Gladstone Land Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing is an annual report, not a standalone fourth-quarter filing. The company is an externally managed farmland REIT that leases agricultural properties, generally under triple-net leases. Its common stock began trading on Nasdaq in January 2013.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $4.04 million | $3.39 million |
| Operating income | $1.36 million | $1.90 million |
| Net income (loss) | $(1.22) million | $0.60 million |
| FFO | $(0.50) million | $1.07 million |
| Pre-tax FFO available to common stockholders | $1.02 million; $0.16 per share | $1.38 million; $0.50 per share |
| Cash flow from operations | $(0.46) million | $1.14 million |
| Cash and cash equivalents at year-end | $16.27 million | $0.87 million |
| Total assets | $93.67 million | $40.99 million |
| Debt, including line of credit | $43.15 million | $30.82 million |
| Stockholders’ equity | $48.51 million | $8.14 million |
Revenue rose 19.1%, mainly from property acquisitions and higher rent on existing farms. Operating expenses increased 80.0%, including higher depreciation, professional fees and public-company general and administrative costs; operating income consequently fell 28.6%. The net loss primarily reflects a $1.52 million income-tax provision associated largely with the planned REIT conversion and deferred intercompany gains. Operating cash flow was negative, principally due to a $2.1 million tax prepayment. FFO is a non-GAAP supplemental measure, not a substitute for earnings or operating cash flow.
At year-end, the company owned 21 farms totaling 5,991 acres, of which 4,920 were farmable, in five states. It acquired nine farms during 2013 for approximately $37.3 million in purchase price. Its $43.1 million MetLife mortgage carried a 3.50% rate and matures in January 2026; the $4.8 million revolving facility matures in April 2017, carried a 3.25% minimum rate, and had $4.7 million available. Reported available liquidity was approximately $21.0 million, including cash and undrawn credit. Estimated NAV was $13.51 per share, a management estimate based on appraisals and other assumptions; it is not a GAAP measure or a guarantee of realizable value.
Material changes and unusual items
- The January 2013 IPO raised approximately $51.3 million net. By year-end, substantially all proceeds had been used for acquisitions, property improvements, distributions and general corporate purposes.
- Rental revenue concentration remained high: Dole represented 66.2% of 2013 rental revenue, down from 76.3% in 2012. California properties generated 83.5% of rental revenue.
- The company distributed $1.49 per share in 2013, including a one-time $0.33 distribution in the fourth quarter; much of the annual distribution was intended to purge accumulated pre-REIT earnings and profits.
- The company intends to elect REIT status effective January 1, 2013, but qualification depends on meeting complex tax requirements. It reported approximately $9.6 million of accumulated pre-REIT earnings and profits and believes these were distributed by year-end.
- Management reported an out-of-period adjustment that understated 2013 net income by $40,438, which it concluded was not material. It also revised 2012 balance-sheet and cash-flow amounts for a tax-related error; the revision did not affect 2012 net income.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The financial statements received an unqualified audit opinion.
Outlook, risks and contingencies
Management stated that near-term cash resources were expected to cover distributions, debt service and operating costs, while the company continued to seek acquisitions and additional capital. It was discussing increased financing commitments with MetLife, but no assurance was given that additional financing would be obtained on favorable terms or at all. Three potential acquisitions under letters of intent or purchase agreements totaled about $8.2 million; completion was not assured. The filing gives no specific earnings or revenue guidance.
Key risks include tenant and geographic concentration, especially Dole’s large share of rent; lease expirations and the ability to renew or re-let farmland; weather, drought, water access, crop disease and permanent-crop exposure; availability and cost of financing; and the company’s ability to maintain REIT qualification. California drought had not yet adversely affected the regions containing its farms, according to the filing, but worsening conditions could. The company also disclosed related-party management arrangements, including a base management fee increasing from 1.0% of adjusted equity in 2013 to 2.0% beginning in 2014, and a performance-based incentive fee structure.
Commitments included irrigation work at Colding Loop, drainage improvements at West Beach, and a cooling-facility upgrade at Trapnell Road. The Trapnell work was completed in January 2014 at a cost of $450,000. The filing reported no material legal proceedings and no off-balance-sheet arrangements.
Investor verification priorities
- Confirm REIT election and qualification, including whether all required accumulated earnings and profits were distributed and how the deferred intercompany gain affected taxes.
- Assess Dole’s credit and lease-renewal outlook, along with the 2014 expirations that represented 22.1% of 2013 rental revenue across three leases.
- Reconcile liquidity, negative operating cash flow, planned acquisitions and financing discussions; verify whether the MetLife commitment was subsequently increased.
- Review the assumptions behind the $13.51-per-share estimated NAV and distinguish it from the stock’s market price.
- Track the 2014 management-fee increase, incentive-fee terms, and the costs and rent effects of outstanding property-improvement commitments.