BTG Pactual leads club in $1.4bn Texas timber deal

BTG Pactual Timberland Investment Group has used preferred equity financing from a consortium of investors to form a joint venture that has purchased 1.1 million acres of Texas timberland from Campbell Global for $1.39 billion.

Billed as the largest US timber transaction since 2007, the joint venture sees BTG Pactual Timberland Investment Group (TIG) join forces with NYSE-listed timber REIT CatchMark Timber Trust in an entity called Triple T Timberlands.

CatchMark will make a $227.5 million investment in the joint venture, which will also receive a $750 million financing facility from CoBank, of which $650 million will be funded at closing, the firms said.

The investor consortium offering the preferred equity that completes the deal includes TIG and Highland Capital Management, an alternative investment manager headquartered in Dallas; New York-headquartered asset manager Medley Management; and other unnamed institutional investors.

In a statement, CatchMark described the unnamed investor as a “major Canadian institutional investor.”

On a Tuesday conference call discussing the deal, CatchMark chief financial officer Brian Davis said that an additional institutional investor had expressed interest in joining the venture, which could happen before the deal’s expected closing within about 60 days.

“We believe there will be an opportunity to recapitalize the venture over time, with lower costs and longer-term equity, as asset-level improvements occur,” Davis added. “Our confidence in that outcome is based on the knowledge that the property has historically attracted significant institutional capital.”

Devil’s in the supply deals

In a presentation describing the transaction, CatchMark said that the timber assets are located in East Texas, a region that has historically shown strong demand for recreational and higher “best-use” properties that is also within 100 miles of three of the top five homebuilding markets in the US (Austin, Dallas and Houston). The properties contain 66 percent of high-quality pine and highly productive soils with site index at age 25 of 74 feet, which, according to CatchMark, is greater than a US South average of 64 feet.

“Importantly, the asset features a rapidly improving inventory profile, growing from the current 2.8 million tons of annual harvest volume to more than 5 million tons by 2028,” said John Rasor, who is currently chief operating officer at CatchMark and will serve as president of the joint venture, on the conference call.

Rasor said that the $1,264-per-acre price of the deal compares favorably with the local market. As harvest volumes on the properties rise, he added, there will be an opportunity to restructure operations to enhance cashflows and value.

CatchMark executives said Triple T Timberlands is assuming Campbell’s existing long-term supply contracts that include the majority of the properties’ timber production: one with Georgia Pacific that expires in 2029, and another with International Paper that expires in 2027, with an option to extend to 2032.

“Our confidence is based on the knowledge that the property has historically attracted significant institutional capital”
Brian Davis, CatchMark Timber Trust

“We believe there will be opportunities to restructure aspects of the saw timber supply agreement to achieve win-wins for the joint venture and our customers,” Rasor said. “This assessment is based on our experience at Timberstar, where we were able to navigate supply agreements and create value by optimizing operations under the terms of the agreements.”

On the call, Jerry Barag, CatchMark’s president and chief executive, acknowledged that, while the lack of near-term cash flow on the properties created a “clear impediment on the front end” of the Triple T deal, their long-term potential, which he estimated will take about another four years to reach, made the challenges of successfully closing the deal worthwhile.

“Deals like this come around when they come around,” said Barag. “It’s hard to plan for them, but you definitely want to be able to capture the opportunity when it is available.”

A market source told Agri Investor that the Triple T deal’s ultimate impact would depend, in part, on the renegotiation of the properties’ existing supply agreements.

“I’m very curious what CatchMark’s fees are for managing this capital,” the source added.

CatchMark executives declined to specifically identify its likely Triple T fee income when asked directly on the call, but suggested that a combination of public filings already available could produce an accurate indication.

TIG and Medley Management declined to comment and Highland did not reply to a request for further detail.

Multi-billion portfolio

TIG is a unit of Latin-America focused BTG Pactual Asset Management that oversees a nearly $3.5 billion portfolio of more than 2 million acres of timber assets located in the US, Latin America, Eastern Europe and South Africa. In June, the unit acquired Weyerhaeuser’s timberland and wood product manufacturing business in Uruguay for $402.5 million.

That deal came about a month before Agri Investor reported that TIG’s BTG Pactual Core Open Ended US Timberland Fund, which commenced fundraising at the end of 2016, had brought in $100 million in commitments from public and private US pensions. A source said that the fund will target 7 percent returns.

TIG’s debut vehicle focused on timber investments in Brazil and closed on $860 million in May 2015, after surpassing an initial target of $750 million.