Farmland Partners Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Farmland Partners Inc. is an internally managed REIT that owns and seeks to acquire farmland throughout North America. As of March 31, 2018, it owned approximately 166,000 acres across 17 states, with approximately 75% used for primary crops and 25% for specialty crops. The Company also operates a small custom-farming and purchasing-services business through its taxable REIT subsidiary and originates mortgage loans to farmers.
This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The Company owned an 87.9% interest in its operating partnership at quarter-end and had 32.9 million common shares outstanding as of March 31, 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total operating revenue | $11.2 million | $7.2 million | +57% |
| Rental income | $9.9 million | $6.8 million | +46% |
| Operating income | $4.8 million | $0.7 million | +$4.1 million |
| Operating margin | 43.0% | 9.9% | Improved |
| Net income | $0.5 million | $(2.0) million | Improved |
| Net loss available to common stockholders | $(2.7) million | $(2.5) million | Loss increased |
| Basic and diluted loss per share | $(0.08) | $(0.10) | Improved |
| FFO | $2.6 million | $(0.5) million | Improved |
| AFFO | $(0.05) million | $0.4 million | Declined |
| Adjusted EBITDAre | $7.5 million | $4.0 million | +90% |
| Net cash from operating activities | $15.1 million | $(2.6) million | Improved |
Net loss attributable to common stockholders remained negative because of $3.1 million of distributions on Series A preferred units and other equity distributions. The Company declared a common dividend of $0.1275 per share for the quarter. AFFO was slightly negative after preferred distributions, despite positive FFO.
Financial position, debt and liquidity
- Total assets were $1.16 billion at March 31, 2018, including $1.12 billion of net real estate.
- Cash was $19.7 million, down from $53.5 million at December 31, 2017.
- Mortgage notes and bonds payable were $514.0 million net, with $515.7 million of principal outstanding.
- Debt represented approximately 44% of total assets; the filing does not provide a net-debt-to-asset ratio.
- Approximately 37% of debt, or $191.5 million, carried variable interest rates. Management estimated that a 100-basis-point increase in rates would reduce annual cash flow by approximately $2.4 million, assuming no change in variable-rate debt.
- Debt maturities totaled $187,000 during the remaining nine months of 2018, $6.5 million in 2019, $48.6 million in 2020, $120.3 million in 2022 and $339.9 million thereafter.
- The Company was in compliance with applicable debt covenants at March 31, 2018, including leverage and loan-to-value requirements.
- The Company had no off-balance-sheet arrangements.
Cash flow and capital allocation
- Operating cash flow of $15.1 million was supported by seasonal rent collections, including $18.2 million of cash rents received during the quarter, and a $10.6 million increase in deferred revenue.
- Investing cash outflows were $33.8 million, including $26.8 million for four farmland acquisitions, $5.3 million for real estate improvements and $5.3 million of new notes receivable.
- Financing cash outflows were $15.1 million, including $4.3 million of common dividends, $3.5 million of Series A preferred distributions, $6.5 million of common-stock repurchases and $0.6 million of distributions to operating-partnership common unitholders.
- The Company repurchased 780,029 common shares for $6.5 million during the quarter at an average price of $8.36 per share. Approximately $8.5 million remained available under the repurchase authorization at quarter-end.
Material changes versus the prior comparable period
- Revenue growth primarily reflected seven acquisitions completed after March 31, 2017, including four acquisitions completed in Q1 2018 for $26.8 million in cash. The prior-year period included the much larger AFCO transaction and 11 other acquisitions.
- Same-property rental income increased approximately 15%, or $0.6 million, although management cautioned that quarterly comparisons are affected by the timing of bonus and crop-share rents.
- Average annual cash rent increased from $199 per acre to $211 per acre.
- Operating expenses were broadly stable at $6.4 million, while acquisition and due-diligence costs declined 75% because the prior-year period included AFCO-related costs and Prudential termination expenses.
- Interest expense increased 62% to $4.4 million because borrowings increased from $437.8 million at March 31, 2017 to $515.7 million at March 31, 2018 and interest rates increased.
- Operating cash flow improved by $17.7 million, while investing outflows declined by $50.8 million because acquisition activity was lower than in Q1 2017.
- Common shares outstanding declined during the quarter because of repurchases, partly offset by conversions of operating-partnership units.
Guidance, outlook, risks and unusual items
- Management reported flat to modestly higher rents for 2018 row-crop renewals and generally stable to slightly higher specialty-crop base rents. No formal numerical earnings or revenue guidance was provided.
- Management expects long-term farmland demand and values to benefit from global population growth, GDP growth and food demand, but acknowledged commodity-price, crop-yield, weather, disease, water-availability and regulatory risks.
- Approximately 56% of annual cash rents and 55.8% of approximate acres were scheduled to expire in 2018 or 2019, creating material renewal and re-leasing exposure.
- One tenant represented 11.6% of rental income recognized in Q1 2018. A tenant default or lease termination could materially affect performance if the properties cannot be re-leased on satisfactory terms.
- Interest-rate exposure remains material because of variable-rate debt and periodic rate resets. The Company entered into an interest-rate swap on April 1, 2018 covering 50% of Rabobank debt for five years at a fixed swap rate of 4.7025%.
- The Company had $15.1 million of deferred revenue at quarter-end, compared with $3.9 million at year-end 2017, reflecting advance rent collections and timing differences between cash receipts and GAAP revenue recognition.
- Notes receivable included a mortgage note with a borrower that had previously defaulted; management stated that collectability was reasonably assured because the collateral value exceeded the amount owed.
- Subsequent events included a planned Illinois property acquisition, a planned sale of approximately 75 timberland acres, and declarations of common and Series B preferred distributions.
- Management stated that there were no material changes to previously disclosed risk factors and that pending legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether positive operating cash flow and FFO translate into sustainable cash available for common dividends, given Q1 AFFO of approximately negative $0.05 million after preferred distributions.
- The ability to refinance or repay the $48.6 million of 2020 maturities and the $120.3 million of 2022 maturities.
- Exposure to variable interest rates, debt covenant headroom and the effect of the Rabobank interest-rate swap.
- Lease renewal rates, rent growth and tenant credit quality, particularly given the concentration of lease expirations in 2018–2020.
- The timing and profitability of acquisitions, future capital expenditures and the effect of farmland valuations on preferred-stock obligations.
- The sustainability of distributions while the Company continues acquisitions, repurchases and preferred distributions.