Rayonier Inc (RYN) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to Rayonier’s Second Quarter Earnings Release Conference Call. Today’s call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes as implied consent. Please disconnect at this time if you do not consent to being recorded.

At this time, for opening remarks and introduction I would like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Gerald Pollack. Please go ahead, sir.

Thank you and good afternoon. I would like to once again welcome everybody to Rayonier’s investor teleconference, this time covering our earnings for the second quarter of 2005. Our earnings statements were released this morning and supplemental materials distributed soon thereafter.

With us today is Lee Nutter, Chairman, President and CEO, and Charlie Margiotta, President of our TerraPointe Real Estate Company. Lee will open the formal presentation followed by my review of the financial highlights of the quarter. Lee, as usual, will then cover markets and operations, and Charlie updating us on current TerraPointe activities. I will close our presentation with the discussion of earnings per share trends.

In these presentations we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Our earnings release and other recent press releases list some of the factors which may cause actual results to differ materially from the forward-looking statements we may make. They also are repeated on page two of our supplemental material. Please familiarize yourselves with them. With that, let’s start the program with opening comments from Lee Nutter. Lee.

Thank you, Gerry. Let me just make a few general comments now and then after Gerry takes you through a summary of the financials, I will come back and discuss our business units, markets and operations. Having gone through some of the materials last week during my remarks to many of you when we announced our New Zealand transaction, I will keep my comments here brief.

Second quarter results were strong across all our businesses and in particular, timber and performance fibers. Real estate had a good quarter as well and reflects the normal variability that this business brings. Here we should see a second half of this year with business results above what we've seen in the first six months. We've enjoyed a good first half and assuming things stay on course, we're well positioned for a year that should reflect results above those of 2004. Our balance sheet remains very strong, as Gerry will discuss, and that, combined with our robust cash flow, positions us well for the future and our timber business particularly. With that, let's go back to Gerry for his review of the financials.

Thanks, Lee. Before going to my discussion of the typical variance analysis that we do, I just want you to look at page three where we itemize or reconcile reported earnings to proforma amounts that we believe are more representative of past and future performance. At the top half of the page we itemize the basic two issues for 2005 that we consider items of special interest. The first relates to the decision to sell the MDF business and take impairment charge and as a result, classify the MDF business as help for sale and discontinued operations. The write down of assets of $24.1 million as shown on the first itemized line, with the net operating loss of $600,000 for the second quarter shown separately, resulting in overall discontinued operations net loss of $24.7 million, or 48 cents per share.

The IRS tax settlement in the second quarter of 14 cents per share is also shown. With a six month affect of 33 cents per share, including the first quarter settlement of 19 cents. From last year's report earnings we noted two tax items related to the conversion to the REIT. The first being reversal for timber related factors no longer needed, and the second the affect of the decision to generally focus cash investment in the U.S. and therefore, the need to provide tax on a repatriation of foreign earnings. I might note that disposition and accrual was made prior to the enactment of the Job Creations Act that provided tax incentives for that repatriation. We are currently studying repatriation plan and will decide in the second half of this year if and how fast to implement one.

I believe that this chart basically sets the stage for the comparative analysis that follows, which subsequently reflects proforma and second quarter earnings of 67 cents per share, rather than the 33 cents that includes the special items at $1.16 per share for the first half of the year. This would then compare to what we believe is an equivalent 88 cents per share in the prior year second quarter, and $1.40 per share for six months June 2004.

What we have not listed here but is of importance in a comparative analysis, is the fact that in last year's second quarter, we had what we called a [permalease] sale representing over $24 million in operating income, and 29 cents in earnings per share. That transaction resulted in approximately 78% of our full year real estate operating income to be first half loaded – something that would not necessarily happen annually. In fact, this year we expect that real estate income in the first half of the year will represent less than 43% of our current annual projection from that business based on anticipated closing schedules.

With that [backdrop] let me move on to chart four to begin our '04 financial highlights. Overall sales for the quarter of $290 million represented an increase over that of the first quarter of 2005 for the decline of $36 million from the equivalent prior year period. As I just mentioned, the large land sale in the first quarter 2004 – in the second quarter of 2004, was the primary fact for the year over year decline. But sales from our trading activity, which is not a major earnings contributor, also declined significantly.

Operating income of $49 million also reflects an increase over the first quarter, as we'll see shortly. Once again, the comparison to last year is dominated by the absence of the major land sale.

Reported income from continuing operations of $42 million, or 81 cents per share, is prior to the charge for MDF. That does include the second quarter tax settlement, while netting the sum of $17 million, or 33 cents per share, as shown here, reflects full bottom line results.

As far as cash resources and liquidity are concerned, we've had a very strong six months with cash provided by operating activities of $123 million. The $35 million decline from prior year is mostly related to last year's major land sale and also due to approximately $16 million in proceeds from the sale of real estate that was restricted in anticipation of 1031 lifetime exchange acquisitions. Those acquisitions, by the way, did not materialize and that $16 million will be recaptured and be reported as cash and cash equivalence in the third quarter.

Cash available for distribution of $94 million was down from prior year also due to the absence of a major land sale, but still approximately 150% of our first half dividends.

Gross debt at $687 million at the end of June reflects an increase over the June 30, 2004 year ago balance as a result of two factors. First, in the second half of 2004, the taxable REIT subsidiary purchased real estate from our forest resources unit and they [indiscernible] at the subsidiary level while cash was made available at the parent company level. Second, in 2005, in anticipation of possible repatriating foreign earnings, foreign cash balances increased and an associated amount of debt incurred at a U.S. domestic subsidiary. Net debt or gross less available cash did not change after these intercompany transactions took place.

Overall as Lee indicated, we are pleased with cash flow for the six months of the year. As we have indicated, both in the timing of real estate, you can't look at it on a quarter to quarter basis, similarly, the movement of cash and the optimization of REIT specific related taxes can significantly impact periodic cash balances. But overall for the year, we continue to expect strong cash performance well exceeding our dividend distribution.

On chart five we show the comparison of the first quarter to second quarter trends. Starting with the 49 cents in earnings per share, also our proforma basis with that metric excluding the first quarter tax audit settlement of 19 cents per share.

As we went through the operating aberrances, which we will talk about in a few minutes, we can see in the timber group offsetting variances between lower volume and higher pricing; and for our real estate business, the effect of the second quarter operating income gained 2/3 of that of the first quarter, or a $5 million variance. Once again, the timing of real estate closings during the year can materially vary.

In [zooming] down the page, we can see the strong performance this quarter for our performance fibers unit in both price and cost, as well as if for wood products, now solely reflecting a lumber business, primarily from higher prices. Overall operating income improved from that of the first quarter with positive contributions for like kind exchange benefits, foreign exchange related tax benefits, and the absence of the first quarter's charge for unrealizable New Zealand withholding taxes made positive benefits earning in the second quarter on a proforma basis of 67 cents per share compares very favorably to what we believe is an apples to apples comparison of 49 cents in the first quarter.

I might note that the six month to date effective tax rate of 15.7% also compares favorably with the first quarter's effective rate of 17.5%.

Let's move on to chart six, just to briefly review the year over year variances. We'll focus on this chart primarily on the second quarter, which, as we suggested, are in chart three, should start with an 88 cents per share basis for income from continuing operations for 2004. Here we can see for the timber group a stronger year over year contribution from higher timber prices, primarily in the northwest, offset by lower volume, also primarily in that region. The impact of the cumber sale year over year can now clearly be seen in the real estate line with a total impact of $25 million pretax, or 31 cents per share, including other minor variances that occurred. For the second quarter, performance fibers pricing in both sale of specialties and absorbent materials was favorable, although a higher wood and chemical cost impacted the variance, as did the fact that last year's second quarter included the favorable release of $1.5 million in maintenance reserve, thereby hurting year over year comparison.

The wood products business contribution year over year was basically flat. The other operations category which includes coal royalty activity, was down this year primarily due to lower production and our resulting participation interest that we have in the northwest. With corporate and taxes accounting for an additional $5 million in net income, but lower incentive compensation and legal expenses, as well as like kind exchange and foreign exchange related tax benefits contributing to the final results.

From a comparative standpoint, the second quarter of 2005 result of 67 cents per share, although less than the apples to apples 88 cents per share in 2004, represents a stronger performance than we had anticipated 90 days ago.

Before I close, let me just review our cash flow as it relates to cash available for distribution or CAD on page seven. In this chart we start out with our adjusted EBITDA which includes the non-cash cost basis of land sold. This year's $175.7 million represents a $24 million decline from the prior equivalent level, primarily being impacted by approximately $25 million in lower cash flow, as a result of the major land sale last year. Capital spending for the six months is ahead of last year's base at $43.7 million, compared to $34.8 million in last year's comparable period. As you can see, there are two additional line items contributing to the overall CAD variance for the six months. The first relates to income tax expense and benefit. But this year, we have had positive contributions from two tax audit settlements contributing $17 million versus the more typical provision, and the other is on the working capital line, where $16 million in restricted cash, higher tax payments and needed working capital contributed to a $27.9 million adverse swing. As I mentioned, a recapture of that $16 million in 1031 restricted cash, as a result of the absence of [LKE] acquisitions, is shown two line items below.

Overall, cash available for distribution is only down $27.6 million from the very strong comparable period last year. CAD per share at $182 well exceeded our first have dividend of $1.24, and with real estate earnings being more back half loaded this year, full year CAD should be at least comparable to last year.

With that, let me turn the conference over to Lee to begin covering our markets and operations report. Lee.

Thanks, Lee. In discussing our markets and operations, I will briefly review the second quarter and then in general, discuss our outlook for the balance of the year, but more specifically our expectations for the third quarter. As always, keep in mind that much can happen over the next five months.

For the northwest, on page nine, timber prices continue to build on the gains of the last two quarters. Volume, as is typical the case, was lower in the second quarter, as will be the third of the second, which is expected to be slightly below the third quarter of last year. Year over year total volume should be slightly above the average for 2003 and 2004. As you look at this chart, let me remind you that the volume in the first half of 2004 reflects that sales that were pushed over from 2003, to take advantage of our then new [read] status. Demand in the northwest remains very strong and we should see a slight pickup in third quarter prices. With the continuing strong market, our average price out there for 2004, excuse me, 2005, could be 35% above the level for 2004. Page 10 reflects the statistics on our southeast timber business. Prices were flat while volume was above both first quarter this year and second quarter of 2004. For third quarter as compared to second quarter, prices are expected to give slightly, while volume will likely be modestly lower. For the year, our southeast volume is expected to be about 10% above last year. The increase essentially reflects the increased harvest impact of the 83,000 acre acquisition that we made last August. In price for the year, we will likely see little change from an $18.00 a ton average.

In New Zealand, on page 11, prices eased slightly from the first quarter, but was still above those the second quarter of 2004. The second quarter volume reflects the typical pickup from first quarter levels that we've always seen in the past. Prices for the third quarter will likely be lower than the second quarter due in part to a shift in geographic mix that will generally be in line with third quarter of last year.

Volumes for this third quarter should reflect the normal pickup, in fact, it should be, perhaps, 10% above last year's third quarter. For the year in New Zealand, the average price should be flat, then on an annualized basis, the volume should be modestly higher.

Before we move to the real estate side of our business, let me recap the recent developments on our New Zealand timber side. I think that transaction is quite well summarized on page 12, but let me say, as you've seen last week's an announcement, we will sell our 118,000 acres of timberland in New Zealand to a consortium for $184 million, or $1,560 an acre. This consortium, which is led by Global Investing [R] with Deutsch Bank Asset Management, will also purchase 235,000 from Carter [Hold] Harvey for $296 million, or $1,260 an acre. When this transaction is complete, which is expected in the fourth quarter, the total holdings will be 353,000 acres. For Rayonier with our REIT, we'll initially have a 49% equity investment in the consortium. If we – the consortium bring in another equity investor, our investment will move down to 40%. As we've indicated, we'll be managing the entire 353,000 acre timberland investment. As we noted last week, strategically, these transactions are positive developments that will enhance the value of Rayonier. Specifically what this means for us, is that we'll increase the asset base and income stream into the REIT, lower the values of our PRS asset base can significantly increase our footprint in Australasia. Please keep in mind this is a REIT investment and all income coming into the U.S. is REIT qualified income and thus, receives the same tax treatment to our stockholders as income from our U.S. REIT. If our equity remains at 49%, our net proceeds will be $61 million. If we pull back the 40%, the net proceeds will be $83 million. These funds, in some part, will be used in some investments to continue to pursue timberland acquisitions. These acquisitions are particularly attractive when we can utilize 1031 or 1033 exchanges.

Let me now take a minute here to comment on the real estate business results. We noticed in the past, given the nature of the business, there will be a quarter to quarter variation, as well as year to year, as Gerry mentioned. Second quarter operating income was down sequentially as well as below last year's second quarter, which you may recall, as Gerry mentioned, include the very large sale. Third quarter results are expected to be a little above second and well above third quarter last year. For the year, operating income should be somewhat below 2004.

With that, let me now turn it over to Charlie Margiotta, who will give you a quick update on developments at TerraPointe. Charlie.

Thanks, Lee. The [creation] announcement of our TerraPointe Real Estate subsidiary has been very positively received and we're excited about broadening the business as we move up the value chain. I'd also like to mention that we are in the process of recruiting some key real estate professionals to strengthen our group. As I think everyone is aware, the real estate market is active with strong demand in both the higher end development property and in our rural sales program. As you look at the year, the sales of our higher end properties appear to be second half loaded, while the rural sales are more evenly distributed over the year with the slight [weighting] to the first half. I wouldn't overanalyze the timing of closings except to repeat my earlier comment that demand for developable property is strong up and down the coast, from Savannah to Daytona Beach, Coastal Carter.

As you can see in the chart, we have segmented our real estate activities by geographic area. Savannah and St. Mary's in Georgia, Nassau and St. Johns Flagler in Florida. Currently, the strongest markets with the highest demand are to the north of Savannah, and our southern most properties in the St. John and Flagler County markets.

Moving from north to south, the Savannah market is very strong with significant interest in residential development projects. We are considering moving forward with the entitlement of several of our properties, which gives buyers much more certainty with the resulting increase in our selling price per acre. The St. Mary's area southern most point on the Georgia coast and just [wet] the Cumberland Island, would be characterized as steady with consistent residential and commercial demand.

I'll come back to Nassau on the northeast coast in Florida in a minute. The St. Johns and Flagler market, just south of Jacksonville, would be our single strongest market with numerous inquiries and many potential joint venture opportunity. I would also like to mention that a major project, which we now refer to as "the bluff," located along the St. Mary's River in northeast Florida, is in the early planning stages. This project is expected to involve thousands of acres over a number of years with mixed uses, including likely high end amenities taking advantage of the elevated river bluff and salt water marsh frontage. We continue to be excited about the interest generated by our TerraPointe real estate business, both within the local real estate market and the financial [pref]. I taped an interview with CNBC just yesterday, which we expect to air on Thursday, and explained our belief that over time, our coastal properties in Georgia and north Florida have the potential to be worth several billion dollars. Turn it back to Lee.

Thank you, Charlie. As we look at the performance fibers business on pages 14 and 15, as I noted last quarter, we did see the slightly higher prices in cellulose specialties while in [pluff], or as here we call it absorbent materials, our average price was up about 3%. As you've seen, operating income results for the quarter was sequentially up and in line with those of a year go. For the year, cellulose specialty prices should be 3 to 4% above 2004, with [flops] notwithstanding the usual volatility, given the commodity nature of the product, average prices for this year expected to be up about 5% from the 2004 average. As I think we all know, oil chemicals and hardwood fiber costs have obviously hurt margins in this business and held down our financial results.

Volumes on page 15, I think the message you should take away from here is that our success in steadily shifting our sales volume to the much higher value in margin sales, specialty business. You can also see the corresponding reduction in the more commodity type pluff products.

On page 16, lumber prices again moved up, as did our volume. Looking at the second half of the year, we could likely see some price reductions while our volumes should hold or increase slightly. That said, the average price for 2005 should be above that of last year.

On page 17, I think enough has been said about our MBF business and our plans to sell the non-core facility.

Let me conclude here by saying that we've had a solid second quarter and now a very good first half. We will remain well focused in our businesses with a strong cash flow and balance sheet. Our tax efficient REIT, thus allowing us to pursue growth opportunities in timberland ownership and value added investments in our substantial holdings of higher and better used properties.

With that, let's go now back to Gerry.

Thanks, Lee. At this point in the conference, we talk a little bit about earnings per share trends, as shown on chart 18. As a result of pairing the MBF business as discontinued operations, we begin in this chart, for this quarter, focusing on earnings per share from continuing operations. [And for comparing] reporting as well, items of special note are excluded to once again include this year the two audit tax elements and last year included the major tax reserves net benefit of 98/10 per share.

In the first set of columns we show proforma amounts which exclude the special items, whereas for reconciliation purposes, we show in the third and fourth columns what the reported actuals or restated amounts would be, including the tax items of note. However, if we focus on the first two columns and what we believe are the relevant comparisons, we expect the third quarter at this time, to be comparable to that of second quarter 2005 to 67/10 in earnings per share, and therefore, obviously, up considerably from the 49 cents per share in the third quarter of 2004.

Also, as we mentioned in our press release, we expect most of the second quarter positive variance to prior expectations to roll into the third and fourth quarter which should result in expectation at full year results to not only surpass last year's apples to apples EPS of $2.16 per share, but also the first cold estimate as of July 25th of $2.20 per share.

Before I close, two updates on metrics that some of you use for modeling purposes. DD&A or depreciation of depletion of amortization plus the non-cash cost basis of land for the full year is expected to come in around $160 million, down from a $170 million level given in January, primarily as a result of extracting MBF depreciation from our continuing operations. Secondly, CAPEX, including both regular and strategic acquisitions, is expected to approximate $105 million, versus a $90 to $95 million estimate previously given, primarily as a result to LKE qualifying timberland acquisitions totaling $10 million.

With that outlook, let me turn the conference over to the conference operator for questions from our audience.

(OPERATOR INSTRUCTIONS) For our first question we'll go to Steve Chercover with D.A. Davidson.

Thanks and good afternoon. First of all, can you quantify what getting the New Zealand assets into a restructure might mean? I recognize that it's going to vary with log prices and volumes, but maybe some kind of ballpark.

Steve, I'm not sure whether you're referring to the REIT asset test or the [indiscernible] in the investment. Once again, we've invested $117 million – or we will be investing $117 million at the 49.7% equity rate into the consortium. That $117 million investment will be purchased by the REIT parent – will be made by the REIT parent, so effectively, the REIT parent company asset base goes up $117 million, the proceeds of the sale of the timberland will come through to the TRS. So you have [a shipped] an investment net net, from an accounting standpoint, we'll be booking a $28 million gain which is really the net differential for the time being. So, I'm not sure those numbers answer your question. As I said, the REIT investment in timberlands goes up, the TRS goes down, but has a cash proceeds. Overall it's net positive on a net net basis of the company.

Yes, I was actually thinking more of the ongoing annuity – the stream of cash flows that will flow back to us – what the impact might be on distributable cash each year.

I think, as I mentioned at the teleconference last time, we don't see right now a major change in the cash flow to the parent company from the investment at this point in time, other than, as I indicated, the cash proceeds will allow us to reduce debt at the TRS level, but no significant change other than as I indicated the potential earning stream coming from the cash that's being extracted from that part of the world.

Okay. Thanks. And secondly, sales and earnings of the trading business in the second half. Will they be similar to what you generated in the first half?

Are we talking about the trading operations which is fairly insignificant to the total, I would probably say the trading activity may be up in the second half compared to the first half, and once again, earnings probably slightly higher than the first half.

Okay, I'll relinquish it and perhaps come back.

Our next question will go to Frank [Deneu] with Deutsch Capital.

Yeah, I have a couple of questions. On the 30 – I think you said 35% year over year increase in prices or [stoppage] in the northwest –

Frank, this is Lee Nutter. I think that's our average, [not] what we're looking at the average for the year. '05 average over '04.

Is that a function – more a function of mix or is that like – or your overall whatever, prices are generally up that much?

Pretty much, generally up that much, Frank.

Okay. And then, I think also – on last week's conference call, I think, when you were talking about the New Zealand deal, you were talking about giving greater flexibility in terms of tests and stuff for retest – did I hear that right last week?

Yes, Frank, that's correct. Both on the income stream from the – the primary interest income and dividends stream from the new venture is requalifying income, part of what's called the 75% revenue test, which by itself then allows more dividend income to come up from the TRS and, once again, the shift in asset value is to the parent company from TRS, so it'll assist in that test also.

Okay. Another question, is there anything I should worry about with you guys with those tests? If you want – because you use greater flexibility – did you need the flexibility?

Well, it –

Frank, it always depends on the opportunity that confronts us and whether or not that opportunity is a trigger event. So far we've been operating as a REIT for al little over a year and a half. It has not restricted us in any operations. We're able to move cash around relative to the TRS buying land from the parent company, so you just – you never know the opportunities that confront you and therefore, it provides that little added cushion.

Okay, and then, I guess a couple of more questions. I guess you said that there was going to be an interview on CNBC, with the real estate people, if I heard you correctly, you said the Florida properties have several billion dollars worth of value? Is that at some future date or is that presently, or –

This is Charlie, Frank. No, it's over a long period of time.

Okay. Right. And so, what would be – could you add a present value to that number?

No, no. We don't have a present value to that number.

Okay. Because I mean, I guess the reason this goes back to the question – the prior question – if there's some people – I mean if the real estate is worth this much, the real estate development has this much – this great potential, and that's not part of the REIT, if it's very successful in the real estate development, does that cause a problem with the REIT status or can you break up the company or do something that –

Frank – Gerry Pollack again, I mean, part of the planning that we all go through at corporate is to decide when to begin marking the land and to delay that activity as long as possible so that the appreciation occurs at the parent company REIT, so over time, undeveloped land is appreciating in anticipation of conversion at some point and being marketed. So the longer we can delay it, the better off we are. On the other hand, we do want to convert some of that potential into present value and that's the challenge that Charlie, Lee and I face in terms of the timing of the real estate transactions intercompany.

All right, so if you start getting entitlements, is that considered stop the clock? I mean is that considered like a development activity as opposed to pass of ownership?

As afar as I know, we can plan for the development of the property, as long as we're not actively marketing it doesn't triggers an issue here. So, we'll do a lot of planning, we'll be looking at it, as Gerry said, we believe the property will appreciate, but as long as we're not marketing – actively marketing it, I don't think there's an issue.

Okay. Thanks.

We'll next go to Chip Dillon with Salomon Smith Barney.

Hi there, good afternoon. I had a question – when you looked at your June 2005, the balance sheet you have, I guess on page E, can you just give us an idea as to what, again the assets of the [billion 9] are in the TRS and what proportion of the liabilities and how that will change when the New Zealand transaction is done? I know you've kind of gone through it, but could you go from that basis, please?

We haven't reported that previously and in many cases, there are intercompany eliminations, preferred tax issues, let us give it some thought as to whether they're really from understanding Rayonier's performance that is that relevant. But long story short, Chip, I'm not sure, I mean we have the numbers, I don't have them with me, but I'm not sure because of the intercompany deferrals that what use will be made of it at this point in time.

Okay, and just so I understand, at least on the asset side, up till now, we've, of course, had the performance fibers business and the New Zealand timberlands in the TRS, right?

That's correct.

And, now when you mentioned that you were going to be sending about $80 million, I think you said, in cash up to the parent, is that treated – on the balance sheet that you report, does that – does your net – I guess the net debt you report would go down by that amount, is that correct?

Let me clarify – if I did say that, Chip, I didn't mean to say we're going to send it. What's going to happen is that proceeds from the sale of our timberlands to the consortium, right? The net proceeds are going to go to TRS. Consolidated net debt will decline by about $80 million as a result of this. Debt will decline in the TRS, but remember, the parent company REIT is going to make the investment in the consortium, and that's how we're going to ship the timberlands – New Zealand timberlands from the TRS to the parent. So consolidated debt goes down approximately $70-$80 million. Cash balances will go up in TRS and down in New Zealand, once again, temporarily through the remainder of the year.

And is there – okay, thank you. When you look at your ownership in the consortium, you mentioned 40 or 49%, if you went above 50%, does that have – does that jeopardize the REIT taxation of that income?

No, no, I think the real issue there is one of consolidation and application of 1046, so it doesn't relate to the – the more we actually own of the New Zealand timberlands, the better off we'd be, but it's really more one of consolidation. We are a major minority interest, but Deutsch Bank basically has put the consortium together.

So the way to think about it is the consortium would – let's say if this were Canada and you did [proportion accounting], your proportion of the net debt of the – I mean, instead of being $80 million decrease in net debt, it looks like the consortium's going to have debt – I'm just kind of weighing it here. I guess of what -- $400 million?

Oh, no. I think – the charts that we gave out on Wednesday had the total investment of the consortium approximately $500 million, with about $250 million of third party bank debt, the rest being investors equity and subordinated debt. So it would have been about $250 and, yes, it was proportionate, which it isn't then at 40 to 50% interest would be equivalent to $80 to $120 million.

And, I'm sorry, you said $250 was equity and subordinated debt, could you give me the breakdown of that? Did you provide that?

We didn't, but it's basically going to be about 50/50.

Okay, so there are a lot of others that are putting actual equity into this thing, not just the bank?

Absolutely.

Okay. Thank you.

And for our next question we'll go to Michael [Gastner] with Buckingham Research.

Thank you. I was hoping you could talk a little in more detail about the Savannah and St. Mary properties that you intend to close on in the remainder of the year. First of all, tell us a little bit about the properties and what – how far along in the development process have you gone with these? Do you plan to entitle them, etc.?

Sure, this is Charlie, Michael. Effectively, the properties we sell are not entitled, they're raw land. [Indiscernible] developers who will entitle them and one of the things we talked about, I mentioned is moving integrating forward and doing more entitling ourselves to generate a higher sales price, but several of the sales in the third and fourth quarter are in those areas and I can't say much more except they're typical development properties in the 2 to 500 acre range to developers and predominantly residential development.

Okay, and at what point are we going to be seeing if you – you go ahead with pursuing entitlement. At what point will we be seeing Rayonier selling, actually, entitled land?

We're certainly working on it and I can't commit to next year, but it's one of our top priorities. It's – we've got our organization working on it. So, it's underway. It just takes a bit of time.

Okay. And how can you help us think about these types of properties and the real estate business in general? Should we be thinking in terms of acres, lots or maybe you could just help us think about how we can approach the business?

Well, we continue to think about it as acres. Over time, we may, as we integrate forward, we may start thinking about it as units or lots, but to be honest, we're just a long way from that point. We still think about it as acres per acre price, entitled per acre price, and so on. So we still think about it as acres and likely report in acres.

Okay. Thank you.

For a follow-up question we'll go to Chip Dillon with Smith Barney.

I'm sorry, I was actually traveling last Wednesday, so I hate to ask you to repeat maybe what you've already repeated, but what is – can you give us some targets as to what you think the reporting equity income from the New Zealand investment? And did you give any kind of guidance as to what you thought that contribution would be in either 2006 or in some future period?

Chip, Gerry Pollack again. No we haven't, and the only comment I made then and I make today is that – and we will break this out eventually, is that on a bottom-line basis, cash coming out will not be materially different than the cash that we've been [go along], it'd just be different forms of cash, interest dividend and management fee income. And on an income basis also, we don't see a material difference between the income that we will be getting from all the agreements that we have in New Zealand, plus the additional income that we'll get from the use of proceeds. So, right now, it's a step, as Lee indicated, to a greater presence in Australasia, a greater flexibility on REIT, but not a material change in the P&L of the company – of Rayonier, yet it is a big impact on our balance sheet.

And again, you said that the tax efficiency is much greater, obviously.

It will help us on a consolidated basis to be more efficient in terms of their debts.

Okay. And then second – just one more follow-up – I know that it's – I was just wondering, what – as you look at your plan for the next 18 months, how should we think about dividends, especially in light of the change that you – or the two big changes, the real estate initiative and the investment or the transition of New Zealand? Is there some expectation we should have in terms of when you might look at possibly raising the dividend?

Chip, this is Lee Nutter. I'm not quite sure the first part of your question, maybe you were thinking that maybe we couldn't or wouldn't do it as much as we otherwise might. As we've indicated all along, we look at it, at year end as we set in for the upcoming year, I think as Gerry mentioned, our CAD or dividends in percent of CAD, obviously cash isn't the problem for us. We certainly have a lot of flexibility as to the amount of dividends that we could increase, but that will be a decision made at the end of this year with our Board.

Okay. No, no, I have no doubt, I just didn't – I just wanted to make sure of what the timing was, so, if you did something, it would be announced, I guess, in January, is that right?

This is Gerry Pollack. At our February board meeting usually.

Gotcha! Thank you.

It's pretty easy to see that we have lots of cash.

And for our next question, we'll go to Steve Chercover with D.A. Davidson.

Thanks again. First of all, is there a reason why you establish your dividend calls once a year as opposed to looking at what's available?

Well, I think, Steve, this is Lee Nutter, it's typically the way we thought of it. I think rather than sort of regularly raising it policy, if you will, or program, is to look at it annually. If you have an unusual circumstance, of course, we would always consider it a little differently. But to date, although you could say to date's been pretty short, since we became REIT, at least my part, I'd prefer to look at I annually unless there's some kind of an unusual circumstance in which we could look at it mid-year.

Fair enough. And when you discuss a number approaching, well, a couple billion for the [HBU] lands, we don't need a calculator to say that $10 billion, sorry, $10,000 an acre, what kind of discount rate or time horizon do you think is fair to think of that?

Go ahead, Charlie.

Well, we talked about 200,000 acres along the Coastal Carter and I think about 25 years of demand pressure to take those acres down and that's a reasonably wild guess trying to guess that far out, but it's all about population pressure and demand in trying to predict although it's pretty hard. The good news is we've seen the population pressure move up from [indiscernible] a land seller, a developer anyway, up from south Florida and western Florida, up to northeast Florida and coastal Georgia. So there would certainly be a steady demand for our property but trying to predict a takeout of those acres over any long period of time is really tough. And we really only been deep into this program for four or five years. So, discount rate, I'd say it's higher than timberland investing, but the way we run the business, it certainly isn't that high.

Okay, and one more – has the whole HBU strategy changed the urgency of doing like kind exchanges or 1041 deals?

I think – there's just a huge benefit to do it. I don't know about the urgency. We saw the benefit we got last year from doing a fairly large one for us. It's certainly a top priority in the company to look for acquisitions to match against sales, so it's certainly a priority. On the other hand., we're not going to do something silly on the acquisition side, so we're always looking, we've done small ones this year, a large one last year. It's absolutely a priority, yea.

Okay. Thank you.

And gentlemen, it appears we have no further questions at this time. I'd like to turn the call back over to management for any additional or closing remarks.

This is Lee Nutter. We thank you for your participation. If anybody has any questions, I would encourage you to call Parag P. Bhansali, our director of investor relations. Hopefully, we've given you a good picture of what the company has done to date, and our outlook for the balance of this year. Thank you.

That does conclude today's conference, you may all disconnect at this time.