Farmland Partners Inc. — 2019 Form 10-K Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed farmland REIT. For the fiscal year ended December 31, 2019, it owned approximately 158,500 acres across 17 states, leased primarily to more than 100 tenant farmers, and operated a small custom-farming business through its taxable REIT subsidiary. Approximately 70% of the portfolio by value supported primary crops and 30% specialty crops. The company also operated the FPI Loan Program for secured agricultural loans.
The filing reports full-year 2019 results and unaudited quarterly information, including the quarter ended December 31, 2019. Agricultural lease collections and variable rent recognition are seasonal, so management emphasizes annual performance.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenues | $53.6 million | $56.1 million | Down 4.5% |
| Operating income / NOI | $26.3 million | $29.7 million | Down 11.3% |
| Net income | $14.9 million | $14.0 million | Up 5.8% |
| FFO | $15.3 million | $19.7 million | Down 22.2% |
| AFFO | $4.4 million | $9.0 million | Down 51.3% |
| Operating cash flow | $18.0 million | $20.0 million | Down approximately $2.0 million |
| Year-end cash and cash equivalents | $12.6 million | $16.9 million | Down $4.3 million |
| Gross indebtedness | $512.9 million | $525.3 million | Down $12.5 million |
| Total assets | $1.103 billion | $1.140 billion | Down $37.0 million |
Revenue consisted primarily of $48.1 million of rental income, $3.1 million of tenant reimbursements, $1.0 million of crop sales and $1.3 million of other revenue. Rental income declined 6.0%, mainly because of lower crop prices and cyclical yields affecting participating rents, timing of variable rent payments and asset dispositions. Contingent rent recognized declined to $11.4 million from $13.2 million.
Net income benefited from a $7.8 million gain on asset sales, compared with $2.9 million in 2018. Interest expense increased 4.2% to $19.6 million. Legal and accounting expense increased 70.4% to $4.0 million, primarily because of litigation and additional Sarbanes-Oxley Section 404(b) audit costs. AFFO declined substantially after preferred distributions and other adjustments.
For the fourth quarter of 2019, operating revenue was $21.9 million, net income was $9.8 million and net income available to common stockholders was $6.1 million, or $0.20 basic earnings per share. The quarter benefited materially from asset-sale gains and seasonal variable rent recognition.
Material changes versus the prior comparable period
- Completed two acquisitions for $3.3 million of total consideration, including cash and reduction of notes receivable.
- Completed four dispositions involving seven farms for $34.1 million of proceeds and recognized a $7.9 million aggregate gain.
- Repurchased approximately 3.5 million common shares for $22.0 million at a weighted-average price of $6.24 per share.
- Repurchased approximately 42,000 Series B preferred shares for $0.9 million at a weighted-average price of $21.60 per share.
- Common distributions declared declined to $0.20 per share from $0.355 per share in 2018, following the significant reduction that began in the third quarter of 2018.
- Same-property rental income declined approximately $2.2 million, or 4.65%, to $46.2 million, largely because of lower crop-share revenue in the permanent-crop portfolio.
- Real estate improvements declined to $6.6 million from $12.8 million, while proceeds from property sales increased to $34.1 million from $31.9 million.
- Outstanding notes and interest receivable declined to $4.8 million from $11.9 million, partly because collateralized property was acquired in settlement of a loan.
Liquidity, debt and capital resources
At December 31, 2019, the company had approximately $512.9 million of gross debt, principally secured by farm mortgages, and $12.6 million of cash. Approximately $48.3 million of debt matured in June and July 2020. Management stated that it did not have sufficient cash to repay these maturities and had not entered into a definitive refinancing agreement as of the filing date. If refinancing were unavailable, the company could be required to sell farms or pursue other financing, potentially on unfavorable or dilutive terms.
Contractual obligations totaled approximately $643.7 million, including $512.9 million of principal payments and $130.8 million of estimated fixed- and variable-rate interest payments. Approximately $181.2 million, or 35% of debt, carried variable rates tied primarily to LIBOR. Management estimated that a 100-basis-point increase in rates would reduce annual cash flow by approximately $0.4 million, net of the interest-rate swap.
The company was in compliance with disclosed debt covenants at year-end. Debt agreements include leverage, loan-to-value, fixed-charge coverage, debt-service coverage and tangible-net-worth requirements, as well as cross-default provisions. The company stated that it expected to address liquidity needs through refinancing, operating cash flow, asset sales and other secured or unsecured borrowings.
Guidance, outlook, commentary, risks and unusual items
- Management expected flat to modestly higher rents on 2020 primary-row-crop lease renewals. Specialty-crop profitability was under pressure, with base rents expected to be consistent with or somewhat below 2019 levels.
- Management continued to express a long-term positive view based on global food demand, limited high-quality farmland supply and anticipated long-term growth in crop demand and farmland values.
- Extreme weather, including Hurricane Michael, excess rainfall and a California heat wave, negatively affected tenant profitability and variable rent revenue in 2018 and 2019.
- Trade disputes reduced prices for crops including soybeans, almonds and walnuts. Management expected the Phase 1 U.S.-China trade agreement to improve exports but provided no assurance regarding timing or magnitude.
- The filing discussed COVID-19 as a potential logistics and distribution risk. Management expected the effect on agricultural demand to be modest and temporary, but stated that disruption to ports, distribution and retail channels could affect operations.
- Litigation remains pending concerning alleged misleading disclosures about the FPI Loan Program, including a purported class action and several derivative actions. No class had been certified, damages were not quantified, and the company could not estimate the ultimate cost or outcome. The company also pursued litigation related to an alleged “short and distort” campaign.
- The company incurred elevated legal costs and did not recognize an insurance receivable for expected coverage of certain shareholder-litigation defense costs. It expected insurance coverage for costs exceeding $0.35 million in the shareholder actions, subject to the insurer’s review.
- The independent auditor issued an adverse opinion on internal control over financial reporting because of a material weakness involving ineffective information-technology general controls and compensating controls. The financial statement audit opinion was unqualified, and management began a remediation plan.
- The company’s Series B preferred stock carries a 6.00% dividend and ranks senior to common stock. Series A preferred units carry a 3.00% cumulative distribution. Common distributions cannot be paid unless required preferred distributions are paid.
- The FPI Loan Program had approximately $4.8 million of notes and interest receivable outstanding at year-end. The company identified credit, foreclosure, collateral-value and agricultural operating risks associated with the program.
Most important facts for investors to verify
- Whether the $48.3 million of June and July 2020 maturities were refinanced, repaid or funded through farm dispositions after the filing date.
- Current cash balances, debt maturities, covenant compliance, interest rates and exposure to the discontinuation of LIBOR.
- Whether operating cash flow and AFFO support common distributions after preferred dividends, capital expenditures, debt service and litigation costs.
- Trends in tenant collections, contingent rent, crop prices, weather impacts and 2020 lease renewals.
- The status, potential damages and insurance coverage of the Turner, Winter, Luger, Barber, Hustedde and Rota Fortunae litigation.
- Progress in remediating the material weakness in internal control over financial reporting and the auditor’s subsequent assessment.
- The effect of common-share repurchases, preferred-stock obligations and redeemable operating-partnership units on leverage, liquidity and common-stock dilution.
- Whether the company maintained REIT qualification and satisfied required distributions without relying on unfavorable asset sales or additional borrowing.