Gladstone Land Corporation — Q3 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. Gladstone Land is an externally managed agricultural REIT that primarily owns and leases farmland. At quarter-end it owned 72 farms across nine states; subsequent to quarter-end it reported 73 farms.
Financial performance and position
- Revenue: Q3 operating revenue was $6.6 million, up 46.9%; nine-month revenue was $18.3 million, up 47.7%. Rental revenue accounted for nearly all revenue.
- Profit and margins: Q3 operating income rose 61.6% to $2.9 million, but the company recorded a $247,000 net loss and a $221,000 net loss attributable to the company, versus $32,000 attributable income a year earlier. Nine-month net income attributable to the company fell 57.8% to $158,000. Operating margin, calculated as operating income divided by operating revenue, was approximately 44.5% in Q3 and 46.0% for nine months, compared with 40.4% and 38.7%, respectively, in 2016. Basic and diluted EPS were $(0.02) for Q3 and $0.01 for nine months.
- Non-GAAP REIT measures: Q3 diluted FFO and AFFO were each $0.14 per weighted-average total share; nine-month diluted FFO was $0.42 and AFFO was $0.42 per share. These measures are not substitutes for GAAP earnings or operating cash flow.
- Cash flow: Nine-month operating cash flow was $7.7 million, versus $7.9 million in 2016. Investing used $125.3 million, chiefly for $121.0 million of farm acquisitions. Financing provided $118.9 million, including equity proceeds and borrowing. Cash increased $1.3 million to $3.8 million.
- Debt and liquidity: Net borrowings were $295.3 million at September 30, versus $207.3 million at year-end 2016; mortgage notes and bonds totaled $292.1 million before financing costs. The company reported approximately $15.0 million of available liquidity, including $3.1 million cash and $11.9 million of MetLife availability, subject to covenants and collateral. Its debt-to-total-capitalization ratio, treating term preferred stock as debt, was 73.3% at book value and 60.7% on a fair-value basis.
- Equity and distributions: Common shares outstanding increased to 13.5 million from 10.0 million at year-end, principally reflecting offerings and ATM sales. Nine-month common distributions were $0.3915 per share. Series A term preferred stock carries a 6.375% rate and is mandatorily redeemable September 30, 2021.
Material changes versus 2016
- Growth in revenue primarily reflected acquisitions: the company acquired 14 farms in seven transactions during the first nine months, for a reported purchase price of $121.8 million. Same-property rental revenue increased 3.2% for nine months.
- Despite higher operating income, higher interest expense and preferred-stock distributions weighed on net income. Nine-month interest expense increased 62.5% to $7.0 million, largely due to higher borrowings; preferred distributions increased to $1.4 million.
- Operating expenses rose 30.1% for nine months, including higher depreciation and amortization and management and incentive fees. Acquisition-related expenses declined, partly reflecting the company’s early adoption of guidance under which most acquisitions are treated as asset acquisitions and related costs are capitalized.
- Ten lease renewals on nine farms during the nine-month period produced aggregate annualized rent of approximately $2.2 million, a 7.0% decrease from the prior leases. Two California renewals in Q3 reduced combined rent by 12.5%.
Outlook, risks and unusual items
- Management said current and near-term resources should cover distributions, debt service and operating costs. It expects to fund longer-term needs through equity, mortgage debt, bonds and other borrowings, and intends to use significant available capital for additional acquisitions. It reported two signed purchase agreements totaling approximately $8.6 million expected to close in Q4 2017; there is no formal earnings guidance in the provided filing text.
- Acquisition and improvement commitments included up to $4.0 million for vineyard development in California, $1.8 million for Oregon farm improvements, and other property investment commitments. The filing reported $6.6 million of total operating obligations at quarter-end. A $78,000 loss arose from removing blueberry bushes for an Oregon farm improvement project.
- Tenant and geographic concentration are significant: one tenant generated 17.7% and Dole 12.2% of nine-month rental revenue. California contributed 47.8%, Florida 26.5%, and Colorado 11.0%. Tenant default, lease termination, natural disasters and agricultural conditions could adversely affect results.
- Debt is predominantly fixed-rate, but the company has variable-rate borrowings and fixed-rate debt that may reset. It had no derivative hedges. Scheduled principal payments included $23.4 million in 2018 and $36.1 million in 2022; term preferred stock redemption is also due in 2021.
- Management estimated NAV at $14.15 per common share at quarter-end, based on estimated property values, versus a reported closing common-stock price of $13.62. The estimate is management-prepared, unaudited, sensitive to assumptions, and not assured to equal realizable value.
- Related-party arrangements include external management and administration by affiliates of the CEO. The amended advisory agreement increased the equity base for the management fee; Q3 net adviser fees were $730,000. The company reported no material litigation, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Reconcile the MD&A liquidity figure of $3.1 million cash with the balance-sheet cash balance of $3.8 million, and confirm current borrowing availability against pledged collateral and covenants.
- Assess whether acquisition-driven rental growth and improvement projects will produce sufficient cash returns to offset higher interest costs, management fees and capital needs.
- Review tenant exposure, upcoming lease expirations—particularly 2020, when 46.4% of leased acreage was scheduled to expire—and renewal economics.
- Evaluate the assumptions and valuation methods underlying the $14.15 estimated NAV per share, including the substantial use of internal valuations and appraisals.
- Confirm the sustainability of common distributions alongside debt maturities, the 2021 preferred-stock redemption, and additional equity issuance and dilution.