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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, 2018
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, 2018, 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, 2019 was 4,365,903.

Documents incorporated by reference: None

Pope Resources, A Delaware Limited Partnership

Form 10-K

For the Fiscal Year Ended December 31, 2018

Index



Part I			Page

	Item 1.	Business	3
	Item 1A.	Risk Factors	18
	Item 1B.	Unresolved Staff Comments	23
	Item 2.	Properties	23
	Item 3.	Legal Proceedings	25
	Item 4.	Mine Safety Disclosures	25

Part II

	Item 5.	Market for Registrant's Units, Related Security Holder Matters and Issuer Purchases of Equity Securities	26
	Item 6.	Selected Financial Data	28
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
	Item 8.	Financial Statements and Supplementary Data	52
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	82
	Item 9A.	Controls and Procedures	82
	Item 9B.	Other Information	83

Part III

	Item 10.	Directors and Executive Officers of the Registrant	84
	Item 11.	Executive Compensation; Compensation Discussion & Analysis	87
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters	98
	Item 13.	Certain Relationships and Related Transactions and Director Independence	100
	Item 14.	Principal Accountant Fees and Services	100

Part IV

	Item 15.	Exhibits	101
		Signatures	105

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 management and the Board of Directors of our managing general partner 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 four primary business segments: (1) Partnership Timber, (2) Funds Timber, (3) Timberland Investment Management, and (4) Real Estate. Operations in our two timber segments consist of growing, managing, harvesting, and marketing timber from the Partnership’s 120,000 acres of direct timberland ownership in Washington (Partnership Timber) and our private equity timber funds’ 134,000 acres (as of December 31, 2018) of timberland in Washington, Oregon, and California that we co-own with our third-party investors (Funds Timber). 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 2,000 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. Recently, we have acquired and developed a couple 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 for over 165 years and served as the location for a lumber mill for most of that time.

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 website 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 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

Partnership Timber and Funds Timber

Background. The 120,000 timberland acres that we own under the Partnership Timber segment consist of the approximately 67,000-acre Hood Canal tree farm, located in western Washington, and the 53,000-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, added over 8,000 acres to this tree farm in 2016, and over 1,000 acres in each of 2017 and 2018.

The Funds Timber segment includes the operations and management of ORM Timber Fund II (Fund II), ORM Timber Fund III (Fund III), and ORM Timber Fund IV (Fund IV), which are consolidated into Pope Resources’ financial

statements. Fund IV was launched in December 2016 and acquired its first two timberland properties in January 2018, and another in October 2018, totaling 46,000 acres in Washington and Oregon. In January 2019, Fund IV closed on the acquisition of a 7,100-acre property in western Washington. 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, 2018, consist of 134,000 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 II total	31
Fund III	Q4 2012	Northern California	19
	Q4 2013	Southwestern Washington	10
	Q4 2014	Northwestern Oregon	13
	Q4 2015	Southern Puget Sound Washington	15
		Fund III total	57
Fund IV	Q1 2018	Southwestern Oregon	20
	Q1 2018	Southern Puget Sound Washington	17
	Q4 2018	Southern Puget Sound Washington	9
		Fund IV total	46
		Funds total	134

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. Fund IV acquired its first timberland property in January 2018 and, as such, the information presented in the following tables for 2017 include only Fund II and Fund III.

Operations. As indicated above, operations in these two segments consist primarily of growing, managing, harvesting, and marketing timber from multiple tree farms owned by the Partnership and our private equity timber funds. These segments generated the following percentage of our consolidated revenue for the years ended December 31, 2018, 2017, and 2016:



	2018	2017	2016

Partnership Timber	44%	38%	45%
Funds Timber	48%	33%	26%

Delivered log sales to domestic manufacturers and export brokers represent the overwhelming majority of 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, sales of other minor forest products, 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) using long-log Scribner scale rules common to western Washington and western Oregon. In the discussion below, we present merchantable volume, productive acres, and projected harvest level data for the Partnership’s and the Funds’ tree farms on a stand-alone and Look-through basis. On our Washington and Oregon tree farms, which we manage on an even-aged 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 an uneven-aged harvest regime 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+ inches”.



Partnership Timber merchantable available volume (in MMBF) as of December 31:
	2018			2017
Merch Class	Sawtimber	Pulpwood	Total	Total
35 to 39 yrs.	292	15	307	271
40 to 44 yrs.	93	4	97	70
45 to 49 yrs.	14	1	15	19
50 to 54 yrs.	9	—	9	9
55 to 59 yrs.	5	—	5	5
60 to 64 yrs.	1	—	1	1
65+ yrs.	22	1	23	25
	436	21	457	400



Funds Timber merchantable available volume (in MMBF) as of December 31:
	2018			2017
Merch Class	Sawtimber	Pulpwood	Total	Total
35 to 39 yrs.	109	3	112	69
40 to 44 yrs.	74	1	75	81
45 to 49 yrs.	90	1	91	75
50 to 54 yrs.	55	1	56	49
55 to 59 yrs.	43	—	43	23
60 to 64 yrs.	38	—	38	15
65+ yrs.	86	1	87	17
16+ inches	161		161	161
	656	7	663	490



Look-through merchantable available volume (in MMBF) as of December 31:
	2018 Volume			2017 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.	307	14	321	271	8	279
40 to 44 yrs.	97	11	108	70	11	81
45 to 49 yrs.	15	14	29	19	12	31
50 to 54 yrs.	9	9	18	9	7	16
55 to 59 yrs.	5	7	12	5	4	9
60 to 64 yrs.	1	6	7	1	2	3
65+ yrs.	23	12	35	25	2	27
16+ inches	—	8	8	—	8	8
	457	81	538	400	54	454

Merchantable volume estimates are updated quarterly. Changes in merchantable volume estimates 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”; a quarterly analysis used to monitor the accuracy of our inventory process. Over the last five years, our overall inventory

variances from the cutout analysis have been up to approximately 8% in any one year, but have averaged less than 5% 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 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 several other minor softwood conifer timber species, including the true firs. These secondary species are referred to generically as “whitewoods”. Western red cedar is another softwood conifer species found on the Partnership’s tree farms. Western red cedar 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. The most significant contributor to the Funds’ whitewood volume is from white fir on Fund III’s tree farm in northern California. Given 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. White fir is a member of the whitewood species group and is used primarily for lumber and core layers in plywood.



Partnership Timber merchantable available volume as of December 31:

	2018			2017
Species	MMBF	% of Total		MMBF	% of Total
Douglas-fir	360	79	%	307	77	%
Western hemlock	33	7	%	32	8	%
Western red cedar	10	2	%	10	3	%
Other conifer	21	5	%	21	5	%
Red alder	28	6	%	25	6	%
Other hardwood	5	1	%	5	1	%
Total	457	100	%	400	100	%



Funds Timber merchantable available volume as of December 31:

	2018			2017
Species	MMBF	% of Total		MMBF	% of Total
Douglas-fir	327	50	%	192	39	%
Western hemlock	105	16	%	103	21	%
Western red cedar	15	2	%	12	2	%
Pine	59	9	%	47	10	%
Other conifer	139	21	%	122	25	%
Red alder	15	2	%	13	3	%
Other hardwood	3	—	%	1	—	%
Total	663	100	%	490	100	%



Look-through merchantable available volume (in MMBF) as of December 31, 2018:

	Partnership		Look-
	100%	Share of	through
Species	Owned	Funds	Total	% of total
Douglas-fir	360	47	407	75	%
Western hemlock	33	15	48	9	%
Western red cedar	10	2	12	2	%
Pine	—	4	4	1	%
Other conifer	21	11	32	6	%
Red alder	28	2	30	6	%
Other hardwood	5	—	5	1	%
Total	457	81	538	100	%



Look-through merchantable available volume (in MMBF) as of December 31, 2017:

	Partnership		Look-
	100%	Share of	through
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	%

The Partnership’s tree farms as of December 31, 2018, consist of 103,100 available acres, representing 83% of total acres, that are designated as available acres, meaning land that will grow timber where harvesting that timber is not constrained by physical, environmental, or regulatory restrictions. The Funds’ tree farms as of December 31, 2018, totaled 114,500 available acres, representing 86% of total acres. On a Look-through basis, this results in 116,600 available acres, of which over 23% contain merchantable timber. In addition, another 25% 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 because of the historic uneven-aged management 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”.

Productive acres are spread by timber age-class as follows as of December 31, 2018 and 2017:



	Productive acres (in thousands)
	Partnership Timber						Funds Timber
Age	2018			2017			2018			2017
Class	Acres	% of Total		Acres	% of Total		Acres	% of Total		Acres	% of Total
Clear-cut	2.9	3	%	3.5	3	%	3.9	3	%	2.2	3	%
0 to 4	8.6	8	%	8.4	8	%	8.4	7	%	5.5	7	%
5 to 9	9.2	9	%	8.3	8	%	8.7	8	%	5.5	7	%
10 to 14	10.3	10	%	11.0	11	%	12.3	11	%	6.8	9	%
15 to 19	10.5	10	%	11.3	11	%	10.0	9	%	6.0	8	%
20 to 24	12.7	12	%	10.4	10	%	7.9	7	%	4.2	6	%
25 to 29	10.3	10	%	12.2	12	%	7.5	7	%	6.3	8	%
30 to 34	16.5	16	%	17.3	17	%	8.0	7	%	6.2	8	%
35 to 39	15.3	15	%	13.8	13	%	6.4	6	%	3.8	5	%
40 to 44	4.6	4	%	3.6	4	%	3.6	3	%	3.5	5	%
45 to 49	0.7	1	%	0.9	1	%	4.4	4	%	3.2	4	%
50 to 54	0.5	—	%	0.4	—	%	2.9	3	%	1.9	3	%
55 to 59	0.2	—	%	0.2	—	%	2.1	2	%	0.7	1	%
60 to 64	0.1	—	%	0.1	—	%	2.6	2	%	0.5	1	%
65+	0.7	1	%	0.9	1	%	7.1	6	%	0.5	1	%
California	—	—	%	—	—	%	18.7	16	%	18.7	25	%
	103.1			102.3			114.5			75.5

Look-through productive acres are spread by timber age-class as follows:



	12/31/2018 Look-through Productive Acres (in thousands)					12/31/2017 Look-through Productive Acres (in thousands)
Age	100%	Share of	Look-	% of Total		100%	Share of	Look-
Class	Owned	Funds	Through	% of Total		Owned	Funds	Through	% of Total
Clear-cut	2.9	0.5	3.4	3	%	3.5	0.3	3.8	3	%
0 to 4	8.6	1.2	9.8	8	%	8.4	0.8	9.2	8	%
5 to 9	9.2	1.1	10.3	9	%	8.3	0.6	8.9	8	%
10 to 14	10.3	1.4	11.7	10	%	11.0	0.6	11.6	11	%
15 to 19	10.5	1.2	11.7	10	%	11.3	0.5	11.8	11	%
20 to 24	12.7	0.8	13.5	12	%	10.4	0.3	10.7	10	%
25 to 29	10.3	1.1	11.4	10	%	12.2	0.9	13.1	12	%
30 to 34	16.5	0.9	17.4	15	%	17.3	0.7	18.0	16	%
35 to 39	15.3	0.8	16.1	14	%	13.8	0.5	14.3	13	%
40 to 44	4.6	0.6	5.2	4	%	3.6	0.5	4.1	4	%
45 to 49	0.7	0.7	1.4	1	%	0.9	0.5	1.4	1	%
50 to 54	0.5	0.5	1.0	1	%	0.4	0.3	0.7	1	%
55 to 59	0.2	0.4	0.6	1	%	0.2	0.1	0.3	—	%
60 to 64	0.1	0.4	0.5	—	%	0.1	—	0.1	—	%
65+	0.7	1.0	1.7	1	%	0.9	—	0.9	1	%
California	—	0.9	0.9	1	%	—	0.9	0.9	1	%
	103.1	13.5	116.6			102.3	7.5	109.8

Site Index. The site index for a given acre of timberland is a measure of the soil’s potential to grow timber in a given location. In our Washington and Oregon operating regions, site index is 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 measurements are grouped into five site classes and are an

important input into models used for projecting harvest levels on all tree farms. The following table presents site class information for the Partnership and the Funds, and on a Look-through basis.



	Partnership Timber			Funds Timber			Share of Funds			Look-through
Site Class	Net Acres	% of total		Net Acres	% of total		Net Acres	% of total		Net Acres	% of total
I (135+ feet)	12,651	12.3	%	8,388	7.3	%	801	5.9	%	13,452	11.5	%
II (115-134 feet)	47,305	45.9	%	49,349	43.1	%	6,186	45.7	%	53,491	45.9	%
III (95-114 feet)	34,319	33.3	%	23,393	20.4	%	2,801	20.7	%	37,120	31.8	%
IV (75-94 feet)	7,719	7.5	%	25,914	22.6	%	2,711	20.0	%	10,430	8.9	%
V (<=74 feet)	1,075	1.0	%	7,494	6.5	%	1,038	7.7	%	2,113	1.8	%
Total	103,069	100.0	%	114,538	100.0	%	13,537	100.0	%	116,606	100.0	%

Acre-weighted average site index	116	feet		109	feet		109	feet		116	feet

Long-term Harvest Planning. Long-term harvest plans for the Partnership’s and the Funds’ tree farms are based on 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 of 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. Over multi-year time frames, however, annual harvest volumes will average out to the sustainable harvest levels developed in our long-term harvest plan. In addition, we strategically harvest timber on our Real Estate properties. The Real Estate volume and productive acres, while included in the above merchantable volume tables, are 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.

The harvest levels for the Funds’ tree farms are developed to maximize the total return during the investment period of each fund 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.

We periodically review the sustainable harvest level for the Partnership and the Funds. In the latter part of 2018, we completed the most recent review of the Partnership’s sustainable harvest level. With the addition of small-tract acquisitions over the past few years, continued improvements in our inventory data and growth-and-yield modeling, and recent investments in silviculture, we increased the Partnership’s annual sustainable harvest level to 57 MMBF, a 10% increase from the prior 52 MMBF level. This change is effective for our 2019 harvest. Assuming full operations on the Funds’ existing tree farms, at December 31, 2018, the long-term planned average annual harvest volume for the Partnership and Fund tree farms (and on a Look-through basis) is presented in the table below:




		Look-through
(amounts in MMBF)	Planned annual harvest volume	planned annual harvest volume
Partnership tree farms	57	57
Fund tree farms	93	12
Total	150	69

Marketing and Markets. The following discussion applies to the Combined tree farms. We sell logs to lumber, plywood, and chip producers and to log export brokers. To do so, we engage independent logging contractors to harvest the standing timber, manufacture that timber into logs, and deliver the logs 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’s log yard.

Domestic mills buy the majority of our sawlog volume. These 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 and the repair and remodel market, which in turn drives domestic demand for logs. Additional domestic demand for our logs comes from

producers of utility poles and cedar fencing. 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, tariffs, 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 a strengthening 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 (PNW) 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 export market for PNW sawlogs in Asia. Notwithstanding recent tariffs, and threats of additional tariffs, imposed on U.S. logs exported to China, 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.

Customers. Logs from the Combined tree farms are sold to customers in both the domestic and export markets. Domestic customers include lumber and plywood mills and other wood fiber processors located throughout western Washington, 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 port of 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.

The ultimate decision on where to sell logs is based on the net proceeds we receive after considering 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 both the proximity of the harvest location to customers and 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 competition from foreign-produced logs and lumber as well as a variety of non-wood building products.

Forestry, Silviculture, and Stewardship Practices. Silviculture activities on the Combined tree farms include reforestation, control of competing brush in young stands, and density management (thinning) of forests 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. We manage our forests to create a species mix and log top-end diameters of a size and quality that we predict will satisfy what domestic mills and export markets will desire in future years. During 2018, we planted 1.8 million seedlings on 5,500 acres of the Combined tree farms compared to 1.9 million seedlings on 6,300 acres in 2017 and 1.7 million seedlings on 6,600 acres in 2016. Seedlings are generally planted from December to April to restock stands that were harvested during the preceding twelve months. The number of seedlings planted varies from year to year based upon harvest level, the timing of harvest, seedling availability, and weather and soil conditions that control the timing of reforestation. 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.

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. 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 specific controls to avoid potential impact to the environment.

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.

Timberland Investment Management (TIM)

Background. Our TIM segment provides timberland investment management services for third-parties, for which it 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 private equity timber 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, 2018, we manage 134,000 acres of timberland in Washington, Oregon, and California with combined appraised values of $526 million. Following the January 2019 acquisition by Fund IV, we manage over 141,000 acres with combined appraised values of $547 million.

The following table summarizes the committed and called capital for the TIM segment on a cumulative basis since its inception, as well as distributions received by the Partnership, as of December 31, 2018 as well as January 31, 2019, which incorporates the recent timberland acquisition 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		14.4		20%
Fund III	180.0		179.7		9.0		9.0		1.3		5%
Fund IV	388.0		146.9		58.0		22.0		0.4		15%
Total, December 31, 2018	714.2		468.5		96.3		59.4		31.2
January 2019 Fund IV acquisition	—		20.3		—		3.0		—
	$	714.2	$	488.8	$	96.3	$	62.4	$	31.2

* Fund I assets were sold in 2014 and the fund was wound up 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 $221 million of Fund IV committed capital, after the January 2019 timberland acquisition, 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, 2016 through 2018, as fee revenue is eliminated in consolidation. On an internal reporting basis, before these eliminations, the TIM segment represented 4%, 3%, and 4% of total revenue for the years ended December 31, 2018, 2017, and 2016, respectively.

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 a wider geography and more frequent acquisitions than we could by investing Partnership capital alone. 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 exceeds 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 Funds Timber segment. The elimination of the fee revenue and corresponding operating expenses reduces the reported cost per acre of operating Fund tree farms under our Fee Timber segment. These eliminations make the Funds Timber results appear stronger and the TIM results appear correspondingly weaker.

Marketing. When raising capital for a new Fund, we market opportunities to investors that desire to invest alongside the Partnership in Pacific Northwest (PNW) timberland assets. Our Funds fill a niche among timberland investment management organizations due to our PNW regional specialization, degree of co-investment, 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. Investors in the Funds are primarily large institutional investors, including pension funds, insurance companies, and endowments.

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 with 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 choose among four primary alternatives to generate value from 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 regularly evaluate our timberland for its best economic use. We currently have a 2,000-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 selling, 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 periods during 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 8%, 26%, and 29% of consolidated revenue in 2018, 2017, and 2016, respectively. Real Estate operations focus on maximizing the value of the 2,000-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 also 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 Partnership Timber properties and preclude future development but allow continued harvest 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.

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. Depending on each property’s size, development complexity, and regulatory environment, a project may be 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, 2018, 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, 2018, the final 65 single-family lots on over 21 acres are nearing completion and are under contract for $12 million. The last 18 acres in the master plan was entitled for a grocery-anchored shopping center in late summer 2018 and was part of a joint venture with another developer. The project is currently on hold as a result of construction cost increases and a proposed doubling of traffic impact fees by the City of Gig Harbor. A smaller project is currently being evaluated for the site.

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 may be sold on a bulk-sale basis to a developer interested in taking the project forward, or development may take place under a joint venture with a developer or using third-party capital, with the Partnership seeking to limit its own capital in this development. 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. On September 6, 2018, we submitted the master plan for the 113-acre townsite and adjoining 205-acre agrarian district to Kitsap County for review. 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. The proposal also 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 ownership of the millsite and surrounding areas, 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 divided into three or more smaller projects. Like Port Gamble, we may sell Arborwood on a bulk-sale basis to a developer interested in taking the project forward, or we may develop it under a joint venture with a developer or using third-party capital. An amendment to the preliminary plat was submitted in late 2018. We plan to prepare engineering and construction drawings for the first phase of lot development in 2019, with the goal of starting construction in 2020.

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 and four lots have been sold to date. In 2013, we obtained a comprehensive plan designation change from industrial to residential for the 35-acre Phase II portion of this property. In 2014, Phase II was rezoned to single-family residential. In 2018, we sold this phase to a commercial developer.

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. As of December 31, 2018, 13 lots have been sold.

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 saleable properties totaling 962 acres for which rural residential development represents a higher and better use compared to continued management 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, and extending dry utilities. 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 warranted by market conditions.

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 in a multi-phase conservation project that includes both fee and conservation easement (CE) sales of the Partnership’s timberland in the area. Funding for conservation sales are made available primarily through the Washington Wildlife and Recreation Program. In tandem with this project, we worked with Skamania County to rezone 7,899 acres of our holdings in that county. In 2018, we completed a CE sale on that property.

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 the remaining portion of the first floor to two separate tenants.

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 of Port Gamble Bay, some of which were under a lease from the Washington State Department of Natural Resources (DNR) that lasted from 1974 to 2004. P&T’s operations resulted in the release of hazardous substances that impacted the upland and submerged portions of the site. These substances include various hydrocarbons, cadmium, and toxins associated with wood waste and the production of wood products.

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.

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 cleanup 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, leaving the Partnership as the only remaining PLP. Because environmental liabilities are joint and several as between PLPs, the result of P&T’s bankruptcy was to leave the liability with the Partnership as the only remaining solvent PLP. At that time, we increased our accrual for remediation liabilities by $1.9 million to reflect the resulting increase in risk.

In-water cleanup

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.

Millsite cleanup

With the in-water portion of the cleanup completed, there will be 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 performed a remedial investigation and feasibility study (RI/FS) which it submitted to DOE for review in January 2019. Following the finalization 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.

Natural Resource Damages (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 NRD 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 that the Trustees allege.

We accrued an additional $5.6 million in 2018 as a result of updates to our estimates of costs associated with the cleanup of the millsite and estimated NRD costs. It is reasonably possible that these components of the liability may increase as the project progresses. With the in-water cleanup completed, which was by the far the most significant component of the project, and the 2018 adjustments, however, we expect that any future adjustments to the liability should be less significant than they have been historically.

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 2016 to 2018 were focused primarily on our Harbor Hill development and conservation land and easement sales. During this period, we also 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.

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. A new passenger ferry with 40-minute travel time from Kingston to downtown Seattle started in late 2018 and should have positive impacts on the desirability of the company’s holdings in North Kitsap County.

Employees

As of December 31, 2018, we employed 62 full-time employees and 3 part-time or seasonal personnel, who are distributed among the segments as follows:



Segment	Full-Time	Part-Time/ Seasonal	Total
Partnership Timber	22	1	23
Timberland Investment Management (TIM)	11	—	11
Real Estate	14	2	16
General & Administrative	15	—	15
Totals	62	3	65

Our Funds Timber segment does not have employees. Rather, this segment is served by employees from the TIM and Partnership Timber segments. 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 that govern forest practices and land use. These laws and regulations can directly and indirectly affect our Partnership Timber, Funds 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. Our Partnership Timber, Funds Timber, and TIM segments 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 timberland has developed “best management practices” (BMP) to reduce the effects of forest practices on water quality and plant and animal habitat. Collectively, these laws and regulations affect our harvest and forest management activities. At times, regulatory agencies and citizens’ and environmental groups seek to expand regulations 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 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 monitor environmental conditions to determine whether existing forest practice rules are effective at protecting threatened and endangered wildlife. 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 (CWA), 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 to meet state water quality standards related to maintaining temperature or reducing or eliminating turbidity. 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 restrict the use of herbicides. Herbicides are used to promote reforestation and to optimize the growth of regenerated stands of trees. FIFRA 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 limits to the use of 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 rules may require significant environmental studies and permitting requirements prior to the issuance of harvest permits. All three states periodically update their regulations and permitting processes. Changes could cause us to incur expenses, and new permitting regulations commonly require us to increase the level of 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 gases emitted by certain stationary sources as well as transportation sources. This may impact forest landowners through increased costs of energy to our manufacturing customers and logging contractors. Washington state voters rejected a carbon tax initiative in 2018. The Oregon legislature is considering a cap and trade program in the 2019 session.

The effects of these laws and initiatives cannot readily be quantified or predicted. However, 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.

Item 1A. RISK FACTORS

Risks Related to Our Industry and Our Markets

Our Partnership Timber and Funds Timber segments are sensitive to demand and price issues relating to our sales of logs in both domestic and foreign markets. We generate timber revenue in these segments 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. The U.S. housing market has been in recovery for several years, but to the extent this recovery should stall, such a turn of events could have a negative impact on our operating results. For example, interest rates have increased recently and are widely expected to rise in the coming periods. Should this occur, it could have a negative impact on the U.S. housing market. 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., Canada, and China. 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. The U.S. and China have both recently announced tariffs on a number of products, including timber exported from the U.S. to China, which has resulted in an element of uncertainty in the trade relationship between the U.S. and China. We cannot predict the ultimate outcome of these trade issues, or the impact on log prices.

Our Partnership Timber, Funds Timber, and Timberland Investment Management (TIM) segments are highly dependent upon sales of commodity products. Revenue from our forestry operations is 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 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/D and ADD 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.

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 Timber segments 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 Timber segments’ revenue, income, or cash flow and, as those segments have traditionally represented our largest business units, 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. Further, this consolidation increases our sensitivity to fluctuations in building demand, and especially residential construction, in the Pacific Northwest. As a result, factors such as a slowdown in home building in the Puget Sound region can have a disproportionate impact on our Timber results.

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. These and other activists also have proposed, and can be expected to continue proposing, bans on herbicides and various methods of applying herbicides, and attempt to inhibit 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 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. Our Partnership Timber, Funds 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 Partnership Timber, Funds 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, earnings, cash flow, and the value of our assets.

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. (P&T). 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 provided for the cleanup and monitoring of Port Gamble Bay. Together, these documents outline the terms under which the Partnership conducted environmental remediation and will perform monitoring of Port Gamble Bay. In February 2018, the Partnership and DOE entered into an agreed order with respect to the millsite under which the Partnership has performed a remedial investigation and feasibility study and will develop a new CAP. As with the in-water portion of the project, this new CAP will define the scope of the remediation activity for the millsite and be codified in a new CD.

We are pursuing contribution of costs under P&T’s insurance policies, though there can be no assurance that we will prevail in this matter. The recorded liability does not reflect any contribution by 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.

Management continues to monitor the Port Gamble cleanup processes closely. The $9.1 million remediation accrual as of December 31, 2018, represents our current estimate of the remaining cleanup cost and most likely outcome to various contingencies, though it is reasonably possible that the millsite cleanup and NRD components 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. The filing of the CDs

limits our legal exposure for matters covered by the decree, but does not eliminate it entirely. DOE reserves the right to reopen the CDs if new information regarding factors previously unknown to the agency requires further remedial action. While unlikely, a reopening of the CDs 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 $94.5 million at December 31, 2018, of which $26.4 million bears interest at variable rates, with the remaining balance at fixed rates. The Funds’ total debt outstanding was $57.4 million at December 31, 2018, all of which bears interest at fixed rates. This debt, particularly that portion that carries variable interest rates, exposes us to certain additional risks, including higher interest expense as interest rates have increased recently and may continue to increase 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 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.

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 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 Timber segments 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. While we carry fire insurance on approximately 27% of our Combined timberland acres, we do not otherwise maintain insurance against loss of standing timber on our timberlands due to natural disasters.

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, or harvest constraints, 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.

We have incurred, and may continue to incur, expenses relating to a recently announced activism campaign from one of our unitholders. On June 18, 2018, James H. Dahl and an individual related to him filed a report on Securities Exchange Act Schedule 13D, purporting to be assignees of more than 5% of our outstanding limited partner units. The filing persons contend in their Schedule 13D that the Partnership is “materially undervalued in the marketplace” by virtue of its governance structure. The filing persons expressed a belief that the Partnership should restructure its operations or explore a “strategic transaction,” and contended that management and the General Partner are “entrenched.” Further, the filing persons’ Schedule 13D also suggested that other unitholders contact management to offer their views about the Partnership’s strategic direction. To date, certain unitholders have communicated their thoughts to the board and management and during the latter half of 2018 our managing general partner and our Board of Directors conducted an extensive review of our operating and capital structure and aspects of our business that relates to those matters. In the course of this review, as we have done consistently in the past we also engaged proactively with a number of longstanding unitholders. The outcome of this review is discussed in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” in Part II of this report. The Board expects to continue monitoring these factors and will continue its longstanding practice of engaging with investors and considering the input those investors provide.

Activism campaigns against public companies have become increasingly commonplace in recent years, and may impose material adverse impacts upon targeted companies and their security holders. In the case of Pope Resources, the announcement of the recent activism initiative has had, and may in the future have, one or more of the following effects:


•	Increasing professional fees and costs and other general and administrative expenses.


•	Distracting management and the board from the Partnership’s day-to-day operations.


•	Creating uncertainty among key employees, which in turn may increase the risk of either losing one or more such employees, or the Partnership’s cost of retaining them.


•	Increasing the volatility in the trading price and trading volume of the Partnership’s units.

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. has 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. Limited partners may remove the managing general partner only in limited circumstances, including, among other things, a vote by the limited partners holding two-thirds 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, or by limited partners holding ninety percent (90%) of all units outstanding (excluding, in each case, limited partner units held by the general partner whose removal is sought). By virtue of the terms of our amended and restated agreement of limited partnership, as amended, or “partnership agreement”, our managing general partner directly, and the general partner shareholders indirectly, have substantial ability to control or exercise substantial influence over the following: transactions that would result in a change of control of the Partnership; preventing or causing the sale of the assets of the Partnership; admitting assignees and unitholders as limited partners; and causing the Partnership to take or refrain from taking certain other actions that might be perceived 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 security. 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.

Our limited partner units trade at a discount to their net asset value (NAV), and unitholders may be unable to realize that NAV in the near or long term. As we have commonly disclosed in our investor materials, we believe the underlying NAV of our units is significantly higher than the trading price of our units on the Nasdaq Global Select Market. While NAV is a difficult concept to establish with any degree of precision, our recent timberland purchases and our knowledge of timberland markets in our operating region suggest that the value of our timberlands, net of debt, would be higher than our recent unit trading prices imply.

Discounts to NAV are common among publicly traded limited partnerships, and we do not expect that we can fully eliminate this discount. Our general partner believes that this characteristic is largely associated with our status as a master limited partnership, which conveys substantial tax, operating, and governance benefits. Accordingly, unitholders should expect that our units continue to trade at a discount to NAV for the foreseeable future, and there can be no assurance that this discount will be reduced, or even that it will not grow more significant.

We benefit from certain tax treatment accorded to master limited partnerships, and if that status changes the holders of our units may realize less advantageous tax consequences. The Partnership is a Master Limited Partnership and is therefore not generally subject to U.S. federal income taxes. If a change in tax law (or interpretation of current tax law) caused the Partnership to become subject to income taxes, operating results would be adversely affected. We also have a handful of taxable subsidiaries. The estimation of income tax expense and preparation of income tax returns requires complex calculations and judgments. We believe the estimates and calculations used in this process are proper and reasonable and more likely than not would be sustained under examination by federal or state tax authorities; however, if a federal or state taxing authority disagreed with the positions we have taken, a material change in provision for income taxes, net income, or cash flows could result.

Item 1B. UNRESOLVED SECURITIES AND EXCHANGE COMMISSION COMMENTS

None

Item 2. PROPERTIES

The following table reconciles acreage owned as of December 31, 2018, to acreage owned as of December 31, 2017. 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	2017	Acquisitions	Sales		Transfer	2018
Hood Canal tree farm (1)	67.0	—	—		—	67.0
Columbia tree farm (1)	51.5	1.4	—		—	52.9
Partnership Timberland acres	118.5	1.4	—		—	119.9
Fund II tree farms (2)	30.8	—	—		—	30.8
Fund III tree farms (2)	56.7	—	—		—	56.7
Fund IV tree farms (3)	—	46.2	—		—	46.2
Funds Timberland acres	87.5	46.2	—		—	133.7
Partnership share of Funds	9.0	6.9	—		—	15.9
Total Real Estate acres (see detail below)	2.1	—	(0.1	)	—	2.0
Combined Look-through total acres (3)	129.6	8.3	(0.1	)	—	137.8


(1)	A subset of this property is used as collateral for the Partnership’s long-term debt, which does not include 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. The Partnership holds a 20% interest in Fund II and a 5% interest in Fund III.


(3)	Fund IV’s tree farms are located in southwestern Oregon and southern Puget Sound, Washington. In January 2019, Fund IV acquired nearly 7,100 acres of timberland in western Washington. The Partnership holds a 15% ownership interest in Fund IV.



	Real Estate Acres Detail						Basis
Project Location	2017	Acquisitions	Sales		Transfers	2018	(in thousands)
Bremerton	46		(38	)		8	$	1,487
Gig Harbor	40					40	11,847
Hansville	78		(12	)		66	445
Kingston - Arborwood	374					374	2,422
Port Gamble town and mill sites	113					113	5,370
Port Gamble Agrarian District	205					205	1,758
Port Ludlow	256					256	726
Poulsbo	2					2	491
Bainbridge Island	1					1	353
Other Rural Residential	984		(22	)		962	1,689
Total	2,099	—	(72	)	—	2,027	$	26,588

The following table provides dwelling unit (DU) per acre zoning for the Partnership’s development properties as of December 31, 2018, and land sold during 2018. 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, 2018		2018 Sales from RE Portfolio
Zoning Designation	Acres	Acres	$/Acre		Total Sales (in thousands)
Urban zoning - residential	386	36	$	52,361	$	1,885
Historic Rural Town	114
Commercial/retail	20
Business park/industrial	8	2	200,000		400
1 DU per 5 acres	378	8	10,000		80
1 DU per 10 acres	33
1 DU per 20 acres	547	26	14,077		366
1 DU per 40 acres	38
1 DU per 80 acres	298
Agrarian District	205
Total	2,027	72	$	37,931	$	2,731

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.

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.

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”.

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 2018, The partnership made two quarterly distributions of 70 cents per unit each, one distribution of 80 cents per unit, and one distribution of $1.00 per unit, totaling $13.9 million in the aggregate. 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.

Our Board of Directors increased our quarterly distribution by $0.10 per unit, or 14% in the third quarter of 2018 and by $0.20 per unit, or 25%, in the fourth quarter of 2018. 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, 2019, there were 4,365,903 outstanding units, held by 210 holders of record. Units outstanding include 39,318 units that are currently restricted from trading and that were granted to 24 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, 2018, there were 39,202 unvested and outstanding restricted units and 858,267 limited partnership units remaining issuable under the plan. Additional information regarding equity compensation arrangements is set forth in Note 10 to Consolidated Financial Statements and Item 11 - Executive Compensation. Such information is incorporated herein by reference.

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 both the current and prior Long-Term Incentive Plan Peer Groups for the five years ended December 31, 2018. 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/957b8e812c466ef64084070e1b6dd664-chart-5541f5c8c462516ca1a.jpg



	*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
	Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved.



	12/31/13	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18
Pope Resources	100.00	98.51	103.42	111.97	122.44	120.23
S&P 500	100.00	113.69	115.26	129.05	157.22	150.33
S&P Smallcap 600	100.00	105.76	103.67	131.20	148.56	135.96
Prior Long-Term Incentive Plan Peer Group	100.00	108.86	94.33	106.54	128.24	92.16
Current Long-Term Incentive Plan Peer Group	100.00	109.71	95.37	107.59	128.88	92.88

Issuance of Unregistered Securities

The Partnership did not conduct any unregistered offering of its securities in 2016, 2017, or 2018.

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 2018	1,601	$73.27	1,601	$109,000
November 2018	1,519	$70.89	1,519	$1,000

(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 allowed for the repurchase of units with an aggregate value of up to $2.5 million through December 7, 2018. The plan was not extended.

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	2018			2017			2016			2015			2014
Revenue:
Partnership Timber	$	45,422		$	39,672		$	36,275		$	28,914		$	33,848
Funds Timber	49,819			33,842			21,029			23,250			31,356
Timberland Investment Management	9			9			8			—			—
Real Estate	8,304			26,300			23,116			25,864			22,266
Total revenue	$	103,554		$	99,823		$	80,428		$	78,028		$	87,470
Operating income/(loss):
Partnership Timber	21,326			19,127			15,726			12,012			14,961
Funds Timber	8,415			15,586			1,403			1,289			29,939
Timberland Investment Management	(4,486		)	(3,511		)	(2,823		)	(2,965		)	(2,940		)
Real Estate (1)	(5,402		)	4,592			(3,609		)	5,313			(2,720		)
General & Administrative	(7,217		)	(5,742		)	(5,076		)	(4,972		)	(3,781		)
Total operating income	$	12,636		$	30,052		$	5,621		$	10,677		$	35,459
Net income attributable to unitholders	$	6,821		$	17,891		$	5,942		$	10,943		$	12,415
Earnings per unit – basic and diluted	$	1.54		$	4.10		$	1.35		$	2.51		$	2.82
Distributions per unit	$	3.20		$	2.80		$	2.80		$	2.70		$	2.50
Balance sheet data
Total assets	$	508,249		$	380,673		$	399,050		$	370,056		$	344,826
Total long-term debt - Partnership	94,056			70,160			73,142			27,405			32,506
Total long-term debt - Funds	57,313			57,291			57,268			57,246			57,224
Partners’ capital	57,477			64,547			59,133			64,548			64,216
Noncontrolling interests	281,123			176,079			189,331			198,518			163,413

(1) Real Estate operating results in 2018, 2016 and 2014 included $5.6 million, $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 cash provided by operating activities. CAD is a measure of cash generated by the Partnership that starts with consolidated cash provided by operating activities and subtracts cash provided by operating activities for the Funds and maintenance capital expenditures by the Partnership only, excluding the Funds, and adds back distributions received by the Partnership from the

Funds. 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. 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):	2018			2017			2016			2015			2014
Cash provided by operations - consolidated	$	39,778		$	31,980		$	5,146		$	20,170		$	30,795
Less: Cash provided by operations - Funds	(20,801		)	(11,970		)	(3,561		)	(5,824		)	(10,025		)
Less: Partnership maintenance capital expenditures (1)	(2,297		)	(1,381		)	(1,114		)	(1,251		)	(1,010		)
Add: Partnership’s share of Fund distributions	1,852			6,443			274			2,172			13,328
Cash available for distribution (CAD)	$	18,532		$	25,072		$	745		$	15,267		$	33,088
Other data
Distributions to unitholders	$	13,943		$	12,215		$	12,177		$	11,708		$	11,037
Timber acres owned/managed (thousands)	254			206			212			205			193
Timber sold (MMBF)	137			112			97			84			97


(1)	Capital expenditures by the Partnership only and excluding timberland acquisitions.

The percentage of annual harvest volume, including timber deed sales, by quarter on a look-through basis for each year in the three-year period ended December 31, 2018, was as follows:



Year ended	Q1	Q2	Q3