Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. POPE RESOURCES LTD PARTNERSHIP (784011) 10-Q published on Nov 06, 2019 at 4:16 pm
Reporting Period: Sep 29, 2019
On November 5, 2019, we issued a press release announcing that we are in discussions with certain parties regarding one or more strategic transactions that, if consummated, may result in a merger of Pope Resources or an acquisition of the Partnership. No definitive agreement has been reached and there can be no assurances that any transaction will result from these discussions. However, in exploring, developing and analyzing these transactions and the various alternatives, we have incurred greater than normal general and administrative expense as discussed further herein.
Domestic demand for sawlogs in the Pacific Northwest (“PNW”) has been affected by high inventory levels at lumber manufacturers and lower-than-expected construction take-away. West Coast softwood lumber production during the first nine months of 2019 decreased 2% relative to the same period of 2018. West Coast break-bulk log exports in Q3 2019 were 12% below Q2 2019 and 36% below Q3 2018, and down 46% during the first nine months of 2019 relative to the same period in 2018. The decline in log exports is driven primarily by a weaker China market due to ongoing trade tensions between the U.S. and China, a softening Chinese economy and a recent influx of inexpensive insect-salvage timber from Europe. We believe that PNW log exporters remain hesitant to purchase logs given the possibility that they could accumulate excessive log inventories and then be unable to sell them to China due to a potential increase in the export tariff rate. The decrease in logs sold to the export market resulted in an increase in logs available to the domestic market. The combination of reduced demand, both export and domestic, contributed to downward pressure on log prices.
Comparing Q3 2019 to Q3 2018. In Q3 2019, we closed on the sale of the final 65 residential lots from our Harbor Hill project in Gig Harbor, Washington for $12.0 million whereas in Q3 2018 we closed on the sale of a parcel with a preliminary plat for 110 single-family residential lots in Bremerton, Washington for $1.4 million and two lots in Kitsap County for a total of $600,000. Rental and other revenue decreased from $541,000 in Q3 2018 to $387,000 in Q3 2019 due primarily to a consulting project that finished in Q2 2019. Real Estate operating expenses were $1.4 million during Q3 2019 compared to $1.2 million in Q3 2018. The increase in 2019 is due to higher professional fees in connection with planning and development for properties and our share of losses from an unconsolidated Real Estate joint venture while it is in the process of securing tenants for its new apartment building on Bainbridge Island, Washington. These factors resulted in operating income of $2.3 million for Q3 2019 compared to an operating loss of $518,000 for Q3 2018.
Comparing YTD 2019 to YTD 2018. In addition to the third quarter transactions noted above, the first nine months of 2019 included a sale of seven residential rural lots for $770,000 and an undeveloped parcel for $22,000. In addition to the third quarter 2018 transactions noted above, the first nine months of 2018 included the sale of a conservation easement covering 7,800 acres of timberland for $3.7 million, as well as a residential lot and a parcel of undeveloped land for $276,000. As with the quarterly amounts, the year-to-date decrease in rental and other income was due to a consulting project that finished in Q2 2019. Excluding the $2.9 million Q2 2018 environmental remediation expense, Real Estate operating expenses were $3.4 million and $3.2 million for each of the first nine months of 2019 and 2018, respectively. The increase in 2019 is due to higher professional fees in connection with planning and development for properties and our share of losses from an unconsolidated Real Estate joint venture while it is in the process of securing tenants for its new apartment building on Bainbridge Island, Washington. These factors, combined with the $2.9 million environmental remediation expense in Q2 2018, resulted in operating income of $766,000 for the first nine months of 2019 compared to an operating loss of $1.8 million for the corresponding period of 2018. Excluding the $2.9 million environmental remediation expense, the Real Estate segment generated operating income of $1.1 million for the first nine months of 2018.
Although we have disclosed that we are considering one or more possible strategic transactions, we cannot offer assurances as to whether or when any such transaction might be consummated or, if so, at what price. On November 5, 2019, we announced that we are in discussions with parties regarding a potential transaction that, if consummated, might result in a merger of the Partnership or an acquisition of the Partnership’s equity interests. As of the date of this Report, we have not entered into a definitive agreement with any parties regarding any such transaction, and we can offer no assurances that any such agreement can be negotiated, executed and delivered. Any such transaction would require the approval of our managing general partner and our limited partners, and would be subject to other closing conditions, and we can offer no certainty as to whether such a transaction could be consummated even if such an agreement is entered into and announced. Similarly, we cannot offer assurances as to the price or other terms, economic and otherwise, of any such transaction, nor can we predict the timing by which any such transaction could be announced or completed. Announcements of this nature are likely to spur an increase in the volatility of the trading price of our units, and if we later announce that we have abandoned or been unable to enter into such an agreement, the price of our limited partner units and the related depositary receipts can be expected to decline, in some cases precipitously. Further, these discussions tend to create distractions for management, and particularly during times of economic or market uncertainty such as those described in this report and in the coming quarters, these distractions can have a more pronounced effect than usual on our management team.
We have incurred, and we expect to continue incurring, higher than normal general and administrative expenses. The discussions of a possible strategic transaction described in the preceding paragraph and elsewhere in this Report have resulted in a higher than normal level of general and administrative expenses associated primarily with the fees of attorneys, financial advisors, accountants, and other professionals whose advice is required in connection with these matters. These fees and expenses affect both our net income and our working capital, and we expect these fees and other transaction costs to remain at an elevated level until a transaction is consummated or until our board of directors determines that we should discontinue further discussions. Further, the announcement that we have abandoned a discussion of strategic transactions or that we have entered into a definitive agreement respecting such a transaction may increase our risk of litigation from security holders, the effect of which would (in either instance) result in further legal fees as we respond to any such allegations. These fees and expenses may have a material adverse effect upon our reported results of operations and financial condition.