Pope Resources reports Q4 net income of US$3.6M, improving on net loss of US$0.3M a year ago, on revenue up 48% to US$19.1M; CEO says improving US housing starts, steady export demand drove strong log prices, enabled company to increase harvest volume

Audrey Dixon

POULSBO, Washington , January 29, 2014 (press release) – Pope Resources (NASDAQ: POPE) reported net income attributable to unitholders of $3.6 million, or $0.81 per diluted ownership unit, on revenue of $19.1 million for the quarter ended December 31, 2013. This compares to a net loss attributable to unitholders of $295,000, or $0.07 per diluted ownership unit, on revenue of $12.9 million for the comparable period in 2012.

Net income attributable to unitholders for the year ended December 31, 2013 totaled $13.1 million, or $2.96 per diluted ownership unit, on revenue of $70.7 million. For the year ended December 31, 2012 the Partnership reported a net loss attributable to unitholders of $4.7 million, or a $1.11 loss per diluted ownership unit, on revenue of $54.0 million. Results for 2012 were impacted by a $12.5 million charge for environmental remediation liabilities at Port Gamble, Washington. Adjusted net income, which excludes the environmental charge of $12.5 million, was $7.8 million, or $1.72 per diluted ownership unit, for the year ended December 31, 2012.

Cash provided by operations for the quarter ended December 31, 2013 was $4.7 million, compared to $4.3 million for the fourth quarter of 2012. For the year ended December 31, 2013, cash provided by operations was $17.9 million, compared to $16.2 million in 2012.

"Gradually improving domestic housing starts and steady export log demand drove strong log prices for the quarter and the year," said David L. Nunes, President and CEO. "These market forces allowed us to increase our harvest volume, capturing previously deferred volume. Our Real Estate segment also benefited from improved market conditions as revenue for 2013 was nearly double the level of 2012. Together, these factors combined for a record year of revenue for the Partnership and they laid the groundwork for a promising 2014 as we anticipate healthy prices for our logs and a string of real estate sales flowing from our Gig Harbor project."

Fourth quarter and year-to-date highlights

Harvest volume was 18 million board feet (MMBF) in both Q4 2013 and Q4 2012. Harvest volume for the year 2013 was 87 MMBF compared to 80 MMBF for 2012, a 9% increase. These harvest volume figures do not include timber deed sales, 2 MMBF sold by one of our timber funds in 2013 and 4 MMBF from a Partnership tree farm in 2012. The harvest volume and log price realization metrics cited below also exclude these timber deed sales.
Average realized log price per thousand board feet (MBF) was $634 in Q4 2013 compared to $538 per MBF in Q4 2012, an 18% increase. For the full year 2013, the average realized log price per MBF was $614 compared to $537 per MBF for 2012, a 14% increase.
As a percentage of total harvest, volume sold to export markets in Q4 2013 increased to 45% from 33% in Q4 2012, while the mix of volume sold to domestic markets decreased to 34% in Q4 2013 from 52% in Q4 2012. For the full year 2013, the percent of total harvest volume sold to export markets increased to 36% from 25% in 2012, while the mix of volume sold to domestic markets decreased to 46% in 2013 from 59% in 2012. Hardwood and pulp log sales make up the balance of total harvest volume.
The percentage of total harvest comprised of Douglas-fir sawlogs edged lower to 58% in Q4 2013 from 59% in Q4 2012, with a slightly larger decrease in the whitewood component to 19% in Q4 2013 from 25% in Q4 2012. For the full year 2013, the percentage of total harvest volume comprised of Douglas-fir sawlogs decreased to 60% from 64% in 2012, while the whitewood component increased slightly to 20% in 2013 from 19% in 2012. This full-year shift in species mix is consistent with the higher weighting of total harvest volume coming from Fund properties, which increased to 44% in 2013 from 40% in 2012.
In December 2013 our third private equity timber fund closed on a purchase of nearly 10,700 acres of timberland in southwest Washington for $43 million. The property was purchased with a combination of $18 million of debt and the balance with the fund's equity. The Partnership contributed $1.3 million, or 5%, of the equity as part of its co-investment in this fund.
In Q4 2013 we closed on a 14-acre sale for $4.4 million for a school site in our Gig Harbor project and a 348-acre sale for $1.6 million for a conservation land sale in Jefferson County, Washington.
We invested $10.8 million in our Gig Harbor project to both complete infrastructure obligations stemming from a Q4 2012 multi-family parcel sale and to prepare for a series of single-family lot sales expected to close in 2014 and beyond.

Fourth quarter and year-to-date operating results

Fee Timber:
Fee Timber operating income for the fourth quarter of 2013 was $3.1 million compared to $1.6 million for the fourth quarter of 2012. This increase in segment operating income was due to a $96 per MBF, or 18%, increase in log prices offset somewhat by Q4 2013 harvest volume being 1% lower than Q4 2012 and a slightly heavier mix of harvest from the Fund properties in Q4 2013 which carry a higher rate of depletion expense.

Fee Timber operating income for 2013 increased to $16.2 million from $11.9 million in 2012. This 36% increase was due to a $77 per MBF, or 14%, increase in log prices and a 9% increase in harvest volume in 2013 when compared to 2012. These factors more than offset a heavier 2013 mix of harvest from Fund properties, a slightly higher proportion of whitewood harvest volume in 2013, and reduced volume of timber deed sales in 2013. The 9% increase in harvest volume reflects the recapture of volume deferred from the 2008-2010 period of soft log markets. We expect to complete the recapture of all harvest deferral volume by the end of 2014. The improved prices noted above for Q4 2013 and the full year 2013 compared to the prior year were due to a higher mix of export volume and incrementally stronger domestic log markets.

Timberland Management & Consulting (TM&C):
Our TM&C segment generates revenue by managing three private equity timber funds, which are consolidated into the Partnership's financial statements due to the Partnership's role managing the funds. Consolidating these funds into the Partnership's financial statements results in the accounting elimination of all management fees earned by the Partnership, with a corresponding decrease in operating expenses in the Fee Timber segment. As a result of this consolidation for external reporting purposes, we eliminated $693,000 and $608,000 of management fees for the quarters ended December 31, 2013 and December 31, 2012, respectively, leaving TM&C no reportable revenue in the fourth quarter of 2013 and a negligible amount in Q4 2012. Operating losses generated by the TM&C segment for the quarters ended December 31, 2013 and 2012 totaled $466,000 and $389,000, respectively, after eliminating revenue earned from managing the funds.

Similarly, due to this consolidation for external reporting purposes, we eliminated $2.8 million and $2.2 million of management fees for the years ended December 31, 2013 and December 31, 2012, respectively. TM&C thus had no reportable revenue for 2013 and a negligible amount for 2012. After incorporating the revenue elimination, operating losses generated by the TM&C segment for the full years 2013 and 2012 totaled $2.0 million and $1.6 million, respectively. For both the quarter and year-to-date periods, expenses for this segment are higher on a year-over-year basis, which is a function of the increase in acres under management, although on a per-acre basis expenses are lower as we are benefiting from greater economies of scale in the fund business.

Our three funds collectively own 91,000 acres and represent approximately $300 million in assets under management. Fund III has $108 million of the original $180 million capital commitment remaining to invest. Our portion of this remaining capital commitment is $5.4 million, which will be drawn down as properties are acquired over the balance of the fund's three-year drawdown period.

Real Estate:
Our Real Estate segment posted operating income of $1.4 million for the quarter ended December 31, 2013, compared to an operating loss of $371,000 for the comparable period in 2012. The primary drivers for current quarter results were a $4.4 million sale of a 14-acre school site in our Gig Harbor project and a 348-acre conservation sale for $1.6 million. Results for the corresponding quarter in 2012 included the partial recognition of revenue from a $3.3 million sale of an 11.5-acre multi-family residential site in our Gig Harbor project plus two rural land sales that totaled $780,000 for 239 acres.

For the full year 2013, the Real Estate segment generated operating income of $3.3 million on the strength of a Q2 2013 2,330-acre conservation land sale for $5.7 million together with the property sales mentioned above that occurred in Q4 2013. This compared to a 2012 operating loss of $11.1 million on revenue of $8.5 million, driven primarily by a $12.5 million second quarter accrual for environmental remediation liabilities. Year-to-date results for this segment in 2012 included the aforementioned fourth quarter sales, a $2.9 million sale of two acres underlying our Poulsbo headquarters building, a 1,852-acre conservation easement sale for $1.2 million, and two rural residential land sales totaling $719,000 for 204 acres.

General & Administrative (G&A):
G&A expenses for Q4 2013 were $1.1 million, slightly less than the $1.2 million reported for Q4 2012. For the full year 2013, G&A expenses were $4.6 million compared to $4.2 million for 2012. The increase in full-year G&A expenses between 2012 and 2013 was due primarily to the combination of higher non-cash equity compensation expense related to a strong unit price and professional fees incurred for non-recurring projects.

Outlook

We expect total annual log harvest and stumpage sale volume for 2014 to be between 95 and 103 MMBF, depending on log market conditions. Log prices early in 2014 are comparing positively to those realized in Q4 2013, but it is early in the first quarter and we are cognizant that macroeconomic headwinds have the potential to dampen global trade and the domestic housing recovery, either of which could weaken results for the coming year.

Furthermore, three sales totaling 107 single-family lots from our Gig Harbor project are expected to close in the next month and several other land sales are expected to close in the first half of this year, all of which will bolster Real Estate results for 2014.

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 204,000 acres of timberland and development property in Washington, Oregon, and California. We also manage, co-invest in, and consolidate three private equity timber funds, for which we earn management fees. These funds provide an efficient means of investing our own capital in Pacific Northwest timberland while earning fees from managing the funds for third-party investors. The company and its predecessor companies have owned and managed timberlands and development properties for over 160 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.

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