Gladstone Land Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. Amounts are U.S. dollars. Gladstone Land owns and leases farmland, generally under triple-net leases, and is externally managed.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $1.78m | $1.00m | $4.84m | $2.86m |
| Operating income | $0.30m | $0.35m | $1.05m | $1.06m |
| Operating margin | 17.0% | 35.0% | 21.8% | 37.2% |
| Net income (loss) | $0.10m | $0.005m | $(0.18)m | $0.083m |
| Net margin | 5.6% | 0.5% | (3.7%) | 2.9% |
| Basic and diluted EPS | $0.02 | $0.00 | $(0.03) | $0.01 |
For the nine months, operating cash flow was $2.03m, versus cash used of $1.80m a year earlier. Investing used $40.19m, principally for farmland acquisitions and improvements; financing provided $24.92m. Cash declined $13.24m to $3.03m.
At September 30, total assets were $120.62m and stockholders’ equity was $59.79m. Mortgage notes totaled $53.85m and line-of-credit borrowings were $3.50m, or $57.35m of total debt. Available liquidity was reported at approximately $27.8m: $3.0m cash plus $24.8m of available MetLife facility capacity, subject to covenants. Book-value debt to total capitalization was 48.9%. The company reported compliance with borrowing covenants.
Quarterly distributions were $0.09 per share in Q3 2014, compared with $0.36 in Q3 2013; nine-month distributions were $0.27 and $0.80, respectively. Subsequent to quarter-end, the board declared a further $0.09 per share for October through December 2014.
Material changes and operating developments
- Revenue increased 78.5% in Q3 and 69.2% year to date, mainly reflecting 15 additional farms acquired since September 2013. Same-property rental revenue rose 9.1% for Q3 and 8.2% for the nine-month period.
- Despite revenue growth, Q3 operating income fell 13.5%, as operating expenses rose 128%, including higher management and administration fees, depreciation, property costs, and acquisition expenses. Nine-month operating income was nearly flat, but higher interest expense and other costs contributed to a net loss.
- The portfolio grew to 29 farms across 7,641 acres, including 6,241 farmable acres. Eight farms were acquired during the first nine months for a reported total purchase price of approximately $37.6m.
- In May, the company replaced its prior MetLife financing with a facility of up to $125m, including a $100m long-term mortgage commitment and a $25m revolving line. It also obtained approximately $12.5m of Farm Credit loans in September. Debt interest rates are fixed initially on the mortgage borrowings, with later resets or floating-rate terms as described in the filing.
- The company elected REIT tax treatment beginning with 2013. The 2014 nine-month tax provision was $20,103; the filing describes a $2.1m tax amount due upon conversion, partly offset by reversal of $743,676 in deferred tax liabilities.
Outlook, risks, and unusual items
- Management intends to use available liquidity and future financing to pursue acquisitions and fund operations. No earnings or revenue guidance is provided. Three signed purchase agreements contemplated approximately $34.5m of additional acquisitions, subject to due diligence and customary conditions; completion was not assured.
- Management cited long-term food demand and farmland scarcity as favorable drivers, while noting acquisition-price pressure and possible higher borrowing costs if interest rates rise. It said drought had so far had little impact on its farms, which have their own water sources, but adverse weather or water conditions remain risks.
- Tenant and geographic concentration remain significant: Dole generated 44.7% of nine-month rental income; California properties generated 67.5%. The filing warns that tenant default or termination, or a natural disaster affecting key regions, could materially harm results.
- Two April fires damaged structures. Q3 included a net property and casualty recovery of $296,934; insurance receipts and expected recoveries offset recognized losses. Further recovery remained subject to the claims process. A terminated assumed lease also led to a $43,328 intangible write-off charged to amortization expense.
- Management estimated NAV at $13.77 per share, based on property fair-value estimates; this is a non-GAAP measure and is not a guarantee of realizable value. The September 30 closing share price was $12.01. Management cautioned that valuations rely on assumptions and may differ from sale proceeds.
Important facts for investors to verify
- Tenant exposure: Dole’s 44.7% share of rental revenue, tenant credit quality, and upcoming lease renewals, including Dalton Lane’s 2015 expiration.
- Whether proposed acquisitions close and how they are funded, given the company’s $3.03m cash balance and continuing acquisition plans.
- Debt availability and terms, covenant headroom, interest-rate resets, and the effect of potential rate increases on interest expense and liquidity.
- Insurance claim collections, remaining repair costs, and the accounting and cash-flow effects of the fire-related items.
- The sustainability of distributions relative to operating cash flow and AFFO; reported nine-month AFFO was $2.09m, or $0.32 per share, while distributions were $0.27 per share.
- Basis and sensitivity of the $13.77 NAV estimate, including appraisal coverage and internal valuation assumptions.