Gladstone Land Corporation — Q1 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2016, compared with the same period in 2015. Gladstone Land is an externally managed REIT that owns and leases farmland. At quarter-end it held 46 farms across seven states; a further farm acquisition after quarter-end brought the portfolio to 47 farms, according to management.
Financial results and position
- Revenue: Total operating revenue was $3.68 million, up 40.3% from $2.63 million. Rental revenue rose 40.3% to $3.68 million. Management attributed growth to acquisitions, higher rents on renewed leases and rent from property improvements. Same-property rental revenue increased 5.7%.
- Profit: Operating income was $1.40 million, up 46.7%. Net income was $240,000 versus $25,000; net income attributable to the Company was $234,000 versus $25,000. Basic and diluted EPS was $0.02 versus $0.00.
- REIT operating measures: Diluted FFO per weighted-average total share was $0.12, CFFO was $0.13 and AFFO was $0.12, compared with $0.11, $0.09 and $0.08, respectively, in Q1 2015. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash flow: Operating cash flow was $4.23 million, compared with $265,000. The increase included a $3.53 million increase in other liabilities; management also cited rental receipts, including prepaid rent on the newly acquired farms. Investing cash outflow was $21.15 million, mainly for acquisitions and property improvements. Financing cash inflow was $16.58 million. Cash declined $339,000 to $2.19 million.
- Debt and liquidity: Borrowings totaled approximately $160.8 million principal at March 31; balance-sheet mortgage notes and bonds payable, net, were $156.9 million, plus $2.8 million drawn on the credit line. Available liquidity was approximately $11.9 million, comprising $2.4 million cash and $9.5 million of MetLife facility availability, subject to collateral and covenants. Book-value debt-to-total-capitalization was 65.8%, versus 64.7% at year-end.
- Assets and equity: Total assets were $257.0 million and total liabilities $173.5 million. Net real estate was $250.0 million. The Company estimated NAV at $13.87 per share; management noted the March 31 market price was $10.07. NAV is a management estimate, not an audited or guaranteed realizable value.
- Distributions: Q1 distributions totaled $0.12 per common share, versus $0.105 in Q1 2015. The Board declared $0.04125 monthly for April through June 2016.
Material changes versus Q1 2015
- Portfolio expansion drove much of the revenue increase: 12 farms acquired since March 31, 2015 contributed approximately $861,000 of Q1 2016 rental revenue. The portfolio grew from 34 farms and 8,789 acres in the prior-year comparison to 46 farms and 23,003 acres at March 31, 2016.
- Interest expense increased 32.2% to $1.25 million, primarily because average borrowings rose to approximately $148.5 million from $104.5 million.
- Operating expenses rose 36.6% to $2.28 million. Management fees increased partly because Q1 2015 included a $320,905 Adviser fee credit; administration fees also increased.
- California remained the largest rental-revenue concentration at 58.2%; Dole accounted for approximately 20% of Q1 rental revenue. Management reported no identified tenant credit deterioration and stated tenants were paying under their leases.
Outlook, risks and notable items
- Management said current and short-term resources should cover distributions, debt service and operating costs in the near term, and described its acquisition pipeline as healthy. It estimated current acquisition buying power at approximately $25.1 million without issuing additional OP Units and was exploring additional financing. These are expectations, not assurances; no earnings guidance was provided.
- Management expected one remaining agricultural lease expiring in 2016 to be renewed, but gave no assurance of renewal or favorable terms. The 2016 lease-expiration table lists 5.5% of rental revenue associated with expiring leases.
- Risks include interest-rate changes, weather and natural disasters, tenant and geographic concentration, lease renewals, access to capital, REIT qualification and possible dilution or cash demands from OP Unit redemptions. Dole’s 20% revenue concentration and California’s 58.2% share are notable exposures.
- Debt included fixed-rate and variable-rate exposure. The MetLife line of credit was variable-rate; certain fixed-rate borrowings can reset or convert to variable rates. The Company had no interest-rate derivatives. Management reported compliance with borrowing covenants.
- Notable transactions and commitments: the March acquisition of three Colorado farms for approximately $25.7 million was partly paid with 745,879 OP Units valued at approximately $6.5 million and financed with $15.5 million of new bonds. After quarter-end, the Company acquired a California farm for approximately $15.5 million and closed a $9.3 million Farm Credit West loan. Orchard development at Bear Mountain was estimated to cost $7.8 million; $3.7 million had been expended or accrued by quarter-end.
- The Company reported no material known or threatened litigation, no off-balance-sheet arrangements, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether reported operating cash flow is sustainable: assess the impact of prepaid rent and the large increase in other liabilities.
- Actual borrowing availability, collateral requirements and covenants, including any changes to MetLife, Farmer Mac or Farm Credit facilities.
- Lease-renewal outcomes and tenant credit, particularly Dole and the remaining 2016 agricultural lease expiration.
- Progress, total cost and rent impact of the Bear Mountain orchard project and other committed irrigation improvements.
- The assumptions and independent support behind management’s estimated $13.87 NAV per share, including property values, capitalization rates and debt fair value.
- Future equity or OP Unit issuance, dilution, and the Company’s capacity to fund acquisitions and distributions as leverage rises.