GLADSTONE LAND Corp annual report, FY2021

Business context and reporting period

Gladstone Land Corporation (Nasdaq: LAND) filed this Form 10-K for the fiscal year ended December 31, 2021. The externally managed agricultural REIT owns and leases farmland and related facilities; it generally does not farm the land. At year-end, it owned 164 farms totaling 112,542 acres across 15 states. As of February 18, 2022, occupancy was 100%, with 85 unrelated tenants growing more than 60 crop types; the weighted-average remaining lease term was 6.7 years.

Financial and operating performance

Operating margin was approximately 42.1% of lease revenue, versus 48.5% in 2020, as operating expenses grew 48.4% to $43.6 million. GAAP net income was reduced by higher interest expense and preferred-stock dividends; preferred dividends and related charges totaled $12.3 million for Series B and C, while Series A and D preferred dividends were recorded in other expense. Common distributions were $0.54075 per share in 2021, compared with $0.53715 in 2020.

At December 31, 2021, total assets were $1.352 billion, total equity was $589.1 million, cash was $16.7 million, and notes and bonds payable, net, plus line-of-credit borrowings were approximately $668.0 million. Debt was secured by farms with approximately $1.2 billion of net book value; the company reported compliance with debt covenants. Scheduled principal payments on notes and bonds were $51.5 million in 2022. Management reported approximately $138.1 million of available liquidity at the filing date, including $24.1 million cash and borrowing availability; this is a later-date figure than the year-end balance-sheet cash amount.

Material changes versus the prior comparable period

• Revenue rose mainly from acquisitions and participation rents; same-property fixed lease revenue was nearly flat (+0.4%), while same-property participation rents increased 88.6%.
• During 2021, the company acquired 27 farms for stated purchase prices totaling approximately $294.5 million. Cash paid for real estate acquisitions was $286.8 million.
• Interest expense increased 20.7% to $24.9 million, primarily due to higher average borrowings. The company issued $60.4 million of Series D term preferred stock and redeemed $28.8 million of Series A term preferred stock.
• Common shares outstanding increased from 26.2 million to 34.2 million. The 2021 ATM program raised $171.7 million net, and Series C preferred sales raised $54.8 million net during the year.
• The Adviser’s base management fee rate increased from 0.50% to 0.60% annually effective July 1, 2021; total base and incentive fees rose to $10.2 million from $7.3 million.

Outlook, risks, contingencies, and unusual items

No formal earnings or acquisition guidance was provided. Management said current and short-term resources should cover near-term distributions, debt service, dividends, and operating costs, and described its acquisition pipeline as healthy. It intends to use available liquidity to pursue additional farms and farm-related facilities. The company stated it had not been materially adversely affected by COVID-19 to date, while warning that pandemic effects, inflation, supply-chain and labor constraints, and tenant operating disruptions remain uncertain.

Key risks include geographic concentration (California generated 65.9% of 2021 lease revenue and Florida 18.2%), water availability and drought, extreme weather and climate change, crop disease and price or yield changes, tenant credit and lease renewals, interest rates and refinancing, and the illiquidity of farmland. Participation rents expose some revenue to farm performance. Seven leases covering 27,844 acres, or 24.7% of acreage, were scheduled to expire in 2022; the filing describes negotiations on an upcoming California lease but gives no assurance of renewal on favorable terms. The Series D term preferred stock has a mandatory redemption date of January 31, 2026.

Management’s estimated NAV was $14.31 per common share and non-controlling OP Unit at December 31, 2021, versus a $33.76 closing common-stock price. NAV is a management estimate, not an audited fair-value measure, and the company cautions that realized values may differ. Other notable items: 2021 participation rents were $5.2 million versus $2.4 million; a $3.0 million lease-termination payment boosted 2020 revenue and did not recur. No properties were deemed impaired, no material litigation was reported, and the auditor gave an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective.

Important facts for investors to verify

• Reconcile year-end cash of $16.7 million with management’s filing-date cash figure of $24.1 million, and confirm the timing and conditions behind reported liquidity and borrowing availability.
• Review debt maturities, collateral and covenant headroom, variable-rate exposure, and the refinancing terms and draw conditions of the expanded MetLife facility.
• Assess California and Florida concentration, water rights and access, and the status of the 2022 lease expirations and renewal negotiations.
• Evaluate whether rent growth and AFFO can support distributions after preferred dividends, interest costs, advisory fees, and ongoing equity issuance; note that AFFO is non-GAAP.
• Examine the assumptions underlying management’s $14.31 NAV estimate and the substantial gap to the year-end market price; the filing says the estimate is not audited or independently assured.
• Consider dilution and senior claims from common and preferred equity issuance, including the Series D mandatory redemption obligation and the unlisted Series C preferred stock.