Gladstone Land Corporation (LAND) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with Q1 2019. Gladstone Land is an externally managed agricultural REIT that owns and leases farmland. At quarter-end, it owned 113 farms spanning 87,860 acres in 10 states.
Financial performance
- Revenue: Lease revenue was $15.3 million, up 95.1% from $7.8 million. Fixed lease payments rose 57.8% to $12.3 million. Revenue included $2.8 million of net lease-termination income, primarily from a $3.0 million payment for ending leases on four Arizona farms.
- Profit: Operating income was $7.2 million versus $3.2 million; net income was $3.1 million versus $0.1 million. Net income attributable to common stockholders was $0.9 million, or $0.04 per diluted share, compared with a $0.5 million loss, or $(0.03) per share. The improvement reflects unusual and timing-related items, notably the termination payment and $1.3 million of Farm Credit interest patronage.
- Margins: Operating margin was approximately 47% and net income margin approximately 20%; these ratios reflect the unusual termination revenue and should not be assumed representative of recurring results.
- Cash flow: Operating cash flow was $3.5 million, up from $2.4 million. Investing used $10.2 million, including $7.4 million for acquisitions and $2.7 million for existing-property capital expenditures. Financing provided $23.2 million, mainly from equity issuance. Cash increased $16.5 million to $30.2 million.
- Debt and liquidity: Notes and bonds payable were $480.6 million gross ($477.4 million net of issuance costs); the company also had $0.1 million drawn on revolving credit lines. The weighted-average borrowing rate was 3.98%. Management reported approximately $53.7 million of available liquidity, including $28.4 million cash and $24.2 million available under the MetLife facility based on pledged collateral. The company reported compliance with debt covenants.
- Equity and distributions: The company issued 1.23 million Series B preferred shares for $27.7 million net proceeds and 409,800 common shares through its ATM program for $5.4 million net proceeds. Series B preferred dividends were $2.1 million, versus $0.6 million in Q1 2019.
Changes versus Q1 2019
- Lease revenue growth reflected acquisitions since year-end 2018, higher rents on some renewed leases, and the Arizona lease termination. The termination payment accounted for a substantial portion of the increase.
- Interest expense increased to $5.0 million from $3.5 million, mainly because average borrowings rose to approximately $481 million from $336 million.
- Depreciation and amortization rose 63.9% to $4.3 million, including accelerated amortization of $0.47 million on terminated lease intangibles and expenses related to portfolio growth.
- Adviser fees increased to $2.4 million from $0.3 million; Q1 2019 included a $0.57 million fee waiver, while Q1 2020 included a $1.33 million incentive fee. A revised advisory agreement effective January 2020 changed the base management fee calculation.
- Management’s estimated NAV was $11.46 per common share and OP Unit at March 31, versus $11.41 at December 31, 2019. This is a management estimate, not a GAAP measure or an independent audit opinion.
Outlook, risks and unusual items
- COVID-19: Management said it had not seen a material operating impact at filing and reported that all tenants were current except one owing an approximately $56,000 April installment, which management expected to collect. No tenants had requested rent relief. Management cautioned that impacts remain uncertain and distributions could not be assured at the same rate or at all.
- Liquidity and growth: Management believed near-term resources were adequate for operations, debt service and distributions, and described its acquisition pipeline as healthy. It gave no formal earnings or revenue guidance; acquisitions and funding remain subject to market conditions, due diligence and financing availability.
- Portfolio and leasing risks: California, Florida and Arizona generated 44.6%, 21.8% and 21.8% of Q1 lease revenue, respectively. Five leases covering 28.3% of acreage were scheduled to expire in 2020, although one was renewed after quarter-end. Renewal or replacement leases at favorable rates are not assured.
- Capital commitments and financing: After quarter-end, Napa County approved additional vineyard plantings, triggering approximately $3.2 million of additional acquisition compensation expected to be paid in Q2 2020; the company expects to earn additional rent on funded costs. Scheduled principal payments for the remainder of 2020 were $21.6 million. The Series A preferred stock has a mandatory redemption date of September 30, 2021.
- Equity offering: After quarter-end, the company launched a Series C preferred offering. Maximum proceeds were estimated at $636.5 million gross and approximately $591.5 million net if fully sold; actual sales through the filing date were only 15,600 shares for $0.36 million net. Proceeds are intended for debt repayment, acquisitions and general corporate purposes.
- No material litigation or real estate impairment was reported. A $1.26 million interest-rate-swap fair-value loss reduced comprehensive income and increased accumulated other comprehensive loss.
Important facts for investors to verify
- How much of the reported revenue and earnings improvement is recurring after excluding the Arizona termination payment and Farm Credit patronage.
- Whether the $56,000 rent installment was collected and whether COVID-19 affects tenant credit, rents, farmland values or access to financing.
- Lease renewal outcomes, especially the 2020 expirations, and the replacement tenant’s performance on the Arizona farms.
- Available borrowing capacity under the MetLife facility, upcoming debt maturities and the company’s ability to refinance or fund acquisitions.
- Actual Series C fundraising, issuance costs and dilution or preferred-dividend burden relative to stated uses of proceeds.
- Key assumptions behind management’s $11.46 NAV estimate, including appraisals and capitalization rates; the filing cautions that realized property values may differ.