Rayonier Inc. (NYSE:RYN) Q3 2023 Earnings Call Transcript

Rayonier Inc. (NYSE:RYN) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Welcome, and thank you for joining Rayonier’s Third Quarter 2023 Teleconference Call. [Operator Instructions] 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: Thank you, and good morning. Welcome to Rayonier’s investor teleconference covering third 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 Forms 10-K and 10-Q filed with the SEC with 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 2 of our financial supplement. Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measures in our earnings release and supplemental materials. With that, let’s start our teleconference with opening comments from Dave Nunes, our CEO. Dave?

Dave Nunes: Thanks, Collin, and good morning, everyone. Before reviewing our results for the third quarter, I’d like to first discuss two announcements made concurrent with our earnings release yesterday afternoon. the executive succession plan as well as a review of our initiatives to enhance shareholder value. Then I’ll provide some high-level comments on the quarter before turning it over to Mark McHugh, President and Chief Financial Officer, to review our consolidated financial results. We’ll then ask Doug Long, Executive Vice President and Chief Resource Officer, 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 balance of the year.

As announced yesterday afternoon, I’ll be retiring as Chief Executive Officer of Rayonier and a member of our Board effective March 31, 2024. It’s been an honor and privilege to lead Rayonier over the last nine years. We have remarkable people fabulous assets and have cultivated a culture like no other. Since emerging from the spin-off of our specialty pulp manufacturing business in 2014, we have worked to continuously improve the quality of our land and timber portfolio, invested in our people and maintain a relentless focus on driving long-term value for our shareholders to become the leading pure-play timber REIT. I’m very excited about the growth opportunities that lie ahead for the company and its next generation of leadership. As part of a multiyear succession planning process, Mark will be assuming CEO responsibilities upon my retirement, while continuing his role as President.

Mark has served as our President since January of this year, while also maintaining his duties as our Chief Financial Officer, a position he’s held since December 2014. Since bringing on Mark as our CFO nearly nine years ago, he has been an invaluable partner to me in running Rayonier. His relentless focus on capital allocation combined with his deep understanding of the history of the timber asset class and his financial acumen have helped us to become the company we are today. He has also grown as a respected people leader during this time and has demonstrated that he’s ready for this challenge. We’re excited about the future of the company under his leadership. I’d also like to congratulate April Tice, who will assume the position of Senior Vice President and Chief Financial Officer effective April 1, 2024.

We April has served as our Vice President and Chief Accounting Officer since April 2021 and has held multiple positions of increasing responsibility within the finance and accounting department since she joined Rayonier in 2010. Mark and I are confident that her appointment will translate into a seamless transition for our finance organization. These announcements reflect the culmination of a well-constructed succession plan that has been a priority of the Board for the last several years and one that I believe leaves Rayonier extremely well positioned for the future. I’d now like to turn to another announcement we released yesterday, which focuses on initiatives to enhance shareholder value as well as the steps that we have already taken to execute on this plan.

We began evaluating our asset base earlier this year, looking for opportunities to reduce leverage through the sale of less strategic assets while also allowing us to take advantage of the significant disconnect between private market timberland values and the valuation implied by the company’s share price. This valuation disconnect has significantly widened since that time, which ultimately motivated us to commit to a more transformational initiative to drive value accretion for our shareholders. Specifically, we announced a plan to target $1 billion of select asset sales over the next 18 months in order to capitalize on the historically wide disconnect between public and private market timberland values reinforce the strength of our balance sheet and return meaningful capital to shareholders.

Pursuant to the plan, we are adjusting our leverage target to less than or equal to 3x net debt to adjusted EBITDA, which will allow us to reduce our debt costs and enhance our future capital allocation flexibility. We are confident that this plan will generate significant value accretion for our shareholders while also better positioning the company for the potential of a higher for longer interest rate environment. As an important first step in effectuating this plan, we are pleased to announce that we have entered into an agreement to sell 55,000 acres of Timberland in Southwest Oregon for $242 million or $4,400 per acre to Manulife Investment Management on behalf of clients. Expected to close in the fourth quarter of this year, the Oregon disposition will reduce our leverage and be immediately accretive to CAD per share.

We originally acquired this property in 2016 with the intention to rebalance our age class profile in the Pacific Northwest as well as to gain scale in Southwest Oregon over time. However, the opportunity to increase our presence in the region has been limited by the highly competitive market for quality assets coupled with a relatively limited deal flow in the area. As a result, we believe recycling capital out of this asset albeit a high-quality property and directing proceeds towards debt reduction is value enhancing for our shareholders. We expect that the disposition of this property will have minimal impacts on our operating cash flow over the next decade due to its relatively young age class profile and will result in a more concentrated focus on our other Pacific Northwest timberland properties in Washington.

We plan to use $150 million from the Oregon disposition to pay down our only floating rate debt. This will translate into interest savings of approximately $9.3 million annually based on the current SOFR rate, making it immediately CAD accretive. The remaining proceeds from the disposition will be retained for future debt repayment or a return of capital to shareholders. Pro forma for the disposition and application of proceeds, leverage will decline to 4.2x net debt to pro forma adjusted EBITDA. Our weighted average cost of debt will decline to approximately 2.8% and 100% of our debt will be fixed until August 2024. In addition, we expect that the disposition and application of proceeds will generate CAD per share accretion of approximately 6%.

As there remains a strong bid for timberland assets in the private market, we are in the process of identifying additional disposition targets and how best to achieve our new leverage targets while also returning capital to shareholders. We have posted a supplemental presentation to our website, which outlines our initiatives to enhance shareholder value, provides additional details regarding the Oregon disposition and illustrates the disconnect we currently see between timberland values implied in the public markets and private market transactions. This plan underscores our keen focus on nimble capital allocation, active portfolio management and prudent balance sheet management. Now I will switch gears and discuss our third quarter results.

In the third quarter, we generated adjusted EBITDA of $79 million and pro forma net income of $19 million or $0.13 per share. The total adjusted EBITDA generated by our Timber segments collectively increased 7% relative to the prior year quarter, driven by higher harvest volumes in our Southern Timber segment and higher carbon credit sales in our New Zealand Timber segment. In our Real Estate segment, we achieved adjusted EBITDA of $19 million, up from $8 million in the prior year quarter. Drilling down further on our operating segment results. Our Southern Timber segment generated third quarter adjusted EBITDA of $38 million, up $1 million from the prior year period. The improvement versus the prior year period reflected a 21% increase in harvest volumes, primarily due to the acquisitions completed in late 2022, which more than offset a 17% decline in net stumpage realizations due to weaker demand and drier weather conditions.

In our Pacific Northwest Timber segment, third quarter adjusted EBITDA of $8 million was down $5 million from the prior year quarter, driven by a 6% reduction in harvest volumes and a 10% decline in domestic sawtimber prices. Overall, market conditions in the region were softer than the prior year period due to weaker domestic and export market demand. Turning to our New Zealand Timber segment. Third quarter adjusted EBITDA of $24 million increased $8 million versus the prior year quarter. The improved results were primarily driven by higher carbon credit revenues as we capitalized on a significant uptick in New Zealand carbon credit pricing during the quarter, partially offset by lower net stumpage realizations, reflecting weaker export and domestic markets compared to the prior year period.

In our Real Estate segment, we generated third quarter adjusted EBITDA of $19 million, up $10 million from the prior year period, reflecting both a higher number of acres sold and stronger pricing. As Mark will detail later in the call, we are on track to achieve a higher end of our full year adjusted EBITDA guidance range — achieve the higher end of our full year adjusted EBITDA guidance range of $275 million to $300 million. With that, let me turn the call over to Mark for more details on our third quarter financial results.

Mark McHugh: Thanks, Dave, and thank you for the kind words earlier. I’m truly honored that the Board has entrusted me to lead Rayonier into the future, and I know that I’ll have very big shoes to fill. It’s been a privilege to work alongside you and the rest of the outstanding team at Rayonier for the past nine years. And I’m very excited about the opportunities that lie ahead. That said, we still have one more earnings call and plenty of work to get done before you retire, so I will save the formal congratulations for next quarter’s call. But I did want to take a moment to acknowledge the extraordinary leadership and commitment that you’ve given to this organization over the past decade. We appreciate you more than you know.

Now moving on to our financial highlights on Page 5 of the supplement. Sales for the third quarter totaled $202 million, while operating income was $35 million and net income attributable to Rayonier was $19 million or $0.13 per share. Pro forma EPS was also $0.13 per share as we had no pro forma items in the quarter. Adjusted EBITDA was $79 million in the third quarter, up from $65 million in the prior year period. On the bottom of Page 5, we provide an overview of our capital resources and liquidity. Our cash available for distribution, or CAD, for the first nine months of the year was $114 million versus $159 million in the prior year period. The decrease was driven by lower adjusted EBITDA, higher cash interest paid and higher capital expenditures, partially offset by lower cash taxes.

A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on Page 8 of the financial supplement. We closed the third quarter with $108 million of cash and $1.5 billion of debt. At quarter end, our weighted average cost of debt was approximately 3.2% and the weighted average maturity on our debt portfolio was approximately five years with no significant debt maturities until 2026. Our net debt of approximately $1.4 billion represented 25% of our enterprise value based on our closing stock price at the end of the quarter. Pro forma for the Oregon disposition and the planned paydown of debt, our leverage ratio will decline by 0.7 turns to roughly 4.2x net debt to adjusted EBITDA, an important first step toward achieving our new credit ratio targets.

Following this debt pay down, we will have no unhedged floating rate debt, and our weighted average cost of debt will decline to approximately 2.8%. Within the supplemental presentation posted to our website, we detail the key aspects of the Oregon sale as well as provide a detailed review of our debt and interest rate swap maturity profile. As Dave discussed earlier, we are adjusting our leverage target from less than or equal to 4.5x to less than or equal to 3.0x net debt to adjusted EBITDA. And we are commensurately reducing our net debt to asset value target from less than or equal to 30% to less than or equal to 20%. With a long-dated and well-staggered debt maturity profile as well as a low-cost primarily fixed rate debt structure, we can afford to be selective and opportunistic in achieving our enhanced leverage targets over the next 18 months.

I’ll now turn the call over to Doug to provide a more detailed review of our timber results.

Doug Long: Thanks, Mark. Let’s start on Page 9 with our Southern Timber segment. Adjusted EBITDA in the third quarter of $38 million was $1 million or 3% above the prior year quarter, driven by higher volumes and non-timber income, partially offset by lower net stumpage pricing and higher costs. Total harvest volume rose 21% versus the prior year quarter, primarily driven by an increase in pine sawtimber volumes from the successful integration of acquisitions we completed in late 2022. Average sawlog stumpage pricing was $29 per ton, a 13% decrease compared to the prior year period. The moderation in pricing reflected reduced market tension across our operating areas due to drier weather conditions, softer demand from sawmills and less competition from pulp mills for timbersaw volume.

Meanwhile, pulpwood net stumpage pricing fell 27% versus the prior year quarter to roughly $17 per ton as weaker end market demand and dryer weather conditions contributed to softer market conditions. Overall, weighted average stumpage prices in the third quarter fell 17% versus the prior year quarter to roughly $21 per ton. Market conditions, particularly for pulpwood, have been challenging this year as customers reduced operating rates to both destock finished product inventories and reduced production levels for a weaker end market demand environment. However, we have been encouraged by recent improvements in mill operating rates, which have led to pricing stabilization across our U.S. South footprint. We believe that the work we’ve done over the past several years on strategically positioning our Southern portfolio towards the most tension wood baskets will continue to be a competitive advantage.

Moving to our Pacific Northwest Timber segment on Page 10. Adjusted EBITDA of $8 million was $5 million below the prior year quarter. The year-over-year decrease was primarily driven by lower net stumpage realizations, higher costs, lower harvest volumes and lower non-timber income. Volume decreased 6% in the third quarter as compared to the prior year period, primarily driven by a 27% reduction in pulpwood volume. At $108 per ton average delivered domestic solid pricing in the third quarter fell 10% from the prior year period, primarily due to weaker demand from domestic lumber mills, coupled with reduced tension from export markets. Meanwhile, at $33 per ton, pulpwood pricing decreased 35% versus the prior year quarter as end market demand deteriorated relative to the favorable market dynamics seen last year.

Moving to New Zealand. Page 11 shows results and key operating metrics for our New Zealand Timber segment. Adjusted EBITDA in the third quarter of $24 million was $8 million above the prior year quarter. The increase in adjusted EBITDA compared to the prior year period was driven by higher carbon credit sales. This was partially offset by lower net stumpage realizations, lower harvest volumes and unfavorable foreign exchange impacts. Average delivered export sawtimber prices of $95 per ton declined 23% compared to the prior year quarter primarily due to ongoing challenges in the Chinese property sector and a weaker Chinese currency. However, export sawtimber net stumpage realizations declined only 4% as port and freight costs fell significantly from the high levels experienced in the prior year period.

Further, we are encouraged by the fact that softwood log port inventories in China have steadily trended lower year-to-date and now sit at an estimated 2.7 million cubic meters, the lowest level we’ve seen over the past three years. That’s despite the impact of increased volume from ongoing hurricane Gabrielle salvage operations. Shifting to the New Zealand domestic market. Third quarter average delivered sawlog prices fell 9% from the prior year period to $63 per ton and declined 7% when excluding foreign exchange impacts. Third quarter non-timber income in New Zealand of $16 million increased $9 million relative to the prior year period as we execute on the sale of carbon credits during the quarter after electing to defer sales earlier in the year amid extraordinary carbon market volatility.

While we expect to remain active in the New Zealand card market in the fourth quarter, we anticipate a markedly lower contribution from carbon sales relative to the third quarter. Lastly, in our Trading segment, we posted a slight operating loss in the third quarter. As a reminder, our trading activities typically generate low margins and are primarily designed to provide additional economies of scale to our fee timber export business. I’ll now turn it back over to Mark to cover our Real Estate results.

Mark McHugh: Thanks, Doug. As detailed on Page 12, our Real Estate segment delivered strong third quarter results. Real Estate sales totaled $31 million on roughly 4,300 acres sold at an average price of $5,800 per acre. Real Estate segment adjusted EBITDA in the third quarter was $19 million. Drilling down, Sales in the improved development category totaled $3 million. In our Heartwood development project south of Savannah, Georgia, we closed on $1.8 million of sales during the quarter, consisting of 24 residential lots at an average base price of $45,000 per lot and 1-acre quick service restaurant site for roughly $530,000 per acre. In our Wildlight development project north of Jacksonville, Florida, sales consisted of a 2-acre convenience store site for $1.4 million or roughly $735,000 per acre.

We also generated $6.4 million of other revenue, which consisted of deferred revenue recognition upon the completion of post-closing construction obligations as well as lost revenue true-ups in our Wildlight and Heartwood development projects. Overall, we continue to believe that both our Wildlight and Heartwood development projects are well positioned and will continue to benefit from favorable migration and demographic trends, relatively affordable price points and a diverse mix of residential, commercial and industrial end uses that each help to catalyze demand for one another. Unimproved development sales during the quarter consisted of a 10-acre site in Nassau County, Florida for $114,000 or roughly $11,000 per acre. Turning to the rural category.

Third quarter sales totaled nearly $20.5 million, consisting of approximately 3,800 acres at an average price of roughly $5,400 per acre. Key transactions included a 1,300-acre sale in Polk County, Texas for $6.1 million or roughly $4,900 per acre and a 460-acre sale in Walker County, Texas for $2.8 million or roughly $6,100 per acre. Overall, we are encouraged by the continued strong demand for rural land despite the higher interest rate environment. Lastly, during the third quarter, we also closed on $1.1 million of nonstrategic timberland sales consisting of approximately 500 acres at an average price of roughly $2,300 per acre. Now moving on to our outlook for the balance of the year. As Dave mentioned earlier, we are on track to achieve the higher end of our prior full year adjusted EBITDA guidance of $275 million to $300 million.

With respect to our individual segments. In our Southern Timber segment, we expect full year harvest volumes consistent with the 7.2 million to 7.4 million ton range we provided in August. While we remain encouraged by recent conversations with our customers and the stabilization in pricing we’ve seen across most of the operating areas in the U.S. South, we expect that our weighted average log pricing will soften a bit in the fourth quarter as compared to the third quarter due to a shift in regional sales mix. Overall, we expect to achieve full year adjusted EBITDA in our Southern Timber segment at the higher end of our prior guidance range of $150 million to $155 million, driven by improved outlook for non-timber income. In our Pacific Northwest Timber segment, we expect full year harvest volumes toward the lower end of the 1.4 million to 1.5 million ton range we provided in August.

Following a brief uptick in lumber pricing, which boosted log demand in the third quarter, we expect that fourth quarter weighted average delivered log pricing will decline modestly. However, we expect that lower per unit cut and haul costs will translate to modestly improved net stumpage realizations versus first half levels. Overall, we expect to achieve full year adjusted EBITDA in our Pacific Northwest Timber segment toward the lower end of our prior guidance range of $30 million to $34 million due to continued softness in end market demand and lower anticipated harvest volumes. In our New Zealand Timber segment, we still expect full year harvest volumes in line with the 2.3 million to 2.5 million ton range we provided in August. We expect that export sawtimber pricing will increase modestly from third quarter pricing levels due to lower Chinese port inventories, but will remain below first half pricing levels due to continued weakness in end market demand.

Likewise, in the domestic market, we expect sawtimber pricing will increase modestly from third quarter pricing levels, but remain below first half levels as elevated interest rates in New Zealand continued to constrain the residential construction market. Turning to the carbon market. While we expect to remain active for the balance of the year following the recent improvement in New Zealand carbon credit pricing, we anticipate a significantly lower contribution from carbon credit sales relative to the third quarter. Overall, we expect the New Zealand Timber segment will generate full year adjusted EBITDA toward the higher end of our prior guidance range of $39 million to $46 million, driven by strong carbon credit sales. In our Real Estate segment, we expect full year adjusted EBITDA toward the higher end of our prior guidance range of $90 million to $100 million, as demand for timberland and rural HBU properties remains remarkably strong despite the higher interest rate environment.

As we previously communicated, we expect significant transaction activity in the fourth quarter based on the anticipated timing of closings from our sales pipeline. I’ll now turn the call back to Dave for closing comments.

Dave Nunes: Thanks, Mark. I’d like to wrap up our prepared remarks by first acknowledging the pressure our stock has been under this year and in particular, the second half of the year, in which our share price has declined by approximately 20%. While we can point to a host of potential reasons for this, such as continued macroeconomic headwinds, softening markets for lumber and pulp or the recognition that interest rates will be higher for longer, the bottom line is we can’t just sit on our hands. As we have done in the past, we plan to proactively respond to current market dynamics with a view toward building value per share, even if that means shrinking our portfolio over the intermediate term. To this end, the rollout of our initiatives to enhance shareholder value, which I touched on at the outset of the call, is intended to capitalize on the current dislocation in the public markets.

As evidenced by the pricing of our pending Oregon sale, there is a wide disconnect between private market timberland values and the public market valuation of Rayonier. Our plan is to sell $1 billion worth of timberland assets is designed to capture some of this value arbitrage and to use the proceeds to reduce future debt refinancing costs, improve our debt metrics and return capital to shareholders. The scale of our portfolio and our pure play timber REIT structure afford us the flexibility to pursue this plan, and we are confident that we can execute on the objectives that we’ve laid out. While ambitious in scale, this initiative is entirely consistent with our long-standing commitment to nimble capital allocation and active portfolio management, both of which have always been key cornerstones of our strategy to create long-term value for our shareholders.

Importantly, compared to many other capital recycling initiatives companies undertake that ultimately prove dilutive to shareholders, we believe that we are uniquely positioned to engage in a process that will allow Rayonier to reallocate capital and reduce future debt refinancing costs in a manner that will be accretive to both CAD and NAV per share. Fundamentally, while there continues to be challenges presented by the downward pressure on lumber prices, rationalization of pulp production and an uncertain economic outlook, we are seeing encouraging signs of stabilization and improvement across many of the markets served by our timber operations. We are fortunate to be in some of the most tensioned wood baskets in the U.S. South with 72% of our southern acreage located in top quartile markets.

We think this provides for both downside protection in soft markets and stronger upside potential in rising markets. Our Pacific Northwest Timber segment, while facing near-term market headwinds, nevertheless, is well positioned going forward with a heavier concentration in Washington, a strong Douglas fir mix and diversification across both domestic and export markets. In our New Zealand Timber segment, we expect to benefit from lower inventories of both logs and lumber in China, coupled with an improved demand trend over time. Further, the recent recovery in carbon credit pricing has positively impacted our operations during a time of market uncertainty in China. We expect to remain opportunistic on the sale of carbon credits in the future.

Meanwhile, the outlook for our Real Estate pipeline remains strong as there continues to be healthy demand for rural land based on positive population migration patterns as well as the fact that a significant component of the buyer pool for these properties are somewhat insensitive to interest rates. As I discussed last quarter, the absorption at both our Wildlight and Heartwood development projects has exceeded our expectations and momentum has continued to build as we have shifted from finished lot sales to pod sales. These trends have translated into a healthy pipeline of real estate transactions expected over the next few quarters as well as the next several years. Overall, we are very optimistic about the long-term value creation potential of our HBU real estate portfolio.

Lastly, the interest in the land-based solutions offered by our timberlands continues to grow, and we’ve undertaken several important initiatives to advance the set of opportunities that is emerging. We believe these emerging additional and alternative uses for our lands will be increasingly important to the long-term value proposition moving forward. As we highlighted last quarter, we now have in place wind, solar and carbon capture and storage leases, and we expect these revenue streams to grow significantly over the next several years. In sum, despite the near-term headwinds we’re facing in the disappointing and somewhat confounding stock price performance we’ve experienced in recent months, I can honestly say that I’ve never been more optimistic about the future of our land base and the team that we have in place to execute on our plan and create long-term value for our shareholders.

To this end, we’ll be hosting an Investor Day in New York on February 28, 2024, which will detail our efforts to grow our land-based solutions business and the cash flow potential of this business, take a deeper dive on the progress and value creation potential of our real estate development portfolio and provide further details on our progress towards achieving $1 billion of timberland dispositions. So be on the lookout for more details regarding this event over the next several weeks. This concludes our prepared remarks, and I’ll now turn the call back over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question for today will come from Mark Weintraub of Seaport Research Partners. Your line is open, sir.

Mark Weintraub: Thank you. First, Dave, congratulations. I really appreciated your insights and your steadiness over the years. I know you’re going to be on for another call, too. So I’ll just stop there and obviously, congrats to Mark and April. So first question is, so you — you’re talking about $1 billion in asset sales. Have you, at this point, identified what’s likely going to be the acreage that’s going to be a part of that program? Or is that more still a conceptual target at this juncture?

Dave Nunes: This is Dave, and thanks for your opening comments. In terms of that question, I’d say that we’re in the process of that identification. It’s part of the reason that we laid this out as an 18-month exercise is that we’re not announcing this with a known set of targets, but we have a pretty rich array of criteria that we use for all portfolio moves. And so that’s the way we’re approaching it right now other than the fact that we’ve obviously closed on this — or we’ve reached contract on this Oregon property that was laid out.

Mark Weintraub: Okay. Great. And can you share with us what some of those key criteria are? And perhaps why $1 billion was the right number in your judgment for the program at this juncture?

Dave Nunes: I’ll touch on the first part, and I’ll let Mark kind of pick up on the scaling of the target. But we look at a lot of factors. We talk a lot about understanding optionality. We look at log markets. We look at cost. We look at the tension, the growth drain relationships, the higher and better use land. We look at our scale in the region. We looked at alternative uses for land. And so it’s a pretty wide array of things that we will regularly consider when we think about portfolio moves. So all of that will kind of come into play. And I’ll let Mark touch on the second part of your question.

Mark McHugh: Yes. Sure, Mark. Just in terms of the sizing of that asset disposition program. If you look at — well, first, I’d start by saying that there are really two main objectives. One was to reduce leverage, just simply given the interest rate environment that we believe that it makes sense to maintain a lower leverage profile on the company in this environment. And secondly, obviously, we see a significant disconnect between private market values and public market values today and we felt compelled to capitalize on that. So in terms of the sizing, based on the midpoint of our 2023 EBITDA guidance, and if you assume a pro forma adjustment for dispositions, we would need to deploy about $600 million towards debt pay down to achieve our new leverage target of less than or equal to 3x net debt to EBITDA.

So that implies that there could be up to $400 million available for return of capital to shareholders. Of course, we could choose to delever beyond three times and our outlook for EBITDA could translate to more or less proceeds being applied toward debt paydown as we look to achieve that new target. It’s also worth noting that as a REIT, we generally look to distribute 100% of our REIT taxable income to avoid any corporate-level tax. And to the extent that we sell low-basis assets in this program, that’s going to generate significant retaxable income, which would also dictate a need for one of more special distributions. And so as we thought about kind of the overall sizing of that program towards kind of both achieving our leverage targets, as well as capitalizing on that disconnect, that felt like the right scale to proceed.

Mark Weintraub: Okay. That makes a lot of sense. So recognizing that there are going to be some of these special distributions likely required, would you be anticipating there would be also cash available for share repurchase if the stock remains depressed relative to your view of valuation?

Mark McHugh: Yes. Sure. We’ll look at both alternatives certainly. And given the disconnect that we see today, we recognize the value accretion that can be realized through share buybacks. And so we will continue to evaluate both alternative forms of returning capital to shareholders, really with a view towards building long-term value per share. Just recognizing that some portion, there may be a distribution requirement for certain portions of those assets that we may look to divest.

Mark Weintraub: Okay. And just to confirm, if you are selling core timberlands, that’s considered good REIT income. So for tax purposes, there would — is it correct to say there would be no tax leakage, if it’s in the U.S. I guess…

Mark McHugh: Actually is assuming you distribute — I mean we’re required to distribute 90% of our REIT taxable income as a REIT. But to the extent that you retain that 10%, you owe corporate-level taxation on that. And so it doesn’t make sense to do that. That leads to tax leakage. And so like I said earlier, generally, we are looking to distribute 100% of that tax income. But yes, portfolio dispositions like this would constitute good REIT taxable income.

Mark Weintraub: Right. And of course, that’s going to be — the REIT income is the gain, not the entire sale of the timberlands to…