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EX-32.2 - EXHIBIT 32.2 - POPE RESOURCES LTD PARTNERSHIPex-32210xqq22017.htm
EX-32.1 - EXHIBIT 32.1 - POPE RESOURCES LTD PARTNERSHIPex-32110xqq22017.htm
EX-31.2 - EXHIBIT 31.2 - POPE RESOURCES LTD PARTNERSHIPex-31210xqq22017.htm
EX-31.1 - EXHIBIT 31.1 - POPE RESOURCES LTD PARTNERSHIPex-31110xqq22017.htm
EX-10.1 - EXHIBIT 10.1 - POPE RESOURCES LTD PARTNERSHIPex-101fundcoxinvestmentnote.htm
EX-3.1 - EXHIBIT 3.1 - POPE RESOURCES LTD PARTNERSHIPex-31restatedpartnershipag.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q
 
( X )
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9035

POPE RESOURCES, A DELAWARE
LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware
91-1313292
(State or other jurisdiction of 
incorporation or organization) 
(IRS Employer
Identification Number)
 
19950 7th Avenue NE, Suite 200, Poulsbo, WA 98370
Telephone: (360) 697-6626
(Address of principal executive offices including zip code)
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x          No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x         No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer o
Accelerated Filer x
Emerging growth company o
 
Non-accelerated Filer o
Smaller Reporting Company o
 
                                                                                                           
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    
Yes o          No x

Partnership units outstanding at July 31, 2017: 4,365,919





Pope Resources
Index to Form 10-Q Filing
For the Six Months Ended June 30, 2017

Description
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
June 30, 2017 and December 31, 2016
(in thousands)
 
2017
 
2016
ASSETS
 
 
 
Current assets
 
 
 
Partnership cash
$
1,627

 
$
1,871

ORM Timber Funds cash
3,245

 
1,066

Cash
4,872

 
2,937

Accounts receivable, net
3,445

 
4,381

Land and timber held for sale
9,416

 
20,503

Prepaid expenses and other current assets
707

 
4,385

    Total current assets
18,440

 
32,206

Properties and equipment, at cost
 

 
 

  Timber and roads, net of accumulated depletion (2017 -  $118,987; 2016 - $110,533)
276,604

 
279,793

Timberland
55,152

 
54,369

Land held for development
25,530

 
24,390

Buildings and equipment, net of accumulated depreciation (2017 - $7,913; 2016 - $7,713)
5,452

 
5,628

    Total property and equipment, at cost
362,738

 
364,180

Other assets
 
 
 
Deferred tax and other assets
943

 
2,664

Total assets
$
382,121

 
$
399,050

 
 
 
 
LIABILITIES, PARTNERS’ CAPITAL AND NONCONTROLLING INTERESTS
 

 
 

Current liabilities
 

 
 

Accounts payable
$
1,403

 
$
2,620

Accrued liabilities
4,031

 
3,843

Current portion of long-term debt
121

 
5,119

Deferred revenue
372

 
418

Current portion of environmental remediation liability
4,569

 
8,650

Other current liabilities
536

 
398

    Total current liabilities
11,032

 
21,048

Long-term debt, net of unamortized debt issuance costs and current portion
135,690

 
125,291

Environmental remediation and other long-term liabilities
4,038

 
4,247

Partners’ capital and noncontrolling interests
 

 
 

General partners' capital (units issued and outstanding 2017 - 60; 2016 - 60)
908

 
934

Limited partners' capital (units issued and outstanding 2017 - 4,267; 2016 - 4,255)
56,271

 
58,199

Noncontrolling interests
174,182

 
189,331

    Total partners’ capital and noncontrolling interests
231,361

 
248,464

Total liabilities, partners’ capital and noncontrolling interests
$
382,121

 
$
399,050


See accompanying notes to condensed consolidated financial statements.

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Pope Resources, a Delaware Limited Partnership
For the Three and Six Months Ended June 30, 2017 and 2016
(in thousands, except per unit data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
15,891

 
$
12,713

 
$
33,236

 
$
23,782

Cost of sales
(8,979
)
 
(7,471
)
 
(20,180
)
 
(14,611
)
Operating expenses
(4,514
)
 
(4,041
)
 
(8,776
)
 
(7,414
)
General and administrative expenses
(1,405
)
 
(1,059
)
 
(3,106
)
 
(2,663
)
Gain on sale of timberland

 

 
12,503

 
226

Income (loss) from operations
993

 
142

 
13,677

 
(680
)
 
 
 
 
 
 
 
 
Interest expense, net
(1,117
)
 
(747
)
 
(2,127
)
 
(1,405
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(124
)
 
(605
)
 
11,550

 
(2,085
)
Income tax expense
(3
)
 

 
(59
)
 
(50
)
Net income (loss)
(127
)
 
(605
)
 
11,491

 
(2,135
)
 
 
 
 
 
 
 
 
Net and comprehensive (income) loss attributable to noncontrolling interests - ORM Timber Funds
285

 
1,041

 
(7,963
)
 
1,536

Net and comprehensive income (loss) attributable to unitholders    
$
158

 
$
436

 
$
3,528

 
$
(599
)
 
 
 
 
 
 
 
 
Allocable to general partners
$
2

 
$
6

 
$
49

 
$
(8
)
Allocable to limited partners
156

 
430

 
3,479

 
(591
)
Net and comprehensive income (loss) attributable to unitholders
$
158

 
$
436

 
$
3,528

 
$
(599
)
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per unit attributable to unitholders
$
0.03

 
$
0.09

 
$
0.80

 
$
(0.15
)
 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,327

 
4,313

 
4,326

 
4,312

 
 
 
 
 
 
 
 
Distributions per unit
$
0.70

 
$
0.70

 
$
1.40

 
$
1.40

See accompanying notes to condensed consolidated financial statements.

4



CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL (Unaudited)
Pope Resources, a Delaware Limited Partnership
Six Months Ended June 30, 2017
(in thousands)

 
Attributable to Pope Resources
 
 
 
 
 
General Partners
 
Limited Partners
 
Noncontrolling Interests
 
Total
December 31, 2016
$
934

 
$
58,199

 
$
189,331

 
$
248,464

Net income
49

 
3,479

 
7,963

 
11,491

Cash distributions
(85
)
 
(6,030
)
 
(23,937
)
 
(30,052
)
Capital call

 

 
825

 
825

Equity-based compensation
11

 
773

 

 
784

Unit repurchases

 
(57
)
 

 
(57
)
Payroll taxes paid on unit net settlements
(1
)
 
(93
)
 

 
(94
)
June 30, 2017
$
908

 
$
56,271

 
$
174,182

 
$
231,361


See accompanying notes to condensed consolidated financial statements.


5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Six Months Ended June 30, 2017 and 2016
(in thousands)
 
2017
 
2016
Net income (loss)
$
11,491

 
$
(2,135
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 

 
 

Depletion
8,485

 
4,193

Equity-based compensation
784

 
594

Depreciation and amortization
252

 
371

Deferred taxes
44

 

Cost of land sold
301

 
1,037

Gain on sale of timberland
(12,503
)
 
(226
)
Gain on disposal of property and equipment
(3
)
 
(24
)
Cash flows from changes in operating accounts
 

 
 

Accounts receivable, net
936

 
638

Prepaid expenses and other assets
5,356

 
188

Real estate project expenditures
(4,294
)
 
(5,225
)
Accounts payable and accrued liabilities
(1,031
)
 
447

Deferred revenue
(47
)
 
40

Environmental remediation
(4,280
)
 
(4,175
)
Other current and long-term liabilities
129

 
(20
)
Net cash provided by (used in) operating activities
5,620

 
(4,297
)
 
 
 
 
Cash flows from investing activities
 

 
 

Reforestation and roads
(1,109
)
 
(918
)
Capital expenditures
(92
)
 
(140
)
Proceeds from sale of property and equipment
30

 

Deposit for acquisition of timberland - Partnership

 
(1,581
)
Acquisition of timberland - Partnership
(4,951
)
 
(1,069
)
Proceeds from sale of timberland - Funds
26,444

 
723

Net cash provided by (used in) investing activities
20,322

 
(2,985
)
 
 
 
 
Cash flows from financing activities
 

 
 

Line of credit borrowings
18,507

 
9,250

Line of credit repayments
(8,000
)
 

Repayment of long-term debt
(5,059
)
 
(57
)
Debt issuance costs
(77
)
 

Unit repurchases
(57
)
 

Payroll taxes paid on unit net settlements
(94
)
 
(152
)
Cash distributions to unitholders
(6,115
)
 
(6,088
)
Cash distributions - ORM Timber Funds, net of distributions to Partnership
(23,937
)
 
(2,573
)
Capital call - ORM Timber Funds, net of Partnership contribution
825

 

Net cash provided by (used in) financing activities
(24,007
)
 
380

 
 
 
 
Net increase (decrease) in cash
1,935

 
(6,902
)
Cash at beginning of period
2,937

 
9,706

Cash at end of period
$
4,872

 
$
2,804


See accompanying notes to condensed consolidated financial statements.

6



POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2017

1.
The condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 and the related condensed consolidated statements of comprehensive income (loss) for the three- and six-month periods and partners’ capital and cash flows for six-month periods ended June 30, 2017 and 2016, have been prepared by Pope Resources, A Delaware Limited Partnership (the “Partnership”), pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2016 is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2016, and should be read in conjunction with such financial statements and notes. The results of operations for the interim periods are not indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2017.

2.
The financial statements in the Partnership’s 2016 annual report on Form 10-K include a summary of significant accounting policies of the Partnership and should be read in conjunction with this Quarterly Report on Form 10-Q.

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2018. Early application is not permitted. The Partnership will adopt this standard using the cumulative effect transition method applied to uncompleted contracts as of the date of adoption. Under this method, the cumulative effect of initially applying the standard is recorded as an adjustment to partners’ capital. This new standard may result in accelerating the recognition of revenue in the Real Estate segment for performance obligations that are satisfied over time, which generally consist of construction and landscaping activity in common areas completed after transaction closing. Management does not expect, however, that the impact will be material to the Partnership’s financial reporting.

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

Effective January 1, 2017, the Partnership adopted ASU 2016-09, which simplifies several aspects of accounting for share-based payment transactions, including income tax consequences, award classification, cash flows reporting, and forfeiture rate application. The adoption of this standard did not have a material impact on the Partnership’s consolidated financial statements.

3.
Prepaid expenses and other current assets included $850,000 held by Internal Revenue Code Section 1031 like-kind exchange intermediaries at December 31, 2016. Deferred tax and other assets included $1.9 million held by like-kind exchange intermediaries at December 31, 2016. There were no amounts held by like-kind exchange intermediaries at June 30, 2017.

4.
The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 partnership units. The allocation of distributions, profits and losses among the general and limited partners is pro rata across all units outstanding.

5.
ORM Timber Fund II, Inc. (Fund II), ORM Timber Fund III (REIT) Inc. (Fund III) and ORM Timber Fund IV LLC (Fund IV), collectively “the Funds”, were formed by Olympic Resource Management LLC (ORMLLC), a wholly owned subsidiary of the Partnership, for the purpose of attracting capital to purchase timberlands. The objective of these Funds is to generate a return on investments through the acquisition, management, value enhancement and sale of timberland properties. Each fund is organized to operate for a specific term from the end of its respective investment period; ten years for each of Fund II and Fund III and fifteen years for Fund IV. Fund II and Fund III are scheduled to terminate in March 2021 and December 2025, respectively. Fund IV will terminate on the fifteenth anniversary of its investment period. Fund

7



IV’s investment period will end on the earlier of placement of all committed capital or December 31, 2019, subject to certain extension provisions.

Pope Resources and ORMLLC together own 20% of Fund II, 5% of Fund III and 15% of Fund IV. The Funds are considered variable interest entities because their organizational and governance structures are the functional equivalent of a limited partnership. As the managing member of the Funds, the Partnership is the primary beneficiary of each of the Funds as it has the authority to direct the activities that most significantly impact their economic performance, as well as the right to receive benefits and obligation to absorb losses that could potentially be significant to the Funds. Accordingly, the Funds are consolidated into the Partnership’s financial statements. Additionally, the obligations of each of the Funds do not have any recourse to the Partnership.

In January 2017, Fund II closed on the sale of one of its tree farms, located on the Oregon coast, for $26.5 million. The carrying value of this tree farm, consisting of $11.1 million for timber and roads and $2.8 million for land, is reflected in land and timber held for sale on the consolidated balance sheets as of December 31, 2016. The consolidated pretax results generated by this tree farm were losses of $51,000 and 65,000 for the quarter and six months ended June 30, 2016, respectively, and a gain of $12.5 million for the six months ended June 30, 2017. The Partnership’s share of these pretax results were losses of $10,000 and $13,000 for the quarter and six months ended June 30, 2016, respectively, and a gain of $2.5 million for the six months ended June 30, 2017.

The Partnership’s condensed consolidated balance sheets included assets and liabilities of the Funds as of June 30, 2017 and December 31, 2016, which were as follows:
 
(in thousands)
June 30, 2017
 
December 31, 2016
Assets:
Cash
$
3,245

 
$
1,066

Land and timber held for sale

 
13,941

Other current assets
1,569

 
2,195

Total current assets
4,814

 
17,202

Properties and equipment, net of accumulated depletion and depreciation (2017 - $44,862; 2016 - $38,306)
243,130

 
249,197

Total assets
$
247,944

 
$
266,399

Liabilities and equity:
 

 
 

Current liabilities
$
2,248

 
$
2,256

Long-term debt, net of unamortized debt issuance costs
57,279

 
57,268

Total liabilities
59,527

 
59,524

Funds’ equity
188,417

 
206,875

Total liabilities and equity
$
247,944

 
$
266,399


6.
In the presentation of the Partnership’s revenue and operating income (loss) by segment, all intersegment revenue and expense is eliminated to determine operating income (loss) reported externally. The following tables reconcile internally reported income (loss) from operations to externally reported income (loss) from operations by business segment, for the three and six months ended June 30, 2017 and 2016:

8



 
Fee Timber
 
 
Three Months Ended June 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Investment Management
 
Real Estate
 
Other
 
Consolidated
2017
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
8,253

$
7,273

$
15,526

 
$
817

 
$
549

 
$

 
$
16,892

Eliminations
(84
)

(84
)
 
(817
)
 
(100
)
 

 
(1,001
)
Revenue - external
8,169

7,273

15,442

 

 
449

 

 
15,891

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(3,336
)
(5,190
)
(8,526
)
 

 
(453
)
 

 
(8,979
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,466
)
(1,662
)
(3,128
)
 
(852
)
 
(1,511
)
 
(1,429
)
 
(6,920
)
Eliminations
40

817

857

 
101

 
19

 
24

 
1,001

Operating, general and administrative expenses - external
(1,426
)
(845
)
(2,271
)
 
(751
)
 
(1,492
)
 
(1,405
)
 
(5,919
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
3,451

421

3,872

 
(35
)
 
(1,415
)
 
(1,429
)
 
993

Eliminations
(44
)
817

773

 
(716
)
 
(81
)
 
24

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
3,407

$
1,238

$
4,645

 
$
(751
)
 
$
(1,496
)
 
$
(1,405
)
 
$
993

 
 
 
 
 
 
 
 
 
 
 
 
2016
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
8,186

$
4,136

$
12,322

 
$
788

 
$
516

 
$

 
$
13,626

Eliminations
(52
)

(52
)
 
(788
)
 
(73
)
 

 
(913
)
Revenue - external
8,134

4,136

12,270

 

 
443

 

 
12,713

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(3,789
)
(3,197
)
(6,986
)
 

 
(485
)
 

 
(7,471
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,597
)
(1,544
)
(3,141
)
 
(665
)
 
(1,133
)
 
(1,074
)
 
(6,013
)
Eliminations
32

794

826

 
62

 
10

 
15

 
913

Operating, general and administrative expenses -external
(1,565
)
(750
)
(2,315
)
 
(603
)
 
(1,123
)
 
(1,059
)
 
(5,100
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
2,800

(605
)
2,195

 
123

 
(1,102
)
 
(1,074
)
 
142

Eliminations
(20
)
794

774

 
(726
)
 
(63
)
 
15

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
2,780

$
189

$
2,969

 
$
(603
)
 
$
(1,165
)
 
$
(1,059
)
 
$
142


9



 
Fee Timber
 
 
Six Months Ended June 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Investment Management
 
Real Estate
 
Other
 
Consolidated
2017
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
17,444

$
14,979

$
32,423

 
$
1,665

 
$
1,216

 
$

 
$
35,304

Eliminations
(169
)

(169
)
 
(1,665
)
 
(234
)
 

 
(2,068
)
Revenue - external
17,275

14,979

32,254

 

 
982

 

 
33,236

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(6,878
)
(12,283
)
(19,161
)
 

 
(1,019
)
 

 
(20,180
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(2,710
)
(3,435
)
(6,145
)
 
(1,925
)
 
(2,716
)
 
(3,164
)
 
(13,950
)
Eliminations
97

1,665

1,762

 
208

 
40

 
58

 
2,068

Operating, general and administrative expenses - external
(2,613
)
(1,770
)
(4,383
)
 
(1,717
)
 
(2,676
)
 
(3,106
)
 
(11,882
)
Gain on sale of timberland

12,503

12,503

 

 

 

 
12,503

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
7,856

11,764

19,620

 
(260
)
 
(2,519
)
 
(3,164
)
 
13,677

Eliminations
(72
)
1,665

1,593

 
(1,457
)
 
(194
)
 
58

 

Income (loss) from operations - external
$
7,784

$
13,429

$
21,213

 
$
(1,717
)
 
$
(2,713
)
 
$
(3,106
)
 
$
13,677

 
 
 
 
 
 
 
 
 
 
 
 
2016
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
12,624

$
9,498

$
22,122

 
$
1,611

 
$
1,900

 
$

 
$
25,633

Eliminations
(100
)

(100
)
 
(1,603
)
 
(148
)
 

 
(1,851
)
Revenue - external
12,524

9,498

22,022

 
8

 
1,752

 

 
23,782

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(5,397
)
(7,482
)
(12,879
)
 

 
(1,732
)
 

 
(14,611
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(2,797
)
(2,787
)
(5,584
)
 
(1,406
)
 
(2,241
)
 
(2,697
)
 
(11,928
)
Eliminations
59

1,609

1,668

 
129

 
20

 
34

 
1,851

Operating, general and administrative expenses - external
(2,738
)
(1,178
)
(3,916
)
 
(1,277
)
 
(2,221
)
 
(2,663
)
 
(10,077
)
Gain on sale of timberland

226

226

 

 

 

 
226

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
4,430

(545
)
3,885

 
205

 
(2,073
)
 
(2,697
)
 
(680
)
Eliminations
(41
)
1,609

1,568

 
(1,474
)
 
(128
)
 
34

 

Income (loss) from operations - external
$
4,389

$
1,064

$
5,453

 
$
(1,269
)
 
$
(2,201
)
 
$
(2,663
)
 
$
(680
)


10



7.
Basic and diluted earnings per unit are calculated by dividing net income (loss) attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders and preferred shareholders of Fund II and Fund III, by the weighted average units outstanding during the period. There were no dilutive securities outstanding during the periods presented. The following table shows the calculation of basic and diluted earnings per unit:

 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands, except per unit amounts)
2017
 
2016
 
2017
 
2016
Net and comprehensive income (loss) attributable to Pope Resources’ unitholders
$
158

 
$
436

 
$
3,528

 
$
(599
)
Less:
 

 
 

 
 

 
 

Net and comprehensive income attributable to unvested restricted unitholders
(25
)
 
(25
)
 
(56
)
 
(50
)
Preferred share dividends - ORM Timber Funds
(8
)
 
(8
)
 
(16
)
 
(16
)
Net and comprehensive income (loss) for calculation of earnings per unit
$
125

 
$
403

 
$
3,456

 
$
(665
)
 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,327

 
4,313

 
4,326

 
4,312

 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per unit
$
0.03

 
$
0.09

 
$
0.80

 
$
(0.15
)

8.
In the first quarter of 2017, the Partnership issued 14,860 restricted units pursuant to the management incentive compensation program and 3,820 restricted units to members of the Board of Directors. These restricted units vest ratably over four years with the grant date fair value equal to the market price on the date of grant. During the six months ended June 30, 2017, 1,088 units were granted with no restrictions to certain board members who elected to receive their quarterly board compensation in the form of units rather than cash. Units granted to directors are included in the calculation of total equity compensation expense which is recognized over the vesting period, for restricted units, or immediately for unrestricted units. Grants to retirement-eligible individuals on the date of grant are expensed immediately. The Partnership recognized $180,000 and $178,000 of equity compensation expense in the second quarter of 2017 and 2016, respectively, related to these compensation programs and $784,000 and $594,000 for the six months ended June 30, 2017 and 2016, respectively,

9.
In May 2017, the Partnership adopted a unit repurchase plan under Rule 10b5-1 of the Securities Exchange Act of 1934. The plan allows for the repurchase of units with an aggregate value of up to $1.2 million through June 1, 2018. The Partnership repurchased units with an aggregate value of $57,000 in the second quarter of 2017.

In June 2017, the Partnership adopted a Distribution Reinvestment Plan (DRP) under which unitholders may elect to reinvest their cash distributions to acquire newly issued units. The Partnership has registered 225,000 units for issuance under the DRP. No units had been issued under the DRP as of June 30, 2017.

10.
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $1.9 million and $1.2 million during the first six months of 2017 and 2016, respectively. Income taxes paid totaled $24,000 and $146,000 during the first six months of 2017 and 2016, respectively.

11.
During the first quarter of 2017, the Partnership closed on acquisitions of timberland in western Washington totaling 1,648 acres for $5.0 million. The aggregate purchase price was allocated $783,000 to land and $4.2 million to timber and roads.

12.
In June 2017, the Partnership amended its $21.0 million credit facility with Northwest Farm Credit Services to increase the borrowing capacity to $31.0 million and restructure the facility to a revolving line of credit through December 31, 2019, at which time it may be repaid or converted to a term loan facility with multiple tranches that have an ultimate maturity in July 2027. Advances under the loan require quarterly interest-only payments with principal due at maturity. These advances may bear interest at a variable rate based on the one-month LIBOR plus a margin of 1.85% (base rate loan segment) or at fixed rates based on the lender's rate pricing index, for terms of one through ten years, plus a margin of 1.95% (fixed rate loan segment). In addition, base rate loan segments may be converted to fixed rate loan segments, though no more than six fixed rate loan segments may be outstanding at any time. The Partnership had $6.0 million outstanding under this facility as a base rate loan segment at June 30, 2017 and December 31, 2016.

11




13.
The Partnership’s financial instruments include cash and accounts receivable, for which the carrying amount of each represents fair value based on current market interest rates or their short-term nature.

The Partnership’s and the Funds’ fixed-rate debt collectively have a carrying value of $101.7 million as of June 30, 2017 and December 31, 2016. The estimated fair value of this debt, based on current interest rates for similar instruments (Level 2 inputs in the Fair Value Hierarchy), is approximately $106.1 million and $111.0 million as of June 30, 2017 and December 31, 2016, respectively.

14.
The Partnership had an accrual for estimated environmental remediation costs of $8.5 million and $12.8 million as of June 30, 2017 and December 31, 2016, respectively. The environmental remediation liability represents management’s estimate of payments to be made to remediate and monitor certain areas in and around Port Gamble Bay, Washington.

In December of 2013, a consent decree and Clean-up Action Plan (CAP) related to Port Gamble were finalized with the Washington State Department of Ecology (DOE) and filed with Kitsap County Superior Court. In the third quarter of 2015, the Partnership selected a contractor to complete the remediation work. Remediation activity began in late September of 2015 and the required in-water portion of the cleanup was completed in January 2017 and will be followed by cleanup activity on the millsite and by a monitoring period. Management’s cost estimates for the remainder of the project are based on amounts included in construction contracts, bids from contractors, and estimates for project management and other professional fees.

The environmental liability at June 30, 2017 is comprised of $4.6 million that management expects to expend in the next 12 months and $3.9 million thereafter.

Activity in the environmental liability is as follows:
 
(in thousands)
Balance at Beginning of the Period
 
Additions to Accrual
 
Expenditures for Remediation
 
Balance at Period-end
Year ended December 31, 2015
$
21,651

 
$

 
$
4,890

 
$
16,761

Year ended December 31, 2016
16,761

 
7,700

 
11,691

 
12,770

Quarter ended March 31, 2017
12,770

 

 
3,329

 
9,441

Quarter ended June 30, 2017
$
9,441

 
$

 
$
951

 
$
8,490


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

12



EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), is engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and three private equity funds (“Fund II”, “Fund III” and “Fund IV”, collectively, the “Funds”). When we refer to the timberland owned by the Partnership, we describe it as the Partnership’s tree farms. We refer to timberland owned by the Funds as the Funds’ tree farms. When referring collectively to the Partnership’s and Funds’ timberland we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber and manufacturing logs for sale to domestic wood products manufacturers and log export brokers. The second most significant business segment in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily include securing permits and entitlements, and in some cases, installing infrastructure for raw land development and then realizing that land’s value by selling larger parcels to developers who, in turn, seek to take the land further up the value chain by either selling homes to retail buyers or lots to developers of commercial property. Since these projects often span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed, and will not recognize operating income until that project is sold. In addition, within this segment we sometimes negotiate and sell development rights in the form of conservation easements (CE’s) on Fee Timber properties which preclude future development, but allow continued forestry operations. Our third business segment, which we refer to as Timberland Investment Management, is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership.

Our current strategy for adding timberland acreage is centered primarily on our private equity timber fund business model. However, we acquire smaller timberland parcels from time to time to add on to the Partnership’s existing tree farms. In addition, during periods when the Funds’ committed capital is fully invested, we may look to acquire larger timberland properties for the Partnership. Our three active timber funds have assets under management totaling approximately $357 million as of June 30, 2017 based on the most recent appraisals. Through our 20% co-investment in Fund II, our 5% co-investment in Fund III and our 15% co-investment in Fund IV, we have deployed $26 million of Partnership capital. Fund IV, launched in December 2016, has not yet deployed any capital to acquire timberland properties. Our co-investment affords us a share of the Funds’ operating cash flows while also allowing us to earn asset management and timberland management fees, as well as potential future incentive fees, based upon the overall success of each fund. We also believe that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management on a more cost-effective basis than we could for the Partnership’s timberlands alone. We believe our co-investment strategy also enhances our credibility with existing and prospective Fund investors by demonstrating that we have both an operational and a financial commitment to the Funds’ success.

The Funds are consolidated into our financial statements, but then income or loss attributable to equity owned by third parties is subtracted from consolidated results in our Condensed Consolidated Statements of Comprehensive Income under the caption “Net and comprehensive (income) loss attributable to non-controlling interests-ORM Timber Funds” to arrive at ‘Net and comprehensive income (loss) attributable to unitholders”.

The strategy for our Real Estate segment centers around how and when to “harvest” or sell a parcel of land to realize its optimal value. In doing so, we seek to balance the long-term risks and costs of carrying and developing a property against the potential for income and cash flows upon sale. Land held for development by our Real Estate segment represents property in western Washington that has been deemed suitable for residential and commercial building sites. Land and timber held for sale represents those properties in the development portfolio that we expect to sell in the next year.
 
Second quarter highlights

Harvest volume was 23.3 million board feet (MMBF) in Q2 2017 compared to 20.9 MMBF in Q2 2016, an 11% increase. Harvest volume for the first six months of 2017 was 50.6 MMBF compared to 36.6 MMBF for the corresponding period of 2016, a 38% increase. These harvest volume figures do not include timber deed sales, sold by Fund III, of 2.1 MMBF and 2.4 MMBF for the quarter and six months ended June 30, 2017, respectively. The harvest volume and log price realization metrics cited below also exclude these timber deed sales, except as noted otherwise.
The average realized log price was $616 per thousand board feet (MBF) in Q2 2017, a 9% increase compared to $563 per MBF in Q2 2016. For the first six months of 2017, the average realized log price was $605 per MBF compared to $575 per MBF for the corresponding period of 2016, a 5% increase.
As a percentage of total harvest, volume sold to domestic markets in Q2 2017 decreased to 59% from 66% in Q2 2016, while the mix of volume sold to export markets increased to 21% in Q2 2017 from 15% in Q2 2016. For the first six months of 2017, the relative percentages of volume sold to domestic and export markets were 59% and 22%, respectively,

13



compared to 63% and 17%, respectively, in the corresponding period of 2016. Hardwood and pulpwood log sales make up the balance of harvest volume.
In June 2017, we modified a credit facility to increase the Partnership’s borrowing capacity under that particular facility from $21.0 million to $31.0 million. We also worked with the lender to amend this facility’s structure. Between now and December 31, 2019, it will operate as a revolving line of credit and thereafter it will convert to a term loan with multiple tranches that have an ultimate maturity in July 2027.
During the quarter, the Partnership repurchased 744 units at an average price of $76.52 per unit under a unit repurchase plan, leaving $1.1 million remaining under the plan through June 2018.

Outlook

We expect our total 2017 harvest volume to be between 112 and 116 MMBF, including timber deed sales. In our Real Estate segment, we expect to close on the sale of up to 93 single-family lots from our Harbor Hill project, the majority of which we expect to occur in the fourth quarter, as well as a number of other potential land and conservation easement sales.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) attributable to unitholders for the respective quarters and six months ended June 30, 2017 and 2016.  The explanatory text that follows the table describes in detail certain of these changes by business segment.
(in thousands)
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
Net income (loss) attributable to Pope Resources’ unitholders:
 
 
 
2017 period
$
158

 
$
3,528

2016 period
436

 
(599
)
Variance
$
(278
)
 
$
4,127

Detail of variance:
 

 
 

Fee Timber
 

 
 

Log volumes (A)
$
1,351

 
$
8,050

Log price realizations (B)
1,235

 
1,518

Gain on sale of timberland

 
12,277

Timber deed sales
638

 
710

Production costs
160

 
(1,990
)
Depletion
(1,700
)
 
(4,292
)
Other Fee Timber
(8
)
 
(513
)
Timberland Investment Management
(148
)
 
(448
)
Real Estate
 

 
 

Land sales
62

 
(23
)
Other Real Estate
(393
)
 
(489
)
General and administrative costs
(346
)
 
(443
)
Net interest expense
(370
)
 
(722
)
Income taxes
(3
)
 
(9
)
Noncontrolling interests
(756
)
 
(9,499
)
Total variances
$
(278
)
 
$
4,127


(A)
Volume variance calculated by multiplying the change in sales volume by the average log sales price for the comparison period.
(B)
Price variance calculated by multiplying the change in average realized price by current period sales volume.


14



Fee Timber
 
Fee Timber results include operations on 120,000 acres of timberland owned by the Partnership and 88,000 acres of timberland owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington, northwestern Oregon, and northern California. Revenue is driven primarily by the volume of timber harvested and the average log price realized on the sale of that timber. Our harvest volume is based typically on manufactured log sales to domestic mills and log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude timber deed sales, except where stated otherwise. Harvest volumes are generally expressed in million board feet (MMBF) increments while harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF).

Fee Timber revenue is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which, along with timber deed sales, are included in other revenue below. Commercial thinning consists of the selective cutting of timber stands not yet of optimal harvest age. They do, however, have some commercial value, thus allowing us to earn revenue while at the same time improving the projected value at harvest of the remaining timber in the stand.

Revenue and operating income for the Fee Timber segment for the quarters ended June 30, 2017, March 31, 2017, and June 30, 2016 were as follows:
 
(in millions)
Quarter ended
 
Log Sale
Revenue
 
Other
Revenue
 
Total Fee
Timber
Revenue
 
Gain on Sale of
Timberland
 
Operating
Income
 
Harvest
Volume
(MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
7.7

 
$
0.5

 
$
8.2

 
$

 
$
3.4

 
12.5

 

Funds
 
6.6

 
0.6

 
7.2

 

 
1.2

 
10.8

 
2.1

Total June 2017
 
$
14.3

 
$
1.1

 
$
15.4

 
$

 
$
4.6

 
23.3

 
2.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
8.7

 
$
0.4

 
$
9.1

 
$

 
$
4.4

 
14.1

 

Funds
 
7.6

 
0.1

 
7.7

 
12.5

 
12.2

 
13.2

 
0.3

Total March 2017
 
$
16.3

 
$
0.5

 
$
16.8

 
$
12.5

 
$
16.6

 
27.3

 
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
7.7

 
$
0.5

 
$
8.2

 
$

 
$
2.8

 
13.7

 

Funds
 
4.1

 

 
4.1

 

 
0.2

 
7.2

 

Total June 2016
 
$
11.8

 
$
0.5

 
$
12.3

 
$

 
$
3.0

 
20.9

 

 
Operating Income
 
Comparing Q2 2017 to Q1 2017.  Operating income decreased $12.0 million from Q1 2017. Our Q1 2017 results reflect a $12.5 million gain on the January 2017 sale of a 6,500-acre tree farm on the Oregon coast by Fund II. Excluding this gain, operating income increased by $580,000, or 14%, driven by a $569,000 rise in other revenue related to higher timber deed sales on Fund tree farms. Also contributing to the increase in operating income was a 3% rise in average realized log prices and a 20% decrease in cost of sales. Offsetting these positive factors were a 15% decrease in delivered log volume and a $159,000 increase in operating expenses.
 
Comparing Q2 2017 to Q2 2016.  Operating income increased $1.6 million, or 53%, from Q2 2016, driven by an 11% increase in delivered log volume and a 9% increase in average realized log prices. Contributing further to the increase in operating income were timber deed sales on 2.1 MMBF of Fund volume that had no counterpart in Q2 2016. The higher volume in 2017 resulted in a 22% rise in cost of sales.
 

15



Revenue
 
Comparing Q2 2017 to Q1 2017.  Log sale revenue in Q2 2017 decreased $2.0 million, or 12%, from Q1 2017 due primarily to a 15% decrease in harvest volume, offset partially by a 3% increase in average realized log prices. We deferred harvest volume during Q2 2017 to later in the year on the expectation of stronger log markets. The $569,000 increase in other revenue is attributable to timber deed sales from Fund timberlands on volume of 2.1 MMBF during Q2 2017 compared to 0.3 MMBF in Q1 2017.

Comparing Q2 2017 to Q2 2016.  Log sale revenue in Q2 2017 increased $2.5 million, or 21%, from Q2 2016, primarily as a result of an 11% increase in harvest volume and a 9% increase in average realized log prices. In 2016, we deferred a large portion of our annual harvest volume to the second half of the year, which suppressed volume during Q2 2016. Log markets were stronger in Q2 2017 relative to Q2 2016 due to increased demand in both domestic and export markets and a reduced supply of logs. On the demand side, we are benefiting from a second production line that came on-line at Sierra Pacific’s new mill in Shelton. On the supply side, reduced harvest volumes from our competitors and lower Canadian production are creating pricing tension in the market.

Revenue and operating income for the Fee Timber segment for the six months ended June 30, 2017 and 2016 were as follows:
 
(in millions) Six Months Ended
 
Log Sale Revenue
 
Other Revenue
 
Total Fee Timber Revenue
 
Gain (loss) on Sale of Timberland
 
Operating Income
 
Harvest Volume (MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
16.4

 
$
0.9

 
$
17.3

 
$

 
$
7.8

 
26.6

 

Funds
 
14.2

 
0.7

 
14.9

 
12.5

 
13.4

 
24.0

 
2.4

Total June 2017
 
$
30.6

 
$
1.6

 
$
32.2

 
$
12.5

 
$
21.2

 
50.6

 
2.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
11.6

 
$
0.9

 
$
12.5

 
$

 
$
4.4

 
20.0

 

Funds
 
9.4

 
0.1

 
9.5

 
0.2

 
1.1

 
16.6

 

Total June 2016
 
$
21.0

 
$
1.0

 
$
22.0

 
$
0.2

 
$
5.5

 
36.6

 

 
Operating Income
 
Comparing YTD 2017 to YTD 2016.  Operating income in the first six months of 2017 increased by $15.7 million, from the corresponding period of 2016. Our 2017 results reflect a $12.5 million gain on the January 2017 sale by Fund II of a 6,500-acre tree farm on the Oregon coast, whereas our 2016 results include a $226,000 gain on the sale of 205 acres of Fund timberland. Excluding the gains from these timberland sales, Fee Timber operating income increased $3.5 million, or 64%, to $8.7 million in 2017 from $5.3 million in 2016. This improvement resulted from a 38% rise in delivered log volume, a 5% increase in average realized log prices, and a $640,000 increase in other revenue from 2.4 MMBF of timber deed sales in 2017 that had no counterpart in 2016. These factors were offset partially by a 49% increase in cost of sales (including timber deed sales), tied to the volume increase, and a $468,000 rise in operating expenses.
 
Revenue
 
Comparing YTD 2017 to YTD 2016.  Log sale revenue in the first six months of 2017 increased $9.6 million, or 46%, from the corresponding period of 2016. The higher revenue was the result of a 38% increase in delivered log volume and a 5% increase in average realized log prices. In 2016, we deferred a large portion of our annual harvest volume to the second half of the year, which resulted in lower volume during the first half of the year. Conversely, we have planned to spread our 2017 harvest more evenly across the quarters. Other revenue increased $640,000 due to timber deed sales on 2.4 MMBF of volume that had no counterpart in 2016.
 
Log Volume

We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the quarters ended June 30, 2017, March 31, 2017, and June 30, 2016:

16



 
Volume (in MMBF)
Quarter Ended
 
 
Jun-17
% Total
 
Mar-17
% Total

 
Jun-16
% Total
Sawlogs
Douglas-fir
13.7

59
%
 
16.0

59
%
 
9.4

45
%
 
Whitewood
3.3

14
%
 
5.5

20
%
 
5.4

26
%
 
Pine
1.3

5
%
 

%
 
1.2

6
%
 
Cedar
0.4

2
%
 
0.7

2
%
 
1.0

5
%
 
Hardwood
0.9

4
%
 
0.5

2
%
 
0.7

3
%
Pulpwood
All Species
3.7

16
%
 
4.6

17
%
 
3.2

15
%
Total
 
23.3

100
%
 
27.3

100
%
 
20.9

100
%
 
Comparing Q2 2017 to Q1 2017. Harvest volume decreased 4.0 MMBF, or 15%, in Q2 2017 from Q1 2017. We deferred harvest volume during Q2 2017 to later in the year on the expectation of stronger log markets. The 6% decrease in whitewood’s relative share of harvest volume and corresponding 5% increase in pine’s share is the result of increased harvest operations in Q2 2017 on Fund III’s McCloud tree farm in northern California as melting snow allowed us to access that tree farm.
 
 Comparing Q2 2017 to Q2 2016. Harvest volume increased 2.4 MMBF, or 11%, in Q2 2017 from Q2 2016. Both domestic and export log markets were stronger in Q2 2017 than in Q2 2016. Our species mix shifted from whitewood in Q2 2016 towards Douglas-fir in Q2 2017 due to improved Douglas-fir log markets relative to whitewood markets compared to a year ago.

We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the six months ended June 30, 2017 and 2016:

Volume (in MMBF)
Six Months Ended
 
 
Jun-17
% Total
 
Jun-16
% Total
Sawlogs:
Douglas-fir
29.7

59
%
 
18.2

50
%
 
Whitewood
8.8

17
%
 
8.0

22
%
 
Pine
1.3

3
%
 
1.2

3
%
 
Cedar
1.1

2
%
 
1.9

5
%
 
Hardwood
1.4

3
%
 
1.3

4
%
Pulpwood:
All Species
8.3

16
%
 
6.0

16
%
Total
 
50.6

100
%
 
36.6

100
%
 
Comparing YTD 2017 to YTD 2016. Harvest volume increased 14.0 MMBF, or 38%, in the first six months of 2017 compared to the corresponding period of 2016. In the first half of 2016 we planned our harvest to defer significant volume until later in the year in anticipation of better log prices. In 2017, we have benefited from increased demand from both the domestic and export markets, as well as reduced supply from our competitors. In addition, we sold 2.4 MMBF of volume via timber deed sales from Fund properties in the current year whereas in 2016 there were no timber deed sales. Our species mix shifted from whitewood in 2016 towards Douglas-fir in 2017 due to improved Douglas-fir log markets relative to whitewood markets compared to a year ago.
  
Log Prices
 
Logs from the Combined tree farms serve a number of different domestic and export markets, with domestic mills historically representing our largest market destination. Export customers consist of log brokers who sell the logs primarily to Japan, China and, to a lesser degree, Korea.


17



We realized the following log prices by species for the quarters ended June 30, 2017, March 31, 2017, and June 30, 2016:
 
 
 
Quarter Ended
 
 
Jun-17
 
Mar-17
 
Jun-16
Average price realizations (per MBF):
 
 
Sawlogs:
Douglas-fir
$
694

 
$
663

 
$
596

 
Whitewood
602

 
548

 
550

 
Pine
486

 

 
500

 
Cedar
1,414

 
1,369

 
1,271

 
Hardwood
685

 
615

 
521

Pulpwood:
All Species
297

 
290

 
290

Overall
 
616

 
596

 
563


The following table compares the dollar and percentage change in log prices from each of Q1 2017 and Q2 2016 to Q2 2017:
   
 
 
Change to Q2 2017 from Quarter Ended
 
 
Mar-17
 
Jun-16
 
 
$/MBF
 
%
 
$/MBF
 
%
Sawlogs:
Douglas-fir
$
31

 
5
%
 
$
98

 
16
%
 
Whitewood
54

 
10
%
 
52

 
9
%
 
Pine
486

 
NA

 
(14
)
 
(3
%)
 
Cedar
45

 
3
%
 
143

 
11
%
 
Hardwood
70

 
11
%
 
164

 
31
%
Pulpwood:
All Species
7

 
2
%
 
7

 
2
%
Overall
 
20

 
3
%
 
53

 
9
%
 
Overall realized log prices in Q2 2017 were 3% higher than Q1 2017. Our overall average realized log price is influenced heavily by price movements for our two most prevalent species, Douglas-fir and whitewood, and the relative mix of harvest volume of those two species. From Q1 2017 to Q2 2017, realized log prices for Douglas-fir and whitewood increased 5% and 10%, respectively. Prices for both species rose due to increased demand in the domestic and export markets as well as reduced supply of logs from competitors. The 11% rise in hardwood prices is the result of increased competition among our customers.

From Q2 2016 to Q2 2017, average realized log prices increased 9%. The favorable change was attributable to increases in Douglas-fir and whitewood realized log prices of 16% and 9%, respectively. In addition, our average realized price benefited from a favorable shift in species mix away from whitewood in Q2 2016 and towards Douglas-fir in Q2 2017. Cedar prices improved 11% due to a reduction in the relative share of lower-value incense cedar from the Fund III’s McCloud tree farm. In Q2 2016, incense cedar comprised 20% of cedar volume, whereas in Q2 2017 it was only 9%. The 31% rise in hardwood prices is the result of increased competition among our customers.

The following table compares realized log prices by species for the first six months of 2017 and 2016, as well as the dollar and percentage change in log prices between the two periods:

18



 
 
 
Six Months Ended
 
 
Jun-17
 
 
 
 
 
Jun-16
 
 
 

 
∆ from Jun -17 to Jun -16
 
 

 
 
 
 
$/MBF
 
%
 
 
Sawlogs:
Douglas-fir
$
677

 
$
69

 
11
%
 
$
608

 
Whitewood
568

 
38

 
7
%
 
530

 
Pine
501

 
1

 
%
 
500

 
Cedar
1,384

 

 
%
 
1,384

 
Hardwood
660

 
131

 
25
%
 
529

Pulpwood:
All species
293

 
(7
)
 
(2
%)
 
300

Overall
 
605

 
30

 
5
%
 
575

 
Overall realized log prices increased 5% in the first six months of 2017 compared to the corresponding period of 2016. The overall average is influenced heavily by Douglas-fir and whitewood prices, which were up 11% and 7%, respectively, on increased demand in the domestic and export markets and reduced log supply from our competitors. Hardwood prices rose 25% on increased competition among our customers.
 
Customers

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

The table below categorizes logs sold by customer type for the quarters ended June 30, 2017, March 31, 2017, and June 30, 2016:

 
Q2 2017
 
Q1 2017
 
Q2 2016
 
Volume
 
 

 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
 
MMBF
%
 
Price
Domestic mills
13.7

59
%
 
$
657

 
16.1

59
%
 
$
653

 
13.8

66
%
 
$
618

Export brokers
5.0

21
%
 
731

 
6.1

22
%
 
670

 
3.2

15
%
 
607

Hardwood
0.9

4
%
 
685

 
0.5

2
%
 
615

 
0.7

4
%
 
521

Pulpwood
3.7

16
%
 
297

 
4.6

17
%
 
290

 
3.2

15
%
 
290

Total
23.3

100
%
 
616

 
27.3

100
%
 
596

 
20.9

100
%
 
563

Timber deed sale
2.1

 

 
301

 
0.3

 

 
229

 

 

 

Total
25.4

 

 
 

 
27.6

 

 
 

 
20.9

 

 
 

 
Comparing Q2 2017 to Q1 2017. The relative volume sold to our various customer types and as pulpwood changed little during Q2 2017 compared to Q1 2017. Timber deed sales in both quarters came from one of Fund III’s tree farms.

Comparing Q2 2017 to Q2 2016. Volume sold to the export market increased to 21% of Q2 2017 volume from 15% of Q2 2016 volume, while volume sold to the domestic market decreased to 59% of Q2 2017 volume from 66% of Q2 2016 volume. Average realized export prices were at a premium to prices from domestic mills during Q2 2017, whereas the relationship was the reverse during Q2 2016.

The table below categorizes logs sold by customer type for the six-month periods ended June 30, 2017 and 2016:

19




 
Six Months Ended
 
June 2017
 
June 2016
 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
Domestic mills
29.8

59
%
 
$
655

 
23.2

63
%
 
$
632

Export brokers
11.1

22
%
 
698

 
6.1

17
%
 
636

Hardwood
1.4

3
%
 
660

 
1.3

4
%
 
529

Pulpwood
8.3

16
%
 
293

 
6.0

16
%
 
300

Subtotal
50.6

100
%
 
605

 
36.6

100
%
 
575

Timber deed sale
2.4

 

 
292

 

 
 

Total
53.0

 

 
 

 
36.6

 
 
 

 
Comparing YTD 2017 to YTD 2016. In the first six months of 2017, the relative amounts of volume sold to our domestic customers decreased to 59% from 63% during the corresponding period of 2016, while volume sold to export customers increased to 22% in the current year versus 17% last year. This shift in customer mix reflects the premium prices paid by export log markets compared to domestic log markets. Timber deed sales volume of 2.4 MMBF during the first six months of 2017 came from one of Fund III’s tree farms.

Cost of Sales
 
Fee Timber cost of sales, which consists predominantly of harvest, haul and depletion costs, vary with harvest volume.
 
Fee Timber cost of sales for the quarters ended June 30, 2017, March 31, 2017, and June 30, 2016, was as follows, with the first table expressing these costs in total dollars and the second table expressing those costs that are driven by volume on a per MBF basis:
 
(in thousands) Quarter Ended
 
Harvest, Haul and Tax
 
Depletion
 
Other
 
Total Fee Timber Cost of Sales
 
Harvest Volume (MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
2,428

 
$
908

 
$

 
$
3,336

 
12.5

 

Funds
 
2,535