Pope Resources (NASDAQ:POPE) reported a net loss attributable to unitholders of $562,000, or $0.14 per diluted ownership unit, on revenue of $7.5 million for the quarter ended September 30, 2011. This compares to net income attributable to unitholders of $1.1 million, or $0.22 per diluted ownership unit, on revenue of $8.6 million for the comparable period in 2010.

Net income for the nine months ended September 30, 2011 totaled $6.4 million, or $1.42 per diluted ownership unit, on revenue of $39.5 million. Net income for the corresponding period in 2010 totaled $375,000, or $0.07 per diluted ownership unit, on revenue of $22.6 million.

Cash provided by operations for the quarter ended September 30, 2011 was $603,000, compared to $4.2 million for the third quarter of 2010. For the nine months ended September 30, 2011, cash provided by operations was $14.3 million, compared to $5.3 million for year-to-date 2010 results.

“In response to surging demand for Pacific Northwest logs from China, we made a conscious decision earlier this year to front-load our annual harvest volume into the first two quarters of the year to take advantage of the all-season operability of some of our low elevation timberlands,” said David L. Nunes, President and CEO. “Anticipating that log prices might soften as more timber came available from higher elevation lands during the summer months, we ratcheted back our third quarter harvest volume. As a result, we generated less revenue and recorded a net loss for the quarter.”

As our timber fund business has grown, harvests from timber fund properties naturally represent a higher proportion of our overall harvest volume. Through the first nine months of the year, timber fund properties represented 40% of the total harvest volume compared to only 15% in 2010. Our timber fund properties also carry a higher proportion of inventory in whitewood species than is the case with the Partnership’s properties. As such, the overall species mix for the nine-month periods ended September 30 changed from 73% Douglas-fir and 8% whitewoods for 2010 to 58% Douglas-fir and 23% whitewoods for 2011. Typically, a heavier mix of whitewoods would result in lower average log realizations, but the strong log demand from China that was largely indifferent as to species counteracted this expected price-dampening effect.

As anticipated, export and total realized log prices each softened 5% in the third quarter of 2011 relative to the second quarter of 2011, with export log prices falling $31 per MBF and total realized log prices falling $27 per MBF. However, log prices were still up sharply from 2010 levels. For the first nine months of 2011, our average realized log price increased $81 per MBF, or 17%, from $487 per MBF in 2010 to $568 per MBF in 2011. This occurred even in the face of continued softness in domestic demand. Within this total, Douglas-fir sawlog prices increased $85 per MBF, or 16%, from $527 per MBF in 2010 to $612 per MBF in 2011, while whitewood sawlogs increased $103 per MBF, or 23%, from $446 per MBF in 2010 to $549 per MBF in 2011. Across all species, export log prices increased $96 per MBF, or 18%, from $529 per MBF in 2010 to $625 per MBF in 2011. In addition, while there was only a 2%, or $8 per MBF, spread between export and domestic log market pricing in the first nine months of 2010, this export spread increased to 11%, or $64 per MBF, for the first nine months of 2011.

Operating income in the third quarter for Fee Timber decreased 66%, from $2.7 million in 2010 to $910,000 in 2011. This decrease was driven primarily by a 26% decrease in our harvest volume, from 16 MMBF in 2010 to 12 MMBF in 2011, offset in part by a $62 per MBF, or 13%, lift in average realized log price, which increased from $493 per MBF in 2010 to $555 per MBF in 2011. The decline in operating income was also influenced by a higher proportion of harvest from timber fund properties, which were acquired more recently and carry a much higher depletion rate than the Partnership’s properties. The percentage of third quarter harvest from timber fund properties increased from 23% in 2010 to 41% in 2011.

For the first nine months of 2011, Fee Timber operating income was up nearly 42% from the corresponding period in 2010, increasing from $8.0 million in 2010 to $11.4 million in 2011. This improvement was driven by the combined effect of a 45% increase in harvest volumes, from 42 MMBF in 2010 to 61 MMBF in 2011, and the $81 per MBF improvement in average realized log price described above. Again, the higher depletion rate on timber fund properties offset some of what would otherwise have been an even more significant increase in year-to-date operating income, as the percentage of harvest from timber fund properties increased.

Our Timberland Management & Consulting (TM&C) segment generates revenue through the management of private equity timber funds, which are consolidated into the Partnership’s financial statements due to the Partnership’s role as General Partner or Managing Member of the funds. Also, from time to time, this segment will be engaged to manage timberland for unaffiliated third parties. Consolidating these funds into the Partnership’s financial statements results in the elimination of all management fees charged to the funds, with a corresponding decrease in operating expenses in the Fee Timber segment. Thus, TM&C had no revenue for the nine months ended September 30, 2011 after eliminating $1.6 million of revenue earned from managing the funds. This compares to $15,000 of revenue for the same period in 2010 after eliminating $987,000 of fund management fee revenue. The increase in the amount of this revenue eliminated resulted from additional fees earned on the management of $58 million of timberland acquired by ORM Timber Fund II, Inc. at the end of the third quarter of 2010. In total we managed 61,000 acres in two timber funds for the first nine months of 2011 versus 36,000 acres in the prior year’s corresponding period.

Operating losses generated by the TM&C segment for the nine months ended September 30, 2011 and 2010 totaled $1.1 million and $905,000, respectively, after eliminating revenue earned from managing the funds. The increase in operating losses is attributable to added costs related to higher harvest levels from the two funds and higher personnel related expenses associated with fund oversight.

Our Real Estate segment posted operating income of $414,000 for the first nine months of 2011 compared to an operating loss of $2.1 million for the comparable period in 2010. The improvement in performance was primarily due to a 386-acre second quarter 2011 conservation land sale that generated $2.0 million of revenue, or $5,065 per acre. In addition, five varying types of property sales totaling 96 acres closed in 2011, for an aggregate price of $859,000. Finally, environmental remediation costs decreased from $568,000 in 2010 to $346,000 in 2011.

General & Administrative expenses for the first nine months of 2011 decreased 6% to $3.2 million, compared to $3.4 million in the prior year. This decrease in overhead costs was driven primarily by implementation of a new long-term compensation plan in 2010 that required a catch-up accrual last year for trailing-year performance cycles.

We expect our harvest volume for the year to total between 86 and 89 MMBF, with the final total depending on the strength or weakness of log markets as well as weather patterns over the last few months of the year.

The financial schedules attached to this earnings release provide detail on individual segment results and operating statistics.

About Pope Resources

Pope Resources, a publicly traded limited partnership and its subsidiaries Olympic Resource Management and Olympic Property Group, own or manage 178,000 acres of timberland and development property in Washington and Oregon. We also manage, co-invest in, and consolidate two timberland investment funds that we manage for a fee. In addition, we offer our forestry consulting and timberland investment management services to third-party owners and managers of timberland in the U.S. Pacific Northwest. The company and its predecessor companies have owned and managed timberlands and development properties for more than 150 years. Additional information on the company can be found at www.poperesources.com. The contents of our website are not incorporated into this release or into our filings with the Securities and Exchange Commission.

This press release contains a number of projections and statements about our expected financial condition, operating results, business plans and objectives. These statements reflect management's estimates based on current goals and its expectations about future developments. Because these statements describe our goals, objectives, and anticipated performance, they are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, they should not be interpreted as promises of future management actions or financial performance. Our future actions and actual performance will vary from current expectations and under various circumstances the results of these variations may be material and adverse. Some of the factors that may cause actual operating results and financial condition to fall short of expectations include conditions in the housing construction and wood-products markets that affect demand for our products; factors that affect our ability to anticipate and respond adequately to fluctuations in the market prices for our products; environmental and land use regulations that limit our ability to harvest timber and develop property, including changes in those regulations; conditions affecting credit markets as they affect the availability of capital and costs of borrowing; labor, equipment and transportation costs that affect our net income; the impacts of natural disasters on our timberlands and on surrounding areas; and our ability to discover and to accurately estimate liabilities associated with our properties. Other factors are set forth in that part of our Annual Report on Form 10-K entitled "Risk Factors." Other issues that may have an adverse and material impact on our business, operating results, and financial condition include those risks and uncertainties discussed in our other filings with the Securities and Exchange Commission. Forward-looking statements in this release are made only as of the date shown above, and we cannot undertake to update these statements.
               
Pope Resources, A Delaware Limited Partnership
Unaudited
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(all amounts in $000's, except per unit amounts)
 
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
 
Revenues $ 7,522 $ 8,591 $ 39,465 $ 22,646
Costs and expenses:
Cost of sales (4,449 ) (4,566 ) (20,366 ) (10,997 )
Operating expenses   (3,839 )   (3,136 )   (11,643 )   (10,057 )
Operating income (loss) (766 ) 889 7,456 1,592
Interest income 10 30 32 91
Interest expense (559 ) (493 ) (1,674 ) (1,355 )
Capitalized interest 108 142 314 460
Debt extinguishment costs - - - (1,250 )
SLARS gain on disposition   -     -     -     11  
Income (loss) before income taxes (1,207 ) 568 6,128 (451 )
Income tax benefit (expense)   (19 )   37     (158 )   25  
Net income (loss) (1,226 ) 605 5,970 (426 )
Net loss attributable to noncontrolling interests   664     445     435     801  
Net income (loss) attributable to Pope Resources' unitholders   ($562 ) $ 1,050   $ 6,405   $ 375  
 
Average units outstanding - Basic   4,329     4,567     4,321     4,546  
Average units outstanding - Diluted   4,329     4,603     4,323     4,583  
 
Basic net income (loss) per unit   ($0.14 ) $ 0.23   $ 1.42   $ 0.07  
Diluted net income (loss) per unit   ($0.14 ) $ 0.22   $ 1.42   $ 0.07  
 
                   
CONDENSED CONSOLIDATING BALANCE SHEETS
(all amounts in $000's)
 
September 30, 2011

 

December 31, 2010
 
Assets: Pope

ORMTimber Funds

ConsolidatingEntries
Consolidated
Cash and cash equivalents $ 166 $ 1,073 $ - $ 1,239 $ 2,423
Other current assets   2,986       447       (399 )   3,034       1,570
Total current assets 3,152 1,520 (399 ) 4,273 3,993
Timber and roads, net 37,324 120,731 - 158,055 164,961
Timberlands 15,364 18,747 - 34,111 33,980
Buildings and equipment, net 5,968 - - 5,968 3,854
Land held for development 28,370 - - 28,370 27,737
Investment in ORM Timber Funds 26,816 - (26,816 ) - -
Other assets   1,124       130       -     1,254       1,312
Total $ 118,118     $ 141,128       ($27,215 ) $ 232,031     $ 235,837
Liabilities and equity:
Current liabilities $ 4,322 $ 1,253 ($399 ) $ 5,176 $ 4,786
Current portion of long-term debt - 31 - 31 30
Long-term debt 36,336 11,044 - 47,380 50,468
Other long-term liabilities   1,722       -       -     1,722       1,746
Total liabilities 42,380 12,328 (399 ) 54,309 57,030
Partners' capital 75,738 128,800 (129,842 ) 74,696 70,990
Noncontrolling interests   -       -       103,026     103,026       107,817
Total $ 118,118     $ 141,128       ($27,215 ) $ 232,031     $ 235,837
 
 
RECONCILIATION BETWEEN NET INCOME (LOSS) AND CASH FLOWS FROM OPERATIONS
(all amounts in $000's)
                 
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
 
Net income (loss) ($1,226 ) $ 605 $ 5,970 ($426 )
Added back:
Depletion 1,571 1,720 7,468 3,909
Timber depletion on land sale - - 150 -
Gain on investments - - - (11 )
Depreciation and amortization 175 180 526 485
Equity-based compensation 146 144 738 568
Capitalized development activities, net of reimbursements (250 ) (271 ) (743 ) (743 )
Deferred taxes (86 ) (183 ) (43 ) (183 )
Excess tax benefit from equity-based compensation - (104 ) - (104 )
Cost of land sold 21 - 110 67
Write-off debt issuance costs - - - 32
Change in operating accounts   252         2,092     94     1,712  
Cash provided by operations $ 603       $ 4,183   $ 14,270   $ 5,306  
 
               
SEGMENT INFORMATION
(all amounts in $000's)
 
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
 
Revenues:
Partnership Fee Timber $ 4,222 $ 6,527 $ 22,584 $ 18,396
Funds Fee Timber   2,737         1,721     13,173         3,427  
Total Fee Timber 6,959 8,248 35,757 21,823
Timberland Management & Consulting (TM&C) - 15 - 15
Real Estate   563         328     3,708         808  
Total 7,522 8,591 39,465 22,646
Operating income (loss):
Fee Timber 910 2,680 11,351 8,014
TM&C (333 ) (289 ) (1,117 ) (905 )
Real Estate (393 ) (498 ) 414 (2,120 )
General & administrative   (950 )       (1,004 )   (3,192 )       (3,397 )
Total   ($766 )     $ 889   $ 7,456       $ 1,592  
 
               
SELECTED STATISTICS
 
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
Log sale volumes by species (million board feet):
Sawlogs
Douglas-fir 5.9 10.8 35.2 30.6
Whitewood 2.6 1.5 14.2 3.3
Cedar 0.2 0.2 1.0 0.5
Hardwood 0.7 0.3 1.8 0.6
Pulpwood
All species 2.4     3.1 8.7     7.0
Total 11.8     15.9 60.9     41.9
 
Log sale volumes by sort (million board feet):
Export 4.9 4.6 32.1 12.3
Domestic 3.9 7.9 18.3 22.0
Pulpwood 2.4 3.1 8.7 7.0
Hardwood 0.6     0.3 1.8     0.6
Total 11.8     15.9 60.9     41.9
 
Average price realizations by species (per thousand board feet):
Sawlogs
Douglas-fir 597 549 612 527
Whitewood 562 439 549 446
Cedar 924 1,045 965 936
Hardwood 622 487 558 495
Pulpwood
All species 385 296 376 302
Overall 555 493 568 487
 
Average price realizations by sort (per thousand board feet):
Export 614 549 625 529
Domestic 571 536 561 521
Pulpwood 385 296 376 302
Hardwood 622 487 558 495
Overall 555 493 568 487
 
 
Owned timber acres 114,000 114,000 114,000 114,000
Acres owned by Funds 61,000 61,000 61,000 61,000
Capital and development expenditures ($000's) 241 403 4,685 1,317
Depletion ($000's) 1,571 1,720 7,618 3,909
Depreciation and amortization ($000's) 175 180 526 485
 
QUARTER TO QUARTER COMPARISONS
(Amounts in $000's except per unit data)
             
Q3 2011 vs. Q3 2011 vs.
Q3 2010 Q2 2011
Net income (loss) attributable to Pope Resources' unitholders:

3rd Quarter 2011
($562 ) ($562 )
2nd Quarter 2011 3,287
3rd Quarter 2010 1,050    
Variance ($1,612 ) ($3,849 )
 
Detail of earnings variance:
Fee Timber
Log volumes (A) ($2,001 ) ($4,079 )
Log price realizations (B) 732 (319 )
Production costs 46 1,315
Depletion 149 1,034
Other Fee Timber (696 ) (355 )
Timberland Management & Consulting
Other Timberland Mgmnt & Consulting (44 ) 21
Real Estate
Land and conservation easement sales 83 (2,237 )
Timber depletion on HBU sale - 150
Other Real Estate 19 (45 )
Environmental remediation costs 3 75
General & administrative costs 54 214
Net interest expense (120 ) (18 )
Other (taxes, noncontrolling int., investment gain) 163   395  
Total change in earnings ($1,612 ) ($3,849 )
 
(A) Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.
(B) Price variance calculated by extending the change in average realized price by current period volume.

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