Major Merger Is Latest Twist Of The Lumber Price Sawmill
The May acquisition of CatchMark Timber Trust by PotlatchDeltic Corp. reduced the number of REITs specializing in timberland from four to three, the latest fluctuation in the production of lumber badly needed by developers and builders across the U.S.
Although the two companies only control a small percentage of U.S. timberlands, which provide the raw material for lumber used as building materials, the deal marks the further consolidation of the wood products industry at a time of unprecedented price volatility. Increased concentration might mean more stable prices for lumber — but at a high level.
The all-stock CatchMark acquisition comes at a time of more than a little uncertainty in the market for wood products, including lumber for building. The price swings of the last two years have proven to be a major headache for developers and contractors, which have enjoyed strong demand for new structures but struggled with shortages and unpredictable prices for wood.
High lumber prices are bad for homebuyers as well, with the volatile swings in lumber over the past year pushing the average price of a new single-family home up by more than $18,600, according to the National Association of Homebuilders.
Lumber prices have been in flux for the last two years, spiking in the spring of 2021, then dipping and spiking again before beginning another slide in mid-2022.
July lumber futures ended Friday at $616.10 per 1,000 board feet, according to pricing service Random Lengths, down roughly $1K from the 2021 peak.
And although periods of industry consolidation tend to correlate with higher prices for end users, the CatchMark deal could provide a degree of stability that developers and builders are likely to appreciate as they work to keep up with sustained demand for new projects, especially in the multifamily and industrial segments.
A pattern has emerged demonstrating that to be the case in both the U.S. and Europe, according to New York University professor of finance Thomas Philippon, writing for the National Bureau of Economic Analysis.
Whether that will be the case for wood products is uncertain. But consolidation is occurring and is expected to continue.
Four timber REITs own nearly 15 million acres of U.S. timberland, or about two-thirds the size of the state of West Virginia, plus more in Canada. Their holdings mostly produce high-quality timber fit for building, including softwood trees such as spruce, fir and pine.
PotlatchDeltic and CatchMark combined own about 2.2 million acres of timberland.
"The consolidation will continue," said Corton Capital Vice President John Duncanson, who is a timber analyst. "I'm waiting for the big lumber companies to start to look seriously at vertical integration and buy timberlands."
One of the four big players, Weyerhaeuser, owns more timberland than any other REIT at 11 million acres and is already also a major producer of lumber, with a capacity of more than 5.2 million board feet as of the end of 2021, according to Forisk.
Other major lumber producers include West Fraser, Canfor, Interfor and Sierra Pacific Industries, which have smaller timberland holdings.
The top 25 North American lumber producers, both public and private, now control about 65% of the supply, up from about 50% a decade ago, Duncanson said.
Moreover, the top 10 lumber producers have close to 40% of the market, and the largest lumber producers are worldwide operations that don't mind (at least in more normal times) shutting down mills periodically in various places to keep prices from falling, Duncanson said.
Timber REITs have also been persistently expanding their holdings through land deals, according to a report on timber REITs published in 2021 by Srijana Baral and Bin Mei of the Warnell School of Forestry and Natural Resources at the University of Georgia.
"Timber REITs own and manage a significant area of commercial timberlands in the U.S.,” Baral and Mei wrote. "Acquisitions of high-quality industrial timberland and their sustainable management is one of the major business strategies of all timber REITs.”
For instance, CatchMark acquired about 988 million acres of East Texas timberland in a joint venture in 2018, while Weyerhaeuser purchased around 69,200 acres of highly productive timberlands in Alabama in 2021.
"Timber REITs are likely to pursue more timberland acquisitions in the future for cash flow generation, portfolio enhancement and improvement of the long-term enterprise values," the University of Georgia report says.
The production of lumber as a building material depends not only on the supply of raw timber but the labor needed to fashion the end product, and labor has been the supply-side pain point since the beginning of the pandemic, according to U.S. Department of Agriculture senior research forester Jeff Prestemon.
"The wood product sector was pretty severely impacted by Covid-19, mainly because there has been a pullback in available labor," Prestemon said. "Mills have had a hard time keeping staffing levels up, as some workers got sick and others were taking care of family members or children who couldn't go to school in person."
That was especially the case early in the pandemic. Fewer workers meant fewer wood products just as Americans wanted more houses and more renovations for existing houses, spiking the price. Another factor in low supplies has been a shortage of trucks and truck drivers to deliver finished timber to meet the heightened demand, Prestemon said.
While the pandemic might have eased, recent international events have added a new layer of uncertainty to lumber prices.
“One of the biggest events happening right now in the timber/lumber space globally is the Ukraine war and the sanctions placed on Russian exports,” Duncanson said.
“It’s too early to see the actual figures yet, but some March trade data show big decreases in both log and lumber shipments. For example, in March, pulpwood imports from Russia to Finland dropped by 69% year-over-year and prices jumped 22%.”
European lumber exports to the U.S. will drop significantly, Duncanson added, as exporters like Germany replace Russian imports to supply their own domestic markets.
Despite these uncertainties, the joining of PotlatchDeltic and CatchMark is a strategy betting that the price of wood products will trend upward over the longer run, especially given the appetite for residential construction, despite macroeconomic trends.
For instance, higher interest rates may negatively affect housing in the short run, Duncanson said, but chronic residential underbuilding will keep housing fundamentals strong, and thus lumber prices are relatively high.
The combined company is expected to have a market cap of more than $4B and a total enterprise value of more than $5B. The deal means that PotlatchDeltic will own about 2.2 million acres of timberlands, including 626,000 acres in Idaho and over 1.5 million acres in the South, where demand for wood as a building material has been particularly strong as the housing markets in the warmer states have grown in recent years.
PotlatchDeltic is clearly willing to pay a premium to control more timberland. The transaction was valued at about $2,600 per acre, Duncanson said, which is well above the average translation price paid in 2021, which was about $1,800 an acre.
"With CatchMark, we gain significant scale in three states and diversify our timberland holdings into some of the strongest markets in the U.S. South," PotlatchDeltic CEO Eric Cremers said in a statement.
Even so, investors have been skeptical of PotlatchDeltic lately, with its stock losing 8.6% over the last year (but gaining more than 10% over the last five). After the company announced the deal with CatchMark, its stock dropped 6.3% in the week of May 31. For its part, CatchMark has barely moved in the last year, up 0.69%, and was similarly down 0.77% over the last five years.
On the other hand, timber giant Weyerhaeuser Co. has seen its stock price gain ground both over the last year (up about 6.4%) and the last five years (up more than 15%). The No. 2 timberland REIT, Rayonier, has likewise enjoyed a one-year stock increase of about 11.7% and a five-year increase of more than 41%.
