Business context and reporting period
Gladstone Land Corporation (Nasdaq: LAND) filed this Form 10-K for the fiscal year ended December 31, 2022. The externally managed agricultural REIT owns and leases farmland; it does not generally farm the properties. At year-end it owned 169 farms comprising 115,731 acres in 15 states. As of February 20, 2023, occupancy was 100% by gross acreage, across 89 tenants and more than 60 crop types, with a 6.2-year weighted-average remaining agricultural lease term.
Financial performance and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Lease revenue | $89.2 million | $75.3 million |
| Operating income | $33.9 million | $31.7 million |
| Operating margin | 38.0% | 42.1% |
| Net income | $4.7 million | $3.5 million |
| Net loss attributable to common stockholders | $(15.0) million; $(0.43) per share | $(8.8) million; $(0.29) per share |
| Cash from operating activities | $43.8 million | $32.4 million |
| FFO / diluted FFO per share | $24.2 million / $0.70 | $21.0 million / $0.69 |
| AFFO / diluted AFFO per share | $24.8 million / $0.72 | $20.4 million / $0.67 |
| Common distributions declared per share | $0.5463 | $0.54075 |
Revenue increased 18.5%, largely from acquisitions, with participation rents up 47.6% to $7.7 million. Same-property lease revenue rose 0.6%: higher participation rents more than offset lower fixed rents. Operating expenses rose 26.8% to $55.3 million, including higher depreciation, advisory and administration fees, and an $853,000 Series C offering-cost write-off. Net income improved, but common-stockholder losses widened principally because preferred dividends and related charges increased to $19.7 million.
At December 31, 2022, total assets were $1.46 billion, cash was $61.1 million, notes and bonds payable net were $626.4 million, and Series D term preferred stock reported as a liability was $59.1 million. Total equity was $731.4 million. Management reported approximately $206.4 million of available liquidity, including cash and available borrowing capacity, and $92.1 million of unencumbered properties eligible as collateral. More than 99.8% of borrowings were fixed-rate; the weighted-average remaining debt maturity was 9.4 years. Common distributions were characterized as 100% return of capital for federal tax purposes for 2022.
Management-estimated NAV was $17.08 per common share at year-end, versus a $18.35 closing share price. NAV is a non-GAAP estimate based partly on property valuations; the auditor did not provide assurance on it. The company reported no off-balance-sheet arrangements.
Material changes versus the prior year
- Portfolio expanded from 164 farms and 112,542 acres at year-end 2021 to 169 farms and 115,731 acres. 2022 acquisitions totaled approximately $65.1 million and added about $4.4 million of annualized straight-line minimum rent.
- Lease revenue grew by $13.9 million, including $12.8 million from fixed rents on acquired properties. Same-property fixed rent declined 2.1%, in part because six leases with two tenants shifted to cash-basis revenue recognition after collectability concerns.
- Operating cash flow increased $11.4 million. Investing cash outflow fell to $85.5 million from $295.0 million, mainly due to lower acquisition spending; capital improvements on existing farms rose to $20.1 million from $6.1 million.
- Financing cash inflow declined to $86.1 million from $270.1 million, reflecting lower net borrowing and equity proceeds, among other factors. Series C preferred stock issuance supported capital raising; the primary offering ended December 31, 2022.
- Common shares outstanding increased to 35.1 million from 34.2 million. The company also paid $7.7 million in cash to redeem 204,778 OP Units.
Outlook, commentary, risks and unusual items
Management provided no formal earnings or revenue guidance. It said near-term cash resources should cover debt service, operating costs, preferred dividends and common distributions, and expects to use available capital for acquisitions and farm improvements. Management considers current liquidity adequate and believes its fixed-rate debt limits near-term exposure to rising rates. It noted that inflation and borrowing costs remain elevated and that recession risk was uncertain.
Water availability is a central operating and valuation issue, especially in California, where groundwater restrictions under the Sustainable Groundwater Management Act and depleted aquifers remain concerns. Winter 2022–2023 storms improved drought conditions, but management said groundwater recovery remained limited. No farm had experienced a water shortage from wells failing to reach aquifers as of the filing. California’s January 2023 floods damaged structures at one farm; repair costs were not expected to exceed $1.0 million and were expected to be covered by insurance or the tenant.
Six leases involving two tenants were placed on a cash basis in the fourth quarter because full collection of remaining rent was no longer considered probable. 2022 revenue from those leases was approximately $258,000, compared with $1.7 million in 2021. Management was negotiating payment plans, rent deferrals or lease termination; replacement leasing, if needed, was estimated to take 1–12 months. Other key risks include tenant credit and bankruptcy, geographic concentration (California generated 68.5% of 2022 lease revenue and Florida 16.3%), drought and extreme weather, crop and commodity volatility, illiquid farmland, interest rates and refinancing, leverage, and REIT qualification. Permanent-crop properties carry additional risk because crops can take years and significant capital to replace.
Other items to monitor include related-party fees and potential conflicts: the Adviser is an affiliate, and 2022 base and incentive fees totaled $11.5 million. The 6.00% Series C preferred stock had no public market at year-end; the company intended to seek an exchange listing by December 31, 2023, without assurance. The Series D preferred stock has a mandatory redemption date of January 31, 2026. The 10-K reports clean audit opinions on the financial statements and internal controls, and management concluded controls were effective.
Important facts for investors to verify
- Follow the two tenants behind the six cash-basis leases: collections, any rent concessions or terminations, and whether replacement tenants are secured.
- Check subsequent liquidity and financing availability, including the 2023 debt maturities, facility draw conditions and covenant compliance. The filing lists $44.5 million of scheduled 2023 principal payments; it also reports an $8.1 million bond repayment after year-end.
- Track California water access, groundwater restrictions, water-rights costs and the outcome of flood-damage assessments and insurance claims.
- Assess whether rent growth and cash generation cover common and preferred distributions, especially given common-stockholder GAAP losses and 2022 common distributions classified entirely as return of capital.
- Evaluate the assumptions behind management’s estimated NAV and the liquidity and listing status of Series C and Series E preferred stock; NAV is not an audited fair-value measure.