Business Context and Reporting Period
Farmland Partners Inc. filed an unaudited Form 10-Q for the quarter ended September 30, 2014. The company is an internally managed farmland REIT pursuing acquisitions across North America. Operations began upon completion of its IPO and formation transactions on April 16, 2014; therefore, nine-month 2014 results combine predecessor operations before the IPO with company operations afterward and are not fully comparable with 2013.
- At September 30, 2014, the company owned or controlled 42 farms and three grain storage facilities across Illinois, Colorado, Nebraska and Arkansas.
- The company owned 79.9% of the Operating Partnership; the remaining 20.1% was held by Pittman Hough Farms.
- As of October 31, 2014, the portfolio had expanded to 46 farms totaling approximately 28,832 acres.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2014 | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2014 | Nine Months Ended September 30, 2013 |
|---|---|---|---|---|
| Total operating revenue | $1.262 million | $0.577 million | $2.734 million | $1.730 million |
| Operating income | $0.321 million | $0.516 million | $0.537 million | $1.570 million |
| Operating margin | 25.4% | 89.5% | 19.6% | 90.8% |
| Net income attributable to the company | $0.028 million | $0.169 million | $(0.331) million | $0.569 million |
| Net margin | 2.2% | 29.4% | (12.1)% | 32.9% |
| AFFO | $0.478 million | $0.224 million | $0.919 million | $0.705 million |
| AFFO per fully diluted share | $0.06 | Not provided | $0.20 | Not provided |
| Net cash from operating activities | Not provided | Not provided | $1.666 million | $(0.502) million |
- Third-quarter rental income increased 106.2% to $1.189 million, while nine-month rental income increased 48.2% to $2.526 million.
- Same-property rental income increased 10.4% in the quarter and 12.1% for the nine-month period, driven by higher average annual cash rent per acre.
- Third-quarter general and administrative expense rose to $646,000 from $8,000, primarily due to employee compensation, public-company costs, board expenses, consulting and restricted-stock amortization.
- Cash and cash equivalents were $63.748 million at September 30, 2014, compared with $17,805 at December 31, 2013.
- Total assets increased to $139.384 million from $39.670 million, principally due to equity-funded acquisitions and cash proceeds from public offerings.
- Mortgage notes and bonds payable were $51.454 million at September 30, 2014, compared with $43.065 million at December 31, 2013. Approximately 60% of debt, or $30.8 million, had variable interest rates.
- Debt maturities included $1.026 million in 2015, $29.728 million in 2016 and $20.700 million in 2017.
- The company declared distributions of $0.105 per common share for each of the second and third quarters.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected the acquisitions of the Erker, Hudye, Broadwater and Ruder farms. The 2014 acquisitions added approximately 16,978 acres at an aggregate purchase price of $35.891 million.
- Despite higher revenue, operating income declined 37.8% in the third quarter and 65.8% for the nine-month period because public-company infrastructure, compensation, stock-based compensation, legal and accounting costs increased substantially.
- Net income attributable to the company declined 79.5% in the third quarter and changed from $0.569 million of income to a $0.331 million loss for the nine-month period.
- Operating cash flow improved to $1.666 million from a $0.502 million use of cash, aided by $1.753 million of deferred revenue and increased rent collections.
- Financing cash flow increased to $99.002 million, primarily from approximately $48.0 million of IPO proceeds and $43.3 million of follow-on offering proceeds, partially offset by $12.3 million of debt repayments.
- The company issued a $20.7 million Farmer Mac bond in September at a fixed 2.40% rate and a three-year term.
Guidance, Outlook, Risks and Unusual Items
- Management expects to use the Farmer Mac Facility, future equity, operating cash flow and additional debt to fund acquisitions and other liquidity needs. The facility was increased after quarter-end from $30 million to $75 million; $26.2 million was outstanding as of October 31, 2014.
- As of October 31, 2014, completed and pending acquisitions represented substantial additional growth; pending transactions totaled approximately $39.349 million and were subject to customary closing conditions.
- Management expects interest expense to increase as a result of the Farmer Mac borrowings and any future issuances.
- Key operating risks include crop-price volatility, weather and natural disasters, tenant defaults or nonrenewals, geographic and tenant concentration, farmland valuations, water availability, interest-rate increases and access to capital markets.
- Astoria Farms and Hough Farms, related parties, accounted for 25.3% of portfolio acres and $1.856 million of recognized rent in the first nine months of 2014. Astoria Farms alone represented 64.7% of recognized rental income for that period.
- Leases are generally short-term, with 70.7% of acres and 57.4% of annualized cash rents scheduled to expire in 2016. Cash rent is generally collected in advance of the spring planting season, while GAAP rental income is recognized over the lease term.
- The company reported no material litigation, known material contingencies or real-estate impairments.
- Disclosure controls were not effective at quarter-end because a previously identified material weakness in internal control over financial reporting remained unremediated. Management was implementing additional policies, procedures and staffing, but could not assure successful remediation.
- The company announced a $10 million share-repurchase authorization on October 29, 2014, to be funded with balance-sheet cash; the program was discretionary and could be modified or suspended.
- The company intended to qualify as a REIT beginning with its short taxable year ending December 31, 2014. Failure to qualify could result in corporate-level taxation.
Important Facts for Investors to Verify
- Reconcile reported revenue and AFFO with cash rent collections, deferred revenue and crop-year revenue adjustments.
- Assess the sustainability of AFFO after excluding stock-based compensation and acquisition-related costs.
- Review tenant and related-party concentration, particularly exposure to Astoria Farms and Hough Farms.
- Evaluate lease rollover risk, including the large concentration of expirations in 2016.
- Confirm the status, funding and closing conditions of pending fourth-quarter acquisitions.
- Analyze debt maturities, variable-rate exposure, covenant requirements and collateral obligations under the First Midwest and Farmer Mac facilities.
- Monitor remediation of the material weakness in internal control over financial reporting.
- Consider the comparability limitations caused by the April 2014 IPO, formation transactions and significant acquisition activity.