Gladstone Land Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Gladstone Land is an externally managed agricultural REIT focused primarily on owning and leasing farmland. At quarter-end it owned 75 farms totaling 63,351 acres across nine states.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total operating revenue | $9.245 million | $5.750 million; up 60.8% |
| Rental revenue | $6.688 million | $5.748 million; up 16.4% |
| Operating income | $2.786 million | $2.604 million; up 7.0% |
| Net income (loss) attributable to company | $(0.297) million; $(0.02) per share | $0.152 million; $0.01 per share |
| Operating cash flow | $2.751 million | $2.746 million |
| Cash and cash equivalents at quarter-end | $2.679 million | $2.938 million at December 31, 2017 |
| Total assets | $472.916 million | $462.278 million at December 31, 2017 |
| Borrowings, net of debt issuance costs | $292.950 million | $301.002 million at December 31, 2017 |
- Operating margin was approximately 30.1% of reported revenue; net margin was approximately negative 3.4%. Interest expense was $2.832 million, up 31.3%, primarily reflecting higher average borrowings ($305.3 million versus $251.0 million).
- Investing activities used $9.310 million, including $5.032 million for acquisitions and $4.478 million for existing-property capital expenditures. Financing activities provided $6.300 million; cash declined $0.259 million.
- Management reported approximately $18.7 million of available liquidity, comprising approximately $2.2 million cash and $16.5 million of borrowing availability under the MetLife facility, subject to covenants and collateral. The balance sheet reports cash of $2.679 million.
- Book-value total-debt-to-total-capitalization, including Series A preferred stock as debt, was 70.9%, down from 73.6% at year-end; management reported 58.7% on a fair-value basis.
- Common distributions were $0.13275 per share for the quarter. Diluted AFFO was $0.14 per share, unchanged from Q1 2017; diluted FFO was $0.13 versus $0.14. These are non-GAAP measures.
Material changes versus Q1 2017
- Rental revenue increased by $0.940 million. Same-property rental revenue rose 1.6%; acquisitions made after Q1 2017 contributed $0.975 million in rental revenue.
- Other operating revenue of $2.551 million and related operating expense of $2.359 million came principally from crop sales by the company’s taxable subsidiary, which began farming a California property in October 2017. This activity contributed revenue but limited its net contribution.
- Total operating expenses increased 105.3%, including higher depreciation and amortization, costs associated with the subsidiary’s crop operations, and acquisition-related expenses. Operating income rose only 7.0%.
- GAAP results shifted from income to loss, reflecting higher interest expense and operating costs, along with a $0.129 million property and casualty loss from lightning damage. The prior-year period included a $0.350 million adviser incentive fee; none was earned in Q1 2018.
- The company acquired two farms for a total of $5.045 million, compared with one $54.0 million acquisition in Q1 2017. Common shares outstanding increased, with 1.417 million net shares issued during the quarter.
Outlook, risks, and unusual items
- The filing provides no formal earnings or FFO guidance. Management said near-term resources should cover distributions, debt service, preferred dividends, and operating costs, and plans to use available capital in part for acquisitions.
- Management cited a healthy acquisition pipeline and one property under a signed purchase agreement for approximately $37.2 million, expected to close in the six months ending September 30, 2018; completion is not assured. The company also had several capital commitments for farm improvements.
- Two Arizona farm leases were replaced with one-year leases. Aggregate minimum rent fell approximately $203,000, or 29.7%, compared with the prior leases, but the new leases include variable rent and are triple-net.
- One tenant accounted for 16.6% of Q1 rental revenue. California contributed 45.3% and Florida 26.2% of rental revenue, creating tenant and geographic concentration exposure, including weather and other natural-disaster risks.
- Lightning damage resulted in a $0.129 million write-down and $0.081 million of repairs. Management believes at least partial insurance recovery is probable but had not recorded an offset pending assessment of recovery and collectability.
- Interest-rate exposure includes variable-rate debt and fixed-rate debt that may reset or convert to variable rates; the company had no derivatives to hedge this risk. Management reported covenant compliance. No material litigation or material off-balance-sheet arrangements were reported, and no material change in risk factors was identified.
- The Series B preferred offering, launched in January for up to $150 million gross proceeds in the primary offering, had no sales through the filing date. Its dealer-manager is an affiliate, and the stated selling commissions and dealer-manager fee can total up to 10% of primary-offering gross proceeds.
- Estimated NAV was $13.57 per common share, down from $13.96 at year-end. Management emphasized that NAV depends on subjective valuations and is not assured to equal realizable sale values; the quarter-end common-stock price was $12.08.
Important facts for investors to verify
- Whether the reported $16.5 million of MetLife availability remains accessible under current collateral and covenant requirements; also reconcile management’s approximately $2.2 million cash figure with the balance-sheet amount of $2.679 million.
- Progress, financing, and expected returns for the approximately $37.2 million proposed acquisition and outstanding improvement commitments.
- Renewal, collection, and variable-rent performance of the Arizona leases, and developments affecting the tenant responsible for 16.6% of rental revenue.
- Insurance proceeds ultimately recoverable for the lightning damage and any effect on reported results.
- Future equity issuance, dilution, preferred-offering costs and uptake, and the sustainability of distributions relative to cash generation and AFFO.