FARMLAND PARTNERS INC. The following analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes included elsewhere in this Quarterly Report, as well as the information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities Exchange Commission (the "SEC") onMarch 1, 2022 , which is accessible on theSEC's website at www.sec.gov. References to "the Company," "we," "our," and "us" refer toFarmland Partners Inc. ("FPI"), aMaryland corporation, together with its consolidated subsidiaries, includingFarmland Partners Operating Partnership, L.P. , aDelaware limited partnership (the "Operating Partnership"), of which FPI is the sole member of the sole general partner.
Special Note Regarding Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). These forward-looking statements include, without limitation, statements concerning pending acquisitions and dispositions, projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results, future stock repurchases, our dividend policy, future economic performance, crop yields and prices and future rental rates for our properties, ongoing litigation, as well as statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance, and our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: the ongoing war inUkraine and its impact on our tenant's businesses and the farm economy generally, the impact of the COVID-19 pandemic and efforts to reduce its spread on our business and on the economy and capital markets generally, general volatility of the capital markets and the market price of our common stock, changes in our business strategy, availability, terms and deployment of capital, our ability to refinance existing indebtedness at or prior to maturity on favorable terms, or at all, availability of qualified personnel, changes in our industry, interest rates or the general economy, the degree and nature of our competition, the outcomes of ongoing litigation, our ability to identify new acquisitions or dispositions and close on pending acquisitions or dispositions and the other factors described in the risk factors described in Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and in other documents that we file from time to time with theSEC . Given these uncertainties, undue reliance should not be placed on such statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by law. Overview and Background
Our primary strategic objective is to be a leading institutional acquirer, owner and manager of high-quality farmland located in agricultural markets throughoutNorth America . As ofMarch 31, 2022 , we own farms with an aggregate of approximately 160,700 acres inAlabama ,Arkansas ,California ,Colorado ,Florida ,Georgia ,Illinois ,Kansas ,Louisiana ,Michigan ,Mississippi ,Missouri ,Nebraska ,North Carolina ,South Carolina ,South Dakota andVirginia . In addition, we serve as property manager over approximately 25,000 acres. As ofMarch 31, 2022 , approximately 70% of our portfolio (by value) is used to grow primary crops, such as corn, soybeans, wheat, rice and cotton, and approximately 30% is used to produce specialty crops, such as almonds, citrus, blueberries, and vegetables. We believe our portfolio gives investors the economic benefit of increasing global food demand in the face of growing scarcity of high-quality farmland and will continue to reflect the approximate allocation ofU.S. agricultural output between primary crops and animal protein (whose production relies principally on primary crops as feed), on one hand, and specialty crops, on the other. In addition, under the FPI Loan Program, we make loans to third-party farmers (both tenant and non-tenant) to provide financing for property acquisitions, working capital requirements, operational farming activities, farming infrastructure projects and for other farming and agricultural real estate
related projects.
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FPI was incorporated in Maryland on September 27, 2013 , and is the sole member
of the sole general partner of the Operating Partnership , which is a Delaware
limited partnership that was formed on September 27, 2013 . All of FPI's assets
are held by, and its operations are primarily conducted through, the Operating
Partnership and its wholly owned subsidiaries. As of March 31, 2022 , FPI owned
97.1% of the Common units and none of the Series A preferred units. See "Note 9
- Stockholders' Equity and Non-controlling Interests" within the notes to the
consolidated financial statements included in this Quarterly Report on Form 10-Q
for additional information regarding the non-controlling interests.
FPI has elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with its short taxable
year ended
The following table sets forth our ownership of acreage by region as ofMarch 31, 2022 : Region (1) Owned Acres Managed Acres Total Acres Corn Belt 44,544 17,444 61,988 Delta and South 32,878 1,489 34,367 High Plains 30,853 - 30,853 Southeast 40,657 6,107 46,764 West Coast 11,752 - 11,752 160,684 25,040 185,724
(1) Corn Belt includes farms located in
farms located in
We intend to continue to acquire additional farmland to achieve scale and further diversify our portfolio by geography, crop type and tenant. We also may continue to selectively dispose of assets when we believe a disposition is in the Company's best interest. We also may acquire, and make loans secured by mortgages on, properties related to farming, such as grain storage facilities, grain elevators, feedlots, processing plants and distribution centers, as well as livestock farms or ranches. In addition, we provide volume purchasing services to our tenants, engage directly in farming, and provide property management, auction, and brokerage services throughFPI Agribusiness Inc. , our taxable REIT subsidiary (the "TRS" or "FPI Agribusiness"). As ofMarch 31, 2022 , the TRS directly operates 2,973 acres of farmland located inCalifornia andMichigan . Our principal source of revenue is rent from tenants that conduct farming operations on our farmland. The majority of the leases that are in place as of the date of this Quarterly Report on Form 10-Q have fixed rent payments. Some of our leases have variable rents based on the revenue generated by our farm-operator tenants. We believe that this mix of fixed and variable rents will help insulate us from the variability of farming operations and reduce our credit-risk exposure to farm-operator tenants while making us an attractive landlord in certain regions where variable leases are customary. However, we may be exposed to tenant credit risk and farming operation risks, particularly with respect to leases that do not require advance payment of 100% of the fixed rent, variable rent arrangements and leases with terms greater than one year. In addition, a number of our leases provide for variable rent payments, through which we only recognize revenue up to the amount of the crop insurance minimum. The excess cannot be recognized as revenue until the tenant enters into a contract to sell their crop. Generally, we expect tenants to enter into contracts to sell their crop following the harvest of the crop.
Impact of COVID-19 on Our Business
We continue to gain a better understanding of the impact of the COVID-19 pandemic on our business and the economy in general. Gasoline consumption (and therefore ethanol, and its input product, corn) increased relative to 2020, when consumption fell significantly because decreased travel during the pandemic. Dining out (e.g., restaurants) increased since 2020, when efforts to limit the spread of COVID-19 included stay-at-home orders that led to significant changes inU.S. consumers' food-spending patterns. We are unable to quantify the ultimate impact of the pandemic on our business, as 36
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there are still significant uncertainties around the social and economic impact of the pandemic, and government responses. In such trying times, we are proud to support the industry and hardworking farmers that feed the entire country.
Impact of the War in
Ukraine and theRussian Federation represent large portions of global trade in a variety of agricultural products (e.g., 34% of global wheat exports). The disruption in farming operations inUkraine as well as the general disruption of trade from the region due to the war inUkraine has stressed the food supply for many countries that depend on imports of agricultural products from those countries in the region that have been affected by the war inUkraine . Agricultural commodity prices, which have increased significantly since the fall of 2020, have risen even higher as a result of the war inUkraine . We anticipate thatU.S. farmers will be an even more important contributor to global food imports asRussia continues its aggression againstUkraine , and high demand for primary crops, which are the core of our business, together with high commodity prices, will enhance profitability forU.S. farmers. Factors That May Influence Future Results of Operations and Farmland Values The principal factors affecting our operating results and the value of our farmland include global demand for food relative to the global supply of food, farmland fundamentals and economic conditions in the markets in which we own farmland and our ability to increase or maintain rental revenues while controlling expenses. We are currently in an environment of rapidly appreciating land values, driven by, among other things, inflation, strong commodity prices (further exacerbated by the war inUkraine ) and a positive outlook for farmer profitability. Moreover, each year additional farmland in various portions of the world, includingthe United States , is repurposed for commercial development, thus decreasing the land acreage available for production of permanent and specialty crops necessary to feed the world's growing population. Although farmland prices may show a decline from time to time, we believe that any reduction inU.S. farmland values overall is likely to be short-lived as global demand for food and agricultural commodities typically exceeds global supply and quality farmland becomes more scarce.
Demand
We expect that global demand for food, driven primarily by significant increases
in the gross domestic product ("GDP") per capita and global population, will
continue to be the key driver of farmland values. We expect that global demand
for most crops will continue to grow to keep pace with global population growth.
We also believe that growth in global GDP per capita, particularly in developing
nations, will contribute significantly to increasing demand for primary crops.
As global GDP per capita increases, the composition of daily caloric intake is
expected to shift away from the direct consumption of primary crops toward
animal-based proteins, which is expected to result in increased demand for
primary crops as feed for livestock. We anticipate these factors will lead to
either higher crop prices and/or higher yields and, therefore, higher rental
rates on our farmland, as well as sustained growth in farmland values over the
long term.
According to "How to Feed the World in 2050," a report by the United Nations'
Food and Agriculture Organization ("UN FAO"), these factors are expected to
require more than one billion additional tons of global annual grain production
by 2050 to feed a global population in excess of 9 billion. The projected
growth in grain production represents a 43% increase from 2005-2007 levels and
more than two times the 446 million tons of grain produced in the United States
in 2014. Furthermore, we believe that, as GDP per capita grows, a significant
portion of additional household income is allocated to food and that once
individuals increase consumption of, and spending on, higher quality food, they
will strongly resist returning to their former dietary habits, resulting in
greater inelasticity in the demand for food. As a result, we believe that, as
global demand for food increases, rental rates on our farmland and the value of
our farmland will increase over the long term. Global demand for corn and
soybeans as inputs in the production of biofuels such as ethanol and soy diesel
also could impact the prices of corn and soybeans, which, in the long term,
could impact our rental revenues and our results of operations. The success of
our long-term business strategy is not dependent on growth in demand for
biofuels, primarily because we believe that growth in global population and GDP
per capita will be more significant drivers of global demand for primary crops
over the long term.
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Despite advances in income, according to "The State of Food Security and
Nutrition in the World," a report by the UN FAO, 2.37 billion people did not
have access to adequate food in 2020. The war in Ukraine may further stress food
supplies for developing countries that are dependent on food imports.
Supply
Global supply of agricultural commodities is driven by two primary factors, the number of arable acres available for crop production and the productivity of the acres being farmed. Although the amount of global cropland in use has gradually increased over time, growth has plateaued over the last 20 years. Typically additions to cropland are in areas of marginal productivity, while cropland loss, driven by urban development, tends to affect primarily highly productive areas. Cropland area continues to increase in developing countries, but after accounting for expected continuing cropland loss, theUN FAO projects only 173 million acres will be added from 2005-2007 to 2050, an approximate 5% increase. In comparison, world population is expected to grow over the same period to 9.1 billion, a nearly 40% increase. According to theWorld Bank Group arable land per capita has decreased by approximately 50% from 1961 to 2018. While we expect growth in the global supply of arable land, we also expect that landowners will only put that land into production if commodity prices and the value of farmland cause landowners to benefit economically from using the land for farming rather than alternative uses. We also believe that decreases in the amount of arable land inthe United States and globally as a result of increasing urbanization will partially offset the impact of additional supply of farmland. Additionally, we believe that farmland lost to urban development disproportionately impacts higher quality farmland. According to a study published in 2017 in the Proceedings of theNational Academy of Sciences , urban expansion is expected to take place on cropland that is 1.77 times more productive than the global average. The global supply of food is also impacted by the productivity per acre of tillable land. Historically, productivity gains (measured by average crop yields) have been driven by advances in seed technology, farm equipment, irrigation techniques, and improvements in soil health, chemical nutrients and pest control. Furthermore, we expect the shortage of water in many irrigated growing regions inthe United States and around the globe, often as a result of new water restrictions imposed by laws or regulations, to lead to decreased productivity growth and, in some cases, cause yields to decline on those acres.
The supply and farmability of arable land is also impacted by international
conflicts, as we are seeing with the ongoing war in
Conditions in Our Existing Markets
Our portfolio spans numerous farmland markets and crop types, which provides us broad diversification across conditions in these markets. Across all regions, farmland acquisitions continue to be dominated by buyers who are existing farm owners and operators, whereas institutional investors constitute a small fraction of the industry. We generally see firm demand for high quality properties across all regions and crop types. Farmland values are typically very stable, often showing modest increases even in years of commodity price weakness. We expect this trend to continue, with modest but consistent annual increases that compound into significant appreciation in the long term. Under certain market conditions, as in 2021 and in the first quarter of 2022, with strong commodity prices and farmer profitability, there are periods of accelerating appreciation in farmland values. Leases being renegotiated under the robust market conditions experienced in 2021, the first leasing cycle since the farm economy improved, reflected significant rent increases. We believe quality farmland inthe United States has a near-zero vacancy rate as a result of the supply and demand fundamentals discussed above. We believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators choose to rent additional acres of farmland when it becomes available in order to allocate their fixed costs over additional acres. Our view is that rental rates for farmland are a function of farmland operators' view of the long-term profitability of farmland, and that many farm operators will compete for farmland even during periods of decreased profitability due to the scarcity of farmland available to rent. Furthermore, because it is generally customary in the industry to provide the existing tenant with the opportunity to re-lease the land at the end of each lease term, we believe that many farm operators will rent additional land that becomes available in order to control the ability to farm that land in future periods. As a result, in our experience, many farm operators will aggressively pursue rental opportunities in their operable geographic area, even when the farmer anticipates lower profits returns or
even
short-term losses.
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In our primary row crop farmland, we realized rent increases of over 10% in connection with 2021 lease renewals, and, as the farm economy continues to be very strong, we expect to benefit from rent growth into 2022. This is consistent with robust prices in primary crop markets and tenant demand for leasing high quality farmland. Across specialty crops, operator profitability is recovering after being under pressure partly due to COVID-19.
Lease Expirations
Farm leases are generally three to five years in duration. As ofMarch 31, 2022 , our portfolio had the following lease expirations as a percentage of approximate acres leased and annual minimum fixed rents: ($ in thousands) % of Approximate Annual Fixed % of Annual Year Ending December 31, Approximate Acres Acres Rents Fixed Rents 2022 (remaining nine months) 51,445 32.0 %$ 12,276 37.5 % 2023 27,549 17.1 % 6,820 20.8 % 2024 43,118 26.8 % 8,899 27.2 % 2025 12,147 7.6 % 1,137 3.5 % 2026 7,539 4.7 % 1,411 4.3 % Thereafter 18,886 11.8 % 2,229 6.7 % 160,684 100.0 %$ 32,772 100.0 % Rental Revenues
Our revenues are primarily generated from renting farmland to operators of farming businesses. Our leases have terms ranging from one to 40 years, with three years being the most common. Although the majority of our leases do not provide the tenant with a contractual right to renew the lease upon its expiration, we believe it is customary to provide the existing tenant with the opportunity to renew the lease, subject to any increase in the rental rate that we may establish. If the tenant elects not to renew the lease at the end of the lease term, the land will be offered to a new tenant. As discussed above, the vacancy rate for qualityU.S. farmland is near-zero and there is often competition among tenants for quality farmland; accordingly, we do not believe that re-leasing farmland upon the expiration of existing leases is a significant risk for FPI. The leases for the majority of the row-crop properties in our portfolio provide that tenants must pay us at least 50% of their fixed farm rent in advance of each spring planting season. As a result, we collect a significant portion of total annual rents in the first calendar quarter of each year, which we believe mitigates the tenant credit risk associated with the variability of farming operations that could be adversely impacted by poor crop yields, weather conditions, mismanagement, undercapitalization or other factors affecting our tenants. Tenant credit risk is further mitigated by usually requiring that our tenants maintain crop insurance and by our claim on a portion of the related proceeds, if any, as well as by our security interest in the growing crop. Prior to acquiring farmland property, we take into consideration the competitiveness of the local farm-operator tenant environment in order to enhance our ability to quickly replace a tenant that is unwilling to renew a lease or is unable to pay a rent payment when it is due. Many of our leases provide for the reimbursement by the tenant of the property's real estate taxes that we pay in connection with the farms they rent from us.
Expenses
Substantially all of our farm leases are structured in such a way that we are
responsible for major maintenance expenses, certain liability and casualty
insurance and taxes (which are sometimes reimbursed to us by our tenants), while
our tenant is responsible for operating expenses, minor maintenance, water usage
and all of the additional input costs related to farming operations on the
property, such as seed, fertilizer, labor and fuel. We expect leases for
farmland we acquire in the future will contain similar features related to
expenses. As the owner of the land, we generally only bear costs related to
major capital improvements permanently attached to the property, such as
irrigation systems, drainage tile, grain storage facilities, permanent plantings
or other physical structures customary for farms. In cases where capital
expenditures are necessary, we typically seek to offset, over a period of
multiple years, the costs of such capital expenditures by increasing rental
rates.
We incur costs associated with running a public company and managing farmland
assets, including, among others, costs associated with our personnel, our Board
of Directors, compliance, and legal and accounting, due diligence and
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acquisitions, including, among others, travel expenses, and consulting fees. We also incur costs associated with managing our farmland. The management of our farmland, generally has significant economies of scale, as farmland generally has minimal physical structures that require routine inspection and maintenance, and our leases, generally, are structured to require the tenant to pay many of the operating expenses associated with the property. We do not expect the expenses associated with managing our portfolio of farmland to increase significantly as the number of farm properties we own increases over time.
Crop Prices
While many people assume that short-term crop prices have a great impact on farm values, we believe that long-term farmer profitability and revenue per acre, expressed as crop prices multiplied by crop yield, is a much more significant driver of farm value. Crop yields trends in corn and soybeans have been steadily increasing over the last thirty years, and theU.S. Department of Agriculture projects improved yields for the 2021/2022 marketing year (September 2021 toAugust 2022 ) compared to the previous year. Short-term crop price changes have had little effect historically on farmland values. They also have a limited impact on our rental revenue, as most of our leases provide for a fixed farm rents, a common approach in agricultural markets, especially with respect to row crops. Fixed farm rent simplifies the administrative requirements for the landlord and the tenant significantly, as farmers benefit from the fundamental revenue hedging that occurs when large crop yields mitigate the effect of lower crop prices. Similarly, lower crop yields have a tendency to trigger higher crop prices and help increase revenue even when confronted by lower crop yields. Such hedging effect also limits the impact of short-term crop price changes on revenues generated by leases with a variable rent component based on farm revenues. Further risk mitigation is available to tenants, and indirectly to us, via crop insurance and hedging programs implemented by tenants. Our TRS also takes advantage of these risk mitigation programs and strategies with respect to the properties it owns.
Crop prices are affected by many factors that can differ on a yearly basis.
Weather conditions and crop diseases can create a significant risk of price
volatility. Changes in government regulations and policy, fluctuations in
global prosperity, fluctuations in foreign trade and export markets and
eruptions of military conflicts, as we are seeing in
Since late 2020, prices rebounded to or near prior highs, driven by increased demand expectations fromChina and modest adverse weather conditions around
the world. Interest Rates We expect that future changes in interest rates will impact our overall operating performance by, among other things, affecting our borrowing costs and borrowing costs of our tenants. While we may seek to manage our exposure to future changes in rates through interest rate swap agreements or interest rate caps, portions of our overall outstanding debt will likely remain at floating rates. In addition, a sustained material increase in interest rates may cause farmland prices to decline if the rise in real interest rates (nominal interest rates minus the inflation rate) is not accompanied by rises in the general levels of inflation. However, our business model anticipates that over time the value of our farmland will increase, as it has in the past, at a rate that is equal to or greater than the rate of inflation, which may in part offset the impact of rising interest rates on the value of our farmland, but there can be no guarantee that this appreciation will occur to the extent that we anticipate or at all.International Trade
In corn, the 2020/2021 marketing year (September 2020 toAugust 2021 ) saw a 55% increase in exports, compared to the previous year. In soybeans, the 2020/2021 marketing year (September 2020 toAugust 2021 ) saw a 35% increase in exports, compared to the previous year. 40
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Following the trade tensions betweenChina and theU.S. that started developing in 2018, the two countries reached a "Phase 1" trade deal in late 2019. At this point, we believe thatChina and theU.S. will endeavor to largely comply with the Phase 1 trade deal, leading to increased purchases byChina of manyU.S. agricultural exports. While logistical disruptions introduced by the COVID-19 pandemic slowedChina's compliance with its Phase 1 commitments,U.S. agricultural exports toChina reached record levels in 2021 and theUSDA projects exports to be higher still in 2022.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the historical consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.
Real Estate Acquisitions
When we acquire farmland where substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets it is not considered a business. As such, we account for these types of acquisitions as asset acquisitions. We allocate the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values using assumptions primarily based upon property-specific characteristics. In making estimates of relative fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired or developed and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets/liabilities acquired. The allocations of purchase price are sensitive due to a number of inputs and judgements made by management including market data and property specific characteristics such as soil types and water availability.
Net tangible assets, historically, have consisted of land, drainage improvements, irrigation improvements, groundwater, permanent plantings (bushes, shrubs, vines, and perennial crops), and grain facilities, while intangible assets, historically, consisted of in-place leases, above-market and below-market leases, and tenant relationships.
We allocate the purchase price to the fair value of the tangible assets by
valuing the land as if it were unimproved. We value improvements, including
permanent plantings and grain facilities, at replacement cost, adjusted for
depreciation. Our estimates of land value are made using a comparable sales
analysis. Factors considered by us in our analysis of land value include soil
types, water availability and the sales prices of comparable farms. Our
estimates of groundwater value are made using historical information obtained
regarding the applicable aquifer. Factors considered by us in our analysis of
groundwater value are related to the location of the aquifer and whether or not
the aquifer is a depletable or a replenishing resource. If the aquifer is a
replenishing resource, no value is allocated to the groundwater. We include an
estimate of property taxes in the purchase price allocation of acquisitions to
account for the expected liability that was assumed.
When above- or below-market leases are acquired, we value the intangible assets
based on the present value of the difference between prevailing market rates and
the in-place rates measured over a period equal to the remaining term of the
lease for above-market leases and the initial term plus the term of any
below-market fixed rate renewal options for below-market leases that are
considered bargain renewal options. The above-market lease values will be
amortized as a reduction of rental income over the remaining term of the
respective leases. The fair value of acquired below-market
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leases, included in deferred revenue on the accompanying consolidated balance sheets, is amortized as an increase to rental income on a straight-line basis over the remaining non-cancelable terms of the respective leases, plus the terms of any below-market fixed rate renewal options that are considered bargain renewal options of the respective leases. The purchase price is allocated to in-place lease values and tenant relationships, if they are acquired, based on our evaluation of the specific characteristics of each tenant's lease, the availability of replacement tenants, the probability of lease renewal, estimated down time, and our overall relationship with the tenant. The value of in-place lease intangibles and tenant relationships will be included as an intangible asset and will be amortized over the remaining lease term (including expected renewal periods of the respective leases for tenant relationships) as amortization expense. If a tenant terminates its lease prior to its stated expiration, any unamortized amounts relating to that lease, including (i) above- and below-market leases, (ii) in-place lease values, and (iii) tenant relationships, would be recorded to revenue or expense as appropriate.
Impairment of Real Estate Assets
We evaluate our tangible and identifiable intangible real estate assets for impairment indicators whenever events such as declines in a property's operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. If such events are present, we project the total undiscounted cash flows of the asset, including proceeds from disposition, and compare it to the net book value of the asset. If this evaluation indicates that the carrying value may not be recoverable, an impairment loss is recorded in earnings equal to the amount by which the carrying value exceeds the fair value of the asset. Assessing impairment can be complex and involves a high degree of subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset. In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions. Assumptions are primarily subject to property-specific characteristics, especially with respect to our intent and ability to hold the related asset. While these property-specific assumptions can have a significant impact on the undiscounted cash flows or estimated fair value of a particular asset, our evaluation of the reported carrying values of long-lived assets during the current year were not particularly sensitive to external or market assumptions. There have been no impairments recognized on real estate assets in the accompanying financial statements.
New or Revised Accounting Standards
For a summary of the new or revised accounting standards, please refer to "Note 1 - Organization and Significant Accounting Policies" within the notes to the consolidated financial statements included in this Quarterly Report on Form
10-Q.
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Results of Operations
Comparison of the three months ended March 31, 2022 to the three months ended
March 31, 2021
For the three months ended March 31,
($ in thousands) 2022 2021 $ Change % Change
OPERATING REVENUES:
Rental income $ 9,547 $ 10,259 $ (712) (6.9) %
Tenant reimbursements 778 938 (160) (17.1) %
Crop sales 695 216 479 NM
Other revenue 2,870 162 2,708 NM
Total operating revenues 13,890 11,575 2,315 20.0 %
OPERATING EXPENSESDepreciation, depletion and amortization 1,751 1,935 (184) (9.5) % Property operating expenses 1,955 1,931 24 1.2 % Cost of goods sold 1,439 250 1,189 NM Acquisition and due diligence costs 63 - 63 NM General and administrative expenses 3,103
1,617 1,486 91.9 %
Legal and accounting 1,256 2,742 (1,486) (54.2) %
Other operating expenses 3 2 1 50.0 %
Total operating expenses 9,570 8,477 1,093 12.9 %
OPERATING INCOME 4,320 3,098 1,222 39.4 %
OTHER (INCOME) EXPENSE:
Other (income) expense 21 (43) 64 NM(Income) loss from equity method investment (7) - (7) NM (Gain) on disposition of assets (660)
(3,392) 2,732 (80.5) %
Interest expense 3,827 4,056 (229) (5.6) %
Total other expense 3,181 621 2,560 NM
Net income before income tax expense 1,139
2,477 (1,338) (54.0) %
Income tax expense - - - NM
NET INCOME $ 1,139 $ 2,477 $ (1,338) (54.0) %
NM=Not Meaningful
Our net income for the three months ended March 31, 2022 was impacted partially
by acquisitions consisting of four farms and dispositions consisting of two
farms during the three months ended March 31, 2022 , as well as substantially
lower legal and accounting expense and additional revenue from crop insurance,
auction and brokerage activities. The overall decrease in our net income for the
three months ended March 31, 2022 , as compared to the same period in 2021, was
primarily attributable to higher gains on sales of assets recognized during the
three months ended March 31, 2021 , as compared to the three months ended March
31, 2022 .
Rental income decreased $0.7 million , or 6.9%, for the three months ended
March 31, 2022 compared to the three months ended March 31, 2021 , resulting from
the conversion of certain farms to direct operations, asset dispositions and
decreased variable rent in the quarter, partially offset by increased solar
rent.
Revenues recognized from tenant reimbursement of property taxes decreased $0.2
million , or 17.1%, for the three months ended March 31, 2022 compared to the
three months ended March 31, 2021 . This decrease is the result of asset
dispositions and the conversion of certain farms to direct operations.
Crop sales increased $0.5 million for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 . This increase is the result
of a larger number of properties directly operated by the Company and a higher
volume of crop sold.
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Other revenue increased $2.7 million for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 . This increase was primarily
due to greater crop insurance proceeds from farms under direct operations,
management fees, and auction and brokerage income.
Depreciation, depletion and amortization decreased $0.2 million , or 9.5%, for
the three months ended March 31, 2022 compared to the three months ended
March 31, 2021 . This decrease is a result of asset dispositions and more assets
becoming fully depreciated partially offset by depreciable assets being placed
into service.
Property operating expenses remained relatively flat at
Acquisition and due diligence costs increased$0.1 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . This increase was primarily due to an increase in property acquisitions and related costs including travel and due diligence. General and administrative expenses increased$1.5 million , or 91.9%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . This increase was largely driven by higher personnel costs, travel and consulting expenses partially attributable to the acquisition of MWA. As the farm economy has strengthened and litigation winds down, the Company has focused on growth by adding people and increasing travel and pursuit cost to rebuild its acquisition pipeline. Legal and accounting expenses decreased$1.5 million , or 54.2%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , which was primarily the result of lower legal fees incurred in excess of insurance coverage in relation to the litigation, as discussed under Part I, Item 1 "Note 8-Commitments and Contingencies-Litigation".
Other operating expenses were negligible during the three months ended
Other income and expense were negligible during the three months ended
Income (loss) from equity method investment were negligible during the three months endedMarch 31, 2022 and remained relatively consistent compared to the three months endedMarch 31, 2021 . Gain on disposition of assets decreased$2.7 million , or 80.5%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , primarily due to the fact that the sale prices for the farms, in excess of book value, sold during the three months endedMarch 31, 2022 were less than the three months endedMarch 31, 2021 . Interest expense decreased$0.2 million , or 5.6%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . This decrease is the result of a decrease in interest rates and lower outstanding debt.
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay any outstanding borrowings, fund and maintain our assets and operations, make distributions to our stockholders and unitholders, and other general business needs.
Our short- and long-term liquidity requirements consist primarily of funds
necessary to make principal and interest payments on outstanding borrowings,
make distributions on our Series A preferred units, make distributions necessary
to qualify for taxation as a REIT, and fund our operations. In addition, we
require liquidity to acquire additional farmland, extend loans under the FPI
Loan Program, and make other investments and capital expenditures. We expect to
meet our
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liquidity needs through cash on hand, undrawn availability under lines of credit, operating cash flows, borrowings, equity issuances and asset dispositions, if necessary.
We entered into equity distribution agreements onOctober 29, 2021 in connection with the "at-the-market" equity offering program (the "ATM Program"), under which the Company may issue and sell from time to time, through the sales agents, shares of our common stock having an aggregate gross sales price of up to$75.0 million (the "$75.0 million ATM Program"). In connection with our entry into the distribution agreements, we terminated the equity distribution agreements, each dated as ofMay 14, 2021 , for our prior$50.0 million ATM Program (the "$50.0 million ATM Program"). ThroughMarch 31, 2022 , the Company generated$38.7 million in gross proceeds and$38.3 million in net proceeds under the$75.0 million ATM Program. The ATM Program is intended to provide cost-effective financing alternatives in the capital markets. We intend to use the net proceeds for future farmland acquisitions in accordance with our investment strategy, for loans under the FPI Loan Program, to reduce leverage and for general corporate purposes. We intend to continue to utilize the ATM Program when the market price of our common stock remains at levels which are deemed appropriate by our Board of Directors. In addition, the Company intends to increase the size of the ATM Program in the future.
Our ability to incur additional debt will depend on a number of factors, including our degree of leverage, the value of our unencumbered assets, compliance with the covenants under our existing debt agreements, borrowing restrictions that may be imposed by lenders and the conditions of debt markets. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions for REITs and market perceptions about us.
We manage our capital position and liquidity needs by continuously forecasting our expected cash receipts, expenses and capital needs, managing our cash position and monitoring all the sources of capital available to us. Our business model, and the business model of real estate investment companies in general, utilizes a combination of debt and equity capital in financing the business. When debt becomes due, it is generally refinanced or repaid with proceeds from the issuance of equity securities or the sale of farms rather than repaid using our cash flow from operations. When material debt repayments are due within the following 12 months, we work with current and new lenders and other potential sources of capital sufficiently in advance of the debt maturity to ensure that all of our obligations are satisfied in a timely manner. We have a history of being able to refinance or extend our debt obligations to manage our debt maturities. We also have an effective shelf registration statement with approximately$200 million of capacity whereby we could issue additional equity or debt securities. During three months endedMarch 31, 2022 we raised$38.3 million of equity capital from our ATM Program as mentioned above. Furthermore, we have a large portfolio of high-quality real estate assets which we believe could be selectively and readily liquidated if necessary to fund our immediate liquidity needs. As ofMarch 31, 2022 , the Company has no material debt maturities due before 2025. During the quarter endedMarch 31, 2022 , the Company reduced total indebtedness by$48.5 million .
During the three months ended
Consolidated Indebtedness
For further details relating to our consolidated indebtedness, refer to "Note 7 - Mortgage Notes, Line of Credit and Bonds Payable" in the financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Sources and Uses of Cash
The following table summarizes our cash flows for the three months endedMarch 31, 2022 and 2021: For the three months ended March 31, (in thousands) 2022 2021
Net cash provided by operating activities$ 10,309 $ 11,406 Net cash provided by (used in) investing activities$ (7,819) $ 25,019 Net cash used in financing activities$ (16,559)
$ (27,572) 45 Table of Contents
Comparison of the three months ended
As of
Cash Flows from Operating Activities
Net cash provided by operating activities decreased by
Receipt of
million in tenant reimbursements for the three months ended
? compared to the receipt of
variable rents, and
ended
Gain on disposition of assets during the three months ended
?
A change in accounts receivable of
?
2021;
A change in accrued interest of
?
2021;
A change in accrued expenses of
?
2021; and
A change in deferred revenue of
?
2021.
Cash Flows from Investing Activities
Net cash provided by investing activities increased by
Property acquisitions during the three months ended
? million as compared to
2021;
Property dispositions during the three months ended
? consideration of
months ended
Issuances of note receivable under the FPI Loan Program of
? the three months ended
three months ended
Cash Flows from Financing Activities
Net cash used in financing activities decreased by
Borrowings from mortgage notes payable during the three months ended
? 2022 of
ended
Repayments on mortgage notes payable during the three months ended
? 2022 of
ended
Net proceeds from the ATM Program during the three months ended
? of
Distribution on Series B participating preferred stock during the three months
? ended
three months ended
Off-Balance Sheet Arrangements
As of
46
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Non-GAAP Financial Measures
Funds from Operations ("FFO") and Adjusted Funds from Operations ("AFFO")
We calculate FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts , or Nareit. Nareit defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, plus real estate related depreciation, depletion and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures. FFO is a supplemental non-GAAP financial measure. Management presents FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating properties, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures necessary to maintain the operating performance of improvements on our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the Nareit definition as we do, and, accordingly, our FFO may not be comparable to such other REITs' FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP. We do not, however, believe that FFO is the only measure of the sustainability of our operating performance. Changes in GAAP accounting and reporting rules that were put in effect after the establishment of Nareit's definition of FFO in 1999 result in the inclusion of a number of items in FFO that do not correlate with the sustainability of our operating performance. Therefore, in addition to FFO, we present AFFO and AFFO per share, fully diluted, both of which are non-GAAP measures. Management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company's operational performance than FFO. AFFO is not intended to represent cash flow or liquidity for the period and is only intended to provide an additional measure of our operating performance. Even AFFO, however, does not properly capture the timing of cash receipts, especially in connection with full-year rent payments under lease agreements entered into in connection with newly acquired farms. Management considers AFFO per share, fully diluted to be a supplemental metric to GAAP earnings per share. AFFO per share, fully diluted provides additional insight into how our operating performance could be allocated to potential shares outstanding at a specific point in time. Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs. However, other REITs may use different methodologies for calculating AFFO and AFFO per share, fully diluted, and, accordingly, our AFFO and AFFO per share, fully diluted may not always be comparable to AFFO and AFFO per share amounts calculated by other REITs. AFFO and AFFO per share, fully diluted should not be considered as an alternative to net income (loss) or earnings per share (determined in accordance with GAAP) as an indication of financial performance or as a measure of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions. 47 Table of Contents
AFFO is calculated by adjusting FFO to exclude or include the income and expenses that we believe are not reflective of the sustainability of our ongoing operating performance, as further explained below:
Real estate related acquisition and due diligence costs. Acquisition (including
audit fees associated with these acquisitions) and due diligence costs are
incurred for investment purposes and, therefore, do not correlate with the
ongoing operations of our portfolio. We believe that excluding these costs from
AFFO provides useful supplemental information reflective of the realized
economic impact of our leases, which is useful in assessing the sustainability
? of our operating performance. The Company incurred an immaterial amount of
acquisition and due diligence costs during the three months ended
2022 and 2021. We believe that excluding these costs from AFFO provides useful
supplemental information reflective of the realized economic impact of our
current acquisition strategy, which is useful in assessing the sustainability
of our operating performance. These exclusions also improve the comparability
of our results over each reporting period and of the Company with other real
estate operators.
Stock-based compensation. Stock-based compensation is a non-cash expense and,
? therefore, does not correlate with the ongoing operations. We believe that
excluding these costs from AFFO improves the comparability of our results over
each reporting period and of the Company with other real estate operators.
Deferred impact of interest rate swap terminations. When an interest rate swap
is terminated and the related termination fees are rolled into a new swap, the
terminated swap's termination fees are amortized over what would have been the
remaining life of the terminated swap, while the related contractual and
? financial obligations extend over the life of the new swap. As a result, the
net impact on interest expense is uneven throughout the life of the swap, which
is inconsistent with the purpose of an interest rate swap. We believe that,
with this adjustment, AFFO better reflects the actual cash cost of the fixed
interest rate we are obligated to pay under the new swap agreement, and results
in improved comparability of our results across reporting periods.
Distributions on Series A preferred units. Dividends on Series A preferred
units, which are convertible into Common units on or after
? have a fixed and certain impact on our cash flow, and therefore are subtracted
from FFO. We believe this improves the comparability of the Company with other
real estate operators. Dividends on Series B Participating Preferred Stock. Dividends on the
previously outstanding shares of Series B Participating Preferred Stock, which
? were converted into shares of common stock on
certain impact on our cash flow, and therefore are subtracted from FFO. We
believe this improves the comparability of the Company with other real estate
operators.
Common shares fully diluted. In accordance with GAAP, common shares used to
calculate earnings per share are presented on a weighted average basis. Common
shares on a fully diluted basis includes shares of common stock, Common units,
and unvested shares of restricted stock outstanding at the end of the period on
? a share equivalent basis, because all shares are participating securities and
thus share in the performance of the Company. The conversion of Series A
preferred units is excluded from the calculation of common shares fully diluted
as they are not participating securities, and therefore do not share in the
performance of the Company and their impact on shares outstanding is uncertain.
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The following table sets forth a reconciliation of net income (loss) to FFO,
AFFO and net (loss) income available to common stockholders per share to AFFO
per share, fully diluted, the most directly comparable GAAP equivalents,
respectively, for the periods indicated below (unaudited):
For the three months ended
March 31 , (in thousands except per share amounts) 2022
2021
Net income$ 1,139 $ 2,477 Gain on disposition of assets (660)
(3,392)
Depreciation, depletion and amortization 1,751
1,935
FFO 2,230 1,020
Stock-based compensation 642 251Deferred impact of interest rate swap terminations 62 184 Real estate related acquisition and due diligence costs 63 - Distributions on Preferred units and stock (878)
(3,064)
AFFO$ 2,119
AFFO per diluted weighted average share data:
AFFO weighted average common shares 47,427
32,202
Net loss per share available to common stockholders $ -
0.02 0.11
Depreciation and depletion 0.04 0.06
Stock-based compensation 0.01 0.01
Gain on disposition of assets (0.01) (0.11)Distributions on Preferred units and stock (0.02)
(0.10)
AFFO per diluted weighted average share$ 0.04
The following table sets forth a reconciliation of AFFO share information to
basic weighted average common shares outstanding, the most directly comparable
GAAP equivalent, for the periods indicated below (unaudited):
For the three months ended
March 31,
(in thousands) 2022 2021Basic weighted average shares outstanding 45,781
30,418
Weighted average OP units on an as-if converted basis 1,357
1,512
Weighted average unvested restricted stock 289 272 AFFO weighted average common shares 47,427
32,202
EBITDAre
The Company calculates Earnings Before Interest Taxes Depreciation and
Amortization for real estate ("EBITDAre") in accordance with the standards
established by NAREIT in its September 2017 White Paper. NAREIT defines EBITDAre
as net income (calculated in accordance with GAAP) excluding interest expense,
income tax, depreciation and amortization, gains or losses on disposition of
depreciated property (including gains or losses on change of control),
impairment write-downs of depreciated property and of investments in
unconsolidated affiliates caused by a decrease in value of depreciated property
in the affiliate, and adjustments to reflect the entity's pro rata share of
EBITDAre of unconsolidated affiliates. EBITDAre is a key financial measure used
to evaluate the Company's operating performance but should not be construed as
an alternative to operating income, cash flows from operating activities or net
income, in each case as determined in accordance with GAAP. The Company
believes that EBITDAre is a useful performance measure commonly reported and
will be widely used by analysts and investors in the Company's industry.
However, while EBITDAre is a performance measure widely used across the
Company's industry, the Company does not believe that it correctly captures the
Company's business operating performance because it includes non-cash expenses
and recurring adjustments that are necessary to better understand the Company's
business operating performance. Therefore, in addition to EBITDAre, management
uses Adjusted EBITDAre, a non-GAAP measure.
We further adjust EBITDAre for certain additional items such as stock-based
compensation, indirect offering costs, real estate acquisition related audit
fees and real estate related acquisition and due diligence costs (for a full
discussion of
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these adjustments, see AFFO adjustments discussed above) that we consider
necessary to understand our operating performance. We believe that Adjusted
EBITDAre provides useful supplemental information to investors regarding our
ongoing operating performance that, when considered with net income and
EBITDAre, is beneficial to an investor's understanding of our operating
performance.
EBITDAre and Adjusted EBITDAre have limitations as analytical tools, and you
should not consider them in isolation or as a substitute for analysis of our
results as reported under GAAP. Some of these limitations are:
? EBITDAre and Adjusted EBITDAre do not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;
? EBITDAre and Adjusted EBITDAre do not reflect changes in, or cash requirements
for, our working capital needs;
? EBITDAre and Adjusted EBITDAre do not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments, on our debt;
Although depreciation and amortization are non-cash charges, the assets being
? depreciated and amortized will often have to be replaced in the future, and
EBITDAre and Adjusted EBITDAre do not reflect any cash requirements for these
replacements; and
? Other companies in our industry may calculate EBITDAre and Adjusted EBITDAre
differently than we do, limiting the usefulness as a comparative measure.
Because of these limitations, EBITDAre and Adjusted EBITDAre should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results of operations and using EBITDAre and Adjusted EBITDAre only as a supplemental measure of our performance.
The following table sets forth a reconciliation of our net income to our EBITDAre and Adjusted EBITDAre for the periods indicated below (unaudited):
For the three months ended
March 31,
(in thousands) 2022 2021
Net income $ 1,139 $ 2,477
Interest expense 3,827 4,056
Income tax expense - -Depreciation, depletion and amortization 1,751
1,935
Gain on disposition of assets (660) (3,392)
EBITDAre $ 6,057 $ 5,076
Stock-based compensation 642 251Real estate related acquisition and due diligence costs 63
-
Adjusted EBITDAre $ 6,762 $ 5,327
Inflation
Most of our farming leases are two to three years for row crops and one to seven years for permanent crops, pursuant to which each tenant is responsible for substantially all of the operating expenses related to the property, including maintenance, water usage and insurance. As a result, we believe that the effect on us of inflationary increases in operating expenses may be offset in part by the operating expenses that are passed through to our tenants and by contractual rent increases because many of our leases will be renegotiated every one to five years. We do not believe that inflation has had a material impact on our historical financial position or results of operations.
Seasonality
We recognize rental revenue from fixed-rate farmland leases on a pro rata basis over the non-cancellable term of the lease in accordance with accounting principles generally accepted inthe United States ("GAAP"). Notwithstanding GAAP accounting requirements to spread rental revenue over the lease term, a significant portion of fixed rent is received in a 50
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lump sum before planting season, in the first quarter, and after harvest, in the fourth quarter. We receive a significant portion of our variable rental payments in the fourth calendar quarter of each year, following harvest, with only a portion of such payments being recognized ratably through the year in accordance with GAAP, in relation to crop insurance contracts entered into by our tenants. The highly seasonal nature of the agriculture industry causes seasonality in our business to some extent. Our financial performance should be evaluated on an annual basis, which eliminates impacts of seasonality and other similar factors that may cause our quarterly results to vary during the course of the year.
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