Gladstone Land Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Gladstone Land is an externally managed agricultural REIT that owns and leases farmland. At quarter-end it owned 59 farms comprising 54,340 acres across seven states, leased to 40 tenants.
Financial performance and position
- Revenue: Operating revenue was $5.75 million, up 56.1% year over year. Rental revenue rose 56.2% to $5.75 million; same-property rental revenue increased 5.7%. Growth also reflected farms acquired since Q1 2016.
- Profit and margins: Operating income increased 86.0% to $2.60 million. Net income was $173,000 versus $240,000; net income attributable to the Company was $152,000 versus $234,000. Diluted EPS was $0.01 versus $0.02. Operating margin was approximately 45.3% versus 38.0%; Company-attributable net margin was approximately 2.6% versus 6.4%.
- REIT supplemental measures: Diluted FFO, core FFO and AFFO were each $0.14 per weighted-average total share, versus $0.12, $0.13 and $0.12, respectively, in Q1 2016. These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Cash flow: Operating cash flow was $2.75 million, down 35.1%; investing cash outflow was $54.22 million, principally reflecting farm acquisitions; financing cash inflow was $51.50 million. Cash increased $35,000 to $2.47 million.
- Debt and liquidity: Borrowings, net, were $240.77 million at March 31, up from $207.35 million at year-end; the $27.71 million Series A preferred stock is also classified as a liability. Management reported approximately $26.0 million of available liquidity, including cash and collateral-based MetLife capacity. Debt-to-total-capitalization including preferred stock was 71.7% at book value and 58.1% at fair value.
- Assets and portfolio valuation: Total assets were $386.98 million, including $379.50 million of net real estate. Management-estimated real estate fair value was $460.62 million, and estimated NAV was $14.47 per common share; management cautions these unaudited estimates are subjective and may differ from realizable values. Q1 common-stock closing price was $11.10.
- Distributions: Common distributions were $0.129 per share for Q1, up from $0.120. The 6.375% Series A term preferred stock had Q1 distributions of $0.3984375 per share.
Material changes versus Q1 2016
- The portfolio expanded to 59 farms from 46 farms reported for the comparable period. Q1 2017 included one $54.0 million Florida farm acquisition, financed in part with $32.4 million of Farmer Mac bonds; the acquired farm contributed $645,000 of revenue after its January 12 purchase.
- March common-stock offerings issued 1,825,749 shares and generated approximately $19.6 million net proceeds. Shares outstanding rose to 11,850,624 from 10,024,875 at December 31, 2016.
- Interest expense rose to $2.16 million from $1.26 million, mainly due to higher average borrowings. The preferred-stock distributions added $458,000 of expense; no such preferred stock was outstanding in Q1 2016.
- Management and incentive fees increased to $744,000 from $387,000, including a $350,000 incentive fee in Q1 2017. Acquisition-related expenses fell to $9,000 from $95,000, partly reflecting early adoption of accounting guidance that generally capitalizes costs for asset acquisitions.
Outlook, commentary and risks
- No quantified full-year earnings or revenue guidance is provided. Management said near-term resources should cover distributions, debt service and operating costs, and plans to use available capital for additional acquisitions.
- Management reported three properties under signed purchase agreements for about $43.3 million, expected to close in Q2 2017, and properties under non-binding letters of intent totaling about $20.2 million, expected during the six months ending September 30, 2017. Closings and financing are not assured.
- Nine agricultural leases were scheduled to expire in 2017; management was negotiating renewals but gave no assurance of renewal at favorable rates. Leases covering 51.9% of acreage expire in 2020.
- Tenant concentration is material: one tenant accounted for 17.8% and Dole Food Company for 12.9% of Q1 rental revenue. California generated 49.7% of rental revenue, creating geographic and potential natural-disaster exposure.
- Interest-rate risk remains: approximately 91.5% of debt was fixed-rate, but some borrowings are variable or subject to later rate changes; the company had no derivatives. A one-percentage-point rate change was estimated to move fixed-rate debt fair value by about $9.5–$10.3 million.
- A California almond-orchard development was expected to finish in Q2 2017. Approximately $8.2 million had been expended or accrued against an estimated $8.3 million total cost; management expected about $5.1 million of additional rent over the remaining lease term.
- Effective April 1, 2017, a revised advisory agreement changed fee calculations and adds a capital-gains fee and potential termination fee. Management expects a higher base management fee but lower overall incentive fees in future periods. An affiliated Gladstone Securities entity may also earn 0.5%–1.0% financing fees.
- The company reported no material litigation, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Progress, final purchase prices and funding for the proposed acquisitions, including collateral availability under credit facilities.
- Renewal outcomes and rent terms for 2017 lease expirations, plus tenant credit and concentration developments.
- Whether operating cash generation supports distributions and debt obligations, given higher interest costs and acquisition activity.
- Assumptions and independent appraisal support behind management’s $460.62 million property valuation and $14.47 estimated NAV per share.
- Actual fee effects of the amended related-party agreements and the governance oversight of adviser and financing fees.