FARMLAND PARTNERS INC. The following analysis of our financial condition and results of operations
should be read in conjunction with our 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 ended
References to "we," "our," "us" and "our company" refer toFarmland Partners Inc. , aMaryland corporation, together with our consolidated subsidiaries, includingFarmland Partners Operating Partnership, L.P. , aDelaware limited partnership (the "Operating Partnership"), of which we are 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 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, 2019 , our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 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 We are an internally managed real estate company that owns and seeks to acquire high-quality farmland located in agricultural markets throughoutNorth America . As of the date of this Quarterly Report on Form 10-Q, we own farms with an aggregate of approximately 155,000 acres inAlabama ,Arkansas ,California ,Colorado ,Florida ,Georgia ,Illinois ,Kansas ,Louisiana ,Michigan ,Mississippi ,Nebraska ,North Carolina ,South Carolina ,South Dakota andVirginia . As of the date of this Quarterly Report on Form 10-Q, 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 blueberries, vegetables, citrus, nuts and edible beans. We believe our portfolio gives investors exposure to the increasing global food demand trend in the face of growing scarcity of high quality farmland and will reflect the approximate breakdown 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. 30 Table of Contents In addition, under the FPI Loan Program, we make loans to third-party farmers (both tenant and non-tenant) to provide financing for working capital requirements and operational farming activities, farming infrastructure projects and for other farming and agricultural real estate related purposes. We were incorporated inMaryland onSeptember 27, 2013 , and we are the sole member of the general partner of theOperating Partnership , which is aDelaware limited partnership that was formed onSeptember 27, 2013 . All of our assets are held by, and our operations are primarily conducted through, theOperating Partnership and its wholly owned subsidiaries. As ofSeptember 30, 2020 , we owned 93.9% of the Common units and none of the Series A preferred units nor the Series B Participating Preferred Stock. 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.
We have elected to be taxed as a real estate investment trust ("REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended,
commencing with our short taxable year ended
The following table sets forth our ownership of acreage by region as of
Region (1) Total Acres Corn Belt 43,322 Delta and South 27,871 High Plains 29,566 Southeast 43,499West Coast 11,586 155,844
Corn Belt includes farms located in
Delta and South includes farms located in
farms located in California .
When we are able to access sufficient additional capital, we intend to continue
to acquire additional farmland to achieve scale and further diversify our
portfolio by geography, crop type and tenants. 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 engage directly in farming through
FPI Agribusiness Inc. , our taxable REIT subsidiary (the "TRS" or "FPI
Agribusiness"). The TRS provides volume purchasing services to our tenants,
operates a small-scale custom farming business, and occasionally provides our
tenants with small operating loans. As of September 30, 2020 , the TRS performs
these custom farming operations on 3,676 acres of farmland located in Florida ,
Michigan , South Carolina , and California .
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 annual rental
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 annual rent, leases for which the rent is based on a percentage of a
tenant's farming revenues and leases with terms greater than one year.
In addition, an increasing number of our leases provide for crop share lease
payments, through which we only recognize revenue 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.
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Impact of COVID-19 on Our Business
As the effects of the coronavirus ("COVID-19") pandemic continue to develop, we
are unable to quantify what the ultimate impact of the virus on our business
will be. So far, the pandemic has significantly affected only certain sectors of
the U.S. agricultural industry to which we have limited or no direct exposure,
such as fresh food production marketed to the hospitality industry, and meat
packing. In particular, we have experienced a decrease in demand - and therefore
price - for lemons and blueberries, two crops to which we have limited direct
operating exposure. We expect slower-moving ripples to potentially affect the
sectors of the agricultural industry in which we are invested. Lower gasoline
demand has affected demand for ethanol and therefore corn, limiting the upside
of a recent tightening of supply.
Labor availability and export logistics disruptions may affect specialty crops
prices and our tenants' ability to effectively harvest and deliver product,
which could adversely affect our results of operations to the extent that a
portion of the rent we receive from tenants is earned under variable-rent
leases. Disruptions in the meat packing industry due to worker health concerns
may affect herd and flock sizes and ultimately feed demand.
Despite short and medium-term disruptions in the U.S. agricultural industry, we
do not expect global demand for food, feed, fuel and fiber to be materially
affected by COVID-19 and the related economic turmoil, and therefore in the long
term we expect the industry to experience some degree of transformation, but to
survive relatively unscathed compared to other industries. As owners of
essential long-term assets in an essential industry, we also expect our business
to perform relatively well, although the demand and pricing disruption in
selected specialty crops that we have seen so far might not be the only negative
impact of the pandemic on our business. We expect certain farmers' profitability
to be impacted, however a combination of the high quality of our tenant base and
financial support measures implemented by the U.S. federal government should
prevent a material degradation in our tenants' creditworthiness.
At this time, we are unable to estimate the ultimate impact of these effects on
our tenants and their ability to pay rent in full and on time. However, the
longer the economic slowdown continues, it becomes more likely that these
factors will impact our results in a material way. Although a significant amount
of our tenants paid 50% of their annual rent in the first quarter of the year in
accordance with the respective leases, financial challenges facing our tenants
could result in delays in our tenants' ability to pay the remaining rent due
under the leases, requests for rent deferral, business closures or bankruptcies.
The direct impact of COVID-19 on our operations has been so far limited. Even
though we operate in an essential industry and therefore we are largely exempted
from stay-at-home orders, we have prioritized the health and well-being of our
employees. We asked our office staff to work from home whenever possible even
before the City and County of Denver and the State of Colorado implemented
stay-at-home orders. Our technology infrastructure was already well suited to
remote working conditions, and the layout of our offices allowed us to
substantially observe social distancing guidelines when staff need to be present
in the office. We asked our field personnel to limit travel to only those trips
required to monitor and maintain the farms we already own, and to substantially
lessen direct contact with our tenants and suppliers. As a result of these
worker health measures, we have experienced a perceptible degradation in
operating efficiency, but not to such an extent as to materially affect our
financial results or internal controls. As of the beginning of the fourth
quarter of 2020, both in-person office attendance and frequency of travel have
increased as compared to the beginning of the pandemic, but remain below
pre-pandemic levels. We do not expect that the pandemic's increased activity in
the fall season will have a material impact on our business and operations, even
if it were to result in renewed widespread impact on overall economic activity.
Our interactions with critical third parties have been affected, but so far we
have been able to mitigate any material impact on our business. A refinancing of
$48.3 million of debt with Farmer Mac originally due in June and July of this
year was delayed as a result of travel restrictions implemented to contain the
spread of the pandemic. We were able to secure from Farmer Mac an extension of
the due date of the expiring debt to October 31, 2020 , and complete the
refinancing prior to the deadline.
The global capital markets have experienced significant turmoil since the beginning of the pandemic. However, we don't have any need to issue equity capital, or immediate plans to do so in a public offering. During the 2008 financial crisis, the availability and pricing of agricultural debt remained largely unaffected, reflecting the stability of farmland
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values and food demand. We believe that, other than the short-term logistical disruptions due to travel restrictions discussed above, our access to debt financing in the ordinary course of business will remain largely unaffected.
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. 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. Demand Notwithstanding any impacts from the ongoing COVID-19 pandemic, we expect that global demand for food, driven primarily by significant increases in the global population and GDP per capita, will continue to be the key driver of farmland values. We further expect that global demand for most crops will continue to grow to keep pace with global population growth, which we anticipate will lead to either higher 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. 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. According to theUnited 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, a 43% increase from 2005-2007 levels and more than two times the 446 million tons of grain produced inthe 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. As described above, the COVID-19 pandemic and efforts to reduce its spread have impacted demand for corn. However, the success of our long-term business strategy is not dependent on growth in demand for biofuels, and we do not believe that demand for corn and soybeans as inputs in the production of biofuels will materially impact our results of operations or the value of our farmland, 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. Supply
Global supply of agricultural commodities is driven by two primary factors, the number of tillable 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. 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 2015. While we expect growth in the global supply of arable land, we also expect that landowners will only put that land into production if increases in 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, improvements in soil health, and chemical fertilizers and pesticides. Furthermore, 33
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we expect the increasing shortage of water in many irrigated growing regions inthe United States and other growing regions around the globe, often as a result of new water restrictions imposed by laws or regulations, to lead to decreased productivity growth on many acres and, in some cases, cause yields to decline on those acres.
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; institutional and investor acquirors remain a small fraction of the industry. We generally see firm demand for high quality properties across all regions and crop types. With regard to leasing dynamics, we believe quality farmland inthe United States has a near-zero vacancy rate as a result of the supply and demand fundamentals discussed above. 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. In particular, we believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators in some circumstances will rent additional acres of farmland when it becomes available in order to allocate their fixed costs over additional acres. 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 current returns or short-term losses. In our primary crop farmland, we continue to see flat to modestly higher rent rates in connection with 2020 lease renewals. This is consistent with, on the one hand, headwinds in primary crop markets and, on the other, tenant demand for leasing high quality farmland. Due to the short-term nature of most of our primary crop leases, we believe that a recovery of crop prices and farm profitability would be reflected relatively rapidly in our revenues via increases in rent rates. Across specialty crops, operator profitability is under some pressure. Participating lease structures are common in many specialty crops and base lease rates are consistent with or somewhat lower than 2019. Lease Expirations Farm leases are generally short-term in nature. As ofSeptember 30, 2020 , our portfolio had the following lease expirations as a percentage of approximate acres leased and annual minimum cash rents: ($ in thousands) % of % of Annual Approximate Cash Year Ending December 31, Approximate Acres Acres Annual Rents Rents 2020 (remaining three months) 44,778 28.8 %$ 10,776 19.6 % 2021 42,755 27.5 % 9,341 17.0 % 2022 29,217 18.8 % 6,277 11.4 % 2023 16,633 10.7 % 2,678 4.9 % 2024 10,319 6.7 % 736 1.3 % 2025 and beyond 11,613 7.5 % 25,239 45.9 % 155,315 100.0 %$ 55,047 100.0 %
As ofSeptember 30, 2020 , we had approximately 48,000 acres for which lease payments are at least partially based on a percentage of farming revenues and 3,676 acres that are leased to our TRS. Acres leased to our TRS are not included in the table above. From time to time, we may enter into recreational leases on our farms. Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future lease expirations during the initial lease term only. Rental Revenues
Our revenues are primarily generated from renting farmland to operators of farming businesses. Our leases have terms ranging from one to 25 years, with three years being the most common. Although the majority of our leases do
not
provide
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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. The leases for the majority of the properties in our portfolio provide that tenants must pay us at least 50% of the annual 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. We believe our use of leases pursuant to which at least 50% of the annual rent is payable in advance of each spring planting season 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. Some of our leases provide for a reimbursement of the property taxes we pay.
As described above, we are assessing the impact, if any, on our ability to collect rent from our tenants as a result of the COVID-19 pandemic. At this time, we expect to continue to be able to collect rents in full and on time. However, the situation is continuing to develop, and we are assessing the potential impact on our tenants on an ongoing basis.
Expenses Substantially all of our farm leases are structured in such a way that we are responsible for major maintenance, certain insurance and taxes (which are sometimes reimbursed to us by our tenants), while our tenant is responsible for 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 that substantially all of the leases for farmland we acquire in the future will continue to be structured in a manner consistent with substantially all of our existing leases. 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 also incur the costs associated with maintaining liability
and
casualty insurance.
We incur costs associated with running a public company, including, among
others, costs associated with employing our personnel and compliance costs. We
incur costs associated with due diligence and acquisitions, including, among
others, travel expenses, consulting fees and legal and accounting fees. We also
incur costs associated with managing our farmland. The management of our
farmland, generally, is not labor or capital intensive because 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 costs associated with the property. Furthermore, we believe that
our platform is scalable, and 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
We believe 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 cash rental rate, a common approach in
agricultural markets, especially with respect to row crops, for several
reasons. This approach recognizes that the value of leased land to a tenant is
more closely linked to the total revenue produced on the property, which is
driven by crop yield and crop price. This approach simplifies the administrative
requirements for the landlord and the tenant significantly. This approach
supports the tenants' desire to maintain access to their leased farms, which are
in short supply, a concept expanded upon below, by providing the landlord
consistent rents. Crop price exposure is also limited because tenants also
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 bonus
component based on farm revenues. Further risk mitigation is available to
tenants, and indirectly to
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us, via crop insurance and hedging programs implemented by tenants. Our TRS also takes advantage of these risk mitigation programs and strategies.
We believe quality farmland inthe United States has a near-zero vacancy rate as a result of supply and demand fundamentals. 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. In particular, we believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators in some circumstances will rent additional acres of farmland when they become available in order to allocate their fixed costs over additional acres. 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 geography, even when the farmer anticipates lower current returns or short-term losses. The value of a crop is affected by many factors that can differ on a yearly basis. Weather conditions and crop diseases in major crop production regions worldwide create a significant risk of price volatility, which may either increase or decrease the value of the crops that our tenants produce each year. Other material factors adding to the volatility of crop prices are changes in government regulations and policy, fluctuations in global prosperity, fluctuations in foreign trade and export markets and eruptions of military conflicts or civil unrest. Prices for many primary crops, particularly corn, experienced meaningful declines in 2014 and 2015, and have still not recovered to their pre-2014 prices. Furthermore, the COVID-19 pandemic has impacted crop prices, including corn and soybeans. We do not believe such declines represent a trend over the long term. Rather, we believe those declines represented a combination of correction to historical norms (adjusted for inflation) and high yields due to favorable weather patterns, and in the case of recent declines in crop prices, a reaction to the decline in economic activity as a result of the pandemic. We expect that continued long-term growth trends in global population and GDP per capita will result in increased revenue per acre for primary crops over time. We expect pricing across specialty crops to generally remain soft in 2020, and possibly 2021, until the economic disruptions due to the COVID-19 pandemic are behind us. Although annual rental payments under the majority of our leases are not based expressly on the quality or profitability of our tenants' harvests, any of these factors could adversely affect our tenants' ability to meet their obligations to us and our ability to lease or re-lease properties on favorable terms. Interest Rates We expect that future changes in interest rates will impact our overall operating performance by, among other things, affecting our borrowing costs. 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 (which is defined as 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 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. However, the logistical disruptions introduced by the COVID-19 pandemic make it unlikely thatChina will be able to meet its Phase 1 commitments, even if there were the economic need and political will to do so. The short to medium-term impact on the Company's financial performance due to a trade conflict may be mitigated by the multi-year term structure of many of our leases and limited to contingent rent components. However, a long-term trade conflict would likely impact our rents and thereby negatively impact our business. Additionally, a long-term trade 36
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conflict would likely motivate non-US. agricultural businesses to strengthen their logistics and trade infrastructure. This may also lead to the weakening ofU.S. agricultural trade relationships that would be difficult forthe United States to reestablish in the future.
Potential Business Development Opportunities
The Company is in negotiations with third parties about creating anOpportunity Zone Fund focused on farmland and related assets. If negotiations are successful, the Company might sell certain properties to the fund, and serve in an advisory and property management capacity. The Company can provide no assurances as to whether the negotiations will be successful, the size of asset sales (if any), and the impact of the transaction of the Company's financial performance.
Critical Accounting Policies and Estimates
Except as set forth in Note 1 to the consolidated financial statements included in this Quarterly Report on Form 10-Q and the de-designation of our original interest rate swap and designation of our new swap, there have been no changes to our critical accounting policies disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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. Results of Operations Comparison of the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2019 For the three months ended September 30, ($ in thousands) 2020 2019 $ Change % Change OPERATING REVENUES: Rental income $ 8,701 $ 9,111$ (410) (4.5) % Tenant reimbursements 911 458 453 98.9 % Crop sales 748 (145) 893 NM Other revenue 244 424 (180) (42.5) % Total operating revenues 10,604 9,848 756 7.7 % OPERATING EXPENSES
Depreciation, depletion and amortization 1,979 2,087 (108) (5.2) % Property operating expenses 1,961 2,050 (89) (4.3) % Cost of goods sold 1,332 619 713 115.2 % Acquisition and due diligence costs - - - NM General and administrative expenses 1,395 1,444 (49) (3.4) % Legal and accounting 287 421 (134) (31.8) % Other operating expenses 1 1 - - % Total operating expenses 6,955 6,622 333 5.0 % OPERATING INCOME 3,649
3,226 423 13.1 %
OTHER (INCOME) EXPENSE: Other income 25 (147) 172 (117.0) % (Gain) loss on disposition of assets (1,348)
18 (1,366) NM
Interest expense 4,411 4,818 (407) (8.4) %
Total other expense 3,088 4,689 (1,601) (34.1) %
Net income before income tax expense 561
(1,463) 2,024 NM
Income tax expense - - - NM
NET INCOME $ 561 $ (1,463) $ 2,024 (138.3) %
NM=Not Meaningful
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Our rental income for the three months ended September 30, 2020 was impacted
partially by one disposition consisting of four farms during the three months
ended September 30, 2020 . To highlight the effect of changes due to acquisitions
and dispositions, we have separately discussed the rental income for the
same-property portfolio, which includes only properties owned and operated for
the entirety of both periods presented. The same-property portfolio for the
three months ended September 30, 2020 includes approximately 147,900 acres,
representing 95% of our current portfolio on an acreage basis. Additionally,
upon renewal in 2020, a number of leases transitioned to higher percentages of
variable rents relative to fixed rents, which variable rents have yet to be
received.
On a same-property basis, total rental income decreased $0.05 million , or 0.5%,
for the three months ended September 30, 2020 as compared to the three months
ended September 30, 2019 . Management does not believe that same-property rent
comparisons for periods shorter than the full year are necessarily indicative of
the expected full year comparison because the majority of bonus and crop share
rent payments are expected to be received in the fourth quarter.
Rental income decreased
Revenues recognized from tenant reimbursement of property taxes increased$0.5 million , or 98.9%, during the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . This increase is the result of higher tenant reimbursement revenues on properties in the state ofCalifornia . Crop sales totaled$0.7 million during the three months endedSeptember 30, 2020 as compared to$(0.1) million in the comparative three-month period endedSeptember 30, 2019 . The increase in crop sales is due to timing and the reversal of some crop sales revenue during the three months endedSeptember 30, 2019 . Other revenues totaled$0.2 million during the three months endedSeptember 30, 2020 as compared to$0.4 million in the comparative three-month period endedSeptember 30, 2019 . The decrease primarily relates to a reduction of interest income on loans due to the settlement of principal balances on several notes receivable.
Depreciation, depletion and amortization expense decreased$0.1 million , or 5.2%, for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 as a result of asset dispositions and the decrease of the amortization of in-place leases acquired as part of the AFCO acquisition that were fully amortized in prior periods. Property operating expenses decreased$0.1 million , or 4.3%, for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . The decrease is largely due to slightly lower property tax expense between comparative periods.
General and administrative expenses remained comparable for the three months
ended
Cost of goods sold increased
Legal and accounting expenses decreased$0.1 million , or 31.8%, for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 , which was primarily the result of lower legal fees incurred in relation to a "short and distort" attack against the Company conducted by anonymous parties, includingQuinton Mathews , under the pseudonym Rota Fortunae, as discussed above under Part I, Item 1 "Note 8-Commitments and Contingencies-Litigation," and his co-conspirators. The Company is pursuing litigation againstQuinton Mathews and his co-conspirators (collectively "Wheel of Fortune"), and is defending stockholder class action lawsuits that are related to the claims made by Wheel of Fortune. The Company believes that a substantial portion of the costs associated with the stockholder class action litigation will be covered by insurance, but the Company can provide no assurances that costs will not ultimately be in excess of the amount that will be covered by insurance. The Company does not expect insurance proceeds to cover a substantial portion of the costs related to the lawsuit it filed against
Wheel
of Fortune.
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Other operating expenses were
Other income decreased
Gain on disposition of assets increased$1.4 million for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 due primarly to the gain on sale of properties during Q3 2020 as opposed to a smaller disposition occurring in Q3 2019. Interest expense decreased$0.4 million , or 8.4%, for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . This decrease is the result of a decrease in interest rates on floating rate debt and the lower outstanding balance of debt. Results of Operations Comparison of the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2019 For the Nine Months Ended September 30, ($ in thousands) 2020 2019 $ Change % Change OPERATING REVENUES: Rental income $ 27,916 $ 28,480$ (564) (2.0) % Tenant reimbursements 2,655 1,392 1,263 90.7 % Crop sales 1,445 788 657 83.4 % Other revenue 755 1,024 (269) (26.3) % Total operating revenues 32,771 31,684 1,087 3.4 % OPERATING EXPENSES
Depreciation, depletion and amortization 5,982 6,294 (312) (5.0) % Property operating expenses 5,640 6,171 (531) (8.6) % Cost of goods sold 2,643 842 1,801 NM Acquisition and due diligence costs 11 1 10 NM General and administrative expenses 4,248
4,237 11 0.3 %
Legal and accounting 1,617 2,437 (820) (33.6) %
Other operating expenses 2 1 1 NM %
Total operating expenses 20,143 19,983 160 0.8 %
OPERATING INCOME 12,628 11,701 927 7.9 %
OTHER EXPENSE:
Other income 113 (283) 396 NM(Gain) loss on disposition of assets (2,179)
(7,891) 5,712 (72.4)
Interest expense 13,541 14,805 (1,264) (8.5) %
Total other expense 11,475 6,631 4,844 NM
Net income (loss) before income tax expense 1,153
5,070 (3,917) (77.3) %
Income tax expense - - - NM
NET INCOME $ 1,153 $ 5,070 $ (3,917) (77.3) %
NM=Not Meaningful
Our rental income for the nine months endedSeptember 30, 2020 was impacted partially by the disposition consisting of four farms during the three months endedSeptember 30, 2020 . This decrease was partially offset by a higher volume of crop share revenue received in Q1 2020 as compared to Q1 2019. To highlight the effect of changes due to acquisitions and dispositions, we have separately discussed the rental income for the same-property portfolio, which includes only properties owned and operated for the entirety of both periods presented. The same-property portfolio for the nine months endedSeptember 30, 2020 includes approximately 147,900 acres, representing 95% of our current portfolio on an acreage 39 Table of Contents
basis. Additionally, upon renewal in 2020, a number of leases transitioned to higher percentages of variable rents relative to fixed rents, which variable rents have yet to be received. On a same-property basis, total rental income decreased$0.3 million , or 1.1%, for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Management does not believe that same-property rent comparisons for periods shorter than the full year are necessarily indicative of the expected full year comparison because the majority of bonus and crop share rent payments are expected to be received in the fourth quarter.
Rental income decreased
Revenues recognized from tenant reimbursement of property taxes increased$1.3 million , or 90.7%, during the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . This increase is the result of higher tenant reimbursement revenues on properties in the state ofCalifornia .
Crop sales increased
Other revenues totaled$0.8 million during the nine months endedSeptember 30, 2020 as compared to$1.0 million in the comparative nine month period endedSeptember 30, 2019 . The decrease primarily relates to a reduction of interest income on loans due to the settlement of principal balances on several notes receivable.
Depreciation, depletion and amortization expense decreased
Property operating expenses decreased$0.5 million , or 8.6%, for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . The decrease is largely due to higher general property operating expenses and bad debt expense in 2019 compared to 2020, partially offset by higher repairs expense in 2020.
General and administrative expenses remained comparable for the nine months
ended
Cost of goods sold increased
Legal and accounting expenses decreased$0.8 million , or 33.6%, for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , which was primarily the result of lower legal fees incurred during 2020 in relation to a "short and distort" attack against the Company conducted by anonymous parties, includingQuinton Mathews , under the pseudonym Rota Fortunae, as discussed above under Part I, Item 1 "Note 8-Commitments and Contingencies-Litigation." The Company is pursuing litigation againstQuinton Mathews's co-conspirators, and is defending stockholder class action lawsuits that are related to the claims made by Wheel of Fortune. The Company believes that a substantial portion of the costs associated with the stockholder class action litigation will be covered by insurance, but the Company can provide no assurances that costs will not ultimately be in excess of the amount that will be covered by insurance. The Company does not expect insurance proceeds to cover a substantial portion of the costs related to the lawsuit it filed against
Wheel of Fortune.
Other operating expenses were
Other income decreased$0.4 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , resulting primarily from losses in commodity futures. 40 Table of Contents Gain on disposition of assets decreased$5.7 million for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 due primarly to the gain on sale of properties during 2019 as opposed to smaller dispositions occurring in 2020. Additionally, during the nine months endedSeptember 30, 2020 , the Company recorded disposals of storm-damaged pivots. Interest expense decreased$1.3 million , or 8.5%, for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . This decrease is the result of a decrease in interest rates on floating rate debt and the lower outstanding balance of 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-term liquidity requirements consist primarily of funds necessary to acquire additional farmland, to pay legal fees in relation to the stockholder class action litigation and the Rota Fortunae litigation in excess of the Company's insurance coverage, improve farms in our portfolio, make principal and interest payments on outstanding borrowings, make distributions on our Series A preferred units and Series B Participating Preferred Stock and make distributions necessary to qualify for taxation as a REIT and fund our operations. Our sources of funds primarily will be cash on hand, operating cash flows, proceeds from asset disposals and borrowings from prospective lenders. Our long-term liquidity needs consist primarily of funds necessary to acquire additional farmland, make other investments and certain long-term capital expenditures, make principal and interest payments on outstanding borrowings and make distributions necessary to qualify for taxation as a REIT. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances (including issuances of Common units), net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings. We manage our liquidity position and expected liquidity needs taking into consideration current cash balances and reasonably expected cash receipts. When material debt repayments are due within the following 12 months, we work with current and new lenders and other potential sources of capital to ensure that all our obligations are timely satisfied. 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. OnApril 30, 2020 , the Company entered into amendments to bonds 8A and 9 with Farmer Mac to extend the maturities of such bonds, under which there was a total of$48.3 million outstanding as ofSeptember 30, 2020 , from June andJuly 2020 toOctober 31, 2020 . OnOctober 29, 2020 , the Company entered into a$54.4 million term loan with MetLife to refinance the maturing Farmer Mac indebtedness as well as a loan withFarm Credit ofCentral Florida . During the nine months endedSeptember 30, 2020 , we used$6.6 million to repurchase an aggregate of 1,004,167 shares of common stock and$3.1 million to repurchase an aggregate of 140,189 shares of Series B Participating preferred stock. We currently have authority to repurchase up to an aggregate of$41.4 million in additional shares of our common stock or shares of our Series B participating preferred Stock. Consolidated Indebtedness
For further details relating to our consolidated indebtness, 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.
41
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Sources and Uses of Cash
The following table summarizes our cash flows for the nine months ended
September 30, 2020 and 2019:
For the nine months ended September 30,
(in thousands) 2020 2019
Net cash provided by operating activities $ 10,161 $ 6,977
Net cash provided by investing activities $ 12,271 $ 33,350
Net cash (used in) provided by financing activities $ (27,885) $ (48,655)
Comparison of the nine months ended
As of
Cash Flows from Operating Activities
Net cash provided by operating activities increased by
Receipt of
? 2020 as compared to receiving
ended
? A decrease of
months ended
? Increase in accrued expenses of
ended
? A decrease in deferred revenue of
endedSeptember 30, 2019 .
Cash Flows from Investing Activities
Net cash provided by investing activities decreased
Property dispositions during the nine months ended
? aggregate consideration of
dispositions during the nine months ended
consideration of
? A decrease of
compared to the nine months ended
Property acquisition during the nine months ended
? million as compared to no property acquisitions during the nine months ended
? A
the Company as compared to the nine months ended
? A
to the nine months endedSeptember 30, 2019 .
Cash Flows from Financing Activities
Net cash used in financing activities decreased
? Debt payments decreased
? A decrease of
nine months ended
? Common stock repurchases decreased
ended
? A decrease of
as compared to the nine months endedSeptember 30, 2019 ; 42 Table of Contents
An increase of
? months ended
and
? An increase of
compared to the nine months endedSeptember 30, 2019 .
Off-Balance Sheet Arrangements
As of
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 an alternative to net income (loss) earnings per share (determined in accordance with GAAP) as a measure of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions. 43 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. Acquisition and due diligence costs totaled
million for the three and nine months ended
respectively. 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 comparability of
our results over each reporting period and of our 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 comparability of our results over each
reporting period and of our 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. Distributions on Series A preferred
units, which are convertible into Common units on or after
? a fixed and certain impact on our cash flow, and thus they are subtracted from
FFO. We believe this improves comparability of our Company with other real
estate operators. Dividends on Series B Participating Preferred Stock. Dividends on Series B
Participating Preferred Stock, which may be redeemed for cash or converted into
? shares of common stock on or after
impact on our cash flow, and thus they are subtracted from FFO. We believe this
improves comparability of our 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,
redeemable Common units and unvested 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; thus, they don't 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 as previously reported
(unaudited):
For the three months ended For the nine months ended
September 30 , September 30 ,(in thousands except per share amounts) 2020 2019 2020 2019 Net income (loss)$ 561 $ (1,463) $ 1,153 $ 5,070 (Gain) loss on disposition of assets (1,348) 18 (2,179) (7,891) Depreciation, depletion and amortization 1,979 2,087 5,982 6,294 FFO 1,192 642 4,956 3,473 Stock based compensation 271 481 788 1,259 Deferred impact of interest rate swap terminations 191 - 329 - Real estate related acquisition and due diligence costs - - 11 1 Distributions on Preferred units (3,064) (3,117) (9,269) (9,368) AFFO$ (1,410) $
(1,994)
AFFO per diluted weighted average share data:
AFFO weighted average common shares 31,428 32,015 31,613 33,287 Net loss per share available to common stockholders$ (0.09) $ (0.15) $ (0.28) $ (0.16) Income available to redeemable non-controlling interest and non-controlling interest in operating partnership 0.12 0.11 0.33 0.31 Depreciation and depletion 0.06 0.07 0.19 0.19 Stock based compensation 0.01 0.02 0.02 0.04 (Gain) loss on disposition of assets (0.04) - (0.07) (0.24) Distributions on Preferred units (0.10) (0.10) (0.29) (0.28) AFFO per diluted weighted average share$ (0.04) $ (0.06) $ (0.10) $ (0.14) 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 For the nine months ended September 30, ended September 30, (in thousands) 2020 2019 2020 2019 Basic weighted average shares outstanding 29,206 29,497 29,391 30,319 Weighted average OP units on an as-if converted basis 1,904 2,134 1,904 2,587 Weighted average unvested restricted stock 318 384 318 381 AFFO weighted average common shares 31,428 32,015 31,613 33,287 EBITDAre The Company calculates Earnings Before Interest Taxes Depreciation and Amortization for real estate ("EBITDAre") in accordance with the standards established by NAREIT in itsSeptember 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. 45 Table of Contents
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 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 For the nine months ended
September 30, September 30,
(in thousands) 2020 2019 2020 2019Net Income (loss) $ 561$ (1,463) $ 1,153 $ 5,070 Interest expense 4,411 4,818 13,541 14,805 Income tax expense - - - -
Depreciation, depletion and amortization 1,979 2,087 5,982 6,294 (Gain) loss on disposition of assets (1,348) 18 (2,179) (7,891) EBITDAre$ 5,603
Stock based compensation 271 481 788 1,259 Real estate related acquisition and due diligence costs -
- 11 1
Adjusted EBITDAre $ 5,874 $ 5,941 $ 19,296 $ 19,538
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 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.
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Seasonality
Because the leases for many of the properties in our portfolio require
significant payments in advance of the spring planting season (for row crops),
we receive a significant portion of our cash rental payments in the first
calendar quarter of each year, although we recognize rental revenue from these
leases on a pro rata basis over the non-cancellable term of the lease in
accordance with GAAP.
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