Farmland Partners Inc. 2018 Form 10-K Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed farmland REIT. The filing covers the fiscal year ended December 31, 2018, including fourth-quarter results. The company owned approximately 162,000 acres across 17 states, leased primarily to more than 100 tenant farmers, and had exposure to more than 26 commercial crops. Approximately 75% of portfolio value comprised primary-crop farmland and 25% specialty-crop farmland.
Revenue is principally generated from farmland rents. The company also earns tenant reimbursements, crop-sale revenue, interest income from the FPI Loan Program and other property-related income. The company operated approximately 625 acres directly through its taxable REIT subsidiary during 2018.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $56.1 million | $46.2 million | 21.3% increase |
| Operating income | $29.7 million | $22.5 million | 31.8% increase |
| Net income | $14.0 million | $9.2 million | 53.3% increase |
| Net income available to common stockholders | $(0.4) million | $0.9 million | Decline |
| Basic and diluted EPS | $(0.01) | $0.03 | Decline |
| FFO | $19.7 million | $17.2 million | 14.9% increase |
| AFFO | $9.0 million | $13.5 million | 33.6% decrease |
| EBITDAre | $38.5 million | $30.7 million | 25.4% increase |
| Adjusted EBITDAre | $40.3 million | $33.9 million | 18.9% increase |
Operating margin was approximately 53.0%, compared with 48.7% in 2017. Net margin was approximately 25.0%, compared with 19.8%. These margins benefited from portfolio growth and a $2.9 million gain on asset dispositions, while higher interest expense and preferred distributions reduced amounts attributable to common stockholders. AFFO margin was approximately 16.0%, compared with 29.2% in 2017.
- Rental income increased 19.2% to $51.2 million, primarily from acquisitions completed in 2017 and 2018.
- Tenant reimbursements increased 65.4% to $3.2 million.
- Crop sales declined 48.7% to $0.4 million.
- Other revenue increased 137.1% to $1.3 million, largely from higher interest income on notes receivable.
- Interest expense increased 38.6% to $18.8 million, reflecting higher borrowings and interest rates.
- Same-property rental income declined approximately $0.6 million, or 3%, to $20.8 million.
- Management estimated that trade tensions and extreme weather reduced 2018 rental income by approximately $1.0 million.
Cash flow, liquidity and capitalization
| Metric | December 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $16.9 million | $53.5 million |
| Total assets | $1.14 billion | $1.17 billion |
| Gross indebtedness | $525.3 million | $515.8 million |
| Total liabilities | $536.0 million | $530.4 million |
| Total equity | $339.3 million | $371.0 million |
- Net cash provided by operating activities was $20.0 million, compared with $0.9 million in 2017.
- Net cash used in investing activities was $15.9 million, including $33.2 million of acquisitions, $12.8 million of real-estate improvements, $6.7 million of new notes receivable and $31.9 million of property-sale proceeds.
- Net cash used in financing activities was $40.8 million, primarily reflecting $20.6 million of common-stock repurchases, preferred-stock repurchases, distributions and debt repayments.
- Approximately 35% of debt, or $181.4 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.
- Debt maturities included approximately $5.4 million in 2019, $112.3 million in 2022 and $354.8 million thereafter. The filing states that all outstanding indebtedness was secured by mortgages on farms.
- The company reported compliance with applicable debt covenants at December 31, 2018 and had no off-balance-sheet arrangements.
- Notes and interest receivable totaled $11.9 million. One note was past due, although management believed it was fully recoverable based on collateral.
Material changes versus the prior comparable period
- Portfolio expansion continued, but at a slower pace: six acquisitions totaling approximately $33.2 million versus 19 acquisitions totaling $206.2 million in 2017.
- The company completed five dispositions for $31.9 million of proceeds and recorded a $3.1 million aggregate gain; no farm dispositions occurred in 2017.
- Common shares outstanding declined to approximately 30.6 million from 33.3 million after repurchases of 3.05 million shares at an average price of $6.76.
- Common distributions were reduced from $0.51 per share in 2017 to $0.355 per share in 2018. The reduction began in the third quarter of 2018.
- Preferred distributions increased materially because the Series B Participating Preferred Stock was outstanding for a full year. Preferred distributions totaled $12.6 million in 2018 versus $6.9 million in 2017.
- Legal and accounting expense increased 60.4% to $2.3 million, primarily because of litigation-related costs.
- Property operating expenses increased 32.8% to $7.8 million, driven largely by higher property taxes and bad-debt expense.
Guidance, outlook, commentary and risks
- Management expected 2019 primary-crop rents to be flat to modestly higher and specialty-crop rents to be flat to modestly increasing. The filing does not provide formal earnings or AFFO guidance.
- As of the filing date, estimated 2019 rent and tenant reimbursements totaled $52.3 million, including $35.8 million of fixed rent and $11.4 million of variable rent. Variable-rent and lease-negotiation estimates were subject to material uncertainty.
- Approximately 36.5% of leased acres and 31.8% of annualized minimum cash rents were scheduled to expire in 2019; approximately 57.2% of acres and 63.4% of minimum cash rents were scheduled to expire through 2021.
- Management cited continuing risks from trade disputes, crop prices, adverse weather, crop disease, water availability, tenant defaults, short-term lease renewals, interest rates and access to capital.
- Hurricane Michael, excess rainfall and a California heat wave negatively affected 2018 operations; management expected the California event to negatively affect 2019 revenue.
- The company significantly reduced common distributions and stated that future distributions were subject to Board discretion, operating results, liquidity, debt covenants, litigation and REIT requirements.
- Pending litigation included a purported shareholder class action and derivative action concerning disclosures about the FPI Loan Program, plus litigation against parties alleged to have disseminated false or misleading information. The company could not estimate the outcomes or related expenses and expected legal costs in the latter matter could be substantial and uninsured.
- The company’s REIT status requires annual distributions of at least 90% of REIT taxable income, subject to applicable tax rules. Failure to maintain REIT qualification could result in corporate-level taxation and materially reduce distributions.
- Series A preferred units and Series B Participating Preferred Stock rank ahead of common stock for distributions. The Series B security also includes farmland-value participation that could require significant future payments.
Most important facts for investors to verify
- Whether operating cash flow and recurring rental income can support common distributions after preferred distributions, capital expenditures, debt service and litigation costs.
- The refinancing plan and liquidity available for the $5.4 million 2019 maturities, the $112.3 million 2022 maturities and other secured debt obligations.
- Tenant credit quality, collection trends and the recoverability of the past-due loan and other receivables.
- The renewal and repricing outcomes for leases expiring in 2019 through 2021, particularly variable-rent leases and California specialty-crop leases.
- The financial impact and potential settlement or defense costs of the pending FPI Loan Program and “short and distort” litigation.
- The effect of trade tensions, extreme weather, water restrictions and crop-price changes on tenant profitability, variable rents and farmland values.
- The reconciliation and sustainability of AFFO, which declined despite higher GAAP net income and FFO and is not a GAAP measure of liquidity.
- The company’s ability to access debt or equity capital, given the common stock price, leverage, secured collateral requirements and reduced distribution level.