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CatchMark Timber Trust, Inc. - Quarter Report: 2013 June (Form 10-Q)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
___________________________________________________
FORM 10-Q
___________________________________________________ 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2013
OR
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to             
Commission file number 000-53193
WELLS TIMBERLAND REIT, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
20-3536671
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
6200 The Corners Parkway
Norcross, Georgia 30092
(Address of principal executive offices)
(Zip Code)
(770) 449-7800
(Registrant’s telephone number, including area code)
N/A 
___________________________________________________ 
(Former name, former address, and former fiscal year, if changed since last report)
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 during the preceding 12 months (or 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 definitions 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 
o
 
 
 
 
 
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
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
Number of shares outstanding of the registrant’s only
class of common stock, as of July 31, 2013: 31,736,523 shares
 
 


FORM 10-Q
WELLS TIMBERLAND REIT, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q of Wells Timberland REIT, Inc. and subsidiaries (“Wells Timberland REIT,” “we,” “our,” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that this report is filed with the Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this report, and we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A herein, as well as Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our quarterly report on Form 10-Q for the period ended March 31, 2013, for a discussion of some of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements. The risk factors described herein and in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our quarterly report on Form 10-Q for the period ended March 31, 2013 are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also harm our business.



3

PART I.
FINANCIAL INFORMATION


ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The information furnished in the accompanying consolidated balance sheets and related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows reflects all normal and recurring adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.

The accompanying consolidated financial statements should be read in conjunction with the condensed notes to Wells Timberland REIT’s consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q and with Wells Timberland REIT’s Annual Report on Form 10-K for the year ended December 31, 2012. Wells Timberland REIT’s results of operations for the three months and six months ended ended June 30, 2013 are not necessarily indicative of the operating results expected for the full year.


4

WELLS TIMBERLAND REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
June 30, 2013
 
December 31, 2012
Assets:
 
 
 
Cash and cash equivalents
$
13,357,474

 
$
11,221,092

Restricted cash and cash equivalents
1,352,822

 
2,050,063

Accounts receivable
893,579

 
658,355

Prepaid expenses and other assets
1,587,781

 
1,098,268

Deferred financing costs, less accumulated amortization of $174,417 and $58,626
      as of June 30, 2013 and December 31, 2012, respectively
1,196,503

 
1,311,770

Timber assets, at cost (Note 3):

 
 
Timber and timberlands, net
328,824,748

 
333,805,295

Intangible lease assets, less accumulated amortization of $922,191 and $841,686
    as of June 30, 2013 and December 31, 2012, respectively
34,894

 
115,399

Total assets
$
347,247,801

 
$
350,260,242

 
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued expenses
$
1,715,089

 
$
1,689,288

Due to affiliates (Note 9)
1,636,366

 
1,326,255

Other liabilities
4,736,037

 
4,801,387

Note payable and line of credit (Note 4)
132,356,123

 
132,356,123

Total liabilities
140,443,615

 
140,173,053

 
 
 
 
Commitments and Contingencies (Note 6)
—

 
—

 
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value; 100,000,000 shares authorized:
 
 
 
Series A preferred stock, $1,000 liquidation preference; 27,585 shares issued
   and outstanding as of June 30, 2013 and December 31, 2012
36,612,667

 
36,476,063

Series B preferred stock, $1,000 liquidation preference; 9,807 shares issued
   and outstanding as of June 30, 2013 and December 31, 2012
12,172,491

 
12,123,992

Common stock, $0.01 par value; 900,000,000 shares authorized; 31,753,373 and
   31,800,627 shares issued and outstanding as of June 30, 2013 and
   December 31, 2012, respectively
317,534

 
318,006

Additional paid-in capital
300,881,510

 
301,348,146

Accumulated deficit and distributions
(144,041,796
)
 
(139,491,344
)
Accumulated other comprehensive income (loss)
861,780

 
(687,674
)
Total stockholders’ equity
206,804,186

 
210,087,189

Total liabilities and stockholders’ equity
$
347,247,801

 
$
350,260,242


See accompanying notes.

5

WELLS TIMBERLAND REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
Three Months Ended
June 30,
 
(Unaudited)
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Timber sales
$
7,267,334

 
$
7,062,469

 
$
13,419,096

 
$
14,284,696

Timberland sales
1,309,371

 
10,552,180

 
1,853,321

 
10,552,180

Other revenues
675,714

 
677,644

 
1,367,793

 
1,341,281

 
9,252,419

 
18,292,293

 
16,640,210

 
26,178,157

Expenses:
 
 
 
 
 
 
 
Contract logging and hauling costs
3,780,638

 
3,849,424

 
7,044,108

 
7,846,384

Depletion
2,247,904

 
2,494,011

 
4,293,257

 
5,474,288

Cost of timberland sales
964,869

 
7,567,615

 
1,343,152

 
7,567,615

Advisor fees and expense reimbursements
1,636,366

 
1,648,503

 
2,381,608

 
2,393,745

Forestry management fees
569,157

 
570,297

 
1,145,861

 
1,143,079

General and administrative expenses
804,196

 
572,510

 
1,409,132

 
1,127,515

Land rent expense
257,806

 
498,419

 
567,952

 
1,013,297

Other operating expenses
608,903

 
568,410

 
1,269,475

 
1,266,358

 
10,869,839

 
17,769,189

 
19,454,545

 
27,832,281

Operating income (loss)
(1,617,420
)
 
523,104

 
(2,814,335
)
 
(1,654,124
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
849

 
182

 
1,999

 
309

Interest expense
(947,352
)
 
(975,420
)
 
(1,737,847
)
 
(1,961,393
)
Loss on interest rate swap
—

 
(12,172
)
 
(474
)
 
(103,165
)
 
(946,503
)
 
(987,410
)
 
(1,736,322
)
 
(2,064,249
)
Net loss
(2,563,923
)
 
(464,306
)
 
(4,550,657
)
 
(3,718,373
)
Dividends to preferred stockholder
(92,969
)
 
(92,970
)
 
(185,103
)
 
(186,011
)
Net loss available to common stockholders
$
(2,656,892
)
 
$
(557,276
)
 
$
(4,735,760
)
 
$
(3,904,384
)
Per-share information—basic and diluted:
 
 
 
 
 
 
 
Net loss available to common stockholders
$
(0.08
)
 
$
(0.02
)
 
$
(0.15
)
 
$
(0.12
)
Weighted-average common shares outstanding
    —basic and diluted
31,757,432

 
31,884,699

 
31,775,958

 
31,869,820


See accompanying notes.

6


WELLS TIMBERLAND REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
(Unaudited)
Three Months Ended
June 30,
 
(Unaudited)
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net loss
$
(2,563,923
)
 
$
(464,306
)
 
$
(4,550,657
)
 
$
(3,718,373
)
Other comprehensive income:
 
 
 
 
 
 
 
     Market value adjustment to interest rate swap
1,456,981

 
—

 
1,549,454

 
—

Comprehensive loss
$
(1,106,942
)
 
$
(464,306
)
 
$
(3,001,203
)
 
$
(3,718,373
)


See accompanying notes.


7

WELLS TIMBERLAND REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
Common Stock
 
Preferred Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit and Distributions
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Balance, December 31, 2012
31,800,627

 
$
318,006

 
37,392

 
$
48,600,055

 
$
301,348,146

 
$
(139,491,344
)
 
$
(687,674
)
 
$
210,087,189

Forfeiture of restricted stock award
(2,021
)
 
(20
)
 
—

 
—

 
(185
)
 
205

 
—

 
—

Redemptions of common stock
(45,233
)
 
(452
)
 
—

 
—

 
(281,348
)
 
—

 
—

 
(281,800
)
Dividends on preferred stock
—

 
—

 
—

 
185,103

 
(185,103
)
 
—

 
—

 
—

Net loss
—

 
—

 
—

 
—

 
—

 
(4,550,657
)
 
—

 
(4,550,657
)
Market value adjustment to interest rate swap
—

 
—

 
—

 
—

 
—

 
—

 
1,549,454

 
1,549,454

Balance, June 30, 2013
31,753,373

 
$
317,534

 
37,392

 
$
48,785,158

 
$
300,881,510

 
$
(144,041,796
)
 
$
861,780

 
$
206,804,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Preferred Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit and Distributions
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Balance, December 31, 2011
31,465,274

 
$
314,653

 
37,748

 
$
48,685,499

 
$
271,428,671

 
$
(130,620,551
)
 
$
—

 
$
189,808,272

Issuance of common stock
408,980

 
4,090

 
—

 
—

 
4,110,711

 
(61
)
 
—

 
4,114,740

Redemptions of common stock
(55,067
)
 
(551
)
 
—

 
—

 
(525,063
)
 
—

 
—

 
(525,614
)
Dividends on preferred stock
—

 
—

 
—

 
186,011

 
(186,011
)
 
—

 
—

 
—

Redemptions of preferred stock
—

 
—

 
(356
)
 
(459,436
)
 
—

 
—

 
—

 
(459,436
)
Commissions and discounts on stock sales and related dealer-manager fees
—

 
—

 
—

 
—

 
(361,364
)
 
—

 
—

 
(361,364
)
Other offering costs
—

 
—

 
—

 
—

 
(48,752
)
 
—

 
—

 
(48,752
)
Write-off of due to affiliates
—

 
—

 
—

 
—

 
27,315,249

 
—

 
—

 
27,315,249

Net loss
—

 
—

 
—

 
—

 
—

 
(3,718,373
)
 
—

 
(3,718,373
)
Balance, June 30, 2012
31,819,187

 
$
318,192

 
37,392

 
$
48,412,074

 
$
301,733,441

 
$
(134,338,985
)
 
$
—

 
$
216,124,722


See accompanying notes.


8

WELLS TIMBERLAND REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
Six Months Ended
June 30,
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(4,550,657
)
 
$
(3,718,373
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depletion
4,293,257

 
5,474,288

Unrealized gain on interest rate swaps
(128,934
)
 
(451,716
)
Other amortization
113,773

 
111,176

Stock-based compensation expense
—

 
8,333

Noncash interest expense
124,489

 
259,520

Basis of timberland sold
1,213,643

 
6,962,273

Changes in assets and liabilities:
 
 
 
Increase in accounts receivable
(235,224
)
 
(179,209
)
Decrease in prepaid expenses and other assets
375,592

 
181,430

Increase (decrease) in accounts payable and accrued expenses
25,801

 
(351,629
)
Increase in due to affiliates
310,111

 
168,307

Increase in other liabilities
867,722

 
369,247

Net cash provided by operating activities
2,409,573

 
8,833,647

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Investment in timber, timberland, and related assets
(688,108
)
 
(451,498
)
Funds released from escrow accounts
697,241

 
4,162,322

Net cash provided by investing activities
9,133

 
3,710,824

 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Financing costs paid
(524
)
 
—

Repayment of Mahrt loan
—

 
(3,628,453
)
Issuance of common stock
—

 
4,062,646

Redemptions of common stock
(281,800
)
 
(525,614
)
Redemptions of preferred stock
—

 
(356,000
)
Dividends paid on preferred stock redeemed
—

 
(103,436
)
Commissions on stock sales and related dealer-manager fees paid
—

 
(447,744
)
Other offering costs paid
—

 
(83,739
)
Net cash used in financing activities
(282,324
)
 
(1,082,340
)
Net increase in cash and cash equivalents
2,136,382

 
11,462,131

Cash and cash equivalents, beginning of period
11,221,092

 
6,848,973

Cash and cash equivalents, end of period
$
13,357,474

 
$
18,311,104


See accompanying notes.

9
Table of Contents

WELLS TIMBERLAND REIT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013 (unaudited)

1.
Organization

Wells Timberland REIT was formed on September 27, 2005 as a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. Wells Timberland REIT engages in the ownership and management of timberland located in the southeastern United States. Substantially all of Wells Timberland REIT’s business is conducted through Wells Timberland Operating Partnership, L.P. (“Wells Timberland OP”), a Delaware limited partnership formed on November 9, 2005, of which Wells Timberland REIT is the sole general partner, possesses full legal control and authority over its operations, and owns 99.99% of its common partnership units. Wells Timberland Management Organization, LLC (“Wells TIMO”), a wholly owned subsidiary of Wells Capital, Inc. (“Wells Capital”), is the sole limited partner of Wells Timberland OP. In addition, Wells Timberland OP formed Wells Timberland TRS, Inc. (“Wells Timberland TRS”), a wholly owned subsidiary organized as a Delaware corporation, on January 1, 2006 (see Note 2). Unless otherwise noted, references herein to Wells Timberland REIT shall include Wells Timberland REIT and all of its subsidiaries, including Wells Timberland OP, and the subsidiaries of Wells Timberland OP, including Wells Timberland TRS. Under an agreement (the “Advisory Agreement”), Wells TIMO performs certain key functions on behalf of Wells Timberland REIT and Wells Timberland OP, including, among others, the investment of capital proceeds and management of day-to-day operations (see Note 9).

As of June 30, 2013, Wells Timberland REIT owned approximately 245,700 acres of timberland and held long-term leasehold interests in approximately 36,300 acres of additional timberland, all of which is located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia (the “Mahrt Timberland”). Wells Timberland REIT acquired the Mahrt Timberland on October 9, 2007. Wells Timberland REIT generates a substantial portion of its revenues from selling timber and the right to access land and harvest timber to third parties pursuant to supply agreements and through open-market sales, selling higher-and-better-use timberland, and leasing land-use rights to third parties.

On August 11, 2006, Wells Timberland REIT commenced its initial public offering (the “Initial Public Offering”) of up to 85.0 million shares of common stock, of which 75.0 million shares were offered in the primary offering for $10.00 per share and 10.0 million shares were reserved for issuance through Wells Timberland REIT’s distribution reinvestment plan (“DRP”). Wells Timberland REIT stopped offering shares for sale under the Initial Public Offering on August 11, 2009. Wells Timberland REIT raised gross offering proceeds of approximately $174.9 million from the sale of approximately 17.6 million shares under the Initial Public Offering.

On August 6, 2009, Wells Timberland REIT commenced its follow-on offering (the “Follow-On Offering”, and together with the Initial Public Offering, the “Public Offerings”) of up to 220.9 million shares of common stock, of which 200.0 million shares were offered in a primary offering for $10.00 per share and 20.9 million shares of common stock were reserved for issuance through Wells Timberland REIT’s DRP for $9.55 per share. Effective December 31, 2011, Wells Timberland REIT ceased offering shares for sale under the Follow-On Offering. From January 1, 2012 to February 13, 2012, Wells Timberland REIT accepted $4.1 million of additional gross offering proceeds from the sale of approximately 0.4 million additional shares under the Follow-On Offering, which sales were agreed to by the investor on or before December 31, 2011. On March 15, 2012, Wells Timberland REIT withdrew from registration the unsold primary offering shares. Wells Timberland REIT raised gross offering proceeds of approximately $123.8 million from the sale of approximately 12.5 million shares under the Follow-On Offering.

Wells Timberland REIT offered up to approximately 11.4 million shares of its common stock, of which approximately 10.4 million shares were offered in a primary offering to non-U.S. persons at a price per share of $9.65, and up to approximately 1.0 million shares of common stock were reserved for issuance through an unregistered distribution reinvestment plan at a price per share equal to $9.55 (the “2010 German Offering”). The 2010 German Offering closed on August 6, 2011 and Wells Timberland REIT raised approximately $8.5 million from the sale of approximately 0.9 million shares in the 2010 German Offering.

10
Table of Contents


Wells Timberland REIT raised gross offering proceeds from the sale of common stock under the Public Offerings and the 2010 German Offering of approximately $307.2 million. After deductions for payments of selling commissions and dealer-manager fees of approximately $24.7 million, other organization and offering expenses of approximately $1.4 million, approximately $0.4 million in placement and structuring agent fees, and common stock redemptions of approximately $2.6 million under the share redemption plan (“SRP”), Wells Timberland REIT had received aggregate net offering proceeds of approximately $278.1 million, which was used to partially fund the Mahrt Timberland acquisition, service acquisition-related debt, redeem shares of its preferred stock, and fund accrued dividends on redeemed shares of preferred stock.

Wells Timberland REIT’s common stock is not listed on a national securities exchange. Wells Timberland REIT’s charter requires that in the event its common stock is not listed on a national securities exchange by August 11, 2018, Wells Timberland REIT must either (i) seek stockholder approval of an extension or amendment of this listing deadline or (ii) seek stockholder approval to begin liquidating investments and distributing the resulting proceeds to the stockholders. In the event that Wells Timberland REIT seeks stockholder approval for an extension or amendment to this listing date and does not obtain it, Wells Timberland REIT will then be required to seek stockholder approval to liquidate. In this circumstance, if Wells Timberland REIT seeks and does not obtain approval to liquidate, Wells Timberland REIT will not be required to list or liquidate and could continue to operate indefinitely as an unlisted company.

2.
Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Wells Timberland REIT have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In the opinion of management, the statements for these unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Results for these interim periods are not necessarily indicative of results for a full year.

Wells Timberland REIT owns a controlling financial interest in Wells Timberland OP and Wells Timberland TRS and, accordingly, includes the accounts of these entities in its consolidated financial statements. The financial statements of Wells Timberland OP and Wells Timberland TRS are prepared using accounting policies consistent with those used by Wells Timberland REIT. All intercompany balances and transactions have been eliminated in consolidation.

For further information, refer to the audited financial statements and footnotes included in Wells Timberland REIT’s Annual Report on Form 10-K for the year ended December 31, 2012.

Fair Value Measurements

Wells Timberland REIT estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures. Under this guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, the accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:

Level 1 — Assets or liabilities for which the identical term is traded on an active exchange, such as publicly-traded instruments or futures contracts.

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Level 2 — Assets and liabilities valued based on observable market data for similar instruments.
Level 3 — Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would require.

Fair Value of Debt Instruments

Wells Timberland REIT applied the provisions of the accounting standard for fair value measurements and disclosures in estimations of fair value of its debt instruments based on Level 2 assumptions. See Note 4 for additional information.

Interest Rate Swaps

Wells Timberland REIT has entered into interest rate swap contracts to mitigate its exposure to changing interest rates on variable rate debt instruments. Wells Timberland REIT does not enter into derivative or interest rate transactions for speculative purposes; however, certain of its derivatives may not qualify for hedge accounting treatment. The fair values of interest rate swaps are recorded as either prepaid expenses and other assets or other liabilities in the accompanying consolidated balance sheets. Changes in the fair value of the effective portion of interest rate swaps that are designated as hedges are recorded as other comprehensive income (loss), while changes in the fair value of the ineffective portion of hedges, if any, are recognized in current earnings. Changes in the fair value of interest rate swaps that do not qualify for hedge accounting treatment are recorded as gain (loss) on interest rate swap in the consolidated statements of operations. Amounts received or paid under interest rate swaps are recorded as interest expense for contracts that qualify for hedge accounting treatment and as gain (loss) on interest rate swaps for contracts that do not qualify for hedge accounting treatment.

Wells Timberland REIT applied the provisions of the accounting standard for fair value measurements and disclosures in recording its interest rate swaps at fair value. The fair values of interest rate swaps, classified under Level 2, were determined using a third-party proprietary model that is based on prevailing market data for contracts with matching durations, current and anticipated London Interbank Offered Rate ("LIBOR") information, consideration of Wells Timberland REIT's credit standing, credit risk of counterparties, and reasonable estimates about relevant future market conditions.

The following table presents information about Wells Timberland REIT’s interest rate swaps measured at fair value as of June 30, 2013 and December 31, 2012:
 
 
 
Estimated Fair Value as of
Instrument Type
Balance Sheet Classification
 
June 30, 2013
 
December 31, 2012
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swap contract
Prepaid expenses and other assets
(Other liabilities)
 
$
861,780

 
$
(687,674
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate swap contract
Other liabilities
 
$
—

 
$
(128,934
)

For additional information about Wells Timberland REIT's interest rate swaps, see Note 5.

Income Taxes

Wells Timberland REIT has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as such beginning with its taxable year ended December 31, 2009. To qualify to be taxed as a REIT, Wells Timberland REIT must meet certain organizational and operational requirements, including a

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requirement to distribute at least 90% of its ordinary taxable income to its stockholders. As a REIT, Wells Timberland REIT generally is not subject to federal income tax on taxable income it distributes to stockholders. Wells Timberland REIT is subject to certain state and local taxes related to the operations of timberland properties in certain locations, which have been provided for in the accompanying consolidated financial statements. Wells Timberland REIT records interest and penalties related to uncertain tax positions as general and administrative expense in the accompanying consolidated statements of operations.

As of January 1, 2009, the beginning of the taxable year in which Wells Timberland REIT qualified for and elected to be taxed as a REIT, or its REIT commencement date, Wells Timberland REIT had net built-in gains on its timber assets of approximately $18.3 million. Wells Timberland REIT has elected not to take such net built-in gains into income immediately prior to its REIT commencement date, but rather subsequently recognize gain on the disposition of any assets it holds at the REIT commencement date, if disposed of within the ten-year period beginning on the REIT commencement date. Wells Timberland REIT will be subject to tax on such net built-in gains at the highest regular corporate rate during the ten-year period beginning on the REIT commencement date on the lesser of (a) the excess of the fair market value of the asset disposed of as of the REIT commencement date over its basis in the asset as of the REIT commencement date (the built-in gain with respect to that asset as of the REIT commencement date); (b) the amount of gain Wells Timberland REIT would otherwise recognize on the disposition; or (c) the amount of net built-in gain in its assets as of the REIT commencement date not already recognized during the ten-year period. As of December 31, 2012, Wells Timberland REIT had net built-in gains of approximately $17.6 million.

At December 31, 2012, Wells Timberland REIT had federal and state net operating loss carryforwards of approximately $98.1 million and $82.2 million, respectively. Such net operating loss carryforwards may be utilized, subject to certain limitations, to offset future taxable income, including net built-in gains. If not utilized, the federal net operating loss carryforwards will begin to expire in 2027, and the state net operating loss carryforwards will begin to expire in 2022.

Wells Timberland REIT has elected to treat Wells Timberland TRS as a taxable REIT subsidiary. Wells Timberland REIT may perform certain non-customary services, including real estate or non-real-estate related services, through Wells Timberland TRS. Earnings from services performed through Wells Timberland TRS are subject to federal and state income taxes irrespective of the dividends paid deduction available to REITs for federal income tax purposes. In addition, for Wells Timberland REIT to continue to qualify to be taxed as a REIT, Wells Timberland REIT’s investment in Wells Timberland TRS may not exceed 25% of the value of the total assets of Wells Timberland REIT.

Deferred tax assets and liabilities represent temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on the enacted rates expected to be in effect when the temporary differences reverse. Deferred tax expense or benefit is recognized in the financial statements according to the changes in deferred tax assets or liabilities between years. Valuation allowances are established to reduce deferred tax assets when it becomes more likely than not that such assets, or portions thereof, will not be realized.

No provision for federal income taxes has been made in the accompanying consolidated financial statements, other than the provision relating to Wells Timberland TRS, as Wells Timberland REIT did not generate taxable income for the periods presented.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 requires an entity to disclose information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to disclose significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified to net income in its entirety in the same reporting period is required under GAAP. For amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 was effective for Wells

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Timberland REIT for the period beginning January 1, 2013. The adoption of ASU 2013-02 has not had a material impact on Wells Timberland REIT's financial statements or disclosures.

In June 2013, FASB issued Accounting Standards Update 2013-08, Financial Services - Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements ("ASU 2013-08"). ASU 2013-08 clarifies the characteristics of an investment company and requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting. In addition, an entity is required to disclose (a) the fact that it is an investment company applying the guidance in the Financial Services - Investment Companies Topic, (b) information about any changes in the entity's status as an investment company, and (c) information about financial support provided to its investees. ASU 2013-08 will be effective for Wells Timberland REIT for the period beginning on January 1, 2014. Wells Timberland REIT expects that the adoption of ASU 2013-08 will not have a material impact on its financial statements or disclosures.

In July 2013,FASB issued Accounting Standards Update 2013-10, Derivatives and Hedging: Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ("ASU 2013-10"). ASU 2013-10 permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under the Derivatives and Hedging Topic, in addition to the U.S. Treasury rate and LIBOR. In addition, the restriction on using different benchmark rates for similar hedges is removed. ASU 2013-10 will be effective prospectively for Wells Timberland REIT for qualifying new hedging relationships entered into on or after July 17, 2013. Wells Timberland REIT expects that the adoption of ASU 2013-10 will not have a material impact on its financial statements or disclosures.

In July 2013, FASB issued Accounting Standards Update 2013-11, Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 requires an entity to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date or not intended to be used to settle any additional income taxes that would result in the dis-allowance of a tax position in which case the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 will be effective prospectively for Wells Timberland REIT for the period beginning on January 1, 2014. Wells Timberland REIT expects that the adoption of ASU 2013-11 will not have a material impact on its financial statements or disclosures.

3.
Timber Assets

During the three months ended June 30, 2013 and 2012, Wells Timberland REIT sold approximately 600 acres and 5,800 acres of timberland, respectively, for approximately $1.3 million and $10.6 million, respectively. Wells Timberland REIT’s cost basis in the timberland sold was approximately $0.9 million and $7.0 million, respectively.

During the six months ended June 30, 2013 and 2012, Wells Timberland REIT sold approximately 900 acres and 5,800 acres of timberland, respectively, for approximately $1.9 million and $10.6 million, respectively. Wells Timberland REIT’s cost basis in the timberland sold was approximately $1.2 million and $7.0 million, respectively.

As of June 30, 2013 and December 31, 2012, timber and timberlands consisted of the following, respectively:
 
As of June 30, 2013
 
Gross
 
Accumulated
Depletion or
Amortization
 
Net
Timber
$
149,947,162

 
4,293,257

 
$
145,653,905

Timberlands
182,909,362

 
—

 
182,909,362

Mainline roads
467,318

 
205,837

 
261,481

Timber and timberlands
$
333,323,842

 
$
4,499,094

 
$
328,824,748


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As of December 31, 2012
 
Gross
 
Accumulated
Depletion or
Amortization
 
Net
Timber
$
161,878,914

 
$
11,677,229

 
$
150,201,685

Timberlands
183,349,545

 
—

 
183,349,545

Mainline roads
428,688

 
174,623

 
254,065

Timber and timberlands
$
345,657,147

 
$
11,851,852

 
$
333,805,295


4.
Note Payable and Line of Credit

Wells Timberland REIT entered into a first mortgage loan agreement (the "CoBank Loan") on September 28, 2012 with a syndicate of banks with CoBank, ACB ("CoBank") serving as administrative agent. Under the CoBank Loan, Wells Timberland REIT initially can borrow up to $148.0 million in principal, including $133.0 million through a term loan facility ("CoBank Term Loan") and up to $15.0 million through a revolving credit facility (the "CoBank Revolver"). On August 11, 2018, all outstanding principal, interest, and any fees or other obligations on the CoBank Loan will be due and payable in full. The CoBank Loan is secured by a first mortgage in the Mahrt Timberland, a first priority security interest in all bank accounts held by Wells Timberland REIT, and a first priority security interest on all other assets of Wells Timberland REIT. As of June 30, 2013, the outstanding balance of the CoBank Loan was $132.4 million, all of which was outstanding under the CoBank Term Loan.

The CoBank Loan contains certain financial covenants. Wells Timberland REIT believes it was in compliance with the financial covenants of the CoBank Loan as of June 30, 2013.
 
During the three months ended June 30, 2013 and 2012, Wells Timberland REIT made interest payments on its borrowings of approximately $0.8 million and $0.8 million, respectively. During the six months ended June 30, 2013 and 2012, interest payments on its borrowings totaled approximately $1.5 million and $1.7 million, respectively.

As of June 30, 2013, the weighted-average interest rate on the aforementioned borrowings, after consideration of an interest rate swap (see Note 5), was 2.63%. As of June 30, 2013 and December 31, 2012, the fair value of Wells Timberland REIT's outstanding debt approximated its book value. The fair value was estimated based on discounted cash flow analysis using the current market borrowing rates for similar types of borrowing arrangements as of the measurement dates.

5.     Interest Rate Swaps
Wells Timberland REIT entered into interest rate swap contracts in order to mitigate its interest rate risk on related financial instruments. Wells Timberland REIT does not enter into derivative or interest rate contracts for speculative purposes; however, Wells Timberland REIT’s derivatives may not qualify for hedge accounting treatment.

Interest Rate Swap Designated as Hedging Instrument

As required by the terms of the CoBank Loan, on October 23, 2012, Wells Timberland REIT entered into an interest rate swap agreement with Rabobank Group ("Rabobank") to hedge its exposure to changing interest rates on $80.0 million of the CoBank Loan that is subject to a variable interest rate (the “Rabobank Forward Swap”). The Rabobank Forward Swap had an effective date of March 28, 2013 and matures on September 30, 2017. Under the terms of the Rabobank Forward Swap, Wells Timberland REIT pays interest at a fixed rate of 0.9075% per annum to Rabobank and receives one-month LIBOR-based interest payments from Rabobank. The Rabobank Forward Swap qualifies for hedge accounting treatment.


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During the three months and six months ended June 30, 2013, Wells Timberland REIT recognized a change in fair value of the Rabobank Forward Swap of approximately $1.5 million and $1.5 million, respectively, as other comprehensive income. There was no hedge ineffectiveness on the Rabobank Forward Swap required to be recognized in current earnings. Net payments of approximately $0.1 million made under the Rabobank Forward Swap by Wells Timberland REIT during the three months ended June 30, 2013 were recorded as interest expense. No amounts were paid or received on the Rabobank Forward Swap during the first quarter.

Interest Rate Swap Not Designated as Hedging Instrument

On March 24, 2010, as required by the terms of its loan agreement, Wells Timberland REIT entered into an interest rate swap agreement with Rabobank to hedge its exposure to changing interest rates on a portion of its $211.0 million senior loan (the “Rabobank Interest Rate Swap”). The Rabobank Interest Rate Swap was effective from September 30, 2010 to March 28, 2013. During the term of the Rabobank Interest Rate Swap, Wells Timberland REIT paid interest at a fixed rate of 2.085% per annum and received variable LIBOR-based interest payments from Rabobank on the following notional amounts during the periods presented:
Start Date
 
End Date
 
Notional Amount
December 30, 2011
 
March 30, 2012
 
$62,500,000
March 30, 2012

June 29, 2012
 
$57,500,000
December 31, 2012
 
March 28, 2013
 
$28,500,000
The detail of loss on the Rabobank Interest Rate Swap, which was recorded as loss on interest rate swaps in the accompanying consolidated statements of operations, is provided below for the three months and six months ended June 30, 2013 and 2012:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Noncash gain on Rabobank Interest Rate Swap
$
—

 
$
256,052

 
$
128,934

 
$
451,716

Net payments on Rabobank Interest Rate Swap
—

 
(268,224
)
 
(129,408
)
 
(554,881
)
Loss on Rabobank Interest Rate Swap
$
—

 
$
(12,172
)
 
$
(474
)
 
$
(103,165
)

6.    Commitments and Contingencies

MeadWestvaco Timber Agreements

In connection with its acquisition of the Mahrt Timberland, Wells Timberland REIT entered into a fiber supply agreement and a master stumpage agreement (collectively, the “Timber Agreements”) with a wholly owned subsidiary of MeadWestvaco Corporation (“MeadWestvaco”). The fiber supply agreement provides that MeadWestvaco will purchase specified tonnage of timber from Wells Timberland TRS at specified prices per ton, depending upon the type of timber. The fiber supply agreement is subject to quarterly market pricing adjustments based on an index published by Timber Mart-South, a quarterly trade publication that reports raw forest product prices in 11 southern states. The master stumpage agreement provides that Wells Timberland REIT will sell specified amounts of timber and make available certain portions of the Mahrt Timberland to Wells Timberland TRS for harvesting at $0.10 per ton of qualifying timber purchased by MeadWestvaco plus a portion of the gross proceeds received from MeadWestvaco under the fiber supply agreement. The initial term of the Timber Agreements is October 9, 2007 through December 31, 2032, subject to extension and early termination provisions. The Timber Agreements ensure a long-term source of supply of wood fiber products for MeadWestvaco in order to meet its paperboard and lumber production requirements at specified mills and provide Wells Timberland REIT with a reliable customer for the wood products from the Mahrt Timberland.


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FRC Timberland Operating Agreement

Wells Timberland REIT is party to a timberland operating agreement with Forest Resource Consultants, Inc. (“FRC”). Pursuant to the terms of the timberland operating agreement, FRC manages and operates the Mahrt Timberland and the related timber operations, including ensuring delivery of timber to MeadWestvaco in compliance with the Timber Agreements. In consideration for rendering the services described in the timberland operating agreement, Wells Timberland REIT pays FRC (i) a monthly management fee based on the actual acreage FRC manages, which is payable monthly in advance, and (ii) an incentive fee based on net revenues generated by the Mahrt Timberland. The incentive fee is payable annually in arrears. The timberland operating agreement, as amended, is effective through December 31, 2013, with the option to extend for one-year periods and may be terminated by either party with mutual consent or by Wells Timberland REIT with or without cause upon providing 120 days’ prior written notice.

Litigation

From time to time, Wells Timberland REIT may be a party to legal proceedings that arise in the ordinary course of its business. Management makes assumptions and estimates concerning the likelihood and amount of any reasonably possible loss relating to these matters using the latest information available. Wells Timberland REIT records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, Wells Timberland REIT accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, Wells Timberland REIT accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, Wells Timberland REIT discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, Wells Timberland REIT discloses the nature and estimate of the possible loss of the litigation. Wells Timberland REIT does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote.

Wells Timberland REIT is not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on the results of operations or financial condition of Wells Timberland REIT. Wells Timberland REIT is not aware of any legal proceedings contemplated by governmental authorities.

7.    Share Redemption Plan

Wells Timberland REIT's SRP, as amended on August 6, 2012 (the “Amended SRP”), allows stockholders who hold their shares for more than one year to sell their shares back to Wells Timberland REIT, subject to certain limitations and penalties. The Amended SRP is funded through a combination of proceeds received from the sale of shares through the DRP plus any additional amounts reserved for redemptions by Wells Timberland REIT's board of directors. Wells Timberland REIT's board of directors has approved a monthly, non-cumulative reserve of $150,000 for redemptions in connection with death, qualifying disability, or qualification for federal assistance for confinement to a long-term care facility (“Qualified Special Redemptions”). As of June 30, 2013, Wells Timberland REIT has not received any proceeds from sales of shares through the DRP, and therefore, it is currently restricted from redeeming shares of its common stock other than Qualified Special Redemptions. Qualified Special Redemptions do not require a one-year holding period.

Effective January 1, 2013, the price to be paid for shares redeemed under the Amended SRP is $6.23 per share, which represents 95% of the most recently published estimated per-share value of Wells Timberland REIT's common stock. The estimated per-share value utilized for purposes of the Amended SRP was as of September 30, 2012. While Wells Timberland REIT is required by Financial Industry Regulatory Authority ("FINRA") rules to update this estimate 18 months from the date of last valuation, it may elect to do so sooner. As disclosed in connection with Wells Timberland REIT's initial publication of its estimated per-share value, the estimated value of its common stock will fluctuate over time in response to market conditions, capital markets activities, attributes specific to Mahrt Timberland, and other factors. Therefore, the estimated per-share value of Wells Timberland REIT's common stock as of September 30, 2012 does not represent current value.

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During the three months and six months ended June 30, 2013, approximately 9,906 and 45,233 shares of common stock, respectively, were redeemed for approximately $61,715 and $281,800, respectively. The board of directors may amend, suspend, or terminate the SRP upon 30 days' written notice and without stockholder approval.

8.
Supplemental Disclosures of Noncash Activities

Outlined below are significant noncash investing and financing transactions for the six months ended June 30, 2013 and 2012, respectively:
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
Write-off of due to affiliates
 
$
—

 
$
27,315,249

Dividends accrued on preferred stock
 
$
185,103

 
$
186,011

Discounts applied to issuance of common stock
 
$
—

 
$
43,761

Issuance of stock dividends
 
$
—

 
$
61

Forfeiture of restricted stock award
 
$
205

 
$
—

Market value adjustment to interest rate swap that qualifies for hedge accounting treatment
 
$
1,549,454

 
$
—

Other liabilities assumed upon acquisition of timberland
 
$
(125,163
)
 
$
—


9.
Related-Party Transactions

Advisory Agreement

Wells Timberland REIT and Wells Timberland OP are party to the Advisory Agreement with Wells TIMO, a wholly owned subsidiary of Wells Capital. On March 16, 2012, the board of directors of Wells Timberland REIT approved a second amendment to the Advisory Agreement (“Advisory Agreement Amendment No. 2”), which amended certain provisions related to fees and expense reimbursements. Advisory Agreement Amendment No. 2, which was effective April 1, 2012, provides that as of and for each quarter, the amount of fees and expense reimbursements payable to Wells TIMO was limited to the lesser of (i) 1.0% of assets under management as of the last day of the quarter less advisor fees paid for the preceding three quarters, and (ii) free cash flow for the four quarters then ended in excess of an amount equal to 1.25 multiplied by Wells Timberland REIT’s interest expense for the four quarters then ended. Free cash flow was defined as EBITDA (as defined in Wells Timberland REIT's loan agreements), less all capital expenditures paid by Wells Timberland REIT on a consolidated basis, less any cash distributions (except for the payments of accrued but unpaid dividends as a result of any redemptions of Wells Timberland REIT's outstanding preferred stock). Under the Advisory Agreement, as amended (the "Amended Advisory Agreement"), Wells TIMO was also entitled to receive the following:

•
Reimbursement of organization and offering costs paid by Wells TIMO and its affiliates on behalf of Wells Timberland REIT, not to exceed 1.2% of gross offering proceeds.

•
For any property sold by Wells Timberland REIT, if Wells TIMO provided a substantial amount of services in connection with the sale (as determined by Wells Timberland REIT’s independent directors), a fee equal to (i) for each property sold at a contract price up to $20.0 million, up to 2.0% of the sales price, and (ii) for each property sold at a contract price in excess of $20.0 million, up to 1.0% of the sales price. The precise amount of the fee within the preceding limits will be determined by Wells Timberland REIT’s board of directors, including a majority of the independent directors, based on the level of services provided and market norms. The real estate disposition fee may be in addition to real estate commissions paid to third parties. However, the total real estate commissions (including such disposition fee) may not exceed the lesser

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of (i) 6.0% of the sales price of each property or (ii) the level of real estate commissions customarily charged in light of the size, type, and location of the property.

No payments would be permitted under the Advisory Agreement, as amended, if they would cause a default under Wells Timberland REIT's loan agreements.

On April 1, 2011, the board of directors of Wells Timberland REIT approved an amendment to the Advisory Agreement (the “Advisory Agreement Amendment No. 1”) that limited the amount of fees and expense reimbursements as of and for each quarter to the least of: (1) an asset management fee equal to one fourth of 1.0% of asset under management plus reimbursements for all costs and expenses Wells TIMO incurred in fulfilling its duties as the asset manager, (2) one quarter of 1.5% of assets under management, or (3) free cash flow in excess of an amount equal to 1.05 multiplied by interest on outstanding debt. Free cash flow was defined as EBITDA (as defined in Wells Timberland REIT's loan agreements), less all capital expenditures paid by Wells Timberland REIT on a consolidated basis, less any cash distributions (except for the payments of accrued but unpaid dividends as a result of any redemptions of Wells Timberland REIT's outstanding preferred stock), less any cash proceeds from timberland sales equal to the cost basis of the properties sold. Advisory Agreement Amendment No. 2 superseded Advisory Agreement Amendment No. 1.

The Amended Advisory Agreement was effective through July 10, 2013 and could be renewed for successive one-year terms upon the mutual consent of the parties. Wells Timberland REIT could terminate the Amended Advisory Agreement without penalty upon 60 days’ written notice. If Wells Timberland REIT terminated the Amended Advisory Agreement, it would pay Wells TIMO all earned but unpaid fees. In addition, if the Amended Advisory Agreement was terminated without cause, the special units of limited partnership held by Wells TIMO will be redeemed. For further information on the special units, including redemption payments, refer to the consolidated financial statements and accompanying notes included in Wells Timberland REIT’s Annual Report on Form 10-K for the year ended December 31, 2012.

Effective July 1, 2013, Wells Timberland REIT entered into an amended and restated advisory agreement with Wells Timberland OP and Wells TIMO. See Note 10 Subsequent Events for additional information.

Under the terms of the Amended Advisory Agreement, Wells Timberland REIT was required to reimburse Wells TIMO for certain organization and offering costs up to the lesser of actual expenses or 1.2% of gross offering proceeds raised. Wells Timberland REIT incurred and charged to additional paid-in capital cumulative organization and offering costs of approximately $2.1 million related to the Initial Public Offering and approximately $1.5 million related to the Follow-On Offering, the sum of which represents approximately 1.2% of cumulative gross proceeds raised by Wells Timberland REIT under the Public Offerings. As of December 31, 2011, approximately $2.2 million of organization and offering costs incurred by Wells Timberland REIT and due to Wells TIMO had been deferred by the terms of Wells Timberland REIT's loan agreements. On January 27, 2012, Wells TIMO forgave the deferred organization and offering expenses. After adjusting for this write-off, organization and offering costs represents approximately 0.5% of cumulative gross proceeds raised under the Public Offerings.

On January 20, 2012, Wells Timberland REIT entered into an agreement with Wells TIMO to forgive approximately $25.1 million of accrued but unpaid asset management fees and expense reimbursements that were previously deferred due to restrictions under Wells Timberland REIT's loan agreements. Due to the related-party nature of these transactions, this amount, along with the organizational and offering costs forgiven by Wells TIMO on January 27, 2012, were recorded as additional paid-in capital during 2012.

Dealer-Manager Agreement

Wells Timberland REIT had executed a dealer-manager agreement (the “Dealer-Manager Agreement”), whereby Wells Investment Securities, Inc. (“WIS”), an affiliate of Wells Capital, performed the dealer-manager function for Wells Timberland REIT’s Public Offerings. For these services, WIS earned a commission of up to 7.0% of the gross offering proceeds from the sale of Wells Timberland REIT’s shares, of which substantially all was re-allowed to participating broker/dealers. Wells Timberland REIT pays no commissions on shares issued under its DRP.


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Additionally, WIS earned a dealer-manager fee of 1.8% of the gross offering proceeds at the time the shares are sold. A portion of the dealer-manager fee was re-allowed to participating broker-dealers. Dealer-manager fees applied to the sale of shares in the primary offering only and do not apply to the sale of shares under Wells Timberland REIT’s DRP.

Structuring Agent Agreement

Wells Timberland REIT is party to a structuring agent agreement (the “Structuring Agent Agreement”) whereby Wells Germany GmbH, a limited partnership organized under the laws of Germany ("Wells Germany"), served as the structuring agent in connection with the 2010 German Offering. Wells Timberland REIT paid a structuring agent fee to Wells Germany of $0.20 per share sold under the 2010 German Offering. The Structuring Agent Agreement expired upon the conclusion of the 2010 German Offering, provided, however, that with respect to the ongoing services contemplated by the parties, the Structuring Agent Agreement will terminate upon the earlier of (i) a liquidity event or (ii) December 31, 2018.

Related-Party Costs

Pursuant to the terms of the agreements described above, Wells Timberland REIT incurred the following related-party costs for the three months and six months ended June 30, 2013 and 2012, respectively:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Advisor fees and expense reimbursements
$
1,636,366

 
$
1,648,503

 
$
2,381,608

 
$
2,393,745

Disposition fees
26,187

 
211,044

 
26,187

 
211,044

Commissions(1)(2)
—

 
—

 
—

 
246,546

Dealer-manager fees(1)
—

 
—

 
—

 
71,057

Other offering costs(1)
—

 
—

 
—

 
48,752

      Total
$
1,662,553

 
$
1,859,547

 
$
2,407,795

 
$
2,971,144

(1) 
Commissions, dealer-manager fees, and other offering costs were charged against stockholders’ equity as incurred.
(2) 
Substantially all commissions were re-allowed to participating broker/dealers.

Advisor fees and expense reimbursements of approximately $1.6 million for the three months ended June 30, 2013 were determined pursuant to the Amended Advisory Agreement and represented 1.0% of asset under management as of the last day of the current quarter less advisor fees paid for the preceding three quarters.

Due to Affiliates

As of June 30, 2013 and December 31, 2012, Wells Timberland REIT had a due to affiliates balance of approximately $1.6 million and $1.3 million, respectively, both of which consisted entirely of advisor fees and expense reimbursements due to Wells TIMO.

Conflicts of Interest

As of June 30, 2013, Wells TIMO had eight employees. Wells TIMO has contracted with Wells Capital to perform many of its obligations under the Amended Advisory Agreement. Until such time, if ever, as Wells TIMO hires sufficient personnel of its own to perform all of the services under the Amended Advisory Agreement, it will continue to rely upon employees of Wells Capital to perform many of its obligations. Wells Capital, the parent company and manager of Wells TIMO, also is a general partner or advisor of the various affiliated public real estate investment programs (“Wells Real Estate Funds”). As such, in connection with serving as a general partner or advisor for Wells Real Estate Funds and managing Wells TIMO’s activities under the Amended Advisory Agreement, Wells Capital may encounter conflicts of interest with regard to allocating human resources and making decisions related to investments, operations, and disposition-related activities for Wells Timberland REIT and Wells Real Estate Funds.

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As of June 30, 2013, one member of Wells Timberland REIT's board of directors serves on the board of Wells Core Office Income REIT, Inc., a REIT currently sponsored by Wells Real Estate Funds, Inc. ("Wells REF"). Accordingly, he may encounter certain conflicts of interest regarding investment and operational decisions.

Operational Dependency

Wells Timberland REIT has engaged Wells TIMO to provide certain services essential to Wells Timberland REIT, including asset management services, supervision of the management of properties owned by Wells Timberland REIT, asset acquisition and disposition services, as well as other administrative responsibilities, including accounting services, stockholder communications, and investor relations. Wells TIMO is dependent on Wells Capital to provide certain services that are essential to their operations. This agreement is terminable by either party upon 60 days’ written notice. As a result of these relationships, Wells Timberland REIT's operations are dependent upon Wells Capital and Wells TIMO.

Wells Capital and Wells TIMO are owned and controlled by Wells REF. The operations of Wells Capital, Wells TIMO, WIS, Wells Management Company, Inc. (“Wells Management”), Wells Core Office Income REIT Advisory Services ("Wells Core Advisor"), and their affiliates represent substantially all of the business of Wells REF. Accordingly, Wells Timberland REIT focuses on the financial condition of Wells REF when assessing the financial condition of Wells Capital and Wells TIMO. In the event that Wells REF were to become unable to meet its obligations as they become due, Wells Timberland REIT might be required to find alternative service providers.

Future net income generated by Wells REF will be largely dependent upon the amount of fees earned by Wells Capital, Wells TIMO, WIS, Wells Management, Wells Core Advisor, and their affiliates, based on, among other things, real estate assets managed, the volume of future acquisitions and dispositions of real estate assets by Wells Timberland REIT and other Wells REF-sponsored programs, as well as distribution income earned from equity interests in another REIT. As of June 30, 2013, Wells Timberland REIT had no reason to believe that Wells REF does not have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on hand, other investments, and borrowing capacity, necessary to meet its current and future obligations as they become due. Modifying service agreements between Wells REF, or its affiliates, and Wells Timberland REIT, or other Wells REF-sponsored programs, could impact Wells REF’s future net income and future access to liquidity and capital resources. For example, a large portion of Wells REF's income had been derived under agreements with Columbia Property Trust, Inc. ("Columbia"), formerly known as Wells Real Estate Investment Trust II, Inc., a REIT previously sponsored by Wells REF. Effective February 28, 2013, Columbia transitioned to self-management and indicated that it does not expect to rely on Wells REF for the same level of services beyond December 31, 2013. As such, Wells REF does not expect to receive significant compensation from Columbia beyond December 31, 2013.

10.
Subsequent Events

Restated Advisory Agreement

Effective July 1, 2013, Wells Timberland REIT, Wells Timberland OP, and Wells TIMO entered into an amended and restated advisory agreement (the “Restated Advisory Agreement”).

Under the Restated Advisory Agreement, the monthly advisor fee payable by Wells Timberland REIT to Wells TIMO is equal to one-twelfth of 1% of the aggregate value of Wells Timberland REIT's interest in properties and joint ventures as established in connection with the most recent estimated valuation conducted pursuant to applicable Financial Industry Regulatory Authority rules (“Assets Under Management”). Upon the sale of any properties for an amount greater than $5.0 million in aggregate since the most recent valuation, Assets Under Management shall be reduced by the cost basis of the properties sold. Upon the acquisition of any properties for an amount greater than $5.0 million in aggregate since the most recent valuation, Assets Under Management shall be increased by the value of the properties acquired as determined by a forestry appraisal firm. However, aggregate advisor fees payable for fiscal year 2013 shall not exceed 1.0% of Assets under Management as of September 30, 2012.

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The advisor fee shall be payable monthly in arrears by Wells Timberland REIT in cash. If payment of the advisor fee for any calendar month will cause an event of default under Wells Timberland REIT's credit agreement, the advisor fee will accrue but will not be paid to Wells TIMO for such calendar month.

In addition, the Restated Advisory Agreement eliminates the reimbursement by Wells Timberland REIT of administrative service expenses that Wells TIMO incurs in fulfilling its duties as advisor, including personnel costs and Wells Timberland REIT's allocable share of other overhead of Wells TIMO.

The Restated Advisory Agreement is effective through June 30, 2014 and may be renewed for an unlimited number of successive periods up to one-year each upon the mutual consent of the parties. Either party may terminate the Restated Advisory Agreement without cause or penalty upon providing 60 days' prior written notice.

Timberland Acquisition

On July 30, 2013, Wells Timberland REIT acquired fee-simple interest in approximately 1,800 acres of timberland located in Taylor County, Georgia, in which it previously held a leasehold interest, for approximately $1.4 million, exclusive of closing costs.



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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as our consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Overview
We engage in the ownership and management of timberland properties located in the timber-producing regions of the southeastern United States. From 2007 through the first quarter of 2012, we raised approximately $307.2 million through the issuance of our common stock in our Offerings and approximately $43.6 million through the issuance of our preferred stock to Wells REF and, along with borrowings, invested those proceeds, net of fees, into timberland properties. As of June 30, 2013, we owned interests in approximately 282,000 acres of timberland located on the Lower Piedmont and Upper Coastal Plains of East Central Alabama and West Central Georgia, which we refer to as the Mahrt Timberland. Based on acreage, the Mahrt Timberland inventory consisted of approximately 75% of pine and approximately 25% of hardwood as of December 31, 2012. We generate a majority of our revenues by selling timber and the right to access land and harvest timber to third parties pursuant to supply agreements and through open-market sales, from selling higher-and-better-use timberland, and leasing land-use rights to third parties. A substantial portion of our timber sales are derived from the Timber Agreements under which we sell specified amounts of timber to MeadWestvaco subject to market pricing adjustments. The initial term of the Timber Agreements is from October 9, 2007 through December 31, 2032, subject to extension and early termination provisions. See Note 6 of our accompanying consolidated financial statements for additional information regarding the material terms of the Timber Agreements. We have elected to be taxed as a REIT for federal income tax purposes.

We have no paid employees and are externally advised and managed by Wells TIMO, a wholly owned subsidiary of Wells Capital. Effective July 1, 2013, we entered into the Restated Advisory Agreement with Wells TIMO under which the monthly advisor fee payable by us is equal to one-twelfth of 1% of Assets Under Management. Upon the sale or acquisition of any properties for an amount greater than $5 million in aggregate, Assets Under Management shall be adjusted according to terms of the Restated Advisory Agreement. However, aggregate advisor fees payable for fiscal year 2013 shall not exceed 1.0% of Assets under Management as of September 30, 2012. The Restated Advisory Agreement eliminates our requirement to reimburse administrative service expenses incurred by Wells TIMO in fulfilling its duties as advisor, including personnel costs and our allocable share of other overhead of Wells TIMO. All other terms are materially consistent with the Amended Advisory Agreement in effect through June 30, 2013.

On March 16, 2012, we entered into Advisory Agreement Amendment No. 2 to amend certain provisions related to fees and expense reimbursements. Advisory Agreement Amendment No. 2 provided that as of and for each quarter, the amount of advisor fees and expense reimbursements payable to Wells TIMO would be limited to the lesser of (1) 1.0% of assets under management as of the last day of the quarter less advisor fees paid for the preceding three quarters, and (2) free cash flow for the four quarters then ended in excess of an amount equal to 1.25 multiplied by our interest expense. Under Advisory Agreement Amendment No. 2, free cash flow was defined as EBITDA (as defined in our loan agreements), less all capital expenditures paid by us on a consolidated basis, less any cash distributions (except for the payments of accrued but unpaid dividends as a result of any redemptions of our outstanding preferred stock). Advisory Agreement Amendment No. 2, which was effective April 1, 2012, superseded a previous amendment to our Advisory Agreement entered into on April 1, 2011, referred to herein as Advisory Agreement Amendment No. 1, which provided that, as of and for each quarter, the amount of fees and expense reimbursements payable to Wells TIMO were limited to the least of: (1) an asset management fee equal to one fourth of 1.0% of asset under management plus reimbursements for all costs and expenses Wells TIMO incurred in fulfilling its duties as the asset manager, (2) one-fourth of 1.5% of assets under management, or (3) free cash flow in excess of an amount equal to 1.05 multiplied by our interest expense. Under Advisory Agreement Amendment No. 1, free cash flow was defined as EBITDA (as defined in our loan agreements), less all capital expenditures paid by us on a consolidated basis, less any cash distributions

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(except for the payments of accrued but unpaid dividends as a result of any redemptions of our outstanding preferred stock), less any cash proceeds from timberland sales equal to the cost basis of the properties sold.

Subsequent to our fundraising stage, we have concentrated our efforts on actively managing our timber assets and exploring a variety of strategic opportunities focused on enhancing the composition of our portfolio and the total return potential for Wells Timberland REIT. In doing so, we have made and may continue to make strategic acquisitions and dispositions of timberland properties.

Our operating strategy entails funding expenditures related to the recurring operations of the Mahrt Timberland, including interest on outstanding indebtedness and certain capital expenditures (excluding timberland acquisitions), with operating cash flows; assessing the amount of operating cash flows that will be required for redemptions of common stock and additional timberland acquisitions; and distributing residual operating cash flows, if any, to our stockholders. Our operating and financial plans for 2013 were established to meet volume obligations under the Timber Agreements, to meet the debt service requirements of our debt facility, and to continue to maximize the production capacity and long-term value of the Mahrt Timberland. We continue to practice intensive forest management and silvicultural techniques that increase the biological growth of the forest. We intend to capitalize on the operational flexibility afforded to timberland owners in order to take advantage of then-prevailing market prices, including, but not limited to, adjusting harvest levels in context of supply and demand for wood in the local wood markets. We plan to harvest approximately 0.9 million tons of timber this year, down slightly from the 1.1 million-ton harvest in 2012.

Our most significant risks and challenges include our ability to access a sufficient amount of capital that will allow us to repay or refinance our outstanding debt facility and to further grow and diversify our portfolio of timber assets. To the extent that significant capital is not raised, we may not be able to repay the CoBank Loan or achieve sufficient economies of scale and diversification to guard against the general economic, industry-specific, financing, and operational risks generally associated with individual investments. Although we believe that our timber assets are well-positioned to weather current market conditions, we are not immune to the adverse effects of a prolonged downturn in the economy, weak real estate fundamentals, or disruptions in the credit markets. Such conditions would likely adversely affect the value of our portfolio, our results of operations, and our liquidity.

Per the terms of our charter, we presently intend to effect a transaction that will provide liquidity to all of our stockholders by August 11, 2018. However, a transaction well in advance of 2018 may be in our best interest. As such, we are exploring strategic alternatives, including listing our common stock on a national securities exchange, merging or otherwise selling our company or its portfolio as a whole, or liquidating our assets. Notwithstanding the execution of such a strategic alternative, our shares remain illiquid and we may not effect a liquidity event before or even by our original targeted date of August 11, 2018.

We have contracted with Wells TIMO to provide certain services that are essential to our operations, including asset management services, asset acquisition and disposition services, as well as other administrative responsibilities, including accounting services, stockholder communications and investor relations. In addition, Wells TIMO has engaged Wells Capital to retain the use of its employees to carry out certain of these services. Wells TIMO and Wells Capital are owned and controlled by Wells REF. As a result, our operations are dependent upon Wells REF. In the event that Wells REF were to become unable to meet its obligations as they become due, we might be required to find alternative service providers. Additionally, as we explore strategic alternatives, some of which could involve the termination of the advisory services provided by Wells REF through Wells TIMO, Wells REF employees may question the long-term security of their positions and may themselves explore alternatives, which could result in their resignation from Wells REF. In the event that Wells REF is not able to retain such employees, Wells REF may no longer be able to provide the same level of service that we have enjoyed to date.


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Liquidity and Capital Resources

Overview

We ceased offering shares for sale under the Follow-On Offering effective December 31, 2011. On September 28, 2012, we entered into the CoBank Loan under which we can initially borrow up to $148.0 million in principal, including $133.0 million through the CoBank Term Loan, and up to $15.0 million through the CoBank Revolver. During the term of the CoBank Loan, we also have the ability to increase the amount of the CoBank Term Loan by up to $50.0 million (the "CoBank Incremental Loan"). The CoBank Loan bears interest at an adjustable rate based on the one-, two-, or three-month LIBOR plus an applicable margin ranging from 2.00% to 2.75% (the "LIBOR Rate") that varies based on the loan-to-collateral-value ratio (the "LTV Ratio") at the time of determination. As of July 31, 2013 and June 30, 2013, the outstanding balance of the CoBank Loan was approximately $132.4 million, all of which was outstanding under the CoBank Term Loan. We intend to maintain substantial amounts outstanding on the CoBank Loan in order to have more funds available for working capital and investment in timberland properties. On August 11, 2018, all outstanding principal, interest, and any fees or other obligations on the CoBank Loan will be due and payable in full.

The CoBank Loan is subject to mandatory prepayment from proceeds generated from dispositions of timberland and lease terminations. The mandatory prepayment excludes (1) the first $4.0 million of cost basis of timberland dispositions in any fiscal year if (a) the LTV Ratio calculated on a pro forma basis after giving effect to such disposition does not exceed 40%, and (b) such cost basis is used as permitted under the CoBank Loan; and (2) lease termination proceeds of less than $2.0 million in a single termination until aggregate lease termination proceeds during the term of the CoBank Loan exceeds $5.0 million. We may make voluntary prepayments at any time without premium or penalty.

The CoBank Loan prohibits us from declaring, setting aside funds for, or paying any dividend, distribution, or other payment to our stockholders other than as required to maintain our REIT qualification if our LTV Ratio is greater than or equal to 40%. So long as our LTV Ratio remains below 40% and we maintain a minimum fixed-charge coverage ratio of 1.05:1:00, we have the ability to declare, set aside funds for, pay dividends or distributions, or make other payments to our stockholders from operating cash flows on a discretionary basis. The amount of distributions that we may pay to our common stockholders will be determined by our board of directors and is dependent upon a number of factors, including, but not limited to, our financial condition, our capital requirements, our expectations of future sources of liquidity, current and future economic conditions and market demand for timber and timberlands, and tax considerations.

We expect our primary sources of future capital will be derived from the operations of the Mahrt Timberland and from proceeds from the CoBank Revolver and the CoBank Incremental Loan. The amount of cash available for distribution to stockholders and the level of discretionary distributions declared will depend primarily upon the amount of cash generated from our operating activities, our determination of funding needs for near-term capital and debt service requirements, redemptions of our common stock, and our expectations of future cash flows.

Short-Term Liquidity and Capital Resources

Net cash provided by operating activities for the six months ended June 30, 2013 was approximately $2.4 million, which was primarily comprised of net cash receipts from timber and timberland sales and recreational leases in excess of payments for operating expenses, interest expense, advisor fees and expense reimbursements, forestry management fees, and general and administrative expenses. We intend to use the majority of future cash flows from operating activities, after payments of operating expenses and interest expense, to fund certain capital expenditures and redemptions of our common stock under the Amended SRP.

For the six months ended June 30, 2013, we invested approximately $0.7 million in timber and timberland assets and received approximately $0.7 million that was released from lender-required escrow accounts. Net cash used in financing activities for the six months ended June 30, 2013 was approximately $0.3 million and represented outflows of funds used to redeem our common stock pursuant to the Amended SRP. We expect to utilize the residual cash balance of

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approximately $13.4 million as of June 30, 2013 to satisfy current and future liabilities and fund future capital expenditures.

We believe that we have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on-hand, and borrowing capacity, necessary to meet our current and future obligations that become due over the next twelve months.

The CoBank Loan contains, among others, the following financial covenants:

•
limits the LTV Ratio to 45% at the end of each fiscal quarter and upon the sale or acquisition of any property; and
•
requires a fixed-charge coverage ratio of not less than 1.05:1.00 at the end of each fiscal quarter.

As of June 30, 2013, we believe we were in compliance and expect to remain in compliance with the financial covenants of the CoBank Loan. Additionally, the CoBank Loan requires funding of an account under the control of CoBank equal to approximately six months of interest on the CoBank Loan during any time the LTV Ratio is 35% or greater, or approximately three months of interest if the LTV Ratio is less than 35%.

Long-Term Liquidity and Capital Resources

Over the long-term, we expect our primary sources of capital to include net cash flows from operations, including proceeds from strategic property sales and proceeds from secured or unsecured financings from banks and other lenders. Our principal demands for capital include operating expenses, interest expense on any outstanding indebtedness, certain capital expenditures (other than timberland acquisitions), repayment of debt, timberland acquisitions, redemptions of common and preferred stock, and stockholder distributions, if any.

In determining how to allocate cash resources in the future, we will initially consider the source of the cash. We anticipate using a substantial portion of cash generated from operations, after payments of periodic operating expenses and interest expense, to fund certain capital expenditures required for our timberland. Any remaining cash generated from operations may be used to partially fund timberland acquisitions, redeem common and preferred stock and, finally, pay distributions to stockholders. Therefore, to the extent that cash flows from operations are lower, timberland acquisitions and stockholder distributions, if any, are anticipated to be lower as well. Proceeds from future debt financings may be used to fund capital expenditures, to pay down existing and future borrowings, and to redeem preferred stock.

Our charter precludes us from incurring debt in excess of 200% of our net assets. As of June 30, 2013, our debt-to-net-assets ratio, defined as our total debt as a percentage of our total gross assets (other than intangibles) less total liabilities, was approximately 45%. Our debt-to-net-assets ratio will vary based on our level of current and future borrowings, which will depend on the level of net cash flows from operations. Before additional borrowings, principal payments, timberland acquisitions or dispositions, we expect our debt-to-net-assets ratio to remain relatively stable in the near future.


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Contractual Obligations and Commitments

As of June 30, 2013, our contractual obligations are as follows:
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
2013
 
2014-2015
 
2016-2017
 
Thereafter
Debt obligations (1)
 
$
132,356,123

 
$
—

 
$
—

 
$
—

 
$
132,356,123

Estimated interest on debt obligations (1) (2)
 
17,329,554

 
1,777,560

 
6,955,669

 
6,817,314

 
1,779,011

Operating lease obligations (3)
 
5,892,771

 
264,594

 
1,446,979

 
1,332,366

 
2,848,832

Other liabilities (4)
 
889,840

 
10,469

 
257,881

 
217,953

 
403,537

Total
 
$
156,468,288

 
$
2,052,623

 
$
8,660,529

 
$
8,367,633

 
$
137,387,503

(1) 
Represents respective obligations under the CoBank Loan as of June 30, 2013.
(2) 
Amounts include impact of an interest rate swap. See Note 5 of our accompanying consolidated financial statements for additional information.
(3) 
Includes payment obligation on approximately 7,330 acres that are subleased to a third party.
(4) 
Represents net present value of future payments to satisfy a liability assumed upon a timberland acquisition.

Results of Operations

Overview

Our results of operations are materially impacted by the fluctuating nature of timber prices, changes in the levels and composition of our harvest volumes, the level of timberland sales, changes to associated depletion rates, and varying interest expense based on the amount and cost of outstanding borrowings. Timber prices, harvest volumes, and changes in the levels and composition of each for the Mahrt Timberland for the three months and six months ended June 30, 2013 and 2012 is shown in the following tables:
 
Three Months Ended
June 30,
 
Change
 
2013
 
2012
 
%
Timber sales volume (tons)
 
 
Pulpwood
187,437

 
170,645

 
10
 %
Sawtimber (1)
70,284

 
74,315

 
(5
)%
 
257,721

 
244,960

 
5
 %
Net timber sales price (per ton)(2)
 
 
Pulpwood
$
11

 
$
10

 
11
 %
Sawtimber
$
19

 
$
20

 
(1
)%
Timberland sales
 
 
 
 
 
Gross sales
$
1,309,371

 
$
10,552,180

 
 
Sales volumes (acres)
624

 
5,802

 
 
Sales price (per acre)
$
2,098

 
$
1,819

 
 


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Six Months Ended
June 30,
 
Change
 
2013
 
2012
 
%
Timber sales volume (tons)
 
 
Pulpwood
314,877

 
302,781

 
4
 %
Sawtimber (1)
142,004

 
165,459

 
(14
)%
 
456,881

 
468,240

 
(2
)%
Net timber sales price (per ton)(2)
 
 
Pulpwood
$
11

 
$
10

 
12
 %
Sawtimber
$
20

 
$
20

 
(2
)%
Timberland sales
 
 
 
 
 
Gross sales
$
1,853,321

 
$
10,552,180

 
 
Sales volumes (acres)
877

 
5,802

 
 
Sales price (per acre)
$
2,113

 
$
1,819

 
 

(1) 
Includes sales of chip-n-saw and sawtimber.
(2) 
Prices per ton are rounded to the nearest dollar and shown on a stumpage basis (i.e., net of contract logging and hauling costs) and, as such, the sum of these prices multiplied by the tons sold does not equal timber sales in the accompanying consolidated statements of operations for the three months and six months ended June 30, 2013 and 2012.

Comparison of the three months ended June 30, 2013 versus the three months ended June 30, 2012

Revenue. Revenues decreased to approximately $9.3 million for the three months ended June 30, 2013 from approximately $18.3 million for the three months ended June 30, 2012 due to a decrease in timberland sales revenue of approximately $9.2 million, offset by an increase in timber sales revenue of approximately $0.2 million. Timberland sales revenue decreased due to selling 624 acres of timberland in the second quarter of 2013 as compared to selling 5,802 acres of timberland in the second quarter of 2012. Timber sales revenue increased slightly primarily due to modestly higher average pricing. Details of timber sales by product for the three months ended June 30, 2013 and 2012 are shown in the following table:
 
For the Three Months Ended
June 30, 2012
 
Changes attributable to:
 
For the Three Months Ended June 30, 2013
 
 
Price
 
Volume
 
Timber sales(1)
 
 
 
 
 
 
 
Pulpwood
$
4,435,540

 
$
249,219

 
$
119,417

 
$
4,804,176

Sawtimber (2)
2,626,929

 
70,294

 
(234,065
)
 
2,463,158

 
$
7,062,469

 
$
319,513

 
$
(114,648
)
 
$
7,267,334

(1) 
Timber sales are presented on a gross basis.
(2) 
Includes sales of chip-n-saw and sawtimber.

We expect future quarterly revenue from timber sales to be lower than the same periods in 2012 based on planned harvest reduction, offset by modestly higher timber prices. We intend to continue to delay harvests on our fee land in order to achieve optimal pricing and to maximize long-term value of the Mahrt Timberland, provided that we generate sufficient cash flow from operations to satisfy our current obligations.

Operating expenses. Contract logging and hauling costs of approximately $3.8 million for the quarter ended June 30, 2013 was substantially the same as it was for the quarter ended June 30, 2012 as a result of an approximately 4% decrease in delivered sales volume, offset by a 2% increase in logging rate. Depletion expense decreased by 10% to approximately $2.2 million for the second quarter of 2013 from approximately $2.5 million for the second quarter of 2012 due to a lower blended depletion rate, offset by a 5% increase in harvest volumes. Our blended depletion rate

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was lower in 2013 due to a decrease in harvests of timber from leased tracts as a percentage of our total harvest to 42% in 2013 from 67% in 2012. As a result of an acquisition of approximately 30,000 acres of timberland during 2012 where we previously held leasehold interests, approximately 12% of our merchantable timber inventory was recategorized as fee timber, which is depleted at much lower rates than timber from leased tracts. Cost of timberland sales decreased due to selling fewer acres. Forestry management fees and other operating expenses were comparable to the second quarter of 2012. General and administrative expenses increased by $0.2 million primarily due to an increase in legal fees. Land rent expense decreased to approximately $0.3 million in 2013 from $0.5 million in 2012 primarily due to expiration of leases and the acquisition described above. Other operating expense for the three months ended June 30, 2013 was $0.6 million, comparable to that for the same period in 2012.

Future contract logging and hauling costs and depletion expense are expected to fluctuate with harvest volumes. Cost of timberland sales is directly correlated to the number of acres sold. Forestry management expense and land rent expense will vary based on the number of acres under management. General and administrative expenses and other operating expenses are expected to remain relatively stable.

Advisor fees and expense reimbursements. Advisor fees and expense reimbursements for the three months ended June 30, 2013 were comparable to that for the three months ended June 30, 2012. See Note 9 to the accompanying consolidated financial statements for additional information regarding the Advisory Agreement and its amendments. Future advisor fees will be determined based on 1.0% of Asset Under Management under the Restated Advisory Agreement.

Interest expense. Interest expense decreased to approximately $0.9 million for the three months ended June 30, 2013 from approximately $1.0 million for the three months ended June 30, 2012 primarily due to lower interest rates, offset by higher principal balances outstanding on our debt facility. Interest expense in future periods will vary based on our level of current and future borrowings, the cost of future borrowings, and the opportunities to acquire timber assets fitting our investment objectives. Before additional borrowings, principal payments, and significant changes to the LIBOR Rate, we expect future interest expense to remain stable.

Net loss. Our net loss increased to approximately $2.6 million for the three months ended June 30, 2013 from approximately $0.5 million for the three months ended June 30, 2012, primarily as a result of incurring an operating loss of $1.6 million. We incurred an operating loss in the second quarter of 2013 as compared to an operating income of $0.5 million in the second quarter of 2012 due to a decrease in net timberland sales revenue of approximately $2.6 million, offset by an approximately $0.5 million increase in net timber sale revenue. We sustained a net loss for the three months ended June 30, 2013 primarily as a result of incurring an operating loss and interest expense of approximately $0.9 million. Our net loss per share available to common stockholders for the quarters ended June 30, 2013 and 2012 was $0.08 and $0.02, respectively. We anticipate future net losses to fluctuate with timber prices, harvest volumes, timberland sales, and interest expense based on our level of current and future borrowings.

Comparison of the six months ended June 30, 2013 versus the six months ended June 30, 2012

Revenue. Revenues decreased to approximately $16.6 million for the six months ended June 30, 2013 from approximately $26.2 million for the six months ended June 30, 2012 due to a decrease in timberland sales revenue of approximately $8.7 million and a decrease in timber sales revenue of approximately $0.9 million. Timberland sales revenue decreased due to selling fewer acres. Timber sales revenue decreased primarily due to lower harvest volumes. Details of timber sales by product for the six months ended June 30, 2013 and 2012 is shown in the following table:
 
For the Six Months Ended
June 30, 2012
 
Changes attributable to:
 
For the Six Months Ended June 30, 2013
 
 
Price
 
Volume
 
Timber sales(1)
 
 
 
 
 
 
 
Pulpwood
$
8,216,617

 
$
344,703

 
$
(138,176
)
 
$
8,423,144

Sawtimber (2)
6,068,079

 
24,115

 
(1,096,242
)
 
4,995,952

 
$
14,284,696

 
$
368,818

 
$
(1,234,418
)
 
$
13,419,096


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(1)
Timber sales are presented on a gross basis.
(2)
Includes sales of chip-n-saw and sawtimber.

We expect future quarterly revenue from timber sales to be lower than the same periods in 2012 based on planned harvest reduction, offset by modestly higher timber prices. We intend to continue to delay harvests on our fee land in order to achieve optimal pricing and to maximize long-term value of the Mahrt Timberland, provided that we generate sufficient cash flow from operations to satisfy our current obligations.

Operating expenses. Contract logging and hauling costs decreased to approximately $7.0 million for the six months ended ended June 30, 2013 from approximately $7.8 million for the six months ended June 30, 2012 as a result of a decrease of approximately 10% in delivered wood volume. Depletion expense decreased by 22% to approximately $4.3 million for the six months ended June 30, 2013 from approximately $5.5 million for the six months ended June 30, 2012 due to a 2% decrease in harvest volumes and a lower blended depletion rate. Our blended depletion rate was lower in 2013 due to a decrease in harvests of timber from leased tracts as a percentage of our total harvest to 45% in 2013 from 72% in 2012. As a result of an acquisition of approximately 30,000 acres of timberland during 2012 where we previously held leasehold interests, approximately 12% of our merchantable timber inventory was recategorized as fee timber, which is depleted at much lower rates than timber from leased tracts. Cost of timberland sales decreased due to selling fewer acres of timberland in the first half of 2013 as compared to the first half of 2012. Land rent expense decreased to approximately $0.6 million in 2013 from $1.0 million in 2012 primarily due to expiration of leases and the acquisition described above. General and administrative expenses increased by $0.3 million primarily due to an increase in legal fees. Forestry management fees and other operating expenses were comparable to the first six months of 2012.

Future contract logging and hauling costs and depletion expense are expected to fluctuate with harvest volumes. Cost of timberland sales is directly correlated to the number of acres sold. Forestry management expense and land rent expense will vary based on the number of acres under management. General and administrative expenses and other operating expenses are expected to remain relatively stable.

Advisor fees and expense reimbursements. Advisor fees and expense reimbursements for the six months ended June 30, 2013 were comparable to that for the six months ended June 30, 2012. See Note 9 to the accompanying consolidated financial statements for additional information regarding the Advisory Agreement and its amendments. Future advisor fees will be determined based on 1.0% of Asset Under Management under the Restated Advisory Agreement.

Interest expense. Interest expense decreased to approximately $1.7 million for the six months ended June 30, 2013 from approximately $2.0 million for the six months ended June 30, 2012 primarily due to lower interest rates, offset by higher principal balances outstanding on our debt facility. Interest expense in future periods will vary based on our level of current and future borrowings, the cost of future borrowings, and the opportunities to acquire timber assets fitting our investment objectives. Before additional borrowings, principal payments, and significant changes to the LIBOR Rate, we expect future interest expense to remain stable.

Net loss. Our net loss increased to approximately $4.6 million for the six months ended June 30, 2013 from approximately $3.7 million for the six months ended June 30, 2012, primarily as a result of a higher operating loss. Our operating loss increased due to a decrease in net timberland sales revenue of approximately $2.5 million, offset by an increase in net timber sales revenue of approximately $1.1 million. We sustained a net loss for the six months ended June 30, 2013 primarily as a result of incurring an operating loss of approximately $2.8 million and interest expense of approximately $1.7 million. Our net loss per share available to common stockholders for the six months ended June 30, 2013 and 2012 was $0.15 and $0.12, respectively. We anticipate future net losses to fluctuate with timber prices, harvest volumes, timberland sales, and interest expense based on our level of current and future borrowings.

Adjusted EBITDA


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The discussion below is presented to enhance the reader’s understanding of our liquidity, ability to generate cash, and ability to satisfy lender requirements. Earnings from Continuing Operations before Interest, Taxes, Depletion, and Amortization (“EBITDA”) is a non-GAAP measure of our operating performance and cash-generating capacity. EBITDA is defined by the SEC; however, we have excluded certain other expenses due to their noncash nature, and we refer to this measure as Adjusted EBITDA. As such, Adjusted EBITDA, may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA should not be viewed as an alternative to net income or cash from operations as a measurement of our operating performance, as it excludes certain expenses related to fixed-asset investments required to generate revenues. Due to our significant amount of debt, management views operating income as the most appropriate earnings measure of our underlying timber operations. Management considers Adjusted EBITDA to be an important measure of our financial condition and cash-generating ability due to the significant amount of fixed assets subject to depletion and the significant amount of financing subject to interest and amortization expense. Our credit agreement, as amended, contains a minimum debt service coverage ratio based, in part, on Adjusted EBITDA since the measure is representative of adjusted income available for interest payments.

For the three months ended June 30, 2013, Adjusted EBITDA was approximately $1.6 million, an approximately $8.5 million decrease from the quarter ended June 30, 2012, primarily due to an approximately $8.7 million decrease in net revenues from timberland sales, offset by an approximately $0.3 million increase in net timber sales.

For the six months ended June 30, 2013, Adjusted EBITDA was approximately $2.8 million, an approximately $8.1 million decrease from the six months ended June 30, 2012, primarily due to an approximately $8.2 million decrease in net revenues from timberland sales. Our reconciliation of net loss to Adjusted EBITDA for the three months and six months ended June 30, 2013, and 2012 is shown in the following table:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net loss
$
(2,563,923
)
 
$
(464,306
)
 
(4,550,657
)
 
(3,718,373
)
Add:
 
 
 
 
 
 
 
Depletion
2,247,904

 
2,494,011

 
4,293,257

 
5,474,288

Unrealized gain on interest rate swaps that do not qualify for hedge accounting treatment
—

 
(256,052
)
 
(128,934
)
 
(451,716
)
Interest expense
881,024

 
1,113,884

 
1,742,766

 
2,256,754

Amortization (1)
123,356

 
185,764

 
238,262

 
370,696

Basis of timberland sold
876,643


6,962,273

 
1,213,643

 
6,962,273

Adjusted EBITDA
$
1,565,004

 
$
10,035,574

 
$
2,808,337

 
$
10,893,922

(1) 
For the purpose of the above reconciliation, amortization includes amortization of deferred financing costs, amortization of intangible lease assets, amortization of mainline road costs, depreciation of machinery, and amortization of other liabilities; these items are included in either interest expense, land rent expense, or other operating expenses in the accompanying consolidated statements of operations.

Election as a REIT

We have elected to be taxed as a REIT under the Code, and have operated as such beginning with our taxable year ended December 31, 2009. To qualify to be taxed as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted taxable income, as defined in the Code, to our stockholders, computed without regard to the dividends-paid deduction and by excluding our net capital gain. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify to be taxed as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for that year and for the four years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes.

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Inflation

In connection with the acquisition of the Mahrt Timberland, we entered into the Timber Agreements with MeadWestvaco. The Timber Agreements provide that we will sell to MeadWestvaco specified amounts of timber subject to quarterly market pricing adjustments and monthly fuel pricing adjustments, which are intended to protect us from, and mitigate the risk of, the impact of inflation. The price of timber has generally increased with increases in inflation; however, we have not noticed a significant impact from inflation on our revenues, net sales, or income from continuing operations.

Application of Critical Accounting Policies
Our accounting policies have been established to conform to GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied or different amounts of assets, liabilities, revenues, and expenses would have been recorded, thus resulting in a different presentation of the financial statements or different amounts reported in the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.
A discussion of the accounting policies that management deems critical because they may require complex judgment in their application or otherwise require estimates about matters that are inherently uncertain, is provided below.
Timber Assets
Timber and timberlands, including logging roads, are stated at cost less accumulated depletion for timber harvested and accumulated amortization. We capitalize timber and timberland purchases and reforestation costs and other costs associated with the planting and growing of timber, such as site preparation; growing or purchases of seedlings; planting, fertilization, and herbicide application; and the thinning of tree stands to improve growth. Timber carrying costs, such as real estate taxes, insect control, wildlife control, leases of timberlands, and forestry management personnel salaries and fringe benefits, are expensed as incurred. Costs of major roads are capitalized and amortized over their estimated useful lives. Costs of roads built to access multiple logging sites over numerous years are capitalized and amortized over seven years. Costs of roads built to access a single logging site are expensed as incurred.
Depletion
Depletion, or costs attributed to timber harvested, is charged against income as trees are harvested. Fee-simple timber tracts owned longer than one year and similarly managed are pooled together for depletion calculation purposes. Depletion rates are determined at least annually by dividing (a) the sum of (i) net carrying value of the timber, which equals the original cost of the timber less previously recorded depletion, and (ii) capitalized silviculture costs incurred and the projected silviculture costs, net of inflation, to be capitalized over the harvest cycle, by (b) the total timber volume estimated to be available over the harvest cycle. The harvest cycle for the Mahrt Timberland is 30 years. Our methods of estimating our timber inventory are consistent with industry practices. We must use significant assumptions and judgments to determine both our current timber inventory and the timber inventory that will be available over the harvest cycle; therefore, the physical quantity of such timber may vary significantly from our estimates. Our estimated inventory is calculated for each tract by utilizing growth formulas based on representative sample tracts and tree counts for various diameter classifications. The calculation of inventory is subject to periodic adjustments based on sample cruises, actual volumes harvested and other timber activity, including timberland sales. In addition to growth, the inventory calculation takes into account in-growth, which is the annual transfer of oldest pre-merchantable age class into merchantable inventory. The age at which timber is considered merchantable is reviewed periodically and updated for changing harvest practices, future harvest age profiles and biological growth factors. The capitalized silviculture

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cost is limited to the expenditures that relate to establishing stands of timber. For each fee-simple timber tract owned less than one year, depletion rates are determined by dividing the acquisition cost attributable to its timber by the volume of timber acquired. Depletion rates for lease tracts, which are generally limited to one harvest, are calculated by dividing the acquisition cost attributable to its timber by the volume of timber acquired. Net carrying value of the timber and timberlands is used to compute the gain or loss in connection with timberland sales. No book basis is allocated to the sale of conservation easements.
Evaluating the Recoverability of Timber Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our timber assets may not be recoverable. When indicators of potential impairment are present that suggest that the carrying amounts of timber assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. Impairment losses would be recognized for (i) long-lived assets used in our operations when the carrying value of such assets exceeds the undiscounted cash flows estimated to be generated from the future operations of those assets, and (ii) long-lived assets held for sale when the carrying value of such assets exceeds an amount equal to their fair value less selling costs. Estimated fair values are calculated based on the following information in order of preference, dependent upon availability: (i) recently quoted market prices, (ii) market prices for comparable properties, or (iii) the present value of undiscounted cash flows, including estimated salvage value. We intend to use one harvest cycle for the purpose of evaluating the recoverability of timber and timberlands used in our operations. Future cash flow estimates are based on probability-weighted projections for a range of possible outcomes and are discounted at risk-free rates of interest. We consider assets to be held for sale at the point at which a sale contract is executed and the buyer has made a nonrefundable earnest money deposit against the contracted purchase price. We have determined that there has been no impairment of our long-lived assets to date.
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of timberland properties, we allocate the purchase price to tangible assets, consisting of timberland and timber, and identified intangible assets and liabilities, which may include values associated with in-place leases or supply agreements, based in each case on our estimate of their fair values.The fair values of timberland and timber are determined based on available market information and estimated cash flow projections that utilize appropriate discount factors and capitalization rates. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The values are then allocated to timberland and timber based on our determination of the relative fair value of these assets.
Intangible Lease Assets
In-place ground leases with us as the lessee have value associated with effective contractual rental rates that are below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) our estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining term of the lease. The capitalized below-market in-place lease values are recorded as intangible lease assets and are amortized as adjustments to land rent expense over the weighted-average remaining term of the respective leases.

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Revenue Recognition
Revenue from the sale of timber is recognized when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) legal ownership and the risk of loss are transferred to the purchaser, (iii) price and quantity are determinable, and (iv) collectibility is reasonably assured. Our primary sources of revenue are recognized as follows:
(1)
For delivered sales contracts, which include amounts sufficient to cover costs of logging and hauling of timber, revenues are recognized upon delivery to the customer.
(2)
For pay-as-cut contracts, the purchaser acquires the right to harvest specified timber on a tract, at an agreed-upon price per unit. Payments and contract advances are recognized as revenue as the timber is harvested based on the contracted sale rate per unit.
(3)
Revenues from the sale of higher-and-better use timberland and nonstrategic timberlands are recognized when title passes and full payment or a minimum down payment is received and full collectibility is assured. If a down payment of less than the minimum down payment is received at closing, we will record revenue based on the installment method.
(4)
For recreational leases, rental income collected in advance is recorded as other liabilities in the accompanying consolidated balance sheets until earned over the term of the respective recreational lease and recognized as other revenue.

In addition to the sources of revenue noted above, we also may enter into lump-sum sale contracts, whereby the purchaser generally pays the purchase price upon execution of the contract. Title to the timber and risk of loss transfers to the buyer at the time the contract is consummated. Revenues are recognized upon receipt of the purchase price. When the contract expires, ownership of the remaining standing timber reverts to us; however, adjustments are not made to the revenues previously recognized. Any extensions of time will be negotiated under a new or amended contract.

Related-Party Transactions and Agreements

We have engaged Wells TIMO and its affiliates to perform certain services under agreements that require us to pay fees and reimbursements to Wells TIMO or its affiliates, including advisor fees and expense reimbursements and disposition fees, subject to certain limitations. See Note 9 of our accompanying consolidated financial statements for a detailed discussion of our related-party agreements and transactions.

Commitments and Contingencies

We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Notes 1, 6, and 9 of our accompanying consolidated financial statements for further explanation. Examples of such commitments and contingencies include:
•
MeadWestvaco Timber Agreements;
•
FRC Timberland Operating Agreement;
•
Advisory Agreement, as amended;
•
Dealer-Manager Agreement; and
•
Structuring Agent Agreement.


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Subsequent Events

Restated Advisory Agreement

Effective July 1, 2013, we entered into the Restated Advisory Agreement with Wells Timberland OP and Wells TIMO.

Under the Restated Advisory Agreement, the monthly advisor fee payable to Wells TIMO is equal to one-twelfth of 1% of Assets Under Management. Upon the sale of any properties for an amount greater than $5 million in aggregate since the most recent valuation, Assets Under Management shall be reduced by the cost basis of the properties sold. Upon the acquisition of any properties for an amount greater than $5 million in aggregate since the most recent valuation, Assets Under Management shall be increased by the value of the properties acquired as determined by a forestry appraisal firm. However, aggregate advisor fees payable for fiscal year 2013 shall not exceed 1.0% of Assets under Management as of September 30, 2012.

The advisor fee shall be payable monthly in arrears in cash. If payment of the advisor fee for any calendar month will cause an event of default under our credit agreement, the advisor fee will accrue but will not be paid to Wells TIMO for such calendar month.

In addition, the Restated Advisory Agreement eliminates the reimbursement of administrative service expenses that Wells TIMO incurs in fulfilling its duties as advisor, including personnel costs and our allocable share of other overhead of Wells TIMO.

The Restated Advisory Agreement is effective through June 30, 2014 and may be renewed for an unlimited number of successive periods up to one-year each upon the mutual consent of the parties. Either party may terminate the Restated Advisory Agreement without cause or penalty upon providing 60 days' prior written notice.

Timberland Acquisition

On July 30, 2013, we acquired fee-simple interest in approximately 1,800 acres of timberland located in Taylor County, Georgia, in which we previously held a leasehold interest, for approximately $1.4 million, exclusive of closing costs.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a result of entering into our loan agreements, we are exposed to interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we have entered into interest rate swap agreements, and may enter into other interest rate swaps, caps, or other arrangements in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes; however, certain of our derivatives may not qualify for hedge accounting treatment. All of our debt was entered into for other than trading purposes. We manage our ratio of fixed-to-floating-rate debt with the objective of achieving a mix that we believe is appropriate in light of anticipated changes in interest rates. We closely monitor interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.

As of June 30, 2013, we had approximately $132.4 million outstanding on the CoBank Loan, which matures on August 11, 2018 and bears interest at an adjustable rate based on one-, two-, or three-month LIBOR Rate plus a margin ranging from 2.00% to 2.75% based upon the then-current LTV Ratio.

The Rabobank Forward Swap entered into on October 23, 2012 became effective on March 28, 2013. Under the Rabobank Forward Swap, we pay interest at a fixed rate of 0.9075% per annum and receive variable LIBOR-based interest payments from Rabobank on $80.0 million between March 28, 2013 and September 30, 2017. As of June 30, 2013, the weighted-average interest rate of the CoBank Loan, after consideration of the Rabobank Forward Swap, was 2.63%.


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Approximately $80.0 million of our total debt outstanding as of June 30, 2013 is subject to an effectively fixed-interest rate when coupled with Rabobank Forward Swap. As of June 30, 2013, this balance incurred interest expense at an average rate of 2.9075%. A change in the market interest rate impacts the net financial instrument position of our fixed-rate debt portfolio; however, it has no impact on interest incurred or cash flows.

As of June 30, 2013, after consideration of the Rabobank Forward Swap, approximately $52.4 million of our total debt outstanding is subject to an effectively variable-interest rate. This balance incurred interest expense at an average rate of 2.2% as of June 30, 2013. A 1.0% change in interest rates would result in a change in interest expense of approximately $0.5 million per year. The amount of effectively variable-rate debt outstanding in the future will be largely dependent upon the level of cash from operations and the rate at which we are able to employ such proceeds toward repayment of the CoBank Loan and acquisition of timberland properties.

ITEM 4.    CONTROLS AND PROCEDURES
Management’s Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods in SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II.
OTHER INFORMATION


ITEM 1.
LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to be material to our business or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.

ITEM 1A.
RISK FACTORS

We are subject to the following additional risks, which hereby add to or replace the risk factors disclosed in the "Risk Factors" sections of our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the period ended March 31, 2013.

We are dependent upon affiliates of Wells REF, including Wells TIMO, to conduct our operations; thus, adverse changes in the financial health of Wells REF could hinder Wells TIMO's ability to provide services to us and consequently impair our operating results and negatively affect the return on your investment.

We are dependent upon Wells TIMO, which is owned and controlled by Wells REF, to provide certain services that are essential to us, including asset management services and asset acquisition and disposition services, as well as other administrative responsibilities, including accounting services, stockholder communications, and investor relations.

Wells REF is largely dependent upon the fees and other compensation that it receives from the public programs it sponsors (including us) to conduct its operations. A large portion of Wells REF's income is derived under a consulting agreement with Columbia. Columbia is a mature program sponsored by Wells REF that reported $5.6 billion of assets as of June 30, 2013. Effective February 28, 2013, Columbia transitioned to self-management and no longer relies on Wells REF other than for consulting and investor relations services, which services are performed pursuant to agreements that expire on December 31, 2013. Wells REF does not expect to receive significant compensation from Columbia beyond December 31, 2013. Wells REF does not expect to replace that income from other sources. Although we expect Wells REF to have the financial resources to continue to provide asset management and advisory services to us pursuant to the terms of the Restated Advisory Agreement, there is no guarantee that Wells REF will be able to continue to provide the same level of service that we have enjoyed to date. A decline in the level of service provided by Wells REF could impair our operating results and could ultimately have an adverse effect on the value of your investment.

We may seek to become self-managed or restructure our advisory agreement with Wells TIMO or engage a new advisor. Any of these alternatives could result in a disruption in our business or a reduction in the quality of services provided to us.

As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q, we intend to explore our strategic alternatives, including listing our common stock on a national securities exchange, merging or otherwise selling our company or its portfolio as a whole, or liquidating our assets. If we do not attempt to sell our company or liquidate our assets in the short term, we will consider the possibility of becoming self-managed or restructuring the advisory agreement with Wells TIMO in order to reduce the costs associated with the management of our operations. We could also engage a new advisor.

The method by which we could become self-managed could take several forms. We could hire our own group of executives and other employees and acquire the infrastructure necessary for our business. The individuals and assets may or may not be affiliated with Wells TIMO and may be hired or acquired in separate negotiations or as a group. If we choose to hire the individuals who are most familiar with our business and to acquire some or all the infrastructure that our business currently utilizes, we may enter into a business combination transaction with an affiliate of Wells TIMO. All of these alternatives involve risks. If we become self-managed by hiring new employees and officers, or if we hire a new advisor, the transition to a new team could disrupt our business and adversely affect our operations

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and the value of your investment. Even if we acquire an affiliate of Wells TIMO or otherwise hire individuals who currently operate our business as employees of Wells TIMO, we are not likely to secure the services of all of the individuals who perform services on our behalf and our operations could suffer as a result. We cannot assure you that our stockholders would have an opportunity to vote on any internalization transaction.

Additionally, as we explore strategic alternatives that could involve the termination of the advisory services provided by Wells REF through Wells TIMO, Wells REF employees may question the long-term security of their positions and may themselves explore alternatives, which could result in their resignation from Wells REF. In the event that Wells REF is not able to retain such employees, Wells REF may no longer be able to provide the same level of service that we have enjoyed to date.

The Restated Advisory Agreement is terminable upon 60 days' notice. If we restructure this agreement to reduce the costs associated with the management of our operations, Wells TIMO's financial condition could be adversely affected or Wells TIMO may decrease the level of service it provides to us in an effort to streamline its business and accommodate a new fee structure. Either outcome could adversely affect our operations and the value of your investment in us. We cannot assure you that we will become self-managed or successfully restructure the Restated Advisory Agreement.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

(a)
Not applicable.
(b)
Not applicable.
(c)
During the quarter ended June 30, 2013, we redeemed shares as follows:
Period
Total Number of
Shares Redeemed
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
or Program
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
April 2013
4,788

 
$
6.23

 
4,788

 
(1) 
May 2013
4,820

 
$
6.23

 
4,820

 
(1) 
June 2013
298

 
$
6.23

 
298

 
(1) 
 
(1)Our share redemption plan commenced on August 11, 2006 and was amended on November 8, 2010, March 16, 2012, and August 6, 2012. The Amended SRP limits redemptions of our common stock as follows: the shares redeemed under the share redemption plan cannot exceed the lesser of (i) the amount redeemable from the sum of net proceeds from the sale of shares through the DRP plus any additional amounts reserved for redemptions by our board of directors, or (ii) in any calendar year, 5% of the weighted-average common shares outstanding during the preceding year. The terms of the our debt agreements prohibit us from making redemptions, other than the Qualified Special Redemptions, during any period in which the LTV ratio exceeds 40%. Qualified Special Redemptions do not require a one-year holding period and are subject only to the overall limitation that during any calendar year. Aggregate redemptions may not exceed 100% of the net proceeds from our DRP and any additional amounts reserved for such purpose by our board of directors. Our board of directors may amend, suspend, or terminate the share redemption plan upon 30 days notice. Currently, our LTV Ratio does not exceed 40%; however, our board of directors has not yet declared any cash distributions and, therefore, there are no proceeds available under the DRP. However, our board of directors approved a monthly, noncumulative reserve of $150,000 funded with operating cash flows for Qualified Special Redemptions. Because we had not received any proceeds from the sales of shares through the DRP as of June 30, 2013, we are currently restricted from redeeming shares other than Qualified Special Redemptions. Effective January 2013, the redemption price for all redemptions, including the Qualified Special Redemptions, equals 95% of the published estimated per-share value of our common stock, plus or minus any valuation adjustment as provided in the Amended SRP. Based on the estimated per-share value calculated as of September 30, 2012 and published on December 14, 2012, the redemption price during the three months ended June 30, 2013 was $6.23. We are not obligated under FINRA rules to update the estimated per-share value of our common stock until 18 months from the date of the last valuation, although we may elect to do so sooner. As disclosed in connection with the initial publication of our estimated per-share value, the estimated value of our common stock will fluctuate over time in response to market conditions, capital markets activities, attributes specific to Mahrt Timberland, and other factors. Therefore,

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the estimated per-share value of our common stock as of September 30, 2012 does not represent current value. As of June 30, 2013, all qualified shares tendered for redemption had been redeemed.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

(a)
There have been no defaults with respect to any of our indebtedness.
(b)
Not applicable.


ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.
OTHER INFORMATION

(a)
During the second quarter of 2013, there was no information that was required to be disclosed in a report on Form 8-K that was not disclosed in a report on Form 8-K.

Submission of Matters to a Vote of Security Holders

On August 9, 2013, we held our annual meeting of stockholders for the purpose of:

(1)
electing the following individuals to our board of directors: Donald S. Moss, Willis J. Potts, Leo F. Wells, III, Douglas P. Williams, and Henry G. Zigtema;

(2)
considering and voting upon three proposals to amend certain provisions of our charter to:
A.
eliminate certain provisions of our charter that had previously been required by state securities administrators in connection with our continuous public offerings;
B.
add certain provisions that enable us to implement a phased-in liquidity program in the event we determine to list our shares; and
C.
make certain conforming, clarifying and ministerial changes.

(3)
considering and voting upon an adjournment of the annual meeting, if necessary, to solicit additional proxies in favor of the foregoing proposals if there are not sufficient votes for the proposals; and

(4)
transacting any other business that may properly come before the meeting or any adjournment or postponement thereof.

All of the director nominees were elected to serve as directors until the next annual meeting of the stockholders and until their successors are duly elected and qualified. The number of votes cast for and votes withheld for each of the director nominees were as follows:
Name

Votes For

Votes Withheld
Donald S. Moss

16,692,306

1,430,143
Willis J. Potts

16,717,675

1,404,774
Leo F. Wells, III

16,574,752

1,547,698
Douglas P. Williams

16,728,280

1,394,169
Henry G. Zigtema
 
16,726,403
 
1,396,046


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Table of Contents

The proposals to amend our charter were approved. The number of votes cast for, the number of votes cast against, and votes abstaining were as follows:

Name
 
Votes For
Votes Against
Abstain
Proposal 2.A (Eliminate Certain Charter Provisions)

 
16,057,721
1,073,063
991,665
Proposal 2.B (Phased-In Liquidity)
 
16,451,710
869,727
801,012
Proposal 2.C (Ministerial Changes)
 
16,312,993
903,189
906,268

Amendment and Restatement of Charter

On August 9, 2013, at the annual meeting of our stockholders, our stockholders approved the Sixth Articles of Amendment and Restatement, which were then filed with the State Department of Assessments and Taxation of Maryland on August 9, 2013, and are effective immediately. The Sixth Articles of Amendment and Restatement eliminate certain provisions of our charter that had previously been required by state securities administrators in connection with our continuous public offerings; add certain provisions that enable us to implement a phased-in liquidity program in the event we determine to list our shares; and make certain conforming, clarifying and ministerial changes. The information set forth above with respect to the Sixth Articles of Amendment and Restatement does not purport to be complete in scope and is qualified in its entirety by the full text of the Sixth Articles of Amendment and Restatement, which is filed as Exhibit 3.1 hereto and is incorporated into this report by reference.

On August 9, 2013, our board of directors authorized and approved the Fourth Amended and Restated Bylaws, which amend and restate the Third Amended and Restated Bylaws, adopted by our board of directors on August 9, 2010, as amended to date. Under the Fourth Amended and Restated Bylaws, a majority of our outstanding voting stock will be required to call a special meeting of stockholders, as opposed to 10% or more of our outstanding voting stock. The Fourth Amended and Restated Bylaws also eliminate Article XIV of the Third Amended and Restated Bylaws, which provides that the maximum amount of leverage that we may have in relation to our net assets may not exceed 200% and that any amendment to this Article XIV requires a majority of all votes entitled to be cast on the matter. The Fourth Amended and Restated Bylaws are effective immediately upon effectiveness of the Sixth Articles of Amendment and Restatement.

The information set forth above with respect to the Fourth Amended and Restated Bylaws does not purport to be complete in scope and is qualified in its entirety by the full text of the Fourth Amended and Restated Bylaws, which is filed as Exhibit 3.2 hereto and are incorporated into this report by reference.

(b)
There are no material changes to the procedures by which stockholders may recommend nominees to our board of directors since the filing of our Schedule 14A.

ITEM 6.
EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.


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Table of Contents


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
WELLS TIMBERLAND REIT, INC.
(Registrant)
 
 
 
 
Date:
August 9, 2013
By:
 
/s/ BRIAN M. DAVIS
 
 
 
 
Brian M. Davis
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)



41


EXHIBIT INDEX TO
SECOND QUARTER 2013 FORM 10-Q OF
WELLS TIMBERLAND REIT, INC.
Exhibit
Number
  
Description
 
 
3.1*
  
Sixth Articles of Amendment and Restatement
 
 
 
3.2*
  
Fourth Amended and Restated Bylaws
 
 
 
4.1
 
Third Amended and Restated Share Redemption Plan (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed on August 7, 2012)
 
 
 
10.1
 
Amended and Restated Advisory Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 2, 2013)
 
 
 
31.1*
  
Certification of the Principal Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2*
  
Certification of the Principal Financial Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1*
  
Statement of the Principal Executive Officer and Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
*     Filed herewith
**
Furnished with this Form 10-Q.


42