GLADSTONE LAND Corp quarterly report, Q1 FY2015

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Gladstone Land Corporation — Q1 2015 Form 10-Q

Business context and reporting period. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Gladstone Land is an externally managed REIT that owns and leases farmland; it reported 34 farms totaling 8,789 acres, leased to 29 tenants, across five states. The balance sheet is compared with December 31, 2014.

Financial and operating results

  • Revenue: Total operating revenue rose 75.6% to $2.626 million, principally reflecting farms acquired since Q1 2014. Rental revenue increased 75.3% to $2.622 million. Same-property rental revenue grew approximately 2.6%.
  • Profit and margins: Operating income increased 141.5% to $955,000; operating margin was approximately 36.4%, versus 26.4%. Net income was $24,574, up 17.5%, while net margin was approximately 0.9%, versus 1.4%. Basic and diluted EPS rounded to $0.00 in both periods.
  • FFO and AFFO: FFO was $816,206, or $0.11 per share, versus $308,949, or $0.05. AFFO was $875,940, or $0.11 per share, versus $461,631, or $0.07. These are non-GAAP measures; Q1 2015 AFFO includes a $310,940 net adjustment for specified one-time items.
  • Cash flow: Operating cash flow was $265,306, down 32.6%. Investing used $20.0 million, primarily for farm acquisitions; financing provided $19.3 million, primarily from borrowings. Cash and cash equivalents fell $439,002 to $2.180 million.
  • Assets and liquidity: Total assets were $172.1 million, up from $151.7 million at year-end. The filing reports $2.180 million of cash and $106.7 million of borrowings at March 31. The MD&A also cites approximately $25.8 million of “current available liquidity,” comprising $6.6 million of cash and $19.2 million of facility availability; those figures do not match the March 31 balance sheet and should be checked against their stated measurement date.
  • Debt: Mortgage notes and bonds totaled $94.9 million, with $11.8 million drawn on the line of credit; combined borrowings were $106.7 million, versus $86.4 million at December 31. Weighted-average effective borrowing cost, before deferred financing costs and interest patronage, was 3.6% for the quarter. Debt to total capitalization at book value was 64.3%, versus 59.0% at year-end. The company reported compliance with its lender covenants.
  • Distributions: The company paid $0.105 per common share during Q1, versus $0.09 in Q1 2014. Subsequent to quarter-end, the board declared monthly distributions of $0.04 per share for April, May, and June 2015.

Material changes versus Q1 2014

  • Revenue growth largely reflected portfolio expansion: 13 additional farms had been acquired since March 31, 2014. Two more farms, Espinosa Road and Parrish Road, were acquired in Q1 2015 for stated purchase prices totaling approximately $20.8 million, adding 750 acres.
  • Operating expenses before adviser credits rose 81.0% to $1.992 million. Depreciation and amortization increased 174.8%, interest expense rose to $949,369 from $374,040, and acquisition-related expenses increased to $170,680 from $43,412.
  • Adviser fees included a $320,905 credit, offsetting the finder’s fee earned by the Adviser on the Espinosa Road acquisition. Administration fees increased 97.9%, reflecting a revised cost-allocation methodology effective July 2014.
  • Despite higher revenue and operating income, net income increased only modestly as higher interest expense absorbed much of the operating improvement.

Outlook, commentary, risks, and unusual items

  • Management described its acquisition pipeline as healthy and said it intended to use available capital for additional farms and general corporate purposes. It reported four properties under non-binding letters of intent, with proposed purchase prices totaling approximately $40.9 million; there is no assurance the transactions will close.
  • Management expected resources to be sufficient in the near term for distributions, debt service, and operating costs. It cited future equity and debt financing as potential sources for longer-term needs. No specific earnings or revenue guidance was provided.
  • Subsequent to quarter-end, the company completed a May 15 common-stock offering of 1.25 million shares at $11.40 per share, raising approximately $13.3 million net. It intended to use $8.4 million to repay the MetLife line of credit and the remainder for acquisitions and other corporate purposes. The underwriters’ option for up to 187,500 additional shares had not been exercised as of the filing.
  • Management noted interest-rate risk: some borrowings are variable-rate or may reset, and rising rates could increase borrowing costs or constrain access to capital. No interest-rate derivatives were in place. Other stated risks include adverse economic or agricultural conditions, drought or natural disasters, REIT qualification, competition, and loss of key personnel.
  • Revenue concentration remains material. Dole accounted for 28.1% of Q1 2015 rental revenue; one other tenant accounted for 11.7%. California generated 70.2% of rental revenue. Management warned that tenant nonpayment or a regional disaster could materially affect results.
  • Commitments included $700,000 of contingent consideration for Parrish Road, dependent on water-permit approval; up to $500,000 of tenant irrigation funding there; expected irrigation work at Sycamore Road with approximately $188,000 of additional cost; and a tenant-optioned irrigation upgrade at Wauchula Road with reimbursement capped at $1.5 million. The filing also describes a pending eminent-domain matter involving approximately 4.5 nonfarmable acres at Espinosa Road, for which the company expected to accept a $160,000 offer.
  • The company reported no material known or threatened litigation and no real estate impairment at March 31. Its estimated NAV was $13.91 per share, based on management valuations and appraisals; management cautioned that NAV is subjective and realized values may differ. The March 31 closing share price was $12.05.

Important facts for investors to verify

  1. Reconcile the MD&A’s stated $25.8 million current liquidity and $6.6 million cash with the March 31 balance-sheet cash of $2.180 million and the borrowing-facility availability described elsewhere in the filing.
  2. Track debt growth, variable-rate exposure, collateral availability, covenant headroom, and planned use of the May equity-offering proceeds.
  3. Assess whether acquired-farm rent, lease renewals, and same-property growth can offset higher interest, depreciation, administration, and acquisition costs.
  4. Monitor tenant and California concentration, upcoming lease expirations, and the status and cost of water-permit and irrigation commitments.
  5. Evaluate the assumptions behind the $13.91 estimated NAV per share, including the substantial share of portfolio value based on internal valuation or purchase price rather than a recent third-party appraisal.
  6. Distinguish recurring operating performance from non-GAAP FFO/AFFO adjustments, particularly the adviser-fee credit and other one-time items.