GLADSTONE LAND CORPORATION All statements contained herein, other than historical facts, may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely," or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled "Forward-Looking Statements" and "Risk Factors" in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "Form 10-K"). We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q (the "Quarterly Report"), except as required by law. All references to "we," "our," "us" and the "Company" in this Quarterly Report meanGladstone Land Corporation and its consolidated subsidiaries, except where it is made clear that the term refers only toGladstone Land Corporation .
OVERVIEW
General
We are an externally-managed, agricultural real estate investment trust ("REIT")
that is engaged in the business of owning and leasing farmland. We are not a
grower of crops, nor do we typically farm the properties we own. We currently
own 169 farms comprised of 115,288 acres located across 15 states in the U.S. We
also own several farm-related facilities, such as cooling facilities,
packinghouses, processing facilities, and various storage facilities.
We conduct substantially all of our activities through, and all of our
properties are held, directly or indirectly, by, Gladstone Land Limited
Partnership (the "Operating Partnership"). Gladstone Land Corporation controls
the sole general partner of the Operating Partnership and currently owns,
directly or indirectly, 100.0% of the units of limited partnership interest in
the Operating Partnership ("OP Units"). In addition, we have elected for
Gladstone Land Advisers, Inc. ("Land Advisers"), a wholly-owned subsidiary of
ours, to be treated as a taxable REIT subsidiary ("TRS").
Gladstone Management Corporation (our "Adviser") manages our real estate
portfolio pursuant to an advisory agreement, and Gladstone Administration, LLC
(our "Administrator"), provides administrative services to us pursuant to an
administration agreement. Our Adviser and our Administrator collectively employ
all of our personnel and directly pay their salaries, benefits, and general
expenses.
Portfolio Diversification
Since our initial public offering inJanuary 2013 (the "IPO"), we have expanded our portfolio from 12 farms leased to 7 different, unrelated tenants to a current portfolio of 169 farms leased to 91 different, unrelated third-party tenants who grow over 60 different types of crops on our farms. Our investment focus is in farmland suitable for growing either fresh produce annual row crops (e.g., certain berries and vegetables) or certain permanent crops (e.g., almonds, blueberries, pistachios, and wine grapes), with an ancillary focus on farmland growing certain commodity crops (e.g., beans and corn). The acquisition of additional farms since our IPO has also allowed us to further diversify our portfolio geographically. The following table summarizes the different geographic locations (by state) of our farms owned as of and for the nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): 27 -------------------------------------------------------------------------------- As of and For the nine months endedSeptember 30, 2022 As
of and For the nine months ended
Number % of % of Total Number % of % of Total
of Total Total Lease Lease of Total Total Lease Lease
State Farms Acres Acres Revenue Revenue Farms Acres Acres Revenue Revenue
California (1) 63 34,401 29.8% $ 43,702 67.8% 60 28,882 27.0% $ 33,687 64.1%
Florida 26 22,606 19.6% 10,810 16.8% 25 21,387 20.0% 10,165 19.4%
Washington 6 2,529 2.2% 2,239 3.5% 3 1,384 1.3% 1,781 3.4%
Colorado 12 32,773 28.4% 1,618 2.5% 12 32,773 30.7% 2,009 3.8%
Arizona 6 6,320 5.5% 1,545 2.4% 6 6,280 5.9% 1,459 2.8%
Michigan 23 1,892 1.6% 1,182 1.8% 23 1,892 1.8% 619 1.2%
Oregon 6 898 0.8% 1,204 1.9% 4 561 0.5% 512 1.0%
Nebraska 9 7,782 6.7% 855 1.3% 9 7,782 7.3% 1,191 2.3%
Texas 1 3,667 3.2% 337 0.5% 1 3,667 3.4% 337 0.6%
Maryland 6 987 0.9% 337 0.5% 6 987 0.9% 354 0.7%
South Carolina 3 597 0.5% 183 0.3% 3 597 0.6% 183 0.3%
Georgia 2 230 0.2% 168 0.3% - - -% - -%
North Carolina 2 310 0.3% 113 0.2% 2 310 0.3% 118 0.2%
New Jersey 3 116 0.1% 97 0.1% 3 116 0.1% 42 0.1%
Delaware 1 180 0.2% 55 0.1% 1 180 0.2% 61 0.1%
TOTALS 169 115,288 100.0% $ 64,445 100.0% 158 106,798 100.0% $ 52,518 100.0%
(1)According to the California Chapter of the
Leases
General
Most of our leases are on a triple-net basis, an arrangement under which, in addition to rent, the tenant is required to pay the related taxes, insurance costs, maintenance, and other operating costs. Our leases generally have original terms ranging from 3 to 10 years for farms growing row crops and 7 to 15 years for farms growing permanent crops (in each case, often with options to extend the lease further). Rent is generally payable to us in advance on either an annual or semi-annual basis, with such rent typically subject to periodic escalation clauses provided for within the lease. Currently, 128 of our farms are leased on a pure, triple-net basis, 38 farms are leased on a partial-net basis (with us, as landlord, responsible for all or a portion of the related property taxes), and 3 farms are leased on a single-net basis (with us, as landlord, responsible for the related property taxes, as well as certain maintenance, repairs, and insurance costs). Additionally, 35 of our farms are leased under agreements that include a variable rent component, called "participation rents," that are based on the gross revenues earned on the respective farms.
Lease Expirations
Agricultural leases are often shorter term in nature (relative to leases of other types of real estate assets), so in any given year, we may have multiple leases up for extension or renewal. The following table summarizes the lease expirations by year for the farms owned and with leases in place as ofSeptember 30, 2022 (dollars in thousands): Number of Expiring
Lease Revenues for the % of Total
Expiring Leased % of Total Nine Months Ended Lease
Year Leases(1) Acreage Acreage September 30, 2022 Revenues
2022 (2) 1 801 0.7% $ 2,447 3.8%
2023 (3) 12 13,783 12.0% 4,625 7.2%
2024 9 10,384 9.0% 5,317 8.2%
2025 7 11,905 10.3% 4,755 7.4%
2026 10 11,967 10.4% 3,284 5.1%
Thereafter 61 66,448 57.6% 43,761 67.9%
Other(4) 7 - -% 256 0.4%
Totals 107 115,288 100.0% $ 64,445 100.0%
(1)Certain lease agreements encompass multiple farms.
(2)Represents a lease with a tenant termination option that we do not currently
expect to be exercised.
(3)Includes one lease that was renewed subsequent to September 30, 2022 (see
"Recent Development-Portfolio Activity-Existing Properties-Leasing Activity"
below for a summary of this and certain other recent leasing activities).
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(4)Consists of ancillary leases (e.g., renewable energy leases; oil, gas, and
mineral leases; telecommunications leases; etc.) with varying expirations on
certain of our farms.
Aside from an early termination option available to the tenant on one of our
farms in California (which we do not currently expect to be exercised), we
currently have one agricultural lease scheduled to expire within the next six
months on a farm in Nebraska . We are currently in negotiations with the existing
tenant on the farm, as well as other potential tenants, and we anticipate being
able to renew the lease at its current market rental rate without incurring any
downtime on the farm. We currently anticipate the rental rate on this renewal to
be relatively flat to that of the existing lease. Regarding all upcoming lease
expirations, there can be no assurance that we will be able to renew the
existing leases or execute new leases at rental rates favorable to us, if at
all, or be able to find replacement tenants, if necessary.
Recent Developments
Portfolio Activity
Property Acquisitions
Since July 1, 2022 , through the date of this filing, we completed the following
acquisitions, which are summarized in the table below (dollars in thousands,
except for footnotes):
Primary Total Annualized
Property Property Acquisition Total No. of Crop(s) Lease Renewal Purchase Acquisition Straight-line
Name Location Date Acres Farms / Use Term Options Price Costs(1) Rent(2)
Reagan Road (3) Cochise, AZ 7/13/2022 40 0 Corn 12.5 years None 120 17 39
North Columbia River Franklin & Grant, WA 7/21/2022 1,145 3 Wine Grapes 8.4 years None 30,320 146 2,296Road(4)(6)
Prunedale Road (5)(6)Umatilla, OR 7/21/2022 172 1 Wine Grapes 10.4 years None 7,008 35 286 1,357 4$ 37,448 $ 198 $ 2,621 (1)Includes approximately$20,000 of external legal fees associated with negotiating and originating the leases associated with these acquisitions, which were expensed in the period incurred. (2)Based on the minimum cash rental payments guaranteed under the respective leases, as required under GAAP, and excludes contingent rental payments, such as participation rents. (3)Represents the acquisition of a parcel of farmable land adjacent to an existing farm. Subsequent to acquisition, we spent approximately$153,000 to install certain improvements on this property. (4)Upon acquisition, we executed three new leases with the existing tenants on these farms. The lease terms above represent the weighted-average lease term and aggregate annualized straight-line rent of these three leases. (5)In connection with the acquisition of this property, we also acquired an ownership interest in a related LLC, the sole purpose of which is to own and maintain an irrigation system providing water to this and other neighboring properties. Our acquired ownership, which equated to an 11.3% interest in the LLC, was valued at approximately$2.7 million at the time of acquisition and is included within Other assets, net on the accompanying Consolidated Balance Sheets. See Note 3, "Real Estate and Intangible Assets-Investments in Unconsolidated Entities," within the accompanying notes to our condensed consolidated financial statements for additional information on our aggregate ownership interest in this and other LLCs. (6)These two properties were acquired as part of a single transaction. In connection with the acquisition of these vineyards, we committed to provide up to an aggregate amount of$2.2 million for certain irrigation and vineyard improvements on these farms, for which we will earn additional rent as the funds are disbursed by us. Existing Properties Leasing Activity The following table summarizes certain leasing activity that has occurred on our existing properties sinceJuly 1, 2022 , through the date of this filing (dollars in thousands, except for footnotes): PRIOR LEASES(1) NEW LEASES(2) Total # of Leases Lease Total # of Leases Lease Number Total Annualized with Structures Annualized Wtd. Avg. with Structures Farm of Farm Straight-line Participation (# of NNN Straight-line Term Participation (# of NNN Locations Leases Acres Rent(3) Rents / NN / N)(4) Rent(3) (Years) Rents / NN / N)(4) AZ, CA, & FL 6 4,082 $ 3,084 0 0 / 6 / 0 $ 3,378 4.4 0 1 / 5 / 0 (1)Prior leases include one lease that was terminated early during the three months endedSeptember 30, 2022 . In connection with this early termination, during the three months endedSeptember 30, 2022 , we wrote off aggregate deferred rent and rent receivable balances of approximately$24,000 against lease revenue. Upon termination of this lease, we entered into a new lease with a new tenant, effective immediately, which is included in the above table. (2)In connection with certain of these leases, we committed to provide capital for certain improvements on these farms. See "Liquidity and Capital Resources-Operating Commitments and Obligations-Operating Obligations" below for additional information on these and other commitments. (3)Based on the minimum cash rental payments guaranteed under the applicable leases (presented on an annualized basis), as required under GAAP, and excludes contingent rental payments, such as participation rents. (4)"NNN" refers to leases under triple-net lease arrangements, "NN" refers to leases under partial-net lease arrangements, and "N" refers to leases under single-net lease arrangements, in each case, as described above under "Leases-General." 29 --------------------------------------------------------------------------------
Financing Activity
Debt Activity
SinceJuly 1, 2022 , we repaid approximately$17.3 million of maturing loans. On a weighted-average basis, these borrowings bore interest at a stated rate of 4.47% and an effective interest rate (after interest patronage) of 2.93%.
Equity Activity
Series C Preferred Stock
OnApril 3, 2020 , we filed a prospectus supplement with theSEC for a continuous public offering (the "Series C Offering") of up to 26,000,000 shares of our 6.00% Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock"). Under the Series C Offering, we were permitted to sell up to 20,000,000 shares of our Series C Preferred Stock on a "reasonable best efforts" basis throughGladstone Securities at an offering price of$25.00 per share (the "Primary Series C Offering") and up to 6,000,000 additional shares of our Series C Preferred Stock pursuant to our dividend reinvestment plan (the "DRIP") at a price of$22.75 per share. OnAugust 24, 2022 , we amended the Series C Offering, to (i) reduce the amount of shares of the Series C Preferred Stock offered through the Primary Series C Offering to 10,200,000, (ii) reduce the amount of shares of the Series C Preferred Stock pursuant to the DRIP to 200,000; and (iii) reduce the duration of the period during which shares of the Series C Preferred Stock may be offered for sale to the earlier of (a)December 31, 2022 (unless earlier terminated or extended by our Board of Directors) or (b) the date on which all 10,200,000 shares of the Series C Preferred Stock offered in the Primary Series C Offering are sold. The offering period for the DRIP will terminate on the earlier of (1) the issuance of all 200,000 shares of Series C Preferred Stock under the DRIP and (2) the listing of the Series C Preferred Stock on the Nasdaq Global Market or another national securities exchange.
See Note 6, "Related-Party Transactions-Gladstone Securities-Dealer-Manager
Agreement," within the accompanying notes to our condensed consolidated
financial statements for more details on the dealer-manager agreement entered
into with
The following table summarizes the sales of our Series C Preferred Stock that
occurred since
Number of Weighted-average
Shares Sold(1) Sales Price per Share Gross Proceeds Net Proceeds(2)
3,285,027 $ 24.76 $ 81,352 $ 74,734
(1)Excludes share redemptions and shares issued pursuant to the DRIP. From July
1, 2022 , through the date of this filing, we redeemed 33,955 shares and issued
approximately 17,562 shares of the Series C Preferred Stock pursuant to the
DRIP.
(2)Net of underwriting discounts and selling commissions and dealer-manager fees
borne by us. Aggregate selling commissions and dealer-manager fees paid to
Gladstone Securities as a result of these sales was approximately $6.6 million .
As amended, the Series C Offering will terminate on the date (the "Series C
Termination Date") that is the earlier of either December 31, 2022 (unless
terminated earlier or extended by our Board of Directors), or the date on which
all 10,200,000 shares in the Primary Series C Offering are sold. There is
currently no public market for shares of the Series C Preferred Stock; however,
we intend to apply to list the Series C Preferred Stock on Nasdaq or another
national securities exchange within one calendar year after the Series C
Termination Date, though there can be no assurance that a listing will be
achieved in such timeframe, or at all.
Common Stock-At-the-Market Program
OnMay 12, 2020 , we entered into new equity distribution agreements withVirtu Americas, LLC , andLadenburg Thalmann & Co., Inc. (each a "Sales Agent"), under which we may issue and sell, from time to time and through the Sales Agents, shares of our common stock having an aggregate offering price of up to$100.0 million (the "ATM Program"). OnMay 18, 2021 , we entered into separate amendments to the existing equity distribution agreements to allow us to sell up to$160.0 million of additional shares of our common stock, expanding the aggregate offering price to up to$260.0 million .
The following table summarizes the activity under the ATM Programs from
Weighted-average
Offering Price
Number of Shares Sold Per Share Gross Proceeds Net Proceeds(1)
183,937 $ 25.21 $ 4,637 $ 4,565
(1)Net of underwriting commissions.
30
--------------------------------------------------------------------------------Impact of Inflation and Rising Interest Rates
According to theU.S. Bureau of Labor Statistics , the consumer price index ("CPI") grew at an annual rate of 8.2% throughSeptember 2022 , as inflation continues to hover near the highest rates seen in over four decades. However, food prices have continued to outpace the rate of inflation, with the overall food segment increasing by 11.2% over that same period, and the food at home segment (which encompasses over 90% of the crops grown on our farms) growing by 13.0%. In addition, according to the NCREIF Farmland Index, which, as ofSeptember 30, 2022 , consisted of approximately$14.9 billion of farms across theU.S. , the total return onU.S. farmland (including appreciation and income) was 10.2% for the 12 months endedSeptember 30, 2022 . If the increases in food prices continue to outpace inflation, we believe this will help mitigate the increase in input costs currently experienced by our farm operators. Interest rates remain volatile in response to competing concerns about inflationary pressures and the spread and effect of coronavirus ("COVID-19") variants, coupled with the threat of a near-term recession. The yield on the 10-yearU.S. Treasury Note has increased substantially since the beginning of 2022 and has recently surpassed 4% for the first time since 2008, which adversely affects interest rates on long-term financing. In addition, global recessionary conditions appear likely to occur within the next 12 months, caused in part by inflation, the ongoing COVID-19 pandemic, and geopolitical conditions, although the actual timeline, impact, and duration are unknown. Over 99% of our borrowings are currently at fixed rates, and on a weighted-average basis, these rates are fixed at an effective interest rate of 3.26% for another five-plus years. As such, with respect to our current borrowings, we have experienced minimal impact from the recent increases in interest rates, and we believe we are well-protected against any future interest rate increases. LIBOR Transition The majority of our debt is at fixed rates, and we currently have very limited exposure to variable-rate debt based upon the London Interbank Offered Rate ("LIBOR"), which is currently being phased out and is anticipated to be completely phased out byJune 2023 . LIBOR is currently expected to transition to a new standard rate, the Secured Overnight Financing Rate ("SOFR"), which will incorporate certain overnight repo market data collected from multiple data sets. SOFR was formally adopted by the Alternative Reference Rates Committee inJuly 2021 . The current intent is to adjust the SOFR to minimize the differences between the interest that a borrower would be paying using LIBOR versus what it will be paying SOFR. We continue to monitor the transition and currently expect SOFR to become the standard rate for all of our variable-rate debt. Our lines of credit with MetLife and five term loans withRabo AgriFinance, LLC (which are effectively fixed through our entry into interest swap agreements), are currently based upon LIBOR and include fallback language providing a mechanism for the parties to negotiate a new reference interest rate in the event that LIBOR ceases to exist. As such, we anticipate we will need to renegotiate these agreements in the near-term future and expect such discussions with the respective lenders to commence soon. Assuming that SOFR replaces LIBOR and is appropriately adjusted, we currently expect the transition to result in a minimal impact to our overall operations.
Our Adviser and Administrator
We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator (both affiliates of ours), which collectively employ all of our personnel and pay their salaries, benefits, and general expenses directly. The investment advisory agreement with our Adviser that was in effect throughJune 30, 2021 (the "Prior Advisory Agreement"), was amended and restated effectiveJuly 1, 2021 (as amended, the "Current Advisory Agreement," and together with the Prior Advisory Agreement, the "Advisory Agreements"). The Current Advisory Agreement revised the calculation of the base management fee beginning with the three months endedSeptember 30, 2021 , while all other terms of the Prior Advisory Agreement remained the same. Each of the Advisory Agreements and the current administration agreement with our Administrator (the "Administration Agreement") were approved unanimously by our board of directors, including, specifically, our independent directors.
A summary of certain compensation terms within the Advisory Agreements and a summary of the Administration Agreement is below.
Advisory Agreements
Pursuant to each of the Advisory Agreements, our Adviser is compensated in the
form of a base management fee and, each as applicable, an incentive fee, a
capital gains fee, and a termination fee. Our Adviser does not charge
acquisition or disposition fees when we acquire or dispose of properties, as is
common in other externally-managed REITs. The base management and incentive fees
are described below. For information on the capital gains and termination fees,
refer to Note 6, "Related-Party Transactions-Our Adviser and
Administrator-Advisory Agreements," within the accompanying notes to our
condensed consolidated financial statements.
31
--------------------------------------------------------------------------------Base Management Fee
Pursuant to the Prior Advisory Agreement, through
Pursuant to the Current Advisory Agreement, beginning with the three months
ended
Incentive Fee
Pursuant to each of the Advisory Agreements, an incentive fee is calculated and payable quarterly in arrears if the Pre-Incentive Fee FFO for a particular quarter exceeded a hurdle rate of 1.75% (7.0% annualized) of the prior calendar quarter's Total Adjusted Common Equity. For purposes of this calculation, Pre-Incentive Fee FFO is defined in the Advisory Agreement as FFO (also as defined in the Advisory Agreement) accrued by the Company during the current calendar quarter (prior to any incentive fee calculation for the current calendar quarter), less any dividends declared on preferred stock securities that were not treated as a liability for GAAP purposes. In addition, Total Adjusted Common Equity is defined as common stockholders' equity plus non-controlling common interests in ourOperating Partnership , if any (each as reported on our balance sheet), adjusted to exclude unrealized gains and losses and certain other one-time events and non-cash items. Our Adviser would receive: (i) no Incentive Fee in any calendar quarter in which the Pre-Incentive Fee FFO did not exceed the hurdle rate; (ii) 100% of the Pre-Incentive Fee FFO with respect to that portion of such Pre-Incentive Fee FFO, if any, that exceeded the hurdle rate but was less than 2.1875% in any calendar quarter (8.75% annualized); and (iii) 20% of the amount of the Pre-Incentive Fee FFO, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).
Administration Agreement
Pursuant to the Administration Agreement, we pay for our allocable portion of the Administrator's expenses incurred while performing its obligations to us, including, but not limited to, rent and the salaries and benefits expenses of our Administrator's employees, including our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator's president, general counsel, and secretary), and their respective staffs. Our allocable portion of the Administrator's expenses is generally derived by multiplying our Administrator's total expenses by the approximate percentage of time the Administrator's employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under similar contractual agreements.
Smaller Reporting Company Status
As ofDecember 31, 2018 , and throughSeptember 30, 2022 , we qualified as a "smaller reporting company" under Rule 12b-2 of the Exchange Act because we had annual revenues of less than$100 million for the previous year and a public float of less than$700 million as of the last business day of our previous second fiscal quarter. As a smaller reporting company, we are permitted to take advantage of reduced disclosure requirements for our public filings. We will no longer qualify as a smaller reporting company beginning with the year endingDecember 31, 2022 , due to our public float as of the last business day of our current second fiscal quarter exceeding the$700 million threshold.
Critical Accounting Policies
The preparation of our financial statements in accordance withU.S. generally accepted accounting principles ("GAAP") requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and, as a result, actual results could materially differ from these estimates. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial statements in our Form 10-K. There were no material changes to our critical accounting policies during the nine months endedSeptember 30, 2022 .
RESULTS OF OPERATIONS
For the purposes of the following discussions on certain operating revenues and expenses:
•With regard to the comparison between the three months ended
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•Same-property basis represents farms owned as of
•Properties acquired or disposed of are farms that were either acquired or disposed of at any point subsequent toJune 30, 2021 . FromJuly 1, 2021 , throughSeptember 30, 2022 , we acquired 17 new farms and did not have any farm dispositions.
•With regard to the comparison between the nine months ended
•Same-property basis represents farms owned as of
•Properties acquired or disposed of are farms that were either acquired or disposed of at any point subsequent toDecember 31, 2020 . FromJanuary 1, 2021 , throughSeptember 30, 2022 , we acquired 32 new farms and did not have any farm dispositions.
We did not have any vacant or self-operated farms during either of the three and
nine months ended
A comparison of results of components comprising our operating income for the three and nine months endedSeptember 30, 2022 and 2021 is below (dollars in thousands): For the Three Months Ended September 30, 2022 2021 $ Change % Change Operating revenues: Lease revenues: Fixed lease payments$ 21,178 $ 17,791 $ 3,387 19.0% Variable lease payments - participation rents 3,003 1,800 1,203 66.8% Variable lease payments - tenant reimbursements 28 - 28 100.0% Total operating revenues 24,209 19,591 4,618 23.6% Operating expenses: Depreciation and amortization 9,146 6,944 2,202 31.7% Property operating expenses 706 696 10 1.4% Base management and incentive fees 2,591 2,693 (102) (3.8)% Administration fee 543 412 131 31.8% General and administrative expenses 729 462 267 57.8% Write-off of costs associated with Series C cumulative redeemable preferred stock 851 - 851 100.0% Total operating expenses 14,566 11,207 3,359 30.0% Operating income$ 9,643 $ 8,384 $ 1,259 15.0% 33
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For the Nine Months Ended
September 30,
2022 2021 $ Change % Change
Operating revenues:
Lease revenues:
Fixed lease payments $ 61,387 $ 50,607 $ 10,780 21.3%
Variable lease payments - participation rents 3,024 1,845 1,179 63.9%
Variable lease payments - tenant reimbursements 34 66 (32) (48.5)%
Total operating revenues 64,445 52,518 11,927 22.7%
Operating expenses:
Depreciation and amortization 25,883 19,280 6,603 34.2%
Property operating expenses 2,103 2,031 72 3.5%
Base management and incentive fees 7,801 6,601 1,200 18.2%
Administration fee 1,470 1,115 355 31.8%
General and administrative expenses 1,983 1,582 401 25.3%
Write-off of costs associated with Series C
cumulative redeemable preferred stock 851 - 851 100.0%
Total operating expenses 40,091 30,609 9,482 31.0%
Operating income $ 24,354 $ 21,909 $ 2,445 11.2%
Operating Revenues
Lease revenues
The following table provides a summary of our lease revenues during the three
and nine months ended
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Same-property basis:
Fixed lease payments $ 17,316 $ 17,238 $ 78 0.5% $ 48,061 $ 47,965 $ 96 0.2%
Participation rents 3,003 1,800 1,203 66.8% 3,024 1,845 1,179 63.9%
Total - Same-property basis 20,319 19,038 1,281 6.7% 51,085 49,810 1,275 2.6%
Properties acquired or
disposed of 3,862 553 3,309 598.4% 13,326 2,642 10,684 404.4%
Tenant reimbursements(1) 28 - 28 100.0% 34 66 (32) (48.5)%
Total Lease revenues $ 24,209 $ 19,591 $ 4,618 23.6% $ 64,445 $ 52,518 $ 11,927 22.7%
(1)Tenant reimbursements generally represent tenant-reimbursed property
operating expenses on certain of our farms, including property taxes, insurance
premiums, and other property-related expenses. Similar amounts are also recorded
as property operating expenses during the respective periods.
Same-property Basis - 2022 compared to 2021
Lease revenues from fixed lease payments increased primarily due to certain new leases, amendments, and renewals executed at higher rental rates and additional rents earned on capital improvements completed on certain of our farms. The increase in fixed lease payments was partially offset by a decrease due to certain lease amendments and renewals executed, through which we decreased the fixed base rent component in exchange for either adding a participation rent component to the lease structure or reducing certain operating expenses for which the landlord was previously responsible. Participation rents related to these leases, if any, are expected to be recorded during the three months endingDecember 31, 2022 .
Lease revenues from participation rents increased primarily due to more farms having scheduled participation rent payments due during 2022 compared to 2021.
Other - 2022 compared to 2021
Lease revenue from properties acquired or disposed of increased primarily due to
additional revenues earned on new farms acquired subsequent to
34
--------------------------------------------------------------------------------The fluctuations in tenant reimbursement revenue are primarily driven by payments made by certain tenants on our behalf (pursuant to the lease agreements) to unconsolidated entities of ours that convey water to the respective properties. As such, the timing of revenue fluctuates as payments are made by our tenants.
Operating Expenses
Depreciation and amortization
Depreciation and amortization expense increased primarily due to additional depreciation and amortization expense incurred on new farms acquired subsequent toDecember 31, 2020 , as well as an increase in depreciation associated with additional capital expenditures on certain of our farms. This increase was partially offset by a decrease attributable to asset dispositions on certain of our farms and the expiration of certain lease intangible amortization periods.
Property operating expenses
Property operating expenses consist primarily of real estate taxes, repair and maintenance expense, insurance premiums, and other miscellaneous operating expenses paid for certain of our properties. The following table provides a summary of the property-operating expenses recorded during the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change Same-property basis$ 649 $ 665 $ (16) (2.4)%$ 1,963 $ 1,891 $ 72 3.8% Properties acquired or disposed of 19 21 (2) (9.5)% 79 52 27 51.9% Tenant-reimbursed property operating expenses(1) 38 10 28 280.0% 61 88 (27) (30.7)% Total Property operating expenses$ 706 $ 696 $ 10 1.4%$ 2,103 $ 2,031 $ 72 3.5% (1)Represents certain operating expenses (property taxes, insurance premiums, and other property-related expenses) paid by us that, per the respective leases, are required to be reimbursed to us by the tenant. Similar amounts are also recorded as lease revenue when earned in accordance with the lease.
Same-property Basis - 2022 compared to 2021
Property operating expenses increased for the nine months endedSeptember 30, 2022 , primarily due to higher property tax expenses, as well as additional legal fees incurred in connection with protecting water rights on certain farms inCalifornia . This increase was partially offset by a decrease in costs associated with our limited obligation to reimburse one of our tenants for certain water usage in accordance with the lease terms during the prior-year period, which obligation expired onDecember 31, 2021 .
Other - 2022 compared to 2021
The fluctuations in tenant-reimbursed property operating expenses are primarily driven by miscellaneous property operating costs incurred by us in connection with our ownership interests in certain unconsolidated entities, for which our tenants are contractually obligated to reimburse us under the terms of the respective leases. Such expenses will fluctuate commensurate with the timing and amount of miscellaneous operating cost incurred by the underlying entities.
Related-Party Fees
The following table provides the calculations of the base management and incentive fees due to our Adviser pursuant to the Prior Advisory Agreement (which was in effect fromJanuary 1, 2020 , throughJune 30, 2021 ) and the Current Advisory Agreement (which has been in effect sinceJuly 1, 2021 ) for each of the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands; for further discussion on certain defined terms used below, refer to Note 6, "Related-Party Transactions," within the accompanying notes to our condensed consolidated financial statements): 35 --------------------------------------------------------------------------------
Quarter Ended
March 31 June 30 September 30 Year to Date
FY 2022 Fee Calculations:
Base Management Fee:
Gross Tangible Real
Estate(1)(2) $ 1,357,800 $ 1,361,757 $ 1,390,646
Quarterly rate 0.150 % 0.150 % 0.150 %
Base management fee(3) $ 2,036 $ 2,043 $ 2,086 $ 6,165
Incentive Fee:
Total Adjusted Common
Equity(1)(2) $ 378,299 $ 381,201 $ 364,955
First hurdle quarterly
rate 1.750 % 1.750 % 1.750 %
First hurdle threshold $ 6,620 $ 6,671 $ 6,387
Second hurdle quarterly
rate 2.1875 % 2.1875 % 2.1875 %
Second hurdle threshold $ 8,275 $ 8,339 $ 7,983
Pre-Incentive Fee FFO(1) $ 7,751 $ 4,819 $ 6,892
100% of Pre-Incentive Fee
FFO in excess of first
hurdle threshold, up to
second hurdle threshold $ 1,131 $ - $ 505
20% of Pre-Incentive Fee
FFO in excess of second
hurdle threshold - - -
Total Incentive fee(3) $ 1,131 $ - $ 505 $ 1,636
Total fees due to Adviser,
net $ 3,167 $ 2,043 $ 2,591 $ 7,801
FY 2021 Fee Calculations:
Base Management Fee:
Gross Tangible Real
Estate(1)(2) $ 1,095,440 $ 1,101,071 $ 1,165,366
Quarterly rate 0.125 % 0.125 % 0.150 %
Base management fee(3) $ 1,370 $ 1,376 $ 1,748 $ 4,494
Incentive Fee:
Total Adjusted Common
Equity(1)(2) $ 228,161 $ 248,501 $ 304,164
First hurdle quarterly
rate 1.750 % 1.750 % 1.750 %
First hurdle threshold $ 3,993 $ 4,349 $ 5,323
Second hurdle quarterly
rate 2.1875 % 2.1875 % 2.1875 %
Second hurdle threshold $ 4,991 $ 5,436 $ 6,654
Pre-Incentive Fee FFO(1) $ 5,810 $ 3,867 $ 6,268
100% of Pre-Incentive Fee
FFO in excess of first
hurdle threshold, up to
second hurdle threshold $ 998 $ - $ 945
20% of Pre-Incentive Fee
FFO in excess of second
hurdle threshold 164 - -
Total Incentive fee(3) $ 1,162 $ - $ 945 $ 2,107
Total fees due to Adviser,
net $ 2,532 $ 1,376 $ 2,693 $ 6,601 (1)As defined in the Advisory Agreements. (2)As of the end of the respective prior quarters. (3)Reflected as a line item on our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.
36
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The base management fee increased primarily due to additional assets acquired
since December 31, 2020 , and an increase in the annual rate applied to the prior
calendar quarter's Gross Tangible Real Estate Assets (from 0.50% pursuant to the
Prior Advisory Agreement to 0.60% pursuant to the Current Advisory Agreement),
effective July 1, 2021 .
Our Adviser earned incentive fees during each of the three and nine months ended
September 30, 2022 and 2021 due to our Pre-Incentive Fee FFO (as defined in the
Advisory Agreements) exceeding the required hurdle rate of the applicable equity
base during each of the first and third quarters of fiscal years 2022 and 2021.
The administration fee paid to our Administrator increased primarily due to hiring additional personnel and us using a higher overall share of our Administrator's resources in relation to those used by other funds and affiliated companies serviced by our Administrator.
Other Operating Expenses
General and administrative expenses consist primarily of professional fees, director fees, stockholder-related expenses, overhead insurance, acquisition-related costs for investments no longer being pursued, and other miscellaneous expenses. General and administrative expenses increased for each of the three and nine months endedSeptember 30, 2022 , as compared to the respective prior-year periods, primarily due to an increase in professional fees (driven by higher audit fees and appraisal costs) and, for the three months endedSeptember 30, 2022 , an increase in acquisition-related costs for investments no longer being pursued. During each of the three and nine months endedSeptember 30, 2022 , we wrote off approximately$851,000 of costs (including approximately$798,000 of unamortized deferred offering costs) related to the Series C Offering due to an amendment that reduced the amount of shares of Series C Preferred Stock to be offered. See Note 8, "Equity-Equity Issuances-Series C Preferred Stock," in the accompanying notes to our condensed consolidated financial statements for additional discussion of the amendment of the Series C Offering.
A comparison of results of other components contributing to net loss
attributable to common stockholders for the three and nine months ended
For the Three Months Ended
September 30,
2022 2021 $ Change % Change
Operating income $ 9,643 $ 8,384 $ 1,259 15.0%
Other income (expense):
Other income 237 20 217 1,085.0%
Interest expense (6,476) (6,126) (350) 5.7%
Dividends declared on Series A and Series D
cumulative term preferred stock (755) (755) - -%
Loss on dispositions of real estate assets, net (819) (1) (818) 81,800.0%
Loss from investments in unconsolidated entities (24) (19) (5) 26.3%
Total other expense, net (7,837) (6,881) (956) 13.9%
Net income 1,806 1,503 303 20.2%
Net income attributable to non-controlling interests (2) (8) 6 (75.0)%
Net income attributable to the Company 1,804 1,495 309 20.7%
Dividends declared on and charges related to Series B and Series C cumulative redeemable preferred stock (5,398)
(3,134) (2,264) 72.2%
Net loss attributable to common stockholders
119.3%
37
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For the Nine Months Ended
September 30,
2022 2021 $ Change % Change
Operating income $ 24,354 $ 21,909 $ 2,445 11.2%
Other income (expense):
Other income 3,067 2,274 793 34.9%
Interest expense (19,446) (18,460) (986) 5.3%
Dividends declared on Series A and Series D
cumulative term preferred stock (2,264) (2,314) 50 (2.2)%
Loss on dispositions of real estate assets, net (2,100) (1,841) (259) 14.1%
Property and casualty recovery, net 49 - 49 100.0%
Loss from investments in unconsolidated entities (54) (42) (12) 28.6%
Total other expense, net (20,748) (20,383) (365) 1.8%
Net income 3,606 1,526 2,080 136.3%
Net income attributable to non-controlling interests (9) (8) (1) 12.5%
Net income attributable to the Company 3,597 1,518 2,079 137.0%
Dividends declared on and charges related to Series B and Series C cumulative redeemable preferred stock (13,801)
(8,837) (4,964) 56.2%
Net loss attributable to common stockholders
39.4%
Other Income (Expense)
Other income, which generally consists of interest patronage received from Farm Credit (as defined in Note 4, "Borrowings," in the accompanying notes to our condensed consolidated financial statements) and interest earned on short-term investments, increased primarily driven by additional interest patronage received from Farm Credit (primarily due to increased borrowings from Farm Credit) and higher interest rates earned on short-term investments. During the three months endedMarch 31, 2022 , we recorded approximately$2.8 million of interest patronage from Farm Credit related to interest accrued during 2021, and during the three months endedSeptember 30, 2022 , we received approximately$113,000 of interest patronage, as certain Farm Credit associations paid a portion of the 2023 interest patronage (which relates to interest accrued during 2022) early. In the aggregate, we recorded approximately$2.9 million of interest patronage from Farm Credit during the three months endedSeptember 30, 2022 , as compared to approximately$2.2 million of interest patronage recorded during the prior-year period. 2021 interest patronage (which was recorded during the three months endedMarch 31, 2022 ), resulted in a 29.9% reduction (approximately 137 basis points) to the interest rate of such borrowings. Interest expense increased, primarily due to increased overall borrowings. The weighted-average principal balance of our aggregate borrowings (excluding our Series A Term Preferred Stock and Series D Term Preferred Stock) outstanding for the three and nine months endedSeptember 30, 2022 , was approximately$649.2 million and$660.1 million , respectively, as compared to approximately$627.6 million and$629.2 million for the respective prior-year periods. Excluding interest patronage received on certain of our Farm Credit borrowings and the impact of debt issuance costs, the overall effective interest rate charged on our aggregate borrowings for the three and nine months endedSeptember 30, 2022 , was 3.82% and 3.76%, respectively, as compared to 3.74% and 3.72% for the respective prior-year periods.
Losses on dispositions of real estate assets related to the disposals of certain irrigation and other improvements on certain of our farms.
The aggregate dividends paid on our Series B Preferred Stock and Series C Preferred Stock increased due to additional shares issued and outstanding during the current-year periods.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our current short- and long-term sources of funds include cash and cash equivalents, cash flows from operations, borrowings (including the undrawn commitments available under our credit facility with Metropolitan Life Insurance Company "MetLife")), and issuances of additional equity securities. Our current available liquidity is approximately$176.2 million , consisting of approximately$48.9 million in cash on hand and, based on the current level of collateral pledged, approximately$127.3 million of availability under our credit facility with MetLife (subject to compliance with covenants) and other undrawn 38 -------------------------------------------------------------------------------- notes or bonds. In addition, we currently have certain properties valued at a total of approximately$105.9 million that are unencumbered and eligible to be pledged as collateral. Over 99% of our borrowings are currently at fixed rates, and on a weighted-average basis, these rates are fixed at an effective interest rate of 3.26% for another five-plus years. In addition, the weighted-average remaining term of our notes and bonds payable is approximately 9.5 years. As such, with respect to our current borrowings, we have experienced minimal impact from the recent increases in interest rates, and we believe we are well-protected against any future interest rate increases. Despite ongoing volatility in the markets, based on discussions with our lenders, we do not believe there will be a credit freeze on agricultural lending in the near term. We are in compliance with all of our debt covenants under our respective credit facilities and borrowings, and we believe we currently have adequate liquidity to cover all near- and long-term debt obligations and operating expenses.
Future Capital Needs
Our short- and long-term liquidity requirements consist primarily of making distributions to stockholders (including to non-controlling OP Unitholders, if any) to maintain our qualification as a REIT, funding our general operating costs, making principal and interest payments on outstanding borrowings, making dividend payments on our Series B Preferred Stock, Series C Preferred Stock, and Series D Term Preferred Stock, and, as capital is available, funding new farmland and farm-related acquisitions consistent with our investment strategy. We believe that our current and short-term cash resources will be sufficient to fund our distributions to stockholders (including non-controlling OP Unitholders, if any), service our debt, pay dividends on our Series B Preferred Stock, Series C Preferred Stock, and Series D Term Preferred Stock, and fund our current operating costs in the near term. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances (including, but not limited to, shares of common stock through our ATM Program, OP Units through ourOperating Partnership as consideration for future acquisitions, and shares of our Series C Preferred Stock), long-term mortgage indebtedness and bond issuances, and other secured and unsecured borrowings. We intend to use a significant portion of any current and future available liquidity to purchase additional farms and farm-related facilities. We continue to actively seek and evaluate acquisitions of additional farms and farm-related facilities that satisfy our investment criteria, and we have several properties that are in various stages of our due diligence process. However, all potential acquisitions will be subject to our due diligence investigation of such properties, and there can be no assurance that we will be successful in identifying or acquiring any properties in the future.
Operating Commitments and Obligations
Operating Obligations
In connection with the execution of certain lease agreements, we have committed to provide capital improvements on certain of our farms. Below is a summary of certain of those projects for which we have incurred or accrued costs asSeptember 30, 2022 (dollars in thousands):
Obligated Amount Expended
Farm Farm Total Completion or Accrued as of
Location(s) Acreage Commitment Date(1) September 30, 2022
Hillsborough, FL 55 $ 2,250 (2) Q4 2022 $ 1,681
Charlotte, FL 975 3,000 (2) Q4 2022 2,841
St. Lucie, FL 549 230 Q3 2023 148
Umatilla, OR 135 2,750 (2) Q4 2023 2,233
Columbia, OR 157 1,800 (2) Q3 2024 1,146
Napa, CA 270 1,635 (2) Q4 2029 766
Wicomico & Caroline, MD, 833 115 Q3 2030 49
and Sussex, DE
Franklin & Grant, WA, and 1,126 2,169 (2) Q4 2032 134
Umatilla, OR
(1)Our obligation to provide capital to fund these improvements does not extend
beyond these respective dates.
(2)Pursuant to contractual agreements, we will earn additional rent on the cost
of these capital improvements as the funds are disbursed by us.
Ground Lease Obligations
In connection with certain farms acquired through a leasehold interest, we assumed certain ground lease arrangements under which we are the lessee. Future minimum lease payments due under the remaining non-cancelable terms of these leases as ofSeptember 30, 2022 , is as follows (dollars in thousands): 39 -------------------------------------------------------------------------------- Future Lease Period Payments(1)
For the remaining three months ending
December 31: 2022 $ 40
For the fiscal years ending December
31: 2023 92
2024 92
2025 62
2026 62
2027 62
Thereafter 693
Total undiscounted lease payments 1,103
Less: imputed interest (457)
Present value of lease payments $ 646
(1)Certain annual lease payments are set at the beginning of each year to then-current market rates (as determined by the lessor). The amounts shown above represent estimated amounts based on the lease rates currently in place.
As a result of these ground leases, we recorded lease expense (included within Property operating expenses on the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income) of approximately$23,000 and$69,000 during the three and nine months endedSeptember 30, 2022 , respectively, and approximately$22,000 and$58,000 during the three and nine months endedSeptember 30, 2021 , respectively.
Cash Flow Resources
The following table summarizes total net cash flows from operating, investing, and financing activities for the nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): For the Nine Months Ended September 30, 2022 2021 $ Change % Change Net change in cash from: Operating activities$ 23,073 $ 20,356 $ 2,717 13.3% Investing activities (78,627) (149,501) 70,874 (47.4)% Financing activities 75,852 186,418 (110,566) (59.3)%
Net change in Cash and cash equivalents
(64.6)%
Operating Activities
The majority of cash from operating activities is generated from the rental
payments we receive from our tenants, which is first used to fund our
property-level operating expenses, with any excess cash being primarily used for
principal and interest payments on our borrowings, management fees to our
Adviser, administrative fees to our Administrator, and other corporate-level
expenses. Cash provided by operating activities increased primarily due to
additional fixed lease (from recent acquisitions) and participation rental
payments (due to more farms having scheduled participation rents) and interest
patronage received from Farm Credit, partially offset by an increase in fees
paid to our Adviser and increases in the amount of interest payments made.
Investing Activities
The decrease in cash used in investing activities was primarily due to a decrease in aggregate cash paid for acquisitions of new farms, partially offset by an increase in the amount of cash paid for capital improvements on existing farms during the current-year period.
Financing Activities
The decrease in cash provided by financing activities was primarily due to the issuance of our Series D Term Preferred Stock in the first quarter of 2021 (which, after voluntarily redeeming our Series A Term Preferred Stock in full, resulted in net cash proceeds of approximately$31.6 million ), a decrease in aggregate net cash proceeds received from equity offerings (including our common stock and the Series C Preferred Stock) of approximately$17.0 million , and a decrease in aggregate net borrowings of approximately$50.2 million . In addition, during the nine months endedSeptember 30, 2022 , we paid approximately$7.7 million to redeem 204,778 OP Units. 40 --------------------------------------------------------------------------------
MetLife Facility
As amended inFebruary 2022 , our facility with MetLife currently consists of$75.0 million of revolving equity lines of credit and an aggregate of$175.0 million of term notes (the "2022 MetLife Facility"). We currently have$100,000 outstanding under the lines of credit and$36.9 million outstanding on the term notes. While$213.0 million of the full commitment amount under the 2022 MetLife Facility remains undrawn, based on the current level of collateral pledged, we currently have approximately$110.3 million of availability under the 2022 MetLife Facility. The draw period for the 2020 MetLife Term Note expires onDecember 31, 2022 , and the draw period for the 2022 MetLife Term Note expires onDecember 31, 2024 (see Note 4, "Borrowings-MetLife Facility," within the accompanying notes to our condensed consolidated financial statements for information on certain defined terms). After these dates, MetLife has no obligation to disburse any additional undrawn funds under the term notes.
Farmer
As amended inDecember 2020 , our agreement with Federal Agricultural Mortgage Corporation ("Farmer Mac") provides for bond issuances up to an aggregate amount of$225.0 million (the "FarmerMac Facility ") byMay 31, 2023 , after which Farmer Mac has no obligation to purchase additional bonds under this facility. To date, we have issued aggregate bonds of approximately$100.1 million under the FarmerMac Facility .
Farm Credit and Other Lenders
SinceSeptember 2014 , we have closed on multiple loans with various different Farm Credit associations (for additional information on these associations, see Note 4, "Borrowings," within the accompanying notes to our condensed consolidated financial statements). We also have borrowing relationships with several other agricultural lenders and are continuously reaching out to other lenders to establish prospective new relationships. As such, we expect to enter into additional borrowing agreements with existing and new lenders in connection with certain potential new acquisitions in the future.
Equity Capital
The following table provides information on equity sales that have occurred
since
Weighted-average
Number of Offering Price
Type of Issuance Shares Sold Per Share Gross Proceeds Net Proceeds(1)
Series C Preferred
Stock(2)(3) 6,313,502 $ 24.76 $ 156,319 $ 143,632
Common Stock - ATM Program 493,992 30.50 15,068 14,892
(1)Net of selling commissions and dealer-manager fees or underwriting discounts
and commissions (in each case, as applicable).
(2)Excludes share redemptions.
(3)Excludes approximately 30,288 shares issued pursuant to the DRIP.
Our Registration Statement (as defined in Note 8, "Equity-Registration
Statement," within the accompanying notes to our condensed consolidated
financial statements) permits us to issue up to an aggregate of $1.0 billion in
securities (including up to approximately $259.6 million reserved for issuance
of shares of the Series C Preferred Stock), consisting of common stock,
preferred stock, warrants, debt securities, depository shares, subscription
rights, and units, including through separate, concurrent offerings of two or
more of such securities. To date, we have issued approximately $243.9 million of
Series C Preferred Stock (including approximately $872,000 issued pursuant to
the DRIP), $60.4 million of Series D Term Preferred Stock, and $260.6 million of
common stock (including common stock issued to redeem OP Units) under the
Registration Statement.
In addition, we have the ability to, and expect to in the future, issue additional OP Units to third parties as consideration in future property acquisitions.
Off-Balance Sheet Arrangements
As of
NON-GAAP FINANCIAL INFORMATION
Funds from Operations, Core Funds from Operations, and Adjusted Funds from Operations
41
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The National Association of Real Estate Investment Trusts ("NAREIT") developed
funds from operations ("FFO") as a relative non-GAAP supplemental measure of
operating performance of an equity REIT to recognize that income-producing real
estate historically has not depreciated on the same basis as determined under
GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with
GAAP), excluding gains or losses from sales of property and impairment losses on
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. We further
present core FFO ("CFFO") and adjusted FFO ("AFFO") as additional non-GAAP
financial measures of our operational performance, as we believe both CFFO and
AFFO improve comparability on a period-over-period basis and are more useful
supplemental metrics for investors to use in assessing our operational
performance on a more sustainable basis than FFO. We believe that these
additional performance metrics, along with the most directly-comparable GAAP
measure, provide investors with helpful insight regarding how management
measures our ongoing performance, as each of CFFO and AFFO (and their respective
per-share amounts) are used by management and our board of directors, as
appropriate, in assessing overall performance, as well as in certain
decision-making analysis, including, but not limited to, the timing of
acquisitions and potential equity raises (and the type of securities to offer in
any such equity raises), the determination of any fee credits, and declarations
of distributions on our common stock. The non-GAAP financial measures presented
herein have limitations as analytical tools and should not be considered in
isolation or as a substitute for an analysis of our results calculated in
accordance with GAAP. We believe that net income is the most directly-comparable
GAAP measure to each of FFO, CFFO, and AFFO.
Specifically, we believe that FFO is helpful to investors in better
understanding our operating performance, primarily because its calculation
excludes depreciation and amortization expense on real estate assets, as we
believe that GAAP historical cost depreciation of real estate assets is
generally not correlated with changes in the value of those assets, particularly
with farmland real estate, the value of which does not diminish in a predictable
manner over time, as historical cost depreciation implies. Further, we believe
that CFFO and AFFO are helpful in understanding our operating performance in
that it removes certain items that, by their nature, are not comparable on a
period-over-period basis and therefore tend to obscure actual operating
performance. In addition, we believe that providing CFFO and AFFO as additional
performance metrics allows investors to gauge our overall performance in a
manner that is more similar to how our performance is measured by management
(including their respective per-share amounts), as well as by analysts and the
overall investment community.
We calculate CFFO by adjusting FFO for the following items:
•Acquisition- and disposition-related expenses. Acquisition- and disposition-related expenses (including due diligence costs on acquisitions not consummated and certain auditing and accounting fees incurred that were directly related to completed acquisitions or dispositions) are incurred for investment purposes and do not correlate with the ongoing operations of our existing portfolio. Further, certain auditing and accounting fees incurred vary depending on the number and complexity of acquisitions or dispositions completed during the period. Due to the inconsistency in which these costs are incurred and how they have historically been treated for accounting purposes, we believe the exclusion of these expenses improves comparability of our operating results on a period-to-period basis. Other adjustments. We will adjust for certain non-recurring charges and receipts and will explain such adjustments accordingly. We believe the exclusion of these amounts improves comparability of our operating results on a period-to-period basis and will apply consistent definitions of CFFO for all prior-year periods presented to provide consistency and better comparability.
Further, we calculate AFFO by adjusting CFFO for the following items:
•Rent adjustments. This adjustment removes the effects of straight-lining rental income, as well as the amortization related to above-market lease values and lease incentives and accretion related to below-market lease values, other deferred revenue, and tenant improvements, resulting in rental income reflected on a modified accrual cash basis. In addition to these adjustments, we also modify the calculation of cash rents within our definition of AFFO to provide greater consistency and comparability due to the period-to-period volatility in which cash rents are received. To coincide with our tenants' harvest seasons, our leases typically provide for cash rents to be paid at various points throughout the lease year, usually annually or semi-annually. As a result, cash rents received during a particular period may not necessarily be comparable to other periods or represent the cash rents indicative of a given lease year. Therefore, we further adjust AFFO to normalize the cash rent received pertaining to a lease year over that respective lease year on a straight-line basis, resulting in cash rent being recognized ratably over the period in which the cash rent is earned. •Amortization of debt issuance costs. The amortization of costs incurred to obtain financing is excluded from AFFO, as it is a non-cash expense item that is not directly related to the operating performance of our properties.
•Other adjustments. We will adjust for certain non-cash charges and receipts and will explain such adjustments accordingly. We believe the exclusion of such non-cash amounts improves comparability of our operating results on a
42
--------------------------------------------------------------------------------period-to-period basis and will apply consistent definitions of AFFO for all prior-year periods presented to provide consistency and better comparability.
We believe the foregoing adjustments aid our investors' understanding of our ongoing operational performance.
FFO, CFFO and AFFO do not represent cash flows from operating activities in
accordance with GAAP, which, unlike FFO, CFFO, and AFFO, generally reflects all
cash effects of transactions and other events in the determination of net
income, and should not be considered an alternative to net income as an
indication of our performance or to cash flows from operations as a measure of
liquidity or ability to make distributions. Comparisons of FFO, CFFO, and AFFO,
using the NAREIT definition for FFO and the definitions above for CFFO and AFFO,
to similarly-titled measures for other REITs may not necessarily be meaningful
due to possible differences in the definitions used by such REITs.
Diluted funds from operations ("Diluted FFO"), diluted core funds from
operations ("Diluted CFFO"), and diluted adjusted funds from operations
("Diluted AFFO") per share are FFO, CFFO, and AFFO, respectively, divided by the
weighted-average number of total shares (including shares of our common stock
and OP Units held by non-controlling limited partners) outstanding on a
fully-diluted basis during a period. We believe that diluted earnings per share
is the most directly-comparable GAAP measure to each of Diluted FFO, CFFO, and
AFFO per share. Because many REITs provide Diluted FFO, CFFO, and AFFO per share
information to the investment community, we believe these are useful
supplemental measures when comparing us to other REITs.
We believe that FFO, CFFO, and AFFO and Diluted FFO, CFFO, and AFFO per share
are useful to investors because they provide investors with a further context
for evaluating our FFO, CFFO, and AFFO results in the same manner that investors
use net income and EPS in evaluating net income.
The following table provides a reconciliation of our FFO, CFFO, and AFFO for the
three and nine months ended September 30, 2022 and 2021 to the most
directly-comparable GAAP measure, net income, and a computation of diluted FFO,
CFFO, and AFFO per share, using the weighted-average number of total shares
(including shares of our common stock and OP Units held by non-controlling OP
Unitholders) outstanding during the respective periods (dollars in thousands,
except per-share amounts):
For the Three Months Ended September For the Nine Months Ended September
30, 30,
2022 2021 2022 2021
Net income $
1,806
(5,398) (3,134) (13,801) (8,837)
Net loss attributable to common stockholders and
non-controlling OP Unitholders (3,592) (1,631) (10,195) (7,311)
Plus: Real estate and intangible depreciation and amortization 9,146
6,944 25,883 19,280
Plus: Losses on dispositions of real estate assets, net 819 1 2,100 1,841
Adjustments for unconsolidated entities(2) 14 9 38 28
FFO available to common stockholders and non-controlling OP Unitholders
6,387 5,323 17,826 13,838
Plus: Acquisition- and disposition-related expenses, net 150 44 169 185
Plus: Other nonrecurring charges, net(3) 851 - 803 56
CFFO available to common stockholders and non-controlling OP Unitholders
7,388 5,367 18,798 14,079
Net rent adjustment (759) (481) (2,208) (1,487)
Plus: Amortization of debt issuance costs 269 264 817 905
Plus: Other non-cash charges(4) 264 101 606 164
AFFO available to common stockholders and non-controlling OP Unitholders
7,162 5,251 18,013 13,661
Weighted-average common stock outstanding-basic and diluted 34,607,440
31,362,423 34,472,018 29,215,628
Weighted-average common non-controlling OP Units outstanding - 204,778 82,511 153,021
Weighted-average total common shares outstanding 34,607,440 31,567,201 34,554,529 29,368,649
Diluted FFO per weighted-average total common share $
0.18
$
0.21
$
0.21
Distributions declared per total common share $
0.14
43
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(1)Includes (i) cash dividends paid on our Series B Preferred Stock and Series C
Preferred Stock, (ii) the value of additional shares of Series C Preferred Stock
issued pursuant to the DRIP, and (iii) the pro-rata write-off of offering costs
related to shares of Series C Preferred Stock that were redeemed during the
respective periods.
(2)Represents our pro-rata share of depreciation expense recorded in
unconsolidated entities during the respective periods.
(3)Consists primarily of (i) costs related to the reduction in size of the
Series C Offering that were expensed during the three months ended September 30,
2022 , (ii) net property and casualty recoveries recorded, net of the cost of
related repairs expensed, as a result of the damage caused to certain irrigation
improvements by natural disasters on certain of our properties, (iii) one-time
listing fees related to our Series D Term Preferred Stock, and (iv) certain
one-time costs related to the early redemption of our Series A Term Preferred
Stock.
(4)Consists of (i) the amount of dividends on the Series C Preferred Stock paid
via issuing new shares (pursuant to the DRIP), (ii) the pro-rata write-off of
offering costs related to shares of Series C Preferred Stock that were redeemed,
which were noncash charges, and (iii) our remaining pro-rata share of (income)
loss recorded from investments in unconsolidated entities during the respective
periods.
Net Asset Value
Real estate companies are required to record real estate using the historical
cost basis of the real estate, adjusted for accumulated depreciation and
amortization, and, as a result, the carrying value of the real estate does not
typically change as the fair value of the assets change. Thus, one challenge is
determining the fair value of the real estate in order to allow stockholders to
see the value of the real estate increase or decrease over time, which we
believe is useful to our investors.
Determination of Fair Value
Our Board of Directors reviews and approves the valuations of our properties pursuant to a valuation policy approved by our Board of Directors (the "Valuation Policy"). Such review and approval occurs in three phases: (i) prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials that are provided by professionals of the Adviser and Administrator, with oversight and direction from the chief valuation officer, who is also employed by the Administrator (collectively, the "Valuation Team"); (ii) the valuation committee of the Board of Directors (the "Valuation Committee"), which is comprised entirely of independent directors, meets to review the valuation recommendations and supporting materials; and (iii) after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee's findings to the entire Board of Directors so that the full Board of Directors may review and approve the fair values of our properties in accordance with the Valuation Policy. Further, on a quarterly basis, the Board of Directors reviews the Valuation Policy to determine if changes thereto are advisable and also reviews whether the Valuation Team has applied the Valuation Policy consistently.
Per the Valuation Policy, our valuations are generally derived based on the following:
•For properties acquired within 12 months prior to the date of valuation, the
purchase price of the property will generally be used as the current fair value
unless overriding factors apply. In situations where OP Units are issued as
partial or whole consideration in connection with the acquisition of a property,
the fair value of the property will generally be the lower of: (i) the
agreed-upon purchase price between the seller and the buyer (as shown in the
purchase and sale agreement or contribution agreement and using the agreed-upon
pricing of the OP Units, if applicable), or (ii) the value as determined by an
independent, third-party appraiser.
•For real estate we acquired more than one year prior to the date of valuation,
we determine the fair value either by relying on estimates provided by
independent, third-party appraisers or through an internal valuation process. In
addition, if significant capital improvements take place on a property, we will
typically have those properties reappraised upon completion of the project by an
independent, third-party appraiser. In any case, we intend to have each property
valued by an independent, third-party appraiser via a full appraisal at least
once every three years, with interim values generally being determined by
either: (i) a restricted appraisal (a "desk appraisal") performed by an
independent, third-party appraiser, or (ii) our internal valuation process.
Various methodologies were used, both by the appraisers and in our internal
valuations, to determine the fair value of our real estate, including the sales
comparison, income capitalization (or a discounted cash flow analysis), and cost
approaches of valuation. In performing their analyses, the appraisers typically
(i) conducted site visits to the properties (where full appraisals were
performed), (ii) discussed each property with our Adviser and reviewed
property-level information, including, but not limited to, property operating
data, prior appraisals (as available), existing lease agreements, farm acreage,
location, access to water and water rights, potential for future development,
and other property-level information, and (iii) reviewed information from a
variety of sources about regional market conditions applicable to each of our
properties, including, but not limited to, recent sale prices of comparable
farmland, market rents for similar farmland, estimated marketing and exposure
time, market capitalization rates, and the current economic environment, among
others. In performing our internal valuations, we will consider the most recent
appraisal available and use similar methodologies in determining an updated fair
value. We will also obtain updated market data related to the property, such as
updated sales and market rent comparisons and market capitalization rates, and
perform an updated assessment of the tenants' credit risk profiles, among
others. Sources of this data may come from market inputs from recent
acquisitions of our own portfolio of real estate, recent appraisals of
properties we own that are similar
44
--------------------------------------------------------------------------------in nature and in the same region (as applicable) as the property being valued, market conditions and trends we observe in our due diligence process, and conversations with appraisers, brokers, and farmers.
A breakdown of the methodologies used to value our properties and the aggregate value as ofSeptember 30, 2022 , determined by each method is shown in the table below (dollars in thousands, except in footnotes): Number of Total Farm Acre-feet Net Cost Current % of Total Valuation Method Farms Acres Acres of Water Basis(1) Fair Value Fair Value Purchase Price 11 7,199 6,426 -$ 169,605 $ 165,884 10.7% Internal Valuation 3 6,189 4,730 - 20,639 36,000 2.3% Third-party Appraisal(2) 155 101,900
84,612 45,000 1,180,672 1,354,144 87.0%
Total 169 115,288 95,768 45,000 $ 1,370,916 $ 1,556,028 100.0%
(1)Consists of the initial acquisition price (including the costs allocated to
both tangible and intangible assets acquired and liabilities assumed), plus
subsequent improvements and other capitalized costs paid for by us that were
associated with the properties, and adjusted for accumulated depreciation and
amortization.
(2)Appraisals performed between October 2021 and October 2022 .
Some of the significant assumptions used by appraisers and the Valuation Team in
valuing our portfolio as of September 30, 2022 , include land values per farmable
acre, market rental rates per farmable acre and the resulting net operating
income ("NOI") at the property level, and capitalization rates, among others.
These assumptions were applied on a farm-by-farm basis and were selected based
on several factors, including comparable land sales, surveys of both existing
and current market rates, discussions with other brokers and farmers, soil
quality, size, location, and other factors deemed appropriate. A summary of
these significant assumptions is provided in the following table:
Appraisal Assumptions Internal Valuation Assumptions
Range Weighted Range Weighted
(Low - High) Average (Low - High) Average
Land Value (per farmable acre) $707 - $123,280 $ 35,294 $5,512 - $5,512 $ 5,512
Market NOI (per farmable acre) $25 - $4,215 $ 2,165 N/A N/A
Market Capitalization Rate 3.75% - 10.50% 5.66% N/A N/A
Note: Figures in the table above apply only to the farmland portion of our portfolio and exclude assumptions made relating to farm-related facilities (e.g., cooling facilities), and other structures on our properties (e.g., residential housing), as their aggregate value was considered to be insignificant in relation to that of the farmland.
Our Valuation Team reviews the appraisals, including the significant assumptions and inputs used in determining the appraised values, and considers any developments that may have occurred since the time the appraisals were performed. Developments considered that may have an impact on the fair value of our real estate include, but are not limited to, changes in tenant credit profiles, changes in lease terms (such as expirations and notices of non-renewals or to vacate), and potential asset sales (particularly those at prices different from the appraised values of our properties). Management believes that the purchase prices of the farms acquired during the previous 12 months and the most recent appraisals available for the farms acquired prior to the previous 12 months fairly represent the current market values of the properties as ofSeptember 30, 2022 , and, accordingly, did not make any adjustment to these values.
A quarterly roll-forward of the change in our portfolio value for the three
months ended
Total portfolio fair value as ofJune 30, 2022
37,448
Plus net value appreciation during the three months ended
Farms valued via third-party appraisals $
16,700
Total net appreciation for the three months ended
16,700
Total portfolio fair value as ofSeptember 30, 2022
Management also determined fair values of all of its long-term borrowings and preferred stock. Using a discounted cash flow analysis, management determined that the fair value of all long-term encumbrances on our properties as ofSeptember 30, 2022 , was approximately$581.8 million , as compared to a carrying value (excluding unamortized related debt issuance costs) of approximately$643.2 million . The fair values of our Series B Preferred Stock and Series D Term Preferred Stock were determined using the closing stock prices as ofSeptember 30, 2022 , of$26.13 per share and$24.42 per share, respectively. Finally, pursuant to Financial Industry Regulatory Authority Rule 2310(b)(5), with the assistance of a third-party valuation 45 --------------------------------------------------------------------------------
expert, we determined the estimated value of our Series C Preferred Stock to be
Calculation of Estimated Net Asset Value
To provide our stockholders with an estimate of the fair value of our real
estate assets, we intend to estimate the fair value of our farms and
farm-related properties and provide an estimated net asset value ("NAV") on a
quarterly basis. NAV is a non-GAAP, supplemental measure of financial position
of an equity REIT and is calculated as total equity, adjusted for the increase
or decrease in fair value of our real estate assets and long-term borrowings
(including any preferred stock required to be treated as debt for GAAP purposes)
relative to their respective cost bases. Further, we calculate NAV per common
share by dividing NAV by our total common shares outstanding (consisting of our
common stock and OP Units held by non-controlling limited partners).
The fair values presented above and their usage in the calculation of net asset
value per share presented below have been prepared by and are the responsibility
of management. PricewaterhouseCoopers LLP has neither examined, compiled, nor
performed any procedures with respect to the fair values or the calculation of
net asset value per common share, which utilizes information that is not
disclosed within the financial statements, and, accordingly, does not express an
opinion or any other form of assurance with respect thereto.
As of
Total equity per balance sheet$ 707,226 Fair value adjustment for long-term assets: Less: net cost basis of tangible and intangible real estate $
(1,370,916)
holdings(1)
Plus: estimated fair value of real estate holdings(2)
1,556,028
Net fair value adjustment for real estate holdings 185,112 Fair value adjustment for long-term liabilities: Plus: book value of aggregate long-term indebtedness(3)
703,620
Less: fair value of aggregate long-term indebtedness(3)(4)
(640,765)
Net fair value adjustment for long-term indebtedness 62,855 Estimated NAV 955,193
Less: aggregate fair value of Series B Preferred Stock and Series C
(380,452)
Preferred Stock(5)
Estimated NAV available to common stockholders and non-controlling OP $ 574,741 Unitholders
Total common shares and non-controlling OP Units outstanding 34,704,005 Estimated NAV per common share and OP Unit$ 16.56 (1)Per Net Cost Basis as presented in the table above. (2)Per Current Fair Value as presented in the table above. (3)Includes the principal balances outstanding of all long-term borrowings (consisting of notes and bonds payable) and the Series D Term Preferred Stock. (4)Long-term notes and bonds payable were valued using a discounted cash flow model. The Series D Term Preferred Stock was valued based on its closing stock price as ofSeptember 30, 2022 . (5)The Series B Preferred Stock was valued based on its closing stock price as ofSeptember 30, 2022 , while the Series C Preferred Stock was valued at its liquidation value, as discussed above.
A quarterly roll-forward in the estimated NAV per common share for the three
months ended
Estimated NAV per common share and non-controlling OP Unit as of$ 15.60 June 30, 2022 Less net loss attributable to common stockholders and (0.10) non-controlling OP Unitholders Adjustments for net change in valuations: Net change in unrealized fair value of farmland portfolio(1)$ 0.65 Net change in unrealized fair value of long-term indebtedness
0.55
Net change in valuations 1.20 Less distributions on common stock and non-controlling OP Units (0.14) Plus accretive effect of equity issuances and redemptions, net - Estimated NAV per common share and non-controlling OP Unit as of$ 16.56 September 30, 2022 46
-------------------------------------------------------------------------------- (1)The net change in unrealized fair value of our farmland portfolio consists of three components: (i) an increase of$0.48 per share due to the net appreciation in value of the farms that were valued during the three months endedSeptember 30, 2022 , (ii) an increase of$0.26 per share due to the aggregate depreciation and amortization expense recorded during the three months endedSeptember 30, 2022 , and (iii) a decrease of$0.09 per share due to net asset dispositions or capital improvements made on certain farms that have not yet been considered in the determination of the respective farms' estimated fair values. Comparison of estimated NAV and estimated NAV per common share, using the definitions above, to similarly-titled measures for other REITs may not necessarily be meaningful due to possible differences in the calculation or application of the definition of NAV used by such REITs. In addition, the trading price of our common shares may differ significantly from our most recent estimated NAV per common share calculation. For example, while we estimated our NAV per common share to be$16.56 as ofSeptember 30, 2022 , based on the calculation above, the closing price of our common stock onSeptember 30, 2022 , was$18.10 per share. The determination of estimated NAV is subjective and involves a number of assumptions, judgments, and estimates, and minor adjustments to these assumptions, judgments, or estimates may have a material impact on our overall portfolio valuation. In addition, many of the assumptions used are sensitive to market conditions and can change frequently. Changes in the market environment and other events that may occur during our ownership of these properties may cause the values reported above to vary from the actual fair value that may be obtained in the open market. Further, while management believes the values presented reflect current market conditions, the ultimate amount realized on any asset will be based on the timing of such dispositions and the then-current market conditions. There can be no assurance that the ultimate realized value upon disposition of an asset will approximate the estimated fair value above. 47
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