Gladstone Land Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Gladstone Land is an externally managed agricultural REIT that owns and leases farmland. At quarter-end it reported 82 farms across nine states, totaling 67,826 acres; a subsequent November acquisition brought the portfolio to 83 farms.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total operating revenue | $8.0 million | $6.6 million | $28.7 million | $18.3 million |
| Rental revenue | $8.0 million | $6.6 million | $21.3 million | $18.3 million |
| Operating income | $3.3 million | $2.9 million | $8.6 million | $8.4 million |
| Net income (loss) | $6.0 million | ($0.2 million) | $3.8 million | $0.2 million |
| Net income (loss) attributable to common stockholders | $5.6 million | ($0.2 million) | $3.6 million | $0.2 million |
| Basic and diluted earnings (loss) per share | $0.35 | ($0.02) | $0.23 | $0.01 |
- Nine-month total revenue included $7.3 million of crop-sale revenue from a farm operated by the company’s taxable REIT subsidiary (TRS); associated crop operating costs were $7.7 million. Rental revenue grew 16.6% year over year, primarily reflecting portfolio additions and $0.9 million of participation rents.
- Q3 earnings included a $6.2 million net gain on real estate dispositions, principally the sale of Oregon Trail. Nine-month results also included a $1.1 million crop-inventory write-down and a $129,000 casualty loss.
- Same-property rental revenue was nearly flat for the first nine months (+0.1%) and declined 1.8% in Q3, with lower renewal rents partly offset by capital-improvement rent and participation rents.
- Operating cash flow was $8.0 million for the nine months, versus $7.7 million a year earlier. Investing used $48.6 million, and financing provided $40.5 million. Cash and equivalents were $2.9 million at quarter-end.
- At September 30, total borrowings were $316.2 million, net of debt issuance costs. The company also reported $28.1 million of Series A term preferred stock as a liability. Weighted-average borrowing rates before patronage were 3.63% for the nine-month period; interest expense rose 25% year over year to $8.7 million.
- Management reported available liquidity of approximately $9.2 million, comprising $3.5 million cash and $5.7 million of MetLife facility availability, subject to covenants and collateral. The balance sheet itself reports $2.9 million cash. Book-value debt-to-total-capitalization, including Series A preferred stock as debt, was 70.0%, compared with 73.6% at year-end 2017; management’s fair-value measure was 57.5%.
- Management-reported diluted FFO, core FFO, and AFFO per common share and OP Unit were $0.12, $0.15, and $0.14, respectively, for Q3; for nine months, $0.27, $0.39, and $0.38. Nine-month 2017 comparatives were $0.42, $0.43, and $0.42.
Material changes and capital activity
- During the first nine months, the company acquired ten farms for an aggregate purchase price of $51.8 million and sold its 1,895-acre Oregon farm for $20.5 million, recognizing a net gain of approximately $6.4 million. Sale proceeds helped fund the Owl Hammock acquisition through a like-kind exchange.
- Common shares outstanding increased to 16.1 million from 13.8 million at December 31, 2017. Common and preferred equity issuances provided $34.4 million of gross proceeds during the period; the Series B preferred offering raised $9.8 million gross through quarter-end.
- Series A preferred stock carries a 6.375% rate and is mandatorily redeemable September 30, 2021. Series B preferred stock carries a 6.00% rate; 393,048 shares were outstanding at quarter-end. Series B shares had no public market, and the company intended to seek an exchange listing after the offering concludes.
- Management’s estimated NAV was $13.79 per common share and OP Unit at September 30, versus a reported common-stock closing price of $12.34. NAV is a management estimate, not an audited valuation.
Outlook, risks, and unusual items
- No specific earnings or FFO guidance was provided. Management said near-term resources should cover distributions, debt service, preferred dividends, and operating costs, and described its acquisition pipeline as healthy. Four properties were under signed purchase agreements for approximately $20.3 million, expected to close in late 2018 or Q1 2019.
- Portfolio and tenant concentration remain material: California and Florida generated 46.3% and 27.1% of nine-month rental revenue. One tenant represented 15.6%. Leases covering 42.4% of leased acreage and 23.9% of rental revenue were scheduled to expire in 2020.
- After quarter-end, a Michigan tenant gave notice to vacate a 119-acre farm effective October 31, 2018. The company was seeking a replacement tenant. Other post-quarter renewals and re-leasings included both rent increases and significant decreases; replacement rents and occupancy are not assured.
- The company wrote unsold TRS-grown crops down to zero following bumper strawberry crops in California. It recorded $1.1 million of losses for the nine months and ended TRS farming operations when the farm was leased to an unrelated tenant effective August 1, 2018.
- Interest-rate exposure is a key market risk. A 1-percentage-point change in market rates was estimated to change the fair value of fixed-rate borrowings by approximately $12.2–$13.1 million. Certain loans become variable-rate or reset after their initial fixed periods; the company reported no derivatives.
- Management reported no material litigation and compliance with applicable debt covenants. Recovery for the $129,000 Arizona lightning-damage loss remained under assessment, with no offset recorded. Hurricane Michael caused no material impact to the company’s Florida farms, according to the filing.
- Related-party arrangements include management and administration services from affiliates and an affiliated dealer-manager for the Series B offering. The adviser earned a $778,000 capital-gains fee on the Oregon sale but waived the full amount through a non-contractual credit.
Most important facts for investors to verify
- Whether rental growth, participation rents, and occupancy persist as leases expire, particularly the large 2020 expiration exposure and the Michigan vacancy.
- How much of reported earnings and revenue reflects the one-time property-sale gain and the temporary TRS crop operation, versus recurring farm rent and cash generation.
- Liquidity and financing availability: reconcile management’s $3.5 million cash figure with the $2.9 million balance-sheet cash balance, and monitor collateral-dependent facility access, maturities, and future borrowing costs.
- Whether equity and preferred-stock issuance can fund planned acquisitions without materially diluting common holders or increasing distribution obligations.
- Assumptions behind management’s $13.79 NAV estimate, including appraisal inputs, and the difference between estimated NAV and the traded share price.
- Execution and costs of committed farm improvements, the pending acquisition pipeline, and any subsequent changes in leasing or financing terms.