Gladstone Land Corporation — FY2017 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2017. Gladstone Land is an externally managed agricultural REIT that primarily owns farmland and leases it to farming tenants, generally on net-lease terms. At year-end it reported 73 farms across nine states, with 63,014 total acres and 50,894 farmable acres; later filing text describes a 74-farm portfolio. The company reported 52 third-party tenants and one farm temporarily operated by its taxable REIT subsidiary (TRS).
Financial and operating metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Operating revenue | $25.1 million | $17.3 million |
| Operating income | $11.4 million | $7.1 million |
| Operating margin | 45.3% | 40.7% |
| Net income (loss) | $(34,000) | $473,000 |
| FFO (non-GAAP) | $7.2 million | $5.7 million |
| AFFO (non-GAAP) | $7.5 million | $5.8 million |
| Cash from operating activities | $6.5 million | $8.4 million |
| Common distributions per share | $0.5238 | $0.4950 |
Rental revenue rose 45.1%; operating income increased 61.2%. Net income slipped to a small loss as interest expense rose to $9.8 million from $6.0 million and distributions on mandatorily redeemable Series A preferred stock increased to $1.8 million from $0.7 million. AFFO grew 28.2%; diluted AFFO was $0.56 per total share versus $0.54. Common distributions were about $0.52 per share, approximately 94% of diluted AFFO per share.
At December 31, total borrowings were approximately $303.0 million before deferred financing costs; the Series A preferred liability had a carrying value of $27.9 million and a $28.8 million principal amount. Management reported debt-to-total-capitalization of 73.6% on a book-value basis and 61.1% on a fair-value basis, including Series A preferred stock as debt. Cash was $2.9 million on the balance sheet. Management separately reported approximately $7.9 million of available liquidity, including cash and $4.6 million of borrowing availability under MetLife, subject to collateral and covenant limits.
Material changes versus the prior comparable period
- Acquired 16 farms totaling 12,641 acres for approximately $128.7 million; reported rental revenue benefited from both these acquisitions and the full-year contribution of 2016 acquisitions.
- Same-property rental revenue increased 2.3%. Ten lease renewals on nine farms produced approximately $2.2 million of annualized rent, down about 7.0% from the prior leases, with no downtime.
- Issued common shares in two public offerings and through the ATM program, raising approximately $39.9 million net during 2017. Borrowings also increased to fund portfolio expansion.
- Operating cash flow decreased 22.5%, partly due to prior-period prepaid rent and costs associated with starting TRS farming operations.
- Common distributions rose from $0.4950 to $0.5238 per share. About 67.4% of 2017 common distributions were classified as return of capital for tax purposes.
Outlook, commentary, risks and unusual items
No quantified earnings or acquisition guidance is provided. Management said it intended to continue acquiring farmland and farm-related properties and believed near-term cash resources were sufficient for operations, debt service and distributions. Two properties were under signed purchase agreements for an aggregate proposed price of approximately $21.1 million, with closings expected in the first half of 2018. A continuous offering of up to $150 million gross of Series B preferred stock was launched in January 2018; no shares had been sold by the filing date. Proceeds were intended for debt repayment, acquisitions and general corporate purposes.
- Portfolio and tenant concentration: California generated 47.8% of 2017 rental revenue; Florida 26.2%. One tenant accounted for 17.3% of rental revenue. Dole represented 11.8% during 2017, but one Dole lease was replaced effective January 2018.
- Leasing risk: 45.2% of leased acreage and 29.7% of rental revenue related to leases expiring in 2020. Subsequent Arizona lease replacements reduced minimum rent by approximately 29.7%, with variable-rent terms added.
- Agricultural exposure includes tenant credit, crop prices and yields, water availability, drought and other weather events, pests and disease. Permanent-crop farms carry longer development timelines and greater replacement risk. California water access and climate-related impacts are notable sensitivities.
- Leverage and financing: debt is secured by farmland, some collateral is cross-collateralized, and refinancing depends on capital markets and property values. Management disclosed no derivative hedges. The company reported compliance with debt covenants at year-end.
- Unusual items included approximately $150,000 of bad-debt expense from early lease terminations, a net $85,000 gain on the sale of one Florida farm, and about $106,000 of losses from removed blueberry bushes and an abandoned well. The TRS began operating one California farm; no TRS taxable income was reported for 2017.
- Estimated NAV was $13.96 per share at year-end, based on management’s property valuations; the common stock closed at $13.43. NAV is a non-GAAP estimate and was not audited or assured by the independent auditor.
- The company is a REIT and must satisfy distribution and other tax tests. It also disclosed related-party management arrangements, risks from its externally managed structure, and a new preferred offering managed by an affiliate. No material litigation was reported; management concluded internal controls were effective.
Important facts for investors to verify
- Reconcile the reported 73 year-end farms, the later 74-farm portfolio figure, and the statement of 100% occupancy with the disclosure that one farm was vacant.
- Review tenant-level credit and lease exposure, especially the 17.3% revenue concentration and the substantial 2020 lease expirations.
- Assess debt maturities, collateral availability, cross-collateralization, covenant headroom and the difference between stated and effective borrowing costs.
- Compare recurring operating cash flow and AFFO with common and preferred distributions; do not treat FFO or AFFO as GAAP cash flow or guaranteed distribution capacity.
- Track Series B offering proceeds, costs, redemption terms and potential dilution or priority claims; no shares had been sold as of the filing date.
- Examine assumptions behind management’s farmland valuations and NAV, including water access, crop development commitments, tenant rent-paying ability and market capitalization rates.