Farmland Partners Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed REIT that owns and leases farmland across North America. As of June 30, 2019, the Company owned approximately 158,000 acres across 17 states, with approximately 70% used for primary crops and 30% for specialty crops. The Company also operates a taxable REIT subsidiary that provides tenant purchasing services, custom farming and certain agricultural loans.
This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The Company owned 92.6% of its operating partnership at quarter-end and had 29.8 million common shares outstanding.
Financial performance and key metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total operating revenues | $10.9 million | $11.4 million | $21.8 million | $22.6 million |
| Operating income | $4.0 million | $5.2 million | $8.5 million | $10.0 million |
| Operating margin | 36.1% | 45.4% | 38.8% | 44.2% |
| Net income | $6.5 million | $1.0 million | $6.5 million | $1.5 million |
| Net income attributable to the Company | $6.1 million | $0.9 million | $6.1 million | $1.3 million |
| Net income available to common stockholders | $2.9 million | $(2.3) million | $(0.2) million | $(5.1) million |
| Basic earnings per share | $0.09 | $(0.07) | $(0.01) | $(0.15) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $12.1 million | $14.1 million |
| FFO | $1.1 million | $3.0 million | $2.8 million | $5.6 million |
| AFFO | $(1.6) million | $0.2 million | $(2.6) million | $0.2 million |
Reported net income benefited substantially from gains on property dispositions. The six-month gain on disposition of assets was $7.9 million, including approximately $7.6 million of aggregate gains from the sale of six properties. FFO and AFFO, which exclude or adjust for disposition gains and other items, were materially weaker than reported GAAP earnings.
At June 30, 2019, total assets were $1.11 billion, including $1.07 billion of net real estate. Cash was $22.4 million, compared with $16.9 million at December 31, 2018. Mortgage notes and bonds payable were $512.5 million net, against $523.6 million at year-end 2018. Total liabilities were $531.2 million, and total equity was $316.7 million.
The Company paid $9.8 million of interest during the first six months. Approximately $181.3 million, or 35.3% of debt, carried variable interest rates tied to LIBOR. Management estimated that a 100-basis-point increase in rates would reduce annual cash flow by approximately $1.8 million. An interest-rate swap hedged $33.2 million of Rabobank debt.
Material changes versus the prior comparable period
- Revenue declined 4% in the second quarter and 3% for the first six months, primarily due to property dispositions, lower tenant reimbursements and timing of crop-share revenue.
- Same-property rental income declined approximately 2.7% in both the quarter and six-month period. Management cautioned that short-period comparisons are not necessarily indicative of full-year results because bonus and crop-share rents are generally recognized later in the year.
- Operating income declined 24% in the quarter and 15% for the six-month period. Property operating expenses rose, while general and administrative expenses declined.
- Legal and accounting expense increased $1.0 million, or 355%, in the quarter and $1.3 million, or 170%, for the six months, primarily because of litigation related to the “short and distort” allegations involving Rota Fortunae and related shareholder lawsuits.
- Interest expense increased 13% in both comparison periods, primarily due to higher interest rates.
- The Company completed no acquisitions in the first six months of 2019, compared with four acquisitions totaling $26.8 million in the prior-year period. It completed three dispositions involving six properties for $34.2 million of proceeds.
- Investing cash flow changed from $(36.4) million in the prior-year period to $34.1 million provided, reflecting disposition proceeds and the absence of acquisitions.
- Financing cash outflows increased to $40.8 million from $4.8 million, driven by $19.5 million of common-stock repurchases, debt repayments and distributions.
- The common dividend was reduced to $0.05 per share per quarter from $0.1275 per share in the comparable 2018 quarter.
Guidance, outlook, risks, contingencies and unusual items
Management expected market rents in the coming year to remain flat. The Company intends to continue acquiring farmland to expand scale and geographic, crop and tenant diversification, while selectively disposing of assets when considered appropriate. No formal earnings or acquisition guidance was provided.
- Lease expirations are concentrated in the near term: approximately 25.2% of leased acres and 33.4% of annual cash rents expire during the remaining six months of 2019; 26.5% of acres and 34.3% of annual cash rents expire in 2020.
- Approximately 48,000 acres had rents based on a percentage of farming revenues, creating exposure to crop prices, yields, weather and tenant profitability.
- Trade tensions had reduced prices received by tenants for soybeans, almonds and walnuts. Management stated that prolonged trade conflict could adversely affect rents and tenant credit quality.
- Extreme weather, including Hurricane Michael, excess rainfall and a California heat wave, negatively affected tenants and increased cleanup costs.
- The Turner shareholder class action proceeded to discovery after the court denied the defendants’ motion to dismiss. No class had been certified, and the Company could not estimate damages or ultimate litigation costs. A related derivative action was stayed. The Company was also pursuing litigation against Rota Fortunae and other parties.
- The Company believed insurance would cover a substantial portion of defense costs in the shareholder litigation but had not recorded an insurance receivable because coverage negotiations remained unresolved.
- Notes receivable totaled $7.8 million at June 30, 2019. Certain borrowers were in default or bankruptcy proceedings, although management generally did not expect material losses. One new $1.1 million crop-secured line of credit was awaiting bankruptcy court approval.
- The Company adopted the new lease standard on January 1, 2019, recognizing a $0.2 million right-of-use asset and lease liability, with no material expected impact.
- Subsequent to quarter-end, the Company repurchased additional common and Series B preferred shares, declared quarterly dividends of $0.05 per common share and $0.375 per Series B preferred share, and sold an additional farm portion for $1.1 million of gross proceeds and a $0.4 million gain.
Most important facts for investors to verify
- Whether recurring rental operations and AFFO can support common dividends, given negative AFFO of $2.6 million for the first six months.
- The sustainability of earnings excluding the $7.9 million property-disposition gain.
- Near-term lease expirations and renewal rates, particularly for 2019 through 2021.
- Exposure to variable-rate debt, LIBOR transition risk and refinancing requirements, including $48.6 million of debt maturities in 2020 and $112.3 million in 2022.
- The outcome, insurance coverage and ultimate cost of the Turner, Winter and Rota Fortunae-related litigation.
- Tenant credit quality, crop-share revenue timing and the effect of trade tensions and extreme weather on rents.
- The effect of continued share repurchases and reduced common dividends on liquidity, leverage and per-share results.