EFTA00624944.pdf

Sustainable Woodlands Fund II, L.P. Y. November 29, 2012 Dear Limited Partners: We are pleased to provide you with the quarterly property performance update for Sustainable Woodlands Fund II, L.P. (the "Fund"). Our quarterly report will include an executive summary, property and market overview, and performance commentary. Executive Summary The Fund continues to perform as a high-quality timberland investment. The investment has realized an internal rate of return (IRR) of-2.38%, as compared to the modeled IRR of 4.33% through September 30, 2012. As you are aware, the IRR results include the lower, most recent, appraisal and investment-to-date cash flow on a nominal basis net of all fees. The assumptions driving the appraiser's market valuation, such as timber pricing and discount rate, have the potential to track upward as the economy improves. Because of delays with the Anthony Forest Products Company (Anthony) Timber Harvest Agreement, operational cash flow since inception is approximately $400,000 behind the modeled cash flow to date. To offset these delayed revenues, we are implementing our new tactical plan to increase open market sales to $3.6 million from the budgeted $1.7 million and land sales from $363,600 to $985,000 in 2012. Year to date, approximately $2.9 million in open market sales are under contract, and we are on target to close $1.15 million in Higher and Better Use (HBU) land sales by year end. These successes along with other cash flow generated during the year, may allow for the Fund to pay a year-end distribution of $1.5 million. While we have had success in implementing the new plan, year-to-date cash receipts are $1.3 million behind plan through September. Expenses were favorable, resulting in an unfavorable cash flow variance year to date of $1.14 million. While our timber marketing efforts have been successful, buyers have not harvested their purchased timber due to tight markets typical for summer. With winter approaching, we expect harvesting activity to significantly increase. However, since our standard harvesting term for market sales is twelve to eighteen months, it may be 2013 before the current shortfall in cumulative cash is realized. On July 30, Anthony and SWF Red River Timber, LLC, signed a Memorandum of Settlement to settle all matters in the motion filed by Anthony to Vacate the Arbitration Award in the Circuit Court of Union County, Arkansas. Also, on that same day, all parties signed the First Amendment to the Timber Support Agreement and the First Amendment to the Timber Harvest Agreement. These amendments released Anthony's timber rights on approximately 15,087 acres included in the original agreements. This is a significant achievement as it now allows us to accelerate potential timber revenues through open market transactions on the released acreage. Furthermore, we believe we have the potential to achieve higher pricing than that provided under the Anthony contract through well-timed, competitive offerings. EFTA00624944  Sustainable Woodlands Fund II, L.P. Following recent acquisition success, Molpus made organizational changes that will accommodate our expansion and provide us an improved framework for future growth. Molpus created three new management regions for all properties: North, East, and South Central. Specific to this portfolio, Tom Tomlinson was promoted as the South Central Region Managing Director, which includes responsibilities for the Red River investment. Steve Marietta remains as Property Manager, reporting to Mr. Tomlinson. Additionally, as part of this restructuring, each region will have a dedicated, value-add specialist who will be focused on pursuing HBU and other value-added opportunities. Jerry Mahon in our Monroe, Louisiana, office was promoted and assumes this responsibility. Properly and Market Overview Thnber Marketing. Molpus continues to implement the new strategy for increased open-market timber sales discussed above. During the quarter, we sold three hardwood sawtimber pay-as-cut timber packages for stumpage prices averaging 10% above the model. As these stands are harvested, an additional $600,000 in timber revenue will be generated. Through the third quarter, we have marketed approximately $2.9 million, or 81%, of the $3.6 million revised annual plan for open market sales. In July, Molpus and Anthony signed an amendment to the Timber Harvest Agreement in which Anthony released its rights to the timber in the Caddo Unit, the timberland reserved to support Anthony's Atlanta, Texas, facility. As you may recall, this facility burned in 2010 and will not be rebuilt. Through this amendment, an estimated 200,000 tons of pine sawtimber is now available for future open market sales. We met with three potential buyer of pine sawtimber in the northeastern Texas and northwestern Louisiana area. These buyers—Roy O. Martin Lumber Co., West Frazer Lumber Co., and Snider Lumber Co.—are currently assessing the resource before submitting prices. We are beginning to see signs that the area's pine sawtimber markets may be improving. Anthony recently extended its sawmill four-day shifts from ten-hour to twelve-hour days. Additionally, despite being almost two months behind on its capital improvement project at the Urbana sawmill, Anthony has conununicated that its harvest production levels will not be curtailed. During the quarter, we prepared the 2013 Timber Harvest Plan for submission to Anthony on October 1. The plan is for 143,117 tons of pine sawtimber, with an estimated value of $2.9 million. By the agreement, Anthony has until November 15 to accept or reject the plan. Higher and Better Use Land Sales. Because of delays in revenue from the 2012 Anthony Timber Harvest Plan, we increased the Higher and Better Use (HBU) land sales goal of $363,600 to $984,000. During the quarter, we negotiated four separate new transactions and closed on four pending sales. In total, HBU sales have generated $490,700 in revenue year to date, with an additional $658,472 in pending sales scheduled to close during the fourth quarter. Hence, we forecast generating approximately $1.15 million, or 117% of the enhanced $984,000 goal, by year end. 2 EFTA00624945  Sustainable Woodlands Fund II, L.P. Land Management Activities and Expenses. During the third quarter, we completed our first round of chemical site preparation on 1,361 acres. Including the 205 acres bedded during the quarter, we have completed this treatment for the year on 499 accts. The final round of chemical site preparation and release work will begin in October, with 298 acres and 597 acres scheduled for release and site prep spray, respectively. (See Exhibit A for specific summaries of individual silvicultural treatments.) As you are aware on this property, we had modeled to cruise all of the higher-valued, natural pine stands during the rust three years of ownership. This year's inventory work on approximately 19,000 acres will complete the three-year project. We began the stand-level field work in September and anticipate a completion in early December. This timber volume information will be used to update stand and property records for valuations and management decisions, formulate inventory and growth models, and, ultimately, more accurately quantify and report Red River's timber assets. Returns Since Inception Character of Quarterly VT D (01120)0) Returns° Return Return Annualized Distributions' 0.00% 0.00% 1.23% Estimated Appreciation/ 0.75% -3.56% -5.22% reclation Est. Gross 0.75% -3.56% 4.02% TotalReturn Est. Net Total 0.50% -4.29% -4.98% Return As disclosure, this information is provided at the request from our investors. We have attempted to provide some guidance regarding estimated quarterly returns and capital appreciation of the Fund. These Past performance is no guarantee of future results. 2 The returns are unaudited and reflect the best judgment of the General Partner. In providing this information, we do so without any representations or warranties whatsoever, expressed or implied, and assume no responsibility or liability. The returns are subject to a year-end audit and subject to adjustment. The adjustment — based on the year- end audit — could be material. Further, the methodology used for the audit will likely differ. The returns are intended to provide investors with a better gauge of the return profile of the assets of the Fund. Returns are geometrically linked based on quarterly values which will result in a small variance between reported gross returns and the summed distribution and appreciation figures. Includes distributions from January 1, 2010, through September 30, 2012, where appropriate. For the purpose of calculating estimated Fund performance, distributions will be treated as received the month in which thc distribution was paid. 4 Appreciation includes the results of the year-end third-party appraisal. During interim years, third-party appraisal updates will be used. 3 EFTA00624946  Sustainable Woodlands Fund II, L.P. quarterly estimated returns reflect our best judgment as to the appreciation of the asset and will not be reflected in your capital account statement. Please note that going forward we will provide only the estimated annualized IRR as part of the quarterly reports as it is th most relevant calculation for this type of investment. We will gladly provide the alternative calculation upon request! Performance Discussion Since inception, the Fund is performing behind modeled real return expectations. However, the Fund has generated cash flow though a successful HBU land sale program and accelerated harvesting plan, while the Fund is building up value for the long-term through biological growth. Moreover, there have been positive trends in the housing market, and further recovery of national housing starts could potentially help to stimulate sawthnber pricing. Cantle!: In summary, we will continue to be aggressive in managing the timberland. We believe the Fund has a positive cash flow future and the potential to benefit from any improvements in the timber markets. The forestry team is continuing to act on both its accelerated harvesting plan and its HBU land sale program which have already generated healthy cash flow for the Fund this year. The expected year-end distribution is reflective of the success of the aforementioned forestry strategy and improvement in the local markets. The timber released from the Timber Harvest Agreement has prospective buyers, and we anticipate the potential for better pricing than previously negotiated under the Timber Harvest Agreement. We believe the long-term outlook for this fund remains strong. Please contact David Hicks (713.993.4038), David Scott (601.949.3144 x28) or Mike Cooper (601.948.8733 x221) with any questions. Past performance is no guarantee of future results. Returns are unaudited and have been included for illustrative purposes. 4 EFTA00624947  6 Sustainable Woodlands Fund II, LP. DISCLOSURE This presentation is for informational purposes only and does not constitute an offering of any security, product, service or fund. No investment strategy can guarantee performance results. Past performance is no guarantee of future results. AU investments are subject to investment risk, including loss of principal invested. All information presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. This information is provided without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. This publication is also designed to provide general information about economics, asset classes and strategies. All sector and asset allocation recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all asset classes and strategies will be suitable for all investors. The opinions expressed in these materials represent the personal views of Sustainable Woodlands Partners, L.L.C. professionals and are based on their broad investment knowledge, experience, research and analysis. However, market conditions, strategic approaches, return projections and other key factors upon which the views presented in these materials are based remain subject to fluctuation and change. Consequently, it must be noted that no one can accurately predict the future of the market with certainty or guarantee future investment performance. This publication contains "forward-looking statements." Forward-looking statements can be identified by the words "may", "will", "intend", "expect", "estimate", "continue", "plan," "anticipate," "could," "should," and similar terms and the negative of such terms. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect actual results are the performance of the portfolio securities, the conditions in the U.S. and international finance and other markets and other factors. Actual results could differ materially from those projected or assumed in our forward-looking statements. Please refer to the PPM for a more complete description of the Fund's strategies, terms of offering, and the risks associated with investing in the Fund. Sustainable Woodlands Fund, L.P. is advised by Sustainable Woodlands Partners, L.L.C., aUS Securities and Exchange Commission registered investment adviser and General Partner to the Fund. 5 EFTA00624948  Sustainable Woodlands Fund II, L.P. February 29, 2011- Dear Limited Partners: We are pleased to provide you with the quarterly property performance update for Sustainable Woodlands Fund It L.P. (the "Fund"). Our quarterly report will include an executive summary, appraisal review, property and market overview, and performance commentary. Executive Summary We are pleased to report that the Fund is performing well despite persistent market headwinds. The investment has an internal rate of return (IRR) of -2.5%, as compared to the modeled IRR of 1.18% through December 31, 2011. The IRR results include the most recent appraisal and investment-to-date cash flow on a nominal basis net of all fees. Cash flow since inception is in line with the model. Despite strong harvest activity during the past six months, cash receipts for the year were behind plan by $250,805, or 3.5%. Expenditures continued to be favorable to budget, resulting in an operational cash flow $420,569 ahead of plan for the year. Due to the positive cash balances, a planned distribution of $2,000,000 was made to the Limited Partners in December. Investment-to-date distributions from this fund total $6,000,000 and track with the acquisition model projections. The pricing reset for the 2012 Timber Harvest Plan for Anthony Forest Products (Anthony) went to arbitration in December. We were recently notified that the arbitrator ruled in Red River's favor. Anthony continues to evaluate the proposed timber package. Depending on the size of a final package, the advance payment could generate up to SI.0 million. Administrative Update We arc pleased to announce that David Scott has been elected by the Board of Managers to serve as Board Chairman. In addition, Salient Partners, L.P, recently welcomed Dan Amiri to their team as an analyst. Year-End Valuation —id Appraisal As noted above, the year-end valuation resulted in a decline in appraised value of approximately 12% year over year primarily as a result of extended weakness in the pine sawtimber markets. Timberland markets have shown some downward movement as a result of our country's recent financial crisis, and future appraisal updates could at some point be additionally affected by financial pressures from this crisis. However, while an appraiser's view of timberland values may exhibit some positive or negative volatility in the short term, the investment's ability to perform at or near model is the factor that is designed to create the stability and potential long-term value that makes timberland an attractive, non- correlated portfolio investment. While the timber markets remained weak, we believe this last year 1 EFTA00624949  Sustainable Woodlands Fund II, L.P. provided some positive signs and there are more promising indications that market fundamentals may be rebounding. First, it has been estimated that roughly S5 billion will be invested globally which could put downward pressure on discount rates due to heightened acquisition activity.' Second, the relationship between southern pine sawtimber prices and lumber prices indicates the spread between the two is more than one standard deviation from the mean.' This is significant, as since 1995 mean reversion has occurred within two years. We feel that is further support that timber prices may have bottomed or even over-corrected in 2011 and that positive upward movement within the next two years is possible.' Acreage. The Fund owns a total of 91,020 acres with an appraised value of 5156 million. The acreage is distributed as follows: • Eleven Arkansas counties — 55% • Six Louisiana parishes — 31% • Three Taws counties —14% The pie chart below reflects the product class diversification based on the appraised values. SWF a Timber Value Breakout by Product Class December 2011Appraisal Source: James W. Severer. December 1911. As shown above, approximately 70% of the appraised timber value is merchantable southern pine. While the premerchantable timber represents 11% of the appraised timber value, 26% of the property acreage is premerchantable pine, representing substantial future value. Over the life of the fund, the property makeup will likely change considerably as the trees move through product classes and the pine sawtimber 3 Source: James W. Sewall and RISI, December, 2011 2 Source: Salient Partners, L.P., December, 2011 3 Past performance is no guarantee of future results. 2 EFTA00624950  Sr Sustainable Woodlands Fund II, L.P. is harvested according to the timber supply agreement. We have included a copy of the appraisal summary as Exhibit "A". Property and Market Financial Overview Timber Marketing. Despite the delay in closing the Anthony 2011 Timber Harvest Plan earlier this year, strong production in the second half of the year resulted in annual timber receipts of $6.1 million, exceeding the plan by 2%. During the fourth quarter, the Anthony crews accelerated harvesting on its contract. This production resulted in quarterly timber receipts exceeding the budget by 73%, or $755,084. Additionally, Molpus sold two hardwood packages and one pine thinning package on the open market. The hardwood transactions sold for prices averaging 2% above the modeled price. The pine thinning package's price was 29% below model but was sold for silvicultural reasons: the plantation's growth rate had slowed, and reducing its density was required to improve tree growth. For the year, open-market timber sales generated over $850,000 in revenue. In anticipation of continued success in capitalizing on opportunities, additional hardwood and pine plantation packages have been prepared for potential sale in the first quarter of 2012. During the quarter, Anthony and Molpus met several times to discuss the stumpage price reset for both regular and large pine sawtimber. The new reset prices would be used for the 2012 Timber Harvest Plan that was submitted to Anthony on September 1. Due to extreme differences regarding pricing, no decision could be reached, and the price decision went to arbitration. After each party presented its case in December, the arbitrator ruled in Red River's favor, establishing the new prices for large and regular sawtimber as $26.00 per ton and S21.50 per ton, respectively. Anthony continues to evaluate the 2012 Timber Harvest Plan of 159,200 tons of pine sawtimber and will pay up to $1.0 million as a 25% advance payment when the contract closes. Higher and Better Use Land Sales. Molpus successfully negotiated a $ I,950 per-acre price, or $156,000, for an 80-acre parcel in Ashley County, Arkansas. The transaction closed December 21 and yielded a return to the investment of 38.1%, net of fees. Even though no Higher and Better Use (HBU) land sales were modeled for this investment, we had anticipated HBU land sale opportunities and budgeted $633,000 for 2011. In total, we generated $357,000, accounting for 56.3% of the annual budgeted land sales revenue. Land Management Activities. During the fourth quarter, we were actively completing site preparation treatments on the 2,743 acres scheduled for planting in 2012. The final round of chemical treatment was applied on 1,315 acres. The mechanical bedding treatment was completed on 487 acres. We took advantage of the extended dry ground conditions and bedded 144 acres more than budgeted. This preparation created a high quality micro-site with improved soil tillage and drainage for better seedling growth and survival. For the year, operating expenditures were $420,569 favorable to budget, due primarily to the postponement of fertilization treatments, fewer acres available to site prepare, and favorable planting costs. (See Exhibit "B"for a summary of all reforestation and silvicultural treatments.) 3 EFTA00624951  Sustainable Woodlands Fund II, L.P r The cruising of the 21,044 natural pine and thinned pine plantation acres scheduled by the Inventory Management and Planning group for inventory updates was completed. The overall cost of the project came in at the budgeted $148,500. Information provided from the inventory cruise provides updated stand and property records for valuations, harvest plans, management decisions, and tracking of Red River's timber assets. The cruise captured the annual growth in these stands and reported an increase of 28,122 tons of pine and 118,403 tons of hardwood. By applying appraisal per-unit product values, this increase is valued at approximately $1.1 million. We finalized the purchase of eighty acres in Columbia County, Arkansas, on October 17, 2011. The two forty-acre parcels join Red River's current ownership and are located, conveniently, within 65 miles of the Urbana, Arkansas, sawmill. Not only is the purchase property accretive to the investment as a stand- alone opportunity, it enhances the value of the adjoining Red River parcel by providing alternative access to forty acres of mature timber. The closing cost of $154,495 was funded from contributed capital. Returns Since I nception Character of Quarterly 1-11) (0!:20111) Returns.* Return Return Annualiied Distributions' 1.12% 1.69% 1.69% Estimated Appreciation' -11.28% -12.44% -5.41% Der reciation 7 Est. Grass -10.15% -10.83% -3.75% Total Return Est. Net Total -10.40% -11.75% -4.72% Return Source Sakai Partners, LP, December 2011. 1 Past performance is no guarantee of future results. 5 The returns are unaudited and reflect the best judgment of the General Partner. In providing this information, we do so without any representations or warranties whatsoever, expressed or implied, and assume no responsibility or liability. The returns are subject to a year-end audit and subject to adjustment. The adjustment — based on the year- end audit - could be material. Further, the methodology used for the audit will likely differ. The returns are intended to provide investors with a better gauge of the return profile of the assets of the Fund. Returns are geometrically linked based on quarterly values which will result in a small variance between reported gross returns and the summed distribution and appreciation figures. 6 Includes distributions from January I, 2010, through December 31, 2011, where appropriate. For the purpose of calculating estimated Fund performance, distributions will be treated as received the month in which the distribution was paid. 7 Appreciation includes the results of the year-end third-party appraisal. During interim years, third-party appraisal updates will be used. 4 EFTA00624952  L Sustainable Woodlands Fund II, L.P. Performance Discussion As mentioned previously, the Fund is currently performing to expectations based on distributions. However, the estimated performance illustrates the impact the recent appraisal had on performance but does not reduce our confidence in the investment's long-term return potential. As mentioned above, we believe there arc multiple indications that inspire optimism for potential market improvement over the coming years. As disclosure, this information is provided at the request from our investors. We have attempted to provide some guidance regarding estimated quarterly returns and capital appreciation of the Fund. Please note that these quarterly estimated returns reflect our best judgment as to the appreciation of the asset and will not be reflected in your capital account statement. Further, they will vary from the stated IRR which is the most relevant return calculation for this type of investment! Conclusion We believe the long-term outlook for this Fund remains quite good. In the near term, the Molpus team is aggressively pursuing spot market opportunities, while the Fund also benefits from the long-term supply agreement that offers some downside price protection. Please feel free to contact David Hicks (713-993-4038) with any questions or comments. Past performance is no guarantee of Mute results. Returns are unaudited. $ EFTA00624953  Sustainable Woodlands Fund II, L.P. March 8, 2011 Dear Limited Partners: We are pleased to provide you with the quarterly property performance update for Sustainable Woodlands Fund 11, L.P. (the "Fund"). Our quarterly report will include an executive summary, appraisal review, property and market overview, and performance commentary. Executive Summary The SWF Red River investment has completed its first full year with a solid performance. Since inception, net cash flow of $4.8 million is tracking in line with model. Due to favorable performance, the planned distribution of $1.5 million was made to the Limited Partners in December. To-date distributions from this Fund total $3 million as compared to a projection of $2 million i n the acquisition model. The Fund received its first appraisal which was conducted by Sizemore and Sizemore. The results of the appraisal are discussed in the next section. The assigned property value was $178 million versus the November 2009 acquisition price of $176 million. Including this recent appraised value and investment- to-date cash flow, the internal rate of return (IRR) estimate for this investment to date is 3.30% on a nominal basis, net of all fees, as compared to the IRR of -3.5% modeled for the first year.' As recently reported, Anthony Forest Products (Anthony) recently announced that it would not rebuild its Atlanta, Texas, sawmill that burned in February, 2010. Since the fire, the investment's cash receipts from timber had remained behind plan. However, through our aggressive market sales strategy, diligent harvesting efforts, and Anthony's November request for an additional sawtimber package, total receipts were only 8.5% behind plan by year end. Our supply agreement is working well, and Anthony's desire to harvest its committed volume has remained unchanged. During the quarter, the proposed plan for the 2011 Timber Harvest Agreement was accepted. This transaction, with an estimated pine sawtimber value of $4 million, is scheduled to close the first week in February. ' The Fund NAV is subject to the year-end audit. The estimated IRR is subject to change based on the final audited year-end value. EFTA00624954  Sustainable Woodlands Fund II, L.P. Year-End Valuation — 3NAppraisal On an acreage basis, the Fund owns a total of 91,194 acres with an appraiscd value of $178 million. The acreage is distributed as follows: • 11 Arkansas counties — 55% • 6 Louisiana parishes — 31% • 3 Texas counties — 14% The pie chart below provides the product class diversification based on the appraised values. SWF II Value Breakout by Product Class December 2010 Appraisal Pine Chip N Saw 6% The pie chart above indicates that approximately 70% of the appraised timber value is southern pine. While the premerchantable timber represents 9% of the appraised timber value, 27% of the property acreage is premerchantable pine representing substantial future value. Over the life of the fund, the property makeup will likely change by a considerable amount as the trees move through product classes and the pine savaimber is harvested consistent with the timber supply agreement. We have included a copy of the appraisal summary as Exhibit "A". 2 EFTA00624955  Sustainable Woodlands Fund II, L.P. Property andMarket Financial Overvien? Timber Marketing. Timber sales were 5% unfavorable to budget during the year ($7.72rnm vs. $8.10mm) due to the earlier impact of the fire at Anthony's sawmill in Atlanta, Texas. For the quarter, timber sales were 6% unfavorable to budget ($1.58mm vs. $1.57nun budgeted). Anthony has completed harvest on the last stands of timber specified in the 2010 Wood Supply Agreement that were not affected by the fire. To supplement the wood flow into their Urbana sawmill, Anthony askcd to purchase additional pine sawtimber as part of the "Excess Timber" provision in the agreement. In November, we finalized the sale of 16,925 tons of pine sawtimber for $585,000. In December, an additional second sale of 19,119 tons was proposed. However, we were unable to reach an acceptable pricing agreement in 2010. In January, Anthony expressed renewed interest in purchasing this package, and we are optimistic that an agreement can be reached soon. Anthony announced on November 23, 2010, that the board of directors voted not to rebuild the company's sawmill in Atlanta, Texas. Molpus has met with Anthony's representatives to begin discussions on Anthony's plans for harvesting the remaining timber in the 2010 Timber Harvest Agreement and for future purchases of sawtimber from SWF Red River property around the Atlanta, Texas, area. The 2011 Timber Harvest Agreement package was submitted and has been accepted by Anthony. An estimated $4 million in pine sawtimber revenue will be generated from this plan. Market prices for pine and hardwood pulpwood continue to remain weak. However, Molpus has been selective in choosing appropriate stands to market as opportunities arise, and these market sales were a bright spot for the year. To date, these sales have generated $1.1 million in revenue, more than doubling the budgeted amount of $450 thousand. Furthermore, the actual pricing achieved across these market sales exceeded model by 28%. This quarter, two biomass' and one thinning package, with an estimated combined value of $81 thousand, were also sold. Additionally, we have reached verbal agreement with Koppers Industries to begin marking utility poles on the property, with plans to finalize the sale agreement in early 2011. This pay-as-cut contract for poles will yield at least an $11.00-per-ton premium above current pine sawtimber prices. Higher and Better Use Land Sales. Even though no Higher and Better Use (HBU) land sales were modeled for this investment, Molpus was successful in negotiating an attractive sales price of $213 thousand, or $2,700 per acre, for a 79-acre parcel in the Bossier Unit. This transaction closed December 21 and yielded a return to the investment of 74%, net of fees. In anticipation of capitalizing on future 2 The financial overview is based on the property level financials included as part of the exhibits. Biomass is a tenn used to describe non-merchantable timber, brush, and logging debris (including limbs and tops) that can be used as a renewable energy source. 3 EFTA00624956  Sustainable Woodlands Fund II, L.P. opportunities, revenues of $500 thousand in land sales were included in the recently submitted 2011 budget. Other Revenue. Other revenue on the Red River property was 29% unfavorable to the quarterly budget ($143k vs. $202k budgeted) and 1.5% favorable to the year-to-date budget ($615k vs. $606k budgeted). The majority of budgeted miscellaneous income is tied to hunting leases and seismic income with the upside variance attributed to unbudgeted easements, right-of-ways, biomass, and miscellaneous income. The biomass income is a good example of the expanding revenue opportunities associated with alternative energy. Gross Profit. Red River quarterly gross profit was 755% favorable to budget ($143k vs. $17k budgeted) and year-to-date gross profit was 247% favorable to budget ($434k vs. -$295k budgeted). The favorable year-to-date variance is primarily reflective of selling timber at prices above the implied budgeted level combined with favorable depletion due to harvesting less volume than budgeted for. Land Management Activities. We stayed on target in our efforts to prepare all acres planned for reforestation in 2011. During October, we completed the last round of chemical site preparation work. For the year, 3,960 acres were aerially treated with herbicide to control competing vegetation. The cost came in at $276 thousand, well below the budgeted amount of $343 thousand. The mechanical site preparation work has been completed, with 738 acres bedded. We made the decision to take advantage of the dry operating conditions this fall and bed acres that could have lain unproductive for a year or more if not bedded during this window of opportunity. By bedding these sites now, this acreage will be ready to plant this 2011 planting season. A total of 538 additional acres were bedded, resulting in costs being $103 Thousand over budget. (See Exhibit "B"for a summary ofall reforestation and silvicultural treatments.) As previously reported, we finalized the transaction on October I5 to acquire an additional 100 acres of timberlands for SWF Red River for the price of $120 thousand. The parcel, adjacent to SWF Red River property in Union County, Arkansas, contains a seven-year-old loblolly pine plantation and will be accretive to the financial performance of the overall investment as well as secure better access to a tract in the existing ownership. For the quarter and year-to-date, operating expenses were favorable to budget. Specifically, quarterly expenses were 13% favorable to budget ($366k vs. $420k budgeted) and 14% favorable to the year-to- date budget ($1.611mm vs. $1.88mm budgeted). Net Income. Net income was favorable through December. Red River quarterly net income was 45% favorable to budget (-5222k vs. -$403k budgeted). Year-to-date net income was 46% favorable to budget 4 EFTA00624957  Sr Sustainable Woodlands Fund II, L.P. (-$1.18mm vs. -$2.17mm budgeted). The shift in the product mix harvested and favorable operating expenses resulted in a favorable net income variance. Operating Cash Flow. The Fund experienced positive operating cash flows for the quarter, $992 thousand, and year-to-date, $5.52 million. These figures are in line with modeled expectations. Returns Character of Quarterly la II Returns 4 Return Return Distributions' 0.84% 1.69% Estimated Appreciation/ 4.25% 2.19% De reciation 6 Est. Gross 5.10% 3.89% Total Return Est. Net Total 4.85% 2.87% Return As mentioned previously, the Fund is currently performing to expectations. We have a high degree of confidence in the investment's long-term return potential. Based on requests from our investors, we have attempted to provide some guidance regarding estimated quarterly returns and capital appreciation of the Fund. Please note that these quarterly estimated returns reflect our best judgment as to the appreciation of the asset and will not be reflected in your capital account statement. The returns are unaudited and reflect the best judgment of the General Partner. In providing this information, we do so without any representations or warranties whatsoever, expressed or implied, and assume no responsibility or liability. The returns are subject to a year-end audit and subject to adjustment. The adjustment — based on the year- end audit — could be material. Further, the methodology used for the audit will likely differ. The returns are intended to provide investors with a better gauge of the return profile of the assets of the Fund. Returns are geometrically linked based on quarterly values which will result in a small variance between reported gross returns and the summed distribution and appreciation figures. 5 Includes distributions from January 1, 2010, through December 31, 2010, where appropriate. For the purpose of calculating estimated Fund performance, distributions will be treated as received the month in which the distribution was paid. 6 Appreciation includes the results of the year-end third-party appraisal. During interim years, third-party appraisal updates will be used. 5 EFTA00624958  Sustainable Woodlands Fund II, L.P. The year-end appraisal indicated an increase in the property value and supports our belief that the property was purchased at an attractive value. Conclusion The long-term outlook for this Fund remains quite good. In the near term, the Molpus team is aggressively pursuing spot market opportunities, while the Fund also benefits from the long term supply agreement which provides some downside price protection. Please feel free to contact David Hicks (713-993-4038) with any questions or comments. 6 EFTA00624959  tic Sustainable Woodlands Fund II, L.P. February 25, 2010 Dear Limited Partners: We are excited about the recent acquisition now known as SWF Red River Land, LLC and SWF Red River Timber, LLC (collectively referred to as "SWF Red River"). The property was purchased from Anthony Forest Products Company ("Anthony"), a vertically integrated company that owned and managed the approximately 91,360 acres of predominantly southern pine timberland. These Sustainable Forestry Initiative® (SF1)-certified timberlands are strategically located in southern Arkansas, northern Louisiana, and eastern Texas in close proximity to the Anthony sawmills and in a highly attractive wood basket with a strong regional wood and paper industry. The Fund will continue the SFI certification of the timberlands. Approximately ninety-three percent (93%) of the land is classified as pine sites, the balance consisting of hardwood sites (4 percent) and non-forest (3 percent). This is an unusually high percentage of pine site land compared to the typical southern pine property average of about 80 to 85 percent pine. The timberlands contain a significant amount of mature pine timber, with 74 percent of the growing stock in diameter classes greater than 16". Further, SWF Red River consists of some of the finest mature timber stands the Molpus foresters have seen, as well as having a very high site quality throughout. We have provided a detailed acquisition overview and due diligence package as Exhibit "A". Immediately after closing on November IS, 2009, the management team began focusing on the Anthony Forest Products (Anthony) Timber Harvesting Agreement and market sales opportunities. Under the Anthony agreement, SWF Red River agrees to sell a predetennined volume of standing timber to Anthony each year. The bulk of this timber will be harvested and delivered to Anthony-owned facilities. This agreement, coupled with good markets for pine pulpwood and hardwood pulpwood, provides a solid foundation for this new fund. The SWF Red River transaction closed during a period when many local mills' on-site inventories had dwindled as a result of heavier than normal rainfall. With our management team in place at closing, we were able to immediately begin negotiating the sale of pine and hardwood pulpwood at premium prices above those in the model. Overall, 2009 was a challenging year for most timberland investments. We have seen wood-using facilities across the U.S. slow production, announce indefinite shutdowns, and/or close permanently. We hope to see signs of improvement in 2010. New markets in pellet manufacturing operations should increase the value of pine pulpwood fiber, and an eventual upward turn in housing starts will help the 1 EFTA00624960  tfr Sustainable Woodlands Fund II, L.P. solid wood business. We will continue to evaluate additional market opportunities, including higher and better use land sales (HBU) and other value-added initiatives. As we start to realize improved timber markets, we believe this investment is well positioned to achieve and perhaps exceed its long-range financial goals. Properly and Market Overview Timber Marketing Following the terms of the agreement, SWF Red River received an advance payment of $1,754,852 for pine sawtimber at closing. Total revenue under this agreement for 2010 should exceed $7 million from pine sawtimber deliveries to Anthony's sawmills at Urbana, Arkansas, and Atlanta, Texas. Additionally, as part of the closing, SWF Red River was to receive payment for harvested volume in excess of 52,000 tons during the period beginning July I, 2009 thru closing. This payment amounted to $269,544. In addition to managing the supply agreement, the forestry team began to actively market other timber products from this property. Continued rains and depleting inventories at local pulp and paper mills led to increased demand for pine pulpwood. As a result, a sales package of 623 acres of pine plantation thinnings was sold at a price exceeding model by 40%. The buyer, Becton Timber Company of Hampton, Arkansas, is an established company with a reputation for high quality work. This sale is for 18,690 tons of pine pulpwood, with an anticipated gross value of $299,040. We are also focusing on potential niche market opportunities that will allow us to maximize this property's revenue potential. One of the more significant niche market initiatives involves an inventory and marketing analysis of higher-valued utility poles. Land Management Activities Chemical site preparation had been completed on 1,103 acres prior to closing. These acres will be planted during the first quarter of 2010 with a combination of Weyerhaeuser Company genetically improved bare root seedlings along with CellFor Inc. varietal seedlings. Varietal seedlings claim to offer superior performance in growth, quality, and stand uniformity. Chemical release work was completed on 492 acres of two- and three-year-old pine plantations that were inundated with hardwood competition. This application controls the hardwood, allowing the pine trees to grow without competition through the remainder of their rotation. Acquisition inventory data was recently incorporated into Molpus's internal GIS database.