UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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

 

For the quarterly period ended March 31,  2015

 

or

 

☐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

 

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FARMLAND PARTNERS INC.

(Exact Name of Registrant as Specified in its Charter)

 

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(720) 452-3100

(Registrant’s Telephone Number, Including Area Code)

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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.   ☒  Yes   ☐ 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).   ☒  Yes   ☐  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):

 

 

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

 

As of May 8,  2015,  7,795,336 shares of the Registrant’s common stock were outstanding.

 

 

 

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Farmland Partners Inc.

 

FORM 10-Q FOR THE QUARTER ENDED

March 31,  2015

 

TABLE OF CONTENTS

 

 

 

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Farmland Partners Inc.

Combined Consolidated Balance Sheets

As of March 31, 2015 and December 31, 2014

(Unaudited)

 

 

See accompanying notes.

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Farmland Partners Inc.

Combined Consolidated Statements of Operations

For the three months ended March 31,  2015 and 2014

(Unaudited)

 

 

See accompanying notes.

 

 

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Farmland Partners Inc.

Combined Consolidated Statements of Cash Flows

For the three months ended March 31,  2015 and 2014

(Unaudited)

 

 

See accompanying notes.

 

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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. As of March 31, 2015, the Company owned or had a controlling interest in a portfolio of 93 farms, as well as six grain storage facilities, which are consolidated in these financial statements. 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. As of March 31, 2015, the Company owned 80.0% of the units of limited partnership interest in the Operating Partnership (“OP Units”).  See Note 8 for additional discussion regarding OP units.

 

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”). 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 (the “Contributed Properties”).  

 

The Company intends to elect 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 ended December 31, 2014.

 

On March 16, 2015, the Company formed FPI Agribusiness Inc. as a taxable REIT subsidiary (the “TRS” or “FPI Agribusiness”).  The  TRS was formed to provide purchasing services to the Company’s tenants and to operate a farming business on a small scale (initially on 563 acres).

 

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.

 

Due to the timing of the IPO and the formation transactions, the results of operations for the three months ended March 31, 2014 reflect the results of operations of FP Land.  The Company’s financial condition as of March 31, 2015 and December 31, 2014 and the results of operations for the three months ended March 31, 2015 reflect the financial condition and results of operations of the Company.

 

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Interim Financial Information

 

The information in the Company’s combined consolidated financial statements for the three months ended March 31, 2015 and 2014 is unaudited.  All significant inter-company balances and transactions have been eliminated in consolidation.  The accompanying financial statements for the three months ended March 31, 2015 and 2014 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, 2014, included in the Company’s Annual Report on Form 10-K, which the Company filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2015.  Operating results for the three months ended March 31, 2015 are not necessarily indicative of actual operating results for the entire year ending December 31, 2015.

 

Reclassifications

 

Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net (loss) income, 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 the Company acquires farmland that was previously operated as a rental property, the Company evaluates whether a lease is in place or a crop is being produced at the time of closing of the acquisition.  If a lease is in place or a crop is being produced, 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. Otherwise, acquisitions with no lease in place or crops being produced at the time of acquisition are accounted for as asset acquisitions.  When the Company acquires farmland 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.

 

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 as if it were unimproved. The Company values improvements, including grain facilities, at replacement cost 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. Management’s estimates of groundwater value are made using historical information obtained regarding the applicable aquifer. 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.  If the aquifer is a replenishing resource, no value is allocated to the groundwater.  The Company includes an estimate of property taxes in the purchase price allocation of acquisitions to account for the expected liability that was acquired.  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

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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 March 31, 2015 and December 31, 2014, 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, probability of lease renewal, estimated down time 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 acquisition or due diligence costs are incurred, the Company capitalizes acquisition costs for expected asset acquisitions.  If the asset acquisition is abandoned, the capitalized asset acquisition costs will be charged to acquisition and due diligence costs in the period of abandonment.

 

Total consideration may include a combination of cash and equity securities.  When equity securities are issued, the Company determines the fair value of the equity securities based on the number of shares of common stock or OP units issued multiplied by the stock price on the date of closing.

 

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 begins depreciating assets when the asset is ready for its intended use.

 

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:

 

 

 

 

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

 

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 March 31, 2015 and December 31, 2014 was held in the custody of three 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, which are capitalized and have been allocated to the Company.  During the period ended March 31, 2015, $103,215 in costs were capitalized in conjunction with the issuance of two bonds in April 2015 under the Farmer Mac Facility (as defined below).  During the year ended December 31, 2014, $135,340 and $234,188 in costs were capitalized in conjunction with the modification of the First Midwest Bank debt on April 16, 2014 and the issuance of five bonds under the Farmer Mac Facility, respectively. 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 $12,300 in deferred financing fees in conjunction with the early repayment of debt during the three months ended March 31, 2015. Accumulated amortization of deferred financing fees was $145,404 and $97,439 as of March 31, 2015 and December 31, 2014, 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.

 

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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 March 31, 2015 and December 31, 2014.

 

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.

 

Leases in place as of March 31, 2015 had terms ranging from one to five years with no renewal options or rent escalations.  The majority of the Company’s leases provide for a fixed cash rent payment.  Tenant leases on acquired farms generally require the tenant to pay the Company 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, the Company typically receives a partial rent payment or no rent payment at all.

 

Certain of the Company’s leases provide for a rent payment determined as a percentage of the gross farm proceeds or a percentage of harvested crops.  Revenue under leases providing for a payment equal to a percentage of the harvested crop or a percentage of the gross farm proceeds is recognized upon notification from the grain facility that grain has been delivered in the Company’s name or when the tenant has notified the Company of the total amount of gross farm proceeds.

 

Certain of the Company’s leases provide for minimum cash rent plus a bonus based on gross farm proceeds.  Revenue under this type of lease is recognized on a straight-line basis over the lease term based on the minimum cash rent.  Bonus rent is recognized upon notification from the tenant of the gross farm proceeds for the year.

 

Tenant reimbursements include reimbursements for real estate taxes that each tenant pays in accordance with the terms of its lease.  When leases require that the tenant reimburse the Company for property taxes paid by the Company, the reimbursement is reflected as tenant reimbursement revenue on the statement of operations, as earned, and the related property tax expense, as incurred.  When a lease requires that the tenant pay the taxing authority, directly, the Company does not incur this cost.  When it becomes probable that a tenant will not be able to bear the property related costs the Company will accrue the estimated expense.

 

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.

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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 (loss) 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.  When an unvested award is forfeited, the Company recognizes compensation expense for dividends paid on the unvested award.  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 expenses on the combined consolidated statement of operations.  As of March 31, 2015, the Company recorded an increase in stock based compensation of $34,343, as a result of a change in fair value of the unvested shares.

 

New or Revised Accounting Standards Not Yet Effective

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge asset. ASU 2015-03 is effective for annual periods beginning after December 15, 2015, but early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s combined consolidated financial statements or financial covenants.

 

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Note 2—Revenue Recognition

 

The Company typically receives one lease payment per year from tenants either during the first quarter of the year or at the 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 March 31,  2015, the Company received full-year rent payments for 2015 of $360,016 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 earned.  At March 31,  2015 and December 31, 2014, the Company had $5,913,183 and $1,364,737 in deferred revenue, respectively.    

 

The following represents a summary of the cash rent received during the three months ended March 31,  2015 and 2014 and the rental income recognized for the three months ended March 31,  2015 and 2014:

 

 

Future minimum lease payments from tenants under all non-cancelable leases in place as of March 31, 2015, excluding tenant reimbursement of expenses and lease payments based on a percentage of farming revenues, for the next four years as of March 31,  2015 are as follows:

 

 

 

 

 

Note 3—Concentration Risk

 

Credit Risk

 

For the three months ended March 31, 2015 and 2014, the Company 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

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financial performance and the Company’s ability to continue operations.  Rental income received is recorded on a straight-line basis over the applicable lease term.  The following is a summary of the Company’s significant tenants:

 

 

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Geographic Risk

 

Many of the Company’s farms are arranged in geographic clusters spanning two to five nearby counties.  Should a natural disaster occur in an area where several of the properties are located, there could be a material adverse effect on the Company’s financial performance.

 

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The following table summarizes the percentage of approximate total acres owned as of March 31, 2015 and 2014 and rental income recorded by the Company for the three months ended March 31, 2015 and 2014 by location of the farm (unaudited):

 

 

 

 

 

Note 4—Related Party Transactions

 

As of March 31, 2015, 15.9% 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 months ended March 31, 2015 and 2014 was $670,429 and $618,710, respectively. As of March 31, 2015 and December 31, 2014, the Company had accounts receivable from these entities of $249,778 and $182,763, respectively.

 

For the three months ended March 31, 2015 and 2014, Pittman Hough Farms incurred $0 and $57,558, respectively, in professional fees on behalf of the Company. 

 

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 paid American Agriculture an annual fee of $175,000 in equal quarterly installments in exchange for management and accounting services.  The agreement was terminated effective as of December 31, 2014, by mutual agreement of both parties.

 

The Company reimbursed American Agriculture $16,816 for general and administrative expenses during the three months ended March 31, 2015, which are included in general and administrative expenses in the combined consolidated statements of operations.  As of March 31, 2015 and December 31, 2014, the Company had outstanding payables to American Agriculture of $9,788 and $49,160, respectively.

 

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.  In February 2015, the Company increased the annual fee to $125,000, effective April 16, 2015.  The Company incurred $18,750 in fees related to the consulting agreement during the three months ended March 31, 2015. The Company did not incur any such fees during the three months ended March 31, 2014. As of March 31, 2015 and December 31, 2014, the Company had outstanding payables to Mr. Hough of $0 and $18,750, respectively.

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On March 21, 2014 and April 16, 2014, the Company and FP Land 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 at the time of the FP Land Merger, which was accrued by FP Land 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.

 

Note 5—Real Estate

 

As of March 31, 2015, the Company owned 93 separate farms, as well as six grain storage facilities, which have been acquired since December 2000.

 

During the three months ended March 31, 2015, the Company acquired the following farms:

 

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The preliminary allocation of purchase price for the farms acquired during the three months ended March 31, 2015 are as follows:

 

 

The allocation of the purchase price for the farms acquired during the three months ended March 31, 2015 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

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months ended March 31, 2015 contributed $0 to total revenue and $2,471 to the net loss (including related real estate acquisition costs of $1,277) for the three months ended March 31, 2015. 

 

During the three months ended March 31, 2015, the Company accounted for the Stonington Bass farm as a business combination.  However, as historical results for the farm were not available, the Company has not included unaudited pro forma financial information reflecting the pro forma results as if the farm had been acquired on January 1, 2014.

 

 

Note 6—Mortgage Notes and Bonds Payable

 

As of March 31, 2015 and December 31, 2014, the Company had the following indebtedness outstanding:

 

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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 net proceeds from 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, 2014 with a portion of the net 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 (as amended, 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

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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.

 

On February 24, 2015, the Company amended the Loan Agreement to revise the financial covenants (as defined below) and repaid $3.08 million of the First Midwest Bank debt.   The Company did not incur any prepayment penalties in conjunction with the repayment.

 

The collateral for the Company’s indebtedness consists of real estate and related farm rents, 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.

 

Under the Loan Agreement, the Company is subject to ongoing compliance with a number of customary affirmative and negative covenants, as well as financial covenants, including a maximum leverage ratio of 0.60 to 1.00 and a minimum fixed charge coverage ratio of 1.50 to 1.00.  Each covenant is 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.   The Company was in compliance with all applicable covenants at March 31, 2015.

 

Farmer Mac Facility

 

The Company and the Operating Partnership are parties to 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 (as amended, the “Farmer Mac Facility”) that has a maximum borrowing capacity of $150.0 million.  Pursuant to the Bond Purchase Agreement, the Operating Partnership may, from time to time, issue one or more bonds 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 may have effective loan-to-value ratios of up to 60%, after giving effect to the overcollateralization obligations described below.  Prepayment of each bond issuance is not permitted unless otherwise agreed upon by all parties to the Bond Purchase Agreement.

 

As of March 31, 2015, the Operating Partnership had $81.1 million outstanding under the Farmer Mac Facility and had $68.9 million of remaining capacity, subject to availability of qualifying collateral.  As of March 31, 2015, the Operating Partnership had $28.4 million in real property valued according to the criteria set forth in the agreement with Farmer Mac, with an effective loan to value of 60%, which could be collateralized against the Farmer Mac Facility, resulting in $17.0 million in available borrowing capacity.

 

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 of $60.8 million. The Company was in compliance with all applicable covenants at March 31, 2015.

 

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 bonds 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 bonds 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.

 

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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 April 7, 2015, the Operating Partnership issued a $14.9 million, interest-only bond under the Farmer Mac Facility. The bond has a ten-year term and has a fixed interest rate of 3.69%.

 

On April 10, 2015, the Operating Partnership issued a $11.2 million, interest-only bond under the Farmer Mac Facility. The bond has a ten-year term and has a fixed interest rate of 3.68%.

 

Aggregate Maturities

 

As of March 31, 2015, aggregate maturities of long-term debt for the succeeding years are as follows:

 

 

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:

 

 

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 March 31, 2015 and December 31, 2014, the fair value of the mortgage notes payable was $107.8 million and $113.6 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.

 

A sale of any of the Contributed Properties that would not provide continued tax deferral to Pittman Hough Farms is contractually restricted until the fifth (with respect to certain properties) or seventh (with respect to certain other properties) anniversary of the completion of the formation transactions. Furthermore, if any such sale or defeasance is foreseeable, the Company is required to notify Pittman Hough Farms and to cooperate with it in considering strategies to defer or

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mitigate the recognition of gain under the Code by any of the equity interest holders of the recipient of the Operating Partnership units.

 

During the first quarter of 2015, the Company entered into purchase agreements with unrelated third-parties to acquire the following farms, which had not closed as of March 31, 2015:

 

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Subsequent to March 31, 2015, the Company completed the Nebraska Battle Creek Farms, Northeast Nebraska Farms, Sutter, Bobcat and Drury farm acquisitions. The Company will account for the Sutter acquisition as an asset acquisition and all others as business combinations.  The initial accounting for the Sutter, Bobcat and Drury farms is not yet complete, making certain disclosures unavailable at this time.  The remaining pending acquisitions are expected to close in the second quarter of 2015, subject to the satisfaction of certain customary closing conditions. 

 

The preliminary allocation of purchase price for the Nebraska Battle Creek Farms and Northeast Nebraska Farms is as follows and may change during the measurement period if the Company obtains new information regarding the assets acquired or liabilities assumed at the acquisition date:

 

 

 

On April 10, 2015, the Operating Partnership issued an aggregate of 238,587 OP units with a fair value of $2.8 million, as of the date of closing, as partial consideration in connection with its acquisition of Nebraska Battle Creek Farms and Northeast Nebraska Farms. 

 

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 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.

 

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The Company accounted for the Nebraska Battle Creek Farms and Northeast Nebraska Farms (collectively the “Farms”) as business combinations.  The unaudited pro forma financial information is presented below as if the Farms acquired subsequent to March 31, 2015 had been acquired on January 1, 2014.

 

 

 

 

Note 8—Stockholders’ Equity

 

The following table summarizes the changes in our stockholders’ equity for the three months ended March 31, 2015:

 

 

As of March 31, 2015, the Company had 9,740,336 fully diluted outstanding shares, including OP units and restricted shares of common stock.

 

Non-controlling Interest in Operating Partnership

 

The Company consolidates its Operating Partnership, a majority owned partnership. As of March 31, 2015, the Company owned 80.0% of the outstanding OP units and the remaining 20.0% of the OP units were owned by Pittman Hough Farms, which is included in Non-controlling interest in Operating Partnership on the balance sheet.

 

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

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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.

 

The 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 issuance of stock compensation and the shares issued as partial consideration for the acquisition, 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 three months ended March 31, 2015, the Company has increased non-controlling interests in the Operating Partnership and decreased additional paid in capital by approximately $.07 million for the three months ended March 31, 2015.

 

Distributions

 

Our Board of Directors declared and paid the following distributions to common stockholders and holders of OP units for the year ended December 31, 2014 and the three months ended March 31, 2015:

 

 

In general, common stock cash dividends declared by the Company will be considered ordinary income to stockholders for income tax purposes.  From time to time, a portion of our dividends may be characterized as capital gains or return of capital.

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Stock Repurchase Plan

 

On October 29, 2014, the Company announced that the Board of Directors approved a program to repurchase up to $10 million in shares of the Company’s common stock.  Repurchases under this program may 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 Rule 10b-18, under the Securities Exchange Act of 1934, 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.  No repurchases had been made as of March 31, 2015.

 

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 terms of each grant are determined by the compensation committee of the Board of Directors.  As of March 31, 2015, there were 13,717 of shares available for future grant under the Plan.

 

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 Compensation Committee of 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.

 

On February 25, 2015, the Company granted 3,214 restricted shares of common stock, having an aggregate grant date fair value of $35,836, to a newly appointed independent director.  The restricted shares vest ratably over a three-year vesting period, subject to continued service as a director.

 

On February 25, 2015, 3,214 restricted shares of common stock, were forfeited by an independent director who resigned from the Company’s Board of Directors.  The Company had recorded $10,820 in stock based compensation and paid $1,047 in dividends.  In conjunction with the forfeiture of restricted shares, the Company reversed $9,773 in previously recorded compensation, net of the dividends paid to the director.

 

A summary of the non-vested shares as of March 31, 2015 is as follows:

 

 

For the three months ended March 31, 2015, the Company recognized approximately $0.2 million of stock-based compensation expense related to these restricted stock awards.  As of March 31, 2015, there was $2.0 million of total

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unrecognized compensation costs related to non-vested stock awards.  As of March 31, 2015, these costs were expected to be primarily recognized over a weighted-average period of 2.1 years.

 

On May 5, 2015, the Company’s stockholders approved the Amended and Restated 2014 Equity Incentive Plan (the “Amended Plan”). The Amended Plan increased the aggregate number of shares of the Company’s common stock reserved for issuance under the Plan to 615,070 shares (including the 214,283 shares of restricted common stock that have been granted to the Company’s executive officers, the Company’s non-executive directors and Jesse J. Hough, the Company’s consultant, and 400,787 shares reserved for potential future issuance).

 

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 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 for the three months ended March 31, 2015.

 

For the three months ended March 31, 2015, 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 months ended March 31, 2015, there were 214,283 anti-dilutive compensation-related shares outstanding.

 

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

 

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(1)   Anti-dilutive for the three months ended March 31, 2015.

 

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.

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Note 9—Subsequent Events

 

See Note 6 for subsequent bond issuances under the Farmer Mac Facility.

 

See Note 7 for subsequent real estate acquisitions.

 

See Note 8 for subsequent issuances of OP units and an amendment to the Plan to increase the number of shares available for future issuance.

 

In April 2015, FPI Agribusiness entered into marketing contracts to sell 25,000 bushels of corn in the fourth quarter of 2015, to protect against the crop exposure from farming operations.  The contracts will be accounted for using the normal purchase and sales exception for hedge accounting.