Potlatchdeltic Corp

NASDAQ:PCH

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. My name is Lindsay and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Third Quarter 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

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

[Jerry Richards, VP & CFO]

Thank you, Lindsay, and good morning. Welcome to PotlatchDeltic's investor call and webcast covering our third quarter 2019 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer.

This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC, concerning the risks associated with these forward-looking statements. Also please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com.

I'll now turn the call over to Mike for some comments and then I will cover our third quarter results and our outlook.

[Mike Covey, Chairman & CEO]

Thanks, Jerry, and good morning.

We generated adjusted EBITDDA of $55 million in the third quarter. This is almost 50% lower than our adjusted EBITDDA in the third quarter of 2018 and reflects weak lumber prices that have persisted longer than any of us expected. Having said that, wood products results improved modestly this quarter, and the segment set quarterly lumber production and shipping records. We remain optimistic about the outlook for this business.

Wood products remains on track to complete its elevated capital project plan as well. We recently completed replacement of five batch dry kilns with two new continuous dry kilns at our own Arkansas sawmill and finished installation of a new kiln at our St. Maries, Idaho sawmill.

Notable projects for the rest of the year include a green stacker and expanded rail spur at our Waldo, Arkansas sawmill.

As a reminder, we plan to spend just under $40 million of capital in this segment in 2019; the primary benefits of these projects are expanded capacity and improved grade realization.

In Timberlands, we mentioned on prior calls this year that we shifted some of our Idaho volume to the second half of the year because customers in the region entered the Spring breakout period with higher than normal log inventories. Log deliveries are on track through October and we expect to meet our Idaho harvest volume for the full-year.

By contrast, we now expect our Southern harvest volumes to fall short this year. Rainfall was double normal levels in our Arkansas operating areas in the first half of the year, which restricted the supply of sawlogs and constrained our ability to harvest particularly in the Southeastern corner of Arkansas, where we have low line land close to the Mississippi Delta. The resulting mill log shortages caused pine sawlog prices to increase to 10-year highs. As operating conditions improved in the third quarter, there was an overwhelming supply response by non-industrial landowners to take advantage of the attractive prices. This resulted in an acute shortage of logging contractors and ultimately led to high mill log inventories. We've now seen pine sawlog prices decline back to normal and we have limited opportunities to catch-up on our planned harvest for the year, given the mill log decks are now full.

We believe that this situation is unique to this year and with the unprecedented rainfall in Arkansas. We expect our harvest levels to return to normal higher levels in 2020.

On a positive note, the higher than expected Southern sawlog prices this year have offset the effect of lower harvest volumes on our Southern Timberland's EBITDDA.

Real Estate performance has been strong this year and the segment is on pace to exceed its planned adjusted EBITDDA by approximately $20 million. This segment has done a particularly good job identifying and executing on rural land sales sourced from Legacy Deltic Timberlands.

Looking forward, we continue to be encouraged by U.S. housing market fundamentals, and we expect lumber prices to improve as we approach the 2020 Spring building season. A meaningful increase in new orders reported by homebuilders earlier this year is translating into higher single family housing starts.

September was the second month in a row where single family starts were above 900,000 units. This is important as single family unit uses approximately three times lumber as a multifamily unit. Further evidence that U.S. housing starts are improving include new building permits about 10% above the current level of starts. Homebuilder sentiment has increased or increased four months in a row is at the highest level since early 2018. And large homebuilders have reported strong new orders for the third quarter.

The current level of U.S. housing starts have only recovered to a level that has been typical in normal recessions. We expect that the under built situation will be exacerbated as Millennials who are the largest demographic cohort are just starting to enter the prime Home Buying units.

Turning to lumber supply. There have been several capacity curtailment or closure announcements, which are estimated to be over 2 billion board feet in aggregate. It has been our view that the full effect of these decisions on lumber shipments would not be felt until the fourth quarter of 2019 because of it takes time for the affected middles to work through their log inventories. PotlatchDeltic is well-positioned to benefit from the recovery in these lumber prices.

Our balance sheet remains strong and provides the flexibility to grow shareholder value. We returned $106 million to shareholders in the first nine months of 2019. We did not purchase any shares in the third quarter. While we still trade at a discount to net asset value, our stock price is 17% above the average price at which we repurchase shares in the first half of the year.

I will now turn it back to Jerry to discuss the quarter and our outlook. And then, we'll take questions.

[Jerry Richards, VP & CFO]

Thanks Mike.

Starting with Page 4 of the slides, total adjusted EBITDDA was $55 million in the third quarter compared to $49 million in the second quarter. The sequential increase in EBITDDA is due primarily to seasonally higher harvest volumes and higher lumber shipments, partially offset by the fact that real estate sold fewer acres of rural land in the third quarter.

I will now review each of our operating segments and provide more color on third quarter results. Information for our Timberland segment is displayed on Slides 5 through 7. The segment’s adjusted EBITDDA was $43 million in the third quarter compared to $26.1 million in the second quarter. We harvested 529,000 tons of sawlogs in the north in the third quarter. This was up seasonally from the 325,000 tons that we harvested in the second quarter.

Northern sawlog prices were 7% higher on a per ton basis in the third quarter compared to the second quarter. The price increase reflects the lagged effect of slightly higher lumber prices on index volume and the seasonal decrease in the density of logs.

In the South, the 1 million tons harvest in the quarter was lower than we planned. The higher than normal mill log inventories in the third quarter that Mike touched on constrained our ability to catch-up on our first half harvest shortfall.

Our pine sawlog prices increased as much as 14% at their peak as extraordinarily wet weather constrained the supply of logs. The elevated prices carried into the third quarter and have resulted in a positive $5 million effect on adjusted EBITDA for the first nine months of the year. Southern pine sawlog prices have dropped back to longer-term averages entering the fourth quarter.

Turning to Wood Products on Slides 8 and 9, adjusted EBITDDA was $5.9 million in the third quarter. This is an improvement of $7.9 million relative to the second quarter. Lower log and manufacturing costs on a per unit basis more than offset the effect of weaker lumber prices, which resulted in improved margins. As Mike mentioned, our Wood Product segments set lumber production and shipping records in the third quarter. We're on track to ship approximately 1.1 billion board feet of lumber for the full-year.

Turning to Real Estate on Slides 10 and 11, the segment’s adjusted EBITDDA was $14.7 million in the third quarter compared to $31.3 million in the second quarter. As a reminder, we closed two large rural sales last quarter, including the sale of Former Deltic Timberlands for $11,000 per acre. The segment closed the $3 million sale of commercial property in Chenal Valley in the current quarter.

Shifting to financial items which are summarized on Slide 12, we ended the quarter with $95 million of cash. We plan to refinance the $40 million term loan scheduled to mature in the fourth quarter. The new loan will mature in November 2029 and we have effectively locked the rate.

Interest savings will be modest relative to the variable rate on the existing term loan.

Capital expenditures were $16.4 million in the third quarter. Note that this amount includes $1.3 million of real estate development expenditures which are included in cash from operations in our cash flow statement. We continue to expect that total capital expenditures including real estate development will be in the range of $65 million to $70 million for 2019.

I'll now provide some high level outlook comments; the details are presented on Slide 13. Harvest volumes in the north are expected to be seasonally lower in the fourth quarter compared to the third quarter. We expect Northern sawlog prices to decrease modestly in the fourth quarter due primarily to seasonally heavier logs. While harvest volumes in the South are anticipated to be higher in the fourth quarter than the third quarter, it will not be enough to make up the shortfall relative to our annual plan. As a result, we believe that Southern harvest volumes will fall about 450,000 tons short of plan this year, and return to more normal higher levels in 2020. We expect the shortfall to be comprised of about 70% sawlogs and 30% pulpwood.

We expect Southern sawlog prices to be lower in the fourth quarter due to slightly lower prime sawlog prices and a seasonally lower mix of hardwood sawlogs.

We expect average fourth quarter lumber prices to be flat compared to the third quarter and to ship approximately 290 million board feet of lumber in the fourth quarter.

Shifting to Real Estate, the segment is expected to wrap up a strong year by selling approximately 3,000 acres of rural land and 50 Chenal Valley lots in the fourth quarter. Overall, we estimate that fourth quarter total adjusted EBITDDA will be lower than third quarter due to a seasonal decrease in harvest volumes and lower real estate sales activity.

That concludes our prepared remarks. Lindsay, I would now like to open the call to Q&A.

[Operator]

[Operator Instructions].

Our first question comes from John Babcock with Bank of America Merrill Lynch. Your line is now open.

[John Babcock, Bank of America Merrill Lynch]

Hey, good morning - afternoon. Just want to start out how does the pullback in harvest volumes for the third quarter impact Potlatch’s plans kind of as you're looking out over the next couple of quarters and obviously also some carryover from what happened in the first half the year?

[Jerry Richards, VP & CFO]

Well, over the next couple of quarters, we have our plan that is established already for Q4 and that guidance is in the supplemental materials that that we put out. Next year, as Mike mentioned, in his comments, our harvest plan for our current acreage is roughly 6 million tons per year, 6, 6.2, somewhere in that zip code. We have not developed our formal operating plan yet for next year. So I don't want to be committed to those numbers, but we expect to get back to that that operating plan next year.

[John Babcock, Bank of America Merrill Lynch]

Okay, thank you. And then next, I guess, I was just wondering a little bit on kind of the sawlog prices, you saw a little bit of an uptick during the quarter, what drove that? And also while it sounds like some new suppliers kind of come into the market, is there any potential that you see for Southern sawlog prices to start ticking up or do you expected kind of roaming around this kind of lower level for a period of time?

[Jerry Richards, VP & CFO]

So there is two different reasons to talk about here. One is the north and one is the South. Yes, clearly in the north, we saw a 7% rise in our sawlog prices in the northern region. Some of that was due to the higher lumber prices, random lengths was up 4% quarter-over-quarter. So that played a role in our higher sawlog prices in the north. And then we also have the weight factor. Our logs are drier in Q3 than they are in Q2, and so on a per ton basis, even though the volume is the same on a per ton basis, pricing will move up favorably. So that contributed about 3% of the overall 7% change in northern sawlog prices.

So going to the South. It's a little bit different in the South in Q3 we get more hardwood in Q3. This year our mix of hardwoods was 8% compared to just 1% in Q2 this year. So that did provide positive uplift to sawlog prices in the south. And we also had that wet weather spillover effect, prices were really strong in Q1 and Q2, and they continued onward into Q3. But they have since rolled over and gotten back down, as Mike mentioned, to more normal levels. So we're now back down to the $43, $44 a ton for Southern Yellow pine. Is that helpful?

[John Babcock, Bank of America Merrill Lynch]

Yes, that is actually. And then kind of next question is more on the lumber side of things. I guess first of all, just confirm was that 2 billion board feet number that you mentioned, was that across North America or was that kind of region specific? And then the next question is really just at this point, do you foresee further mill curtailments or do you think that the market is getting into more supply and demand balance?

[Jerry Richards, VP & CFO]

Well, the 2 billion is really the number that's kind of happened so far. And it's a lot of that is up in BC but there's -- it's not just from BC there's also mills on the west side that have closed down. I think GP had a mill issue. Swanson, Simpson all three of those companies have reported no closures or curtailments. You've also seen a pullback in the South. GP just announced the mill over in South Carolina that they're going to idle, the Conifex mill is down, I think Rex Lumber is idling. So all total the number is really probably higher than two, it could be as high as 3, 3.5 billion board feet is just some of that is permanently closed and some of it is curtailed.

[John Babcock, Bank of America Merrill Lynch]

Okay. And an expectation for kind of further mill curtailments from here?

[Jerry Richards, VP & CFO]

Yes, it's hard to say it all depends on pricing. I think the worst mills in the industry have already washed out. As prices move up, I would expect less curtailment. But prices continue to languish. I'm hearing rumors that mills in Eastern Canada are really suffering right now. Who knows something good could happen there. So it really just depends on what happens to pricing going forward.

[John Babcock, Bank of America Merrill Lynch]

Okay, great. And then last question before I turn it over, if you could just kind of comment on inventories -- lumber inventories to the chain under grade? Thanks.

[Jerry Richards, VP & CFO]

Yes, so lumber inventories, we don't track them ourselves. It's anecdotal, what we hear from our customers, it's what we see in pundit reports, FDA had webinar, I don't know a couple of weeks ago, they highlight the fact that lumber inventories are pretty low levels throughout the channel. Customers seem to have found a way to live operating with low levels of inventory, particularly in this environment, when they can place a phone call and get wood delivered on very short notice. So that may be a more permanent operating posture of the industry is just they've learned run with low inventories.

[Operator]

Our next question comes from Ketan Mamtora with BMO Capital Markets. Your line is now open.

[Ketan Mamtora, BMO Capital Markets]

Thank you. Good afternoon, everyone. First question on this beetle outbreak that we are seeing in some parts of Europe are you seeing more -- are you seeing signs of more lumber coming into the U.S. from Europe?

[Jerry Richards, VP & CFO]

No, Ketan I've heard a lot about those the beetle issue in Central Europe. And I think if you look at imports into the U.S., frankly, from countries other than Canada, I think year-to-date, they are down like 4%, 5%. So it's not like we're seeing a flood that this would hit the U.S. shores. I've heard anecdotally, some of it may be showing up in the Northeast, but it's certainly not showing up in the overall industry wide data.

[Mike Covey, Chairman & CEO]

But it is, I think there's a lot of evidence that wood is flowing to other parts of the world both particularly in Asia.

[Jerry Richards, VP & CFO]

Yes, particularly China.

[Ketan Mamtora, BMO Capital Markets]

Got it, okay. And then turning to lumber, some of these wider Southern Yellow Pine grades have come under a lot of pressure. What is driving that? I mean [indiscernible] is also, I mean it's not been grades but it seems like the wider grades have come under a lot more pressure, what do you think is driving that?

[Jerry Richards, VP & CFO]

I'm sorry, did you say, wider which --

[Ketan Mamtora, BMO Capital Markets]

Wider grades.

[Jerry Richards, VP & CFO]

Yes, so wides -- yes, wides were under a lot of pressure right now Ketan and it's a couple different things. One is that that rain in the Southern region is kind of moved out. So now the lower line elevation stands are accessible, those tend to be bigger trees, they tend to produce more wides. So number one, the overall mix from the South has kind of increased to wides. But then number two, you're also at a time of year where seasonally treaters back off their purchases. They won't come back into the market in a meaningful way until say first quarter of next year when they begin getting ready for the deck building season, if you will. So a lot of it is just -- it's just seasonal weakness.

[Ketan Mamtora, BMO Capital Markets]

Got it, that's helpful. And then just turning to the hardwood lumber markets, they've come under a lot of pressure as well. Now, can you just talk about kind of what you guys are seeing and sort of implications for hardwood timber owners and if you can just remind me kind of how much hardwood you have in your mix. And whether it creates any opportunities for you guys?

[Mike Covey, Chairman & CEO]

Well, yes, so the hardwood, the hardwood lumber business has come on a lot of pressure and a lot of that hardwood lumber was previously on a boat to China. So those tariffs have really gotten a number on hardwood lumber exports. Our overall hardwood mix is roughly I know this year is going to be like 4% of our Southern harvest volume, that's lower than it might normally be, it normally would be in the who knows 8% to 10% kind of a range. So certainly less demand is not good for hardwood. But we think once the tariff issue is resolved, those exports will continue and prices will firm-up.

[Ketan Mamtora, BMO Capital Markets]

Got it. And then just last one from my side kind of what you're seeing in terms of activity in the Timberland markets?

[Mike Covey, Chairman & CEO]

Well, Ketan, it's been a quiet year, by and large with not a lot of activity from TMOs or REITs or private landowners this year. Most things other than the Michigan transaction, the warehouses are executed to line timber, but it's been kind of small sales in the 20,000 to 50,000 acre size range. There seems to be no price change from what we can see. Prices have held up relatively steady but not a lot of volume.

[Operator]

Our next question comes from Collin Mings with Raymond James. Your line is now open.

[Collin Mings, Raymond James]

First question for me just going back to Wood Products and your outlook for that segment, just maybe can you update us on where your lumber realizations actually stand quarter-to-date relative to 3Q. Maybe just expand a little bit more on the factors leading you to expect flat pricing. I'm just trying to reconcile some of the positive commentary on kind of supply/demand dynamics with the guidance slide here?

[Jerry Richards, VP & CFO]

Yes, so where we're at quarter-to-date, Collin is we are down slightly, very modestly a percent or two. Our product mix is more skewed to factors that are not working right now. Things like timbers, seasonal weakness in timbers, we have economy grade is under a fair bit of pressure. So we're down slightly kind of quarter-to-date.

Our expectation is flat to maybe even up a couple percent. It does feel to us like things are starting to firm just here in the last week or so, talking to the sales force. It feels like things are getting better. So there's crosscurrents taking place here but it feels just like things have bottomed to maybe getting a little bit better.

[Mike Covey, Chairman & CEO]

And also, Collin, I would just add that the headline information about lumber prices are largely skewed towards SPF, which have been quite strong, and Southern Yellow Pine has kind of not participated in that party very much.

[Jerry Richards, VP & CFO]

Well, the other thing to add to that Collin is that a lot of what you're hearing about is lumber futures, which there's a big, big disconnect between futures, which are 40 to 50 bucks higher than where cash markets are today. Now, those futures are at a -- wood to be delivered at a point in time into the future, whether it's December or January or February. So, something's got to happen, either futures prices are going to have to come down or cash prices are going to have to come up.

[Mike Covey, Chairman & CEO]

The other thing to kind of know Collin is that going forward; especially since the merger is we're more of a Southern Yellow Pine company than we used to be. So it matters to us more than it used to.

[Collin Mings, Raymond James]

Okay, that’s all very helpful color there guys. Just sticking with Wood Products just again recognizing you aren’t providing any formal guidance for 2020 at this juncture. But maybe just update us on how you're thinking about further non-maintenance capital going into kind of your Wood Products segment just given obviously, the reset and pricing relative to 18 months ago and clearly you have spent a lot over the last couple of years now on kind of lowering the cost structure making your mills more efficient. So just trying to get a sense of how you're thinking about that going forward, relative to the last couple of years?

[Jerry Richards, VP & CFO]

Yes, so Collin you highlighted it's early for us. We're not done generating our plan yet for next year. I can -- we do have a couple of meaningful projects in Wood Products, we're going to put in a new debarking operation at our Holder sawmill. And we're also going to put in a new stacker at our St. Maries sawmill. Those pieces of equipment are on order and they're to be delivered on first half of next year. So we're committed to those, it's really premature for us to comment beyond those two because I just don't know.

[Mike Covey, Chairman & CEO]

The one thing we are encouraged about Collin is the capital work that we've done this year, which a lot of it's pointed at more production capacity with more dry kilns. And we should see a meaningful uptick in our production next year, probably in the range of 3% to 5%. And we look for better lumber markets next year, I think as we sit here today, so I think those will be positive trends for our Wood Products business.

[Collin Mings, Raymond James]

Helpful there as well. And then just maybe sticking with capital allocation and kind of following-up on an earlier question just on the Timberland market. Just maybe just update us on the appetite here for bolt-on acquisitions clearly to start the year. Mike, you're pretty adamant that the best opportunity out there was to repurchase shares, just given the disconnect between where the stock price was compared to your NAV but obviously you didn't buy any shares in 3Q, just maybe talk a little bit more about the appetite there for acquisitions, just again to the point that maybe it's been a quieter year on the transaction market as a whole?

[Mike Covey, Chairman & CEO]

We have seen a nice movement on our stock price, I think up 17% since the first half of the year when we purchased shares. So our -- the attractiveness of buying Timberlands has improved relative to what our stock price was in the first half of the year. So I think we've always been interested in small bolt-on deals, and they're probably even more attractive now as the stock repurchase opportunity. And we think about it opportunistically is not as attractive as it was. We've returned a lot of capital to shareholders in the last 18 months or so.

Both in the form of the dividend and the stock repurchase, we contributed to our pension plan. We did a $44 million E&P purge to complete the merger. So we still have some dry powder left. And as we sit here today, I think bolt-on acquisitions would rise higher in the stack of priorities than where it's been in the first half of the year.

[Jerry Richards, VP & CFO]

And Collin just to highlight that we just recently consummated a transaction in one of our Southern states, it's not a big deal, its $4 million, $5 million, but it’s land, it’s in our operating area. It was purchased with a discount rate of around 7.5%. It came with it 10/31 tax benefits. So we'll look for opportunities like that where we can earn outsized returns on our M&A activity.

[Operator]

Our next question comes from Chip Dillon with Vertical Research. Your line is now open.

[Chip Dillon, Vertical Research]

Hi, good morning, and afternoon. Thank you for all the details. My main question has to do with as you look out to 2020 and 2021 and we think about modeling the real estate segment. And obviously this year you ended up with more sales than you had planned earlier in the year. How do you think next year will unfold? And then, secondly, if on a separate note, if you could update us on how we should think about the number of blocks that you still have left? And how could we see those sales flow through and assume that we have a decent market for land next year and the year after?

[Mike Covey, Chairman & CEO]

Well I will take the first part Chip and Eric can talk about the lot sales. We've since prior to the merger, and really, since the merger, we kind of said we're going to sell roughly 20,000 acres a year for a land that that has an attractive premium to what its underlying Timberland value is, and that's obviously going to be lumpy. Some years are going to be slightly higher, some will be a bit lower, but I don't expect any change in that from where we sit today.

One of the real kind of gems out of the merger with Deltic has been a larger rural land sale opportunity at higher prices and more acres that are suitable than what we expected, when we did our due diligence. So I think we're encouraged about that. I will let Eric speak to the lot sales and Chenal.

[Eric Cremers, President & COO]

Yes. So Chip on regarding lot sales, so Chenal as you may recall master plan community with total development size of 4,600 lots. Of the 4,600, 3,000 have been sold. So we have about 1,600 yet remaining. In a typical year, we're going to sell about 150 lots in Chenal. So if you just do the simple math, it's about 10, 11 year kind of a runway. I'm sure there's going to be periods of time where we'll see that and there will be periods of time when recessionary type of year would be on the low-end of that. But there is strong demand for lots in Chenal; our pricing is coming in ahead of what we had planned for the year and we're optimistic about that business.

[Mike Covey, Chairman & CEO]

There's also a nice commercial plot of land there in Chenal Valley that is I think 800 acres or so. Not sure exactly what the total is, but we'll continue to, that's going to be very lumpy of course. But as we get more rooftops established in Chenal Valley residential area just going to put more demand on the retail and commercial space so that'll kind of go hand-in-hand.

[Eric Cremers, President & COO]

Yes, I mean that that commercial business shifts so similar to residential, there's 800 commercial acres at the start, and there's about 370 acres remaining. That acreage, although it's lumpy, it has a really nice sticker price to it. So that the $3 million that we generated in Q3 in commercial in Chenal was for six acres so that's $500,000 per acre.

And I can assure you, like Mike said, there's the more Chenal gets built out, the more demand for that commercial land is going to -- is going to increase and we've got more, more commercial deals that are in the pipeline, but it's a very lumpy business.

[Chip Dillon, Vertical Research]

And on that of the 500,000 type property, what kind of -- who's buying that, is that for retail or shopping malls or for what kind of -- what's going in on those lands?

[Jerry Richards, VP & CFO]

Yes, it’s kind of all the above its banks, it’s restaurants, it's -- there was a manufacturer, there’s a school, there’s a church, multifamily hotels, and it runs the gamut. I mean, this is the place to live in Little Rock, Arkansas.

[Chip Dillon, Vertical Research]

Got you, got you. Okay, that's super helpful. And then just on a separate note, just to follow-up a little bit about the -- your timber sales effort. Are there any mills that have either been shut down that you are concerned about coming back or new ones that are starting up that could impact you in the next year or two? And then I guess as a side note, if you see another jump in prices, let's say in Southern Arkansas, are you concerned about another situation where the private owners kind of crowd you guys out?

[Jerry Richards, VP & CFO]

So yes, what happened in -- what happened in Q3 was a bit unusual, I mean prices really, really did spike up into the low 50s. That stimulated a lot of gate wood, non-industrial private landowner wood to come to market. We were very surprised by that, frankly caught us a little off guard. Q3 is normally a time of year when we really get after hardwoods because that's when the place dries out.

But that contractor capacity was not available to us in Q3 because Southern Yellow pine prices were so high. I really expect things to go back to normal. I mean, we're already seeing prices back down to where they were, pre-2019 where Southern Yellow Pine logs were in the kind of $43, $44 ton range. And I don't expect this to happen again.

And regarding your earlier question there, mill startups there's nothing that I see on the horizon that's going to dramatically change the equation, the Conifex mill in Eldorado is down right now. They could start back up again. But I think if it did start back up again, you wouldn't see a big move in sawlog prices.

[Chip Dillon, Vertical Research]

Okay, great.

[Mike Covey, Chairman & CEO]

The area where we have got the most optimism Chip is in Alabama. We've got a GP at Talladega started a new mill and the Westervelt companies got one under construction in Southern Alabama. So that that market is going to be a little tighter than the rest of the South sooner.

[Chip Dillon, Vertical Research]

Okay. And that’s Southern Alabama, right?

[Mike Covey, Chairman & CEO]

Well the GP Talladega is more Northeastern Alabama and the Thomasville location for Westervelt is in the Southwest corner of Alabama.

[Operator]

Our next question comes from Mark Weintraub with Seaport Global. Your line is now open.

[Mark Weintraub, Seaport Global]

Thank you. First question was on the Real Estate business where it looks like it's been quite strong. Were you largely selling forward because of the strength or were you actually also getting better pricing than you would have anticipated?

[Jerry Richards, VP & CFO]

No, I don't know that we were selling forward. I mean, these are deals that just naturally came together in the third quarter. One particular transaction was in Minnesota, where we had a large $4 million sale with a mining company there. And in that particular transaction, this mining company had an option to buy that land from us since 2012.

And they've been paying us $250,000, $275,000 per year to have that option to buy those 3,000 acres. And as their project has progressed, they're getting more and more optimistic about their mining project coming to fruition and they needed to have the acres to trade to the state to show conservation ground. So this was just a matter of it naturally came together and really was nothing regarding timing, there was nothing unusual there.

[Mark Weintraub, Seaport Global]

Okay, maybe I misunderstood I thought that part as you had noted in your initial comments that the acreage sold was higher than you'd originally anticipated. I thought that was in part because the market was strong. Was I misinterpreting that?

[Jerry Richards, VP & CFO]

No, I think we were planning on selling these acres in Q4, it just came together in Q3 and the market for rural acres is definitely strong. You got a stock market at the high levels you've got unemployment at low levels; consumer confidence is generally pretty high. The business in general is very strong. But we did execute the transaction in Q3 and plan to be executed in Q4.

[Mark Weintraub, Seaport Global]

Okay, thank you. And just coming back to the question on the farmer wood that came out in the third quarter? Was this surprise to you that that pricing had gone up so much for Southern sawlogs in that region or was it that there was as much wood as came to market that responded to the stronger pricing?

[Jerry Richards, VP & CFO]

I think it was a little bit of both. I mean, we actually the rain started in the first half of the year but it continued on into Q3, Tropical Storm very blue through Arkansas, and I think July. So unprecedented rainfall led to unprecedented prices. And it was just a perfect storm for higher log prices. I think we were surprised by the amount of gatewood that quickly came to market. And that gatewood was on ground, it was at a higher elevation than what we were trying to harvest on our ground. So contractors could not go work on our property in that Southwest, Southeast corner of Arkansas, because that lower elevation land was relatively speaking onto water, whereas the gatewood was at a higher elevation contractors could go work.

[Mark Weintraub, Seaport Global]

Okay. And then lastly, one thing obviously it’s important is to recognize you guys are a net buyer of sawlogs in the South. Now are shifts in where pricing is by region et cetera. Does that affect mix in ways that impact your profitability or where -- when we see or is it really just about where the spread between lumber and overall Southern sawlog pricing is, that's going to drive your profitability on a -- in a given time period?

[Mike Covey, Chairman & CEO]

It’s the latter. The mix feature kind of ebbs and flows month-to-month or week-to-week but the latter point that you made is the more important one and that's the spread between lumber and log prices, which still is attractive.

[Operator]

Our next question comes from Paul Quinn with RBC Capital Markets. Your line is now open.

[Paul Quinn, RBC Capital Markets]

Thanks very much. Good afternoon I guess or good morning to you guys. I guess start on Wood Products, congratulations on the record lumber production or what should we be modeling in here for 2020? Is that kind of a $1.2 billion board foot number?

[Eric Cremers, President & COO]

No, so Paul, it’s Eric. Yes, I think Mike alluded to it earlier. We have got a good track record here every year, we get about 3% to 5% higher volumes out of our mills. And although it's early, and we're not giving guidance yet on next year, I would certainly say that, I think our back of the envelope math suggests that another 4% increase in production is in the making.

[Paul Quinn, RBC Capital Markets]

Okay. And then in terms of the CapEx that you put in margin improvement, what would be sort of a rule of thumb on how much more margin you've got given the CapEx that you've done this year and intend to do next year?

[Eric Cremers, President & COO]

Well, that's a really difficult question to answer to develop our capital plans for next year. I would reiterate that all the projects that we've done in our mills, large projects, we've got returns anywhere from I'm looking at a piece of paper, the lowest one is 16% IRR, the highest one is 48%. So these are all projects with quick three, four year kind of paybacks attached to them.

[Paul Quinn, RBC Capital Markets]

Okay. Then just shifting over to Real Estate just and I guess I'm just glomming on a prior question, but just how sustainable is the current strength in the real estate, do you feel strong about the next number of years going forward?

[Eric Cremers, President & COO]

Yes, I do. It’s hard to predict too far out, given that everybody talks about a recession being right around the corner. But as Mike said, we still got 200 some thousand acres, rural acreage that we intend to sell, and we sell about 20,000 acres a year. So that's a good 10-year runway with those acres. And that is I talked about Chenal, we've got 15 years worth of logs left at Chenal or 10 to 15 years worth of logs left at Chenal at our current pace and we’ve got a plenty of commercial acres as well. So I really don't see real estate slowing down anytime soon, except if there's a recession.

[Operator]

Our next question comes from Kurt Yinger with D.A. Davidson. Your line is now open.

[Kurt Yinger, D.A. Davidson]

Yes. Good morning, everyone. Just on the Wood Products, how do you think about capacity creep versus the need to really put capital to work to keep growing that capacity? And then if we were to think about kind of a base annual capital need there, how does that compare to where you expect to come in over 2019?

[Mike Covey, Chairman & CEO]

Well, I'll take the second question first, which is capital plans. There's no doubt 2019 was an elevated capital spending plan for our company. We had just completed the merger with Deltic. There were a number of pent-up projects at those mills. And that that caused us to elevate our capital plans in 2019. So I would expect capital plans to come down in 2020 although we haven't finished developing our plans yet, I do think that ultimately it's going to come down.

So your other question was regarding capacity. We run our mills, as hard as we can, as long as we have variable margin. That's the way most people in the industry do it. And as long as it's variable margin, it makes sense where you can find attractive projects with good returns to continue to expand capacity. So I think we -- our plans are to continue to push our mills as hard as we can, assuming we can find attractive projects. Does that answer your question on capacity?

[Kurt Yinger, D.A. Davidson]

Yes, absolutely. That's really helpful. And then, just lastly, obviously, this year is going to be different from an EBITDDA perspective versus 2018 but how do you guys think about maybe a target leverage range or perhaps you approach it in a different way, any color there would be helpful?

[Jerry Richards, VP & CFO]

You bet, Kurt. So this is Jerry Richards. So in terms of target leverage, what we talk about typically is EBITDDA leverage somewhere around four times, I would describe that as a conservative target. And as we look at even with a lower 2019 EBITDDA, we're still certainly within the balance of kind of that target.

[Operator]

At this time, I’m showing there are no more questions. I will now turn the call back over to Jerry Richards.

[Jerry Richards, VP & CFO]

All right, thank you, Lindsay, and certainly appreciate everybody's interest in PotlatchDeltic and your participation in the call. I'll be available for the detailed modeling questions the rest of the day, and hope everybody has a good day.

[Operator]

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