Farmland Partners Inc. 2017 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2017, filed March 2, 2018. Farmland Partners is an internally managed agricultural REIT that owns and leases U.S. farmland, provides mortgage loans to farmers through the FPI Loan Program, and conducts limited farming activities through its taxable REIT subsidiary. The portfolio covered approximately 166,000 acres across 17 states, diversified among more than 100 tenants and over 26 crop types. Approximately 75% of portfolio value was associated with primary crops and 25% with specialty crops.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenues | $46.2 million | $31.0 million | +49.1% |
| Operating income | $22.5 million | $15.6 million | +44.1% |
| Net income | $9.2 million | $6.0 million | +52.7% |
| FFO | $17.0 million | $7.6 million | +124.4% |
| AFFO | $13.3 million | $11.0 million | +20.9% |
| Net income available to common stockholders | $0.9 million | $1.2 million | Declined |
| AFFO per diluted share | $0.36 | $0.58 | Declined |
Rental income was $43.0 million, or approximately 93% of operating revenue. Tenant reimbursements increased to $1.9 million from $0.3 million, while crop sales declined slightly to $0.8 million. Operating margin was approximately 48.7% and net margin was approximately 19.8%; these ratios benefited from the substantial increase in the acquired asset base but were affected by higher depreciation and interest expense.
Cash flow from operating activities was $0.9 million, compared with $5.0 million in 2016. Cash used in investing activities was $234.1 million, including $206.2 million for acquisitions, $21.6 million for real estate improvements and $6.6 million for new notes receivable. Cash provided by financing activities was $239.5 million. Year-end cash and cash equivalents were $53.5 million.
Total assets increased to $1.17 billion from $655.5 million. Net real estate was $1.09 billion. Gross indebtedness was $515.8 million, versus $309.9 million in 2016, representing approximately 44% of total assets. Debt was secured by mortgages on farms; approximately 37% of debt carried variable interest rates. A 100-basis-point increase in rates was estimated to reduce annual cash flow by approximately $1.9 million.
The Company declared common distributions of $0.1275 per share each quarter, or $0.51 for the year. It also paid $2.9 million of distributions on Series A preferred units and $3.3 million of dividends on Series B Participating Preferred Stock. The Series B stock carries a 6.00% annual dividend and ranks senior to common stock.
Material Changes Versus the Prior Comparable Period
- Completed 18 asset acquisitions and the AFCO business combination for gross consideration of $472.0 million, expanding into three additional states.
- Issued 14.8 million common shares and 0.2 million Common units in the AFCO transaction; year-end common shares outstanding increased to 33.3 million from 17.4 million.
- Issued 6.04 million Series B Participating Preferred shares for net proceeds of approximately $144.5 million.
- Increased the farm portfolio substantially, with total assets rising approximately 78% and gross indebtedness rising approximately 66%.
- Same-property rental income decreased approximately 8%, from $10.6 million to $9.7 million, primarily because row-crop rents were generally flat to slightly lower.
- Depreciation, depletion and amortization increased to $7.8 million from $1.6 million, and interest expense increased to $13.6 million from $10.0 million.
- Repurchased approximately 1.12 million common shares for $10.0 million at an average price of $8.93 per share.
- Repaid all Farmer Mac bonds maturing in 2017 and entered into new MetLife and Rabobank borrowings, including a $66.4 million Rabobank note and a $44.0 million MetLife loan.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expected 2018 rents for primary-crop farmland to be flat to modestly higher and specialty-crop rents to be flat to modestly increasing. Management cited continued demand for high-quality farmland, near-zero perceived vacancy in quality markets and long-term support from global food demand, while acknowledging weak primary-crop pricing and farm profitability headwinds.
Approximately 24.3% of leased acres and 21.5% of annualized minimum cash rents were scheduled to expire in 2018, and approximately 40.7% of acres and 36.0% of annualized minimum cash rents were scheduled to expire in 2019. Management estimated 2018 rents, including variable rent and leases under negotiation, at $53.5 million, plus $3.2 million of tenant reimbursements; variable-rent estimates depend on crop yields and prices and are not guaranteed.
- Revenue is exposed to tenant credit quality, crop prices, weather, drought, flooding, disease, pests, water availability and government agricultural policies. A major tenant represented 16.4% of 2017 rental income.
- Leverage and refinancing risk are material. Contractual obligations totaled $681.6 million, including $515.8 million of principal, $161.9 million of projected interest payments and $3.6 million of capital commitments.
- Most debt is secured by farmland and debt agreements contain loan-to-value, coverage, leverage, collateral, cross-default and other covenants. The Company reported compliance with applicable covenants at year-end.
- The FPI Loan Program had approximately $9.4 million of principal outstanding at year-end, with one past-due note. Management believed the collateral was sufficient and the note fully recoverable.
- The Company recognized no impairment of real estate assets and reported no known material contingencies or material known or threatened litigation.
- Unusual 2017 items included the AFCO merger, a $0.7 million expense related to terminating Prudential agreements, a $0.2 million loss on disposition of assets and prior-period lease termination economics that affected comparability.
- The Company remains subject to REIT distribution and qualification requirements. Preferred securities and Common units have priority, redemption or conversion features that may constrain common-stock distributions and dilute common holders.
- Subsequent to year-end, the Company completed approximately $27.4 million of farm acquisitions, issued a $5.3 million loan, and declared 2018 quarterly dividends of $0.1275 per common share and $0.375 per Series B preferred share.
Most Important Facts for Investors to Verify
- Reconcile reported net income, FFO and AFFO, particularly the effect of preferred dividends, non-controlling interests, depreciation and acquisition-related adjustments.
- Assess whether operating cash flow of only $0.9 million adequately supports distributions, capital commitments, interest payments and acquisition activity.
- Review debt maturities, floating-rate exposure, covenant headroom and refinancing requirements, especially maturities in 2020 and 2022.
- Evaluate same-property rent trends, lease expirations and the assumptions underlying management’s variable-rent estimates.
- Analyze tenant concentration, tenant payment history and exposure to primary crops, specialty crops and California permanent-crop assets.
- Review the economic terms of the Series B Participating Preferred Stock, Series A preferred units, Common units and associated potential dilution or priority claims.
- Verify the carrying values and collateral coverage of farmland, mortgage notes receivable and properties acquired through the AFCO merger.
- Confirm subsequent acquisitions, loan activity, dividend declarations and any developments after the March 2, 2018 filing date.