Farmland Partners Inc. 2016 Form 10-K Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed farmland REIT whose primary business is acquiring, owning and leasing U.S. farmland. The portfolio was approximately 115,489 acres and included eight grain-storage facilities at December 31, 2016; subsequent to year-end, the AFCO merger expanded the portfolio substantially. Approximately 75% of acreage was devoted to primary crops and 25% to specialty crops. The company also operated a taxable REIT subsidiary engaged in limited custom farming and originated secured agricultural loans.
This filing covers the fiscal year ended December 31, 2016. The fourth quarter is included in the annual filing but is not a separate reporting period. The AFCO merger closed on February 2, 2017 and therefore was not included in 2016 operating results.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenues | $31.0 million | $13.8 million | +125.4% |
| Net operating income | $28.6 million | $12.7 million | +126% |
| Operating income | $15.6 million | $6.2 million | +151.4% |
| Net income | $6.0 million | $1.7 million | +255.2% |
| Net income available to common stockholders | $1.2 million | $0.8 million | +45.6% |
| Basic and diluted EPS | $0.09 | $0.08 | Increase |
| FFO | $7.6 million | $2.6 million | +192% |
| AFFO | $11.0 million | $4.1 million | +172% |
| Adjusted EBITDA | $21.6 million | $8.7 million | +149% |
Operating margin was approximately 50.4% and net margin was approximately 19.4%. Rental income represented $29.7 million of revenue, including $3.7 million of previously deferred rent recognized and a $2.8 million early termination payment related to certain leases. Same-property contractual rents increased 2.8%, or approximately $0.3 million, and average annual cash rent for the full portfolio increased to $224 per acre from $215 per acre.
Net cash provided by operating activities was $5.0 million, down from $7.7 million in 2015, primarily due to higher interest payments, employee compensation and working capital needs. Investing activities used $137.4 million, including $131.8 million for acquisitions and $5.7 million for property improvements. Financing activities provided $156.0 million. Cash and cash equivalents increased to $47.2 million from $23.5 million.
Total assets increased to $655.5 million from $345.0 million. Net real estate increased to $594.1 million from $316.2 million. Total liabilities were $320.0 million, including $308.8 million of mortgage notes and bonds payable, compared with $196.7 million of liabilities and $187.1 million of debt in 2015.
The company completed 24 acquisitions totaling approximately 41,069 acres for an aggregate purchase price of $273.4 million. It raised approximately $32.9 million of net proceeds in a December 2016 common-stock offering and approximately $11.1 million through its at-the-market program. Quarterly common distributions totaled $0.51 per share in 2016, or $0.1275 per quarter.
Fourth-quarter results
| Metric | Three months ended December 31, 2016 |
|---|---|
| Operating revenues | $13.3 million |
| Net income | $6.5 million |
| Net income available to common stockholders | $3.8 million |
| Basic EPS | $0.26 |
| Diluted EPS | $0.18 |
Fourth-quarter results benefited materially from the lease termination settlement and recognition of previously deferred rent.
Material changes versus the prior comparable period
- Revenue growth was primarily acquisition-driven, with 50 acquisitions completed during 2015 and 2016, rather than driven by significant same-property rent growth.
- Interest expense increased 115.7% to $10.0 million, reflecting substantially higher borrowings and approximately $2.4 million of Bridge Loan interest and amortization costs, including a $2.1 million issuance discount that management characterized as nonrecurring.
- Acquisition and due diligence costs increased to $2.5 million, including approximately $2.4 million related to the AFCO transaction.
- General and administrative expense increased 67.5% to $7.0 million as the portfolio and employee base expanded.
- Debt increased by approximately $122.6 million, while real estate assets increased by approximately $277.8 million.
- The company issued 117,000 preferred operating-partnership units in connection with the Forsythe acquisition. These units had a $1,000 liquidation preference and a 3% cumulative distribution, resulting in approximately $119.9 million of redeemable preferred non-controlling interest at year-end.
Guidance, outlook, risks and unusual items
Management expected 2017 primary-crop rents to be flat to modestly lower on renewals because of continued crop-market pressure, with specialty-crop rents flat to modestly higher. Management also expected rent increases from irrigation, drainage and grain-storage improvements to partially offset primary-crop weakness. The filing does not provide formal earnings or revenue guidance.
Management expected long-term farmland values and rents to benefit from global food-demand growth and limited high-quality farmland supply, but acknowledged that crop prices, tenant profitability and farmland values remain cyclical. Approximately 24.1% of leased acres and 25.9% of annualized minimum cash rents were scheduled to expire in 2017, while 51.7% of leased acres and 41.7% of annualized minimum cash rents were scheduled to expire in 2018.
At December 31, 2016, approximately $81.2 million of debt was scheduled to mature in 2017. Management planned to refinance these maturities but stated that comparable refinancing was not assured and that no alternative capital sources had yet been identified. Approximately 36% of debt, or $110.8 million, carried variable interest rates; a 100-basis-point increase in rates was estimated to reduce annual cash flow by approximately $1.1 million.
Other key risks include tenant defaults and concentration, adverse weather and crop disease, commodity-price volatility, water availability and regulation, short lease terms, secured-debt foreclosure risk, REIT qualification requirements, environmental liabilities and dependence on capital markets. The company reported no real-estate impairments and no off-balance-sheet arrangements. A purported class action related to the AFCO merger remained pending, although the plaintiffs did not pursue the requested injunction and the merger closed.
Subsequent to year-end, the AFCO merger added approximately 17,817 acres and was valued at approximately $171.1 million of stock and OP-unit consideration. The company also disclosed additional 2017 acquisitions, new MetLife and Rutledge financing, and a planned termination of Prudential sub-advisory and property-management agreements for approximately $1.6 million plus a termination fee of approximately $0.16 million.
Most important facts for investors to verify
- Debt refinancing: Confirm whether the $81.2 million of 2017 maturities were refinanced on acceptable terms and whether leverage and covenant compliance changed after the AFCO merger.
- Recurring earnings quality: Separate recurring rental income and AFFO from the $3.7 million deferred-rent recognition, $2.8 million lease termination payment and nonrecurring Bridge Loan costs.
- AFCO integration: Verify the final purchase-price allocation, acquired debt, realized synergies and post-merger operating performance.
- Tenant exposure: Review the concentration represented by Tenant A, which generated 40.4% of 2016 rental income, and assess collections and lease renewals.
- Lease rollover: Evaluate the 2017 and 2018 expirations, renewal rates and the effect of expected lower primary-crop rents.
- Distribution coverage: Compare the $0.51 per-share annual distribution with recurring AFFO, operating cash flow, preferred-unit distributions and required capital expenditures.
- Data consistency: Reconcile the filing’s differing acreage figures, including approximately 115,489 acres at December 31, 2016 and approximately 142,223 acres reported after subsequent acquisitions and the AFCO transaction.