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POPE > SEC Filings for POPE > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for POPE RESOURCES LTD PARTNERSHIP

Form 10-Q for POPE RESOURCES LTD PARTNERSHIP


6-May-2014

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" within the meaning of applicable securities laws, which describe our goals, objectives and anticipated performance. These statements can be identified by words such as "anticipate," "believe," "expect," "intend" and similar expressions. 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; government regulation that affects our ability to access our timberlands and harvest logs from those lands; factors that affect the timing and amounts realized from the sales, if any, of our real estate holdings; the implications of significant indirect sales to overseas customers, including 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; the impacts of climate change and natural disasters on our timberlands and on surrounding areas; and the potential impacts of fluctuations in foreign currency rates as they affect demand for our products. 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 unless required by law, we do not 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 approximately $302 million based on appraisals as of December 31, 2013. Our 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $32 million at time of acquisition, 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 potential future 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 more cost-effectively than could be maintained for the Partnership's timberlands alone. We believe our co-investment strategy also enhances 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. With this capital, we have acquired timberland in northern California and southwest Washington. As of March 31, 2014, $108 million of undrawn capital commitment remains, including a commitment to Fund III by the Partnership of $5 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 under the caption "Net (income) loss attributable to non-controlling interests-ORM Timber Funds" to arrive at comprehensive income attributable to unitholders of the Partnership.

The challenge for our Real Estate segment centers around how and when to "harvest" parcels of our 2,900-acre portfolio in western Washington to 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.

First quarter highlights

Harvest volume was 30 million board feet (MMBF) in Q1 2014 compared to 26 MMBF in Q1 2013, a 13% increase.

Average realized log price per thousand board feet (MBF) was $701 in Q1 2014 compared to $610 per MBF in Q1 2013, a 15% increase.

As a percentage of total harvest, volume sold to export markets in Q1 2014 increased to 42% from 26% in Q1 2013, while the mix of volume sold to domestic markets decreased to 43% in Q1 2014 from 58% in Q1 2013.

The percentage of total harvest comprised of higher-value Douglas-fir sawlogs dropped to 61% in Q1 2014 from 69% in Q1 2013, with a corresponding increase in the whitewood component to 22% in Q1 2014 from 13% in Q1 2013. This shift in species mix is consistent with the higher weighting of total harvest volume coming from Fund properties in the first quarter, which increased to 53% in 2014 from 35% in 2013.

The following significant Real Estate land sales occurred during Q1 2014, while there were no such sales in Q1 2013:

o 107 single-family residential lots to three separate builders in our Gig Harbor project representing total revenue of $10.7 million, and

o 535-acre conservation land sale for $4.6 million.


Outlook

We expect our harvest volume for the full year 2014 to be between 95 and 100 MMBF, with the final total depending on log market conditions for the balance of the year. The projected split of this total annual harvest is approximately 47% from Partnership tree farms and 53% from Fund tree farms. Log prices thus far in 2014 compare quite favorably to those realized in recent years, but we expect the log price environment to be softer in the second quarter based on export market conditions observed in April. If export log market conditions soften or the domestic housing recovery slows down, this could translate to weaker results over the balance of the year.

In the first quarter of 2014, we closed on the sale of a number of Real Estate properties and although we expect to close on several more during 2014, the timing and success of those transactions remains uncertain.

                             RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that
impacted our net income for the respective quarters ended March 31, 2014 and
2013. The explanatory text that follows the table describes in detail certain of
these changes by business segment.

                                                                         Quarter Ended
(in thousands)                                                             March 31,
Net income (loss) attributable to Pope Resources' unitholders:
2014 period                                                             $         12,241
2013 period                                                                        3,484
  Variance                                                              $          8,757
Detail of variance:
Fee Timber
Log volumes (A)                                                         $          2,077
Log price realizations (B)                                                         2,718
Production costs                                                                  (1,775 )
Depletion                                                                           (753 )
Other Fee Timber                                                                     640
Timberland Management & Consulting                                                   (98 )
Real Estate
Land sales                                                                         7,879
Other Real Estate                                                                    (69 )
General & administrative costs                                                      (129 )
Net interest expense                                                                (219 )
Other (taxes and noncontrolling interest)                                         (1,514 )
Total variances                                                         $          8,757

(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 110,000 acres of timberland owned by the Partnership and 91,000 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. Fee Timber revenue, to a lesser extent, is also derived from the ground leases for cellular communication towers and royalties from gravel mines and quarries. 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 domestic mills or log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. During the second, third and fourth quarters of 2013, we sold volume under the terms of a small 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 stated otherwise. Harvest volumes are generally expressed in million board feet (MMBF) increments while harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF). Fee Timber cost of sales, which consist predominantly of harvest, haul, and depletion costs, vary with harvest volume and the resulting revenue. Revenue and cost data related to harvest activities on timberland owned by the Funds are included in 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. These comparisons provide an opportunity to note harvest and log price trends that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended March 31, 2014, December 31, 2013, and March 31, 2013, 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   $      10.2     $        0.9     $      11.1     $       6.1            13.9
       Funds' tree farms          10.7              0.3            11.0             3.1            15.9
  Total Fee Timber March
                31, 2014   $      20.9     $        1.2     $      22.1     $       9.2            29.9

  Partnership tree farms   $       7.2     $        0.5     $       7.7     $       3.3            11.1
       Funds' tree farms           4.1              0.3             4.5            (0.2 )           6.8
        Total Fee Timber
       December 31, 2013   $      11.3     $        0.8     $      12.2     $       3.1            17.9

  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

Comparing Q1 2014 to Q4 2013. Fee Timber revenue in Q1 2014 increased $9.9 million, or 81%, from $12.2 million in Q4 2013 to $22.1 million in Q1 2014. This increase was primarily attributable to a 12.0 MMBF, or 67%, increase in harvest volume combined with a $67/MBF, or 11%, increase in average realized log price. The increase in harvest volume is attributable to strong demand in both the domestic and export log markets, combined with our typical front-loading of planned annual harvest volume into the first quarter of the year to take advantage of our abundance of low-elevation timberlands that allow for winter logging. The increase in mineral, cell tower and other revenue is due primarily to revenue from commercial thinning which had no counterpart in Q1 2013. Commercial thinning consists of the selective thinning of pre-merchantable timber stands for which we can sell the timber while at the same time improve the growth characteristics of the stand.


Operating income increased $6.1 million, or nearly tripled, from $3.1 million in Q4 2013 to $9.2 million in Q1 2014 primarily as a result of the aforementioned 67% increase in harvest volume and 11% increase in average realized log prices. Cost of sales increased 66% due to the increase in harvest volume. Further lifting cost of sales was the increase in the Funds' share of harvest volume, which grew from 38% in Q4 2013 to 53% in Q1 2014, leading to an increase in depletion expense on a per MBF basis. The Funds' tree farms have a higher basis and correspondingly higher depletion rate as they were acquired more recently than the Partnership's tree farms.

Fee Timber revenue from the Funds increased $6.5 million, or 144%, from $4.5 million in Q4 2013 to $11.0 million in Q1 2014 due to a 9.1 MMBF, or 134%, increase in harvest volume and a $70/MBF, or 12%, increase in realized log prices. These same factors combined to convert an operating loss of $227,000 in Q4 2013 to operating income of $3.1 million in Q1 2014.

Comparing Q1 2014 to Q1 2013. Fee Timber revenue increased $5.7 million, or 35%, from $16.4 million in Q1 2013 to $22.1 million in Q1 2014. The increase was the result of a 3.4 MMBF, or 13%, increase in harvest volume, combined with a $91/MBF, or 15%, increase in realized average log price. The increases in both harvest volume and realized log price are attributable to stronger demand in both the export and domestic log markets compared to a year ago. Operating income increased $2.9 million, or 46%, from $6.3 million in Q1 2013 to $9.2 million in Q1 2014.

Fee Timber revenue from the Funds increased $5.7 million, or 107%, from $5.3 million in Q1 2013 to $11.0 million in Q1 2014 on a 6.5 MMBF, or 69%, increase in harvest volume and a $148/MBF, or 28%, increase in average realized log price. Operating income increased $2.3 million, from $791,000 in Q1 2013 to $3.1 million in Q1 2014.

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 March
31, 2014, December 31, 2013, and March 31, 2013:

    Volume (in MMBF)                                    Quarter Ended
    Sawlogs                Mar-14      % Total       Dec-13      % Total       Mar-13      % Total
            Douglas-fir      18.0            61 %      10.5            59 %      18.3            69 %
            Whitewood         6.7            22 %       3.3            18 %       3.6            13 %
            Cedar             0.7             2 %       0.4             2 %       0.4             2 %
            Hardwood          1.0             3 %       1.1             6 %       0.6             2 %
    Pulpwood
            All Species       3.5            12 %       2.6            15 %       3.6            14 %
    Total                    29.9           100 %      17.9           100 %      26.5           100 %

Comparing Q1 2014 to Q4 2013. Harvest volume increased 12.0 MMBF, or 67%, from
17.9 MMBF in Q4 2013 to 29.9 MMBF in Q1 2014. The increase reflects seasonal factors that typically lead us to front-load volume into the first quarter of the year and to take advantage of very attractive log pricing in both the domestic and export markets. This was made possible by our abundance of low-elevation timberlands that allow for winter logging. Whitewood harvest volume, as a percent of overall harvest, increased from 18% in Q4 2013 to 22% in Q1 2014 due to the higher mix of Fund harvest in Q1 2014 (53%) versus Q4 2013 (38%). The Funds' tree farms have a heavier mix of whitewood relative to the Partnership's tree farms.

Comparing Q1 2014 to Q1 2013. Harvest volume increased 3.4 MMBF, or 13%, from
26.5 MMBF in Q4 2013 to 29.9 MMBF in Q1 2014. The increase is attributable to a slightly more aggressive front-loading of harvest volume in 2014 versus 2013, brought on by log prices that were on average 15% higher in Q1 2014 versus Q1 2013. Douglas-fir harvest volume, as a percent of overall harvest, decreased from 69% in Q1 2013 to 61% in Q1 2014, while conversely, the component of whitewood harvest volume increased from 13% in Q1 2013 to 22% in Q1 2014. This shift in mix was due to a higher proportion of harvest volume coming from the Funds in Q1 2014 (53%) versus Q1 2013 (35%).


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. Export customers consist of log brokers who historically have sold the logs primarily to Japan, and to a lesser degree, Korea. Beginning in late 2009 these log brokers began acquiring logs for export to China which has resulted in an increase in the proportion of our logs being sold into the export market and enhanced the diversification of our log markets.

We realized the following log prices by species for the quarters ended March 31, 2014, December 31, 2013, and March 31, 2013:

                                                    Quarter Ended
                                            Mar-14      Dec-13      Mar-13
                 Average price realizations (per MBF):
                 Sawlogs
                           Douglas-fir     $   765     $   711     $   670
                           Whitewood           695         648         587
                           Cedar             1,406       1,203       1,125
                           Hardwood            599         563         519
                 Pulpwood  All Species         269         247         286
                 Overall                       701         634         610

The following table compares the dollar and percentage change in log prices from Q4 2013 and Q1 2013 to Q1 2014:

                                       Change to March 2014 from Quarter Ended
                                        Dec-13                        Mar-13
                                  $/MBF            %            $/MBF            %
         Sawlogs  Douglas-fir   $      54             8 %     $      95            14 %
                  Whitewood            47             7 %           108            18 %
                  Cedar               203            17 %           281            25 %
                  Hardwood             36             6 %            80            15 %
         Pulpwood All Species          22             9 %           (17 )          -6 %
         Overall                       67            11 %            91            15 %

Overall realized log prices in Q1 2014 were $67/MBF, or 11%, higher than Q4 2013 and $91/MBF, or 15%, higher than Q1 2013. The overall average is heavily influenced by price movements for Douglas-fir and whitewood where we saw significant increases in Q1 2014 due to greater demand by both domestic and export markets compared to prior quarters.

Douglas-fir: Douglas-fir is noted for its structural characteristics that make it generally preferable to other softwoods for construction grade lumber and plywood. Demand and price for Douglas-fir sawlogs have historically been driven largely by the level of new home construction in the United States. Since late 2009, however, increased demand from China has also been a driver of demand and price for Douglas-fir sawlogs. Increased demand in both the domestic and export markets during Q1 2014 served to lift realized Douglas-fir log prices $54/MBF, or 8%, versus Q4 2013, and $95/MBF, or 14%, versus Q1 2013.


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. Historically, there has been a modest export market for whitewood logs, with most of this volume going to Korea. Beginning in late 2009 this changed as the China log export market demonstrated an appetite for softwood logs with little apparent express preference as to species. Increased demand for softwood in both the domestic and export markets during Q1 2014 served to lift realized whitewood log prices $47/MBF, or 7%, versus Q4 2013, and $108/MBF, or 18%, versus Q1 2013.

Cedar: Cedar is a minor component in most timber stands in our region and is used generally to produce products 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 tend to be seasonal, with manufacturers generally buying volume early in the year to prepare for spring sales associated with repair and remodel projects. As such, average realized log prices for cedar increased $203/MBF, or 17%, from Q4 2013 to Q1 2014. Compared to Q1 2013, average realized cedar prices were $281/MBF, or 25%, higher in Q1 2014 due to reduced supply of cedar logs in the market.

Hardwood: Hardwood is an ancillary product of Pacific Northwest log harvest volume, and at times this product's pricing will vary inversely to harvest volume. Hardwood can refer to many different species, but on our tree farms primarily consists of red alder. The local mills that process red alder sawlogs are using the resource to manufacture lumber for use in furniture and cabinet construction. Given the relatively small volume of hardwood logs that we produce, the quality and species attributes of the volume can have an outsized impact on our price realizations, although of course that same factor means that these variations have relatively little impact on our Fee Timber revenues. Hardwood prices increased $36/MBF, or 6%, from Q4 2013 to Q1 2014, and increased $80/MBF, or 15%, from Q1 2013 to Q1 2014.

Pulpwood: Pulpwood is a lower quality conifer or hardwood log unsuitable for the manufacture of lumber, but useful to produce wood chips for the pulp and paper industry. During the recession, many timberland owners deferred harvest for several years and domestic mills severely curtailed operations. Pulp mills rely on woodchips either from sawmill residuals or chipped from whole logs (pulpwood). Both of these sources were in short supply during the recession. With recent increased production at local sawmills, and commensurate increase in residual woodchips, pulp mills have become less dependent on whole logs which has led to generally declining prices for pulpwood. Notwithstanding this general trend, pulpwood prices increased $22/MBF, or 9%, from Q4 2013 to Q1 2014. Pulpwood prices decreased $17/MBF, or 6%, from Q1 2013 to Q1 2014.

Customers

The ultimate decision of whether to sell our logs into the export or domestic market is based on the net proceeds we receive after taking into account both the delivered log prices paid by a prospective customer and the cost to deliver logs to that customer. As such, realized log prices are influenced by marketing decisions predicated on net stumpage values rather than focusing exclusively on the delivered log price. Our reported log price realizations will reflect our properties' proximity to customers as well as the broader log market.


The table below categorizes logs sold by customer type for the quarters ended March 31, 2014, December 31, 2013, and March 31, 2013:

                             Q1 2014                         Q4 2013                         Q1 2013
                        Volume                          Volume                          Volume
. . .
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