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EX-32.2 - EXHIBIT 32.2 - POPE RESOURCES LTD PARTNERSHIPex-32210xqq32017.htm
EX-32.1 - EXHIBIT 32.1 - POPE RESOURCES LTD PARTNERSHIPex-32110xqq32017.htm
EX-31.2 - EXHIBIT 31.2 - POPE RESOURCES LTD PARTNERSHIPex-31210xqq32017.htm
EX-31.1 - EXHIBIT 31.1 - POPE RESOURCES LTD PARTNERSHIPex-31110xqq32017.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 September 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 October 31, 2017: 4,356,049





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

Description
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
September 30, 2017 and December 31, 2016
(in thousands)
 
2017
 
2016
ASSETS
 
 
 
Current assets
 
 
 
Partnership cash
$
1,345

 
$
1,871

ORM Timber Funds cash
2,960

 
1,066

Cash
4,305

 
2,937

Accounts receivable, net
4,027

 
4,381

Land and timber held for sale
9,513

 
20,503

Prepaid expenses and other current assets
482

 
4,385

    Total current assets
18,327

 
32,206

Properties and equipment, at cost
 

 
 

  Timber and roads, net of accumulated depletion (2017 -  $123,239; 2016 - $110,533)
272,829

 
279,793

Timberland
55,131

 
54,369

Land held for development
25,965

 
24,390

Buildings and equipment, net of accumulated depreciation (2017 - $8,038; 2016 - $7,713)
5,396

 
5,628

    Total property and equipment, at cost
359,321

 
364,180

Other assets
 
 
 
Deferred tax and other assets
1,134

 
2,664

Total assets
$
378,782

 
$
399,050

 
 
 
 
LIABILITIES, PARTNERS’ CAPITAL AND NONCONTROLLING INTERESTS
 

 
 

Current liabilities
 

 
 

Accounts payable
$
1,498

 
$
2,620

Accrued liabilities
3,513

 
3,843

Current portion of long-term debt
122

 
5,119

Deferred revenue
254

 
418

Current portion of environmental remediation liability
3,419

 
8,650

Other current liabilities
502

 
398

    Total current liabilities
9,308

 
21,048

Long-term debt, net of unamortized debt issuance costs and current portion
140,142

 
125,291

Environmental remediation and other long-term liabilities
3,287

 
4,247

Partners’ capital and noncontrolling interests
 

 
 

General partners' capital (units issued and outstanding 2017 - 60; 2016 - 60)
891

 
934

Limited partners' capital (units issued and outstanding 2017 - 4,260; 2016 - 4,255)
54,472

 
58,199

Noncontrolling interests
170,682

 
189,331

    Total partners’ capital and noncontrolling interests
226,045

 
248,464

Total liabilities, partners’ capital and noncontrolling interests
$
378,782

 
$
399,050


See accompanying notes to condensed consolidated financial statements.

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Pope Resources, a Delaware Limited Partnership
For the Three and Nine Months Ended September 30, 2017 and 2016
(in thousands, except per unit data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
18,803

 
$
13,178

 
$
52,039

 
$
36,960

Cost of sales
(11,388
)
 
(6,211
)
 
(31,568
)
 
(20,822
)
Operating expenses
(4,520
)
 
(3,831
)
 
(13,296
)
 
(11,245
)
General and administrative expenses
(1,134
)
 
(1,151
)
 
(4,240
)
 
(3,814
)
Gain on sale of timberland
44

 

 
12,547

 
226

Income from operations
1,805

 
1,985

 
15,482

 
1,305

 
 
 
 
 
 
 
 
Interest expense, net
(1,179
)
 
(953
)
 
(3,306
)
 
(2,358
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
626

 
1,032

 
12,176

 
(1,053
)
Income tax expense
(46
)
 
(116
)
 
(105
)
 
(166
)
Net income (loss)
580

 
916

 
12,071

 
(1,219
)
 
 
 
 
 
 
 
 
Net and comprehensive (income) loss attributable to noncontrolling interests - ORM Timber Funds
1,078

 
1,054

 
(6,885
)
 
2,590

Net and comprehensive income attributable to unitholders    
$
1,658

 
$
1,970

 
$
5,186

 
$
1,371

 
 
 
 
 
 
 
 
Allocable to general partners
$
23

 
$
27

 
$
72

 
$
19

Allocable to limited partners
1,635

 
1,943

 
5,114

 
1,352

Net and comprehensive income attributable to unitholders
$
1,658

 
$
1,970

 
$
5,186

 
$
1,371

 
 
 
 
 
 
 
 
Basic and diluted earnings per unit attributable to unitholders
$
0.38

 
$
0.45

 
$
1.17

 
$
0.30

 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,324

 
4,312

 
4,325

 
4,312

 
 
 
 
 
 
 
 
Distributions per unit
$
0.70

 
$
0.70

 
$
2.10

 
$
2.10

See accompanying notes to condensed consolidated financial statements.

4



CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL AND NONCONTROLLING INTERESTS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 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
72

 
5,114

 
6,885

 
12,071

Cash distributions
(127
)
 
(9,041
)
 
(26,359
)
 
(35,527
)
Capital call

 

 
825

 
825

Equity-based compensation
13

 
937

 

 
950

Units issued under Distribution Reinvestment Plan

 
4

 

 
4

Unit repurchases

 
(648
)
 

 
(648
)
Payroll taxes paid on unit net settlements
(1
)
 
(93
)
 

 
(94
)
September 30, 2017
$
891

 
$
54,472

 
$
170,682

 
$
226,045


See accompanying notes to condensed consolidated financial statements.


5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership

Nine Months Ended September 30, 2017 and 2016 (in thousands)
 
2017
 
2016
Net income (loss)
$
12,071

 
$
(1,219
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 

 
 

Depletion
12,737

 
6,101

Equity-based compensation
950

 
756

Depreciation and amortization
393

 
554

Deferred taxes and other
10

 
49

Cost of land sold
1,970

 
1,139

Gain on sale of timberland - Funds
(12,547
)
 
(226
)
Gain on disposal of property and equipment
(3
)
 
(24
)
Cash flows from changes in operating accounts
 

 
 

Accounts receivable, net
354

 
(18
)
Prepaid expenses and other assets
5,673

 
(1,484
)
Real estate project expenditures
(6,496
)
 
(10,598
)
Accounts payable and accrued liabilities
(1,452
)
 
1,250

Deferred revenue
(164
)
 
(49
)
Environmental remediation
(6,182
)
 
(5,280
)
Other current and long-term liabilities
94

 
92

Net cash provided by (used in) operating activities
7,408

 
(8,957
)
 
 
 
 
Cash flows from investing activities
 

 
 

Reforestation and roads
(1,665
)
 
(1,276
)
Capital expenditures
(162
)
 
(159
)
Proceeds from sale of property and equipment
30

 

Investment in unconsolidated real estate joint venture
(250
)
 

Acquisition of timberland - Partnership
(4,951
)
 
(33,324
)
Proceeds from sale of timberland - Funds
26,590

 
724

Net cash provided by (used in) investing activities
19,592

 
(34,035
)
 
 
 
 
Cash flows from financing activities
 

 
 

Line of credit borrowings
23,000

 
20,026

Line of credit repayments
(8,000
)
 
(2,700
)
Proceeds from issuance of long-term debt

 
32,000

Repayment of long-term debt
(5,088
)
 
(85
)
Debt issuance costs
(104
)
 
(163
)
Proceeds from units issued under Distribution Reinvestment Plan
4

 

Unit repurchases
(648
)
 

Payroll taxes paid on unit net settlements
(94
)
 
(152
)
Cash distributions to unitholders
(9,168
)
 
(9,133
)
Cash distributions - ORM Timber Funds, net of distributions to Partnership
(26,359
)
 
(3,053
)
Capital call - ORM Timber Funds, net of Partnership contribution
825

 

Net cash provided by (used in) financing activities
(25,632
)
 
36,740

 
 
 
 
Net increase (decrease) in cash
1,368

 
(6,252
)
Cash at beginning of period
2,937

 
9,706

Cash at end of period
$
4,305

 
$
3,454

See accompanying notes to condensed consolidated financial statements.

6



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

1.
The condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 and the related condensed consolidated statements of comprehensive income for the three- and nine-month periods, and cash flows for nine-month periods ended September 30, 2017 and 2016, and partners’ capital and noncontrolling interests for the nine-month period ended September 30, 2017, 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. 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. For most revenue from the Fee Timber segment, which consists of logs, timber deed sales, and commercial thinning, we expect there will be no change to the timing or amount of revenue recognized because our contracts are legally enforceable, the transaction price is fixed and performance is completed at a point in time, typically when risk of loss and title passes to the customer. We are continuing to assess the effect on our other revenue, which includes primarily royalties from gravel mines and quarries and land use permits. For our Real Estate segment, this new standard may result in accelerating the recognition of revenue 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 September 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 raising capital to purchase timberlands. The objective of these Funds is to

7



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 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 the 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 are non-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 $24,000 and $89,000 for the quarter and nine months ended September 30, 2016, respectively, and a gain on sale of $12.5 million for the nine months ended September 30, 2017. The Partnership’s share of these pretax results were losses of $5,000 and $18,000 for the quarter and nine months ended September 30, 2016, respectively, and a gain on sale of $2.5 million for the nine months ended September 30, 2017.

The Partnership’s condensed consolidated balance sheets include assets and liabilities of the Funds as of September 30, 2017 and December 31, 2016, which were as follows:
 
(in thousands)
September 30, 2017
 
December 31, 2016
Assets:
Cash
$
2,960

 
$
1,066

Land and timber held for sale

 
13,941

Other current assets
1,489

 
2,195

Total current assets
4,449

 
17,202

Properties and equipment, net of accumulated depletion and depreciation (2017 - $48,238; 2016 - $38,306)
240,019

 
249,197

Total assets
$
244,468

 
$
266,399

Liabilities and equity:
 

 
 

Current liabilities
$
2,437

 
$
2,256

Long-term debt, net of unamortized debt issuance costs
57,285

 
57,268

Total liabilities
59,722

 
59,524

Funds’ equity
184,746

 
206,875

Total liabilities and equity
$
244,468

 
$
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 nine months ended September 30, 2017 and 2016:

8



 
Fee Timber
 
 
Three Months Ended September 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Investment Management
 
Real Estate
 
Other
 
Consolidated
2017
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
8,981

$
7,082

$
16,063

 
$
829

 
$
2,920

 
$

 
$
19,812

Eliminations
(83
)

(83
)
 
(829
)
 
(97
)
 

 
(1,009
)
Revenue - external
8,898

7,082

15,980

 

 
2,823

 

 
18,803

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(3,552
)
(5,717
)
(9,269
)
 

 
(2,119
)
 

 
(11,388
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,576
)
(1,937
)
(3,513
)
 
(780
)
 
(1,213
)
 
(1,157
)
 
(6,663
)
Eliminations
38

829

867

 
101

 
18

 
23

 
1,009

Operating, general and administrative expenses - external
(1,538
)
(1,108
)
(2,646
)
 
(679
)
 
(1,195
)
 
(1,134
)
 
(5,654
)
Gain on sale of timberland

44

44

 

 

 

 
44

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
3,853

(528
)
3,325

 
49

 
(412
)
 
(1,157
)
 
1,805

Eliminations
(45
)
829

784

 
(728
)
 
(79
)
 
23

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
3,808

$
301

$
4,109

 
$
(679
)
 
$
(491
)
 
$
(1,134
)
 
$
1,805

 
 
 
 
 
 
 
 
 
 
 
 
2016
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
7,882

$
3,231

$
11,113

 
$
772

 
$
2,194

 
$

 
$
14,079

Eliminations
(48
)

(48
)
 
(772
)
 
(81
)
 

 
(901
)
Revenue - external
7,834

3,231

11,065

 

 
2,113

 

 
13,178

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

 
(608
)
 

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

766

802

 
64

 
10

 
25

 
901

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

(452
)
2,563

 
64

 
534

 
(1,176
)
 
1,985

Eliminations
(12
)
766

754

 
(708
)
 
(71
)
 
25

 

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

$
314

$
3,317

 
$
(644
)
 
$
463

 
$
(1,151
)
 
$
1,985


9



 
Fee Timber
 
 
Nine Months Ended September 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Investment Management
 
Real Estate
 
Other
 
Consolidated
2017
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
26,425

$
22,061

$
48,486

 
$
2,494

 
$
4,136

 
$

 
$
55,116

Eliminations
(252
)

(252
)
 
(2,494
)
 
(331
)
 

 
(3,077
)
Revenue - external
26,173

22,061

48,234

 

 
3,805

 

 
52,039

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(10,430
)
(18,000
)
(28,430
)
 

 
(3,138
)
 

 
(31,568
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(4,286
)
(5,372
)
(9,658
)
 
(2,705
)
 
(3,929
)
 
(4,321
)
 
(20,613
)
Eliminations
135

2,494

2,629

 
309

 
58

 
81

 
3,077

Operating, general and administrative expenses - external
(4,151
)
(2,878
)
(7,029
)
 
(2,396
)
 
(3,871
)
 
(4,240
)
 
(17,536
)
Gain on sale of timberland

12,547

12,547

 

 

 

 
12,547

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
11,709

11,236

22,945

 
(211
)
 
(2,931
)
 
(4,321
)
 
15,482

Eliminations
(117
)
2,494

2,377

 
(2,185
)
 
(273
)
 
81

 

Income (loss) from operations - external
$
11,592

$
13,730

$
25,322

 
$
(2,396
)
 
$
(3,204
)
 
$
(4,240
)
 
$
15,482

 
 
 
 
 
 
 
 
 
 
 
 
2016
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
20,506

$
12,729

$
33,235

 
$
2,383

 
$
4,094

 
$

 
$
39,712

Eliminations
(148
)

(148
)
 
(2,375
)
 
(229
)
 

 
(2,752
)
Revenue - external
20,358

12,729

33,087

 
8

 
3,865

 

 
36,960

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

 
(2,340
)
 

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

2,375

2,470

 
193

 
30

 
59

 
2,752

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

226

226

 

 

 

 
226

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
7,445

(997
)
6,448

 
269

 
(1,539
)
 
(3,873
)
 
1,305

Eliminations
(53
)
2,375

2,322

 
(2,182
)
 
(199
)
 
59

 

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

$
1,378

$
8,770

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



10



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

 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per unit amounts)
2017
 
2016
 
2017
 
2016
Net and comprehensive income attributable to Pope Resources’ unitholders
$
1,658

 
$
1,970

 
$
5,186

 
$
1,371

Less:
 

 
 

 
 

 
 

Net and comprehensive income attributable to unvested restricted unitholders
(25
)
 
(25
)
 
(84
)
 
(74
)
Preferred share dividends - ORM Timber Funds
(8
)
 
(8
)
 
(23
)
 
(23
)
Net and comprehensive income for calculation of earnings per unit
$
1,625

 
$
1,937

 
$
5,079

 
$
1,274

 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,324

 
4,312

 
4,325

 
4,312

 
 
 
 
 
 
 
 
Basic and diluted earnings per unit
$
0.38

 
$
0.45

 
$
1.17

 
$
0.30


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 nine months ended September 30, 2017, 1,648 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 $166,000 and $163,000 of equity compensation expense in the third quarter of 2017 and 2016, respectively, related to these compensation programs and $950,000 and $756,000 for the nine months ended September 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 $649,000 during the nine months ended September 30, 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. The Partnership issued 61 units under the DRP during the nine months ended September 30, 2017.

10.
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $3.2 million and $2.0 million during the first nine months of 2017 and 2016, respectively. Income taxes paid totaled $65,000 and $187,000 during the first nine 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 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 $9.0 million and $6.0 million outstanding under this facility as a base rate loan segment at September 30, 2017 and December 31, 2016, respectively.

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.

Collectively, the Partnership’s and the Funds’ fixed-rate debt has a carrying value of $101.7 million as of September 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 $105.8 million and $111.0 million as of September 30, 2017 and December 31, 2016, respectively.

14.
The Partnership had an accrual for estimated environmental remediation costs of $6.6 million and $12.8 million as of September 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 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 2015. The required in-water portion of the cleanup was completed in January 2017 and the dredged sediments were removed by the end of September 2017, with the bulk of the sediments being relocated to property owned by the Partnership a short distance from the town of Port Gamble. This 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.

Certain environmental laws allow state, federal, and tribal trustees (collectively, the Trustees) to bring suit against property owners to recover damages for injuries to natural resources. Like the liability that attaches to current property owners in the cleanup context, liability for natural resource damages can attach to a property owner simply because an injury to natural resources resulted from releases of hazardous substances on that owner’s property, regardless of culpability for the release. The Trustees are alleging that Partnership has NRD liability because of releases that occurred on its property. The Partnership has been in discussions with the Trustees regarding their claims and the alleged conditions in Port Gamble Bay, and has also been discussing restoration alternatives that might address the damages the Trustees allege. Discussions with the Trustees may result in an obligation for the Partnership to fund NRD restoration activities and past assessment costs that are greater than it has estimated.

The environmental liability at September 30, 2017 is comprised of $3.4 million that management expects to expend in the next 12 months and $3.2 million thereafter.

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

Quarter ended September 30, 2017
$
8,490

 
$

 
$
1,900

 
$
6,590


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

12



not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled “Risk Factors” in Part II, Item 1A below. From time to time we identify other risks and uncertainties in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates and expectations as of the date of the report, and unless required by law, we do not undertake to update these statements as our business operations and environment change.

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

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), is engaged in three primary businesses; Fee Timber, Timberland Investment Management, and Real Estate.

By far the most significant segment, in terms of owned assets and operations, is our 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 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.

Our Timberland Investment Management segment is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership. 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 attributable to unitholders”.

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 September 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.

Our Real Estate segment’s 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. 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.


13



Third quarter highlights

Harvest volume was 21.3 million board feet (MMBF) in Q3 2017 compared to 17.0 MMBF in Q3 2016, a 25% increase. Harvest volume for the first nine months of 2017 was 71.9 MMBF compared to 53.6 MMBF for the corresponding period of 2016, a 34% increase. These harvest volume figures do not include timber deed sales of 3.6 MMBF and 6.0 MMBF for the quarter and nine months ended September 30, 2017, respectively, and 1.3 MMBF for both the quarter and nine months ended September 30, 2016. 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 $657 per thousand board feet (MBF) in Q3 2017, a 15% increase compared to $573 per MBF in Q3 2016. For the first nine months of 2017, the average realized log price was $621 per MBF compared to $574 per MBF for the corresponding period of 2016, an 8% increase.
As a percentage of total harvest, volume sold to domestic markets in Q3 2017 decreased to 62% from 65% in Q3 2016, while the mix of volume sold to export markets increased to 24% in Q3 2017 from 16% in Q3 2016. For the first nine months of 2017, the relative percentages of volume sold to domestic and export markets were 60% and 23%, respectively, compared to 64% and 16%, respectively, in the corresponding period of 2016. Hardwood and pulpwood log sales make up the balance of harvest volume.
During the quarter, our Real Estate segment sold 15 lots from our Harbor Hill development in Gig Harbor, Washington, as well as six other residential lots for total revenue of $2.5 million.
During the quarter, the Partnership repurchased 8,171 units at an average price of $72.40 per unit under our unit repurchase plan. Through the first nine months of 2017, the Partnership has repurchased 8,915 units at an average price of $72.75, leaving $551,000 remaining under the plan through June 2018.

Outlook

We expect our total 2017 harvest volume to be between 111 and 115 MMBF, including timber deed sales. In our Real Estate segment, we expect to close on the sale of up to 78 additional single-family lots from our Harbor Hill project in the fourth quarter, up to four additional residential lots from other properties, and a potential conservation easement sale.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) attributable to unitholders for the respective quarters and nine months ended September 30, 2017 and 2016.  The explanatory text that follows the table describes in detail certain of these changes by business segment.

14



(in thousands)
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Net income attributable to Pope Resources’ unitholders:
 
 
 
2017 period
$
1,658

 
$
5,186

2016 period
1,970

 
1,371

Variance
$
(312
)
 
$
3,815

Detail of variance:
 

 
 

Fee Timber
 

 
 

Log volumes (A)
$
2,464

 
$
10,504

Log price realizations (B)
1,789

 
3,379

Gain on sale of timberland
44

 
12,321

Timber deed sales
750

 
1,460

Production costs
(1,322
)
 
(3,312
)
Depletion
(2,344
)
 
(6,636
)
Other Fee Timber
(589
)
 
(1,164
)
Timberland Investment Management
(35
)
 
(483
)
Real Estate
 

 
 

Land sales
(757
)
 
(780
)
Other Real Estate
(197
)
 
(686
)
General and administrative costs
17

 
(426
)
Net interest expense
(226
)
 
(948
)
Income taxes
70

 
61

Noncontrolling interests
24

 
(9,475
)
Total variances
$
(312
)
 
$
3,815


(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.

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.

15




Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2017, June 30, 2017, and September 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
 
$
8.3

 
$
0.6

 
$
8.9

 
$

 
$
3.8

 
12.1

 

Funds
 
5.7

 
1.4

 
7.1

 

 
0.3

 
9.2

 
3.6

Total September 2017
 
$
14.0

 
$
2.0

 
$
16.0

 
$

 
$
4.1

 
21.3

 
3.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
6.8

 
$
1.1

 
$
7.9

 
$

 
$
3.0

 
11.6

 
0.7

Funds
 
3.1

 
0.1

 
3.2

 

 
0.3

 
5.4

 
0.6

Total September 2016
 
$
9.9

 
$
1.2

 
$
11.1

 
$

 
$
3.3

 
17.0

 
1.3

 
Operating Income
 
Comparing Q3 2017 to Q2 2017.  Operating income decreased $536,000, or 11%, from Q2 2017. Although the average realized log price rose 7%, a 9% decline in delivered log volume resulted in a 2% decrease in log sale revenue. Other revenue increased by $898,000. Also contributing to the lower operating income were 9% and 16% increases in cost of sales and operating expenses, respectively.
 
Comparing Q3 2017 to Q3 2016.  Operating income increased $792,000, or 24%, from Q3 2016, driven by a 25% increase in delivered log volume and a 15% rise in average realized log prices.
 
Revenue
 
Comparing Q3 2017 to Q2 2017.  Log sale revenue in Q3 2017 decreased $360,000, or 2%, from Q2 2017 due primarily to the offsetting effect of a 9% decline in harvest volume and a 7% rise in average realized log prices. The decrease in harvest volume was related to fire concerns and tight capacity in the contractor logging force. The $898,000 increase in other revenue is mainly attributable to the following: timber deed sales from Fund timberlands on volume of 3.6 MMBF, compared to 2.1 MMBF in Q2 2017; higher mineral royalties; and commercial thinning that had no counterpart during Q2 2017.

Comparing Q3 2017 to Q3 2016.  Log sale revenue in Q3 2017 increased $4.1 million, or 41%, from Q3 2016, primarily because of a 25% increase in harvest volume and a 15% rise in average realized log prices. In 2016, we deferred a large portion of our annual harvest volume to the fourth quarter, which suppressed volume during Q3 2016. Log markets were stronger in Q3 2017 relative to Q3 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 a new mill in Shelton, Washington. On the supply side, reduced harvest volumes from our local competitors and lower Canadian production are creating pricing tension in the market. The increase in other revenue was due to a 2.3 MMBF increase in timber deed sales and to commercial thinning activity that had no counterpart in Q3 2016.

Revenue and operating income for the Fee Timber segment for the nine months ended September 30, 2017 and 2016 were as follows:
 

16



(in millions) Nine Months 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
 
$
24.7

 
$
1.5

 
$
26.2

 
$

 
$
11.6

 
38.8

 

Funds
 
19.9

 
2.1

 
22.0

 
12.5

 
13.7

 
33.1

 
6.0

Total September 2017
 
$
44.6

 
$
3.6

 
$
48.2

 
$
12.5

 
$
25.3

 
71.9

 
6.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
18.4

 
$
2.0

 
$
20.4

 
$

 
$
7.4

 
31.6

 
0.7

Funds
 
12.4

 
0.3

 
12.7

 
0.2

 
1.4

 
22.0

 
0.6

Total September 2016
 
$
30.8

 
$
2.3

 
$
33.1

 
$
0.2

 
$
8.8

 
53.6

 
1.3

 
Operating Income
 
Comparing YTD 2017 to YTD 2016.  Operating income in the first nine months of 2017 increased by $16.5 million, or almost three-fold, 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 $4.2 million, or 49%, to $12.8 million in 2017 from $8.6 million in 2016. This improvement resulted from a 34% rise in delivered log volume, 8% higher average realized log prices, and a $1.3 million increase in other revenue from 6.0 MMBF of timber deed sales in 2017, compared to 1.3 MMBF of such sales in 2016. These factors were offset partially by a 54% increase in cost of sales (tied to the volume increase), a higher average depletion rate, and a 16% rise in operating expenses.
 
Revenue
 
Comparing YTD 2017 to YTD 2016.  Log sale revenue in the first nine months of 2017 increased $13.8 million, or 45%, from the corresponding period of 2016. The higher revenue was the result of a 34% increase in delivered log volume and 8% higher average realized log prices. In 2016, we deferred a large portion of our annual harvest volume to the fourth quarter, which resulted in lower volume during the first nine months of the year. By contrast, we have spread our 2017 harvest more evenly across the quarters. Other revenue increased $1.3 million due to timber deed sales on 6.0 MMBF of volume, compared to 1.3 MMBF from such sales 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 September 30, 2017, June 30, 2017, and September 30, 2016:
 
Volume (in MMBF)
Quarter Ended
 
 
Sep-17
% Total
 
Jun-17
% Total

 
Sep-16
% Total
Sawlogs
Douglas-fir
11.0

52
%
 
13.7

59
%
 
9.8

57
%
 
Whitewood
6.2

29
%
 
3.3

14
%
 
3.0

18
%
 
Pine
1.1

5
%
 
1.3

5
%
 
0.5

3
%
 
Cedar
0.1

%
 
0.4

2
%
 
0.5

3
%
 
Hardwood
0.4

2
%
 
0.9

4
%
 
0.8

5
%
Pulpwood
All Species
2.5

12
%
 
3.7

16
%
 
2.4

14
%
Total
 
21.3

100
%
 
23.3

100
%
 
17.0

100
%
 
Comparing Q3 2017 to Q2 2017. Harvest volume declined 2.0 MMBF, or 9%, in Q3 2017 from Q2 2017. The 15% increase in whitewood’s relative share of harvest volume is the result of greater harvest operations during Q3 2017 at higher elevations where whitewood is more prevalent. Snow, or the anticipation of snow, often limits access to the higher elevations during other parts of the year.
 

17



 Comparing Q3 2017 to Q3 2016. Harvest volume increased 4.3 MMBF, or 25%, in Q3 2017 from Q3 2016. Both domestic and export log markets were stronger in Q3 2017 than in Q3 2016. The Q3 2017 increase in the proportion of whitewood in our species mix relative to Q3 2016 reflects a 29% improvement in whitewood pricing 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 nine months ended September 30, 2017 and 2016:

Volume (in MMBF)
Nine Months Ended
 
 
Sep-17
% Total
 
Sep-16
% Total
Sawlogs:
Douglas-fir
40.8

57
%
 
27.9

51
%
 
Whitewood
15.0

21
%
 
11.1

21
%
 
Pine
2.4

3
%
 
1.7

3
%
 
Cedar
1.2

2
%
 
2.5

5
%
 
Hardwood
1.8

2
%
 
2.0

4
%
Pulpwood:
All Species
10.7

15
%
 
8.4

16
%
Total
 
71.9

100
%
 
53.6

100
%
 
Comparing YTD 2017 to YTD 2016. Harvest volume increased 18.3 MMBF, or 34%, in the first nine months of 2017 compared to the corresponding period of 2016. In 2016, we planned our harvest to defer significant volume until the fourth quarter in anticipation of better log prices. In 2017, we have benefited throughout the year from higher demand from both the domestic and export markets, as well as reduced supply from our competitors, and so have spread our harvest more evenly over the year. Relative to 2016, our 2017 species mix reflects a 6% increase in Douglas-fir and modest decreases in cedar and hardwood sawlog volumes.
  
Log Prices
 
We realized the following log prices by species for the quarters ended September 30, 2017, June 30, 2017, and September 30, 2016:
 
 
 
Quarter Ended
 
 
Sep-17
 
Jun-17
 
Sep-16
Average price realizations (per MBF):
 
 
Sawlogs:
Douglas-fir
$
749

 
$
694

 
$
629

 
Whitewood
651

 
602

 
506

 
Pine
472

 
486

 
418

 
Cedar
1,306

 
1,414

 
1,321

 
Hardwood
685

 
685

 
640

Pulpwood:
All Species
303

 
297

 
284

Overall
 
657

 
616

 
573


The following table compares the dollar and percentage change in log prices from each of Q2 2017 and Q3 2016 to Q3 2017:
   

18



 
 
Change to Q3 2017 from Quarter Ended
 
 
Jun-17
 
Sep-16
 
 
$/MBF
 
%
 
$/MBF
 
%
Sawlogs:
Douglas-fir
$
55

 
8
%
 
$
120

 
19
%
 
Whitewood
49

 
8
%
 
145

 
29
%
 
Pine
(14
)
 
(3
%)
 
54

 
13
%
 
Cedar
(108
)
 
(8
%)
 
(15
)
 
(1
%)
 
Hardwood

 
%
 
45

 
7
%
Pulpwood:
All Species
6

 
2
%
 
19

 
7
%
Overall
 
41

 
7
%
 
84

 
15
%
 
Overall realized log prices in Q3 2017 were 7% higher than Q2 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 Q2 2017 to Q3 2017, realized log prices increased by 8% for both Douglas-fir and whitewood. Prices for both species rose due to higher demand in the domestic and export markets as well as reduced supply of logs from competitors.

From Q3 2016 to Q3 2017, average realized log prices increased 15%. The favorable change was attributable to increases in Douglas-fir and whitewood realized log prices of 19% and 29%, respectively. The outsized price increase for whitewood was driven by higher demand from China. Prices for pine and hardwood sawlogs, and all pulpwood species, showed healthy increases relative to Q3 2016.

The following table compares realized log prices by species for the first nine months of 2017 and 2016, as well as the dollar and percentage change in log prices between the two periods:
 
 
 
Nine Months Ended
 
 
Sep-17
 
 
 
 
 
Sep-16
 
 
 

 
∆ from Sep -17 to Sep -16
 
 

 
 
 
 
$/MBF
 
%
 
 
Sawlogs:
Douglas-fir
$
697

 
$
82

 
13
%
 
$
615

 
Whitewood
602

 
78

 
15
%
 
524

 
Pine
488

 
10

 
2
%
 
478

 
Cedar
1,376

 
6

 
%
 
1,370

 
Hardwood
665

 
94

 
16
%
 
571

Pulpwood:
All species
295

 
(1
)
 
%
 
296

Overall
 
621

 
47

 
8
%
 
574

 
Overall realized log prices increased 8% in the first nine 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 13% and 15%, respectively, on higher demand in the domestic and export markets and reduced log supply from our competitors. Hardwood prices rose 16% on greater competition among our customers.
 
Customers

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. 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.


19



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

 
Q3 2017
 
Q2 2017
 
Q3 2016
 
Volume
 
 

 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
 
MMBF
%
 
Price
Domestic mills
13.3

62
%
 
$
679

 
13.7

59
%
 
$
657

 
11.0

65
%
 
$
621

Export brokers
5.1

24
%
 
767

 
5.0

21
%
 
731

 
2.8

16
%
 
621

Hardwood
0.4

2
%
 
685

 
0.9

4
%
 
685

 
0.8

5
%
 
640

Pulpwood
2.5

12
%
 
303

 
3.7

16
%
 
297

 
2.4

14
%
 
284

Total
21.3

100
%
 
657

 
23.3

100
%
 
616

 
17.0

100
%
 
573

Timber deed sale
3.6

 

 
343

 
2.1

 

 
301

 
1.3

 

 
381

Total
24.9

 

 
 

 
25.4

 

 
 

 
18.3

 

 
 

 
Comparing Q3 2017 to Q2 2017. The relative volume sold to export brokers rose modestly as the export market continued to strengthen. The relative volume sold as pulpwood declined as volume was diverted from pulp mills to sawmills with improved demand in the market for sawlogs. Timber deed sales in both quarters came from one of Fund III’s tree farms.

Comparing Q3 2017 to Q3 2016. Volume sold to the export market increased to 24% of Q3 2017 volume from 16% of Q3 2016 volume, while volume sold to the domestic market decreased to 62% of Q3 2017 volume from 65% of Q3 2016 volume. Average realized export prices were at a premium to prices from domestic mills during Q3 2017, whereas during Q3 2016 there was no such export premium, which resulted in less log volume sold to export log brokers in 2016.

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

 
Nine Months Ended
 
September 2017
 
September 2016
 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
Domestic mills
43.1

60
%
 
$
663

 
34.3

64
%
 
$
629

Export brokers
16.2

23
%
 
720

 
8.9

16
%
 
631

Hardwood
1.8

2
%
 
665

 
2.0

4
%
 
571

Pulpwood
10.8

15
%
 
295

 
8.4

16
%
 
296

Subtotal
71.9

100
%
 
621

 
53.6

100
%
 
574

Timber deed sale
6.0

 

 
322

 
1.3

 
 
381

Total
77.9

 

 
 

 
54.9

 
 
 

 
Comparing YTD 2017