Company Quick10K Filing
Quick10K
Pope Resources Partnership
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$66.88 4 $292
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-03 Regulation FD, Exhibits
8-K 2019-05-29 Regulation FD, Exhibits
8-K 2019-05-16 Other Events, Exhibits
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-04-05 Other Events, Exhibits
8-K 2019-02-22 Amend Bylaw, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-10-18 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-10-17 Other Events, Exhibits
8-K 2018-10-17 Other Events, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-06-18 Other Events, Exhibits
8-K 2018-05-23 Regulation FD, Exhibits
8-K 2018-05-07 Earnings, Exhibits
8-K 2018-04-02 Other Events, Exhibits
8-K 2018-02-28 Earnings, Exhibits
8-K 2018-02-07 Other Events, Exhibits
8-K 2018-02-01 Other Events, Exhibits
8-K 2018-01-02 Other Events, Exhibits
CY Cypress Semiconductor 6,050
FIX Comfort Systems 1,840
SRG Seritage Growth Properties 1,620
CTB Cooper Tire & Rubber 1,460
FCAP First Capital 169
CTEK CynergisTek 43
FTFT Future Fintech Group 41
CUI CUI Global 35
BSQR Bsquare 25
KONA Kona Grill 0
POPE 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To A Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex-31110xqq12019.htm
EX-31.2 ex-31210xqq12019.htm
EX-32.1 ex-32110xqq12019.htm
EX-32.2 ex-32210xqq12019.htm

Pope Resources Partnership Earnings 2019-03-31

POPE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 pope10-qq12019.htm 10-Q Document


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 March 31, 2019

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Depositary Receipts (Units)
POPE
NASDAQ Capital Market

Partnership units outstanding at April 30, 2019: 4,362,993





Pope Resources
Index to Form 10-Q Filing
For the Three Months Ended March 31, 2019

Description
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
March 31, 2019 and December 31, 2018
(in thousands)
 
2019
 
2018
ASSETS
 
 
 
Current assets
 
 
 
Partnership cash
$
1,977

 
$
1,784

ORM Timber Funds cash
2,813

 
3,330

Cash
4,790

 
5,114

Restricted cash
844

 
943

Total cash and restricted cash
5,634

 
6,057

Accounts receivable, net
7,062

 
4,670

Contract assets
2,866

 
2,872

Land held for sale
6,656

 
5,697

Prepaid expenses and other current assets
957

 
1,070

    Total current assets
23,175

 
20,366

Properties and equipment, at cost
 

 
 

Timber and roads
389,180

 
377,970

Timberland
77,011

 
74,267

Land held for development
20,954

 
20,891

Buildings and equipment, net of accumulated depreciation (2019 - $8,108; 2018 - $8,223)
5,605

 
5,500

    Total property and equipment, at cost
492,750

 
478,628

Other assets
7,825

 
9,255

Total assets
$
523,750

 
$
508,249

 
 
 
 
LIABILITIES, PARTNERS’ CAPITAL AND NONCONTROLLING INTERESTS
 

 
 

Current liabilities
 

 
 

Accounts payable
$
2,681

 
$
2,379

Accrued liabilities
4,004

 
5,191

Current portion of long-term debt - Partnership
129

 
128

Deferred revenue
422

 
336

Current portion of environmental remediation liability
925

 
1,082

Other current liabilities
1,284

 
865

    Total current liabilities
9,445

 
9,981

Long-term debt, net of unamortized debt issuance costs and current portion - Partnership
99,013

 
93,928

Long-term debt, net of unamortized debt issuance costs - Funds
57,318

 
57,313

Environmental remediation and other long-term liabilities
8,293

 
8,427

Partners’ capital and noncontrolling interests
 

 
 

General partners' capital (units issued and outstanding 2019 - 60; 2018 - 60)
936

 
944

Limited partners' capital (units issued and outstanding 2019 - 4,266; 2018 - 4,253)
55,858

 
56,533

Noncontrolling interests
292,887

 
281,123

    Total partners’ capital and noncontrolling interests
349,681

 
338,600

Total liabilities, partners’ capital and noncontrolling interests
$
523,750

 
$
508,249

See accompanying notes to condensed consolidated financial statements.

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Pope Resources, a Delaware Limited Partnership
Three Months Ended March 31, 2019 and 2018
(in thousands, except per unit data)
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
$
25,042

 
$
24,987

Cost of sales
(16,608
)
 
(12,300
)
Operating expenses
(4,294
)
 
(4,109
)
General and administrative expenses
(1,764
)
 
(1,621
)
Income from operations
2,376

 
6,957

 
 
 
 
Interest expense, net
(1,515
)
 
(1,144
)
 
 
 
 
Income before income taxes
861

 
5,813

Income tax expense
(94
)
 
(98
)
Net and comprehensive income
767

 
5,715

 
 
 
 
Net and comprehensive loss attributable to noncontrolling interests - ORM Timber Funds
2,528

 
3

Net and comprehensive loss attributable to noncontrolling interests - Real Estate
16

 

Net and comprehensive income attributable to unitholders    
$
3,311

 
$
5,718

 
 
 
 
Allocable to general partners
$
46

 
$
79

Allocable to limited partners
3,265

 
5,639

Net and comprehensive income attributable to unitholders
$
3,311

 
$
5,718

 
 
 
 
Basic and diluted earnings per unit attributable to unitholders
$
0.75

 
$
1.31

 
 
 
 
Basic and diluted weighted average units outstanding
4,325

 
4,321

 
 
 
 
Distributions per unit
$
1.00

 
$
0.70

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
Three Months Ended March 31, 2019 and 2018
(in thousands)

 
 
 
Attributable to Pope Resources
 
 
 
 
 
Units
 
General Partners
 
Limited Partners
 
Noncontrolling Interests
 
Total
December 31, 2018
4,313

 
$
944

 
$
56,533

 
$
281,123

 
$
338,600

Net income

 
46

 
3,265

 
(2,544
)
 
767

Cash distributions

 
(61
)
 
(4,305
)
 
(3,076
)
 
(7,442
)
Capital call

 

 

 
17,259

 
17,259

Preferred stock issuance

 

 

 
125

 
125

Equity-based compensation
17

 
8

 
585

 

 
593

Units issued under distribution reinvestment plan

 

 
24

 

 
24

Unit repurchases
(3
)
 

 
(166
)
 

 
(166
)
Payroll taxes paid on unit net settlements
(1
)
 
(1
)
 
(78
)
 

 
(79
)
March 31, 2019
4,326

 
$
936

 
$
55,858

 
$
292,887

 
$
349,681


 
 
 
Attributable to Pope Resources
 
 
 
 
 
Units
 
General Partners
 
Limited Partners
 
Noncontrolling Interests
 
Total
December 31, 2017
4,311

 
$
1,028

 
$
63,519

 
$
176,079

 
$
240,626

Net income

 
79

 
5,639

 
(3
)
 
5,715

Cash distributions

 
(42
)
 
(3,010
)
 
(3,481
)
 
(6,533
)
Capital call

 

 

 
92,280

 
92,280

Equity-based compensation
15

 
7

 
516

 

 
523

Units issued under distribution reinvestment plan
1

 

 
59

 

 
59

Unit repurchases
(4
)
 

 
(292
)
 

 
(292
)
Payroll taxes paid on unit net settlements
(1
)
 
(1
)
 
(101
)
 

 
(102
)
March 31, 2018
4,322

 
$
1,071

 
$
66,330

 
$
264,875

 
$
332,276



See accompanying notes to condensed consolidated financial statements.


5



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Three Months Ended March 31, 2019 and 2018 (in thousands)
 
2019
 
2018
Net income
$
767

 
$
5,715

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depletion
6,534

 
4,717

Equity-based compensation
593

 
523

Depreciation and amortization
166

 
140

Deferred taxes and other
23

 
45

Cost of land sold
2

 

Loss from unconsolidated real estate joint venture
9

 

Gain on disposal of property and equipment
(61
)
 
(4
)
Cash flows from changes in operating accounts
 

 
 

Accounts receivable, net
(2,026
)
 
1,943

Prepaid expenses, contract assets, and other assets
517

 
(203
)
Real estate project expenditures
(1,023
)
 
(278
)
Accounts payable and accrued liabilities
(736
)
 
(1,979
)
Deferred revenue
86

 
245

Environmental remediation payments
(158
)
 
(219
)
Other current and long-term liabilities
285

 
27

Net cash provided by operating activities
4,978

 
10,672

 
 
 
 
Cash flows from investing activities
 

 
 

Reforestation and roads
(644
)
 
(892
)
Capital expenditures
(252
)
 
(274
)
Proceeds from sale of property and equipment
71

 
4

Deposit for acquisition of timberland - Partnership
(5
)
 

Acquisitions of timberland - Partnership
(16
)
 
(4,626
)
Acquisitions of timberland - Funds
(19,344
)
 
(108,379
)
Net cash used in investing activities
(20,190
)
 
(114,167
)
 
 
 
 
Cash flows from financing activities
 

 
 

Line of credit borrowings
4,500

 
19,800

Line of credit repayments
(2,400
)
 
(1,500
)
Proceeds from issuance of long-term debt
3,000

 

Repayment of long-term debt
(32
)
 
(31
)
Proceeds from unit issuances - distribution reinvestment plan
24

 
59

Unit repurchases
(166
)
 
(292
)
Proceeds from preferred stock issuance - ORM Timber Funds
125

 

Payroll taxes paid on unit net settlements
(79
)
 
(102
)
Cash distributions to unitholders
(4,366
)
 
(3,052
)
Cash distributions - ORM Timber Funds, net of distributions to Partnership
(3,076
)
 
(3,481
)
Capital call - ORM Timber Funds, net of Partnership contribution
17,259

 
92,280

Net cash provided by financing activities
14,789

 
103,681

 
 
 
 
Net increase (decrease) in cash and restricted cash
(423
)
 
186

Cash and restricted cash at beginning of period
6,057

 
5,284

Cash and restricted cash at end of period
$
5,634

 
$
5,470

See accompanying notes to condensed consolidated financial statements.

6



POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2019

1.
The condensed consolidated balance sheets as of March 31, 2019, and December 31, 2018, and the related condensed consolidated statements of comprehensive income, partners’ capital, and cash flows for the three-month periods ended March 31, 2019, and 2018, 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, 2018, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2018, 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, 2019.

2.
The financial statements in the Partnership’s 2018 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.

In February 2016, the FASB established Topic 842, Leases, which requires lessees to recognize leases on the balance sheet and disclose certain information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For lessors, leases will be classified as a sales-type, direct financing, or operating lease.
The Partnership adopted this new standard effective January 1, 2019 and utilized the effective date as the date of initial application. Consequently, financial information was not updated, and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019. The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements, that latter not being applicable to us.
The Partnership recognized a ROU asset and lease liability of $294,000 as of January 1, 2019 in connection with the adoption of this standard and all of its leases continue to be classified as operating leases. Accordingly, the adoption of this standard did not have a cumulative effect, or material effect, on the Partnership’s consolidated financial statements.
3.
Revenue is measured based on the consideration specified in a contract with a customer. The Partnership recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Included in “Accounts receivable, net” are $6.1 million and $3.0 million of receivables from contracts with customers as of March 31, 2019, and December 31, 2018, respectively.

Significant changes in the contract asset balance during the period were as follows, and there were no contract liabilities as of March 31, 2019, and December 31, 2018 (in thousands):

Contract assets, December 31, 2018
$
3,829

Transferred to receivables from contract assets
(720
)
Contract assets, March 31, 2019
3,109

Less: noncurrent portion included in other assets
(243
)
Current portion of contract assets, March 31, 2019
$
2,866


The contract assets in the table above represent rights to consideration for timber deeds transferred to the customer and are related primarily to the Funds Timber segment. These contracts provide the customer the legal right to harvest timber on the Partnership’s and Funds’ property. The value of a timber deed contract is determined based on the estimated timber volume by tree species multiplied by the contracted price. The contract consideration is considered variable because the timber volume by species is an estimate until the harvest is completed. The contract assets are transferred to receivables

7



when the rights to consideration become due under the contract. Customers may harvest the timber at their discretion, within a time period and operational parameters stated in the contract.

The following is a description of principal activities, separated by reportable segments, from which the Partnership generates its revenue.

Partnership Timber and Funds Timber

Log sale revenue in these two segments is recognized when control is transferred, and title and risk of loss passes to the customer, which typically occurs when logs are delivered to the customer. Revenue in these two segments is earned primarily from the harvest and sale of logs from the Partnership’s and Funds’ timberland. Other revenue in these segments is generated from the sale of rights to harvest timber (timber deed sales), commercial thinning, ground leases for cellular communication towers, royalties from gravel mines and quarries, and land use permits. Timber deed sales are generally structured so that the customer pays a contracted price per volume, measured in thousands of board feet (MBF), and revenue is recognized when control is transferred to the customer, which generally occurs on the effective date of the contract. Commercial thinning consists of the selective cutting of timber stands that have not yet reached optimal harvest age. However, this timber does have some commercial value and revenue is based on the volume harvested. Royalty revenue from gravel mines and quarries is recognized monthly based on the quantity of material extracted.

The following table presents log sale and other revenue for the Partnership Timber and Funds Timber Segments:

(in thousands)
Quarter ended March 31,
 
2019
 
2018
Partnership Timber
 
 
 
Log sale revenue
$
14,722

 
$
14,635

Other revenue
449

 
503

Total revenue
$
15,171

 
$
15,138

 
 
 
 
Funds Timber
 
 
 
Log sale revenue
$
8,860

 
$
9,509

Other revenue
580

 
32

Total revenue
$
9,440

 
$
9,541


Timberland Investment Management (TIM)

Fee revenue generated by the TIM segment for managing the Funds includes fixed components related to invested capital and acres under management, and a variable component related to harvest volume from the Funds’ tree farms. These fees, which represent an expense in the Funds Timber segment, are eliminated in consolidation. The TIM segment occasionally earns revenue from providing timberland management-related consulting services to third-parties and recognizes such revenue as the related services are provided.

Real Estate

The Real Estate segment’s activities consist of investing in and later selling improved properties, holding properties for later development and sale, and managing commercial properties. Revenue is generated primarily from sales of land, sales of development rights known as conservation easements (CE’s), sales of unimproved land from the Partnership’s timberland portfolio, and residential and commercial rents. Revenue on real estate sales is recorded on the date the sale closes. When a real estate transaction is closed with obligations to complete infrastructure or other construction, the portion of the total contract allocated to the post-closing obligations may be recognized over time as that work is performed, provided the customer either simultaneously receives and consumes the benefits as we perform under the contract, our performance creates or enhances the asset controlled by the customer, or we do not create an asset with an alternative use to the customer and we have an enforceable right to payment for the performance completed. Progress towards the satisfaction of our performance obligations is generally measured based on costs incurred relative to the total cost expected to be incurred for the performance obligations.

8




The following table breaks down revenue for the Real Estate segment:
 
Quarter ended March 31,
 
2019
 
2018
 
 
 
 
Unimproved land
$
22

 
$

Rentals and other
409

 
308

Total revenue
$
431

 
$
308


4.
The Partnership is both a lessee and a lessor. A contract is determined to contain a lease if there is an identified asset to which the lessee has the right to substantially all of the economic benefits and has control over how the asset is used throughout the contract period. The Partnership elected the practical expedients to not separate lease and non-lease components for all of its leases.

Lessee lease information

As a lessee, the Partnership’s leases consist of office equipment and office space and are classified as operating leases. Leases for some printers have a variable payment for printing in excess of a page allowance set in the lease contract. The discount rate for leases was determined based on Northwest Farm Credit Services’ (NWFCS), the Partnership’s lender, cost of funds for the lease period plus a margin of 1.60%, as provided for in the Partnership’s credit agreement with NWFCS.

The following table presents the balances of our right-of-use assets and lease liabilities and the balance sheet captions in which they are reported (in thousands):

 
March 31, 2019
 
Balance Sheet caption
 
 
 
 
Right of use assets
$
250

 
Other assets
Lease liability - current
$
159

 
Other current liabilities
Lease liability - long-term
$
91

 
Environmental remediation and other long-term liabilities

The following table presents the components of lease costs and other lease information for the quarter ended March 31, 2019:

(In thousands, except weighted-average information)
 
Lease cost
 
Operating lease cost
$
47

Variable lease cost
2

Total lease cost
$
49

 
 
Other lease information
 
Cash paid for amounts included in the measurement of lease liabilities
$
49

Right-of-use asset obtained in exchange for new leases
$
16

Weighted-average remaining lease term in years
1.7

Weighted average discount rate
4.2
%

Payments due under lease contracts for the next five years and thereafter are as follows (in thousands):


9



2019
$
164

2020
78

2021
14

2022

2023

Thereafter

Unamortized discount
(6
)
Total lease liability at March 31, 2019
$
250


Lessor lease information
As a lessor, the Partnership’s leases consist of leases of commercial and residential real estate, reported in the Real Estate segment under “rentals and other”, and land leases on the Partnership’s and Funds’ timberland for cellular communication towers (Tower Leases), reported in the Partnership Timber and Funds Timber segments under “other revenue”. All these leases are classified as operating leases. Tower Leases have a variable payment component for revenue sharing from subleases of space on the tower. Tower Leases typically have a five-year term and two to five automatic five-year extensions.
Commercial real estate leases have non-lease components of taxes, insurance and common area maintenance. Tower Leases have non-lease components for real property taxes related to tenant improvements.
The following table presents the components of lease income for the quarter ended March 31, 2019 (in thousands):

Lease Income
 
Operating lease income
$
403

Variable lease income
20

Total lease income
$
423


Buildings subject to operating leases had a cost of $2.1 million and accumulated depreciation of $1.2 million at March 31, 2019.

Lease income maturities at March 31, 2019, based on payments due by period under the lease contracts, are presented in the following table (in thousands):
2019
$
835

2020
759

2021
673

2022
630

2023
587

Thereafter
4,045

Total
$
7,529



5.
The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 limited partner units. The allocation of distributions, profits, and losses among the general and limited partners is pro rata across all units outstanding.

6.
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 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; 10 years for each of Fund II and Fund III, and 15 years for Fund IV. Fund II and Fund III are scheduled to terminate in March 2021

10



and December 2025, respectively. Fund IV will terminate on the fifteenth anniversary of the end of its investment period, which will occur on the earlier of placement of all committed capital or December 31, 2019, subject to certain extension provisions.

Pope Resources and ORMLLC together own equity interests totaling 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. The obligations of each of the Funds are non-recourse to the Partnership.

In January 2019, Fund IV closed on the acquisition of 7,100 acres of timberland in south central Washington for $20.3 million, of which the Partnership’s share was $3.0 million. At December 31, 2018, Fund IV had paid a deposit of $1.0 million in connection with the transaction, which was included in other assets. The purchase price was allocated $17.5 million to timber and roads, and $2.8 million to the underlying land.

The assets and liabilities of the Funds as of March 31, 2019, and December 31, 2018, were as follows:
 
(in thousands)
March 31, 2019

December 31, 2018
Assets:
Cash
$
2,813

 
$
3,330

Contract assets
2,799

 
2,780

Other current assets
3,503

 
2,151

Total current assets
9,115

 
8,261

Properties and equipment, net of accumulated depreciation
375,556

 
360,163

Other long-term assets
243

 
1,962

Total assets
$
384,914

 
$
370,386

Liabilities and equity:
 

 
 

Current liabilities
$
3,866

 
$
3,237

Long-term debt, net of unamortized debt issuance costs
57,318

 
57,313

Other long-term liabilities
100

 
300

Funds’ equity
323,630

 
309,536

Total liabilities and equity
$
384,914

 
$
370,386


7.
Other assets consisted of the following at March 31, 2019 and December 31, 2018:

 
March 31, 2019
 
December 31, 2018
 
 
 
 
Investment in Real Estate joint venture entity
$
5,882

 
$
5,891

Advances to Real Estate joint venture entity
873

 
804

Deferred tax assets, net
518

 
541

Right-of-use assets
250

 

Contract assets
243

 
957

Note receivable
54

 
57

Deposits for acquisitions of timberland
5

 
1,005

Total
$
7,825

 
$
9,255



11



8.
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.

In the fourth quarter of 2018, the Partnership changed its method of reporting costs incurred by the Partnership Timber segment on behalf of the TIM segment, and reclassified $109,000 of operating expenses for the first quarter of 2018 from the Partnership Timber segment to the TIM segment to conform to the current year presentation.

Quarter ended March 31, (in thousands)
Partnership Timber
 
Funds Timber
 
Timberland Investment Management
 
Real Estate
 
Other
 
Consolidated
2019
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
15,372

 
$
9,440

 
$
1,363

 
$
551

 
$

 
$
26,726

Eliminations
(201
)
 

 
(1,363
)
 
(120
)
 

 
(1,684
)
Revenue - external
15,171

 
9,440

 

 
431

 

 
25,042

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(7,188
)
 
(9,139
)
 

 
(281
)
 

 
(16,608
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,317
)
 
(2,489
)
 
(1,290
)
 
(856
)
 
(1,790
)
 
(7,742
)
Eliminations
245

 
1,311

 
69

 
33

 
26

 
1,684

Operating, general and administrative expenses - external
(1,072
)
 
(1,178
)
 
(1,221
)
 
(823
)
 
(1,764
)
 
(6,058
)
Income (loss) from operations - internal
6,867

 
(2,188
)
 
73

 
(586
)
 
(1,790
)
 
2,376

Eliminations
44

 
1,311

 
(1,294
)
 
(87
)
 
26

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
6,911

 
$
(877
)
 
$
(1,221
)
 
$
(673
)
 
$
(1,764
)
 
$
2,376

 
 
 
 
 
 
 
 
 
 
 
 
2018
 

 
 

 
 

 
 

 
 

 
 

Revenue - internal
$
15,247

 
$
9,541

 
$
1,024

 
$
443

 
$

 
$
26,255

Eliminations
(109
)
 

 
(1,024
)
 
(135
)
 

 
(1,268
)
Revenue - external
15,138

 
9,541

 

 
308

 

 
24,987

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(5,026
)
 
(6,952
)
 

 
(322
)
 

 
(12,300
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,510
)
 
(1,806
)
 
(1,076
)
 
(955
)
 
(1,651
)
 
(6,998
)
Eliminations
159

 
1,024

 
20

 
35

 
30

 
1,268

Operating, general and administrative expenses -external
(1,351
)
 
(782
)
 
(1,056
)
 
(920
)
 
(1,621
)
 
(5,730
)
Income (loss) from operations - internal
8,711

 
783

 
(52
)
 
(834
)
 
(1,651
)
 
6,957

Eliminations
50

 
1,024

 
(1,004
)
 
(100
)
 
30

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
8,761

 
$
1,807

 
$
(1,056
)
 
$
(934
)
 
$
(1,621
)
 
$
6,957



12



9.
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 
 March 31,
(in thousands, except per unit amounts)
2019
 
2018
Net and comprehensive income attributable to Pope Resources’ unitholders
$
3,311

 
$
5,718

Less:
 

 
 

Non-forfeitable distributions paid to unvested restricted unitholders
(38
)
 
(45
)
Preferred share dividends - ORM Timber Funds
(12
)
 
(8
)
Net and comprehensive income for calculation of earnings per unit
$
3,261

 
$
5,665

 
 
 
 
Basic and diluted weighted average units outstanding
4,325

 
4,321

 
 
 
 
Basic and diluted net earnings per unit
$
0.75

 
$
1.31


10.
In the first quarter of 2019, the Partnership issued 11,504 restricted units pursuant to the management incentive compensation program and 3,600 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 three months ended March 31, 2019, 432 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 $593,000 and $523,000 of equity compensation expense in the first quarter of 2019 and 2018, respectively, related to these compensation programs.

11.
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $415,000 and $508,000 during the first three months of 2019 and 2018, respectively. Income taxes paid totaled $20,000 and $338,000 for the first three months of 2019 and 2018, respectively.

12.
The Partnership’s financial instruments include cash, accounts receivable, and a note receivable, included in other assets, 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 $125.5 million as of March 31, 2019 and December 31, 2018. 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 $129.4 million and $126.3 million as of March 31, 2019 and December 31, 2018, respectively.

13.
The Partnership had an accrual for estimated environmental remediation costs of $8.9 million and $9.1 million as of March 31, 2019 and December 31, 2018, respectively. The environmental remediation liability represents management’s estimate of payments to be made to remedy and monitor certain areas in and around Port Gamble Bay, Washington. The liability at March 31, 2019 is comprised of $925,000 that management expects to expend in the next 12 months and $8.0 million thereafter.

In December 2013, a consent decree and Clean-up Action Plan (CAP) related to Port Gamble Bay were finalized with the Washington State Department of Ecology (DOE) and filed with Kitsap County Superior Court. Construction activity commenced in late September 2015 and the required in-water portion of the cleanup was completed in January 2017. By the end of the third quarter of 2017, the sediments dredged from the Bay were moved to their permanent storage location on property owned by the Partnership a short distance from the town of Port Gamble. This effectively concluded the component of the project related to the in-water cleanup of Port Gamble Bay.

In February 2018, the Partnership and DOE entered into an agreed order with respect to the millsite under which the Partnership has performed a remedial investigation and feasibility study (RI/FS) and drafted a CAP. As with the in-water portion of the project, the CAP defines the scope of the remediation activity for the millsite.

13




As disclosed previously, 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 (NRD) 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. In the case of Port Gamble, the Trustees are alleging that the 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. These discussions have progressed to the point where management has identified a short list of restoration projects that may resolve the Trustees’ NRD claims.

The RI/FS and CAP for the millsite will be reviewed by DOE prior to being finalized, which will be codified in a consent decree. For the NRD component of the project, discussions with the Trustees are continuing, and management expects those discussions will ultimately result in a settlement agreement. At present, management expects the CAP and consent decree for the millsite and the NRD settlement agreement to be finalized in 2019. In both cases, it is reasonably possible that cost estimates could change as a result of changes to either the millsite cleanup or the NRD restoration components of the liability, or both. Management currently expects the millsite cleanup and NRD restoration projects to occur over the next two to three years.
Finally, there will be a monitoring period that is expected to be approximately 15 years during which the Partnership will monitor conditions in the Bay, on the millsite, and at the storage location of the dredged and excavated sediments. During this monitoring phase, conditions may arise that require corrective action, and monitoring protocols may change over time. In addition, extreme weather events could cause damage to the sediment caps that would need to be repaired. These factors could result in additional costs.

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, 2017
$
12,770

 
$

 
$
(7,791
)
 
$
4,979

Year ended December 31, 2018
4,979

 
5,600

 
(1,496
)
 
9,083

Quarter ended March 31, 2019
9,083

 

 
(158
)
 
8,925


14.
In April 2019, the Partnership refinanced a $9.8 million debt tranche with Northwest Farm Credit Services that was originally due in September 2019. As refinanced, this debt has an ultimate maturity of April 2031. The $9.8 million refinancing is divided into three tranches with fixed rates, gross of patronage rebates, for specific periods, as follows:
$3.0 million at 4.35% through April 2027
$3.0 million at 4.51% through April 2029
$3.8 million at 4.60% through April 2031

On the expiration of the fixed-rate periods, the tranches can be repaid or refinanced without penalty, or revert to a floating rate or be fixed at then-current rates for periods not to exceed the ultimate maturity of April 2031. The Partnership paid a prepayment fee of $61,000 in connection with this refinancing.

14



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. Some of 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. 
 
EXECUTIVE OVERVIEW

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

By far the most significant segments, in terms of owned assets and operations, are our two timber segments, which we refer to as Partnership Timber and Funds Timber. These segments include timberlands owned directly by the Partnership and three private equity funds (“Fund II”, “Fund III”, and “Fund IV”, collectively, the “Funds”), respectively. We refer to the timberland owned by the Partnership as the Partnership’s tree farms, and our Partnership Timber segment reflects operations from those properties. We refer to timberland owned by the Funds as the Funds’ tree farms, and operations from those properties are reported in our Funds Timber segment. When referring collectively to the Partnership’s and Funds’ timberland, we refer to them as the Combined tree farms. Operations in each of these segments 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 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, where it does not conflict with exclusivity provisions with the Funds, 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 $545 million as of March 31, 2019 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 $51 million of Partnership capital. Fund IV, launched in December 2016, is still in its investment period and has not yet placed all of its committed capital. 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

15



property. More recently, we have acquired and developed other real estate properties (not previously owned by the Partnership), either on our own or by partnering with another developer in a joint venture. 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 Partnership Timber properties which preclude future development, but allow continued timber 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 held for sale includes those properties in the development portfolio that we expect to sell in the next 12 months.

Adjusted EBITDDA

We use Adjusted EBITDDA as a supplemental measure of segment performance. We define Adjusted EBITDDA as earnings before interest, taxes, depletion, depreciation, amortization, gain or loss on timberland sold, and environmental remediation expense. In addition, we reflect Adjusted EBITDDA on an internal reporting basis without eliminating inter-segment activity, which has no net impact on total Adjusted EBITDDA. Accordingly, fees earned from managing the Funds are reflected in the Timberland Investment Management segment and this same amount is reflected as expense in the Funds Timber segment. We believe Adjusted EBITDDA captures the ongoing operations of each of our segments and is a useful supplemental metric to assess the segments’ financial performance. Our definition of Adjusted EBITDDA may be different from similarly titled measures reported by other companies, including those in our industry. Adjusted EBITDDA is not necessarily indicative of the Adjusted EBITDDA that may be generated in future periods. Adjusted EBITDDA is a non-GAAP performance measure which is reconciled to the GAAP measure of operating income in the table below.

Quarter ended March 31, (in thousands)
Partnership Timber
 
Funds Timber
 
Timberland Investment Management
 
Real Estate
 
Other
 
Consolidated
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
6,911

 
$
(877
)
 
$
(1,221
)
 
$
(673
)
 
$
(1,764
)
 
$
2,376

Reversal of segment eliminations
(44
)
 
(1,311
)
 
1,294

 
87

 
(26
)
 

Income (loss) from operations - internal
6,867

 
(2,188
)
 
73

 
(586
)
 
(1,790
)
 
2,376

Depletion, depreciation, and amortization
1,641

 
4,935

 
19

 
67

 
12

 
6,674

Adjusted EBITDDA
$
8,508

 
$
2,747

 
$
92

 
$
(519
)
 
$
(1,778
)
 
$
9,050

 
 
 
 
 
 
 
 
 
 
 
 
2018
 

 
 

 
 

 
 

 
 

 
 

Income (loss) from operations - external
$
8,761

 
$
1,807

 
$
(1,056
)
 
$
(934
)
 
$
(1,621
)
 
$
6,957

Reversal of segment eliminations
(50
)
 
(1,024
)
 
1,004

 
100

 
(30
)
 

Income (loss) from operations - internal
8,711

 
783

 
(52
)
 
(834
)
 
(1,651
)
 
6,957

Depletion, depreciation, and amortization
1,330

 
3,422

 
10

 
68

 
14

 
4,844

Adjusted EBITDDA
$
10,041

 
$
4,205

 
$
(42
)
 
$
(766
)
 
$
(1,637
)
 
$
11,801


Outlook

We expect 2019 harvest volume will range between 63-67 MMBF for the Partnership, and 87-91 MMBF for the Funds, including timber deed sales. The Partnership volume includes 6-10 MMBF of volume from timber located on real estate properties that is not factored into our long-term, sustainable harvest plan of 57 MMBF. On a look-through basis, accounting for Partnership’s share of the Funds’ results based on its ownership interest in fund, total 2019 harvest volume, including timber deed sales, is expected to be 75-78 MMBF.

We expect the Partnership to close on the remaining 65 residential lots from our Harbor Hill project in Gig Harbor, Washington; a parcel of timberland in Kitsap County, Washington; and an assortment of conservation easement, industrial lot, and residential lot sales.



16



Timber - Overall
 
Operations. As of March 31, 2019, Timber results include operations on 120,000 acres of timberland owned by the Partnership (Partnership Timber) in western Washington, and 141,000 acres of timberland owned by the Funds (Funds Timber) in western Washington, northwestern Oregon, southwestern Oregon, and northern California.

Timber revenue is earned primarily from the harvest and sale of logs from these timberlands and is driven primarily by the volume of timber harvested and the average log price realized on the sale of those logs. Our harvest volume typically represents delivered log sales to domestic mills and log export brokers. We also occasionally sell rights to harvest timber (timber deed sales) 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).

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.

Revenue in our Partnership Timber and Funds Timber segments is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which are included in other revenue in the tables that follow, and timber deed sales. Commercial thinning consists of the selective cutting of timber stands not yet of optimal harvest age. The smaller diameter logs harvested in these operations 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.

Log Prices. During Q1 2019, log prices decreased slightly from prices realized during Q4 2018, but fell substantially from the record highs realized during Q1 2018. For the Partnership, the overall realized log price decreased 2% and 19% relative to Q4 2018 and Q1 2018, respectively. For the Funds, the overall realized log price decreased 3% and 13% relative to Q4 2018 and Q1 2018, respectively.

West Coast softwood lumber production during Q1 2019 dropped 3%1 from Q4 2018 and 6% from Q1 2018. Log prices in the first quarter of 2019 were weak in the face of ample supply and weak demand relative to the same period of 2018. In addition to low log inventory levels in late 2017 due to an unusually devastating wildfire season, winter weather-related transportation bottlenecks inhibited log and lumber deliveries in Q1 2018, resulting in record-high prices in anticipation of a strong building season. The rising cost of building materials and increasing mortgage rates resulted in a shortfall in new home construction and caused lumber prices to drop precipitously beginning in Q2 2018 and through the remainder of the year. Lumber inventories began building in Q2 2018 and increased through Q4 2018, peaking in November. Producers responded with lower log acquisitions and production curtailments. Lumber inventories remained relatively high coming into Q1 2019, but receded to Q2 2018 levels by March 2019.

West Coast break-bulk log exports in Q1 2019 were 30% below Q4 20182 and 18% below Q1 2018, driven primarily by a softening China market related to heightened trade tensions between the U.S. and China. On September 18, 2018, China announced tariffs on $60 billion of U.S. goods, which became effective on September 24, 2018. These tariffs on softwood logs from the Pacific Northwest (PNW) region include 5% on Douglas-fir and western hemlock logs (most impactful to us), 10% for spruce logs, 25% for pine logs, and 10% for softwood lumber. The potential existed for China to increase the tariffs on Douglas-fir and western hemlock to 20% on January 1, 2019, if the U.S. were to implement tariff increases on Chinese imports, as threatened by the Trump administration. While new tariffs never materialized, the threat of tariff increases by the U.S. created uncertainty among PNW log exporters, who became hesitant to purchase logs given the possibility that they could accumulate log inventories and then be unable to sell them to China. This caused an increase in log supply to the domestic market, placing downward pressure on log prices. The domestic market was already well supplied with logs and lumber, as manufacturers had built up log inventories heading into the winter months. As a result, log and finished lumber inventories at domestic mills were high, leading to log price reductions, quotas, and in some cases temporary shutdowns.
 
1 Random Lengths Yardstick, March 2019
2 Jones Stevedoring Company Monthly Breakbulk Log Export Report, March 2019

17



Partnership Timber

Partnership Timber operating results for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, were as follows:
 
Q1 2019
 
Q4 2018
 
Q1 2018
Partnership
 
 
 
 
 
Overall log price per MBF
$
629

 
$
643

 
$
779

Total volume (in MMBF)
23.4

 
18.6

 
18.8

 
 
 
 
 
 
(in thousands)
 
 
 
 
 
Log sale revenue
$
14,722

 
$
11,726

 
$
14,635

Timber deed sale revenue

 
92

 

Other revenue
449

 
657

 
503

Total revenue
15,171

 
12,475

 
15,138

Cost of sales
(7,188
)
 
(5,832
)
 
(5,026
)
Operating expenses
(1,072
)
 
(1,693
)
 
(1,351
)
Operating income
$
6,911

 
$
4,950

 
$
8,761


Operating Income
 
Comparing Q1 2019 to Q4 2018.  Operating income increased by $2.0 million, or 40%, from Q4 2018, driven by a 26% increase in total harvest volume, which was partially offset by a weighted average realized log price decrease of 2%.
 
Comparing Q1 2019 to Q1 2018.  Operating income decreased $1.9 million, or 21%, from Q1 2018, driven by a 19% decrease in the average realized log price and a 43% increase in cost of sales, which is associated with a 24% increase in delivered log volume and higher harvest and haul costs on a per MBF basis.

Revenue
 
Comparing Q1 2019 to Q4 2018.  Log sale revenue in Q1 2019 increased $3.0 million, or 26%, from Q4 2018, due to a 26% increase in total harvest volume, which was partially offset by an average realized log price decrease of 2%.

Comparing Q1 2019 to Q1 2018.  Log sale revenue in Q1 2019 increased $87,000, or 1%, from Q1 2018, due to a 24% increase in harvest volume, which was mostly offset by a 19% decrease in average realized log prices.

 Log Prices

Partnership Timber log prices for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, were as follows:

Average price realizations (per MBF)
 
 
 
 
 
 
Q1 2019
 
Q4 2018
 
Q1 2018
Partnership
 
 
 
 
 
Douglas-fir domestic
$
655

 
$
660

 
$
850

Douglas-fir export
730

 
776

 
922

Whitewood domestic
528

 
610

 
549

Whitewood export
544

 
622

 
764

Cedar
973

 
996

 
1,458

Hardwood
650

 
742

 
708

Pulpwood
385

 
371

 
375

Overall log price
629

 
643

 
779


18




Comparing Q1 2019 to Q4 2018. Overall realized log prices in Q1 2019 were 2% lower than Q4 2018. 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 harvest volume mix of those two species. Realized Douglas-fir sawlog prices decreased by 1% and 6% for domestic and export sorts, respectively. Realized whitewood sawlog prices decreased by 13% for both domestic and export sorts.

Comparing Q1 2019 to Q1 2018. From Q1 2018 to Q1 2019, average realized log prices decreased 19%. While the weather-related transportation bottlenecks experienced in Q1 2018 were less of an issue in Q1 2019, the supply-side response to the record-high log and lumber prices observed in the first half of 2018 resulted in over-supplied log yards in the second half of the year, which led mill operators to curtail production and drastically reduce log purchases by late Q3 2018. At the same time, ongoing trade tensions between the U.S. and China, as well as slowing economic activity in China, resulted in reduced log exports. In combination, these factors caused a general softening in log demand resulting in price decreases across most species and sorts.

Log Volume

The Partnership harvested the following log volumes by species for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018:

Volume (in MMBF)
 
 
 
 
 
 
 
 
 
Q1 2019
 
Q4 2018
 
Q1 2018
Partnership
 
 
 
 
 
 
 
 
Douglas-fir domestic
12.4

53
%
 
9.8

55
%
 
12.2

64
%
Douglas-fir export
4.8

21
%
 
3.1

17
%
 
1.8

10
%
Whitewood domestic
0.5

2
%
 
0.8

4
%
 
0.3

2
%
Whitewood export
0.2

1
%
 
0.6

3
%
 
0.5

3
%
Cedar
0.4

2
%
 
0.2

1
%
 
0.4

2
%
Hardwood
1.3

6
%
 
1.1

6
%
 
0.6

3
%
Pulpwood
3.8

15
%
 
2.6

14
%
 
3.0

16
%
Log sale volume
23.4

100
%
 
18.2

100
%
 
18.8

100
%
Timber deed sale volume

 
 
0.4

 
 

 
Total volume
23.4

 
 
18.6

 
 
18.8

 

Comparing Q1 2019 to Q4 2018. Harvest volume increased 4.8 MMBF, or 26%, in Q1 2019 from Q4 2018. The increase in Q1 2019 includes volume that was not harvested in Q4 2018 due to an over-supplied log market and additional volume associated with a 10% increase in our annual sustainable harvest level.

 Comparing Q1 2019 to Q1 2018. Harvest volume increased 4.6 MMBF, or 24%, in Q1 2019 from Q1 2018. The increase in Q1 2019 includes volume that was not harvested in 4Q 2018 due to an over-supplied log market and additional volume associated with a 10% increase in our annual sustainable harvest level.

Cost of Sales
 
Cost of sales varies with harvest volume, and for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, was as follows, with the first part of the table expressing these costs in total dollars and the second part of the table expressing those costs that are driven by volume on a per MBF basis:


19



(in thousands)
 
 
 
 
 
 
Q1 2019
 
Q4 2018
 
Q1 2018
Partnership
 
 
 
 
 
Harvest, haul, and tax
$
5,586

 
$
4,545

 
$
3,728

Depletion
1,599

 
1,284

 
1,295

Other
3

 
3

 
3

Total cost of sales
$
7,188

 
$
5,832

 
$
5,026

 
 
 
 
 
 
Amounts per MBF *
 
 
 
 
 
Harvest, haul, and tax
$
239

 
$
250

 
$
198

Depletion
$
68

 
$
69

 
$
69

 *
Timber deed sale volumes are excluded in the per MBF computation for harvest, haul and tax costs but included in the per MBF computation for depletion.
 
Comparing Q1 2019 to Q4 2018. Cost of sales increased $1.4 million, or 23%, in Q1 2019 from Q4 2018 due to a 26% increase in harvest volume. On a per-MBF basis, the harvest, haul and tax rate decreased by 4% due to a slightly higher mix of gentler terrain that allows for less expensive ground-based logging.
 
Comparing Q1 2019 to Q1 2018. Cost of sales increased $2.2 million, or 43%, in Q1 2019 from Q1 2018 due primarily to a 24% increase in harvest volume. On a per-MBF basis, the harvest, haul and tax rate increased by 21% due to logging in more expensive cable-based units and longer haul distances during the current quarter.

Operating Expenses
 
Operating expenses include the cost of maintaining existing roads and building temporary roads for harvesting, silviculture costs, and other management expenses. For the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, segment operating expenses were $1.1 million, $1.7 million, and $1.4 million, respectively. The $621,000 decrease in operating expenses in Q1 2019 from Q4 2018 is attributable to lower silviculture and management expenses, which were partially offset by higher road maintenance expenses. The $279,000 decrease in operating expenses from Q1 2018 to Q1 2019 reflects lower expenses in all categories.

Funds Timber

Funds Timber operating results for quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, were as follows:


20



 
Q1 2019
 
Q4 2018
 
Q1 2018
Funds
 
 
 
 
 
Overall log price per MBF
$
631

 
$
650

 
$
728

Total volume (MMBF)
14.1

 
16.6

 
13.1

 
 
 
 
 
 
(in thousands)
 
 
 
 
 
Log sale revenue
$
8,860

 
$
7,907

 
$
9,509

Timber deed sale revenue

 
935

 

Other revenue
580

 
266

 
32

Total revenue
9,440

 
9,108

 
9,541

Cost of sales
(9,139
)
 
(8,221
)
 
(6,952
)
Operating expenses - internal
(2,489
)
 
(2,473
)
 
(1,806
)
Operating income (loss) - internal
(2,188
)
 
(1,586
)
 
783

Eliminations *
1,311

 
1,191

 
1,024

Operating income (loss) - external
$
(877
)
 
$
(395
)
 
$
1,807

* Represents primarily management fees charged to the Funds and eliminated from operating expenses in consolidation. In the TIM segment, these fees are reflected as revenue, on an internal reporting basis, and eliminated in consolidation.

Operating Income
 
Comparing Q1 2019 to Q4 2018. Operating loss increased $482,000 from Q4 2018, due primarily to timber deed sales of $935,000 in Q4 2018 that had no counterpart in Q1 2019. Log sale revenue increased by 12% due to a 15% increase in delivered log volume, which was partially offset by a 3% decline in the average realized log price. These factors combined to generate a 4% increase in total revenue, which served to partially offset increases of 11% and 1% in cost of sales and operating expenses, respectively.
 
Comparing Q1 2019 to Q1 2018. Operating income decreased $2.7 million from Q1 2018, driven by a 13% decrease in the average delivered log price, a 51% increase in operating expenses, and a 32% increase cost of sales.

Revenue
 
Comparing Q1 2019 to Q4 2018. Total revenue in Q1 2019 increased $332,000, or 4%, from Q4 2018, due to increases of $953,000 in log sale revenue and $314,000 in other revenue, which were partially offset by a $935,000 decrease in timber deed sales. The increase in log sale revenue was driven by a 15% increase in delivered log sale volume, which was partially offset by a 3% decrease in the average realized log price. The increase in other revenue was driven primarily by revenue from a salvage harvest of fire-damaged timber on a Fund IV property, for which there was no counter-part in Q4 2018.

Comparing Q1 2019 to Q1 2018. Total revenue in Q1 2019 decreased $101,000, or 1%, from Q1 2018, due to a $649,000 decrease in log sale revenue, which was partially offset by a $548,000 increase in other revenue. The decrease in log sale revenue was due to 13% decline in the average realized log price, that was partially offset by an 8% increase in delivered log volume. The increase in other revenue was driven by revenue from a salvage harvest of fire-damaged timber on a Fund IV property, for which there was no counter-part in Q1 2018.

Log Prices

Funds Timber log prices for quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, were as follows:

21



Average price realizations (per MBF)
 
 
 
 
 
 
Q1 2019
 
Q4 2018
 
Q1 2018
Funds
 
 
 
 
 
Douglas-fir domestic
$
647

 
$
661

 
$
829

Douglas-fir export
731

 
767

 
963

Whitewood domestic
513

 
605

 
665

Whitewood export
547

 
628

 
707

Pine
432

 
562

 
480

Cedar
961

 
1,095

 
1,343

Hardwood
530

 
664

 
722

Pulpwood
359

 
359

 
384

Overall log price
631

 
650

 
728

Timber deed sales

 
215

 


Comparing Q1 2019 to Q4 2018. Overall realized log prices in Q1 2019 were 3% lower than Q4 2018. Prices decreased across all species and sorts, with the exception of pulpwood. The excess lumber inventories held by domestic producers in the second half of 2018 carried over into Q1 2019, which continued to place downward pressure on prices for logs that were in plentiful supply due to favorable operating conditions and slack demand from a softening export market.

Comparing Q1 2019 to Q1 2018. From Q1 2018 to Q1 2019, average realized log prices decreased 13%. Prices decreased across all species and sorts from Q1 2018 to Q1 2019 for several reasons. The weather-related supply and transportation issues that resulted in strengthening log prices during Q1 2018 were largely ameliorated later in 2018. The tight supply conditions that caused lumber prices to reach record highs during the first half of 2018 reversed by the second half of the year, resulting in over-supplied mill yards. The uncertainty created by trade tensions between the U.S. and China led to softening demand in the export market which remains today.

Log Volume

The Funds harvested the following log volumes by species for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018:

Volume (in MMBF)
 
 
 
 
 
 
 
 
 
Q1 2019
 
Q4 2018
 
Q1 2018
Funds
 
 
 
 
 
 
 
 
Douglas-fir domestic
7.4

52
%
 
3.9

31
%
 
3.8

29
%
Douglas-fir export
2.9

21
%
 
2.9

24
%
 
1.6

12
%
Whitewood domestic
1.3

9
%
 
3.4

28
%
 
4.9

37
%
Whitewood export
0.4

3
%
 
0.5

4
%
 
0.4

3
%
Pine
0.1

1
%
 
0.3

2
%
 
0.2

2
%
Cedar
0.5

4
%
 
0.2

2
%
 
0.3

2
%
Hardwood
0.2

1
%
 
0.1

1
%
 
0.2

2
%
Pulpwood
1.3

9
%
 
1.0

8
%
 
1.7

13
%
Log sale volume
14.1

100
%
 
12.3

100
%
 
13.1

100
%
Timber deed sale volume

 
 
4.3

 
 

 
Total volume
14.1

 
 
16.6

 
 
13.1

 
 
 
 
 
 
 
 
 
 
Partnership’s share of Funds
1.8

 
 
1.6

 
 
1.7

 

Comparing Q1 2019 to Q4 2018. Volume from delivered log and timber deed sales decreased by 2.5 MMBF, or 15%, in Q1 2019 versus Q4 2018. This decrease was driven by a 4.3 MMBF decrease in timber deed sale volume. The changes

22



in relative product mix reflect the species composition in harvest units and weakening demand in the export market which caused log volume that otherwise would have been sold to the export market to be diverted to the domestic market.

 Comparing Q1 2019 to Q1 2018. Volume from delivered log and timber deed sales increased by 1.0 MMBF, or 8%, in Q1 2019 versus Q1 2018. The changes in the relative product mix for Douglas-fir (+32%) and whitewood (-28%) reflect the species composition of the units selected for harvest during each quarter.

Cost of Sales
 
Cost of sales vary with harvest volume. Because the Funds’ tree farms were acquired more recently than those of the Partnership, the depletion rates for the Funds’ tree farms are much higher than for the Partnership. For the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018, cost of sales were as follows, with the first part of the table expressing these costs in total dollars and the second part of the table expressing those costs that are driven by volume on a per MBF basis:

(in thousands)
 
 
 
 
 
 
Q1 2019
 
Q4 2018
 
Q1 2018
Funds
 
 
 
 
 
Harvest, haul, and tax *
$
3,817

 
$
3,046

 
$
3,517

Depletion *
4,935

 
4,976

 
3,422

Other
387

 
199

 
13

Total cost of sales
$
9,139

 
$
8,221

 
$
6,952

 
 
 
 
 
 
Partnership’s share of Funds
$
1,091

 
$
713

 
$
782

 
 
 
 
 
 
Amounts per MBF
 
 
 
 
 
Harvest, haul, and tax
$
271

 
$
248

 
$
268

Depletion
$
350

 
$
300

 
$
261

* Timber deed sale volumes are excluded in the per MBF computation for harvest, haul, and tax costs but included in the per MBF computation for depletion.

Comparing Q1 2019 to Q4 2018. Cost of sales increased $918,000, or 11%, in Q1 2019 from Q4 2018, due to a $771,000 increase in harvest, haul and tax costs, partially offset by a $41,000 decrease in depletion expense. Despite the 15% decrease in volume, a larger component of Q1 2019 volume was from delivered log sales, for which we incur harvest and haul costs, as opposed to timber deed sales, for which we do not incur harvest and haul costs. The increase in other cost of sales is related to the salvage harvest of fire-damaged timber on a Fund IV property. The 9% increase in per-MBF harvest, haul, and tax rate reflects a higher proportion of steeper terrain that requires more expensive cable-logging systems. The per-MBF average depletion rate increased by 17% as the mix of harvest volume from the Funds’ properties shifted to tree farms with higher depletion rates.
 
Comparing Q1 2019 to Q1 2018. Cost of sales increased $2.2 million, or 31%, in Q1 2019 from Q1 2018, due to a $1.5 million increase in depletion expense, a $400,000 increase in other cost of sales, and a $300,000 increase in harvest, haul, and tax costs. The higher depletion expense and harvest, haul and tax costs were driven by an 8% increase in harvest volume. In addition, the per-MBF average depletion rate increased by 34% as the mix of harvest volume from the Funds’ properties shifted to tree farms with higher depletion rates. The increase in other cost of sales is related to the salvage harvest of fire-damaged timber on a Fund IV property.

Operating Expenses
 
Operating expenses include the cost of maintaining existing roads and building temporary roads for harvesting, silviculture costs, and other management expenses that include the asset and timberland management fees charged to the Funds. These fees, which are the source of revenue for our Timberland Investment Management segment (discussed below), are eliminated in consolidation, and amounted to $1.3 million, $1.2 million, and $1.0 million in Q1 2019, Q4 2018, and Q1 2018, respectively. After elimination of these fees, Fund operating expenses were $1.2 million, $1.3 million, and $782,000 for Q1 2019, Q4 2018, and Q1 2018, respectively.

23




The $104,000 decrease in operating expenses in Q1 2019 from Q4 2018 is attributable to a $230,000 decrease in silviculture expenses, which was partially offset by increases in management and road maintenance expenses. Silviculture costs are decreasing generally on the Funds’ tree farms, as we complete silviculture treatments deferred by the prior owners.

Operating expenses increased by $396,000 in Q1 2019 from Q1 2018, due in part to operating expenses incurred on the Fund IV properties which were acquired during Q4 2018 and Q1 2019. Specific cost increases include $346,000 in road maintenance and $86,000 in management expenses, which were only partially offset by a $36,000 decrease in silviculture expenses.

Other information

The table below reflects the Partnership’s share of the Funds’ results based on its 20%, 5%, and 15% ownership interest in Fund II, Fund III, and Fund IV, respectively. We present this as additional information to help readers understand the financial benefit we receive from investing in these private equity vehicles and the resulting economics of owning Pope Resources units. These results will fluctuate between periods based on the relative activity in each fund and the Partnership’s different ownership interest in each fund:
 
Q1 2019
 
Q4 2018
 
Q1 2018
Partnership's share of Funds
 
 
 
 
 
Total volume (MMBF)
1.8

 
1.6

 
1.7

 
 
 
 
 
 
(in thousands)
 
 
 
 
 
Log sale revenue
$
1,103

 
$
606

 
$
1,207

Timber deed sale revenue

 
140

 

Other revenue
86

 
42

 
5

 
 
 
 
 
 
Cost of sales
(1,091
)
 
(713
)
 
(782
)
Operating expenses - internal
(314
)
 
(301
)
 
(200
)
Eliminations *
159

 
129

 
112

* Represents primarily the Partnership’s share of management fees charged to the Funds and eliminated from operating expenses in consolidation. In the TIM segment, these fees are reflected as revenue, on an internal reporting basis, and eliminated in consolidation.

Timberland Investment Management
 
The Timberland Investment Management (TIM) segment manages timberland portfolios on behalf of three private equity timber funds that own a combined 141,000 acres of commercial timberland in western Washington, northwestern Oregon, southwestern Oregon, and northern California as of March 31, 2019. Total assets under management are $545 million based on the most recent appraisals.

Fund Distributions and Fees Paid to the Partnership

Fund distributions are paid from available Fund cash, generated primarily from the harvest and sale of timber after paying all Fund expenses, management fees, and recurring capital costs. The Partnership received combined distributions from the Funds of $434,000 and $1.9 million during the three months ended March 31, 2019 and 2018, respectively.
The Partnership earned asset, investment, and timberland management fees from the Funds of $1.4 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively. These fees, which represent a portion of the operating expenses in our Funds Timber segment (discussed above) are eliminated as the Funds are consolidated in our financial statements, as shown in the table below.
Revenue and Operating Loss

The fees earned from managing the Funds include a fixed component related to invested capital and acres owned, and a variable component related to harvest volume from the Funds’ tree farms.

24



 
Revenue and operating loss for the TIM segment for the quarters ended March 31, 2019 and 2018 were as follows:
  
 
 
Quarter Ended
(in thousands, except invested capital, volume and acre data)
 
Mar-19
 
Mar-18
Revenue internal
 
$
1,363

 
$
1,024

Intersegment eliminations
 
(1,363
)
 
(1,024
)
Revenue external
 
$

 
$

 
 
 
 
 
Operating income internal
 
$
73

 
$
(52
)
Intersegment eliminations
 
(1,294
)
 
(1,004
)
Operating loss external
 
$
(1,221
)
 
$
(1,056
)
 
 
 
 
 
Invested capital (in millions)
 
$
407

 
$
354

Acres owned by Funds
 
141,000

 
124,000

Harvest volume - Funds (MMBF), including timber deed sales
 
14.1

 
13.1

 
TIM generated management fee revenue of $1.4 million and $1.0 million from managing the Funds during Q1 2019 and Q1 2018, respectively. The increase in revenue resulted primarily from an increase in management fees associated with a rise in invested capital and acres owned following the acquisition of two properties by Fund IV since Q1 2018.

Operating expenses rose for the quarter ended March 31, 2019, versus the comparable period in 2018, totaling $1.2 million and $1.1 million, respectively, due to costs associated with managing the additional properties acquired by Fund IV.

Real Estate
 
The Real Estate segment’s activities consist of investing in and later reselling improved properties, holding properties for later development and sale, and managing commercial properties. Revenue is generated primarily from the sale of land within our 2,000-acre Real Estate portfolio, sales of development rights known as conservation easements (CE’s), sales of tracts from the Partnership’s timberland portfolio, and residential and commercial rents from our Port Gamble and Poulsbo properties. The CE sales allow us to continue conducting harvest operations on the timberland, but bar any future subdivision or development on the property. In addition, we may acquire and develop other properties for sale, either on our own or by partnering with other experienced real estate developers in a joint venture. The Partnership’s Real Estate holdings are located primarily in the Washington counties of Pierce, Kitsap, and Jefferson with sales of land for this segment typically falling into one of three general types:

Residential and commercial plat land sales represent land sold after development rights have been obtained and are generally sold with prescribed infrastructure improvements.
Rural residential lot sales that generally require some capital improvements such as zoning, road building, or utility access improvements prior to completing the sale.
The sale of unimproved land, which generally consists of larger acreage sales rather than single lot sales, is normally completed with very little capital investment prior to sale.

Land Held for Development” on our Condensed Consolidated Balance Sheets represents the Partnership’s cost basis in land that has been identified as having greater value as development property than timberland. Our Real Estate segment personnel work with local officials to obtain entitlements for further development of these parcels.

Those properties that are for sale, under contract, and we expect to sell within the next 12 months, are classified on our balance sheet as a current asset under “Land Held for Sale”. The $6.7 million amount currently in Land Held for Sale reflects properties that are under contract and expected to close between now and the end of the first quarter of 2020, comprising residential parcels from our Harbor Hill project in Gig Harbor, Washington.
 
Results from Real Estate operations are expected to vary significantly from period to period as we make multi-year investments in entitlements and infrastructure prior to selling entitled or developed land. Further, Real Estate results will vary as

25



a result of adjustments to our environmental remediation liability related to Port Gamble. These adjustments are reflected in our Real Estate segment within operating expenses. 

Comparing Q1 2019 to Q1 2018. In Q1 2019, we closed on the sale of a small parcel of undeveloped land for $22,000 whereas there were no such transactions in Q1 2018. Rental and other revenue increased from $308,000 in Q1 2018 to $409,000 in Q1 2019 due primarily to a consulting project that had no counterpart in the prior year. Real Estate operating expenses decreased to $823,000 during Q1 2019 from $920,000 during Q1 2018 as a result of lower project planning, legal, and personnel costs. These factors resulted in an operating loss of $673,000 for Q1 2019 compared to $934,000 for Q1 2018.

Real Estate revenue and gross margin are summarized in the table below for the three months ended March 31, 2019 and 2018:

(in thousands, except units sold and per unit amounts)
 
 
 
 
 
 
 
 
Description
 
Revenue
 
Gross Margin
 
Units Sold
 
Revenue per unit
 
Gross Margin per unit
Unimproved land
 
$
22

 
$
16

 
Acres:
 
3

 
7,333

 
5,333

Rentals and other
 
409

 
134

 
 
 
 

 
 

 
 

March 31, 2019 total
 
$
431

 
$
150

 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Rentals and other
 
$
308

 
$
(14
)
 
 
 
 

 
 

 
 

March 31, 2018 total
 
$
308

 
$
(14
)
 
 
 
 

 
 

 
 


Environmental Remediation
As disclosed previously, we have a liability for environmental remediation at Port Gamble, Washington, due to contamination that we believe to have occurred in Port Gamble prior to our 1985 acquisition of the property at the time of our spinout from Pope & Talbot, Inc. (P&T), or between that acquisition and the time P&T ceased to operate the site. We have adjusted that liability from time to time based on evolving circumstances. The required remediation in Port Gamble Bay was completed in January 2017.
In February 2018, the Partnership and DOE entered into an agreed order with respect to the millsite under which the Partnership has performed a remedial investigation and feasibility study (RI/FS) and drafted a CAP. As with the in-water portion of the project, the CAP defines the scope of the remediation activity for the millsite.

As disclosed previously, 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 (NRD) 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. In the case of Port Gamble, the Trustees are alleging that the 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. These discussions have progressed to the point where management has identified a short list of restoration projects that may resolve the Trustees’ NRD claims.

The RI/FS and CAP for the millsite will be reviewed by DOE prior to being finalized, which will be codified in a consent decree. For the NRD component of the project, discussions with the Trustees are cotinuing, and we expect those discussions will ultimately result in a settlement agreement. At present, we expect the CAP and consent decree for the millsite and the NRD settlement agreement to be finalized in 2019. In both cases, it is reasonably possible that cost estimates could change as a result of changes to either the millsite cleanup or the NRD restoration components of the liability, or both. We currently expect the millsite cleanup and NRD restoration projects to occur over the next two to three years.
Finally, there will be a monitoring period that is expected to be approximately 15 years