Gladstone Land Corporation — Q2 2017 Form 10-Q
Business context and period: Gladstone Land is an externally managed agricultural REIT that owns and leases farmland, primarily under net leases. This unaudited filing covers the quarter and six months ended June 30, 2017, compared with the same 2016 periods. At quarter-end, it owned 65 farms across eight states; subsequent acquisitions brought the portfolio to 69 farms as of the filing date.
Financial results and position
- Revenue: Q2 operating revenue was $6.0 million, up 41.3%; six-month revenue was $11.7 million, up 48.2%. Rental revenue drove the increase. Same-property rent rose 2.5% in Q2 and 4.4% for the first half; most growth came from acquisitions.
- Profit and margins: Q2 operating income was $2.9 million versus $1.6 million; net income attributable to the company was $227,000 versus $108,000, and EPS was $0.02 versus $0.01. First-half operating income was $5.5 million versus $3.0 million; attributable net income was $379,000 versus $342,000, with EPS of $0.03 in both periods. Operating margin was approximately 48.5% in Q2 and 46.9% for the first half, versus 37.6% and 37.8%, respectively, in 2016.
- REIT operating measures: First-half diluted AFFO was $3.5 million, or $0.28 per total share, compared with $2.7 million, or $0.26, in 2016. FFO, CFFO and AFFO are non-GAAP measures and are not substitutes for operating cash flow.
- Cash flow: First-half operating cash flow was $4.7 million, down from $7.0 million. Investing used $85.1 million, mainly for farm acquisitions; financing provided $80.8 million, including borrowing and equity proceeds. Cash increased $328,000 to $2.8 million.
- Debt and liquidity: At June 30, borrowings were $272.0 million, compared with $207.3 million at year-end 2016; the balance sheet also reports $27.8 million of mandatorily redeemable preferred stock. The weighted-average stated borrowing rate was 3.27% for the first half, before patronage effects. Debt-to-total-capitalization, including preferred stock as debt, was 74.2% at book value. The filing cites approximately $8.9 million of borrowing availability under the MetLife facility, subject to collateral and covenants; management separately states current liquidity of approximately $13.0 million, including $4.1 million of cash, which differs from the balance-sheet cash figure.
- Assets and equity: Total assets were $417.0 million, up from $334.0 million at December 31, 2016. Management estimated NAV at $14.46 per common share at June 30; the closing common-stock price was $11.67. NAV is a management estimate, not an audited valuation.
Material changes versus the prior period
- During the first half, the company acquired seven farms for total purchase prices of $83.7 million, with annualized straight-line minimum rent of $4.7 million. It funded expansion with additional debt and a March common-stock offering that produced $19.6 million net proceeds.
- Interest expense rose 58.7% for the first half, principally because average borrowing balances increased. Preferred-stock distributions, treated as interest-like expense, totaled $917,000; no such preferred stock was outstanding in the 2016 comparison period.
- The company adopted ASU 2017-01 early. Most farmland acquisitions are now treated as asset acquisitions, with most acquisition costs capitalized rather than expensed, affecting comparability of acquisition-related expenses.
- A revised advisory agreement took effect in Q2. It includes a 2.0% annual base fee on adjusted total equity and a revised incentive-fee structure; management expects higher base fees but lower overall incentive fees in future periods.
Outlook, risks and notable items
- Management gave no specific earnings or revenue guidance. It said near-term resources should cover distributions, debt service and operating costs, and plans to use available capital for additional acquisitions. Four properties were under signed purchase agreements for approximately $31.1 million, with closings expected in the second half of 2017; completion was not assured.
- Tenant and geographic concentration are material: one tenant accounted for 18.1% and Dole for 12.6% of first-half rental revenue. California generated 48.8%, Florida 26.8% and Colorado 11.4%. Tenant defaults, lease nonrenewals or natural disasters could materially affect results.
- Lease renewal risk remains: 48.9% of leased acreage was associated with leases expiring in 2020. Management noted it could not assure renewals at favorable rates or replacement tenants if needed. First-half renewals on seven farms had aggregate annualized rents about 0.3% below prior leases; later renewals disclosed in MD&A were about 1.2% above prior rents.
- Interest-rate exposure includes variable-rate borrowing and fixed-rate debt that may reset; the company had no interest-rate derivatives. Farm Credit patronage can reduce effective borrowing costs, but future amounts are uncertain.
- Subsequent events included a July acquisition of four California farms for about $13.6 million, additional borrowing and ATM share sales. The company also authorized an increase in its total share authorization to 100 million, initially classifying the added shares as common stock.
- The company reported no material litigation or material off-balance-sheet arrangements. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile management’s stated $13.0 million liquidity and $4.1 million cash figure with the June 30 balance-sheet cash of $2.8 million and the cited $8.9 million MetLife availability.
- Review debt maturities, collateral constraints and variable-rate exposure, including the preferred stock’s mandatory redemption date of September 30, 2021.
- Assess acquisition funding, the proposed $31.1 million pipeline, and the effect of share issuance and debt on per-share results and leverage.
- Monitor major-tenant concentration, lease expirations and the renewal pipeline, particularly the acreage tied to 2020 expirations.
- Evaluate management’s NAV assumptions and the distinction between estimated property values and realizable sale proceeds; the filing says the NAV calculation was not audited or independently assured.