Gladstone Land Corporation — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 19, 2020. This is an annual report, not a standalone fourth-quarter report. Gladstone Land is an externally managed agricultural REIT that owns farmland and leases it primarily to third-party farming tenants.
Business context and portfolio
- At December 31, 2019, the company reported 111 farms across 10 states, with 86,535 total acres and 69,985 farmable acres. The filing’s later overview describes 113 farms and 87,860 acres as of February 2020.
- At year-end, 100% of gross acreage was leased; as of February 2020, the portfolio had 70 unrelated tenants, more than 45 crop types, and a 6.9-year weighted-average remaining lease term.
- California and Florida generated 53.3% and 27.3% of 2019 lease revenue, respectively. One tenant contributed 10.9% of lease revenue.
Financial performance and condition
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Total operating revenue | $40.7 million | $36.7 million | Up 10.9%; 2018 included $7.3 million of crop-sale revenue from temporary self-operation. |
| Lease revenue | $40.7 million | $29.4 million | Up 38.6%, primarily from acquisitions; same-property lease revenue rose 4.6%. |
| Operating income | $19.3 million | $12.1 million | Operating margin was approximately 47.4%, versus 33.0% in 2018, based on reported operating income and revenue. |
| Net income | $1.8 million | $2.8 million | Down 36.3%; higher interest expense and the absence of the prior-year property-sale gain weighed on results. |
| Net income attributable to common stockholders | Loss of $2.5 million; loss per share $0.13 | Income of $2.3 million; earnings per share $0.15 | Series B preferred dividends rose to $4.2 million from $0.4 million. |
| Operating cash flow | $21.4 million | $10.4 million | More than doubled, principally reflecting higher rental receipts. |
| Investing cash flow | Outflow of $262.7 million | Outflow of $93.8 million | Higher farm acquisitions and capital spending. |
| Financing cash flow | Inflow of $240.2 million | Inflow of $95.2 million | Funded largely by borrowings and equity issuance. |
- FFO / CFFO / AFFO: Diluted FFO per share was $0.54, CFFO per share $0.56, and AFFO per share $0.57, compared with $0.38, $0.51, and $0.51, respectively, in 2018. These are non-GAAP measures and are not substitutes for net income or operating cash flow.
- Balance sheet: Total assets were $816.8 million and total equity $279.0 million at year-end, versus $565.1 million and $181.1 million a year earlier. Cash and equivalents were $13.7 million.
- Debt and liquidity: Borrowings, net, were $481.9 million, compared with $335.9 million in 2018. Nearly all borrowings were fixed-rate; weighted-average debt maturities were 10.4 years as of February 2020. Management reported approximately $53.8 million of available liquidity at filing time, including $28.5 million cash and $25.3 million of facility availability, subject to covenants. This liquidity figure is not the December 31 balance-sheet cash amount.
- Asset value: Management estimated NAV at $11.41 per common share and OP Unit as of December 31, 2019; the common stock closed at $12.97. The NAV valuation was management-prepared and not audited or assured by the external auditor.
Material changes versus 2018
- Lease revenue increased as the company expanded its portfolio, including 26 farms acquired during 2019 for an aggregate purchase price of approximately $252.7 million. The year-end portfolio’s net cost basis was $794.8 million.
- Interest expense increased 34.6% to $16.3 million, principally due to higher average borrowings. The overall effective rate on borrowings, excluding Series A preferred stock, was 3.77%, compared with 3.59% in 2018.
- The 2018 results included a $5.5 million net gain on real estate dispositions, $7.3 million of crop sales and $7.7 million of related operating costs, and a $1.1 million crop-inventory write-down. There was no comparable crop operation in 2019.
- Common shares outstanding increased from 17.9 million to 20.9 million, and Series B preferred shares from 1.1 million to 4.8 million, reflecting capital raises and OP Unit redemptions.
Outlook, risks and unusual items
- Management gave no quantified earnings or acquisition guidance. It said the acquisition pipeline remained healthy, with properties under signed agreements or letters of intent that it hoped to close in the first half of 2020; completion was not assured.
- Management said near-term cash resources were expected to cover distributions, debt service, preferred dividends, and operating costs. Longer-term needs were expected to be funded through equity issuance and additional debt. The company’s stated strategy is to continue acquiring and diversifying farmland.
- Lease rollover is a notable exposure: leases covering 31.6% of year-end acreage were scheduled to expire in 2020. Two leases were renewed after year-end, but future renewals or replacement leases at favorable rates were not assured.
- In February 2020, a tenant agreed to terminate leases on four Arizona farms, paying a one-time $3.0 million fee; the company entered a new seven-year lease with another tenant. The payment was expected to be recognized in first-quarter 2020 revenue.
- Key risks include weather, drought and water access, crop disease, permanent-crop development and price exposure, tenant defaults, geographic concentration, refinancing and interest-rate risk, and the ability to maintain REIT status. Five farms leased to one tenant produced 10.9% of 2019 lease revenue.
- The company is externally managed by affiliates, creating potential conflicts of interest. The 2020 Advisory Agreement changed the base management fee calculation, effective in 2020, to 0.50% annually of gross tangible real estate; incentive and other fee terms remained materially unchanged.
- Debt was secured by company farms; certain properties were cross-collateralized. The company reported compliance with applicable debt covenants at December 31, 2019. No material litigation or off-balance-sheet arrangements were reported.
Investor facts to verify
- Reconcile the reported 111 farms at December 31, 2019 with the 113-farm, 87,860-acre figure stated for February 2020.
- Review the 2020 lease expirations and subsequent Arizona tenant transition, including the replacement lease’s economics and collection risk.
- Assess tenant and state concentration, water availability, and the agricultural and climate risks underlying the portfolio.
- Evaluate debt maturities, collateral and covenant requirements, the limited facility availability, and the company’s refinancing and acquisition funding plans.
- Compare common distributions with AFFO and operating cash flow; note that 97.3% of 2019 common distributions were characterized for tax purposes as return of capital.
- Examine management’s NAV assumptions and related-party advisory, administration, financing, and preferred-offering fees.