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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission file number: 001- 36405

 


 

FARMLAND PARTNERS INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Maryland

 

46-3769850

(State of Organization)

 

(IRS Employer

Identification No.)

 

 

 

8670 Wolff Court, Suite 240

Westminster, Colorado

 

80031

(Address of Principal Executive Offices)

 

(Zip Code)

 

(720) 452-3100

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x  Yes   o No

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).   x  Yes   o  No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer

o

 

Accelerated Filer

o

 

 

 

 

 

Non-Accelerated Filer

x  (Do not check if a smaller reporting company)

 

Smaller reporting company

o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes   x  No

 

As of October 30, 2014, 7,731,755 shares of the Registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

Farmland Partners Inc.

 

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2014

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART IFINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements.

 

 

 

 

 

Combined Consolidated Financial Statements

 

 

Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

3

 

Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

4

 

Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

5

 

Notes to Combined Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

50

Item 4.

Controls and Procedures.

51

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

52

Item 1A.

Risk Factors.

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

52

Item 3.

Defaults Upon Senior Securities.

52

Item 4.

Mine Safety Disclosures.

52

Item 5.

Other Information.

53

Item 6.

Exhibits.

53

 



Table of Contents

 

Farmland Partners Inc.

Combined Consolidated Balance Sheets

As of September 30, 2014 and December 31, 2013

(Unaudited)

 

 

 

September 30, 2014

 

December 31, 2013

 

ASSETS

 

 

 

 

 

Land, at cost

 

$

67,994,854

 

$

34,693,573

 

Grain facilities

 

2,563,415

 

2,563,415

 

Groundwater

 

1,742,550

 

 

Irrigation improvements

 

1,555,995

 

768,935

 

Drainage improvements

 

779,975

 

779,975

 

Other

 

88,000

 

 

Real estate, at cost

 

74,724,789

 

38,805,898

 

Less accumulated depreciation

 

(658,364

)

(450,474

)

Total real estate, net

 

74,066,425

 

38,355,424

 

Deposits

 

1,001,851

 

 

Cash

 

63,747,769

 

17,805

 

Deferred financing fees, net

 

251,761

 

133,734

 

Deferred offering costs

 

 

699,013

 

Accounts receivable

 

79,613

 

12,867

 

Accounts receivable, related party

 

137,846

 

450,833

 

Other

 

99,020

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

139,384,285

 

$

39,669,676

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Mortgage notes and bonds payable

 

$

51,454,000

 

$

43,065,237

 

Dividends payable

 

1,016,059

 

 

Accrued interest

 

34,027

 

78,603

 

Accrued property taxes

 

178,399

 

 

Deferred revenue (See Note 2)

 

1,753,410

 

 

Accrued expenses

 

235,102

 

1,248,758

 

Total liabilities

 

54,670,997

 

44,392,598

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 7,731,755 and 1,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

75,175

 

10

 

Additional paid in capital

 

68,789,362

 

990

 

Retained deficit

 

(330,632

)

 

Distributions in excess of earnings

 

(1,233,334

)

 

Members’ deficit

 

 

(4,723,922

)

Non-controlling interest in operating partnership

 

17,412,717

 

 

Total equity

 

84,713,288

 

(4,722,922

)

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

139,384,285

 

$

39,669,676

 

 

See accompanying notes.

 

3



Table of Contents

 

Farmland Partners Inc.

Combined Consolidated Statements of Operations

For the three and nine months ended September 30, 2014 and 2013

(Unaudited)

 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

Rental income (See Note 2)

 

$

1,189,366

 

$

576,716

 

$

2,526,185

 

$

1,704,046

 

Tenant reimbursements

 

61,283

 

 

188,910

 

26,007

 

Other income

 

11,405

 

 

19,008

 

 

Total operating revenues

 

1,262,054

 

576,716

 

2,734,103

 

1,730,053

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Depreciation and depletion

 

100,208

 

38,486

 

209,472

 

108,573

 

Property operating expenses

 

65,069

 

 

174,598

 

665

 

Acquisition and due diligence costs

 

42,602

 

14,435

 

103,525

 

14,692

 

General and administrative expenses

 

645,962

 

7,873

 

1,466,263

 

23,618

 

Legal and accounting

 

87,192

 

 

243,192

 

12,094

 

Total operating expenses

 

941,033

 

60,794

 

2,197,050

 

159,642

 

OPERATING INCOME

 

321,021

 

515,922

 

537,053

 

1,570,411

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

Interest expense

 

286,216

 

346,504

 

909,326

 

1,001,252

 

Total other expense

 

286,216

 

346,504

 

909,326

 

1,001,252

 

NET INCOME (LOSS)

 

34,805

 

169,418

 

(372,273

)

569,159

 

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to non-controlling interests - operating partnership

 

(7,154

)

 

41,641

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to the Company

 

$

27,651

 

$

169,418

 

$

(330,632

)

$

569,159

 

 

 

 

 

 

 

 

 

 

 

Nonforfeitable dividends allocated to unvested restricted shares

 

(22,500

)

 

 

(45,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders of Farmland Partners Inc.

 

$

5,151

 

 

 

$

(375,632

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted per common share data:

 

 

 

 

 

 

 

 

 

Basic net income (loss) available to common stockholders

 

$

 

 

 

$

(0.12

)

 

 

Diluted net income (loss) available to common stockholders

 

$

 

 

 

$

(0.12

)

 

 

Distributions declared per common share

 

$

0.105

 

 

 

$

0.21

 

 

 

Basic weighted average common shares outstanding

 

6,305,253

 

 

 

3,168,803

 

 

 

Diluted weighted average common shares outstanding

 

6,309,584

 

 

 

3,168,803

 

 

 

 

See accompanying notes.

 

4



Table of Contents

 

Farmland Partners Inc.

Combined Consolidated Statements of Cash Flows

For the nine months ended September 30, 2014 and 2013

(Unaudited)

 

 

 

For the nine months ended September 30,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net (loss) income

 

$

(372,273

)

$

569,159

 

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and depletion

 

209,472

 

108,573

 

Amortization of deferred financing fees

 

97,987

 

41,720

 

Stock based compensation

 

446,460

 

 

Loss on disposition of assets

 

7,419

 

 

Changes in operating assets and liabilities

 

 

 

 

 

Increase in accounts receivable

 

(174,592

)

(1,339,935

)

Increase in other assets

 

(99,020

)

 

(Decrease) increase in accrued interest

 

(44,576

)

156,267

 

Decrease in accrued expenses

 

(314,643

)

 

Increase in deferred revenue

 

1,753,410

 

 

Increase (decrease) in accrued property taxes

 

156,440

 

(37,548

)

Net cash provided by (used in) operating activities

 

1,666,084

 

(501,764

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Real estate acquisitions, net of cash acquired

 

(35,889,805

)

(1,147,188

)

Grain facilities construction

 

 

(200,000

)

Irrigation equipment additions

 

(46,128

)

(196,358

)

Deposits on future acquisitions

 

(1,001,851

)

 

Net cash used in investing activities

 

(36,937,784

)

(1,543,546

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings from mortgage notes payable

 

20,700,000

 

13,736,041

 

Repayments on mortgage notes payable

 

(12,311,237

)

(6,754,868

)

Proceeds from initial public offering

 

49,476,000

 

 

Proceeds from underwritten public offering

 

44,144,980

 

 

Payment of offering costs

 

(2,255,090

)

 

Redemption of common stock

 

(1,000

)

 

Dividends on common stock

 

(625,725

)

 

Payment of financing fees

 

(216,014

)

(153,273

)

Contributions from member

 

1,178,107

 

1,218,208

 

Distributions to member

 

(16,765

)

(5,987,933

)

Distributions - to non-controlling interest in operating partnership

 

(1,071,592

)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

99,001,664

 

2,058,175

 

 

 

 

 

 

 

NET INCREASE IN CASH

 

63,729,964

 

12,865

 

CASH, BEGINNING OF PERIOD

 

17,805

 

42,955

 

 

 

 

 

 

 

CASH, END OF PERIOD

 

$

63,747,769

 

$

55,820

 

 

 

 

 

 

 

Cash paid during period for interest

 

$

853,008

 

$

803,265

 

 

 

 

 

 

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING TRANSACTIONS

 

 

 

 

 

Transfer of deferred offering costs to equity, offset by deferred costs included in accrued expenses related to pending offering

 

$

699,013

 

$

 

Dividends payable

 

$

1,016,059

 

$

 

Distribution of accounts receivable to Pittman Hough Farms

 

$

(450,833

)

$

 

Cash acquired in business combination

 

$

1,000

 

$

 

Accounts receivable acquired in acquisitions

 

$

30,000

 

$

 

Property tax liability acquired in acquisitions

 

$

21,959

 

$

 

 

See accompanying notes.

 

5



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1—Organization and Significant Accounting Policies

 

Organization

 

Farmland Partners Inc. (the “Company”) is an internally managed real estate company that owns and seeks to acquire high-quality farmland located in agricultural markets throughout North America. The Company was incorporated in Maryland on September 27, 2013. The Company is the sole member of the general partner of Farmland Partners Operating Partnership, LP (the “Operating Partnership”), which was formed in Delaware on September 27, 2013. All of the Company’s assets are held by, and its operations are primarily conducted through, the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.

 

The Company and the Operating Partnership commenced operations upon completion of the underwritten initial public offering of shares of the Company’s common stock (the “IPO”) on April 16, 2014 (see “Note 8—Stockholders’ Equity”). Concurrently with the completion of the IPO, the Company’s predecessor, FP Land LLC, a Delaware limited liability company (“FP Land”), merged with and into the Operating Partnership, with the Operating Partnership surviving (the “FP Land Merger”). The Operating Partnership issued 1,945,000 units of limited partnership interest in the Operating Partnership (“OP Units”), having an aggregate value of $27.2 million, as consideration for the merger to Pittman Hough Farms LLC (“Pittman Hough Farms”), which was the sole member of FP Land and is 75% owned by Paul A. Pittman, the Company’s Executive Chairman, President and Chief Executive Officer. As a result of the FP Land Merger, the Operating Partnership succeeded to the business and operations of FP Land, including FP Land’s 100% fee simple interest in a portfolio of 38 farms and three grain storage facilities. Upon completion of the IPO and the FP Land Merger, the Company owned approximately 67.4% of the OP Units in the Operating Partnership.

 

The Company intends to elect and qualify to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its short taxable year ending December 31, 2014.

 

As of September 30, 2014, the Company owned 79.9% of the OP Units.  See Note 8 for additional discussion regarding OP Units.

 

As of September 30, 2014, the Company owned or had a controlling interest in a portfolio of 42 farms, as well as three grain storage facilities, which are consolidated in these financial statements.

 

Principles of Combination and Consolidation

 

The accompanying combined consolidated financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation. Upon completion of the IPO and the related formation transactions, the Company succeeded to the operations of FP Land.  FP Land was an entity under the common control of Mr. Pittman, and was organized to hold the equity interests of PH Farms LLC, an Illinois limited liability company, and Cottonwood Valley Land, LLC, a Nebraska limited liability company, both of which are engaged in the ownership of farmland and property related to farming in agricultural markets in Illinois, Nebraska and Colorado.  These financial statements retroactively reflect the consolidated equity ownership structure of the Company and the formation transactions.  The formation transactions were accounted for at historical cost due to the existence of common control.

 

6



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1 — Organization and Significant Accounting Policies (Continued)

 

Due to the timing of the IPO and the formation transactions, the Company’s financial condition as of December 31, 2013 reflects the combined financial condition of the Company and FP Land, and the results of operations for the three and nine months ended September 30, 2013 reflect the results of operations of FP Land.  The Company’s financial condition as of September 30, 2014 and the results of operations for the three months ended September 30, 2014 reflect the financial condition and results of operations of the Company, but the results of operations for the nine months ended September 30, 2014 reflect the results of operations of FP Land combined with the Company for the period prior to April 16, 2014, and the Company’s consolidated results for the period from April 16, 2014 through September 30, 2014.

 

Interim Financial Information

 

The information in the Company’s combined consolidated financial statements for the three and nine months ended September 30, 2014 and 2013 is unaudited.  All significant inter-company balances and transactions have been eliminated in consolidation.  The accompanying financial statements for the three and nine months ended September 30, 2014 and 2013 include adjustments based on management’s estimates (consisting of normal and recurring accruals), which the Company considers necessary for a fair presentation of the results for the periods.  The financial information should be read in conjunction with the combined consolidated financial statements for the year ended December 31, 2013, included in the final prospectus, dated July 24, 2014, relating to the underwritten follow-on offering of shares of the Company’s common stock (the “Follow-On Offering”), which the Company filed with the Securities and Exchange Commission (the “SEC”).  Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of actual operating results for the entire year ending December 31, 2014.

 

Reclassifications

 

Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income (loss), stockholders’ equity or cash flows.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Real Estate Acquisitions

 

The Company accounts for all acquisitions in accordance with the business combinations standard. When an acquisition involves farmland with no tenant leasing history, such as in a sale-lease back transaction, the Company accounts for the transaction as an asset acquisition and capitalizes the transaction costs incurred in connection with the acquisition. When the Company acquires farmland that was previously operated as a rental property, the Company accounts for the transaction as a business combination and charges the costs associated with the acquisition to acquisition and due diligence costs on the statement of operations as incurred.  Upon acquisition of real estate, the Company allocates 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 and grain facilities, and may also consist of intangible assets including in-place leases, above market and below market leases, and tenant relationships. The Company allocates the purchase price to the fair value of the tangible assets of acquired real estate by valuing the land and groundwater as if it were unimproved. The Company values improvements, including grain facilities, at replacement cost

 

7



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1 — Organization and Significant Accounting Policies (Continued)

 

as new, adjusted for depreciation. Management’s estimates of land and groundwater value are made using a comparable sales analysis. Factors considered by management in its analysis of land value include soil types and water availability, the sales prices of comparable farms, and the replacement cost and residual useful life of land improvements. Factors considered by management in its 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.  The Company has not previously acquired properties subject to above or below market leases. If above and below market leases are acquired, the Company will 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, and the below market lease values will be amortized as an increase to rental income over the remaining initial terms plus the terms of any below market fixed rate renewal options that are considered bargain renewal options of the respective leases.

 

As of September 30, 2014 and December 31, 2013, the Company did not have any in-place lease or tenant relationship intangibles. The purchase price is allocated to in-place lease values and tenant relationships, if they are acquired, based on the Company’s evaluation of the specific characteristics of each tenant’s lease, availability of replacement tenants, estimated down time, if any, and its overall relationship with the tenant. The value of in-place lease intangibles and tenant relationships will be included as components of deferred leasing intangibles, and will be amortized over the remaining lease term (and expected renewal periods of the respective leases for tenant relationships) as adjustments to depreciation and amortization expense. If a tenant terminates its lease early, above and below market leases, the in-place lease value and tenant relationships will be immediately written off.

 

Using information available at the time of acquisition, the Company allocates the total consideration to tangible assets and liabilities and identified intangible assets and liabilities. 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

 

The Company’s real estate consists of land, groundwater and improvements made to the land consisting of grain facilities, irrigation improvements, drainage improvements and other improvements. The Company records real estate at cost and capitalizes improvements and replacements when they extend the useful life or improve the efficiency of the asset.

 

The Company expenses costs of repairs and maintenance as such costs are incurred. The Company computes depreciation and depletion for assets classified as improvements using the straight-line method over their estimated useful lives as follows:

 

 

 

Years

 

Grain facilities

 

24-25

 

Irrigation improvements

 

3-33

 

Drainage improvements

 

30-65

 

Groundwater

 

3-10

 

Other

 

10-39

 

 

The Company periodically evaluates the estimated useful lives for groundwater based on current state water regulations and depletion levels of the aquifers.

 

8



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1 — Organization and Significant Accounting Policies (Continued)

 

When a sale occurs, the Company recognizes 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, the Company first assesses it through the impairment evaluation process—see ‘‘Impairment’’ below.

 

Impairment

 

The Company evaluates its 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, the Company projects the total undiscounted cash flows of the asset, including proceeds from disposition, and compares them 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.

 

Cash

 

The Company’s cash at September 30, 2014 and December 31, 2013 was held in the custody of two financial institutions, and the Company’s balance at any given financial institution may at times exceed federally insurable limits. The Company monitors balances with individual financial institutions to mitigate risks relating to balances exceeding such limits.

 

Deferred Financing Fees

 

Deferred financing fees include costs incurred by the Company or its predecessor in obtaining debt that are capitalized and have been allocated to the Company. In addition, $135,340 and $80,674 in costs were capitalized in conjunction with the modification of the First Midwest Bank debt on April 16, 2014 and the issuance under the Farmer Mac Facility (as defined below) on September 5, 2014, respectively, during the nine months ended September 30, 2014. Deferred financing fees are amortized using the straight-line method, which approximates the effective interest method, over the terms of the related indebtedness. Any unamortized amounts upon early repayment of mortgage notes payable are written off in the period in which repayment occurs. Fully amortized deferred financing fees are removed from the books upon maturity or repayment of the underlying debt. The Company wrote off $0 and $26,929 in deferred financing fees in conjunction with the early repayment of debt during the three and nine months ended September 30, 2014, respectively.  Accumulated amortization of deferred financing fees was $57,058 and $41,663 as of September 30, 2014 and December 31, 2013, respectively.

 

Deferred Offering Costs

 

Deferred offering costs include incremental direct costs incurred by the Company in conjunction with pending equity offerings.  At the completion of the offering, the deferred offering costs are recorded as a reduction of the gross proceeds from the applicable offering.  If an offering is abandoned, the previously deferred offering costs will be charged to operations in the period in which the abandonment occurs.  The IPO was completed on April 16, 2014, at which time the deferred offering costs were recorded as a reduction of the proceeds.  The Follow-On Offering was completed on July 30, 2014, at which time the deferred offering costs were recorded as a reduction of the gross proceeds.

 

9



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1 — Organization and Significant Accounting Policies (Continued)

 

Accounts Receivable

 

Accounts receivable are presented at face value, net of the allowance for doubtful accounts. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions. The allowance for doubtful accounts was $0 as of September 30, 2014 and December 31, 2013.

 

Prior to completion of the formation transactions on April 16, 2014, accounts receivable outstanding at December 31, 2013 of $450,833 were distributed to Pittman Hough Farms.

 

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 pro rata basis over the lease term.  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.

 

All leases in place during 2013 had a term of one year with no renewal options or rent escalations.  Leases for substantially all of the properties required payment of rent in installments upon the Company’s request.  Prior to January 1, 2014 one lease had rental payments that were received in kind through transfer of ownership of a percentage of the tenant’s crops.  Rental revenue under that lease was recognized upon receipt of the crop inventory.

 

Leases in place as of September 30, 2014 had terms ranging from one to five years with no renewal options or rent escalations.  Leases on 36 of the Company’s properties required rent to be payable within 10 days after the completion of the IPO and the lease on one property is payable in installments.  Revenue for leases with fixed rent is recognized on a pro rata basis over the lease term.  One lease has rental payments due at harvest equal to 25% of the tenant’s annual farming revenue.  Rental revenue under such lease is recognized upon notification from the tenant of the amount of crop harvested during the applicable harvest(s) throughout the year and the price at which the harvest was sold.  One lease has rental payments due at harvest equal to either 20% or 25% of the crop, depending on the type of crop.  Rental revenue under such lease is recognized upon notification from the grain facility that grain has been delivered in the Company’s name.  Tenant leases on acquired farms generally require the tenant to pay 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 may receive a partial rent payment or no rent payment at all, depending on the status of the lease at closing (assuming existing lease vs. entering into a new lease at closing), whether there are any rent payments still due at closing, the type of lease (fixed vs. revenue share), and whether harvest is expected to have taken place by the time of closing.  Rent on these leases is allocated over the lease term on a straight line basis.

 

Tenant reimbursements include reimbursements for real estate taxes that each tenant pays in accordance with the terms of its lease.  Beginning January 1, 2013, all but two of the Company’s leases required the tenants to pay all expenses incurred during the lease term in connection with the leased farms including property taxes and maintenance; therefore, the Company would not incur these costs unless the tenant became unable to bear the costs.  If it had become probable that a tenant had become unable to bear the property related costs, the Company would have accrued the estimated expense.  Under the terms of the leases that were in place upon the completion of the IPO, the leases on two of the Company’s properties require the tenant to reimburse the Company for the 2013 real estate taxes paid by the Company in 2014.  Leases on 36 of the Company’s properties require the tenant to directly pay the 2013 property taxes due in 2014; however,

 

10



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1 — Organization and Significant Accounting Policies (Continued)

 

beginning in 2015, the Company will pay the property taxes related to each of the farms and will be reimbursed by its tenants for those property taxes no later than December 1 of each year.  Taxes paid by the Company and their subsequent reimbursement are recognized under property operating expenses as incurred and tenant reimbursements as earned or contractually due, respectively.  The Company includes an estimate of property taxes in the purchase price allocation of acquisitions to account for the expected liability that was acquired.

 

Income Taxes

 

As a REIT, the Company will be permitted to deduct dividends paid to its stockholders, thereby eliminating the U.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 the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.

 

When the Company acquires a property in a business combination, the Company evaluates such acquisition for any related deferred tax assets or liabilities and determines if a deferred tax asset or liability should be recorded in conjunction with the purchase price allocation.  If a built-in gain is acquired, the Company evaluates the required holding period (generally 5-10 years) and determines if it has the ability and intent to hold the underlying assets for the necessary holding period.  If the Company has the ability to hold the underlying assets for the required holding period, no deferred tax liability is recorded with respect to the built-in gain.

 

Segment Reporting

 

The Company’s chief operating decision maker does not evaluate performance on a farm-specific or transactional basis and does not distinguish the Company’s principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.

 

Earnings Per Share

 

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period, excluding the weighted average number of unvested restricted shares (“participating securities” as defined in Note 8).  Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period plus other potentially dilutive securities such as stock grants or shares that would be issued in the event that OP Units are redeemed for shares of common stock of the Company.  No adjustment is made for shares that are anti-dilutive during a period.

 

Stock Based Compensation

 

From time to time, the Company may award non-vested shares under the Company’s 2014 Equity Incentive Plan (the “Plan”) as compensation to officers, employees, non-employee directors and non-employee consultants (See Note 8).  The shares issued to officers, employees, and non-employee directors vest over a period of time as determined by the Board of Directors at the date of grant.  The Company recognizes compensation expense for non-vested shares granted to officers, employees and non-employee directors on a straight-line basis over the requisite service period based upon the fair market value of the shares on the date of grant, as adjusted for forfeitures.  The Company recognizes expense related to non-vested shares granted to non-employee consultants over the period that services are received.  The change in fair value of the shares to be issued upon vesting is remeasured at each reporting period and is recorded in general and administrative

 

11



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 1 — Organization and Significant Accounting Policies (Continued)

 

expenses on the combined consolidated statement of operations.  As of September 30, 2014, the Company recorded a reduction in stock based compensation of $22,216, as a change in fair value of the unvested shares.

 

Recently Issued Accounting Guidance

 

The Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Under this revised guidance, only disposals representing a strategic shift in operations, such as a disposal of a major geographic area, a major line of business or a major equity method investment, will be presented as discontinued operations. The standard requires prospective application and will be effective for interim and annual periods beginning on or after December 15, 2014 with early adoption permitted. The early adoption provision excludes components of an entity that were sold or classified as held for sale prior to the adoption of the standard.

 

The Company elected to early adopt this standard effective January 1, 2014. Because there were no dispositions for the nine months ended September 30, 2014 and guidance is applied prospectively, there was no impact to the Company’s statements of operations or financial position.

 

New or Revised Accounting Standards Not Yet Effective

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 will have on the Company’s combined consolidated financial statements.

 

Note 2—Revenue Recognition

 

The Company generally receives one lease payment per year from tenants either during the first quarter of the year or at time of acquisition of the related farm.  As such, the rental income received is recorded on a straight-line basis over the lease term.  In the quarter ended September 30, 2014, the Company received full-year rent payments for 2014 of $65,000 under lease agreements entered into in connection with farms acquired during the quarter.  Payments received in advance are included in deferred revenue until they are recognized.  At September 30, 2014, the Company had $1,753,410 in deferred revenue, of which $33,040 is related to cash received on an easement option that expires in 2015.

 

12



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 2—Revenue Recognition (continued)

 

The following represents a summary of the cash rent received during the three and nine months ended September 30, 2014 and 2013 and the rental income recognized for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Cash rent received

 

Rental income recognized

 

 

 

For the three months ended

 

For the nine months ended

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leases in effect at the beginning of the year

 

$

42,537

 

$

20,144

 

$

2,551,664

 

$

351,184

 

$

678,391

 

$

565,123

 

$

1,950,097

 

$

1,691,121

 

Leases entered into during the year

 

65,000

 

 

1,677,847

 

12,925

 

510,975

 

11,593

 

576,088

 

12,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

107,537

 

$

20,144

 

$

4,229,511

 

$

364,109

 

$

1,189,366

 

$

576,716

 

$

2,526,185

 

$

1,704,046

 

 

Future minimum lease payments from tenants under all non-cancelable leases, excluding tenant reimbursement of expenses and lease payments based on a percentage of farming revenues or crops, for the remainder of 2014 and each of the next four years as of September 30, 2014 are as follows:

 

Year Ending December 31,

 

Future rental
payments

 

Remaining 3 months in 2014

 

$

34,288

 

2015

 

3,254,257

 

2016

 

2,487,282

 

2017

 

65,000

 

2018

 

65,000

 

 

 

$

5,905,827

 

 

13



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 3—Concentration Risk

 

Credit Risk

 

For the three and nine months ended September 30, 2014 and 2013, we had certain tenant concentrations as set forth in the table below.  Astoria Farms and Hough Farms are related parties (see ‘‘Note 4—Related Party Transactions’’).  If a significant tenant, representing a tenant concentration, fails to make rental payments to the Company or elects to terminate its leases, and the land cannot be re-leased on satisfactory terms, there would be a material adverse effect on the Company’s financial performance and the Company’s ability to continue operations.  Although the Company did not receive any cash rent from the listed tenants for the three months ended September 30, 2014 and 2013, as described above, rental income received is recorded on a straight-line basis over the applicable lease term.  The following is a summary of our significant tenants:

 

 

 

Rental income recognized

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Astoria Farms

 

$

545,035

 

45.8

%

$

486,458

 

84.3

%

$

1,635,104

 

64.7

%

$

1,459,374

 

85.6

%

Hough Farms

 

73,675

 

6.2

%

58,521

 

10.1

%

221,025

 

8.7

%

175,563

 

10.3

%

Hudye Farms tenant A

 

201,740

 

17.0

%

 

 

217,174

 

8.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

820,450

 

 

 

$

544,979

 

 

 

$

2,073,303

 

 

 

$

1,634,937

 

 

 

 

 

 

Cash rent received

 

 

 

For the nine months ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Astoria Farms

 

$

2,180,139

 

51.5

%

$

295,000

 

81.0

%

Hough Farms

 

294,700

 

7.0

%

 

 

Hudye Farms tenant A

 

677,612

 

16.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,152,451

 

 

 

$

295,000

 

 

 

 

Geographic Risk

 

The Company’s farms are located in Illinois (Fulton, Schuyler, McDonough, Mason and Tazewell counties), Colorado (Kit Carson, Cheyenne and Baca counties), Nebraska (Butler and Morrill counties) and Arkansas (Yell county). A portion of one of our Colorado farms is located in Kansas.  Should a natural disaster occur where the properties are located, there could be a material adverse effect on the Company’s financial performance and the Company’s ability to continue operations.

 

14



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 3—Concentration Risk (continued)

 

The following table summarizes the percentage of approximate total acres leased as of September 30, 2014 and December 31, 2013 and rental income recorded by the Company for the three and nine months ended September 30, 2014 and 2013 by location of the farm (unaudited):

 

 

 

 

 

 

 

Rental income

 

Rental income

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

Location of 

 

Approximate total acres

 

September 30,

 

September 30,

 

farm

 

September 30, 2014

 

December 31, 2013

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Colorado

 

68.0

%

13.1

%

45.0

%

3.5

%

23.8

%

1.2

%

Illinois

 

24.0

%

78.5

%

47.3

%

86.4

%

66.8

%

88.5

%

Nebraska

 

5.0

%

8.4

%

7.7

%

10.1

%

9.4

%

10.3

%

Arkansas

 

3.0

%

 

 

 

 

 

 

 

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

 

Note 4—Related Party Transactions

 

As of September 30, 2014, 25.3% of the acres in the Company’s farm portfolio was rented to and operated by Astoria Farms or Hough Farms, both of which are related parties. Astoria Farms is a partnership in which Pittman Hough Farms, which is 75% owned by Mr. Pittman, has a 33.34% interest. The balance of Astoria Farms is held by limited partnerships in which Mr. Pittman is the general partner. Hough Farms is a partnership in which Pittman Hough Farms has a 25% interest. The aggregate rent recognized by the Company for these entities for the three and nine months ended September 30, 2014 was $618,710 and $1,856,129, respectively, and for the three and nine months ended September 30, 2013 was $544,979 and $1,634,937, respectively. As of September 30, 2014 and December 31, 2013, the Company had accounts receivable from these entities of $137,846 and $450,833, respectively.

 

For the three and nine months ended September 30, 2014, Pittman Hough Farms incurred $0 and $219,597, respectively, in professional fees on behalf of the Company.  No amounts were incurred for the three and nine months ended September 30, 2013.  As of September 30, 2014 and December 31, 2013, the Company had outstanding payables to Pittman Hough Farms of $0 and $75,000, respectively.

 

American Agriculture Corporation (‘‘American Agriculture’’), is a Colorado corporation that is 75% owned by Mr. Pittman and 25% owned by Jesse J. Hough, who provides consulting services to the Company. On April 16, 2014, the Company entered into a shared services agreement with American Agriculture pursuant to which the Company pays American Agriculture an annual fee of $175,000 in equal quarterly installments in exchange for management and accounting services.  The Company incurred $43,750 and $80,208 in fees related to the shared services agreement during the three and nine months ended September 30, 2014, resepectively.  The Company did not incur any such fees during the three and nine months ended September 30, 2013.

 

On April 16, 2014, the Company entered into a consulting agreement with Mr. Hough pursuant to which the Company pays Mr. Hough an annual fee of $75,000 in equal quarterly installments.  The Company incurred $18,750 and $34,375 in fees related to the consulting agreement during the three and nine months ended September 30, 2014, respectively.  The Company did not incur any such fees during the three and nine months ended September 30, 2013.

 

15



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 4—Related Party Transactions (continued)

 

On March 21, 2014 and April 16, 2014, the Company and the Operating Partnership entered into reimbursement agreements with Pittman Hough Farms to reimburse Pittman Hough Farms for costs incurred to complete the IPO and the FP Land Merger.  The amount of the costs that were reimbursed was reduced by interest expense of $78,603 related to outstanding debt, which was accrued by the Operating Partnership as of December 31, 2013.  The aggregate net reimbursable amount under the agreements was $1,361,321.  On June 9, 2014, the Company and the Operating Partnership entered into an additional reimbursement agreement with Pittman Hough Farms for $51,537 in professional fees incurred prior to the IPO, which is recorded in general and administrative expenses on the combined consolidated statement of operations.

 

Note 5—Real Estate

 

As of September 30, 2014, the Company owned 42 separate farms, as well as three grain storage facilities, which have been acquired since December 2000.

 

During the three and nine months ended September 30, 2014, the Company acquired the following farms:

 

Farm name

 

Location

 

Date acquired

 

Total
approximate
acres

 

Purchase price

 

Acquisition
costs

 

Type of Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Erker

 

Kit Carson County, Colorado

 

5/30/2014

 

3,171

 

$

7,644,339

 

$

5,017

 

Asset acquisition

 

Hudye (1)

 

Eastern Colorado

 

6/12/2014

 

12,500

 

24,500,000

 

63,836

 

Business combination

 

Broadwater

 

Morrill County, Nebraska

 

7/1/2014

 

640

 

1,040,666

 

666

 

Asset acquisition

 

Ruder

 

Yell County, Arkansas

 

9/24/2014

 

667

 

2,705,800

 

9,180

 

Business combination

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,978

 

$

35,890,805

 

$

78,699

 

 

 

 

The Company received rent for 2014 in its entirety, without proration on the Erker, Hudye and Broadwater farm acquisitions.  The Company will receive all of the rent for 2014 under the Ruder farm acquisition lease which has rental payments due at harvest equal to either 20% or 25% of the crop, depending on the lease for the type of crop.

 


(1)         On June 12, 2014, the Company acquired all of the outstanding stock in Hudye Farms U.S., Inc. (“HFUSI”), which owned an approximately 12,500-acre farm (referred to as the Hudye farm) located primarily in eastern Colorado, for $24.5 million, excluding related acquisition costs of $63,836.  The Company funded this business combination with cash available from the IPO.  All tenant leases were terminated by the previous owner prior to the closing of the acquisition.  On June 20, 2014, HFUSI was merged with and into FPI Burlington Farms LLC, a wholly owned subsidiary of the Company, with FPI Burlington Farms LLC surviving. FPI Burlington Farms LLC entered into new leases with tenants on June 23, 2014.  The new leases provide for aggregate annual cash rent of $1.2 millionRent for 2014 was paid at lease execution in its entirety, without proration.  In conjunction with the business combination, the Company acquired a tax built-in gain of $17.8 million.  No deferred tax liability was recorded with respect to the tax built-in gain as the Company has the ability and intent to hold the property for the required holding period.

 

16



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 5—Real Estate (Continued)

 

During the three and nine months ended September 30, 2013, the Company acquired the following farm:

 

Farm name

 

Location

 

Date acquired

 

Total
approximate
acres

 

Purchase price

 

Acquisition
costs

 

Type of Acquisition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Smith

 

McDonough County, IL

 

6/26/2013

 

99.54

 

$

1,147,189

 

$

257

 

Business combination

 

 

The preliminary allocation of purchase price for the farms acquired during the nine months ended September 30, 2014 and the final allocation of the purchase price for the farm acquired in 2013 are as follows:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Land

 

$

33,301,282

 

$

1,147,189

 

Irrigation improvements

 

749,932

 

 

Groundwater

 

1,742,550

 

 

Other

 

88,000

 

 

Accounts receivable

 

30,000

 

 

Cash

 

1,000

 

 

Accrued property taxes

 

(21,959

)

 

 

 

$

35,890,805

 

$

1,147,189

 

 

The allocation of the purchase price for the farms acquired in 2014 is preliminary and may change during the measurement period if the Company obtains new information regarding the assets acquired or liabilities assumed at the acquisition date.

 

The Company has included the results of operations for the acquired real estate in the combined consolidated statements of operations from the date of acquisition.  The real estate acquired in business combinations during the three and nine months ended September 30, 2014 contributed $390,620 and $447,441 to total revenue and $342,022 and $322,631 to net income (including related real estate acquisition costs of $9,180 and $73,016) for the three and nine months ended September 30, 2014, respectively.  The real estate acquired during the three and nine months ended September 30, 2013 contributed $11,593 and $12,925 to total revenue and $4,355 and ($9,006) to net income (loss) (including related real estate acquisition costs of $0 and $257) for the three and nine months ended September 30, 2013, respectively.

 

The unaudited pro forma information presented below does not purport to represent what the actual results of operations of the Company would have been had the Hudye, Ruder and Smith business combinations outlined above occurred as of the beginning of the periods presented, nor does it purport to predict the results of operations of future periods.

 

17



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 5—Real Estate (Continued)

 

The unaudited pro forma financial information is presented below as if the Hudye and Ruder farms acquired during the three and nine months ended September 30, 2014 and as if the Smith farm acquired during the three and nine months ended September 30, 2013 had been acquired on January 1, 2012.

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

Proforma (unaudited)

 

2014

 

2013

 

2014

 

2013

 

Total operating revenue

 

$

1,262,054

 

$

893,495

 

$

2,734,103

 

$

2,083,403

 

Net income (loss)

 

$

42,658

 

$

449,754

 

$

(380,995

)

$

769,299

 

 

 

 

 

 

 

 

 

 

 

Earnings per share basic and diluted

 

 

 

 

 

 

 

 

 

Income (loss) per share attributable to common stockholders

 

$

 

 

 

$

(0.11

)

 

 

Weighted-average number of common shares - basic and diluted

 

6,305,253

 

 

 

3,168,803

 

 

 

 

18



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 6—Mortgage Notes and Bonds Payable

 

As of September 30, 2014 and December 31, 2013, the Company had the following indebtedness outstanding:

 

 

 

 

 

 

 

Annual
Interest
Rate as of
September

 

Principal Outstanding as of

 

 

 

Book Value of
Collateral as of
September 30,

 

Loan

 

Payment Terms

 

Interest Rate Terms

 

30, 2014

 

September 30, 2014

 

December 31, 2013

 

Maturity

 

2014

 

First Midwest Bank

 

Principal and interest at maturity

 

Greater of LIBOR + 2.59% and 2.80%

 

2.80

%

$

754,000

(a)

$

1,796,000

 

June 2016

 

$

1,145,333

(b)

First Midwest Bank

 

Annual principal and quarterly interest

 

Greater of LIBOR + 2.59% and 2.80%

 

2.80

%

30,000,000

(a)

34,500,000

 

March 2016

 

26,336,648

(c)

Farmer Mac Bond #1

 

Semi-annual interest only

 

2.40%

 

2.40

%

20,700,000

 

 

September 2017

 

34,500,000

 

Financial institution

 

Annual principal and interest

 

Proprietary index, initially 3.25%

 

 

 

 

1,137,388

 

October 2032

 

 

Financial institution

 

Annual principal and interest

 

Proprietary index, initially 3.99%

 

 

 

 

255,143

 

December 2027

 

 

Financial institution

 

Annual principal and interest

 

Proprietary index, initially 3.99%

 

 

 

(d)

240,000

 

December 2021

 

 

Financial institution

 

Annual principal and interest

 

5.25% until 2015, then 5-yr US Treasury + 3.5%

 

 

 

 

920,441

 

July 2030

 

 

Financial institution

 

Annual principal and interest

 

4.95% until 2016, then 5-yr US Treasury + 3.5%

 

 

 

 

528,748

 

September 2031

 

 

Financial institution

 

Annual principal and interest

 

Proprietary index, initially 4.9%

 

 

 

 

787,285

 

December 2041

 

 

Financial institution

 

Principal and interest at maturity

 

3.15% until 2014, then proprietary index

 

 

 

 

469,732

 

November 2032

 

 

Financial institution

 

Annual principal and interest

 

Proprietary index, initially 3.15%

 

 

 

 

1,742,500

 

April 2043

 

 

Financial institution

 

Annual principal and interest

 

4.00%

 

 

 

 

688,000

 

April 2018

 

 

Total

 

 

 

 

 

 

 

$

51,454,000

 

$

43,065,237

 

 

 

$

61,981,981

 

 


(a) Messrs. Pittman and Hough unconditionally agreed to jointly and severally guarantee $11.0 million.

(b) The book value collateral as of December 31, 2013 was $2,426,593.

(c) The book value collateral as of December 31, 2013 was $29,548,000.

(d) The Company repaid the outstanding principal balance March 21, 2014.

 

19



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 6—Mortgage Notes and Bonds Payable (Continued)

 

First Midwest Bank Indebtedness

 

On April 16, 2014, the Company repaid $6.5 million of secured mortgage debt and made a partial repayment of the First Midwest Bank debt of $4.7 million with a portion of the proceeds of the IPO.  On March 24, 2014, Pittman Hough Farms made a contractual debt payment of $766,000 on the First Midwest Bank debt, which the Company reimbursed on April 16, with a portion of the proceeds from the IPO.  The Company did not incur any early termination fees or fees related to the partial repayment.  In conjunction with the repayments, the Company wrote off $26,929 in unamortized deferred financing fees.

 

On April 16, 2014, the Operating Partnership, as borrower, and First Midwest Bank, as lender, entered into the Amended and Restated Business Loan Agreement (the “Loan Agreement”), which provides for loans in the aggregate principal amount of approximately $30.8 million. The Company capitalized $135,340 in financing fees related to the modification of the loan.  In connection with the Loan Agreement, PH Farms LLC and Cottonwood Valley Land, LLC, which are wholly owned subsidiaries of the Operating Partnership, unconditionally agreed to guarantee all of the obligations of the Operating Partnership under the Loan Agreement.  In addition, Messrs. Pittman and Hough unconditionally agreed to jointly and severally guarantee $11.0 million of the Operating Partnership’s obligations under the Loan Agreement.  In conjunction with the modification, other than combining the two First Midwest Bank notes into one master note with two tranches, no other material terms were modified.

 

The collateral for the Company’s indebtedness consists of real estate, including farms, grain facilities and any other improvements present on such real estate.

 

The Loan Agreement includes standard acceleration clauses triggered by default under certain provisions of the note.

 

The Company is subject to ongoing compliance with a number of customary affirmative and negative covenants, as well as financial covenants, including a maximum debt to net worth ratio of 1.00 to 1.00 and a minimum debt service coverage ratio of 1.25 to 1.00.  Each covenant will be measured annually as of December 31st of each year.  Additionally, the Company is required to maintain a minimum account balance of $500,000 during the term of the agreement.

 

Farmer Mac Facility

 

On August 22, 2014, the Company and the Operating Partnership entered into a bond purchase agreement (the “Bond Purchase Agreement”) with Federal Agricultural Mortgage Corporation (“Farmer Mac”) and Farmer Mac Mortgage Securities Corporation, a wholly owned subsidiary of Farmer Mac, as bond purchaser (the “Purchaser”), regarding a secured note purchase facility (the “Farmer Mac Facility”) that initially provided for borrowings up to an aggregate principal amount of $30.0 million. On October 13, 2014, the Company, the Operating Partnership, Farmer Mac and the Purchaser entered into an amendment to the Farmer Mac Facility to increase the facility’s maximum borrowing capacity to $75.0 million.

 

Pursuant to the Bond Purchase Agreement, the Operating Partnership may, from time to time, issue one or more notes to the Purchaser that will be secured by pools of mortgage loans, which will, in turn, be secured by first liens on agricultural real estate owned by the Company. The mortgage loans will have effective loan-to-value ratios of up to 60%, after giving effect to the overcollateralization obligations described below. Each note issued by the Operating Partnership is expected to have a three-year term and bear a fixed or floating interest rate to be determined at the time of each issuance based on

 

20



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 6—Mortgage Notes and Bonds Payable (Continued)

 

then-current market rates. Prepayment of each note issuance will not be permitted unless otherwise agreed upon by all parties to the Bond Purchase Agreement.

 

The Operating Partnership’s ability to borrow under the Farmer Mac Facility is subject to the Company’s ongoing compliance with a number of customary affirmative and negative covenants, as well as financial covenants, including: a maximum leverage ratio of not more than 60%; a minimum fixed charge coverage ratio of 1.50 to 1.00, beginning after the second quarter of 2015; and a minimum tangible net worth. The Company was in compliance with all applicable covenants at September 30, 2014.

 

In connection with the Bond Purchase Agreement, on August 22, 2014, the Company and the Operating Partnership also entered into a pledge and security agreement (the “Pledge Agreement”) in favor of the Purchaser and Farmer Mac, pursuant to which the Company and the Operating Partnership agreed to pledge, as collateral for the Farmer Mac Facility, all of their respective right, title and interest in (i) mortgage loans with a value at least equal to 100% of the aggregate principal amount of the outstanding notes held by the Purchaser and (ii) such additional collateral as necessary to have total collateral with a value at least equal to 110% of the outstanding notes held by the Purchaser. In addition, the Company agreed to guarantee the full performance of the Operating Partnership’s duties and obligations under the Pledge Agreement.

 

The Bond Purchase Agreement and the Pledge Agreement include customary events of default, the occurrence of any of which, after any applicable cure period, would permit the Purchaser and Farmer Mac to, among other things, accelerate payment of all amounts outstanding under the Farmer Mac Facility and to exercise its remedies with respect to the pledged collateral, including foreclosure and sale of the agricultural real estate underlying the pledged mortgage loans.

 

On September 5, 2014, the Operating Partnership issued a $20.7 million, interest-only bond to the Purchaser under the Farmer Mac Facility. The note has a three-year term and has a fixed interest rate of 2.40%.

 

On October 23, 2014, the Operating Partnership issued a $5.5 million, interest-only bond to the Purchaser under the Farmer Mac Facility. The note has a three-year term and has a fixed interest rate of 2.35%.

 

Aggregate Maturities

 

Aggregate maturities of long-term debt for the succeeding years are as follows:

 

Year Ending December 31,

 

 

 

Remaining 3 months in 2014

 

$

 

2015

 

1,026,000

 

2016

 

29,728,000

 

2017

 

20,700,000

 

 

 

$

51,454,000

 

 

21



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 6—Mortgage Notes and Bonds Payable (Continued)

 

Fair Value

 

FASB ASC 820-10 establishes a three-level hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

·                  Level 1—Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

·                  Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable or can be substantially corroborated for the asset or liability, either directly or indirectly.

·                  Level 3—Inputs to the valuation methodology are unobservable, supported by little or no market activity and are significant to the fair value measurement.

 

The fair value of the mortgage notes payable is valued using Level 3 inputs under the hierarchy established by GAAP and is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimates of market interest rates on long-term debt with comparable terms whenever the interest rates on the mortgage notes payable are deemed not to be at market rates. As of September 30, 2014 and December 31, 2013, the fair value of the mortgage notes payable was $51.5 million and $43.1 million, respectively.

 

Note 7—Commitments and Contingencies

 

The Company is not currently subject to any known material contingencies arising from its business operations, nor to any material known or threatened litigation.

 

During the second and third quarters of 2014, the Company entered into purchase agreements with unrelated third-parties to acquire the following farms:

 

Farm Name

 

State

 

Total
approximate
acres

 

Purchase price

 

Ballymore

 

AR

 

1,250

 

$

4,600,000

 

Garrott

 

AR

 

1,273

 

3,320,000

 

Vendome

 

AR

 

1,447

 

7,162,650

 

Stonington-Smith

 

CO

 

1,308

 

3,924,000

 

Dionisio

 

CO

 

247

 

2,500,000

 

Davis

 

LA

 

885

 

3,867,500

 

Bonita Brake

 

LA

 

1,088

 

5,151,505

 

Jarecki

 

NE

 

160

 

1,640,000

 

 

 

 

 

 

 

 

 

 

 

 

 

7,658

 

$

32,165,655

 

 

As of October 31, 2014, the Company completed the Ballymore, Stonington-Smith, Davis and Bonita Brake acquisitions. We will account for these acquisitions as business combinations; however, the initial accounting for these transactions is not yet complete, making certain disclosure unavailable at this time.  The remaining pending acquisitions are expected to close in the fourth quarter of 2014, subject to the satisfaction of certain customary closing conditions.  There can be no assurance that these conditions will be satisfied or that the pending acquisitions will be consummated on the terms described herein, or at all.

 

22



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 8—Stockholders’ Equity

 

The following table summarizes the changes in our stockholders’ equity for the nine months ended September 30, 2014:

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Non-controlling

 

 

 

 

 

Shares

 

Par Value

 

Additional
Paid-in
Capital

 

Retained
Deficit

 

Distributions
in Excess of
Earnings

 

Members’
Deficit

 

Interest in
Operating
Partnership

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

1,000

 

$

10

 

$

990

 

$

 

$

 

$

(4,723,922

)

$

 

$

(4,722,922

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

(330,632

)

 

 

(41,641

)

(372,273

)

Contributions

 

 

 

 

 

 

1,178,107

 

 

1,178,107

 

Distributions

 

 

 

 

 

 

(16,765

)

(1,071,592

)

(1,088,357

)

Distribution of accounts receivable

 

 

 

 

 

 

(450,833

)

 

(450,833

)

Exchange of members’ deficit for OP units

 

 

 

 

 

 

4,013,413

 

(4,013,413

)

 

Proceeds from initial public offering, net of offering costs of $1,451,153 and underwriters discount of $3,724,000

 

3,800,000

 

38,000

 

47,986,847

 

 

 

 

 

48,024,847

 

Proceeds from underwritten public offering, net of offering costs of $803,937 and underwriters discount of $2,323,420

 

3,717,472

 

37,175

 

43,303,868

 

 

 

 

 

43,341,043

 

Grant of unvested restricted stock

 

214,283

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

446,460

 

 

 

 

 

446,460

 

Dividends accrued or paid

 

 

 

 

 

(1,233,334

)

 

(408,450

)

(1,641,784

)

Redemption of initial shares

 

(1,000

)

(10

)

(990

)

 

 

 

 

(1,000

)

Allocation of non-controlling interest in Operating Partnership

 

 

 

(22,947,813

)

 

 

 

22,947,813

 

 

Balance at September 30, 2014

 

7,731,755

 

$

75,175

 

$

68,789,362

 

$

(330,632

)

$

(1,233,334

)

$

 

$

17,412,717

 

$

84,713,288

 

 

23



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 8—Stockholders’ Equity (continued)

 

Under the Company’s articles of incorporation, the total number of shares initially authorized for issuance was 1,000 shares of common stock, $0.01 par value per share.  On December 5, 2013, the Company issued 1,000 shares of common stock to its sole stockholder at $1.00 per share.  The shares were repurchased by the Company on April 18, 2014 for $1.00 per share.

 

On March 24, 2014, the Company amended and restated its articles of incorporation to authorize the issuance of up to 500,000,000 shares of common stock.  Upon completion of the IPO, on April 16, 2014, the Company had 500,000,000 shares of common stock authorized, 3,800,000 shares of common stock issued and outstanding and 214,283 unvested restricted shares of common stock.

 

On April 16, 2014, the Company completed the IPO and the FP Land Merger. The IPO resulted in the sale of 3,800,000 shares of common stock at a price per share of $14.00 and generated gross proceeds of $53.2 million. The aggregate net proceeds to the Company, after deducting the underwriting discount and commissions and expenses payable by the Company, were approximately $48.0 million. The Company contributed the net proceeds from the IPO to the Operating Partnership in exchange for OP Units. The Operating Partnership used the net proceeds from the IPO as follows: (i) approximately $12.0 million to repay outstanding indebtedness, of which $766,000 had been advanced by Pittman Hough Farms and was reimbursed to Pittman Hough Farms with a portion of the net proceeds from the IPO; and (ii) approximately $55,000 (exclusive of the $766,000 that was reimbursed for amounts advanced by Pittman Hough Farms to repay certain indebtedness) to reimburse Pittman Hough Farms for amounts advanced or incurred in connection with the IPO and related formation transactions. The Operating Partnership used the remaining net proceeds for general corporate purposes, including working capital and acquisitions.

 

On May 14, 2014, the Board of Directors declared a cash dividend of $0.105 per share, which was paid on July 15, 2014 to the Company’s stockholders of record as of July 1, 2014.

 

On July 30, 2014, the Company completed the Follow-On Offering, pursuant to which the Company sold 3,717,472 shares of common stock at a price per share of $12.50 and generated gross proceeds of $46.5 million. The aggregate net proceeds to the Company, after deducting the underwriting discount and commissions and expenses payable by the Company, were approximately $43.3 million. The Company contributed the net proceeds from the Follow-On Offering to the Operating Partnership in exchange for OP Units.

 

On August 5, 2014, the Board of Directors declared a cash dividend of $0.105 per share, which was paid on October 15, 2014 to the Company’s stockholders of record as of October 1, 2014.

 

The Company’s fully diluted outstanding shares, including OP Units and restricted stock, were 9,676,755 as of September 30, 2014.

 

Non-controlling Interest in Operating Partnership

 

The Company consolidates its Operating Partnership, a majority owned partnership that has a non-controlling ownership interest and is included in non-controlling interest in Operating Partnership on the balance sheet. As of September 30, 2014, the Company owned 79.9% of the outstanding OP Units and the remaining 20.1% of the OP Units were owned by Pittman Hough Farms.

 

24



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 8—Stockholders’ Equity (continued)

 

On or after 12 months after becoming a holder of OP Units, each limited partner, other than the Company, has the right, subject to the terms and conditions set forth in the partnership agreement of the Operating Partnership, to require the Operating Partnership to redeem all or a portion of such units in exchange for a cash amount equal to the number of tendered units multiplied by the fair market value of a share of the Company’s common stock (determined in accordance with, and subject to adjustment under, the terms of the partnership agreement of the Operating Partnership), unless the terms of such units or a separate agreement entered into between the Operating Partnership and the holder of such units provide that they do not have a right of redemption or provide for a shorter or longer period before such holder may exercise such right of redemption or impose conditions on the exercise of such right of redemption. On or before the close of business on the tenth business day after the Company receives a notice of redemption, the Company may, as the parent of the general partner, in its sole and absolute discretion, but subject to the restrictions on the ownership of common stock imposed under the Company’s charter and the transfer restrictions and other limitations thereof, elect to acquire some or all of the tendered units in exchange for cash or shares of the Company’s common stock, based on an exchange ratio of one share of common stock for each OP Unit (subject to anti-dilution adjustments provided in the partnership agreement).

 

If the Company gives the limited partners notice of its intention to make an extraordinary distribution of cash or property to its stockholders or effect a merger, a sale of all or substantially all of its assets, or any other similar extraordinary transaction, each limited partner may exercise its right to redeem its OP Units, regardless of the length of time such limited partner has held its OP Units.

 

Regardless of the rights described above, the Operating Partnership will not have an obligation to issue cash to a unitholder upon a redemption request if the Company elects to redeem the OP Units for shares of common stock.  When a unitholder redeems an OP Unit, non-controlling interest in the Operating Partnership is reduced and stockholders’ equity is increased.

 

Our Operating Partnership intends to make distributions on each OP Unit in the same amount as those paid on each share of the Company’s common stock, with the distributions on the OP Units held by the Company being utilized to make distributions to the Company’s common stockholders.

 

Pursuant to the consolidation accounting standard with respect to the accounting and reporting for non-controlling interest changes and changes in ownership interest of a subsidiary, changes in parent’s ownership interest when the parent retains controlling interest in the subsidiary should be accounted for as equity transactions.  The carrying amount of the non-controlling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the parent.  Accordingly, as a result of the IPO, the Follow-On Offering and issuance of stock compensation, which caused changes in the ownership percentages between the Company’s stockholders’ equity and non-controlling interest in the Operating Partnership that occurred during the nine months ended September 30, 2014, the Company has increased non-controlling interests in the Operating Partnership and decreased additional paid in capital by approximately $22.9 million as of September 30, 2014.

 

Equity Incentive Plan

 

The Company may issue equity-based awards to officers, employees, independent contractors and other eligible persons under the Plan. The Plan provides for the grant of stock options, share awards (including restricted stock and restricted stock units), stock appreciation rights, dividend equivalent rights, performance awards, annual incentive cash awards and other equity based awards, including LTIP units, which are convertible on a one-for-one basis into OP Units.  The Plan provides for a maximum of 228,000 shares of common stock for issuance pursuant to the Plan.  The terms of each grant are determined by the compensation committee of the Board of Directors.  As of September 30, 2014, there were 13,717 of shares available for future grant under the Plan.

 

25



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 8—Stockholders’ Equity (continued)

 

From time to time, the Company may award non-vested shares under the Plan, as compensation to officers, employees non-employee directors and non-employee contractors. The shares vest over a period of time as determined by the Board of Directors at the date of grant. The Company recognizes compensation expense for awards issued to officers, employees and non-employee directors for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.  The Company recognizes compensation expense for awards issued to non-employee consultants in the same period and in the same manner as if the Company paid cash for the underlying services.

 

Concurrently with the completion of the IPO, the Company granted an aggregate of 214,283 restricted shares of common stock, having an aggregate grant date fair value of $3.0 million (calculated as the number of shares granted multiplied by the stock price on date of grant), to the Company’s independent directors, Mr. Pittman, Luca Fabbri, the Company’s Chief Financial Officer, and Jesse J. Hough, the Company’s consultant.  Each of the restricted stock grants vest ratably over a three-year vesting period, subject to continued service with the Company.

 

The consulting agreement with Mr. Hough is recognized as expense over the period that services are received.  The change in fair value of the shares to be issued upon vesting is remeasured at each reporting period and is recorded in general and administrative expenses on the combined consolidated statement of operations.

 

A summary of the non-vested shares as of September 30, 2014 is as follows:

 

 

 

Number of
shares

 

Weighted
average grant
date fair value

 

 

 

 

 

 

 

Unvested at January 1, 2014

 

 

$

 

Granted on April 16, 2014

 

214,283

 

14.00

 

Vested

 

 

 

Forfeited

 

 

 

Unvested at September 30, 2014

 

214,283

 

$

14.00

 

 

For the three and nine months ended September 30, 2014, the Company recognized approximately $0.2 million and $0.4 million, respectively, of stock-based compensation expense related to these restricted stock awards.  As of September 30, 2014, there was $2.4 million of total unrecognized compensation costs related to non-vested stock awards.  As of September 30, 2014, these costs were expected to be primarily recognized over a weighted-average period of 2.5 years. There were no forfeitures for the nine months ended September 30, 2014.

 

Earnings per Share

 

The limited partners’ outstanding OP Units (which may be redeemed for shares of common stock) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income would also be added back to net income. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested restricted shares (participating securities) have been excluded, as applicable, from net income or loss attributable to

 

26



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 8—Stockholders’ Equity (continued)

 

common stockholders utilized in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of noncontrolling interests in the earnings per share calculations.  The weighted average number of OP Units held by the noncontrolling interest was 1,945,000 and 1,189,799 for the three and nine months ended September 30, 2014, respectively.

 

For the three and nine months ended September 30, 2014, diluted weighted average common shares do not include the impact of certain unvested compensation-related shares because the effect of these items on diluted earnings per share would be anti-dilutive. For the three and nine months ended September 30, 2014, there were 209,952 and 214,283 anti-dilutive compensation-related shares outstanding.

 

The computation of basic and diluted earnings per share is as follows:

 

 

 

For the three
months ended
September 30,
2014

 

For the nine
months ended
September 30,
2014

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income (loss) attributable to Farmland Partners Inc.

 

$

27,651

 

$

(330,632

)

Less: Dividends paid on unvested restricted shares

 

(22,500

)

(45,000

)

Net loss attributable to common stockholders

 

$

5,151

 

$

(375,632

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted-average number of common shares - basic

 

6,305,253

 

3,168,803

 

Unvested restricted shares (1)

 

4,331

 

 

Weighted-average number of common shares - diluted

 

6,309,584

 

3,168,803

 

 

 

 

 

 

 

Income (loss) per share attributable to common stockholders - basic

 

$

 

$

(0.12

)

 

 

 

 

 

 

Income (loss) per share attributable to common stockholders - diluted

 

$

 

$

(0.12

)

 


(1) Anti-dilutive for the nine months ended September 30, 2014.

 

Unvested restricted shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share.

 

27



Table of Contents

 

Farmland Partners Inc.

Notes to Combined Consolidated Financial Statements

(Unaudited)

 

Note 9—Subsequent Events

 

See Note 6 for a subsequent bond issuance under the Farmer Mac Facility and an amendment to increase the maximum borrowing capacity under the Farmer Mac Facility.

 

See Note 7 for subsequent real estate acquisitions.

 

On October 29, 2014, the Company announced that the Board of Directors approved a $10 million program to repurchase shares of the Company’s common stock.  Repurchases under this program will be made from time to time, in amounts and prices as the Company deems appropriate.  Repurchases may be made in open market or privately negotiated transactions in compliance with SEC Rule 10b-18, subject to market conditions, applicable legal requirements, trading restrictions under the Company’s insider trading policy, and other relevant factors.  This share repurchase plan does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion.  The Company expects to fund repurchases under the program using cash on its balance sheet.

 

In October 2014, the Company entered into purchase agreements with unrelated third parties to acquire the following farms:

 

Farm Name

 

State

 

Total
approximate
acres

 

Purchase
price

 

Prague

 

NE

 

80

 

$

344,000

 

Keating (2 farms)

 

NE

 

2,720

 

10,450,000

 

Mentink

 

NE

 

160

 

560,000

 

Otterpohl

 

NE

 

162

 

1,010,938

 

Kropatsch

 

NE

 

80

 

772,000

 

Tindall

 

NE

 

160

 

1,312,000

 

Crow

 

AR

 

718

 

2,500,000

 

Proventus

 

MS

 

1,964

 

6,783,000

 

Jacoby

 

CO

 

160

 

993,995

 

 

 

 

 

6,204

 

$

24,725,933

 

 

The acquisitions are expected to close in the fourth quarter of 2014, subject to the satisfaction of certain customary closing conditions.  There can be no assurance that these conditions will be satisfied or that the pending acquisitions will be consummated on the terms described herein, or at all.

 

28



Table of Contents

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the prospectus dated July 24, 2014, which was filed with the SEC in accordance with Rule 424(b) of the Securities Act on July 25, 2014, which is accessible on the SEC’s website at www.sec.gov. The terms “Company,” “we,” “our” and “us” refer to Farmland Partners Inc. and its consolidated subsidiaries except where the context otherwise requires.

 

Note Regarding Forward-Looking Statements

 

We make statements in this Quarterly Report on Form 10-Q that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These forward-looking statements include, without limitation, statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance, as well as statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.  Some factors that might cause such a difference include the following: general volatility of the capital markets and the market price of our common stock, changes in our business strategy, availability, terms and deployment of capital, availability of qualified personnel, changes in our industry, interest rates or the general economy, the degree and nature of our competition and the other factors described in the section entitled “Risk Factors” in the prospectus that was filed with the SEC on July 25, 2014.  Given these uncertainties, undue reliance should not be placed on such statements.  We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.  We urge you to review the disclosures concerning risks in the sections entitled “Risk Factors,” “Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the prospectus that was filed with the SEC on July 25, 2014.

 

Overview and Background

 

We are an internally managed real estate company that owns and seeks to acquire high-quality farmland located in agricultural markets throughout North America. As of October 31, 2014, our portfolio consists of 46 farms in Illinois, Nebraska, Colorado, Arkansas and Louisiana, totaling approximately 28,832 acres, including four farms totaling 4,531 acres acquired subsequent to September 30, 2014.  The substantial majority of our farms are devoted to primary crops, such as corn, soybeans and wheat, because we believe primary crop farmland is likely to provide attractive risk-adjusted returns over time through a combination of stable rental income generation and value appreciation.

 

We were incorporated in Maryland on September 27, 2013, and we are the sole member of the general partner of Farmland Partners Operating Partnership, LP (the “Operating Partnership”), which was formed in Delaware on September 27, 2013. All of the Company’s assets are held by, and its operations are primarily conducted through, the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.

 

We succeeded to the operations of our predecessor, FP Land LLC, a Delaware limited liability company (“FP Land” or our “Predecessor”) upon completion of the underwritten initial public offering of 3,800,000 shares of our common stock

 

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(the “IPO”) on April 16, 2014. Concurrently with the completion of the IPO, FP Land merged with and into the Operating Partnership, with the Operating Partnership surviving (the “FP Land Merger”). As consideration for the FP Land Merger, the Operating Partnership issued 1,945,000 units of limited partnership interest in the Operating Partnership (“OP Units”) to Pittman Hough Farms LLC (“Pittman Hough Farms”), which was the sole member of FP Land and is 75% owned by Paul A. Pittman, our Executive Chairman, President and Chief Executive Officer. As a result of the FP Land Merger, the Operating Partnership acquired the 38 farms and three grain storage facilities owned indirectly by our Predecessor and assumed the ownership and operation of our Predecessor’s business.

 

As of September 30, 2014, the Company owned 79.9% of the OP Units in the Operating Partnership.

 

We intend to elect and qualify to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with our short taxable year ending December 31, 2014.

 

Recent Developments

 

Completed Acquisitions

 

Since the completion of the IPO, we have completed eight acquisitions, which are described in further detail below. As a result, the number of acres in our portfolio more than tripled, the number of our tenants increased from four to fifteen, and the percentage of total acres leased to unrelated third parties went from approximately 16% to approximately 81%. All eight of these completed acquisitions are in geographic areas in which we did not have a prior presence (East-Central Colorado, Western Nebraska, Arkansas and Louisiana), with the acreage in East-Central Colorado being sizeable enough (approximately 15,671 acres) to potentially allow us in the future to create economies of scale for our tenants. Our acquisitions in Colorado, Arkansas and Louisiana also diversified our crop exposure with significantly more wheat (a crop in which we previously had only nominal exposure), cotton and rice.

 

Farm name

 

Location

 

Date
acquired

 

Total
approximate
acres

 

Purchase
price

 

 

 

 

 

 

 

 

 

 

 

Erker

 

Kit Carson County, Colorado

 

5/30/2014

 

3,171

 

$

7,644,339

 

Hudye

 

Eastern Colorado

 

6/12/2014

 

12,500

 

24,500,000

 

Broadwater

 

Morrill County, Nebraska

 

7/1/2014

 

640

 

1,040,666

 

Ruder

 

Yell County, Arkansas

 

9/24/2014

 

667

 

2,705,800

 

Davis

 

Richland, Lousiana

 

10/16/2014

 

885

 

3,867,500

 

Bonita Brake

 

Morehouse, Lousiana

 

10/15/2014

 

1,088

 

5,151,505

 

Ballymore

 

Yell County, Arkansas

 

10/24/2014

 

1,250

 

4,600,000

 

Stonington-Smith

 

Baca County, Colorado

 

10/29/2014

 

1,308

 

3,924,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,509

 

$

53,433,810

 

 

The Company received rent for 2014 in its entirety, without proration, on the Erker, Hudye and Broadwater farm acquisitions.  The Company will receive all of the rent for 2014 under the Ruder farm acquisition lease which has rental payments due at harvest equal to either 20% or 25% of the crop, depending on the lease for the type of crop.  The Ballymore farm acquisition lease has rental payments due at harvest equal to either a set number of bushels of the crop or 25% of the crop harvested, depending on the type of crop.  The Company received pro rata rent for 2014, on the Davis, Bonita Brake and Stonington-Smith farm acquisitions, based on the date of acquisition.

 

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Properties under Contract

 

We have entered into purchase agreements with unrelated third parties to acquire the following farms:

 

Farm Name

 

State

 

Total
approximate
acres

 

Purchase
price

 

Crow

 

AR

 

718

 

$

2,500,000

 

Garrott

 

AR

 

1,273

 

3,320,000

 

Vendome

 

AR

 

1,447

 

7,162,650

 

Dionisio

 

CO

 

247

 

2,500,000

 

Jarecki

 

NE

 

160

 

1,640,000

 

Prague

 

NE

 

80

 

344,000

 

Keating (2 farms)

 

NE

 

2,720

 

10,450,000

 

Mentink

 

NE

 

160

 

560,000

 

Otterpohl

 

NE

 

162

 

1,010,938

 

Kropatsch

 

NE

 

80

 

772,000

 

Tindall

 

NE

 

160

 

1,312,000

 

Proventus

 

MS

 

1,964

 

6,783,000

 

Jacoby

 

CO

 

160

 

993,995

 

 

 

 

 

9,331

 

$

39,348,583

 

 

These acquisitions are expected to close in the fourth quarter of 2014, subject to the satisfaction of certain customary closing conditions.  There can be no assurance that these conditions will be satisfied or that the pending acquisitions will be consummated on the terms described herein, or at all.

 

Follow-on Equity Offering

 

We completed an underwritten public offering on July 30, 2014, pursuant to which we sold 3,717,472 shares of common stock at an offering price of $12.50 per share and generated gross proceeds of approximately $46.5 million. We received net proceeds from the offering of approximately $43.3 million after deducting the underwriting discounts and commissions and other offering expenses payable by us. We intend to use the net proceeds from the offering to fund future acquisitions and for general corporate purposes.

 

Financing Activity

 

On August 22, 2014, the Company and the Operating Partnership entered into a bond purchase agreement (the “Bond Purchase Agreement”) with Federal Agricultural Mortgage Corporation (“Farmer Mac”) and Farmer Mac Mortgage Securities Corporation, a wholly owned subsidiary of Farmer Mac, as bond purchaser, regarding a secured note purchase facility (the “Farmer Mac Facility”) that initially provided for borrowings up to an aggregate principal amount of $30.0 million. On October 13, 2014, we amended the Farmer Mac Facility to increase the facility’s maximum borrowing capacity to $75.0 million.

 

On September 5, 2014, the Operating Partnership issued a $20.7 million, interest-only bond under the Farmer Mac Facility. The note has a three-year term and has a fixed interest rate of 2.40%.

 

On October 23, 2014, the Operating Partnership issued a $5.5 million, interest-only bond under the Farmer Mac Facility. The note has a three-year term and has a fixed interest rate of 2.35%.

 

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Factors That May Influence Future Results of Operations and Farmland Values

 

The principal factors affecting our operating results and the value of our farmland include global demand for food relative to the global supply of food, farmland fundamentals and economic conditions in the markets in which we own farmland, and our ability to increase or maintain rental revenues while controlling expenses. Although farmland prices may show a decline from time to time, we believe that any reduction in U.S. farmland values overall is likely to be short-lived as global demand for food and row crops typically exceeds global supply. In addition, although prices for many annual row crops, and particularly corn, have experienced significant declines in 2014, we do not believe that such declines represent a trend that will continue over the long term. Rather, we believe that long-term growth trends in global population and GDP per capita will result in increased prices for primary row crops over time.

 

Demand

 

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 primary row crops will continue to grow to keep pace with global population growth, which we anticipate will result in higher prices for primary row crops 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 row crops. As global GDP per capita increases, the composition of daily caloric intake is expected to shift away from the direct consumption of primary row crops toward animal-based proteins, which is expected to result in increased demand for primary row crops as feed for livestock. According to the United Nations’ Food and Agriculture Organization (“UN FAO”), these factors are expected to require more than one billion additional tons of global annual grain production by 2050, a 45.5% increase from 2005-2007 levels and two-and-a-half times the 423 million tons of grain produced in the United States in 2012.  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 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 row crops over the long-term.

 

Supply

 

Global supply of row crops is driven by two primary factors, the number of tillable acres available for row crop production and the productivity of the acres being farmed. Although the amount of global cropland in use has gradually increased over time, growth has plateaued over the last 20 years.  Cropland area continues to increase in developing countries, but after accounting for expected continuing cropland loss, the UN FAO projects only 173 million acres will be added from 2005-2007 to 2050, a 4.3% increase. In comparison, world population is expected to grow over the same period to 9.5 billion, a nearly 38% increase. 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 in the United States and globally as a result of increasing urbanization will partially offset the impact of additional supply of farmland. The global supply of food is also impacted by the productivity per acre of tillable land. Historically, productivity gains (measured by average crop yields) have been driven by advances in seed technology, farm equipment, irrigation techniques and chemical fertilizers and pesticides. Furthermore, we expect the

 

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increasing shortage of water in many irrigated growing regions in the United States and other growing regions around the globe, often as a result of new water restrictions imposed by laws or regulations, to lead to decreased productivity growth on many acres and, in some cases, cause yields to decline on those acres.

 

Conditions in Our Existing Markets

 

The market for farmland is dominated by buyers who are existing farm owners and operators. As a result of increasing commodity prices and the relatively low return on alternative investments, farmland values in many agricultural markets have increased in recent years and capitalization rates have decreased. Although farmland prices may show a decline from time to time, we do not expect a major long-term reduction in farmland values, and believe any reduction in land values is likely to be short-lived as global demand for food and row crops continues to outpace supply. On the other hand, we do not expect farmland values to continue to rise as rapidly as they have in recent years. We believe quality farmland in the United States has a near-zero vacancy rate as a result of the supply and demand fundamentals discussed above. We believe rental rates for farmland are a function of farmland operators’ view of the long-term profitability of farmland, and that many farm operators will continue to 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 more acres. Furthermore, because it is generally customary in the farming 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 when profitability is higher. As a result, in our experience, many farm operators will aggressively pursue rental opportunities in close proximity to their existing operations when they arise, even when the farmer anticipates lower current returns or short-term losses. In addition, because many farmers both own farmland and rent additional farmland from other landowners, we believe that many farmers will choose to subsidize losses on rented land during periods of lower profitability with relatively higher profits generated by land that they own and that has comparatively lower fixed costs.

 

Our existing portfolio is concentrated primarily in Illinois and Colorado, which may expose us to greater economic risk than if we owned a more geographically diverse portfolio.  Negative developments or conditions in these markets could adversely affect the value of our farmland and our ability to lease our farmland on favorable terms or at all.

 

Lease Expirations

 

Farm leases are often short-term in nature.  Our portfolio as of September 30, 2014 has the following lease expirations as a percentage of approximate acres and annualized cash rents:

 

Year Ending December 31,

 

Approximate
acres

 

% of
approximate
acres

 

Annualized
cash rents

 

% of
annualized
cash rents

 

Remaining 3 months in 2014

 

4,616

 

19.1

%

$

967,004

 

22.9

%

2015

 

1,857

 

7.6

%

766,975

 

18.2

%

2016

 

17,188

 

70.7

%

2,422,282

 

57.4

%

2018

 

640

 

2.6

%

65,000

 

1.5

%

 

 

24,301

 

 

 

$

4,221,261

 

 

 

 

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Rental Revenues

 

Our revenues are generated from renting farmland to operators of farming businesses. Farmland leases typically have terms of between one and three years. Substantially all of our leases have terms ranging from one to five years.  Although our leases do not provide the tenant with a contractual right to renew the lease upon its expiration, we believe it is customary to provide the existing tenant with the opportunity to renew the lease, subject to any increase in the rental rate that we may establish. If the tenant elects not to renew the lease at the end of the lease term, the land will be offered to a new tenant.

 

The leases for substantially all of the properties in our portfolio provide that tenants must pay us 100% of the annual rent in advance of each spring planting season.  As a result, we expect to collect 100% of the annual rent in the first calendar quarter of each year for 39 of the 45 farms in our portfolio.  We believe our use of leases pursuant to which 100% of the annual rent is payable in advance of each spring planting season substantially 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. Prior to acquiring farmland property, we will 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.

 

Expenses

 

All of the leases for our portfolio are, and we expect that substantially all of the leases for farmland we acquire in the future will be, structured in such a way such that we are responsible for major maintenance, insurance and taxes (which are generally 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. As the owner of the land, we generally will only bear costs related to major capital improvements permanently attached to the property, such as irrigation systems, drainage tile, grain storage facilities or other typical physical structures. In cases where capital expenditures are necessary, we typically will seek to offset, over a period of multiple years, the costs of such capital expenditures by increasing rental rates. We also will 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 (including fees under the Consulting Agreement with Jesse J. Hough) and legal and accounting fees. We also incur costs associated with managing our farmland. However, because farmland generally has minimal, if any, physical structures that need routine inspection and maintenance, and our leases generally are and we expect will continue to be structured to provide that the tenant pays many of the costs associated with the property, we do not believe the management of our farmland will be labor- or capital-intensive. 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. Rather, we expect that as we add additional farmland to our portfolio, we will be able to achieve economies of scale, which will enable us to reduce our operating costs per acre.

 

Crop Prices

 

The value of a crop is affected by many factors that can differ on a yearly basis. Weather conditions and crop disease in major crop production regions worldwide creates a significant risk of price volatility, which may either increase or decrease the value of the crops that our tenants produce each year. Other material factors adding to the volatility of crop prices are changes in government regulations and policy, fluctuations in global prosperity, fluctuations in foreign trade and export markets, and eruptions of military conflicts or civil unrest. Prices for many annual row crops, and particularly corn, have experienced significant declines in 2014, but we do not believe that such declines represent a trend that will

 

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continue over the long term. Rather, we believe that those declines in prices for annual row crops represented a correction to historical norms (adjusted for inflation) and that long-term growth trends in global population and GDP per capita will result in increased prices for primary row crops over time. Although annual rental payments under our leases typically will not be 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, increasing 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 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.

 

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 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 combined 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.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Real Estate Acquisitions

 

The Company accounts for all acquisitions in accordance with the business combinations standard. When an acquisition involves a sale-lease back transaction with newly originated leases entered into with the seller, the Company accounts for the transaction as an asset acquisition and capitalizes the transaction costs incurred in connection with the acquisition. When the Company acquires farmland that was previously operated as a rental property, the Company accounts for the transaction as a business combination and charges the costs associated with the acquisition to acquisition and due diligence costs on the statement of operations as incurred.  Upon acquisition of real estate, the Company allocates 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 and grain facilities, and may also consist of intangible assets including in-place leases, above market and below market leases and tenant relationships. The Company allocates the purchase price to the fair val