Farmland Partners Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed REIT that owns and leases farmland throughout North America and operates a small taxable REIT subsidiary engaged in custom farming and tenant services. As of June 30, 2020, the company owned approximately 156,500 acres, with about 70% used for primary crops and 30% for specialty crops. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total operating revenue | $10.5 million | $10.9 million | $22.2 million | $21.8 million |
| Operating income | $3.7 million | $4.0 million | $9.0 million | $8.5 million |
| Operating margin | 35.1% | 36.1% | 40.5% | 38.8% |
| Net income | $0.2 million | $6.5 million | $0.6 million | $6.5 million |
| Net income attributable to common stockholders | $(2.9) million | $2.9 million | $(5.7) million | $(0.2) million |
| Basic loss per share | $(0.10) | $0.09 | $(0.19) | $(0.01) |
| Net cash from operating activities | Not separately provided | Not separately provided | $10.0 million | $12.1 million |
| FFO | $1.3 million | $1.1 million | $3.8 million | $2.8 million |
| AFFO | $(1.4) million | $(1.6) million | $(1.8) million | $(2.6) million |
Cash was $11.6 million at June 30, 2020, compared with $12.6 million at December 31, 2019 and $22.4 million at June 30, 2019. Mortgage notes and bonds payable were $510.7 million, net, versus $511.4 million at year-end 2019. Total assets were $1.09 billion and total equity was $300.3 million.
Six-month investing cash flow was $6.7 million, including $7.5 million of property-sale proceeds and $0.9 million of acquisitions. Financing cash flow used $17.7 million, including common and preferred share repurchases, dividends and preferred distributions. Common and Series B preferred dividends were $0.05 and $0.375 per share, respectively, on a quarterly basis.
Material changes versus the prior comparable period
- Q2 revenue declined 3.9%, primarily from lower rental income, crop sales and other revenue; tenant reimbursements increased 89.5%.
- Six-month revenue increased 1.5%, while same-property rental income increased 3.2%; reported rental income declined 0.8% because of dispositions and timing of crop-share revenue recognition.
- Q2 net income fell 97.4%, largely because the prior-year period included a $7.5 million gain on asset dispositions versus a $0.9 million gain in 2020.
- Six-month net income declined 90.9% for the same reason, despite a 5.9% increase in operating income and an 8.6% reduction in interest expense.
- Six-month operating cash flow declined $2.1 million, reflecting lower cash rent receipts and working-capital changes.
- The company acquired four properties for aggregate consideration of $1.4 million and sold four properties for $7.5 million during the first six months of 2020. In the prior-year period, it completed no acquisitions and sold six properties for $34.2 million.
- The company repurchased 494,661 common shares for $3.2 million and 140,189 Series B preferred shares for $3.1 million during the first six months. Approximately $44.7 million remained available under the repurchase authorization.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects primary-crop rents to be flat to modestly higher on 2020 renewals, while specialty-crop rents and profitability remain under pressure, potentially through 2021. Management expects long-term food, feed, fuel and fiber demand to support farmland values, but states that the ultimate COVID-19 impact cannot be quantified.
- COVID-19: Direct effects were limited at the reporting date, but lower ethanol demand, labor and export disruptions, specialty-crop weakness, tenant payment delays and rent deferrals could adversely affect results.
- Liquidity and maturities: $48.3 million of Farmer Mac debt originally due in June and July 2020 was extended to October 31, 2020 because of COVID-19-related refinancing delays. Management expected to refinance it but warned that failure could require farm sales to repay the debt.
- Interest-rate exposure: $181.0 million, or 35.3% of debt, was variable-rate debt tied primarily to LIBOR. A 100-basis-point increase was estimated to reduce annual cash flow by approximately $0.9 million. LIBOR discontinuation after 2021 could affect borrowing costs.
- Hedging: The company terminated an existing swap and entered into a new six-year swap covering 50% of the Rabobank debt exposure; the new swap had a $33.2 million notional amount and a $3.5 million derivative liability at June 30, 2020.
- Litigation: Several shareholder class and derivative actions relate to alleged disclosures concerning the FPI Loan Program. No class had been certified in the principal securities action, damages were not estimable, and discovery was stayed pending motions. The company also pursued litigation concerning an alleged “short and distort” campaign; insurance is not expected to cover a substantial portion of those costs.
- Internal controls: Disclosure controls were deemed ineffective because of a previously reported material weakness involving information-technology general controls. Management implemented additional quarterly review controls and believed remediation was underway.
Important facts for investors to verify
- Completion and terms of the planned refinancing of the $48.3 million Farmer Mac maturities before October 31, 2020.
- Tenant collections, rent deferrals, lease renewals and variable-rent performance as COVID-19 and specialty-crop conditions evolve.
- Actual AFFO and dividend coverage, given negative reported AFFO after preferred distributions.
- Progress and final outcome of the shareholder and derivative litigation, including insurance coverage and potential costs.
- Remediation and auditor or management conclusions regarding the IT-related material weakness.
- LIBOR transition provisions and the effect of floating-rate debt on future interest expense and liquidity.