Attached files

file filename
EX-23.1 - EXHIBIT 23.1 - POPE RESOURCES LTD PARTNERSHIPpope-ex231_consentx2015123.htm
EX-21.1 - EXHIBIT 21.1 - POPE RESOURCES LTD PARTNERSHIPpope-ex211_subsidiariesx20.htm
EX-31.2 - EXHIBIT 31.2 - POPE RESOURCES LTD PARTNERSHIPpope-ex312_201512321x10k.htm
EX-31.1 - EXHIBIT 31.1 - POPE RESOURCES LTD PARTNERSHIPpope-ex311_201512321x10k.htm
EX-32.2 - EXHIBIT 32.2 - POPE RESOURCES LTD PARTNERSHIPpope-ex322_201512321x10k.htm
EX-32.1 - EXHIBIT 32.1 - POPE RESOURCES LTD PARTNERSHIPpope-ex321_201512321x10k.htm


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, 2015
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. ¨
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, 2015, the aggregate market value of the non-voting equity units of the registrant held by non-affiliates was approximately $220,227,399
The number of the registrant’s limited partnership units outstanding as of February 17, 2016 was 4,347,822.
Documents incorporated by reference: None

1



Pope Resources, A Delaware Limited Partnership
Form 10-K
For the Fiscal Year Ended December 31, 2015
Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I


Item 1.   BUSINESS
 
OVERVIEW

When we refer to the “Partnership,” the “Company,” “we,” “us,” or “our,” we mean Pope Resources, A Delaware Limited Partnership and its consolidated subsidiaries. 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 form. The Partnership was formed in 1985 as a result of the spinoff of certain timberlands and development properties from Pope & Talbot, Inc.

The Partnership currently operates in three primary business segments: (1) Fee Timber, (2) Timberland Management and (3) Real Estate. Fee Timber operations consist of growing and harvesting timber from the 205,000 acres that we own or co-own with our timber fund investors as tree farms. Our Timberland 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 2,500 acres in the west Puget Sound region of Washington. 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. Our Real Estate operations also include ownership and management of Port Gamble, Washington, now an historic town.  Port Gamble was established by Pope & Talbot in 1853 and was operated as a company town and location for a logging mill for more than 150 years.  Copies of the Partnership’s reports filed or furnished under the Securities Exchange Act, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q and 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 connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with or furnished to the Securities and Exchange Commission. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that also contains our current and periodic reports and all of our other securities filings.

DESCRIPTION OF BUSINESS SEGMENTS

Fee Timber

Operations. As indicated above, our Fee Timber operations consist primarily of growing, managing, harvesting, and marketing timber. Statements of intention, belief or expectation reflect intent, beliefs and expectations of our executive officers as of the date of this report, based on information known to them as of that date.  Delivered log sales to domestic manufacturers and export brokers represent the overwhelming majority of Fee Timber revenue, but we also occasionally sell rights to harvest timber (timber deed sale) from our tree farms.  In addition, our tree farms generate revenue from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries. The 205,000 timberland acres that we own or manage under the banner of this segment break down into two categories. The first of these categories consists of the approximately 69,000-acre Hood Canal tree farm, located in the southern Kitsap and northeastern Jefferson counties of Washington, and the 42,000-acre Columbia tree farm located in southwest Washington. Management views the Hood Canal and Columbia tree farms as the Partnership’s core holdings, and manages them as a single operating unit. 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, while we acquired the bulk of the Columbia tree farm in 2001.

This segment also includes a second category, comprised of the operations of ORM Timber Fund I, LP (Fund I), ORM Timber Fund II, Inc. (Fund II), and ORM Timber Fund III (REIT), Inc. (Fund III), which are consolidated into our financial statements.  Fund I's assets were sold in 2014 and the fund was unwound in 2015 when its remaining cash was distributed to its investors. When referring to all the Funds collectively, depending on context, we will use the designations “Fund” or “Funds” interchangeably.  The Funds’ assets consist of 94,000 acres of timberland located in western Washington, northwestern Oregon and northern California. The Partnership holds ownership interests of 20% in Fund II and 5% in Fund III, and held a 20% ownership interest in Fund I.  The Funds' tree farms consist of the following:

3



Fund
 
Acquisition
Date
 
Location
 
Acres
(in thousands)
Fund II
 
Q4 2009
 
Northwestern Oregon
 
11
 
 
Q3 2010
 
Western Washington
 
13
 
 
Q3 2010
 
Northwestern Oregon
 
13
Fund III
 
Q4 2012
 
Northern California
 
19
 
 
Q4 2013
 
Southwestern Washington
 
10
 
 
Q4 2014
 
Northwestern Oregon
 
13
 
 
Q4 2015
 
Southern Puget Sound Washington
 
15
 
 
 
 
 
 
94
 
When referring to the Partnership and Fund tree farms together we will refer to them as the “Combined tree farms”. When referring to the combination of the Partnership’s tree farms and its 20%, and 5% ownership interest in Fund II and Fund III, respectively, along with its 20% interest in Fund I prior to the sale of its assets in the second half of 2014, we will refer to the sums as “Look-through totals”.  Our Fee Timber segment produced 67%, 75% and 79% of our consolidated revenue in 2015, 2014 and 2013, respectively.

Inventory. Timber volume is generally expressed in thousands of board feet (MBF) or millions of board feet (MMBF). In the discussion below, we present merchantable volume, productive acres and projected harvest level data for the Partnership’s and Funds’ tree farms on both a stand-alone and Look-through basis. On our Washington and Oregon tree farms, we define “merchantable volume” to mean timber inventory in productive stands that are 35 years of age and older.  Our California tree farm has received historically uneven-age management treatments wherein stands consist of trees of a variety of age classes. On that tree farm, we classify merchantable volume based on the tree’s diameter at breast height (DBH), or four and one half feet above ground.  Trees with a DBH greater than or equal to 16 inches are considered merchantable and less than 16 inches are considered pre-merchantable.  Accordingly, merchantable volume from our California tree farm is reflected in the tables below as “16+”.
Partnership merchantable volume (in MMBF) as of December 31:
 
 
 
 
2015
 
2014
Merch Class
 
Sawtimber
 
Pulpwood
 
Total
 
Total
35 to 39 yrs.
 
161

 
9

 
170

 
148

40 to 44 yrs.
 
52

 
3

 
55

 
62

45 to 49 yrs.
 
29

 
2

 
31

 
35

50 to 54 yrs.
 
8

 
1

 
9

 
5

55 to 59 yrs.
 
3

 

 
3

 
6

60 to 64 yrs.
 
4

 
1

 
5

 
9

65+ yrs.
 
24

 
1

 
25

 
29

 
 
281

 
17

 
298

 
294

Fund merchantable volume (in MMBF) as of December 31:
 
 
 
2015
 
2014
Merch Class
Sawtimber
 
Pulpwood
 
Total
 
Total
35 to 39 yrs.
98

 
5

 
103

 
93

40 to 44 yrs.
113

 
4

 
117

 
128

45 to 49 yrs.
91

 
3

 
94

 
78

50 to 54 yrs.
43

 
1

 
44

 
45

55 to 59 yrs.
27

 

 
27

 
18

60 to 64 yrs.
6

 
1

 
7

 
1

65+ yrs.
17

 

 
17

 
8

16+ inches
177

 

 
177

 
177

 
572

 
14

 
586

 
548


4



 
Look-through merchantable volume (in MMBF) as of December 31:
 
 
 
 
 
 
2015 Volume
 
2014 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.
 
170

 
16

 
186

 
148

 
15

 
163

40 to 44 yrs.
 
55

 
16

 
71

 
62

 
19

 
81

45 to 49 yrs.
 
31

 
16

 
47

 
35

 
13

 
48

50 to 54 yrs.
 
9

 
6

 
15

 
5

 
8

 
13

55 to 59 yrs.
 
3

 
4

 
7

 
6

 
3

 
9

60 to 64 yrs.
 
5

 
1

 
6

 
9

 

 
9

65+ yrs.
 
25

 
1

 
26

 
29

 
1

 
30

16+ inches
 

 
9

 
9

 

 
9

 
9

 
 
298

 
69

 
367

 
294

 
68

 
362

 
Merchantable volume estimates are updated annually. Changes in timber inventory typically reflect depletion from timber harvested, growth, revised estimates of acres available for harvest, timber inventory measurement 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" such that generally no "cruise" for stands with actual volume is ever more than ten years old. Actual volume harvested is compared to the volume carried in our inventory system, referred to as a "cutout analysis," to monitor the accuracy of our timber inventory process.

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

The merchantable timber inventory on Fund properties contains a greater proportion of whitewoods than do the Partnership’s timberlands.  With the acquisition of timberland by Fund III in northern California, we added ponderosa pine and white fir to our species mix.  Ponderosa pine is used for shelving, lumber, and parts for windows, doors, and furniture.  White fir is a member of the whitewood species group and is used primarily for lumber and core layers in plywood.
Look-through merchantable volume (in MMBF) as of December 31:
 
 
 
 
2015 Volume
 
 
Partnership
 
Look-
 
 
 
 
100%
 
Share of
 
through
 
Percent
Species
 
Owned
 
Funds
 
Total
 
of total
Douglas-fir
 
217

 
28

 
245

 
67
%
Western hemlock
 
26

 
22

 
48

 
13
%
Western red cedar
 
11

 
1

 
12

 
3
%
Pine
 
1

 
2

 
3

 
1
%
Other conifer
 
17

 
12

 
29

 
8
%
Red alder
 
23

 
4

 
27

 
7
%
Other hardwood
 
3

 

 
3

 
1
%
Total
 
298

 
69

 
367

 
100
%
 

5



Look-through merchantable volume (in MMBF) as of December 31:
 
 
 
 
2014 Volume
 
 
Partnership
 
Look-
 
 
 
 
100%
 
Share of
 
through
 
Percent
Species
 
Owned
 
Funds
 
Total
 
of total
Douglas-fir
 
215

 
29

 
244

 
67
%
Western hemlock
 
27

 
20

 
47

 
13
%
Western red cedar
 
14

 
1

 
15

 
4
%
Pine
 

 
3

 
3

 
1
%
Other conifer
 
16

 
12

 
28

 
8
%
Red alder
 
19

 
3

 
22

 
6
%
Other hardwood
 
3

 

 
3

 
1
%
Total
 
294

 
68

 
362

 
100
%
 
The Partnership’s tree farms as of December 31, 2015 consist of approximately 111,000 acres. Of this total, approximately 92,900 acres are designated as productive acres, meaning land that is capable of growing merchantable timber and where the harvesting of that timber is not constrained by physical, environmental or regulatory restrictions. The Funds’ tree farms as of December 31, 2015 totaled approximately 94,000 acres, of which 82,000 were designated as productive acres.  Our productive acres on a look-through basis, as of December 31, 2015, were nearly 108,300.  Approximately 33% of the Partnership’s acreage and 20% of the Funds’ Washington and Oregon acreage is in the 25-34 year age-class, much of which will begin moving from pre-merchantable to merchantable timber volume over the next five years. There is no age-class associated with the California tree farm and its productive acres are shown in the following tables under the heading “California.”

Look-through productive acres are spread by timber age-class as follows as of December 31, 2015:
 
 
12/31/2015 Productive Acres (in thousands)
Age
 
100%
 
 
 
Share of
 
 
 
Look-through
 
 
Class
 
Owned
 
%
 
Funds
 
%
 
Total
 
%
Clear-cut
 
2.5

 
3
%
 
0.3

 
3
%
 
2.8

 
3
%
0 to 4
 
7.0

 
8
%
 
1.0

 
12
%
 
8.0

 
8
%
5 to 9
 
8.8

 
9
%
 
0.6

 
7
%
 
9.4

 
9
%
10 to 14
 
10.2

 
11
%
 
0.6

 
7
%
 
10.8

 
11
%
15 to 19
 
13.4

 
14
%
 
0.4

 
5
%
 
13.8

 
14
%
20 to 24
 
4.6

 
5
%
 
0.6

 
7
%
 
5.2

 
5
%
25 to 29
 
14.9

 
16
%
 
0.8

 
9
%
 
15.7

 
15
%
30 to 34
 
16.1

 
17
%
 
0.5

 
6
%
 
16.6

 
16
%
35 to 39
 
9.2

 
10
%
 
0.9

 
10
%
 
10.1

 
10
%
40 to 44
 
2.9

 
3
%
 
0.8

 
9
%
 
3.7

 
4
%
45 to 49
 
1.6

 
2
%
 
0.8

 
9
%
 
2.4

 
2
%
50 to 54
 
0.3

 
%
 
0.3

 
3
%
 
0.6

 
1
%
55 to 59
 
0.2

 
%
 
0.1

 
1
%
 
0.3

 
%
60 to 64
 
0.2

 
%
 

 
%
 
0.2

 
%
65+
 
1.0

 
1
%
 

 
%
 
1.0

 
1
%
California
 

 
%
 
0.9

 
10
%
 
0.9

 
1
%
 
 
92.9

 
 

 
8.6

 
 

 
101.5

 
 

 

6



Look-through productive acres are spread by timber age-class as follows as of December 31, 2014:
 
 
12/31/2014 Productive Acres (in thousands)
Age
 
100%
 
 
 
Share of
 
 
 
Look-
 
 
Class
 
Owned
 
%
 
Funds
 
%
 
through
 
%
Clear-cut
 
2.0

 
2
%
 
0.3

 
4
%
 
2.3

 
2
%
0 to 4
 
7.3

 
8
%
 
0.7

 
8
%
 
8.0

 
8
%
5 to 9
 
9.2

 
10
%
 
0.7

 
8
%
 
9.9

 
10
%
10 to 14
 
9.6

 
10
%
 
0.5

 
6
%
 
10.1

 
10
%
15 to 19
 
13.6

 
15
%
 
0.3

 
4
%
 
13.9

 
14
%
20 to 24
 
4.6

 
5
%
 
0.7

 
8
%
 
5.3

 
5
%
25 to 29
 
15.8

 
17
%
 
0.6

 
7
%
 
16.4

 
16
%
30 to 34
 
15.4

 
16
%
 
0.7

 
8
%
 
16.1

 
16
%
35 to 39
 
9.1

 
10
%
 
0.9

 
11
%
 
10.0

 
10
%
40 to 44
 
3.2

 
3
%
 
1.0

 
12
%
 
4.2

 
4
%
45 to 49
 
1.6

 
2
%
 
0.6

 
7
%
 
2.2

 
2
%
50 to 54
 
0.2

 
%
 
0.3

 
4
%
 
0.5

 
%
55 to 59
 
0.4

 
%
 
0.1

 
1
%
 
0.5

 
%
60 to 64
 
0.3

 
%
 

 
%
 
0.3

 
%
65+
 
1.1

 
1
%
 

 
%
 
1.1

 
1
%
California
 

 
%
 
1.0

 
12
%
 
1.0

 
1
%
 
 
93.4

 
 

 
8.4

 
 

 
101.8

 
 


Site Index.  The site index for a given acre of timberland is a measure of the soil’s potential to grow timber. In the Partnership’s operating region, site index is expressed in feet and is a measure of a Douglas-fir tree's projected height at age 50. Site index is calculated by tree height and age data collected during the cruising process. Site index is an important input into the models used for projecting harvest levels on a tree farm. The Partnership’s properties have an estimated weighted average site index of 115 feet. On a look-through basis, our weighted average site index is 113 feet.

Long-term Harvest Planning. Long-term harvest plans for the Partnership’s tree farms and the Funds’ tree farms reflect the different ownership time horizons associated with each group.  Plans for Partnership timberlands are designed to maintain sustainable harvest levels over an extended time frame, assuming perpetual ownership. "Sustainable harvest level" denotes the annual volume of timber than 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, but over multi-year time frames will average out to the sustainable harvest levels developed in our long-term harvest plan. The harvest levels for the Funds’ tree farms are developed to maximize the total return during their 10-13 year investment periods by blending income from harvest with the value of the portfolio upon disposition. This will result in more harvest variability between years for Fund tree farms than is the case with the Partnership’s tree farms.

Assuming full operations on the Funds’ existing tree farms, at December 31, 2015 the long-term planned annual harvest level for the Partnership and Fund tree farms (and on a Look-through basis) can be found in the table below:
(amounts in MMBF)
 
 
Look-through
 
Planned annual
 
planned annual
 
harvest volume
 
harvest volume
Partnership tree farms
48
 
48
Fund tree farms
55
 
7
Total
103
 
55
 
Marketing and Markets. The following discussion applies to the Combined tree farms.  We market timber by selling logs mostly to lumber, plywood, and pulp producers or to log export brokers.  To do so, we engage independent logging contractors to harvest the standing timber, manufacture it into logs, and deliver it to our customers on the open market. Except in the case of some timber deed sales, we retain title to the logs until they are delivered to a customer log yard.


7



Historically, Japanese customers have paid a premium for the highest quality logs from which visually appealing beams for residential construction are produced. U.S. mills, on the other hand, manufacture mostly framing lumber requiring structural integrity for wall systems that are concealed by drywall and do not need such a high aesthetic quality. Accordingly, those logs sold to the domestic market 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, the reduction in China’s log imports from Russia, coupled with strengthening in the Chinese currency, opened up an opportunity for North American log producers to supply a larger portion of 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 to a broader Asian market that now comprises China, Japan, and Korea, with China representing the largest market within the region based on volume. This export market has provided support to log prices over the last few years during the sluggish recovery of U.S. housing starts. Sawlogs sold to China are used chiefly for concrete forms, pallets, and other low-end uses that can be satisfied with the logs traditionally purchased by domestic sawmills. The lower average sawlog quality and more diverse species mix flowing to China, combined with the limited volume of high-quality Douglas-fir flowing to Japan, has narrowed the overall export premium received for sales of logs to these export markets relative to the domestic market. In 2015, we began to see a widening of this premium again as the U.S. dollar strengthened and demand from China declined as its economy weakened.

The logs that we sell to China, Japan, and Korea are actually sold to U.S.-based brokers who in turn sell directly to offshore customers. Our decision to sell through intermediaries is predicated on risk management. Mitigation of foreign exchange risk, loss prevention, and minimizing cash collection risks inform our decision to sell through these brokers.

Customers. Logs from the Combined tree farms are sold to a number of customers in both the domestic and export markets. Domestic customers include lumber mills and other wood fiber processors located throughout western Washington, western Oregon, and northern California. Export customers consist of intermediaries located at the Washington ports of Longview, Tacoma, Port Angeles, Grays Harbor, and Olympia, and the Oregon ports of St. Helens and Astoria. Whether destined for export or domestic 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 taking into account both the delivered log prices and the haul cost to deliver 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 more of our own proximity to customers rather than the broader market trend.

Weyerhaeuser was the largest customer for our Fee Timber segment in 2015, representing 13% of segment revenue, followed by Scott Timber which represented 10% of segment revenue. We delivered logs from the Combined tree farms to 49 separate customers during 2015, compared to 54 during 2014.

Competition. Most of our competitors are comparable 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 will enable us to compete effectively in these markets. However, our products are subject to some competition from a variety of non-wood and engineered wood products as well as competition from foreign-produced logs and lumber.

Forestry and Stewardship Practices. Timberland management activities on the Combined tree farms include reforestation, control of competing brush in young stands, thinning of the timber to achieve optimal spacing after stands are established, and road maintenance. During 2015, we planted 1.1 million seedlings on 3,100 acres of the Combined tree farms compared to 1.4 million seedlings on 3,900 acres in 2014 and 1.2 million seedlings on 3,300 acres in 2013. Seedlings are generally planted from December to April, depending on weather and soil conditions, to restock stands that were harvested during the preceding twelve months. The number of seedlings planted will vary from year to year based upon harvest level, the timing of harvest, and seedling availability. Management’s policy is to return all timberlands to productive status in the first planting season after harvest, provided the requisite brush control has been completed.

All harvest and road construction activities are conducted in compliance with federal, state and local laws and regulations. Many of these regulations are programmatic and include, for example; limitations on the size of harvest areas, reforestation following harvest, retention of trees for wildlife and water quality, and sediment management on forest roads.  The regulations also require project-specific permits or notifications that govern a defined set of forest operations. An application

8



for harvest or road construction may require more specific guidance to avoid potential impact to public resources.  For example, we often consult third-party, state-qualified geo-technical specialists for operations that have the potential to impact unstable slopes in order to avoid, minimize, or mitigate risks to safety and public resources.

Sustainable Forestry Initiative (SFI®). Since 2003, we have been a member of the SFI® forest certification program, an independent environmental review and certification program that promotes sustainable forest management, focusing on water quality, biodiversity, wildlife habitat, and species protection. With our voluntary entry into this certification program, we have been subject to annual independent audits of the required standards for the program. Management views 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 positively to our reputation and to the long-term value of our assets.

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

Timberland Management

Background. In 1997, the Partnership formed two wholly owned subsidiaries, ORM, Inc. and Olympic Resource Management LLC (“ORMLLC”), to facilitate the Timberland Management activities. Our Timberland Management segment earns management fees and incurs expenses resulting from raising, investing, and managing capital invested in PNW timberland on behalf of third-party investors. Since the launch of our timberland private equity fund strategy in 2003, the activities in this segment have consisted primarily of attracting third-party investment capital for the Funds and then acquiring and managing properties on their behalf.  When we discuss the Timberland Management 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, 2015, we manage 94,000 acres of timberland in Washington, Oregon, and California with combined appraised values of $364 million.

In total, ORMLLC has called $322 million of equity capital and borrowed $57 million of debt for the Funds.  Cumulatively, we have co-invested a total of $37 million in the Funds. Subsequent to the liquidation of Fund I and the sale of a portion of Fund III's Willapa tree farm in 2015, our cumulative co-investment in the Funds is $26 million as of December 31, 2015. The following table provides detail behind cumulative committed and called capital by the Funds as of December 31, 2015.
 
 
Total Fund
 
Co-investment
(in millions)
 
Commitment
 
Called Capital
 
Commitment
 
Called Capital
 
Distributions
Received
Fund I *
 
$
61.8

 
$
58.5

 
$
12.4

 
$
11.7

 
$
15.1

Fund II
 
84.4

 
83.4

 
16.9

 
16.7

 
7.4

Fund III
 
180.0

 
179.7

 
9.0

 
9.0

 
0.2

Total
 
$
326.2

 
$
321.6

 
$
38.3

 
$
37.4

 
$
22.7


* Fund I assets were sold in Q3 2014 and Q4 2014.

Operations. The Timberland Management segment’s key activity is to provide investment and timberland management services to the Funds. We anticipate growth in this segment as we continue to manage the Funds, together with any future funds established by the Partnership. The Timberland Management segment represented less than 1% of consolidated revenue for each of the three years ended December 31, 2013 through 2015, as fee revenue is eliminated in consolidation.

The Partnership benefits in a number of ways from this segment.  First, we co-invest in each of these funds such that we are able to diversify our market exposure across more tree farms and more frequent acquisitions than we could by investing only for the Partnership.  We also benefit from the economies of scale generated through managing these additional acres of timberland, which accrue to 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 are able to retain additional expertise that neither the Partnership nor the Funds’ timberlands could support on a stand-alone basis.


9



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

Accounting rules require that we eliminate in consolidation all fee revenue generated from managing the Funds in our Timberland Management segment and corresponding operating expenses for the Fee Timber segment. The elimination of this fee revenue and corresponding operating expenses reduces the otherwise reported cost per acre of managing Fund tree farms under our Fee Timber segment. An effect of these eliminations is to make the Fee Timber results look stronger and the Timberland Management results look correspondingly weaker.
 
Marketing. When raising capital for a new Fund, we market these opportunities to accredited investors that have an interest in investing alongside a manager with a specific regional specialization and expertise in the timberland asset class. Our Funds fill a niche among timberland investment management organizations due to our regional specialization, degree of co-investment, smaller fund sizes, and the ability to target relatively small transactions. Additional marketing and business development efforts include regular contact with forest products industry representatives, non-industry owners, and others who provide key financial services to the timberland sector. Our acquisition and disposition activities keep management informed of changes in timberland ownership that can represent opportunities for us to market our services.

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

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

Background. The Partnership’s real estate activities are associated closely with the management of our timberlands. We evaluate timberlands regularly in terms of the best economic use, whether this means continuing to grow and harvest timber, seeking a rezoning of the property for sale or development, or working with conservation organizations and the public on a sale. After timberland has been logged, we have a choice among four primary alternatives for the underlying land: reforest and continue to use 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. In addition, the Real Estate segment may acquire and develop other properties for sale, either on its own or by partnering with other experienced real estate developers. Generally speaking, the Real Estate segment’s activities consist of investing in and later reselling improved properties, and holding properties for later development and sale. As a result, revenue from this segment tends to fluctuate substantially, and is characterized by relatively long periods in which revenue is relatively low, while expenses incurred to increase the value of our development properties may be higher. During periods of diminished demand, entitlement related costs and infrastructure investment are managed so as to minimize negative cash flows, but segment expenses do not 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. We have a 2,500-acre portfolio of properties for which we believe there to be a higher and better use than timberland.

Operations. Real Estate operations focus on maximizing the value of the 2,500-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. In addition, this segment’s results reflect our efforts to negotiate conservation easements (CE) that typically encumber Fee Timber properties and preclude future development on that land but allow continued forestry operations. 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, WA. The Real Estate segment represented 33%, 25% and 21% of consolidated revenue in 2015, 2014 and 2013, respectively.

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 valued 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 the highest-and-best-use of the properties include: working with communities and elected

10



officials to develop grass roots support for entitlement efforts, securing favorable comprehensive plan designation and zoning, acquiring easements, and obtaining plat approvals.

Development Properties – Planned Communities

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

Gig Harbor. Gig Harbor, a suburb of Tacoma, Washington, is the site of Harbor Hill, a mixed-use development project that includes 42 acres of commercial/retail sites, 50 acres of business park lots, and 200 acres of land with residential zoning. At December 31, 2015, we still own 18.5 acres of commercial/retail, 11.5 acres of business park and 99 acres of residential lots in this project.  A 20-year development agreement was approved by the city of Gig Harbor in late 2010.  Key provisions of the development agreement and plat approval include: (a) extending the project approval 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, 2015, 302 single-family lots remained for sale.

Port Gamble. Port Gamble fits within both the development and commercial properties aspects of our Real Estate operations.  Port Gamble is located northwest of Kingston on the Kitsap Peninsula.  Founded in 1853 by the company that became Pope & Talbot, Inc. (“P&T”), Port Gamble served as a millsite, logging port and company town for nearly 150 years and many of its buildings still stand.  The town and mill sites, totaling 130 acres, were transferred from P&T to Pope Resources at the time of our formation in 1985. In exchange for the transfer, the Partnership assumed a $22.5 million mortgage and paid other consideration. The operation and management of the town of Port Gamble is discussed under “Commercial Properties” below.

With respect to our development plans for the site, Port Gamble has been designated a “Rural Historic Town” under Washington’s Growth Management Act since 1999. This designation allows for substantial new commercial, industrial, and residential development using historic land use patterns and densities while maintaining the town’s unique architectural character. Our plans are focused on bringing back the New England-style homes that have slowly disappeared since Port Gamble’s heyday in the 1920s.  If approved as proposed, our plat application to Kitsap County will allow for between 200 and 240 additional residential units and 200,000 to 260,000 square feet of additional commercial building space. We submitted this master plan for the 114-acre townsite and adjoining 205-acre agrarian district in January 2013, kicking off a multi-year period of environmental impact review and public comment.  The proposal calls for 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. During the first half of 2016, our efforts are focused on gaining agency approval for constructing a new membrane bioreactor wastewater treatment plant with a large onsite septic system which will be turned over to Kitsap County’s Public Utility District at completion.  The new facility will cost approximately $5.6 million, of which $2.0 million is being funded by a Washington State appropriation grant. Once operational, the existing treatment plant will no longer discharge treated wastewater to the Hood Canal through the currently permitted outfall pipe.  Official de-commissioning of the outfall will commence after the new plant is operational. 

Kingston. The Partnership owns a 364-acre property in Kingston called “Arborwood” with plans for the development of 663 single-family lots and 88 multi-family units. Further development will not proceed until the local market demonstrates an increased appetite for residential lots.

Bremerton. The West Hills area of Bremerton, Washington is the site of a 46-acre industrial park which was being developed in two phases totaling 24 lots. Construction on the 9 lots that make up Phase I was completed in 2007. One lot has been sold from Phase I and the industrial market remains weak at this time. In 2013, we obtained a comprehensive plan designation change from industrial to residential for the 36-acre Phase II portion of this property.  In 2014, Phase II was rezoned to single-family residential and we hope to secure a preliminary plat for 114 lots in 2016.

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

11




Port Ludlow. Port Ludlow represents a 256-acre property located just outside the Master Planned Resort boundary of Port Ludlow, Washington. We currently expect preliminary plat approval in 2016 that, if obtained, will allow for up to 54 lots ranging from 1 to 1.5 acres each, with the balance of the property designated as open space. Development beyond the point of plat approval will not commence until demand for rural residential lots improves.

Development Properties – Other

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

North Kitsap County. Since 2011, we have been formally engaged with a coalition of approximately 30 entities to conserve up to 6,500 acres of the Partnership’s land 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 conservations funds. We continue to work with the coalition to raise funds for additional sales.

Skamania County.  We have been engaged with the Columbia Land Trust (CLT) in a multi-phase conservation project that includes both fee and conservation easement sales.  In tandem with this project, we have been working with Skamania County to rezone the majority of our holdings in the county.  In the second half of 2014, the county approved a rezoning of approximately 14,000 acres that allows for the development of 20-acre lots. Funding for conservation sales have been primarily through the Washington Wildlife and Recreation Program (WWRP). CLT has applied for additional conservation easement grants for the final 7,899 acres of this project through the Forest Legacy Program.  If awarded, the Forest Legacy grant will be funded for a 2016 closing.

Commercial Properties

Poulsbo. In May 2011, we purchased a 30,000-square-foot commercial office building in Poulsbo, on a 2-acre parcel of land.  At the time, the building was fully leased to Union Bank on a five-year, triple-net lease with a lease that expired in October 2015.  We moved our headquarters to the new building in November 2012, sharing the space until Union Bank vacated the building in April 2015.  We have taken over the basement of the building for our own operations, leased a portion of the first floor, and are seeking replacement tenants for the remaining first-floor space of approximately 5,500 square feet.

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 its venues, that leverages the charm of the townsite to attract clientele.  These commercial activities help offset the costs of maintaining the town until 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 logging and shipping operations in the tidal and subtidal waters throughout Port Gamble Bay, some of which was under lease from the Washington State Department of Natural Resources (DNR) that lasted from 1974 to 2004. Both the upland and submerged portions of the site are believed to have become contaminated with various hydrocarbons, heavy metals and other contaminants, including wood waste, during P&T’s operations there.

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

12



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

P&T and Pope Resources entered into a settlement agreement in 2002 that allocated responsibility for environmental contamination at the townsite, millsite, a solid waste landfill, and adjacent waters, with P&T assuming responsibility for funding clean-up in the Bay and 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 and $13 million, with 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, that portion of the site had largely been cleaned and the remaining aspects of that project consisted of test well monitoring and modest additional remediation.  The Port Gamble Bay area and related tidelands, for which P&T was responsible under the parties’ settlement agreement, had not yet been remediated. In 2007, P&T filed for bankruptcy protection and was eventually liquidated in bankruptcy, leaving the Partnership and DNR as the only remaining PLPs. Because environmental liabilities are joint and several as between PLPs and DOE, the result of P&T’s bankruptcy was to leave substantial portions of the liability with the Partnership, as one of the two remaining solvent PLPs.  At that time, we increased our reserve for remediation liabilities by $1.9 million to reflect the resulting increase in risk.

Beginning in 2010, DOE began to reconsider its expectations regarding the level of cleanup that would be required for Port Gamble Bay, largely because of input from interested citizens and groups, one of the most prominent of which has been the Port Gamble S’Klallam Tribe. In response to input from these groups, DOE adopted remediation levels that were far more stringent than either DOE or the Partnership had contemplated previously. This culminated in significant modifications to the cleanup alternatives in the draft Port Gamble Baywide and Millsite 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, or 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 reserve for environmental liabilities was insufficient. Accordingly, we accrued an additional $10.0 million in December 2014.

In December 2014, the Partnership filed suit against DNR seeking contribution to cleanup costs. In April 2016, the Partnership moved for summary judgment on the issue of DNR's liability for the site. On June 8, 2015, Kitsap County Superior Court ruled on summary judgment that Washington’s Department of Natural Resources (DNR) did not qualify as an owner or operator of the site and therefore did not have liability under Washington’s Model Toxics Control Act (MTCA). The effect of the court’s ruling is to absolve DNR of any responsibility to contribute to the cost of cleanup at Port Gamble. The Court issued its ruling without making findings of fact or conclusions of law, presumably to facilitate a more thorough review by the State’s appellate courts. We have appealed the Superior Court’s ruling, and believe we have a strong case for overturning the lower court’s decision. Ten public and/or private entities, including DOE, support our position and have filed or joined in amicus briefs arguing that DNR is liable as an owner or operator of the site. We, and the amicus supporters, continue to believe that DNR is liable under the most reasonable interpretation of MTCA, which holds state agencies responsible to the same extent as private parties. Moreover, this position is supported by the fact that DOE has alleged that DNR is liable under MTCA at this site and many others. Our recorded liability includes our estimate of the entire cost of the project, without any contribution from DNR.

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

Marketing. Marketing efforts for development properties in 2013 to 2015 were focused primarily on our Harbor Hill development and conservation land sales.  In 2015, we started investigating and pursuing the acquisition and development of

13



other real estate properties and closed on the acquisition of a two-acre parcel on Bainbridge Island, Washington. 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/passenger ferries that link the communities of Kingston, Bremerton, and Bainbridge Island to Edmonds and Seattle.
 
Employees
 
As of December 31, 2015, we employed 60 full-time, salaried employees and 6 part-time and seasonal personnel, who are distributed among the segments as follows:
Segment
 
Full-Time
 
Part-Time/
Seasonal
 
Total
Fee Timber
 
27

 

 
27

Timberland Management
 
3

 

 
3

Real Estate
 
19

 
6

 
25

General & Administrative
 
11

 

 
11

Totals
 
60

 
6

 
66


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, including environmental regulations, forestry and timber practices regulations and initiatives, and various state and local real estate and land use laws.  These laws and regulations can directly and indirectly affect our fee timber and timberland management segments by regulating harvest levels and impacting the market values of timber and related raw materials.   Further, all three states in which we operate maintain extensive regulations governing forest management practices. Our real estate operations are also subject to a wide variety of state and local laws that affect real estate development and land use.

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

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

Endangered Species Laws.

A number of fish and wildlife species that inhabit geographic areas near or within our timberlands have been listed as threatened or endangered under the federal Endangered Species Act (ESA) or similar state laws. Federal ESA listings include the Northern Spotted Owl, marbled murrelet, numerous salmon species, bull trout, and steelhead trout. State endangered species laws, particularly in California, impose further restrictions by limiting the proximity of harvest operations to certain identified plants and wildlife. Regulatory and public initiatives to expand the list of protected species and populations, such as the pacific fisher, may impose further restrictions. Federal and state requirements to protect habitat for threatened and

14



endangered species have imposed restrictions on timber harvest on some of our timberlands, and these protections may be expanded in ways that further affect our operations. These actions may increase our operating costs; further restrict timber harvests or reduce available acres; and adversely affect supply and demand more broadly across our markets.

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

Water Quality Regulations.

Also affecting our forestry operations are laws and regulations that are designed to promote water quality. A number of prominent and well-funded environmental groups have conducted an extensive legal challenge to the Environmental Protection Agency’s (EPA) permitting process, as a result of which the EPA is conducting public outreach for existing programs that protect water quality from forest road discharges. The public comment period for this effort concluded on February 12, 2016 and the EPA is expected to decide whether it will regulate forest roads in the second quarter of 2016.

The EPA also requires states to develop total maximum daily load (“TMDL”) allocations for pollutants in water bodies that have been determined to be “water quality impaired”.  The TMDL limits restrict substances that may be discharged to a body of water or establish best management practices for nonpoint sources, including timberland operations, to reduce the amounts of certain substances to be discharged into designated bodies of water.  These forestry practices standards are intended to minimize siltation of streams caused by roads, harvest operations and other timberland activities.  

State laws and regulations serve to reduce timberlands available for harvest by, among other things, increasing buffer requirements on a subset of fish bearing streams in order to meet state water quality standards related to maintaining temperature or reducing or eliminating pollutants. Other laws and regulations could have significant impacts on our harvest activities, including increases in setback requirements and, in Oregon, a proposed statewide ballot initiative to ban clearcutting. A wide variety of similar proposals are under consideration by legislatures, environmental authorities, and interest groups. 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.

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

State Harvest Permitting Processes.

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

California has implemented a cap and trade program that limits the amount of greenhouse gasses emitted by certain stationary sources and will phase in transportation.  This may indirectly impact forest landowners through indirect costs of energy to our manufacturing customers and logging contractors.  In Washington State there are proposed regulatory changes to air quality laws and there are at least two potential initiatives intended to impose a financial penalty for greenhouse gas emissions.


15



The regulatory and non-regulatory forest management programs described above have increased operating costs and resulted in changes in the value of the Combined timberlands. 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, with the exception of the Oregon ballot initiative that would ban clear cutting.

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 circumstance also apply to real estate development.  Additionally, there are also state and local land use regulations that have additional permitting requirements and that limit development opportunities. For example, in Washington development rights are affected by the Growth Management Act, 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

We are sensitive to demand and price issues relating to our sales of logs in both domestic and foreign markets. We generate Fee Timber revenue primarily by selling softwood logs to domestic mills and to third-party intermediaries who resell them to the export market. The domestic market for logs in our operating area depends heavily on U.S. housing starts. Recently, the U.S. housing market has started to improve but, to the extent the recovery in the housing market should stall, such a turn of events could have a negative impact on our operating results. Demand from export markets for Pacific Northwest logs are affected significantly by fluctuations in United States, Japanese and, increasingly, Chinese and Korean economies, the foreign currency exchange rate between these Asian currencies and the U.S. dollar, as well as by ocean transportation costs. Further, the prices we realize for our logs depend in part upon competition, and the recent expiration of the Softwood Lumber Agreement between the United States and Canada in October 2015 may have the effect of increasing the supply of logs from Canada. While this has not had a noticeable impact to date, it remains too early to assess whether the longer-term implications of the expiry of this agreement may have an adverse impact on the prices we realize on the sales of our logs.

Our Fee Timber and Timberland Management segments are highly dependent upon sales of commodity products. Our revenues from our forestry businesses, which comprise our Fee Timber and our Timberland Management segments, are widely available from producers in other regions of the United States and in a number of other countries. 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. Similarly, from time to time in the past we have seen, and in the future we may experience, an increase in supply or a reduction in demand as a result of international tensions or competition that are beyond our control and that may not be predictable.

We are subject to statutory and regulatory restrictions that currently limit, and may increasingly limit, our ability to generate income. 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 have proposed a ballot initiative that, if approved and sustained in the courts, would eliminate clearcutting, which is the predominant harvest practice across our geographic region. These 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 significantly increase the cost or reduce available inventory thereby reducing income. Any such additional restrictions would likely have a similar effect on our Timberland Management 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

16



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 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 cleanup standards to our existing environmental remediation operations at Port Gamble, Washington, after soliciting or receiving input from environmental groups, citizen groups, and Native American tribal representatives. These revisions substantially increased the cost and the time associated with our previously-existing remediation plans. Similarly, citizens’ and environmental groups have significant influence in the entitlement and zoning processes that affect our Real Estate operations. These activities are not likely to diminish in the foreseeable future, and in some instances may have a material impact upon the revenues we can generate from our properties or upon the costs of generating those revenues.

Our businesses are highly dependent upon domestic and international macroeconomic factors. Both our timberland operations and our real estate operations are highly influenced by housing markets. Our Fee Timber and Timberland Management segments depend upon housing and construction markets in the United States and in other Pacific Rim countries. Our Real Estate segment depends upon a highly localized demand in the Puget Sound region of Western Washington. Factors that affect these markets will have a disproportionate impact on our business, and may be difficult or impossible to predict or estimate accurately.

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

Risks Relating to Our Operations

Our operations are geographically concentrated, and we may face greater impacts from localized events than would more geographically diverse timber companies. Because our operations are conducted exclusively west of the Cascade Mountains of the Pacific Northwest, between northern California and the Canadian border, regionalized events and conditions may have a more pronounced impact upon our operations than they might upon a more geographically diverse timber company. For example, disease and insect infestations tend to be local or regional in scope, and because our Fee Timber and Timberland Management businesses are geographically concentrated, events of this nature may affect our operations more significantly than they might a similarly situated company whose operations are more widely dispersed. Similarly, because the vast majority of our Real Estate operations are limited to the Puget Sound region of Western Washington, regional impacts such as growth patterns, weather patterns and natural disasters, as well as socio-political events such as environmental and land use initiatives, may disproportionately affect that segment more significantly than a company whose operations are less concentrated.
 
Consolidation of sawmills in our geographic operating area may reduce competition among our customers, which could adversely affect our log prices. In the past we have experienced, and may continue to experience, consolidation of sawmills and other wood products manufacturing facilities in the Pacific Northwest. For example, Simpson Timber Co.

17



announced in 2015 the sale of four of their mills in the Pacific Northwest region to two separate buyers. Two of those mills will be shut down permanently while another will be closed until a new, more modern, mill is built in its place. The replacement mill is expected to open in 2017. In addition, Interfor announced recently their intention to sell a lumber mill in Tacoma, Washington that it closed in May 2015. Because a portion of our cost of sales in our Fee Timber segment, which encompasses the Combined tree farms, consists of transportation costs for delivery of logs to domestic sawmills, it becomes increasingly expensive to transport logs over longer distances for sales in domestic markets. As a result, a reduction in the number of sawmills, or in the number of sawmill operators, may reduce competition for our logs, increase transportation costs, or both. These consolidations thus may have a material adverse impact upon our Fee Timber revenue or income and, as that segment has traditionally represented our largest business unit, upon our results of operation and financial condition as a whole. Any such material adverse impact on timber revenue and income as a result of regional mill consolidations will also indirectly affect our Timberland Management segment in the context of raising capital for investment in Pacific Northwest-based timber funds.

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 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 have certain environmental remediation liabilities associated with our Port Gamble and former Port Ludlow resort properties, and those liabilities may increase. We currently own certain real estate at Port Gamble on the Kitsap Peninsula and, until mid-2001, owned real estate within the resort community of Port Ludlow in Jefferson County in western Washington. Sediments adjacent to these properties were alleged to have been impacted by operations occurring prior to our acquisition of the properties, which occurred at the time of our spinoff from Pope & Talbot, Inc. in 1985. However, as current owner of Port Gamble and based on conditions of our sale of the Port Ludlow assets, we have environmental liability for these properties under Washington State’s Model Toxics Control Act (MTCA). In December 2013, we reached an agreement with the Washington State Department of Ecology (“DOE”) in the form of a consent decree (“CD”) and clean-up action plan (“CAP”) that provides for the cleanup of Port Gamble Bay. Together, these documents outline the terms under which the Partnership will conduct environmental remediation as well as the specific clean-up activities to be performed. The CD and CAP were filed with the Kitsap County Superior Court in December 2013.  On June 8, 2015, Kitsap County Superior Court ruled on summary judgment that Washington’s Department of Natural Resources (DNR) did not qualify as an owner or operator of the site and therefore did not have liability under the MTCA. DNR had been identified by DOE as a "potentially liable person" under the MTCA. The effect of the court’s ruling is to absolve DNR of any responsibility to contribute to the cost of cleanup at Port Gamble. We have appealed the Superior Court’s ruling, and believe we have a strong case for overturning the lower court’s decision, however, there can be no assurance that we will prevail in this matter or that we can reach an acceptable settlement with DNR. The recorded liability reflects the estimated cost of the entire project, without any contribution by DNR.

Management continues to monitor the Port Gamble and Port Ludlow cleanup processes closely. The $16.8 million remediation accrual as of December 31, 2015 represents our current estimate of the remaining cleanup cost and most likely outcome to various contingencies within both locations. These estimates are predicated upon a variety of factors, including the actual amount of the ultimate cleanup costs. These liabilities are based upon a number of estimates and judgments that are subject to change as the project progresses. There may be additional litigation costs if we cannot reach a settlement with DNR and the outcome of any such litigation is uncertain. The filing of the CD limits our legal exposure, but does not eliminate it entirely. Any changes in factors relating to this matter 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 and operations.

18




We compete with a number of larger competitors that may be better able than we to absorb price fluctuations, may be able to expend greater resources on production, may have greater access to capital, and may operate more efficiently than we can. We compete against much larger companies in each of our business segments. We compete with these companies for management and line personnel, as well as for purchases of relatively scarce capital assets such as land and standing timber and for sales of our products. These larger competitors may have access to larger amounts of capital and significantly greater economies of scale, and they may be better able to absorb the risks 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 readers that competition will not have a material and adverse effect on our results of operations or our financial condition.

We and our customers are dependent upon active credit markets to fund operations. We sell logs from our Fee Timber segment to mills and log brokers that in most circumstances rely upon an active credit market to fund their operations. Our Real Estate sales are also often dependent upon credit markets in order to fund acquisitions. To the extent borrowing restrictions impinge on customers’ access to debt, we expect those customers to respond by reducing their expenditures, and those reductions may have the effect of directly reducing our revenues and of indirectly reducing the demand for our products. Any such outcomes could materially and adversely impact our results of operations, cash flows, and financial condition.

We may incur losses as a result of natural disasters that may occur, or that may be alleged to have occurred, on our properties. Forests are subject to a number of natural hazards, including damage by fire, severe windstorms, insects and disease, flooding and landslides. Changes in global climate conditions may intensify these natural hazards. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of forest products. While damage from natural causes is typically localized and would normally affect only a small portion of our timberlands at any one time, these hazards are unpredictable and losses might not be so limited. Consistent with the practices of other large timber companies, we do not maintain insurance against loss of standing timber on our timberlands due to natural disasters. However, as a result of the extreme fire conditions in the Pacific Northwest in 2015, we have acquired fire insurance on a portion of our timberland portfolio.

We rely on contract loggers and truckers who are in short supply and seeking consistent work at increasing rates.  We rely on contract loggers and truckers for the production and transportation, respectively, of our products to customers.  During the economic downturn of 2008 and 2009 most industrial forestry firms deferred harvest, which resulted in a shortfall in demand for the contract logging and trucking work force.  Many private logging and trucking companies did not survive the protracted economic downturn.  As the economy has improved and companies return to harvesting, a shortage of logging contractors and truckers has developed.  The remaining contractors who survived did so by reducing their workforce or, in the case of log truckers, converting their trucks to configurations suitable for highway freight hauling.  This decline in the pool of available contractors has resulted in a steady increase in harvest and haul costs and market forces that are stressing continuity of work when soliciting contractor bids for a job.  The commitment to more continuous work could preclude our ability to time markets, affecting total returns.

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 individual shareholders of Pope MGP, Inc. have the ability to designate one of our directors and jointly appoint two others, with the fifth board position taken by our chief executive officer, who serves as a director by virtue of his executive position. Unitholders may remove the managing general partner only in limited circumstances, including, among other things, a vote by the holders of a two-thirds majority of the “qualified units,” which means the units that have been owned by their respective holders for at least five years prior to such vote. By virtue of the terms of our agreement of limited partnership, as amended, or “partnership agreement”, our managing general partner directly, and the general partner shareholders indirectly, have the ability to do the following: prevent or impede transactions that would result in a change of control of the Partnership; to prevent or, upon the approval of limited partners holding a majority of the units, to cause, the sale of the assets of the Partnership; and to cause the Partnership to take or refrain from taking certain other actions that one might otherwise perceive to be in the Partnership’s best interest. Under our partnership agreement, we are required to pay to Pope MGP, Inc. an annual management fee of $150,000, and to reimburse Pope MGP, Inc. for certain expenses incurred in managing our business.


19



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. As of February 16, 2016, we had outstanding a total of 4,347,822 units outstanding, of which 414,365 units were held by our affiliates. Our average daily trading volume during the three (3) months ended on that date was 1,876. Our relatively small public float and our limited trading volume may, in certain instances, make trading in our units more volatile, as a result of which our price may deviate more significantly, and opportunities to buy or sell our units may be more limited, than investors might experience with a more liquid market. This circumstance may be magnified during times of significant or prolonged selling pressure on our securities.

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


20



Item 2.    PROPERTIES

The following table reconciles acreage owned as of December 31, 2015 to acreage owned as of December 31, 2014. As noted previously, we own 20% of Fund II and 5% of Fund III.  This table includes the entire 94,000 acres of timberland owned by the Funds and also presents the acreage on a look-through basis. Properties are typically transferred from Fee Timber 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
 
2014
 
Acquisitions
 
Sales
 
Transfer
 
2015
Hood Canal tree farm (1)
 
68.8

 
1.0

 
(0.7
)
 

 
69.1

Columbia tree farm (1)
 
41.8

 

 

 

 
41.8

Subtotal Partnership Timberland
 
110.6

 
1.0

 
(0.7
)
 

 
110.9

Fund II tree farms (2)
 
37.2

 

 

 

 
37.2

Fund III tree farms (2)
 
42.6

 
15.1

 
(0.9
)
 

 
56.8

Subtotal Funds' Timberland
 
79.8

 
15.1

 
(0.9
)
 

 
94.0

Total Fee Timber acres
 
190.4

 
16.1

 
(1.6
)
 

 
204.9

Partnership share of Funds
 
9.6

 
0.8

 

 

 
10.4

Total Real Estate acres (see detail below)
 
2.6

 

 
(0.1
)
 

 
2.5

Combined Look-through total acres
 
122.8

 
1.8

 
(0.8
)
 

 
123.8

 
(1) A subset of this property is used as collateral for the Partnership's long-term debt, excluding debt of the Funds. The Hood Canal tree farm is located in northwestern Washington and the Columbia tree farm is located is 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.

 
 
Real Estate Acres Detail
Project Location
 
2014
 
Acquisitions
 
Sales
 
Transfer
 
2015
Bremerton
 
46

 
 
 
 
 
 
 
46

Gig Harbor
 
174

 
 
 
(45
)
 
 
 
129

Hansville
 
149

 
 
 
 
 
 
 
149

Kingston - Arborwood
 
364

 
 
 
 
 
 
 
364

Port Gamble town and mill sites
 
130

 
 
 
 
 
 
 
130

Port Gamble Agrarian District
 
205

 
 
 
 
 
 
 
205

Port Ludlow
 
256

 
 
 
 
 
 
 
256

Poulsbo
 
2

 
 
 
 
 
 
 
2

Bainbridge Island
 

 
2

 
 
 
 
 
2

Other Rural Residential
 
1,249

 
 
 
 
 
 
 
1,249

Total
 
2,575

 
2

 
(45
)
 

 
2,532

 
The following table provides dwelling unit (DU) per acre zoning for the Partnership’s owned timberland and development properties as of December 31, 2015 and land sold during 2015. The table does not include sales of development rights or small timberland sales from tree farm properties:

21



Current Real Estate Land Inventory by Zoning Category
 
2015 Sales from RE Portfolio
Zoning Designation
 
Acres
 
Acres
 
$/Acre
 
Total Sales (in thousands)
Urban zoning - residential
 
501

 
45

 
$
395,489

 
$
17,797

Historic Rural Town
 
114

 
 
 
 
 
 
Commercial/retail
 
21

 
 
 
 
 
 
Business park/industrial
 
22

 
 
 
 
 
 
1 DU per 5 acres
 
375

 
 
 
 
 
 
1 DU per 10 acres
 
153

 
 
 
 
 
 
1 DU per 20 acres
 
789

 
 
 
 
 
 
1 DU per 40 acres
 
38

 
 
 
 
 
 
1 DU per 80 acres
 
298

 
 
 
 
 
 
Agrarian District
 
205

 
 
 
 
 
 
Total
 
2,516

 
 
 
 
 
$
17,797

 
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.

Item 4.            MINE SAFETY DISCLOSURES

Not applicable.

22



PART II

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

Market Information

The Partnership’s equity securities are listed on NASDAQ and traded under the ticker symbol “POPE”. The following table sets forth the 2013 to 2015 quarterly ranges of low and high prices, respectively, for the Partnership’s units together with per unit distribution amounts by the period in which they were paid:
 
High
 
Low
 
Closing
 
Distributions
Year Ended December 31, 2013
 
 
 
 
 
 
 
First Quarter
$
66.49

 
$
56.15

 
$
61.50

 
$
0.45

Second Quarter
74.99

 
59.97

 
70.00

 
0.45

Third Quarter
73.07

 
60.07

 
67.69

 
0.55

Fourth Quarter
69.65

 
63.01

 
67.00

 
0.55

Year Ended December 31, 2014
 

 
 

 
 

 
 

First Quarter
$
70.50

 
$
64.17

 
$
66.99

 
$
0.55

Second Quarter
70.26

 
63.94

 
67.00

 
0.65

Third Quarter
71.00

 
65.85

 
66.35

 
0.65

Fourth Quarter
68.25

 
62.35

 
63.63

 
0.65

Year Ended December 31, 2015
 

 
 

 
 

 
 

First Quarter
$
65.21

 
$
59.00

 
$
63.46

 
$
0.65

Second Quarter
70.05

 
62.50

 
68.46

 
0.65

Third Quarter
70.50

 
59.95

 
67.21

 
0.70

Fourth Quarter
68.72

 
58.15

 
64.07

 
0.70


Distributions

The Partnership has no directors. Instead, the Board of Directors of its managing general partner, Pope MGP, Inc. (the “Managing General Partner”), serves in that capacity. References to the “Board” or words of similar construction in this report are to the board of the Managing General Partner, acting in its management capacity with respect to the Partnership. All cash distributions are at the discretion of the board of directors. During 2015, the Partnership made two quarterly distributions of 65 cents per unit and two distributions of 70 cents per unit, totaling $11.7 million in the aggregate. In 2014, the Partnership made one quarterly distribution of 55 cents per unit and three of 65 cents per unit totaling $11.0 million in the aggregate.

Our board of directors increased our quarterly distribution by $0.05 per unit, or 8% in the third quarter of 2015. This increase was in addition to a $0.10, or 18%, increase in the quarterly distribution rate in the second quarter of 2014. 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, 2016, there were 4,347,822 outstanding units, held by 227 holders of record. Units outstanding include 35,507 that are currently restricted from trading and that were granted to 21 holders of record who are either current or former management 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.



23



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, 2015 there were 36,047 unvested and outstanding restricted units and 909,239 limited partnership units remained issuable under the plan. Additional information regarding equity compensation arrangements is set forth in Note 6 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 the Long-Term Incentive Plan Peer Group for the five years ended December 31, 2015. 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 Long-Term Incentive Plan Peer Group. The graph assumes distributions are reinvested.
 
*$100 invested on 12/31/10 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
 
Copyright© 2016 S&P, a division of The McGraw-Hill Companies Inc. All rights reseved.

 
12/31/10

12/31/11

12/31/12

12/31/13

12/31/14

12/31/15

Pope Resources
100.00

120.03

160.69

199.22

196.25

206.03

S&P 500
100.00

102.11

118.45

156.82

178.29

180.75

S&P Smallcap 600
100.00

101.02

117.51

166.05

175.61

172.14

Long-Term Incentive Plan Peer Group
100.00

102.22

138.26

147.48

156.82

144.40


24




Issuance of Unregistered Securities

The Partnership did not conduct any unregistered offering of its securities in 2013, 2014, or 2015.

Repurchase of Equity Securities

None.

Item 6.            SELECTED FINANCIAL DATA

Actual Results. 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
2015
 
2014
 
2013
 
2012
 
2011
Revenue:
 
 
 
 
 
 
 
 
 
Fee Timber
$
52,164

 
$
65,204

 
$
56,035

 
$
45,539

 
$
52,729

Timberland Management

 

 

 
7

 

Real Estate
25,864

 
22,266

 
14,657

 
8,497

 
4,545

Total revenue
78,028

 
87,470

 
70,692

 
54,043

 
57,274

Operating income/(loss):
 

 
 

 
 

 
 

 
 

Fee Timber
12,961

 
44,289

 
16,168

 
11,853

 
16,899

Timberland Management
(2,625
)
 
(2,329
)
 
(1,950
)
 
(1,568
)
 
(1,515
)
Real Estate (1)
5,313

 
(2,720
)
 
3,276

 
(11,099
)
 
(349
)
General and Administrative
(4,972
)
 
(3,781
)
 
(4,562
)
 
(4,170
)
 
(4,188
)
Total operating income (loss)
10,677

 
35,459

 
12,932

 
(4,984
)
 
10,847

Net income (loss) attributable to unitholders
$
10,943

 
$
12,415

 
$
13,135

 
$
(4,709
)
 
$
8,754

Earnings (loss) per unit – diluted
$
2.51

 
$
2.82

 
$
2.96

 
$
(1.11
)
 
$
1.94

Distributions per unit
$
2.70

 
$
2.50

 
$
2.00

 
$
1.70

 
$
1.20

Balance sheet data
 

 
 

 
 

 
 

 
 

Total assets
$
370,056

 
$
344,826

 
$
310,908

 
$
267,499

 
$
230,408

Long-term debt, net of current portion
84,537

 
86,621

 
75,581

 
43,710

 
45,793

Partners’ capital
64,548

 
64,216

 
69,445

 
64,223

 
75,759

 
(1)  Real Estate operating results in 2014, 2012, and 2011 included $10.0 million, $12.5 million, and $977,000, 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 after expenditures for maintenance capital and including the Partnership's share of cash generated by the Funds, based on its co-investment ownership interest percentage in each Fund. As such, CAD represents cash generated that is available to distribute to the Partnership's unitholders. Management considers this metric in evaluating capital allocation alternatives, including the distribution payout rate to unitholders. Management recognizes that there are varying methods of calculating cash flow and has provided the information below to give transparency to this particular metric’s calculation.

25



(In thousands)
Year Ended December 31,
Cash Available for Distribution (CAD):
2015
 
2014
 
2013
 
2012
 
2011
Cash provided by operations
$
20,170

 
$
30,795

 
$
17,949

 
$
16,209

 
$
21,660

Less: Maintenance capital expenditures (1)
(2,549
)
 
(2,335
)
 
(2,230
)
 
(1,987
)
 
(1,911
)
Less: Noncontrolling portion of Funds cash from operations (2)
(3,963
)
 
(7,481
)
 
(4,795
)
 
(2,540
)
 
(6,875
)
Cash available for distribution (CAD)
$
13,658

 
$
20,979

 
$
10,924

 
$
11,682

 
$
12,874

Other data
 

 
 

 
 

 
 

 
 

Acres owned/managed (thousands)
205

 
193

 
204

 
196

 
178

Fee timber harvested (MMBF) (3)
84

 
97

 
90

 
84

 
90

 
(1)
Capital expenditures from the cash flow statement, excluding timberland acquisitions less costs incurred to purchase and make leasehold improvements to the new corporate building.
(2)
Share of Funds’ operating income (loss), interest, tax, amortization, depreciation, and depletion expense, cost of land sold, change in working capital accounts, maintenance capital expenditures, and cash from operations that are attributable to noncontrolling interests.  That share is 80% in the case of Funds I and II and 95% in the case of Fund III.
(3)
Includes timber deed sales of 0.6 MMBF, 4.0 MMBF, 2.0 MMBF and 4.4 MMBF in 2015, 2014, 2013 and 2012, respectively.

The following table presents Fee Timber revenue, operating income, and harvest volume on a look-through basis for each year in the three-year period ended December 31, 2015. This depiction reflects an adjustment to these GAAP financial items to reflect our proportionate ownership of each of the Funds, which for GAAP purposes are consolidated into our financial statements.
 
 
Revenue
 
 
 
 
 
 
 
 
(in millions) Year ended
 
Log Sale
 
Other
 Revenue
 
Total Fee
Timber
 
Gain (loss) on Sale of Timberland
 
Operating
Income
 
Harvest
Volume
(MMBF)
 
Timber
Deed Sale
Volume 
(MMBF)
Partnership
 
$
26.2

 
$
2.7

 
$
28.9

 
$

 
$
11.7

 
42.6

 

Share of Funds
 
3.0

 
0.1

 
3.1

 
(0.1
)
 
0.3

 
5.6

 

Look-through 2015
 
$
29.2

 
$
2.8

 
$
32.0

 
$
(0.1
)
 
$
12.0

 
48.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
30.9

 
$
2.9

 
$
33.8

 
$

 
$
14.4

 
47.1

 

Share of Funds
 
4.6

 
0.2

 
4.8

 
4.8

 
1.0

 
7.2

 
0.2

Look-through 2014
 
$
35.5

 
$
3.1

 
$
38.6

 
$
4.8

 
$
15.4

 
54.3

 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
30.7

 
$
1.5

 
$
32.2

 
$

 
$
14.1

 
48.5

 

Share of Funds
 
4.6

 
0.1

 
4.7

 

 
0.5

 
7.8

 
0.1

Look-through 2013
 
$
35.3

 
$
1.6

 
$
36.9

 
$

 
$
14.6

 
56.3

 
0.1



26



The following table presents log volume sold by species on a look-through basis for each year in the three-year period ended December 31, 2015 as follows:
Volume (in MMBF)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015

 
% Total

 
2014

 
% Total

 
2013

 
% Total

Sawlogs
Douglas-fir
 
28.7

 
60
%
 
32.8

 
61
%
 
36.6

 
65
%
 
Whitewood
 
5.1

 
11
%
 
9.2

 
17
%
 
8.0

 
14
%
 
Pine
 
0.2

 
%
 

 
%
 

 
%
 
Cedar
 
2.8

 
6
%
 
1.7

 
3
%
 
1.3

 
2
%
 
Hardwoods
 
2.6

 
5
%
 
1.7

 
3
%
 
1.7

 
3
%
Pulpwood
All Species
 
8.7

 
18
%
 
8.7

 
16
%
 
8.6

 
16
%
 
Total
 
48.1

 
100
%
 
54.1

 
100
%
 
56.2

 
100
%
 
Average Price/MMBF
 
$
597

 
 

 
$
653

 
 

 
$
627

 
 

 
The following table presents log price realized by species on a look-through basis for each year in the three-year periods ended December 31, 2015 as follows:
 
 
 
Fiscal Year
 
 
 
 
 
∆ from 2014 to 2015
 
 
 
∆ from 2013 to 2014
 
 
 
 
 
2015
 
$/MBF
 
%
 
2014
 
$/MBF
 
%
 
2013
Sawlogs
Douglas-fir
 
$
626

 
$
(93
)
 
(13
)%
 
$
719

 
$
24


3
%
 
$
695

 
Whitewood
 
454

 
(170
)
 
(27
)%
 
624

 
8


1
%
 
616

 
Pine
 
172

 
(371
)
 
(68
)%
 
543

 
543


NA

 

 
Cedar
 
1,436

 
67

 
5
 %
 
1,369

 
207


18
%
 
1,162

 
Hardwood
 
595

 
(26
)
 
(4
)%
 
621

 
68


12
%
 
553

Pulpwood
All Species
 
332

 
29

 
10
 %
 
303

 
31


11
%
 
272

Overall
 
597

 
(56
)
 
(9
)%
 
653

 
26


4
%
 
627

 
The percentage of annual harvest volume by quarter on a look-through basis for each year in the three-year period ended December 31, 2015 was as follows:
Year ended
Q1
Q2
Q3
Q4
2015
33%
18%
21%
28%
2014
32%
27%
20%
22%
2013
34%
28%
16%
22%

Fee Timber cost of sales on a Look-through basis for each year in the three-year period ended December 31, 2015 is as follows, with the first table expressing these costs in total dollars and the second table expressing those costs that are driven by volume on a per MBF basis:

27



(in thousands)
 
Harvest,
Haul and
Tax
 
Depletion
 
Other
 
Total Fee
Timber
Cost of
Sales
 
Harvest
Volume
(MMBF)
 
Timber
Deed Sale
Volume
(MMBF)
Partnership tree farms
 
$
9,143

 
$
1,880

 
$
852

 
$
11,875

 
42.6

 

Share of Funds
 
1,390

 
944

 
92

 
2,426

 
5.6

 

Look-through 2015
 
$
10,533

 
$
2,824

 
$
944

 
$
14,301

 
48.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership tree farms
 
$
10,992

 
$
2,244

 
$
1,161

 
$
14,397

 
47.1

 

Share of Funds
 
1,918

 
1,347

 
30

 
3,295

 
7.0