This report may contain projections and statements about our expected financial condition, operating results, and business and strategic plans and objectives. These statements reflect management's estimates based upon our current expectations, in light of management's knowledge of existing circumstances and our intentions 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 plans, 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 or their outcomes 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 our Annual Report on Form 10-K entitled "Risk Factors," in a similarly titled section of our Definitive Proxy Statement dated April 6, 2020, and in our other filings with the Securities and Exchange Commission. Any 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 (income) loss attributable to non-controlling interests-ORM Timber Funds" to arrive at "Net and comprehensive income attributable to unitholders".

Our three active timber funds have assets under management totaling approximately $472 million as of March 31, 2020 based on the most recent appraisals.

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 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. 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.

Recent Developments

On January 15, 2020, we announced that we had entered into an Agreement and Plan of Merger dated January 14, 2020 (the "Merger Agreement") with Rayonier, Inc., a North Carolina corporation ("Rayonier"), Rayonier Operating Company



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LLC, a Delaware limited liability company ("OpCo"), Pacific GP Merger Sub I, LLC, a Delaware limited liability company and a wholly owned subsidiary of Rayonier ("Merger Sub 1"), Pacific GP Merger Sub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Rayonier ("Merger Sub 2"), Pacific LP Merger Sub III, LLC, a Delaware limited liability company and a wholly owned subsidiary of OpCo ("Merger Sub 3"), and our general partners, Pope EGP, Inc., a Delaware corporation ("EGP"), and Pope MGP, Inc., a Delaware corporation and the managing general partner of the Partnership ("MGP" and together with EGP, the "General Partners"). Certain information about the transactions contemplated by the Merger Agreement is set forth in a Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 6, 2020. The transactions contemplated by the Merger Agreement were approved by a vote of our unitholders on May 5, 2020, and are expected to be consummated on May 8, 2020.

Timber - Overall

Operations Overall Timber results include operations on 122,000 acres of timberland owned or managed 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 For the Partnership, the weighted-average realized log price for Q1 2020 decreased 5% relative to Q1 2019. For the Funds, the overall realized log price decreased 7% relative to Q1 2019. Average realized log prices continue to be weak due to a well-supplied log market. Demand from China for logs from the Pacific Northwest (PNW) remained low as a result of an increased supply of lower cost spruce logs supplied from Europe. In recent years, European forests have experienced drought, severe storms and a spruce bark beetle infestation, the combination of which has resulted in the death of large areas of timber. With fewer logs from the PNW being sold to the China market, logs available to the domestic market increased. These factors have combined to exert downward pressure on log prices. In addition, business slowdowns resulting from COVID-19 began to have a negative impact on log prices towards the end of March.

Partnership Timber

Partnership Timber operating results for the quarters ended March 31, 2020 and 2019, were as follows:




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                           Q1 2020     Q1 2019

Partnership


Overall log price per MBF $   597     $    629
Total volume (in MMBF)       19.8         23.4

(in thousands)
Log sale revenue          $ 9,861     $ 14,722
Timber deed sale revenue    1,638            -
Other revenue                 577          449
Total revenue              12,076       15,171
Cost of sales              (5,305 )     (7,188 )
Operating expenses         (1,030 )     (1,072 )
Operating income          $ 5,741     $  6,911



Operating Income

Operating income decreased $1.2 million, or 17%, from Q1 2019, driven by decreases of 3.6 MMBF, or 15%, in total harvest volume, and 5% in the weighted-average realized log price.

Revenue

Log sale revenue in Q1 2020 decreased $4.9 million, or 33%, from Q1 2019, due to decreases of 6.9 MMBF, or 29%, in delivered log volume, and 5% in the weighted-average realized log price. This was offset partially by $1.6 million from timber deed sales in Q1 2020 that had no counterpart in the prior year.

Log Prices

Partnership Timber log prices for the quarters ended March 31, 2020 and 2019, were as follows:

Average price realizations (per MBF)


                                      Q1 2020      Q1 2019
Partnership
Douglas-fir domestic                 $     633    $     655
Douglas-fir export                         723          730
Whitewood domestic                         473          528
Whitewood export                           435          544
Cedar                                      985          973
Hardwood                                   470          650
Pulpwood                                   332          385
Overall log price                          597          629

From Q1 2019 to Q1 2020, our weighted-average realized log price decreased 5%. Other than for cedar, prices declined for all species.

Log Volume

The Partnership harvested the following log volumes by species for the quarters ended March 31, 2020 and 2019:




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Volume (in MMBF)
                          Q1 2020       Q1 2019
Partnership
Douglas-fir domestic    11.0   67 %   12.4   53 %
Douglas-fir export       2.1   13 %    4.8   21 %
Whitewood domestic       0.4    2 %    0.5    2 %
Whitewood export           -    - %    0.2    1 %
Cedar                    0.2    1 %    0.4    2 %
Hardwood                 0.5    3 %    1.3    6 %
Pulpwood                 2.3   14 %    3.8   15 %
Log sale volume         16.5  100 %   23.4  100 %
Timber deed sale volume  3.3             -
Total volume            19.8          23.4

Delivered log volume decreased 6.9 MMBF, or 29%, in Q1 2020 from Q1 2019. We sold 3.3 MMBF of timber deed sales, however, that had no counterpart in the prior year.

Cost of Sales

Cost of sales varies with harvest volume, and for the quarters ended March 31, 2020 and 2019, 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:

(in thousands)


                        Q1 2020     Q1 2019
Partnership
Harvest, haul, and tax $  3,896    $  5,586
Depletion                 1,396       1,599
Other                        13           3
Total cost of sales    $  5,305    $  7,188

Amounts per MBF *
Harvest, haul, and tax $    236    $    239
Depletion              $     71    $     68

* 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.

Cost of sales decreased $1.8 million, or 26%, in Q1 2020 from Q1 2019, primarily due to the 29% decrease in delivered log harvest volume.

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, 2020, and 2019, segment operating expenses were $1.0 million and $1.1 million, respectively.

Funds Timber

Funds Timber operating results for quarters ended March 31, 2020 and 2019, were as follows:




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                              Q1 2020      Q1 2019
Funds
Overall log price per MBF     $    585     $   631
Total volume (MMBF)               20.5        14.1

(in thousands)
Log sale revenue              $ 11,999     $ 8,860
Timber deed sale revenue             4           -
Other revenue                       47         580
Total revenue                   12,050       9,440
Cost of sales                  (12,893 )    (9,139 )
Operating expenses - internal   (2,569 )    (2,489 )
Operating loss - internal       (3,412 )    (2,188 )
Eliminations *                   1,407       1,311
Operating loss - external     $ (2,005 )   $  (877 )

* 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 Loss

Operating loss increased $1.1 million, or 129%, from Q1 2019. A 45% increase in harvest volume was more than offset by a 41% increase in cost of sales and a 7% decline in average realized log prices.

Revenue

Total revenue in Q1 2020 rose $2.6 million, or 28%, from Q1 2019, driven by an increase of $3.1 million in delivered log sale revenue, offset partially by a $533,000 decline in other revenue.

Log Prices

Funds Timber log prices for quarters ended March 31, 2020 and 2019, were as follows: Average price realizations (per MBF)


                                      Q1 2020      Q1 2019
Funds
Douglas-fir domestic                 $     650    $     647
Douglas-fir export                         676          731
Whitewood domestic                         515          513
Whitewood export                           372          547
Pine                                       425          432
Cedar                                      659          961
Hardwood                                   395          530
Pulpwood                                   312          359
Overall log price                          585          631

The weighted-average realized log price declined 7% from Q1 2019 to Q1 2020. For Douglas-fir and whitewood, domestic prices remained steady or slightly higher. Rather, the price declines for these two species were concentrated in the export market. For hardwood and pulpwood, however, log prices decreased.




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Log Volume

The Funds harvested the following log volumes by species for the quarters ended March 31, 2020, and 2019:

Volume (in MMBF)


                       Q1 2020       Q1 2019

Funds


Douglas-fir domestic 10.8   54 %    7.4   52 %
Douglas-fir export    2.7   13 %    2.9   21 %
Whitewood domestic    4.4   21 %    1.3    9 %
Whitewood export        -    - %    0.4    3 %
Pine                  0.2    1 %    0.1    1 %
Cedar                 0.1    - %    0.5    4 %
Hardwood              0.2    1 %    0.2    1 %
Pulpwood              2.1   10 %    1.3    9 %
Log sale volume      20.5  100 %   14.1  100 %

Total volume from delivered log sales increased by 6.4 MMBF, or 45%, in Q1 2020 from Q1 2019. This overall increase was exclusively from the domestic market, as volume sold to the export market declined from the prior year.

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, 2020 and 2019, cost of sales 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:

(in thousands)


                        Q1 2020     Q1 2019

Funds


Harvest, haul, and tax $  5,415    $  3,817
Depletion                 7,478       4,935
Other                         -         387
Total cost of sales    $ 12,893    $  9,139

Amounts per MBF *
Harvest, haul, and tax $    264    $    271
Depletion              $    365    $    350

* 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.

Cost of sales increased $3.8 million, or 41%, in Q1 2020 from Q1 2019, primarily due to the 45% increase in harvest volume. The higher amount of other cost of sales for Q1 2019 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



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eliminated in consolidation, and amounted to $1.5 million and $1.4 million in Q1 2020 and Q1 2019, respectively. After elimination of these fees, Fund operating expenses were $1.2 million in each of Q1 2020 and Q1 2019.

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, 2020.

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 during Q1 2019. There were no distributions from the Funds in Q1 2020 due to the anticipated slow-down in operating activities and cash flow as a result of COVID-19. Fees earned by the Partnership for managing the Funds represent a portion of the operating expenses in our Funds Timber segment (discussed above) and 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.

Revenue and operating loss for the TIM segment for the quarters ended March 31, 2020 and 2019 were as follows:



                                                                     Quarter Ended
(in thousands, except invested capital, volume and acre data)     Mar-20       Mar-19
Revenue internal                                                $  1,459     $  1,363
Intersegment eliminations                                         (1,459 )     (1,363 )
Revenue external                                                $      -     $      -

Operating income internal                                       $    107     $     73
Intersegment eliminations                                         (1,389 )     (1,294 )
Operating loss external                                         $ (1,282 )   $ (1,221 )

Invested capital (in millions)                                  $    407     $    407
Acres owned by Funds                                             141,000      141,000

Harvest volume - Funds (MMBF), including timber deed sales 20.5 14.1

TIM generated management fee revenue of $1.5 million and $1.4 million from managing the Funds during Q1 2020 and Q1 2019, respectively.

Operating expenses rose slightly for the quarter ended March 31, 2020, versus the comparable period in 2019, totaling $1.3 million and $1.2 million, respectively.

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 1,500-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



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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.

Results from Real Estate operations may 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 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.

Other than the sale of a small parcel of undeveloped land for $22,000 in Q1 2019, there were no land sales either Q1 2020 or 2019. Rental and other revenue decreased from $409,000 in Q1 2019 to $259,000 in Q1 2020 due primarily to a consulting project that finished in Q2 2019. Real Estate operating expenses were $1.4 million during Q1 2020 compared to $823,000 in Q1 2019. These factors resulted in operating loss of $1.4 million for Q1 2020 compared to $673,000 for Q1 2019.

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 cleanup action plan, or 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 known and alleged 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.

We currently expect the millsite cleanup and NRD restoration to occur over the next two to three years. There will be a monitoring period of approximately 10 to 15 more years during which we will monitor conditions in the Bay, on the millsite, and at the landfill containing the dredged and excavated sediments, which is on land that we own a short distance from the town of Port Gamble. 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.

Should any future circumstances result in a change to the estimated cost of the project, we will record an appropriate adjustment to the liability in the period it becomes known and when we can reasonably estimate the amount.





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General and Administrative (G&A)

G&A expenses were $7.5 million for the first quarter of 2020 compared to $1.8 million for the first quarter of 2019. The increase in G&A expenses is due to $5.2 million of legal and professional fees for Q1 2020 related to the pending merger with Rayonier and its subsidiaries.

Interest Expense, Net



                                      Quarter ended March 31,
(in thousands)                          2020             2019
Interest expense - Partnership             (882 )       (1,025 )
Interest expense - Funds                   (561 )         (556 )
Capitalized interest - Partnership            -             66
Interest expense, net              $     (1,443 )     $ (1,515 )

The decrease in interest expense is due primarily to lower interest rates in the first quarter of 2020 compared to the prior year. The Partnership's and Fund III's debt arrangements with Northwest Farm Credit Services (NWFCS) are included in the latter's patronage program, which rebates a portion of interest paid in the prior year back to the borrower. This NWFCS patronage program is a feature common to most of this lender's loan agreements. The patronage program reduced interest expense by $350,000 and $278,000 for Q1 2020 and Q1 2019, respectively. The increase in the patronage rebate are the result of higher debt balances. Income Tax

Pope Resources is a limited partnership and is therefore not subject to federal income tax. Taxable income/loss is instead reported to unitholders each year on a Form K-1 for inclusion in each unitholder's income tax return. However, Pope Resources and the Funds do have corporate subsidiaries that are subject to income tax, giving rise to the line item for such tax in the Condensed Consolidated Statement of Comprehensive Income.

The Partnership and Funds recorded a consolidated income tax benefit of $265,000 for Q1 2020 and expense of $94,000 for Q1 2019.

Noncontrolling interests

The line item "Net and comprehensive (income) loss attributable to noncontrolling interests - ORM Timber Funds" represents the combination of the portions of the net income or loss for the Funds which are attributable to third-party owners: 80% for Fund II, 95% for Fund III, and 85% for Fund IV.

The line item "Net and comprehensive loss attributable to noncontrolling interests - Real Estate" represents two-thirds of the net income or loss from a Real Estate entity, Ferncliff Investors, that is attributable to third party owners. Ferncliff Investors holds a 50% interest in an unconsolidated real estate joint venture entity.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Liquidity and Capital Resources

We ordinarily finance our business activities using operating cash flows and, where appropriate in our assessment, commercial credit arrangements with banks or other financial institutions. We expect that funds generated internally from operations and externally through financing will provide the required resources for the Partnership's operations and capital expenditures for at least the next twelve months.

The Partnership's debt at March 31, 2020, consists of mortgage debt with fixed and variable interest rate tranches and operating lines of credit with Northwest Farm Credit Services (NWFCS). The mortgage debt includes a $71.8 million long-term credit facility with NWFCS structured in ten tranches that mature from 2024 through 2036, as well as a $40.0 million



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delayed-draw facility under which the Partnership may borrow at any time through October 2023. The delayed-draw facility matures in October 2028 and $7.0 million was outstanding at March 31, 2020. The Partnership's credit arrangements with NWFCS include an accordion feature under which the Partnership may borrow, subject to lender approval, up to an additional $50.0 million within either the long-term or delayed-draw facility. The Partnership has a $30.0 million operating line of credit that matures in October 2023, and had $24.0 million outstanding as of March 31, 2020. The operating line of credit carries a variable interest rate that is based on one-month LIBOR rate plus 1.6%. All of these facilities are collateralized by portions of the Partnership's timberland. In addition, our commercial office building in Poulsbo, Washington is collateral for a $2.2 million amortizing loan from NWFCS that matures in 2023.



These debt agreements contain covenants that are measured either quarterly or
annually, consisting of the following:
•            a maximum debt-to-total-capitalization ratio of 30%, with total
             capitalization calculated using fair market (vs. carrying) value of
             timberland, roads and timber; and

• a maximum loan-to-appraised value of timberland collateral of 50%.

The Partnership is in compliance with these covenants as of March 31, 2020, and expects to remain in compliance for at least the next twelve months.

Mortgage debt within our private equity timber Funds is collateralized by Fund properties only, with no recourse to the Partnership. Fund II has a timberland mortgage comprised of two fixed-rate tranches totaling $25.0 million with MetLife Insurance Company. We are engaged in discussions with the lender and another financial institution to refinance or extend the maturity of this credit facility and believe we will be able to do so. The tranches are non-amortizing and collateralized by a portion of Fund II's timberland portfolio, with both tranches maturing in September 2020. The loans allow for, but do not require, annual principal payments of up to 10% of outstanding principal without incurring a make-whole premium. Fund III has a timberland mortgage comprised of two fixed-rate tranches totaling $32.4 million with NWFCS. The mortgage is non-amortizing and collateralized by a portion of Fund III's timberland, with an $18.0 million tranche maturing in December 2023 and a $14.4 million tranche maturing in October 2024.

Fund II's mortgage contains a requirement to maintain a loan-to-value ratio of less than 50%, with the denominator defined as fair market value. Fund III's mortgage contains covenants, measured annually, that require Fund III to maintain an interest coverage ratio of 1.5:1, maintain working capital of $500,000, and not exceed a debt-to-appraised value of collateral of 50%. Fund II and Fund III are in compliance with these covenants as of March 31, 2020, and we expect they will remain in compliance for at least the next twelve months.

The $4.5 million decrease in cash and restricted cash generated for the three months ended March 31, 2020 compared to March 31, 2019 is explained in the following table:



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                                                          Three Months Ended March 31,
(in thousands)                                        2020            Change          2019
Cash provided by operating activities            $     1,444       $   (3,534 )   $     4,978

Investing activities
Reforestation and roads                                 (931 )           (287 )          (644 )
Capital expenditures                                       -              252            (252 )
Proceeds from sale of property and equipment               -              (71 )            71
Investment in unconsolidated real estate joint
venture                                                  (46 )            (46 )             -
Deposit for acquisition of timberland -
Partnership                                                -                5              (5 )
Acquisition of timberland - Partnership                  (19 )             (3 )           (16 )
Acquisition of timberland - Funds                          -           19,344         (19,344 )
Cash used in investing activities                       (996 )         19,194         (20,190 )
Financing activities
Line of credit borrowings                              9,000            4,500           4,500
Line of credit repayments                             (1,000 )          1,400          (2,400 )
Repayment of long-term debt                              (33 )             (1 )           (32 )
Proceeds from issuance of long-term debt                   -           (3,000 )         3,000
Units issued under distribution reinvestment
plan                                                       -              (24 )            24
Unit repurchases                                           -              166            (166 )
Proceeds from preferred stock issuance - ORM
Timber Funds                                               -             (125 )           125
Payroll taxes paid upon unit net settlements               -               79             (79 )
Cash distributions to unitholders                     (4,367 )             (1 )        (4,366 )
  Cash distributions to fund investors, net of
distributions to Partnership                               -            3,076          (3,076 )
  Capital call - ORM Timber Funds, net of
Partnership contribution                                   -          (17,259 )        17,259

Cash provided by (used in) financing activities 3,600 (11,189 ) 14,789 Net increase (decrease) in cash and restricted cash

$     4,048       $    4,471     $      (423 )

The decrease in cash provided by operating activities of $3.5 million resulted primarily from the payment of over $5.0 million of legal and professional fees paid in connection with our merger with Rayonier and lower average log price realizations in Q1 2020 compared to the prior year, offset partially by a $968,000 decrease in Real Estate project expenditures.

Cash used in investing activities during 2020 decreased by $19.2 million compared to 2019 due primarily to the acquisition of a tree farm by Fund IV in January 2019.

Cash provided by financing activities decreased in the current year by $11.2 million due primarily to a capital call for Fund IV's tree farm acquisition in the first quarter of 2019 that had not counterpart in 2020, offset by higher net borrowings under credit facilities.

Seasonality

Timber - Partnership and Funds. The elevation and terrain characteristics of our timberlands are such that we can conduct harvest operations virtually year-round on a significant portion of our tree farms. Generally, we concentrate our harvests from these areas in those months when weather limits operations on other properties, thus taking advantage of reduced competition for log supply to our customers and improving prices realized. As such, on a combined basis, the pattern of quarterly volumes harvested is flatter than would be the case if looking at one tree farm in isolation. However, this pattern may not hold true during periods of comparatively strong log prices, when we may accelerate harvest volume, or soft log prices, when we may defer harvest volume. In addition, our quarterly harvest patterns may be impacted by severe weather or fire conditions.




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Timberland Investment Management. Management revenue generated by this segment consists of asset and timberland management fees. These fees, which relate primarily to our activities on behalf of the Funds and are eliminated in consolidation, vary based upon the amount of invested capital, the number of acres owned by the Funds, and the volume of timber harvested from properties owned by the Funds and are not expected to be significantly seasonal.

Real Estate. While Real Estate results are not expected to be seasonal, the nature of the activities in this segment will likely result in periodic large transactions that will have significant positive impacts on both revenue and operating income of the Partnership in periods in which these transactions close, and relatively limited revenue and operating income in other periods. While the variability of these results is not primarily a function of seasonal weather patterns, we do expect to see some seasonal fluctuations in this segment because of the general effects of weather on Pacific Northwest development activities.

Capital Expenditures and Commitments



The following table presents our capital expenditures by major category for the
quarter ended March 31, 2020:
in millions
Reforestation and roads - Partnership  $ 0.4
Reforestation and roads - Funds          0.5
Other Real Estate development projects   0.1
                                       $ 1.0

We expect capital resources to remain sufficient for at least the next 12 months.

ACCOUNTING MATTERS

Critical Accounting Policies and Estimates

An accounting estimate is deemed to be critical if it requires us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and also if different estimates that we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of the Company's financial condition, changes in financial condition, or results of operations. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and related disclosures. Actual results could differ from these estimates and assumptions. Management believes its most critical accounting policies and estimates relate to the cost allocation of purchased timberland, timber volume, and environmental remediation liabilities.

For a further discussion of our critical accounting estimates, see Accounting Matters in the Management Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2019. See also notes 2 and 4 to the condensed consolidated financial statements in this report.

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