Gladstone Land Corporation — Q2 2019 Form 10-Q
Business and period: Agricultural REIT that primarily owns and leases farmland. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are against December 31, 2018. At quarter-end, the company owned 90 farms across 10 states; two additional farms were acquired in July.
Financial highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Lease revenue | $8.36 million | $6.63 million | $16.19 million | $13.33 million |
| Total operating revenue | $8.36 million | $11.39 million | $16.19 million | $20.64 million |
| Operating income | $4.12 million | $2.47 million | $7.35 million | $5.26 million |
| Net income (loss) | $0.17 million | $(1.85) million | $0.28 million | $(2.17) million |
| Net loss attributable to common stockholders | $(0.72) million | $(1.75) million | $(1.22) million | $(2.04) million |
| Loss per common share | $(0.04) | $(0.11) | $(0.07) | $(0.14) |
- Quarterly lease revenue grew 26.0%; six-month lease revenue grew 21.5%, mainly reflecting acquisitions and the leasing of formerly vacant or self-operated farms. Same-property fixed rent increased only 0.5% in Q2 and 0.7% for the six-month period.
- Total revenue fell year over year because 2018 included crop-sale revenue from a farm operated by the company’s taxable subsidiary. That farm was leased to an unrelated tenant beginning August 2018. 2018 also included a $1.06 million crop-inventory write-down.
- Q2 operating income improved, but common stockholders still recorded a loss after preferred dividends. Q2 2019 included a $0.97 million adviser fee waiver; the six-month waiver was $1.54 million. These non-contractual credits materially reduced reported management-fee expense.
- Six-month operating cash flow was $4.26 million, versus $4.48 million in 2018. Investing used $54.60 million, chiefly for acquisitions and property improvements; financing provided $64.32 million, primarily from equity issuance and borrowing. Cash increased $13.98 million to $28.71 million.
- At June 30, total assets were $628.72 million, notes and bonds payable net were $350.14 million, and total equity was $231.35 million. The company reported a 62.0% debt-to-total-capitalization ratio at book value, including Series A preferred stock as debt, down from 66.8% at year-end 2018. Weighted-average borrowing rate was 3.93% before interest patronage.
- Management stated available liquidity of approximately $48.1 million: $25.2 million cash and $22.9 million available under the MetLife facility, subject to covenants. The filing does not clearly reconcile the stated $25.2 million cash figure with the balance-sheet cash and cash equivalents of $28.71 million.
Changes, outlook, and risks
- During the first half, the company acquired five farms for approximately $47.9 million, with stated annualized minimum straight-line rent of $3.07 million. It issued 2.07 million common shares in the June offering and sold Series B preferred shares; these capital raises supported acquisitions but increased share count and preferred-dividend obligations.
- Management said current and short-term resources should cover distributions, debt service, preferred dividends, and operating costs in the near term. It expects to fund longer-term needs through further equity issuance and borrowings, and intends to use significant available liquidity for acquisitions. The filing gives no quantified earnings or acquisition guidance.
- Management described its acquisition pipeline as healthy but cautioned that planned transactions remain subject to due diligence and may not close. It anticipated renewing near-term expiring leases at current market rates or higher, but gave no assurance of renewal, favorable rents, or uninterrupted occupancy. Thirteen leases were scheduled to expire in 2020, representing 43.5% of leased acreage.
- Tenant and geographic concentration are notable: one tenant generated 13.6% of six-month lease revenue; California and Florida generated 48.8% and 29.0%, respectively. Natural disasters in concentrated regions could materially affect results.
- Subsequent to quarter-end, two farm acquisitions totaled $66.8 million, with $4.27 million annualized minimum rent; the larger Florida acquisition included $3.3 million of OP Units as partial consideration. Additional post-quarter financings were also obtained.
- A July 2019 advisory-agreement amendment excludes preferred equity from management-fee and incentive-fee calculations beginning Q3 2019. Management expects lower gross base fees but a higher potential for incentive fees. Most debt is fixed-rate; the company noted that LIBOR-based facilities will require future transition or renegotiation as LIBOR is phased out.
- There were no material known or threatened legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements. Management reported disclosure controls were effective.
Investor verification priorities
- Reconcile the $25.2 million cash component of management’s liquidity disclosure to the $28.71 million balance-sheet cash figure, and confirm current borrowing availability and covenant capacity.
- Assess lease rollover and re-leasing risk, particularly the 2020 expirations and concentration in California and Florida, and monitor the significant single-tenant exposure.
- Evaluate acquisition economics, financing and share dilution, including the July acquisitions and subsequent debt, and compare stated minimum rents with purchase prices and actual cash collections.
- Review recurring cash generation and distribution coverage alongside GAAP losses attributable to common stockholders, preferred dividends, and adviser fee credits.
- Treat management’s $11.61 estimated NAV per common share as a non-GAAP estimate based partly on appraisals and internal valuations, not an audited or assured realizable value.