Good morning. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic First Quarter 2024 Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Wayne Wasechek, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed. .

Good morning, and welcome to PotlatchDeltic's First Quarter 2024 Earnings Conference Call. Joining me on the call is Eric Cremers, PotlatchDeltic's President and Chief Executive Officer. This call will contain forward-looking statements.

Please review the warning statements in our press release and the presentation slides and in our filings with the SEC regarding the risks associated with these forward statements. Please note that a reconciliation of non-GAAP measures can be found in the appendix to the presentation slides and on our website at www.potlatchdeltic.com.

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

Well, thank you, Wayne, and good morning, everyone. Looking at our first quarter results, we reported total adjusted EBITDA of $30 million after the market closed yesterday. I'm pleased with the solid operational performance delivered by our team despite market and weather-related challenges during the quarter.

Our Timberlands segment generated adjusted EBITDA of $35 million in the first quarter. We harvested 1.9 million tons, achieving the upper range of our Q1 harvest plan. Our Wood Products segment's adjusted EBITDA was breakeven in the first quarter compared to a loss of $6 million in the fourth quarter. .

The year kicked off to a challenging start for lumber markets as severe weather across the country, restricted construction activity in January. Despite this difficult start to the typical inventory building season, lumber prices modestly trended upward throughout the first quarter, driving the improvement in our Wood Products results.

As for our elevated 2024 capital plan, we are approaching the final phases of our $131 million Waldo, Arkansas sawmill modernization and expansion project. .

Vertical construction and equipment installation is well underway with project completion continuing to remain on track and within budget for startup early in the third quarter. Following completion of the project, we anticipate a ramp-up in production through Q4 and into next year.

Based on other brownfield additions in the industry we have seen, we expect it will take 6 to 12 months to reach the mill's new capacity of 275 million board feet per year. As a reminder, the project will increase the mill's annual capacity by 85 million board feet, it will improve recovery by 6% and reduced cash processing costs by about 30%. .

Once the ramp-up phase is completed, we expect the mill to generate approximately $25 million of incremental EBITDA annually. Our Real Estate segment generated $6 million of adjusted EBITDA in the first quarter.

On the development side of the business, we sold 24 residential lots at an average price of about $120,000 per lot in our Chenal Valley master planned community in Little Rock, Arkansas. On the rural side of our real estate business, we completed the sale of 1,800 acres at nearly $3,100 an acre.

It's important to note that the volume of transactions in rural real estate can fluctuate significantly from quarter-to-quarter, although we experienced a subdued level of rural real estate transactions in this period, we expect the sales pace to accelerate as we move through the second quarter. .

The interest in our rural land remains quite high. The highlight of our anticipated rural real estate activity in the upcoming second quarter includes the previously announced deal to sell 34,000 acres of Southern plantation timberlands, which have an average age of just under 4 years, for a total of $58 million or $1,700 per acre.

Now let me transition to our emerging Natural Climate Solutions business. Our collaboration with solar developers continues to grow as evidenced by the optioning of an additional solar deal in the first quarter. .

Currently, our option contracts for solar land sales and leases are valued at nearly $200 million on a net present value basis, representing roughly 1% of our total timberland ownership. Additionally, we are in the process of finalizing negotiations on several more lease options.

At the end of 2024, we expect to have approximately 30,000 acres of solar land sale and lease options under contract valued at over $300 million on a net present value basis. .

Our Southern Timberland carbon credit initiative continues to move forward. We're anticipating generating in excess of 500,000 carbon credits in the first year with an estimated 100,000 credits each year for at least a decade thereafter.

The extensive scope and high-quality nature of these credits necessitates a thorough verification process, which is lengthy and complex. We have initiated preliminary marketing activities and are targeting placement and sale of credits in the market towards the end of the year. .

Nonetheless, the completion of this project time line is heavily dependent on various third parties involved in the accreditation process. We've also identified potentially valuable prospects in carbon capture and storage as well as bioenergy.

These opportunities, along with other natural climate solutions are currently under discussion with various other parties. Although they are not imminent, we are optimistic as to their potential value.

Furthermore, we continue to believe that all of these natural climate solutions opportunities will boost the demand for our rural land, likely driving timberland values higher. .

Moving to capital allocation. We continue to be committed to our disciplined and opportunistic approach, and we constantly evaluate all our capital allocation opportunities to grow shareholder value over time. Timberland M&A was our main priority during the quarter.

As we previously announced, in Q1, we acquired 16,000 acres of high-quality mature timberlands in Arkansas through a privately negotiated one-on-one transaction for $31 million or about $1,900 per acre. .

Also, the acquired timberland has strong oral real estate potential, including solar opportunities. We employ stringent criteria when evaluating timberland M&A. And for this particular transaction, we expect to achieve an approximate 8% real IRR, which is well above our cost of capital. We did not purchase any shares in the first quarter.

However, share repurchases remain an important component of our capital allocation strategy, especially when we are trading well below our estimated NAV. We consistently assess and prioritize our capital allocation options, taking into consideration the economic backdrop.

We have $125 million remaining on our $200 million share repurchase authorization. .

Turning our attention to the U.S. housing market. Existing home inventories for sale continue to persistently hover at historically low levels. The scarcity in this segment of the market poses challenges in meeting housing demand. However, new housing has emerged with an affordability advantage over existing housing.

Large homebuilders are enticing buyers with rate buydown incentives, making new home construction more financially attractive, especially given today's mortgage rate environment. .

Consequently, new single-family residential construction demonstrated resilience by maintaining over 1 million starts for the fifth consecutive month, providing some level of stability to the market. In addition, homebuilder confidence has been steady and in positive territory in spite of the recent uptick in mortgage rates.

Nonetheless, new residential construction continues to underperform as challenges in the economy persists driven by the uncertainty of inflation and the direction of interest rates. In particular, the multifamily segment of new residential housing has been under pressure in large part due to excessive financing costs.

the timing and pace of potential rate cuts by the Federal Reserve add to the level of uncertainty. .

However, we anticipate that once rate cuts begin to decline, once rates begin to decline, possibly later this year, it will likely spur pent-up housing demand ultimately benefiting lumber markets.

Longer term, we retain a positive outlook on housing fundamentals, an underlying shortage of housing stock, which some funded estimate 4 million units and favorable demographic trends will provide tailwinds to the housing market. We continue to expect that U.S.

housing starts will return to levels above the long-term average of 1.5 million units per year once mortgage rates decline and homes become more affordable. .

Turning to the Repair and Remodel segment. Demand in this market appears to have moderated somewhat with some weakness in the DIY segment. That said, our home center business remains solid.

The overall resilience in the repair and remodel market is underpinned by several factors, including strong consumer balance sheets, record home equity levels across the U.S., steady labor markets, and existing homeowners staying in their homes due to the prevailing higher interest rate environment. .

Looking ahead, long-term trends indicate that the fundamentals of the repair and remodel market will be favorable. This optimism is bolstered by an aging housing stock, leading to increased repair activity as well as elevated home equity levels and the ongoing prevalence towards remote work. .

In closing, we remain committed to enhancing operational and financial performance across all of our business segments. As part of this commitment, we are diligently focused on completing our strategic modernization expansion project at the Waldo sawmill on schedule and within budget.

Also, returning capital to our shareholders remains a core tenant of this strategy. With our investment-grade balance sheet and ample liquidity, we possess the flexibility and a solid foundation to continue creating long-term shareholder value. .

I will now turn it over to Wayne to discuss our first quarter results and our outlook. .

Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $30 million in the first quarter compared to $41 million in the fourth quarter. A sequential quarter-over-quarter decline in EBITDA resulted from fewer rural real estate sales, partially offset by improved wood product segment results, stemming from higher average lumber prices.

I will now review each of our operating segments and provide more color on our first quarter results. .

Information for our Timberlands segment is displayed on Slides 5 through 7. The segment's adjusted EBITDA increased from $33 million in the fourth quarter to $35 million in the first quarter. EBITDA benefited from improved per unit log and haul costs and seasonally lower forest management costs, which more than offset a decline in Idaho sawlog prices.

Our sawlog harvest volume in Idaho was 327,000 tons in the first quarter, which is consistent with our fourth quarter harvest volume. Harvest volumes in the first quarter were adversely impacted by mild winter weather limiting available holidays.

Our Idaho sawlog prices were 5% lower on a per ton basis in the first quarter compared to the fourth quarter. The price decline is primarily a result of the effect of seasonally heavier logs. .

Turning to the South. We harvested 1.6 million tons in the first quarter. This level of activity slightly exceeded our Q1 planned harvest volume as we benefited from favorable logging conditions. Additionally, demand for sawlogs and pulpwood in the South generally remained stable throughout the quarter.

Our Southern sawlog prices were 3% lower in the first quarter compared to the fourth quarter. The decline was primarily driven by a seasonally lower mix of hardwood sawlogs and higher mix of smaller diameter softwood sawlogs. .

Moving to Wood Products on Slides 8 and 9, adjusted EBITDA increased from a loss of $6 million in the fourth quarter to breakeven in the first quarter. Higher average lumber prices and lower per unit cash processing costs drove the improvement.

Our average lumber price realizations increased $15 per thousand board feet or approximately 4% in the quarter. This price increase is comparable to the random lengths framing lumber composite on a percentage basis.

Our lumber prices increased each month during the quarter, specifically, our average lumber price realizations per thousand board feet were $405 in January, $427 in February and $443 in March. Lumber shipments in Q1 totaled 271 million board feet compared to 285 million board feet in Q4 of last year.

The sequentially lower shipment volume in Q1 was influenced by seasonal factors, but nonetheless, marks the company's second highest Q1 shipment volume on record. .

Shifting to real estate on Slides 10 and 11. The segment's adjusted EBITDA was $6 million in the first quarter compared to $22 million in the fourth quarter. EBITDA generated by our rural real estate business decreased due to the sale of fewer acres.

EBITDA generated by our Chenal Valley master plan community declined primarily due to lack of commercial land sales this quarter. Commercial sales tend to be lumpy, but our pipeline of potential future land sale opportunities continues to remain attractive.

We closed on the sale of 24 residential lots in the first quarter at a 12% higher average price than in the fourth quarter due to a different mix of lot price points. .

Turning to capital structure, which is summarized on Slide 12. Our total liquidity was $479 million. This amount includes $180 million of cash on our balance sheet as well as availability on our undrawn revolver.

This level of liquidity is after utilizing cash on hand to acquire 16,000 acres of bolt-on timberlands in Arkansas for $31 million, as Eric previously discussed. We have $176 million of debt that is scheduled to mature in October and November of this year. Our decision to pay off a portion or refinance all of this debt will occur later this year.

We still have $200 million of notional forward swaps valued at $36 million on our balance sheet, which we can deploy to issue debt at below market rates. Capital expenditures were $14 million in the first quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement. .

For the full year, we continue to expect CapEx spend of $100 million to $110 million, excluding potential timberland acquisitions. That estimate includes approximately $44 million for the final installments on the Waldo, Arkansas sawmill modernization expansion project..

I will now provide some high-level outlook comments. The details are presented on Slide 13. Harvest volumes in the North are planned to be seasonally lower in the second quarter compared to the first quarter due to spring breakup.

We expect Northern sawlog prices to increase approximately 6% in the second quarter due to resetting the price of index volume to reflect improved Q1 lumber prices and seasonally lighter logs. In the South, we plan to harvest approximately 1.4 million tons in the second quarter.

We expect our Southern sawlog prices to decrease modestly primarily due to seasonally smaller sawlogs in the mix. We plan to ship $275 million to $285 million board feet of lumber in the second quarter. Our average lumber price thus far in the second quarter is flat compared to our first quarter average lumber price.

This is based on approximately $115 million board feet of lumber. As a reminder, a $10 per 1,000 board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. .

Shifting to real estate. We expect to sell approximately 43,000 acres of rural land, which includes the sale of 34,000 Southern acres for $58 million, as Eric previously mentioned. Additionally, we expect to sell approximately 24 Chenal Valley residential lots in the second quarter. Additional real estate details are provided on the slide.

Overall, we expect our total adjusted EBITDA will be higher in the second quarter, primarily attributable to more rural land sales, driven by the Southern land sale to FIA. That concludes our prepared remarks. Dee, I would now like to open the call to Q&A. .

[Operator Instructions] And your first question comes from the line of Anthony Pettinari from Citi. .

Obviously, lumber prices are pretty dynamic, and it's early in the year. But I'm just wondering, as you think about the kind of cash flow that you could generate this year.

And with the spending on Waldo, can you just talk a little bit more around kind of capital allocation and supporting the dividend, potential opportunities to delever at a time when the stock does seem like it's trading at maybe near-record discount to NAV.

Just wondering if you can talk a little bit more about that given it seems like there's a few options here. .

Yes. Thanks for the question, Anthony. So regarding capital allocation, I mean, I think first and foremost, we're going to protect our balance sheet. We're going to maintain investment grade status. But moving beyond that as a REIT, we view our dividend as sacrosanct or nearly sacrosanct. So that's always going to be the highest priority for us.

I will say that as our stock drifts lower in a tough lumber market environment, share repurchases look more attractive to us than otherwise..

But I would also say that we're constantly thinking about M&A. And in the first quarter, we completed what we call Project Ridgewood, our $31 million acquisition in Arkansas. And I think that kind of pushed share repurchases to the back burner a little bit. We also like investing in our mills quite a bit. We like Wood Products CapEx.

Obviously, it might not feel good doing it right now and we're in such a tough lumber price environment. But lumber prices they're historically very volatile. .

And this too shall pass. The industry cannot continue to run at breakeven or for a lot of mills below breakeven levels. So continuing to keep our fleet of mills as first or second quartile mills is always going to be our objective, assuming we can find projects to generate the needed returns.

So I think that CapEx is always given strong consideration amongst our capital allocation levers. .

Regarding debt paydown, I think it all comes down to what our refinance costs are going to be and how do those refinance costs compared to other options that we have. We're just now really getting into those discussions with our banking partners. And so it's a little premature to speak to delevering at this point.

And we also have those -- as Wayne mentioned, we still have $200 million of swaps sitting on our balance sheet that we can deploy to bring down our borrowing costs. So it's a little bit premature to talk about delevering at this point. But certainly, that will be in the mix of our capital allocation decisions. .

Got it. Got it. That's very helpful. And then just picking up on one thing you mentioned. I mean if you're running EBITDA breakeven in lumber, presumably, there's a lot of other producers who are burning cash here. And obviously, I'm not asking you to speak for other competitors.

But I'm just wondering if you are surprised that we haven't seen more capacity curtailments in lumber year-to-date? Are you starting to see them? Just any kind of industry dynamics that would keep some of this capacity on maybe for longer? Is there an import dynamic? I'm just wondering if you could talk generally about the supply side of supply/demand in lumber.

.

Yes, that's a great question, Anthony. So capacity utilization across the industry, I think it's running in the high 70% kind of range, which is frankly quite low. It hasn't been this low since I don't know, to 2012, 2013, something like that.

Relative to demand, there is a lot of excess supply in the industry, particularly in Southern Yellow Pine, where we've seen a lot of new capacity come online. So far this year, we have seen 9 mills close up and several were in BC, but you also had some in the Pacific Northwest and then you had some in the South. .

But given where we sit today with pricing where it's at today, and I've seen cost curves for the industry. There's no doubt that there are a lot of mills that are hemorrhaging cash right now.

And so I would not be surprised if we see more curtailments in the coming months especially when you take into consideration the fact that duties are going up on Canadian lumber from 8% to 14% here in just a couple of months. .

So there's still more pain yet to be felt. So yes, to answer your question, there -- I'm almost certain there'll be more curtailments. Everybody's got to make their own decision, but nobody likes hemorrhaging cash. That's for sure. .

Our next question comes from the line of Ketan Mamtora from BMO Capital Markets. .

Eric, maybe can you talk a little bit about sort of your operating rate in lumber in the first quarter? And perhaps talk about sort of how your order books are trending thus far given that we are pretty close, if not already in the busiest time of the year?.

Yes. So Ketan, we've been running our mills as hard as we possibly can, producing as much volume as we can. And it's because we've got good efficient mills.

Now you might look at it and say, well, you had breakeven EBITDA why would you bother running so hard? But you have to take it one step further because there are administration costs to running your mills, if you look at each mill individually, each mill individually can make money. .

But then you add up the earnings from those individual mills, and they have to offset administration costs. After you offset those administration costs, we ran at a breakeven level in the first quarter. So the point is that the mills themselves are individually are doing just fine, barely doing just fine.

But in this environment, it still makes sense for us to run as hard as we can. .

Now I will say our mills are better than a lot of mills and I generally know where they sit on the cost curve as it relates to industry-wide competition. And I know that there are a lot of mills that are not covering their cash variable costs and those are the mills that I'm sure the owners are having tough discussions about what to do.

So for us, we're continuing to run as hard as we can, but I'm sure it's a different discussion at other mills. .

Got it. No, that's helpful.

And how are your order books for this time of the year, Eric, in lumber?.

I would say our order books are -- they're adequate. They're not -- what will generally happen is when we have a point of view that markets are going to get better, we'll keep our order book short. Basically saving lumber that we can sell at what we think is going to be at a higher price.

When prices are really strong, we'll tend to extend our order books and sell lumber out as much as, I don't know, 4 weeks out into the future..

Today, our order books are relatively short. And the reason it's short is not necessarily because of lack of demand. It's because our sense is that things are bottoming, and we want to save lumber to sell at a future higher price.

That makes sense?.

It does. No, that's helpful. And then just one last one from me. I want to come back to capital allocation again. You talked about during Q1, you were going through the asset purchase and to that -- to some degree, that sort of pushed the share repurchases to the back burner.

So as we sort of think about, as you move about that, how do you approach that?.

And I'm just curious, how does this sort of the net leverage, which is, of course, driven by depressed lumber prices, which is sitting at 5x right now, how does that sort of influence, sort of your decision as you think about share repurchases in particular?.

Yes. So Ketan, we started out the year, we were pretty optimistic on where markets were headed. You think back, I think the market was expecting 6 interest rate cuts by the Federal Reserve by the end of the year. Suddenly, that went to three interest rate cuts. Last I heard, we were down to maybe one interest rate cut perhaps in December.

And I don't know, after some employment cost index data this morning, we may be at zero cuts for the year.

So what kind of an economic environment are we in?.

Is this -- we're going to have a hard landing? Or going to have a soft landing? Is there going to be no landing? It's really murky what the outlook for the economy is right now. And so it's hard to have a lot of conviction about where markets are headed with this kind of a backdrop.

So I think that's one of the factors that weighed into the discussion. The Board meets every quarter to talk about share repurchases. .

And certainly, that will be a topic of conversation at an upcoming Board meeting. Now I would also tell you that what we look at, we don't -- we think about our 5-year plan, our 5-year model for what our dividend ought to be and what leverage ought to be.

There are going to be periods of time where markets are blowing and going, like they were during COVID and there are going to be periods of time where the industry gets stressed, and we get stressed like we are right now. This too shall pass. I do think markets are going to get better. I do think lumber markets are going to get better.

I do think supply is going to come down. I do think demand is going to come back. .

Capacity utilization in the industry will come back, and earnings are going to come back to our Wood Products business. And I would also add that as I think about interest coverage and leverage and all that, our current forecast has our cash balances running higher than where they are today by the end of the year.

So I feel pretty good about where we're at in the environment. The only question I have is where is the economy headed? It's very, very unclear at this stage. .

That's fair.

And do you still have a 10b5-1 program in place, Eric?.

Yes, we still have one in place. .

Our next question comes from the line of Mark Weintraub from Seaport Research Partners. .

First question, so in the slides, in the case you're expecting higher lumber prices to QB, 1Q, you mentioned that they're to date flat and presumably the spot is lower than where it was on average. So that seems to convey some optimism that there's going to be some improvement. Can you kind of just clarify because that would be pretty soon.

I totally understand the conversation about why we're at lows or toward lows over the cycle.

What gives the confidence that we're going to get some improvement hopefully sooner rather than later?.

Yes, we do expect prices to improve. And we do think we're feeling some weakness right now, particularly in multifamily. We've seen project finance costs move up Also, R&R and treated markets, in particular in the South is under a bit of pressure.

I think the one thing that gives me hope or optimism, Mark, is that we are moving into the spring demand build time of the year. Markets haven't completely fallen out of bed. Demand has not fallen completely out of bed. Single-family starts are hanging in there at over $1 million, as we said, for several months in a row now..

I think Home Depot said their comp store sales are going to be down 1% for the year. I think Lowe's was maybe minus 2% to minus 3% for the year. So things haven't completely fallen out of bed.

And as we get into the summertime and people start taking on more and more repair and model projects, and I think demand will come back and there's an opportunity for prices to move higher. It's just -- it's hard for me to see prices not getting better given that so many mills across North America are below breakeven right now. .

Totally understood. But just -- so there's nothing though that you're seeing right in this moment.

I'm over-reading it, if I conclude that you're seeing something that's going to lead to like a near-term improvement necessarily reasons you gave all very valid although the timing, I guess, unclear on most of that? Or am I missing something?.

Yes. I mean our forecast is things dip in May and then they come back in June, we'll see. .

Okay. And then second, kind of on the almost the flip side of this is I see sawlog price is expected to be up 6%. I guess the strength that we've seen in the West, I would have thought there would have been a bigger increase given the way it lags through.

Maybe if there's just a word on the dynamics or if there's something that's going on there that wouldn't be obviously apparent. .

Yes. I mean looking at the north on the sawlog prices, I think it did actually trend pretty close to where we see the when you lag the random lengths to where we came out, I think it paralleled fairly close actually.

So really, the story was for the quarter, just the dynamics around heavier logs is really the density issue more than the indexing pricing itself. .

Yes. Wayne, I apologize. I meant the second quarter outlook, the 6% improvement when I would have thought you would have been positioned for a bigger increase given what happened in like inland Hemlock, et cetera, over and then the lag, I apologize if we can take this offline and go through it. .

Yes. Well, yes. I mean, as it looks for the outlook where we head into Q2, I think there is, again, you've got the seasonal lighter log mix. There is an improvement but I think the other consideration is there is the lag there, but you also have to think about where spring breakup is and there's no calling in that period as well.

And so the timing of the lag is a bit extended. So I think that factors in. .

Okay.

And then lastly, when is the FIA sale expected to be completed?.

Second quarter? Yes. .

Can you give us kind of more specifically within the quarter? Is that very soon or might it be toward the end of the quarter?. .

I mean mid- to later in the quarter is the expectation. .

Okay. Great.

And then presumably, that does that then -- is that likely to put share repurchase more to the front burner given -- I guess, you've given the explanation in the first quarter that you had the acquisition and now the share price is lower and you'd have the monies coming in? Or I mean, is the consideration of how things work with the refi need to be kept in as a part of the equation as well.

How would you have us kind of understand your sentiment on priorities as that $58 million comes in?.

I think that clearly is -- moves the likelihood of share repurchases a little bit more forward. But you got to remember, there's a couple of other big factors that are in the back of our minds. One is the Waldo startup. How does that go? Because we've seen some mills in the South have disastrous start-ups and others have gone well.

We expect ours to go well, but that remains a little bit of an unknown. I'd also like to see lumber markets improve. We'll see how that goes. And then part of it is going to be what happens with the refinance equation. What happens to our view on our expected borrowing costs. So there's a couple of moving pieces there.

But certainly, all things equal, completing the FIA sale will derisk things for us. . .

Our next question comes from the line of..

Matthew McKellar from RBC Capital Markets. .

I think last quarter, you talked about modest signs of flying and take-up of lots in Chenal Valley.

Your guidance for 24 lots in Q2 and 130 lots for 2024 seems to imply a significant pickup in sales in the second half of the year? Can you just talk about the visibility you might have to stronger sales in Q3 and Q4?.

Yes, Matt, this is Wayne. The timing of our outlook on real estate lots is really driven off of inventory availability. So we expect to bring more lots to market in the latter half of the year. I mean we try to -- we really closely manage our for real estate.

We don't try to get out over our skis and create excess inventory, so we really try to stay just in front of demand. And yes, our outlook for the rest of the year is when we -- we're bringing a couple of sub developments to the market, those will be completed here in the coming months and then be available for market later this year.

So that's really it's a lot of availability and what we're bringing to market, and that's what's driving the timing. .

Great. And then I was wondering if you could just provide a bit more commentary on the state of the Timberlands markets for M&A.

Maybe just what you're seeing, whether there's been any changes in sentiment in the market and what have you, maybe since your last update?.

Yes. So I think the best way to describe it is that the market is relatively quiet right now.

I would say, in general, $3 billion to $4 billion of timberland changes hands each year, and we'll see where we wind up this year, but I think it's going to wind up being a relatively light year, so far, the trade rags in the industry have highlighted the fact that we've had four busted deals in the industry so far this year, deals that did not get done..

Now I would also say that they were generally speaking, from what I know about them, they were very low quality deals. So it's no surprise that they didn't get done. But I do think demand for high-quality timberland remains quite high. And it's just that right now, there isn't a lot of high-quality timberland on the market.

So we'll see how the market shakes out, but I think there's no doubt demand is still out there. .

Our next question comes from the line of Nico Piccini from Truist Securities. .

This is Nico on for Mike Roxland today.

First off, can you talk about any early indications on demand for carbon credits realizing that you're a little ways away from actually placing in the market? And then has that changed at all since you began pursuing force carbon credits?.

No. Our carbon credit deal, it's going to be a voluntary project, and we've had price discussions with our broker and with a party that we think is going to wind up buying them. And we think the price talk is still in this $20 to $30 a ton range, and we feel pretty good about it.

I don't know, Wayne, do you have anything to add to that?.

Yes. No, I think it's more of the updates we gave in the past, we're still on track and moving the project forward, trying to target later this year, but we'll see. It's a complex and we're developing high-quality credits, and that takes time. And we're also dependent on third parties that are involved in the accreditation process.

So ultimately, that will drive completion. But yes, definitely we think there's strong demand there. .

Understood. And just realizing that so far, solar and carbon credits seem to be the more mature NCS initiatives, not just for Potlatch, but in the industry.

Is there any -- can you give any update or maybe an estimate of when we might see those other initiatives coming to play like bioenergy or carbon capture sequestration?.

Yes. I mean, certainly, we're in the early innings on biomass -- maybe Barium, Lithium we're looking at carbon storage and sequestration, those are -- we're developing all those opportunities. We continue to make progress.

I think it's difficult to put a exact time frame on where we would see monetizing some of these type of projects, but we're all -- we're very active in each one of those. .

And pursuing each of those opportunities with outside parties. We were under some NDAs as it relates to CCS as we continue to look at that opportunity. I think we estimate in CCS, we may have around or up to about 150,000 acres that are suitable for CCS. And we're active in looking at that geological formations that I think will support CCS.

So we're active in all of those areas and aggressively pursuing each of those opportunities. .

Our next question comes from the line of George Staphos from Bank of America. .

Just want to -- so the harvest levels in the first quarter were a touch better, I think, than your initial guidance. Was that just a weight issue? Or were there other things that were driving the slightly better harvest profile? And then maybe staying on that same topic. As we look to the south and again, we all know that these are local markets.

We can't look monolithically. Nonetheless, pricing remains relatively flat in the South. It's been relatively flat for a long time.

When do you see the inflection coming in timber pricing in the South?. .

Yes, George. So your first question on harvest volume. Yes, we were I would say, slightly ahead in the South, this first quarter compared to what we had planned. And we had just favorable harvest conditions, and we took advantage of those conditions.

And it drove a slight update in our harvest volume, but we continue to maintain our overall outlook for harvest volumes for the year, somewhere around probably $5.6 million..

Yes. So no real change there. I think it's just taking advantage of conditions when you can. And as far as pricing is concerned, yes, I think you're right. We're -- we've been in a pretty stable environment. I think that's our near-term outlook, both on the demand side and the pricing side. .

Even when we look across kind of digging deeper into both of our markets, whether that's kind of on the Gulf South side or the Southeast, I think we see pricing relatively stable across the board.

When that can turn, yes, I think as markets continue to tension, especially in the southeast side where we see a premium because markets are more tension, think when lumber demand picks up, those tension markets, you'll see a bigger increase in pricing in that region probably compared to where we're a little bit less tension in the Gulf South region.

So that will probably lag but there is additional capacity coming online. So timing is difficult to ultimately say, but we do think those markets will tension over time as well. But, yes, I think as soon as we see demand picking up, you can see those, especially those tension markets really turning around much quicker.

I mean the log in the lumber markets have decoupled in the South for a long time, is your view that we're getting to a point, maybe in -- within the next year that they will recouple?.

And so as we start to see lumber prices moving higher, we actually will see a higher propensity to pay for logs? Or is that still kind of too hard to call at this juncture?.

Yes, I think that's a bit difficult. I mean, look, we -- we haven't -- prices have been fairly stable. When we saw the historic run-up in lumber prices, we didn't see a huge increase in log prices in the South. I mean -- but we continue to add capacity in the South.

And I think as those tension, you'll see prices come up over time, but it's difficult to pinpoint exactly when that will be. I mean there's a lot of variables involved. .

But I think, George, you got to step back and think about like what happened after the great financial crisis all those mills closed in the south. And you think about what happened to growth to drain, the forest was growing much faster than the harvest each year.

And so a lot of standing inventory went on the stump each and every year for 15 years and the latest industry data that I saw, it had drained actually equaling or maybe even slightly exceeding growth, so now the standing timber inventory in the South has now reached an equilibrium. .

And if you look out over the next 5 years, in fact, drain is going to be higher than growth. So you'll start to see those standing inventories come back down again. Now to Wayne's point, every market is going to be a little bit different, right? The already tension markets are going to show more tension, assuming lumber demand continues to improve.

And you'll see those tension markets show better price appreciation than the non-tension markets. But the reality is even the non-tension markets are expected to get better over the coming years as the drain exceeds growth. .

Would you be maybe more willing now than in past years to consider selling in areas where you're not going to see that tension in the next several years given that, again, we're 15-plus years since the crisis. .

Well, as portfolio managers, we're always open to selling. I mean just take a look at our FIA transaction where we sold 4-year-old trees for $1,700 an acre. That's a good core timberland for sure, but it's just really young trees that have no cash flows or virtually no cash flows for 20-some years.

So we're always open to the idea of selling, but I think the thing you got to keep in mind is you don't want to be just in the tension markets. Look at the pullback that we've just had over the past year or two.

Which markets have taken it the hardest in the South, it's been those most tension markets because those are the areas where capacity comes out first. So I think you want to play in both tension and non-tension markets, frankly. .

The sawmill expansions, the additions that we're seeing, they tend to be more of the weaker markets and the fact that capacity is going in those weaker markets is what in turn is going to drive log prices higher. But at the end of the day, like I said at the start, we're portfolio managers at the right price, we'll sell just about anything. .

No, understood. I appreciate the thoughts on that, Eric. I guess my final question, I'll turn it over. Recognizing the land sales we'll make for a nicely improved 2Q versus 1Q. If we hold that aside and we look just at Timberlands and Wood Products.

Wood products lumber volumes might be up a touch from what we saw in the first quarter, but pricing right now is relatively stable and actually, May, you're expecting to be lower.

In Timberlands, harvest funds are recognizing you're going to be opportunistic will be a touch lower than the first quarter where you've got northern prices up, Southern prices down. So it seems like operationally, kind of flat 2Q versus 1Q.

Would you agree with that very, very quick analysis?.

I think that was pretty quick analysis. I mean, my expectation is, yes, lumber markets are weak. We actually had a decent April, not a great April, but it was certainly better than, say, the first quarter. So I think wood products could be a little bit better.

I think Timberlands, I don't know, it may be flattish, but yes, real estate should be up significantly. .

At this time, I'm showing there are no more questions. I'll now turn the call back over to Wayne Wasechek. .

Thank you for your questions and your interest in PotlatchDeltic. That concludes our call. .

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect..