The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K.
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 Annual Report on Form 10-K, we own farms with an aggregate of approximately 150,000 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 Annual Report on Form 10-K, approximately 70% of our portfolio (by value) is used to grow primary crops, such as corn, soybeans, wheat, rice and cotton, with the balance 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. 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. As of the first quarter of 2021 we are also engaged in farmland asset management on behalf of third parties.
We were incorporated inMaryland onSeptember 27, 2013 , and we are the sole member of the sole 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 of the date of this Annual Report on Form 10-K we own 95.4% of the Class A Common units of limited partnership interest in theOperating Partnership ("Common units"), and none of the Series A preferred units of limited partnership interest in theOperating Partnership ("Series A preferred units") or shares of our 6.00% Series B Participating Preferred Stock (the "Series B Participating Preferred Stock").
As of
We elected and qualified to be taxed as a REIT for
Recent Developments
2020 Completed Acquisitions and Dispositions
During 2020, we completed three asset acquisitions. Aggregate consideration for the three acquisitions totaled$1.4 million and consisted of cash and reduction of notes receivable. No intangible assets were acquired through these acquisitions. We also completed seven dispositions consisting of eleven farms for total consideration of$20.5 million for a total gain over net book value of$3.2 million , or 15.6%. Stock Repurchases During 2020, we repurchased an aggregate of 1,034,167 shares of common stock at a weighted average price per share of$6.59 for a total cost of$6.8 million and aggregate of 140,189 shares of Series B preferred stock at a weighted average price per share of$22.08 for a total cost of$3.1 million . Opportunity Zone Agreement OnJanuary 20, 2021 , we entered into an agreement withPromised Land Opportunity Zone Farms I, LLC (the "OZ Fund ") to sell, throughout 2020, twelve farms located in opportunity zones as designated by the Tax Cuts and Jobs Act of 42
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2017, and to provide farm management services on the farms for the
Impact of COVID-19 on Our Business
As the vaccine for the coronavirus ("COVID-19") is beginning to be widely distributed among the population most at risk, we are gaining a better understanding of the impact of the COVID-19 pandemic on our business, particularly with regard to the 2020 crop marketing cycle. We expect the impact of the COVID-19 pandemic to lessen in the 2021 crop marketing cycle. However, we are unable to fully quantify what the ultimate impact of the pandemic on our business will be, as there are still significant uncertainties around the social and economic impact of the pandemic, and the size and timing of additional economic relief measures. So far, the pandemic has significantly affected only certain sectors of theU.S. agricultural industry, 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, among other crops. Related revenue declines have had a transient yet significant impact on our profitability. Other permanent crops in our farm portfolio - almonds in particular - have suffered in 2020 due to a mix of the COVID-19 pandemic and trade war related disruptions, which caused a combination of price weakness and longer sales cycles. Lower gasoline demand has affected demand for ethanol and therefore corn, however the negative impact on commodity prices was offset by a recent tightening of supply. We expect that the impact of the COVID-19 pandemic on our profitability will be temporary, but not necessarily limited to 2020; for example, we do not expect that the demand from the bar and restaurant trade will approach pre-pandemic levels until mid- to late-2021 at the earliest. Despite short and medium-term disruptions in theU.S. agricultural industry, we do not expect global demand for food, feed, fuel and fiber to be materially affected by the COVID-19 pandemic and the related economic turmoil. We expect the industry to experience some degree of long term transformation, but to survive relatively unscathed compared to other industries. As of the date of this Annual Report, farm values have largely held, and probably increased portfolio-wide, throughout the pandemic. 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 the financial support measures implemented by theU.S. federal government should prevent a material degradation in our tenants' creditworthiness. So far, the impact of the pandemic on our financial performance has been largely limited to our exposure to the pricing of certain permanent crops through participating leases and direct operation of farms, as our tenants have been able to maintain their financial commitments. The direct impact of the COVID-19 pandemic on our operations has been limited as of the date of this Annual Report. Even though we operate in an essential industry and therefore have been 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 theCity and County of Denver and theState of Colorado implemented stay-at-home orders. Our technology infrastructure was already well suited to remote working conditions, and the layout of our offices allows us to substantially observe social distancing guidelines when staff need to be present in the office. We have 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 first quarter of 2021, both in-person office attendance and frequency of travel have increased as compared to the beginning of the pandemic, and are expected to return to pre-pandemic levels later in the year. We do not expect the pandemic will have a material impact on our business and operations going forward, especially as broader segments of theU.S. population are becoming eligible to be vaccinated. 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
43 Table of Contents 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. In addition, although prices for many crops experienced significant declines in 2014 and 2015, in late 2020 and early 2021 they have rebounded to or near prior highs, driven by increased demand expectations fromChina and modest weather issues around the world. We believe that the combination of long-term growth trends in global population and GDP per capita and steadily increasing yields will result in stable or increased prices and increased revenue per acre for primary crops over time. 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. 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. 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 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, 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 44 Table of Contents
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. 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 compounding into significant appreciation in the long term
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 row crop farmland, we see modestly higher rent rates in connection with 2021 lease renewals, and we expect to continue seeing 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 under some pressure. Participating lease structures are common in many specialty crops, and base lease rates are consistent with or somewhat lower than 2020. Lease Expirations
Farm leases are often short-term in nature among row crop farms, and longer term in nature among permanent crop farms in our portfolio. As ofDecember 31, 2020 , our portfolio had the following lease expirations as a percentage of approximate acres leased and annualized minimum cash rents: % of % of ($ in thousands) Approximate Approximate Annual Annual Year Ending December 31, Acres Acres Cash Rents Cash Rents 2021 46,695 33.9 %$ 10,780 40.5 % 2022 32,554 23.6 % 7,249 27.2 % 2023 33,024 23.9 % 5,236 19.7 % 2024 9,038 6.6 % 736 2.8 % 2025 8,502 6.1 % 885 3.3 % 2026 and beyond 8,126 5.9 % 1,716 6.5 % 137,939 100.0 %$ 26,602 100.0 %
As of the date of this report, 1,862 total acres are unleased and we are currently negotiating leases for all of them.
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 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 45
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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 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 us, via crop insurance and hedging programs implemented by tenants. Our TRS also takes advantage of these risk mitigation programs and strategies. 46 Table of Contents 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. In addition, although prices for many crops experienced significant declines in 2014 and 2015, in late 2020 and early 2021 they have rebounded to or near prior highs, driven by increased demand expectations fromChina and modest weather issues around the world. 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. Furthermore, the COVID-19 pandemic has impacted certain specialty crops. We do not believe such declines represent a trend over the long term, but rather a reaction to the decline in economic activity as a result of the pandemic. We expect pricing across specialty crops to strengthen in 2021 as economic disruptions due to the COVID-19 pandemic gradually abate. 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. While logistical disruptions introduced by the COVID-19 pandemic have slowedChina's compliance with its Phase 1 commitments,U.S. agricultural exports toChina have been supported by a combination of tighter global supplies of agricultural commodities and an increase in demand to replenishChina's strategic reserves. Trade tensions have impacted our business mostly in the area of tree nuts - especially almonds, a crop of which we have significant acreage and to which we are exposed through participating rents. For example, a combination of trade tensions and logistical disruptions caused by the COVID-19 pandemic have affected the timing of pricing and sale of the 2020 almond crop, leading to a shift of revenues to the following fiscal year and potentially lower overall revenues. 47 Table of Contents
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and 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 filing. 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. When substantially all of the fair value of the gross assets acquired is not concentrated in a single identifiable asset or a group of similar assets and contains acquired inputs, processes and outputs, these acquisitions are accounted for as a business combination. We consider single identifiable assets as tangible assets that are attached to and cannot be physically removed and used separately from another tangible asset without incurring significant cost or significant diminution in utility or fair value. We consider similar assets as assets that have a similar nature and
risk characteristics.
Whether our acquisitions are treated as an asset acquisition under ASC 360 or a business combination under ASC 805, the fair value of the purchase price is allocated among the assets acquired and any liabilities assumed by valuing the property as if it was vacant. The "as-if-vacant" value is allocated to land, buildings, improvements, permanent plantings and any liabilities, based on management's determination of the relative fair values of such assets and liabilities as of the date of acquisition. Upon acquisition of real estate, we allocate the purchase price of the real estate based upon the fair value of the assets and liabilities acquired, which historically have consisted of land, drainage improvements, irrigation improvements, groundwater, permanent plantings (bushes, shrubs, vines, and perennial crops), and grain facilities, and may also consist of intangible assets including 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 and 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 resource 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 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. 48 Table of Contents 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, availability of replacement tenants, 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. We capitalize acquisition costs and due diligence costs if the asset is expected to qualify as an asset acquisition. If the asset acquisition is abandoned, the capitalized asset acquisition costs will be expensed to acquisition and due diligence costs in the period of abandonment. Costs associated with a business combination are expensed to acquisition and due diligence costs as incurred.
Total consideration for acquisitions may include a combination of cash and equity securities. When equity securities are issued, we determine the fair value of the equity securities issued based on the number of shares of common stock and Common units issued multiplied by the stock price on the date of closing in the case of common stock and Common units and by liquidation preference in the case of preferred stock and preferred units.
Using information available at the time of a business combination, we allocate the total consideration to tangible assets and liabilities and identified intangible assets and liabilities. During the measurement period, which may be up to one year from the acquisition date, the Company may adjust the preliminary purchase price allocations after obtaining more information about assets acquired and liabilities assumed at the date of acquisition. Real Estate
Our real estate consists of land, groundwater, permanent crops (consisting of trees and vines) and improvements made to the land consisting of grain facilities, irrigation improvements, other assets and drainage improvements. We record real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as such costs are incurred. We begin depreciating assets when the asset is ready for its intended use. We compute depreciation and depletion for assets classified as improvements using the straight-line method over the estimated useful life of 10-40 years for grain facilities, 2-40 years for irrigation improvements, 20-65 for drainage improvements, 3-50 years for groundwater, 13-40 years for permanent plantings, and 5-40 years for other assets acquired. We periodically evaluate the estimated useful lives for groundwater based on current state water regulations and depletion levels of the aquifers.
When a sale occurs, we recognize the associated gain when all consideration has been transferred, the sale has closed, and there is no material continuing involvement. If a sale is expected to generate a loss, we first assess it through the impairment evaluation process. See ''-Impairment of Real Estate Assets'' below
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. There have been no impairments recognized on real estate assets in the accompanying financial
statements. Inventory of our TRS
The costs of growing crop are accumulated until the time of harvest at the lower of cost or net realizable value and are included in inventory in our consolidated financial statements. Costs are allocated to growing crops based on a percentage of the total costs of production and total operating costs that are attributable to the portion of the crops that remain in 49
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inventory at the end of the year. Growing crop consists primarily of land preparation, cultivation, irrigation and fertilization costs incurred by FPI Agribusiness. Growing crop inventory is charged to cost of products sold when the related crop is harvested and sold. Harvested crop inventory includes costs accumulated during both the growing and harvesting phases and is stated at the lower of those costs or the estimated net realizable value, which is the market price, based upon the nearest market in the geographic region, less any cost of disposition. Cost of disposition includes broker's commissions, freight and other marketing costs. Revenue Recognition Rental income includes rents that each tenant pays in accordance with the terms of its lease. Minimum rents pursuant to leases are recognized as revenue on a straight-line basis over the lease term, including renewal options in the case of bargain renewal options. Deferred revenue includes the cumulative difference between the rental revenue recorded on a straight-line basis and the cash rent received from tenants in accordance with the lease terms. Acquired below market leases are included in deferred revenue on the accompanying consolidated balance sheets, which are amortized into rental income over the life of the respective leases, plus the terms of the below market renewal options, if any. Farm leases in place as ofDecember 31, 2020 had terms ranging from one to forty years. As ofDecember 31, 2020 , we had 99 leases over 209 properties with rent escalations. The majority of our leases provide for a fixed annual or semi-annual cash rent payment. Tenant leases on acquired farms generally require the tenant to pay us rent for the entire initial year regardless of the date of acquisition, if the acquisition is closed prior to, or shortly after, planting of crops. If the acquisition is closed later in the year, we typically receive a partial rent payment or no rent payment at all. Certain of our leases provide for a portion of the rent determined as a percentage of the gross farm proceeds. Revenue under leases providing for a payment equal to a percentage of the gross farm proceeds are recorded at the guaranteed crop insurance minimums and recognized ratably over the lease term during the crop year. Upon notification from the grain or packing facility that a future contract for delivery of the harvest has been finalized or when the tenant has notified us of the total amount of gross farm proceeds, revenue is recognized for the excess of the actual gross farm proceeds and the previously recognized minimum guaranteed insurance. Revenue derived from a percentage of the farm gross proceeds that is over and above the crop insurance minimums is recognized once crop price and quantity are known (typically at or after the time the crops are harvested). As a result, we are only able to recognize revenue from such leases once annually. Certain of our leases provide for minimum cash rent plus a bonus based on gross farm proceeds. Revenue under this type of lease is recognized on a straight-line basis over the lease term based on the minimum cash rent. Bonus rent is recognized upon notification from the grain or packing facility that a future contract for delivery of the harvest has been finalized or when the tenant has notified us of the total amount of gross farm proceeds Tenant reimbursements include reimbursements for real estate taxes that each tenant pays in accordance with the terms of its lease. When leases require that the tenant reimburse us for property taxes paid by us, the reimbursement is reflected as tenant reimbursement revenue on the statements of operations, as earned, and the related property tax as property operating expense, as incurred. We recognize interest income on notes receivable on an accrual basis over the life of the note. Direct origination costs are netted against loan origination fees and are amortized over the life of the note using the straight-line method, which approximates the effective interest method, as an adjustment to interest income which is included in other revenue in the Company's Consolidated Statements of Operations for the years endedDecember 31, 2020 and 2019. Crop sales revenue
We record revenue from the sale of harvested crops when the harvested crop has been contracted to be delivered to a grain or packing facility and title has transferred. Harvested crops delivered under marketing contracts are recorded using the fixed price of the marketing contract at the time of delivery to a grain or packing facility. Harvested crops delivered without a marketing contract are recorded using the market price at the date the harvested crop
is delivered to the grain or 50 Table of Contents
packing facility and title has transferred.
Other revenue We recognize interest income on notes receivable on an accrual basis over the life of the note. Direct origination costs are netted against loan origination fees and are amortized over the life of the note using the straight-line method, which approximates the effective interest method, as an adjustment to interest income which is included in other revenue in the Company's Consolidated Statements of Operations for the years endedDecember 31, 2020 and 2019. Income Taxes As a REIT, for income tax purposes we are permitted to deduct dividends paid to our stockholders, thereby eliminating theU.S. federal taxation of income represented by such distributions at the Company level, provided certain requirements are met. REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject toU.S. federal income tax (including, for periods prior to 2018, any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.
The Operating Partnership leases certain of its farms to the TRS, which is subject to federal and state income taxes. We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis of assets and liabilities and their respective income tax basis and for operating loss, capital loss and tax credit carryforwards based on enacted income tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. There was$(1.9) million in taxable income from the TRS for the year endedDecember 31, 2020 , and$(0.2) million in taxable income for the year endedDecember 31, 2019 . We perform an annual review for any uncertain tax positions and, if necessary, will record future tax consequences of uncertain tax positions in the financial statements. An uncertain tax position is defined as a position taken or expected to be taken in a tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. AtDecember 31, 2020 , we did not identify any uncertain tax positions. When we acquire a property in a business combination, we evaluate such acquisition for any related deferred tax assets or liabilities and determine if a deferred tax asset or liability should be recorded in conjunction with the purchase price allocation. If a built-in gain is acquired, we evaluate the required holding period (generally 5 years) and determine if we have the ability and intent to hold the underlying assets for the necessary holding period. If we have the ability to hold the underlying assets for the required holding period, no deferred tax liability will be recorded with respect to the built-in gain. We determined that no deferred tax assets or liabilities were recorded through acquisition activity that we undertook during the year endedDecember 31, 2020 .
Derivatives and Hedge Accounting
We manage economic risks, including interest rate, liquidity, and credit risk, by managing the amount, sources, duration and interest rate exposure of our funding. We may also use interest rate derivative financial instruments, namely interest rate swaps. We enter into marketing contracts to sell commodities. Derivatives and hedge accounting guidance requires us to evaluate these contracts to determine whether the contracts are derivatives. Certain contracts that meet the definition of a derivative may be exempt from derivative accounting if designated as normal purchase or normal sales. We evaluate all contracts at inception to determine if they are derivatives and if they meet the normal purchase and normal sale designation requirements. All contracts entered into during the year endedDecember 31, 2020 met the criteria to be exempt from derivative accounting and were designated as normal purchase and sales exceptions for hedge accounting. 51 Table of Contents We have in place one interest rate swap agreement withRabobank to add stability to interest expense and to manage our exposure to interest rate movements. This agreement qualifies as a cash flow hedge and is actively evaluated for its effectiveness (see Note 12 - "Hedge Accounting"). The entire change in the fair value of our designated cash flow hedges is recorded to accumulated other comprehensive income, a component of shareholders' equity in our consolidated balance sheets. Additionally, we assesses whether the derivative used in our hedging transaction is expected to be highly effective in offsetting changes in the fair value or cash flows of the hedged item. We discontinue hedge accounting when it is determined that a derivative has ceased to be or is not expected to be highly effective as a hedge, and then reflect changes in fair value of the derivative in earnings after termination of the hedge relationship.
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 combined consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Results of Operations
This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Comparison of the year endedDecember 31, 2020 to the year endedDecember 31, 2019 For the year ended December 31, ($ in thousands) 2020 2019 $ Change % Change OPERATING REVENUES: Rental income $ 43,693 $ 48,119$ (4,426) (9.2) % Tenant reimbursements 3,637 3,146 491 15.6 % Crop Sales 1,902 978 924 94.5 % Other revenue 1,457 1,321 136 10.3 % Total operating revenues 50,689 53,564 (2,875) (5.4) % OPERATING EXPENSES:
Depreciation and depletion 7,972 8,320 (348) (4.2) % Property operating expenses 7,350 7,897 (547) (6.9) % Cost of goods sold 3,387 927 2,460 NM Acquisition and due diligence costs 11 6 5 83.3 % General and administrative expenses 5,896 6,102 (206) (3.4) % Legal and accounting 3,742 3,971 (229) (5.8) % Other operating expenses 2 4 (2) NM Total operating expenses 28,360 27,227 1,133 4.2 % OPERATING INCOME 22,329
26,337 (4,008) (15.2) %
OTHER (INCOME) EXPENSE: Other income 111 (260) 371 (142.7) % Gain on sale of assets (2,989) (7,841) 4,852 NM Interest expense 17,677 19,588 (1,911) (9.8) % Total other expense 14,799 11,487 3,312 28.8 %
Net income before income tax expense 7,530
14,850 (7,320) (49.3) % Income tax expense - - - NM NET INCOME $ 7,530 $ 14,850$ (7,320) (49.3) % NM = Not Meaningful 52 Table of Contents Our rental income for 2020 was impacted by the two acquisitions and four dispositions that took place in 2019, in addition to the three acquisitions and seven dispositions, consisting of eleven farms, that took place in 2020. To highlight the effect of changes in our rental income due to acquisitions, 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 year endedDecember 31, 2020 includes approximately 145,000 acres, representing 94% of our current portfolio on an acreage basis. Total rental income under leases for the same-property portfolio decreased$3.2 million , or 7.12%, from$45.4 million for the year endedDecember 31, 2019 to$42.2 million for the year endedDecember 31, 2020 , largely due to a decrease in crop share revenue in the permanent crop portfolio as a result of a decrease in demand for lemons and blueberries, and delayed and weak pricing of the 2020 almond crop as a result of the COVID-19 pandemic and trade war related disruptions. Rental income decreased$4.4 million , or 9.2%, for the year endedDecember 31, 2020 as compared to the prior year, as a result of the impact of the COVID-19 pandemic on the demand for lemons and blueberries, the impact of international trade disruptions on the pricing of almonds (resulting in potentially both a delay and reduction of related revenues), the impact of low cyclical yields of pistachios, and asset dispositions. Revenues recognized from tenant reimbursement of property taxes increased$0.5 million , or 15.6%, during the year endedDecember 31, 2020 as compared to the prior year. The increase in tenant reimbursements was the result of an increase in the number of leases in place under which we were reimbursed for property taxes, as well as a general overall increase in property tax expense on a same property basis for which we were reimbursed.
Crop sales increased
Other revenues increased
Depreciation, depletion and amortization expense decreased
Property operating expenses decreased$0.5 million , or 6.9%, for the year endedDecember 31, 2020 as compared to the prior year. The decrease primarily relates to the initial accounting of a sales-type equipment lease in the third quarter of 2019 that was terminated in the first quarter of 2020, as well as an overall net reduction in acreage due to asset sales in 2020. Cost of goods sold increased$2.5 million for the year endedDecember 31, 2020 as compared to the prior year. This increase was largely due to a higher volume of crop sold in 2020 as the Company direct operated more acres in 2020 than
in 2019.
Acquisition and due diligence costs were negligible and remained relatively consistent in 2020 compared to the prior year.
General and administrative expenses declined by
Legal and accounting expenses decreased$0.2 million , or 5.8%, for the year endedDecember 31, 2020 as compared to the prior year. The change was primarily a result of a slight decrease in legal fees incurred in relation to a "short and distort" attack against the Company conducted by parties under the pseudonym Rota Fortunae, as discussed below under Note 8 to our Consolidated Financial Statements included in Part IV, Item 8 of this Annual Report on Form 10-K. The Company is pursuing litigation against Rota Fortunae and is defending stockholder class action lawsuits that are related to the claims made by Rota Fortunae. The Company has not recognized any receivable for insurance recoveries that the Company believes it will be entitled to. The Company does not expect insurance proceeds to cover a substantial portion 53
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of the costs related to the lawsuit it filed against Rota Fortunae. Additionally, the Company received$0.5 million in insurance proceeds related to the Rota Fortunae litigation that were used to offset legal fees. There was no impact on reported earnings as a result.
Other operating expenses were negligible and remained relatively consistent in 2020 compared to the prior year.
Other income totaled
The gain / loss on disposition of assets decreased$4.9 million for the year endedDecember 31, 2020 as compared to the prior year due primarly to larger gains on sales of properties in the Corn Belt and the Southeast regions in 2019.
Interest expense decreased
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 to Common unitholders, and other general business needs.
Our short-term liquidity requirements consist primarily of funds necessary to acquire additional farmland, make other investments consistent with our investment strategy, make principal and interest payments on outstanding borrowings, make distributions on our Series A preferred units and Series B Participating Preferred Stock, make distributions necessary to qualify for taxation as a REIT, fund our operations, and pay legal fees in relation to the Rota Fortunae litigation in excess of the Company's insurance coverage. Our sources of funds primarily will be cash on hand, operating cash flows 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. In light of the level at which our common stock has traded in recent years, we have not been able to access the equity capital markets in order to fund our liquidity needs. Furthermore, because of the trading price of our common stock, we have been unable to fund acquisitions of farmland with Common units. We may consider raising equity capital or acquiring farmland with common units if we can do so in a way that causes minimal dilution to our existing stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, asset dispositions and, given the recent recovery in our stock price, future equity issuances (including issuances of Common units).
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 liquidity position and expected liquidity needs taking into consideration current cash balances and reasonably expected cash receipts. Our business model, and the business model of real estate investment companies in general, relies on debt as a structural source of financing. When debt becomes due, it is generally refinanced 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 to ensure that all of our obligations are satisfied in a timely manner. We have a history of being able to refinance our debt obligations to manage our debt maturities. 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. Our first course of action is to work with our lenders to 54 Table of Contents
refinance debt which is coming due on terms acceptable to us. In the event that we are unsuccessful in refinancing our debt on terms acceptable to us, we would look to liquidate certain assets to fund our liquidity shortfall. OnJanuary 29, 2021 , the Company entered into an amendment to extend the maturity dates of its five Rutlege Promissory Notes fromJanuary 1, 2022 toApril 1, 2022 . Consolidated Indebtedness For further details relating to our consolidated indebtness refer to "- Recent Developments - Financing Activity" and Note 7 - Mortgage Notes, Line of Credit and Bonds Payable included in the financial statement section of this Annual Report on Form 10-K. Sources and Uses of Cash The following table summarizes our cash flows for the years endedDecember 31, 2020 and 2019: For the year ended December 31, ($ in thousands) 2020 2019 Net cash provided by operating activities$ 19,726 $ 17,994 Net cash provided by investing activities$ 18,668 $ 31,052 Net cash used in financing activities$ (23,738) $ (53,376)
Comparison of the year ended
As of
Cash Flows from Operating Activities
Net cash provided by operating activities increased
? Increase in accrued interest of
period of 2019;
? Decrease in net income of
in 2019;
? Decrease in gain on disposition of assets of
same period in 2019
? Decrease in inventory of
? Increase in loss related to settlement of interest rate swap of
2020
Cash Flows from Investing Activities
Net cash provided by investing activities decreased
Completing three asset acquisitions in 2020 for cash consideration of
? million, and principal receipt on notes receivable of
to two acquisitions for aggregate cash consideration of
and
? Investing of
? Receiving
million in 2019
Cash Flows from Financing Activities
Net cash used in financing activities decreased
Borrowings from mortgage notes payable of
? months ended
the twelve months ended
? Debt repayments of$59.0 million during 2020, as compared to$11.4 million in 2019; 55 Table of Contents
? Repurchase of
million in 2019;
? Dividend payments of
Stockholders made in 2020, compared to
? Proceeds from the issuance of common stock of
million in 2019;
? Repurchase of
2020 compared to
? Dividend payments of
million in 2019. Contractual Obligations The following table sets forth our contractual obligations and commitments as ofDecember 31, 2020 : ($ in thousands) Payments Due by Period Contractual Obligations 2021 2022-2024 2025-2027 2028 & beyond Total Principal Payments of Long-Term Indebtedness $ -$ 114,100 $ 221,849 $ 172,237 $ 508,186 Interest Payments on Fixed-Rate Long-Term Indebtedness 11,942 35,827 25,257 32,524 105,550 Variable-Rate Long-Term Indebtedness 2,897 3,418 3,108 332 9,755 Commitment on Mortgage Note Receivable - - - - - Lease Payments 99 - - - 99 Capital Commitments - - - - - Total$ 14,938 $ 153,345 $ 250,214 $ 205,093 $ 623,590
Variable rate long-term indebtedness has been determined for purposes of this
(1) table based upon the balance and interest rates in place as of
2020.
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. 56 Table of Contents 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.
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 years ended
of the audit fees we incur are directly related to acquisitions, which varies
with the number and complexity of the acquisitions we evaluate and complete in
a given period. As such, these costs do not correlate with the ongoing
operations of our portfolio. Total acquisition related audit fees excluded from
AFFO totaled
respectively.
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. 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, 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, thus they are subtracted from FFO. We believe this
improves comparability of our Company with other real estate operators. 57 Table of Contents
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, thus don't share in the performance
of the Company and their impact on shares outstanding is uncertain.
The following table sets forth a reconciliation of net income (loss) to FFO, AFFO and net 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 year endedDecember 31 ,
($ in thousands except per share data) 2020 2019 Net income (loss) $ 7,530$ 14,850 (Gain) loss on disposition of assets (2,989) (7,841) Depreciation and depletion 7,972 8,320 FFO 12,513 15,329 Stock based compensation 1,060 1,527 Deferred impact of interest rate swap terminations 519 - Real estate related acquisition and due diligence costs 11 - Distributions on preferred units (12,334) (12,486) AFFO $
1,769 $ 4,370
AFFO per diluted weighted average share data:
AFFO weighted average common shares 31,534 32,938 Net income (loss) available to common stockholders $
(0.18) $ 0.04 Income attributable to redeemable non-controlling interest and non-controlling interest in operating partnership
0.44 0.40 Depreciation and depletion 0.25 0.25 Stock based compensation 0.03 0.05 (Gain) loss on disposition of assets (0.09) (0.24) Real estate related acquisition and due diligence costs 0.00 - Distributions on preferred units (0.39) (0.37) AFFO per diluted weighted average share $ 0.06 $ 0.13 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 year ended December 31, ($ in thousands) 2020 2019
Basic weighted average shares outstanding 29,376
30,169
Weighted average OP units on an as if converted basis 1,842 2,415 Weighted average unvested restricted stock 316 354 Weighted average redeemable non-controlling interest - - AFFO weighted average common shares 31,534
32,938
As of
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), 58
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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 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 year ended December 31, ($ in thousands) 2020 2019 Net income (loss)$ 7,530 $ 14,850 Interest expense 17,677 19,588 Income tax expense - - Depreciation and depletion 7,972 8,320 (Gain) loss on disposition of assets (2,989) (7,841) EBITDAre$ 30,190 $ 34,917 Stock based compensation 1,060 1,527
Real estate related acquisition and due diligence costs
11 - Adjusted EBITDAre$ 31,261 $ 36,444 59 Table of Contents 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 Because the leases for a many of the properties in our portfolio require significant payments in advance of the spring planting season, 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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