Comments On Pope Resources Third Quarter Results

| About: Pope Resources (POPE)

Pope Resources (NASDAQ:POPE) announced 3rd quarter results last week. A link can be found here. Sales were $14.6 million, down 18% from Q2 but up 95% from Q3 2011. Operating Income was $3.4 million, up from a negative $9.2 million in Q2 and up from a negative $0.8 million in Q3 2011. Net income was $3.7 million, up from a negative $9.7 million in Q2 and a negative $5.6 million in Q3 2011. Sales year to date were $41.2 million, up 4% from 2011. Operating income year to date was a negative of $4.7 million, down from a positive $7.5 million in 2011. Net income year to date was a negative of $4.4 million down from a positive $6.4 million in 2011.

To be fair, Pope had to take a $12.5 million charge in Q2 for environmental remediation in the historic town of Port Gamble, which is owned by Pope. This is an accrual and has not been paid out as of yet. If you look at Pope's number without the $12.5 million charge, operating income year to date would be $7.8 million, up 4% over 2011. Net income year to date would be $8.1 million, up 27% from 2011.

Cash provided by Operations for 2012 year to date was $3.3 million, down 17% from 2011. Debt is down 11% year to date and the debt to capital ratio is 40%. Cash on hand is $3.9 million. Cash generation is easily covering Pope's dividend of $.45 a quarter.

POPE is an MLP. Pope derived about 80% of its business in 2012 from Timber, 10% from Real Estate, and 10% from its Timber Fund business. I had to make a few assumptions to come up with these numbers but I think they are close. (The assumptions had to do with separating Pope's part of the Timber Fund investments from that of the outside investors.) Contrast this with the other tREITs, (NYSE:WY), (NYSE:RYN), (NYSE:PCL) and (NASDAQ:PCH), which reported last week. The Real Estate number ignores the special $12.5 million charge.

2012 Operating Income





Plum Creek

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Wood Products






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Operating Income from Pope's Timber segment showed a 69% decrease from Q2 but an 89% gain over Q3 2011. Year to date operating income was $10.2 million, down 11% from 2011. Harvest volume for the first nine months of 2012 was 62 MMBF, about the same as 2011. Total 2012 harvest volume is expected to be 80-82 MMBF, down from 90 MMBF in 2011. Prices are down about 5% from 2011. Export log volume is down 55% from 2011 and export log prices are down 6% from 2011.

Pope's real estate business is very lumpy, as is that of the four tREITs. Operating income for 2012 was $1.8 million without the $12.5 million environmental charge and a negative $10.7 million with it. This compares to $0.4 million in 2011. The environmental remediation charge is for the town of Port Gamble. Port Gamble is a beautiful old mill town that sits on Gamble Bay and Hoods Canal. Port Gamble has long been a problem child for Pope. The town breaks even from a cash flow standpoint, but its potential liabilities are large. Hopefully the $12.5 million will cover most of this. Pope is hoping that the town may someday be a real estate coup, but with the anti-growth sentiments in Washington and Indian Tribal issues from local tribes that oppose anything Pope tries to do, it could be a long wait.

Pope's Timber Fund business invests exclusively in the Pacific Northwest, mainly in Washington and Oregon. GAAP accounting rules make Pope consolidate their Timber Fund business with their own operations, even though Pope only owns 20% of the Timber Fund. This results in a somewhat muddied view of both Pope's and the Timber Fund's operations. So far, Pope has invested about $171 million on 61,000 acres of Timber Fund timberland. They collect a 0.9% asset management fee and about $12.50 per acre land management fee. This works out to about $2.3 million a year. My estimate of expenses are about $1.5 million. This leaves about $800,000 net. Again, these are my estimates. Pope has closed on a $180 million Fund III, of which they will invest 5%. When it is all invested, I estimate that about 72,000 acres will be added to Pope's ownership. Fees should be about $4.8 million with a net of about $2.2 million, again, my estimates.

Pope's unit price is now at $53.00, up 23% from $42.95 on January 1, 2012. The yield is about 3.4%. The 52-week range is $41.19 to $60.39. Year to date 2012 results have been affected considerably by the $12.5 million environmental remediation charge in the second quarter. Without this charge, Pope is not having a bad year considering log prices are down about 5%.

As I have said in previous articles, lumber and plywood prices have been rising this year due to increased building as the housing sector improves. However, these higher lumber prices have not yet trickled down into higher log prices. In addition, export demand for logs from China is still weak. When log prices increase, due to either or both of these factors, Pope's earnings and cash flow should rebound considerably. In the meantime, it pays a nice dividend and owns some of the best timberland properties in the Pacific Northwest.

Disclosure: I am long POPE, PCL, PCH, RYN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.