in that region probably compared to where we're a little bit less tension in the Gulf South region.

Speaker 1

So that'll probably lag. But there is additional capacity coming in line. So timing is difficult to ultimately say, but we do think those markets will tension over time as well. But, yes, I think as soon as we see demand picking up, you could see those especially those tension markets really turning around much quicker.

Speaker 7

I mean the log in the lumber markets have decoupled in the South for a long time. Is your view that we're getting to a point maybe within the next year that they will recouple? And so as we start to see lumber prices moving higher, we actually will see a higher propensity to pay for logs. Or is that still kind of too hard to call at this juncture? Yes.

Speaker 7

I think

Speaker 1

that's a bit difficult. I mean, look, we haven't price hasn't been fairly stable. When we saw the historic run up in lumber prices, we didn't see a huge increase in log prices in the South. I mean, but we continue to add capacity in the South. And I think as those tension, you'll see prices come up over time, but it's difficult to pinpoint exactly when that will be.

Speaker 1

I mean, there's a lot of variables involved. And I think, George, you got to step back and think about like what happened after the great financial crisis. All those mills closed in the South, and you think about what happened to growth to drain, the forest was growing much faster than the harvest each year. And so a lot of standing inventory went on the stump each and every year for 15 years. And the latest industry data that I saw, it had drain actually equaling or maybe even slightly exceeding growth.

Speaker 1

So now the standing timber inventory in the South has now reached an equilibrium. And if you look out over the next 5 years, in fact, drain is going to be higher than growth. So you'll start to see those standing inventories come back down again. Now to Wayne's point, every market is going to be a little bit different, right? The already tensioned markets are going to show more tension, assuming lumber demand continues to improve, and you'll see those tensioned markets show better price appreciation than the non tensioned markets.

Speaker 1

But the reality is even the non tensioned markets are expected to get better over the coming years as the drain exceeds growth.

Speaker 7

Would you be maybe more willing now than in past years to consider selling in areas where you're not going to see that tension in the next several years given that again we're 15 plus years since the crisis?

Speaker 1

Well, as portfolio managers, we're always open to selling. I mean, just take a look at our FIA transaction where we sold 4 year old trees for $1700 an acre. That's good core timberland for sure, but it's just really young trees that have no cash flows or virtually no cash flows for 20 some years. So we're always open to the idea of selling. But I think the thing you got to keep in mind is you don't want to be just in the tension markets.

Speaker 1

Look at the pullback that we've just had over the past year or 2. Which markets have taken it the hardest in the South? It's been those most tensioned markets because those are the areas where capacity comes out first. So I think you want to play in both tensioned and non tensioned markets frankly. The sawmill expansions, the additions that we're seeing, they tend to be in more of the weaker markets and the fact that capacity is going in those weaker markets is what in turn is going to drive log prices higher.

Speaker 1

But at the end of the day, like I said at the start, we're portfolio managers. At the right price, we'll sell just about anything.

Speaker 7

No, understood. And I appreciate the thoughts on that, Eric. I guess my final question, I'll turn it over. Recognizing the land sales will make for a nicely improved 2Q versus 1Q. If we hold that aside and we look just at Timberlands and Wood Products, wood products, lumber volumes might be up a touch from what we saw in the Q1, but pricing right now is relatively stable and actually May you're expecting to be lower.

Speaker 7

In Timberlands, horizons are recognizing you're going to be opportunistic, will be a touch lower than the Q1 where you've got Northern prices up, Southern prices down. So it seems like operationally EBITDA is kind of flat 2Q versus 1Q. Would you agree with that very, very quick analysis?

Speaker 1

I think that was pretty quick analysis. I mean, my expectation is, yes, lumber markets are weak. We actually had a decent April, not a great April, but it was certainly better than, say, the Q1. So I think Wood Products could be a little bit better. I think Timberlands, I don't know, it may be flattish, but yes, real estate should be up significantly.

Speaker 7

Okay. Thank you very much guys

Speaker 5

for the thoughts. Good luck in the quarter.

Speaker 1

Thanks.

Operator

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

Speaker 1

Thank you for your questions and your interest in PotlatchDeltic. That concludes our call.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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