Business context and reporting period
Gladstone Land Corporation is an externally managed REIT that owns and leases farmland and farm-related facilities; it does not operate as a grower. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. At quarter-end, the company reported 47 farms across seven states, with 23,456 total acres and 18,395 farmable acres. A July 1 acquisition brought the portfolio to 48 farms.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $4.24 million; up 52.5% | $7.93 million; up 46.5% |
| Operating income | $1.59 million; up 78.2% | $2.99 million; up 61.9% |
| Net income attributable to company | $107,813; prior-year loss $30,289 | $342,229; prior-year loss $5,715 |
| Basic and diluted EPS | $0.01; prior-year loss per share reported as $0.00 | $0.03; prior-year loss per share reported as $0.00 |
| Operating margin | 37.6%; prior year 32.1% | 37.8%; prior year 34.2% |
Rental revenue drove growth: same-property rental revenue increased 3.9% for the quarter and 4.3% for the six-month period. Growth also reflected acquisitions, higher renewed rents, and rent from property improvements. Interest expense rose 56.9% for the quarter and 44.5% for the half-year, mainly because of higher borrowings.
- Cash flow: Six-month operating cash flow was $6.26 million, investing cash outflow $42.63 million, and financing cash inflow $35.91 million. Cash declined $455,272 to $2.08 million.
- Assets and debt: Total assets were $275.19 million. Mortgage notes and bonds payable, net, were $165.97 million, and line-of-credit borrowings were $14.50 million. Aggregate debt principal was $181.53 million.
- Leverage and liquidity: Debt-to-total-capitalization was 68.8% on a book basis and 55.3% on a fair-value basis, versus 64.7% and 50.2% at year-end 2015. MD&A stated available liquidity of approximately $8.2 million, including $2.8 million cash and $5.4 million facility availability; this cash figure does not match the balance sheet’s $2.08 million.
- Distributions: The company paid $0.24375 per common share for the first half, up from $0.225 in 2015. It declared $0.04125 monthly for July through September.
- REIT operating measures: Six-month diluted AFFO was $0.26 per weighted-average total share, versus $0.17 in 2015. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Material changes versus the prior comparable period
- Rental revenue growth substantially outpaced expense growth, lifting operating income; the company moved from small GAAP losses to positive net income.
- The portfolio expanded through acquisitions, including four farms acquired in the first half for approximately $41.2 million. The company issued OP Units worth approximately $6.5 million as partial consideration for Gunbarrel Road.
- Capital spending on existing real estate rose: six-month capital expenditures were $7.88 million, compared with $1.59 million in 2015. The company also reimbursed tenants for irrigation improvements that increase contracted rents.
- Debt principal increased from $142.73 million at December 31, 2015, to $181.53 million at June 30, 2016. Farmer Mac’s borrowing capacity was increased from $75 million to $125 million, although collateral constraints limited current availability.
- California generated 56.8% of first-half rental revenue, while Dole Food Company contributed 18.6%, indicating tenant and geographic concentration.
Outlook, commentary, risks and unusual items
- Management said near-term resources should cover distributions, debt service, and operating costs. It expected to fund longer-term needs through equity, OP Unit issuance, mortgage debt, bonds, and other borrowings.
- Five potential acquisitions were under signed purchase agreements or non-binding letters of intent, with proposed aggregate consideration of approximately $62.2 million; management expected them to close in the second half of 2016, subject to due diligence and financing.
- The company was discussing modifications to the MetLife facility and a possible new Farm Credit CFL facility. These discussions were not completed commitments, and management gave no assurance of favorable terms or completion.
- Bear Mountain’s almond-orchard development was estimated to cost approximately $7.8 million and was expected to be completed in the third quarter; approximately $7.1 million had been spent or accrued by June 30. Final cost and incremental rent were not yet clear.
- One lease was expected to terminate early, with re-leasing anticipated in the third quarter; the company warned it might not re-lease on favorable terms or at all. A related deferred-rent asset write-off of approximately $64,000 was recorded in the quarter.
- Material risks include weather and natural disasters, interest-rate exposure, tenant credit, lease renewals, acquisition execution, REIT qualification, and dependence on key personnel. Dole and California are significant concentrations. The company reported no material known or threatened litigation.
- Management estimated NAV at $13.68 per share, compared with a June 30 market price of $11.06. The valuation is management-prepared, relies partly on internal estimates and appraisals, is not audited or assured by the external auditor, and may differ from realizable sale values.
- The filing reports disclosure controls as effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile MD&A’s stated $2.8 million cash and $8.2 million available liquidity with balance-sheet cash of $2.08 million and the disclosed borrowing availability.
- Confirm current borrowing balances, collateral-based availability, covenants, and the status and terms of proposed lender-facility changes; the filing’s narrative and debt tables contain differing line-of-credit figures.
- Track the proposed $62.2 million acquisition pipeline, the financing required, and whether the transactions close as expected.
- Monitor lease renewals and re-leasing, especially the lease due to expire in 2016 and the anticipated early termination, along with Dole’s tenant exposure and California revenue concentration.
- Assess the assumptions and independent support for farmland valuations and NAV, and the market-price gap to estimated NAV.
- Verify completion and total cost of the Bear Mountain project and the resulting rent, and evaluate the sustainability of distributions against AFFO, cash flow, debt service, and capital needs.