ITEM 2. 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 expectations, 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. 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 three private equity funds (“Fund II”, “Fund III” and “Fund IV”, collectively, the “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 and manufacturing logs for sale to domestic wood products manufacturers and log export brokers. The second most significant business segment in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily include securing permits and entitlements, and in some cases, installing infrastructure for raw land development and then realizing that land’s value by selling larger parcels to developers who, in turn, seek to take the land further up the value chain by either selling homes to retail buyers or lots to developers of commercial property. Since these projects often 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 which preclude future development, but allow continued forestry operations. Our third business segment, which we refer to as Timberland Investment 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 primarily on our private equity timber fund business model. However, we acquire smaller timberland parcels from time to time to add on to the Partnership’s existing tree farms. In addition, during periods when the Funds’ committed capital is fully invested, we may look to acquire larger timberland properties for the Partnership. Our three active timber funds have assets under management totaling approximately $357 million as of
June 30, 2017
based on the most recent appraisals. Through our 20% co-investment in Fund II, our 5% co-investment in Fund III and our 15% co-investment in Fund IV, we have deployed $26 million of Partnership capital. Fund IV, launched in December 2016, has not yet deployed any capital to acquire timberland properties. Our co-investment affords 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 on a more cost-effective basis than we could for the Partnership’s timberlands alone. We believe our co-investment strategy also enhances our credibility with existing and prospective Fund 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 subtracted from consolidated results in our Condensed Consolidated Statements of Comprehensive Income under the caption “Net and comprehensive (income) loss attributable to non-controlling interests-ORM Timber Funds” to arrive at ‘Net and comprehensive income (loss) attributable to unitholders”.
The strategy for our Real Estate segment centers around how and when to “harvest” or sell a parcel of land to realize its optimal value. In doing so, we seek to balance the long-term risks and costs of carrying and developing a property against the potential for income and cash flows upon sale. Land held for development by our Real Estate segment represents property in western Washington that has been deemed suitable for residential and commercial building sites. Land and timber held for sale represents those properties in the development portfolio that we expect to sell in the next year.
Second quarter highlights
|
|
•
|
Harvest volume was
23.3 million
board feet (MMBF) in
Q2
2017
compared to
20.9 MMBF
in
Q2
2016
, an
11%
increase. Harvest volume for the first
six months
of
2017
was
50.6 MMBF
compared to
36.6 MMBF
for the corresponding period of
2016
, a
38%
increase. These harvest volume figures do not include timber deed sales, sold by Fund III, of 2.1 MMBF and 2.4 MMBF for the quarter and six months ended June 30, 2017, respectively. The harvest volume and log price realization metrics cited below also exclude these timber deed sales, except as noted otherwise.
|
|
|
•
|
The average realized log price was
$616
per thousand board feet (MBF) in
Q2
2017
, a 9% increase compared to
$563
per MBF in
Q2
2016
. For the first
six months
of
2017
, the average realized log price was
$605
per MBF compared to
$575
per MBF for the corresponding period of
2016
, a
5%
increase.
|
|
|
•
|
As a percentage of total harvest, volume sold to domestic markets in
Q2
2017
decreased to
59%
from
66%
in
Q2
2016
, while the mix of volume sold to export markets increased to
21%
in
Q2
2017
from
15%
in
Q2
2016
. For the first
six months
of
2017
, the relative percentages of volume sold to domestic and export markets were
59%
and
22%
, respectively,
|
compared to
63%
and
17%
, respectively, in the corresponding period of
2016
. Hardwood and pulpwood log sales make up the balance of harvest volume.
|
|
•
|
In June 2017, we modified a credit facility to increase the Partnership’s borrowing capacity under that particular facility from $21.0 million to $31.0 million. We also worked with the lender to amend this facility’s structure. Between now and December 31, 2019, it will operate as a revolving line of credit and thereafter it will convert to a term loan with multiple tranches that have an ultimate maturity in July 2027.
|
|
|
•
|
During the quarter, the Partnership repurchased 744 units at an average price of $76.52 per unit under a unit repurchase plan, leaving $1.1 million remaining under the plan through June 2018.
|
Outlook
We expect our total 2017 harvest volume to be between 112 and 116 MMBF, including timber deed sales. In our Real Estate segment, we expect to close on the sale of up to 93 single-family lots from our Harbor Hill project, the majority of which we expect to occur in the fourth quarter, as well as a number of other potential land and conservation easement sales.
RESULTS OF OPERATIONS
The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) attributable to unitholders for the respective quarters and
six months ended
June 30, 2017
and
2016
. The explanatory text that follows the table describes in detail certain of these changes by business segment.
|
|
|
|
|
|
|
|
|
(in thousands)
|
Quarter Ended
June 30,
|
|
Six Months Ended
June 30,
|
Net income (loss) attributable to Pope Resources’ unitholders:
|
|
|
|
2017 period
|
$
|
158
|
|
|
$
|
3,528
|
|
2016 period
|
436
|
|
|
(599
|
)
|
Variance
|
$
|
(278
|
)
|
|
$
|
4,127
|
|
Detail of variance:
|
|
|
|
|
|
Fee Timber
|
|
|
|
|
|
Log volumes (A)
|
$
|
1,351
|
|
|
$
|
8,050
|
|
Log price realizations (B)
|
1,235
|
|
|
1,518
|
|
Gain on sale of timberland
|
—
|
|
|
12,277
|
|
Timber deed sales
|
638
|
|
|
710
|
|
Production costs
|
160
|
|
|
(1,990
|
)
|
Depletion
|
(1,700
|
)
|
|
(4,292
|
)
|
Other Fee Timber
|
(8
|
)
|
|
(513
|
)
|
Timberland Investment Management
|
(148
|
)
|
|
(448
|
)
|
Real Estate
|
|
|
|
|
|
Land sales
|
62
|
|
|
(23
|
)
|
Other Real Estate
|
(393
|
)
|
|
(489
|
)
|
General and administrative costs
|
(346
|
)
|
|
(443
|
)
|
Net interest expense
|
(370
|
)
|
|
(722
|
)
|
Income taxes
|
(3
|
)
|
|
(9
|
)
|
Noncontrolling interests
|
(756
|
)
|
|
(9,499
|
)
|
Total variances
|
$
|
(278
|
)
|
|
$
|
4,127
|
|
|
|
(A)
|
Volume variance calculated by multiplying the change in sales volume by the average log sales price for the comparison period.
|
|
|
(B)
|
Price variance calculated by multiplying the change in average realized price by current period sales volume.
|
Fee Timber
Fee Timber results include operations on 120,000 acres of timberland owned by the Partnership and 88,000 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. Revenue is driven primarily by the volume of timber harvested and the average log price realized on the sale of that timber. Our harvest volume is based typically on manufactured log sales to domestic mills and log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude 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 revenue is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which, along with timber deed sales, are included in other revenue below. Commercial thinning consists of the selective cutting of timber stands not yet of optimal harvest age. They do, however, have some commercial value, thus allowing us to earn revenue while at the same time improving the projected value at harvest of the remaining timber in the stand.
Revenue and operating income for the Fee Timber segment for the quarters ended
June 30, 2017
,
March 31, 2017
, and
June 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
Quarter ended
|
|
Log Sale
Revenue
|
|
Other
Revenue
|
|
Total Fee
Timber
Revenue
|
|
Gain on Sale of
Timberland
|
|
Operating
Income
|
|
Harvest
Volume
(MMBF)
|
|
Timber Deed Sale Volume (MMBF)
|
Partnership
|
|
$
|
7.7
|
|
|
$
|
0.5
|
|
|
$
|
8.2
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
12.5
|
|
|
—
|
|
Funds
|
|
6.6
|
|
|
0.6
|
|
|
7.2
|
|
|
—
|
|
|
1.2
|
|
|
10.8
|
|
|
2.1
|
|
Total June 2017
|
|
$
|
14.3
|
|
|
$
|
1.1
|
|
|
$
|
15.4
|
|
|
$
|
—
|
|
|
$
|
4.6
|
|
|
23.3
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
$
|
8.7
|
|
|
$
|
0.4
|
|
|
$
|
9.1
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
14.1
|
|
|
—
|
|
Funds
|
|
7.6
|
|
|
0.1
|
|
|
7.7
|
|
|
12.5
|
|
|
12.2
|
|
|
13.2
|
|
|
0.3
|
|
Total March 2017
|
|
$
|
16.3
|
|
|
$
|
0.5
|
|
|
$
|
16.8
|
|
|
$
|
12.5
|
|
|
$
|
16.6
|
|
|
27.3
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
$
|
7.7
|
|
|
$
|
0.5
|
|
|
$
|
8.2
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
13.7
|
|
|
—
|
|
Funds
|
|
4.1
|
|
|
—
|
|
|
4.1
|
|
|
—
|
|
|
0.2
|
|
|
7.2
|
|
|
—
|
|
Total June 2016
|
|
$
|
11.8
|
|
|
$
|
0.5
|
|
|
$
|
12.3
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
20.9
|
|
|
—
|
|
Operating Income
Comparing
Q2 2017
to
Q1 2017
.
Operating income decreased
$12.0 million
from
Q1 2017
. Our Q1 2017 results reflect a $12.5 million gain on the January 2017 sale of a 6,500-acre tree farm on the Oregon coast by Fund II. Excluding this gain, operating income increased by $580,000, or 14%, driven by a $569,000 rise in other revenue related to higher timber deed sales on Fund tree farms. Also contributing to the increase in operating income was a 3% rise in average realized log prices and a 20% decrease in cost of sales. Offsetting these positive factors were a 15% decrease in delivered log volume and a $159,000 increase in operating expenses.
Comparing
Q2 2017
to
Q2 2016
.
Operating income increased
$1.6 million
, or
53%
, from
Q2 2016
, driven by an 11% increase in delivered log volume and a 9% increase in average realized log prices. Contributing further to the increase in operating income were timber deed sales on 2.1 MMBF of Fund volume that had no counterpart in Q2 2016. The higher volume in 2017 resulted in a 22% rise in cost of sales.
Revenue
Comparing
Q2 2017
to
Q1 2017
. Log sale revenue in
Q2 2017
decreased
$2.0 million
, or
12%
, from
Q1 2017
due primarily to a
15%
decrease in harvest volume, offset partially by a
3%
increase in average realized log prices. We deferred harvest volume during Q2 2017 to later in the year on the expectation of stronger log markets. The $569,000 increase in other revenue is attributable to timber deed sales from Fund timberlands on volume of 2.1 MMBF during Q2 2017 compared to 0.3 MMBF in Q1 2017.
Comparing
Q2 2017
to
Q2 2016
. Log sale revenue in
Q2 2017
increased
$2.5 million
, or
21%
, from
Q2 2016
, primarily as a result of an
11%
increase in harvest volume and a 9% increase in average realized log prices. In 2016, we deferred a large portion of our annual harvest volume to the second half of the year, which suppressed volume during Q2 2016. Log markets were stronger in Q2 2017 relative to Q2 2016 due to increased demand in both domestic and export markets and a reduced supply of logs. On the demand side, we are benefiting from a second production line that came on-line at Sierra Pacific’s new mill in Shelton. On the supply side, reduced harvest volumes from our competitors and lower Canadian production are creating pricing tension in the market.
Revenue and operating income for the Fee Timber segment for the
six months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) Six Months Ended
|
|
Log Sale Revenue
|
|
Other Revenue
|
|
Total Fee Timber Revenue
|
|
Gain (loss) on Sale of Timberland
|
|
Operating Income
|
|
Harvest Volume (MMBF)
|
|
Timber Deed Sale Volume (MMBF)
|
Partnership
|
|
$
|
16.4
|
|
|
$
|
0.9
|
|
|
$
|
17.3
|
|
|
$
|
—
|
|
|
$
|
7.8
|
|
|
26.6
|
|
|
—
|
|
Funds
|
|
14.2
|
|
|
0.7
|
|
|
14.9
|
|
|
12.5
|
|
|
13.4
|
|
|
24.0
|
|
|
2.4
|
|
Total June 2017
|
|
$
|
30.6
|
|
|
$
|
1.6
|
|
|
$
|
32.2
|
|
|
$
|
12.5
|
|
|
$
|
21.2
|
|
|
50.6
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
$
|
11.6
|
|
|
$
|
0.9
|
|
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
20.0
|
|
|
—
|
|
Funds
|
|
9.4
|
|
|
0.1
|
|
|
9.5
|
|
|
0.2
|
|
|
1.1
|
|
|
16.6
|
|
|
—
|
|
Total June 2016
|
|
$
|
21.0
|
|
|
$
|
1.0
|
|
|
$
|
22.0
|
|
|
$
|
0.2
|
|
|
$
|
5.5
|
|
|
36.6
|
|
|
—
|
|
Operating Income
Comparing YTD
2017
to YTD
2016
. Operating income in the first
six months
of
2017
increased by
$15.7 million
, from the corresponding period of
2016
. Our 2017 results reflect a $12.5 million gain on the January 2017 sale by Fund II of a 6,500-acre tree farm on the Oregon coast, whereas our 2016 results include a $226,000 gain on the sale of 205 acres of Fund timberland. Excluding the gains from these timberland sales, Fee Timber operating income increased $3.5 million, or 64%, to $8.7 million in 2017 from $5.3 million in 2016. This improvement resulted from a 38% rise in delivered log volume, a 5% increase in average realized log prices, and a $640,000 increase in other revenue from 2.4 MMBF of timber deed sales in 2017 that had no counterpart in 2016. These factors were offset partially by a 49% increase in cost of sales (including timber deed sales), tied to the volume increase, and a $468,000 rise in operating expenses.
Revenue
Comparing YTD
2017
to YTD
2016
.
Log sale revenue in the first
six months
of
2017
increased
$9.6 million
, or
46%
, from the corresponding period of
2016
. The higher revenue was the result of a 38% increase in delivered log volume and a 5% increase in average realized log prices. In 2016, we deferred a large portion of our annual harvest volume to the second half of the year, which resulted in lower volume during the first half of the year. Conversely, we have planned to spread our 2017 harvest more evenly across the quarters. Other revenue increased $640,000 due to timber deed sales on 2.4 MMBF of volume that had no counterpart in 2016.
Log Volume
We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the quarters ended
June 30, 2017
,
March 31, 2017
, and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume (in MMBF)
|
Quarter Ended
|
|
|
Jun-17
|
% Total
|
|
Mar-17
|
% Total
|
|
|
Jun-16
|
% Total
|
Sawlogs
|
Douglas-fir
|
13.7
|
|
59
|
%
|
|
16.0
|
|
59
|
%
|
|
9.4
|
|
45
|
%
|
|
Whitewood
|
3.3
|
|
14
|
%
|
|
5.5
|
|
20
|
%
|
|
5.4
|
|
26
|
%
|
|
Pine
|
1.3
|
|
5
|
%
|
|
—
|
|
—
|
%
|
|
1.2
|
|
6
|
%
|
|
Cedar
|
0.4
|
|
2
|
%
|
|
0.7
|
|
2
|
%
|
|
1.0
|
|
5
|
%
|
|
Hardwood
|
0.9
|
|
4
|
%
|
|
0.5
|
|
2
|
%
|
|
0.7
|
|
3
|
%
|
Pulpwood
|
All Species
|
3.7
|
|
16
|
%
|
|
4.6
|
|
17
|
%
|
|
3.2
|
|
15
|
%
|
Total
|
|
23.3
|
|
100
|
%
|
|
27.3
|
|
100
|
%
|
|
20.9
|
|
100
|
%
|
Comparing
Q2 2017
to
Q1 2017
. Harvest volume decreased
4.0 MMBF
, or
15%
, in
Q2 2017
from
Q1 2017
. We deferred harvest volume during Q2 2017 to later in the year on the expectation of stronger log markets. The 6% decrease in whitewood’s relative share of harvest volume and corresponding 5% increase in pine’s share is the result of increased harvest operations in Q2 2017 on Fund III’s McCloud tree farm in northern California as melting snow allowed us to access that tree farm.
Comparing
Q2 2017
to
Q2 2016
. Harvest volume increased
2.4 MMBF
, or
11%
, in
Q2 2017
from
Q2 2016
. Both domestic and export log markets were stronger in Q2 2017 than in Q2 2016. Our species mix shifted from whitewood in Q2 2016 towards Douglas-fir in Q2 2017 due to improved Douglas-fir log markets relative to whitewood markets compared to a year ago.
We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the
six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Volume (in MMBF)
|
Six Months Ended
|
|
|
Jun-17
|
% Total
|
|
Jun-16
|
% Total
|
Sawlogs:
|
Douglas-fir
|
29.7
|
|
59
|
%
|
|
18.2
|
|
50
|
%
|
|
Whitewood
|
8.8
|
|
17
|
%
|
|
8.0
|
|
22
|
%
|
|
Pine
|
1.3
|
|
3
|
%
|
|
1.2
|
|
3
|
%
|
|
Cedar
|
1.1
|
|
2
|
%
|
|
1.9
|
|
5
|
%
|
|
Hardwood
|
1.4
|
|
3
|
%
|
|
1.3
|
|
4
|
%
|
Pulpwood:
|
All Species
|
8.3
|
|
16
|
%
|
|
6.0
|
|
16
|
%
|
Total
|
|
50.6
|
|
100
|
%
|
|
36.6
|
|
100
|
%
|
Comparing YTD
2017
to YTD
2016
. Harvest volume increased
14.0 MMBF
, or
38%
, in the first
six months
of
2017
compared to the corresponding period of
2016
. In the first half of 2016 we planned our harvest to defer significant volume until later in the year in anticipation of better log prices. In 2017, we have benefited from increased demand from both the domestic and export markets, as well as reduced supply from our competitors. In addition, we sold 2.4 MMBF of volume via timber deed sales from Fund properties in the current year whereas in 2016 there were no timber deed sales. Our species mix shifted from whitewood in 2016 towards Douglas-fir in 2017 due to improved Douglas-fir log markets relative to whitewood markets compared to a year ago.
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, 2017
,
March 31, 2017
, and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Jun-17
|
|
Mar-17
|
|
Jun-16
|
Average price realizations (per MBF):
|
|
|
Sawlogs:
|
Douglas-fir
|
$
|
694
|
|
|
$
|
663
|
|
|
$
|
596
|
|
|
Whitewood
|
602
|
|
|
548
|
|
|
550
|
|
|
Pine
|
486
|
|
|
—
|
|
|
500
|
|
|
Cedar
|
1,414
|
|
|
1,369
|
|
|
1,271
|
|
|
Hardwood
|
685
|
|
|
615
|
|
|
521
|
|
Pulpwood:
|
All Species
|
297
|
|
|
290
|
|
|
290
|
|
Overall
|
|
616
|
|
|
596
|
|
|
563
|
|
The following table compares the dollar and percentage change in log prices from each of
Q1 2017
and
Q2 2016
to
Q2 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change to Q2 2017 from Quarter Ended
|
|
|
Mar-17
|
|
Jun-16
|
|
|
$/MBF
|
|
%
|
|
$/MBF
|
|
%
|
Sawlogs:
|
Douglas-fir
|
$
|
31
|
|
|
5
|
%
|
|
$
|
98
|
|
|
16
|
%
|
|
Whitewood
|
54
|
|
|
10
|
%
|
|
52
|
|
|
9
|
%
|
|
Pine
|
486
|
|
|
NA
|
|
|
(14
|
)
|
|
(3
|
%)
|
|
Cedar
|
45
|
|
|
3
|
%
|
|
143
|
|
|
11
|
%
|
|
Hardwood
|
70
|
|
|
11
|
%
|
|
164
|
|
|
31
|
%
|
Pulpwood:
|
All Species
|
7
|
|
|
2
|
%
|
|
7
|
|
|
2
|
%
|
Overall
|
|
20
|
|
|
3
|
%
|
|
53
|
|
|
9
|
%
|
Overall realized log prices in
Q2 2017
were
3%
higher than
Q1 2017
. Our overall average realized log price is influenced heavily by price movements for our two most prevalent species, Douglas-fir and whitewood, and the relative mix of harvest volume of those two species. From Q1 2017 to Q2 2017, realized log prices for Douglas-fir and whitewood increased 5% and 10%, respectively. Prices for both species rose due to increased demand in the domestic and export markets as well as reduced supply of logs from competitors. The 11% rise in hardwood prices is the result of increased competition among our customers.
From
Q2 2016
to
Q2 2017
, average realized log prices increased 9%. The favorable change was attributable to increases in Douglas-fir and whitewood realized log prices of 16% and 9%, respectively. In addition, our average realized price benefited from a favorable shift in species mix away from whitewood in Q2 2016 and towards Douglas-fir in Q2 2017. Cedar prices improved 11% due to a reduction in the relative share of lower-value incense cedar from the Fund III’s McCloud tree farm. In Q2 2016, incense cedar comprised 20% of cedar volume, whereas in Q2 2017 it was only 9%. The 31% rise in hardwood prices is the result of increased competition among our customers.
The following table compares realized log prices by species for the first
six months
of
2017
and
2016
, as well as the dollar and percentage change in log prices between the two periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Jun-17
|
|
|
|
|
|
Jun-16
|
|
|
|
|
|
∆ from Jun -17 to Jun -16
|
|
|
|
|
|
|
|
$/MBF
|
|
%
|
|
|
Sawlogs:
|
Douglas-fir
|
$
|
677
|
|
|
$
|
69
|
|
|
11
|
%
|
|
$
|
608
|
|
|
Whitewood
|
568
|
|
|
38
|
|
|
7
|
%
|
|
530
|
|
|
Pine
|
501
|
|
|
1
|
|
|
—
|
%
|
|
500
|
|
|
Cedar
|
1,384
|
|
|
—
|
|
|
—
|
%
|
|
1,384
|
|
|
Hardwood
|
660
|
|
|
131
|
|
|
25
|
%
|
|
529
|
|
Pulpwood:
|
All species
|
293
|
|
|
(7
|
)
|
|
(2
|
%)
|
|
300
|
|
Overall
|
|
605
|
|
|
30
|
|
|
5
|
%
|
|
575
|
|
Overall realized log prices increased 5% in the first
six months
of 2017 compared to the corresponding period of 2016. The overall average is influenced heavily by Douglas-fir and whitewood prices, which were up 11% and 7%, respectively, on increased demand in the domestic and export markets and reduced log supply from our competitors. Hardwood prices rose 25% on increased competition among our customers.
Customers
The ultimate decision of whether to sell our logs to the domestic or export market is based on the net proceeds we receive after taking into account both the delivered log prices and the cost to deliver logs to the customer. As such, 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
June 30, 2017
,
March 31, 2017
, and
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2017
|
|
Q1 2017
|
|
Q2 2016
|
|
Volume
|
|
|
|
|
Volume
|
|
|
|
Volume
|
|
|
Destination
|
MMBF
|
%
|
|
Price
|
|
MMBF
|
%
|
|
Price
|
|
MMBF
|
%
|
|
Price
|
Domestic mills
|
13.7
|
|
59
|
%
|
|
$
|
657
|
|
|
16.1
|
|
59
|
%
|
|
$
|
653
|
|
|
13.8
|
|
66
|
%
|
|
$
|
618
|
|
Export brokers
|
5.0
|
|
21
|
%
|
|
731
|
|
|
6.1
|
|
22
|
%
|
|
670
|
|
|
3.2
|
|
15
|
%
|
|
607
|
|
Hardwood
|
0.9
|
|
4
|
%
|
|
685
|
|
|
0.5
|
|
2
|
%
|
|
615
|
|
|
0.7
|
|
4
|
%
|
|
521
|
|
Pulpwood
|
3.7
|
|
16
|
%
|
|
297
|
|
|
4.6
|
|
17
|
%
|
|
290
|
|
|
3.2
|
|
15
|
%
|
|
290
|
|
Total
|
23.3
|
|
100
|
%
|
|
616
|
|
|
27.3
|
|
100
|
%
|
|
596
|
|
|
20.9
|
|
100
|
%
|
|
563
|
|
Timber deed sale
|
2.1
|
|
|
|
|
301
|
|
|
0.3
|
|
|
|
|
229
|
|
|
—
|
|
|
|
|
—
|
|
Total
|
25.4
|
|
|
|
|
|
|
|
27.6
|
|
|
|
|
|
|
|
20.9
|
|
|
|
|
|
|
Comparing
Q2 2017
to
Q1 2017
. The relative volume sold to our various customer types and as pulpwood changed little during Q2 2017 compared to Q1 2017. Timber deed sales in both quarters came from one of Fund III’s tree farms.
Comparing
Q2 2017
to
Q2 2016
. Volume sold to the export market increased to 21% of Q2 2017 volume from 15% of Q2 2016 volume, while volume sold to the domestic market decreased to 59% of Q2 2017 volume from 66% of Q2 2016 volume. Average realized export prices were at a premium to prices from domestic mills during Q2 2017, whereas the relationship was the reverse during Q2 2016.
The table below categorizes logs sold by customer type for the
six-month periods
ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 2017
|
|
June 2016
|
|
Volume
|
|
|
|
Volume
|
|
|
Destination
|
MMBF
|
%
|
|
Price
|
|
MMBF
|
%
|
|
Price
|
Domestic mills
|
29.8
|
|
59
|
%
|
|
$
|
655
|
|
|
23.2
|
|
63
|
%
|
|
$
|
632
|
|
Export brokers
|
11.1
|
|
22
|
%
|
|
698
|
|
|
6.1
|
|
17
|
%
|
|
636
|
|
Hardwood
|
1.4
|
|
3
|
%
|
|
660
|
|
|
1.3
|
|
4
|
%
|
|
529
|
|
Pulpwood
|
8.3
|
|
16
|
%
|
|
293
|
|
|
6.0
|
|
16
|
%
|
|
300
|
|
Subtotal
|
50.6
|
|
100
|
%
|
|
605
|
|
|
36.6
|
|
100
|
%
|
|
575
|
|
Timber deed sale
|
2.4
|
|
|
|
|
292
|
|
|
—
|
|
|
|
—
|
|
Total
|
53.0
|
|
|
|
|
|
|
|
36.6
|
|
|
|
|
|
Comparing YTD
2017
to YTD
2016
. In the first
six months
of 2017, the relative amounts of volume sold to our domestic customers decreased to 59% from 63% during the corresponding period of 2016, while volume sold to export customers increased to 22% in the current year versus 17% last year. This shift in customer mix reflects the premium prices paid by export log markets compared to domestic log markets. Timber deed sales volume of 2.4 MMBF during the first six months of 2017 came from one of Fund III’s tree farms.
Cost of Sales
Fee Timber cost of sales, which consists predominantly of harvest, haul and depletion costs, vary with harvest volume.
Fee Timber cost of sales for the quarters ended
June 30, 2017
,
March 31, 2017
, and
June 30, 2016
, was as follows, with the first table expressing these costs in total dollars and the second table expressing those costs that are driven by volume on a per MBF basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) Quarter Ended
|
|
Harvest, Haul and Tax
|
|
Depletion
|
|
Other
|
|
Total Fee Timber Cost of Sales
|
|
Harvest Volume (MMBF)
|
|
Timber Deed Sale Volume (MMBF)
|
Partnership
|
|
$
|
2,428
|
|
|
$
|
908
|
|
|
$
|
—
|
|
|
$
|
3,336
|
|
|
12.5
|
|
|
—
|
|
Funds
|
|
2,535
|
|
|
2,655
|
|
|
—
|
|
|
5,190
|
|
|
10.8
|
|
|
2.1
|
|
Total June 2017
|
|
$
|
4,963
|
|
|
$
|
3,563
|
|
|
$
|
—
|
|
|
$
|
8,526
|
|
|
23.3
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
$
|
2,520
|
|
|
$
|
1,022
|
|
|
$
|
—
|
|
|
$
|
3,542
|
|
|
14.1
|
|
|
—
|
|
Funds
|
|
3,193
|
|
|
3,900
|
|
|
—
|
|
|
7,093
|
|
|
13.2
|
|
|
0.3
|
|
Total March 2017
|
|
$
|
5,713
|
|
|
$
|
4,922
|
|
|
$
|
—
|
|
|
$
|
10,635
|
|
|
27.3
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
$
|
3,188
|
|
|
$
|
586
|
|
|
$
|
15
|
|
|
$
|
3,789
|
|
|
13.7
|
|
|
—
|
|
Funds
|
|
1,921
|
|
|
1,277
|
|
|
—
|
|
|
3,198
|
|
|
7.2
|
|
|
—
|
|
Total June 2016
|
|
$
|
5,109
|
|
|
$
|
1,863
|
|
|
$
|
15
|
|
|
$
|
6,987
|
|
|
20.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts per MBF) Quarter Ended
|
|
Harvest, Haul and Tax *
|
|
Depletion *
|
Partnership
|
|
$
|
194
|
|
|
$
|
72
|
|
Funds
|
|
235
|
|
|
206
|
|
Total June 2017
|
|
$
|
213
|
|
|
$
|
140
|
|
|
|
|
|
|
Partnership
|
|
$
|
179
|
|
|
$
|
72
|
|
Funds
|
|
242
|
|
|
289
|
|
Total March 2017
|
|
$
|
209
|
|
|
$
|
178
|
|
|
|
|
|
|
Partnership
|
|
$
|
233
|
|
|
$
|
43
|
|
Funds
|
|
267
|
|
|
177
|
|
Total June 2016
|
|
$
|
244
|
|
|
$
|
89
|
|
|
|
*
|
Timber deed sale volumes are excluded in the per MBF computation for harvest, haul and tax costs but included in the per MBF computation for depletion.
|
Comparing
Q2 2017
to
Q1 2017
.
Cost of sales decreased
$2.1 million
, or
20%
, in
Q2 2017
from
Q1 2017
. The decrease was primarily attributable to a 21% decline in the Combined depletion rate. While the relative mix of harvest volume (including timber deed sales) coming from Partnership and Fund tree farms was fairly stable between the two comparable quarters, the mix of harvest volume from the Funds’ tree farms shifted to tree farms with lower depletion rates. The 8% decrease in harvest volume (including timber deed sales) also contributed to the reduction in cost of sales.
Comparing
Q2 2017
to
Q2 2016
.
Cost of sales increased
$1.5 million
, or
22%
, in
Q2 2017
from Q2
2016
, as a result of a 22% increase in harvest volume (including timber deed sales). Two other factors had large, but offsetting, impacts on cost of sales. First, harvest, haul, and tax costs decreased 13% on a per MBF basis in Q2 2017 from Q2 2016 as a result of more competitive bidding for our business by logging contractors, a higher proportion of volume from harvest units utilizing lower-cost, ground-based logging systems, and shorter haul distances. Second, the Combined depletion rate increased 57% in Q2 2017 from Q2 2016, which was the product of three separate factors:
|
|
•
|
The Funds’ share of relative harvest volume (including timber deed sales) increased to 51% in Q2 2017 from 34% in Q2 2016. Depletion rates are higher for the Funds’ tree farms because they were purchased more recently than the Partnership’s tree farms and thus have a higher cost basis.
|
|
|
•
|
The mix of harvest volume from the Funds’ tree farms shifted to tree farms with higher depletion rates.
|
|
|
•
|
The Partnership’s pooled depletion rate increased 70% due to the Q3 2016 purchase of the Carbon River tree farm. Prior to that acquisition, the Partnership’s pooled depletion rate was based on tree farms that were acquired many years ago at much lower costs relative to current timberland values.
|
Fee Timber cost of sales for the
six months
ended
June 30, 2017
and
2016
was as follows, with the first table expressing these costs in total dollars and the second table expressing those costs that are driven by volume on a per MBF basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) Six Months Ended
|
|
Harvest, Haul and Tax
|
|
Depletion
|
|
Other
|
|
Total Fee Timber Cost of Sales
|
|
Harvest Volume (MMBF)
|
|
Timber Deed Sale Volume (MMBF)
|
Partnership
|
|
$
|
4,948
|
|
|
$
|
1,930
|
|
|
$
|
—
|
|
|
$
|
6,878
|
|
|
26.6
|
|
|
—
|
|
Funds
|
|
5,728
|
|
|
6,555
|
|
|
—
|
|
|
12,283
|
|
|
24.0
|
|
|
2.4
|
|
Total June 2017
|
|
$
|
10,676
|
|
|
$
|
8,485
|
|
|
$
|
—
|
|
|
$
|
19,161
|
|
|
50.6
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
$
|
4,511
|
|
|
$
|
857
|
|
|
$
|
29
|
|
|
$
|
5,397
|
|
|
20
|
|
|
—
|
|
Funds
|
|
4,147
|
|
|
3,336
|
|
|
—
|
|
|
7,483
|
|
|
16.6
|
|
|
—
|
|
Total June 2016
|
|
$
|
8,658
|
|
|
$
|
4,193
|
|
|
$
|
29
|
|
|
$
|
12,880
|
|
|
36.6
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts per MBF) Six Months Ended
|
|
Harvest, Haul and Tax *
|
|
Depletion *
|
Partnership
|
|
$
|
186
|
|
|
$
|
73
|
|
Funds
|
|
239
|
|
|
248
|
|
Total June 2017
|
|
$
|
211
|
|
|
$
|
160
|
|
|
|
|
|
|
Partnership
|
|
$
|
226
|
|
|
$
|
43
|
|
Funds
|
|
250
|
|
|
201
|
|
Total June 2016
|
|
$
|
237
|
|
|
$
|
115
|
|
|
|
*
|
Timber deed sale volumes are excluded in the per MBF computation for harvest, haul and tax costs but included in the per MBF computation for depletion.
|
Comparing YTD
2017
to YTD
2016
. Cost of sales increased
$6.3 million
, or
49%
, in the first
six months
of
2017
compared to the corresponding period in
2016
primarily due to a 45% increase in harvest volume (including timber deed sales). As with the quarterly results, two other factors had large, but offsetting, impacts on cost of sales. First, harvest, haul, and tax costs decreased 11% on a per MBF basis in 2017 from 2016 as a result of more competitive bidding for our business by logging contractors, a higher proportion of volume from harvest units utilizing lower-cost, ground-based logging systems, and shorter haul distances. Second, the Combined depletion rate increased 40% in 2017 from 2016, which was the product of three separate factors:
|
|
•
|
The Fund’s share of relative harvest volume (including timber deed sales) increased to 50% in 2017 from 45% in 2016.
|
|
|
•
|
The mix of harvest volume among the Funds’ tree farms shifted to tree farms with higher depletion rates.
|
|
|
•
|
The Partnership’s pooled depletion rate increased 69% due to the Q3 2016 purchase of the Carbon River tree farm.
|
Operating Expenses
Fee Timber operating expenses include the cost of maintaining existing roads and building temporary roads for harvesting, silviculture costs, and other management expenses. For the quarters ended
June 30, 2017
,
March 31, 2017
, and
June 30, 2016
, operating expenses were
$2.3 million
, $2.1 million, and
$2.3 million
, respectively. The $159,000 increase in operating expenses in Q2 2017 from Q1 2017 is attributable to a rise in silviculture expenses which was partially offset by decreases in management expenses and road maintenance. Operating expenses were flat between Q2 2017 and Q2 2016.
Fee Timber operating expenses for the
six months
ended
June 30, 2017
and
2016
were $4.4 million and $3.9 million, respectively. The $468,000 increase is primarily attributable to professional fees paid in 2017 associated with the start-up of Fund IV.
Gain on Sale of Timberland
The $12.5 million gain on sale of timberland in the first six months of 2017 resulted from the Q1 2017 sale of a 6,500-acre tree farm by Fund II for $26.5 million. The $226,000 gain on sale of timberland in the first six months of 2016 resulted from sales of two parcels owned by the Funds during Q1 2016.
Timberland Investment Management
The Timberland Investment Management (TIM) segment manages timberland portfolios on behalf of three private equity timber funds that currently own a combined 88,000 acres of commercial timberland in western Washington, northwestern Oregon, and northern California. Total assets under management are $357 million based on the most recent appraisals.
Fund Distributions and Fees Paid to the Partnership
Fund distributions are paid from available Fund cash, generated primarily from the harvest and sale of timber after paying all Fund expenses, management fees, and recurring capital costs. The Partnership received combined distributions from the Funds of $6.0 million and $211,000 during the
six months ended
June 30, 2017
and
2016
, respectively, which are eliminated in consolidation. The 2017 distributions included $5.5 million from Fund II’s sale of a 6,500-acre tree farm. The Partnership earned asset, investment, and timberland management fees from the Funds of
$1.7 million
and
$1.6 million
for the
six months ended
June 30, 2017
and
2016
, respectively. These fees are eliminated as the Funds are consolidated in our financial statements, as shown in the table below.
Revenue and Operating Loss
The fees earned from managing the Funds include a fixed component related to invested capital and acres owned, and a variable component related to harvest volume from the Funds’ tree farms.
Revenue and operating loss for the TIM segment for the quarters ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands, except invested
|
|
Quarter Ended
|
capital, volume and acre data)
|
|
Jun-17
|
|
Jun-16
|
Revenue internal
|
|
$
|
817
|
|
|
$
|
788
|
|
Intersegment eliminations
|
|
(817
|
)
|
|
(788
|
)
|
Revenue external
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Operating income (loss) internal
|
|
$
|
(35
|
)
|
|
$
|
123
|
|
Intersegment eliminations
|
|
(716
|
)
|
|
(726
|
)
|
Operating loss external
|
|
$
|
(751
|
)
|
|
$
|
(603
|
)
|
|
|
|
|
|
Invested capital (in millions)
|
|
$
|
240
|
|
|
$
|
258
|
|
Acres owned by Funds
|
|
88,000
|
|
|
94,000
|
|
Harvest volume - Funds (MMBF), including timber deed sales
|
|
12.9
|
|
|
7.2
|
|
Comparing
Q2 2017
to
Q2 2016
.
TIM generated management fee revenue of
$817,000
and
$788,000
from managing the Funds during Q2 2017 and Q2 2016, respectively. The increased harvest volume during Q2 2017 served to boost revenue generated from fees based on harvest volume, though this was offset partially by a decline in revenue generated from fees based on invested capital and acres owned resulting from Fund II’s tree farm sale in Q1 2017.
Operating expenses incurred for the quarters ended
June 30, 2017
, and
2016
totaled
$751,000
and
$603,000
, respectively. The increase in operating expenses is attributable to costs associated with the launch of our fourth timber fund, which occurred at the tail end of 2016, as well as additional personnel costs to manage our expanding timber fund portfolio.
Revenue and operating loss for the TIM segment for the
six months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands, except invested
|
|
Six Months Ended
|
capital, volume and acre data)
|
|
Jun-17
|
|
Jun-16
|
Revenue internal
|
|
$
|
1,665
|
|
|
$
|
1,611
|
|
Intersegment eliminations
|
|
(1,665
|
)
|
|
(1,603
|
)
|
Revenue external
|
|
$
|
—
|
|
|
$
|
8
|
|
|
|
|
|
|
Operating income internal
|
|
$
|
(260
|
)
|
|
$
|
205
|
|
Intersegment eliminations
|
|
(1,457
|
)
|
|
(1,474
|
)
|
Operating loss external
|
|
$
|
(1,717
|
)
|
|
$
|
(1,269
|
)
|
|
|
|
|
|
Invested capital (in millions)
|
|
$
|
240
|
|
|
$
|
258
|
|
Acres owned by Funds
|
|
88,000
|
|
|
94,000
|
|
Harvest volume - Funds (MMBF), including timber deed sales
|
|
26.4
|
|
|
16.6
|
|
Comparing YTD
2017
to YTD
2016
. TIM generated management fee revenue of
$1.7 million
and
$1.6 million
from managing the Funds for the
six months
ended
June 30, 2017
and
2016
, respectively. The increased harvest volume during 2017 served to boost revenue generated from fees based on harvest volume, though this was offset partially by a decline in revenue generated from fees based on invested capital and acres owned resulting from Fund II’s tree farm sale in Q1 2017, as well as the sale of two smaller parcels owned by the Funds in Q1 2016.
Operating expenses incurred by the TIM segment for the
six months
ended
June 30, 2017
and
2016
totaled
$1.7 million
and
$1.3 million
, respectively. The increase in operating expenses is attributable to costs associated with the launch of our fourth timber fund, which occurred at the tail end of 2016, as well as additional personnel costs to manage our expanding timber fund portfolio.
Real Estate
The Partnership’s Real Estate segment produces its revenue primarily from the sale of land within its 2,200-acre portfolio. Additional sources of revenue include sales of development rights and tracts of land from the Partnership’s timberland portfolio, together with residential and commercial property rents earned from our Port Gamble and Poulsbo properties. Real Estate holdings are located in the Washington counties of Pierce, Kitsap, and Jefferson with sales of land for this segment typically falling into one of three general types:
|
|
•
|
Residential, commercial, and business park plat land sales represent land sold after development rights have been obtained and are generally sold with prescribed infrastructure improvements.
|
|
|
•
|
Rural residential lot sales that generally require some capital improvements such as zoning, road building, or utility access improvements prior to completing the sale.
|
|
|
•
|
The sale of unimproved land, which generally consists of larger acreage sales rather than single lot sales, is normally completed with very little capital investment prior to sale.
|
In addition to outright sales of fee simple interests in land, we also enter into conservation easement (CE) sales that allow us to retain the right to harvest and manage timberland, but bar any future subdivision of or real estate development on, the property.
“
Land Held for Development” on our Condensed Consolidated Balance Sheets represents the Partnership’s cost basis in land that has been identified as having greater value as development property than timberland. Our Real Estate segment personnel work with local officials to obtain entitlements for further development of these parcels.
Those properties that are for sale, under contract, and management expects to sell within the next 12 months, are classified on our balance sheet as a current asset under “Land and Timber Held for Sale”. The
$9.4 million
amount currently in Land and Timber Held for Sale reflects properties that are under contract and expected to close between now and the end of the second quarter of 2018, comprising 93 single-family residential lots from our Harbor Hill project and four single-family lot sales from a separate project.
Project costs that are associated directly with the development and construction of a real estate project are capitalized and then included in cost of sales when the property is sold, along with our original basis in the underlying land and the closing costs associated with the sale transaction.
Results from Real Estate operations often vary significantly from period-to-period as we make multi-year investments in entitlements and infrastructure prior to selling entitled or developed land.
Comparing
Q2 2017
to
Q2 2016
.
We closed on the sale of a 10-acre rural residential lot for $170,000 during
Q2
2017
. There were no land sales in
Q2
2016
, though we recognized $157,000 of revenue on a percentage-of-completion basis from parcels sold in previous quarters. Real Estate operating expenses were
$1.5 million
and
$1.1 million
during Q2
2017
and Q2
2016
, respectively. The increase in operating expenses is due primarily to legal and professional fees in connection with planning and development for a number of properties, as well as for pursuing potential insurance recoveries for our Port Gamble environmental remediation. These factors resulted in operating losses of
$1.5 million
and
$1.2 million
for the
second quarter
of
2017
and
2016
, respectively.
Comparing YTD
2017
to YTD
2016
. In the first
six months
of
2017
, we closed on the sale of a 10-acre rural residential lot for $170,000, as noted above, and recognized the remaining revenue on a percentage-of-completion basis on parcels sold in Q4 2016 from our Harbor Hill development for $285,000. In the first
six months
of
2016
, we closed on the sale of 9 residential lots from Harbor Hill and recognized the remaining revenue on a percentage-of-completion basis on parcels sold in previous periods for a combined total of $1.2 million. Rentals and other activities in our Real Estate segment have decreased in 2017 due to the loss of commercial tenants at Port Gamble due to the environmental remediation project. Real Estate operating expenses increased from
$2.2 million
to
$2.7 million
for the first
six months
of
2016
and
2017
, respectively, due primarily to legal and professional fees in connection with planning and development for a number of properties as well as for pursuing potential insurance recoveries for our Port Gamble environmental remediation. These factors resulted in an operating loss of
$2.7 million
for the first
six months
of
2017
compared to an operating loss of
$2.2 million
for the corresponding period of
2016
.
Real Estate revenue, gross margin and operating income are summarized in the table below for the
six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except units sold and per unit amounts)
|
|
|
|
|
|
|
|
|
For the three months ended:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Revenue
|
|
Gross Margin
|
|
Units Sold
|
|
Revenue per unit
|
|
Gross Margin per unit
|
Residential
|
|
$
|
285
|
|
|
$
|
131
|
|
*
|
|
|
|
|
|
|
|
Residential
|
|
170
|
|
|
82
|
|
|
Acres:
|
|
10
|
|
|
17,000
|
|
|
8,200
|
|
Total land
|
|
455
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and other
|
|
248
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 total
|
|
$
|
703
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,220
|
|
|
154
|
|
|
Lots:
|
|
9
|
|
|
135,556
|
|
|
17,111
|
|
Total land
|
|
1,220
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and other
|
|
532
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016 total
|
|
$
|
1,752
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents revenue recognized on a percentage-of-completion basis on lots sold in previous periods.
|
Environmental Remediation
As disclosed previously, we have a liability for environmental remediation at Port Gamble, Washington, due to contamination that occurred in Port Gamble Bay prior to our 1985 acquisition of the property from Pope & Talbot, Inc. We have adjusted that liability from time to time based on evolving circumstances. The required in-water remediation activity was completed in January 2017. The sediments now stockpiled on the millsite must remain there for several months to allow the saltwater in the sediments to rinse out, which we expect will be completed in the third quarter of 2017. The stockpiles were
tested to determine their level of contamination, with the result that less than 2% of the material will need to be relocated to a commercial landfill. The bulk of the sediments will be relocated to property we own a short distance from the town of Port Gamble. We expect this to be completed by the end of the year.
In addition to the handling of the sediments, there will be some cleanup activity on the millsite itself in 2018. The scope of this activity will be influenced by the results of testing to be conducted on the millsite following the removal of the dredged material and our liability includes an estimate of the costs for this activity.
Project costs may still vary due to a number of factors, including but not limited to:
Handling of dredged material:
We have not yet finalized arrangements with our contractor to relocate the dredged material to our property near Port Gamble or to relocate the portion that must be taken to a commercial landfill and the actual per unit cost for this work may differ from our current estimates.
Natural Resource Damages (NRD):
Certain environmental laws allow state, federal, and tribal trustees (collectively, the Trustees) to bring suit against property owners to recover damages for injuries to natural resources. Like the liability that attaches to current property owners in the cleanup context, liability for natural resource damages can attach to a property owner simply because an injury to natural resources resulted from releases of hazardous substances on that owner’s property, regardless of culpability for the release. The Trustees are alleging that Pope Resources has NRD liability because of releases that occurred on its property. We have been in discussions with the Trustees regarding their claims and the alleged conditions in Port Gamble Bay. We have also been discussing restoration alternatives that might address the damages the Trustees allege. Discussions with the Trustees may result in an obligation for us to fund NRD restoration activities and past assessment costs that are greater than we have estimated.
Unforeseen conditions:
While the required in-water construction activity has been completed, there may be uncertainties with respect to the
remaining cleanup on the millsite as the scope of this portion of the cleanup will be influenced by the results of testing to be conducted there following the removal of the sediments. Moreover, as we transition to the monitoring phase of the project, conditions may arise in the future that require us to incur costs to conduct additional cleanup activity. Likewise, we cannot accurately predict the impacts, if any, of potential NRD actions.
Should any future circumstances result in a change to the estimated cost of the project, we will record an appropriate adjustment to the liability in the period it becomes known and we can reasonably estimate the amount.
General and Administrative (G&A)
G&A expenses were
$1.4 million
and
$1.1 million
in the
second quarter
s of
2017
and
2016
, respectively. G&A expenses increased to
$3.1 million
for the first
six months
of
2017
from
$2.7 million
for the first
six months
of
2016
. For both the quarter and year-to-date periods, the increase is primarily due to higher incentive compensation accruals. The value of certain elements of our incentive compensation program, though paid in cash, are driven by our unit trading price, which has increased this year compared to 2016.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest income
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
6
|
|
Interest expense
|
(1,252
|
)
|
|
(933
|
)
|
|
(2,380
|
)
|
|
(1,744
|
)
|
Capitalized interest
|
134
|
|
|
183
|
|
|
250
|
|
|
333
|
|
Interest expense, net
|
$
|
(1,117
|
)
|
|
$
|
(747
|
)
|
|
$
|
(2,127
|
)
|
|
$
|
(1,405
|
)
|
The Partnership’s and Fund III’s debt arrangements with Northwest Farm Credit Services (NWFCS) are included in the latter’s patronage program, which rebates a portion of interest paid in the prior year back to the borrower. This NWFCS patronage program is a feature common to most of this lender’s loan agreements. The patronage program reduced interest expense by $234,000 and $143,000 for Q2
2017
and Q2
2016
, respectively, and by $548,000 and $394,000 for the first six months of 2017 and 2016, respectively. The increases in interest expense and the patronage rebate are due to higher debt balances in 2017.
Capitalized interest decreased from 2016 to 2017 due to the reduction in basis from 2016 due to completed construction activity at Harbor Hill.
Income Tax
The Partnership recorded income tax expense of
$3,000
and
$0
for Q2
2017
and Q2
2016
, respectively, and
$59,000
and
$50,000
for the first
six months
of
2017
and
2016
, respectively.
Pope Resources is a limited partnership and is therefore not subject to federal income tax. Taxable income/loss is instead reported to unitholders each year on a Form K-1 for inclusion in each unitholder’s income tax return. However, Pope Resources does have corporate subsidiaries that are subject to income tax, giving rise to the line item for such tax in the Condensed Consolidated Statement of Comprehensive Income (Loss).
Noncontrolling interests-ORM Timber Funds
The line item “Net and comprehensive (income) loss attributable to noncontrolling interests-ORM Timber Funds” represents the combination of the portions of the net income or loss for the Funds which are attributable to third-party owners; 80% for Fund II, 95% for Fund III, and 85% for Fund IV.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Liquidity and Capital Resources
We ordinarily finance our business activities using operating cash flows and, where appropriate in our assessment, commercial credit arrangements with banks or other financial institutions. During periods of reduced operating cash flows, we have available to us a line of credit that can be accessed in order to provide for liquidity needs. We expect that funds generated internally from operations and externally through financing will provide the required resources for the Partnership’s operations and capital expenditures for at least the next twelve months.
The Partnership’s debt consists of mortgage debt with fixed and variable interest rate tranches and an operating line of credit with Northwest Farm Credit Services (NWFCS). The mortgage debt at
June 30, 2017
includes $51.8 million in term loans with NWFCS structured in five tranches that mature from 2019 through 2028 and is collateralized by portions of the Partnership’s timberland. In addition, our commercial office building in Poulsbo, Washington is collateral for a $2.5 million loan from NWFCS that matures in 2023. We also have available a $31.0 million facility with NWFCS structured as a line of credit through December 31, 2019, after which it converts to a term loan with multiple tranches that have an ultimate maturity in July 2027. At
June 30, 2017
, $6.0 million was outstanding under this facility at a variable rate based on the one-month LIBOR rate plus 1.85%. Our $20.0 million operating line of credit matures April 1, 2020 and we had $18.5 million drawn as of
June 30, 2017
. The line of credit carries a variable interest rate that is based on the one-month LIBOR rate plus 1.50%.
These debt agreements contain covenants that are measured quarterly. Among the covenants measured is a requirement that the Partnership maintain an interest coverage ratio of 3:1 and not exceed a maximum debt-to-total-capitalization ratio of 30%, with total capitalization calculated using fair market (vs. carrying) value of timberland, roads and timber. The Partnership is in compliance with these covenants as of
June 30, 2017
, and expects to remain in compliance for at least the next twelve months.
Mortgage debt within the Funds is collateralized by Fund properties only, and the Partnership and its subsidiaries do not guaranty that debt. Fund II has a timberland mortgage comprised of two fixed rate tranches totaling $25.0 million with MetLife Insurance Company. The tranches are non-amortizing and both mature in September 2020. The loans allow for, but do not require, annual principal payments of up to 10% of outstanding principal without incurring a make-whole premium. This mortgage is collateralized by a portion of Fund II’s timberland portfolio. Fund III has a timberland mortgage comprised of two fixed rate tranches totaling $32.4 million with NWFCS. The mortgage is non-amortizing and collateralized by a portion of Fund III’s timberland, with an $18.0 million tranche maturing in December 2023 and a $14.4 million tranche maturing in October 2024.
The
$8.8 million
increase in cash generated for the
six months ended
June 30, 2017
compared to
June 30, 2016
is explained in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(in thousands)
|
2017
|
|
Change
|
|
2016
|
Cash provided by (used in) operating activities
|
$
|
5,620
|
|
|
$
|
9,917
|
|
|
$
|
(4,297
|
)
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Reforestation and roads
|
(1,109
|
)
|
|
(191
|
)
|
|
(918
|
)
|
Capital expenditures
|
(92
|
)
|
|
48
|
|
|
(140
|
)
|
Proceeds from sale of property and equipment
|
30
|
|
|
30
|
|
|
—
|
|
Deposit for acquisition of timberland - Partnership
|
—
|
|
|
1,581
|
|
|
(1,581
|
)
|
Acquisition of timberland - Partnership
|
(4,951
|
)
|
|
(3,882
|
)
|
|
(1,069
|
)
|
Proceeds from sale of timberland - Funds
|
26,444
|
|
|
25,721
|
|
|
723
|
|
Cash provided by (used in) investing activities
|
20,322
|
|
|
23,307
|
|
|
(2,985
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Line of credit borrowings
|
18,507
|
|
|
9,257
|
|
|
9,250
|
|
Line of credit repayments
|
(8,000
|
)
|
|
(8,000
|
)
|
|
—
|
|
Repayment of long-term debt
|
(5,059
|
)
|
|
(5,002
|
)
|
|
(57
|
)
|
Debt issuances costs
|
(77
|
)
|
|
(77
|
)
|
|
—
|
|
Unit repurchase
|
(57
|
)
|
|
(57
|
)
|
|
—
|
|
Payroll taxes paid upon unit net settlements
|
(94
|
)
|
|
58
|
|
|
(152
|
)
|
Cash distributions to unitholders
|
(6,115
|
)
|
|
(27
|
)
|
|
(6,088
|
)
|
Cash distributions to fund investors, net of distributions to Partnership
|
(23,937
|
)
|
|
(21,364
|
)
|
|
(2,573
|
)
|
Capital call - ORM Timber Funds, net of Partnership contribution
|
825
|
|
|
825
|
|
|
—
|
|
Cash provided by (used in) financing activities
|
(24,007
|
)
|
|
(24,387
|
)
|
|
380
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
1,935
|
|
|
$
|
8,837
|
|
|
$
|
(6,902
|
)
|
The increase in cash from operating activities of
$9.9 million
resulted primarily from a
38%
increase in timber harvest volume, offset partially by fewer Real Estate sales and an increase in Real Estate project expenditures in 2017.
Cash from investing activities during
2017
increased by
$23.3 million
compared to
2016
due primarily to the sale of one of Fund II’s tree farms in January 2017, offset partially by Partnership timberland acquisitions in Q1 2017.
Cash from financing activities decreased in the current year by
$24.4 million
due primarily to the distribution of the net proceeds from the sale of one of Fund II’s tree farms to that fund’s investors and net repayments of debt, offset partially by proceeds from Fund IV’s first capital call.
Seasonality
Fee Timber.
The elevation and terrain characteristics of our timberlands are such that we can conduct harvest operations virtually year-round on a significant portion of our tree farms. Generally, we concentrate our harvests from these areas in those months when weather limits operations on other properties, thus taking advantage of reduced competition for log supply to our customers and improving prices realized. As such, on a combined basis the pattern of quarterly volumes harvested is flatter than would be the case if looking at one tree farm in isolation. However, this pattern may not hold true during periods of comparatively soft log prices, when we may defer harvest volume to capture greater value when log prices strengthen. In addition, our quarterly harvest patterns may be impacted by severe weather or fire conditions.
Timberland Investment Management.
Management revenue generated by this segment consists of asset and timberland management fees. These fees, which relate primarily to our activities on behalf of the Funds and are eliminated in consolidation, vary based upon the amount of invested capital, the number of acres owned by the Funds, and the volume of timber harvested from properties owned by the Funds and are not expected to be significantly seasonal.
Real Estate.
While Real Estate results are not expected to be seasonal, the nature of the activities in this segment will likely result in periodic large transactions that will have significant positive impacts on both revenue and operating income of the Partnership in periods in which these transactions close, and relatively limited revenue and income in other periods. While the variability of these results is not primarily a function of seasonal weather patterns, we do expect to see some seasonal fluctuations in this segment because of the general effects of weather on Pacific Northwest development activities.
Capital Expenditures and Commitments
Capital expenditures, excluding timberland acquisitions, for the full year
2017
are projected to be approximately $11.2 million. The most significant expenditures relate to finishing residential lots for sale to merchant homebuilders in our Harbor Hill project in the third and fourth quarters and the installation of a new wastewater treatment plant for the town of Port Gamble. The following table presents our capital expenditures by major category on a year-to-date basis and what we expect for the remainder of the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD
|
|
Remainder of Year
|
|
Total
|
in millions
|
|
|
|
|
|
Harbor Hill project development
|
$
|
2.7
|
|
|
$
|
2.9
|
|
|
$
|
5.6
|
|
Port Gamble wastewater treatment plant
|
1.4
|
|
|
0.2
|
|
|
1.6
|
|
Reforestation and roads
|
1.1
|
|
|
1.4
|
|
|
2.5
|
|
Other
|
0.3
|
|
|
1.2
|
|
|
1.5
|
|
|
$
|
5.5
|
|
|
$
|
5.7
|
|
|
$
|
11.2
|
|
ACCOUNTING MATTERS
Critical Accounting Policies and Estimates
An accounting policy is deemed to be “critical” if it is important to a company’s results of operations and financial condition, and requires significant judgment and estimates on the part of management in its application. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and related disclosures. Actual results could differ from these estimates and assumptions. Management believes its most critical accounting policies and estimates relate to the calculation of timber depletion, cost allocations for purchased timberland, and environmental remediation liabilities.
For a further discussion of our critical accounting policies and estimates see Accounting Matters in the Management Discussion and Analysis section of our Annual Report on Form 10-K for the year ended
December 31, 2016
. See also note 2 to the condensed consolidated financial statements.