Document


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 September 30, 2016

OR
( )
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 
incorporation or organization) 
(IRS Employer
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 October 31, 2016: 4,349,913





Pope Resources
Index to Form 10-Q Filing
For the Nine Months Ended September 30, 2016

Description
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





P A R T  I – FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
September 30, 2016 and December 31, 2015
(in thousands)
 
2016
 
2015
ASSETS
 
 
 
Current assets
 
 
 
Partnership cash
$
2,078

 
$
6,310

ORM Timber Funds cash
1,376

 
3,396

Cash
3,454

 
9,706

Accounts receivable, net
3,256

 
3,238

Land held for sale
10,750

 
3,642

Prepaid expenses and other
2,327

 
810

    Total current assets
19,787

 
17,396

Properties and equipment, at cost
 

 
 

  Timber and roads, net of accumulated depletion (2016 -  $109,523; 2015 - $103,378)
290,804

 
266,104

Timberland
56,871

 
53,879

Land held for development
28,005

 
25,653

Buildings and equipment, net of accumulated depreciation (2016 - $7,656; 2015 - $7,251)
5,697

 
6,024

    Total property and equipment, at cost
381,377

 
351,660

Other assets
 
 
 
Deposit for acquisition of timberland
265

 

Other assets
918

 
1,000

Total assets
$
402,347

 
$
370,056

 
 
 
 
LIABILITIES, PARTNERS' CAPITAL AND NONCONTROLLING INTERESTS
 

 
 

Current liabilities
 

 
 

Accounts payable
$
1,423

 
$
1,384

Accrued liabilities
4,619

 
3,442

Current portion of long-term debt
5,118

 
114

Deferred revenue
229

 
278

Current portion of environmental remediation liability
10,254

 
11,200

Other current liabilities
440

 
322

    Total current liabilities
22,083

 
16,740

Long-term debt, net of unamortized debt issuance costs and current portion
128,645

 
84,537

Environmental remediation and other long-term liabilities
1,354

 
5,713

Partners' capital and noncontrolling interests
 

 
 

General partners' capital (units issued and outstanding 2016 - 60; 2015 - 60)
910

 
1,009

Limited partners' capital (units issued and outstanding 2016 - 4,254; 2015 - 4,240)
56,480

 
63,539

Noncontrolling interests
192,875

 
198,518

    Total partners' capital and noncontrolling interests
250,265

 
263,066

Total liabilities, partners' capital and noncontrolling interests
$
402,347

 
$
370,056

See accompanying notes to condensed consolidated financial statements.

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Pope Resources, a Delaware Limited Partnership
For the Three and Nine Months Ended September 30, 2016 and 2015
(in thousands, except per unit data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
13,178

 
$
15,208

 
$
36,960

 
$
56,020

Cost of sales
(6,211
)
 
(9,746
)
 
(20,822
)
 
(33,058
)
Operating expenses
(3,831
)
 
(4,030
)
 
(11,245
)
 
(10,889
)
General and administrative expenses
(1,151
)
 
(1,202
)
 
(3,814
)
 
(3,590
)
Gain (loss) on sale of timberland

 
(1,103
)
 
226

 
(1,103
)
Income (loss) from operations
1,985

 
(873
)
 
1,305

 
7,380

 
 
 
 
 
 
 
 
Interest expense, net
(953
)
 
(726
)
 
(2,358
)
 
(2,248
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
1,032

 
(1,599
)
 
(1,053
)
 
5,132

Income tax expense
(116
)
 
(1
)
 
(166
)
 
(369
)
Net income (loss)
916

 
(1,600
)
 
(1,219
)
 
4,763

 
 
 
 
 
 
 
 
Net and comprehensive loss attributable to noncontrolling interests - ORM Timber Funds
1,054

 
2,215

 
2,590

 
3,950

Net and comprehensive income attributable to unitholders    
$
1,970

 
$
615

 
$
1,371

 
$
8,713

 
 
 
 
 
 
 
 
Allocable to general partners
$
27

 
$
9

 
$
19

 
$
122

Allocable to limited partners
1,943

 
606

 
1,352

 
8,591

Net and comprehensive income attributable to unitholders
$
1,970

 
$
615

 
$
1,371

 
$
8,713

 
 
 
 
 
 
 
 
Basic and diluted earnings per unit attributable to unitholders
$
0.45

 
$
0.13

 
$
0.30

 
$
2.01

 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,312

 
4,298

 
4,312

 
4,297

 
 
 
 
 
 
 
 
Distributions per unit
$
0.70

 
$
0.70

 
$
2.10

 
$
2.00

See accompanying notes to condensed consolidated financial statements.

4



CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (Unaudited)
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 30, 2016
(in thousands)

 
Attributable to Pope Resources
 
 
 
 
 
General Partners
 
Limited Partners
 
Noncontrolling Interests
 
Total
December 31, 2015
$
1,009

 
$
63,539

 
$
198,518

 
$
263,066

Net income (loss)
19

 
1,352

 
(2,590
)
 
(1,219
)
Cash distributions
(127
)
 
(9,006
)
 
(3,053
)
 
(12,186
)
Equity-based compensation
11

 
745

 

 
756

Indirect repurchase of units for minimum tax withholding
(2
)
 
(150
)
 

 
(152
)
September 30, 2016
$
910

 
$
56,480

 
$
192,875

 
$
250,265


See accompanying notes to condensed consolidated financial statements.


5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 30, 2016 and 2015
(in thousands)
 
2016
 
2015
Net income (loss)
$
(1,219
)
 
$
4,763

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 

 
 

Depletion
6,101

 
7,198

Equity-based compensation
756

 
722

Excess tax benefit of equity-based compensation

 
(5
)
Depreciation and amortization
554

 
466

Deferred taxes
49

 
199

Cost of land sold
1,139

 
9,246

(Gain) loss on sale of timberland
(226
)
 
1,103

Gain on disposal of property and equipment
(24
)
 

Cash flows from changes in operating accounts
 

 
 

Accounts receivable, net
(18
)
 
(519
)
Prepaid expenses and other assets
(1,484
)
 
1,510

Real estate project expenditures
(10,598
)
 
(7,053
)
Accounts payable and accrued liabilities
1,250

 
1,282

Deferred revenue
(49
)
 
(477
)
Environmental remediation
(5,280
)
 
(1,579
)
Other current and long-term liabilities
92

 
47

Net cash provided by (used in) operating activities
(8,957
)
 
16,903

 
 
 
 
Cash flows from investing activities
 

 
 

Maturity of short-term investments

 
1,000

Reforestation and roads
(1,276
)
 
(1,473
)
Buildings and equipment
(159
)
 
(197
)
Deposit for acquisition of timberland - Partnership
(265
)
 

Acquisition of timberland - Partnership
(33,059
)
 
(4,851
)
Proceeds from sale of timberland - Funds
724

 
1,001

Net cash used in investing activities
(34,035
)
 
(4,520
)
 
 
 
 
Cash flows from financing activities
 

 
 

Line of credit borrowings
20,026

 

Line of credit repayments
(2,700
)
 

Proceeds from issuance of long-term debt
32,000

 

Repayment of long-term debt
(85
)
 
(5,081
)
Debt issuance costs
(163
)
 

Payroll taxes paid on unit net settlements
(152
)
 
(107
)
Excess tax benefit of equity-based compensation

 
5

Cash distributions to unitholders
(9,133
)
 
(8,672
)
Cash distributions - ORM Timber Funds, net of distributions to Partnership
(3,053
)
 
(4,163
)
Net cash provided by (used in) financing activities
36,740

 
(18,018
)
 
 
 
 
Net decrease in cash
(6,252
)
 
(5,635
)
Cash at beginning of period
9,706

 
24,028

Cash at end of period
$
3,454

 
$
18,393

See accompanying notes to condensed consolidated financial statements.

6



POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2016

1.
The condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 and the related condensed consolidated statements of comprehensive income for the three- and nine-month periods and cash flows for the nine-month periods ended September 30, 2016 and 2015 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, 2015 is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2015, 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, 2016.

2.
The financial statements in the Partnership’s 2015 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, 2018. 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. Management has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires substantially all leases to be reflected on the balance sheet as a liability and a right-of-use asset. The ASU will replace existing lease accounting guidance in U.S. GAAP when it becomes effective on January 1, 2019, though early application is permitted. The standard will be applied on a modified retrospective basis in which certain optional practical expedients may be applied. Due to the Partnership's limited leasing activity, management does not expect the effect of this standard to be material to its ongoing financial reporting.

The Partnership adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, effective January 1, 2016. In accordance with this standard, all deferred tax assets and liabilities are classified as noncurrent on the Partnership's condensed consolidated balance sheets. Our adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

3.
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 among the general and limited partners is pro rata across all units outstanding.

4.
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 the Partnership, 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 investment period. Fund I sold all of its timberland holdings in 2014 and terminated in 2015. Fund II is scheduled to terminate in March 2021 and Fund III is scheduled to terminate in December 2025.

Pope Resources and ORMLLC together owned 20% of Fund I, currently own 20% of Fund II and 5% of Fund III. The Funds are considered variable interest entities because their organizational and governance structures are the functional equivalent of a limited partnership. As the general partner or managing member of the Funds, the Partnership is the primary beneficiary of each of the Funds as it has the authority to direct the activities that most significantly impact their economic performance, as well as the right to receive benefits and obligation to absorb losses that could potentially be significant to the Funds. Accordingly, the Funds are consolidated into the Partnership’s financial statements. Additionally, the obligations of each of the Funds do not have any recourse to the Partnership.


7



The Partnership’s condensed consolidated balance sheet included assets and liabilities of the Funds as of September 30, 2016 and December 31, 2015, which were as follows:
 
(in thousands)
September 30, 2016
 
December 31, 2015
Assets:
Cash
$
1,376

 
$
3,396

Other current assets
908

 
602

Total current assets
2,284

 
3,998

Properties and equipment, net of accumulated depletion and depreciation (2016 - $39,184; 2015 - $34,757)
267,631

 
271,850

Total assets
$
269,915

 
$
275,848

Liabilities and equity:
 

 
 

Current liabilities
$
1,892

 
$
1,723

Long-term debt, net of unamortized debt issuance costs
57,263

 
57,246

Total liabilities
59,155

 
58,969

Funds' equity
210,760

 
216,879

Total liabilities and equity
$
269,915

 
$
275,848


5.
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 nine months ended September 30, 2016 and 2015:

8



 
Fee Timber
 
 
Three Months Ended September 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Management
 
Real Estate
 
Other
 
Consolidated
2016
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
7,882

$
3,231

$
11,113

 
$
772

 
$
2,194

 
$

 
$
14,079

Eliminations
(48
)

(48
)
 
(772
)
 
(81
)
 

 
(901
)
Revenue - external
7,834

3,231

11,065

 

 
2,113

 

 
13,178

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(3,321
)
(2,282
)
(5,603
)
 

 
(608
)
 

 
(6,211
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,546
)
(1,401
)
(2,947
)
 
(708
)
 
(1,052
)
 
(1,176
)
 
(5,883
)
Eliminations
36

766

802

 
64

 
10

 
25

 
901

Operating, general and administrative expenses - external
(1,510
)
(635
)
(2,145
)
 
(644
)
 
(1,042
)
 
(1,151
)
 
(4,982
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
3,015

(452
)
2,563

 
64

 
534

 
(1,176
)
 
1,985

Eliminations
(12
)
766

754

 
(708
)
 
(71
)
 
25

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
3,003

$
314

$
3,317

 
$
(644
)
 
$
463

 
$
(1,151
)
 
$
1,985

 
 
 
 
 
 
 
 
 
 
 
 
2015
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
6,506

$
4,910

$
11,416

 
$
779

 
$
3,931

 
$

 
$
16,126

Eliminations
(100
)

(100
)
 
(779
)
 
(39
)
 

 
(918
)
Revenue - external
6,406

4,910

11,316

 

 
3,892

 

 
15,208

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(2,463
)
(3,888
)
(6,351
)
 

 
(3,395
)
 

 
(9,746
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,678
)
(1,637
)
(3,315
)
 
(594
)
 
(1,005
)
 
(1,236
)
 
(6,150
)
Eliminations

779

779

 
100

 
5

 
34

 
918

Operating, general and administrative expenses -external
(1,678
)
(858
)
(2,536
)
 
(494
)
 
(1,000
)
 
(1,202
)
 
(5,232
)
Loss on sale of timberland

(1,103
)
(1,103
)
 

 

 

 
(1,103
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
2,365

(1,718
)
647

 
185

 
(469
)
 
(1,236
)
 
(873
)
Eliminations
(100
)
779

679

 
(679
)
 
(34
)
 
34

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
2,265

$
(939
)
$
1,326

 
$
(494
)
 
$
(503
)
 
$
(1,202
)
 
$
(873
)

9



 
Fee Timber
 
 
Nine Months Ended September 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Management
 
Real Estate
 
Other
 
Consolidated
2016
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
20,506

$
12,729

$
33,235

 
$
2,383

 
$
4,094

 
$

 
$
39,712

Eliminations
(148
)

(148
)
 
(2,375
)
 
(229
)
 

 
(2,752
)
Revenue - external
20,358

12,729

33,087

 
8

 
3,865

 

 
36,960

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(8,718
)
(9,764
)
(18,482
)
 

 
(2,340
)
 

 
(20,822
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(4,343
)
(4,188
)
(8,531
)
 
(2,114
)
 
(3,293
)
 
(3,873
)
 
(17,811
)
Eliminations
95

2,375

2,470

 
193

 
30

 
59

 
2,752

Operating, general and administrative expenses - external
(4,248
)
(1,813
)
(6,061
)
 
(1,921
)
 
(3,263
)
 
(3,814
)
 
(15,059
)
Gain on sale of timberland

226

226

 

 

 

 
226

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
7,445

(997
)
6,448

 
269

 
(1,539
)
 
(3,873
)
 
1,305

Eliminations
(53
)
2,375

2,322

 
(2,182
)
 
(199
)
 
59

 

Income (loss) from operations - external
$
7,392

$
1,378

$
8,770

 
$
(1,913
)
 
$
(1,738
)
 
$
(3,814
)
 
$
1,305

 
 
 
 
 
 
 
 
 
 
 
 
2015
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
20,213

$
16,567

$
36,780

 
$
2,380

 
$
19,592

 
$

 
$
58,752

Eliminations
(246
)

(246
)
 
(2,380
)
 
(106
)
 

 
(2,732
)
Revenue - external
19,967

16,567

36,534

 

 
19,486

 

 
56,020

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(8,371
)
(13,420
)
(21,791
)
 

 
(11,267
)
 

 
(33,058
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(3,979
)
(4,267
)
(8,246
)
 
(2,254
)
 
(3,029
)
 
(3,682
)
 
(17,211
)
Eliminations

2,380

2,380

 
246

 
14

 
92

 
2,732

Operating, general and administrative expenses - external
(3,979
)
(1,887
)
(5,866
)
 
(2,008
)
 
(3,015
)
 
(3,590
)
 
(14,479
)
Loss on sale of timberland

(1,103
)
(1,103
)
 

 

 

 
(1,103
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
7,863

(2,223
)
5,640

 
126

 
5,296

 
(3,682
)
 
7,380

Eliminations
(246
)
2,380

2,134

 
(2,134
)
 
(92
)
 
92

 

Income (loss) from operations - external
$
7,617

$
157

$
7,774

 
$
(2,008
)
 
$
5,204

 
$
(3,590
)
 
$
7,380



10



6.
Basic and diluted earnings per unit are calculated by dividing net and comprehensive 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 the calculation of basic and diluted earnings per unit:

 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per unit amounts)
2016
 
2015
 
2016
 
2015
Net and comprehensive income attributable to Pope Resources' unitholders
$
1,970

 
$
615

 
$
1,371

 
$
8,713

Less:
 

 
 

 
 

 
 

Net and comprehensive income attributable to unvested restricted unitholders
(25
)
 
(27
)
 
(74
)
 
(55
)
Preferred share dividends - ORM Timber Funds
(8
)
 
(8
)
 
(23
)
 
(23
)
Net and comprehensive income for calculation of earnings per unit
$
1,937

 
$
580

 
$
1,274

 
$
8,635

 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,312

 
4,298

 
4,312

 
4,297

 
 
 
 
 
 
 
 
Basic and diluted earnings per unit
$
0.45

 
$
0.13

 
$
0.30

 
$
2.01


7.
In the first quarter of 2016, the Partnership granted 10,400 restricted units pursuant to the management incentive compensation program and 3,880 restricted units to members of the Board of Directors. These restricted units vest ratably over four years with the grant date fair value equal to the market price on the date of grant. During the nine months ended September 30, 2016, 1,360 units were granted with no restrictions to certain board members who elected to receive their quarterly board compensation in the form of units rather than cash. Units granted to directors are included in the calculation of total equity compensation expense, which is recognized over the vesting period, for restricted units, or immediately for unrestricted units. Grants to retirement-eligible individuals on the date of grant are expensed immediately. The Partnership recognized $163,000 and $142,000 of equity compensation expense in the third quarter of 2016 and 2015, respectively, and $756,000 and $722,000 for the nine months ended September 30, 2016 and 2015, respectively, related to these compensation programs.

8.
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $2.0 million and $2.3 million for the first nine months of 2016 and 2015, respectively. Income taxes paid totaled $187,000 and $236,000 during the first nine months of 2016 and 2015, respectively.

9.
In July 2016, the Partnership closed on the acquisition of a 7,324-acre tree farm in western Washington for $32.0 million. It consists of 6,746 owned acres and a timber deed on 578 acres that expires in 2051. The purchase price was allocated $2.9 million to land and $29.1 million to timber and roads.

The acquisition was financed with a new $32.0 million credit facility issued under the existing master loan agreement with Northwest Farm Credit Services (NWFCS) and is comprised of three segments, all of which require quarterly interest-only payments with principal due at maturity. The two fixed rate loan segments are for $11.0 million each, one of which matures in July 2026 and the other of which matures in July 2028. These segments bear interest at 3.89% and 4.13%, respectively. The third segment is for $10.0 million, matures in July 2023 and bears interest at a variable rate based on the one-month LIBOR plus a margin of 2.20%. As with the Partnership's other debt arrangements with NWFCS, this loan will be included in the lender's annual patronage program, which rebates a portion of the interest paid in the prior year back to the borrower. The loan is not collateralized by the timberland acquired in this transaction, but rather by the same portions of the Partnership's timberland that are already pledged as collateral for the Partnership's existing credit facility with NWFCS.

10.
In August 2016, the Partnership entered into a $21.0 million loan agreement issued under the existing master loan agreement with NWFCS. This amount will remain available for the Partnership to borrow through March 31, 2017. Advances under the loan require quarterly interest-only payments with principal due at maturity in July 2027. Advances under the loan agreement can bear interest at a variable rate based on the one-month LIBOR plus a margin of 1.85% (base rate loan segment) or at fixed rates based on the lender's rate pricing index, for terms of one through eleven years, plus a margin of 1.95% (fixed rate loan segment). In addition, base rate loan segments can be converted to fixed rate loan segments, though no more than four fixed rate loan segments may be outstanding at any time. The Partnership expects to

11



use borrowings under this facility to reduce the balance outstanding on the operating line of credit and increase the amount available to fund either Real Estate lot development, environmental remediation expenditures, or other liquidity needs. As with the Partnership's other debt arrangements with NWFCS, this loan will be included in the lender's annual patronage program, which rebates a portion the interest paid in the prior year back to the borrower. The loan is collateralized by the same portions of the Partnership's timberland that are already pledged as collateral for the Partnerships existing credit facility with NWFCS. In October 2016, the Partnership completed its first borrowing under this credit facility, consisting of a base rate loan segment for $6.0 million.

11.
The Partnership’s financial instruments include cash and cash equivalents 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 $106.8 million and $84.9 million as of September 30, 2016 and December 31, 2015, 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 $115.9 million and $89.8 million, as of September 30, 2016 and December 31, 2015, respectively.

12.
The Partnership had an accrual for estimated environmental remediation costs of $11.5 million and $16.8 million as of September 30, 2016 and December 31, 2015, respectively. The environmental remediation liability represents management’s estimate of payments to be made to monitor and remediate certain areas in and around Port Gamble Bay, Washington.

In December of 2013, a consent decree and Clean-up Action Plan (CAP) related to Port Gamble were finalized with the Washington State Department of Ecology (DOE) and filed with Kitsap County Superior Court. In the third quarter of 2015, the Partnership selected a contractor to complete the remediation work. Remediation activity began in late September of 2015 and will continue through 2017, followed by a period of monitoring activity. Management's cost estimates for the project are based on amounts included in the construction contract and estimates for project management and other professional fees.

The environmental liability at September 30, 2016 is comprised of $10.3 million that management expects to expend in the next 12 months and $1.2 million thereafter.

Activity in the environmental liability is as follows:
 
(in thousands)
Balance at Beginning of the Period
 
Additions to Accrual
 
Expenditures for Remediation
 
Balance at Period-end
Year ended December 31, 2014
13,241

 
10,000

 
1,590

 
21,651

Year ended December 31, 2015
21,651

 

 
4,890

 
16,761

Quarter ended March 31, 2016
16,761

 

 
3,223

 
13,538

Quarter ended June 30, 2016
13,538

 

 
952

 
12,586

Quarter ended September 30, 2016
$
12,586

 
$

 
$
1,105

 
$
11,481


13.
In October 2016, the Partnership closed on two timberland acquisitions for a combined $6.6 million comprising 1,967 acres. The acquired timberland is adjacent to the Partnership's existing Washington State timberland holdings in Jefferson and Skamania counties.

12



ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect management’s estimates based upon our current expectations, in light of management’s knowledge of existing circumstances and expectations about future developments. Statements about expectations and future performance are “forward looking statements” within the meaning of applicable securities laws, which describe our goals, objectives and anticipated performance. These statements can be identified by words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions. These statements are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled “Risk Factors” in Part II, Item 1A below. From time to time we identify other risks and uncertainties in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates and expectations as of the date of the report, and unless required by law, we do not undertake to update these statements as our business operations and environment change.

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

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), is engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and operations of two private equity funds ("Fund II" and "Fund III", collectively, the “Funds”). When we refer to the timberland owned by the Partnership, we describe it as the Partnership’s tree farms. We refer to timberland owned by the Funds as the Funds’ tree farms. When referring collectively to the Partnership’s and Funds’ timberland we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber to be harvested as logs for sale to domestic manufacturers and export brokers. The second most significant business segment in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily 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 by either selling homes to retail buyers or lots to developers 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 which preclude future development, but allow continued forestry operations. Our third business segment, 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 primarily on our private equity timber fund business model. However, we will acquire smaller timberland parcels from time to time to add on to the Partnership's existing tree farms. In addition, during periods when the Funds' committed capital is fully invested, we may look to acquire larger timberland properties for the Partnership as we did in July 2016 with the acquisition of a 7,324-acre tree farm in western Washington. We have closed and invested capital from three timber funds, with assets under management totaling approximately $364 million as of September 30, 2016 based on the most recent appraisals. Through our 20% co-investment in Fund II and our 5% co-investment in Fund III, we have deployed $26 million of Partnership capital. Our co-investment affords us a share of the Funds’ operating cash flows while also allowing us to earn asset management and timberland management fees, as well as potential future incentive fees, based upon the overall success of each fund. We also believe that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management on a more cost-effective basis than we could for the Partnership’s timberlands alone. We believe our co-investment strategy also enhances our credibility with existing and prospective Fund investors by demonstrating that we have both an operational and a financial commitment to the Funds’ success.

The Funds are consolidated into our financial statements, but then income or loss attributable to equity owned by third parties is eliminated from consolidated results in our Condensed Consolidated Statements of Comprehensive Income under the

13



caption “Net and comprehensive loss attributable to non-controlling interests-ORM Timber Funds” to arrive at net and comprehensive income attributable to unitholders of the Partnership.

The strategy for our Real Estate segment centers around how and when to “harvest” a parcel of land and 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 cash flows upon sale. Land held for development by our Real Estate segment represents property in western Washington that has been deemed suitable for residential and commercial building sites.  Land held for sale represents those properties in the development portfolio that we expect to sell in the next year.
 
Third quarter highlights

Harvest volume was 17.0 million board feet (MMBF) in Q3 2016 compared to 17.8 MMBF in Q3 2015, a 4% decrease. Harvest volume for the first nine months of 2016 was 53.6 MMBF compared to 57.4 MMBF for 2015, a 7% decrease. These harvest volume figures do not include timber deed sales of 1.3 MMBF in Q3 2016 and 0.6 MMBF in Q1 2015. The harvest volume and log price realization metrics cited below also exclude these timber deed sales, except as noted otherwise.
Average realized log price per thousand board feet (MBF) was $573 in Q3 2016 compared to $579 per MBF in Q3 2015. For the first nine months of 2016, the average realized log price was $574 per MBF compared to $587 per MBF for 2015, a 2% decrease.
As a percentage of total harvest, volume sold to export markets in Q3 2016 decreased to 16% from 26% in Q3 2015, while the mix of volume sold to domestic markets was 65% in Q3 2016 compared to 53% in Q3 2015. For the first nine months of 2016, the relative percentages of volume sold to export and domestic markets were 16% and 64%, respectively, compared to 20% and 58%, respectively, in 2015. Hardwood, cedar and pulpwood log sales make up the balance of harvest volume.
The percentage of total harvest comprised of Douglas-fir sawlogs increased to 57% in Q3 2016 from 55% in Q3 2015, with a decrease in the whitewood sawlog component to 18% in Q3 2016 from 20% in Q3 2015. Douglas-fir sawlogs represented 51% of total harvest volume for the first nine months of both 2016 and 2015.
As noted last quarter, in July the Partnership closed on a 7,324-acre timberland acquisition for $32.0 million consisting of 6,746 owned acres and a timber deed on 578 acres that expires in 2051.
The Partnership closed on the sale of two parcels of undeveloped land comprising 265 acres for $1.7 million.

Outlook

Over the course of 2016, we have made investments that will begin to pay off in the fourth quarter.  In our Fee Timber segment, we expect to realize over 40% of our annual volume in the fourth quarter. This back-end loading of our 2016 harvest is timed to coincide with anticipated log pricing improvement.  We expect our total 2016 harvest volume to be between 96 and 100 MMBF, including timber deed sales. In our Real Estate segment, we’ve invested over $10 million in our Harbor Hill project this year with the expectation of closing on the sale of up to 127 residential lots in the fourth quarter.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) attributable to unitholders for the respective quarters and nine months ended September 30, 2016 and 2015.  The explanatory text that follows the table describes in detail certain of these changes by business segment.

14



(in thousands)
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Net income attributable to Pope Resources' unitholders:
 
 
 
2016 period
$
1,970

 
$
1,371

2015 period
615

 
8,713

Variance
$
1,355

 
$
(7,342
)
Detail of variance:
 

 
 

Fee Timber
 

 
 

Log volumes (A)
$
(463
)
 
$
(2,231
)
Log price realizations (B)
(102
)
 
(697
)
(Gain) loss on sale of timberland
1,103

 
1,329

Timber deed sales
485

 
255

Production costs
405

 
2,291

Depletion
343

 
1,018

Other Fee Timber
220

 
(969
)
Timberland Management
(150
)
 
95

Real Estate
 

 
 

Land sales
(493
)
 
(3,827
)
Conservation easement sales

 
(4,311
)
Other Real Estate
1,459

 
1,196

General and administrative costs
51

 
(224
)
Net interest expense
(227
)
 
(110
)
Income taxes
(115
)
 
203

Noncontrolling interests
(1,161
)
 
(1,360
)
Total variances
$
1,355

 
$
(7,342
)
(A)
Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.
(B)
Price variance calculated by extending the change in average realized price by current period sales volume.


15



Fee Timber
 
Fee Timber results include operations on 119,000 acres of timberland owned by the Partnership and 94,000 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. Revenues are driven primarily by the volume of timber harvested and the average log price realized on the sale of that timber. Our harvest volume is based typically on manufactured log sales to domestic mills and log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude 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 revenue is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which, along with timber deed sales, are included in other revenue below. Commercial thinning consists of the selective cutting of timber stands not yet of optimal harvest age.  However, they do have some commercial value, thus allowing us to earn revenue while at the same time improving the projected value at harvest of the remaining timber in the stand.

Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2016, June 30, 2016, and September 30, 2015 were as follows:
 
(in millions)
Quarter ended
 
Log Sale
Revenue
 
Other
Revenue
 
Total Fee
Timber
Revenue
 
Gain (loss) on Sale of
Timberland
 
Operating
Income
 
Harvest
Volume
(MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
6.8

 
$
1.1

 
$
7.9

 
$

 
$
3.0

 
11.6

 
0.7

Funds
 
3.1

 
0.1

 
3.2

 

 
0.3

 
5.4

 
0.6

Total September 2016
 
$
9.9

 
$
1.2

 
$
11.1

 
$

 
$
3.3

 
17.0

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
7.7

 
$
0.5

 
$
8.2

 
$

 
$
2.8

 
13.7

 

Funds
 
4.1

 

 
4.1

 

 
0.2

 
7.2

 

Total June 2016
 
$
11.8

 
$
0.5

 
$
12.3

 
$

 
$
3.0

 
20.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
5.6

 
$
0.8

 
$
6.4

 
$

 
$
2.3

 
9.2

 

Funds
 
4.7

 
0.2

 
4.9

 
(1.1
)
 
(0.9
)
 
8.6

 

Total September 2015
 
$
10.3

 
$
1.0

 
$
11.3

 
$
(1.1
)
 
$
1.3

 
17.8

 

 
Operating Income
 
Comparing Q3 2016 to Q2 2016.  Operating income increased $348,000, or 12%, from $3.0 million in Q2 2016 to $3.3 million in Q3 2016. The increase is due primarily to the sale of 1.3 MMBF of timber via timber deed sales on both Partnership and Fund tree farms for $485,000 in Q3 2016 that had no counterpart in Q2 2016. A 12% decrease in harvest volume (including volume from timber deed sales) served to lower operating income, while a 2% increase in average realized log prices and a $169,000 decrease in operating expenses worked to increase operating income.
 
Comparing Q3 2016 to Q3 2015.  Operating income increased $2.0 million, or 154%, from $1.3 million in Q3 2015 to $3.3 million in Q3 2016. Our Q3 2015 results reflect a $1.1 million loss on the sale of 858 acres from Fund III's timberland, and the absence of a counterpart in our Q3 2016 results is the primary reason for the improvement in operating income. Q3 2016 includes the sale of 1.3 MMBF of timber via timber deed sales from both Partnership and Fund tree farms that had no counterpart in Q3 2015. A 3% increase in harvest volume (including volume from timber deed sales) was partially offset by a 1% decrease in average realized log prices. A $391,000 decrease in operating expenses also helped improve operating income.
 

16



Revenue
 
Comparing Q3 2016 to Q2 2016.  Log sale revenue in Q3 2016 decreased $1.9 million, or 16%, from Q2 2016 due primarily to a 19% decrease in harvest volume, offset partially by a 2% increase in average realized log prices. Generally, the third quarter is when log supply is at its peak, and log prices are lower, because summer weather conditions allow uninhibited access to timberlands at higher elevations. We typically reduce our harvest volume during this period in favor of harvesting greater volumes at other times in the year when log supply is more constrained and log prices are higher. We reduced our harvest volume in Q3 2016 as we expect higher log prices in Q4 2016 and Q1 2017 due to this seasonal pattern. The increase in other revenue is primarily attributable to timber deed sales of $485,000 in Q3 2016 that had no counterpart in Q2 2016, as well as a $176,000 increase in revenue from road easement fees on the Partnership’s Hood Canal tree farm.

Comparing Q3 2016 to Q3 2015.  Log sale revenue in Q3 2016 decreased $400,000, or 4%, from Q3 2015, primarily as a result of a 4% decrease in harvest volume and a 1% decline in average realized log prices. We deferred some harvest volume in Q3 2016, particularly on Fund tree farms, as we expect higher log prices in Q4 2016 and Q1 2017, consistent with typical seasonal patterns. The increase on other revenue was driven primarily by an increase in timber deed sales in Q3 2016 compared to Q3 2015.
 
Revenue and operating income for the Fee Timber segment for the nine months ended September 30, 2016 and 2015 were as follows:
 
(in millions) Nine Months Ended
 
Log Sale Revenue
 
Other Revenue
 
Total Fee Timber Revenue
 
Gain (loss) on Sale of Timberland
 
Operating Income
 
Harvest Volume (MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
18.4

 
$
2.0

 
$
20.4

 
$

 
$
7.4

 
31.6

 
0.7

Funds
 
12.4

 
0.3

 
12.7

 
0.2

 
1.4

 
22.0

 
0.6

Total September 2016
 
$
30.8

 
$
2.3

 
$
33.1

 
$
0.2

 
$
8.8

 
53.6

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
18.0

 
$
2.0

 
$
20.0

 
$

 
$
7.6

 
28.8

 

Funds
 
15.7

 
0.8

 
16.5

 
(1.1
)
 
0.2

 
28.6

 
0.6

Total September 2015
 
$
33.7

 
$
2.8

 
$
36.5

 
$
(1.1
)
 
$
7.8

 
57.4

 
0.6

 
Operating Income
 
Comparing YTD 2016 to YTD 2015.  Operating income increased by $1.0 million, or 13%, from $7.8 million in the first nine months of 2015 to $8.8 million in the first nine months of 2016. Our 2015 results include a $1.1 million loss on sale of 858 acres from Fund III's timberland, whereas our 2016 results include a $226,000 gain on the sale of 205 acres of Fund timberland. Excluding these timberland sales, Fee Timber operating income was $8.5 million in 2016 and $8.9 million in 2015. This decrease resulted from a 5% decrease in harvest volume (including timber deed sales), a 2% decline in average realized log prices, a $516,000 decrease in other revenue from a lack of commercial thinning activity in the current year, and a $194,000 increase in operating expenses. These factors were offset partially by a 15% decrease in cost of sales, driven by a combination of lower harvest volume and a lower average depletion rate.
 
Revenue
 
Comparing YTD 2016 to YTD 2015.  Log sale revenue in the first nine months of 2016 decreased $2.9 million, or 9%, from the first nine months of 2015. The reduction in revenue was the result of a 7% decrease in harvest volume and a 2% decline in average realized log prices. Since the October 2015 expiration of the Softwood Lumber Agreement (SLA), Canadian lumber has been sold duty-free into the U.S. market. The combination of this duty-free entry and a weak Canadian currency has boosted Canadian exports of softwood lumber to the U.S. during the first eight months of 2016 by 34% over the corresponding period of 2015, based on data from the U.S. Census Bureau. The influx of Canadian lumber has played a role in keeping log prices in check when compared to last year. Other revenue declined $516,000 in the current year, primarily as a result of no commercial thinning activity, which last year produced revenue of $1.3 million.


17



Log Volume

We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the quarters ended September 30, 2016, June 30, 2016, and September 30, 2015:
 
Volume (in MMBF)
Quarter Ended
 
 
Sep-16
% Total
 
Jun-16
% Total

 
Sep-15
% Total
Sawlogs
Douglas-fir
9.8

57
%
 
9.4

45
%
 
9.9

55
%
 
Whitewood
3.0

18
%
 
5.4

26
%
 
3.5

20
%
 
Pine
0.5

3
%
 
1.2

6
%
 
0.1

1
%
 
Cedar
0.5

3
%
 
1.0

5
%
 
0.6

3
%
 
Hardwood
0.8

5
%
 
0.7

3
%
 
0.7

4
%
Pulpwood
All Species
2.4

14
%
 
3.2

15
%
 
3.0

17
%
Total
 
17.0

100
%
 
20.9

100
%
 
17.8

100
%
 
Comparing Q3 2016 to Q2 2016. Harvest volume decreased 3.9 MMBF, or 19%, in Q3 2016 from Q2 2016. The third quarter is generally when log supply is at its peak, and log prices are lower, because summer weather conditions afford timberland owners uninhibited access to their timberland, particularly at higher elevations. We plan for this and, to the extent we can, reduce our sales volume during the summer months in favor of harvesting greater volumes at other times in the year when log supply is more constrained and logs prices are higher. We reduced our harvest in Q3 2016 as we expect to realize higher log prices in Q4 2016 and Q1 2017 from this seasonal pattern. Our species mix shifted towards Douglas-fir and away from whitewoods in Q3 2016 compared to Q2 2016, which was primarily a function of favorable log markets for Douglas-fir for both domestic and export markets.
 
 Comparing Q3 2016 to Q3 2015. Harvest volume decreased 0.8 MMBF, or 4%, in Q3 2016 from Q3 2015. The decrease is due to a 3.2 MMBF decline in harvest volume from Fund properties, offset by a 2.4 MMBF increase in volume from Partnership properties. In addition, we sold 1.3 MMBF of volume through timber deed sales in Q3 2016, taking some of the pressure off making delivered log sales. Species mix was relatively consistent between the two quarters.
 
We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the nine months ended September 30, 2016 and 2015:

Volume (in MMBF)
Nine Months Ended
 
 
Sep-16
% Total
 
Sep-15
% Total
Sawlogs:
Douglas-fir
27.9

51
%
 
29.0

50
%
 
Whitewood
11.1

21
%
 
12.4

22
%
 
Pine
1.7

3
%
 
1.3

2
%
 
Cedar
2.5

5
%
 
2.3

4
%
 
Hardwood
2.0

4
%
 
2.6

5
%
Pulpwood:
All Species
8.4

16
%
 
9.8

17
%
Total
 
53.6

100
%
 
57.4

100
%
 
Comparing YTD 2016 to YTD 2015. Harvest volume decreased 3.8 MMBF, or 7%, in the first nine months of 2016 compared to the first nine months of 2015. The decrease in harvest volume is attributable to a reduction in harvest volume from Fund properties in anticipation of better log markets later in the year and into 2017, consistent with typical seasonal patterns. In addition to the delivered log volume displayed in the above table, we sold 1.3 MMBF of volume via timber deed sales in the current year, compared to 0.6 MMBF of timber deed sales in 2015. Species mix was relatively stable between 2015 and 2016.
 

18



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 September 30, 2016, June 30, 2016, and September 30, 2015:
 
 
 
Quarter Ended
 
 
Sep-16
 
Jun-16
 
Sep-15
Average price realizations (per MBF):
 
 
Sawlogs:
Douglas-fir
$
629

 
$
596

 
$
623

 
Whitewood
506

 
550

 
522

 
Pine
418

 
500

 
420

 
Cedar
1,321

 
1,271

 
1,426

 
Hardwood
640

 
521

 
559

Pulpwood:
All Species
284

 
290

 
349

Overall
 
573

 
563

 
579


The following table compares the dollar and percentage change in log prices from each of Q2 2016 and Q3 2015 to Q3 2016:
   
 
 
Change to Q3 2016 from Quarter Ended
 
 
Jun-16
 
Sep-15
 
 
$/MBF
 
%
 
$/MBF
 
%
Sawlogs:
Douglas-fir
$
33

 
6
%
 
$
6

 
1
%
 
Whitewood
(44
)
 
(8
%)
 
(16
)
 
(3
%)
 
Pine
(82
)
 
(16
%)
 
(2
)
 
%
 
Cedar
50

 
4
%
 
(105
)
 
(7
%)
 
Hardwood
119

 
23
%
 
81

 
14
%
Pulpwood:
All Species
(6
)
 
(2
%)
 
(65
)
 
(19
%)
Overall
 
10

 
2
%
 
(6
)
 
(1
%)
 
Overall realized log prices in Q3 2016 were 2% higher than Q2 2016. Our overall average is influenced heavily by price movements for our two most prevalent species on the Combined tree farms, Douglas-fir and whitewood, and the relative mix of harvest volume between those two species. From Q2 2016 to Q3 2016, log prices for Douglas-fir increased 6% while whitewood decreased 8%. Douglas-fir benefited from continued solid demand in the export market, which has worked through an oversupply of logs from earlier in the year. This generated upward pressure on domestic prices as manufacturers needed to compete with the export market to acquire Douglas-fir logs. A reduction in log supply from several large timber companies also helped to create pricing tension in the domestic market. Whitewood prices were down on weakness in the domestic market for that species. Prices for pine, all of which comes from Fund III’s McCloud tree farm in northern California, declined 16% as Q3 2016 sales volume consisted primarily of lower-quality salvage logs whereas higher-quality logs were sold in Q2. Hardwood prices increased 23% due to the sale of higher-quality logs in Q3 2016 relative to Q2 2016.

From Q3 2015 to Q3 2016, average realized log prices decreased 1%. Species mix was largely unchanged between the two comparable quarters. Whitewood prices declined 3% and pulpwood was down 19%. The decline in pulpwood was due to an abundance of residual wood chips in the market, which decreases demand for pulpwood from which to produce chips.
 

19



The following table compares realized log prices by species for the first nine months of 2016 and 2015, as well as the dollar and percentage change in log prices between the two periods:
 
 
 
Nine Months Ended
 
 
Sep-16
 
 
 
 
 
Sep-15
 
 
 

 
∆ from Sep -16 to Sep -15
 
 

 
 
 
 
$/MBF
 
%
 
 
Sawlogs:
Douglas-fir
$
615

 
$
(12
)
 
(2
%)
 
$
627

 
Whitewood
524

 
(18
)
 
(3
%)
 
542

 
Pine
478

 
(61
)
 
(11
%)
 
539

 
Cedar
1,370

 
(35
)
 
(2
%)
 
1,405

 
Hardwood
571

 
(35
)
 
(6
%)
 
606

Pulpwood:
All species
296

 
(36
)
 
(11
%)
 
332

Overall
 
574

 
(13
)
 
(2
%)
 
587

 
Overall realized log prices decreased 2% in the first nine months of 2016 compared to the corresponding period of 2015. The overall average is influenced heavily by Douglas-fir and whitewood prices, which were down 2% and 3%, respectively, but prices for all other species and pulpwood declined as well. Douglas-fir pricing was influenced by reduced demand in the domestic market, while whitewood was impacted by softness in the export market as well as the lower-quality log segment of the domestic market. Pine prices declined 11% due to a large supply of pine logs produced from salvage logging operations following the severe 2015 California fire season. Pulpwood prices declined 11% due to an abundance of residual wood chips in the market, reducing the demand for pulpwood from which to produce chips.


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 September 30, 2016, June 30, 2016, and September 30, 2015:

 
Q3 2016
 
Q2 2016
 
Q3 2015
 
Volume
 
 

 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
 
MMBF
%
 
Price
Export brokers
2.8

16
%
 
$
621

 
3.2

15
%
 
$
607

 
4.7

26
%
 
$
616

Domestic mills
11.0

65
%
 
621

 
13.8

66
%
 
618

 
9.4

53
%
 
638

Hardwood
0.8

5
%
 
640

 
0.7

4
%
 
521

 
0.7

4
%
 
559

Pulpwood
2.4

14
%
 
284

 
3.2

15
%
 
290

 
3.0

17
%
 
346

Total
17.0

100
%
 
573

 
20.9

100
%
 
563

 
17.8

100
%
 
579

Timber deed sale
1.3

 

 
381

 

 

 

 

 

 

Total
18.3

 

 
 

 
20.9

 

 
 

 
17.8

 

 
 

 
Comparing Q3 2016 to Q2 2016. The relative volume sold to our various customer types changed little during Q3 2016 compared to Q2 2016.

Comparing Q3 2016 to Q3 2015. Volume sold to the export market decreased to 16% of Q3 2016 harvest volume compared to 26% of Q3 2015 volume, while volume sold to the domestic market increased to 65% of Q3 2016 harvest volume compared to 53% of Q3 2015 harvest volume. For a certain portion of our volume, the domestic and export markets compete for the same type of log. Domestic customers were paying more than export customers were offering for those logs, so we sold more volume to the domestic market.

20




The table below categorizes logs sold by customer type for the nine-month periods ended September 30, 2016 and 2015:

 
Nine Months Ended
 
September 2016
 
September 2015
 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
Export brokers
8.9

16
%
 
$
631

 
11.5

20
%
 
$
634

Domestic mills
34.3

64
%
 
629

 
33.5

58
%
 
645

Hardwood
2.0

4
%
 
571

 
2.6

5
%
 
606

Pulpwood
8.4

16
%
 
296

 
9.8

17
%
 
332

Subtotal
53.6

100
%
 
574

 
57.4

100
%
 
587

Timber deed sale
1.3

 

 
381

 
0.6

 
 
389

Total
54.9

 

 
 

 
58.0

 
 
 

 
Comparing YTD 2016 to YTD 2015. In the first nine months of 2016, the relative amounts of volume sold to our domestic customers has increased to 64% from 58% during the first nine months of 2015, while volume sold to export customers has decreased to 16% in the current year versus 20% last year. This shift in customer mix reflects the domestic market's continuing gradual recovery tied to the U.S. housing market, while the export market has weakened due in part to a relatively strong U.S. Dollar. Timber deed sales volume of 1.3 MMBF during the first nine months of 2016 came from the Partnership’s Hood Canal tree farm and Fund III’s Mashel tree farm, while the 0.6 MMBF during the first nine months of 2015 came from Fund III’s Willapa tree farm.

Cost of Sales
 
Fee Timber cost of sales, which consists predominantly of harvest, haul and depletion costs, vary with harvest volume. Commercial thinning costs are the primary component of other cost of sales in the tables below.
 
Fee Timber cost of sales for the quarters ended September 30, 2016, June 30, 2016, and September 30, 2015, was as follows, with the first table expressing these costs in total dollars and the second table expressing those costs that are driven by volume on a per MBF basis: