Jan 29, 2013
Executives
Michael Covey - Chairman, President and CEO Eric Cremers - Executive Vice President and CFO
Analysts
Gail Glazerman - UBS Mike Roxland - Bank of America Merrill Lynch Chip Dillon - Vertical Research Collin Mings - Raymond James & Associates Joshua Barber - Stifel Nicolaus Mark Weintraub - Buckingham Research
Operator
Good morning. My name is Stephanie, and I will be your conference operator today.
At this time I would like to welcome everyone to the Potlatch Yearend and Fourth Quarter 2012 Earning Conference Call, featuring Eric Cremers, Executive Vice President and Chief Financial Officer and Michael Covey, Chairman, President and Chief Executive Officer for Potlatch Corporation. (Operator Instructions) Thank you.
I would now like to turn the call over to Mr. Eric Cremers for opening remarks.
Sir, you may proceed.
Eric Cremers
Thank you and good morning. Welcome to Potlatch's investor teleconference covering our fourth quarter 2012 earnings.
Before we begin, let me remind you that this call may contain forward-looking statements with regard to our business and operations. 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 segment information as well as a reconciliation of non-GAAP measures can be found on our website, www.potlatchcorp.com, as part of the webcast for this call. I would now like to turn the call over to Mike Covey, our Chairman and CEO, who'll make some introductory remarks, and then I'll review our fourth quarter results in more detail.
Mike?
Michael Covey
Good morning, everyone. We're very pleased to report fourth quarter results and total earnings for 2012 that were both well above our expectations.
Our Wood Products division continues to perform exceptionally well bolstered by a significantly higher demand and pricing as the housing market recovers. Furthermore, the division finished the year with its best annual performance in the nearly a decade.
Our Resource segment performed as expected for the quarter and the year, with lower earnings driven by our intentional decision to defer harvest volume in order to preserve our trees for better market conditions, which we believe are rapidly approaching. Note that we harvested just 3.6 million tons in 2012, roughly 1 million tons lower than our potential of 4.6 million tons.
Earnings from our Real Estate segment were robust for the fourth quarter and solid for the year as a whole especially considering that we didn't execute any large non-strategic timberland sales. Over the past year we have witnessed numerous industry developments that we feel have set us up for a very strong 2013 and beyond.
First and foremost, lumber demand in North America is gaining significant momentum, demand this year is expected to increase by about $4 billion board feet, buoyed by a markedly improving housing starts. Further, repair and remodel activity is also expected to improve as higher housing prices strength in consumer confidence, and spur in repair and remodel activities.
Several other factors, Chinese demand, the mountain pine beetle in Canada, limited dealer inventories are still recovering manufacturing base, are all contributing to higher lumber prices. As a result industry experts are forecasting lumber prices to increase, roughly 5% to 10% comparing full year, 2013 to fully year 2012 which will further increase our wood products earnings.
As is typical improved lumber pricing eventually finds its way back to the stump. This year, this past year we saw log prices in our Northern region, continue to move higher along with lumber prices as one would expect, but prices on the south remain at relatively low levels in-spite of sharply higher lumber prices.
We believe at higher sawlog prices in the south are inevitable, and this may take a little more time. Consequently we are modestly increasing our harvest level in 2013 to 3.8 million tons.
Although sawlog prices have begun to improve we continue to believe our shareholders are best served if we patiently wait for even better sawlog prices, which we believe is only a better of time. I'll now turn the call back over to Eric to discuss the quarter, a bit of our outlook for 2013 and then we'll take questions.
Eric Cremers
Thanks, Mike. As displayed on page 3 of the slides accompanying this presentation, we reported net income of $13.9 million or $0.34 per diluted share for the fourth quarter of 2012.
This compares to a net loss of $1.5 million or $0.04 loss per diluted share in last year's fourth quarter. And net income of $18.6 million or $0.46 per diluted share from the third quarter of this year.
As a reminder our fourth quarter 2011, results were impacted by a $1.2 million pre-tax charge, relating to EPA proceedings regarding clean-up of one of our properties in Northern Idaho, and we had no additional charges in 2012. I'll now review our fourth quarter 2012, results broken down by segment.
Operating income and margins trends for our resource segment are displayed on page 4. Operating income totaled $10.5 million for the quarter, which compares to operating income of $23.6 million for the third quarter and $12.6 million for the fourth quarter of last year.
The negative income variance from the prior quarter is primarily attributable to lower harvest volumes related to typical seasonality, particularly in our Northern Region. The variance from the fourth quarter of 2011, is primarily the result of our planned harvest deferral that mainly impacted our Southern region.
Page 5, depicts volume and pricing trends in the Northern region of our resource operations, comparing Q4, 2012 to last year's fourth quarter. Sawlog harvest volumes and prices increased 3% and 6% respectively.
The increased volume is attributed to additional chip-n-saw and mixed sawlog production offset somewhat by less cedar volume in the overall product mix. Comparing Q4 to 2012 to Q3 2012, sawlog volume decreased 36% which is attributable to a typical seasonality.
Sawlog prices continued to climb higher on a volume basis in Q4, although due to seasonal factors, when measured on a per ton basis, decreased 4% over the prior period. Now Idaho sawlogs are sold to our customers on a volume or an MBF basis, but reported on page 5, on a per ton basis.
Sawlogs harvested during the fourth quarter each year are heavier than in the third quarter due to increase in moisture content resulting from wet weather, which drags our prices down on a weight or a per ton basis. In regard to pulpwood, in our northern region comparing Q4 2012 to Q4 2011, (inaudible) pricing decreased 67% and 13% respectively due to over supplied pulpwood in residual markets.
Comparing Q4 to Q3 the 74% volume reduction is related to seasonality and involves an intentional pulpwood harvest reduction due to weak pulpwood pricing. Page 6, highlights volume and price trends for our southern region, comparing Q4 2012 to Q4 2011 sawlog harvest volume decreased 31% while prices increased 6%.
The decrease in volume is consistent with our harvest deferral strategy while the price increase was primarily related to product mix differences as hardwood prices were more favorable in 2012. In comparing Q4 to Q3, sawlog harvest volumes and prices declined 13% and 5% respectively.
The lower volume was due to fact that we harvested more aggressively in Q3 in order to capitalize on favorable market and weather conditions. The decline in prices stemmed from product mix differences between the quarters.
Moving on to review southern region pulpwood comparing Q4 2012 to last year's fourth quarter, prices increased 8% due to strong demand. Our harvest volumes were down 18% due to our planned harvest deferral.
Compared to Q3, Q4 harvest volumes were down 18% and overall prices remained flat. Page 7 highlights revenue trends from our real estate segment.
Real estate generated revenues of $19.1 million on 37 transactions during Q4 compared to the revenues of $3.2 million in last year's fourth quarter and $2.4 million in Q3. Two large real estate sales constitute the majority of the variants between Q4 and both prior periods.
The first is $11 million conservation sale of Minnesota HBU property of approximately 2000 acres known as Mississippi River Northwoods parcel which was discussed on our last call. The second is the Central Idaho sale of approximately 3700 acres primarily rural and some HBU parcels that generated revenues of approximately $5.1 million.
Real estate operating income and margin results are depicted on slide 8, the segment posted operating income of $13.8 million in Q4 which compares to operating income of $2.1 million for Q4 2011 and $1.3 million in the third quarter of 2012. Again the variants among the quarters is related to the two aforementioned land sales that closed in Q4.
Page 9 details our acres sold by product type we are pleased with the strong demand from our rural recreational on HBU properties as our number of acres sold have improved each year. Page 10 highlights pricing trends by product type.
Our average sale price for rural recreational a non strategic properties during the quarter remained firm. The well above average sale price for HBU properties was heavily impacted by the large HBU sale in Minnesota.
Moving on to our wood products segment, page 11 displays, operating income and margin trends. Our wood products operations continue to exceed our expectations, posting operating income of $13.5 million for the fourth quarter of 2012 which compares to a loss $1.3 million from the fourth quarter of last year an income of $15.2 million in Q3.
$1.7 million decrease compared to Q3 to be largely attributed to less production driven by fewer operating hours in our mills due to the holidays. Page 12 presents price and volume trends for our wood products segment.
Lumber pricing remained very strong at year end, up 1% over Q3 and up a remarkable 23% from last year's fourth quarter. Fourth quarter shipments impacted by the holidays were down 2% from Q3, but were up 5% comparing to last year's fourth quarter.
As favorable market conditions for wood products remained, we continue to explore opportunities to increase production through measures such as productivity improvements, additional operating hours and targeted high return capital expenditure projects. Returning to page 3, total corporate administration cost excluding net cash interest expense were $11 million for the fourth quarter of 2012 compared to $9 million for the fourth quarter of last year and $10.6 million last quarter.
The year-over-year variance is primarily attributed to increased pension expense. The increase in our book tax provision compared to the prior quarter and last year's Q4 results as a result of higher net income generated during a quarter in our taxable REIT subsidiary.
Our balance sheet position remained strong with over $80 million of cash and short-term investments on handy year-end, well in excess of where we began the year despite retiring $22 million in depth during the year. Also notable was the successful completion in Q4 of two land acquisitions financed by a new $12 million term loan.
The properties were purchased for approximately $12 million or roughly $1,258 per acre, an increased our southern region timberland ownership by a combined 9300 acres. The properties were pursued based on their near-term cash accretive value, as they both contain mature harvestable timber as well as their geographic proximity to our current ownership.
One of the tracks contains a high amount of high value hard woods and the other consists of primarily larger pine sawlogs and both products have firm demand in the area. Combined, though, small, we estimate the acquisitions created about $3 million of shareholder value.
Next I'd like to make a few comments about of our outlook for 2013. In our resource operations, we plan to harvest approximately $3.8 million tons in 2013 with $2.1 million tons coming from Idaho, $1.5 million tons in Arkansas, and the remainder from Minnesota.
Our anticipated harvest volumes are a continuation of our harvest deferral plan, but include an approximate 200,000 ton increase in our southern region due to the two acquisitions we recently completed. So excluding these two acquisitions, harvest levels are flat comparing 2013 versus 2012.
Regarding pricing expectations for resource operations, in the northern region we anticipate modest price growth for sawlogs, but flat or modestly decreasing pulpwood prices caused by the extremely weak pulpwood markets in the region. In our southern region, we expect both sawlog and pulpwood pricing to remain somewhat subdued in 2013 due to supply and demand imbalance.
Logging costs are anticipated to increase modestly over the coming year in both regions slightly outpacing inflation. Turning back to wood product segment, we continue to be optimistic about the segment's prospects for 2013.
It is now widely expected that housing starts will approach the 1 million level in 2012, a hike not seen since 2008. And North American lumber demand has expected to increase by nearly 7% or approximately $4 billion board fee.
As such, industry forecast project attractive lumber pricing for the coming year as well. Well this will be partially offset by higher log input cost.
Furthermore, our expectation is for a robust lumber demand and prices in 2013 although our expectations for robust lumber demand and prices in 2012, the wood products manufacturing industry remains plagued by very weak residual markets, which is serving to offset some of the pricing gains we are realizing in our wood product segment. In our real estate segment, we expect to sell between 18,000 to 20,000 acres in 2013 with 60% of the acres being rural real-state, 20% HBU and 20% non-strategic timberland.
We expect pricing to be relatively consistent with past results and for our average selling price per acre to be around $1,400 per acre. We expect the basis of land sold to approximate 20% to 25% of our land sales revenue, though of course it will vary based on the specific acres sold.
As is typical, we plan to close roughly 25 to 35 transactions per quarter in the coming year. For corporate related items, we expect corporate G&A and net interest expense in 2013 to be comparable to 2012 levels.
Concerning our tax provision which is always difficult to project and is generally driven by the earning of our taxable REIT subsidiary, we expect an annual provision of approximately $12 million for 2013. With depreciation, depletion and amortization or DD&A, we anticipate $25 million for the year, though the final total will be significantly impacted by the ultimate location in amount of harvest completed.
Note that the aforementioned DD&A amount excludes the bases of lands sold in our real estate segment. In regard to our defined benefit pension plan, we have no obligations for cash funding during 2013.
Capital expenditures are anticipated to total about $24 million during 2013 with approximately $15 million in spending planned for our resource operations, which is primarily used for the construction of logging roads and reforestation expenses. We've earmarked to $8.1 million for our Wood Products division this year, which is higher than in recent years, primarily due to a specific high return project at one of our lumber mills that we expect to substantially increase production of premium products that are in high demand.
The project has an estimated 40% IRR. It's important to note that we remained active in the timberland acquisition market and no larger deals are highly competitive and excess returns tend to be bit away.
We will continue to diligently peruse acquisitions where shareholder value can be created. To close, we are very pleased with our 2012 performance that was much stronger than we envisioned at the start of the year.
We are organically earning our dividend despite our continued to harvest deferral strategy, producing funds available for distribution of $1.30 per diluted share in 2012. From a cash generation standpoint, we expect to earn well on access of our dividend in 2013, despite only modestly increasing our harvest levels.
Our balance sheet is in excellent shape with over $80 million of cash in short-term investments. In addition, we recently closed on a new un-drawn unsecured $250 million revolver featuring significantly improved terms, greater flexibility and increased borrowing capacity, which further improves our liquidity position.
To sum it up our outlook for 2013 is very positive. Stephanie, I would now like to open up the call to Q&A.
Operator
(Operator Instructions) Your first question comes from the line of Gail Glazerman with UBS.
Gail Glazerman - UBS
Hi, good morning. Eric, can you give a little bit of guidance for the first quarter in terms of harvesting price trends and perhaps land sales, I guess you gave it for the year but you didn't really talk much about the quarter?
Eric Cremers
Harvesting price trends in the first quarter, this year Gail, they're going to be a little bit higher than where they were last year, because of the strong pricing we're seeing here in Q1 we will push up a little bit of volume probably take it out in Q3 and Q4 and move it up to Q1. So may be 100,000 tons higher than what we did in 2012.
And on the pricing side of course it's going to vary quite a bit by product category and by region. I think it's fair to say we'll see a little bit price appreciation in northern region sawlogs.
And in the south you'll probably see a little bit of price weakness in southern region sawlogs. So I'd tell you that what time here will weather can heavily influence prices we're right on the cusp of weather having an impact down there.
So while prices may be flat to slightly lower, there is a possibility that they can actually improve a buck or two a ton from Q4.
Gail Glazerman – UBS
Okay, and the price decline that you are expecting is that more of a mix effect and then weather would be additive upon that or is any of the line trends down ex-weather?
Eric Cremers
Yeah, I would say pine sawlogs are basically, they are relatively flat from Q4 to Q1. We will have a little bit lower hardwood production in Q1, which will negatively impact prices a little bit.
But again weather can have a big impact and actually push prices higher in Q1 versus Q4.
Gail Glazerman – UBS
Okay and I guess trends in the coast have been pretty tight. Have you seen that triple over to Idaho or not like we did a couple of years ago or not so much?
Eric Cremers
No, we are working to knowing to see it drift over into Idaho. The mills in the region are running hard, they are looking for additional volume and prices are relatively firm and log yards are what I would say relatively on the low side.
So we are continuing to see a bit of an indirect impact in the N1 region.
Gail Glazerman – UBS
Okay and just last question, more strategically. I mean effectively ex-acquisitions you are not raising harvest.
What do you think is going to take to firm up the southern market and encourage you to start reversing the deferrals? I mean is there certain level of housing starts you have in mind or is there certain activity or this is what basically are you looking for?
Michael Covey
As we look forward Gail, the outlook for housing starts in 2014 is around 1.2 million units are absolutely a little bit stronger than that. FEA and other forecasters look for increases in southern log prices to begin in 2014 and even increase more in 2015.
So again we have had the deferral in place for some time now and we’ll continue to be patient until we see log prices come up and I think further more we have optimism that given the increase in demand and in lumber that Eric mentioned about 4 billion board feet with the west coast not having a lot of flexibility to increase capacity either due to high log cost or mills that are already running at full capacity. We fully expect the increased output to come from the U.S.
South and that will eventually work its way into higher log prices as demand goes up for logs.
Gail Glazerman – UBS
Okay, very helpful. Thank you.
Operator
Your next question comes from the line of Mike Roxland with Bank of America Merrill Lynch.
Mike Roxland - Bank of America Merrill Lynch
Thanks very much. Congrats on a good quarter and a good year for that matter.
Michael Covey
Thank you.
Mike Roxland - Bank of America Merrill Lynch
Just a couple of quick questions, how much of your lumber production is currently premium products versus commodity?
Michael Covey
That’s premiums are in the eyes of the buyer, so it’s hard to answer that, but approximately in our stud product line we make two before lumber that goes to a lot of at the home centers, its roughly 30% to 50% is in the premium end of things and southern pine where a lot of our lumber is treated are to in better percentages probably two-thirds of our mix.
Mike Roxland - Bank of America Merrill Lynch
So relatively, would say as the outlook for the overall probably by 50% or so.
Michael Covey
Yeah, probably X. Depends on how you define premium, but in terms of a square edge board that is going to end up at a home center or some other outlet where they value its appearance is probably roughly half of our product mix across all of our lumber facilities.
Mike Roxland - Bank of America Merrill Lynch
Got you. Now I know that in the last call you mentioned that you are always looking at projects that would add about 10 million, 15 million board feet in future years.
Now those, is that what – does that relate to the project you just mentioned or Eric that you just mentioned in terms of increasing your premium production of lumber or started premium products?
Eric Cremers
No it really does not Michael. The project that I mentioned really is the mill is going to have a comparable output year-over-year, but its moving product from a lower grade to an improved grade.
So we expect to get a pricing premium on that volume is going to shift from a lower grade premium to higher grade premium. So the shipments that I spoke off before roughly 10 million to 15 million board feet is what we expect to get in 2013 compared to 2012.
Its outside of that specific capital project that I mentioned.
Mike Roxland - Bank of America Merrill Lynch
Okay, I got you the 10 million to 15 million board feet you mentioned in the last call, the incremental board feet you would get this year versus 2012?
Eric Cremers
Correct.
Mike Roxland - Bank of America Merrill Lynch
Got it. Okay, just last question.
How much of the additional flexibility do you currently have in your lumber system? I know that you have added hour as a day or two to certain schedules, but given the increased demand is there any way for you to add shifts.
Is there any way to increase capacity and what can, you know given what appears to be the turn in housing and ultimately how that impacts wood products. Have you considered any options for expanding your capacity in lumber?
Michael Covey
Like we are currently running our facilities at about 104% of capacity due to the amount of over time that we operate the facilities and that’s on a two shift basis. We have no plans to put three shifts at any of our mills while we could do that, we have no plans to do so.
We don’t think it makes sense long-term and beyond the small capital investment that Eric mentioned in our Wood Products division to increase premium output we don’t have any large plans to increase capacity beyond the overtime rates that we are running today.
Mike Roxland - Bank of America Merrill Lynch
Got you, good luck in the quarter and the year.
Operator
Your next question comes from the line of Chip Dillon with Vertical Research.
Chip Dillon - Vertical Research
Yes, good morning to you. First question has to do with the comment I think I heard.
Eric did I hear you say that you do have a plan to potentially raise a dividend this year and if so can you give us an idea of the magnitude or maybe I just miss heard you?
Eric Cremers
No, what I said Chip was that we’re earning well in excess of our dividend both from 2012 and in 2013. Our current plan has this building cash over the foreseeable future.
So, we are just now starting to have those kinds of conversations at the Board level about what’s the smartest use for that excess cash and you can imagine the typical corporate finance discussions of all round acquisitions, capital expenditures, share buybacks and a dividend increase.
Michael Covey
Debt repayment.
Eric Cremers
Yeah and debt repayment.
Michael Covey
I mean there is a whole host of alternatives we are exploring. I think Chip to add a little more color.
The engine that drives cash flow for us is timber harvest and until we can look to our southern operations and see higher pricing that sustains and supports higher harvest levels. That one we’ll review with the Board whether to raise the dividend.
Chip Dillon - Vertical Research
Got you, one thing I know that you were seeing in your plan for this year that 2.1 million tons of your harvest would be in Idaho and if you could just refresh our memories I think a significant portion of that actually is done under contract where I understood the sawlog prices you receive is somehow tied to lumber price and therefore I would think you're seeing some increases in realization. Is that correct?
Eric Cremers
Yeah, that’s correct. Chip we expect to see northern region sawlogs improve mid-single-digit percentage, over the course of the year.
Chip Dillon - Vertical Research
That even the lumber prices look to be quite a bit more than mid-single-digits?
Eric Cremers
Yeah, and I have seen two forecasts in the last week that have lumber prices the random length is composite of 18% to 20% 2013 compared to 2012. Our own internal forecast does not have composite prices being up 18% to 20% year-over-year, but certainly there is a lot of excitement and enthusiasm about lumber prices in 2013.
Chip Dillon - Vertical Research
I totally get that. I just didn’t know, why the increase in the log price would only be mid-single-digits if lets says lumber, well I know you said your forecast isn’t that strong.
So, then it sounds to me roughly speaking that maybe for every 2% lumber goes up maybe your log prices in the northern region might go up one for sawlogs. Is that a fair rough rule of thumb?
Eric Cremers
No there is all kinds of moving pieces involved in the math Chip and you know one example is residuals, saw mill residuals enter into what the price of the log is and residuals as I mentioned in the script are they are under pressure. So you can't just look at it and say [gee] if lumber does this you got to look at the very specific species of lumber that the pricing agreements are tied to.
It’s a very complex calculation; it’s not back of the envelope kind of stuff you can do.
Chip Dillon - Vertical Research
Okay, and then just one more on the – in Arkansas I know it was – gosh I guess a year and half so ago that a company in Atlanta who was a big customer there shutdown I guess Crawford and now that we see panels prices doing quite well and I know you can't speak for what your customer do. But any inkling that there might be a possible restart and if so when that happens if and when it happens could you remind us as to what the impact on your tonnage per year could be in rough terms?
Michael Covey
We have no evidence from Georgia Pacific that they plan to restart the plywood facility in Crawford. They have not approached us about plans to do that.
We have sold them approximately 400,000 tons when the plant was operating.
Chip Dillon - Vertical Research
Per year.
Michael Covey
Per year of plywood logs.
Chip Dillon - Vertical Research
Got you. Okay, well, that's a very helpful.
Thank you.
Operator
Your next question comes from the line of Collin Mings with Raymond James & Associates.
Collin Mings - Raymond James & Associates
Hey good morning guys. Lot of my questions have already been answered, but just quickly can you guys a put a little bit more color around the acquisitions you guys made in Arkansas, I know in the prepared remarks you made a few comments, but may be just characterize the land you acquired in context in your portfolio that's already there?
Michael Covey
Well, to restate they're very small, it's a little less than 10,000 acres in two separate deals. In one case that was a land owner, there was trying to sell a generation - a multigenerational holding of peace of timberland and advance of the capital gains increased by year end and we were well positioned to execute that quickly.
The land is all in our basically our backyard it's very tributary to our Warren sawmill into the customer base we have in South Central Arkansas, it's a mixture of pine sawlogs and hardwood sawlogs very typical with kind of our traditional southern ownership. Not quite as much plantation for us, it's more natural pine but we'll seamlessly integrate that in a log it converted into pine plantations and manager going forward.
Collin Mings - Raymond James & Associates
Okay and then just also as far as on the land sale in Idaho, can you put a little bit more color on that transaction as well?
Eric Cremers
Yeah, that transaction Collin was for around $5.1 million, in a quarter, it was about 3,700 acres or about nearly $1,400 an acre, and it was an individual that already owned acreage in Idaho that wanted to expand his ownership in the region, so we had some adjacent property and he paid us a pretty healthy price for the tract of land.
Michael Covey
We're encouraged we have a lot of ownership in that area in Central Idaho and that's been a market that's frankly been dead for the last few years with just over supply and weaker pricing. So we're encouraged to have in a sale that at a basis that's what we purchased the land for I think hopefully it's started to more active market in that area just north of (Inaudible) Idaho.
Collin Mings - Raymond James & Associates
Okay, great guys. Again congrats on the quarter.
Michael Covey
Thank you.
Operator
Your next question comes from the line of Joshua Barber with Stifel Nicolaus.
Joshua Barber - Stifel Nicolaus
Hi, good morning. I know you guys talked about harvest basically being flat for the year.
Can you talk about any shift within that though I mean do you think your percentage of sawlogs will be higher in a meaningful way than your percentage of pulpwood or just a little too early to tell or just going to be flat?
Michael Covey
No, Joshua we expect is, the harvest will be up about 200,000 tons and as I indicated in the script that that really is going to be driven by these two acquisitions that we just completed in the south that are relatively matured track to land. And so that incremental 200,000 will be predominately additional sawlog harvest.
So that's kind of how we see playing out.
Joshua Barber - Stifel Nicolaus
Okay, I know you mentioned the Minnesota sale last quarter, but it look like the price was little bit higher than I had expected could you remind us again why the blend that was going for more than $5,000 an acre?
Eric Cremers
Yeah, this was property that was situated along the headwaters of Mississippi River, it was an excellent tract of land that had to potential to be developed into a planned community with residential and shopping and what not. And that the state another conversation interest groups wanted to tie the land up and put it to - to be a conservation outcome.
So it was really we could have either chosen to pursue the development route or the conservation route with the state and that's what we chose to do.
Joshua Barber - Stifel Nicolaus
Okay, so the state basically had to bid against real estate developers in order to secure it?
Michael Covey
That's correct.
Eric Cremers
Yeah.
Joshua Barber - Stifel Nicolaus
Yeah, okay last question but it's good to see that you guys are back on the acquisition path again but I guess how you guys thinking about future acquisitions on either timber side or even perhaps on lumber wood product side would that be something that ease of interest whether it has to be something that specific that you would basket or would you be content getting an acquisition that perhaps included some wood product as well?
Michael Covey
Our acquisition criteria really haven't changed, intend to add on to our ownership base, the geographic areas we already have a footprint that's our first priority in our primary focus and we've always looked at opportunities to acquire manufacturing facilities if they're coupled with timberland but not on a standalone basis, those criteria haven't changed. And to new acquisitions that are accretive, one we just demonstrate that cash flow will generate from the incremental harvests there certainly adds value.
Joshua Barber - Stifel Nicolaus
I am sorry, if I missed this, the acquisition was funded with cash or with that used with some debt.
Eric Cremers
No, we took out two term loans medium term loans.
Joshua Barber - Stifel Nicolaus
Perfect. Thanks very much.
Operator
Your next question comes from the line of Mark Weintraub with Buckingham Research.
Mark Weintraub - Buckingham Research
Thank you. Can you give us a sense where your lumber prices today are averaging versus what they average in the fourth quarter?
Michael Covey
Well.
Eric Cremers
Go ahead, Mike
Michael Covey
The random lengths is printed up around 14% to 18% this year compared to Q4, in our lumber prices track very closely with that. Having said that, we started to see in the last week, weakness in the lumber market that's been manifested by the onset of finding winter weather, Q4 was very mild.
The tip-off winter has hit a lot of the building country. So, prices have begun to take a bit of a breather, but still we expect Q1 lumber prices to be stronger than Q4.
Mark Weintraub - Buckingham Research
But and I guess that's really what I was trying to better understand is how closely your prices due tend to track some of the overall indexes because for instance in the fourth quarter if I got it right your price is up a little up random lengths is up a fair bit more and I assume that has a function to do with your species mix, sorry?
Michael Covey
I'm sorry.
Mark Weintraub - Buckingham Research
Go, Eric.
Eric Cremers
Well, I was going to say, yeah, random lengths was up 5% in the fourth quarter and we were up just 1% in the fourth quarter. Over a long periods of time we track, we know we got different mills, different locations producing different products.
But net-net if you look at it over a period of time, our composite if you will tracks pretty closely to random lengths composite. Now they diverged in the fourth quarter, we didn't get quite a bump that random lengths did it's because inland lumber prices did not go up as much, they were up 0% to 2% compared to the random lengths composite which was up 5%.
So, there will be a quarter here and quarter there where we don't track on top of the composite but overtime we will.
Mark Weintraub - Buckingham Research
Okay. And so, that was more of an aberration in the fourth quarter in your view and in the first quarter you're more tracking again in line with random lengths, is that fair?
Michael Covey
Well, we're three to half weeks into the first quarter. So, so far we're tracking with random lengths but we have nine weeks to go.
Mark Weintraub - Buckingham Research
Understood, okay. And then, I know you had talked about in the north that some of your stumpages tied to lumber pricing and how that can affect you?
In the south I know its less but do you - don't you have some in the south of your stumpage also tried to lumber pricing and can you walk through how that might play out?
Michael Covey
No, we don't have any index customers in the south, Mark and it's a different dynamic down there. There is a lot more what I would call non-industrial land owners in the south.
So gatewood is readily available. So, to approach mill and try to get them to index to lumber down in south is a very hard conversation to have.
In Idaho where it's not nearly as much non-industrial land owner wood floating around and so, customers are more interested in securing long supply. So, it's an easier conversation to have.
Mark Weintraub - Buckingham Research
Okay. Thank you.
Operator
(Operator Instructions) At this time, there are no additional questions.
Michael Covey
Thank you, Stephanie and thanks to the call participants. We'll speak to you next quarter.
Operator
Thank you. This concludes today's conference.
You may now disconnect.