Farmland Partners Inc. — Q3 2018 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, with approximately 163,000 acres at September 30, 2018. The portfolio was approximately 75% primary-crop acreage and 25% specialty-crop acreage. The company also operates an agricultural lending program and a small custom-farming business through its taxable REIT subsidiary.
This report covers the unaudited three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company owned 87.9% of Farmland Partners Operating Partnership, L.P. at quarter-end.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total operating revenue | $12.5 million | $12.0 million | $35.2 million | $30.7 million |
| Operating income | $6.2 million | $6.1 million | $16.2 million | $12.4 million |
| Operating margin | 49.0% | 50.7% | 45.9% | 40.4% |
| Net income | $4.2 million | $2.6 million | $5.6 million | $2.6 million |
| Net income available to common stockholders | $0.5 million | $0.2 million | $(4.6) million | $(1.6) million |
| Basic and diluted EPS | $0.02 | $0.01 | $(0.14) | $(0.05) |
| FFO | $3.4 million | $4.7 million | $9.0 million | $8.3 million |
| AFFO | $0.7 million | $3.3 million | $0.9 million | $7.5 million |
| Adjusted EBITDAre | $8.8 million | $8.9 million | $24.1 million | $21.0 million |
| Net cash from operating activities | Not separately presented | Not separately presented | $13.6 million | $(3.4) million |
Revenue increased 4% in the quarter and 15% year to date. Rental income rose 1% in the quarter and 10% year to date, while tenant reimbursements increased 108% and 105%, respectively. Operating income increased 31% year to date, but Q3 operating margin declined because legal and accounting costs and property operating expenses increased.
Interest expense increased 36% in Q3 and 40% year to date, primarily due to higher borrowings and interest rates. The reported net income improvement was aided by a $3.1 million gain on property dispositions year to date. Common-stockholder results remained weak after preferred dividends and distributions: common-stockholder loss was $4.6 million for the first nine months.
Balance sheet, debt and liquidity
| Balance-sheet item | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $1.145 billion | $1.166 billion |
| Real estate, net | $1.101 billion | $1.092 billion |
| Cash | $23.8 million | $53.5 million |
| Mortgage notes and bonds payable, net | $523.6 million | $514.1 million |
| Total liabilities | $536.9 million | $530.4 million |
| Total equity | $342.3 million | $371.0 million |
- Debt principal outstanding was $525.4 million, with maturities of $5.4 million in 2019, $48.6 million in 2020, $112.3 million in 2022 and $358.8 million thereafter.
- Approximately 35% of debt, or $181.5 million, carried variable interest rates. Management estimated that a 100-basis-point increase in rates would reduce annual cash flow by approximately $1.8 million.
- The company was in compliance with applicable debt covenants at September 30, 2018, including stated leverage, fixed-charge coverage and loan-to-value requirements.
- A $33.2 million interest-rate swap fixes the rate on approximately half of the Rabobank borrowing for five years.
- Nine-month investing cash use was $15.7 million, including $32.7 million for five acquisitions and $31.6 million of property-sale proceeds. Financing cash use was $27.7 million, including $14.3 million of common-stock repurchases and $20.7 million of common and preferred distributions.
Material changes versus the prior comparable period
- The company completed five cash asset acquisitions totaling approximately $32.7 million and sold five properties for proceeds of approximately $31.9 million, recognizing a $3.1 million gain.
- Cash from operations improved from an outflow of $3.4 million to inflow of $13.6 million, largely because of higher rent collections and substantially lower cash payments related to an assumed AFCO obligation.
- Interest expense increased by $4.0 million year to date as debt increased from approximately $465.8 million at September 30, 2017 to $525.4 million at September 30, 2018.
- Legal and accounting expense increased 53% year to date, primarily due to litigation-related costs.
- Common shares outstanding declined to approximately 31.7 million from 33.3 million at year-end 2017, following repurchases and conversions of operating-partnership units.
- The common dividend was reduced to $0.05 per share for Q3 2018 from $0.1275 per share in each 2017 quarter. Year-to-date common dividends declared were $0.3050 per share versus $0.3825 in the prior-year period.
Guidance, outlook, risks and unusual items
Management expects 2019 primary-crop lease renewals to produce flat to modestly higher rents, while specialty-crop base rents are expected to be consistent with or slightly higher than 2018. The company expects market rents generally to be flat in the coming year. No quantified earnings or revenue guidance was provided.
- Management warned that Southeast weather events could reduce fourth-quarter and full-year revenue, increase costs or shift revenue recognition into later periods; the impact could not yet be estimated.
- Trade tensions and agricultural tariffs could weaken tenant financial performance and eventually pressure rents, particularly if prolonged.
- Tenant concentration exists: one California tenant represented 19.5% of Q3 rental income and 14.1% of nine-month rental income.
- Approximately 50% of the portfolio’s acreage and 47.8% of annual minimum cash rents expire during 2018–2020, creating renewal and re-leasing exposure.
- The company incurred significant legal costs related to its lawsuit against parties alleged to have conducted a “short and distort” campaign. It expects costs above $0.35 million may be insured but has recognized no insurance receivable because the insurer had not responded.
- Two purported shareholder class actions allege materially misleading disclosure concerning the agricultural lending program. No class had been certified, and damages could not be estimated at the filing date.
- Notes receivable totaled $12.4 million, including a $0.2 million reserve against a tenant crop-secured line of credit and a provision associated with a previously defaulted mortgage note.
- Series B preferred stock carries a 6% dividend and ranks senior to common stock. Preferred dividends and Series A distributions materially reduce earnings and AFFO available to common holders.
Most important facts for investors to verify
- Whether cash generation and AFFO recover after the substantial reduction in common dividends and the ongoing preferred distributions.
- The sustainability of property-sale gains and the effect of higher interest expense on recurring earnings.
- Debt refinancing and maturity risk, particularly the large maturities beginning in 2022 and the exposure to variable rates.
- Tenant renewals, rent levels and tenant credit quality amid weak primary-crop markets, trade tensions and weather risks.
- The ultimate cost and insurance recovery associated with the Rota Fortunae litigation, as well as the potential exposure from the two shareholder class actions.
- The company’s remaining repurchase authorization and the discrepancy in the filing between different reported authorization amounts; the precise amount should be confirmed in the filed tables and subsequent reports.