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a50915624.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

( X )

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

( )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9035

POPE RESOURCES, A DELAWARE

LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

Delaware	91-1313292
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification Number)

19950 7th Avenue NE, Suite 200, Poulsbo, WA 98370

Telephone: (360) 697-6626

(Address of principal executive offices including zip code)

(Registrant’s telephone number including area code)

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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer o	Accelerated Filer x
Non-accelerated Filer o	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Partnership units outstanding at June 30, 2014: 4,434,250

Pope Resources

Index to Form 10-Q Filing

For the six Months Ended June 30, 2014

Description		Page Number
Part I. Financial Information

Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets		4
Condensed Consolidated Statements of Comprehensive Income		5
Condensed Consolidated Statements of Cash Flows		6
Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures about Market Risk		34

Item 4. Controls and Procedures		34

Part II. Other Information

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38

Item 3. Defaults Upon Senior Securities		38

Item 4. Submission of Matters to a Vote of Security Holders		38

Item 5. Other Information		38

Item 6. Exhibits		38

Signatures		39

P A R T I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
June 30, 2014 and December 31, 2013
(in thousands)
	2014		2013
ASSETS
Current assets
Partnership cash and cash equivalents	$	16,351	$	5,704
ORM Timber Funds cash		1,293		1,256
Cash and cash equivalents		17,644		6,960
Short-term investments		3,000		-
Accounts receivable, net		2,822		1,501
Land held for sale		4,083		10,258
Prepaid expenses and other		1,569		1,660
Total current assets		29,118		20,379
Properties and equipment, at cost
Timber and roads, net of accumulated depletion
(2014 - $99,484; 2013 - $92,971)		206,452		211,946
Timberland		44,946		44,946
Land held for development		27,790		27,040
Buildings and equipment, net of accumulated
depreciation (2014 - $6,647; 2013 - $6,437)		6,076		6,205
Total properties and equipment, at cost		285,264		290,137

Other assets		452		392
Total assets	$	314,834	$	310,908

LIABILITIES, PARTNERS' CAPITAL AND NONCONTROLLING INTERESTS
Current liabilities
Accounts payable	$	1,959	$	2,196
Accrued liabilities		2,306		4,109
Current portion of long-term debt		108		109
Deferred revenue		1,342		599
Other current liabilities		986		966
Total current liabilities		6,701		7,979
Long-term debt, net of current portion		75,527		75,581
Environmental remediation and other long-term liabilities		12,542		12,734
Partners' capital and noncontrolling interests
General partners' capital (units issued and outstanding 2014 - 60; 2013 - 60)		1,098		974
Limited partners' capital (units issued and outstanding 2014 - 4,333; 2013 - 4,312)		77,416		68,471
Noncontrolling interests		141,550		145,169
Total partners' capital and noncontrolling interests		220,064		214,614
Total liabilities, partners' capital and noncontrolling interests	$	314,834	$	310,908

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Pope Resources, a Delaware Limited Partnership
For the Three and Six Months Ended June 30, 2014 and 2013
(in thousands, except per unit data)
	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013

Revenue	$	18,583		$	23,197		$	56,362		$	39,915
Cost of sales		(11,377	)		(12,085	)		(30,301	)		(20,949	)
Operating expenses		(3,619	)		(3,015	)		(6,904	)		(5,918	)
General and administrative expenses		(450	)		(1,238	)		(1,772	)		(2,431	)
Income from operations		3,137			6,859			17,385			10,617

Other expense
Interest expense, net		(629	)		(343	)		(1,203	)		(698	)

Income before income taxes		2,508			6,516			16,182			9,919
Income tax benefit (expense)		(69	)		2			(226	)		16
Net income		2,439			6,518			15,956			9,935

Net income attributable to noncontrolling
interests - ORM Timber Funds		(593	)		(390	)		(1,869	)		(323	)
Net and comprehensive income attributable to unitholders		1,846			6,128			14,087			9,612


Allocable to general partners	$	25		$	84		$	193		$	132
Allocable to limited partners		1,821			6,044			13,894			9,480
Net and comprehensive income attributable to unitholders	$	1,846		$	6,128		$	14,087		$	9,612

Basic and diluted earnings per unit attributable
to unitholders	$	0.41		$	1.34		$	3.17		$	2.11

Basic and diluted weighted average units outstanding		4,391			4,369			4,389			4,367

Distributions per unit	$	0.65		$	0.45		$	1.20		$	0.90

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Six Months Ended June 30, 2014 and 2013
(in thousands)
	2014			2013
Net income	$	15,956		$	9,935
Adjustments to reconcile net income to net cash provided by operating activities
Depletion		6,451			6,446
Timber depletion on land sale		-			296
Equity-based compensation		521			763
Depreciation and amortization		359			345
Deferred taxes		94			(97	)
Cost of land sold		7,618			940
Loss (gain) on disposal of property and equipment		(1	)		57
Cash flows from changes in operating accounts
Accounts receivable, net		(1,321	)		(510	)
Prepaid expenses and other assets		(43	)		98
Real estate project expenditures		(2,128	)		(1,491	)
Accounts payable and accrued liabilities		(2,040	)		291
Deferred revenue		743			176
Environmental remediation		(214	)		(253	)
Other current and long-term liabilities		(4	)		14
Net cash provided by operating activities		25,991		$	17,010

Cash flows from investing activities
Purchase of short-term investments		(3,000	)		-
Reforestation and roads		(1,083	)		(853	)
Buildings and equipment		(143	)		(183	)
Proceeds from sale of property and equipment		1			-
Net cash used in investing activities		(4,225	)		(1,036	)

Cash flows from financing activities
Repayment of long-term debt		(55	)		(57	)
Proceeds from preferred stock issuance - ORM Timber Funds		125			-
Payroll taxes paid on unit net settlements		(196	)		(241	)
Cash distributions to unitholders		(5,343	)		(3,999	)
Cash distributions - ORM Timber Funds, net of distributions to Partnership		(5,613	)		(4,267	)
Capital call - ORM Timber Funds, net of Partnership contribution		-			137
Net cash used in financing activities		(11,082	)		(8,427	)

Net increase in cash and cash equivalents		10,684			7,547
Cash and cash equivalents at beginning of period		6,960			3,779
Cash and cash equivalents at end of period	$	17,644		$	11,326

See accompanying notes to condensed consolidated financial statements.

POPE RESOURCES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2014

The condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013 and the related condensed consolidated statements of comprehensive income for the three- and six-month periods and cash flows for the six-month periods ended June 30, 2014 and 2013 have been prepared by Pope Resources, A Delaware Limited Partnership (the “Partnership”), pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements are unaudited, but, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2013, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2013, and should be read in conjunction with such financial statements and notes. The results of operations for the interim periods are not indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2014.

The financial statements in the Partnership’s 2013 annual report on Form 10-K include a summary of significant accounting policies of the Partnership and should be read in conjunction with this Quarterly Report on Form 10-Q. On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Partnership is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Partnership has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

3.	Short-term investments consist of certificates of deposit maturing 180 days from the date of purchase.

4.	The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 partnership units. The allocation of distributions, profits and losses between the general and limited partners is pro rata across all units outstanding.

ORM Timber Fund I, LP (Fund I), ORM Timber Fund II, Inc. (Fund II), and ORM Timber Fund III (REIT) Inc. (Fund III), collectively “the Funds”, were formed by Olympic Resource Management LLC (ORMLLC), a wholly owned subsidiary of Pope Resources, for the purpose of attracting capital to purchase timberlands. The objective of these Funds is to generate a return on investments through the acquisition, management, value enhancement and sale of timberland properties. Each Fund will operate for a term of ten years from the end of the respective drawdown period, with Fund I terminating in August 2017, Fund II terminating in March 2021, and Fund III terminating on the tenth anniversary of the completion of its drawdown period. Fund III’s drawdown period will end at the earlier of placement of all committed capital or July 31, 2015.

Pope Resources and ORMLLC together own 20% of Fund I and Fund II and 5% of Fund III. The Funds are consolidated into the Partnership’s financial statements based in part on ORMLLC’s controlling role as the general partner or managing member of the Funds. The consolidated financial statements exclude management fees paid by the Funds to ORMLLC as they are eliminated in consolidation. See note 6 for a breakdown of operating results before and after such eliminations. The portion of these fees, among other items of income and expense, attributed to third-party investors is reflected as an adjustment to income in the Partnership’s Condensed Consolidated Statement of Comprehensive Income under the caption “Net income attributable to noncontrolling interests - ORM Timber Funds.”

The Partnership’s condensed consolidated balance sheet included assets and liabilities of the Funds as of June 30, 2014 and December 31, 2013, which were as follows:

(in thousands)	June 30, 2014		December 31, 2013
Assets:
Cash	$	1,293	$	1,256
Other current assets		1,232		362
Total current assets		2,525		1,618
Timber, timberland and roads, net of accumulated depletion (2014 - $33,896; 2013 - $28,713)		207,403		211,871
Other long-term assets		117		125
Total assets	$	210,045	$	213,614
Liabilities and equity:
Current liabilities excluding long-term debt	$	2,470	$	1,747
Current portion of long-term debt		-		3
Total current liabilities		2,470		1,750
Long-term debt, net of current portion		42,980		42,980
Total liabilities		45,450		44,730
Funds' equity		164,595		168,884
Total liabilities and equity	$	210,045	$	213,614

In the presentation of the Partnership’s revenue and operating income (loss) by segment, all intersegment revenue and expense is eliminated to determine operating income (loss) reported externally. The following tables reconcile internally reported income (loss) from operations to externally reported income (loss) from operations by business segment, for the three and six months ended June 30, 2014 and 2013:

	Fee Timber
Three Months Ended	Pope Resources			ORM Timber			Total Fee			Timberland			Real
June 30, (in thousands)	Timber			Funds			Timber			Management			Estate			Other			Consolidated
2014
Revenue internal	$	8,884		$	8,772		$	17,656		$	840		$	1,118		$	-		$	19,614
Eliminations		(161	)		-			(161	)		(840	)		(30	)		-			(1,031	)
Revenue external		8,723			8,772			17,495			-			1,088			-			18,583

Cost of sales		(4,244	)		(6,091	)		(10,335	)		-			(1,042	)		-			(11,377	)

Operating, general and
administrative expenses internal		(1,430	)		(1,521	)		(2,951	)		(671	)		(998	)		(480	)		(5,100	)
Eliminations		-			840			840			161			-			30			1,031
Operating, general and
administrative expenses external		(1,430	)		(681	)		(2,111	)		(510	)		(998	)		(450	)		(4,069	)

Income (loss) from operations
internal		3,210			1,160			4,370			169			(922	)		(480	)		3,137
Eliminations		(161	)		840			679			(679	)		(30	)		30			-
Income (loss) from operations
external	$	3,049		$	2,000		$	5,049		$	(510	)	$	(952	)	$	(450	)	$	3,137

2013
Revenue internal	$	8,552		$	8,700		$	17,252		$	740		$	6,127		$	-		$	24,119
Eliminations		(140	)		-			(140	)		(740	)		(42	)		-			(922	)
Revenue external		8,412			8,700			17,112			-			6,085			-			23,197

Cost of sales		(3,499	)		(6,705	)		(10,204	)		-			(1,881	)		-			(12,085	)

Operating, general and
administrative expenses internal		(1,115	)		(1,297	)		(2,412	)		(637	)		(858	)		(1,268	)		(5,175	)
Eliminations		12			740			752			140			-			30			922
Operating, general and
administrative expenses external		(1,103	)		(557	)		(1,660	)		(497	)		(858	)		(1,238	)		(4,253	)

Income (loss) from operations
internal		3,938			698			4,636			103			3,388			(1,268	)		6,859
Eliminations		(128	)		740			612			(600	)		(42	)		30			-
Income (loss) from operations
external	$	3,810		$	1,438		$	5,248		$	(497	)	$	3,346		$	(1,238	)	$	6,859

	Fee Timber
Six Months Ended	Pope Resources			ORM Timber			Total			Timberland			Real
June 30, (in thousands)	Timber			Funds			Fee Timber			Management			Estate			Other			Consolidated
2014
Revenue internal	$	20,182		$	19,737		$	39,919		$	1,715		$	16,817		$	-		$	58,451
Eliminations		(315	)					(315	)		(1,715	)		(59	)		-			(2,089	)
Revenue external		19,867			19,737			39,604			-			16,758			-			56,362

Cost of sales		(8,154	)		(13,285	)		(21,439	)		-			(8,862	)		-			(30,301	)

Operating, general and
administrative expenses internal		(2,530	)		(3,080	)		(5,610	)		(1,435	)		(1,889	)		(1,831	)		(10,765	)
Eliminations					1,715			1,715			315			-			59			2,089
Operating, general and
administrative expenses external		(2,530	)		(1,365	)		(3,895	)		(1,120	)		(1,889	)		(1,772	)		(8,676	)

Income (loss) from operations
internal		9,498			3,372			12,870			280			6,066			(1,831	)		17,385
Eliminations		(315	)		1,715			1,400			(1,400	)		(59	)		59			-
Income (loss) from operations
external	$	9,183		$	5,087		$	14,270		$	(1,120	)	$	6,007		$	(1,772	)	$	17,385

2013
Revenue internal	$	19,757		$	14,078		$	33,835		$	1,413		$	6,444		$	-		$	41,692
Eliminations		(281	)		-			(281	)		(1,413	)		(83	)		-			(1,777	)
Revenue external		19,476			14,078			33,554			-			6,361			-			39,915

Cost of sales		(8,020	)		(10,760	)		(18,780	)		-			(2,169	)		-			(20,949	)

Operating, general and
administrative expenses internal		(2,147	)		(2,502	)		(4,649	)		(1,290	)		(1,697	)		(2,490	)		(10,126	)
Eliminations		24			1,413			1,437			281			-			59			1,777
Operating, general and
administrative expenses external		(2,123	)		(1,089	)		(3,212	)		(1,009	)		(1,697	)		(2,431	)		(8,349	)

Income (loss) from operations
internal		9,590			816			10,406			123			2,578			(2,490	)		10,617
Eliminations		(257	)		1,413			1,156			(1,132	)		(83	)		59			-
Income (loss) from operations
external	$	9,333		$	2,229		$	11,562		$	(1,009	)	$	2,495		$	(2,431	)	$	10,617

Basic and diluted earnings per unit are calculated by dividing net income attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders and preferred shareholders of Fund II and Fund III, by the weighted average units outstanding during the period. There were no dilutive securities outstanding during the periods presented. The following table shows how we arrived at basic and diluted income per unit:

	Quarter Ended						Six Months Ended
	June 30						June 30
(in thousands, except per unit amounts)	2014			2013			2014			2013
Net income attributable to Pope Resources' unitholders	$	1,846		$	6,128		$	14,087		$	9,612
Less:
Net income attributable to unvested restricted unitholders		(30	)		(263	)		(175	)		(410	)
Preferred share dividends - ORM Timber Funds		(8	)		(4	)		(16	)		(8	)
Net income for calculation of EPS	$	1,808		$	5,861		$	13,896		$	9,194

Basic and diluted weighted average units outstanding		4,391			4,369			4,389			4,367

Basic and diluted earnings per unit	$	0.41		$	1.34		$	3.17		$	2.11

In January 2014, the Partnership granted 9,966 restricted units pursuant to the management incentive compensation program. These restricted units vest ratably over four years with the grant date fair value equal to the market price on the date of grant. Simultaneous with the restricted unit grant to management, members of our Board of Directors received 3,000 restricted units. Restricted units granted to directors are not part of the management incentive compensation program, but are included in the calculation of total equity compensation expense. These awards to directors vest 50% on the third anniversary and 50% on the fourth anniversary of the date of grant. Total equity compensation expense is recognized over the vesting period. We recognized $72,000 and $227,000 of equity compensation expense in the second quarter of 2014 and 2013, respectively, and $521,000 and $763,000 for the first half of 2014 and 2013, respectively, related to these incentive compensation programs.

Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $1.0 million and $614,000 for the first half of 2014 and 2013, respectively. During the six months ended June 30, 2014, the Partnership paid income taxes of $33,000 and received a net income tax refund of $240,000 in the first six months of 2013.

10.

The Partnership’s financial instruments include cash and cash equivalents, short-term investments and accounts receivable, for which the carrying amount of each represents fair value based on current market interest rates or their short-term nature. Carrying amounts of contracts receivable, although long-term, also approximate fair value based on current market rates.

The Partnership’s and the Funds’ fixed-rate debt collectively have a carrying value of $75.6 million and $75.7 million as of June 30, 2014 and December 31, 2013, respectively. The estimated fair value of this debt, based on current interest rates for similar instruments (Level 2 inputs in the Fair Value Hierarchy), is approximately $80.8 million and $77.5 million, as of June 30, 2014 and December 31, 2013, respectively.

11.

The Partnership had an accrual for estimated environmental remediation costs of $13.0 million and $13.2 million as of June 30, 2014 and December 31, 2013, respectively. The environmental remediation liability represents management’s estimate of payments to be made to monitor and remediate certain areas in and around the townsite/millsite of Port Gamble, and at Port Ludlow, Washington.

In December of 2013, a consent decree and Clean-up Action Plan (CAP) related to Port Gamble were finalized with the Department of Ecology (DOE) and filed with Kitsap County Superior Court. The scope of the clean-up in the final CAP is substantially the same as was contemplated in the second quarter of 2012 when an additional accrual of $12.5 million was recorded. Certain unresolved issues remain; principally related to the degree to which the Department of Natural Resources (DNR), the other potentially liable party (PLP) in Port Gamble, is going to participate in funding the costs of clean-up.

In developing its estimate of the Port Gamble environmental liability, management has employed a Monte Carlo statistical simulation model that suggests a potential aggregate range of clean-up costs from $11.4 million to $15.3 million. The $12.9 million liability recorded by the Company as of June 30, 2014 is based on the 50th percentile within the range, which management considers the best estimate of the most likely outcome.

The environmental liability at June 30, 2014 is comprised of $700,000 that management expects to expend in the next 12 months and $12.3 million thereafter and these amounts are included in other current liabilities and other long-term liabilities, respectively.

Activity in the environmental liability is as follows:

	Balances at		Additions		Expenditures
	the Beginning		to		for		Balance at
(in thousands)	of the Period		Accrual		Remediation		Period-end
Year ended December 31, 2012	$	2,203	$	12,500	$	761	$	13,942
Year ended December 31, 2013		13,942		-		701		13,241
Quarter ended March 31, 2014		13,241		-		11		13,230
Quarter ended June 30, 2014		13,230		-		203		13,027

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect management’s estimates based upon our current goals, in light of management’s knowledge of existing circumstances and expectations about future developments. Statements about expectations and future performance are “forward looking statements” within the meaning of applicable securities laws, which describe our goals, objectives and anticipated performance. These statements can be identified by words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions. These statements are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled “Risk Factors” in Part II, Item 1A below. Some of the issues that may have an adverse and material impact on our business, operating results and financial condition include economic conditions that affect consumer demand for our products and the prices we receive for them both domestically and overseas, particularly in certain parts of Asia; government regulation that affects our ability to access our timberlands and harvest logs from those lands; factors that affect the timing and amounts realized from the sales, if any, of our real estate holdings; the implications of significant indirect sales to overseas customers, including regulatory and tax matters; the effect of financial market conditions on our investment portfolio and related liquidity; the effects of competition, especially from larger, better-financed competitors; environmental and land use regulations that limit our ability to harvest timber and develop property; access to debt financing by our customers as well as ourselves; the impacts of climate change and natural disasters on our timberlands and on surrounding areas; and the potential impacts of fluctuations in foreign currency rates as they affect demand for our products. From time to time we identify other risks and uncertainties in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates and expectations as of the date of the report, and unless required by law, we do not undertake to update these statements as our business operations and environment change.

This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included with this report.

EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), is engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and operations of the three private equity funds (“Funds”). When we refer to the timberland owned by the Partnership, we describe it as the Partnership’s tree farms. We refer to timberland owned by the Funds as the Funds’ tree farms. When referring collectively to the Partnership’s and Funds’ timberland we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber to be harvested as logs for sale to export brokers and domestic manufacturers. The second most significant business in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily take the form of securing permits, entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land’s value by selling larger parcels to buyers who will take the land further up the value chain, either to home buyers or to developers and lessors of commercial property. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed, and will not recognize operating income until that project is sold. In addition, within this segment we sometimes negotiate and sell development rights in the form of conservation easements (CE’s) on Fee Timber properties to preclude future development. Our third business, which we refer to as Timberland Management, is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership.

Our current strategy for adding timberland acreage is centered on our private equity timber fund business model. We have closed and invested capital from three timber funds, with assets under management totaling approximately $302 million based on appraisals as of December 31, 2013. Our 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $32 million at time of acquisition, afford us a share of the Funds’ operating cash flows while also allowing us to earn asset management and timberland management fees, as well as potential future incentive fees, based upon the overall success of each fund. We also believe that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management more cost-effectively than could be maintained for the Partnership’s timberlands alone. We believe our co-investment strategy also enhances our credibility with existing and prospective investors by demonstrating that we have both an operational and a financial commitment to the Funds’ success.

The Funds are consolidated into our financial statements, but then income or loss attributable to equity owned by third parties is removed from consolidated results in our Condensed Consolidated Statements of Comprehensive Income under the caption “Net (income) loss attributable to non-controlling interests-ORM Timber Funds” to arrive at comprehensive income attributable to unitholders of the Partnership.

The challenge for our Real Estate segment centers around how and when to “harvest” parcels of our 2,900-acre portfolio in western Washington to optimize value realization by selling the property, balancing the long-term risks and costs of carrying and developing a property against the potential for income and positive cash flows upon sale.

Second quarter highlights

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

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

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

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

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

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

Outlook

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

In the first half of 2014, we closed on the sale of a number of Real Estate properties and although we expect to close on several more during 2014, some may slide into early 2015 due to permitting delays.

RESULTS OF OPERATIONS

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

Fee Timber

Fee Timber results include operations from 110,000 acres of timberland owned by the Partnership and 91,000 acres of timberland owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington, northwestern Oregon, and northern California. This revenue source is driven primarily by the volume of timber harvested and the average log price realized on the sale of that harvested timber. Our volume harvested is typically based on manufactured log sales to domestic mills or log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms, the revenue from which is included in the Other Revenue column on the below tables. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude the timber deed sales, except where stated otherwise. Harvest volumes are generally expressed in million board feet (MMBF) increments while harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF). Fee Timber cost of sales, which consist predominantly of harvest, haul, and depletion costs, vary with harvest volume and the resulting revenue. Revenue and cost data related to harvest activities on timberland owned by the Funds are included in this discussion of operations. Fee Timber revenue, is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which are included in Other Revenue below.

When discussing our Fee Timber operations, we compare the current quarter results to both the previous quarter and the corresponding quarter of the prior year, as well as the current year-to-date results to the prior year-to-date. These comparisons provide an opportunity to depict harvest volume and log price trends that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended June 30, 2014, March 31, 2014, and June 30, 2013 were as follows:

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

Partnership tree farms	$	10.2	$	0.9	$	11.1	$	6.1		13.9
Funds' tree farms		10.7		0.3		11.0		3.1		15.9
Total Fee Timber March 31, 2014	$	20.9	$	1.2	$	22.1	$	9.2		29.8

Partnership tree farms	$	8.1	$	0.3	$	8.4	$	3.8		12.9
Funds' tree farms		8.6		0.1		8.7		1.4		14.0
Total Fee Timber June 30, 2013	$	16.7	$	0.4	$	17.1	$	5.2		26.9

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

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

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

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

Partnership tree farms	$	18.9	$	0.6	$	19.5	$	9.4		29.9
Funds' tree farms		14.0		0.1		14.1		2.2		23.4
Total Fee Timber June 30, 2013	$	32.9	$	0.7	$	33.6	$	11.6		53.3

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

Log Volume

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

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

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

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

We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned timber deed sales, for the six months ended June 30, 2014 and 2013:

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

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

Log Prices

Logs from the Combined tree farms serve a number of different domestic and export markets, with domestic mills historically representing our largest market destination. Export customers consist of log brokers who sell the logs primarily to Japan, China and, to a lesser degree, Korea.

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

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

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

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

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

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

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

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

Douglas-fir: Douglas-fir is noted for its structural characteristics that make it generally preferable to other softwoods for construction grade lumber and plywood. Demand and price for Douglas-fir sawlogs have historically been driven largely by the level of new home construction in the United States. Since late 2009, however, increased demand from China has also been a driver of demand and price for Douglas-fir sawlogs. Log supply at Asian ports expanded earlier in the year when demand for logs failed to keep pace with the log volume received into Asian ports which served to lower realized Douglas-fir prices $71/MBF, or 9%, in Q2 2014 versus Q1 2014. When comparing the current quarter to the comparable period in the prior year, notwithstanding increased demand in both the domestic and export markets in 2014, a less valuable mix of saw logs relative to other less valuable products in this species served to slightly lower realized Douglas-fir log prices $3/MBF versus Q2 2013. The realized price increased $56/MBF, or 8%, from the first six months of 2013 as compared to the first six months of 2014 due to increased demand from both the export and domestic markets in 2014 over 2013.

Whitewood: Whitewood is a term used to describe several softwood species, but for us primarily refers to western hemlock. Though generally considered to be of a lower quality than Douglas-fir, these logs are also used for manufacturing construction grade lumber. Increased supply at Asian ports due to heavy volumes exported earlier in the year served to lower realized whitewood prices $42/MBF, or 6%, in Q2 2014 versus Q1 2014. Meanwhile, an overall increase in demand in 2014 compared to 2013 served to lift realized whitewood log prices $33/MBF, or 5%, in Q2 2014 versus Q2 2013. Similarly, the realized price increased $62/MBF, or 10%, from the first six months of 2013 to the first six months of 2014.

Pine: We have added Pine to our species mix with the acquisition of the northern California tree farm by one of our funds. Pine is a species produced primarily on the Funds’ northern California tree farm. It is used primarily by plywood manufacturers, as well as for the production of construction grade lumber and wood chips. During Q2 2014, pine prices averaged $526/MBF. We had no pine harvest volume in the comparable periods.