Potlatchdeltic Corp (PCH) 2022 Q2 法說會逐字稿

Good morning. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to the PotlatchDeltic Second Quarter 2022 Conference Call. Today's conference is being recorded. (Operator Instructions)

I'd now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Thank you, David. Good morning, everyone, and welcome to PotlatchDeltic's second quarter 2022 earnings conference call. Joining me on the call is Eric Cremers, 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-looking statements.

Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com.

I'll now turn the call over to Eric for some comments, and then I'll review our second quarter results and our outlook.

Thank you, Jerry. We reported second quarter total adjusted EBITDDA of $175 million after the market closed yesterday. This is the second highest EBITDDA PotlatchDeltic has ever reported in the second quarter. Additionally, our quarterly EBITDDA has exceeded $100 million in 7 out of the last 8 quarters, and we have generated nearly $1.4 billion of EBITDDA over those 8 quarters. Those financial results reflect the strength of our leverage to lumber strategy.

Speaking of lumber, Wood Products generated $107 million of adjusted EBITDDA in the second quarter. As expected, lumber prices moderated during the quarter from the extraordinarily high levels we saw in Q1 when the random lengths framing lumber composite price exceeded $1,300 per thousand board feet. The composite price has increased every week since reaching a low of $578 per thousand board feet in the middle of June, and lumber prices are at very attractive levels.

We expect lumber prices to remain well above long-term averages for the rest of the year. We shipped 254 million board feet of lumber in the second quarter, which was 21 million feet more than we shipped in Q1. Transportation continues to be a significant challenge. For example, our Warren, Arkansas mill, which typically ships about 50% of its lumber by rail only received 5 railcars out of 260 requested in Q2.

Our Wood Products team worked miraculously to shift virtually all of Warren's shipments to truck, and they continue to go above and beyond to solve these types of issues while maintaining their focus on working safely. Transportation challenges continue to present risk to our business. Restarting the large log line at our Ola, Arkansas sawmill remains a top company priority. The new sawmill equipment has been installed, which is an important milestone.

We expect to wrap up the project during the third quarter, and our target is to complete the start-up phase by the end of the year. As a reminder, Ola's rebuild will significantly lower cash processing costs, improved log recovery and increased production volume after it completes the start-up phase.

Our Timberlands segment generated adjusted EBITDDA of $58 million in the second quarter. Our Southern timberlands team took advantage of favorable logging conditions to generate harvest volumes that exceeded our expectations.

Idaho harvest volumes were lower this quarter due to unseasonably wet weather in June after the typical pause for spring breakup. On a positive note, the wet spring should reduce forest fire risk in Idaho this year. Sawlog prices remained strong in both regions, which is notable for the South because weather was favorable, and there was decent log availability.

Our Real Estate segment had another strong quarter with adjusted EBITDDA of $22 million. On the rural side of the business, we closed a Minnesota conservation sale comprised of more than 10,000 acres. This is notable because this sale effectively completes our long-term strategy to sell our Minnesota land holdings for prices well above timberland value. Over the course of the last 16 years, we estimate that the Minnesota land sales have created approximately $300 million of value for our shareholders.

We also continue to see strong demand in the development side of our real estate business. Residential lot inventory in our Chenal Valley master-planned community remains at rock bottom levels. And we continue to sell residential lots as fast as our team can create them. We also completed 2 more commercial real estate sales during the quarter for $2 million in the aggregate or nearly $700,000 per acre.

Turning to housing fundamentals. We believe that the long-term backdrop still remains favorable. Specifically, the housing shortage estimated to be approximately 4 million units in the United States still exists. Millennials, who are the largest demographic cohort in history and who have entered their prime home buying years, still have a strong desire to own a single-family residence.

Existing U.S. housing stock remains the oldest at 42 years on average in the history of the statistic. Those 3 examples support our belief that housing-related investment, new residential construction as well as repair and remodel will remain strong over the next several years. While we remain optimistic about the future, we must acknowledge some negative factors that have moderated housing starts in recent months.

We believe that the combination of more expensive homes, higher mortgage rates and a decline in consumer confidence have pushed many potential buyers to the sidelines. Until expectations about the U.S. economy improve, we believe housing starts will settle at modestly lower levels, perhaps around a $1.5 million annual run rate. We also expect a mix shift away from single-family towards multifamily.

In the meantime, the number of housing units under construction was a record 1.7 million units in June. The elevated level of housing units under construction bodes well for lumber demand in the near-term.

In addition, home buyers and builders have levers to offset affordability issues, migration to less costly housing markets given the durability of remote work, builder concessions and smaller houses are examples of factors that may mitigate the effect of higher mortgage rates.

Shifting to repair and remodel markets, we think lumber demand will continue to be healthy in this market segment. The underlying fundamentals remain favorable and higher interest rates usually have less of an effect on repair and remodel demand than other factors.

Importantly, home equity remains at record levels across the U.S. The job market is very strong, consumer balance sheets are in great shape. And if you cannot afford to trade up to a new or existing home, remodeling is a very attractive option for homeowners. Our home center takeaway remains solid at pre-COVID levels.

Turning to the topic of growth. We have been very active recently. Last month, we announced a $131 million project to modernize and expand our Waldo, Arkansas sawmill. The project will increase the mill's annual capacity by 85 million board feet and significantly reduce cash processing costs, which we expect will result in incremental EBITDDA of $25 million to $30 million per year and a 22% IRR in our base case.

The existing mill will continue to operate during a project with just 3 weeks of downtime expected in 2024 to tie in the new equipment. Project completion is expected by the end of 2024.

Shifting to the CatchMark merger, there has been a lot of progress since we announced the transaction at the end of May. The registration statement on Form S-4 was filed July 11. The next steps are to finalize the S-4 and for CatchMark to conduct its shareholder vote. We expect the merger will close late in Q3, and we continue to be excited about the strategic and financial benefits of the transaction.

We have also been a successful bidder on 3 bolt-on timberland transactions this year, aggregating $100 million in total. The first transaction closed in May, the second closed earlier this month, and we anticipate closing the third transaction later this quarter. The 3 bolt-on transactions add approximately 46,000 acres to our ownership in Mississippi and Arkansas.

Combined, this year's bolt-on acquisitions and CatchMark represent an increase of nearly 400,000 acres or 22% in our fee timberlands. We remain committed to growing our regular dividend sustainably, increasing our stable cash flows with the CatchMark merger and the bolt-on timberland transactions provides the opportunity to continue doing so.

We typically review the regular dividend with our Board in the fourth quarter. Given our strong results in the first half of the year, we expect to pay another special dividend this year. While the amount depends on our performance for the remainder of the year, we expect the amount will be much lower than the $4 special dividend we paid last year. We will provide updates as the year progresses, and we have better line of sight.

Finally, on the theme of returning cash to shareholders, we repurchased $5 million of our shares recently at approximately $44 per share under our 10b5-1 plan. We plan to discuss our share repurchase strategy with our Board at our next regular meeting.

At the end of Q2, we had $511 million of cash on the balance sheet and liquidity of $810 million. Our leverage remains the lowest of the timber REITs, and our financial strength provides a solid platform for continued growth.

Regarding environmental, social and governance reporting, we published our third annual ESG report in May. Our team is currently working on developing a full ESG section of our website, and we plan to publish a carbon and climate report in the fall. PotlatchDeltic has a strong ESG story, and we are committed to do our part to mitigate climate change and continue our legacy of responsibility across the ESG spectrum.

To wrap up my comments, PotlatchDeltic remains very well positioned to take advantage of favorable industry fundamentals, and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value.

I will now turn it over to Jerry to discuss our second quarter results and our outlook.

Thank you, Eric. Starting with Page 5 of the slides. Adjusted EBITDDA was $175 million in the second quarter. While the amount is lower than the $246 million of EBITDDA that we generated in the first quarter, it was the second most profitable second quarter in the company's history. The quarter-over-quarter decline in EBITDDA was primarily due to lower lumber prices and harvest volumes.

I'll now review each of our operating segments and provide more color on our second quarter results. Information for our Timberlands segment is displayed on Slides 6 through 8. The segment's adjusted EBITDDA decreased from $76 million in the first quarter to $58 million in the second quarter. We harvested 276,000 tons of sawlogs in the North in the second quarter compared to 385,000 tons in the first quarter.

Spring breakup and unseasonably wet weather in June constrained our harvest volume in the second quarter. Because our team took advantage of favorable logging conditions in the first quarter, our year-to-date sawlog harvest volume is in line with our annual harvest plan in the North.

Northern sawlog prices were 8% higher on a per ton basis in the second quarter compared to the first quarter. The increase in sawlog prices reflects higher prices for index sawlogs and the effect of seasonally lighter logs. Our index prices reset on a 1-month lag, which means the first quarter index prices did not include peak lumber prices in March, and second quarter index prices did not include lower June lumber prices.

In the South, we harvested 1 million tons in the second quarter. Relatively dry conditions and solid execution by our Southern timberlands team allowed us to take advantage of strong sawlog demand. While it's not evident in the rounded prices on Slide 8, our Southern sawlog prices were 1% higher in the second quarter compared to the first quarter. While we expect Southern yellow pine sawlog prices to moderate in the second half of the year, we remain encouraged by the recent signs of tensioning that we've seen in our wood baskets.

Moving to Wood Products on Slides 9 and 10. Adjusted EBITDDA was $107 million in the second quarter compared to $150 million in the first quarter. Our average lumber price realization decreased 20% from $1,075 per thousand board feet in the first quarter to $865 per thousand board feet in the second quarter. By comparison, the Random Lengths Framing Lumber Composite price was 33% lower in the second quarter than the first quarter.

As a reminder, the lag we experienced between booking and shipping orders is not captured by the composite, which is closer to a real-time indication of price. Our lumber prices declined each month during the quarter. Our average lumber price realizations per thousand board feet were $1,050 in April, $895 in May and $690 in June.

Lumber shipments increased 21 million board feet from 233 million board feet in the first quarter to 254 million board feet in the second quarter. As Eric mentioned, our team worked hard to mitigate the effect of transportation issues to achieve that result.

Shifting to Real Estate on Slides 11 and 12. The segment's adjusted EBITDDA was $22 million in the second quarter compared to $30 million in the first quarter. EBITDDA generated by rural sales declined sequentially due to the mix and timing of transactions. For example, second quarter results included a 10,700-acre Minnesota conservation transaction at just over $800 per acre. While the first quarter included the sale of 1,700 acres for $7,500 per acre for a commercial solar farm.

In our Chenal Valley master-planned community in Little Rock, Arkansas, residential lot sales remained strong, and we closed the sale of 2 commercial real estate lots for an average price of nearly $700,000 per acre in the second quarter.

Turning to financial items, which are summarized on Slide 13. Our total liquidity increased to $810 million. This amount includes $511 million of cash as well as availability on our undrawn revolver. We plan to refinance the $40 million of debt scheduled to mature in December 2022. We've locked the refinance rate at 2.35% net of patronage, which will reduce our annual interest expense approximately $500,000.

CatchMark had debt of $300 million at the end of March. We plan to use about half of our forward starting interest rate swaps to refinance $277.5 million of CatchMark's debt at a fixed rate of approximately 2.5%. We plan to pay off the remaining $22.5 million of CatchMark's debt at closing. We repurchased 103,000 shares for $5 million at the end of June and in early July under our 10b5-1 plan.

Note that we have largely been precluded from discretionary share repurchases since our first quarter earnings call due mostly to merger discussions with CatchMark, we are required to suspend our 10b5-1 plan once our registration statement is declared effective. We remain committed to repurchase our shares at attractive prices, and we look forward to increase flexibility after we close the CatchMark merger.

We expect to pay another special dividend in December. While the actual amount is dependent on our financial performance for the rest of the year, we believe that this year's special dividend will be much lower than the $4 per share we paid in 2021.

Capital expenditures were $31 million in the second quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement, and it excludes Timberland acquisitions.

As Eric mentioned, we were the successful bidders on 3 bolt-on Timberland acquisitions in Mississippi and Arkansas for $101 million in the aggregate. We used cash of $40 million to close the first transaction in May. We either have used or planned to use cash of $61 million to close the other 2 transactions in the third quarter.

I will now provide some high-level outlook comments. The details are presented on Slide 14. We expect to harvest 1.7 million to 1.9 million tons in our Timberlands segment in the third quarter. Harvest volumes in the North are planned to be at their seasonal peak as the third quarter typically has the best logging conditions of any quarter during the year.

We expect Northern sawlog prices to decline significantly in the third quarter due to lower prices for indexed and cedar sawlogs. In the South, we expect harvest volumes to be seasonally higher and sawlog prices to be flat compared to the second quarter. We plan to ship 250 million to 265 million board feet of lumber in the third quarter. This assumes our team continues to successfully work through a myriad of transportation challenges that we and the rest of the industry face.

Our average lumber price thus far in the second quarter is approximately $290 lower than our second quarter average lumber price. This is based on approximately 100 million board feet of lumber. Our lumber spot price is also approximately $290 lower than our second quarter average lumber price. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDDA for us on an annual basis.

Shifting to Real Estate. We expect to sell approximately 3,000 acres of rural land and approximately 45 Chenal Valley residential lots in the third quarter. Additional real estate details are provided on the slide.

Our total capital expenditures are planned to be in the range of $85 million to $90 million in 2022, excluding acquisitions. That estimate includes approximately $15 million to rebuild Ola, which we expect will be reimbursed by insurance. The estimate also includes a $12 million deposit for the Waldo modernization expansion project that we announced last month.

For modeling purposes, our quarterly Wood Products depreciation will increase approximately $3 million per quarter starting with the third quarter. That's because depreciation is being accelerated on Waldo assets that are being replaced in the modernization and expansion project.

Overall, we anticipate our total adjusted EBITDDA will be lower in the third quarter. This is based on expectations for lower lumber and index sawlog prices and lower real estate activity.

Having said that, we remain confident that industry fundamentals will continue to be positive and lumber prices remain at very attractive levels. We are well positioned to continue growing shareholder value over the long-term.

So David, that concludes our prepared remarks. I'd now like to open the call up to Q&A.

(Operator Instructions) And we'll take our first question from Ketan Mamtora with BMO Capital Markets.

First question, just maybe on sort of the third quarter, you talked about Northern sawlog prices -- to decline significantly. Jerry, is there a way to think about the magnitude of drop given the volatility in lumber prices that we've seen?

Yes, Ketan. And certainly, that's a key factor that's driving Q3 results. But when you think about -- we -- our sawlog prices actually went up in Idaho in Q2 versus Q1. So we're starting at a fairly high level in Q2 when you think about what's happened to lumber prices since that time.

And obviously, we had the composite went down 33% Q2 versus Q1. So something in probably the 35% to 40% range feels right in terms of where indexed sawlog prices are going to go for us in Q3.

Understood. That's helpful. And then can you talk a little bit about the 3 bolt-on transactions that you are doing right now, maybe any color on the kind of parcels you are buying, whether this was kind of a competitive bid?

Yes. Ketan, this is Eric. So yes, as you noticed, as we mentioned in our prepared remarks, we are in the process of acquiring 3 bolt-on deals. They total about 46,000 acres really right in our backyard, frankly, in Mississippi and Arkansas. Total purchase price for the 3 is about just a little over $100 million and $101 million. [All told], it's about $2,200 per acre.

And I'll talk about all 3 deals combined. On average, they were 20 years old. They were done at around a 5% discount rate -- real discount rate. The stocking level was relatively high at a little over 70 tons per acre. Typical in the South might be 40 to 50, so 70 is pretty good. It's got a relatively high site index at 71, which is higher than our Southern average of around 66 or so.

It's going to generate all told, about $7 million of incremental EBITDDA. It's going to add about 200,000 to 250,000 tons per year to our harvest plan.

The way we think about it is we spent $101 million, and we're going to pick up $7 million of EBITDDA, and that's the average over the next 10 years. So all told, these deals were done at about a 14 multiple.

So I look at other comparable timberland transactions. I look at where publicly traded timberland REITs trade at, which is typically up in the 20, 21x kind of range. And I feel really good about these 3 deals. We're excited about all 3 of them. Does that answer your question?

It does. Very helpful color. I really appreciate it.

Next, we'll go to Kurt Yinger with D.A. Davidson.

Just looking at Southern harvest levels going forward, I mean, it looks like this year, you're expecting to come in around 4.3 million tons. Next year, I suspect, with Ola back online, that should be a positive. And then you just talked about the recent deals you've done, and we have the numbers for CatchMark. And I guess assuming that deal closes, is it reasonable to think that Southern harvest levels could be, I guess, comfortably north of kind of 6 million tons potentially next year?

Yes, I'll jump in on that one, Kurt. And it's kind of in the right Zip code because we guided when we announced the CatchMark merger that harvest -- sustainable harvest there was between the 1.6 million, 1.8 million ton per year range. And then as you noted, there's been some nice other incremental harvest opportunities as well. So that's probably in the Zip code.

We actually will come back on our third quarter earnings call and provide some more specific color about CatchMark. And then when we have our fourth quarter call, that's when we'll kind of set expectations for 2023 after we go through our budgeting process.

Okay. All right. That's fair. And then you talked about, I guess, volumes to kind of the home center channel being still above pre-pandemic levels. But I guess, could you just talk about how order trends, I guess, the cadence of those over the quarter and what you're seeing here in early July? And just what you're seeing also in terms of channel inventory levels and how that squares with your view of underlying demand and current pricing dynamics?

Yes. So -- yes, Kurt. So on the home center front, we did reference takeaway being comparable to pre-COVID levels, solid takeaway. There's been no real drop off in demand. I suspect that the rolling over of lumber prices is kind of stimulating demand in the R&R segment, if you will. DIY might be a little on the soft side, but the pro contractor segment is still very, very solid. So our home center business is very good right now.

So on the other side, we don't sell directly to homebuilders. There's clearly going to be a pullback here in housing starts. We don't think there's going to be a significant drop off. There may be a pause here with these mortgage rates, they ran up. And -- but you look at what's happening here lately, they're kind of taking a pause here. They're even pulling back. I saw the 10-year treasury was at 2 7 this morning.

So we expect mortgage rates to roll over here a little bit. And as we get into next year, we think demand is going to come back. Inventory throughout distribution channels remains at just rock bottom levels. We've got order files that stretch out a couple of weeks. So it's not like business has completely collapsed. There's still really good takeaway in our lumber business.

Got it. Okay. That's helpful color. And then just from the last one. Jerry, I think you made a comment on the expectation that Southern sawlog prices could moderate over the balance of the year. Can you maybe just expand on that? What's kind of the -- I guess, the driver of that thinking?

Yes. Good question, Kurt. And you did hear me correctly that we do expect Southern pine sawlog prices to moderate a bit in the back half. And the other key point is sawlog pricing, we expect to be flat Q3 over Q2. So when you dig into that and to provide some more color, we have a seasonal increase in hardwood logs in Q3. So that's probably -- by itself is probably has an effect of a positive 5% on that sawlog price increase, which means to get to flat, you need a 5% decrease in Southern yellow pine sawlog pricing.

And when you think about that 5% negative, it's about half of its mix, I think, seismics, heavier mix at chip-n-saw, which sells for a lower per ton price. And probably the other half is just due to it's a seasonally strong harvest window in the South, like you've seen with our harvest volumes, they're expected to peak in the South in Q3. There's just more logs available.

But when you look through it, long-term, we're still very optimistic about continued tensioning. And when we step back, we've seen Southern sawlog pricing increase about 3% to 4% 2 years in a row now, and we continue to see positive signs of tensioning. So we continue to be very optimistic. And as capacity continues to come into the South, we think that's only going to continue to become a more positive part of our story.

Next, we'll go to Mark Weintraub with Seaport Research Partners.

Curious on the bolt-on transactions, they are in -- it seems they're in wood baskets where you are already present. Can you -- are there much in the way of synergies or anything that you bring along that made these transactions, especially good for you versus others in curiosity?

Well, they are in our backyard, Mark. And we still use our existing staff to manage these properties. We'll use contractors. We have strong relationships with. We'll be selling to customers that we've got strong relationships with -- I just look at -- most of this acreage was in Mississippi, 39,000 acres are in Mississippi.

And you look at the mill expansions taking place there, whether it's [be were] mission Forest Products, [Toko] Hankins. I mean, just -- there's an endless list of mill expansions taking place in that market area.

And eventually, that increased demand is going to translate to higher log prices. So just we were the logical buyer for these 3 properties is they're literally right in our backyard.

And then talking about log prices, as you noted, they're going to be going down in Idaho. How does that run through your lumber business? So as we're thinking about the third quarter, you've sort of given us a sense of at least where average prices have averaged and where they are currently. What's likely to happen to your lumber costs as we look 3Q versus 2Q?

Well, there will be a benefit to the sawmills from lower log prices, of course, and that's especially true in Idaho where the log prices are indexed back to lumber.

Also, you have to take into consideration the timing effects. But all told, our St. Maries mill is probably going to benefit, I don't know, $1 million to $2 million, perhaps due to the declining log prices. So there will be a benefit to the lumber side of the equation.

Next, we'll go to Paul Quinn with RBC Capital Markets.

Just on the Ola restart, what's the production pickup that we can expect in '23? And is there additional volumes that you may be able to get in '24 as well?

Yes. So Paul, so this year, we expect to get around -- right around 50 million board feet out of Ola. So recall the small log line is running today at about a 30-million-foot production level per year. And then we expect to get some volume in Q4 out of the large log line when it starts up. So all told, we get about 50 million feet this year.

When the large log line is fully up and running, which we hope to have accomplished by the end of the year, that large log line will run at about 150 million feet per year run rate. So we could expect to see a step-up of 100 million feet next year versus this year.

Beyond that, we're always looking at each of our mills looking for pieces of equipment that we can modified to improve production volumes. And I don't expect it to happen at the Ola mill just because we've really thought through every step of the production process with this rebuild. But certainly, we'll have projects at other mills that will allow us to increase production volumes.

Okay. So once you start up the large log line, you're shutting down the smaller log -- sorry, log line?

That's correct.

Okay. And then just the economics of that $22 million to $35 million EBITDDA incremental for Waldo. What are you using on lumber pricing assumption for that?

Yes. So Paul, as is typically our case, we use the 7-year average. And coincidentally, it pencils out at around $500 per thousand board feet, which you think about that, we're optimistic that lumber prices stayed at a relatively high level. And as it turns out, that's probably at the lower end of the range of lumber prices that we see going forward.

Yes. We haven't really talked about it on this call, Paul, but -- BC has got a pretty, pretty high-cost structure right now up in the $550, $600 kind of range. And we think that high-cost structure up in BC, which is, of course, 15% in North American lumber production that should provide a nice floor on pricing.

Yes. No, I agree, and BC is well over $600 right now something went up July 1. Just -- in terms of Waldo, what's the 131? What are you doing with the mill?

Oh, gosh. There's very few parts of the mill that we're not going to be touching. We'll have a new kiln, we'll have a new primary breakdown system, a new planer. Log yard is going to be improved. I mean virtually every part of the production process is going to be impacted.

Okay. And then just on the 3 acquisitions that you did. At multiple seems pretty low at 14.5x, much competition in the area for these timberland pieces?

Well, I would -- it's like any region. There's -- you've got the TMOs that are in the area, and you've got other timber REITs in the area. I'd like to say that we're particularly good at buying timberland, but timber is a very, very, very efficient market, as you well know.

So I don't -- I suspect maybe these are not markets like we're picking up with CatchMark that are in really super tight wood baskets where there's a ton of pricing tension. These are markets where it's going to take a little while for that tension concept to really play out.

So it may not have attracted as much attention as the acreage over in, say, Georgia, the Carolinas, but it's a great timberland and the log prices are probably the cheapest in the South in these markets, but they're poised to go higher with incremental capacity going in the region.

So it's a question of do you want the tension immediately? Or are you willing to let it happen a year or 2 down the road after capacity goes in place? So I would guess that's probably what's behind a little bit less competitive bidding for these markets.

Next, we'll go to John Babcock with Bank of America.

Just quickly on the CatchMark deal, could you just talk about the key milestones we should be mindful of there? Also, I do remember you guys are targeting the second half close there. Just wondering, if there's any update?

Yes, John, so the key milestones, I mean, really comes down to finalizing the registration statement on S-4 as well as the CatchMark shareholder vote. And I'd say, we're really pleased with the progress, as Eric said in his comments -- prepared comments, and we think we're on track to close late in Q3.

Okay. And then also, if you could just talk about your housing outlook and ultimately what's driving that? I mean it sounds like you're looking to run kind of 1.5 million starts with perhaps over the balance of the year, a little bit more growth on the multifamily side and the single-family side. Overall, just how are you thinking about that? I mean, is that more consensus driven? Or are you kind of baking in your own expectations into that?

Yes, John. So -- given the sharp increase in interest rates that we've seen here recently, we have lowered our near-term outlook. Basically, I think this year we'll come in at 1 6, maybe 1 5, something like that. Next year, we're kind of looking at a similar kind of a 1 5 kind of a number. So a little bit of softness here next year.

But once we get past this tightening cycle, we still envision starts getting back up to the 1.8 million level, and that could be by 2024, given all the pent-up demand that there is for housing. When you think about it, what's driving starts these days, it's relatively scarce inventory.

In millennial age cohorts at high levels, the strong home prices, you've got this work-from-home trend, consumer balance sheets are in great shape. You've got a -- still got a strong job market. The U.S. is underbuilt by 4 million to 6 million units. You've got all these different factors that they really have not gone away.

I think there's just a pause in terms of when people will pull the trigger to buy their house. And we've seen so much volatility in mortgage rates. They've just shot up overnight from the 2.5%, 3% levels up over 6%. Now they're starting to moderate a little bit. You've also seen mortgage rates really blow out relative to the 10-year treasury. We think that gap could tighten.

So I think there's reason to believe here the Fed is going to be aggressive trying to control inflation in the short-term. But I'm now starting to read things to say there may be cuts from the Fed come early next year due to economic weakness. So we have taken our near-term housing starts down. But go out to 2024, we think they're right back up again.

Okay. And just with the rising mortgage rates, are you seeing any notable changes in behavior among your different buyers and throughout the broader channels for lumber?

Well, I would say no, because we don't sell directly to homebuilders. We sell to home centers, and we send to the dealers, basically. And those dealers turn around and they could be selling it for R&R projects, they could be selling it for new home construction, we can't really track it. But what I would tell you is that we do have a really good line of sight to is the home centers.

And the home centers right now, we've got solid takeaway. We have not seen any hiccups there. And the rest of the business, there's still solid takeaway. Our order files are at 2 weeks, which is probably typical for us. So it continues to be solid takeaway. And I think that goes back to something we said in our opening remarks, which is that there's a lot of homes that are being constructed right now.

The homebuilders have really strong order backlogs going into 2022, and they're now in the process of completing those homes. So hence, the need for lumber and takeaway, and that's what we're seeing in our business.

Okay. And then just one last quick question. It does look like corporate; you're guiding to be up a little bit in the back half. What's kind of driving that? I know it's not significant, but I just want to get some clarity there.

Yes. So what -- so when you look at corporate certainly was up in Q2 as well, John. And what's happened is, with our strong performance, we've increased the accrual rate on our annual bonus, much like we did last year. So that's really the sole factor here as the way you see corporate bump up a little bit.

Next, we'll go to Mike Roxland with Truist.

Congrats, Eric and Jerry, on a good quarter.

Thanks.

One quick question. Just you mentioned the special dividend. Wondering why you called out that the special dividend potentially could be a lot lower this year relative to last year, if you're comfortable with the whole housing dynamic? And if you don't really think housing starts are going to fall that much, and given the fact that you also have a pretty strong liquidity.

That's a great question, Mike. And I think it's helpful to start with why did we pay the special dividend last year. And really, it was largely driven by the excess cash we were generating, both in the REIT with index log prices, but more so on our lumber business with cash it was generating.

And as it turns out, who would have thought, but there actually is a cap on how much cash we can hold in the company. So we had to hit the release valve, if you will, and distribute cash in the form of a special dividend last year.

So we would prefer to buy shares, to be honest with you, especially today with where the stock price is at, then paying cash out in a special dividend, to be honest.

So the components last year were excess REIT taxable income over the regular dividend. Again, it was the release valve for the Wood Products cash that generated. And importantly, about 40% of that special dividend was actually discretionary. And it's important to focus on that component as well.

So what's changed? One, Idaho log prices are lower this year, year-on-year. So there's less REIT taxable income. That would be one factor. Number two, our regular dividend payout has increased this year versus last year. And really what that does is it converts what might have been a special dividend, a component of that to the regular dividend this year.

And then last but not least, as I mentioned, buying shares at the current price is certainly much more attractive than including a discretionary component in the special dividend. And as Eric talked about with bolt-ons and investing in Waldo, we have some great other uses of cash this year as we think about our strong liquidity.

So a significant amount of growth here recently. We look forward to pulling the right levers to continue growing shareholder value. And with the strong liquidity, we just think there's better options than putting a discretionary component in that special dividend this year.

Yes. Got you. Just one quick follow-up there. Would it be fair to say then that with respect to share repurchases if the stock hangs around these levels that we should see more maybe more aggressive share repurchases in the back half?

Well, I think as Jerry mentioned, we're basically going to be blocked out of the market here when this registration statement goes effective here pretty soon. So it's hard to say how this is going to play out. We are going to revisit our estimated NAV discussion with our Board, and that's really what drives our share repurchase strategy at an upcoming Board meeting. So I don't want to get in front of the Board on this one.

Got it. And I appreciate it, Eric. Just one -- and one last question. Just can you help us frame how you're thinking about harvest in a slowing housing demand environment? I know your forecast is for mass decline, but assuming that it's even more than that. I'm trying to relate this to what happened during the Great Recession. Not saying we're going to head there, but I'm trying to get at is during the Great Recession, the industry deferred obviously a significant amount of harvest.

If I recall correctly, you had Potlatch itself is a pre-Deltic, even deferred harvest by about 500,000 tons in late 2009, 2010. Now again, I'm not saying we're headed there, but how would you deal with a more aggressive slowing housing market with respect to harvest deferrals, particularly given the fact that in the U.S. South, you really haven't overcome the excess timber inventory that's down there?

Yes. That's a really good question. I think this cycle is going to be a lot different than the last cycle. And the reason why is, in the last cycle, we had lumber prices got so low. It was below variable cash cost for mills. So at some point, you really do need to throttle back production, curtail, whatever it takes to save cash.

In this cycle, we think the production cuts that come due to lower lumber demand, due to lower housing starts. Those production cuts are going to happen up in Canada, and they're going to happen up in British Columbia that's got this crazy high-cost structure. That's one place where the cuts are going to come. The other place is going to come probably is lower imports from Europe.

If you look at the data, so we're getting roughly 2 billion board feet of lumber per year right now from European exports. Really, that was -- where did those exports come from? They're driven by the spruce beetle epidemic that hit Central Europe, number one; and number two, the incredibly high prices that we had here in the U.S. attracted European exports.

But if you look at the 10 years prior to win this spruce beetle hit and when lumber prices ran up here in the U.S., there were virtually no European exports of lumber to the U.S. So as these prices moderate, I think that European exports are going to moderate as well.

So getting back to your question of what's going to happen to log demand in the South. I think there's going to be plenty of margin for mills to keep running as hard as they can in the South, which any time you've got favorable margin, you're going to run your mills as hard as you can. So I don't see a risk to our harvest volumes in the South at all from this.

Next, we'll go to George Staphos with Bank of America.

Sorry for the double teaming here, but I want to pick up on that question that Mike asked you. So recognizing that these markets are regional, right, and there isn't 1 monolithic Southern market, when do you expect growth versus drain will ultimately turn negative?

In the South, you talked about tensioning in the markets. But the folks that we talk about, they expect inventory -- standing inventory to keep growing really for the rest of this decade. Would you disagree with that? And what's your view?

Yes. George, that's a great question. It really does -- you can talk about the South as a whole, and I think the data that I've seen on the South as a whole is that there's probably another, I don't know, 3 years, 4 years maybe where timber inventory -- standing timber inventories across the South continue to expand, but it really is a market-by-market sort of analysis that you need to do.

I would guess that if you go over to Georgia and South Carolina, those areas, I think growth-to-drain might already be in drain mode, whereas in Mississippi and Arkansas might still be in slight increase mode. So it really does vary dramatically from wood basket to wood basket. But yes, I think the data that I've seen says in the next 3 to 4 years, timber inventories are going to peak and then start to roll over.

Okay. And I want to pick up on John's question, and I'll turn it over. So recognizing, again, you're not selling directly to homebuilders. Today, we saw new home sales fall kind of to a 2-year low. You're expecting only maybe about 100,000 drop-off in starts next year versus this year. What we're hearing is that perhaps builders, they like their margins, they're having difficulty finding people, laborers and so to preserve margins are not going to be as quick to try to expand and build out and rather just enjoy what they've got.

As you thought about that and what that might mean if you agree with the premise, maybe you disagree, how do you think that then, in turn, plays into your lumber forecast on your harvest and why 1.5 is a reasonable place to be? And good luck in the quarter.

Yes. It's a really good question. I mean the homebuilders here have got 2 options here. Either they can try to preserve their margins, which, by the way, their margins are at record levels. So they've got some room to give there if they want to keep moving volume. I think it all comes back to there's fundamental pent-up demand that's out there. It goes back to this under building over the last decade, 4 million to 6 million units short in the U.S.

You've got this millennial age cohort they all want to buy. I think the homebuilders are going to have to make a decision here on what they'd rather do, they want to drop prices and move volume, or do they want to keep prices high and preserve margins. Obviously, if they keep prices high and preserve margins, it's going to be less lumber demand.

I haven't heard them say that. I thought I heard (inaudible) say this morning that they're looking at price concessions to stimulate demand. I think we'll just have to wait and see how that plays out. But obviously, if they preserve margins, it won't be good for lumber demand.

Okay. At this time, I'm showing there are no further questions. And I'll turn the call back over to Jerry Richards.

Okay. Thank you, David. And thank you, everyone, for your questions and for your interest in PotlatchDeltic. To recap our results for the first half of 2022 were very strong. We look forward to providing updates on the performance of our leverage to lumber strategy, our pending merger with CatchMark and our progress on increasing shareholder value.

This concludes today's conference call. You may now disconnect.