Gladstone Land Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Gladstone Land owns and leases farmland, generally under triple-net leases. At quarter-end, it held 26 farms totaling 6,439 acres; after two July acquisitions, management reported 28 farms totaling 6,833 acres.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $1.566 million | $0.950 million | $3.062 million | $1.864 million |
| Operating income | $357,477 | $338,423 | $752,661 | $714,900 |
| Net income (loss) | $(301,094) | $30,356 | $(280,176) | $77,872 |
| Basic and diluted EPS | $(0.05) | $0.00 | $(0.04) | $0.01 |
| Operating cash flow | Not stated by quarter | $737,235 | $(1.692) million |
- Revenue increased 64.9% in Q2 and 64.2% for the half year, mainly from farms acquired since June 2013. Same-property rent grew 8.5% in Q2 and 7.7% for the half year.
- Operating income rose only modestly as operating expenses increased 97.7% in Q2 and 100.9% for the half year. Higher management fees, depreciation, acquisition costs and property expenses contributed.
- Interest expense was $405,797 in Q2 and $779,837 for the half year, up from the comparable periods. The reported weighted-average effective borrowing rate was 3.7% for Q2 and 3.6% for the half year.
- Six-month investing cash outflow was $12.535 million, primarily reflecting farm purchases and capital improvements. Financing cash outflow was $644,139; cash declined $12.442 million to $3.830 million.
Balance sheet, debt and liquidity
- At June 30, 2014, total assets were $93.771 million, net real estate was $86.807 million, total liabilities were $46.715 million and stockholders’ equity was $47.056 million.
- Borrowings totaled $44.332 million: $41.332 million under the mortgage and $3.000 million under the revolving line. Management reported $14.5 million of additional drawable availability based on pledged collateral; the facility’s nominal unused commitment was larger.
- The May 2014 MetLife facility provides up to $100 million of mortgage financing and a $25 million revolving line. Initial mortgage advances bear 3.50% interest; the line has a variable rate with a 2.75% minimum. Management stated the company complied with facility covenants at quarter-end.
- Management estimated quarter-end NAV at $13.93 per share, a non-GAAP measure based partly on appraisals and internal valuations; the June 30 closing share price was $12.99.
Changes, outlook and risks
- During the half year, the company acquired five farms in three transactions for approximately $11.16 million. It also completed or undertook property improvements, including a $446,108 cooling-facility upgrade and a July irrigation project costing approximately $1.2 million.
- New or extended leases at West Beach and San Andreas raised stated annualized straight-line rent by 20.7% and 31.3%, respectively. Management said the two leases were renewed before expiration and without downtime.
- Two April fires damaged structures on separate farms. The company recorded a $250,478 casualty loss; partial insurance recovery was considered probable, but no recovery was recorded because the amount and collectability remained under assessment.
- After quarter-end, Gladstone acquired two California farms for approximately $12.7 million, funded with line-of-credit draws. It also reported purchase agreements for additional properties, including an 825-acre Florida farm for about $14.2 million and a 64-acre California property for about $6.4 million; completion was uncertain.
- Management intended to use available liquidity for acquisitions and said it expected resources to cover near-term distributions, debt service and operating costs. It identified interest-rate increases, drought and other natural events, acquisition financing, and tenant or regional concentration as risks. No formal earnings guidance was provided.
- Revenue was concentrated: Dole generated 46.5% of first-half rental income, while California farms generated 67.1%. The company also disclosed a $550,000 aggregate annual property-tax exposure if tenants fail to pay taxes required under their leases.
- The company intended to elect REIT taxation beginning with 2013. It paid distributions of $0.18 per share in the first half, compared with $0.44 a year earlier; Q2 distributions were $0.09 per share. The filing notes that REIT qualification and distribution requirements apply.
Important facts for investors to verify
- Whether insurance proceeds for the fire damage were ultimately received, and how they affected later-period results.
- Actual available borrowing under the MetLife facility, covenant calculations and the effect of subsequent acquisitions and credit-line draws.
- Tenant credit and lease-renewal risk, particularly Dole concentration and the 2015 Dalton Lane expiration.
- Assumptions and independent support for the $13.93 NAV estimate, including appraisal dates and the extent of internal valuation.
- Completion, financing and expected returns of pending acquisitions and required capital improvements.
- Whether cash generation supports distributions and the 2.0% base management fee as the portfolio expands.