Business Context and Reporting Period
Farmland Partners Inc. is an internally managed REIT owning and leasing farmland across North America. As of September 30, 2019, the portfolio comprised approximately 157,885 acres, with approximately 70% used for primary crops and 30% for specialty crops. The company also operates a small taxable REIT subsidiary and provides agricultural loans.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total operating revenue | $9.8 million | $12.5 million | $31.7 million | $35.2 million |
| Operating income | $3.2 million | $6.2 million | $11.7 million | $16.2 million |
| Net income (loss) | $(1.5) million | $4.2 million | $5.1 million | $5.6 million |
| Net income (loss) attributable to common stockholders | $(4.5) million | $0.5 million | $(4.7) million | $(4.6) million |
| Basic and diluted EPS | $(0.15) | $0.02 | $(0.16) | $(0.14) |
| FFO | $0.6 million | $3.4 million | $3.5 million | $9.0 million |
| AFFO | $(2.0) million | $0.7 million | $(4.6) million | $0.9 million |
| Adjusted EBITDAre | $5.9 million | $8.8 million | $19.5 million | $24.1 million |
Operating margins were approximately 32.8% in Q3 2019 versus 49.0% in Q3 2018, and 36.9% for the first nine months versus 46.0% in the prior-year period. Net margin was approximately negative 14.9% in Q3 2019 versus 33.1% in Q3 2018; nine-month net margin was approximately 16.0% versus 16.0%.
- Rental income was $9.1 million in Q3 and $28.5 million for nine months. Same-property rental income declined 0.5% in Q3 and 2.4% for nine months.
- Net cash provided by operating activities was $7.0 million for nine months, down from $13.6 million.
- Investing activities provided $33.4 million, primarily from $35.3 million of property-sale proceeds. No acquisitions were completed during the period.
- Financing activities used $48.7 million, including $21.2 million of common-stock repurchases, $0.9 million of preferred-stock repurchases, debt repayments and distributions.
- Cash declined to $8.6 million at September 30, 2019, from $16.9 million at December 31, 2018 and $23.8 million at September 30, 2018.
- Total real estate, net, was $1.072 billion, compared with $1.100 billion at December 31, 2018.
- Outstanding debt principal was $512.9 million, compared with $525.3 million at December 31, 2018; debt is reported net at $511.4 million.
- Variable-rate debt totaled $181.3 million, or 35.3% of total debt. Management estimated that a 100-basis-point increase in rates would reduce annual cash flow by approximately $1.8 million.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased 21.5% in Q3 and 9.9% for nine months, principally from lower rental income, fewer tenant reimbursements, property dispositions, timing of variable rent payments, lower crop prices and low cyclical yields.
- Operating expenses increased 3.6% in Q3 and 5.1% for nine months. Property operating expenses increased, while general and administrative expenses declined; legal and accounting costs increased for nine months due to litigation.
- Q3 2018 included a $3.0 million gain on asset dispositions; Q3 2019 had essentially no disposition gain. For the nine-month period, 2019 included a $7.9 million gain on property sales versus $3.1 million in 2018.
- Interest expense declined 3.7% in Q3 but increased 7.0% for nine months, reflecting changes in floating-rate debt costs and the timing of debt balances.
- The company sold seven properties in four transactions for $35.3 million and recognized a $7.9 million aggregate gain. It completed five acquisitions for $32.7 million in the first nine months of 2018 but none in 2019.
- Common shares repurchased during the first nine months totaled 3.4 million for $21.2 million, reducing outstanding common shares to approximately 30.1 million from 30.6 million at year-end 2018.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no quantitative earnings, revenue or FFO guidance. Management intends to continue selectively acquiring farmland, disposing of assets when advantageous, and pursuing diversification by geography, crop type and tenant.
- Management expects long-term food demand, limited high-quality farmland supply and population and GDP growth to support farmland values and rents, but acknowledges uncertainty regarding crop prices, yields and tenant profitability.
- Trade tensions reduced prices received by tenants for soybeans, almonds and walnuts. Extreme weather, including Hurricane Michael, excess rainfall and a California heat wave, negatively affected tenants and variable rent revenue.
- Approximately 53,000 acres had leases with rents at least partly based on farming revenues. A single California permanent-crop tenant represented 12.0% of nine-month rental income.
- Lease expirations are concentrated in the near term: approximately 25.6% of acres and 27.8% of annual cash rents expire during the remaining three months of 2019, with another 25.5% of acres and 26.5% of rents expiring in 2020.
- Debt maturities include $48.6 million in 2020 and $112.3 million in 2022. The company reported compliance with applicable debt covenants at September 30, 2019.
- LIBOR discontinuation after 2021 could affect approximately $181.3 million of variable-rate debt with maturities beyond 2021; the impact of any replacement benchmark is uncertain.
- The company faces shareholder class-action and derivative litigation concerning disclosures about its agricultural loan program, as well as litigation against parties associated with an alleged “short and distort” campaign. No class had been certified, damages were not estimable, and insurance recoveries had not been recognized.
- A crop-sales figure of negative $0.1 million in Q3 reflected a $0.4 million reversal of revenue previously recognized in Q2. The company also recorded $0.6 million of other operating expenses related to crop costs in Q3.
- The company adopted the new lease standard on January 1, 2019, recognizing a right-of-use asset and lease liability of approximately $0.2 million, with no material overall impact expected.
- Subsequent to quarter-end, the board declared a $0.05 common dividend, a $0.375 quarterly Series B preferred dividend and a $30 annual Series A preferred-unit distribution. The board also authorized additional repurchases under the program up to an aggregate cost of approximately $51.9 million.
Important Facts for Investors to Verify
- Reconcile recurring rental performance with reported revenue, particularly the effect of dispositions, crop-share timing and tenant reimbursements.
- Assess liquidity relative to $8.6 million of cash, scheduled debt maturities, preferred distributions, litigation costs and remaining repurchase authorization.
- Review debt covenant headroom, refinancing plans and exposure to LIBOR transition and floating interest rates.
- Evaluate lease rollover risk, including 2019–2021 expirations and the concentration of rental income among major tenants.
- Monitor the outcome and insurance coverage of the shareholder and derivative litigation; the filing does not provide a clear estimate of potential damages or total future costs.
- Distinguish GAAP earnings and cash flow from non-GAAP FFO and AFFO, which were materially affected by preferred distributions and disposition gains.