Business Context and Reporting Period
Farmland Partners Inc. is an internally managed REIT that owns and leases agricultural farmland and grain facilities across North America. The unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparable periods ended June 30, 2015. As of June 30, 2016, the Company reported 263 farms covering approximately 110,674 acres and 13 grain storage facilities, and owned 67.2% of Farmland Partners Operating Partnership, LP.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total operating revenues | $6.0 million, versus $2.9 million | $10.7 million, versus $5.0 million |
| Operating income | $3.2 million, versus $1.2 million | $5.1 million, versus $1.8 million |
| Operating margin | 53.6%, versus 42.1% | 47.8%, versus 35.9% |
| Net income (loss) | $1.3 million, versus $0.1 million | $(0.6) million, versus $(0.1) million |
| Net income (loss) available to common stockholders | $(38,000), versus $(24,000) | $(1.8) million, versus $(0.2) million |
| Basic and diluted loss per share | Approximately $0.00 in both periods | $(0.15), versus $(0.03) |
| Net cash provided by operating activities | Not separately presented | $5.0 million, versus $9.5 million |
| Cash used in investing activities | Not separately presented | $(109.2) million, versus $(89.8) million |
| Cash provided by financing activities | Not separately presented | $113.2 million, versus $67.3 million |
Rental income was $5.9 million in the second quarter and $10.3 million for the six-month period. Adjusted EBITDA was $4.0 million for the quarter and $7.6 million for the six months. AFFO was $1.2 million for the quarter and $2.9 million for the six months; AFFO per fully diluted share was $0.06 and $0.16, respectively. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
At June 30, 2016, total assets were $610.0 million, including $570.1 million of net real estate and $32.5 million of cash. Mortgage notes and bonds payable, net, were $297.3 million, compared with $187.1 million at December 31, 2015. Total liabilities were $313.3 million. The Company had $118.2 million of redeemable preferred operating-partnership interests, including accrued distributions.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected 27 acquisitions completed after June 30, 2015. Sixteen acquisitions during the first half of 2016 involved approximately 36,407 acres and aggregate purchase prices of approximately $251.1 million, including the $197.1 million Forsythe Farms acquisition.
- Second-quarter rental income increased 111%, and six-month rental income increased 114%. Same-property cash rental income increased modestly, with average annual rent for the same-property portfolio rising to approximately $186 per acre from $182.
- Despite revenue growth, six-month net loss increased to $0.6 million from $52,000, and loss attributable to common stockholders increased to $1.8 million from $205,000. Preferred-unit distributions of $1.2 million and substantially higher interest expense contributed to the common-stockholder loss.
- Interest expense increased 82% in the quarter and 215% for the six months, driven by higher borrowings and approximately $2.4 million of interest and loan-fee costs associated with the short-term Forsythe bridge loan. Management stated that this bridge-loan expense was nonrecurring.
- General and administrative expense increased 68% in the quarter and 71% for the six months due principally to increased personnel, employee benefits, public-company costs, travel and growth-related activities.
- Operating cash flow declined to $5.0 million from $9.5 million, primarily because of higher interest and general and administrative cash payments. Cash nevertheless increased to $32.5 million from $20.8 million at June 30, 2015.
- The Company issued approximately 696,607 common shares through its at-the-market program for approximately $7.7 million of net proceeds during the first six months. It also issued $118.2 million of preferred operating-partnership units as partial consideration for Forsythe Farms.
Guidance, Outlook, Risks and Unusual Items
- Management expected market rents in the coming year to be flat or modestly lower. Same-property rents were broadly stable, but the average annual cash rent for the entire portfolio declined to $198 per acre in the second quarter from $217 per acre in the prior-year quarter.
- Management intended to continue acquiring farmland to increase scale and geographic, crop and tenant diversification. Properties under contract at the reporting date had aggregate purchase prices of approximately $16.1 million; subsequent disclosures also identified additional acquisitions and pending transactions.
- As of June 30, 2016, no borrowings were scheduled to mature during the following 12 months. Debt maturities included approximately $81.1 million in 2017 and $48.3 million in 2020, with $168.8 million thereafter.
- The Farmer Mac Facility had approximately $155.5 million outstanding and a maximum borrowing capacity of $165 million. MetLife term loans had approximately $143.0 million outstanding. The Company was in compliance with applicable debt covenants, including maximum leverage or loan-to-value limits of 60% and a 1.50-to-1.00 fixed-charge coverage requirement under the Farmer Mac Facility.
- Approximately 49% of debt, or $142.7 million, carried variable interest rates. Management estimated that a sustained 100-basis-point rate increase would reduce short-term annual cash flow by approximately $288,000 and could reduce cash flow by approximately $1.3 million beginning in 2019.
- Material business risks include crop-price and weather volatility, tenant credit and concentration risk, water availability and regulation, farmland-value declines, short lease terms and renewals, acquisition and financing availability, interest-rate exposure, and the need to refinance or repay debt.
- The four largest tenants represented 38.2% of second-quarter rental income and 43.4% of six-month rental income. Justice Family Farms alone represented 27.4% of six-month rental income.
- The Company reported no real estate impairments, material litigation, known material contingencies or off-balance-sheet arrangements. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
- The Company changed its presentation of AFFO and Adjusted EBITDA by discontinuing the crop-year revenue adjustment after March 31, 2016; consequently, 2016 non-GAAP amounts are not directly comparable with prior periods that included the adjustment.
- The Company accrued a 3.00% cumulative preferential distribution on 117,000 preferred units. The units had a liquidation value of $118.2 million at June 30, 2016 and generally become convertible beginning in 2026.
Important Facts for Investors to Verify
- Reconcile the reported farm count, acreage and acquisition totals, including subsequent acquisitions and properties under contract.
- Assess whether rental growth from acquisitions can offset modestly lower market rents, tenant concentration and near-term lease expirations.
- Review debt maturities, floating-rate exposure, covenant compliance, collateral requirements and refinancing assumptions.
- Separate recurring operating performance from the nonrecurring bridge-loan interest and financing costs included in six-month 2016 results and AFFO adjustments.
- Evaluate common-stockholder cash returns after preferred-unit distributions, operating-partnership distributions, capital expenditures and acquisition funding needs.
- Review the methodology and comparability limitations of FFO, AFFO and Adjusted EBITDA, particularly after removal of the crop-year revenue adjustment.