Interfor Corp. (TSX:IFP, Financial) – The U.S. housing market has been one of a few economic bright spots in the first half of the year. In anticipation of slower housing construction than ultimately came to fruition, North American lumber producers curtailed production substantially in March and April. With demand from renovation and remodel markets accelerating throughout the COVID crisis and housing starts continuing more strongly than initially anticipated, lumber supply chain inventories have been depleted to low levels causing a very rapid price recovery. At the time of this writing, lumber futures are at their highest levels in nearly two years. Canadian investment bank CIBC recently estimated that at current lumber prices, Interfor would generate more than $300 million of EBITDA next year. For perspective, the entire enterprise value of Interfor is roughly $850 million today, a figure that also represents a fraction of the replacement value of its lumber mills. Also keep in mind that mortgage rates are presently at historic lows making home ownership particularly accessible. Meanwhile extremely low inventory of existing homes for sale further supports the conditions for a continuation of the growth of single family home construction we have seen in recent years. In 2019, volumes of new homes built remained well below historical norms and evidence suggests meaningful underbuilding relative to the natural demand drivers of household formation and replacement demand. These factors appear poised to create demand for increasing numbers of new homes, yet the existing pace of demand has already created pressure on lumber producers to supply the desired volumes, which has resulted in rapidly rising prices and profits.
From the Third Avenue Value Fund (Trades, Portfolio)'s second-quarter 2020 commentary.
