Farmland Partners Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed REIT that owns and leases farmland across North America and operates primarily through Farmland Partners Operating Partnership, LP. The filing covers the unaudited three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. At quarter-end, the company owned approximately 114,119 acres and held a 70.9% interest in the Operating Partnership.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $6.9 million | $4.2 million | $17.7 million | $9.2 million |
| Operating income | $2.2 million | $2.2 million | $7.3 million | $3.9 million |
| Net income (loss) | $0.1 million | $0.9 million | $(0.5) million | $0.8 million |
| Net income (loss) available to common stockholders | $(0.8) million | $0.5 million | $(2.7) million | $0.3 million |
| Basic and diluted EPS | $(0.06) | $0.04 | $(0.21) | $0.03 |
| Operating margin | 31.5% | 51.7% | 41.4% | 43.1% |
| Adjusted EBITDA | $4.8 million | $3.2 million | $12.4 million | $7.1 million |
| AFFO | $1.7 million | $1.8 million | $4.6 million | $3.9 million |
| AFFO per diluted share | $0.09 | $0.11 | $0.25 | $0.32 |
Revenue growth was driven primarily by 30 acquisitions completed after September 30, 2015. Rental income increased 52% year over year in Q3 and 86% for the nine-month period. Same-property rental income increased modestly, while average annual cash rent for the entire portfolio declined to $196 per acre from $216 per acre in the comparable periods.
Operating expenses rose 136% in Q3 and 99% for the nine-month period. Q3 acquisition and due diligence costs included approximately $1.6 million related to the proposed AFCO merger. Interest expense increased 49% in Q3 and 143% for the nine-month period, reflecting substantially higher borrowings and approximately $2.4 million of Bridge Loan interest and related amortization during the nine-month period.
Cash provided by operating activities was $3.6 million for the nine months ended September 30, 2016, compared with $8.7 million in 2015. Investing cash flow was $(127.3) million, primarily reflecting $122.4 million of real estate acquisitions and $5.0 million of improvements. Financing cash flow was $117.4 million, including $200.8 million of mortgage borrowings, $84.8 million of repayments, $9.3 million of ATM offering proceeds, and $4.8 million of common dividends. Cash declined to $17.2 million from $23.5 million at December 31, 2015.
Total real estate, net, increased to $588.4 million from $316.2 million at December 31, 2015. Mortgage notes and bonds payable, net, increased to $302.4 million from $187.1 million. The company reported approximately $303.3 million of principal debt outstanding and $177.2 million of equity at September 30, 2016.
Material changes versus the prior comparable period
- The company acquired 39,851 acres through 22 acquisitions for aggregate purchase prices of approximately $268.8 million, compared with 24,709 acres and $133.5 million in the first nine months of 2015.
- The Forsythe Farms acquisition represented approximately $197.1 million of the 2016 purchase price and was funded with cash, OP units, and 117,000 preferred units.
- Preferred non-controlling interests of $119.1 million were issued in connection with the Forsythe acquisition and carry cumulative distributions at 3.00% annually.
- Common shares outstanding increased to 14.0 million at September 30, 2016 from 12.0 million at December 31, 2015. The ATM program generated approximately $9.3 million of net proceeds from 844,207 shares.
- The company refinanced existing obligations with MetLife term loans totaling approximately $127.0 million, added a $15.7 million MetLife term loan, and drew approximately $5.1 million under a Farm Credit facility. The $53.0 million Bridge Loan was repaid in March 2016.
- The quarterly common distribution remained $0.1275 per share, while distributions on preferred units reduced amounts available to common stockholders.
Guidance, outlook, commentary, risks and unusual items
- Management expects market rents to be flat or modestly lower in the coming year and reported flat to modestly lower rent rates on lease renewals.
- The company expects to continue acquiring farmland and related agricultural assets and may originate additional farmer loans. Management’s long-term thesis relies on global food demand, limited high-quality farmland supply, and potential long-term growth in crop prices and farmland values.
- The proposed AFCO mergers were expected to close in the first quarter of 2017. The transaction would add approximately 17,798 acres, convert AFCO shares and OP units at an exchange ratio of 0.7417, and add approximately $75 million of AFCO debt as of September 30, 2016. Completion was not assured.
- An AFCO stockholder lawsuit filed October 26, 2016 seeks, among other relief, a potential injunction against the mergers. The company believes the claims are without merit. The merger agreement also provides for a potential $6.0 million termination fee payable by the company under specified circumstances.
- A tenant default involved approximately $680,000 of past-due 2016 rent in Arkansas. Recovery was uncertain and could affect results.
- Interest-rate exposure is material: approximately $147.8 million, or 49% of debt, had variable rates. A 100-basis-point increase was estimated to reduce annual cash flow by approximately $369,000 in the short term and approximately $1.5 million beginning in 2019 and thereafter.
- Approximately $20.7 million of debt was expected to mature over the following 12 months. Debt agreements included leverage, fixed-charge coverage, loan-to-value, and other covenants; the company reported compliance at quarter-end.
- The company had future capital commitments of approximately $6.1 million to convert Ironwood Farm to center-pivot irrigation. No material business-operation contingencies or known material litigation were reported apart from the AFCO-related matter and tenant dispute.
- FFO, AFFO, EBITDA, and Adjusted EBITDA are non-GAAP measures. AFFO presentation changed because the company stopped including the crop-year revenue adjustment after March 31, 2016, reducing comparability with earlier reported periods.
Most important facts for investors to verify
- Whether the AFCO mergers closed as planned, including final consideration, acquired debt, litigation status, and integration costs.
- Debt maturities, refinancing capacity, floating-rate exposure, collateral requirements, and continued compliance with all financial covenants.
- The sustainability of the $0.1275 quarterly common distribution after preferred-unit distributions, acquisition spending, capital commitments, and debt service.
- Collection of the approximately $680,000 Arkansas tenant receivable and broader tenant concentration risk; three tenants generated 39.6% of nine-month 2016 rental income.
- Whether rent declines, crop prices, farmland values, and lease renewals affect same-property cash rents and portfolio returns.
- The comparability and cash conversion of AFFO and Adjusted EBITDA, particularly after changes to non-GAAP definitions and the exclusion of acquisition-related and other unusual costs.