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Pope Resources Reports Fourth Quarter Net Income of $2.3 Million

February 8, 2012

POULSBO, Wash.-- (BUSINESS WIRE) -- Feb. 8, 2012 -- Pope Resources (NASDAQ:POPE) reported net income attributable to unitholders of $2.3 million, or $0.52 per diluted ownership unit, on revenue of $17.8 million for the fourth quarter ended December 31, 2011. This compares to net income attributable to unitholders of $1.7 million or $0.35 per diluted ownership unit, on revenue of $8.5 million for the comparable period in 2010.

Net income attributable to unitholders for the year ended December 31, 2011 totaled $8.8 million, or $1.94 per diluted ownership unit, on revenue of $57.3 million. Net income attributable to unitholders for the corresponding period in 2010 totaled $2.0 million, or $0.43 per diluted ownership unit, on revenue of $31.2 million. Results for 2010 included a loss on early debt extinguishment of $1.2 million.

Cash provided by operations for the quarter ended December 31, 2011 was $7.4 million, compared to $3.5 million for the fourth quarter of 2010. For the year ended December 31, 2011, cash provided by operations was $21.7 million, compared to $9.0 million in 2010.

“The big story for 2011 was strong demand from China for logs and lumber,” said David L. Nunes, President and CEO. “We were well positioned to capitalize on this surge in demand since all of our tree farms are tributary to export log ports. Based on both new properties acquired by our second timber fund in 2010 and significant amounts of deferred harvest volume from 2008-2010, we had a record harvest year in 2011 at 90 million board feet (MMBF). In addition, we enjoyed a 17% increase in our average realized log price based on both export demand and greater competition in domestic markets where many of the mills benefited by the exporting of lumber to China. These factors combined for a very strong year in terms of cash flow generation.”

Fee Timber operating income for the fourth quarter of 2011 was $5.5 million compared to $1.7 million for the fourth quarter of 2010. This tripling of operating income was due to the combined impact of a 164% increase in harvest volume, which increased from 11 MMBF in 2010 to 29 MMBF in 2011, and a 17% boost in average realized log price, which increased from $481 per thousand board feet (MBF) in 2010 to $565 per MBF in 2011. In recent years, our fourth quarter log production has been relatively light as a function of the front-loading of annual harvest volumes into the earlier part of the year. The fourth quarter of 2011 broke significantly from this pattern as a result of incorporating harvest volume from timber fund properties acquired in 2010, mild weather, and a decision to dip into deferred harvest volumes from 2008-2010. Over 52% of 2011’s fourth quarter harvest came from timber fund properties versus 39% for the comparable period in 2010. Notwithstanding the significantly higher per-MBF depletion expense for the timber fund properties, this additional harvest from the timber fund properties contributed $1.8 million of operating income to Q4 2011.

Fee Timber operating income for 2011 increased 74% to $16.9 million compared to $9.7 million in 2010. As with the fourth quarter, the improved full-year performance was driven by the combined effect of a 70% increase in harvest volume, which increased from 53 MMBF in 2010 to 90 MMBF in 2011, and a 17% improvement in average realized log price, which increased from $486 per MBF in 2010 to $567 per MBF in 2011. In response to a surge in demand for logs from buyers in China, we harvested more timber than initially planned in 2011 and significantly boosted our export mix, which increased from 33% in 2010 to 45% in 2011. Robust export markets forced domestic producers to compete aggressively for logs which contributed to a year-over-year 9% increase in domestic log prices. With the benefit of including more harvest volume from timber fund properties acquired in the third quarter of 2010, the mix of harvest volume from timber fund properties more than doubled from 20% of 2010’s total volume to 44% of 2011’s total volume. The timber fund properties contributed $3.3 million of operating income to results for 2011 compared to $130,000 in 2010.

Our Timberland Management & Consulting (TM&C) segment generates revenue through the management of three private equity timber funds, which are consolidated into the Partnership’s financial statements due to the Partnership’s role as general partner or managing member of the funds. Consolidating these funds into the Partnership’s financial statements results in the elimination of all management fees charged to the funds, with a corresponding decrease in operating expenses in the Fee Timber segment. The first two funds collectively acquired 61,000 acres of commercial timberlands between 2006 and 2010 for total consideration of $150 million. Our third fund, with a target size of $100 million, had its first close in the fourth quarter of 2011 for $51 million. We expect the final close for this fund by mid-2012.

After eliminating $813,000 of intercompany timber fund management fees, TM&C had no revenue for the fourth quarter of 2011. In 2010, the fourth quarter for this segment showed $16,000 of revenue after the elimination of $501,000 of intercompany fees. Operating losses generated by the TM&C segment for the quarters ended December 31, 2011 and 2010 totaled $398,000 and $345,000, respectively, after eliminating revenue earned from managing the funds. The increase in operating losses is attributable to added costs related to higher harvest levels from the two funds, higher personnel related expenses associated with fund oversight, and costs related to raising capital for the third fund.

TM&C had no revenue for the twelve months ended December 31, 2011 after eliminating $2.4 million of fees earned from managing the funds. This compares to $31,000 of revenue for the same period in 2010 after eliminating $1.5 million of fund management fee revenue. The increase in the amount of management fee revenue eliminated resulted from additional fees earned on the management of $58 million of timberland acquired by our second timber fund at the end of 2010’s third quarter. In total we managed 61,000 acres in two timber funds for the entirety of 2011 versus 36,000 acres for the first nine months and 61,000 for the last three months of 2010. Operating losses generated by the TM&C segment for the twelve months ended December 31, 2011 and 2010 totaled $1.5 million and $1.3 million, respectively, after eliminating revenue earned from managing the funds. The increase in operating losses for the full year is attributable to the same set of factors mentioned above in connection with the quarter-to-quarter comparisons.

Our Real Estate segment completed a $480,000 conservation easement sale in the fourth quarter of 2011, which contributed to overall segment revenues of $837,000. However, as a result of a $631,000 charge for contingent environmental remediation costs, our Real Estate segment posted an operating loss of $763,000 for the period. This compares to Real Estate’s operating income of $1.3 million reported in 2010’s fourth quarter on revenue of $2.7 million, achieved primarily as a result of a $2.4 million conservation easement sale. Results for the fourth quarter of 2010 included a $307,000 charge for contingent environmental remediation costs.

For the full year 2011, the Real Estate segment posted an operating loss of $349,000 on revenue of $4.5 million, compared to 2010’s operating loss of $809,000 on revenue of $3.5 million. Accruals for environmental remediation costs weighed heavily on both the 2010 and 2011 annual results for our Real Estate operations, with $875,000 accrued in 2010 and $977,000 in 2011. Results for this segment in both years were bolstered by sales with a conservation “flavor”. Conservation transactions in 2011 totaled nearly $2.5 million including a $2.0 million land sale in the second quarter ($5,065/acre on 386 acres) and a $480,000 easement sale in the fourth quarter ($1,882/acre on 255 acres). In 2010 we completed a $2.4 million conservation easement sale in the fourth quarter ($349/acre on 6,886 acres). While the broader market for development property remains weak, we saw some signs of life in 2011 with six rural residential lot and residential plat transactions covering 107 acres for a total value of $901,000 ($8,421/acre). There were no comparable lot sales in 2010.

General & Administrative expenses for 2011 declined by 11% to $4.2 million, compared to $4.7 million in 2010. This decrease in overhead costs was driven primarily by implementation of a new long-term compensation plan in 2010 that required a catch-up accrual in 2010 for multiple trailing-year performance cycles.

As we look to 2012, export log market demand has cooled from 2011 peak levels, but we still expect 2012 will be strongly influenced by demand from Asia, with some log price weakening expected relative to 2011. Notwithstanding recent signals that the domestic housing market may be poised for a recovery, the continuing saga of poor housing markets is expected to remain a drag on both domestic lumber and real estate markets for the near-term.

The financial schedules attached to this earnings release provide detail on individual segment results and operating statistics.

About Pope Resources

Pope Resources, a publicly traded limited partnership, and its subsidiaries Olympic Resource Management and Olympic Property Group, own or manage 178,000 acres of timberland and development property in Washington and Oregon. We also manage, co-invest in, and consolidate three timberland investment funds that we manage for a fee. In addition, we offer our forestry consulting and timberland investment management services to third-party owners and managers of timberland in the U.S. Pacific Northwest. The company and its predecessor companies have owned and managed timberlands and development properties for more than 150 years. Additional information on the company can be found at http://www.poperesources.com. The contents of our website are not incorporated into this release or into our filings with the Securities and Exchange Commission.

This press release contains a number of projections and statements about our expected financial condition, operating results, business plans and objectives. These statements reflect management's estimates based on current goals and its expectations about future developments. Because these statements describe our goals, objectives, and anticipated performance, they are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, they should not be interpreted as promises of future management actions or financial performance. Our future actions and actual performance will vary from current expectations and under various circumstances the results of these variations may be material and adverse. Some of the factors that may cause actual operating results and financial condition to fall short of expectations include conditions in the housing construction and wood-products markets, both domestically and globally, that affect demand for our products; factors that affect our ability to anticipate and respond adequately to fluctuations in the market prices for our products; environmental and land use regulations that limit our ability to harvest timber and develop property, including changes in those regulations; conditions affecting credit markets as they affect the availability of capital and costs of borrowing; labor, equipment and transportation costs that affect our net income; the impacts of natural disasters on our timberlands and on surrounding areas; and our ability to discover and to accurately estimate liabilities associated with our properties. Other factors are set forth in that part of our Annual Report on Form 10-K entitled "Risk Factors." Other issues that may have an adverse and material impact on our business, operating results, and financial condition include those risks and uncertainties discussed in our other filings with the Securities and Exchange Commission. Forward-looking statements in this release are made only as of the date shown above, and we cannot undertake to update these statements.

               
Pope Resources, A Delaware Limited Partnership
Unaudited
               
               
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(all amounts in $000's, except per unit amounts)
                 
    Three months ended December 31,   Twelve months ended December 31,
    2011     2010     2011     2010  
                 
Revenues   $17,809     $8,546     $57,274     $31,192  
Costs and expenses:                
Cost of sales   (10,198 )   (3,349 )   (30,564 )   (14,346 )
Operating expenses   (4,220 )   (3,876 )   (15,863 )   (13,933 )
Operating income   3,391     1,321     10,847     2,913  
Interest income   10     11     42     102  
Interest expense   (484 )   (460 )   (2,158 )   (1,815 )
Capitalized interest   118     109     432     569  
Debt extinguishment costs   -     -     -     (1,250 )
Gain on disposition of investments   -     -     -     11  
Income before income taxes   3,035     981     9,163     530  
Income tax benefit (expense)   (78 )   265     (236 )   290  
Net income   2,957     1,246     8,927     820  
Net loss (income) attributable to noncontrolling interests   (608 )   417     (173 )   1,218  
Net income attributable to Pope Resources' unitholders   $2,349     $1,663     $8,754     $2,038  
                 
Average units outstanding - Basic   4,329     4,577     4,323     4,554  
Average units outstanding - Diluted   4,331     4,605     4,325     4,578  
                 
Basic net income per unit   $0.52     $0.35     $1.94     $0.43  
Diluted net income per unit   $0.52     $0.35     $1.94     $0.43  
                         
                   
CONDENSED CONSOLIDATING BALANCE SHEETS
(all amounts in $000's)
                     
    December 31, 2011   December 31, 2010
                     

 

      ORM   Consolidating        

Assets:

  Pope   Timber Funds   Entries   Consolidated    
Cash and cash equivalents   $249   $2,404   $-     $2,653   $2,423
Other current assets   4,184   546   (666 )   4,064   1,570
Total current assets   4,433   2,950   (666 )   6,717   3,993
Timber and roads, net   36,669   117,567   -     154,236   164,961
Timberlands   15,384   18,746   -     34,130   33,980
Buildings and equipment, net   6,019   -   -     6,019   3,854
Land held for development   28,413   -   -     28,413   27,737
Investment in ORM Timber Funds   26,250   -   (26,250 )   -   -
Other assets   767   126   -     893   1,312
Total   $117,935   $139,389   ($26,916 )   $230,408   $235,837
Liabilities and equity:                    
Current liabilities   $4,405   1,525   ($666 )   $5,264   $4,786
Current portion of long-term debt   -   32   -     32   30
Long-term debt   34,757   11,036   -     45,793   50,468
Other long-term liabilities   2,161   -   -     2,161   1,746
Total liabilities   41,323   12,593   (666 )   53,250   57,030
Partners' capital   76,612   126,796   (127,649 )   75,759   70,990
Noncontrolling interests   -   -   101,399     101,399   107,817
Total   $117,935   $139,389   ($26,916 )   $230,408   $235,837
                       
           
RECONCILIATION BETWEEN NET INCOME AND CASH FLOWS FROM OPERATIONS
(all amounts in $000's)
                 
    Three months ended December 31,   Twelve months ended December 31,
    2011     2010     2011     2010  
                 
Net income   2,957     $1,246     $8,927     $820  
Added back:                
Depletion   4,290     1,260     11,908     5,169  

Gain on investments

  -     -     -     (11 )
Depreciation and amortization   175     157     701     642  
Equity-based compensation   162     144     900     712  
Capitalized development activities, net of reimbursements   (150 )   (332 )   (893 )   (1,075 )
Deferred taxes   100     (69 )   57     (252 )
Excess tax benefit from equity-based compensation   (96 )   -     (96 )   -  
Cost of land sold   2     -     112     67  
Write-off debt issuance costs   -     -     -     32  
Change in operating accounts   (50 )   1,134     44     2,846  
Cash provided by operations   $7,390     $3,540     $21,660     $8,950  
                 
                 
SEGMENT INFORMATION
(all amounts in $000's)
                 
                 
    Three months ended December 31,   Twelve months ended December 31,
    2011     2010     2011     2010  
                 
Revenues:                
Partnership Fee Timber   $8,396     $3,908     $30,980     $22,304  
Funds Fee Timber   8,576     1,943     21,749     5,370  
Total Fee Timber   16,972     5,851     52,729     27,674  
Timberland Management & Consulting (TM&C)   -     16     -     31  
Real Estate   837     2,679     4,545     3,487  
Total   17,809     8,546     57,274     31,192  
Operating income (loss):                
Fee Timber   5,548     1,689     16,899     9,703  
TM&C   (398 )   (345 )   (1,515 )   (1,250 )
Real Estate   (763 )   1,311     (349 )   (809 )
General & administrative   (996 )   (1,334 )   (4,188 )   (4,731 )
Total   $3,391     $1,321     $10,847     $2,913  
                 
                 

 

 

SELECTED STATISTICS

       
                 
    Three months ended December 31,   Twelve months ended December 31,
    2011     2010     2011     2010  
Log sale volumes by species (million board feet):                
Sawlogs                
Douglas-fir   20.0     4.4     55.2     35.0  
Whitewood   3.8     3.8     18.0     7.1  
Cedar   0.4     0.4     1.4     0.9  
Hardwood   0.5     0.4     2.4     0.9  
Pulpwood                
All species   4.5     2.1     13.2     9.1  
Total   29.2     11.1     90.2     53.0  
                 
Log sale volumes by sort (million board feet):                
Export   8.5     5.3     40.6     17.7  
Domestic   15.7     3.3     34.0     25.3  
Pulpwood   4.5     2.1     13.2     9.1  
Hardwood   0.5     0.4     2.4     0.9  
Total   29.2     11.1     90.2     53.0  
                 
Average price realizations by species (per thousand board feet):              
Sawlogs                
Douglas-fir   603     537     609     528  
Whitewood   534     446     546     446  
Cedar   799     895     923     917  
Hardwood   623     513     573     502  
Pulpwood                
All species   398     340     383     311  
Overall   565     481     567     486  
                 
Average price realizations by sort (per thousand board feet):                
Export   642     517     628     526  
Domestic   570     511     565     520  
Pulpwood   398     340     383     311  
Hardwood   623     513     573     502  
Overall   565     481     567     486  
                 
                 
Owned timber acres   114,000     114,000     114,000     114,000  
Acres owned by Funds   61,000     61,000     61,000     61,000  
Capital and development expenditures ($000's)   1,328     695     6,013     2,012  
Depletion ($000's)   4,290     1,260     11,908     5,169  
Depreciation and amortization ($000's)   175     157     701     642  
                         
             
QUARTER TO QUARTER COMPARISONS
(Amounts in $000's except per unit data)
             
    Q4 2011 vs.       Q4 2011 vs.
    Q4 2010       Q3 2011
Net income (loss) attributable to Pope Resources' unitholders:            
4th Quarter 2011   $2,349         $2,349  
3rd Quarter 2011   -         (562 )
4th Quarter 2010   1,663         -  
Variance   $686         $2,911  
             
Detail of earnings variance:            
Fee Timber            
Log volumes (A)   $8,738         $9,676  
Log price realizations (B)   2,457         292  
Production costs   (3,878 )       (3,014 )
Depletion   (3,030 )       (2,719 )
Other Fee Timber   (428 )       403  
Timberland Management & Consulting            
Other Timberland Mgmt. & Consulting   (53 )       (65 )
Real Estate            
Land and conservation easement sales   (1,849 )       345  
Other Real Estate   99         (86 )
Environmental remediation costs   (324 )       (629 )
General & administrative costs   338         (46 )
Net interest expense   (16 )       85  
Other (taxes, noncontrolling int., investment gain)   (1,368 )       (1,331 )
Total variance   $686         $2,911  
             
(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 volume.

 

Source: Pope Resources

Pope Resources
Tom Ringo, VP & CFO, 360-697-6626
Fax: 360-697-1156

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