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| POPE > SEC Filings for POPE > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect our management's estimates and present intentions based on our current goals, in light of currently known circumstances and management's expectations about future developments. Statements about expectations, plans and future performance are "forward looking statements" within the meaning of applicable securities laws. Because these statements describe our goals, objectives and anticipated performance, they are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled "Item 1A: Risk Factors " below and other factors discussed elsewhere in this report or in our annual report on Form 10-K for the fiscal year ended December 31, 2008. Some of the issues that may have an adverse and material impact on our business, operating results and financial condition include economic conditions that affect consumer demand for our products and the prices we receive for them; the effect of financial market conditions on our investment portfolio and related liquidity; environmental and land use regulations that limit our ability to harvest timber and develop property; access to debt financing by our customers as well as ourselves; and other risks and uncertainties which are discussed in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates as of the date of the report, and we cannot undertake to update these statements as our business operations and environment change.
This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included with this report.
Pope Resources, A Delaware Limited Partnership ("we" or the "Partnership"), was organized in late 1985 as a result of a spin-off by Pope & Talbot, Inc. ("P&T"). We are engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets, revenues, income and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and operations of ORM Timber Fund I, LP ("Fund I") and ultimately ORM Timber Fund II, Inc. ("Fund II"), collectively the ("Funds"). Operations in this segment consist of growing timber to be harvested as logs for sale to domestic manufacturers and to a lesser extent export brokers. The second most significant business in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily take the form of securing permits, entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land's value through the sale of larger parcels to buyers who will take the land further up the value chain, either to home buyers or to operators and lessors of commercial property. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed until that project is sold resulting in operating income. Our third business segment, Timberland Management & Consulting, consists of raising investment capital from third parties for investment in timberland through private equity timber funds like the Funds and providing timberland management and related services for a fee to the Funds, as well as for other third party owners of timberland.
Our current strategy for adding timberland acreage is centered on our private equity timber fund business model. For example, in March 2009 we completed the final close for Fund II with $84 million of committed capital including Pope Resources' 20% co-investment. In early October 2009, Fund II closed on its first two timberland acquisitions representing 41% of its committed capital. Our 20% co-investment in the Funds affords us a share of the Funds' operations while allowing us to earn asset management and timberland management fees. Management also believes that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management than could be cost-effectively maintained for the Partnership's timberlands alone. Our Real Estate challenges center around how and when to "harvest" a parcel of land and capture the optimum value increment by selling the property.
During periods in which the U.S. and, to a much lesser extent, Asian residential real estate markets perform poorly, we tend to recognize diminishing financial performance in both our Fee Timber and Real Estate segments. In Fee Timber, declines in building construction affect log prices and volumes directly. As discussed below in greater detail, we often further reduce our harvest during these periods so as to avoid liquidating our timber assets at low prices, an opportunity afforded to us by our relatively low leverage and our relatively low-cost operating model. Land held for sale in western Washington by our Real Estate segment is suitable primarily for residential and commercial building sites and the market for this product suffers along with regional and national markets, producing a decline in our sales.
During the first nine months of 2009, we purchased 95,372 units for an aggregate purchase price of $1.8 million and a weighted average unit purchase price of $19.11 bringing the total repurchase program to 110,624 units for a total of $2.1 million, yielding a weighted average unit purchase price of $19.16.
The following table reconciles and compares key revenue and cost elements that impact our net income for each of the quarter and nine month periods ended September 30, 2009 to September 30, 2008. In addition to the table's detailed numeric analysis, the explanatory text that follows the table describes many of these changes by business segment.
Nine
Quarter Months
Ended Ended
September 30, September 30,
Net income (loss) attributable to unitholders:
2009 period $ 920 $ 104
2008 period (23 ) 2,601
Variance $ 943 $ (2,497 )
Detail of earnings variance:
Fee Timber:
Log price realizations (A) $ (645 ) $ (2,344 )
Log volumes (B) (2,596 ) (6,689 )
Depletion 1,257 1,962
Production costs 1,081 2,747
Other Fee Timber 326 184
Total Fee Timber (577 ) (4,140 )
Timberland Management & Consulting (TM&C):
Management fee changes (187 ) (109 )
Other TM&C 164 362
Total Timberland Management & Consulting (TM&C) (23 ) 253
Real Estate:
Land sales 2,605 2,152
Timber depletion on HBU sale 20 146
Other Real Estate 150 530
Total Real Estate 2,775 2,828
General & administrative costs 232 381
Net interest expense (1,367 ) (1,819 )
Other (taxes, noncontrolling int., impairment) (97 ) -
Total change in net income (loss) attributable to Pope
Resources' Unitholders $ 943 $ (2,497 )
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(A) Price variance calculated by applying the change in price to current period
volume.
(B) Volume variance calculated by applying the change in sales volume to the
average log sales price for the prior period.
Fee Timber
Fee Timber results include operations from 114,000 acres of fee timber owned by the Partnership and 24,000 acres of fee timber owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands all of which are located in western Washington and, to a lesser extent, from leasing cellular communication towers and selling gravel and other resources from our timberlands. Revenue from the sale of timberland tracts will also appear in results for this segment on the relatively infrequent occasions when those transactions occur. Our Fee Timber revenue is driven primarily by the volume of timber harvested which is generally expressed in thousand board feet (MBF) or million board feet (MMBF), and Fee Timber expenses, which consist predominantly of depletion, harvest and transportation costs, vary directly and roughly proportionately with harvest volume and the resulting revenues. Harvest activities from the timberland owned by our timber funds are consolidated into this discussion of operations.
Planned Harvest for 2009. We began 2009 with a plan to harvest 37 MMBF representing a nearly 30% harvest volume deferral from the estimate of our long-term sustainable harvest of 52 MMBF, which includes 8 MMBF of harvest from properties of the Funds. As 2009 has progressed, we have deferred additional volume from our original plan owing to protracted weakness in log markets, and we are now estimating our annual harvest for 2009 will be closer to 32 MMBF. We continue to monitor log markets closely and may adjust harvest volume from the current plan as log markets continue to change.
We consider a number of factors in evaluating our harvest plans, including current log market conditions, harvest costs, age of the timber, expected growth rate for stands that are being considered for deferral, and future log price expectations. As 2009 progressed and log prices declined from the already low levels that existed at the end of 2008, we reviewed our harvest plan and have made adjustments. These adjustments included an additional deferral of harvest volume that we had originally planned to harvest in 2009 from Fund I and substitution of harvest units that contained a higher mix of pulp logs to both better match current log market conditions and to preserve future values in stands with a heavier mix of higher valued sawlogs. We anticipate the decision to defer harvest volume will produce an economic benefit due to both log price improvement and biologic growth of the timber left on the stump.
When discussing our Fee Timber operations, we compare current results to both
the previous quarter and the corresponding quarter of the prior year. These
comparisons offer an understanding of trends in market price and harvest volumes
that affect Fee Timber results of operations. Revenue and operating income
(loss) for the Fee Timber segment for the quarters ended September 30, 2009,
June 30, 2009 and September 30, 2008 are as follows:
Mineral, Cell
Tower & Total Fee Harvest
($ Million) Log Sale Other Timber Operating Volume
Quarter Ended Revenue Revenue Revenue Income/(loss) (MBF)
Pope Resources Timber $ 2.5 $ 0.4 $ 2.9 $ 0.4 6,396
Fund I - - - (0.1 ) -
Total Fee Timber September 30, 2009 $ 2.5 $ 0.4 $ 2.9 $ 0.3 6,396
Pope Resources Timber $ 2.4 $ 0.4 $ 2.8 $ 0.4 7,120
Fund I - - - (0.1 ) -
Total Fee Timber June 30, 2009 $ 2.4 $ 0.4 $ 2.8 $ 0.3 7,120
Pope Resources Timber $ 3.8 $ 0.5 $ 4.3 $ 1.3 7,373
Fund I 1.9 - 1.9 (0.4 ) 4,332
Total Fee Timber September 30, 2008 $ 5.7 $ 0.5 $ 6.2 $ 0.9 11,705
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Comparing Q3 2009 to Q2 2009. Fee Timber revenue and operating income for the third quarter 2009 are flat compared to the second quarter of 2009, with a $50/MBF increase in average log price realized offset by a 724 MBF decline in harvest volume in the third quarter compared to the second quarter of 2009.
Comparing Q3 2009 to Q3 2008. Fee Timber revenue and operating income for the third quarter 2009 are $3.3 million and $565,000 lower, respectively, than the comparable period in the prior year. The decline in revenue consists of a $3.2 million decrease in log revenue combined with a $134,000 decline in other revenue. The decline in log revenue is due to a 5.3 MMBF, or 45%, decrease in harvest volume and a $101/MBF, or 21%, decline in average log price realized. A portion of this log price decline is due to our decision to harvest lower valued stands in the third quarter of 2009 compared to those we harvested a year earlier. As a result, our pulpwood percentage doubled from 22% of total harvest volume in 2008 to 44% in 2009. Operating income decreased due to the $3.2 million decline in log revenue, offset by a reduction in cost of sales and operating costs.
Revenue and operating income for the Fee Timber segment for the nine-month periods ended September 30, 2009 and 2008 were as follows:
Mineral, Cell
Tower & Total Fee Harvest
($ Million) Log Sale Other Timber Operating Volume
Nine Months Ended Revenue Revenue Revenue Income/(loss) (MBF)
Pope Resources Timber $ 9.1 $ 1.1 $ 10.1 $ 2.3 22,261
Fund I - - - (0.3 ) -
Total Fee Timber September 30, 2009 $ 9.1 $ 1.1 $ 10.1 $ 2.0 22,261
Pope Resources Timber $ 15.7 $ 1.4 $ 17.1 $ 6.6 30,429
Fund I 2.4 2.4 4.8 (0.5 ) 5,246
Total Fee Timber September 30, 2008 $ 18.1 $ 3.8 $ 21.9 $ 6.1 35,675
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Comparing YTD 2009 vs. YTD 2008. The decline in Fee Timber revenue and operating income for the current nine-month period relative to the comparable period in 2008 is primarily attributable to a 13.4 MMBF, or 38%, decrease in harvest volume and a $100/MBF, or 20%, decline in average log price realized. The decrease in 2009 harvest volume over 2008 is due to weak log markets which have caused us to reduce harvest levels in 2009 below our estimated long-term sustainable harvest level of 52 MMBF. We originally planned to harvest 37 MMBF in 2009 representing nearly a 30% volume deferral but as 2009 progressed and log markets weakened below the levels that we had forecasted we are currently planning to harvest 32 MMBF in 2009.
ORM Timber Funds. The Funds are consolidated into our financial statements. Fund II acquired its first properties in early October 2009 and, as a result, only Fund I has operating results to include in the Fee Timber discussion herein. The 80% of these Funds owned by third parties is reflected in our Statement of Operations under the caption "Noncontrolling interest-ORM Timber Funds." Fund I generated $3,000 of revenue in the third quarter of 2009, compared with no revenue generated in the second quarter of 2009 and $1.9 million in the third quarter of 2008. The Funds incurred operating losses of $299,000, $313,000, and $700,000 in the quarters ended September 30, 2009, June 30, 2009, and September 30, 2008, respectively. Operating losses of the Funds are calculated before elimination of management fees paid to Olympic Resource Management LLC (ORM LLC) of $221,000, $198,000, $275,000 in the quarters ended September 30, 2009, June 30, 2009 and September 30, 2008, respectively.
Revenue generated by Fund I for the nine months ended September 30, 2009 was $4,000 compared to $4.8 million for the comparable prior year due to revenue generated by the 2008 conservation easement sale and modest log sales that did not recur in 2009. The Funds incurred operating losses of $887,000 and $1.2 million in the periods ended September 30, 2009 and 2008, respectively. Operating losses of the Funds are calculated before elimination of management fees paid to ORM LLC of $623,000 and $696,000 in the nine-month periods ended September 30, 2009 and 2008, respectively.
Log Volume The Partnership harvested the following log volumes by species from its timberlands, including Fund I, for the quarters ended September 30, 2009, June 30, 2009 and September 30, 2008 and the nine-month periods ended September 30, 2009 and 2008: Log sale volumes (MBF): Quarter Ended Sawlogs Sep-09 % Total June-09 % Total Sep-08 % Total Douglas-fir 2,527 40 % 4,953 70 % 7,279 62 % Whitewood 282 4 % 207 3 % 1,293 11 % Cedar 434 7 % 180 2 % 281 3 % Hardwood 310 5 % 271 4 % 274 2 % Pulp All Species 2,843 44 % 1,509 21 % 2,578 22 % Total 6,396 100 % 7,120 100 % 11,705 100 % |
Comparing Quarterly Harvest Levels. For the quarter ended September 30, 2009 we harvested 20% of our revised annual harvest plan for 2009 of 32 MMBF as compared to 22% for the quarter ended June 30, 2009 and 31% of our actual annual harvest for the comparable quarter in the prior year. As discussed in more detail below, in the third quarter of both 2008 and 2009, we harvested a relatively high proportion of volume from low-quality timber stands to sell logs into the pulp market, which has not weakened quite as dramatically in relative terms as the domestic sawlog market and acts to preserve asset value in higher quality stands. Logs sold as pulp are generally lower quality logs that are manufactured into wood chips by the buyer. Sawlogs are of a higher quality and primarily used to manufacture lumber or plywood.
Log sale volumes (MBF): Nine Months Ended
Sawlogs Sep-09 % Total Sep-08 % Total
Douglas-fir 15,010 67 % 23,405 66 %
Whitewood 554 3 % 3,035 8 %
Cedar 678 3 % 741 2 %
Hardwood 700 3 % 926 3 %
Pulp
All Species 5,319 24 % 7,568 21 %
Total 22,261 100 % 35,675 100 %
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Comparing Year-To-Date Harvest Levels. For the nine months ended September 30, 2009, we have harvested 70% of our revised annual harvest plan of 32 MMBF, compared to the first nine months of 2008, when we harvested 94% of the total actual annual harvest of 38 MMBF. As previously reported, our 2009 timber harvest volume has been reduced from our long-term sustainable level of 52 MMBF. The original plan to harvest 37 MMBF in 2009 has been revised to 32 MMBF as management acts to preserve the Partnership's asset value during this period of declining log and lumber prices, which result primarily from the condition of domestic and overseas housing markets. We plan to harvest this deferred volume when log markets improve. We would generally expect the proportion of harvest going to pulp markets to average between 10% and 15%. However, in 2009 and 2008 we have concentrated our harvest on lower quality timber stands to sell logs into pulp markets which have not been as dramatically impacted as other log markets by the downturn in housing. As such, pulp logs represent a relatively higher-than-normal proportion of harvest volume for both 2009 and 2008. This shift in weighting of our sort mix does lower the average realized price per MBF below what it would otherwise be.
Log Prices
While harvest volume is largely within management's control, one additional factor that impacts Fee Timber income is the price we realize upon selling our logs. Logs from the Partnership's tree farms serve a number of different domestic and export markets but the core market through which most of the demand for our logs is generated is the domestic residential construction market. During this recessionary period, residential construction has been particularly hard hit, as demonstrated by the dramatic decrease in sawlog prices in 2009 versus 2008. In response to these market conditions we have directed harvest to lower value pulp stands to preserve stands with higher value sawlogs until the residential construction market returns. We realized the following log prices from our fee timberlands for the quarters ended September 30, 2009, June 30, 2009 and September 30, 2008 and the nine-month periods ended September 30, 2009 and 2008:
Quarter Ended
Sep-09 June-09 Sep-08
Average price realizations (per MBF):
Sawlogs
Douglas-fir $ 393 $ 343 $ 520
Whitewood 279 290 387
Cedar 832 867 1,277
Hardwood 439 430 593
Pulp
All Species 321 247 357
Overall 388 338 489
Nine Months Ended
Sep-09 Sep-08
Average price realizations (per MBF):
Sawlogs
Douglas-fir $ 434 $ 538
Whitewood 286 413
Cedar 839 1,246
Hardwood 442 641
Pulp
All Species 283 361
Overall 407 507
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Douglas-fir: Douglas-fir is noted for its structural characteristics that make it generally preferable to other softwoods and hardwoods for the production of construction grade lumber and plywood. Demand and price for Douglas-fir sawlogs is very dependent upon the level of new home construction. Construction starts leveled off and began to show signs of improvement that carried through the third quarter; however, the export market continued to fluctuate. We have experienced a $127/MBF, or 24%, drop in Douglas-fir sawlog prices in the third quarter of 2009 from the comparable period in 2008 and a $50/MBF, or 15%, increase from the second quarter of 2009. For the nine-month period ended September 30, 2009 the price realized is off $104/MBF, or 19%, from the comparable nine-month period in 2008, also a result of the aforementioned weak domestic housing starts and weak repair and remodel market.
Whitewood: "Whitewood" is a term used to describe several softwood species, but for us primarily refers to western hemlock. Though generally considered to be of a lower quality than Douglas-fir, these logs are also used for manufacturing construction grade lumber and plywood. In the third quarter of 2008, export and domestic whitewood markets were depressed by an influx of storm-damaged whitewood that entered the market following salvage operations of logs from a coastal Washington storm late in 2007. The market for whitewood sawlogs continued to be very weak for the remainder of 2008 and into 2009. The average price realized on whitewood declined $11/MBF, or 4%, in the third quarter of 2009 versus second quarter of 2009 and $108/MBF, or 28%, off from the comparable period in 2008. These same factors served to bring down the average price realized for the year-to-date period ended September 30, 2009 by $127/MBF, or 31%, from the same year-to-date period in 2008.
Cedar: Cedar is a minor component in most upland timber stands and is generally used for outdoor applications such as fencing, siding and decking. Although there is a link between demand for these products and housing starts, this link is not as strong as with most other softwood species. Cedar prices decreased by $35/MBF, or 4%, in the three-month period ended September 30, 2009 versus the second quarter of 2009. The relatively modest decline reflects the seasonal nature of demand for cedar logs which is generally centered-around the summer months. On a year-over-year basis cedar prices declined $445/MBF, or 35%, which reflects the decrease in home remodeling activity. The weak economic conditions also drove down our average year-to-date price realized on cedar through . . .
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