Business Context and Reporting Period
Farmland Partners Inc. is an internally managed REIT that owns and leases farmland across North America and operates an agricultural lending and small custom-farming business through its taxable REIT subsidiary. This unaudited Form 10-Q covers the three and six months ended June 30, 2017. The portfolio comprised approximately 154,165 acres, and the Company owned 83.7% of its operating partnership at quarter-end.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Total operating revenue | $11.5 million | $6.0 million | $18.6 million | $10.7 million |
| Operating income | $5.6 million | $3.2 million | $6.3 million | $5.1 million |
| Operating margin | 48.4% | 53.6% | 33.6% | 47.8% |
| Net income | $2.0 million | $1.3 million | $19 thousand | $(0.6) million |
| Net income (loss) available to common stockholders | $0.8 million | $(38 thousand) | $(1.8) million | $(1.8) million |
| Basic and diluted EPS | $0.02 | $0.00 | $(0.06) | $(0.15) |
| AFFO | $3.7 million | $1.2 million | $4.1 million | $1.9 million |
| AFFO per diluted share | $0.10 | $0.06 | $0.11 | $0.11 |
Rental income increased 78% year over year in the second quarter and 68% for the six-month period, primarily because of acquisitions and the February 2017 AFCO merger. Operating expenses increased faster than revenue, driven by depreciation, property expenses, acquisition costs and growth-related overhead. Interest expense rose 77% in the quarter and 6% year to date as debt increased substantially.
Balance Sheet, Debt and Liquidity
- Total assets were $1.013 billion at June 30, 2017, compared with $655.5 million at December 31, 2016. Net real estate increased to $970.5 million from $594.1 million.
- Debt, net of financing costs and premiums, was $485.4 million, compared with $308.8 million at year-end 2016. Total principal outstanding was $486.7 million.
- Cash was $29.4 million, down from $47.2 million at December 31, 2016. The Company had $3.1 million of remaining capacity under the Farm Credit of Central Florida facility.
- Approximately $81.1 million of borrowings mature during the remaining six months of 2017. Management expected to refinance this debt but stated that refinancing on similar terms, or at all, could not be assured.
- Approximately 26% of debt, or $125.1 million, carried variable interest rates. A 100-basis-point increase in rates was estimated to reduce annual cash flow by approximately $1.3 million.
- The Company reported compliance with applicable debt covenants at June 30, 2017, including Farmer Mac and MetLife loan-to-value and coverage requirements.
- Common dividends were declared at $0.1275 per share for each quarter, or $0.2550 for the first six months. Preferred-unit distributions were 3.0% annually on a $1,000 liquidation preference.
Cash Flow
| Six months ended June 30 | 2017 | 2016 |
|---|---|---|
| Net cash from operating activities | $(1.7) million | $5.0 million |
| Net cash used in investing activities | $(106.0) million | $(109.2) million |
| Net cash from financing activities | $90.0 million | $113.2 million |
| Net change in cash | $(17.7) million | $9.0 million |
Investing cash use primarily reflected $91.7 million of cash real estate acquisitions, $11.3 million of property improvements and $3.1 million of new notes receivable. Operating cash flow was negatively affected by approximately $12.1 million of payments settling assumed obligations from the AFCO merger and other operating cash uses.
Material Changes Versus the Prior Comparable Period
- The Company completed the AFCO mergers on February 2, 2017, issuing approximately 14.8 million common shares, 218,525 OP units and assuming $75.0 million of debt. The transaction added approximately $171.1 million of net consideration and significantly expanded the portfolio.
- Since December 31, 2016, the Company completed 16 acquisitions, including AFCO, for total consideration of approximately $282.7 million.
- Shares issued and outstanding increased to 32.8 million from 17.4 million at year-end 2016. The Company’s ownership of the operating partnership increased to 83.7% from 75.1%.
- Same-property cash rent declined. For the second quarter, average annual rent declined to $163 per acre from $201; for the six months, it declined to $145 per acre from $215. Management attributed the decrease partly to greater use of crop-share leases and the absence of certain prior-period lease-termination revenue.
- Management terminated the Prudential sub-advisory and related property-management agreements effective March 31, 2017. The six-month income statement impact was approximately $0.7 million, with an additional $0.9 million included in AFCO purchase accounting.
- The Company adopted the revised inventory guidance without a material impact and early adopted the revised definition of a business, expecting more acquisitions to be accounted for as asset acquisitions.
Outlook, Commentary, Risks and Unusual Items
- Management expected 2017 market rents to be flat, with flat to modestly lower rent rates for primary row-crop renewals. Specialty-crop operator profitability was described as generally healthy, with base rents consistent with 2016.
- Management continued to pursue acquisitions to increase scale and diversify geography, crop types and tenants. No quantified earnings or revenue guidance was provided.
- Approximately 19% of leased acres and 17.4% of annual minimum cash rents were scheduled to expire during the remaining six months of 2017; 22.1% of acres and 20.2% of rents expire in 2018, and 38.4% of acres and 32.4% of rents expire in 2019.
- Crop-share revenue is recognized only when the tenant contracts to sell the crop, creating timing differences between economic activity and reported revenue. The Company also has exposure to crop prices, weather, yields, water availability, tenant credit quality and farmland values.
- Debt refinancing is a significant near-term contingency because $81.1 million matures in 2017. Failure to refinance could reduce acquisition capacity and affect distributions and growth.
- The Company may be exposed to higher borrowing costs from variable-rate debt and to covenant or default risks, including cross-default provisions and collateral foreclosure remedies.
- A $0.2 million out-of-period tenant reimbursement adjustment was recorded in the second quarter for revenue that should have been recognized in the first quarter; management deemed it immaterial.
- A purported AFCO merger-related class action lawsuit was dismissed without prejudice on April 18, 2017.
- The board authorized a $25 million share repurchase program, but no repurchases occurred during the six months ended June 30, 2017.
Important Facts for Investors to Verify
- Progress and pricing of refinancing the $81.1 million of 2017 debt maturities.
- Whether same-property rents stabilize and whether crop-share revenue is realized and recognized as expected.
- Debt leverage, variable-rate exposure, covenant headroom and the effect of interest-rate changes on cash available for distributions.
- The sustainability of AFFO relative to the $0.2550 per-share common distribution declared for the first half of 2017.
- Integration results and incremental operating costs following the AFCO merger, including the effect of assumed obligations and lease expirations.
- Tenant concentration, crop conditions, water availability, regional farmland values and the ability to renew or replace expiring leases.