Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2017
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to________
 
Commission File No. 1-9035
Pope Resources, A Delaware Limited Partnership
(Exact name of registrant as specified in its charter)
Delaware
(State of Organization)
 91-1313292
(IRS Employer I.D. No.)
 
19950 Seventh Avenue NE, Suite 200, Poulsbo, WA 98370
(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (360) 697-6626
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
 
Depositary Receipts (Units)
NASDAQ
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨
Accelerated Filer x
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act). Yes ¨  No x
At June 30, 2017, the aggregate market value of the non-voting equity units of the registrant held by non-affiliates was approximately $241,737,040
The number of the registrant’s limited partnership units outstanding as of February 15, 2018 was 4,362,224.
Documents incorporated by reference: None

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Pope Resources, A Delaware Limited Partnership
Form 10-K
For the Fiscal Year Ended December 31, 2017
Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I


Item 1.   BUSINESS
 
OVERVIEW

When we refer to the “Partnership,” the “Company,” “we,” “us,” or “our,” we mean Pope Resources, A Delaware Limited Partnership and its consolidated subsidiaries. In some contexts, particularly with respect to our co-investment in our private equity timber funds, “Partnership” may refer to Pope Resources and its wholly-owned subsidiaries, exclusive of the timber funds. References to notes to the financial statements refer to the Notes to the Consolidated Financial Statements of Pope Resources, A Delaware Limited Partnership, included in Item 8 of this report. Statements of intention, belief, or expectation reflect intent, beliefs and expectations of our executive officers as of the date of this report, based on information known to them as of that date. Readers should not place undue reliance on these statements, as they are, in large part, an attempt to predict future outcomes and events, and the section of this report entitled “Item 1A: Risk Factors” contains a non-exhaustive list of factors that may cause us to fall short of our expectations or to deviate from the plans discussed herein.

The Partnership was formed in 1985 as a result of the spinoff of certain timberlands and development properties from Pope & Talbot, Inc.

We currently operate in three primary business segments: (1) Fee Timber, (2) Timberland Investment Management and (3) Real Estate. Fee Timber operations consist of growing, managing, harvesting, and marketing timber from the Partnership’s 118,000 acres of direct timberland ownership in Washington and our private equity timber funds’ 88,000 acres (as of December 31, 2017) of timberland in Washington, Oregon, and California that we co-own with our third-party investors. Our Timberland Investment Management segment is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership. Our Real Estate segment’s operations are focused on a portfolio of approximately 2,100 acres in the west Puget Sound region of Washington, most of which are legacy timberlands that have become suitable as development property owing to the expansion of the Puget Sound metropolitan and suburban areas. In recent years, however, we have begun to acquire and develop other properties for sale, either on our own or by partnering with other experienced real estate developers. This segment’s activities consist of efforts to enhance the value of our land by obtaining the entitlements and, in some cases, building the infrastructure necessary to enable further development, and then selling those properties, ordinarily to commercial and residential developers. Our Real Estate operations also include ownership and management of commercial properties, including Port Gamble, Washington, now an historic town. Port Gamble was established by Pope & Talbot in 1853 and was operated as a company town and location for a lumber mill for more than 160 years.

Copies of our reports filed or furnished under the Securities Exchange Act, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and all amendments to these reports, are available free of charge at www.poperesources.com. The information contained in or linked through our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with or furnished to the Securities and Exchange Commission, or of any report, registration statement or other filing into which the contents hereof are incorporated by reference. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet database, known as EDGAR, at www.sec.gov that contains our current and periodic reports and all of our other securities filings.

DESCRIPTION OF BUSINESS SEGMENTS

Fee Timber

Background. The 206,000 timberland acres that we own or manage under this segment break down into two categories. The first consists of the approximately 67,000-acre Hood Canal tree farm, located in western Washington, and the 51,000-acre Columbia tree farm located in southwest Washington. The Hood Canal and Columbia tree farms are the Partnership’s core holdings, and we manage them as a single operating unit for planning harvest volumes. When we refer to these two tree farms, we will describe them as the “Partnership’s tree farms.” We have owned the Hood Canal tree farm, substantially as currently comprised, since our formation in 1985. We acquired the bulk of the Columbia tree farm in 2001, a smaller block in 2004, and added over 8,000 acres to this tree farm in 2016 and over 1,000 acres in 2017.

This segment also includes a second category, comprised of the operations and management of ORM Timber Fund II, Inc. (Fund II), ORM Timber Fund III (REIT), Inc. (Fund III), and ORM Timber Fund IV (REIT), Inc. (Fund IV), which are

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consolidated into our financial statements. Fund IV was launched in December 2016 and acquired its first two timberland properties in January 2018, totaling nearly 37,000 acres in Washington and Oregon. When referring to all the Funds collectively, depending on context, we use the designations “Fund” or “Funds” interchangeably. The Partnership holds ownership interests of 20% in Fund II, 5% in Fund III, and 15% in Fund IV. The Funds’ assets at December 31, 2017, consist of 88,000 acres of timberland as outlined in the table below:
Fund
 
Acquisition
Date
 
Location
 
Acres
(in thousands)
Fund II
 
Q4 2009
 
Northwestern Oregon
 
5
 
 
Q3 2010
 
Western Washington
 
13
 
 
Q3 2010
 
Northwestern Oregon
 
13
Fund III
 
Q4 2012
 
Northern California
 
19
 
 
Q4 2013
 
Southwestern Washington
 
10
 
 
Q4 2014
 
Northwestern Oregon
 
13
 
 
Q4 2015
 
Southern Puget Sound Washington
 
15
 
 
 
 
 
 
88
 
When referring to the Partnership and Fund tree farms together we refer to them as the “Combined tree farms.” When referring to the combination of the Partnership’s tree farms and its 20%, 5%, and 15% ownership interest in Fund II, Fund III, and Fund IV, respectively, we will refer to the sums as “Look-through” totals. As Fund IV did not acquire its first timberland property until January 2018, the information presented in the following tables include only Fund II and Fund III.

Operations. As indicated above, our Fee Timber operations consist primarily of growing, managing, harvesting, and marketing timber from multiple tree farms owned by the Partnership and our private equity timber funds. Our Fee Timber segment produced 74%, 71%, and 67% of our consolidated revenue in 2017, 2016, and 2015, respectively. Delivered log sales to domestic manufacturers and export brokers represent the overwhelming majority of Fee Timber revenue, but we also occasionally sell rights to harvest timber from our tree farms, known as “timber deed sales.” In addition, our tree farms generate revenue from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries.

Inventory. Timber volume is generally expressed in thousands of board feet (MBF) or millions of board feet (MMBF). In the discussion below, we present merchantable volume, productive acres, and projected harvest level data for the Partnership’s and Funds’ tree farms on a stand-alone and Look-through basis. On our Washington and Oregon tree farms, which we manage on an even-age basis, we define “merchantable volume” to mean timber inventory in productive stands that are 35 years of age and older. Fund III’s California tree farm has been managed historically using uneven-age harvest treatments wherein stands consist of trees of a variety of age classes. On that tree farm, we classify merchantable volume based on the tree’s diameter at breast height (DBH), or four and one-half feet above ground. Trees with a DBH greater than or equal to 16 inches are considered merchantable and less than 16 inches are considered pre-merchantable. Accordingly, merchantable volume from Fund III’s California tree farm is reflected in the tables below as “16+”. The two January 2018 acquisitions by Fund IV will add, on a Look-through basis, 31 MMBF of merchantable inventory, 4,800 productive acres, and 2 MMBF of planned annual harvest volume to the December 31, 2017, data presented in the following tables.
Partnership merchantable volume (in MMBF) as of December 31:
 
 
 
 
2017
 
2016
Merch Class
 
Sawtimber
 
Pulpwood
 
Total
 
Total
35 to 39 yrs.
 
258

 
13

 
271

 
230

40 to 44 yrs.
 
67

 
3

 
70

 
58

45 to 49 yrs.
 
18

 
1

 
19

 
29

50 to 54 yrs.
 
8

 
1

 
9

 
8

55 to 59 yrs.
 
5

 

 
5

 
5

60 to 64 yrs.
 
1

 

 
1

 
3

65+ yrs.
 
24

 
1

 
25

 
26

 
 
381

 
19

 
400

 
359


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Fund merchantable volume (in MMBF) as of December 31:
 
 
 
2017
 
2016
Merch Class
Sawtimber
 
Pulpwood
 
Total
 
Total
35 to 39 yrs.
55

 
2

 
57

 
102

40 to 44 yrs.
75

 

 
75

 
106

45 to 49 yrs.
71

 
1

 
72

 
96

50 to 54 yrs.
45

 
1

 
46

 
53

55 to 59 yrs.
22

 

 
22

 
28

60 to 64 yrs.
12

 
1

 
13

 
12

65+ yrs.
14

 

 
14

 
16

16+ inches
161

 

 
161

 
161

 
455

 
5

 
460

 
574

 
Look-through merchantable volume (in MMBF) as of December 31:
 
 
 
 
 
 
2017 Volume
 
2016 Volume
 
 
Partnership
 
Look-
 
Partnership
 
Look-
 
 
100%
 
Share of
 
through
 
100%
 
Share of
 
through
Merch Class
 
Owned
 
Funds
 
Total
 
Owned
 
Funds
 
Total
35 to 39 yrs.
 
271

 
8

 
279

 
230

 
15

 
245

40 to 44 yrs.
 
70

 
11

 
81

 
58

 
15

 
73

45 to 49 yrs.
 
19

 
12

 
31

 
29

 
16

 
45

50 to 54 yrs.
 
9

 
7

 
16

 
8

 
7

 
15

55 to 59 yrs.
 
5

 
4

 
9

 
5

 
5

 
10

60 to 64 yrs.
 
1

 
2

 
3

 
3

 
1

 
4

65+ yrs.
 
25

 
2

 
27

 
26

 
6

 
32

16+ inches
 

 
8

 
8

 

 
9

 
9

 
 
400

 
54

 
454

 
359

 
74

 
433

 
Merchantable volume estimates are updated quarterly. Changes in timber inventory typically reflect depletion of harvested timber, growth of standing timber, transitions of timber stands from pre-merchantable to merchantable, revised estimates of acres available for harvest, timber inventory measurement (cruising) updates, and timberland acquisition and disposition activity. A portion of each tree farm’s timber stands is physically measured or re-measured each year using a statistical sampling process called “cruising.” Stands with actual volume are generally cruised every seven years. The comparison of actual volume harvested to the volume carried in our inventory system, is referred to as a “cutout analysis,” which monitors the accuracy of our timber inventory process. Over the last ten years, our overall inventory variances from the cutout analysis have been up to approximately 8% in any one year, but have averaged less than 1% in the aggregate over that time frame.

The dominant timber species on the Partnership’s tree farms is Douglas-fir, which has unique growth and structural characteristics that make it generally preferable to other softwoods and hardwoods for producing construction grade lumber and plywood. A secondary softwood conifer species on the Partnership’s tree farms is western hemlock, which is similar in color and structural characteristics to a number of other minor softwood conifer timber species, including Sitka spruce and the true firs. These secondary species are thus purchased and manufactured into lumber generically, and referred to as “whitewoods.” There is also a minor amount of another softwood conifer species, western red cedar, which is used in siding, fencing, and decking applications. Hardwood species on the Partnership’s tree farms include primarily red alder and smaller volumes of other hardwood species.

The merchantable timber inventory on Fund properties contains a greater proportion of whitewoods than do the Partnership’s timberlands. However, given that the most significant contributor to the Funds’ whitewood volume is Fund III’s tree farm in northern California and that the Partnership holds only a 5% ownership in Fund III, on a Look-through basis the Funds contribute a more equally-weighted species mix between Douglas-fir and whitewoods. Fund III’s northern California

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tree farm includes ponderosa pine and white fir. Ponderosa pine is used for shelving, lumber, and parts for window frames, doors, and furniture. Although listed separately in the tables below, pine is also generally referred to as a whitewood. White fir is a member of the whitewood species group and is used primarily for lumber and core layers in plywood.
Look-through merchantable volume (in MMBF) as of December 31, 2017:
 
 
 
 
 
 
 
Partnership
 
Look-
 
 
 
 
100%
 
Share of
 
through
 
Percent
Species
 
Owned
 
Funds
 
Total
 
of total
Douglas-fir
 
307

 
26

 
333

 
74
%
Western hemlock
 
32

 
14

 
46

 
10
%
Western red cedar
 
10

 
1

 
11

 
2
%
Pine
 

 
3

 
3

 
1
%
Other conifer
 
21

 
8

 
29

 
6
%
Red alder
 
25

 
2

 
27

 
6
%
Other hardwood
 
5

 

 
5

 
1
%
Total
 
400

 
54

 
454

 
100
%
 
Look-through merchantable volume (in MMBF) as of December 31, 2016:
 
 
 
 
 
 
 
Partnership
 
Look-
 
 
 
 
100%
 
Share of
 
through
 
Percent
Species
 
Owned
 
Funds
 
Total
 
of total
Douglas-fir
 
267

 
32

 
299

 
69
%
Western hemlock
 
31

 
23

 
54

 
12
%
Western red cedar
 
11

 
1

 
12

 
3
%
Pine
 

 
3

 
3

 
1
%
Other conifer
 
18

 
12

 
30

 
7
%
Red alder
 
27

 
3

 
30

 
7
%
Other hardwood
 
5

 

 
5

 
1
%
Total
 
359

 
74

 
433

 
100
%
 
The Partnership’s tree farms as of December 31, 2017, consist of 118,000 acres. Of this total, 102,300 acres, or 87% are designated as productive acres, meaning land that will grow merchantable timber where harvesting that timber is not constrained by physical, environmental, or regulatory restrictions. The Funds’ tree farms as of December 31, 2017, totaled 88,000 acres. Of this total, 75,500, or 86%, were designated as productive acres. On a Look-through basis, this results in 110,000 productive acres, of which 20% contain merchantable timber. In addition, another 28% of the Look-through productive acres are in the 25-34 year age-class, much of which will begin moving from pre-merchantable to merchantable timber volume over the next five to ten years. There is no age-class associated with the California tree farm, which is not managed on an even-age regime, resulting in stands that contain timber with multiple ages. Productive acres for our California tree farm are shown in the following tables under the heading “California.”

Look-through productive acres are spread by timber age-class as follows as of December 31, 2017:

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12/31/2017 Productive Acres (in thousands)
Age
 
100%
 
Share of
 
Look-through
 
 
Class
 
Owned
 
Funds
 
Total
 
%
Clear-cut
 
3.5

 
0.3

 
3.8

 
3
%
0 to 4
 
8.4

 
0.8

 
9.2

 
8
%
5 to 9
 
8.3

 
0.6

 
8.9

 
8
%
10 to 14
 
11.0

 
0.6

 
11.6

 
11
%
15 to 19
 
11.3

 
0.5

 
11.8

 
11
%
20 to 24
 
10.4

 
0.3

 
10.7

 
10
%
25 to 29
 
12.2

 
0.9

 
13.1

 
12
%
30 to 34
 
17.3

 
0.7

 
18.0

 
16
%
35 to 39
 
13.8

 
0.5

 
14.3

 
13
%
40 to 44
 
3.6

 
0.5

 
4.1

 
4
%
45 to 49
 
0.9

 
0.5

 
1.4

 
1
%
50 to 54
 
0.4

 
0.3

 
0.7

 
1
%
55 to 59
 
0.2

 
0.1

 
0.3

 
%
60 to 64
 
0.1

 

 
0.1

 
%
65+
 
0.9

 

 
0.9

 
1
%
California
 

 
0.9

 
0.9

 
1
%
 
 
102.3

 
7.5

 
109.8

 
 

 
Look-through productive acres are spread by timber age-class as follows as of December 31, 2016:
 
 
12/31/2016 Productive Acres (in thousands)
Age
 
100%
 
Share of
 
Look-
 
 
Class
 
Owned
 
Funds
 
through
 
%
Clear-cut
 
3.2

 
0.2

 
3.4

 
3
%
0 to 4
 
8.4

 
1.1

 
9.5

 
9
%
5 to 9
 
7.6

 
0.6

 
8.2

 
7
%
10 to 14
 
11.3

 
0.7

 
12.0

 
11
%
15 to 19
 
12.8

 
0.5

 
13.3

 
12
%
20 to 24
 
7.7

 
0.4

 
8.1

 
7
%
25 to 29
 
14.5

 
0.9

 
15.4

 
14
%
30 to 34
 
17.3

 
0.7

 
18.0

 
16
%
35 to 39
 
12.2

 
0.8

 
13.0

 
12
%
40 to 44
 
3.1

 
0.8

 
3.9

 
4
%
45 to 49
 
1.4

 
0.7

 
2.1

 
2
%
50 to 54
 
0.3

 
0.3

 
0.6

 
1
%
55 to 59
 
0.3

 
0.2

 
0.5

 
%
60 to 64
 
0.1

 

 
0.1

 
%
65+
 
0.9

 
1.0

 
1.9

 
2
%
California
 

 
0.9

 
0.9

 
1
%
 
 
101.1

 
9.8

 
110.9

 
 


Site Index. The site index for a given acre of timberland is a measure of the soil’s potential to grow timber. In our Washington and Oregon operating regions, site index is predominantly expressed in feet reflecting the measured or projected height of a Douglas-fir tree at age 50. In the California region, it is based on a mix of species. Site index is calculated by tree height and age data collected during the cruising process. Site index is an important input into the models used for projecting harvest levels on a tree farm. The Partnership’s properties have an estimated acre-weighted average site index of 116 feet and the Funds’ properties have an estimated acre-weighted average site class of 113 feet. Site index measurements are grouped into five site classes, ranging from Site 1 to Site V, with Site I being the best. Site I is 135 feet and above, Site II is 115-134 feet, Site III is 95-114 feet, Site IV is 75-94 feet, and Site V is 74 feet or less.

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Long-term Harvest Planning. Long-term harvest plans for the Partnership’s and the Funds’ tree farms reflect the different ownership time horizons associated with each group. Plans for Partnership timberlands are designed to maintain sustainable harvest levels over an extended time frame, assuming perpetual ownership. “Sustainable harvest level” denotes our assessment as to the annual volume of timber that can be harvested from a tree farm in perpetuity. As such, the sustainable harvest level generally resembles the annual growth of merchantable timber. Actual annual harvest levels may vary depending on log market conditions and timberland acquisition or disposition activity. In addition, we strategically harvest timber on our Real Estate properties. This Real Estate volume, while included in the above merchantable volume tables, is not used to calculate our long-term sustainable harvest level as it has been designated for potential sale as HBU real estate rather than perpetual timber operations. Over multi-year time frames, however, annual harvest volumes will average out to the sustainable harvest levels developed in our long-term harvest plan. The harvest levels for the Funds’ tree farms are developed to maximize the total return during their investment periods by blending cash flow from harvest with the value of the portfolio upon disposition. This will result in more harvest variability between years for Fund tree farms than is the case with the Partnership’s tree farms.

Assuming full operations on the Funds’ existing tree farms, at December 31, 2017, the long-term planned average annual harvest volume for the Partnership and Fund tree farms (and on a Look-through basis) can be found in the table below:
(amounts in MMBF)
 
 
 
 
 
 
Look-through
 
Planned annual harvest volume
 
planned annual harvest volume
Partnership tree farms
52
 
52
Fund tree farms
54
 
6
Total
106
 
58
 
Marketing and Markets. The following discussion applies to the Combined tree farms. We market timber by selling logs mostly to lumber, plywood, and chip producers or to log export brokers. To do so, we engage independent logging contractors to harvest the standing timber, manufacture it into logs, and deliver them to our customers. Except in the case of some timber deed sales, we retain title to the logs until they are delivered to a customer log yard.
Domestic mills buy the majority of our sawlog volume. Domestic mill customers use the logs as raw material for manufacturing lumber. Higher quality logs sold to the domestic market are generally used to peel veneer necessary to manufacture plywood or specialized beams. Lumber markets tend to rise and fall with new home starts as well as the repair and remodel market, which in turn drives domestic demand for logs. Additional domestic demand for our products comes from producers of utility poles, cedar fencing, and lumber. Our lowest quality logs are chipped for use by pulp mills in the production of pulp and paper.
We also sell logs to export markets in Asia through brokers based in the Pacific Northwest. Our decision to sell through intermediaries is predicated on risk management considerations, such as mitigation of foreign exchange risk, loss prevention, and minimizing cash collection risks. These export markets generally represent 15% to 35% of the log volume we produce, but can reach as high as 50%. Export markets provide important diversification from our domestic markets. Drivers of export markets include construction activities in Japan, China, and Korea, exchange rates, and shipping costs. Export markets do not tend to correlate with our domestic markets which is why the diversification provided by these markets is valuable.
Historically, Japanese customers have paid a premium for the highest quality Douglas-fir logs from which they mill visually appealing exposed beams used for residential construction. U.S. mills, on the other hand, manufacture mostly framing lumber requiring structural integrity for wall systems or trusses that are ultimately concealed by drywall and thus do not require high aesthetic quality. Accordingly, the logs sold to domestic markets are more of a commodity relative to logs sold to the Japanese market, and thus do not command as high a price.
Beginning in 2010, a reduction in China’s log imports from Russia, coupled with strengthening in the Chinese currency compared to the U.S. dollar, opened an opportunity for North American log producers to supply a larger portion of logs to the growing Chinese market. This resulted in the migration of the U.S. Pacific Northwest export market from one focused almost exclusively on Japan and Korea to a broader Asian market that now includes China. Today, China represents the largest market in Asia. This export market has provided additional support to log prices during the gradual recovery of U.S. housing over the past several years. Sawlogs sold to China are used chiefly for construction of concrete forms, pallets, and other uses that can be satisfied with whitewood and lower quality Douglas-fir sawlogs. China’s appetite for lower quality logs expanded the diversity of species mix and log sorts sold to the export market. This increased demand, and in turn prices, for whitewood and Douglas-fir sawlogs purchased traditionally by domestic mills. Combined with the limited volume of high-

8



quality Douglas-fir flowing to Japan, this narrowed the overall premium received for sales of logs to these export markets relative to the domestic market.

Customers. Logs from the Combined tree farms are sold to a number of customers in both the domestic and export markets. Domestic customers include lumber and plywood mills and other wood fiber processors located throughout western Washington, western Oregon, and northern California. Export customers consist of intermediaries located at the Washington ports of Longview, Tacoma, Port Angeles, Grays Harbor, and Olympia, and the Oregon ports of St. Helens and Astoria. Whether destined for domestic or export markets, the cost of transporting logs limits the destinations to which the Partnership and Funds can profitably deliver and sell their logs. Interfor was the largest customer for our Fee Timber segment in 2017, representing 12% of consolidated revenue. There were no Fee Timber customers that represented over 10% of consolidated revenue in 2016 or 2015.

The ultimate decision on where to sell logs is based on the net proceeds we receive after taking into account both the delivered log prices and the cost to deliver the logs to that customer. In instances where harvest operations are closer to a domestic mill than the log yard of an export broker, we may earn a higher margin from selling to a domestic mill even though the delivered log price is lower. As such, realized delivered log price movements are influenced by marketing decisions predicated on margins rather than focusing exclusively on the delivered log price. In such instances, our reported delivered log prices may reflect the property’s proximity to customers as much as the broader market trend.

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

Forestry, Silviculture, and Stewardship Practices. We manage our forests and young trees to create log sorts, determined largely by log top-end diameter and log quality, and species mix that satisfy what we expect domestic mills will desire in future years. Silviculture activities on the Combined tree farms include reforestation, control of competing brush in young stands, and density management (thinning) of the timber to achieve optimal spacing after stands are established. This is all to ensure that young stands are on a pathway to produce the desired log sorts and species mix. During 2017, we planted 1.9 million seedlings on 6,300 acres of the Combined tree farms compared to 1.7 million seedlings on 6,600 acres in 2016 and 1.1 million seedlings on 3,100 acres in 2015. Seedlings are generally planted from December to April, depending on weather and soil conditions, to restock stands that were harvested during the preceding twelve months. The number of seedlings planted will vary from year to year based upon harvest level, the timing of harvest, and seedling availability. Our policy is to return all timberlands to productive status in the first planting season after harvest, provided any requisite brush control has been completed and seedlings are available.

All harvest and road construction activities are conducted in compliance with federal, state, and local laws and regulations. Many of these regulations are programmatic and include, for example: limitations on the size of harvest areas, reforestation following harvest, retention of trees for wildlife habitat and water quality, and sediment management on forest roads. The regulations also require project-specific permits or notifications that govern a defined set of forestry operations. An application for harvest or road construction may require more specific guidance to avoid potential impact to public resources. For example, we often consult third-party, state-qualified geo-technical specialists for operations that have the potential to impact unstable slopes to avoid, minimize, or mitigate risks to safety and public resources.

Sustainable Forestry Initiative (SFI®). Since 2003, we have been a member of the SFI® forest certification program; an independent environmental review and certification program that promotes sustainable forest management, focusing on water quality, biodiversity, wildlife habitat, and the protection of unique biota. With our participation in this certification program, we are subject to annual independent audits of the standards required by the program. We view this certification as an important indication of our commitment to manage our lands sustainably while continually seeking ways to improve our management practices. We believe this commitment is an important business practice that contributes to our reputation and to the long-term value of our assets.

Our certifications are current for all the Combined tree farms. We believe this certification allows us to obtain the broadest market penetration for our logs while protecting the core timberland assets of the Partnership and the Funds.


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Timberland Investment Management (TIM)

Background. In 1997, the Partnership formed two wholly-owned subsidiaries, ORM, Inc. and Olympic Resource Management LLC (“ORMLLC”), to provide timberland investment management services for third-parties. Today, our TIM segment earns management fees and incurs expenses resulting from raising, investing, and managing capital which is invested in Pacific Northwest timberland on behalf of third-party investors alongside the Partnership’s co-investment. Since the launch of our timberland private equity fund strategy in 2003, the activities in this segment have consisted primarily of raising third-party investment capital for the Funds and then acquiring and managing timberland portfolios on their behalf. When we discuss the Fund properties we will refer to either the acquisition values, defined as contractually agreed-upon prices paid for the properties, or the value of assets under management, defined as the current third-party appraised value of the properties. As of December 31, 2017, we manage 88,000 acres of timberland in Washington, Oregon, and California with combined appraised values of $361 million. Following the January 2018 acquisitions by Fund IV, we manage over 125,000 acres with combined appraised values of $475 million.

The following table summarizes the committed and called capital, as well as distributions received by the Partnership, for our TIM segment on a cumulative basis since its inception, as of December 31, 2017 as well as January 31, 2018 incorporating the two recent timberland acquisitions by Fund IV:
 
 
Total Fund
 
Partnership Co-investment
(in millions)
 
Commitment
 
Called Capital
 
Commitment
 
Called Capital
 
Distributions
Received
 
Ownership Percentage
Fund I *
 
$
61.8

 
$
58.5

 
$
12.4

 
$
11.7

 
$
15.1

 
20%
Fund II
 
84.4

 
83.4

 
16.9

 
16.7

 
13.4

 
20%
Fund III
 
180.0

 
179.7

 
9.0

 
9.0

 
0.8

 
5%
Fund IV
 
388.0

 
6.2

 
58.0

 
0.9

 

 
15%
Total, December 31, 2017
 
714.2

 
327.8

 
96.3

 
38.3

 
29.3

 
 
January 2018 Fund IV acquisitions
 

 
108.5

 

 
16.2

 
 
 
 
 
 
$
714.2

 
$
436.3

 
$
96.3

 
$
54.5

 
$
29.3

 
 

* Fund I assets were sold in 2014 and the fund was dissolved in 2015.

Operations. The TIM segment’s key activity is to provide investment and portfolio management services to the Funds. We anticipate growth in this segment as we continue to place the remaining $273 million of Fund IV committed capital, together with any future funds established by the Partnership. The TIM segment represented less than 1% of consolidated revenue for each of the three years ended December 31, 2015 through 2017, as fee revenue is eliminated in consolidation. On an internal reporting basis, before these eliminations, the TIM segment represented 3% , 4% , and 3% of total revenue for the years ended December 31, 2015, 2016, and 2017, respectively.

In January 2018, Fund IV closed two transactions totaling $114 million of placed capital and nearly 37,000 acres. The Partnership contributed $17 million of this capital. Placement of this capital will result in both management fees and distributions resulting from our 15% investment in Fund IV.

The Partnership benefits in several ways from this segment. First, the Partnership co-invests in each of these funds, allowing us to diversify our market exposure across more tree farms and more frequent acquisitions than we could by investing only for the Partnership. We also benefit from the economies of scale generated through managing these additional acres of timberland, which benefit both the Partnership and Fund timberlands. The contribution margin from the fees charged to the Funds lowers the management costs on the Partnership’s timberlands. Lastly, we retain additional expertise that neither the Partnership nor the Funds’ timberlands could support on a stand-alone basis.

The Partnership earns annual asset management fees from the Funds based on the equity capital used to acquire timberland properties. The Partnership also earns timberland management fees on acres owned by the Funds and log marketing fees based on harvest volume from Fund tree farms. At the end of a Fund term, if a Fund achieves threshold return levels, the Partnership earns a carried interest incentive fee.

Accounting rules require that we eliminate in consolidation the fee revenue generated from managing the Funds in our TIM segment and corresponding operating expenses for the Fee Timber segment. The elimination of the fee revenue and

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corresponding operating expenses reduces the reported cost per acre of operating Fund tree farms under our Fee Timber segment. These eliminations make the Fee Timber results appear stronger and the TIM results appear correspondingly weaker.
 
Marketing. When raising capital for a new Fund, we market these opportunities to investors that have an interest in investing alongside the Partnership with its specific Pacific Northwest regional specialization and expertise in the timberland asset class. Our Funds fill a niche among timberland investment management organizations due to our regional specialization, degree of co-investment, smaller fund sizes, and the ability to target relatively small transactions. Additional marketing and business development efforts include regular contact with forest products industry representatives, non-industry owners, and others who provide key financial services to the timberland sector. Our acquisition and disposition activities keep management informed of changes in timberland ownership that can represent opportunities for us to market our services.

Customers. The Funds are the primary customers and users of TIM services.

Competition. We compete against both larger and comparably sized companies providing similar timberland investment management services. There are over 20 established timberland investment management organizations competing against us in this business. Some companies in this group have access to established sources of capital and, in some cases, increased economies of scale that can put us at a disadvantage. Our value proposition to investors is centered on the differentiation we provide relative to other managers, as described above, as well as our long track record of success in the Pacific Northwest.
 
Real Estate

Background. The Partnership’s real estate activities are associated closely with the management of our timberlands. After timberland has been logged, we have a choice among four primary alternatives for the underlying land: reforest and continue to operate as timberland, sell as undeveloped property, undertake some level of development to prepare the land for sale as improved property, or hold for later development or sale. We evaluate our timberland regularly in terms of its best economic use. We currently have a 2,100-acre portfolio of properties for which we believe there to be a higher and better use than timberland. In addition, we may acquire and develop other properties for sale, either on our own or by partnering with other experienced real estate developers. To date, this activity has not constituted a material part of our Real Estate segment’s operations.

The Real Estate segment’s activities generally consist of investing in, and later reselling, improved properties as well as holding properties for later development and sale. As a result, revenue from this segment tends to fluctuate substantially, and is characterized by relatively long periods in which revenue is low, while costs incurred to increase the value of our development properties may be higher. During periods of diminished demand, we manage our entitlement related costs and infrastructure investment to minimize negative cash flows. Segment expenses do not generally trend directly with segment revenues. When improved properties are sold, income is recognized in the form of sale price net of acquisition and development costs.

Operations. The Real Estate segment represented 26%, 29% and 33% of consolidated revenue in 2017, 2016 and 2015, respectively. Real Estate operations focus on maximizing the value of the 2,100-acre portfolio mentioned above. For Real Estate projects, we secure entitlements and/or infrastructure necessary to make development possible and then sell the entitled property to a party who will construct improvements. This segment’s results reflect conservation-related transactions with respect to our timberland. These transactions can take the form of sales of timberland for conservation purposes, sales of conservation easements (CE) that encumber Fee Timber properties and preclude future development but allow continued forestry operations, or sales of timberland on which we retain the right to harvest the standing timber for a period of time, typically up to 25 years. The third and final area of operations in this segment includes leasing residential and commercial properties in Port Gamble, Washington, and leasing out a portion of our corporate headquarters building in Poulsbo, Washington. 

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


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Information about the location and zoning categories of our Real Estate portfolio is set forth in Part I, Item 2: “Properties.”

Development Properties

Projects in Gig Harbor, Port Gamble, Kingston, Bremerton, Hansville, and Port Ludlow, Washington comprise approximately half the acres in our development property portfolio. Due to each property’s size, development complexity, and regulatory environment, the projects are long-term in nature and require extensive time and capital investments to maximize returns.

Gig Harbor. Gig Harbor, a suburb of Tacoma, Washington, is the site of Harbor Hill, a 292-acre mixed-use development project that, at its inception, included the following mix of zoning: 42 acres of commercial/retail sites, 50 acres of business park lots, and 200 acres of land with residential zoning. At December 31, 2017, we still own 18.5 acres of commercial/retail and 21.6 acres of residential lots in this project. A 20-year development agreement was approved by the City of Gig Harbor (City) in late 2010. Key provisions of the development agreement and plat approval include: (a) extending the project development period from 7 to 20 years; (b) reserving sufficient domestic water supply, sanitary sewer, and traffic trip capacity on behalf of the project’s residential units; and (c) waiver of park impact fees in exchange for a 7-acre parcel of land for City park purposes. All components of this project have transportation, water, and sewer capacities reserved for full build-out. We received preliminary plat approval in early 2011 for the then 200-acre residential portion of this project that included 554 single-family and 270 multi-family units. At December 31, 2017, 65 single-family lots on over 21 acres remained for sale.

Port Gamble. Port Gamble fits within both the development and commercial properties aspects of our Real Estate operations. Port Gamble is located northwest of Kingston in Kitsap County. Founded in 1853 by the company that became Pope & Talbot, Inc. (“P&T”), Port Gamble served as a company town for over 140 years, and a mill site and logging port for much of that time, with many of its buildings still standing. The town and mill sites, totaling 113 acres, were acquired from P&T at the time of the Partnership’s formation in 1985. The operation and management of the town of Port Gamble is discussed under “Commercial Properties” below.

With respect to our development plans for the site, Port Gamble has been designated a “Rural Historic Town” under Washington’s Growth Management Act since 1999. This designation allows for substantial new commercial, industrial, and residential development using historic land use patterns and densities while maintaining the town’s unique architectural character. Our plans are focused on bringing back the New England-style homes that have slowly disappeared since Port Gamble’s heyday in the 1920s. If approved as proposed, our plat application to Kitsap County will allow for between 200 and 240 additional residential units and 200,000 to 260,000 square feet of additional commercial building space. We submitted this master plan for the 113-acre townsite and adjoining 205-acre agrarian district in January 2013, kicking off a multi-year period of environmental impact review and public comment. The proposal calls for the development of homes, an inn, a dock, waterfront trails, and an agricultural area with greenhouses, orchard, and winery. Walking trails along the shoreline, through the adjoining forestlands, and along pastoral farmland would contribute to the lifestyle of residents and should enhance Port Gamble as a unique tourist attraction. In 2016, the town was connected to the Kitsap County water supply infrastructure. During 2017, a new membrane bioreactor wastewater treatment plant with a large onsite septic system was installed and turned over to Kitsap County’s Public Utility District, and the former treatment plant was de-commissioned.

As discussed in greater detail below, P&T’s operations at Port Gamble, prior to the Partnership’s operation of the millsite and surrounding areas, are believed to have resulted in the release of hazardous substances that impacted the upland and submerged portions of the site, and we have an environmental remediation liability as a result of our ownership of Port Gamble.

Kingston. The Partnership owns a 374-acre property in Kingston called “Arborwood” with plans for the development of 663 single-family lots and 88 multi-family units. In 2016, we acquired an adjacent 10 acres to provide another access point to the project and allow it to be broken into three or more smaller projects which we plan to develop in phases.

Bremerton. The West Hills area of Bremerton, Washington is the site of a 46-acre industrial park which we have been developing in two phases totaling 24 lots. Construction on the 9 lots covering 10 acres that comprise Phase I was completed in 2007. One lot has been sold from Phase I and the industrial market in this part of Kitsap County remains weak at this time. In 2013, we obtained a comprehensive plan designation change from industrial to residential for the 36-acre Phase II portion of this property. In 2014, Phase II was rezoned to single-family residential, and we recently entered into an agreement to sell this parcel later in 2018, subject to customary feasibility and other closing contingencies.


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Hansville. The Partnership owns a 149-acre residential development project in Hansville called “Chatham,” with 19 parcels ranging from 3 to 10 acres in size. Construction was completed in late 2007, and the lots are currently being marketed for sale. To date, 11 lots have been sold, including 10 in 2017.

Port Ludlow. Port Ludlow represents a 256-acre property in Jefferson County located just outside the Master Planned Resort boundary of Port Ludlow, Washington. Development of the property will progress commensurate with demand for rural residential lots in this area.

Rural Residential. We have a number of properties totaling 984 acres for which rural residential development represents a higher and better use compared to continuing to manage them as timberland. In general, these properties are non-contiguous smaller lots ranging in size between 5 and 40 acres with zoning ranging from one dwelling unit per 5 acres to one per 80 acres. Development and disposition strategies vary depending on the property’s unique characteristics. Development efforts and costs incurred to prepare these properties for sale include work to obtain development entitlements that will increase the property’s value as residential property as well as making improvements to existing logging roads, constructing new roads, extending dry utilities, and sometimes establishing gated entrances. As is the case with much of the Real Estate portfolio, investments in the rural residential program have been limited to those necessary to achieve entitlements, while deferring construction costs until market conditions improve.

North Kitsap County. Since 2011, we have been formally engaged with a coalition of approximately 30 entities to conserve up to 6,500 acres of the Partnership’s timberland in north Kitsap County. This effort, known as the Kitsap Forest & Bay Project, saw two closings in 2014 totaling 901 acres. In 2015, an additional 175 acres were sold to Kitsap County utilizing state conservation funds, and in 2016 we sold 1,356 acres to Kitsap County, though we retained a timber deed that will allow us to harvest timber on the property for 25 years. In December 2017, we sold an additional 1,504 acres to Kitsap County and retained a timber deed that will allow us to harvest timber on 1,334 acres of the property for 25 years.

Skamania County. We have been engaged with the Columbia Land Trust (CLT) in a multi-phase conservation project that includes both fee and conservation easement (CE) sales of the Partnership’s timberland. Funding for conservation sales have been primarily through the Washington Wildlife and Recreation Program (WWRP). In tandem with this project, we have been working with Skamania County to rezone 7,899 acres of our holdings in that county, and CLT has applied for additional CE grants for these acres through the Forest Legacy Program. If awarded, the Forest Legacy grant will be funded for a 2018 closing.

Commercial Properties

Poulsbo. In May 2011, we purchased a 30,000-square-foot commercial office building in Poulsbo, on a 2-acre parcel of land. We utilize the second floor, basement, and part of the first floor for our own operations. We lease a portion of the first floor, and are seeking tenants for the remaining first-floor space.

Port Gamble. As described above under “Development Properties,” the Partnership owns and operates the town of Port Gamble where 25 residential buildings and approximately 46,000 square feet of commercial space are currently leased to third parties. In addition, we operate a wedding and events business, utilizing another 8,000 square feet in the town’s venues, that leverages the charm of the townsite to attract clientele, and a museum. These commercial activities help offset the costs of maintaining the town while the master plan progresses.

Environmental Remediation. As noted above, P&T and its corporate predecessors operated a sawmill at Port Gamble from 1853 to 1995. P&T continued to lease various portions of the site for its operations until 2002. During the time P&T operated in Port Gamble, it also conducted shipping, log storage, and log transfer operations in the tidal and subtidal waters throughout Port Gamble Bay, some of which were under lease from the Washington State Department of Natural Resources (DNR) that lasted from 1974 to 2004. P&T’s operations are believed to have resulted in the release of hazardous substances that impacted the upland and submerged portions of the site. Hazardous substances believed to have been released include various hydrocarbons, cadmium, and toxins associated with wood waste.

Following the mill shutdown, the Washington State Department of Ecology (DOE) began to examine the environmental conditions at Port Gamble. Under Washington law, both Pope Resources and P&T were considered by DOE to be “potentially liable persons” (PLPs); the Partnership because of its ownership of certain portions of the site, and P&T because of its historical ownership and operation of the site. DNR was also considered by DOE to be a PLP because of its management of the submerged beds in Port Gamble Bay and its leasing of certain of those beds to P&T. We believe that DNR is liable for a significant portion of cleanup costs by virtue of its having permitted P&T to operate on the tidal and submerged portions of the

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site, and by failing to properly enforce the then-existing environmental laws in a manner that we believe would have substantially mitigated the contamination that occurred during P&T’s operations at the site.

P&T and Pope Resources entered into a settlement agreement in 2002 that allocated responsibility for environmental contamination at the townsite, millsite, a solid waste landfill, and adjacent waters, with P&T assuming responsibility for funding clean-up in the Bay and the other areas of the site that were impacted by its historical operations. At that time, the parties estimated the aggregate cleanup costs allocable to both parties to be between $10 million and $13 million, with the clean-up of Port Gamble Bay expected to amount to approximately 90% of the overall project costs.

In 2005, both Pope Resources and P&T received Environmental Excellence Awards from DOE for their work in remediating the contamination that had existed at the Port Gamble townsite and landfill. DOE also issued letters to both parties in 2006 indicating that the agency expected to take no further action regarding conditions at those portions of the site. Pope Resources continued cleaning up the remaining contamination at the millsite. By late 2005, the millsite portion of the site had largely been cleaned and the remaining aspects of that project consisted of test well monitoring and modest additional remediation. The Port Gamble Bay area and related tidelands, for which P&T was responsible under the parties’ settlement agreement, had not yet been remediated. In 2007, P&T filed for bankruptcy protection and was eventually liquidated in bankruptcy, leaving the Partnership and DNR as the only remaining PLPs. Because environmental liabilities are joint and several as between PLPs, the result of P&T’s bankruptcy was to leave substantial portions of the liability with the Partnership, as one of the two remaining solvent PLPs. At that time, we increased our accrual for remediation liabilities by $1.9 million to reflect the resulting increase in risk.

Beginning in 2010, DOE began to reconsider its expectations regarding the level of cleanup that would be required for Port Gamble Bay, largely because of input from interested citizens and groups, one of the most prominent of which has been the Port Gamble S’Klallam Tribe. In response to input from these groups, DOE adopted remediation levels that were far more stringent than either DOE or the Partnership had contemplated previously. This culminated in significant modifications to the cleanup alternatives in the draft Port Gamble Bay and Mill Site Remedial Investigation and Feasibility Study issued by DOE in May 2012. As a result, we recorded a $12.5 million increase in our accrual for the environmental remediation liability in the second quarter of 2012.

In December 2013, the Partnership and DOE entered into a consent decree that included a cleanup action plan (CAP) requiring the removal of docks and pilings, excavation and backfilling of intertidal areas, subtidal dredging and monitoring, and other specific remediation steps. Throughout 2014, we evaluated the requirements of the CAP and conducted additional sampling and investigation to design the remediation project. In November 2014, we submitted a draft engineering design report (EDR) to DOE, followed by other supplemental materials establishing our proposed means for complying with the CAP. Based on the EDR and subsequent discussions with DOE, we reached the conclusion that the existing accrual for environmental liabilities was insufficient. Accordingly, we accrued an additional $10.0 million in December 2014. The construction phase of the cleanup of the Port Gamble Bay area and related tidelands began in September 2015 and the in-water portion of the cleanup was completed in January 2017. In the fourth quarter of 2016, we accrued an additional $7.7 million, primarily representing costs associated with removing pilings and dredging and capping an area of deep wood waste discovered along the southern embankment of the millsite, as well as estimated additional long-term monitoring costs.

The in-water portion of the cleanup will be followed by relatively modest cleanup activity on the millsite and a monitoring period. In February 2018, the Partnership and DOE entered into an agreed order with respect to the millsite under which the Partnership will perform a remedial investigation and feasibility study (RI/FS). Following the completion of the RI/FS, the Partnership will work with DOE to develop a CAP. As with the in-water portion of the project, the CAP will define the scope of the remediation activity for the millsite. Once the CAP is approved by DOE, it will be codified in a consent decree.

Another aspect of this matter relates to Natural Resource Damages, or NRD. Certain environmental laws allow state, federal, and tribal trustees (collectively, the Trustees) to bring suit against property owners to recover damages for injuries to natural resources. Like the liability that attaches to current property owners in the cleanup context, liability for natural resource damages can attach to a property owner simply because an injury to natural resources resulted from releases of hazardous substances on that owner’s property, regardless of culpability for the release. The Trustees are alleging that Pope Resources has NRD liability because of releases that occurred on its property. We have been in discussions with the Trustees regarding their claims, and the alleged conditions in Port Gamble Bay. We have also been discussing restoration alternatives that might address the damages the Trustees allege. Resolution of these NRD claims will occur after the construction phase of the project is completed. Discussions with the Trustees may result in an obligation for us to fund NRD restoration activities and past assessment costs that are greater than we have estimated, and it is reasonably possible that this component of the liability may increase.


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In December 2014, the Partnership filed suit against DNR seeking contribution to cleanup costs. In April 2015, the Partnership moved for summary judgment on the issue of DNR’s liability for the site. On June 8, 2015, Kitsap County Superior Court ruled on summary judgment that DNR did not qualify as an owner or operator of the site and therefore did not have liability under Washington’s Model Toxics Control Act (MTCA). The effect of the court’s ruling was to absolve DNR of any responsibility to contribute to the cost of cleanup at Port Gamble. We appealed the Superior Court’s ruling and ten public and/or private entities, including DOE, filed or joined in amicus briefs in support of our position, arguing that DNR is liable as an owner or operator of the site. On December 28, 2016, The Washington State Court of Appeals (Division II) reversed the superior court’s summary judgment order, ruling that DNR is liable under MTCA as an owner or operator of the site. This liability extends to NRD liability as well. DNR appealed this ruling to the Washington State Supreme Court. Oral arguments were presented on September 26, 2017, and the Supreme Court’s ruling is anticipated in the first quarter of 2018. In addition, we are pursuing contribution of costs under P&T’s insurance policies. Our recorded liability does not reflect any contribution from DNR or from P&T’s insurance policies. Under MTCA, allocation of liability among PLPs is a separate process from determination of liability.

Additional information regarding this environmental remediation liability, and the methodology used to monitor its adequacy, is set forth in Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Real Estate” and “– Critical Accounting Estimates”.

Marketing. Marketing efforts for development properties from 2015 to 2017 were focused primarily on our Harbor Hill development and conservation land and easement sales. In 2015, we started investigating and pursuing the acquisition and development of other real estate properties (not owned by the Partnership) and closed on the acquisition of a two-acre parcel on Bainbridge Island, Washington. In 2017, we partnered with another developer to form a joint venture for the acquisition of a 5-acre property on Bainbridge Island, Washington, that will include 18 townhomes for sale and 107 apartments for lease. Efforts were also expended in the last several years to sell North Kitsap lands for conservation.

Customers. We typically market properties from the Real Estate portfolio to private individuals, residential contractors, and commercial developers. Customers for rental space in the Port Gamble townsite consist of both residential and commercial tenants. MainVue Homes was the largest customer for our Real Estate segment in 2017, representing 11% of consolidated revenue. In 2016, The Quadrant Corporation was the largest customer for our Real Estate segment, representing 17% of consolidated revenue. There were no customers that represented over 10% of consolidated revenue in 2015.

Competition. We compete in this segment with local and regional peers that offer land for sale or lease.

Transportation. Land values for the Real Estate portfolio are influenced by transportation options between the west side of Puget Sound, where our properties are located, and the Seattle-Tacoma metropolitan corridor. These areas are separated by bodies of water. Transportation options include the Tacoma Narrows Bridge or one of several car and passenger ferries that link the communities of Kingston, Bremerton, and Bainbridge Island to Edmonds and Seattle.
 
Employees
 
As of December 31, 2017, we employed 61 full-time employees and 9 part-time or seasonal personnel, who are distributed among the segments as follows:
Segment
 
Full-Time
 
Part-Time/
Seasonal
 
Total
Fee Timber
 
24

 

 
24

Timberland Investment Management (TIM)
 
5

 

 
5

Real Estate
 
17

 
9

 
26

General & Administrative
 
15

 

 
15

Totals
 
61

 
9

 
70


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

Government Regulation

Our timberland and real estate operations are subject to a number of federal, state, and local laws and regulations pertaining to environmental issues, forest practices, and land use. These laws and regulations can directly and indirectly affect

15



our Fee Timber and TIM segments by regulating harvest levels and impacting the market values of forest products and forestland. Our real estate operations are also directly and indirectly affected by these laws and regulations by limiting development opportunities and the underlying market value of real estate.

Laws and Regulations that Affect Our Forestry Operations. Both our Fee Timber segment and our TIM segment are affected by federal and state laws and regulations that are designed to promote air and water quality and protect endangered and threatened species. Further, each state in which we own or manage timberlands has developed “best management practices” (BMP) to reduce the effects of forest practices on water quality and plant and animal habitats. Collectively, these laws and regulations increasingly affect our harvest and forest management activities. Regulatory agencies and citizens’ and environmental groups are continually seeking to expand these protections using a wide variety of judicial, legislative, and administrative processes, as well as state ballot initiatives, a process applicable to all three states in which we operate, that allows citizens to adopt laws without legislative or administrative action.

The primary laws and regulations that affect our forestry operations include:

Endangered Species Laws

A number of fish and wildlife species that inhabit geographic areas near or within our timberlands have been listed as threatened or endangered under the federal Endangered Species Act (ESA) or similar state laws. Federal ESA listings include the northern spotted owl, marbled murrelet, numerous salmon species, bull trout, steelhead trout, and other species. At times, state endangered species laws impose further restrictions by limiting the proximity of harvest operations to certain identified plants and wildlife. Legislative, regulatory, and legal efforts to expand the list of protected species and populations may impose further restrictions. Federal and state requirements to protect habitat for threatened and endangered species have imposed restrictions on timber harvest on some of our timberlands, and these protections may be expanded in ways that further affect our operations. These actions may increase our operating costs, further restrict timber harvests or reduce available acres, and adversely affect supply and demand more broadly across our markets.

Further, federal and state regulatory agencies continually monitor environmental conditions to determine whether, in those agencies’ opinions, existing forestry practice rules are effective at promoting compliance with all applicable laws and regulations. If one or more of these agencies were to assert that the rules need to be adjusted, new or modified regulations could result in increased costs, additional capital expenditures, and reduced operating flexibility.

Water Quality Laws

Also affecting our forestry operations are laws and regulations that are designed to protect water quality. The preeminent federal law is the Clean Water Act , which is enforced through associated state laws and regulations in the jurisdictions in which we operate.

These state laws and regulations reduce timberlands available for harvest by, among other things, requiring buffers on some streams in order to meet state water quality standards related to maintaining temperature or reducing or eliminating pollutants. Other laws and regulations could have significant impacts on our harvest activities, including increases in setback requirements. As these rules grow more restrictive, we may face increasing costs associated with our silviculture, may find some areas of our tree farms inaccessible (either physically or because of economic inefficiency), and may face reductions in the portion of our timberlands that can be harvested.

The Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and other state laws related to the use of pesticides, are increasingly restricting the use of herbicides in a manner that may reduce our timber production. Herbicides are used to promote reforestation and to optimize the growth of regenerated stands of trees. These federal and state laws and regulations may reduce the efficiency with which we can produce timber, and they may ultimately reduce the volume of timber that is available for harvest. Further, a reduction in insecticides or herbicides may make our tree farms more vulnerable to disease or infestations.

State Harvest Permitting Processes

Washington, Oregon, and California all have a permitting or notification system as part of their forest practice rules. Changes in these processes can cause additional administrative expenses and/or delay project implementation. These laws require significant environmental studies and permitting requirements, often including multiple regulatory agencies, prior to the issuance of harvest permits. All three states periodically update their regulations and permitting processes. The regulatory comment process can cause us to incur expenses, and new permitting regulations commonly require us to increase the level of

16



research and expertise necessary to meet applicable requirements. Substantive changes in these regulations may increase our harvest costs, may decrease the volume of our timber that is available for harvest, and may otherwise reduce our revenues or increase our costs of operations.

Climate Change Laws

California has implemented a cap and trade program that limits the amount of greenhouse gasses emitted by certain stationary sources as well as transportation sources. This may indirectly impact forest landowners through indirect costs of energy to our manufacturing customers and logging contractors. In both Washington and Oregon there are proposed legislative changes that include both a carbon tax proposal as well as cap and trade program.

The effects of these laws and initiatives cannot readily be quantified or predicted. However, the regulatory and non-regulatory forest management programs described above have increased operating costs and resulted in changes in the value of the Combined timberlands, and may exacerbate this effect in the future. Management does not expect to be disproportionately affected by these programs in comparison with typical timberland owners. Likewise, management does not expect that these programs will significantly disrupt our planned operations over large areas or for extended periods.

Laws and Regulations that Affect Real Estate Development.  Many of the federal laws (ESA and CWA) that impact forest management can, in a more limited manner, also apply to real estate development. State and local land use regulations can also have additional permitting requirements and limit development opportunities. For example, development rights in Washington State are affected by the Growth Management Act (GMA), which requires counties to submit comprehensive plans that identify the future direction of growth and stipulate where population densities are to be concentrated. The purposes of the GMA include: (1) direction of population growth to population centers (Urban Growth Areas), (2) reduction of “suburban sprawl”, and (3) protection of historical sites. We work with local governments within the framework of the GMA to develop our real estate holdings to their highest and best use. Oregon also has growth management provisions in its land use laws which served as a model for Washington’s growth management provisions. Oregon’s land use laws are generally more stringent outside of urban areas, especially in commercial forest lands where residential conversions are often outright disallowed without statutory action by the State legislature. These regulations can impact the permitted density of a given area, which may affect the number of lots, dwellings, or commercial buildings that can be constructed in a given location, any or all of which may affect our real estate revenues and the value of our real estate holdings.

In October of 2016, the Washington State Supreme Court issued a ruling on a case requiring counties to ensure that there is legal water available before issuing permits for exempt wells. The Washington State Legislature has passed a law that removes the moratorium on well development imposed by the Court. It allows for wells to be developed with a nominal fee, however, in some areas, the amount of water that can be removed is limited

Item 1A.         RISK FACTORS
Risks Related to Our Industry and Our Markets

Our Fee Timber segment is 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. For example, interest rates are widely expected to rise in the coming periods. Should this occur, it could have a negative impact on the U.S. housing market. Similarly, the impact of the 2017 Tax Cuts and Jobs Act on housing starts cannot readily be determined. Demand from export markets for Pacific Northwest logs are affected by fluctuations in the economies of the United States, Japan, China, and to a lesser degree, Korea; the foreign currency exchange rate between the currencies of these Asian countries and the U.S. dollar; and by ocean transportation costs. Further, the prices we realize for our logs depend in part upon competition, including the supply of logs from Canada that can be impacted by fluctuations in currency exchange rates and trade relations between the U.S. and Canada. The U.S. recently announced tariffs on lumber imported from Canada, with the intention of making U.S.-sourced lumber more competitive. An indirect effect of the tariffs could be support for U.S. log prices.

Our Fee Timber and Timberland Investment Management (TIM) segments are highly dependent upon sales of commodity products. Revenue from our forestry operations are widely available from producers in other regions of the United States, as well as Canada and a number of other countries. We do not normally hedge against the financial risks associated with this condition. We are therefore subject to risks associated with the production of commonly available products, such that an increase in supply from abroad as a result of overproduction by competitors in other nations or as a result of changes in currency exchange rates, may reduce the demand for our products in some or all of the markets in which we do business. A

17



bilateral agreement between the United States and Canada, called the Softwood Lumber agreement, had been intended to help manage potentially harmful effects of international competition between our countries, but that agreement expired in October 2015. In December 2017, the U.S. International Trade Commission (ITC) ruled that the U.S. lumber industry was injured by Canadian lumber imports. The final ruling resulted in countervailing duties (CVD) and anti-dumping duties (ADD) on Canadian lumber shipments to the U.S. The expected net effect of these CV/AD duties is upward price pressure for sawlog producers in the Pacific Northwest, though management cannot predict accurately the precise effects. Similarly, we have seen or may experience an increase in supply or a reduction in demand as a result of international tensions or competition that is beyond our control and that may not be predictable.

We are subject to statutory and regulatory restrictions that currently limit, and may increasingly limit, our ability to generate income and cash flow. Our ability to grow and harvest timber can be impacted significantly 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. Similarly, certain activist groups in Oregon are likely to continue to register ballot initiatives that would eliminate clearcutting, which is the predominant harvest practice across our geographic region, propose bans on pesticides and various methods of applying pesticides, and other practices that are commonly used to promote efficient, sustainable forestry practices. While these initiatives have thus far failed to gain traction, such initiatives, alone or in combination, may limit the portion of our timberlands that is eligible for harvest, may make it more expensive or less efficient to harvest all or certain portions of our timberlands, or may restrict other aspects of our operations. 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 increase the cost or reduce available inventory thereby reducing income and cash flow. Any such additional restrictions would likely have a similar effect on our TIM operations. We cannot offer assurances that we will not be alleged to have failed to comply with these regulations, or we may face a reduction in revenues or an increase in costs as a result of complying with newly adopted statutes, regulations and court or administrative decisions. 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.

Environmental and other activist groups may have an adverse impact on the value of our assets or on our ability to generate revenues from our timberlands. In recent years we have seen an increase in activities by environmental groups, Native American tribes, and other activists in the legislative, administrative, and judicial processes that govern all aspects of our operations. For example, on more than one occasion, the Washington Department of Ecology applied more stringent regulatory standards to our existing environmental remediation project at Port Gamble, Washington, after soliciting or receiving input from tribal representatives. These revisions substantially increased the cost associated with our pre-existing remediation plans, and we cannot offer assurances that similar actions will not further protract the process or increase remediation costs. In an ongoing example of this activism, various citizens’ and tribal groups are asserting, in their capacities as alleged trustees under the Natural Resources Damages Act, that we are liable for damages to the environment on the basis of our now largely remediated property at Port Gamble, Washington. Similarly, citizens’ and environmental groups have significant influence in the entitlement and zoning processes that affect our Real Estate operations. These activities are not likely to diminish in the foreseeable future, and in some instances may have a material impact upon the revenues we can generate from our properties or upon the costs of generating those revenues.

Our businesses are highly dependent upon domestic and international macroeconomic factors. Both our timberland operations and our real estate operations are highly influenced by housing markets. Our Fee Timber and TIM segments depend upon housing and construction markets in the United States and in other Pacific Rim countries, and our geographic concentration in the Pacific Northwest increases our exposure to economic, labor, and shipping risks that are tied to this particular area. Similarly, our Real Estate segment depends upon a highly localized demand in the Puget Sound region of western Washington. Factors that affect these markets will have a disproportionate impact on our business, and may be difficult or impossible to predict or estimate accurately.

We face increasing competition from engineered and recycled products. Our Fee Timber and TIM segments derive substantially all of their revenues from the market for softwood logs and wood products derived from them. Recent years have witnessed the emergence of plastic, fiberglass, wood composite and recycled products, as well as metal products in certain industries, that may have the effect of reducing demand for our products. As these products evolve, and as other competitive products may be developed, we may face a decline in log price realizations that would have an adverse impact on our revenues, our earnings, cash flow, and the value of our assets.


18



As a property owner and seller, we face environmental risks associated with events that occur or that may be alleged to have occurred on our properties. Various federal and state environmental laws in the states in which we operate place liability for environmental contamination on the current and former owners of real estate on which contamination is discovered. These laws are often a source of “strict liability,” meaning that an owner or operator need not necessarily have caused, or even been aware of, the release of hazardous substances. Such a circumstance applies to our operations at Port Gamble, Washington, for example, where contamination occurred prior to the formation of the Partnership. If hazardous substances are discovered or are alleged to have been released on property that we currently own or operate, that we have owned or operated in the past, or that we acquire or operate in the future, we may be subject to liability for the cost of remediating these properties without regard for our conduct or our knowledge of the events that led to the contamination or alleged contamination. These events would likely increase our expenses and might, in some cases, make it more difficult or impossible for us to continue operating our timberlands or to sell parcels of real estate for a price we would deem reasonable.

Risks Relating to Our Operations

We have certain environmental remediation liabilities associated with our Port Gamble property, and that liability may increase. We currently own certain real estate at Port Gamble on the Kitsap Peninsula in western Washington. Sediments adjacent to these properties were alleged to have been impacted by operations of the former owner of the property, Pope & Talbot, Inc. However, as current owner of Port Gamble, we have environmental liability for these properties under Washington State’s Model Toxics Control Act (MTCA). In December 2013, we reached an agreement with the Washington State Department of Ecology (DOE) in the form of a consent decree (“CD”) and clean-up action plan (“CAP”) that provides for the cleanup of 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. In February 2018, the Partnership and DOE entered into an agreed order with respect to the millsite under which the Partnership will perform a remedial investigation and feasibility study and develop a CAP. As with the in-water portion of the project, the CAP will define the scope of the remediation activity for the millsite.

On June 8, 2015, Kitsap County Superior Court ruled on summary judgment that Washington’s Department of Natural Resources (DNR) did not qualify as an owner or operator of the site and therefore did not have liability under the MTCA. We appealed the Superior Court’s ruling and ten public and/or private entities, including DOE, filed or joined in amicus briefs in support of our position, arguing that DNR is liable as an owner or operator of the site. On December 28, 2016, The Washington State Court of Appeals (Division II) reversed the superior court’s summary judgment order, ruling that DNR is liable under MTCA as an owner or operator of the site. In addition, we are pursuing contribution of costs under P&T’s insurance policies. There can be no assurance that we will prevail in these matters or that we can reach an acceptable settlement with DNR. The recorded liability does not reflect any contribution by DNR or P&T’s insurance policies. Additionally, certain environmental laws allow state, federal, and tribal trustees (collectively, the Trustees) to bring suit against property owners to recover damages for injuries to natural resources (NRD). Like the liability that attaches to current property owners in the cleanup context, liability for natural resource damages can attach to a property owner simply because an injury to natural resources resulted from releases of hazardous substances on that owner’s property, regardless of culpability for the release. The Trustees are alleging that Pope Resources has NRD liability because of releases that occurred on its property. We have been in discussions with the Trustees regarding their claims, and the alleged conditions in Port Gamble Bay. We have also been discussing restoration alternatives that might address the damages the Trustees allege. Discussions with the Trustees may result in an obligation for us to fund NRD assessment and restoration activities that are greater than we have estimated. The outcome of this matter is too uncertain for us to determine the likelihood or potential amount of any such obligation at this time.

Management continues to monitor the Port Gamble cleanup processes closely. The $5.0 million remediation accrual as of December 31, 2017, represents our current estimate of the remaining cleanup cost and most likely outcome to various contingencies, though it is reasonably possible that the NRD component of the liability may increase. These estimates are predicated upon a variety of factors, including the actual amount of the ultimate cleanup costs. The liability is based upon a number of estimates and judgments that are subject to change as the project progresses. There may be additional litigation costs if we cannot reach a settlement with DNR, and the outcome of any such litigation is uncertain. The filing of the CD limits our legal exposure for matters covered by the decree, but does not eliminate it entirely. DOE reserves the right to reopen the CD if new information regarding factors previously unknown to the agency requires further remedial action. While unlikely, a reopening of the CD may result in adverse financial impacts and 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, cash flow, and operations.

Our leverage may give rise to additional risks. The Partnership’s total outstanding debt was $70.5 million at December 31, 2017, of which $26.2 million bears interest at variable rates, with the remaining balance at fixed rates. This debt, particularly that portion that carries variable interest rates, exposes us to certain additional risks, including the possibility that

19



we may face additional interest expense, particularly in an economic environment that includes rising interest rates, as are expected in the United States in coming periods. In addition, generally speaking, an increase in our indebtedness may limit our ability to defer timber harvests and potentially restricts our flexibility to take advantage of other investment opportunities that might otherwise benefit our business. In extreme cases, we could be placed in a position in which we default under one or more of our credit arrangements, which could require us to pledge additional portions of our timberland as collateral for our indebtedness or which might require us to take other actions or expose us to other remedies that could have a material adverse effect upon our assets, operations, or business.

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.

Our operations are geographically concentrated, and we may face greater impacts from localized events than would more geographically diverse timber companies. Because our operations are conducted exclusively west of the Cascade Mountains of the Pacific Northwest, between northern California and the Canadian border, regionalized events and conditions may have a more pronounced impact upon our operations than they might upon a more geographically diverse timber company. For example, disease and insect infestations tend to be local or regional in scope, and because our Fee Timber and TIM businesses are geographically concentrated, events of this nature may affect our operations more significantly than they might a similarly situated company whose operations are more widely dispersed. Similarly, because the vast majority of our Real Estate operations are limited to the Puget Sound region of western Washington, regional impacts such as growth patterns, weather patterns and natural disasters, as well as socio-political events such as environmental and land use initiatives, may disproportionately affect that segment more significantly than a company whose operations are less concentrated.
 
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 could become 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, income, or cash flow 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, income, and cash flow as a result of regional mill consolidations will also indirectly affect our TIM segment in the context of raising capital for investment in Pacific Northwest-based timber funds.

Our timber investment fund business depends upon establishing and maintaining a strong reputation among investors, and on our ability to maintain strong relationships with existing and prospective investors in our Funds. Our ability to expand our operations using our private equity timber fund strategy depends, to a significant degree, upon our ability to maintain and develop our expertise in managing timberlands in a manner that generates investment returns for prospective Fund investors. Events or conditions that adversely impact this capacity, including events that damage our reputation or our relationship with Fund investors, may make it more difficult to grow our operations using this strategy, and in some instances, may result in actual or alleged liability to our investors. Any such events may cause a reduction in our revenues or may cause us to realize less than the optimum potential of our assets.

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 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 inherent in our line of business. Moreover, the timber industry has experienced 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

20



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 investors that competition will not have a material and adverse effect on our results of operations or our financial condition.

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 may incur losses as a result of natural disasters that may occur on our properties. Forests are subject to a number of natural hazards, including damage by fire, severe windstorms, insects, 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. 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. However, we do carry fire insurance on approximately 13% of our timberland acres.

We rely on experienced contract loggers and truckers who are at times in short supply and who may seek consistent work. We rely on contract loggers and truckers for the production and transportation, respectively, of our products to customers. The pool of available contractors is limited and can result in an increase in harvest and haul costs as harvest volumes increase regionally. In addition, contractors may value continuity of work which influences contractor availability and the selection of contract bidders. A commitment to more continuous work could reduce our flexibility to time markets, affecting total returns.

Risks Relating to Ownership of Our Securities

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 controlling 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 “qualifying units,” which generally 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; prevent or, upon the approval of limited partners holding a majority of the units, cause the sale of the assets of the Partnership; and 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 have a limited market capitalization and a relatively low historic trading volume, as a result of which the trading prices of our units may be more volatile than would an investment in a more liquid security. Our relatively small public float and our limited trading volume may, in some instances, make trading in our units more volatile, as a result of which our price may deviate more significantly, and opportunities to buy or sell our units may be more limited, than investors might experience with a more liquid market. This circumstance may be magnified during times of significant or prolonged selling pressure on our securities. Further, we are simultaneously maintaining both a distribution reinvestment plan, which may have the effect of increasing the number of outstanding units, and a unit repurchase plan, which has had and may continue to have the effect of reducing the number of outstanding units. These factors together make it difficult to predict the effect, if any, on our liquidity or our market capitalization.

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

21



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.
 
Item 1B.         UNRESOLVED SECURITIES AND EXCHANGE COMMISSION COMMENTS

None

Item 2.    PROPERTIES

The following table reconciles acreage owned as of December 31, 2017, to acreage owned as of December 31, 2016. As noted previously, we own 20% of Fund II, 5% of Fund III, and 15% of Fund IV, though Fund IV did not acquire its first property until January 2018. This table includes the acres of timberland owned by the Funds and also presents the acreage on a Look-through basis. Properties are typically transferred from the Fee Timber segment to the Real Estate segment at the point in time when the Real Estate segment takes over responsibility for managing the properties with the goal of maximizing the properties’ value upon disposition.
 
 
Timberland Acres (in thousands) by Tree Farm
Description
 
2016
 
Acquisitions
 
Sales
 
Transfer
 
2017
Hood Canal tree farm (1)
 
68.4

 
0.3

 
(1.7
)
 

 
67.0

Columbia tree farm (1)
 
50.0

 
1.5

 

 

 
51.5

Subtotal Partnership Timberland
 
118.4

 
1.8

 
(1.7
)
 

 
118.5

Fund II tree farms (2)
 
37.1

 

 
(6.3
)
 

 
30.8

Fund III tree farms (2)
 
56.7

 

 

 

 
56.7

Subtotal Funds’ Timberland (3)
 
93.8

 

 
(6.3
)
 

 
87.5

Total Fee Timber acres (3)
 
212.2

 
1.8

 
(8.0
)
 

 
206.0

Partnership share of Funds
 
10.4

 

 

 

 
10.4

Total Real Estate acres (see detail below)
 
2.2

 

 
(0.1
)
 

 
2.1

Combined Look-through total acres (3)
 
131.0

 
1.8

 
(1.8
)
 

 
131.0

 
(1)
A subset of this property is used as collateral for the Partnership’s long-term debt, excluding debt of the Funds. The Hood Canal tree farm is located in northwestern Washington and the Columbia tree farm is located in western Washington.
(2)
A subset of these properties is used as collateral for the Funds’ long-term debt. Fund II’s tree farms are located in western Washington and northwestern Oregon. Fund III’s tree farms are located in southern Puget Sound and southwestern Washington, northwestern Oregon and northern California.
(3)
In January 2018, Fund IV acquired nearly 37,000 acres of timberland in western Washington and southwestern Oregon. The Partnership holds a 15% ownership interest in Fund IV.

 
 
Real Estate Acres Detail
 
Basis
Project Location
 
2016
 
Acquisitions
 
Sales
 
Transfers
 
2017
 
(in thousands)
Bremerton
 
46

 
 
 
 
 
 
 
46

 
$
2,711

Gig Harbor
 
81

 
 
 
(41
)
 
 
 
40

 
8,830

Hansville
 
149

 
 
 
(71
)
 
 
 
78

 
527

Kingston - Arborwood
 
374

 
 
 
 
 
 
 
374

 
2,282

Port Gamble town and mill sites
 
113

 
 
 
 
 
 
 
113

 
5,339

Port Gamble Agrarian District
 
205

 
 
 
 
 
 
 
205

 
1,758

Port Ludlow
 
256

 
 
 
 
 
 
 
256

 
726

Poulsbo
 
2

 
 
 
 
 
 
 
2

 
491

Bainbridge Island
 
2

 
 
 
(1
)
 
 
 
1

 
686

Other Rural Residential
 
984

 
 
 
 
 
 
 
984

 
1,689

Total
 
2,212

 

 
(113
)
 

 
2,099

 
$
25,039

 

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The following table provides dwelling unit (DU) per acre zoning for the Partnership’s development properties as of December 31, 2017, and land sold during 2017. The table does not include sales of development rights or small timberland sales from tree farm properties:

Real Estate Land Inventory by Zoning Category - December 31, 2017
 
2017 Sales from RE Portfolio
Zoning Designation
 
Acres
 
Acres
 
$/Acre
 
Total Sales (in thousands)
Urban zoning - residential
 
422

 
42

 
$
441,357

 
$
18,537

Historic Rural Town
 
113

 
 
 
 
 
 
Commercial/retail
 
21

 
 
 
 
 
 
Business park/industrial
 
10

 
 
 
 
 
 
1 DU per 5 acres
 
385

 
 
 
 
 
 
1 DU per 10 acres
 
33

 
71

 
19,366

 
1,375

1 DU per 20 acres
 
574

 
 
 
 
 
 
1 DU per 40 acres
 
38

 
 
 
 
 
 
1 DU per 80 acres
 
298

 
 
 
 
 
 
Agrarian District
 
205

 
 
 
 
 
 
Total
 
2,099

 
113

 
$
176,212

 
$
19,912

 
Item 3.            LEGAL PROCEEDINGS

The Partnership may, from time to time, be a defendant in lawsuits arising in the ordinary course of business. Management believes that loss to the Partnership, if any, will not have a material adverse effect on the Partnership’s consolidated financial condition or results of operations.

As we have disclosed previously, we have filed suit against the Washington State Department of Natural Resources (DNR) seeking contribution to cleanup costs for the environmental remediation of the Port Gamble site. On May 2, 2017, the Washington State Supreme Court granted review of the Court of Appeals’ December 2016 ruling in our favor that holds DNR liable under Washington’s Model Toxics Control Act as an owner or operator of the site. Oral arguments were presented on September 26, 2017. The Supreme Court’s ruling is anticipated in the first quarter of 2018.

In 2015, the Partnership filed a lawsuit seeking coverage under insurance policies in place around the time it acquired the Port Gamble site from Pope & Talbot (P&T). Pursuant to an order from P&T’s bankruptcy court, the Partnership later amended its complaint to add claims against P&T and P&T’s historical liability insurers. The Partnership is seeking to obtain a judgment against P&T and to enforce that judgment against any applicable insurance coverage available through P&T’s carriers. The litigation is currently pending in King County Superior Court.

Item 4.            MINE SAFETY DISCLOSURES

Not applicable.

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PART II

Item 5.            MARKET FOR REGISTRANT’S UNITS, RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Partnership’s equity securities are listed on NASDAQ and traded under the ticker symbol “POPE”. The following table sets forth the 2016 and 2017 quarterly ranges of low and high prices, respectively, for the Partnership’s units together with per unit distribution amounts by the period in which they were paid:
 
High
 
Low
 
Closing
 
Distributions
Year Ended December 31, 2016
 

 
 

 
 

 
 

First Quarter
$
68.77

 
$
51.50

 
$
60.48

 
$
0.70

Second Quarter
70.06

 
57.15

 
64.20

 
0.70

Third Quarter
68.95

 
62.66

 
66.00

 
0.70

Fourth Quarter
67.95

 
63.90

 
66.32

 
0.70

Year Ended December 31, 2017
 

 
 

 
 

 
 

First Quarter
$
75.72

 
$
64.95

 
$
70.76

 
$
0.70

Second Quarter
79.50

 
68.75

 
74.05

 
0.70

Third Quarter
76.00

 
68.36

 
70.33

 
0.70

Fourth Quarter
73.44

 
69.30

 
69.74

 
0.70


Distributions

The Partnership has no directors. Instead, the board of directors of its managing general partner, Pope MGP, Inc. (the Managing General Partner), serves in that capacity. References to the “Board” or words of similar construction in this report are to the board of the Managing General Partner, acting in its management capacity with respect to the Partnership. All cash distributions are at the discretion of the Board of Directors. During 2016 and 2017, the Partnership made four quarterly distributions of 70 cents per unit each, totaling $12.2 million in the aggregate for each year. In 2015, the Partnership made two quarterly distribution of 65 cents per unit and two of 70 cents per unit totaling $11.7 million in the aggregate.

Our Board of Directors increased our quarterly distribution by $0.05 per unit, or 8% in the third quarter of 2015. The Board, in its discretion, determines the amount of the quarterly distribution and regularly evaluates distribution levels. As such, the quarterly determination of distribution amounts, if any, will reflect the expectations of management and the Board for the Partnership’s liquidity needs.

 Unitholders

As of January 31, 2018, there were 4,362,568 outstanding units, held by 211 holders of record. Units outstanding include 39,761 units that are currently restricted from trading and that were granted to 22 holders of record who are either current or former employees or members of the Board of Directors. The trading restriction for these units is removed as the units vest. These restricted units vest over four years, either ratably or 50% on the third anniversary of the grant date and the remaining 50% upon reaching the fourth anniversary.

Equity Compensation Plan Information

The Partnership maintains the Pope Resources 2005 Unit Incentive Plan, which authorizes the granting of nonqualified equity compensation in order to provide incentives to align the interests of management with those of unitholders. Pursuant to the plan, the Partnership issues restricted unit grants that vest over four years. As of December 31, 2017, there were 39,214 unvested and outstanding restricted units and 873,522 limited partnership units remaining issuable under the plan. Additional information regarding equity compensation arrangements is set forth in Note 8 to Consolidated Financial Statements and Item 11 - Executive Compensation. Such information is incorporated herein by reference.
 

24



Performance Graph

The following graph shows a five-year comparison of cumulative total unitholder returns for the Partnership, the Standard and Poor’s 500 Index, the Standard and Poor’s Smallcap 600 Index, and the Long-Term Incentive Plan Peer Group for the five years ended December 31, 2017. The total unitholder return assumes $100 invested at the beginning of the period in the Partnership’s units, the Standard and Poor’s 500 Index, the Standard and Poor’s Smallcap 600 Index, and the current and prior Long-Term Incentive Plan Peer Groups. The graph assumes distributions are reinvested.
https://cdn.kscope.io/caba74c792b3c7f5990f14c6410bd78f-pope-201512_chartx54638a02.jpg
 
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
 
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.

 
12/31/12

12/31/13

12/31/14

12/31/15

12/31/16

12/31/17

Pope Resources
100.00

123.98

122.13

128.22

138.82

151.79

S&P 500
100.00

132.39

150.51

152.59

170.84

208.14

S&P Smallcap 600
100.00

141.31

149.45

146.50

185.40

209.94

Current Long-Term Incentive Plan Peer Group
100.00

106.46

115.66

100.45

113.67

134.40


Issuance of Unregistered Securities

The Partnership did not conduct any unregistered offering of its securities in 2015, 2016, or 2017.


25



Repurchase of Equity Securities

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period
(a) Total Number of Units Purchased
(b) Average Price Paid per Unit
(c) Total Number of Units Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Approximate Dollar Value of Units that May Yet Be Purchased Under the Plans or Programs
 
 
 
 
 
October 2017
2,790

$71.81
2,790

$351,000
November 2017
4,237

$71.52
4,237

$48,000
December 2017
2,159

$70.96
2,159

$1,109,000

(1) Units purchased pursuant to plan adopted under Rule 10b5-1 of the Securities Exchange Act of 1934 and announced publicly on May 30, 2017 and extended and expanded the plan on December 7, 2017. The plan allows for the repurchase of units with an aggregate value of up to $2.5 million through December 7, 2018.

Item 6.            SELECTED FINANCIAL DATA

The financial information set forth below for each of the indicated years is derived from the Partnership’s audited consolidated financial statements. This information should be read in conjunction with the audited consolidated financial statements and related notes included with this report.
(In thousands, except per unit data)
Year Ended December 31,
Statement of operations data
2017
 
2016
 
2015
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
 
Fee Timber
$
73,514

 
$
57,304

 
$
52,164

 
$
65,204

 
$
56,035

Timberland Investment Management
9

 
8

 

 

 

Real Estate
26,300

 
23,116

 
25,864

 
22,266

 
14,657

Total revenue
99,823

 
80,428

 
78,028

 
87,470

 
70,692

Operating income/(loss):
 

 
 

 
 

 
 

 
 

Fee Timber
34,381

 
16,926

 
12,961

 
44,289

 
16,168

Timberland Investment Management
(3,179
)
 
(2,620
)
 
(2,625
)
 
(2,329
)
 
(1,950
)
Real Estate (1)
4,592

 
(3,609
)
 
5,313

 
(2,720
)
 
3,276

General & Administrative
(5,742
)
 
(5,076
)
 
(4,972
)
 
(3,781
)
 
(4,562
)
Total operating income
30,052

 
5,621

 
10,677

 
35,459

 
12,932

Net income attributable to unitholders
$
17,891

 
$
5,942

 
$
10,943

 
$
12,415

 
$
13,135

Earnings per unit – basic and diluted
$
4.10

 
$
1.35

 
$
2.51

 
$
2.82

 
$
2.96

Distributions per unit
$
2.80

 
$
2.80

 
$
2.70

 
$
2.50

 
$
2.00

Balance sheet data
 

 
 

 
 

 
 

 
 

Total assets
$
380,673

 
$
399,050

 
$
370,056

 
$
344,826

 
$
310,908

Long-term debt - Partnership
70,160

 
73,142

 
27,405

 
32,506

 
32,475

Long-term debt - Funds
57,291

 
57,268

 
57,246

 
57,224

 
57,255

Partners’ capital
64,547

 
59,133

 
64,548

 
64,216

 
69,445

Noncontrolling interests
176,079

 
189,331

 
198,518

 
163,413

 
145,169

 
(1)  Real Estate operating results in 2016 and 2014 included $7.7 million and $10.0 million, respectively, of environmental remediation charges.

Management uses cash available for distributions (CAD), a non-GAAP measure, as a meaningful indicator of liquidity and, as such, has provided this information in addition to the generally accepted accounting principles-based presentation of

26



cash provided by operating activities. CAD is a measure of cash generated by the Partnership that starts with cash provided by operating activities and subtracts expenditures for maintenance capital expenditures and the noncontrolling interests portion of cash generated by the Funds. As such, CAD includes the Partnership’s share of cash generated by the Funds based on its ownership interest percentage in each fund. CAD represents cash generated that is available to fund capital allocation alternatives, such as distributions to unitholders, repurchasing units, paying down debt, co-investing in the Funds, or acquisition of timberland and real estate. This definition assumes the Funds distribute the cash they generate to their investors, including the Partnership. Because we control cash distributions from the Funds, we believe this assumption is appropriate. Management considers this metric in evaluating capital allocation alternatives described above. Management recognizes that there are varying methods of calculating CAD and has provided the information below to illustrate this particular metric’s calculation.
(In thousands)
Year Ended December 31,
Cash Available for Distribution (CAD):
2017
 
2016
 
2015
 
2014
 
2013
Cash provided by operations
$
31,980

 
$
5,146

 
$
20,170

 
$
30,795

 
$
17,949

Less: Maintenance capital expenditures (1)
(2,500
)
 
(1,973
)
 
(2,549
)
 
(2,335
)
 
(2,230
)
Less: Noncontrolling portion of Funds’ CAD (2)
(9,760
)
 
(2,346
)
 
(3,963
)
 
(7,481
)
 
(4,795
)
Cash available for distribution (CAD)
$
19,720

 
$
827

 
$
13,658

 
$
20,979

 
$
10,924

Other data
 

 
 

 
 

 
 

 
 

Timber acres owned/managed (thousands)
206

 
212

 
205

 
193

 
204

Fee timber harvested (MMBF) (3)
112

 
97

 
84

 
97

 
90

 
(1)
Capital expenditures from the consolidated statement of cash flows, excluding timberland acquisitions.
(2)
Share of Funds’ cash provided by operating activities, less maintenance capital expenditures, that are attributable to noncontrolling interests. That share is 80% in the case of Funds I and II, 95% in the case of Fund III, and 85% in the case of Fund IV.
(3)
Includes timber deed sales of 7.8 MMBF, 5.9 MMBF, 0.6 MMBF, 4.0 MMBF, and 2.0 MMBF in 2017, 2016, 2015, 2014, and 2013, respectively.

The following table presents Fee Timber revenue, operating income, and harvest volume on a look-through basis for each year in the three-year period ended December 31, 2017. This depiction reflects an adjustment to these GAAP financial items to reflect our proportionate ownership of each of the Funds, which for GAAP purposes are consolidated into our financial statements.
 
 
Revenue
 
 
 
 
 
 
 
 
(in millions)
Year ended
 
Log Sale
 
Other
 Revenue
 
Total Fee
Timber
 
Gain (loss) on Sale of Timberland
 
Operating
Income
 
Harvest
Volume
(MMBF)
 
Timber
Deed Sale
Volume 
(MMBF)
Partnership
 
$
37.1

 
$
2.6

 
$
39.7

 
$

 
$
18.8

 
54.9

 
0.8

Share of Funds
 
3.7

 
0.2

 
3.9

 
2.5

 
3.2

 
5.7

 
0.4

Look-through 2017
 
$
40.8

 
$
2.8

 
$
43.6

 
$
2.5

 
$
22.0

 
60.6

 
1.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
33.8

 
$
2.5

 
$
36.3

 
$
0.8

 
$
15.5

 
57.1

 
0.6

Share of Funds
 
2.6

 
0.1

 
2.7

 

 
0.4

 
4.8

 
0.3

Look-through 2016
 
$
36.4

 
$
2.6

 
$
39.0

 
$
0.8

 
$
15.9

 
61.9

 
0.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
26.2

 
$
2.7

 
$
28.9

 
$

 
$
11.7

 
42.6

 

Share of Funds
 
3.0

 
0.1

 
3.1

 
(0.1
)
 
0.3

 
5.6

 

Look-through 2015
 
$
29.2

 
$
2.8

 
$
32.0

 
$
(0.1
)
 
$
12.0

 
48.2

 



27



The following table presents log volume sold by species on a look-through basis for each year in the three-year period ended December 31, 2017, as follows:
Volume (in MMBF)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017

 
% Total

 
2016

 
% Total

 
2015

 
% Total

Sawlogs
Douglas-fir
 
40.7

 
67
%
 
38.1

 
62
%
 
28.7

 
60
%
 
Whitewood
 
7.2

 
12
%
 
8.2

 
13
%
 
5.1

 
11
%
 
Pine
 
0.2

 
%
 
0.2

 
%
 
0.2

 
%
 
Cedar
 
1.2

 
2
%
 
2.6

 
4
%
 
2.8

 
6
%
 
Hardwoods
 
1.7

 
3
%
 
2.3

 
4
%
 
2.6

 
5
%
Pulpwood
All Species
 
9.6

 
16
%
 
10.5

 
17
%
 
8.7

 
18
%
 
Total
 
60.6

 
100
%
 
61.9

 
100
%
 
48.1

 
100
%
 
The following table presents log price realized by species on a look-through basis for each year in the three-year periods ended December 31, 2017, as follows:
 
 
 
Fiscal Year
 
 
 
 
 
∆ from 2016 to 2017
 
 
 
∆ from 2015 to 2016
 
 
 
 
 
2017
 
$/MBF
 
%
 
2016
 
$/MBF
 
%
 
2015
Sawlogs
Douglas-fir
 
$
741

 
$
108

 
17
%
 
$
633

 
$
7


1
 %
 
$
626

 
Whitewood
 
639

 
132

 
26
%
 
507

 
53


12
 %
 
454

 
Pine
 
515

 
30

 
6
%
 
485

 
313


182
 %
 
172

 
Cedar
 
1,464

 
96

 
7
%
 
1,368

 
(68
)

(5
)%
 
1,436

 
Hardwood
 
669

 
74

 
12
%
 
595

 


 %
 
595

Pulpwood
All Species
 
315

 
16

 
5
%
 
299

 
(33
)

(10
)%
 
332

Overall
 
673

 
84

 
14
%
 
589

 
(8
)

(1
)%
 
597

 
Annual harvest volume and average price paid by destination on a look-through basis for each year in the three-year period ended December 31, 2017, was as follows:

 
2017
 
2016
 
2015
Destination
Volume
 
%
 
Price
 
Volume
 
%
 
Price
 
Volume
 
%
 
Price
Export brokers
13.1

 
21
%
 
$
752

 
12.0

 
19
%
 
$
630

 
12.4

 
26
%
 
$
638

Domestic mills
36.3

 
63
%
 
737

 
37.1

 
60
%
 
657

 
24.4

 
51
%
 
690

Hardwood
1.7

 
2
%
 
669

 
2.3

 
4
%
 
595

 
2.6

 
5
%
 
595

Pulpwood
9.5

 
14
%
 
315

 
10.5

 
17
%
 
299

 
8.7

 
18
%
 
332

Total
60.6

 
100
%
 
$
673

 
61.9

 
100
%
 
589

 
48.1

 
100
%
 
597

Timber deed sales
1.1

 
 

 
473

 
0.9

 
 

 
450

 

 
 

 

Total
61.7

 
 

 
 

 
62.8

 
 

 
 

 
48.1

 
 

 
 

The percentage of annual harvest volume by quarter on a look-through basis for each year in the three-year period ended December 31, 2017, was as follows:
Year ended
Q1
Q2
Q3
Q4
2017
27%
25%
21%
27%
2016
17%
21%
20%
42%
2015
33%
18%
21%
28%


28



Fee Timber cost of sales on a Look-through basis for each year in the three-year period ended December 31, 2017, is 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:
(in thousands)
 
Harvest,
Haul and
Tax
 
Depletion
 
Other
 
Total Fee
Timber
Cost of
Sales
 
Harvest
Volume
(MMBF)
 
Timber
Deed Sale
Volume
(MMBF)
Partnership tree farms
 
$
10,855

 
$
4,019

 
$

 
$
14,874

 
54.9

 
0.8

Share of Funds
 
1,407

 
1,246