Gladstone Land Corporation — Q2 2015 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2015. Gladstone Land is an externally managed REIT that owns and leases farmland; it reported 36 farms totaling 11,467 acres across five states, leased to 30 tenants.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue, 2015 | $2.784 million | $5.410 million |
| Operating revenue, 2014 | $1.566 million | $3.062 million |
| Operating income, 2015 | $895,000 | $1.849 million |
| Net loss, 2015 | $(30,000) | $(6,000) |
| Net loss, 2014 | $(301,000) | $(280,000) |
| Operating cash flow, 2015 | Not separately reported in the supplied filing text | $1.606 million |
| Investing cash flow, 2015 | Not separately reported in the supplied filing text | $(37.165) million |
| Financing cash flow, 2015 | Not separately reported in the supplied filing text | $36.098 million |
- Quarterly revenue rose 77.8% year over year; six-month revenue rose 76.7%. Management attributed most of the growth to farms acquired since June 2014. Same-property rental revenue increased 3.5% for the quarter and 2.0% for the six-month period.
- Operating margin, calculated as operating income divided by revenue, was approximately 32.1% for Q2 2015 versus 22.8% in Q2 2014; for the six-month periods it was 34.2% versus 24.6%.
- Interest expense increased to $947,000 for Q2 and $1.897 million for six months, mainly reflecting higher borrowing balances. Weighted-average borrowings for the six-month period were $104.0 million, versus $41.9 million a year earlier.
- At June 30, total assets were $189.2 million, net real estate was $180.5 million, and cash was $3.159 million. Total debt was $110.461 million, including $107.661 million of mortgage notes and bonds and $2.8 million drawn on the line of credit. Stockholders’ equity was $71.9 million.
- Management reported a 60.6% debt-to-total-capitalization ratio at book value, up from 59.0% at December 31, 2014. Debt carried a reported weighted-average effective rate of approximately 3.6% for Q2 and 3.5% for the six-month period, excluding deferred financing costs.
- Six-month distributions were $0.225 per share, versus $0.18 in 2014. The board subsequently declared $0.12 per share for July–September 2015.
- Non-GAAP FFO, CFFO and AFFO for the six-month period were $1.498 million, $1.884 million and $1.673 million, respectively; AFFO was $0.21 per weighted-average share. The company cautions that these measures are not substitutes for GAAP results or operating cash flow.
Material changes and notable activity
- The company acquired four farms in three transactions during the first half for an aggregate purchase price of $36.6 million, adding 3,428 acres. Portfolio size grew from 26 farms and 6,439 acres a year earlier to 36 farms and 11,467 acres.
- Common shares outstanding rose to 9,060,314 from 7,753,717 at year-end. A May–June follow-on offering issued 1,306,597 shares at $11.40 each and generated approximately $13.8 million net proceeds.
- Rental revenue growth was partly offset by higher depreciation, administration and property expenses, and substantially higher interest expense. A $320,905 adviser finder’s fee was credited against management fees in the first half.
- Several leases were renewed or extended at higher rents: reported increases included 7.9% at Keysville Road, 32.5% at Spring Valley, 5.8% at Santa Clara and 16.8% at Dalton Lane. All three leases originally due to expire in 2015 were renewed or extended.
Outlook, risks and contingencies
- No formal earnings or revenue guidance was provided. Management said current resources were expected to cover near-term distributions, debt service and operating costs. It reported approximately $18.3 million of available liquidity, described as $1.8 million cash plus $16.5 million available under the MetLife facility, subject to collateral and covenant requirements. This liquidity cash figure differs from the $3.159 million balance-sheet cash amount and should be reconciled.
- Management was pursuing acquisitions and reported signed purchase agreements for an 841-acre California property for about $18.9 million and two Nebraska farms for about $11.0 million in total; completion was subject to conditions and not assured. These properties were not owned at June 30.
- Committed or anticipated property investments included approximately $275,000 of additional irrigation work at Sycamore Road, tenant-elected irrigation upgrades at Wauchula Road with reimbursement capped at $1.5 million, and up to $500,000 of irrigation capital for Parrish Road. Parrish also had $700,000 of contingent consideration tied to water-permit approval.
- The company assumed an eminent-domain lawsuit concerning approximately 4.5 nonfarmable acres at Espinosa Road and intended to accept a $160,000 compensation offer. It reported no material known or threatened litigation and no material legal proceeding.
- Principal risks include tenant and geographic concentration, agricultural and water availability conditions, natural disasters, interest-rate exposure, lease renewal and refinancing risk, acquisition execution, REIT qualification and access to capital. Dole accounted for 27.3% of first-half rental revenue; California accounted for 68.7%. The company has variable-rate or periodically resetting debt and reported no interest-rate derivatives.
- Q2 included a $20,809 insurance recovery related to a 2014 fire; an additional $76,423 was received after quarter-end and was expected to be recognized in Q3. Repairs at one affected property were ongoing, with completion expected in Q3 and no cost to the company.
- Management estimated June 30 NAV at $13.42 per share, versus a closing share price of $10.34. NAV relies partly on internal property valuations and assumptions; management cautioned that realized asset values could differ materially. The filing’s portfolio valuation table and quarterly rollforward show slightly different totals, which merits reconciliation.
Important facts for investors to verify
- Reconcile management’s stated $1.8 million cash in available liquidity with balance-sheet cash of $3.159 million, and confirm current borrowing availability and collateral requirements.
- Review tenant concentration, especially Dole, and lease expirations: the filing shows 20.4% of first-half rental revenue associated with leases expiring in 2017 and 30.3% in 2020.
- Assess whether acquisition-driven revenue and AFFO growth can cover higher interest costs, distributions and future capital needs without continued equity issuance or increased leverage.
- Verify completion, funding and rent effects of the pending acquisitions, irrigation commitments, water-permit condition and eminent-domain matter.
- Evaluate the assumptions behind the $13.42 NAV estimate and the difference between the reported portfolio fair-value totals; compare independently with market price and potential sale values.