Potlatch says credit metrics 'very strong,' balance sheet helped by long maturities, rate swap

By Paul Deckelman

New York, Sept. 15 - Potlatch Corp. feels its balance sheet and credit profile are about as solid as one of the 100-year-old-plus trees in its Idaho forests.

"We've got very strong credit metrics," the company's chief financial officer, Eric J. Cremers, asserted during a presentation on Thursday at the UBS Global Paper & Forest Products Conference in New York.

As of the end of the second quarter on June 30, the company had about $360 million of debt on its balance sheet, about $340 million of it long term and $20 million short term. It had cash and short-term investments of $75 million and had full borrowing capacity under its $150 million senior secured revolving credit facility, which runs through December of 2013.

Cremers noted that the revolver was originally $250 million, but earlier this year, "we decided we didn't need that capacity, so we dialed it back to $150 million to save on commitment fees."

Credit metrics no problem

Looking at the Spokane, Wash.-based timber real estate investment trust and wood products company's credit metrics, Cremers, who is also vice president for finance, noted that Potlatch's ratio of debt to total capital stood at 55% as of the end of the second quarter, well within the 70% maximum required by its financial covenants.

Even that figure, he said, underestimates the company's solid position.

He noted that Potlatch, which was founded in 1903, originally produced lumber and paper. It eventually disposed of the latter assets and restructured itself primarily as a REIT, buying and selling timberlands while also harvesting timber and selling it to various buyers, including its own wood products subsidiary. Potlatch owns 1.5 million acres of timberlands in the southern, midwest and western United States.

Accordingly, it has a "lot of assets on [its] books from over 100 years ago," in terms of old trees, "so book value dramatically understates the market value."

He continued that "we don't think debt to capital is the right way to think about leverage for a company like ours. Rather, we think the best way to look at it is net debt to enterprise value."

On that basis, he said, Potlatch sits at a ratio of just under 17% today, "which is relatively modest, especially given the liquidity of our assets. We can [separate off] acres any time we want and sell them." He said there are a number of TIMOs - timber investment management organizations - that would be interested in buying timberland that Potlatch would be willing to sell them.

The CFO said the company's ratio of trailing 12-month EBITDA to interest expense, at north of 5.5 times, is well above the 2.75 times minimum mandated by its covenants, "so there's no issues there."

He also said there are "no concerns" when it comes to the company's debt maturity profile, with a weighted average 8.9 years to maturity.

Potlatch has $22 million of maturities to deal with next year, all in the early part of 2012, "so we'll just pay them off with internally generated capital."

Over the next few years, only relatively small amounts come due: just $8 million in 2013, assuming no revolver borrowings, and a total of just $96 million from 2012 through 2018. Then in 2019, its $150 million of 7½% notes are slated to come due. Those bonds priced at 98.284 on Oct. 29, 2009 to yield 7¾%.

Revolver secured by forests

Cremers said that when Potlatch put its current revolver agreement in place back in December 2008, when it was spinning off its Clearwater Paper operations, "the credit markets, as I'm sure you know, were very tight." Even though historically the company had never been forced to put up collateral to secure a revolver, it was required to do so given the unsettled state of the credit markets at that time.

He said that the credit agreement called for collateral with an appraised value of three times the amount of debt requiring such collateral. Presently, between the $150 million revolver and another $66 million of debt required to be collateralized pari passu with the revolver, the company secures $216 million of debt with about 350,000 acres of its core Idaho timberland, or about 24% of its total acreage. With an enterprise value of between $1.6 billion and $1.7 billion, "I think this just highlights the net asset value that's embedded in a company like ours."

The company's credit profile was also helped by its swap of $68 million of fixed-rate debt to floating-rate back in June 2010. The CFO said that about $63 million of that is still outstanding. "With short-term rates being as low as they are, that's proved to be a wise thing, and we save about $1 million a year in interest expense from having executed that swap."

All-in, the company's debt carries a weighted average interest rate of around 6.8%, including the effect of the floating-rate swap.

Asset sales could augment cash

Cash totaled $75 million at the end of the second quarter. Cremers said that since then, "it has ramped up and is now sitting around $100 [million], as the third quarter is our seasonally strongest quarter of the year."

Should the company need more cash, he noted that only about 1.2 million acres of its 1.5 million acres of timberland are considered core holdings; the remainder are being held for possible sale at the right price, either for use as timberlands or for possible development.

When cash generation from its logging operations slowed due to the recession-induced slowdown in timber used for home construction, the company turned to the sale of some of its excess real estate assets, helping EBITDA grow from $107 million in recession-wracked 2008 to $151 million last year and to a projected $156 million this year.

Cremers concluded, "I think we've been pretty creative about monetizing assets here over the past couple of years in order to generate cash."

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