Gladstone Land Corporation — Q1 2013 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Gladstone Land is an externally managed farmland owner and lessor. At quarter-end it owned 12 farms across California and Florida; a Michigan farm acquired April 5 brought the portfolio to 13 farms after the reporting period.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Rental revenue | $914,583 | $813,475 |
| Operating income | $376,478 | $496,073 |
| Net income | $47,516 | $152,504 |
| Basic and diluted EPS | $0.01 | $0.06 |
| FFO | $207,552 | $247,869 |
| FFO per share | $0.04 | $0.09 |
Revenue grew 12.4%, primarily reflecting four farm acquisitions in 2012. Operating expenses rose 69.5% to $538,105; operating margin declined to about 41% from 61%. Net income fell 68.8%, reflecting higher depreciation, management and administration costs, a new incentive fee, general and administrative expenses, and interest expense. Interest expense was $280,400, up from $217,454. The effective income tax rate was 55.5%, versus 45.8%.
Net cash used in operating activities was $2.56 million, versus $31,256 used in Q1 2012. The 2013 outflow primarily reflected a $2.1 million IRS cash-bond prepayment related to a deferred intercompany gain and other asset movements. Investing cash outflow was $20.05 million, largely from placing $20.0 million in short-term U.S. Treasury bills. Financing cash inflow was $50.81 million, principally IPO proceeds, partly offset by mortgage repayments and distributions.
Balance sheet, financing and capital
- At March 31, cash and cash equivalents were $29.07 million and short-term investments were $20.68 million. Together, these were approximately $49.75 million.
- Total assets were $90.01 million; stockholders’ equity was $58.99 million.
- Mortgage debt was $29.49 million at a stated 3.50% rate, with maturity in 2026; the $4.8 million revolving facility had $100,000 outstanding and approximately $4.69 million available. Total borrowings were $29.59 million.
- The January IPO and over-allotment issued 3,780,264 shares at $15.00 per share, generating approximately $56.7 million gross and $51.3 million net. Most proceeds remained uninvested at quarter-end. The company said available cash resources were sufficient for its needs over the next 12 months.
- Quarterly distributions paid were $0.08 per share. The board subsequently declared $0.36 per share for April–June 2013.
Material changes, outlook and risks
- The advisory and administration agreements changed effective February 1, 2013. The adviser now receives a base fee and an incentive fee tied to FFO; a $41,037 incentive fee was recognized in Q1. The 2013 base fee is 1.0% of adjusted stockholders’ equity; the stated rate becomes 2.0% beginning in 2014.
- Management intends to elect REIT status for the 2013 or 2014 tax year. The company estimated $9.1 million of accumulated non-REIT earnings and profits that must be distributed by the end of the year of its first REIT election. A $2.1 million federal tax prepayment was made; the Q1 income-tax provision is expected to be reversed when the company completes the required steps and commits to the REIT election. Failure to qualify as a REIT could materially affect results and distributions.
- Three leases expiring in 2013 represented approximately 75.1% of Q1 rental income. Management reported renewal discussions and expected to renew at similar or higher rents, but gave no assurance of renewal or favorable terms.
- Dole-related leases generated 70.8% of Q1 rental revenue; the parent company guarantees both leases. California properties generated 87.0% of rental revenue. Tenant concentration, lease renewals, regional exposure, natural disasters and tenant financial distress are material risks.
- The April 5 Michigan acquisition cost approximately $1.3 million and added 119 acres under an existing triple-net lease with seven years remaining and a tenant renewal option. Annualized GAAP straight-line rent is approximately $105,000.
- Management is seeking additional farmland acquisitions but cautioned there is no assurance it will identify or complete them. It reported no property impairments and no material legal proceedings. Disclosure controls were deemed effective as of March 31, 2013.
The company reported estimated NAV of $14.44 per share, based partly on third-party appraisals performed between June 2011 and September 2012. NAV is a non-GAAP estimate, is not a transaction price, and may differ from realized asset values.
Important facts for investors to verify
- Progress and terms of the three 2013 lease renewals, especially those representing 75.1% of quarterly rent.
- Dole’s tenant credit and lease performance, given its 70.8% share of Q1 rental revenue.
- Timing and completion of the REIT election, related tax treatment, and required distribution of accumulated earnings and profits.
- Deployment of remaining IPO proceeds, acquisition pipeline, and the availability and terms of MetLife’s undrawn mortgage commitments.
- Sustainability of distributions relative to FFO and operating cash flow, which was negative in Q1 in part because of the tax prepayment and working-capital movements.
- Current property values supporting NAV, since the disclosed appraisals were not recent and NAV is inherently an estimate.