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POPE > SEC Filings for POPE > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for POPE RESOURCES LTD PARTNERSHIP


6-Aug-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 differ from our current expectations, and under various circumstances these deviations 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 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, particularly in our Real Estate segment, 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 $233 million in value based on appraisals for Funds I and II as of December 31, 2012 and an appraisal for Fund III as of June 30, 2013. 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 June 30, 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 June 30, 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 but then income or loss attributable to equity owned by third parties is removed from consolidated results in our Condensed Consolidated Statements of Comprehensive Income (Loss) under the caption "(Income) loss attributable to noncontrolling interests-ORM Timber Funds" to arrive at comprehensive income (loss) 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 May 2013, we entered into a purchase and sale agreement with a buyer who will acquire, for conservation purposes, approximately 535 acres of our property in Port Gamble, Washington, for $4.6 million. We expect this transaction to close in the fourth quarter of 2013.

Second quarter highlights

Harvest volume was 26.9 million board feet (MMBF) in Q2 2013 compared to 30.2 MMBF in Q2 2012, an 11% decrease. Harvest volume for the first six months of 2013 was 53.3 MMBF compared to 44.7 MMBF for the first half of 2012, a 19% increase. The harvest volume figures do not include two timber deed sales, one sold by one of our timber funds in Q2 2013 for 0.6 MMBF and the other from one of the Partnership's tree farms in Q2 2012 for 4.4 MMBF. Unless stated otherwise, all harvest volume and log price realization metrics cited below exclude these timber deed sales.

Average realized log price per thousand board feet (MBF) was $620 in Q2 2013 compared to $532 per MBF in Q2 2012, a 17% increase. For the first six months of 2013, the average realized log price per MBF was $615 compared to $541 per MBF for the first half of 2012, a 14% increase.

Fund properties contributed 53% of Q2 2013 harvest volume, compared to 38% in Q2 2012. For the first half of the 2013, Fund properties contributed 44% of harvest volume, compared to 32% for the first half of 2012.

Mix of harvest volume sold to export markets in Q2 2013 increased to 33% from 15% in Q2 2012, while mix of harvest volume sold to domestic markets decreased to 49% in Q2 2013 from 69% in Q2 2012. For the first half of the year, the relative percentages of harvest volume sold to export and domestic markets in 2013 were 30% and 54%, respectively, compared to 27% and 57% in 2012.

The percentage of total harvest comprised of Douglas-fir logs dropped to 58% in Q2 2013 from 64% in Q2 2012, with a corresponding increase in the whitewood component to 23% in Q2 2013 from 19% in Q2 2012. Similarly, for the first half of 2013, the relative mix of Douglas-fir and whitewood was 64% and 18%, respectively, compared to 68% and 15% for the first half of 2012. This shift in species mix is consistent with the higher weighting of total harvest from Fund properties in both 2013's second quarter and year-to-date periods compared to the prior year.

Real Estate closed on a 2,330-acre conservation land sale for $5.7 million during Q2 2013 while last year's second quarter for this segment had no real estate sales.


We expect our harvest volume for the full year 2013 to be between 88 and 91 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 based on our current timberland holdings. During the depths of the housing downturn in 2008 through 2010, however, we deferred considerable harvest volume and now that markets appear to be recovering, we have been metering in 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 we are also metering in as markets allow.

We anticipate that a number of land sales currently in the pipeline to close in 2013 will further 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 (loss) for the respective quarter and year-to-date periods ended June 30, 2013 and June 30, 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.


                                                                              Six Months
                                                          Quarter Ended          Ended
                                                            June 30,           June 30,
(in thousands)                                                Total              Total
Net income (loss) attributable to Pope Resources'
unitholders:
2013 period                                              $         6,128     $       9,612
2012 period                                                       (9,295 )          (8,089 )
  Variance                                               $        15,423     $      17,701
Detail of variance:
Fee Timber
Log volumes (A)                                          $        (1,764 )   $       4,919
Log price realizations (B)                                         2,344             3,693
Timber deed sales                                                   (908 )            (908 )
Production costs                                                     166            (2,972 )
Depletion                                                            (16 )          (1,314 )
Other Fee Timber                                                      17              (440 )
Timberland Management & Consulting
Other Timberland Management & Consulting                             (74 )            (202 )
Real Estate
Land sales                                                         4,253             4,253
Timber depletion on land sale                                       (295 )            (295 )
Other Real Estate                                                     20              (274 )
Environmental remediation costs                                   12,500            12,500
General & administrative costs                                      (234 )            (263 )
Net interest expense                                                  32                70
Other (taxes and noncontrolling interest)                           (618 )          (1,066 )
Total variances                                          $        15,423     $      17,701

(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 111,000 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 mills or log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. During the second quarter of 2012, we executed a timber deed sale from the Partnership's timberland, and in the second quarter of 2013, we executed a much smaller timber deed sale from the Funds' timberland. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude the timber deed sales, except where called out as including it. 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 the current quarter results to both the previous quarter and the corresponding quarter of the prior year, as well as the current year-to-date results to the prior year-to-date. These comparisons provide an opportunity to note trends in patterns of harvest volumes and log prices that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended June 30, 2013, March 31, 2013, and June 30, 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   $      8.1     $        0.3     $       8.4     $       3.8           12.9
              Funds' tree farms          8.6              0.1             8.7             1.4           14.0
 Total Fee Timber June 30, 2013   $     16.7     $        0.4     $      17.1     $       5.2           26.9

         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   $     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

Comparing Q2 2013 to Q1 2013. Both export and domestic sawlog markets continued the strength exhibited in Q1 2013 with incremental improvement in Q2 2013. As such, Fee Timber revenue in Q2 2013 increased $670,000, or 4%, from $16.4 million in Q1 2013 to $17.1 million in Q2 2013. This increase was attributable to a 2% increase in harvest volume and a 2% increase in realized log prices from Q1 2013 to Q2 2013. The revenue increase was also aided by a $118,000 timber deed sale comprising 0.6 MMBF of volume from one of the Funds' tree farms during Q2 2013, which appears in the table above in the "Mineral, Cell Tower & Other Revenue" column.

Operating income of $5.2 million for Q2 2013 was $1.1 million, or 17%, lower than Q1 2013 primarily as a result of a 35% increase in depletion expense on a per MBF basis due to the increase in the proportion of harvest volume coming from the Funds, which was 53% in Q2 2013 versus 35% in Q1 2013. Since the Funds' tree farms were acquired much more recently than the Partnership's tree farms, the former have a significantly higher acquisition cost, and accordingly the resulting depletion rate for those properties is substantially higher.

Fee Timber revenue from the Funds increased $3.3 million, or 62%, from Q1 2013 to Q2 2013 on a 4.6 MMBF increase in harvest volume, stronger log pricing, and to a lesser degree, the aforementioned 0.6 MMBF timber deed sale. The increase in harvest volume is the result of decisions made during Q4 2012, when we accelerated planned Fund harvest volume from Q1 2013 to take advantage of rising log prices, thus reducing Q1 2013 volume. Operating income for the Funds increased $647,000, or 82%, from $791,000 in Q1 2013 to $1.4 million in Q2 2013.

Comparing Q2 2013 to Q2 2012. Fee Timber revenue declined $338,000, or 2%, from $17.4 million in Q2 2012 to $17.1 million Q2 2013. The decrease was driven primarily by a decline in timber deed sale revenue from $1.0 million on 4.4 MMBF from one of the Partnership's tree farms in Q2 2012 to $118,000 on 0.6 MMBF from one of the Funds' tree farms in Q2 2013. Revenue from timber deed sales appears in the table above in the "Mineral, Cell Tower & Other Revenue" column. The revenue decline was also impacted by an 11% reduction in harvest volume, partially offset by a 17% increase in realized log prices from Q2 2012 to Q2 2013. Operating income declined $161,000, or 3%, from Q2 2012 to Q2 2013 due to the decrease in revenue and a heavier mix of harvest from the Fund properties, which carry a higher depletion expense rate per MBF.


Fee Timber revenue from the Funds increased $2.9 million, or 50%, from Q2 2012 to Q2 2013 on a 2.6 MMBF increase in harvest volume, stronger log pricing, and to a lesser degree, the aforementioned 0.6 MMBF timber deed sale. Operating income increased from $286,000 in Q2 2012 to $1.4 million in Q2 2013 due to the increase in revenue.

Revenue and operating income for the Fee Timber segment for year-to-date periods ended June 30, 2013, and June 30, 2012, were as follows:

                                                   Mineral,
                                                  Cell Tower       Total Fee                       Harvest
         (in millions)             Log Sale        & Other          Timber         Operating        Volume
       Six Months Ended            Revenue         Revenue          Revenue         Income          (MMBF)
         Partnership tree farms   $     18.9     $        0.6     $      19.5     $       9.4           29.9
              Funds' tree farms         14.0              0.1            14.1             2.2           23.4
 Total Fee Timber June 30, 2013   $     32.9     $        0.7     $      33.6     $      11.6           53.3

         Partnership tree farms   $     16.9     $        1.7     $      18.6     $       8.3           30.5
              Funds' tree farms          7.3                -             7.3             0.3           14.2
 Total Fee Timber June 30, 2012   $     24.2     $        1.7     $      25.9     $       8.6           44.7

Comparing YTD 2013 to YTD 2012. Fee Timber revenue for the first half of 2013 increased by $7.6 million, or 29%, over the comparable period in 2012. The increase is attributable to strengthening log markets in 2013 relative to 2012 leading to an 8.6 MMBF, or 19%, increase in harvest volume, combined with a $74/MBF, or 14%, increase in realized log price. Partially offsetting the increased log sale revenue was a $908,000 decrease in revenue from timber deed sales from the first half of 2012 to the first half of 2013, which is included in the "Mineral, Cell Tower & Other Revenue" column in the above table. These factors combined to lead to a $3.0 million, or 35%, increase in operating income in the first half of 2013 versus the comparable period in 2012. The improved operating income would have been more pronounced if not for the Funds' share of harvest volume increasing from 32% in the first half of 2012 to 44% in the first half of 2013, which led to an increase in depletion expense.

Log Volume

We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned timber deed sales, for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012:


   Volume (in MMBF)                                     Quarter Ended
   Sawlogs                 Jun-13      % Total       Mar-13      % Total       Jun-12      % Total
            Douglas-fir      15.7            58 %      18.3            69 %      19.3            64 %
            Whitewood         6.1            23 %       3.6            13 %       5.8            19 %
            Cedar             0.4             1 %       0.4             2 %       0.3             1 %
            Hardwood          0.8             3 %       0.6             2 %       1.1             4 %
   Pulpwood
            All Species       3.9            15 %       3.6            14 %       3.7            12 %
   Total                     26.9           100 %      26.5           100 %      30.2           100 %

Comparing Q2 2013 to Q1 2013. Harvest volume increased a modest 0.4 MMBF, or 2%, from Q1 2013 to Q2 2013 which reflects the prior quarter's decision to pull volume forward into Q1 2013 to take advantage of strong pricing, thus moderating the more typical seasonal pattern of increased harvest volume in the second quarter when weather improves. Douglas-fir harvest volume, as a percent of overall harvest, decreased from 69% in Q1 2013 to 58% in Q2 2013, while whitewood harvest volume increased from 13% in Q1 2013 to 23% in Q2 2013. This shift in mix from Douglas-fir to whitewood is due to strong demand from the China export market for whitewood, seasonally better access to high elevation stands where whitewood is more prevalent, and an increase in the Funds' portion of the Combined harvest volume from 35% in Q1 2013 to 53% in Q2 2013. The Funds' tree farms have a heavier mix of whitewood relative to the Partnership's tree farms.

Comparing Q2 2013 to Q2 2012. Harvest volume decreased by 3.3 MMBF, or 11%, from Q2 2012 to the comparable period in 2013. The decrease reflects decisions in 2012 to delay harvest activity from the first quarter to the second quarter due to lukewarm early-2012 demand from the China export log market. These Q1 2012 influences led to increased Q2 2012 harvest activities relative to Q2 2013. By contrast, in 2013 we pulled volume forward into the first quarter to take advantage of strong pricing. The mix of volume coming from the Partnership's and Funds' tree farms was 62% and 38%, respectively, in Q2 2012, compared with 47% and 53%, respectively, in Q2 2013. This shift in tree farm mix contributed to an overall decline in the relative percentage of Douglas-fir harvest volume from 64% in Q2 2012 to 58% in Q2 2013, and a commensurate increase in whitewood harvest volume from 19% in Q2 2012 to 23% in Q2 2013. There was a slight increase in the percentage of pulpwood volumes from 12% in Q2 2012 to 15% in Q2 2013 due primarily to the mix of the stands harvested in Q2 2013.

We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned timber deed sales, for the six months ended June 30, 2013, and June 30, 2012:

            Volume (in MMBF)                      Six Months Ended
            Sawlogs                 Jun-13      % Total       Jun-12      % Total
                     Douglas-fir      34.0            64 %      30.4            68 %
                     Whitewood         9.6            19 %       6.7            15 %
                     Cedar             0.8             1 %       0.4             1 %
                     Hardwood          1.4             4 %       1.5             3 %
            Pulpwood
                     All Species       7.5            12 %       5.7            13 %
            Total                     53.3           100 %      44.7           100 %

Comparing YTD 2013 to YTD 2012. Harvest volume increased 8.6 MMBF, or 19%, in the first six months of 2013 versus the corresponding period in 2012. The increase in volume is in response to a stronger domestic market that was cutting lumber for the improving U.S. housing market, as well as improved demand and pricing for logs from Asian export markets. The slight shift in mix from Douglas-fir in 2012 to whitewood in 2013 is attributable to the decline in relative harvest volume off the Partnership's timberland from 68% in 2012 to 56% in 2013 and commensurate increase in relative harvest volume off the Funds' timberland from 32% in 2012 to 44% in 2013.


Log Prices

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