Business context and reporting period
Gladstone Land Corporation is an externally managed agricultural REIT that owns and leases farmland. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. At quarter-end, it owned 97 farms comprising 81,586 acres, leased to 70 unrelated tenants. Management reported 103 farms across 10 states by the filing date, reflecting subsequent acquisitions.
Financial performance and condition
| Metric | Three months ended Sept. 30, 2019 | Nine months ended Sept. 30, 2019 |
|---|---|---|
| Lease revenue | $11.0 million, up 37.4% | $27.2 million, up 27.5% |
| Operating income | $5.4 million; 49.4% of lease revenue | $12.8 million; 47.0% of lease revenue |
| Net income | $0.5 million | $0.8 million |
| Net income (loss) attributable to common stockholders | $(0.6) million; $(0.03) per share | $(1.9) million; $(0.10) per share |
| FFO / CFFO / AFFO per diluted share | $0.14 / $0.14 / $0.14 | $0.37 / $0.39 / $0.40 |
For the nine months, operating cash flow was $13.9 million, investing cash outflow $210.0 million, and financing cash inflow $185.3 million. Cash declined $10.7 million to $4.0 million. Real estate acquisitions used $200.7 million; capital expenditures were $9.0 million.
At September 30, total assets were $757.0 million and total equity $253.3 million. Notes and bonds payable, net, were $448.0 million; revolving credit borrowings were $4.1 million. The Series A term preferred stock, classified as a liability, had a carrying value of $28.3 million. Management stated available liquidity of approximately $13.4 million, consisting of approximately $3.1 million cash and $10.3 million available under the MetLife facility; this differs from the balance-sheet cash figure, which is $4.0 million.
Material changes versus the prior comparable period
- Lease revenue growth reflected acquisitions and increased fixed rents. Same-property fixed rents rose 0.8% for the quarter and 1.1% for the nine months; same-property participation rents fell 57.1% and 55.1%, respectively.
- Common-stockholder results weakened despite higher operating income. The 2018 comparisons included a $6.2 million gain on a farm disposition; 2019 recorded small disposition losses. Nine-month 2018 results also included crop-sale revenue and related costs from a temporarily self-operated farm, including a $1.1 million crop-inventory write-down. These items make total-revenue and net-income comparisons less representative of recurring leasing performance.
- Interest expense increased 42.8% for the quarter and 30.6% for the nine months, primarily as borrowings rose. Total borrowings, net, increased from $335.9 million at December 31, 2018 to $452.1 million at September 30, 2019.
- Equity issuance expanded the capital base: common shares outstanding increased from 17.9 million to 20.9 million, and Series B preferred shares from 1.14 million to 3.47 million. Series B dividends attributable to common stockholders consequently increased substantially.
Outlook, commentary, risks and unusual items
- Management said current and short-term resources should cover distributions, debt service, preferred dividends and operating costs in the near term. It expects to fund longer-term needs through equity issuance, mortgage and bond debt, and other borrowings, while continuing to pursue acquisitions. No quantified earnings or revenue guidance was provided.
- Management described its acquisition pipeline as healthy, but noted that prospective transactions remain subject to due diligence and may not be completed. Subsequent to quarter-end, the company acquired six farms for an aggregate purchase price of $51.7 million.
- Lease expirations are a key near-term consideration: leases covering 40.1% of acreage and 20.1% of nine-month lease revenue were scheduled to expire in 2020. After quarter-end, two leases representing 46.4% of the revenue associated with those 2020 expirations were extended.
- Revenue is geographically concentrated: California accounted for 51.0% and Florida 28.6% of nine-month lease revenue. One tenant contributed 12.2%; tenant default or non-renewal could materially affect results. Agricultural conditions, water availability and natural disasters are additional portfolio risks.
- Management estimated September 30 NAV at $11.49 per common share and OP Unit, compared with a $11.90 closing share price. The NAV is a management estimate based partly on appraisals and internal valuations, is not audited or assured by the external auditor, and may differ from realized asset values.
- The company reported compliance with debt covenants and no material litigation. It had commitments for property improvements, including up to $4.0 million contingent on vineyard approvals, plus other improvement commitments. Management was monitoring the expected LIBOR phaseout and anticipated renegotiating LIBOR-based credit arrangements; it expected minimal impact if SOFR replaced LIBOR with appropriate adjustments.
- The advisory agreement was amended effective for the September quarter: preferred equity is excluded from the base management fee calculation, while the revised incentive-fee calculation uses common equity and may increase the potential for incentive fees in future periods. The company is externally managed by affiliates, making related-party fees and governance relevant to investors.
Important facts for investors to verify
- Reconcile management’s stated $13.4 million available liquidity with the balance-sheet cash balance and confirm current borrowing availability and collateral constraints.
- Review 2020 lease renewals, remaining expirations, tenant credit quality and exposure to the largest tenant and California/Florida markets.
- Assess acquisition returns and funding: purchase spending was substantial, borrowings rose, and common and preferred equity issuance diluted common-stockholder participation.
- Compare recurring operating measures, including AFFO and same-property rents, with GAAP earnings; review the definitions and adjustments used for non-GAAP measures.
- Evaluate debt maturities, variable-rate exposure, refinancing plans and the mandatory September 2021 redemption of Series A term preferred stock.
- Review assumptions underlying the $11.49 estimated NAV, including appraisals, capitalization rates and land values, and distinguish that estimate from realizable proceeds.