Business Context and Reporting Period
Farmland Partners Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company owns and acquires primary row-crop farmland through Farmland Partners Operating Partnership, LP and intends to qualify as a REIT beginning with its short taxable year ending December 31, 2014.
The April 16, 2014 IPO and related formation transactions materially changed the company’s structure. The comparative 2013 results represent the predecessor business, while 2014 includes the predecessor before the IPO and the company’s consolidated results thereafter. At June 30, 2014, the company owned or controlled 40 farms and three grain storage facilities and held approximately 67.4% of the Operating Partnership.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Total operating revenues | $786,398 | $564,331 | $1,472,049 | $1,127,330 |
| Operating income (loss) | $(253,132) | $496,946 | $216,032 | $1,002,849 |
| Net income (loss) | $(541,668) | $170,459 | $(407,078) | $348,101 |
| Net loss attributable to the company | $(358,283) | $170,459 | $(358,283) | $348,101 |
| Loss per common share | $(0.12) | Not provided | $(0.24) | Not provided |
| FFO | $(472,299) | $205,816 | $(297,814) | $418,188 |
| AFFO | $266,607 | $217,666 | $441,092 | $430,038 |
Revenue increased 39.4% in the second quarter and 30.6% for the six-month period. Calculated operating margins were approximately negative 32.2% and 14.7%, respectively; calculated net margins were approximately negative 68.9% and negative 27.6%.
- Rental income rose 24.2% in the quarter and 18.6% year to date. Tenant reimbursements contributed $77,830 in the quarter and $127,627 year to date, compared with none in the prior-year periods.
- Operating expenses increased sharply, primarily because of public-company costs, officer compensation, stock-based compensation, professional fees, acquisition costs and property expenses.
- Interest expense declined 11.6% in the quarter and 4.8% year to date after debt repayments funded partly with IPO proceeds.
- Cash provided by operating activities was $2.23 million, compared with cash used of $124,707 in the prior-year period. Cash used in investing activities was $32.49 million, principally for acquisitions, while financing activities provided $35.67 million.
- Cash was $5.43 million at June 30, 2014, compared with $17,805 at December 31, 2013. Total assets were $76.95 million and total equity was $42.11 million.
- Mortgage notes payable totaled $30.75 million, down from $43.07 million at December 31, 2013. Approximately 100% of debt carried variable interest rates, principally based on LIBOR plus a spread, and substantially all debt matured in 2016.
- A 100-basis-point increase in interest rates was estimated to reduce annual cash flow by approximately $0.4 million, assuming no change in variable-rate debt.
- The company declared a quarterly dividend of $0.105 per common share. The July 2014 dividend was payable on July 15, 2014.
Material Changes Versus the Prior Comparable Period
- The company completed its IPO on April 16, 2014, selling 3.8 million shares at $14.00 per share and receiving approximately $48.0 million of net proceeds.
- IPO proceeds were used to repay approximately $12.0 million of debt, fund acquisitions and provide working capital.
- The company acquired the approximately 3,171-acre Erker farm for $7.64 million and the approximately 12,500-acre Hudye farm for $24.5 million during the quarter. The portfolio expanded into Colorado and western Kansas, and the percentage of acres leased to unrelated third parties increased to approximately 74%.
- Real estate, net, increased to $70.45 million from $38.36 million at year-end 2013.
- General and administrative expense increased to $747,006 in the quarter from $7,872, reflecting the transition to a public company, compensation, stock-based compensation, board expenses, travel and related-party professional fees.
- The company’s average annual cash rent for the entire portfolio declined to $186 per acre from $326 per acre because of portfolio mix. Same-property average annual cash rent increased to $366 per acre from $327 per acre.
- FFO declined to a loss because of depreciation and the quarter’s expenses, while AFFO increased to $266,607 from $217,666 after adjustments for crop-year revenue, stock compensation and acquisition costs.
Outlook, Risks, Contingencies and Unusual Items
- Management expects long-term farmland values and rental rates to benefit from global population growth, food demand and limited growth in arable land, but these are forward-looking views rather than formal financial guidance.
- Results are exposed to commodity prices, tenant credit, crop yields, weather, drought, crop disease, water availability, government policy, farmland valuations, interest rates and geographic concentration in Illinois, Nebraska and Colorado.
- Revenue is highly concentrated. Astoria Farms, a related-party tenant, accounted for 77.8% of quarterly rental income and 81.5% of year-to-date rental income. Astoria Farms and Hough Farms together operated approximately 26.8% of the company’s acres.
- Lease expirations are concentrated in the near term: 17.2% of acres and 23.3% of annualized cash rents expire during the remaining six months of 2014, 8.1% of acres and 18.5% of rents expire in 2015, and 74.7% of acres and 58.3% of rents expire in 2016.
- The company had a material weakness in internal control over financial reporting related to insufficient qualified accounting personnel and segregation of duties. Management had begun remediation, but disclosure controls were not effective at June 30, 2014 and successful remediation was not assured.
- The First Midwest loan is secured by farms and grain facilities and includes a 1.00-to-1.00 maximum debt-to-net-worth covenant, a 1.25-to-1.00 minimum debt-service-coverage covenant and a $500,000 minimum cash balance requirement.
- The company had a non-binding term sheet for a proposed Farmer Mac facility of up to $30.0 million. The facility was not definitive, and the company stated that it might not enter into it or obtain the proposed terms.
- The company had a pending agreement to acquire an approximately 1,250-acre Arkansas farm for approximately $4.6 million, subject to closing conditions and execution of a tenant lease.
- Subsequent to quarter-end, the company acquired a 640-acre Nebraska farm for approximately $1.0 million and completed a July 30, 2014 follow-on offering of 3,717,472 shares at $12.50 per share, generating approximately $43.3 million of net proceeds.
- No material litigation or known material operating contingencies were reported, and no real estate impairments were recognized.
Most Important Facts for Investors to Verify
- Reconcile reported 2014 results with the predecessor-company basis used for 2013 comparisons and distinguish IPO-period effects from recurring operations.
- Assess whether AFFO, rather than GAAP net income or FFO, is the appropriate recurring-performance measure, including the impact of full-year rent collected in advance and non-GAAP adjustments.
- Evaluate tenant concentration, related-party leasing and professional-service arrangements, particularly exposure to Astoria Farms and Hough Farms.
- Review debt maturities concentrated in 2016, variable-rate exposure, covenant compliance and the availability of sufficient liquidity for debt service, dividends and acquisitions.
- Monitor the material weakness remediation and future filings for evidence that internal controls have been strengthened.
- Verify completion, pricing and use of proceeds from the July 2014 follow-on offering and the status of the proposed Farmer Mac facility and Arkansas acquisitions.