Business context and reporting period
Gladstone Land Corporation’s Form 10-K covers the fiscal year ended December 31, 2018; it is an annual filing, not a standalone fourth-quarter report. The company is an externally managed agricultural REIT that principally owns and leases farmland, generally to unrelated farming tenants under net leases. At year-end it owned 85 farms comprising 73,205 acres; by February 25, 2019, it reported 86 farms, 73,900 acres, 100% occupancy by gross acreage, 64 tenants, and a 5.7-year weighted-average remaining lease term.
Financial and operating results
| Metric | 2018 | 2017 |
|---|---|---|
| Total operating revenue | $36.7 million | $25.1 million |
| Rental revenue | $29.3 million | $25.1 million |
| Net income (loss) | $2.8 million | $(34,000) |
| Net income (loss) attributable to common stockholders | $2.25 million | $(31,000) |
| Diluted EPS | $0.15 | Approximately $0.00 |
| Operating cash flow | $10.4 million | $6.5 million |
| Cash used in investing | $(93.8) million | $(129.6) million |
| Cash from financing | $95.2 million | $123.6 million |
- Rental revenue increased 16.8%. Growth reflected acquisitions, partly offset by a 1.8% decline in same-property fixed rents. Participation rents rose to $1.2 million from $304,000.
- Net income included a $5.5 million net gain on real estate dispositions, primarily the $6.4 million gain on the sale of the Oregon Trail farm. The company also recorded a $1.1 million crop-inventory write-down and a $194,000 property-and-casualty loss.
- FFO available to common stockholders and OP unitholders was $6.2 million, versus $7.2 million; AFFO was $8.4 million, versus $7.5 million. Diluted AFFO per share was $0.51, versus $0.56. These are non-GAAP measures defined by the company.
- Common distributions declared were $0.5319 per share, up from $0.5238. The company reported it had not missed a scheduled common distribution since its 2013 IPO; distributions remain subject to Board approval.
- At December 31, total assets were $565.1 million, total equity $181.1 million, cash $14.7 million, and borrowings net of issuance costs $335.9 million. The separately classified Series A term preferred stock liability was $28.1 million. Management reported debt-to-total-capitalization, including Series A preferred, of 66.8% at book value, down from 73.6%.
- Management reported available liquidity of approximately $37.7 million at the time of its discussion, including $19.6 million cash and $18.1 million available under the MetLife facility, subject to covenants. This is a later-period liquidity figure; year-end balance-sheet cash was $14.7 million.
Material changes versus the prior comparable period
- Revenue and operating cash flow increased, driven mainly by portfolio expansion and crop-sale activity through the taxable REIT subsidiary (TRS). The TRS farming activity generated $7.3 million of other operating revenue and $7.7 million of related operating expense in 2018; management excluded its net incremental impact from CFFO and AFFO as non-core.
- Operating expenses, net of adviser credits, rose 78.8% to $24.6 million, including higher depreciation, property costs, administration costs, and TRS crop-operating costs. Interest expense and financing costs increased 24.3% to $12.1 million as average borrowings rose and the effective borrowing rate increased.
- The company acquired 13 farms in 2018 for an aggregate purchase price of approximately $91.4 million and sold the 1,895-acre Oregon Trail farm for $20.5 million. The sale proceeds funded the Owl Hammock acquisition as part of a like-kind exchange.
- Capital expenditures on existing properties increased to $22.6 million from $5.2 million. Common and preferred equity offerings raised substantial capital; the company also increased outstanding notes and bonds.
- Estimated NAV per common share and OP Unit was $12.88 at year-end, down from $13.79 at September 30, 2018. NAV is a management estimate, not an audited GAAP measure; the December 31 common-stock closing price was $11.48.
- Fourth-quarter 2018 operating revenue was $8.0 million and net loss was $1.1 million, compared with $6.8 million revenue and $215,000 net loss in fourth-quarter 2017. Fourth-quarter 2018 loss attributable to common stockholders was $1.3 million, or $0.07 per share.
Outlook, risks, contingencies, and unusual items
- Management said its near-term cash resources were expected to cover distributions, debt service, preferred dividends, and operating costs. It planned to use available liquidity for acquisitions and expected to rely on future equity issuance and borrowing for longer-term needs. Three properties were under signed purchase agreements for approximately $41.9 million, targeted for completion by June 30, 2019; completion was not assured. No specific earnings or rental-growth guidance was provided.
- Tenant concentration is material: one tenant leased five farms and generated 15.1% of 2018 rental revenue. California and Florida generated 46.5% and 27.7%, respectively, of rental revenue. Lease expirations include 39.1% of leased acreage in 2020, creating renewal and re-leasing exposure.
- Key business risks include tenant default or bankruptcy, weather and climate impacts, crop disease and price volatility, water availability and regulation, geographic concentration, and the higher risks of permanent-crop farmland. Most properties were pledged as collateral; certain mortgages were cross-collateralized. Management reported covenant compliance at year-end.
- The Farmer Mac facility’s bond-issuance period expired in December 2018, and Farmer Mac was no longer obligated to purchase additional bonds. The company was discussing a possible expansion and extension, without assurance of favorable terms. Debt maturities, refinancing access, interest-rate changes, and leverage may affect liquidity and distributions.
- Gladstone Land is externally managed by affiliates. Related-party arrangements include management and administration fees, financing fees, and Series B preferred-stock selling commissions. The adviser received a 2.0% annual base management fee and may earn incentive, capital-gains, or termination fees; conflicts of interest are disclosed.
- Unusual 2018 items included forgiveness of rent and an intercompany note balance associated with the TRS-operated farm (eliminated in consolidation), unsold strawberry crops written down to zero amid bumper California crops, and irrigation damage from a lightning strike and Hurricane Michael. Repairs to the Florida irrigation pivots were ongoing, and recovery amounts had not been determined.
- The company reported no material litigation, no off-balance-sheet arrangements, and effective internal control over financial reporting. Its independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the timing and composition of reported available liquidity with year-end cash and confirm borrowing availability under applicable collateral and covenant limits.
- Track the concentrated tenant’s rent payments and upcoming lease renewals, especially the acreage scheduled to expire in 2020.
- Assess whether operating cash flow and AFFO support common and preferred distributions, without reliance on asset sales, new equity, or additional borrowing.
- Review debt maturities, variable-rate exposure, collateral and cross-default terms, and the status of any Farmer Mac facility extension.
- Examine the assumptions behind management’s estimated NAV, including appraisals, capitalization rates, water access, and permanent-crop valuations; NAV is unaudited and may differ from realized sale values.
- Confirm the financial impact of TRS activity, the crop-inventory write-down, irrigation repairs and any recoveries, and related-party fee waivers and payments.