Gladstone Land Corporation — FY2020 Form 10-K
Business and period: This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter report. Gladstone Land is an externally managed agricultural REIT that owns and leases farmland rather than generally farming it. At year-end it owned 137 farms totaling 101,079 acres across 13 states. As of February 23, 2021, occupancy was 100% by gross acreage, with 81 unrelated tenants and a 6.7-year weighted-average remaining lease term.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Lease revenue | $57.0 million | $40.7 million |
| Operating income | $27.7 million | $19.3 million |
| Operating margin | 48.5% | 47.4% |
| Net income attributable to the Company | $4.9 million | $1.7 million |
| Net loss attributable to common stockholders | $(4.4) million; $(0.20) per share | $(2.5) million; $(0.13) per share |
| Cash from operating activities | $25.0 million | $21.4 million |
| Cash used in investing activities | $(272.9) million | $(262.7) million |
| Cash from financing activities | $243.4 million | $240.2 million |
| FFO / CFFO / AFFO per diluted share (non-GAAP) | $0.65 / $0.66 / $0.64 | $0.54 / $0.56 / $0.57 |
Revenue growth was 40.2%, principally reflecting portfolio expansion. Fixed lease payments rose 34.6%; participation rents were $2.4 million, while lease termination income added $2.8 million net. Operating expenses increased 37.4% to $29.4 million, including higher depreciation and adviser fees. Interest expense rose 26.3% to $20.6 million as average borrowings increased. Preferred dividends and related charges meant positive net income did not translate into positive common-stockholder earnings.
Balance sheet, debt and liquidity
- At December 31, 2020, total assets were $1.067 billion, total equity was $383.8 million and cash and cash equivalents were $9.2 million.
- Borrowings, net of debt issuance costs, were $624.1 million, compared with $481.9 million a year earlier. Including the $28.6 million Series A term preferred liability, reported debt-like obligations were approximately $652.7 million. The weighted-average stated borrowing rate before Farm Credit patronage was 3.95%; substantially all farm borrowings were secured by property.
- Scheduled principal payments on notes and bonds were $19.8 million in 2021, $51.1 million in 2022, $43.8 million in 2023, $39.9 million in 2024 and $36.9 million in 2025. The company reported compliance with debt covenants.
- Management reported approximately $75.3 million of available liquidity at the filing date, comprising $51.2 million cash and approximately $24.2 million of facility availability, subject to covenants and collateral. This is a later-date liquidity figure; year-end balance-sheet cash was $9.2 million.
Material changes and unusual items
- The company acquired 26 farms in 2020 for approximately $256.0 million, adding 14,544 acres. Cash paid for real estate acquisitions was $255.9 million. The portfolio expanded from 111 farms and 86,535 acres at the end of 2019.
- A tenant paid approximately $3.0 million to terminate leases on four Arizona farms early. The company recognized $2.8 million net as lease termination income, wrote off related lease intangibles and entered into a new seven-year lease.
- Equity issuance and borrowing supported acquisitions and capital needs. During 2020, the company completed a common-stock follow-on offering and issued common shares through its ATM program; it also completed its Series B preferred offering and began issuing Series C preferred shares.
- After year-end, the company raised approximately $58.5 million net through 5.00% Series D term preferred stock and redeemed all Series A term preferred stock for approximately $28.8 million. These are subsequent events, not year-end balances.
- Common distributions were $0.53715 per share for 2020 versus $0.53430 in 2019. For tax purposes, the 2020 common distributions were reported entirely as return of capital; preferred distributions were partly return of capital.
Outlook, commentary and risks
Management said near-term cash resources were expected to cover distributions, debt service, preferred dividends and operating costs, and described the acquisition pipeline as healthy. It intended to use significant available liquidity for further farm acquisitions. No quantified earnings or revenue guidance was provided. Management also noted uncertainty around COVID-19 and the transition from LIBOR, but expected the latter to have minimal impact if SOFR is appropriately adjusted.
- COVID-19 prompted short-term rent extensions for two tenants totaling approximately $0.34 million; those payments were collected in full in 2020. Further deferrals or tenant stress remain possible.
- Geographic exposure is concentrated: California generated 55.3% and Florida 23.4% of 2020 lease revenue. Weather, drought and water access, crop disease, climate change, and agricultural regulation could affect tenants and property values.
- Tenant defaults, crop and commodity-price volatility, lease renewals, and the relative illiquidity of farmland could reduce rent or delay re-leasing and sales. Permanent-crop farms carry additional development, disease and weather risks.
- Leverage, refinancing, interest-rate changes, secured-property foreclosure, and cross-collateralization may affect liquidity and distributions. REIT qualification, access to capital and the ability to maintain distributions are also risks.
- The company is externally managed by affiliates, creating potential conflicts of interest and related-party fee exposure. Adviser incentive fees were $3.0 million in 2020; the base management fee calculation changed under the 2020 advisory agreement.
Most important facts for investors to verify
- Reconcile net income attributable to the Company with the common-stockholder loss, preferred dividends and non-GAAP FFO/AFFO measures.
- Review debt maturities, collateral, covenant headroom, facility availability and the gap between year-end cash and management’s later-date liquidity figure.
- Assess whether acquisition-driven revenue growth, including the nonrecurring lease termination payment, translates into sustainable cash earnings and distributions.
- Track California and Florida concentration, water availability, tenant credit quality, participation-rent exposure and lease expirations.
- Confirm the impact of the Series D issuance and Series A redemption on preferred costs, common equity and future distribution capacity; consider that management’s estimated NAV per common share of $12.23 was unaudited and the year-end market price was $14.64.
The independent auditor issued an unqualified opinion on the financial statements. Its critical audit matter concerned judgment in allocating acquisition purchase prices, particularly land valuations using comparable sales. Management reported effective internal control over financial reporting as of December 31, 2020.