Business context and reporting period
Gladstone Land Corporation is an externally managed agricultural REIT that owns and leases farmland. This Form 10-Q covers the quarter and six months ended June 30, 2018. At quarter-end it owned 75 farms across nine states; subsequent acquisitions and a sale changed the portfolio to 79 farms, as described below.
Financial and operating performance
Amounts are in millions of dollars unless otherwise noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Rental revenue | $6.632 | $5.994 | $13.320 | $11.742 |
| Total operating revenue | $11.394 | $5.996 | $20.639 | $11.746 |
| Operating income | $2.472 | $2.906 | $5.258 | $5.509 |
| Net income (loss) | ($1.852) | $0.255 | ($2.170) | $0.428 |
| Net income (loss) attributable to common stockholders | ($1.745) | $0.227 | ($2.042) | $0.379 |
| Basic and diluted EPS | ($0.11) | $0.02 | ($0.14) | $0.03 |
- Rental revenue rose 10.6% in Q2 and 13.4% for the six months. Same-property rental revenue was nearly flat: down 0.5% in Q2 and up 0.5% year to date.
- Other operating revenue of $4.760 million in Q2 and $7.311 million year to date came primarily from crop sales by the company’s taxable subsidiary. Related crop costs were $5.140 million and $7.498 million, respectively.
- Operating income fell 14.9% in Q2 and 4.6% year to date. Higher depreciation and interest expense, crop operating costs, and a $1.060 million inventory write-down contributed to the reported net losses.
- Six-month operating cash flow was $4.482 million, investing cash outflow was $16.560 million, and financing cash inflow was $11.723 million. Cash decreased by $0.355 million to $2.583 million.
- At June 30, total assets were $475.211 million, total equity $135.151 million, and borrowings net of debt issuance costs $293.424 million, including $3.5 million drawn on credit lines. The separate $28.007 million Series A term preferred stock is classified as a liability.
- Weighted-average stated borrowing rates were 3.60% for Q2 and 3.56% for the six months, before applicable Farm Credit interest patronage. Interest expense increased 28.4% in Q2 and 29.8% year to date.
- Common distributions declared were $0.13290 per share for Q2 and $0.26565 for the six months. Series A preferred distributions were $0.3984375 per share for the quarter; Series B distributions began in 2018.
- Management-reported diluted AFFO per share was $0.10 in Q2 and $0.23 for the six months, versus $0.14 and $0.28, respectively, in 2017. These are non-GAAP measures, not substitutes for GAAP earnings or operating cash flow.
Material changes versus prior periods
- Revenue growth principally reflected farms acquired since the comparable 2017 periods. The new crop operation substantially increased both reported revenue and operating expenses but generated a net loss.
- Q2 and six-month results included a $1.060 million write-down of unsold strawberry crops to zero value after bumper crops in California impaired sales prospects. A separate $0.129 million property and casualty loss followed lightning damage to Arizona irrigation infrastructure; repairs were completed, but expected recovery had not been recorded.
- Interest expense rose with higher average borrowings. Six-month average aggregate borrowing principal was approximately $300.8 million, versus $252.0 million in 2017.
- The company issued common stock and raised net proceeds through offerings and its at-the-market program; common shares outstanding increased to 16.024 million at June 30, from 13.792 million at year-end 2017.
Outlook, risks, contingencies and unusual items
- No formal earnings guidance was provided. Management said it expected near-term resources to cover distributions, debt service, preferred dividends and operating costs, and planned to use available capital for acquisitions. At filing, three properties were under signed purchase agreements for about $32.5 million, expected to close during the remainder of 2018, subject to conditions.
- After quarter-end, the company sold a 1,895-acre Oregon farm for $20.5 million and expected a gain of about $6.7 million. It acquired five Florida farms totaling 5,630 acres for about $37.4 million, leased back to the seller for seven years at minimum annualized straight-line rent of about $2.1 million.
- Management reported approximately $18.7 million of available liquidity, comprising $5.7 million cash and $13.0 million of MetLife facility availability. This does not reconcile to the balance-sheet cash figure of $2.583 million; the filing text does not provide a clear reconciliation. Farmer Mac commitment availability was also collateral-limited, with no current additional borrowing capacity reported.
- Debt maturities included approximately $19.7 million of scheduled principal payments in the remaining six months of 2018 and $36.6 million in 2022. A $9.4 million Farmer Mac bond due July 2018 was replaced after quarter-end with a $10.4 million, seven-year bond at 4.45%.
- Key exposures include tenant concentration (one tenant generated 16.6% of six-month rental revenue), geographic concentration (California 45.5%, Florida 26.5%, and Colorado 10.3% of rental revenue), agricultural and natural-disaster risks, lease renewal risk, and interest-rate exposure. Leases covering 45.0% of acreage were scheduled to expire in 2020.
- Management estimated NAV at $13.51 per common share and OP Unit at June 30, based on estimated property values; the common stock closed at $12.67. NAV is a management estimate, depends on valuation assumptions and is not audited by the company’s independent auditor.
- The Series B preferred offering sought up to $150 million gross at 6.00%; only $0.507 million had been raised by June 30. Shares had no public market, and any future listing was not assured. The adviser and dealer-manager are affiliates, creating related-party fee and governance considerations.
- The company reported effective disclosure controls, no material change in internal controls, and no material known or threatened litigation. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile reported liquidity of $18.7 million, including $5.7 million cash, with balance-sheet cash of $2.583 million, and confirm current borrowing availability and covenant headroom.
- Assess recurring farmland rental performance separately from the temporary crop operation, including the crop write-down and the transition of the California farm to a third-party lease beginning August 1, 2018.
- Monitor the 2020 lease expirations, the concentrated tenant and state exposures, and renewal outcomes and rent terms.
- Review the effect of acquisitions, the Oregon sale, new debt and equity issuance on leverage, dilution, interest costs and distributions.
- Evaluate management’s NAV assumptions and non-GAAP FFO/AFFO calculations, including adjustments excluding the subsidiary’s farming operations.
- Confirm progress and costs of the Series B offering and related-party arrangements, and the funding and expected rent returns for outstanding property-improvement commitments.