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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.

Cedar: Cedar is a minor component in most timber stands in our region and is used generally to produce products for outdoor applications such as fencing, siding, and decking. Although there is a link between demand for these products and housing starts, this link is not as strong as with most other softwood species. Cedar prices tend to be seasonal, with manufacturers generally buying volume early in the year to prepare for spring sales associated with repair and remodel projects. As such, average realized log prices for cedar decreased $136/MBF, or 10%, from Q1 2014 to Q2 2014. Compared to Q2 2013, average realized cedar prices were $17/MBF, or 1%, higher in Q2 2014. Increased demand from manufacturers caused cedar prices to increase $148/MBF, or 12%, from the first six months of 2013 to the first six months of 2014.

Hardwood: Hardwood is an ancillary product of our Pacific Northwest log harvest volume, and at times this product’s pricing will vary inversely to harvest volume. Hardwood can refer to many different species, but on our tree farms primarily consists of red alder. The local mills that process red alder sawlogs manufacture lumber for use in furniture and cabinet construction. Given the relatively small volume of hardwood logs that we produce, the quality and species attributes of the volume can have an outsized impact on our price realizations, although of course that same factor means that these variations have relatively little impact on our total Fee Timber revenues. Hardwood prices decreased $2/MBF from Q1 2014 to Q2 2014, and increased $76/MBF, or 15%, from Q2 2013 to Q2 2014. For the first six months of 2014, hardwood prices were $78/MBF, or 15%, higher than the corresponding period in 2013.

Pulpwood: Pulpwood is a lower quality conifer or hardwood log unsuitable for the manufacture of lumber, but useful to produce wood chips for the pulp and paper industry. During the recession, many timberland owners deferred harvest for several years and domestic mills severely curtailed operations. Pulp mills rely on woodchips either from sawmill residuals or chipped from whole logs (pulpwood). Both of these sources were in short supply during the recession. With recent increased production at local sawmills, and commensurate increase in residual woodchips, pulp mills have become less dependent on whole logs which has led to generally declining prices for pulpwood. Notwithstanding this general trend, pulpwood prices increased $12/MBF, or 4%, from Q1 2014 to Q2 2014 and increased $16/MBF, or 6%, from Q2 2013 to Q2 2014. For the first half of 2014, pulpwood prices were unchanged from the first half of 2013.

Customers

The ultimate decision of whether to sell our logs into the export or domestic market is based on the net proceeds we receive after taking into account both the delivered log prices and the cost to deliver logs to the customer. As such, our reported log price realizations will reflect our properties’ proximity to customers as well as the broader log market.

The table below categorizes logs sold by customer type for the quarters ended June 30, 2014, March 31, 2014, and June 30, 2013:

	Q2 2014							Q1 2014							Q2 2013
	Volume							Volume							Volume
Destination	MMBF		%			Price		MMBF		%			Price		MMBF		%			Price
Export brokers		8.5		33	%	$	722		12.5		42	%	$	793		9.0		33	%	$	724
Domestic mills		13.8		53	%		669		13.9		46	%		728		14.0		52	%		652
Pulpwood		3.8		14	%		281		3.5		12	%		269		3.9		15	%		265
Subtotal		26.1		100	%		630		29.9		100	%		701		26.9		100	%		620

Timber deed sale		-							-							0.5					243
Total		26.1							29.9							27.4

Comparing Q2 2014 to Q1 2014. Volume sold to the export market decreased to 33% of Q2 2014 harvest volume compared to 42% of Q1 2014 volume. Conversely, volume sold to the domestic market increased to 53% of Q2 2014 harvest volume compared to 46% of Q1 2014 harvest volume. Prices in both markets decreased significantly following a buildup of log inventories at Asian ports earlier in the year that pulled down export prices. The reduction in demand from the export market led to an increase in supply which reduced prices for both the export and domestic markets. Export prices decreased 9% and domestic prices decreased 8%. As a percentage of total volume harvested, our sales to the pulpwood market increased from 12% in Q1 2014 to 14% in Q2 2014 as prices increased 4%.

Comparing Q2 2014 to Q2 2013. Volume sold to export brokers as a percentage of total harvest was unchanged at 33%, while average realized prices decreased slightly by $2/MBF from this customer base. Similarly, volumes sold to domestic mills increased to 53% of total volume in Q2 2014 compared to 52% in Q2 2013, while average realized prices increased 3%. The pulpwood mix decreased from 15% of harvest in Q2 2013 to 14% of harvest in Q2 2014, while prices increased 6%.

During Q2 2013, we sold a timber deed on 0.5 MMBF of volume from the Funds’ tree farm in northern California. Under a timber deed sale, the customer is responsible for harvest and hauling costs which makes comparison to delivered log prices difficult. We estimate those costs to be approximately $150/MBF, thereby equating to an estimated delivered log price of $393/MBF. The $393/MBF represents a large negative variance to the realized delivered log price during Q2 2013 of $620/MBF which is attributable to the difference between western Washington and Oregon log markets compared to northern California. Log markets in northern California are much less influenced by the export market and carry a lower-valued species mix. These two factors combined to account for the price variance.

The table below categorizes logs sold by customer type for the six month periods ended June 30, 2014 and 2013:

	Six Months Ended
	30-Jun-14							30-Jun-13
	Volume							Volume
Destination	MMBF		%			Price		MMBF		%			Price
Export brokers		21.0		38	%	$	765		15.8		30	%	$	702
Domestic mills		27.7		49	%		698		30.0		56	%		654
Pulpwood		7.3		13	%		275		7.5		14	%		275
Subtotal		56.0		100	%		668		53.3		100	%		615

Timber deed sale		-							0.5				$	243
Total		56.0							53.8

Comparing YTD 2014 to YTD 2013. Volume sold to export brokers as a percentage of total harvest in the first six months of 2014 increased to 38% compared with 30% during the corresponding period in 2013. Conversely, volume sold to domestic mills decreased to 49% in the first six months of 2014 compared to 56% during the corresponding period of 2013. The shift in customer mix is in response to better demand and hence prices in the export market versus the domestic market. Prices in the export market increased 9% from 2013 to 2014, while prices in the domestic market increased 7%. The pulpwood mix decreased from 14% of harvest in 2013 to 13% of harvest in 2014, while prices remained unchanged.

Cost of Sales

Cost of sales for the Fee Timber segment consists of harvest, haul, and harvest excise tax costs, along with depletion expense. Harvest costs will vary by terrain, with steeper slopes requiring more expensive cable logging systems and a high labor component, while more moderate slopes can be harvested utilizing mechanized equipment resulting in lower relative costs. Haul costs will vary directly in proportion to the distance traveled from the logging site to the customer, and will also reflect the impact of fuel cost variability. Taken together, harvest and haul costs represent by far the most significant direct costs incurred to convert standing timber into manufactured logs and deliver those logs to the point of sale. Harvest excise tax costs vary by state, with our typical volume-weighted average ranging from $10/MBF to $14/MBF.

Depletion expense represents the cost of acquiring and growing the harvested timber. The applicable depletion rate is derived each year by dividing the sum of the cost of merchantable stands of timber and capitalized road expenditures by the estimated volume of merchantable timber available for harvest at the beginning of that year. Merchantable timber in Washington and Oregon consists of age 35 and older stands and, in California, trees with a diameter at breast height (DBH) of 16 inches or greater. The depletion rate, so derived and expressed in $/MBF terms, is then multiplied by the volume harvested in a given period to calculate depletion expense for that period. Because of the relatively recent acquisition dates of the Funds’ tree farms, the depletion rates associated with harvests from those properties are considerably higher than for harvests from the Partnership’s tree farms. Partnership depletion consists primarily of historical timber cost that has been owned by the Partnership for many decades, as well as the Columbia tree farm property that was acquired in 2001.

We calculate a pooled depletion rate for volume harvested from the Partnership’s tree farms. On the other hand, for the Funds we calculate separate depletion rates for each of the Fund tree farms and then present them as a blended aggregate rate weighted by the actual harvest volume from each of the tree farms.

Fee Timber cost of sales for the quarters ended June 30, 2014, March 31, 2013, and June 30, 2013, was as follows, with the first table expressing these costs in total dollars and the second table on a per MBF basis:

(in thousands) Quarter ended	Harvest, Haul and Other		Depletion		Total Fee Timber Cost of Sales		Harvest Volume (MMBF)
Partnership tree farms	$	3,639	$	605	$	4,244		12.7
Funds' tree farms		3,682		2,409		6,091		13.4
Total Fee Timber June 30, 2014	$	7,321	$	3,014	$	10,335		26.1

Partnership tree farms	$	3,246	$	664	$	3,910		13.9
Funds' tree farms		4,421		2,773		7,194		15.9
Total Fee Timber March 31, 2014	$	7,667	$	3,437	$	11,104		29.8

Partnership tree farms	$	2,774	$	725	$	3,499		12.9
Funds' tree farms		3,668		3,037		6,705		14.5	*
Total Fee Timber June 30, 2013	$	6,442	$	3,762	$	10,204		27.4	*

* Volume includes 0.5 MMBF from timber deed sale.

(Amounts per MBF) Quarter ended	Harvest, Haul and Other *		Depletion *		Total Fee Timber Cost of Sales *
Partnership tree farms	$	287	$	48	$	334
Funds' tree farms		275		180		455
Total Fee Timber June 30, 2014	$	280	$	115	$	396

Partnership tree farms	$	233	$	48	$	280
Funds' tree farms		278		174		452
Total Fee Timber March 31, 2014		257		115		372

Partnership tree farms	$	215	$	56	$	271
Funds' tree farms		262		210		463
Total Fee Timber June 30, 2013		239		137		373

*	Timber deed sale volumes are excluded in the per MBF computation for harvest, haul and other costs but included in the per MBF computation for depletion and total cost of sales.

Comparing Q2 2014 to Q1 2014. Cost of sales decreased $769,000, or 7%, from Q1 2014 to Q2 2014. The decrease was primarily attributable to a 13% decrease in harvest volume from Q1 2014 to Q2 2014. Cost of sales would have been down more in line with the volume decrease if not for a 9% increase in the “Harvest, Haul and Other” rate resulting from higher per MBF harvest costs on the Partnership’s tree farms, as well as a $73,000 increase in commercial thinning cost of sales, which is included in the “Harvest, Haul and Other” columns in the tables above.

Comparing Q2 2014 to Q2 2013. Cost of sales increased $131,000, or 1%, in Q2 2014 compared to the corresponding period in 2013, notwithstanding a 5% decrease in harvest volume – including the timber deed sale – from Q2 2013 to Q2 2014. The “Harvest, Haul and Other” rate increased 17% due to higher per MBF haul costs as well as $534,000 of commercial thinning cost of sales in Q2 2014 which had no counterpart in Q2 2013. The depletion rate decreased $22/MBF, or 16%, from Q2 2013 to Q2 2014, partly attributable to a decrease in the Funds’ share of harvest volume from 53% in Q2 2013 to 51% in Q2 2014. Depletion rates for the Funds’ tree farms are higher than depletion rates for the Partnership’s tree farms because the former were purchased more recently.

Fee Timber cost of sales for the six months ended June 30, 2014 and 2013, respectively, was as follows, with the first table expressing these costs in total dollars and the second table on a per MBF basis:

(in thousands) Six Months Ended	Harvest, Haul and Other		Depletion		Total Fee Timber Cost of Sales		Harvest Volume (MMBF)
Partnership tree farms	$	6,885	$	1,269	$	8,154		26.7
Funds' tree farms		8,103		5,182		13,285		29.3
Total Fee Timber June 30, 2014	$	14,988	$	6,451	$	21,439		56.0

Partnership tree farms	$	6,356	$	1,664	$	8,020		29.9
Funds' tree farms		5,978		4,782		10,760		23.9	*
Total Fee Timber June 30, 2013	$	12,334	$	6,446	$	18,780		53.8	*

* Volume includes 0.5 MMBF from timber deed sale.

(Amounts per MBF) Six Months Ended	Harvest, Haul and Other *		Depletion *		Total Fee Timber Cost of Sales *
Partnership tree farms	$	258	$	48	$	305
Funds' tree farms		277		177		453
Total Fee Timber June 30, 2014	$	268	$	115	$	383

Partnership tree farms	$	213	$	56	$	268
Funds' tree farms		255		200		450
Total Fee Timber June 30, 2013	$	231	$	120	$	349

*	Timber deed sale volumes are excluded in the per MBF computation for harvest, haul and other costs but included in the per MBF computation for depletion and total cost of sales.

Comparing YTD 2014 to YTD 2013. Cost of sales increased $2.7 million, or 14%, in the first six months of 2014 compared to the corresponding period in 2013, partly attributable to a 4% increase in harvest volume – including the timber deed sale – from 2013 to 2014. The “Harvest, Haul and Other” rate increased $37/MBF, or 16%, due to higher per MBF haul costs as well as $994,000 of commercial thinning cost of sales in 2014 which had no counterpart in 2013. Commercial thinning cost of sales is included in the “Harvest, Haul and Other” columns in the tables above. The depletion rate decreased 4% from 2013 to 2014, notwithstanding an increase in the Funds’ share of harvest volume from 44% in 2013 to 52% in 2014. Depletion rates for the Funds’ tree farms are higher than depletion rates for the Partnership’s tree farms because the former were purchased more recently.

Operating Expenses

Fee Timber operating expenses include the cost of maintaining existing roads and building temporary roads for harvesting, as well as silviculture costs, and other management expenses. For the quarters ended June 30, 2014, March 31, 2014, and June 30, 2013, operating expenses were $2.1 million, $1.8 million, and $1.7 million, respectively. The $327,000 increase in operating expenses from Q1 2014 to Q2 2014 was attributable to higher road and silviculture expenses. The $451,000 increase in operating expenses from Q2 2013 to Q2 2014 was attributable primarily to higher road related expenses on the Partnership’s tree farms and other management expenses associated with managing the Fund properties.

Fee Timber operating expenses for the six months ended June 30, 2014 and 2013 were $3.9 million and $3.2 million, respectively. The $683,000 increase is primarily attributable to increased management expenses associated with managing the Fund properties.

Operating Income

Comparing Q2 2014 to Q1 2014. Operating income was down $4.2 million, or 45%, from $9.2 million in Q1 2014 to $5.0 million in Q2 2014 primarily as a result of the 13% decrease in harvest volume and 10% decrease in average realized log prices described earlier. Also contributing to the decline were higher expenditures for temporary roads and silviculture.

Comparing Q2 2014 to Q2 2013. Operating income went down by $199,000 or 3%, from $5.2 million in Q2 2013 to $5.0 million in Q2 2014. The $400,000 increase in revenue, driven by stronger prices, was more than offset by increases in cost of sales and higher expenditures for temporary roads.

Comparing YTD 2014 to YTD 2013. Operating income increased by $2.7 million, or 23%, from $11.6 million in the first half of 2013 to $14.3 million in the first half of 2014. On a year-to-date basis, the increases in cost of sales and operating expenses were more than offset by 9% higher log prices and 5% greater harvest volume, as well as revenue from commercial thinning.

Timberland Management

The Timberland Management segment primarily develops timberland investment portfolios on behalf of the Funds. As of June 30, 2014, we managed three private equity timber funds, which own a combined 91,000 acres of commercial timberland in western Washington, northwestern Oregon and northern California with total assets under management of $304 million. Fund III is currently in the drawdown period to invest its $180 million of committed capital, of which 5%, or $9 million, represents the Partnership’s co-investment share. As of June 30, 2014, Fund III had $108 million of committed capital remaining to invest, which includes over $5 million from the Partnership. The drawdown period for Fund III commenced on July 31, 2012, and will last for three years or until all of the committed capital is invested, whichever occurs first.

Fund Capital

The following table provides detail behind committed and called capital by fund on a life-to-date basis as of June 30, 2014.

									Distributions
	Total Fund				Partnership Co-investment				Received by
(in millions)	Commitment		Called Capital		Commitment		Called Capital		Partnership
Fund I	$	62	$	59	$	12	$	12	$	1
Fund II		84		83		17		17		7
Fund III		180		72		9		3		0
Total	$	326	$	214	$	38	$	32	$	8

The Partnership received combined distributions from the Funds of $1.2 and $1.0 million for the six months ended June 30, 2014 and 2013, respectively. Fund distributions are paid from available Fund cash, generated primarily from the harvest and sale of timber after paying all Fund expenses and management fees. During Q3 2013, Fund II made a special distribution of $14.1 million to its investors, financed by the closing of a $14 million timberland mortgage. The Partnership’s portion of this special distribution was $2.7 million, and is included in the “Distributions Received” column in the above table. In addition to receiving its co-investment-based share of fund distributions, the Partnership also earned investment and timberland management fees from the Funds which totaled $1.7 and $1.4 million for the six months ended June 30, 2014 and 2013, respectively. These fees and distributions are eliminated in our consolidated financial statements because the Funds’ financial statements are consolidated with the Partnership’s.

Revenue and Operating Loss

Revenue and expense generated through the management of the Funds is accounted for within the Timberland Management segment. Accounting guidance requires us to consolidate the Funds’ financial statements into the Partnership’s financial statements because the Partnership controls the Funds. As such, all fees earned by the Timberland Management segment associated with managing the Funds are eliminated from revenue in the Partnership’s consolidated financial statements. Accordingly, operating loss consists entirely of operating expenses for this segment. This fee revenue is an expense to the Fee Timber segment which is also eliminated when the Funds are consolidated into the Partnership’s financial statements. The Partnership owns 20% of Funds I and II and 5% of Fund III. Accordingly, the Partnership’s income attributable to its unitholders reflects 80% of the fees paid by Funds I and II to the Partnership and 95% of such fees paid by Fund III.

Revenue and operating loss for the Timberland Management segment for the quarters ended June 30, 2014 and 2013 were as follows:

(in thousands, except invested	Quarter Ended
capital, volume and acre data)	Jun-14			Jun-13
Revenue internal	$	840		$	740
Intersegment eliminations		(840	)		(740	)
Revenue external	$	-		$	-

Operating income internal	$	169		$	103
Intersegment eliminations		(679	)		(600	)
Operating loss external	$	(510	)	$	(497	)

Invested capital (in millions)	$	239		$	188
Harvest volume - Funds (MMBF)		13.4			14.5
Acres under management		91,000			80,000

Comparing Q2 2013 to Q2 2013. Timberland Management eliminated the $840,000 and $740,000 of revenue earned by the Partnership from managing the Funds for the second quarters of 2014 and 2013, respectively. The fees earned from managing the Funds include a variable component related to harvest volume from the Funds’ tree farms, and a fixed component related to invested capital and acres under management. The increase in fees is due to the Q4 2013 acquisition by Fund III of 11,000 acres in southwest Washington, partially offset by the decrease in the Funds’ Q2 2014 harvest volume compared to Q2 2013, resulting in an increase in management fees generated from the Funds, all of which are eliminated in consolidation as described above.

As all revenue is eliminated in consolidation, operating losses consist of operating expenses incurred by the Timberland Management segment. Operating expenses incurred for the quarters ended June 30, 2014 and 2013 totaled $510,000 and $497,000, respectively. The increase in operating expenses is attributable to growth in the Funds’ acres under management and increased costs associated with placing Fund III’s remaining capital.

Revenue and operating loss for the Timberland Management segment for the year-to-date periods ended June 30, 2014 and 2013 were as follows:

(in thousands, except invested	Six Months Ended
capital, volume and acre data)	Jun-14			Jun-13
Revenue internal	$	1,715		$	1,413
Intersegment eliminations		(1,715	)		(1,413	)
Revenue external	$	-		$	-

Operating income internal	$	280		$	123
Intersegment eliminations		(1,400	)		(1,132	)
Operating loss external	$	(1,120	)	$	(1,009	)

Invested capital (in millions)	$	239		$	188
Harvest volume - Funds (MMBF)		29.3			23.9
Acres under management		91,000			80,000

Comparing YTD 2014 to YTD 2013. Timberland Management eliminated the $1.7 million and $1.4 million of revenue earned by the Partnership from managing the Funds for the six months ended June 30, 2014 and 2013, respectively. The fees earned from managing the Funds include a variable component related to harvest volume from the Funds’ tree farms, and a fixed component related to invested capital and acres under management. The increase in fees is due to a combination of the Q4 2013 acquisition by Fund III of 11,000 acres in southwest Washington, as well as the increase in the Funds’ 2014 harvest volume compared to 2013, resulting in an increase in management fees generated from the Funds, all of which are eliminated in consolidation as described above.

Operating expenses incurred by the Timberland Management segment for the six months ended June 30, 2014 and 2013 totaled $1.1 million and $1.0 million, respectively. The increase in operating expenses is attributable to growth in the Funds’ acres under management and increased costs associated with placing Fund III’s remaining capital.

Real Estate

The Partnership’s Real Estate segment produces its revenue primarily from the sale of land within its 2,900-acre portfolio and sales of development rights and tracts from the Partnership’s timberland portfolio, together with residential and commercial property rents from our Port Gamble and Poulsbo properties. Real Estate holdings are located in the Washington counties of Pierce, Kitsap, and Jefferson with sales of land for this segment typically falling into one of three general types:

·	Commercial, business park, and residential plat land sales represent land sold after development rights have been obtained and are generally sold with prescribed infrastructure improvements.

·	Rural residential lot sales that generally require some capital improvements such as zoning, road building, or utility access improvements prior to completing the sale.

·	The sale of unimproved land, which generally consists of larger acreage sales rather than single lot sales, is normally completed with very little capital investment prior to sale.

In addition to outright sales of fee simple interests in land, such as those in the three categories outlined above, we also enter into conservation easement (CE) sales that allow us to retain harvesting rights and other timberland management rights, but bar any future subdivision of or real estate development on the property.

“Land Held for Development” on our Condensed Consolidated Balance Sheets represents the Partnership’s cost basis in land that has been identified as having greater value as development property rather than as timberland. Our Real Estate segment personnel work with local officials to acquire entitlements for further development of these parcels.

Those properties that are for sale, under contract, and for which the Partnership has an expectation they will sell within the next 12 months, are classified on our balance sheet as a current asset under “Land Held for Sale”. The $4.1 million amount currently in Land Held for Sale reflects our expectation of sales between now and the end of the second quarter of 2015, comprising 93 residential lots from the Harbor Hill project and a 366-acre conservation land sale.

Project costs that are associated directly with the development and construction of a real estate project are capitalized and then included in cost of sales when the property is sold, along with our original basis in the underlying land and the closing costs associated with the sale transaction.

Results from Real Estate operations vary significantly from period-to-period as we make multi-year investments in entitlements and infrastructure prior to selling entitled or developed land.

In the second quarter of 2014, we closed on the sale of 8 lots from our Harbor Hill development in Gig Harbor, Washington for $754,000, whereas in the second quarter of 2013 we closed on the sale of a 2,330-acre conservation land sale for $5.7 million. Real Estate operating expenses were $998,000 for the second quarter of 2014 compared to $858,000 for the second quarter of 2013. The increase is attributable to higher personnel and other costs resulting from the increased activity in the Real Estate segment. These factors resulted in an operating loss of $952,000 for the second quarter of 2014 compared to operating income of $3.3 million in the second quarter of 2013.

In the first half of 2014, we closed on a conservation land sale for $4.6 million as well as the sale of 115 residential lots from our Harbor Hill development for $11.6 million. In the first half of 2013, we closed on the sale of a 2,330 acre conservation land sale for $5.7 million. Otherwise, rental and other activities in our Real Estate segment were largely consistent from 2013 to 2014.

Real Estate operating expenses were $1.9 million for the first half of 2014 compared to $1.7 million for the first half of 2013. The increase is attributable to higher personnel and other costs resulting from the increased activity in the Real Estate segment.

Real Estate revenue, gross margin and operating income are summarized in the table below for the six months ended June 30, 2014 and 2013:

(in thousands, except acre, lot and per acre/lot amounts)
For the six months ended:						Operating				Revenue		Gross Margin
Description	Revenue		Gross margin			income (loss)		Sold		per acre/lot		per acre/lot
Conservation land sale	$	4,600	$	3,838				Acres:	535	$	8,598	$	7,174
Residential		11,551		4,083				Lots:	115		100,443		35,504
Total land		16,151		7,921
Rentals and other		607		(25	)
June, 2014 Total	$	16,758	$	7,896		$	6,007

Unimproved land		5,659		4,196				Acres:	2,330		2,429		1,801
Residential		157		68	*
Total land	$	5,816	$	4,264
Rentals and other		545		(72	)
June, 2013 Total	$	6,361	$	4,192		$	2,495

* Percentage-of-completion income recognized on Q4 2012 multi-family sale

Environmental Remediation

The environmental remediation liability represents management’s best estimate of payments to be made to remediate and monitor certain areas in and around the townsite/millsite of Port Gamble, and at Port Ludlow, Washington.

In the second quarter of 2012 we accrued an additional $12.5 million for Port Gamble environmental liabilities. This additional accrual was derived prior to the conclusion of negotiations with the Department of Ecology (DOE), but was the result of significant modifications to the draft Port Gamble Baywide and Millsite Remedial Investigation (RI) and Feasibility Study (FS) issued by the DOE in May 2012. From mid-August 2012 through the balance of 2013, we were in regular dialogue with DOE on the development of a Clean-Up Action Plan (CAP), the negotiation of a consent decree (CD), and the potential sale of property around Gamble Bay by Pope Resources. In December of 2013, the CD and CAP were finalized and filed with Kitsap County Superior Court. The scope of the clean-up outlined in the final CAP is substantially the same as was contemplated in the second quarter of 2012 when the additional accrual 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, will 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 Partnership as of June 31, 2014 is based on the 50th percentile within the range, which management considers its best estimate of the most likely outcome.

The environmental liability at March 31, 2014 is comprised of $700,000 that the Partnership expects to expend in the next 12 months and $12.5 million thereafter. Activity in the environmental remediation liability is detailed in note 10 to the condensed consolidated financial statements.

General and Administrative (G&A)

G&A expenses decreased to $450,000 in the second quarter of 2014 from $1.2 million in the second quarter of 2013. This decrease from 2013 to 2014 is due primarily to the reversal of previously accrued incentive and unit compensation expense resulting from the departure of our former chief executive officer. Similarly, G&A expenses decreased to $1.8 million for the first half of 2014 from $2.4 million for the first half of 2013.

Interest Expense, Net

Interest expense, net includes interest income, interest expense and capitalized interest components. Excluding capitalized interest, net interest expense for the second quarter of 2014 was $851,000 compared to $515,000 for the second quarter of 2013. The increase is due primarily to an incremental $14.0 million borrowing by Timber Fund II in August 2013 and the $18.0 million borrowing by Fund III in December 2013. As a result, interest expense (excluding capitalized interest) increased from $1.5 million for the first half of 2013 to $2.2 million for the first half of 2014.

For the second quarter of 2014, $222,000 of interest expense was capitalized compared to $172,000 for the second quarter of 2013. Capitalized interest was $491,000 for the first half of 2014 compared to 339,000 for the first half of 2013. The increase is attributable to a higher cumulative basis for those projects under active development in our Harbor Hill project in Gig Harbor.

Our debt arrangements with Northwest Farm Credit Services (NWFCS) include an annual rebate of a portion of interest expense paid in the prior year (patronage). This NWFCS patronage program is a feature common to all of this lender’s customer loan agreements. Throughout the year, we accrue an estimate of the patronage rebate that we expect to receive early in the following year. Interest expense was reduced for the patronage accrual by $91,000 and $68,000 in the second quarters of 2014 and 2013, respectively, and by $186,000 and $122,000 for the first six months of 2014 and 2013, respectively. The increase in the patronage accrual resulted from the additional borrowings by Fund III described above.

Income Tax

The Partnership recorded tax expense of $69,000 and a tax benefit of $2,000 for the quarters ended June 30, 2014 and 2013, respectively. The Partnership recorded income tax expense of $226,000 and an income tax benefit of $16,000 for the first six months of 2014 and 2013, respectively.

Pope Resources is a limited partnership and is therefore not subject to federal income tax. Taxable income/loss is instead reported to unitholders each year on a Form K-1 for inclusion in each unitholder’s income tax return. However, Pope Resources does have corporate subsidiaries that are subject to income tax, giving rise to the line item for such tax in the Condensed Consolidated Statement of Comprehensive Income.

Noncontrolling interests-ORM Timber Funds

The line item “Net income attributable to noncontrolling interests-ORM Timber Funds” represents the combination of the 80% portion of the net income or loss for Funds I and II which is attributable to third-party owners plus 95% of the net income or loss of Fund III that is similarly attributable to third-party owners of that Fund.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Liquidity and Capital Resources

We ordinarily finance our business activities using operating cash flows and, where appropriate in management’s assessment, commercial credit arrangements with banks or other financial institutions. Funds generated internally from operations and externally through financing are expected to provide the required resources for the Partnership’s future operations and capital expenditures for at least the next twelve months.

The Partnership’s debt consists of mortgage debt with fixed interest rates and an operating line of credit with Northwest Farm Credit Services (NWFCS). The mortgage debt includes $29.8 million in term loans with NWFCS structured in four tranches maturing from 2015 through 2025. In addition, our commercial office building in Poulsbo, Washington is collateral for a $3 million loan from NWFCS that matures in 2023. Our $20.0 million operating line of credit matures August 1, 2015 and we had no balance drawn as of June 30, 2014. The line of credit carries a variable interest rate that is based on the one-month LIBOR rate plus applicable margins determined by certain financial covenants.

These debt agreements contain covenants that are measured quarterly. Among the covenants measured is a requirement that the Partnership not exceed a maximum debt-to-total-capitalization ratio of 30%, with total capitalization calculated using fair market (vs. carrying) value of timberland, roads and timber. The Partnership is in compliance with these covenants as of June 30, 2014 and expects to remain in compliance for at least the next twelve months.

Mortgage debt within our proviate equity funds are collateralized by Fund properties only. Fund II has a timberland mortgage comprised of two fixed rate tranches totaling $25 million with MetLife Insurance Company. The tranches are non-amortizing and both mature in September 2020. The loans allow for, but do not require, annual principal payments of up to 10% of outstanding principal without incurring a make-whole premium. This mortgage is collateralized by a portion of Fund II’s timberland portfolio.

In December 2013, Fund III entered into a fixed-rate, $18.0 million timberland mortgage payable to NWFCS to fund a portion of the purchase of approximately 11,000 acres of timberland in southwest Washington. The mortgage is collateralized by all of Fund III’s timberland, is non-amortizing and matures in December 2023.

The $13.9 million increase in cash generated for the six months ended June 30, 2014 compared to June 30, 2013 is explained in the following table:

	Six months						Six months
	ended						ended
(in thousands)	Jun-14			Change			Jun-13
Cash provided by operations	$	25,991		$	8,981		$	17,010

Purchase of short-term investments		(3,000	)		(3,000	)		-
Reforestation and roads		(1,083	)		(230	)		(853	)
Buildings and equipment		(143	)		40			(183	)
Proceeds from sale of property and equipment		1			1			-
Cash used in investing activities		(4,225	)		(3,189	)		(1,036	)
Financing activities
Repayment of long-term debt		(55	)		2			(57	)
Cash distributions to unitholders		(5,343	)		(1,344	)		(3,999	)
Proceeds from preferred stock issuance - ORM Timber Funds		125			125			-
Payroll taxes paid upon unit net settlements		(196	)		45			(241	)
Cash distributions to fund investors, net of
distributions to Partnership		(5,613	)		(1,346	)		(4,267	)
Capital call - ORM Timber Funds, net of Partnership					0
contribution		0			(137	)		137
Other		-			0			-
Cash used in financing activities		(11,082	)		(2,655	)		(8,427	)
Net increase in cash and cash equivalents	$	10,684		$	3,137		$	7,547

The increase in cash provided by operating activities of $9.0 million resulted primarily from the real estate sales described earlier, as well as a 9% increase in log prices which more than offset a 3% decline in volume.

Cash used in investing activities during 2014 increased by $3.2 million compared to 2013 due primarily to the purchase of $3.0 million of certificates of deposit with 180-day maturities as well as greater investments in reforestation and roads.

Cash used in financing activities increased in the current year by $2.7 million due primarily to higher distributions to both unitholders and to the Funds’ investors in 2014 driven by stronger financial performance.

As of June 30, 2014, $113 million of capital commitment remains for Fund III, which includes a remaining commitment by the Partnership of $5 million. The drawdown period for Fund III ends on the earlier of July 31, 2015 or when all of the committed capital is placed.

We receive distributions associated with each of our Fund co-investments which have totaled $8 million since we began receiving distributions from Fund I in 2007. Of this amount, $5.3 million have been sourced by Fund operations and $2.7 million by Fund debt financing. In addition to these distributions, the Partnership receives management fees as outlined above.

Seasonality

Fee Timber. The elevation and terrain characteristics of our timberlands are such that we can conduct harvest operations virtually year-round on a significant portion of our tree farms. Generally, we concentrate our harvests from these areas in those months when weather limits operations on other properties, thus taking advantage of reduced competition for log supply to our customers and improving prices realized. As such, on a combined basis the pattern of quarterly volumes harvested is flatter than would be the case if looking at one tree farm in isolation.

Timberland Management. Management revenue generated by this segment consists of asset and timberland management fees. These fees, which relate primarily to our activities on behalf of the Funds and are eliminated in consolidation, vary based upon the amount of capital managed, the number of acres managed, and the volume of timber harvested from properties owned by the Funds and are not expected to be significantly seasonal.

Real Estate. While Real Estate results are not expected to be seasonal, the nature of the activities in this segment will likely result in periodic large transactions that will have significant positive impacts on both revenue and operating income of the Partnership in periods in which these transactions close, and relatively limited revenue and income in other periods. While the variability of these results is not primarily a function of seasonal weather patterns, we do expect to see some seasonal fluctuations in this segment because of the general effects of weather on Pacific Northwest development activities.

Capital Expenditures and Commitments

Capital expenditures for the full year 2014 are projected to be approximately $11.1 million, of which approximately $8.5 million relates to land development projects in Gig Harbor. Projected capital expenditures are subject to permitting timetables, suitable weather for construction of such improvements, and progress towards closing on specific land transactions.

ACCOUNTING MATTERS

Critical Accounting Policies and Estimates

An accounting policy is deemed to be “critical” if it is important to a company’s results of operations and financial condition, and requires significant judgment and estimates on the part of management in its application. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and related disclosures. Actual results could differ from these estimates and assumptions. Management believes its most critical accounting policies and estimates relate to the calculation of timber depletion as well as modeling performed to determine liabilities for matters such as environmental remediation, and potential asset impairments.

For a further discussion of our critical accounting policies and estimates see Accounting Matters in the Management Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2013. We have not adopted any new accounting policies or principles during the quarter or six months ended June 30, 2014.

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. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. See also note 2 to the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The consolidated fixed-rate debt outstanding had a fair value of approximately $80.8 and $77.5 million at June 30, 2014 and December 31, 2013, respectively, based on the prevailing interest rates for similar financial instruments. A change in interest rate on fixed-rate debt will affect the fair value of debt, whereas a change in the interest rate on variable-rate debt will affect interest expense and cash flows payable by the Partnership. A hypothetical 1% change in prevailing interest rates would change the fair value of fixed-rate long-term debt obligations by $3.0 million. We are not subject to material foreign currency risk, derivative risk, or similar uncertainties.

ITEM 4. CONTROLS AND PROCEDURES

The Partnership’s management maintains a system of internal controls, which management views as adequate to promote the timely identification and reporting of material, relevant information. Those controls include (1) requiring executive management and all managers in accounting roles to sign and adhere to a Code of Conduct and (2) implementation of a confidential hotline for employees to contact the Audit Committee directly with financial reporting concerns. Additionally, the Partnership’s senior management team meets regularly to discuss significant transactions and events affecting the Partnership’s operations. The Partnership’s executive officers lead these meetings and consider whether topics discussed represent information that should be disclosed under generally accepted accounting principles and the rules of the SEC. The Board of Directors of the Partnership’s general partner includes an Audit Committee. The Audit Committee reviews the earnings release and all reports on Form 10-Q and 10-K prior to their filing. The Audit Committee is responsible for hiring the Partnership’s external auditors and meets with those auditors at least eight times each year, including regularly scheduled executive sessions outside the presence of management.

Our executive officers are responsible for establishing and maintaining disclosure controls and procedures. They have designed such controls to ensure that others make all material information known to them within the organization. Management regularly evaluates ways to improve internal controls.

As of the end of the period covered by this quarterly report on Form 10-Q our executive officers completed an evaluation of the disclosure controls and procedures and have determined them to be effective. There have been no changes to internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Partnership may be subject to legal proceedings and claims that may have a material adverse impact on its business. Management is not aware of any current legal proceedings or claims that are expected to have, individually or in the aggregate, a material adverse impact on its business, prospects, financial condition or results of operations.

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 or expensive 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. Any such additional restrictions likely would have a similar effect on our Timberland Management operations, particularly in the case of the Funds.

Our real estate holdings are highly illiquid, and changes in economic and regulatory factors may affect the value of our properties or the timing of the proceeds, if any, that we expect to receive on the sale of such properties. 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. Further, we occasionally announce contracts relating to the sale of our real estate holdings, but those agreements may contain contingencies and conditions that may delay or prevent the consummation of transactions even after we have agreed to sale terms.

We are sensitive to 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. Recently, the U.S. housing market has started to improve but, to the extent the recovery in the housing market should stall, such a turn of events could have a negative impact on our operating results. 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 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. Sediments adjacent to these properties were alleged to have been impacted by operations occurring prior to our acquisition of the properties, which occurred at the time of our spinoff from Pope & Talbot, Inc. in 1985. However, as current owner of Port Gamble and based on conditions of our sale of the Port Ludlow assets, we have environmental liability for these properties under Washington State’s Model Toxics Control Act (MTCA). We recently reached an agreement with the Washington State Department of Ecology (“DOE”) on a consent decree (“CD”) and clean-up action plan (“CAP”) for the cleanup environmental remediation effort in Port Gamble Bay. Together, these documents outline the terms under which the Partnership will conduct environmental remediation as well as the specific clean-up activities to be performed. The CD and CAP were filed with the Kitsap County Superior Court in December 2013. We are also negotiating with the other “potentially liable person”, the Washington State Department of Natural Resources (“DNR”), regarding its allocation of liability and its contribution towards cleanup costs.

While these negotiations are ongoing, management continues to monitor the Port Gamble and Port Ludlow cleanup processes closely. The $13.0 million remediation accrual as of June 30, 2014 represents our current estimate of the remaining cleanup cost and most likely outcome to various contingencies within both locations. These estimates are predicated upon a variety of factors, including the proportion of costs that would be allocated to us in comparison to those allocable to DNR or other parties, the actual amount of the ultimate cleanup costs, the cost of any litigation if we cannot reach a settlement with DNR, and the outcome of any such litigation. These liabilities are based upon a number of estimates and judgments that are subject to change as the project progresses. The filing of the CD limits our legal exposure substantially, but does not eliminate it entirely. Any litigation ensuing from this matter may have the effect of distracting management and other key personnel from the day to day operation of our business. These factors, alone or in combination with other challenges, may have a material adverse effect upon our assets, income and operations.

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 market forces that are stressing 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 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 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 a handful of taxable subsidiaries. The estimation of income tax expense and preparation of income tax returns requires complex calculations and judgments. We believe the estimates and calculations used in this process are proper and reasonable and more likely than not would be sustained under examination by federal or state tax authorities, however if a federal or state taxing authority disagreed with the positions we have taken, a material change in provision for income taxes, net income, or cash flows could result.

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 borrowing restrictions impinge on customers’ access to debt, we expect those customers 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 are controlled by our managing general partner. As a master 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, each of the two individual shareholders of Pope MGP, Inc. have the ability to designate one of our directors and jointly appoint two others, with the fifth board position taken by 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 by 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 the general partner shareholders indirectly, have the ability to do the following: 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 one 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.

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, severe windstorms, insects and disease, flooding and landslides. 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 our timberlands are managed under the auspices of the Sustainable Forestry Initiative and 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 compete with a number of larger competitors that may be better able than we 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.

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 and other wood products manufacturing facilities in the Pacific Northwest. Because a portion of our cost of sales in our Fee Timber segment, which encompasses 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 segment in the context of raising capital for investment in Pacific Northwest-based timber funds.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (e) None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

(a)

Effective May 31, 2014, the Partnership’s former President and Chief Executive Officer resigned to accept a CEO position with Rayonier Inc. (NYSE: RYN), an international forest products company headquartered in Jacksonville, Florida. The board of directors of Pope MGP, Inc. designated Thomas M. Ringo, the Partnership’s Chief Financial Officer, as the interim President and Chief Executive Officer effective June 1, 2014. No timetable has been established by Pope MGP, Inc.’s board of directors for naming a permanent successor.

(b)

There have been no material changes in the procedures for shareholders of the Partnership’s general partner to nominate directors to the board.

ITEM 6. Exhibits

Exhibits.

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

32.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished with this report in accordance with SEC Rel. No. 33-8238).

32.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 (furnished with this report in accordance with SEC Rel. No. 33-8238).

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 5, 2014.

	POPE RESOURCES,
	A Delaware Limited Partnership

	By:	POPE MGP, Inc.
		Managing General Partner


		By: /s/ Thomas M. Ringo
		Thomas M. Ringo
		President, Chief Executive Officer and CFO
		(Principal Executive and Financial Officer)


		By: /s/ Sean M. Tallarico
		Sean M. Tallarico
		Controller
		(Principal Accounting Officer)

a50915624ex31_1.htm

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Thomas M. Ringo, certify that:

I have reviewed this quarterly report on Form 10-Q of Pope Resources;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2014	/s/Thomas M. Ringo
	Thomas M. Ringo
	Chief Executive Officer

a50915624ex31_2.htm

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Thomas M. Ringo, certify that:

I have reviewed this quarterly report on Form 10-Q of Pope Resources;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2014	/s/Thomas M. Ringo
	Thomas M. Ringo
	Chief Financial Officer

a50915624ex32_1.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Pope Resources (the “Company”) on Form 10-Q for the period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas M. Ringo, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report.

This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.

/s/ Thomas M. Ringo

Thomas M. Ringo

Chief Executive Officer

August 5, 2014

a50915624ex32_2.htm

Exhibit 32.2