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POPE > SEC Filings for POPE > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for POPE RESOURCES LTD PARTNERSHIP

Form 10-Q for POPE RESOURCES LTD PARTNERSHIP


7-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect management's estimates based upon our current goals, in light of management's knowledge of existing circumstances and expectations about future developments. Statements about expectations and future performance are "forward looking statements" which describe our goals, objectives and anticipated performance. These statements 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 "Risk Factors" in PART II, ITEM 1A below. 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 both domestically and overseas, particularly in certain parts of Asia; our ability to identify, and to estimate accurately the economic effects of, environmental and other liabilities associated with our assets and operations; government regulation that affects our ability to access our timberlands and harvest logs from those lands; the implications of significant indirect sales to overseas customers, including currency translation, regulatory and tax matters; 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; our ability to consummate proposed or contracted transactions in a manner that will yield revenues; the impacts of climate change and natural disasters on our timberlands and on surrounding areas; and the potential impacts of fluctuations in foreign currency exchange rates as they affect demand for our products and customers' ability to pay. From time to time we identify other risks and uncertainties 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.

EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership ("we" or the "Partnership"), is engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and operations of the three private equity funds ("Funds"). When we refer to the timberland owned by the Partnership, we describe it as the Partnership's tree farms. We refer to timberland owned by the Funds as the Funds' tree farms. When referring collectively to the Partnership's and Funds' timberland we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber to be harvested as logs for sale to export brokers and domestic manufacturers. 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 by selling 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, and will not recognize operating income until that project is sold. In addition, within this segment we sometimes negotiate and sell development rights in the form of conservation easements (CE's) on Fee Timber properties to preclude future development. Our third business, which we refer to as Timberland Management & Consulting, or "TM&C," is raising and investing capital from third parties and the Partnership for private equity timber funds, and thereafter managing those funds for the benefit of all investors.


Our current strategy for adding timberland acreage is centered on our private equity timber fund business model, which consists of raising investment capital from third-party investors and investing that capital, along with our own co-investment, into new timberland properties. We have closed and invested capital from two timber funds, with assets under management now totaling $171 million. Our 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $28 million as of September 30, 2012, afford us a share of the Funds' operating cash flows while also allowing us to earn asset management and timberland management fees as well as incentive fees based upon the overall success of each fund. 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. We believe our co-investment strategy also boosts our credibility with existing and prospective investors by demonstrating that we have both an operational as well as a financial commitment to the Funds' successes.

We have closed on $180 million of committed capital for Fund III, $9 million of which represents our co-investment. The Funds are consolidated into our financial statements with the income attributable to equity owned by third parties reflected in our Condensed Consolidated Statements of Comprehensive Income under the caption "Net (income) loss attributable to noncontrolling interests-ORM Timber Funds."

Land held for sale in western Washington by our Real Estate segment represents property that has been deemed suitable for residential and commercial building sites. The markets for these resources have suffered recently along with regional and national markets, producing a decline in our sales. The challenge for our Real Estate segment centers around how and when to "harvest" a parcel of land and capture the optimum value increment by selling the property, balancing the long-term risks and costs of carrying and developing a property against the potential for income and positive cash flows upon sale.

We have entered into a purchase and sale agreement with a buyer that will acquire approximately 17 acres within our Harbor Hill project in Gig Harbor, Washington, in order to develop a continuing care retirement community. The agreement gives the buyer up to 45 months to close and, as such, consistent with accounting guidelines, revenue will be recognized on this transaction once it is earned and we concluded we have no material continuing involvement or obligation to the purchaser. With this signed agreement, all our multi-family parcels in the Harbor Hill project are under contract.

Revenue nearly doubled from the third quarter of 2011 to the third quarter of 2012 primarily due to the $2.9 million sale of the 2-acres of land underlying our corporate office building in Poulsbo and a nearly 1,900-acre conservation easement sale on our Columbia tree farm, which yielded proceeds of $1.2 million. These were third quarter 2012 transactions in our Real Estate segment that did not have a counterpart in the third quarter of 2011. The increased real estate sales activity coupled with a 45% increase in log sale volume, partially offset by a 5% decline in average log price, served to significantly increase revenue when comparing third quarter of 2011 to third quarter of 2012.

Weakness in third quarter 2012 log prices, compared to the same period in 2011, was offset by increased demand from domestic sawmills and some export markets. In spite of a gradual U.S. housing market recovery and some domestic demand for wood to be milled for the Japan market, the absence of a current year equivalent to the 2011 surge in China log markets translated into overall log price weakness during the third quarter of 2012. We harvested 17 MMBF in the third quarter of 2012 compared to 35 MMBF in the second quarter of 2012, which included 4.4 MMBF from a timber deed sale, and 12 MMBF in the third quarter of 2011. The decline in harvest volume from the second to the third quarter of 2012 reflects our response to stronger pricing in the first half of 2012 that led us to move third quarter volume up into the first half as well as our expectation of an increase in regional supply of logs and lumber that typically occurs in the summer when logging operations in high elevation areas hit their peak.


Realized log prices declined $7/MBF, or 1%, from the second to the third quarter of 2012 and $30/MBF, or 5%, from the third quarter of 2011 to the third quarter of 2012. For the nine months ended September 30, 2012 and 2011, we harvested 66 MMBF and 61 MMBF, respectively. The 2012 year-to-date volume total of 66 MMBF includes a 4.4 MMBF timber deed sale, a second quarter transaction in which we sold rights to harvest timber on our timberlands rather than harvesting and selling logs directly. Realized log prices during the nine months ended September 30, 2012 declined $31/MBF, or 5%, from the same nine-month period in 2011.

We expect our harvest volume for the full year 2012 to be between 80 and 82 MMBF, with the final total depending on weather conditions and the strength or weakness of log markets as we transition to winter. This harvest volume total includes the aforementioned 4.4 MMBF timber deed sale. This projected total represents approximately 50 MMBF from Partnership tree farms and 30 MMBF from Fund tree farms. Generally speaking, we aim to set our annual Partnership tree farm harvest level at a long-term sustainable level, which approximates 44 MMBF. During the depths of the housing downturn in 2008 through 2010, however, we deferred considerable harvest and now that markets are recovering, we are metering in a portion of that deferral. With respect to Fund tree farms, our harvest targets are less guided by long-term sustainability models and more by ten-year harvest plans developed during property acquisition modeling. These ten-year harvest plans are designed at a fund portfolio level to balance cash flows during the holding period with a view to also optimizing the property values at the windup of each Fund's ten-year life. Relative to the planned harvest level from the Fund tree farms, harvest volume was also deferred during the housing downturn, which will be similarly metered in during the market recovery.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) for the respective quarter and year-to-date periods ended September 30, 2012 and September 30, 2011. In addition to the table's numerical analysis, the explanatory text that follows the table describes certain of these changes by business segment.


                                                                                  Nine Months
                                                              Quarter Ended          Ended
(in thousands)                                                September 30,      September 30,
Net income (loss) attributable to Pope Resources'
unitholders:
2012 period                                                  $         3,675     $       (4,414 )
2011 period                                                             (562 )            6,405
  Variance                                                   $         4,237     $      (10,819 )
Detail of variance:
Fee Timber
Log volumes (A)                                              $         2,949     $          654
Log price realizations (B)                                              (514 )           (2,097 )
Stumpage sales                                                             -              1,026
Production costs                                                      (1,178 )             (897 )
Depletion                                                               (510 )              254
Other Fee Timber                                                          (2 )              (52 )
Timberland Management & Consulting
Other Timberland Management & Consulting                                 (39 )              (62 )
Real Estate
Land and conservation easement sales                                   1,377               (931 )
Sale of land underlying corporate office                               2,726              2,726
Timber depletion on land sale                                              -                150
Other Real Estate                                                       (751 )             (933 )
Environmental remediation costs                                            2            (12,154 )
General & administrative costs                                           118                192
Net interest expense                                                      89                208
Taxes                                                                   (182 )              (23 )
Noncontrolling interest                                                  152              1,120
Total variances                                              $         4,237     $      (10,819 )

(A) Volume variance calculated by extending change in sales volume by the average log sales price
for the comparison period.
(B) Price variance calculated by extending the change in average realized price by current period
sales volume.

Fee Timber

Fee Timber results include operations from 114,000 acres of timberland owned by the Partnership and 61,000 acres of timberland owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington and northwestern Oregon and, to a lesser extent, from the ground leases for cellular communication towers, gravel mines and quarries, together with the sale of other resources from our timberlands. Our Fee Timber revenue is driven primarily by the volume of timber harvested and the average log price realized on the sale of that harvested timber. Our volume harvested is typically based on manufactured log sales to customers or exporters. However, during the second quarter of 2012, we sold rights to harvest timber (timber deed sale) from the Hood Canal Tree Farm. In this section of this document, volumes sold and calculations of average price realized during the reporting period exclude the timber deed sale, except where it is called out as included. Harvest volumes are generally expressed in million board feet (MMBF) increments and harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF). Fee Timber expenses, which consist predominantly of harvest, hauling, and depletion costs, vary directly and roughly proportionately with harvest volume and the resulting revenues. Revenue and costs related to harvest activities on timberland owned by the Funds are consolidated into this discussion of operations.


When discussing our Fee Timber operations, we compare current results to both the previous quarter and the corresponding quarter of the prior year, as well as current year-to-date results to the prior year-to-date results. These comparisons provide an opportunity to note trends in log prices and patterns of harvest volumes that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2012, June 30, 2012, and September 30, 2011 were as follows:

                                             Mineral,
                                            Cell Tower                                             Harvest
     (in millions)          Log Sale         & Other           Total Fee          Operating        Volume
     Quarter ended           Revenue         Revenue         Timber Revenue        Income          (MMBF)
  Partnership tree farms   $       5.5     $        0.4     $            5.9     $       1.9            10.1
       Funds' tree farms           3.5                -                  3.5            (0.3 )           7.0
        Total Fee Timber
      September 30, 2012   $       9.0     $        0.4     $            9.4     $       1.6            17.1

  Partnership tree farms   $      10.3     $        1.3     $           11.6     $       5.1            18.8
       Funds' tree farms           5.8                -                  5.8             0.3            11.4
   Total Fee Timber June
                30, 2012   $      16.1     $        1.3     $           17.4     $       5.4            30.2

  Partnership tree farms   $       3.8     $        0.4     $            4.2     $       1.1             6.9
       Funds' tree farms           2.7                -                  2.7            (0.2 )           4.9
        Total Fee Timber
      September 30, 2011   $       6.5     $        0.4     $            6.9     $       0.9            11.8

Comparing Q3 2012 to Q2 2012. Fee Timber revenue declined $8.0 million, or 46%, from $17.4 million in the second quarter of 2012 to $9.4 million in the third quarter of 2012 primarily as a result of 13 MMBF, or 43%, reduction in harvest volume in the third quarter. This volume variance does not include a 4.4 MMBF timber deed sale that occurred the second quarter of 2012, which appears in the table above in the Mineral, Cell Tower, & Other Revenue column, and which had no counterpart in the third quarter of 2012, magnifying the disparity in revenue between the two periods. The harvest volume decrease from second to third quarter reflects a plan to move volume forward into the second quarter to both take advantage of favorable pricing during the first half of the year and limit third quarter harvest during a time when harvest operations are typically at their peak due to favorable weather in the Pacific Northwest that enables access to higher elevation harvest units. Some softening in log prices is common in the third quarter of each year as customers have more alternatives for log purchases.

Operating income for the third quarter of 2012 decreased by $3.8 million, or 70%, from second quarter 2012 results. Income decreased as a result of the decline in harvest volume and the third quarter absence of an equivalent to the second quarter timber deed sale which provided $765,000 of operating income during the second quarter. The operating income decline was also made more pronounced by a slightly heavier mix of total harvest from the Timber Funds, which carry a higher depletion expense per MBF.

Revenue in the Funds declined $2.3 million, or 40%, during the third quarter of 2012, with $3.5 million generated during the third quarter compared with revenue of $5.8 million in the second quarter of 2012. The drop in revenue was driven by a 4 MMBF, or 39%, decrease in harvest volume from 11 MMBF in the second quarter of 2012 to 7 MMBF in the third quarter of 2012. This harvest volume reduction is the primary contributory factor to a shift of Fund operating results from income of $286,000 during the second quarter of 2012 to a loss of $306,000 during the third quarter of 2012.


Comparing Q3 2012 to Q3 2011. Notwithstanding the advance of some of third quarter 2012 volume into the first half of this year, harvests were still 45% higher in the third quarter of 2012 compared to the third quarter of 2011. This harvest volume differential served to lift third quarter 2012 Fee Timber revenue by $2.5 million, or 36%, over the comparable period in the prior year, with the effect of higher volume partially offset by a $30/MBF, or 5%, reduction in average realized log price during 2012. Operating income for the third quarter of 2012 was $745,000, or 82%, higher than it was for the same period in 2011, again primarily due to the increased harvest volume. In the third quarter of 2012, our focus was on maximizing net stumpage values by selling to specific domestic sawmills rather than to the export market, which had softer demand in 2012 relative to 2011. Sawmill destinations were based on proximity to our tree farms to minimize haul costs and thereby enable higher net realized log returns than we otherwise would have recognized.

Third quarter 2012 Fund revenue rose 28% to $3.5 million from $2.7 million for the same quarter in 2011 on a 2 MMBF, or 43%, jump in harvest volume. Operating loss for the period increased from $156,000 in 2011 to $306,000 in 2012 as a result of higher harvest and haul costs.

Revenue and operating income for the Fee Timber segment for year-to-date periods ended September 30, 2012 and September 30, 2011 were as follows:

                                             Mineral,
                                            Cell Tower                                             Harvest
     (in millions)          Log Sale         & Other           Total Fee          Operating        Volume
   Nine Months Ended         Revenue         Revenue         Timber Revenue        Income          (MMBF)
   Pope Resources Timber   $      22.4     $        2.1     $           24.5     $      10.2            40.6
            Timber Funds          10.8                -                 10.8               -            21.2
        Total Fee Timber
      September 30, 2012   $      33.2     $        2.1     $           35.3     $      10.2            61.8

   Pope Resources Timber   $      21.4     $        1.1     $           22.5     $       9.8            36.8
            Timber Funds          13.2                -                 13.2             1.5            24.1
        Total Fee Timber
      September 30, 2011   $      34.6     $        1.1     $           35.7     $      11.3            60.9

Comparing YTD 2012 to YTD 2011. Fee Timber revenue for the first nine months of 2012 declined slightly by $437,000, or 1%, over the comparable period in 2011. A relatively weaker Chinese log export market in 2012 as compared to 2011 is primarily responsible for the decline in log prices, which was the primary contributor to a $1.1 million, or 10%, decline in operating income from 2011 to 2012. Fee timber operating income in 2012 was bolstered by the second quarter timber deed sale which provided $765,000 of operating income and, to some extent, by a relatively lower harvest from Fund timberlands in 2012 compared to 2011, because harvesting from the Partnership's lands provides for a lower depletion expense and a correspondingly higher operating margin.

Log Volume

We harvested the following log volumes by species from the Combined tree farms,
exclusive of the aforementioned 4.4 MMBF timber deed sale, for the quarters
ended September 30, 2012, June 30, 2012, and September 30, 2011:

      Volume (in MMBF)                               Quarter Ended
      Sawlogs              Sep-12    % Total       Jun-12    % Total       Sep-11    % Total
            Douglas-fir      10.1          59 %      19.3          64 %       5.9          50 %
            Whitewood         4.2          25 %       5.8          19 %       2.6          22 %
            Cedar             0.2           1 %       0.3           1 %       0.2           2 %
            Hardwood          0.4           2 %       1.1           4 %       0.7           6 %
      Pulpwood
            All Species       2.2          13 %       3.7          12 %       2.4          20 %
      Total                  17.1         100 %      30.2         100 %      11.8         100 %

Comparing Q3 2012 to Q2 2012. Harvest volume declined 13 MMBF, or 43%, from the second to the third quarter of 2012. The decrease reflects a decision to advance some of the third quarter 2012 volume into the first half of 2012 and capture stronger pricing and to avoid competing with large seasonal volumes of wood entering the market. Douglas-fir harvest volume, as a percent of overall harvest, declined from the second to the third quarter of 2012 due to an increase in harvest from the Funds, which increased from 33% of the second quarter volume to 41% of the third quarter volume. The Funds' tree farms have a higher mix of whitewood species relative to the Partnership tree farms, which are heavier to Douglas-fir. As such, the whitewood volume increased from 19% of the second quarter harvest mix to 25% of the total third quarter harvest mix.

Comparing Q3 2012 to Q3 2011. Harvest volumes were up by 5 MMBF, or 45%, from the third quarter of 2011 to the same period in 2012. The difference in volume results mainly from the 2011 reduction in harvest in the third quarter due to heavy weighting of the 2011 harvest activities to the first half of 2011. We have noted declines in local pulpwood prices as result of the closure of a major regional pulp mill, which served to increase pulpwood inventories generally and drive down prices. Additionally, sawmills, the low cost supplier preference of pulp mills, continue to gradually increase production, thus further suppressing the demand for, and weakening prices of, woodchips from whole logs. As a result of these market dynamics, we shifted to a heavier mix of sawlog stands, which resulted in both an increased proportion of Douglas-fir sawlogs and a lower proportion of pulpwood. Douglas-fir volume increased 71% between 2011 and 2012, while its proportion of our total harvest mix increased from 50% in 2011 to 59% in 2012. There was a 9% decline in pulpwood volumes that dropped this mix component's share of the overall sort mix from 20% of third quarter 2011 harvest to 13% of third quarter 2012 harvest as we de-emphasized units heavy to pulpwood.


Comparing YTD 2012 to YTD 2011. We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned 4.4 MMBF timber deed sale, for the nine months ended September 30, 2012 and September 30, 2011:

               Volume (in MMBF)                 Nine Months Ended
               Sawlogs              Sep-12    % Total       Sep-11    % Total
                     Douglas-fir      40.5          65 %      35.2          58 %
                     Whitewood        10.9          18 %      14.2          23 %
                     Cedar             0.6           1 %       1.0           2 %
                     Hardwood          1.9           3 %       1.8           3 %
               Pulpwood
                     All Species       7.9          13 %       8.7          14 %
               Total                  61.8         100 %      60.9         100 %

Harvest volumes were mostly flat, increasing 1 MMBF, or 1%, in the first nine months of 2012 over the same period in 2011. Harvest from the Partnership tree farms increased 4 MMBF, or 10%, from 37 MMBF to 41 MMBF in 2011 and 2012, respectively. Harvest from the Funds dropped 3 MMBF, or 12%, from 24 MMBF to 21 . . .

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