Farmland Partners Inc. — 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 operates a small taxable REIT subsidiary farming and agricultural lending business. The filing covers the unaudited three and nine months ended September 30, 2017. The portfolio totaled approximately 154,164 acres, and the Company owned 85.1% of its operating partnership.
The February 2017 American Farmland Company mergers materially expanded the portfolio and affected year-over-year comparability. The Company completed 15 additional asset acquisitions during the first nine months of 2017.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total operating revenue | $12.0 million | $6.9 million | $30.7 million | $17.7 million |
| Rental income | $11.1 million | $6.2 million | $28.4 million | $16.5 million |
| Operating income | $6.1 million | $2.2 million | $12.4 million | $7.3 million |
| Net income | $2.6 million | $0.1 million | $2.6 million | $(0.5) million |
| Net income available to common stockholders | $0.2 million | $(0.8) million | $(1.6) million | $(2.7) million |
| EPS, basic and diluted | $0.01 | $(0.06) | $(0.05) | $(0.21) |
| FFO | $4.7 million | $0.5 million | $8.3 million | $0.6 million |
| AFFO | $3.3 million | $1.7 million | $7.4 million | $3.7 million |
| AFFO per diluted share | $0.09 | $0.09 | $0.20 | $0.20 |
Q3 operating margin was approximately 50.7%, compared with 31.5% in the prior-year quarter. Nine-month operating margin was approximately 40.4%, compared with 41.4% in the prior-year period. Q3 net margin was approximately 21.7%, compared with 1.4%; nine-month net margin was approximately 8.6%, compared with negative 2.9%.
- Revenue increased 73% in both the quarter and nine-month period, primarily from acquisitions and the AFCO mergers.
- Operating expenses increased 25% in Q3 and 77% for nine months, driven by higher depreciation, property expenses, general and administrative costs, and legal and accounting expenses.
- Interest expense rose 78% in Q3 and 25% for nine months as debt increased and interest rates rose.
- Cash rents for the same-property portfolio declined, reflecting greater use of crop-share rent structures and a prior-year $6.5 million lease-termination revenue item. Management cautioned that quarterly and nine-month same-property comparisons are not representative of the full year because crop-share and bonus rents are generally recognized later.
- Common dividends remained $0.1275 per share per quarter, or $0.3825 per share for the first nine months.
Balance Sheet, Cash Flow, Debt and Liquidity
| Balance-sheet item | September 30, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $1.12 billion | $655.5 million |
| Real estate, net | $975.6 million | $594.1 million |
| Cash | $129.3 million | $47.2 million |
| Debt, net | $464.5 million | $308.8 million |
| Total equity | $374.7 million | $215.6 million |
- Operating cash flow was negative $3.4 million for the first nine months, compared with positive $3.6 million in the prior-year period. The decline reflected $12.5 million of cash payments related to assumed AFCO obligations, higher interest and other operating payments.
- Investing cash outflow was $114.2 million, including $92.7 million for acquisitions, $17.7 million for real estate improvements and $3.9 million of new notes receivable.
- Financing cash inflow was $199.7 million, including $144.5 million of net proceeds from the Series B preferred offering and $101.8 million of borrowings, partially offset by debt repayments, dividends, distributions and $7.4 million of common-share repurchases.
- Approximately 27% of debt, or $125.1 million, carried variable interest rates. A 100-basis-point increase in rates was estimated to reduce annual cash flow by approximately $1.3 million.
- Debt maturities during the remainder of 2017 were initially $60.4 million. Subsequent to quarter-end, the Company repaid the $5.5 million Farmer Mac Bond #2, leaving $54.9 million of Farmer Mac debt maturing before year-end.
- The Company reported compliance with applicable debt covenants, including Farmer Mac and MetLife requirements, but relied on non-binding term sheets to refinance 2017 maturities and fund part of a planned California acquisition.
Material Changes, Outlook and Unusual Items
- The Company issued 6,037,500 shares of 6.00% Series B Participating Preferred Stock for $144.5 million of net proceeds. The preferred stock is senior to common stock and includes participation in farmland-value appreciation, subject to a 9.0% total-return cap.
- Management expects market rents in the coming year to be flat. Primary-crop rents were described as flat to modestly lower on renewals, while specialty-crop operator profitability remained healthy and base rents were generally consistent with 2016.
- The Company contracted to acquire three California tree-nut ranches for approximately $110 million, expected to close in December 2017 subject to customary conditions. A non-binding financing term sheet was signed, but completion and financing were not assured. A $1.1 million South Carolina acquisition was also under contract.
- Capital commitments for farm improvements totaled approximately $5.2 million, including $4.3 million expected during the remainder of 2017.
- The Company recorded immaterial out-of-period adjustments: $0.2 million of tenant reimbursement revenue in Q2 related to Q1 and $0.2 million of rental revenue in Q3 related to Q1 and Q2.
- The Company paid $1.6 million under the Prudential termination agreement; $0.7 million was expensed in 2017 and $0.9 million was reflected in AFCO purchase accounting.
- One California tenant represented 18.8% of Q3 rental income and 14.3% of nine-month rental income. Tenant failure or lease termination could materially affect performance.
- Future results remain exposed to crop prices, weather, tenant credit quality, farmland values, water availability, interest rates, refinancing availability and acquisition execution. No material changes to previously disclosed risk factors were reported.
- Management stated that disclosure controls and procedures were effective at September 30, 2017, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the Company successfully refinanced the remaining 2017 maturities and completed the planned California acquisition on acceptable terms.
- The sustainability of AFFO and common-dividend coverage given negative year-to-date operating cash flow and preferred distributions.
- The effect of crop-share leases and fourth-quarter crop or bonus rents on full-year rental revenue and same-property performance.
- Tenant concentration, particularly the California tenant contributing 18.8% of Q3 rental income.
- Debt covenant headroom, variable-rate exposure and the impact of future LIBOR or other interest-rate increases.
- The effect of the Series B preferred stock’s senior dividend rights, participation feature and potential dilution or redemption obligations.
- Completion, pricing and financing of contracted acquisitions and the approximately $5.2 million of committed property improvements.