Farmland Partners Inc. 2014 Form 10-K Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed farmland REIT focused primarily on owning and leasing primary-crop farmland. The filing covers the fiscal year ended December 31, 2014, including the company’s first year as a publicly traded company following its April 2014 IPO. The financial statements combine predecessor operations before the IPO with the company’s consolidated operations after the IPO.
At December 31, 2014, the company owned 87 farms totaling approximately 46,460 acres and six grain storage facilities across eight states. The property portfolio expanded materially during 2014 through 33 acquisitions completed after the IPO, including approximately $127.9 million of acquisitions recorded in the financial statements.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total operating revenues | $4.2 million | $2.4 million | +79.5% |
| Rental income | $4.0 million | $2.4 million | +69.0% |
| Operating income | $0.6 million | $1.4 million | -59.5% |
| Net income (loss) | $(0.7) million | $0.03 million | Declined |
| Net loss attributable to the company | $(0.6) million | $0.03 million | Declined |
| Basic and diluted loss per share | $(0.15) | Not meaningful | New public-company measure |
| Net cash provided by operating activities | $1.8 million | $0.02 million | Increased |
| FFO | $(0.3) million | $0.2 million | Declined |
| AFFO | $1.3 million | $0.2 million | Increased |
| Adjusted EBITDA | $2.7 million | $1.5 million | Increased |
2014 operating expenses were $3.7 million, including $2.3 million of general and administrative expense, $0.6 million of legal and accounting expense, and $0.2 million of acquisition and due diligence costs. The increase in public-company costs, employee compensation, restricted-stock amortization and acquisition activity more than offset revenue growth. Operating margin declined to approximately 13.2% from approximately 58.6% in 2013.
Cash and cash equivalents were $33.7 million at year-end, compared with $17,805 at December 31, 2013. Total assets increased to $201.0 million from $39.7 million, while total equity increased to $83.5 million from a deficit of $4.7 million.
Debt, liquidity and distributions
- Total mortgage notes and bonds payable were $113.9 million at December 31, 2014, compared with $43.1 million at year-end 2013.
- The company had $81.1 million outstanding under the Farmer Mac Facility, whose maximum borrowing capacity was increased to $150 million in December 2014. Reported remaining capacity was $68.9 million, subject to qualifying collateral.
- The $30.8 million First Midwest Bank loan generally matured in 2016 and carried interest at the greater of one-month LIBOR plus 2.59% or 2.80%.
- Approximately 27% of debt had variable interest rates. Management estimated that a 100-basis-point increase in rates would reduce annual cash flow by approximately $0.3 million, assuming no change in variable-rate debt.
- Debt maturities were $3.1 million in 2015, $29.7 million in 2016 and $81.1 million in 2017.
- The company declared distributions totaling $0.33 per common share during 2014. The fourth-quarter distribution was $0.116 per share, paid in January 2015.
- At December 31, 2014, the company had not repurchased shares under its authorized $10 million repurchase program.
Material changes versus the prior comparable period
- The IPO and July 2014 follow-on offering generated approximately $48.0 million and $43.3 million of net proceeds, respectively.
- The portfolio grew from approximately 38 farms and three grain storage facilities at the IPO to 87 farms and six grain storage facilities at year-end.
- Rental income increased primarily from acquisitions, but average annual cash rent for the entire portfolio declined to approximately $179 per acre from $326 per acre because the new acquisitions generally had lower rents per acre.
- Same-property rental income increased 11.4%, with average annual cash rent rising to approximately $365 per acre from $327 per acre.
- Cash used in investing activities increased to $126.3 million, primarily for farmland acquisitions, while financing cash flow increased to $158.2 million from equity offerings and new debt.
- General and administrative expense increased by approximately $2.1 million, reflecting the transition to a public company, new employees, board expenses, consulting, public-company costs and restricted-stock compensation.
- The company’s geographic exposure became substantially more diversified. Colorado represented 38.9% of acreage, Arkansas 17.4%, South Carolina 14.7% and Illinois 12.4% at year-end.
- Management reported that predecessor material weaknesses in internal control related to insufficient accounting personnel and segregation of duties were remediated during the fourth quarter of 2014. No auditor attestation report was required because of the company’s newly public status.
Outlook, commentary, risks and unusual items
Management expects long-term farmland values and rents to benefit from global population growth, rising GDP per capita and demand for food, feed and biofuels. It expects to continue acquiring farmland, using equity, OP units and secured debt as acquisition and financing tools. The filing does not provide formal earnings or revenue guidance.
Approximately 85.3% of estimated 2015 rent was from fixed-rent leases, 9.2% from variable-rent leases, 2.0% from internal leases and 3.5% from leases under negotiation. Estimated 2015 rent totaled $9.2 million, but portions were based on management estimates and were not guaranteed.
- Tenant concentration is material: Astoria Farms and Hough Farms, related parties, represented approximately 15% of acreage and approximately 30.7% of 2015 contractual rent. They accounted for approximately $2.5 million, or 62.3%, of 2014 recognized rental income.
- The portfolio is concentrated in primary crops and regional clusters, exposing results to weather, drought, flooding, crop disease, water availability, commodity prices, transportation conditions and regulatory changes.
- Most leases are short-term, generally one to five years, creating exposure to lower renewal rents and tenant turnover.
- The company was not in compliance with First Midwest Bank’s debt-to-net-worth and debt-service-coverage covenants at December 31, 2014, but subsequently obtained a waiver. The loan agreement was amended in February 2015.
- The REIT election was intended to begin with the short taxable year ended December 31, 2014. Failure to qualify could subject the company to regular corporate income tax and impair distributions.
- The company had no recognized real estate impairment in 2014 and was not subject to material litigation or known material contingencies.
- Unusual 2014 items included a $144,020 gain on the sale of a transmission easement and $680,540 of stock-based compensation expense.
- Distributions may include return of capital; the filing states that 37.9% of 2014 distributed income was characterized as return of capital.
- Tax protection agreements restrict dispositions of certain contributed properties and may require the company to maintain or replace debt to preserve tax deferral for certain OP unitholders.
Important facts for investors to verify
- Whether the company’s acquisition pace can translate into recurring rental income and positive GAAP earnings after public-company expenses and interest costs.
- The sustainability and collection of rent from related-party tenants, particularly Astoria Farms and Hough Farms.
- The company’s compliance with amended First Midwest Bank covenants and Farmer Mac Facility requirements.
- Refinancing plans for the $29.7 million of 2016 maturities and $81.1 million of 2017 maturities.
- The extent to which estimated 2015 rent from variable leases, leases under negotiation and internal leases becomes contractual third-party revenue.
- REIT qualification and the tax consequences of the company’s built-in gains, tax protection agreement and distributions classified as return of capital.
- Geographic, crop and water-related concentration, including exposure to Colorado, Arkansas and South Carolina.
- Whether AFFO remains positive after considering recurring capital expenditures, debt service and the timing of cash rent collections; AFFO is a non-GAAP measure and is not equivalent to cash available for distribution.