Farmland Partners Inc. — Q1 2020 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 and provides agricultural loans. For the quarter ended March 31, 2020, the Company owned approximately 158,500 acres, held a 94.0% interest in its operating partnership, and operated a small custom-farming business on 3,676 acres through its taxable REIT subsidiary. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total operating revenues | $11.7 million | $10.9 million | Up 7.0% |
| Operating income | $5.3 million | $4.5 million | Up 16.9% |
| Net income | $0.4 million | $0.01 million | Up $0.4 million |
| Net loss available to common stockholders | $2.7 million | $3.1 million | Loss narrowed |
| Basic and diluted loss per share | $0.09 | $0.10 | Improved |
| Operating cash flow | $12.9 million | $13.8 million | Down $1.0 million |
| FFO | $2.5 million | $1.7 million | Up $0.8 million |
| AFFO | $(0.4) million | $(1.0) million | Improved |
| Adjusted EBITDAre | $7.4 million | $7.1 million | Up $0.4 million |
Revenue growth was led by rental income of $10.1 million, up 4.1%, and tenant reimbursements of $0.9 million, up 84.4%. Operating expenses were essentially unchanged at $6.4 million, producing an operating margin of approximately 45.4%, compared with 41.5% in the prior-year quarter. Interest expense declined 5.9% to $4.7 million. Preferred distributions of $3.1 million continued to result in a net loss available to common stockholders despite positive consolidated net income.
Cash increased to $15.0 million at March 31, 2020 from $12.6 million at December 31, 2019. Real estate, net, was $1.07 billion, and total assets were $1.10 billion. Mortgage notes and bonds payable, net, were $511.3 million, or approximately 46% of total assets. Total principal debt outstanding was $512.8 million. The Company had $181.2 million of variable-rate debt tied to LIBOR, representing 35.3% of debt.
Material changes versus the prior comparable period
- Rental income increased $0.4 million, partly due to two late-2019 acquisitions, higher crop-share revenue, and a non-recurring revenue-share payment. Same-property rental income increased 7.6%, although management cautioned that first-quarter comparisons are not indicative of full-year results because bonus and crop-share revenue is seasonal.
- Tenant reimbursements increased $0.4 million, primarily from California properties.
- Crop sales declined $0.1 million to $0.3 million, while cost of goods sold increased $0.3 million to $0.6 million, largely due to the timing of citrus sales.
- Legal and accounting expense declined $0.2 million, primarily because of lower legal fees related to litigation.
- No acquisitions or dispositions were completed during Q1 2020. In Q1 2019, the Company sold four properties for $4.7 million and recognized a $0.4 million gain.
- Operating cash flow declined despite higher cash rents, reflecting changes in accrued expenses and deferred revenue. Financing cash outflows decreased to $9.9 million from $14.2 million, mainly because common-stock repurchases and debt repayments were lower.
- The Company repurchased 224,869 common shares for $1.4 million and 47,999 Series B preferred shares for $1.0 million. Approximately $48.6 million remained available under the repurchase program at March 31, 2020.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects flat to modestly higher rents on primary-crop farmland in 2020, while specialty-crop profitability and pricing are expected to remain pressured. Approximately 29.1% of leased acres and 19.3% of annual cash rents were scheduled to expire during the remaining nine months of 2020, creating renewal and re-leasing exposure.
Management stated that the direct impact of COVID-19 was limited through the filing date but could not quantify the ultimate effect. Identified risks include lower ethanol and corn demand, labor and export-logistics disruptions, specialty-crop price pressure, tenant rent deferrals or defaults, and operational effects from remote work. The Company expects long-term food, feed, fuel and fiber demand to remain resilient but acknowledged potential medium-term disruption.
Liquidity was a significant focus. Debt maturities during the remaining nine months of 2020 totaled $48.5 million, including $48.3 million of Farmer Mac bonds originally due in June and July. After quarter-end, Farmer Mac extended those maturities to October 31, 2020 because COVID-19 travel restrictions delayed refinancing due diligence. Management believes its liquidity plans are sufficient but warned that failure to refinance could require asset sales. The Company was in compliance with disclosed debt covenants at March 31, 2020.
The Company’s interest-rate swap had a $33.2 million notional amount and a $3.2 million liability at quarter-end. A 100-basis-point increase in interest rates would reduce annual cash flow by approximately $0.5 million, assuming no change in variable-rate debt. LIBOR discontinuation after 2021 creates additional refinancing and contract-transition risk.
Shareholder class and derivative litigation related to disclosures concerning the FPI Loan Program remained pending. No class had been certified, damages could not be estimated, and several related proceedings were stayed. The Company expects insurance to cover costs exceeding $0.35 million for the shareholder-related actions, but does not expect insurance to cover a substantial portion of its separate lawsuit against the alleged “short and distort” defendants.
Internal controls remained a material issue: management concluded that disclosure controls and procedures were ineffective because of a previously reported material weakness involving information-technology general controls. Additional quarterly review controls were implemented during the quarter, but remediation had not yet resulted in an effective conclusion as of March 31, 2020.
Subsequent events included the acquisition of one farm for $0.9 million, sales of three farms for aggregate consideration of $7.8 million, extension of the Rabobank interest-rate swap to March 2026, and declaration of the regular $0.05 common dividend and $0.375 Series B preferred dividend.
Most important facts for investors to verify
- Whether the $48.3 million Farmer Mac maturities were successfully refinanced or repaid by the October 31, 2020 extended deadline.
- Tenant collections, rent deferrals, crop-share receipts, and exposure to COVID-19-related agricultural disruptions.
- Lease renewal outcomes for the 45,977 acres scheduled to expire in 2020 and the related $10.4 million of annual rents.
- Compliance with debt covenants, the effect of LIBOR transition, and sensitivity to variable interest rates.
- Progress and financial exposure in the Turner, Winter, Luger, Barber, Hustedde and “Rota Fortunae” litigation.
- Whether the disclosed IT-control remediation eliminated the material weakness in subsequent reporting periods.
- The sustainability of common dividends given Q1 AFFO of negative $0.4 million and the Company’s refinancing requirements.