Gladstone Land Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; this is an annual filing, not a quarterly report. Comparisons are principally with 2015. The company is an externally managed farmland REIT that owns and leases agricultural property rather than farming it. At year-end it owned 58 farms totaling 50,592 acres; after a January 2017 acquisition, it reported 59 farms and 54,340 acres across seven states.
Financial and operating performance
- Revenue: Operating revenue was $17.32 million, up 45.5% from $11.90 million. Rental revenue was $17.31 million. Same-property rental revenue rose 4.2%; acquisitions accounted for most of the overall increase.
- Profit and margins: Operating income was $7.06 million, up 54.5%. Net income was $473,488 versus $568,545 in 2015; net income attributable to the company was $448,102, or $0.04 per common share, versus $0.07. Approximate operating margin was 40.7%, compared with 38.4%; approximate net margin was 2.7%, compared with 4.8%.
- REIT performance measures: FFO was $5.66 million ($0.53 per diluted total share), versus $3.67 million ($0.42). AFFO was $5.82 million ($0.54 per diluted total share), up 69.3% from $3.44 million ($0.40). These are non-GAAP measures, not substitutes for cash flow or net income.
- Cash flow: Cash from operations was $8.40 million, up from $4.75 million. Investing used $95.50 million, largely for farm acquisitions and improvements; financing provided $87.00 million. Year-end cash and cash equivalents were $2.44 million.
- Debt and liquidity: Borrowings were $208.76 million at year-end, primarily secured by the farm portfolio; the stated blended borrowing rate before patronage was 3.17%. The company also had $28.75 million gross liquidation value of 6.375% Series A term preferred stock, classified as a liability because it is mandatorily redeemable in 2021. Management stated available liquidity of approximately $6.4 million, comprising $2.1 million cash and $4.3 million of facility availability based on collateral then pledged. Debt-to-capitalization including preferred stock was 72.8% on book value and 59.3% using farmland fair value.
- Distributions: Common distributions were $0.495 per share for 2016, versus $0.465 in 2015; the year-end monthly rate was $0.0425. Preferred distributions totaled approximately $677,000. The company reported that 69.3% of 2016 common distributions were characterized as return of capital for tax purposes.
- Portfolio: Occupancy was reported at 100%. California generated 56.8% of 2016 rental revenue, Florida 19.0%, and Colorado 8.4%. Fifteen farms acquired in 2016 covered 33,780 acres and cost approximately $99.7 million.
Material changes versus 2015
- Revenue and operating income grew with the expanded property base; operating expenses rose 39.9%, including higher depreciation, management fees and incentive fees. Interest expense increased 44.6% as average borrowings increased to approximately $176.6 million from $118.3 million.
- Net income declined 16.7%, reflecting higher financing costs and $677,122 of preferred distributions, despite higher operating income. The adviser earned a $349,550 incentive fee in 2016; none was earned in 2015.
- The company raised $27.6 million net from its preferred-stock offering. It also amended its MetLife facility, increasing total commitments from $125 million to $200 million, raising the collateral loan-to-value limit from 58% to 60%, and reducing the rate on existing term borrowings by 19 basis points. The Farmer Mac facility commitment increased from $75 million to $125 million.
- Estimated farmland fair value was $401.1 million, compared with net cost basis of $325.7 million. Management-estimated NAV was $14.21 per share, versus a December 31 market price of $11.24. These estimates are not audited appraisals of every property and are not guaranteed realizable values.
Outlook, risks and unusual items
- Management intended to continue acquiring and diversifying farmland and expected long-term growth in rents and land values, supported by demand for food and limited arable land. No specific earnings or distribution guidance was provided.
- The acquisition pipeline required more capital than the company’s stated available liquidity. Management expected to rely on additional equity, OP Units, mortgage debt and bond issuances to fund growth.
- Lease concentration is material: Dole’s two leases accounted for 17.1% of 2016 rental revenue and expire in 2020. Leases expiring in 2020 represented 30.3% of 2016 rental revenue. California produced 56.8% of rental revenue, creating geographic and water-related exposure.
- Risks include tenant default or nonrenewal, weather and crop disease, water availability, permanent-crop development and pricing, interest-rate increases, refinancing and collateral foreclosure, limited liquidity, and the company’s ability to maintain REIT status. The portfolio’s farmland values are management estimates sensitive to market assumptions.
- In January 2017, the company acquired a Florida farm for $54 million, financed in part with $32.4 million of Farmer Mac bonds and an $18.5 million MetLife line-of-credit draw. The new lease had stated minimum annualized straight-line rent of approximately $2.9 million.
- The company reported no material litigation or real estate impairment. It early adopted ASU 2017-01 in October 2016, generally shifting qualifying acquisitions to asset-acquisition accounting, which capitalizes acquisition costs rather than expensing them. Management reported effective internal controls; the financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Whether lease renewals and collections support rental growth, especially for Dole and leases expiring in 2020.
- Actual borrowing availability under collateral and covenant limits, upcoming maturities, and the funding plan for acquisitions beyond current liquidity.
- Whether AFFO and cash from operations adequately cover common and preferred distributions after debt service and capital needs; note that reported common distributions included substantial return of capital.
- The assumptions and independent appraisal support for the $401.1 million farmland valuation and $14.21 estimated NAV per share.
- Tenant, state, crop and water concentration, including the performance and funding needs of permanent-crop and development properties.