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POPE > SEC Filings for POPE > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for POPE RESOURCES LTD PARTNERSHIP


3-May-2013

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; our ability to consummate proposed or contracted transactions in a manner that will yield revenue; 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 and expectations 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 developers 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 engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership.

Our current strategy for adding timberland acreage is centered on our private equity timber fund business model. We have closed and invested capital from three timber funds, with assets under management totaling $231 million in appraised value as of December 31, 2012. Our original 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $31 million as of March 31, 2013, 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 and a financial commitment to the Funds' success.


We have closed on $180 million of committed capital for Fund III, $9 million of which represents our co-investment commitment. In the fourth quarter of 2012 we acquired a property in northern California which represented our first acquisition with this committed capital. As of March 31, 2013 $134 million of undrawn capital commitment remains which includes a commitment to Fund III by the Partnership of nearly $7 million.

The Funds are consolidated into our financial statements with the loss attributable to equity owned by third parties added back to consolidated income in our Condensed Consolidated Statements of Comprehensive Income under the caption "Loss attributable to non-controlling interests-ORM Timber Funds" to arrive at comprehensive income attributable to unitholders of the partnership.

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 segment sales. The challenge for our Real Estate segment centers around how and when to "harvest" a parcel of land and optimize value realization 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.

In February 2013, we entered into a purchase and sale agreement with a buyer who will acquire approximately 9 acres which may be divided into 63 single family residential lots within our Harbor Hill project in Gig Harbor, Washington. The transaction contemplated by the agreement is targeted to close in mid-2013 and consistent with accounting guidelines, revenue will be recognized on this transaction once it is earned and we conclude we have no material continuing involvement or obligation to the purchaser.

First quarter highlights

Harvest volume was 26.5 million board feet (MMBF) in Q1 2013 compared to 18.1 MMBF in the fourth quarter of 2012 and 14.5 MMBF in Q1 2012, an 83% increase.

Average realized log price per thousand board feet (MBF) was $610 in Q1 2013 compared to $538 per MBF in Q4 2012, a 13% increase and also compared to $559 per MBF in Q1 2012, a 9% increase.

Fund properties contributed 35% of Q1 2013 harvest volume, compared to 19% in Q1 2012.

Mix of harvest volume sold to export markets in Q1 2013 declined to 26% from 50% in Q1 2012, while mix of harvest volume sold to domestic markets increased to 60% in Q1 2013 from 36% in Q1 2012. Pulpwood volume remained stable at 14% of the total harvest for the comparative periods.

The percentage of total harvest comprised of Douglas-fir logs dropped to 69% in Q1 2013 from 77% in Q1 2012, with a corresponding increase in the whitewood component to 13% in Q1 2013 from 6% in Q1 2012. This shift in species mix is consistent with the higher weighting of total harvest toward Fund properties in Q1 2013.


No acquisitions of timberland by Fund III during Q1 2013.

No Real Estate land sales occurred during Q1 2013 or in Q1 2012.

We expect our harvest volume for the full year 2013 to be between 84 and 88 MMBF, with the final total depending on log market conditions for the balance of the year. The projected split of this total harvest is approximately 55% from Partnership tree farms and 45% 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 deferred volume. 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 due diligence. These ten-year harvest plans are designed at a fund portfolio level to generate cash flows during the holding period with a view to optimizing total return over each Fund's ten-year life. Relative to the planned harvest level for the Fund tree farms, harvest volume was also deferred during the housing downturn, which will be similarly metered in during the market recovery.

We anticipate that a number of land sales currently in the pipeline to close in 2013 will boost net income for 2013 significantly above 2012 levels.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income for the quarter ended March 31, 2013 with that of the first and fourth quarters of 2012. In addition to the table's numerical analysis, the explanatory text that follows the table describes in detail certain of these changes by business segment.


                                                          Q1 2013 vs.       Q1 2013 vs.
(in thousands)                                              Q1 2012           Q4 2012
Net income (loss) attributable to Pope Resources'
unitholders:
1st Quarter 2013                                         $       3,484     $       3,484
1st Quarter 2012                                                 1,206
4th Quarter 2012                                                                    (295 )
Variance                                                 $       2,278     $       3,779
Detail of variance:
Fee Timber
Log volumes (A)                                          $       6,683     $       4,488
Log price realizations (B)                                       1,349             1,905
Production costs                                                (3,138 )          (1,653 )
Depletion                                                       (1,298 )             121
Other Fee Timber                                                  (457 )            (164 )
Timberland Management & Consulting
Other Timberland Management & Consulting                          (128 )            (122 )
Real Estate
Other Real Estate                                                 (294 )            (479 )
General & administrative costs                                     (29 )             (23 )
Net interest expense                                                38               (14 )
Taxes                                                              (22 )              31
Noncontrolling interest                                           (426 )            (311 )
Total variances                                          $       2,278     $       3,779

(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 113,000 acres of timberland owned by the Partnership and 80,000 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, northwestern Oregon and northern California, 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. 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, haul, 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. 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 March 31, 2013, December 31, 2012, and March 31, 2012 were as follows:


                                             Mineral,
                                            Cell Tower       Total Fee                         Harvest
     (in millions)          Log Sale         & Other          Timber         Operating         Volume
     Quarter ended           Revenue         Revenue          Revenue          Income          (MMBF)
  Partnership tree farms   $      10.8     $        0.3     $      11.1     $        5.5            17.1
       Funds' tree farms           5.3                -             5.3              0.8             9.4
  Total Fee Timber March
                31, 2013   $      16.1     $        0.3     $      16.4     $        6.3            26.5

  Partnership tree farms   $       3.9     $        0.4     $       4.3     $        1.4             7.0
       Funds' tree farms           5.8              0.1             5.9              0.2            11.1
        Total Fee Timber
       December 31, 2012   $       9.7     $        0.5     $      10.2     $        1.6            18.1

  Partnership tree farms   $       6.6     $        0.4     $       7.0     $        3.2            11.7
       Funds' tree farms           1.5                -             1.5                -             2.8
  Total Fee Timber March
                31, 2012   $       8.1     $        0.4     $       8.5     $        3.2            14.5

Comparing Q1 2013 to Q4 2012. With new property acquisitions from the Funds, our commercial timberlands are increasingly limited to uplands that have higher winter snow accumulation and thus a more limited operating season. Our high proportion of low elevation timberlands that allows for winter logging gives us the flexibility to front-load annual harvest volumes within the year to take advantage of the constrained winter log production and resultant higher log prices. In addition to our frequent practice of front-loading harvest volumes, we recognized in December of 2012 that our three primary markets in the U.S., Japan, and China were all improving at the same time. We therefore decided to increase harvest volumes aggressively in the first quarter to take advantage of these simultaneously improving markets. The upshot of these actions was that Fee Timber's revenue increased $6.2 million, or 61%, from $10.2 million in the fourth quarter of 2012 to $16.4 million in the first quarter of 2013 as a result of an 8.4 MMBF, or 46%, increase in harvest volume coupled with an increase in average price of $72MBF, or 13%. These price and volume shifts will be discussed in detail below.

Operating income of $6.3 million for the first quarter of 2013 was nearly four times that of the fourth quarter of 2012 as a result of higher harvest volumes and log prices. The operating income increase includes the effects of a lower depletion rate due to a lighter mix of total harvest from the Funds' tree farms in the first quarter. Since the Fund tree farms have been acquired much more recently than the Partnership tree farms, the former have a significantly higher acquisition cost and, accordingly the resulting depletion expense from those properties is substantially higher.

We moved much of the January 2013 scheduled harvest plan for the Funds forward to December 2012 for two reasons: a) to match rising log prices that moved up significantly compared to October and November of 2012, and b) to maintain continuity with contracted harvest operators at a time when they were in short supply. This drove the drop in harvest volume of 1.7 MMBF, or 15%, from 11.1 MMBF in the fourth quarter of 2012 to 9.4 MMBF in the first quarter of 2013. Revenue in the Funds declined $583,000, or 8%, during the first quarter of 2013, with $5.3 million generated during the first quarter compared with revenue of $5.9 million in the fourth quarter of 2012.

Comparing Q1 2013 to Q1 2012. First quarter 2013 harvest volumes were 83% higher compared to the first quarter of 2012. This increase in volume is attributable to soft export log demand in the first quarter of 2012 as the China market was plagued by high inventories. In addition to the robust export market, the domestic housing market has improved and thus provided additional log demand in the first quarter of 2013. The increase in harvest volume coupled with a $51/MBF, or 9%, increase in average realized log price from the comparable period in 2012, served to lift first quarter 2013 Fee Timber revenue by $7.9 million, or 93%, over the comparable period in the prior year. Operating income for the first quarter of 2013 was $3.1 million, or 97%, higher than it was for the comparable period in 2012, again primarily due to the increased harvest volume and higher prices.


First quarter 2013 Fund revenue rose to $5.3 million from $1.5 million for the comparable quarter in 2012, a 250% increase on a 6.5 MMBF, or 231% jump in harvest volume. Operating income for the period increased to $791,000 from nil in 2012. The increase in operating income is not as pronounced in the Fund tree farms due to the aforementioned higher depletion rates.

Log Volume

We harvested the following log volumes by species from the Combined tree farms
for the quarters ended March 31, 2013, December 31, 2012, and March 31, 2012:

     Volume (in MMBF)                                  Quarter Ended
     Sawlogs              Mar-13      % Total       Dec-12      % Total       Mar-12      % Total
           Douglas-fir      18.3            69 %      10.6            59 %      11.1            77 %
           Whitewood         3.6            13 %       4.5            25 %       0.9             6 %
           Cedar             0.4             2 %       0.2             1 %       0.1             1 %
           Hardwood          0.6             2 %       0.5             2 %       0.4             2 %
     Pulpwood
           All Species       3.6            14 %       2.3            13 %       2.0            14 %
     Total                  26.5           100 %      18.1           100 %      14.5           100 %

Comparing Q1 2013 to Q4 2012. Harvest volume increased 8.4 MMBF, or 46%, from the fourth quarter of 2012 to the first quarter of 2013. The increase reflects a decision to accelerate our planned harvest for the year to capture stronger pricing as well as to take advantage of deferred volume accumulated during prior years. In addition, we wanted to avoid competing with large seasonal volumes of wood entering the market in the late spring and summer months. Douglas-fir harvest volume, as a percent of overall harvest, increased from the fourth quarter of 2012 to the first quarter of 2013 due to an increase in harvest from the Partnership's tree farms, which have a higher proportion of low elevation lands and a higher proportion of Douglas-fir inventory. We increased harvest volume on all low elevation lands to meet stronger domestic lumber demand and corresponding demand from the domestic sawmills that produce high-value products such as lumber for the Japanese market, poles, and plywood.

Comparing Q1 2013 to Q1 2012. Harvest volumes were up by 12 MMBF, or 83%, from the first quarter of 2012 to the comparable period in 2013. The difference in volume is attributable to soft demand from the export market and tepid demand in the U.S. housing market during the first quarter of 2012. Douglas-fir volume increased by 7.2 MMBF, or 65%, between the first quarter of 2012 and the comparable period in 2013, while its proportion of our total harvest mix decreased from 77% in 2012 to 69% in 2013 with a higher percentage of total harvest coming from Fund tree farms in 2013 where the stocking is heavier to whitewoods. There was an 80% increase in pulpwood volumes between periods that was essentially proportionate with higher total log volume production.


Log Prices

Logs from the Combined tree farms serve a number of different domestic and export markets, with domestic mills historically representing our largest market destination. This customer mix shifted in late 2010, when log exporters in the Pacific Northwest began shipping more volume to China, which accepts lower quality logs than had traditionally been exported to other markets. As a result, significant volumes that theretofore had been sold to domestic mills instead flowed to the China market. As a result, our export mix surged in 2010 to 33% of total volume and peaked at 45% in 2011. From 2010 through the first quarter of 2011, the relative strength of the China export market was a driving force for much of our log pricing. This shifted during the fourth quarter of 2011 when oversupply in China abruptly reduced demand from that now important market. As a result, a greater proportion of our log supply was sold to domestic mills beginning in 2011's fourth quarter. In the first quarter of 2012 most of our export volume was comprised of higher-value Douglas-fir logs going to Japan. This mix, however, shifted once again during the second quarter of 2012 with improved lumber demand from higher housing starts, and increased demand from a limited portion of the domestic market that manufactured high-grade Douglas-fir logs for high-value Japanese lumber grades. As log inventories in China were worked down during the first half of 2012, we experienced greater demand from China during the second half of 2012.This shift continued to the end of 2012 and into the first quarter of 2013.

Improvement in demand from the domestic market has historically resulted in a compression of spreads between realized export and domestic log prices (hardwood data is excluded from domestic data when calculating export-to-domestic spreads). The narrowing spread was partially caused by the quality of logs harvested in the first quarter of 2013 which fit several domestic niche markets that in turn drove up our domestic log prices. This spread narrowed from $67/MBF, or 12% of the lower domestic price, from the first quarter of 2012 to $10/MBF, or 2%, in the first quarter of 2013. Similarly, the spread narrowed from the fourth quarter of 2012 to the first quarter of 2013 from $30/MBF, or 5%, to $10/MBF, or 2%. This degree of price compression drives us to focus even more acutely on net realized equivalent delivered log prices after taking into account log hauling costs and not merely focusing on gross sales price to either the export or domestic customer.

We realized the following log prices by species for the quarters ended March 31, 2013, December 31, 2012, and March 31, 2012:

                                                            Quarter Ended
                                                  Mar-13       Dec-12       Mar-12
        Average price realizations (per MBF):
        Sawlogs
                         Douglas-fir              $   670     $    601     $    587
                         Whitewood                    587          517          486
                         Cedar                      1,125          925          953
                         Hardwood                     519          528          585
        Pulpwood         All Species                  286          266          418
        Overall                                       610          538          559


The following table compares the dollar and percentage change in log prices from the fourth quarter of 2012 and the first quarter of 2012 to the first quarter of 2013:

                                                  Change to Q1 2013
                                              Q4 2012             Q1 2012
                                         $/MBF       %       $/MBF        %
                  Sawlogs  Douglas-fir   $   69       11 %   $   83        14 %
                           Whitewood         70       14 %      101        21 %
                           Cedar            200       22 %      172        18 %
                           Hardwood          (9 )     -2 %      (66 )     -11 %
                  Pulpwood All Species       20        8 %     (132 )     -32 %
                  Overall                    72       13 %       51         9 %

Overall log prices in the first quarter of 2013 were higher than both the fourth quarter of 2012 and the first quarter of 2012 due to stronger Douglas-fir and whitewood pricing brought about by increased log demand from both China and the domestic market.

Pulpwood prices declined by $132 per MBF, or 32%, from $418/MBF in the first quarter of 2012 to $286/MBF in the first quarter of 2013. This decline was the result of a structural shift in that particular segment of the log market described below under "Pulpwood".

Hardwood is an ancillary product of our log harvest volume and the price at times will vary inversely to harvest volume as the demand for it has been stable. Therefore, in the first quarter of 2012, when log volumes were low the price of hardwood was high and as log volumes in the first quarter of 2013 were . . .

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