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POPE > SEC Filings for POPE > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for POPE RESOURCES LTD PARTNERSHIP

Form 10-Q for POPE RESOURCES LTD PARTNERSHIP


5-Aug-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; the effects of competition, especially from larger, better-financed competitors; 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, 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. We also believe 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.

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.

Second quarter highlights

Harvest volume was 26 million board feet (MMBF) in Q2 2014 compared to 27 MMBF in Q2 2013, a 3% decrease. Harvest volume for the first six months of 2014 was 56 MMBF compared to 53 MMBF for the first half of 2013, a 5% increase.

Average realized log price per thousand board feet (MBF) was $630 in Q2 2014 compared to $620 per MBF in Q2 2013, a 2% increase. For the first six months of 2014, the average realized log price per MBF was $668 compared to $615 per MBF for the first half of 2013, a 9% increase.

Fund properties contributed 51% of Q2 2014 harvest volume, compared to 53% in Q2 2013. For the first half of 2014, Fund properties contributed 52% of harvest volume, compared to 44% for the first half of 2013.

As a percentage of total harvest, volume sold to export markets in Q2 2014 was 33%, unchanged from Q2 2013, while harvest volume sold to domestic markets increased slightly to 53% in Q2 2014 from 52% in Q2 2013. For the first half of the year, the relative percentages of harvest volume sold to export and domestic markets in 2014 were 38% and 49%, respectively, compared to 30% and 56% in 2013.

The percentage of total harvest comprised of Douglas-fir sawlogs dropped to 42% in Q2 2014 from 58% in Q2 2013, with a corresponding increase in the whitewood component to 37% in Q2 2014 from 23% in Q2 2013. Similarly, for the first half of 2014, the relative mix of Douglas-fir and whitewood was 51% and 29%, respectively, compared to 64% and 18% for the first half of 2013.


We closed on 8 single-family residential lots in Gig Harbor for a total sales price of $720,000 during Q2 2014, while in 2013's Q2 we closed on a 2,330-acre conservation land sale for a sales price of $5.7 million.

Outlook

We expect our harvest volume for the full year 2014 to be between 90 and 94 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 52% from Partnership tree farms and 48% from Fund tree farms. Log prices thus far in 2014 compare favorably to those realized in recent years. However, prices softened in the second quarter, primarily resulting from declining demand from export markets. If export log market conditions remain at current levels, soften further, or the domestic housing recovery slows down, this will translate to weaker results for the second half of the year.

In the first half 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, some may slide into early 2015 due to permitting delays.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income for the respective quarters and six months ended June 30, 2014 and 2013. The explanatory text that follows the table describes in detail certain of these changes by business segment.

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. This revenue source 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, the revenue from which is included in the Other Revenue column on the below tables. 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. Fee Timber revenue, is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which are included in Other Revenue below.

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 depict harvest volume and log price trends that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended June 30, 2014, March 31, 2014, and June 30, 2013 were as follows:


                                                                 Total Fee                       Harvest
         (in millions)             Log Sale        Other          Timber         Operating        Volume
         Quarter ended             Revenue        Revenue         Revenue         Income          (MMBF)
         Partnership tree farms   $      7.9     $      0.8     $       8.7     $       3.0           12.7
              Funds' tree farms          8.5            0.3             8.8             2.0           13.4
 Total Fee Timber June 30, 2014   $     16.4     $      1.1     $      17.5     $       5.0           26.1

         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           29.8

         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

Comparing Q2 2014 to Q1 2014. Fee Timber revenue in Q2 2014 decreased $4.6 million, or 21%, from $22.1 million in Q1 2014 to $17.5 million in Q2 2014. Weaker log prices in both the domestic and export log markets and a second quarter slowdown from our first quarter front-loading of planned annual harvest volume combined to result in a 13% reduction in harvest volume along with a 10% decrease in average realized log prices. Log inventories expanded at Asian ports earlier in the year as demand for logs failed to keep pace with log imports, which in turn pulled down domestic log prices as demand from the U.S. housing market was insufficient to offset the decline in demand from export markets. The largest component of Other Revenue in both quarters is from commercial thinning operations. Commercial thinning consists of the selective cutting of timber stands not yet of optimal harvest age. However, they do have some commercial value, thus allowing us to earn revenue while at the same time improving the growth characteristics of the stand.

Comparing Q2 2014 to Q2 2013. Fee Timber revenue was up by $383,000, or 3%, from $17.1 million in Q2 2013 to $17.5 million in Q2 2014. The increase resulted from 2% higher average realized log prices, offset partially by a 3% reduction in harvest volume. Stronger overall demand pushed log prices up in the domestic market, while the decline in harvest volume is attributable to a more concentrated front-loading effort in Q1 2014 versus Q1 2013 to take advantage of strong log prices in the first quarter of 2014.

Revenue and operating income for the Fee Timber segment for the six months ended June 30, 2014 and 2013 were as follows:

                                                                 Total Fee                       Harvest
         (in millions)             Log Sale        Other          Timber         Operating        Volume
       Six Months Ended            Revenue        Revenue         Revenue         Income          (MMBF)
         Partnership tree farms   $     18.1     $      1.7     $      19.9     $       9.2           26.7
              Funds' tree farms         19.3            0.5            19.7             5.1           29.3
Total Fee Timber March 31, 2014   $     37.4     $      2.2     $      39.6     $      14.3           56.0

         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

Comparing YTD 2014 to YTD 2013. Fee Timber revenue for the first half of 2014 exceeded the first six months of 2013 by $6.0 million, or 18%, moving from $33.6 million in 2013 to $39.6 million in 2014. The improvement was due to a 5% higher harvest volume and 9% higher average realized log prices. Both the increase in harvest volume and in average log prices resulted from stronger demand from both domestic and export markets compared to a year ago. The increase in Other Revenue is almost entirely attributable to $1.3 million of revenue from commercial thinning operations in the first half of 2014 which had no counterpart in the first half of 2013.


Log Volume

We harvested the following log volumes by species from the Combined tree farms,
exclusive of deed sales, for the quarters ended June 30, 2014, March 31, 2014,
and June 30, 2013:

    Volume (in MMBF)                                    Quarter Ended
    Sawlogs               Jun-14       % Total      Mar-14       % Total      Jun-13       % Total
            Douglas-fir      10.9            42 %      18.0            61 %      15.7            58 %
            Whitewood         9.6            37 %       6.7            22 %       6.1            23 %
            Pine              0.5             2 %         -             0 %         -             0 %
            Cedar             0.8             3 %       0.7             2 %       0.4             1 %
            Hardwood          0.5             2 %       1.0             3 %       0.8             3 %
    Pulpwood
            All Species       3.8            14 %       3.5            12 %       3.9            15 %
    Total                    26.1           100 %      29.9           100 %      26.9           100 %

Comparing Q2 2014 to Q1 2014. Harvest volume decreased 3.8 MMBF, or 13%, from
29.9 MMBF in Q1 2014 to 26.1 MMBF in Q2 2014. The decrease in the second quarter reflects the very attractive log pricing early in the year which led us to front-load harvest volume in the first quarter. Whitewood harvest volume, as a percent of overall harvest, increased from 22% in Q1 2014 to 37% in Q1 2014, while Douglas-fir harvest volume registered a corresponding decrease from 61% in Q1 2014 to 42% in Q2 2014. This shift in mix from Douglas-fir to whitewood is largely attributable to an increase in whitewood harvest volume coming from the Partnership's Columbia tree farm during Q2 2014. The small amount of Pine produced during Q2 2014 was harvested from the Funds' northern California tree farm.

Comparing Q2 2014 to Q2 2013. Harvest volume decreased 0.8 MMBF, or 3%, from
26.9 MMBF in Q2 2013 to 26.1 MMBF in Q2 2014. The decrease is attributable to the harvest front-loading effort in Q1 2014 to take advantage of strong pricing. Douglas-fir harvest volume, as a percent of overall harvest, decreased from 58% in Q2 2013 to 42% in Q2 2014. Conversely, the component of whitewood harvest volume increased from 23% in Q2 2013 to 37% in Q2 2014. This shift in mix from Douglas-fir to whitewood is attributable to stronger whitewood prices in Q2 2014 versus Q2 2013 than for Douglas-fir prices in Q2 2014 versus 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, 2014 and 2013:


             Volume (in MMBF)                     Six Months Ended
             Sawlogs               Jun-14       % Total      Jun-13       % Total
                     Douglas-fir      28.9            51 %      34.0            64 %
                     Whitewood        16.3            29 %       9.6            19 %
                     Pine              0.5             1 %         -             0 %
                     Cedar             1.5             3 %       0.8             1 %
                     Hardwood          1.5             3 %       1.4             4 %
             Pulpwood                                                            0 %
                     All Species       7.3            13 %       7.5            12 %
             Total                    56.0           100 %      53.3           100 %

Comparing YTD 2014 to YTD 2013. Harvest volume increased 2.7 MMBF, or 5%, from
53.3 MMBF in the first six months of 2013 to 56.0 MMBF in the corresponding period of 2014. The increase in harvest volume is attributable to stronger demand in both the domestic and export markets compared to a year ago. Douglas-fir harvest volume, as a percentage of overall harvest, decreased from 64% in the 2013 to 51% in 2014. Conversely, the component of whitewood harvest volume increased from 18% in 2013 to 29% in 2014. This shift in mix from Douglas-fir to whitewood is attributable to the increase in share of harvest volume coming from Fund properties from 44% in 2013 to 52% in 2014. The Fund's properties have a heavier component of whitewood than the Partnership properties.

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 sell the logs primarily
to Japan, China and, to a lesser degree, Korea.

We realized the following log prices by species for the quarters ended June 30,
2014, March 31, 2014, and June 30, 2013:

                                                  Quarter Ended
                                         Jun-14      Mar-14       Jun-13
                  Average price
                  Sawlogs
                           Douglas-fir   $   694     $   765     $   697
                           Whitewood         653         695         620
                           Pine              525           -           -
                           Cedar           1,270       1,406       1,253
                           Hardwood          597         599         521
                  Pulpwood All Species       281         269         265
                  Overall                    630         701         620


The following table compares the dollar and percentage change in log prices from Q1 2014 and Q2 2013 to Q2 2014:

                                         Change to Q2 2014 from Quarter Ended
                                           Mar-14                       Jun-13
                                    $/MBF             %            $/MBF         %
           Sawlogs  Douglas-fir   $      (71 )           -9 %     $     (3 )       0 %
                    Whitewood            (42 )           -6 %           33         5 %
                    Pine                 n/a            n/a            n/a       n/a
                    Cedar               (136 )          -10 %           17         1 %
                    Hardwood              (2 )            0 %           76        15 %
           Pulpwood All Species           12              4 %           16         6 %
           Overall                       (71 )          -10 %           10         2 %

Overall realized log prices in Q2 2014 were 10% lower than Q1 2014 and 2% higher than Q2 2013. Our overall average is influenced heavily by price movements for Douglas-fir and whitewood. From Q1 2014 to Q2 2014, export log prices for these two species declined following a buildup of log inventories at Asian ports earlier in the year, which in turn also pulled down domestic log prices as demand from the U.S. housing market was not strong enough to compensate from the decline in demand from the export market. While log prices weakened from Q1 2014 to Q2 2014, log prices have generally improved in 2014 over 2013. From Q2 2013 to Q2 2014, the slight decline in Douglas-fir prices was due to a lower quality mix of saw logs sold relative to other less valuable products from this species in the current year and whitewood log prices were up due to stronger overall demand in both the domestic and export markets.

The following table compares realized log prices by species for the first six months of 2014 and 2013, as well as the dollar and percentage change in log prices between the two periods:

                                                  Six Months Ended
                               Jun-14                                          Jun-13
                                               ? from Jun-14 to Jun-13
                                              $/MBF                 %
        Sawlogs  Douglas-fir   $   738     $        56                   8 %   $   682
                 Whitewood         670              62                  10 %       608
                 Pine              526             526                 n/a           -
                 Cedar           1,337             148                  12 %     1,189
                 Hardwood          598              78                  15 %       520
        Pulpwood All Species       275               0                   0 %       275
        Overall                    668              53                   9 %       615

Overall realized log prices increased 9%, from $615/MBF in the first six months of 2013 to $668/MBF in the corresponding period of 2014. Again, the overall average is heavily influenced by price movements for Douglas-fir and whitewood, both of which improved in the current year due to stronger demand in the domestic and export markets.

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. Log supply at Asian ports expanded earlier in the year when demand for logs failed to keep pace with the log volume received into Asian ports which served to lower realized Douglas-fir prices $71/MBF, or 9%, in Q2 2014 versus Q1 2014. When comparing the current quarter to the comparable period in the prior year, notwithstanding increased demand in both the domestic and export markets in 2014, a less valuable mix of saw logs relative to other less valuable products in this species served to slightly lower realized Douglas-fir log prices $3/MBF versus Q2 2013. The realized price increased $56/MBF, or 8%, from the first six months of 2013 as compared to the first six months of 2014 due to increased demand from both the export and domestic markets in 2014 over 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. Increased supply at Asian ports due to heavy volumes exported earlier in the year served to lower realized whitewood prices $42/MBF, or 6%, in Q2 2014 versus Q1 2014. Meanwhile, an overall increase in demand in 2014 compared to 2013 served to lift realized whitewood log prices $33/MBF, or 5%, in Q2 2014 versus Q2 2013. Similarly, the realized price increased $62/MBF, or 10%, from the first six months of 2013 to the first six months of 2014.

Pine: We have added Pine to our species mix with the acquisition of the northern California tree farm by one of our funds. Pine is a species produced primarily on the Funds' northern California tree farm. It is used primarily by plywood manufacturers, as well as for the production of construction grade lumber and . . .

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