Gladstone Land Corporation — Q2 2013 Form 10-Q
Business and period: The company owns and leases farmland, primarily under triple-net leases, and is externally managed. This filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. At quarter-end, it reported 14 farms across California, Florida, Michigan and Oregon.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Rental revenue | $0.950m | $0.812m | $1.864m | $1.625m |
| Operating income | $0.338m | $0.557m | $0.715m | $1.053m |
| Net income | $0.030m | $0.164m | $0.078m | $0.317m |
| Basic and diluted EPS | $0.00 | $0.06 | $0.01 | $0.12 |
| Operating cash flow | — | $(1.692)m | $0.608m |
- Q2 rental revenue rose 17.0%, while net income fell 81.5%. Six-month rental revenue increased 14.7%, while net income declined 75.4%.
- Operating margin was approximately 35.6% in Q2 versus 68.6% a year earlier; six-month operating margin was 38.3% versus 64.8%. Net margin was approximately 3.2% versus 20.3% for Q2 and 4.2% versus 19.5% for the six-month periods.
- Management attributed higher rental revenue mainly to farms acquired after June 2012. Expenses increased with depreciation, public-company reporting and overhead costs; interest expense also rose. The six-month income-tax provision decreased, but remained a significant expense.
Financial position and liquidity
- At June 30, 2013, cash and cash equivalents were $42.406m, short-term investments $0.680m, total assets $88.205m, and stockholders’ equity $56.671m.
- Debt totaled $29.589m: $29.489m mortgage debt and $0.100m on a MetLife line of credit. The mortgage carried a 3.50% stated rate and matures in 2026; its rate can reset in January 2014. The line had approximately $4.685m available.
- Six-month cash flows were $(1.692)m from operations, $(4.678)m from investing and $47.902m from financing. Operating cash use was primarily affected by a $2.1m IRS cash-bond prepayment. Financing chiefly reflected IPO proceeds, offset by distributions and mortgage repayments.
- January 2013 IPO proceeds were approximately $51.3m net. By June 30, $4.6m had been invested in farm acquisitions; most proceeds remained in cash after Treasury bills matured.
Material developments, outlook and risks
- The company acquired two blueberry farms in Michigan and Oregon for a combined stated purchase price of $4.441m, funded with IPO proceeds. It also signed a new five-year lease for Colding Loop, Florida, with minimum annualized straight-line rent of $125,400.
- Colding Loop requires new well and irrigation work estimated at $400,000 for 121 acres; a further estimated $300,000 may be required if the tenant uses an additional 60 acres. The company had spent $39,000 by June 30.
- Management intends to elect REIT tax status for 2013 or 2014 and expected to complete significant qualifying actions in Q4 2013. Qualification is not assured. The company reported $9.1m of estimated accumulated earnings and profits to distribute by the end of its first REIT election year and had prepaid $2.1m toward federal tax associated with a deferred intercompany gain.
- A 2012 tax-accounting error led to a $484,947 revision to the December 31, 2012 balance sheet, increasing reported other assets and deferred tax liability. The filing says it did not affect previously reported net income or EPS and was not material to prior periods.
- Tenant and geographic concentration are substantial: Dole accounted for 69.4% of six-month rental income, and California farms generated 85.3%. Dole’s parent guaranteed the leases. Two leases were due to expire in 2013 and together generated approximately 69.2% of six-month rental income; management was negotiating renewals but gave no assurance of renewal on favorable terms.
- Management said available resources should meet cash needs for the next 12 months. It is seeking acquisitions, but provided no quantified earnings or acquisition guidance. It estimated NAV at $14.06 per share using appraisals, while cautioning that NAV is subjective and is not a transaction price.
- Other stated risks include tenant default, natural disasters and climate impacts, interest-rate changes, competition for acquisitions, and failure to qualify as a REIT. The company reported no material legal proceedings or off-balance-sheet arrangements; disclosure controls were assessed as effective.
Investor facts to verify
- Whether the 2013 lease expirations were renewed, at what rents, and how much revenue remains concentrated in Dole and California.
- Deployment of remaining IPO cash, acquisition returns, and the effect of the mortgage rate reset and any additional MetLife borrowing.
- Actual irrigation and well costs at Colding Loop and whether the tenant uses the additional acreage.
- Progress toward REIT qualification, distribution of accumulated earnings and profits, and the resulting tax and cash effects.
- Basis and timing of portfolio appraisals underlying the $14.06 NAV estimate, and the difference between appraised values and realizable proceeds.