Business context and reporting period
Gladstone Land Corporation is an externally managed REIT that owns and leases farmland and farm-related properties. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, compared with the same 2015 periods. At quarter-end, the company owned 56 farms across seven states; an October acquisition brought the portfolio to 57 farms.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $4.47 million, up 44.9% | $12.40 million, up 46.0% |
| Operating income | $1.81 million, up 54.7% | $4.80 million, up 59.1% |
| Net income attributable to the company | $31,883, down 84.6% | $374,112, up 86.4% |
| Basic and diluted EPS | Less than $0.01 (reported as $—); prior year $0.02 | $0.04; prior year $0.02 |
| Operating cash flow | Not separately reported for the quarter | $7.21 million; prior year $4.30 million |
Operating margin was approximately 40.4% for the quarter and 38.7% for the nine-month period, versus approximately 37.9% and 35.5%, respectively, in 2015. Revenue growth reflected acquisitions and higher same-property rents; profit growth was restrained by higher interest expense, depreciation and preferred-stock distributions.
At September 30, total assets were $316.3 million, cash was $2.40 million, and real estate, net, was $309.2 million. Outstanding borrowing principal was $191.5 million; mortgage notes and bonds payable, net, were $167.9 million, with $22.5 million drawn on the line of credit. The company also reported $27.6 million of mandatorily redeemable preferred stock as a liability. Management reported a 71.6% debt-to-total-capitalization ratio at book value, including preferred stock as debt, and 58.9% using its estimated farmland fair values.
For the nine months, investing activities used $79.8 million, principally for farm acquisitions ($69.2 million) and existing-property capital expenditures ($10.1 million). Financing activities provided $72.4 million. Cash declined $135,670 to $2.40 million. Management stated available liquidity was approximately $30.7 million, including $3.0 million cash and $27.7 million MetLife availability; this reflects collateral and financing developments subsequent to quarter-end, rather than the quarter-end balance-sheet cash and availability.
Management-reported diluted AFFO per weighted-average total share was $0.14 for the quarter and $0.40 for the nine months, versus $0.10 and $0.27 in 2015. Estimated NAV was $13.68 per common share at September 30, based on management valuations; the common-stock closing price that day was $10.59. NAV is a non-GAAP estimate and was not reviewed or assured by the company’s auditor.
Material changes versus the prior comparable period
- Nine-month rental revenue rose 46.0%; same-property rental revenue increased 5.0%. The company attributed growth primarily to farm acquisitions, lease renewals at higher rates, and rent on property improvements.
- Operating expenses increased 38.7% for the nine months. Management and incentive fees rose 102.9%, including a $180,923 incentive fee; depreciation and amortization increased 61.9%.
- Interest expense increased 45.1% for the nine months as average borrowings rose to approximately $179.9 million from $109.8 million. The new 6.375% preferred issue also added $218,919 of distributions treated as interest expense.
- The company acquired 13 farms in seven transactions during the first nine months for a total purchase price of approximately $81.6 million, adding 16,988 acres. Some consideration was paid in OP Units.
- Cash from operations improved, but significant acquisition and capital-improvement spending was financed principally through borrowings and preferred-stock proceeds.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said near-term cash resources were expected to cover distributions, debt service, preferred dividends and operating costs, and described its acquisition pipeline as healthy. It reported one property under a signed purchase agreement for about $13.1 million and non-binding letters of intent totaling about $54.0 million, subject to diligence and closing.
- On October 5, MetLife amended its facility, adding a $50 million term note and a $25 million revolver, lowering the rate on prior term advances from 3.35% to 3.16%, and increasing reported facility availability by about $28.3 million. The company drew about $21.6 million, using $21.0 million to repay the prior line-of-credit balance.
- On October 13, the company acquired a 197-acre California almond orchard for $6.5 million and entered a 10-year lease with minimum annualized straight-line rent of about $325,000; it also obtained a related $3.9 million Farm Credit West loan.
- Portfolio risks include tenant and geographic concentration: Dole accounted for 17.8% of nine-month rental revenue, while California properties accounted for 56.4%. Ten leases representing 13.7% of nine-month rental revenue were scheduled to expire in 2017. Management cited natural disasters, climate, interest rates, competition, REIT qualification and key-personnel loss as risks.
- The September Espinosa Road lease renewal raised stated annualized rent 28.1%, but the company assumed property taxes; management expected net income from the property to rise 9.0%. An early Colding Loop lease termination led to $84,600 of deferred-rent write-offs over nine months and a new one-year lease at a lower rate.
- The company had approximately $8.0 million committed to the Bear Mountain almond-orchard development and had expended or accrued $7.9 million by quarter-end. It said additional rent from the project could not yet be estimated. No material known or threatened litigation was reported; disclosure controls were deemed effective.
- Management’s liquidity assessment and NAV rely on estimates and assumptions. It cautioned that realized property values may differ materially from estimated fair values. The filing also notes potential dilution or cash demands if outside OP Unit holders exercise redemption rights, and preferred-stock priority over common-stock distributions.
Important facts for investors to verify
- Reconcile reported quarter-end cash and MetLife borrowing availability with management’s approximately $30.7 million liquidity figure, which incorporates subsequent events.
- Track debt, interest costs, facility draw conditions, collateral requirements and scheduled principal maturities, particularly the 2017–2020 payments.
- Assess lease renewals and tenant credit, especially 2017 expirations, Dole concentration and California revenue exposure.
- Review acquisition economics, development spending and resulting rent; confirm final purchase-price allocations where the filing says they are preliminary.
- Evaluate preferred-stock costs and seniority, OP Unit redemption and dilution exposure, and the sustainability of common distributions relative to cash flow and AFFO.
- Scrutinize the assumptions behind management’s $13.68 NAV estimate and recognize that it is unaudited and may not reflect realizable sale values.