CATCHMARK TIMBER TRUST CTT
October 24, 2014 - 3:29pm EST by
Drew770a
2014 2015
Price: 11.15 EPS $0.00 $0.00
Shares Out. (in M): 40 P/E 0.0x 0.0x
Market Cap (in $M): 440 P/FCF 0.0x 0.0x
Net Debt (in $M): 55 EBIT 0 0
TEV ($): 550 TEV/EBIT 0.0x 0.0x

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  • REIT
  • Timber
  • Discount to NAV
  • Insider Buying
  • Potential Acquisition Target
  • Dividend Increase
  • Spin-Off
 

Description

CTT is a timber REIT trading 25-30% below NAV based on public transactions and comps.  CTT is somewhat of an orphaned stock due to its history. It is the offspring of a busted TIMO (Timber Investment Management Company) that restructured into a public REIT.  The basis of the original investors is probably around $25 / share.  New management (and well-regarded, from Timberstar) came in and helped to reorg the company.  For a while it was trading <10% from NAV, and then in July management decided to undertake an ill-fated secondary to fund acquisitions of more land.  The share price when they started the secondary process was $13.50, they sold shares for 11.75, and then it promptly fell to the $11 range.  We believe the acquisitions were around fair value (some may say a bit expensive, management will say that they land is well-stocked so has a good IRR), we assume around fair value was paid.  Given the size of CTT, there was a strategic rationale to 'bulk up' + the acquisitions will allow dividend increases (though the shareholders at the time paid the price for the bulking up, but now we benefit).  In September the CEO then bought 1,750 shares at $11.58 (on top of the 55.5k shares he bought in December at $13.55) and a board member bought 2k shares at 11.61.
The fairly straightforward math on NAV (we also note that PCH just paid $1,910 / acre for Southern timberland)
 
Southern Timberland: 347.4k acres
Leased Acres: 33k acres
 
Value of Southern Timberland / acre: $1900 * 347.4k acres = $660mm
Leased: 33k * $350 / acre: $11.5mm
Total Value: $671.5mm - $55mm net debt = $15.6 / share (71.5% discount to NAV) or 40% upside + 5% dividend yield (which we think will go higher)
 
The upside scenario is if housing rebounds.  There is the potential for lumber demand to increase another 40% + shrinking supply out of Canada (and potentially Pacific Northwest) due to the pine beetle, which would also lead to a rise in lumber pricing . The net takeaway is the the dividend could more than double, as would the share price.  CTT has some nice charts in their presentation describing the potential supply / demand & pricing upside.  Here is the link: http://www.catchmark.com/files/6114/1164/4749/CTT_Company_Update_9-25-14.pdf  (note: its pretty much similar to what the other public REITs / TIMOs say).  I discount it somewhat given they are pitching their book. But, there is maybe a 50% chance that housing does get back to 1.5mm homes in the 2017 timeframe (and we would need more lumber) leading to a price rebound. There is also a 50% chance that lumber prices stay anemic for a while.
 
So, our target price is 50% * $15 / share + 50%*$22 /share =$18.5 in 3 years, which is an 80% overall return (including dividends)
 
Given how much capital, both institutional and public equity, there is chasing timberland, we also think it is possible for the company to be acquired at fair value
 
We own shares and may buy or sell at anytime
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Housing rebounds
 
Return to fair value by execution
 
Acquired by larger player
 
Dividend increases
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    Description

    CTT is a timber REIT trading 25-30% below NAV based on public transactions and comps.  CTT is somewhat of an orphaned stock due to its history. It is the offspring of a busted TIMO (Timber Investment Management Company) that restructured into a public REIT.  The basis of the original investors is probably around $25 / share.  New management (and well-regarded, from Timberstar) came in and helped to reorg the company.  For a while it was trading <10% from NAV, and then in July management decided to undertake an ill-fated secondary to fund acquisitions of more land.  The share price when they started the secondary process was $13.50, they sold shares for 11.75, and then it promptly fell to the $11 range.  We believe the acquisitions were around fair value (some may say a bit expensive, management will say that they land is well-stocked so has a good IRR), we assume around fair value was paid.  Given the size of CTT, there was a strategic rationale to 'bulk up' + the acquisitions will allow dividend increases (though the shareholders at the time paid the price for the bulking up, but now we benefit).  In September the CEO then bought 1,750 shares at $11.58 (on top of the 55.5k shares he bought in December at $13.55) and a board member bought 2k shares at 11.61.
    The fairly straightforward math on NAV (we also note that PCH just paid $1,910 / acre for Southern timberland)
     
    Southern Timberland: 347.4k acres
    Leased Acres: 33k acres
     
    Value of Southern Timberland / acre: $1900 * 347.4k acres = $660mm
    Leased: 33k * $350 / acre: $11.5mm
    Total Value: $671.5mm - $55mm net debt = $15.6 / share (71.5% discount to NAV) or 40% upside + 5% dividend yield (which we think will go higher)
     
    The upside scenario is if housing rebounds.  There is the potential for lumber demand to increase another 40% + shrinking supply out of Canada (and potentially Pacific Northwest) due to the pine beetle, which would also lead to a rise in lumber pricing . The net takeaway is the the dividend could more than double, as would the share price.  CTT has some nice charts in their presentation describing the potential supply / demand & pricing upside.  Here is the link: http://www.catchmark.com/files/6114/1164/4749/CTT_Company_Update_9-25-14.pdf  (note: its pretty much similar to what the other public REITs / TIMOs say).  I discount it somewhat given they are pitching their book. But, there is maybe a 50% chance that housing does get back to 1.5mm homes in the 2017 timeframe (and we would need more lumber) leading to a price rebound. There is also a 50% chance that lumber prices stay anemic for a while.
     
    So, our target price is 50% * $15 / share + 50%*$22 /share =$18.5 in 3 years, which is an 80% overall return (including dividends)
     
    Given how much capital, both institutional and public equity, there is chasing timberland, we also think it is possible for the company to be acquired at fair value
     
    We own shares and may buy or sell at anytime
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Housing rebounds
     
    Return to fair value by execution
     
    Acquired by larger player
     
    Dividend increases

    Messages


    Subjectforgot
    Entry10/24/2014 03:39 PM
    MemberDrew770a
    forgot to add that the CEO said he will not be doing any secondaries down at this level (i.e. not building an empire regardless of price / diluting shareholders)

    SubjectRE: RE: RE: forgot
    Entry10/31/2014 11:46 AM
    MemberDrew770a
    Good questions:
    1) They are located in good locations, near lumber mills, infrastructure, etc. Its worth noting that some of the public comps have had issues getting their timber to market b/c processors have shut down (i.e. GP shut a mill recently)
    2) The land they bought in acquisitions was more highly stocked / better located than average / peers and what they owned before hand. So, I used the $1900 / overall, which gets to a $15.60 NAV (I discounted somewhat to gett oa NAV of $15). If I more highly discounted the land they owned prior to the acquisitions, than NAV drops to $14. Still buying at a good discount with upside from housing ramping back to 1.5mm starts
    3) They've sold some HBU land at $3k/acre. I generally think the public guys are double counting - i.e. when you pay $1900/acre for 20k acres, you are getting some HBU and you are getting some worthless acres. Giving incremental credit for HBU isn't correct (and note generally low overall HBU sales / yr as a % of acreage. Over time there is more potential, but not enough to seperately call out)
    4) I think peers are pricing in a higher price than CTT. I.e. PCL has some land in States / locations worth much less than $1k / acre, and their Southern Land all isnt in great locations.  For PCH, the big ? is what is the real value of the Idaho land.  CTT is at least fairly straightforward (location wise) with their holdings)
    5) Mgmt can harvet more near term given the acquisitions are more highly stocked
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