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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome and thank you for joining Rayonier's Third Quarter 2018 Teleconference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect now. Now I will turn the meeting over to Mr. Mark McHugh, Senior Vice President and CFO. Sir, you may begin.
Thank you and good morning. Welcome to Rayonier's investor teleconference covering third quarter earnings. Our earnings statements and financial supplements were released yesterday afternoon and are available on our Web site rayonier.com. I'd like to remind you that in these presentations, we include forward-looking statements made pursuant to the Safe Harbor provisions of federal securities laws.
Our earnings release and Form 10-K filed with the SEC lists some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. They are also referenced on Page 2 of our financial supplement. Throughout these presentations, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measure in our earnings release and supplemental materials.
With that, let's start our teleconference with opening comments from Dave Nunes, President and CEO. Dave?
Thanks Mark and good morning everyone. First, I'd like to make some high level comments before turning it back over to Mark to review our consolidated financial results. Then, we'll ask Doug Long, Senior Vice President, Forest Resources to comment on our U.S. and New Zealand timber results. And following the review of our timber results, Chris Corr, Senior Vice President, Real Estate will discuss our real estate results.
We're pleased with our third quarter results given the challenging market conditions we faced. For the quarter, we achieved earnings per share of $0.18 and adjusted EBITDA of $83 million, reflecting solid operational performance across all our timber segments as well as a strong contribution from our real estate segment.
Our Real Estate results were driven by a $28 million timberland sale in New Zealand comprised of approximately 5000 productive acres at a price of over $5600 per acre. In our Southern Timber segment, wet weather condition led to lower harvest volumes but also contributed to greater market tension and stronger pulpwood prices compared to the prior year quarter.
In our Pacific Northwest Timber segment, we continued to enjoy robust demand and strong pricing in the third quarter, which was partially offset by higher cut and haul costs. In our New Zealand Timber segment, we saw some pricing softness as expected during the quarter but are pleased with how quickly these markets have rebounded in response to reduced wood flows from the U.S. following the announcement of tariffs on log exports into China.
With that, let me turn it back over to Mark to review our financial results.
Thanks Dave. Before discussing our quarterly results, I wanted to highlight a change that we have made to our segment reporting. We have reclassified New Zealand timberland sales from the New Zealand Timber segment to the Real Estate segment. This change took effect in the third quarter and we have adjusted prior period results to reflect this reclassification.
We made the change in order to better align our segment reporting with how we internally evaluate business performance. And we believe that it further provides for better comparability of our segment financial results from period to period. Moving on, Page 5 of the financial supplement provides a summary of our quarterly results. Sales for the quarter totaled $201 million, while operating income was $46 million and net income attributable to Rayonier was $23 million or $0.18 per share.
Pro forma EPS was also $0.18 per share as we had no pro forma items in the quarter. Third quarter adjusted EBITDA of $83 million was above the prior year quarter primarily due to favorable results in our Real Estate and Pacific Northwest Timber segment. Partially offset by a lower contributions from our Southern Timber and New Zealand Timber segments.
As Dave noted, our Real Estate results were positively impacted by our timberland sale in New Zealand, which contributed $28 million of adjusted EBITDA and $13 million of net income attributable to Rayonier or approximately $0.10 per share. On the bottom of Page 5, we've provided an overview of our capital resources and liquidity at quarter end as well as a comparison to prior periods.
Our cash available for distribution or CAD for the first nine months was $222 million compared to $144 million in the prior year period primarily due to higher adjusted EBITDA, lower cash interest paid and lower capital expenditures. A reconciliation of CAD to cash provided by operating activities and other GAAP measures is provided on Page 8 of the financial supplement.
We closed the quarter with $146 million of cash and roughly $975 billion of debt. Our net debt of $829 million represented 16% of our enterprise value based on our closing stock price at quarter end. Note that these figures exclude $45 million of cash proceeds from timberland and HBU sales that are currently held by LKE intermediaries and therefore are classified as restricted cash.
I'll now turn the call over to Doug to provide a more detailed review of our timber results.
Thanks Mark. Good morning. Let's start on Page 9 with our Southern Timber segment. Adjusted EBITDA in the third quarter of $23 million was $8 million and $1 million unfavorable to the prior quarter and the prior year quarter respectively. Third quarter harvest volume of approximately 1.3 million tons was 160,000 tons and 26,000 tons lower than the prior quarter and the prior year quarter respectively.
Production in the first half of 2018 was unusually high due to strong demand in our markets. So, we expected a decrease in harvest volume going into third quarter which was coupled with wet weather across the south. We were fortunate to avoid significant damage to our timberland properties from the recent hurricanes Florence and Michael. We sustained relatively minor damage with about 200 acres directly impacted by Hurricane Michael. And we expect to begin salvage operations on those acres in the fourth quarter.
While we were fortunate to avoid damage to our properties, we do expect some near term challenges in certain market areas that are proximate to hurricane damage as there will be significant volumes of salvaged wood on the market likely for several quarters. Third quarter pine pulpwood stumpage prices of $16.74 per ton were 4.3% and 2.6% favorable compared to the prior quarter and the prior year quarter respectively.
The increase in pine pulpwood prices was due to wet weather along the East Coast reducing supply and therefore creating favorable spot markets. The increase over the prior year quarter was also due to the impact of salvage volume from the West Mims fire on the prior year quarter results. Pine sawtimber stumpage prices of $25.55 per ton were 2.6% and 1.5% unfavorable to the prior quarter and prior year quarter respectively.
A reduction in price compared to both periods was influenced by general shift in volume from the East Coast to the Gulf State combined with the impact of China tariffs on export prices. During the third quarter, China implemented a tariff of 25% on southern pine log exports which has certainly had a negative impact on economics of exporting log from the South.
We are working hard to maintain our Southern export network despite the tariff headwinds and are continuing to monitor the situation closely. Pulpwood prices of $13.34 per ton were 10% favorable to the prior quarter and 17% unfavorable compared to prior year quarter. Pulpwood markets are very localized and product-specific, so changes in price tend to be driven by both product and geographic mix.
Pacific Northwest timber segment on page 10, adjusted EBITDA of $10 million was $5 million unfavorable to the prior quarter and $2 million favorable to the prior year quarter. Third quarter harvest volume of 310,000 tons was 64,000 tons unfavorable to the prior quarter and 58,000 tons favorable to the prior year quarter.
Favorable market conditions afford us an opportunity to accelerate volume in the first half of this year and as a result production volumes in the third quarter slowed to last me our extendable harvest targets. Moves in the prior year quarter we're also negatively impacted by fire restrictions that did not reoccur this year. Delivered sawtimber prices have a $102 dollars and $0.34 per ton or 1% unfavorable the prior quarter and 15% favorable to the prior year quarter.
The increase in sawtimber prices versus the prior year quarter was driven by strong demand and both export and domestic markets. Delivered Pulpwood prices of $48.93 per ton or 2% unfavorable to the prior quarter and 18% favorable compared to the prior year quarter. The decrease and pulpwood prices compared to prior quarter was driven by geographic mix of sales whereas the increase in pulpwood prices compared to the prior year quarter was due to price tension from competition from chip exports in the first half of this year.
While overall pricing dynamics in the northwest were relatively stronger in the third quarter, recent market conditions have deteriorated. Our downstream customers in the Pacific Northwest prepared for the fire season by taking on additional inventories heading into the summer. And our team has long inventories as the fire season was uneventful compared to prior year. Coupled with the announcement of tariffs on log exports in China, log prices have declined materially in the fourth quarter.
Page eleven shows results and key offering metrics for New Zealand timber segment. We continually pleased with the operating performance of New Zealand timber segment which delivered another solid quarter. Adjusted EBITDA in the third quarter of $24 million was $2 million unfavorable compared to prior quarter primarily due to lower prices and both domestic and export markets and $4 million dollars unfavorable compared to prior year quarter due to a combination of lower volumes and lower weighted average prices.
Third quarter harvest volume of 724,000 tons was 2% percent and 7% lower compared to prior quarter and the prior year quarter respectively. The modest volume variances were clearly due to the timing of export shipments. Export sawtimber prices of $114.54 per ton decreased 5% compared to the prior quarter and increased 1% compared to the prior year quarter. Demand remains strong in China but market uncertainty around the U.S., China trade tensions coupled with a devaluation of the Chinese one cause of in long prices.
However we've seen a recent rebound in New Zealand export pricing as a result of lower U.S. log volume going into China. Domestic sawtimber prices of $80.34 per ton and U.S. dollar terms were 6% and 3% unfavorable to the prior quarter and prior quarter respectively primarily due to changes in the New Zealand, U.S. exchange rate. In our trading segment third quarter adjusted EBITDA of $0.3 million increase compared to prior year quarter due to a reduction in export costs partly offset by lower volumes.
I'll now turn it over to Chris to cover Real Estate.
Thanks, Doug. As previously mentioned, our Real Estate segment results have been reclassified to now include New Zealand Timberland sales, highlighted on page 12 of sales for our real estate segment totaled $36 million on roughly 7,300 acres, 300 acres sold driven primarily by a non-strategic timberland sale on the North Island of New Zealand, excluding improved development sales we generated a weighted average price of $4,749 per acre.
Sales in our improved development category reflect a steady pace of activity at our wildlife development project during the quarter we closed 20 residential lots for a total of $843,000 or $42,000 per lot including the first closing on townhome lots. We also closed on roughly two acres of commercial property for $500,000 or $225,000 per acre in our unimproved development category sales totaled $1.2 million comprised of one sale totaling the 126 acres in brand County Georgia. In the rural category sales totaled $4.5 million on $1,420 acres at an average price of roughly $302 per acre while we closed fewer transactions in our rural places program than we did in the prior quarter market interest remains strong and we are encouraged by our current pipeline of opportunities.
In the non-strategic and timberlands category sales of $29 million were comprised of 5,785 acres sold at an average price roughly $5,000 per acre. The results include the sale of 4,996 productive acres in New Zealand for $28 million are roughly $5,600 per acre. Following an extraordinarily strong year so far in Real Estate, we expect much lighter activity during the fourth quarter as we've discussed in the past our Real Estate results tend to be lumpy from quarter-to-quarter for our wildlife project infrastructure development for the village center is largely complete and most lots are either sold or under contract.
Our focus is now shifting to refining development plans for the next area of residential development.
I'll now turn the call back over to Mark.
Thanks, Chris. As we look to the fourth quarter, we expect to achieve our prior full year adjusted EBITDA guidance of $300 million to $315 million before considering the impact of the third quarter New Zealand Timberland sale. Based on our current outlook, we're reducing our full year volume guidance in the US out to a range of 5.6 million to 5.7 million tons as we're pulling back our harvest activity in markets impacted by significant salvage volume following hurricane Michael.
We also expect that Q4 pricing in southern timber will be down modestly due to geographic mix. Overall based primarily on the reduced volume, we expect that adjusted EBITDA will be modestly below our prior guidance. In our Pacific Northwest segment, we expect to achieve full year harvest volumes of roughly 1.3 million tons and adjusted EBITDA towards the lower end of our prior guidance, while market conditions for the first nine months have been very favorable. We're currently seeing some headwinds driven primarily by the China tariff on export logs coupled with high log inventories at domestic mills.
In our New Zealand timber segment, we remain on track to achieve full year harvest volumes of 2.6 to 2.7 million tons and we expect to achieve adjusted EBITDA modestly above prior guidance. Prices have rebounded nicely in New Zealand as reduced log inventories in China coupled with reduced wood flows from the U.S. have driven increased export demand in New Zealand. Lastly on our real estate segment, we expect relatively light activity in the fourth quarter following an extraordinarily strong first nine months of the year.
I'll now turn the call back to Dave for closing comments.
Thanks Mark. Before offering some closing remarks, I'd like to briefly address some organizational changes that were implemented recently within our real estate organization. As our wildlife in Richmond Hill development projects have continued to gain momentum under Chris leadership. We've decided that now is the right time to realign our resources to better support these projects over the long-term.
As such Chris will assume full time oversight of our improved and unimproved development business including these two active development projects. Oversight of HBU and non-strategic land sales will transition to Rhett Rogers under the portfolio management organization. Both Chris and Rhett will continue to report to me and all real estate activity including New Zealand land sales will continue to be reported through the real estate segment.
In addition Mike Bell has been promoted to Vice President Public Affairs and Communications. Mike will oversee all of Rayonier's public affairs and communications efforts and will report to me. We're excited about these changes and feel they will help with both improved alignment and performance going forward.
We've often discussed the quality and diversity of Rayonier's portfolio. Our pure play focus and nimble approach to capital allocation is key investment attributes that we believe differentiate us from our competitors. We're in the midst of some challenging and uncertain market conditions, rising interest rates and declining housing affordability have impeded the pace of the housing recovery. In addition, tariffs on log exports into China have reduced market optionality and labor availability continues to impact our business in a variety of ways. Notwithstanding these headwinds we believe that Rayonier is very well positioned based on the strength of our balance sheet and the construction of our portfolio which is concentrated in high quality markets.
We've made some very measured and deliberate moves over the past four years to position that company for sustainable long-term success. We recapitalized our New Zealand joint venture and in so doing also increased our equity stake ahead of a significant lift in the segments financial performance.
We realigned our Pacific Northwest portfolio to increase our short-term and long-term harvest potential allowing us to capitalize on recent strong market conditions in the region. We made several significant portfolio moves in the south to increase our exposure to the strongest markets. These portfolio moves have all helped to improve our cash flow generation, over the past few years but importantly they also improved our defensive positioning should markets deteriorate in the future.
In addition, we've also carefully managed our balance sheet by fixing all our long-term debt at advantageous rates and extending maturities ahead of a significant rise in interest rates. These moves have been done with an eye towards maintaining a nimble and opportunistic approach to capital allocation decisions all designed with a goal of building long-term value per share.
Our team has done a great job working together and I continue to be impressed by the tremendous dedication and focus of our employees. Despite challenging market conditions, we had another solid quarter and remain on track for a very strong year. And so, we are pleased with how well we're positioned and continue to be optimistic about our long-term prospects for our company.
And this concludes our prepared remarks and I'll now turn it back over to the operator for questions.
Thank you. [Operator Instructions] Our first question comes from Collin Mings with Raymond James. Your line is open.
Hey, good morning, guys.
Good morning.
Good morning, Collin.
Just to start. Maybe, Doug, in the prepared remarks you referenced has deteriorated materially in the Pacific Northwest, can you just maybe quantify that just given it sounds like even as we've moved here into the beginning of the fourth quarter, you've seen further deterioration. So maybe just talk a little bit more about that?
Sure. So as we mentioned in the call, we can see both strong domestic export pricing in that third quarter, but then late in the fourth quarter, things started to change. The mills are flush with log inventories and that lack of the summer fires they really had built up towards that. And then we start to see additional supply come on as China imposed export tariffs that ranged from 5% to 10% based on the species and size and the threat was actually at 25% to begin with. So we started to see the export business start to pull back even before those tariffs really came into place. And so we're continuing to see that happen and the perfect storm kind of happened at the same time that lumber prices took a sharp correction. We had imports up over 25% from year-over-year from other places offshore and then [indiscernible] housing starts.
So, one thing I think that these lower lumber prices we believe that something about that lumber import will start to not be economical anymore in demand even though the seasonal slowdown will start to erode that domestic mill inventory the remainder of the quarter. We are pleased with our decision to accelerate those harvests in the first half of the year and believe that that strategy has allowed us to capture something out of the pricing upside that occurred this year and will flow into our full-year average pricing results on a year-over-year basis. So as we've seen it going forward, we think that the right decision was to pull that going forward and sit back and allow some of this volume to work out for the inventories and see what's going to happen with the export markets as we move forward.
Okay. No better way to quantify that in terms of - like quarter-to-date or quarter-over-quarter type deterioration - I recognize there's a lot of nuances but just overall kind of the degree of deterioration?
Yes, I don't think we want to get into our specific pricing in the quarter, Collin, obviously there are a number of third party services that track log pricing in the Pacific Northwest and you'll see a little bit of a lag effect there, but like Doug said, Q4, thus far has been a bit of a perfect storm and so we don't want to overreact regarding what's happened so far in Q4, because we do think that the longer term trends are certainly positive in the Norhtwest.
Okay. Fair enough. And then Dave, just as we think about the New Zealand Timberland sale in the quarter, can you maybe just talk a little bit more about how that came about and just how does that acreage, obviously a very healthy pricing there, how does that acreage compare to the rest of your New Zealand position?
You bet. Yes, we've always - some of this to some extent gets back to our broader capital allocation posture as it relates to Timberland and sort of keeping an eye towards looking for opportunistic sales and we put in place an effort - over the last couple of years, we identified two properties that were in the southern portion of the North Island that were very remote relative to our base of operations. They were decent properties, but they were remote, so a little harder to get to from an access standpoint, less efficient from an export point. And so we put in place an effort to capitalize on the rise in the markets in New Zealand and sold those. We sold one of them about a year ago and then this is the second one that we've completed. And so now we're sort of out of that region. This property in terms of its attributes - it had an average plantation age of about 16 years and that's a little older than you would typically have on a perfectly regulated forest, so it was above average from that perspective. It was a lease property, it did not include a fee simple ownership.
From a productivity standpoint, it was below average relative to the rest of our claim, but importantly from an evaluation standpoint, it was also 100% ground based logging, which translates to decent value. So overall, we are very happy with the sale and happy to be able to take that capital and look for opportunities to recycle it elsewhere.
That's helpful and then maybe Dave just sticking with New Zealand, can you just update us on the status of your joint venture partner stake there. I recognize you're limited to some degree given the litigation, but just any update there, just given the number of headlines coming out and where things stand with the Stafford op would be helpful.
You bet. So Stafford has largely been successful in its effort to acquire all of [indiscernible], we expect that closing to occur any time now. And they're going through the orderly process of transitioning their participation in the joint venture that we control in New Zealand. And as we've said to folks before, we know them well and we've had a long working relationship with them and so we see the transition being fairly orderly and as it relates to the ongoing litigation, that's something that we'll probably not discuss at this juncture.
All right. And then just one last one from me and I'll turn it over. Mark, you've spent a lot of time discussing Timberland markets and just return to the asset class over time, just kind of against that backdrop, just maybe talk a little bit about what you're seeing in terms of deal flow. It looks like you guys made a total of about $7 million to $8 million in Timberland acquisitions during the quarter.
On prior calls kind of have been upbeat about the deal environment, obviously, you've closed on a number of deals over the last year or two. So just what are you seeing in terms of deal flow, is there any shift in buyer activity or values or discount rates or anything that you're seeing just given some of the market dynamics here between some concerns near-term about housing, the trends in the Pacific Northwest maybe softening a bit just what are you seeing out there in the Timberland markets?
I guess, it had a very high level and I'll invite Doug or Dave to comment as well. I'd say we continue to see a pretty robust Timberland M&A market. We've obviously been less active this year than we have been in years past and I think that that's just a reflection of there having been properties to come to market or we haven't sort of - auction processes for properties that have come to market that we believe were particularly additive to our portfolio. And so we've continued to do a number of bolt-on acquisitions smaller in size. You know, we're content to hit singles and doubles when we don't see larger opportunities that really fit our needs at the time. But overall I'd say we continue to see a pretty steady pace of activity and just to be clear, I'd say the Timberland market as a whole doesn't tend to overreact to the noise that we see in the market around kind of monthly housing stats and things of that nature.
Keep in mind, this is an asset class, it's underwritten on a 25-year to 50-year DCF assuming making assumptions regarding long-term sustainable harvest flows and trendline prices and so you know, we tend to not see the private market correct meaningfully relative to these statistics that we see coming on a regular basis. I'd say the China situation is certainly creating some noise in the market. Obviously, we had all expected that China was going to present a good opportunity for export out of the south and it's been a meaningful component of export out of the northwest. And there's a lot of uncertainty around that right now. But I'd say overall, discount rates, maybe there's been a bias towards seeking higher IRRs in transactions given the rise in interest rates, but again, Timberland tends to be valued on a real DCF basis and so while the overall interest rate environment fluctuates, it is certainly up over time. I wouldn't say people's view of real long-term discount rates have changed significantly.
Yes. And the only thing I would add to that Collin is that the fact that we've had not a lot of closings is not indicative of the activity level. It's been a very busy and active year, but having said that I think we - and this kind of gets back to some of my prepared remarks. We have a bias towards being in higher quality markets and pursuing higher quality properties and we view that both from a defense standpoint and an offense, so that has been - there's has been more limited opportunity of those types of properties out there. And we are just going to continue to be disciplined and kind of stick to our knitting on that particular front.
All right, thank you for the color there. I'll turn it over.
Our next question comes from Ketan Mamtora with BMO Capital Markets. Your line is open.
Thank you. Just first question again sticking with this tariff issue, can you comment at all what you are seeing in terms of volumes on your Southern exports? I recall that you'll have talked about doubling it from 2017 levels. What have you'll seen so far since this got implemented?
Sure. This is Doug. Yes, so as you mentioned we are in the process of doubling our volumes. And year-to-date, we have done approximately 170,000 tons. But in the last quarter really and [indiscernible] coming in really in July things started to move forward with that, we have definitely slowed down our exports volumes out of the South. You would probably recall, we do about 2% to 3% of our total harvest has been in the export market. And our own - for our own properties, we have stepped that back as mentioned in our comments and probably just trying to keep the doors open. So we've taken a considerable step back in the amount of volume that's now being sent to China.
Yes, Ketan, to be clear. I mean it's not particularly advantageous to export volume to China with the 25% export tariff. But that said, we are trying to maintain that network as we do see China is a longer term opportunity. So again, we don't want to sort of shutdown the relationships and the infrastructure that we created around that business in reaction to the current trade war, our hope and expectations over the long run that will still be an opportunity for us, but it's a - it's definitely not an economical business today.
Yes, that's been showed in the results. This is not - just Rayonier out of south in general. But in second quarter, we saw about 630,000 cubic meters export out of the south. And by Q3 that dropped to 400,000 cubic meters to give you a kind of relative impact of the trade wars on things and expect that to even decrease bit more in Q4. What mainly impacts the southern markets, it does have an offsetting positive impact in New Zealand or as I mentioned before, we are seeing increases in our prices.
And we export about fixed number volume out of New Zealand. So from side, it is taking away and it is adding to the other side. I guess that's certainly a positive message in all of this is that we think we have got nice diversification around this issue in the sense that the China wood demand continues to be very robust. And they have got to get it from somewhere and New Zealand is the biggest log exporter to China. And so, as the U.S. trade flows have fallen off, we have seen a quicker rebound that we anticipated in New Zealand log prices. And so, we have had a nice offsetting effect there.
And just one more thing to add to that is another thing we have seen is there's fewer exports of logs space in the northwest but also other commodities out of the U.S. And that means there is more ships available out there. And so they are turning towards New Zealand to look for opportunities to export logs from there. So we would - I think by shipping and we are seeing price increase there, but this kind of new influx of shipping capacity, we are seeing some prices come down in our shipping rates also in this quarter. And really going in the next quarter we believe it's going to happen. So another offset that you might not expect is flow through from the less commodity terms from China.
Got it. That's very helpful color. I really appreciate it. And then just turning to sort of U.S. south on the domestic side, have you seen with this sharp drop in lumber prices, have you seen any signs of people pulling back on these sawmill projects that have really come up quite a bit over the last 12 months? Are you seeing any signs of people either postponing it or pulling back? Or even sort of any signs of kind of caution on bidding for stumpage?
Yes, it's Dough again. So we haven't heard of anybody pulling back on their projects. Again, I think a lot of people feel that this is a short term thing and not the long term. So, I think they are continuing moving forward. And delay that we have heard of so far on the sawmills have been more around resourcing and getting equipments and people to work on the projects. So we haven't heard of anyone who specifically said they are pulling back based on kind of what we believe is going to be a short-term correction. On the stumpage side, as probably we have talked about for the last couple of quarters, we didn't see our southern stumpage prices run up with the lumbar. And we also haven't seen them go down with the lumber. So they haven't been correlated to lumber prices at all. And so, I guess while it would have been nice to see them run up with the lumber, the other side of equation they have been very stable and we have just continued moving forward with what's been going on for the rest of the year.
Got it. That's very helpful. Good luck into 2019.
Thank you.
Our next question comes from Anthony Pettinari with Citi. Your line is open.
Good morning. This is actually Randy Toth sitting in for Anthony. I guess my first question is how are export price realizations out of New Zealand in October? You mentioned they rebounded pretty nicely. What kind of pricing outlook have you seen in 4Q over the 3Q average?
Yes, what I would say is that as we look into our November and December shipments, we are seeing prices comparable to our second quarter that we had going into that. So we did see that dip in Q3, but we are starting to see pricing as very comparable to our Q2. And as mentioned, we are seeing some cost savings on shipping. So we are looking at a favorable Q4 compared to Q3 and more comparable to Q2.
And Randy, this is Dave. I would add to that one of the things that we track very carefully is the level of log inventory in the ports in China. And as we have seen the drop in shipments coming from the U.S. associated with these - this tariff activity, we haven't seen a drop in the takeaway. And so as a result, we have seen the inventory drop pretty dramatically in China. It's now at roughly 3 million cubic meters and the ratio of demand to inventory has come to a level that we haven't seen this low. I mean probably about five or six years. And so, it's really the reason that we have seen this fairly quick turnaround in pricing out of New Zealand. And as Doug mentioned, you have got - we have a further benefit from lower shipping rates as there has been less activity out of North America. So, it really gets back to that diversification thing that Mark talked about earlier.
Okay, that's helpful. Thank you. And then looking at Slide 7, sales generated using the delevered model over 34% of sales which I believe is the highest since you guys started breaking that out. Was there anything in particular driving that? Or how should we think about that?
You are talking with respect to the southern timber?
Yes, yes.
Yes - no, I don't think this is actually a change in our methodology or things like that. It's a matter of kind of removals and what we saw as we had lowest stumpage due to wet weather. So, it's really more of a factor of sales process and what happened with that volume. So we are able to keep our delevered crews running through the wet weather and stumpage. Some of those crews, they had to move off. And that's probably more of what you are seeing there. We have had a slight increase as we moved through the year. As we have more to deliver but it's really very market specific. Each wood basket we think we get the most value with [indiscernible] delivered. And so it's a combination of where the harvest are from and also that wet weather impacting stump removals.
Yes, I suspect part of that is driven by geographic mix or as we intend to have more of a deliberate model out of the Gulf States and more towards stumpage in the Atlantic region. Is that fair Doug?
Yes, it's a combination definitely. And one thing we may see going into Q4 is with the Hurricane Michael's impact and the salvage to be done, we have seen stumpage crews move off our state to go do the salvage work while deliver crews we have kept with them so we have long term contracts. So we could see that kind of be a considerable impact in Q4. But again, it's more a short-term thing that's happened.
Okay, that's very helpful. I will turn it over. Thank you.
Our next question comes from the [indiscernible] with RBC Capital Market. Your line is open.
Hi, guys. Good morning. Lot of good color this quarter, just maybe a follow-up question on the export situation of the U.S. South, is there any other markets you can divert to given the situation?
Yes, we are exploring other markets. And we are aware that some other folks sending to India and we export to India from New Zealand. There is lots of folks exporting Middle East, Pakistan and other places like that. So, we are evaluating to options as we go forward. But at this point in time, we have spent a lot of effort to develop our network in the China and don't want to pull back on that right this minute. So we are exploring those opportunities and looking how we can move some of that wood. But we do think that long term, China has the largest opportunities for growth for us. And so, we are focused on keeping our relationship with these customers at this time.
Okay, right. Thanks. And just back to kind of the broader view on the U.S. housing market, given you guys' involvement in development [indiscernible], what are you guys seeing on the ground? Any talks with your customers there? Is there any kind of shift in near-term sentiment?
This is Dave. I'll take that. I think in general we view this as sort of a continued steady growth pattern on housing. I think overall we expect housing starts to come in at roughly at 1.3 million level. I think it's key to remember that we've got some pretty strong market in various regional areas. I know there's been a lot of media attention of late on through the housing market “cooling” with the effect of rising interest rates and affordability but it's also important to sort of look at a bigger picture there. And there has been about an 80 basis point increase in mortgage rates and we've seen about a 6% increase in median home prices. But don't forget there's also been a fair bit of noise around the housing stats associated with these two hurricanes as well as the significant rainfall in Texas and the other thing that hasn't been, sort of touched on as much as there's been a pretty meaningful rise in median household income of about 5.6%.
And so you put all that together and while affordability has ticked down slightly, it's still a pretty healthy levels from a long-term perspective and, so I think the thing that we're most encouraged about we certainly see that in our wildlife project is strong growth in single family. We've seen a single family grow by roughly 6% percent year-over-year. And we're continuing to see repair and remodel growth which makes up about 40% of lumber market. Now that's up by 7.5%, so yes I'd say overall where we're generally pleased with how things are going.
And another thing to keep in mind is there's been a fairly large influx of imported lumber outside of North America into this market to really capitalize on this spike in lumber prices that we saw earlier this year and we don't see that necessarily occurring downstream and as we see more of this southern lumber capacity comes online. It's going to push that flow of imports out as a short order effect and so that's kind of our view in general and in our mind it really gets back to where it gets back to the theme I've touched on earlier is, for us it's all about being in the best and strongest markets we have, we have a nice presence in the markets that feed both the Florida and Texas housing markets both of which are very healthy.
And once we get past, the near-term noise associated with whether its hurricanes or rain events, we expect to see a nice response in those markets.
All right, thanks. You touched a bit on affordability could you just refresh us on what kind of price points that you guys have for residential or so your customers have for residential and wildly?
Yes, hey this is Chris. On average single family is sort of right and around $300,000 but there's a range of course down to the lower 2s and up in the fours.
That's it for me guys. Thanks.
Next question comes from John Babcock with Bank of America Merrill Lynch. Your line is open.
Hey, good morning. Just want to follow up, you talked a little bit about some of the uncertainty you're seeing in China and the impact that's having on New Zealand, could you just provide a little bit more color around that. Generally if there are certain markets that are being impacted, the extent to which that impact has been felt that sort of color?
I mean what we talk about generally is that, the I guess last quarter we talked about the noise around the trade tensions kind of causing some pullback in the market in New Zealand which I think was a bit counterintuitive because, if you see lower trade flows coming from the U.S. The expectation will be that New Zealand would pick up and that's in fact, what's occurred during the course of Q3.
So while prices ticked down in New Zealand and Q3 what we've said in the press release on the call is that you know we've seen those prices rebound pretty nicely kind of towards the end of Q3 and in kind of what we're seeing so far in Q4.
I think you know one thing's important also in that during that time we saw the Chinese one devalue and that impacted the pricing but as demand's fallen below that level of comfort on the inventory ratio that Dave mentioned. We've seen the prices come back up into the one has recovered. So the demand has increased kind of the price that the person is willing to pay in China to get that same log.
Okay, I guess I was getting at though is whether or not you're actually seeing from customers though in China with both kind of the growth that they're exhibiting that's slowed a little bit in the last quarter and also just generally the tariffs overall seem to be having an impact. I just wondered if you're seeing any end market demand slowdown.
No, we really haven't to-date we've been very successful as we mentioned before. We're looking to hit our volume targets for the year and the timing we had on exports in Q3 a little bit was that we saw some weaker markets at that point in time. And so we looked to have some more volume in Q4, so that to date we were planning with our export targets.
Okay, thank you. And then just the last question I had was just on acquisition strategy I was wearing how that might change if you were to enter a downturn and then also, what markets right now seem to be a good fit with your footprint and also consider valuation, where you might target acquisitions?
Yes and I think this gets back to what I discussed earlier in terms of having a general bias towards higher quality properties and I think that we have a point of view and you certainly see this in our investor materials that the lower quality markets have not been priced with as much of a discount as you might otherwise expect and so I think as we as you move forward if you were to get into a period where you did have a downturn, then it gets to what's your financial capacity and sort of where those opportunities are and I think this is an area where I think we're very well positioned.
We have been organically de-levering for the past few years. We have a pretty meaningful capacity right now from an incremental debt standpoint and we're going to just continue to be patient and stick with our strategy of going after higher quality properties. It doesn't mean that we're not going to look at the properties that are of lower quality but they're going to have to be priced accordingly for us to go after them.
Okay.
Our next question will come from Steve Chercover with Davidson. Your line is open.
Good morning Dave. Hi Mark. Lot of my questions have really been answered but, I wanted to just drill into a couple of things when you were referring to increasing your stake in New Zealand. I assume you're referring to the opportunistic incremental purchases you've done over the last several years?
Well, I think really what we're referring to Steve was when we did the recapitalization transaction we effectively diluted our partner there down. So we increased our stake from 65% to 77% via that recapitalization transaction.
Okay, yes that's right. Thanks. And Stafford's privatization of finals doesn't change your right of first refusal on their stake in this matter he doesn't?
To be clear there's not a right of first refusal. There is a right of first offer and suffice it to say that, that with the [indiscernible] acquisition you're really largely being it's not completed yet I believe. But it's essentially done where Stafford has gotten the over there 90% threshold to force a compulsory acquisition of the minority stake there. They will effectively be our new partner in Matariki.
Got it. Okay. And then do you have a sense of just how much acreage was impacted by hurricane Michael and therefore be subject to salvage.
I believe Doug's got some stats on that.
Yes, I do. So I'll break these out for a little bit and then we can talk about how much capacity salvage, so the Florida Forest Service estimates that 2.8 million acres of forest land were moderately to catastrophically impacted by the hurricane. With estimated timber losses of 1.3 billion approximately 350,000 acres are considered a complete loss an additional million acres were severely damaged meaning same purpose on the timber or acquire salvage or cleanup.
And that's an estimated 32 million tons of pine and 22 million tons of hardwood. So it is a Herculean task and unfortunate that working gets time as the wood ages integrates. The Georgia Forestry camp still got a few more unfortunately, the George Forestry commission shows to more than 2 million acres of forest land in fact by the storm with an estimate turned up during say $334 million and that's composed of around 11 million tons of pine and 7.17 tons of hardwood.
And there's about 379,000 acres, that they also say are severely damaged or a complete loss. And then Alabama was much smaller in that area but they did also have some damage. And they're talking roughly 50,000 acres that need to be salvaged. So obviously it's a huge task in front of folks and the impact of the storm this year are hard to assess at this point, from what we've seen a lot of it was snapped off due to high winds. And when that happens from my experience usually the trees stand for a long time and it gets to certain points and they shake violently. And the fiber separate for the tree snaps right in the eye, it's a lot of timbers can be tough to make lumber out of and things like that but you get further away you'll have more or blow down and those are the ones.
I think will be salvageable for lumber and from what I'm currently hearing what we've seen before landlords are mainly folks on the higher value logs, so where it may actually be an increase of saw logs and decrease of pulpwood production in the local markets for the first few months as folks cheat the higher value and that looks to be what we're seeing and we've heard about some local sawmills looking put in wet decks to take on his log.
So the market impacts are going to be really hard to assess at this point in time and so we understand a little bit further what's going on. We could see, kind of perfect markets around them, have less supply as salvage crews move in that area. And as I mentioned we could actually see a reduction in pulpwood to start with as folks are trying to capture those logs, those are value logs. So it's a tricky situation. The main question is how long will you become for tourists. And we did a study looking back at the success of salvage efforts from Hurricane Hugo in 1989 which impact about 4.5 million acres and they were successful salvaging about 3 tons per acre was all said and done.
So obviously a lot of wood on the ground but it's very difficult a lot of it's not recoverable because of the form it's in. And just as I mentioned you're working it's time there's a consensus that the logs should last for six months in the field over this wintertime particular and that's consistent with what the harvesting crews have left us. They tell us, they're going to salvage it they'll be away for six months. That's not saying, that they won't sell more than six months but we expect them to attempt by kind of non-local crews taking this higher value products will curve that pretty time.
So it's really difficult to him just assess when you have 4 million to 5 million acres that's on the ground but unfortunately kind of passive spring shows that they'll be a flush of wood for a while and then that's going to slow down and a lot of it goes into, how to deal with the aftermath. And that's been our own case when hurricanes hit us in the 80s and 90s. We ended up going after the high value products and then having to basically use bulldozers and chains and push down standing timber and burn it and get prepared to move forward. So it's really hard to assess right now but that gives you a sense of the scale that the teams have to work for and work with.
So we expect that there'll be impacts on the on the local markets and then the impacts on the periphery markets. But thankfully we only had 200 acres of our salvage. So it's small on us directly but we are watching and that's why we've made decision to pull back some volume in Q4, so we can assess this and see how it's going impact these both the local markets that I mentioned interesting thing is we've had seven crews to date and I know of another three to five they're considering leaving over here on the Atlantic coast to go to salvage. So the impact it could have on these markets as our crews producing for the local mills so it's a very dynamic situation right now.
Thank you for that all that detail. You mentioned you're burning it, maybe that's the one thing that's different than back in the Hurricane Hugo era is the emergence of biomass, so maybe that's the long term destination for a lot of that blow down. But I was also wondering between the hurricane and there's been recent articles about folks who were incented to plant trees 20, 30 years ago down in the south and the resultant oversupply. Do you think you can play into that and maybe serve as a source of liquidity for folks, who otherwise can't get out and obviously it'll have to meet all your current thresholds.
Yes, I mean look we're well capitalized and we're always looking for opportunities and if we see a dislocation in the market that we think is short-term in nature but we can capitalize on a long-term opportunity. We'll certainly focus on that. I mean, I think the thing to keep in mind regarding these recent hurricanes this is like Doug said a Herculean task to address all the salvage volume but it will be relatively short term in nature in the longer term impact as there is a lot of timber that the older timber that's kind of taken out of production so you could see those markets be supply constrained on a longer term basis.
Steve the other thing I'd add is that the reference to the article around the Conservation Reserve Program keeps in mind that most of that was concentrated in poorer markets and so it's not really as much of an impact in the footprint that we operate in.
Okay, thank you all for the call.
[Operator Instructions] We do have a question coming from Collin Mings with Raymond James. Your line is open Colin.
Thanks. Just one quick follow up for me just going back to Steve's question in Doug's commentary, just as you think about that, the movement in these logging crews and the salvage Jeffords can you maybe just clarify, do you expect that to impact volumes kind of looking out over the next few quarters or also costs are you having to pay a little bit more to retain some of the crews that you have as it relates to some your delivered log sales activity.
No, primarily volume and is right really the stoppage crews there leaving that we see that the impact on the volumes. With respect to costs obviously salvage costs more. And that's something that, those crews may be going over there. But locally know what we're not seeing we're not seeing the impact of that happen to having to pay to keep the crews. It's very hard and very dangerous work to do this type of salvage.
You have a lot of trees are broken off and it's like pick-up sticks crisscrossed and so on. That's the reason the costs go up for that salvage work over there and but locally we don't see the impact the impact over here.
Okay, thanks.
Then we have no further questions at this time, so I'll hand the call back for closing.
HI, this is Mark McHugh. Thanks everybody for joining the call today and I look forward to catching up with some of you by phone later.
Hey with that, will conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.