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a50574187.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

X	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2012

___	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to________

Commission File No. 1-9035

Pope Resources, A Delaware Limited Partnership

(Exact name of registrant as specified in its charter)

Delaware	91-1313292
(State of Organization)	(IRS Employer I.D. No.)

19950 Seventh Avenue NE, Suite 200, Poulsbo, WA 98370

(Address of principal executive offices, Zip Code)

Registrant's telephone number, including area code: (360) 697-6626

Securities registered pursuant to Section 12(b) of the Act:

	Title of each class	Name of each exchange on which registered
	Depositary Receipts (Units)	NASDAQ

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	o		Accelerated Filer	x
Non-Accelerated Filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act).

Yes

At June 30, 2012, the aggregate market value of the non-voting equity units of the registrant held by non-affiliates was approximately $175,916,049.

The number of the registrant’s limited partnership units outstanding as of February 18, 2013 was 4,444,777.

Documents incorporated by reference: None

Pope Resources, A Delaware Limited Partnership

Form 10-K

For the Fiscal Year Ended December 31, 2012

Index

Part I			Page

	Item 1.	Business	3
	Item 1A.	Risk Factors	20
	Item 1B.	Unresolved Staff Comments	22
	Item 2.	Properties	22
	Item 3.	Legal Proceedings	24
	Item 4.	Mine Safety Disclosures	24

Part II

	Item 5.	Market for Registrant’s Units, Related Security Holder
		Matters and Issuer Purchases of Equity Securities	25
	Item 6.	Selected Financial Data	28
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
	Item 8.	Financial Statements and Supplementary Data	61
	Item 9.	Changes in and Disagreements with Accountants on Accounting and
		Financial Disclosure	87
	Item 9A.	Controls and Procedures	87
	Item 9B.	Other Information	88

Part III

	Item 10.	Directors and Executive Officers of the Registrant	89
	Item 11.	Executive Compensation; Compensation Discussion & Analysis	93
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters	104
	Item 13.	Certain Relationships and Related Transactions and Director Independence	107
	Item 14.	Principal Accountant Fees and Services	107

Part IV

	Item 15.	Exhibits, Financial Statement Schedule	108
		Signatures	115

PART I

Item 1. BUSINESS

OVERVIEW

When we refer to the “Partnership,” the “Company,” “we,” “us,” or “our,” we mean Pope Resources, A Delaware Limited Partnership and its consolidated subsidiaries. References to notes to the financial statements refer to the Notes to the Consolidated Financial Statements of Pope Resources, A Delaware Limited Partnership included in Item 8 of this form. The Partnership was formed in 1986 as a result of the spinoff of certain timberlands from Pope & Talbot Inc.

The Partnership currently operates in three primary business segments: (1) Fee Timber, (2) Timberland Management & Consulting (TM&C), and (3) Real Estate. Fee Timber operations consist of growing and harvesting timber from the 193,000 acres that we own or manage as tree farms. Activities in the Timberland Management & Consulting segment are centered on raising and investing capital from third parties for private equity timber funds, and thereafter managing those funds for the benefit of all investors. Our Real Estate segment’s operations are focused on a portfolio of approximately 2,900 acres in the Puget Sound basin of Washington. This segment’s activities consist of efforts to enhance the value of our land by obtaining the entitlements and, in some cases, building the infrastructure necessary to enable further development. Further segment financial information is presented in Note 11 to our consolidated financial statements included in this report. Copies of the Partnership’s reports filed or furnished under the Securities Exchange Act, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, and all amendments to these reports, are available free of charge at www.poperesources.com. The information contained in or connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with or furnished to the Securities and Exchange Commission. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that also contains our current and periodic reports.

DESCRIPTION OF BUSINESS SEGMENTS

Fee Timber

Operations. As indicated above, our Fee Timber operations consist primarily of growing, harvesting, and marketing timber to export brokers and domestic manufacturers. In addition, our tree farms generate lease revenues from other sources such as minerals, cell towers, and brush. The 193,000 timberland acres that we own or manage under the banner of this segment break down into two categories. The first of these categories consists of the approximately 69,500-acre Hood Canal tree farm, located in the Hood Canal area of Washington, and the 43,600-acre Columbia tree farm located in southwest Washington. Management views the Hood Canal and Columbia tree farms as the Partnership’s core holdings, and manages them as a single operating unit. When we refer to these two tree farms we will describe them as the “Partnership’s tree farms”. We have owned the Hood Canal tree farm, substantially as currently comprised, since our formation in 1985, while we acquired the bulk of the Columbia tree farm in 2001.

This segment also includes as a second category the operations of ORM Timber Fund I, LP (Fund I), ORM Timber Fund II, Inc. (Fund II), and ORM Timber Fund III (REIT), Inc. (Fund III), which are consolidated into our financial statements. When referring to all the Funds collectively, depending on context, we will use the designations “Fund” or “the Funds” interchangeably. The Funds’ assets consist of 80,000 acres of timberland located in western Washington, western Oregon and northern California. Fund I acquired 24,000 acres of timberland in 2006, Fund II acquired its 37,000 acres of timberland in 2009 and 2010. Fund III acquired 19,000 acres of northern California timberland in the fourth quarter of 2012, a deployment of approximately 25% of its committed capital. We will refer to tree farms owned by the Funds as “Fund tree farms”. The Partnership’s ownership interest in both Funds I and II is 20% and is 5% with respect to Fund III.

When referring to the Partnership and Fund tree farms together we will refer to them as the “Combined tree farms”. When referring to the combination of the Partnership’s tree farms and the aggregate proportion of each of the Funds owned by the Partnership, we will refer to the sums as “Look-through totals”. Our Fee Timber segment produced 84%, 92%, and 89% of our consolidated revenue in 2012, 2011, and 2010, respectively.

Inventory. Timber volume is generally expressed in thousand board feet (MBF) or million board feet (MMBF). In the discussion below, inventory and projected harvest level data for the Partnership’s tree farms is presented separately from that of the Funds’ tree farms, in addition to presentation of inventory and harvest level data on a Look-through basis. We define “merchantable timber inventory” to mean timber inventory in productive timber stands that are 35 years of age and older.

Partnership merchantable inventory (volumes in MMBF) as of December 31:
	2012
Age Class	Sawtimber		Pulpwood		Total		2011 Total
35 to 39		81		20		101		82
40 to 44		56		12		68		78
45 to 49		30		5		35		31
50 to 54		4		1		5		10
55 to 59		10		2		12		12
60 to 64		14		2		16		20
65+		45		7		52		66
		240		49		289		299

Total merchantable inventory on the Partnership’s tree farms decreased 3%, or 10 MMBF, from 299 MMBF in 2011 to 289 MMBF in 2012. This decrease resulted from the harvest of 52 MMBF, which included a 4.4 MMBF timber deed sale and 8 MMBF of previously deferred harvest volume. The 3% decline in merchantable inventory includes growth and shifts in age-class layers as standing timber reached 35 years of age and began to be included in merchantable timber inventory.

Fund merchantable inventory (volumes in MMBF) as of December 31:
	2012
Age Class	Sawtimber		Pulpwood		Total		2011 Total
35 to 39		80		17		97		93
40 to 44		103		37		140		101
45 to 49		47		11		58		49
50 to 54		29		8		37		48
55 to 59		27		6		33		20
60 to 64		6		3		9		3
65+		9		2		11		10
		301		84		385		324

In 2012, the Funds’ tree farms experienced a 19% increase in merchantable inventory, or 61 MMBF, primarily as a result of the Fund III acquisition which added 59 MMBF of merchantable timber. These additions were partially offset by 32 MMBF of timber harvested in 2012. The Funds’ merchantable volume also increased due to growth and the shift in new age-class layers as standing timber reached 35 years of age, and adjustments as a result of ongoing cruises.

Look-through merchantable inventory (volumes in MMBF) as of December 31:
	2012 Volume						2011 Volume
	Partnership						Partnership
		100%	Share of		Look-			100%	Share of		Look-
Age Class		Owned	Funds		through			Owned	Funds		through
35 to 39		101		19		120		82		19		101
40 to 44		68		21		89		78		20		98
45 to 49		35		11		46		31		10		41
50 to 54		5		7		12		10		9		19
55 to 59		12		7		19		12		4		16
60 to 64		16		1		17		20		1		21
65+		52		2		54		66		2		68
		289		68		357		299		65		364

Merchantable inventory volume on a Look-through basis was 357 MMBF as of December 31, 2012, which is 2%, or 7 MMBF, lower than the 364 MMBF as of December 31, 2011. From a Look-through standpoint, the impact of the Fund III inventory increase is heavily muted because the Partnership’s share of that Fund is only 5%.

As of December 31, 2012, total merchantable inventory volume from the Combined tree farms was estimated to be 674 MMBF, which is 8%, or 51 MMBF, greater than the estimated merchantable timber inventory volume of 623 MMBF at December 31, 2011. Most of this increase is attributable to the aforementioned Fund III acquisition that added 59 MMBF during 2012.

Timber inventory volume estimates are updated annually. Of the timber stands older than 24 years, 10% to 20% are physically re-measured each year using a statistical sampling process called “cruising”. Adjustments are made for depletion of areas harvested, growth, changes in acres and associated timber volume resulting from acquisitions, dispositions, and reclassification of acres as available or unavailable for harvest.

The dominant timber species on the Partnership’s tree farms is Douglas-fir, which has unique structural characteristics that make it generally preferable to other softwoods and hardwoods for the production of construction grade lumber and plywood. A secondary conifer, or softwood, species on the Partnership’s tree farms is western hemlock, which is similar in color and structural characteristics to a number of other minor conifer timber species, including Sitka spruce and the true firs. These species are thus purchased and manufactured into lumber generically, and referred to as “whitewoods”. There is also a minor amount of another conifer species, western red cedar, which is used in siding and fencing. Hardwood species on the Partnership’s tree farms include red alder and other minor hardwoods. The merchantable timber inventory on Fund properties contains a greater proportion of whitewoods than do the Partnership’s timberlands. With the acquisition of Fund III in northern California, we added ponderosa pine and white fir to the Combined species inventory. Ponderosa pine is used for shelving, lumber, and parts for windows, doors, and furniture. White fir is a member of the whitewood species group and is used primarily for lumber production and the core layers in plywood.

Partnership merchantable inventory (volumes in MMBF) as of December 31:
Species	2012 Volume		Percent of total			2011 Volume		Percent of total
Douglas-fir		206		71	%		214		72	%
Western hemlock		35		12	%		37		12	%
Western red cedar		15		5	%		15		5	%
Other conifer		11		4	%		12		4	%
Red alder		19		7	%		18		6	%
Other hardwood		3		1	%		3		1	%
Total		289		100	%		299		100	%

Fund merchantable inventory (volumes in MMBF) as of December 31:
Species	2012 Volume		Percent of total			2011 Volume		Percent of total
Douglas-fir		191		50	%		185		57	%
Western hemlock		91		23	%		90		28	%
Western red cedar		2		1	%		2		1	%
Ponderosa pine		17		4	%		-		-	%
White fir		32		8	%		-		-	%
Other conifer		38		10	%		33		10	%
Red alder		12		3	%		12		3	%
Other hardwood		2		1	%		2		1	%
Total		385		100	%		324		100	%

Look-through merchantable inventory (volumes in MMBF) as of December 31:
	2012 Volume
	Partnership
		100%	Share of		Look-		Percent
Species		Owned	Funds		through		of total
Douglas-fir		206		37		243		68	%
Western hemlock		35		18		53		15	%
Western red cedar		15		-		15		4	%
Ponderosa pine		-		1		1		-	%
White fir		-		2		2		1	%
Other conifer		11		7		18		5	%
Red alder		19		3		22		6	%
Other hardwood		3		-		3		1	%
Total		289		68		357		100	%

Look-through merchantable inventory (volumes in MMBF) as of December 31:
	2011 Volume
	Partnership
		100%	Share of		Look-		Percent
Species		Owned	Funds		through		of total
Douglas-fir		214		37		251		69	%
Western hemlock		37		18		55		15	%
Western red cedar		15		-		15		4	%
Ponderosa pine		-		-		-		-	%
White fir		-		-		-		-	%
Other conifer		12		7		19		5	%
Red alder		18		3		21		6	%
Other hardwood		3		-		3		1	%
Total		299		65		364		100	%

The Partnership’s tree farms as of December 31, 2012 include approximately 113,000 acres. Of this total, approximately 96,000 acres are designated as productive acres, meaning land that is capable of growing merchantable timber and where the harvesting of that timber is not constrained by physical, environmental or regulatory restrictions. The Funds’ tree farms as of December 31, 2012 totaled approximately 80,000 acres, of which almost 71,000 were designated as productive acres. Productive acres on a Look-through basis, as of December 31, 2012, were 107,000 acres. Approximately 32% of the Partnership’s acreage and 29% of Fund acreage is in the 25-34 year age classes, much of which will begin moving from pre-merchantable to merchantable timber inventory over the next five years. As of December 31, 2012, Combined productive acres are spread by timber age-class as follows:

Age	12/31/2012 Acres (in thousands)
Class	Partnership	%		Funds	%		Combined		%
Clear-cut	2.5	2	%	1.5	2	%		4.0	2	%
0 to 4	6.6	7	%	3.5	5	%		10.1	6	%
5 to 9	10.8	11	%	4.1	6	%		14.9	9	%
10 to 14	10.2	11	%	4.5	6	%		14.7	9	%
15 to 19	9.7	10	%	2.5	3	%		12.2	7	%
20 to 24	9.4	10	%	11.7	17	%		21.1	13	%
25 to 29	17.0	18	%	7.3	10	%		24.3	15	%
30 to 34	14.0	14	%	13.2	19	%		27.2	17	%
35 to 39	6.6	7	%	7.4	10	%		14.0	8	%
40 to 44	3.7	4	%	7.9	11	%		11.6	7	%
45 to 49	1.6	2	%	3.5	5	%		5.1	3	%
50 to 54	0.3	-	%	1.7	2	%		2.0	1	%
55 to 59	0.7	1	%	1.2	2	%		1.9	1	%
60 to 64	0.6	1	%	0.4	1	%		1.0	1	%
65+	1.9	2	%	0.4	1	%		2.3	1	%
	95.6			70.8				166.4

Look-through productive acres are spread by timber age-class as follows as of December 31, 2012:

	12/31/2012 Acres (in thousands)
Age	100%			Share of			Look-
Class	Owned	%		Funds	%		through		%
Clear-cut	2.5	2	%	0.3	3	%		2.8	2	%
0 to 4	6.6	7	%	0.6	5	%		7.2	7	%
5 to 9	10.8	11	%	0.6	5	%		11.4	11	%
10 to 14	10.2	11	%	0.8	7	%		11.0	10	%
15 to 19	9.7	10	%	0.5	4	%		10.2	9	%
20 to 24	9.4	10	%	1.7	15	%		11.1	10	%
25 to 29	17.0	18	%	1.4	12	%		18.4	17	%
30 to 34	14.0	14	%	1.6	14	%		15.6	15	%
35 to 39	6.6	7	%	1.4	12	%		8.0	7	%
40 to 44	3.7	4	%	1.2	11	%		4.9	5	%
45 to 49	1.6	2	%	0.6	5	%		2.2	2	%
50 to 54	0.3	-	%	0.3	3	%		0.6	1	%
55 to 59	0.7	1	%	0.2	2	%		0.9	1	%
60 to 64	0.6	1	%	0.1	1	%		0.7	1	%
65+	1.9	2	%	0.1	1	%		2.0	2	%
	95.6			11.4				107.0

Look-through productive acres are spread by timber age-class as follows as of December 31, 2011:

	12/31/2011 Acres (in thousands)
Age	100%			Share of			Look-
Class	Owned	%		Funds	%		through		%
Clear-cut	3.4	4	%	0.3	3	%		3.7	3	%
0 to 4	5.2	5	%	0.4	4	%		5.6	5	%
5 to 9	11.2	12	%	0.5	5	%		11.7	11	%
10 to 14	12.3	13	%	0.6	6	%		12.9	12	%
15 to 19	6.7	7	%	0.7	7	%		7.4	7	%
20 to 24	12.4	13	%	1.4	14	%		13.8	13	%
25 to 29	17.2	18	%	1.4	14	%		18.6	18	%
30 to 34	11.5	12	%	1.2	12	%		12.7	12	%
35 to 39	5.5	6	%	1.4	14	%		6.9	7	%
40 to 44	4.3	4	%	1.1	11	%		5.4	5	%
45 to 49	1.5	2	%	0.5	5	%		2.0	2	%
50 to 54	0.6	1	%	0.4	4	%		1.0	1	%
55 to 59	0.7	1	%	0.1	1	%		0.8	1	%
60 to 64	0.8	1	%	-	-	%		0.8	1	%
65+	2.5	2	%	-	-	%		2.5	2	%
	95.8			10.0				105.8

Long-term Harvest Planning. Long-term harvest plans for the Partnership’s tree farms and the Funds’ tree farms reflect the different ownership time horizons associated with each group. Plans for the Partnership timberlands are designed to maintain sustainable harvest levels, assuming indefinite ownership. Plans for the Funds’ tree farms, on the other hand, reflect the 10-13 year combined investment and drawdown term of each fund and take into account the different mix of age classes in each fund. The harvest level for the Funds’ tree farms is developed to maximize the total return during each of the Funds’ investment periods by blending harvest income with the value of the portfolio upon disposition. This will result in more harvest variability between years than is the case with the Partnership’s tree farms. The Funds’ tree farms also enjoy greater harvest flexibility relative to the Partnership’s tree farms due to the fact that they have nearly two times the percentage of merchantable acres (32% of Fund productive acres are 35 years of age and older versus 17% for Partnership tree farms), resulting in a harvest range of 15 - 50 MMBF in a given year.

In response to a dramatic downturn in log prices in 2008, we began deferring harvest volume from the Combined tree farms and continued doing so into 2010. Beginning in 2010, the reduction in China’s log imports from Russia opened up an opportunity for North American log producers to supply a larger portion of the growing Chinese market. Over the course of 2010 and into 2011, log export volumes from the Pacific Northwest to China surged, resulting in log prices that were unexpectedly high during the first half of 2011. Timberland owners took advantage of opportunities to harvest deferred volume into a strengthening log market. By the second half of 2011, however, the Chinese government restricted credit to try to curb inflation and slow down the pace of building. This resulted in the buildup of inventory and, in turn, a weakening of demand and pricing in 2011’s fourth quarter. During 2012, export log prices for both the China and Japan segments of the export market remained at a diminished premium over the pricing of U.S. domestic sawmills. This narrowed spread was primarily an outgrowth of strengthening prices for lumber in the United States as the U.S. domestic housing market slowly improved, combined with a decline in the price of export logs. The premium offered for export logs was thin enough to encourage delivery of our logs to domestic customers closer in distance from the point of production. The resulting savings in haul costs allowed for higher realized net stumpage. Some specialty mills that produce high-grade lumber for export to Japan were able to offer prices for export quality logs that were equivalent to those paid by exporters, which had the added result of haul savings over the export option. In general, net stumpage realizations were attractive enough in 2012 to continue the harvest of some deferred volume from 2008 through 2010 that had begun in 2011.

Over the next three to five years, assuming a continuation in log market price recovery, we expect to take advantage of spikes in demand and corresponding pricing opportunities to increase the harvest volume from the Partnership’s tree farms to meter in an additional 17 MMBF (see table below) deferred during the recent economic downturn on top of the sustainable harvest level of 44 MMBF per year. Similarly, harvest from Fund tree farms will incorporate 15 MMBF of deferred harvest volume. As described above, the base level of harvest from the Funds’ tree farms will fluctuate more widely relative to the planned harvest level of 47 MMBF. Assuming full operations on the Funds’ existing tree farms, the long-term planned annual harvest level for each ownership and on a Look-through basis, along with cumulative deferred volumes, can be found in the table below:

							Accumulated
(amounts in MMBF)			Look-through		Accumulated		Look-through
	Planned annual		planned annual		volume deferral		volume deferral
	harvest volume		harvest volume			2009-12		2009-12
Partnership Properties		44		44		17		17
Fund Properties		47		9		15		3
Total		91		53		32		20

Marketing and Markets. The following marketing and markets discussion applies to the Combined tree farms. We market timber by selling finished logs to wood manufacturers or to export brokers. To do so, we engage independent logging contractors to harvest the standing timber and manufacture it into logs that we then sell on the open market. We retain title to the logs until delivery takes place, which normally occurs at a customer log yard. We sell our logs to international customers and to domestic manufacturers, the former through log exporting intermediaries. While domestic manufacturers historically represent the largest consumer of our sawlogs, they slid behind export markets as a percent of total sawlog production in the fourth quarter of 2010 and have bounced between the primary and secondary market for us since that time.

Historically, Japanese customers have paid a premium for the highest quality logs from which visually appealing beams for residential construction are produced. U.S. mills, on the other hand, manufacture mostly framing lumber requiring structural integrity for wall systems that are concealed by drywall. The logs required by U.S. sawmills for domestic lumber consumption do not have to be of as high a quality and are more of a commodity relative to logs headed for the Japanese market, and thus command a lower price. In recent years the export market for logs in the Pacific Northwest has been migrating from a market highly focused on Japan to a market that now includes more volume to China. In late 2010, China overtook Japan as the largest importer of Pacific Northwest logs. Sawlogs sold to China are used chiefly for cement forms, pallets, and other low-end uses that can be satisfied with the commoditized logs traditionally purchased by domestic sawmills. The lower average sawlog quality and more diverse species mix flowing to China, combined with the limited volume of high-quality Douglas-fir flowing to Japan, has resulted in a narrowing of the overall export premium received for sales of logs into these export markets relative to the domestic market. In 2011, the U.S. home building industry was still in a slump, with low lumber demand and pricing making it hard for U.S. mills to compete for logs. Domestic mills, however, were able to sell significant volumes of lumber into the Chinese market, allowing them to better compete for log supply. Domestic lumber markets improved in 2012 in response to declines in domestic home inventories and increases in home values that have spurred a sharp increase in housing starts. These modest economic improvements, coupled with spot export markets, helped to form a consistent, yet diverse, sales base in 2012.

The logs that we sell to China, Japan, and Korea are actually sold to U.S.-based brokers who in turn sell directly to offshore customers. Our decision to sell through intermediaries is predicated on risk management. Mitigation of foreign exchange risk, loss prevention, and minimizing cash collection risks inform our decision to sell through brokers. For the years 2005 through 2009, the percentage of our annual production sold into export markets ranged from 6% to 15%. For the years 2010 and 2011, however, our export mix surged to 33% to 45%, respectively, as demand from China continued to climb. With the narrowing of the export premium, the percent of logs sold to export customers diminished to 25% in 2012. Factors that affect the proportion of our sales to export markets include the relative strength of U.S. and foreign building markets, currency exchange rates, hauling costs to export ports, and ocean transportation costs.

Customers. Logs from the Combined tree farms are sold to export intermediaries located at the ports of Longview, Tacoma, Port Angeles, and Olympia, Washington and Astoria, Oregon. The Partnership sells logs from its own tree farms and from Fund properties domestically to lumber mills and other wood fiber processors located throughout western Washington, northwest Oregon, and northern California. Whether destined for export or domestic markets, the cost of transporting logs limits the destinations to which the Partnership can profitably deliver and sell its logs.

The ultimate decision on where to sell logs is based on the net proceeds we receive after considering the delivered log prices from a prospective customer and the hauling cost needed to get logs to that customer. In some instances where harvest operations are in close proximity to a mill relative to the export yard of a broker, we will take advantage of favorable haul costs over selling to an export customer whose nominal log price may be higher but whose yard may be a greater distance from a harvest unit. The higher net stumpage earned by selling to the domestic mill will, in such instances, result in sales of logs originally intended for Asia being diverted to domestic markets. As such, delivered log prices that we realize are influenced by marketing decisions informed by net stumpage rather than merely focusing on the delivered per MBF log price.

Weyerhaeuser was the largest customer for our Fee Timber segment in 2012, representing 23% of segment revenue. The Combined tree farms delivered logs to 45 separate customers during 2012, compared to 50 during 2011.

Competition. Most of our competitors are comparable in size or larger. Log sellers compete on the basis of quality, pricing, and the ability to satisfy volume demands for various types and grades of logs to particular markets. Management believes that the location, type, and grade of timber from the Combined tree farms will enable it to compete effectively in these markets. However, our products are subject to some competition from a variety of non-wood and engineered wood products as well as competition from foreign-produced logs and lumber.

Forestry and Stewardship Practices. Timberland management activities on the Combined tree farms include reforestation, control of competing brush in young stands, thinning of the timber to achieve optimal spacing after stands are established, fertilization, and road maintenance. During 2012, we planted 1.2 million seedlings on 3,300 acres of the Combined tree farms. This compares to the years 2011 and 2010 in which the Partnership planted 803,000 and 657,000 seedlings on 2,000 and 1,800 acres, respectively, of the Combined tree farms. Seedlings are generally planted from December to April, depending on weather and soil conditions, to restock plantations that were harvested during the preceding twelve months. Planting will vary from year to year based upon harvest level, the timing of harvest, and seedling availability. Management’s policy is to return all timberlands to productive status in the first planting season after harvest.

All harvest and road construction activities are conducted under the forest practice rules and regulations of the applicable state. These regulations are comprehensive sets of rules that require project-specific permits that govern a defined set of forest operations. For example, an application for harvest or road construction must address soil stability and potential impact to public resources. In many cases we consult third-party, state-qualified, geo-technical consultants to promote safety and regulatory compliance. In addition to new road construction, existing roads are maintained to the standards of the applicable state forest practices act in order to minimize siltation of nearby streams and avoid slope failures.

In Washington, beginning in 2000, all roads were required to be evaluated for hazards and scheduled for upgrading or deconstruction (abandonment), if needed, by the end of 2015. We developed a compliance schedule for our roads in Washington and it was accepted by the state. At the beginning of 2011, our efforts were on track to complete all maintenance activities by 2015. Due to the economic downturn, the state established a process in 2011 to extend the timeframe for these requirements, allowing an additional five years to complete the necessary work. The Partnership will exercise this option for some Fund properties. Oregon does not presently have a similar road maintenance and abandonment plan requirement.

Sustainable Forestry Initiative (SFI®). Since 2001, we have been a member of the SFI forest certification program, an independent environmental review and certification program that promotes sustainable forest management, focusing on water quality, biodiversity, wildlife habitat, and species protection. With our voluntary entry into this certification program, we have been subject to independent audits of the required standards for the program. Management views this certification as an important indication of our commitment to manage our lands sustainably while continually seeking ways to improve our management practices. We believe this commitment is an important business practice that contributes positively to our reputation and to the long-term value of our assets.

Beginning in 2007, SFI third-party audits increased in frequency from every three years to annually. We were re-certified in 2012, which includes both the Partnership and Fund properties. We believe this certification allows us to obtain the broadest market penetration for our logs while protecting the core timberland assets of the Partnership and the Funds.

Timberland Management & Consulting

Background. In 1997, the Partnership formed two wholly owned subsidiaries, ORM, Inc. and Olympic Resource Management LLC (“ORMLLC”), to facilitate the Timberland Management & Consulting activities. Our TM&C segment earns management fees and incurs expenses resulting from managing property on behalf of third-party owners and investors. Since the launch of our timberland private equity fund strategy in 2003, the activities in this segment have consisted primarily of attracting third-party investment capital for the Funds and then acquiring and managing properties on behalf of the Funds. When we discuss the TM&C properties we will refer to either the acquisition values, defined as contractually agreed-upon prices paid for the properties, or the value of assets under management, defined as the current appraised value of the properties. As of December 31, 2012, we manage 80,000 acres of timberland properties in Washington, Oregon, and California in this business segment with combined appraised values of $231 million.

ORMLLC has deployed capital for the Funds with a total acquisition value of $195 million, which includes our co-investment of approximately $31 million. In July 2012 we completed our final close of Fund III with commitments totaling $180 million, including our co-investment commitment of $9 million. The Funds afford us greater economies of scale in the management, acquisition, and disposition of timberland than would be possible with the Partnership’s investment capital alone. In addition, we earn management fees that are paid by the Funds for managing the Funds and their respective timberland portfolios. Accounting rules require us to consolidate the Funds into our financial statements, based in part on ORMLLC’s controlling role as the general partner or managing member of the Funds, resulting in the elimination of $2.2 million, $2.4 million, and $1.5 million of management fee revenue in 2012, 2011, and 2010, respectively. These fees are eliminated in concert with a corresponding elimination of operating expenses for the Fee Timber segment.

Operations. The TM&C segment’s key activity is to provide investment and timberland management services to the Funds and to other third-party timberland owners. We anticipate growth in this segment as we continue to manage the Funds, together with any future funds successfully established by the Partnership. The TM&C segment represents less than 1% of consolidated revenue for each of the three years ended December 31, 2010 through 2012, due to the elimination of the fees generated from asset and timberland management of the Funds. This may leave the reader to wonder why even bother with the TM&C business. The Partnership’s bottom line does benefit, however, in at least three distinct ways. First, we benefit through the opportunity to co-invest in each of these funds. By partnering with other investors we are able to diversify our capital across more tree farms than we could by investing for ourselves. Second, third party investors are paying the majority of the fees associated with managing these Funds. Third, we benefit from the economies of scale generated through managing these additional acres of timberland.

As stated above, the primary activity of this segment is the building and managing of diversified timberland portfolios for investors that include third parties and the Partnership. Management views this objective as the primary means of increasing the Partnership’s total timberland base, through our co-investment, while at the same time improving overall management economies of scale, spreading acquisition costs over additional capital, and generating fee income. We earn annual asset and investment management fees for managing this capital once timberland properties are acquired. We also earn annual timberland management fees on acres owned by the Funds and log marketing fees based on harvest activity from Fund tree farms. At the end of a Fund term, if a Fund achieves threshold return levels, we earn a carried interest incentive fee.

As mentioned earlier, accounting guidance requires that all fees generated from managing the Funds and corresponding operating expenses for the Fee Timber segment are eliminated as a result of consolidation of the Funds into the Partnership’s financial statements. The elimination of these fees and corresponding operating expenses results in a decrease in the otherwise reported cost per acre of managing Fund tree farms under our Fee Timber segment as well as eliminating the revenue generated from managing the Funds in the TM&C segment. An effect of these eliminations is to make the Fee Timber results look stronger and the TM&C results look correspondingly weaker.

The follow table provides fund-specific statistics as of December 31, 2012:

	Date	Number of		Total		Values (in millions)
	closed	tree farms		acres		at acquistion
Fund I	Aug-05		2		24,000	$	57.8
Fund II	Mar-09		4		37,000		92.6
Fund III*	Jul-12		1		19,000		45.1
			7		80,000	$	195.5

*Fund III has $134 million of committed capital remaining to be invested as of December 31, 2012.

Marketing. When raising capital for a new Fund, we market these opportunities to accredited investors with an interest in investing alongside a manager with a specific regional specialization and expertise in the timberland asset class. Our Funds fill a unique niche among timberland investment management organizations due to our degree of co-investment, relatively small size, and regional specialization. Additional marketing and business development efforts include regular contact with forest products industry representatives, non-industry owners, and others who provide key financial services to the timberland sector. Our acquisition and disposition activities keep management informed of changes in timberland ownership that can represent opportunities for us to market our management and consulting services.

Customers. The Funds are the primary customers and users of TM&C services.

Competition. We compete against both larger and comparably sized companies providing similar timberland investment management services. There are over 20 established timberland investment management organizations competing against us in this business. The companies in this group have access to established sources of capital and, in some cases, increased economies of scale that can put us at a disadvantage. Our value proposition to investors is our long track record of success in the Pacific Northwest and our co-investment in each of the Funds.

Limitation on Expenditures. The 1997 amendment to Pope Resources’ Limited Partnership Agreement authorizing launch of the Investor Portfolio Management Business (“IPMB”) limits our cumulative net expenditures incurred in connection with the IPMB to $5.0 million including debt guarantees. As of December 31, 2012, cumulative expenditures incurred in pursuit of IPMB opportunities, including guarantees, were less than cumulative income generated. Therefore, cumulative net expenditures as of December 31, 2012 against the $5.0 million limit are zero.

Real Estate

Background. The Partnership’s real estate activities are closely associated with the management of its timberlands. Management continually evaluates timberlands in terms of the best economic use, whether this means continuing to grow and harvest timber, seeking a rezone of the property for sale or development, or working with conservation organizations and the public on a sale. After timberland has been logged, management has a choice between four primary alternatives for the underlying land: reforest and continue to use as timberland, sell as undeveloped property, undertake some level of development to prepare the land for sale as improved property, or hold as property slated for later development or sale. Generally speaking, the Real Estate segment’s activities consist of investing in and later reselling improved properties, and holding properties for later development and sale. As a result, revenue from this segment tends to fluctuate substantially, and is characterized by relatively long periods in which revenue is relatively low, while expenses incurred to increase the value of the Partnership’s development properties may be higher. During periods of diminished demand, however, soft costs and infrastructure investment are managed so as to minimize negative cash flows. When improved properties are sold, income is recognized in the form of sale price net of acquisition and development costs. The Partnership has a 2,900-acre portfolio of property for which management believes there to be a higher and better use than timberland.

Operations. Real Estate operations focus on maximizing the value of the Partnership’s real estate portfolio. For Real Estate projects, management secures entitlements and/or infrastructure necessary to make development possible and then sells the entitled property to a party who will construct improvements. In addition, this segment works to negotiate conservation easements (CE) that typically encumber Fee Timber properties to preclude land from future development. The third and final area of operations in this segment includes leasing residential and commercial properties in Port Gamble, Washington, and leasing out a portion of a commercial office building in Poulsbo, Washington. The Real Estate segment represents 16%, 8%, and 11% of consolidated revenue in 2012, 2011, and 2010, respectively.

Development Properties

Other Land Investments. Management recognizes the significant value represented by the Partnership’s Real Estate holdings and is focused on adding to that value. The means and methods of adding value to this portfolio vary considerably depending on the specific location and zoning of each parcel. The variety of our holdings extends from land that has commercial activity zoning where unit values are valued on a per-square-foot basis to large lots of recently cutover timberland where value is measured in per-acre terms. In general, value-adding activities that allow for the highest-and-best-use of the properties include: working with communities and elected officials to develop grass roots support for entitlement efforts, securing favorable comprehensive plan designation and zoning, acquiring easements, and obtaining preliminary plat approvals.

Master planned communities in Gig Harbor, Kingston, Port Gamble, Bremerton, Hansville, and Port Ludlow, Washington make up approximately 47% of the acres in our development property portfolio. Due to each property’s size, development complexity, and regulatory environment, the projects are long-term in nature and require extensive time and capital investments to maximize returns.

Gig Harbor. Gig Harbor, a suburb of Tacoma, Washington, is the site of Harbor Hill, a mixed-use development project that includes a 16-acre retail/commercial site, 28 acres of business park lots, and 188 acres of land with residential zoning. A 20-year development agreement was approved in late 2010. We received preliminary plat approval in early 2011 for the then 200-acre residential portion of this project that at that time included 554 single-family and 270 multi-family units. Key provisions of the development agreement and plat approval include: (a) extending the project approval from 7 to 20 years; (b) reserving sufficient domestic water supply, sanitary sewer, and traffic trip capacity on behalf of the project’s 824 residential units; and (c) waiver of park impact fees in exchange for a 7-acre parcel of land for City park purposes. All components of this project have transportation, water and sewer capacities reserved for full build-out. Management has been in discussions with a number of different interested parties for sale of subsets of both the single- and multi-family portions of this project. In December 2012, we sold an 11.5-acre residential land parcel containing 172 multi-family units from our Gig Harbor development.

Kingston. The Partnership owns a 360-acre property in Kingston that is named “Arborwood” with plans for the development of 663 single-family and 88 multi-family lots. Final approval of a preliminary plat and a 15-year development agreement was completed in February 2010. Further development will not proceed until the local market demonstrates an increased appetite for residential lots. The Partnership owns an additional 366 acres bordering this project, which has zoning for 5-acre lots. This property is currently under option for conservation as open space to be added to the North Kitsap Heritage Park, the neighboring park owned by Kitsap County, if funding for acquisition is secured.

Port Gamble. The Partnership currently owns and operates the town of Port Gamble, Washington, northwest of Kingston on the Kitsap Peninsula. Port Gamble was designated a “Rural Historic Town” under Washington’s Growth Management Act in 1999. This designation allows for substantial new commercial, industrial, and residential development using historic land use patterns and densities while maintaining the town’s unique architectural character. In 2012 substantial work was completed toward making a plat application to Kitsap County that, if approved, will allow for between 200 and 240 additional residential units and 200,000 to 260,000 square feet of additional commercial building space. Submission of this master plan for the 114-acre townsite and adjoining 205-acre agrarian district was submitted in January 2013, kicking off what is expected to be a multi-year period of environmental impact review and public comment before any construction can take place. The plan currently calls for development of homes, an inn, a dock, waterfront trails, and an agricultural area with a creamery, garden plots, greenhouses, orchard and winery. The vision is also to bring back the New England-style homes that have slowly disappeared since Port Gamble’s heyday in the 1920’s. Walking trails along the shoreline, through the adjoining forestlands and along pastoral farmland would contribute to the lifestyle of residents and enhance Port Gamble as a unique tourist attraction.

Bremerton. The West Hills area of Bremerton, Washington is the site of a 46-acre industrial park which is being developed in two phases that will result in a total of 24 lots. Construction on the 9 lots that make up Phase I was completed in 2007. One lot has been sold from Phase I. We currently anticipate that, at the completion of the sale of Phase I lots, infrastructure spending and marketing will commence for Phase II.

Hansville. The Partnership owns a 149-acre residential development project in Hansville called “Chatham”, with 19 parcels ranging from 3 to 10 acres in size. Construction was completed in late 2007 and the lots are currently being marketed for sale. To date, only one lot has sold from this project.

Port Ludlow. Port Ludlow represents a 256-acre property located just outside the Master Planned Resort boundary of Port Ludlow, Washington. We currently expect preliminary plat approval in late 2013 that, if obtained, will allow for up to 54 lots ranging from 1 to 1.5 acres each, with the balance of the property designated as open space. Development beyond the point of plat approval will not commence until demand for rural residential lots improves.

Rural Residential. Management launched the Rural Lifestyles program to capitalize on higher-and-better-use real estate values. These properties are typically non-contiguous smaller lots ranging in size between 5 and 40 acres with zoning ranging from one dwelling unit per 5 acres to one per 80 acres. Development and disposition strategies vary depending on the property’s unique characteristics. Development efforts and costs expended to ready these properties for sale include work to obtain development entitlements that will increase the property’s value as residential property as well as making improvements to existing logging roads, constructing new roads, extending dry utilities, and sometimes establishing gated entrances. As is the case with much of the Real Estate portfolio, investments in the Rural Lifestyles program have been restricted to costs necessary to achieve entitlements, while deferring construction costs until such point in time when market conditions improve.

Commercial Properties

Poulsbo. In 2010 the Partnership was approached about selling its 10,000-square-foot headquarters building and underlying 2-acre parcel located in Poulsbo, Washington for an attractive price. This induced us in May 2011, before the sale closed on this building, to purchase a nearby 30,000-square-foot commercial office building in Poulsbo, also on a 2-acre parcel of land. The larger building has a long-term tenant with a five-year, triple-net lease with a term that began in late 2010. The sale of the 10,000-square-foot building and land was consummated in July 2012. In November 2012 we moved our headquarters location into the new building, sharing the space with the aforementioned tenant. This new building currently contains square footage that is under lease but not presently occupied, thus providing potential availability for our expansion or alternative rental to other third parties.

Port Gamble. As described above under “Development Properties”, the Partnership currently owns and operates the town of Port Gamble where 25 residential buildings and approximately 46,000 square feet of commercial building space are currently rented to third-parties. In addition, the Partnership operates a wedding and events business, with another 8,000 square feet in its venues, that leverages the charm of the townsite to attract clientele. These commercial activities serve as placeholders to help offset the costs of maintaining the town until the master plan process (also described above) culminates.

The Partnership’s antecedent, Pope & Talbot, Inc. (P&T), operated a sawmill at Port Gamble from 1853 to 1995. Starting in 2002, management worked both directly and indirectly through P&T to remedy environmental contamination at the townsite and millsite and to monitor results of the cleanup efforts. After contamination was discovered at the townsite, millsite, and in the adjacent bay, the Partnership entered into a settlement and remediation agreement with P&T pursuant to which both parties were allocated responsibility for cleanup costs. Under Washington law, both Pope Resources and P&T were “potentially liable persons” (PLP) based on historic ownership and/or operation of the site. These laws provide for joint and several liability among parties owning or operating property on which contamination occurs, meaning that cleanup costs can be assessed against any or all such parties. Following a series of actions under the U.S. Bankruptcy Code that began in 2007, P&T has been liquidated, leaving the Partnership as one of few potentially liable persons.

Negotiations with the Department of Ecology (DOE) during 2012 centered on clean-up action priorities. Notwithstanding the absence of an agreement or conclusion to the negotiations, we accrued an additional $12.5 million for Port Gamble environmental liabilities during the second quarter of 2012. The accrual was heavily informed by elements of an expanded scope of clean-up actions envisioned by DOE. Consensus, however, has not yet been reached regarding treatment of some overwater structures and degree of cost participation by all the PLPs. We hope to finalize a clean-up action plan and consent decree in the coming year.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Real Estate – Environmental Remediation Costs.”

Marketing. Marketing efforts were limited given the soft markets for land and real estate. Marketing related to Development Properties in 2012 was centered on residential, commercial, and industrial lands for sale through traditional brokerage and real estate listing services. Efforts were also expended to sell North Kitsap lands for conservation. Commercial Properties marketing was designed to increase visitation to and exposure of Port Gamble, thereby boosting retail sales, which led to improved lease-up of the townsite’s commercial, industrial, and residential spaces.

Customers. Management typically markets properties from the Real Estate portfolio to private individuals, residential contractors, and developers of commercial property. Customers for rental space in the Port Gamble townsite consist of both residential and commercial tenants.

Competition. Development and Commercial Properties compete with local and regional peers that offer land for sale or property for lease.

Transportation. Land values for the Real Estate portfolio are strongly influenced by transportation options between the western side of Puget Sound where our properties are located and the Seattle-Tacoma metropolitan corridor. Transportation options between these areas separated by bodies of water include the Tacoma Narrows Bridge or one of several car/passenger ferries. Ferry transportation within the market area currently utilizes vessels that carry both automobiles and passengers from each of the communities of Kingston, Bremerton, and Bainbridge Island, respectively, to and from Edmonds and Seattle.

Employees

As of December 31, 2012, the Partnership employed 49 full-time, salaried employees and 6 part-time and seasonal personnel, who are distributed among the segments as follows:

Segment	Full-Time		Part-Time/ Seasonal		Total
Fee Timber		17		-		17
Timberland Management & Consulting		5		-		5
Real Estate		15		6		21
General & Administrative		12		-		12
Totals		49		6		55

None of our employees are subject to a collective bargaining agreement and the Partnership has no knowledge that any steps toward unionization are in progress. Management considers the Partnership’s relations with its employees to be good.

Government Regulation

In the operation and management of its tree farms, the Partnership is subject to federal and state law. Washington’s Forest Practices Act, in effect since 1974, is among the most rigorous in the nation. In 2006, in concert with its Forest and Fish Law, Washington received a federal multi-species Habitat Conservation Plan (HCP) designation covering its forest regulations. The HCP was intended to give timberland owners 50 years of regulatory stability. There is an adaptive management element to the HCP, where new scientific findings may result in some new or modified regulations which could result in increased costs, additional capital expenditures, and reduced operating flexibility.

In Oregon, the laws governing forest practices have the same objectives as in Washington, but lack both some of the rigor of Washington’s regulatory overlay and a counterpart to Washington’s HCP. Whereas in Washington there is a complex application process for forest practices that may take in excess of 30 days, in Oregon the landowner notifies the state of the landowner’s operational intentions, and the regulations are enforced as part of compliance oversight of ongoing operations rather than as part of the notification phase.

In California, the application process for a forest practices permit is similar to that in Washington where documentation must be provided in advance of approval and it must demonstrate the operational protection of public resources. The California approval process, however, considers multiple forest practices. For instance, harvest approvals are encompassed in Timber Harvest Plans that may have multiple operations spanning several years. Review of such plans is more comprehensive, with archaeological, botanical, biological and other disciplines involved. The public is allowed to review the plans and make comment. Only a Registered Professional Forester can sign a Timber Harvest Plan, a status that requires multidisciplinary training and testing. Once approved, a Timber Harvest Plan has a seven-year life.

The following are examples of potential changes to the regulatory climate that could affect forest practices in Washington and Oregon:

A revised Northern Spotted Owl Recovery Plan was made available to the public on June 30, 2011. On February 29, 2012 the USFWS released its proposed critical habitat designation for the Northern Spotted Owl, doubling the amount of land across three states (Oregon, Washington, and California) so designated as critical habitat and for the first time including private forests. Small portions of our Columbia and Fund I tree farms were included in the expanded habitat designation, as were thousands of acres of both industrial timberland and small timbered parcels owned by individuals. Following publication of the new Critical Habitat designation, we and other private landowners submitted public comment to the USFWS questioning the benefits of the biological attributes of each landowner’s particular property and the appropriateness of inclusion of private lands at all in light of habitat contributions from the private sector already in place. Following the public comment period, in late 2012 the USFWS dropped all state and private lands from the critical habitat designation, leaving 9.5 million acres of federal land for support of the Northern Spotted Owl Recovery Plan.

A 2011 lawsuit in Oregon resulted in a ruling by the 9th Circuit Court of Appeals that water channeling structures such as culverts on logging roads are, in fact, point sources of pollution, with the potential impact of requiring an Environmental Protection Agency (EPA) discharge permit for each such structure, numbering millions of such permits across the nation. On December 12, 2011 the U.S. Supreme Court issued an order calling for the views of the U.S. Solicitor General on certiorari petitions filed by the state of Oregon and by the Oregon Forest Industry Council. The petitions asked the Supreme Court to review and reverse the 9th Circuit’s decision that storm water runoff from forest roads is a “point source” pollutant requiring a federal pollution discharge permit. In late 2012, just as the Supreme Court was to begin deliberations on whether to hear the appeal, EPA issued new rules that defined logging road drainage structures as non-point pollution sources. Although this may be seen as a positive action, it does not have the same impact as a Supreme Court reversal of the 9th Circuit decision, in that the EPA decision could lead to further litigation and does not end the issue as would a decision by the Supreme Court. In fact, a lawsuit was filed in January 2013 by the plaintiff in the original lawsuit, the Northwest Environmental Defense Center (NEDC), challenging the new EPA rule. Legislatively, several members of Congress are sponsoring a bill that may codify the “silvicultural exemption” to the Clean Water Act, which was effectively overturned by the 9th Circuit’s ruling. The Supreme Court is expected to make its ruling on the case by the middle of this coming year.

·	State budget shortfalls are affecting state regulatory agencies. We expect that states will impose new, or increase existing, fees for the conduct of forest practices.

Regulatory Structure. Growing and harvesting of timber is subject to numerous laws and government policies intended to protect public resources such as wildlife, water quality, and other social values. Changes in those laws and policies can significantly affect local or regional timber harvest levels and market values of timber-based raw materials. Real estate development activities are also subject to numerous state and local regulations such as the Washington State Growth Management Act (GMA). In addition, the Partnership is subject to federal, state, and local pollution controls (with regard to air, water and land), solid and hazardous waste management, disposal and remediation laws, and regulations in each segment and all geographic regions in which it has operations.

Growth Management. Land holdings throughout Washington are affected by the GMA, which requires counties to submit comprehensive plans that identify the future direction of growth and stipulate where population densities are to be concentrated. The purposes of the GMA include: (1) direction of population growth to population centers (Urban Growth Areas), (2) reduction of “suburban sprawl”, and (3) protection of historical sites. The Partnership works with local governments within the framework of the GMA to develop its real estate holdings to their highest and best use. Oregon also has growth management provisions in its land use laws which served as a model for Washington’s growth management provisions. Oregon's land use laws are generally more stringent outside of urban areas, especially in commercial forest lands where residential conversions are often outright disallowed.

Forest Management Practices. Forest practice regulations in some U.S. states increasingly affect present or future harvest and forest management activities. For example, in some states, these rules have one or more of the following impacts: limiting the size of clear-cut harvest units; requiring some timber to be left unharvested to protect water quality and fish and wildlife habitat; regulating construction and maintenance of forest roads; requiring reforestation following timber harvest; and providing for procedures for state agencies to review and approve proposed forest practice activities.

Each state in which the Partnership owns or manages timberlands has developed “best management practices” to reduce the effects of forest practices on water quality and aquatic habitats. Additional, more stringent regulations may be adopted in order to achieve the following: enhance water quality standards under the federal Clean Water Act, protect fish and wildlife habitat, or advance other public policy objectives.

In the state of Washington, the Forests and Fish Law became the basis for revised forest practices rules and regulations. The Washington Forest Protection Association produced the Forest and Fish Report, which provided the basis for the Forests and Fish Law, through the collaborative efforts of Washington’s private landowners, federal, state and county governments, and Native American tribes. The goals of these revised rules are to:

·	Provide compliance with the Endangered Species Act (ESA) for aquatic and riparian dependent species on private forest lands;

·	Restore and maintain riparian habitat on private land to support a harvestable supply of fish;

·	Meet the requirements of the Clean Water Act for water quality on private forest lands; and

·	Keep the timber industry economically viable in the state of Washington.

The proposed Water Quality Standards that the Washington State Department of Ecology adopted in 2003 have undergone Department of Ecology and public scrutiny. As such, these rules should be sufficient to comply with the Anti-Degradation Implementation Plan as described in the Clean Water Act.

In June 2006, the U.S. Fish & Wildlife Service and NOAA Fisheries signed a Forest Practices Habitat Conservation Plan (HCP) for Washington. This HCP is a statewide program protecting 60,000 miles of streams on 9.3 million acres of forestland. It ensures landowners that practicing forestry in Washington meets the requirements for aquatic species designated by the federal Endangered Species Act.

The U.S. Environmental Protection Agency also promulgated regulations in 2000 requiring states to develop total maximum daily load (“TMDL”) allocations for pollutants in water bodies that have been determined to be “water quality impaired”. The TMDL requirements set limits on pollutants that may be discharged to a body of water or set additional requirements, such as best management practices for nonpoint sources, including timberland operations, to reduce the amounts of pollutants in water quality impaired bodies of water. These requirements have impacted tree farming principally through rules requiring tree farms to better minimize siltation of streams caused by roads, harvest operations and other management activities. TMDL targets will be established for specific water bodies in the states where the Partnership operates and these targets will be set so as to achieve water quality standards within 10 years, when practicable. In Washington, the Road Maintenance and Abandonment Planning (RMAP) section of the Forest Practices Rules and Regulations has been in place since 2001, under which all sedimentation problems associated with forest roads must be mitigated by 2015. The Partnership is on schedule to complete the necessary work to meet the 2015 deadline, which will largely address the issue of non-point pollution consisting of sedimentation originating from the Partnership’s forest operations. The mitigation process has been complicated by the 9th Circuit Court ruling that forest roads are point sources of pollution and will thus require discharge permits as discussed earlier.

The regulatory and non-regulatory forest management programs described above have increased operating costs and resulted in changes in the value of the Combined timberlands. Management does not expect to be disproportionately affected by these programs in comparison with typical timberland owners. Likewise, management does not expect that these programs will significantly disrupt its planned operations over large areas or for extended periods.

Endangered Species and Habitats. A number of fish and wildlife species that inhabit geographic areas near or within Partnership timberlands have been listed as threatened or endangered under the federal Endangered Species Act (ESA) or similar state laws in the United States. Federal ESA listings include the Northern Spotted Owl, marbled murrelet, numerous salmon species, bull trout, and steelhead trout in the Pacific Northwest. Listings of additional species or populations may result from pending or future citizen petitions or be initiated by federal or state agencies. Federal and state requirements to protect habitat for threatened and endangered species have resulted in restrictions on timber harvest on some timberlands, including some timberlands of the Partnership. Additional listings of fish and wildlife species as endangered, threatened, or sensitive under the ESA and similar state laws as well as regulatory actions taken by federal or state agencies to protect habitat for these species may, in the future, result in the following: an increase in operating costs; additional restrictions on timber harvests; impacts to forest management practices or real estate development activities; and potential impact on timber supply and prices.

Item 1A. RISK FACTORS

We are subject to statutory and regulatory risks that currently limit, and may increasingly limit, our ability to generate income. Our ability to grow and harvest timber can be significantly impacted by legislation, regulations or court rulings that restrict or stop forest practices. For example, events that focus media attention upon natural disasters and damage to timberlands have at various times brought increasing public attention to forestry practices. Additional regulations, whether or not adopted in response to such events, may make it more difficult for us to harvest timber and may reduce the amount of harvestable timber on our properties. These and other restrictions on logging, planting, road building, fertilizing, managing competing vegetation, and other activities can significantly increase the cost or reduce available inventory thereby reducing income. These regulations are likely to have a similar effect on our Timberland Management & Consulting operations, particularly in the case of the Funds. Specific examples of such regulations are cited above on page 17 in our discussion of government regulation.

Moreover, the value of our real estate investments, and our income from Real Estate operations, is sensitive to changes in the economic and regulatory environment, as well as various land-use regulations and development risks, including the ability to obtain the necessary permits and land entitlements that would allow us to maximize the revenue from our real estate investments. Our real estate investments are long-term in nature, which raises the risk that unforeseen changes in the economy or laws surrounding development activities may have an adverse effect on our investments. These investments often are highly illiquid and thus may not generate cash flow if and when needed to support our other operations.

Consolidation of sawmills in our geographic operating area may reduce competition among our customers, which could adversely affect our log prices. In the past we have experienced, and may continue to experience, consolidation of sawmills in the Pacific Northwest. Because a portion of our cost of sales in our Fee Timber segment, which considers the Combined tree farms, consists of transportation costs for delivery of logs to domestic sawmills, it becomes increasingly expensive to transport logs over longer distances for sales in domestic markets. As a result, a reduction in the number of sawmills, or in the number of sawmill operators, may reduce competition for our logs, increase transportation costs, or both. These consolidations thus may have a material adverse impact upon our Fee Timber revenue or income and, as that segment has traditionally represented our largest business unit, upon our results of operation and financial condition as a whole. Any such material adverse impact on timber revenue and income as a result of regional mill consolidations will also indirectly affect our Timberland Management & Consulting segment in the context of raising capital for investment in Pacific Northwest-based timber funds.

We are sensitive to cyclicality of demand and price issues relating to our sales of logs in both domestic and foreign markets. We generate Fee Timber revenue primarily by selling softwood logs to domestic mills and to third-party intermediaries who resell them to the export market. The domestic market for logs in our operating area depends heavily on U.S. housing starts, which are subject to cyclical fluctuations. In connection with the global financial crisis that occurred in the second half of 2008, housing starts declined dramatically and have remained relatively flat since, which has negatively impacted the demand for lumber. In addition, imported lumber from Canada and increasing market acceptance of engineered wood products have acted to hold down the price of lumber. Although housing starts have recently experienced modest growth, the overall market remains relatively weak and we remain subject to a number of risks, including negative impacts on our operating results, associated with these weak market conditions. The export markets for Pacific Northwest logs are significantly affected by fluctuations in United States, Japanese and, increasingly, Chinese and Korean economies, as well as by the foreign currency exchange rate between these Asian currencies and the U.S. dollar, as well as ocean transportation costs.

We and our customers are dependent upon active credit markets to fund operations. We sell logs from our Fee Timber segment to mills and log brokers that in most circumstances rely upon an active credit market to fund their operations. Our Real Estate sales are also often dependent upon credit markets in order to fund acquisitions. To the extent the currently weak economic conditions exacerbates existing borrowing restrictions that impact consumer credit generally, we expect consumers to respond by reducing their expenditures, and those reductions may have the effect of directly reducing our revenues and of indirectly reducing the demand for our products. Any such outcomes could materially and adversely impact our results of operations, cash flows, and financial condition.

We may incur losses as a result of natural disasters that may occur, or that may be alleged to have occurred, on our properties. Forests are subject to a number of natural hazards, including damage by fire, hurricanes, insects and disease, and during periods of unusually heavy rain and snowmelt, flooding and landslides may damage homes and personal property. Changes in global climate conditions may intensify these natural hazards. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of forest products. While damage from natural causes is typically localized and would normally affect only a small portion of our timberlands at any one time, these hazards are unpredictable and losses might not be so limited. While management believes we follow sound forest management and risk mitigation procedures, and all forest operations meet or exceed the rules and regulations governing forest practices in Washington, Oregon, and California, we cannot be certain that we will not be the subject of claims based on allegations that we acted improperly in managing our property. These claims may take the form of individual or class action litigation, regulatory or enforcement proceedings, or both. Any such claims could result in substantial defense costs and divert management’s attention from the ongoing operation of our business, and if any such claims were successful, may result in substantial damage awards, fines or civil penalties. Consistent with the practices of other large timber companies, we do not maintain insurance against loss of standing timber on our timberlands due to natural disasters.

We have certain environmental remediation liabilities associated with our Port Gamble and former Port Ludlow resort properties, and those liabilities may increase. We currently own certain real estate at Port Gamble on the Kitsap Peninsula and, up until mid-2001, owned real estate property within the resort community of Port Ludlow in Jefferson County in western Washington. We are in active discussions with the Washington State Department of Ecology to promote protection of the environment, optimize and appropriately allocate the remaining cleanup liabilities, and maximize our control over the remediation process.

Management continues to monitor the Port Gamble and Port Ludlow cleanup processes closely. The $13.9 million remediation liability balance as of December 31, 2012 represents our best current estimate of the remaining cleanup cost and most likely outcome to various contingencies within both locations. Where possible, the Company records to the most likely point estimate within the range and when no point estimate within the range is better than another, the Company records to the low end of the range of possible outcomes. These liabilities are based upon a number of estimates and judgments that are subject to change as the project progresses. Statistical models have been used to estimate the liability for the aforementioned matters and suggest a potential aggregate range of $11.5 million to $16.1 million which represents a two-standard-deviation range from the mean of possible outcomes generated by the modeling process used to estimate the liability.

We rely on contract loggers and truckers who are in short supply and seeking consistent work at increasing rates. We rely on contract loggers and truckers for the production and transportation, respectively, of our products to customers. During the economic downturn of 2008 and 2009 most industrial forestry firms deferred harvest, which resulted in a shortfall in demand for the contract logging and trucking work force. Many private logging and trucking companies did not survive the protracted economic downturn. As the economy has improved and companies return to harvesting, a shortage of logging contractors and truckers has developed. The remaining contractors who survived did so by reducing their workforce or, in the case of log truckers, converting their trucks to configurations suitable for highway freight hauling. This decline in the pool of available contractors has resulted in a steady increase in harvest and haul costs and a new requirement to provide continuity of work when soliciting contractor bids for a job. The commitment to more continuous work could preclude our ability to time markets, affecting total returns.

We compete with a number of larger competitors that may be better able than we are to absorb price fluctuations, may be able to expend greater resources on production, may have greater access to capital, and may operate more efficiently than we can. We compete against much larger companies in each of our business segments. We compete with these companies for management and line personnel, as well as for purchases of relatively scarce capital assets such as land and standing timber and for sales of our products. These larger competitors may have access to larger amounts of capital and significantly greater economies of scale, and they may be better able to absorb the risks of our line of business. Moreover, the timber industry has experienced significant consolidation in recent years and, as that consolidation occurs, our relative market share decreases and the relative financial capacity of our competitors’ increases. While management believes the Partnership is at a competitive advantage over some of these companies because of our lack of vertical integration into forest products manufacturing, our advantageous tax structure, and management’s attempts to diversify our asset base, we cannot assure readers that competition will not have a material and adverse effect on our results of operations or our financial condition.

The demand for our products is exposed to foreign currency exchange rate fluctuations. A large portion of our logs are exported to Asian markets, in particular, China, Japan and South Korea. Although we sell our export logs to domestic intermediaries, which has the effect of mitigating our foreign exchange risks, the demand for our products in these markets is affected by the strength of the U.S. dollar relative to the Chinese yuan, the Japanese yen and the Korean won. Exchange rates also impact the ability of our domestic intermediaries to compete in Asian markets with logs that originate from Canada, Russia or the Southern Hemisphere. As a result, a stronger U.S. dollar relative to the home currencies of our foreign customers and competitors could have a material adverse effect on the demand for our logs in our largest export markets.

We benefit from certain tax treatment accorded to master limited partnerships, and if that status changes the holders of our units may realize less advantageous tax consequences. The Partnership is a Master Limited Partnership (MLP) and is therefore not generally subject to U.S. federal income taxes. If a change in tax law (or interpretation of current tax law) caused the Partnership to become subject to income taxes, operating results would be adversely affected. We also have three taxable subsidiaries.

We are controlled by our managing general partner. As a limited partnership, substantially all of our day-to-day affairs are controlled by our managing general partner, Pope MGP, Inc. The board of directors of Pope MGP, Inc. serves as our board of directors, and by virtue of a stockholder agreement, the shareholders of Pope MGP, Inc., Emily T. Andrews and Peter T. Pope, each have the ability to designate one of our directors and to veto the selection of each of our other directors, other than our chief executive officer, who serves as a director by virtue of his executive position. Unitholders may remove the managing general partner only in limited circumstances, including, among other things, a vote of the holders of a two-thirds majority of the “qualified units,” which means the units that have been owned by their respective holders for at least five years prior to such vote. By virtue of the terms of our agreement of limited partnership, as amended, or “partnership agreement”, our managing general partner directly, and Mrs. Andrews and Mr. Pope indirectly, have the ability to prevent or impede transactions that would result in a change of control of the Partnership; to prevent or, upon the approval of limited partners holding a majority of the units, to cause, the sale of the assets of the Partnership; and to cause the Partnership to take or refrain from taking certain other actions that you might otherwise perceive to be in the Partnership’s best interest. Under our partnership agreement, we are required to pay to Pope MGP, Inc. an annual management fee of $150,000, and to reimburse Pope MGP, Inc. for certain expenses incurred in managing our business. There were no expense reimbursements in 2012 or 2011.

Item 1B. UNRESOLVED SECURITIES AND EXCHANGE COMMISSION COMMENTS

None

Item 2. PROPERTIES

The following table reconciles acreage owned as of December 31, 2012 to acreage owned as of December 31, 2011. As noted previously, we own 20% of Funds I and II and 5% of Fund III, and this table includes the entire 80,000 acres of timberland owned by the Funds. Properties are typically transferred from Fee Timber to the Real Estate segment at the point in time when the Real Estate segment takes over responsibility for managing the properties with the goal of maximizing the properties’ value upon disposition.

	Timberland Acres (in thousands) by Tree Farm
Description	2011		Acquisitions		Sales			Transfer			2012
Hood Canal tree farm (1)		70.0		-		(0.4	)		(0.1	)		69.5
Columbia tree farm (1)		43.6		-		-			-			43.6
Subtotal Partnership Timberland		113.6		-		(0.4	)		(0.1	)		113.1

Fund I tree farms		23.9		-		-			-			23.9
Fund II tree farms (2)		37.2		-		-			-			37.2
Fund III tree farms		-		18.9		-			-			18.9
Subtotal Funds' Timberland		61.1		18.9		-			-			80.0

Total Fee Timber acres		174.7		18.9		(0.4	)		(0.1	)		193.1

Partnership share of Funds		12.2		0.9		-			-			13.2
Total Real Estate acres (see detail below)		2.8		-		-			0.1			2.9
Combined Look-through total acres		128.6		0.9		(0.4	)		-			129.2

(1) A subset of this property is used as collateral for the Partnership's long-term debt, excluding debt of the Funds.
(2) A subset of these properties is used as collateral for Fund II's long-term debt.

	Real Estate Acres Detail
Project Location	2011		Acquisitions		Sales			Transfer		2012

Bremerton		46									46
Gig Harbor		244				(12	)				232
Hansville		149									149
Kingston - Arborwood		360									360
Kingston - 5-acre zoning		366									366
Port Gamble LAMIRD townsite (a)		114									114
Port Gamble Agrarian District (b )		53							152		205
Port Ludlow		256									256
Poulsbo		4				(2	)				2
Other Rural Residential		1,228				(40	)				1,188
Total		2,820		-		(54	)		152		2,918

a) adjustment for preliminary plat acres (LAMIRD means "Limited Area of More Intense Rural Development")
b) adjustment for master plan filing that transfers 152 acres from Fee Timber to Real Estate

The following table provides dwelling unit (DU) per acre zoning for the Partnership’s owned timberland and development properties as of December 31, 2012 and land sold during 2012. The table does not include sales of development rights or small timberland sales from tree farms properties:

Current Real Estate Land Inventory by Zoning Category			2012 Sales from RE Portfolio
Zoning Designation	Acres		Acres		$/Acre		Total Sales
Urban zoning - residential		488		12	$	272,333	$	3,268,000
Historic Rural Town		114
Urban zoning - commercial		91		2		1,450,000		2,900,000
1 DU per 5 acres		726
1 DU per 10 acres		131
1 DU per 20 acres		861
1 DU per 40 acres		5		40		5,225		209,000
1 DU per 80 acres		251
Agrarian District		205
Forest Resource Lands		26
Open Space		20
Total		2,918		54	$	118,093	$	6,377,000
*Accounting rules require deferral of 48%, or $1.7 million, of revenue from this sale due to
construction-related post-closing obligations.

Item 3. LEGAL PROCEEDINGS

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5.

MARKET FOR REGISTRANT’S UNITS, RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Partnership’s equity securities are listed on NASDAQ and traded under the ticker symbol “POPE”. The following table sets forth the 2010 to 2012 quarterly ranges of low and high prices, respectively, for the Partnership’s units together with per unit distribution amounts by the period in which they were paid:

Year Ended December 31, 2010	High		Low		Closing		Distributions
First Quarter	$	28.89	$	23.32	$	25.91	$	0.10
Second Quarter		28.90		25.02		25.73		0.10
Third Quarter		28.00		24.00		27.10		0.25
Fourth Quarter		38.61		26.62		36.80		0.25
Year Ended December 31, 2011
First Quarter	$	48.00	$	35.02	$	46.75	$	0.25
Second Quarter		49.00		40.81		45.51		0.25
Third Quarter		50.29		39.02		41.00		0.35
Fourth Quarter		47.50		38.00		42.99		0.35
Year Ended December 31, 2012
First Quarter	$	45.78	$	41.19	$	43.70	$	0.35
Second Quarter		60.39		42.50		55.07		0.45
Third Quarter		57.13		50.71		52.15		0.45
Fourth Quarter		56.49		51.25		55.68		0.45

Unitholders

As of January 31, 2013, there were 4,444,777 outstanding units, representing 251 holders of record. Units outstanding include 78,758 that are currently restricted from trading and that were granted to 16 holders of record who are either management employees or members of the managing general partner’s board of directors. The trading restriction for these units is lifted as the units vest. These restricted units vest over a four-year vesting schedule, either ratably over four years for management or 50% on the third anniversary of the grant date and the remaining 50% upon reaching the fourth anniversary for non-management Board members.

Distributions

All cash distributions are at the discretion of the Partnership’s managing general partner, Pope MGP, Inc. (the “Managing General Partner”). During 2012, the Partnership made one quarterly distribution of 35 cents per unit and three of 45 cents per unit that totaled $7.5 million in the aggregate. In 2011, we made two distributions of 25 cents per unit and two of 35 cents per unit, totaling $5.3 million in the aggregate.

Confidence in our ability to generate cash flow in 2012 and continued improvement in all of our markets served to inform a $0.10, or 29% increase in quarterly distribution in the second quarter of 2012. This increase was on top of a $0.10, or 40%, increase in quarterly distribution in the third quarter of 2011. The Managing General Partner, in its discretion, determines the amount of the quarterly distribution and regularly evaluates distribution levels. The Partnership recognizes that current economic conditions warrant continued sensitivity to the stewardship of cash balances. As such, the quarterly determination of distribution amounts, if any, will reflect the expectations of management and the Managing General Partner for the Partnership’s liquidity needs.

Equity Compensation Plan Information

The Partnership maintains the Pope Resources 2005 Unit Incentive Plan, which authorizes the granting of nonqualified equity compensation in order to provide incentives to align the interests of management with those of unitholders. Pursuant to the plan, the Partnership issues restricted unit grants with vesting ranges between two and four years on the anniversary of the grant. The terms of these grants require that the grantee remain an employee as of the vesting date. As of December 31, 2012 there were 52,348 unvested and outstanding restricted units of which 16,440 units are scheduled to vest in 2013, and 952,194 limited partnership units remained issuable under the plan. Previously, the Partnership maintained the Pope Resources 1997 Unit Option Plan pursuant to which unit options were granted for purposes similar to the 2005 incentive plan. Upon the adoption of the 2005 Unit Incentive Plan, the Partnership ceased making further awards under the 1997 plan. As of December 31, 2012 there were no outstanding options. Additional information regarding equity compensation arrangements is set forth in Note 6 to Consolidated Financial Statements and Item 11 - Executive Compensation. Such information is incorporated herein by reference.

Repurchase of Equity Securities

In December 2008 we announced a unit repurchase plan pursuant to which the Partnership was authorized to repurchase limited partner units with an aggregate value of up to $2.5 million. Since that time, we have increased the aggregate value of units authorized for repurchase to $5 million and extended the repurchase plan to allow for repurchases through December 2013. As of December 31, 2012, there remained an unutilized authorization for unit repurchases of $2.5 million. There were no Partnership unit repurchases under this 2008 plan during 2012. On December 31, 2010, the Partnership repurchased 334,340 units from a single shareholder, outside the scope of the formal repurchase program, for $35.50 per unit (which excludes a $0.05 per unit commission paid on settlement). The units represented 7.2% of the total units outstanding at that time and were retired.

Performance Graph

The following graph shows a five-year comparison of cumulative total unitholder returns for the Partnership, the Standard & Poor’s Forest Products Index and the Wilshire 4500 for the five years ended December 31, 2012. The total unitholder return assumes $100 invested at the beginning of the period in the Partnership’s units, the Standard and Poor’s Forest Products Index, and the Wilshire 4500. The graph assumes distributions are reinvested.

Issuance of Unregistered Securities

The Partnership did not conduct any unregistered offering of its securities in 2010, 2011, or 2012.

Item 6. SELECTED FINANCIAL DATA

Actual Results. The financial information set forth below for each of the indicated years is derived from the Partnership’s audited consolidated financial statements. This information should be read in conjunction with the audited consolidated financial statements and related notes included with this report.

(In thousands, except per unit data)	Year Ended December 31,
Statement of operations data	2012			2011			2010			2009			2008
Revenue:
Fee Timber	$	45,539		$	52,729		$	27,674		$	14,847		$	23,551
Timberland Management & Consulting		7			-			31			601			944
Real Estate		8,497			4,545			3,487			5,030			3,683
Total revenue		54,043			57,274			31,192			20,478			28,178

Operating income/(loss):
Fee Timber		11,853			16,899			9,703			3,724			6,294
Timberland Management & Consulting		(1,568	)		(1,515	)		(1,250	)		(375	)		(543	)
Real Estate (1)		(11,099	)		(349	)		(829	)		1,616			(1,200	)
General and Administrative		(4,170	)		(4,188	)		(4,711	)		(3,686	)		(3,862	)
Total operating income		(4,984	)		10,847			2,913			1,279			689

Net income (loss) attributable to unitholders	$	(4,709	)	$	8,754		$	2,038		$	(272	)	$	1,162

Earnings (loss) per unit – diluted	$	(1.11	)	$	1.94		$	0.43		$	(0.07	)	$	0.23

Distributions per unit	$	1.70		$	1.20		$	0.70		$	0.70		$	1.60

Balance sheet data
Total assets	$	267,499		$	230,408		$	235,837		$	187,080		$	165,411
Long-term debt, net of current portion		43,710			45,793			50,468			28,659			28,169
Partners’ capital		64,223			75,759			70,990			83,126			87,817
Debt-to-total capitalization (2)		35	%		33	%		37	%		26	%		25	%

(1)	Real Estate operating results in 2012, 2011, 2010, and 2009 included $12.5 million, $977,000, $875,000, and $30,000, respectively, of environmental remediation charges.

(2)	Debt-to-total-capitalization ratio is calculated with the numerator equal to long-term debt of the Partnership plus 20% of Fund I and II debt, divided by the sum of the aforementioned numerator and Partner’s capital. Fund III, owned 5% by the Partnership, has no debt.

Management uses adjusted cash available for distributions, a non-GAAP measure, as a meaningful indicator of liquidity for purposes of calibrating our distribution payout rate to unitholders and, as such, has provided this information in addition to the generally accepted accounting principle-based presentation of cash provided by operating activities. Management recognizes that there are varying methods of calculating cash flow and has provided the information below to give transparency to this particular metric’s calculation.

(In thousands)	Year Ended December 31,
Adjusted cash available for distribution:	2012			2011			2010			2009			2008
Cash provided by operations	$	16,209		$	21,660		$	8,950		$	662		$	3,952
Less: Maintenance capital expenditures (1)		(1,284	)		(1,353	)		(858	)		(1,118	)		(1,500	)
Less: Required debt service		(3	)		(6	)		(1,015	)		(1,357	)		(1,342	)

Less: Noncontrolling portion of Funds cash from operations (2)		(3,270	)		(7,405	)		(733	)		543			(1,877	)
Plus: Financed debt extinguishment costs (3)		-			-			1,250			1,137			-
Adjusted cash available for distribution (ACAD)	$	11,652		$	12,896		$	7,594		$	(133	)	$	(767	)

Other data
Acres owned/managed (thousands)		196			178			175			150			405
Fee timber harvested (MMBF) (4)		84			90			53			32			38

(1)	Capital expenditures from the cash flow statement less costs incurred to purchase and make leasehold improvements to the new corporate building less non-controlling interest share of Fund capital expenditures.

(2)

Share of Funds’ operating income (loss), interest, tax, amortization, depreciation, and depletion expense, cost of land sold, change in working capital accounts, and cash from operations that are attributable to noncontrolling interests. That share is 80% in the case of Funds I and II and 95% in the case of Fund III.

(3)	Make-whole payments owed to prior lender that were added to total amount borrowed from new lender.

(4)	Includes 4.4 MMBF sold as a timber deed sale in 2012.

The following table presents revenue, operating income, and harvest volume on a look-through basis for each year in the three-year period ended December 31, 2012 as follows:

	Revenue								Harvest
(in millions)			Mineral, Cell		Total Fee		Operating		Volume
Year ended	Log Sale		Tower & Other		Timber		Income		(MMBF)
Partnership-100% owned	$	26.3	$	2.5	$	28.8	$	11.6		47.6
Share of Funds		3.3		-		3.3		0.1		6.4
Look-through 2012	$	29.6	$	2.5	$	32.1	$	11.7		54.0

Partnership-100% owned	$	29.5	$	1.5	$	31.0	$	13.6		50.7
Share of Funds		4.3		-		4.3		0.7		7.9
Look-through 2011	$	33.8	$	1.5	$	35.3	$	14.3		58.6

Partnership-100% owned	$	20.7	$	1.6	$	22.3	$	9.5		42.3
Share of Funds		1.0		0.1		1.1		-		2.1
Look-through 2010	$	21.7	$	1.7	$	23.4	$	9.5		44.4

The following table presents log volume sold by species on a look-through basis for each year in the three-year period ended December 31, 2012 as follows:

Volume (in MMBF)
Sawlogs	2012	% Total		2011	% Total		2010	% Total
Douglas-fir	38.8	72	%	40.9	70	%	31.8	72	%
Whitewood	6.2	11	%	6.4	11	%	3.8	9	%
Cedar	0.6	1	%	0.9	1	%	0.6	1	%
Hardwoods	1.4	3	%	1.6	3	%	0.7	1	%
Pulpwood
All Species