Gladstone Land Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The company owns and leases farmland, generally under triple-net leases, and is externally managed. Its portfolio comprised 21 farms across five states, totaling 6,000 acres, with 16 tenants.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior period |
|---|---|---|
| Rental revenue | $1.496 million | $0.915 million; up 63.5% |
| Operating expenses | $1.100 million | $0.538 million; up 104.5% |
| Operating income | $395,184 | $376,478; up 5.0% |
| Net income | $20,918; $0.00 per share | $47,516; $0.01 per share |
| Pre-tax FFO | $315,572; $0.05 per share | $266,741; $0.05 per share |
| Cash from operations | $393,759 | Cash used: $2.562 million |
Operating margin was approximately 26.4%, versus 41.2% a year earlier; net margin was approximately 1.4%, versus 5.2%. Higher revenue largely reflected nine additional farms acquired since March 2013. Expense growth included higher management fees, depreciation, professional fees, property costs and public-company expenses. Interest expense increased 33.4%, mainly because average borrowings were higher.
At March 31, 2014, total assets were $91.624 million, cash and cash equivalents $13.546 million, and short-term investments $0.681 million. Total liabilities were $43.678 million. Debt comprised a $41.332 million mortgage at 3.50% and $100,000 drawn on a $4.785 million revolving facility; reported remaining facility availability was $4.685 million. Management reported available liquidity of approximately $18.2 million, including cash and undrawn credit. The mortgage matures in 2026; the credit facility matures in April 2017. Mortgage principal payments are scheduled to resume in 2015.
Cash declined $2.725 million during the quarter. Investing cash use was $504,039, including $503,299 of capital expenditures. Financing cash use was $2.615 million, principally mortgage repayments and $587,724 of distributions. Quarterly distributions were $0.09 per share, compared with $0.08 a year earlier; GAAP earnings were substantially below distributions, while pre-tax FFO was $0.05 per share.
Material changes and notable developments
- West Beach received a new nine-year lease starting November 1, 2014, with minimum annualized GAAP straight-line rent of $540,469, 21% above the expiring lease.
- The Trapnell Road cooling-facility upgrade cost $446,108; the company expects an initial annual return through rent of 8.5%, with escalations.
- Management is negotiating with MetLife to increase and extend its financing. A non-binding term sheet was agreed, but completion and favorable terms are not assured.
- Four potential acquisitions were under a signed letter of intent or purchase agreement, with aggregate stated value of approximately $14.7 million; completion was uncertain. Management said IPO proceeds were substantially exhausted.
- The company intended to elect REIT status for tax year 2013 when filing its 2013 tax return. It reported that it believed prior-year accumulated earnings and profits had been distributed. A $2.1 million federal tax amount related to deferred intercompany gains was prepaid in 2013; remaining state tax obligations included the final California installment due in 2014.
- Management estimated NAV at $14.03 per share, based partly on third-party appraisals and purchase prices. This is a non-GAAP estimate, subject to assumptions and market changes, and is not a guaranteed realizable value.
Outlook, risks and contingencies
No specific earnings or acquisition guidance was provided. Management said it was actively evaluating farmland acquisitions and believed existing cash flows and credit availability could support near-term operations, distributions and debt service; further capital may be needed for growth. The company had an effective shelf registration permitting up to $300 million of securities, but future financing was not assured.
- Tenant concentration is material: Dole generated 47.2% of Q1 2014 rental income and leased 16.0% of acreage. California properties generated 67.8% of rental income.
- The San Andreas agricultural lease, representing 7.2% of Q1 rental income, was due to expire December 31, 2014. Renewal discussions were underway; renewal at favorable terms was not assured.
- West Beach flood-protection improvements were expected to cost $200,000–$250,000, plus $46,000 for tenant oversight. Approximately $55,000 had been spent or accrued by quarter-end. Additional irrigation work at Colding Loop could cost approximately $83,000 if the tenant uses the remaining acreage.
- Risks cited include tenant or lease loss, agricultural and regional conditions, natural disasters, interest-rate and financing-market changes, acquisition competition and access to capital. No real estate impairment or material legal proceeding was reported.
Investor verification priorities
- Check progress and final terms of the MetLife financing negotiations and any resulting changes to debt capacity, maturity or cost.
- Verify renewal status and rent terms for San Andreas before its December 2014 expiration, and commencement of the West Beach replacement lease.
- Monitor Dole’s tenant credit and concentration, as well as California exposure and weather-related risks.
- Compare distributions with recurring cash generation and FFO; Q1 distributions exceeded GAAP net income.
- Review the assumptions and appraisal dates underlying the $14.03 estimated NAV, and distinguish that estimate from market price and realizable value.
- Confirm REIT election and related tax liabilities when the 2013 tax return and remaining 2014 state tax payments are finalized.