Farmland Partners Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed REIT that owns and leases agricultural land and provides agricultural loans. The filing covers the unaudited three months ended March 31, 2017, compared with the same period in 2016. As of March 31, 2017, the Company owned approximately 150,781 acres and held an 82.9% interest in its Operating Partnership.
The Company completed its merger with American Farmland Company on February 2, 2017. As of the filing date, the combined portfolio totaled approximately 152,610 acres across 16 states.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total operating revenue | $7.2 million | $4.7 million | +52% |
| Rental income | $6.8 million | $4.4 million | +54% |
| Operating income | $0.7 million | $1.9 million | -63% |
| Operating margin | 9.9% | 40.4% | Lower |
| Net loss | $(2.0) million | $(1.9) million | Loss increased $0.1 million |
| Net loss available to common stockholders | $(2.5) million | $(1.8) million | Loss increased $0.8 million |
| Basic and diluted loss per share | $(0.10) | $(0.15) | Improved per share |
| FFO | $(0.5) million | $(1.6) million | Improved |
| AFFO | $0.4 million | $0.7 million | Down $0.4 million |
| Adjusted EBITDA | $4.0 million | $2.6 million | +53% |
Operating expenses increased 130% to $6.4 million, driven by higher depreciation, property expenses, acquisition costs and general and administrative expenses. Interest expense declined 30% to $2.7 million, primarily because Q1 2016 included approximately $2.1 million of additional Bridge Loan interest and related costs.
Total assets increased to $971.3 million from $655.5 million at December 31, 2016, primarily because of the AFCO merger and additional acquisitions. Net real estate increased to $953.0 million from $594.1 million. Debt principal outstanding was $437.8 million, compared with $309.9 million at year-end 2016; debt is reported net of issuance costs and premiums at $436.3 million in the debt detail and $436.7 million on the balance sheet.
Cash flow, liquidity and capital structure
- Cash used in operating activities was $2.6 million, compared with $5.8 million of cash provided in Q1 2016.
- Cash used in investing activities was $84.6 million, including $79.2 million for real estate acquisitions and $3.9 million for improvements.
- Cash provided by financing activities was $46.4 million, including $52.9 million of new borrowings.
- Cash declined to $6.4 million from $47.2 million at December 31, 2016.
- The Company received $17.1 million of cash rent during the quarter, but rental revenue is recognized ratably under GAAP.
- Approximately $81.1 million of debt matures during the remaining nine months of 2017. Management expects to refinance this debt but stated that refinancing on similar terms, or at all, is not assured.
- The Rutledge facilities and Farm Credit facility had stated available capacity of approximately $18.7 million as of the filing date; the filing separately states that $27.6 million remained available under the Fifth Rutledge facility as of March 31, 2017.
- Approximately 22% of debt, or $97.5 million, carried variable interest rates. A 100-basis-point increase in rates was estimated to reduce annual cash flow by approximately $1.0 million.
- The Company was in compliance with applicable debt covenants, including leverage, loan-to-value, fixed-charge coverage and tangible-net-worth requirements.
Material changes versus the prior comparable period
- Revenue growth primarily reflected acquisitions completed after March 31, 2016, the 2017 acquisitions and the AFCO merger.
- Same-property cash rental income declined to $2.1 million from $3.7 million. Management attributed the decline to greater use of crop-share leases, for which revenue generally cannot be recognized until contractual crop sales occur, and to lease timing.
- Depreciation and depletion increased to $1.5 million from $0.3 million, and property operating expenses increased to $1.8 million from $0.4 million, reflecting portfolio growth and acquired properties.
- Acquisition and due diligence costs increased to $0.5 million from $0.1 million. The Company also recorded approximately $0.7 million related to terminating the Prudential sub-advisory arrangement.
- Common shares outstanding increased to 32.4 million from 17.4 million at year-end 2016, primarily due to the AFCO merger. The Company issued approximately 14.8 million shares and 218,525 OP units as merger consideration.
- The Company’s ownership of the Operating Partnership increased to 82.9% from 75.1% at year-end 2016.
- The Board authorized a $25 million common-stock repurchase program on March 15, 2017; no shares had been repurchased through March 31.
Outlook, management commentary, risks and unusual items
Management expects 2017 primary-crop lease renewals to be flat to modestly lower, reflecting continued pressure in primary-crop markets. Specialty-crop profitability was described as generally healthy, with base rents consistent with 2016. The Company expects market rents in the coming year to be flat.
Management’s long-term strategy remains focused on acquiring farmland, increasing geographic and crop diversification, achieving scale and pursuing agricultural lending. Management believes long-term population and income growth will support food demand, crop prices, rental rates and farmland values, but these expectations are not guarantees.
- Major risks include crop prices and yields, weather, water availability and regulation, tenant creditworthiness, lease renewals, farmland values, interest rates, access to capital and refinancing risk.
- Approximately 19.7% of leased acres and 11.8% of annual cash rents expire during the remaining nine months of 2017; 37.7% of leased acres and 32.2% of annual cash rents expire in 2019.
- The Company had $68.3 million of future minimum rental payments from tenants under non-cancelable leases, excluding tenant reimbursements.
- The Company had approximately $9.4 million of future capital commitments for specified farm improvements, primarily in 2017.
- The AFCO-related shareholder lawsuit was dismissed without prejudice on April 18, 2017.
- The Company adopted ASU 2017-01 early as of January 1, 2017, changing the evaluation of whether certain acquisitions are asset acquisitions or business combinations.
- The filing does not provide a formal full-year earnings or revenue guidance range.
Important facts for investors to verify
- Ability to refinance the $81.1 million of 2017 debt maturities and the terms and availability of replacement financing.
- Cash liquidity after acquisition spending, dividends, preferred-unit distributions and required debt service.
- Progress integrating AFCO assets and realizing expected operating efficiencies.
- Same-property rent trends, crop-share revenue timing and lease renewal outcomes in primary-crop markets.
- Compliance with debt covenants and exposure to variable-rate debt as interest rates change.
- Coverage and sustainability of the $0.1275 quarterly common-stock distribution given negative GAAP earnings, negative FFO and positive but reduced AFFO.
- Potential impact of tenant defaults, crop conditions, water constraints and farmland-value changes.