Plum Creek 2Q15 Earnings Call Notes

We’re encouraged by homebuilder sentiment

“Builder sentiment in July was at the highest level seen in 10 years. Existing home sales were in an eight-year high in June, and new home sales in June were up 18% year-over-year. The supply-demand balance for housing is relatively tight, contributing to an acceleration in existing home price gains, as reported by the National Association of Homebuilders. We are encouraged by the trends and what they say about future lumber and log demand.”

Stronger dollar has slowed lumber exports. Our customers recognize that these forces are temporary

” lumber markets have experienced some disruption in the first half of the year. The stronger dollar has slowed U.S. lumber and log exports, and more Canadian supply has been directed towards U.S. markets. This, combined with slow demand growth, put pressure on lumber prices. Our customers recognize these market forces as temporary and remain committed to their investment plans that will increase future production and log demand.”

Fire danger in the west may restrict supply of logs

” With extreme fire danger in many parts of the West, logging restrictions may limit the near-term timber supply. While domestic mills were well supplied going into the third quarter, near-term log availability is emerging as a concern for Western sawmillers. We have seen West Coast log prices stabilize the past few weeks, and Douglas fir prices are up a couple dollars per ton from their bottom in June.”

We think we’re acquiring our stock and therefore timberlands at a significant discount to market value

“During the second quarter, we repurchased approximately $31 million of company stock, acquiring more than 750,000 shares at an average price of $41.16 per share. In 2015, we have now repurchased over $50 million of our stock.

We view this as an attractive arbitrage, effectively purchasing our timberlands at a significant discount to their current market value. As we outlined on Investor Day, we believe our Southern timberland portfolio is worth more than $2,100 per acre in today’s market, given its characteristics and productivity.”

We have a preference to buying back shares at these levels

“Clearly, where the shares have been trading, we think we’ll allocate capital to buying shares back as we did in the second quarter and we will in the third quarter as well at these levels. ”

CalPERS has trimmed its lumber holdings but may be driven by different things than other institutions

” I think CalPERS is going through their entire portfolio and try to trim costs and other things. We’ve been more than a bit disappointed in some of their timber investments of-late. And I think they’ve decided with those as they have with many different investments they’ve made that they’re just going to exit. So I think their focus and maybe actions are quite different from what we see amongst any of the other institutions.”

The Chinese are buying more logs from New Zealand and Russia with the currency shifts

“big competitors of both New Zealand and Russia, and given the currency shifts, Russian logs and lumber are much cheaper now than they were, and New Zealand logs are cheaper and they have a transportation advantage. So in this market, I think to the extent they can, the Chinese will buy more from those particular outlets and less from North America. But over the long term, they need to buy from North America, both logs and lumber, be it from the U.S. or Canada.”

Nothing unusual with these institutions selling land in the market

“So you kind of see these 50,000 acre things in the market from time and again, and I think you’re going to continue to see that. And a lot of it has to do with the timing of some of the investments these people made with the TIMOs and they’re coming up for renewal. And it’s just time to take them to market or maybe a client want some current yield or something and so they take some of these lands to market, and we see that all the time. So that’s not unusual. And I think you’ll continue to see that this year and next.”

Analyst comment

” I would suggest that part of the discrepancy between the value of the stock and the realizable value of the company comes from your development lands.”

We’re starting to see the development lights come back on

“So we’re starting to see the development lights come back on. If you look at the Urban Land Institute at their most recent meeting, there were a lot of developers there starting to talk about opportunities, growing their business, capital flows coming into their businesses and that sort of thing. So I think over the next one year to three years to five years, you’re going to see a lot more activity in the development arena, and Plum Creek will participate”

We are frustrated that housing isn’t stronger than its been but the millenials will buy homes

” we’re frustrated and we’ve been frustrated, and three years or four years ago, we would expect it by now to be at 1.4 million starts or 1.5 million starts, and here we’re at 1.1 million starts. So we like many in our business have been a bit frustrated by the anemic, I call it, anemic recovery in housing. That said, if you look at demographics, if you look at interest rates, if you look at even the next generation down, they’re going to buy – the millennials, they’re going to buy homes, it’s going to be delayed a bit.”

The only way to meet US demand for lumber is from the US south

” if you look at that and everything else being equal with what’s going on in Canada and the Chinese market and trade flows, the only place you have production to build all those homes can come from is going to be the U.S. South. And it will – the production capacity will go in place there and sawlog prices certainly will have to go up at that point in time.”