Gladstone Land Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Real Estate and Intangible Assets

Real Estate and Intangible Assets

3 Months Ended

Mar. 31, 2017

All of our properties are wholly owned on a fee-simple basis. The following table provides certain summary information about our 59 farms as of March 31, 2017 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California	22	6,713	6,240	$	181,634	$	126,186
Florida	16	9,315	7,664	108,345		64,967
Colorado	9	30,170	23,257	42,469		24,145
Oregon	4	2,313	2,003	19,305		11,549
Arizona	2	3,000	2,195	13,334		7,502
Nebraska	2	2,559	2,101	10,748		6,602
Michigan	4	270	183	3,022		1,477
	59	54,340	43,643	$	378,857	$	242,428

⁽¹⁾

Consists of the initial acquisition price (including the costs allocated to both tangible and intangible assets acquired and liabilities assumed), plus subsequent improvements and other capitalized costs associated with the properties, and adjusted for accumulated depreciation and amortization. Includes Investments in real estate, net (excluding improvements paid for by the tenant) and Lease intangibles, net; plus net above-market lease values included in Other assets; and less net below-market lease values, deferred revenue and unamortized tenant improvements included in Other liabilities, each as shown on the accompanying Condensed Consolidated Balance Sheet.


⁽²⁾	Excludes approximately $1.7 million of deferred financing costs related to mortgage notes and bonds payable included in Mortgage notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheet.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of March 31, 2017, and December 31, 2016 (dollars in thousands):



	March 31, 2017			December 31, 2016
Real estate:
Land and land improvements	$	318,473		$	265,985
Irrigation systems	35,805			33,969
Buildings	14,849			14,671
Horticulture	17,771			17,759
Other improvements	5,001			4,993
Real estate, at cost	391,899			337,377
Accumulated depreciation	(12,400		)	(11,066		)
Real estate, net	$	379,499		$	326,311

Real estate depreciation expense on these tangible assets was approximately $1.3 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively.

Included in the figures above are amounts related to improvements on certain of our properties paid for by our tenants but owned by us, or tenant improvements. As of each of March 31, 2017, and December 31, 2016, we recorded tenant improvements, net of accumulated depreciation, of approximately $1.8 million. We recorded both depreciation expense and additional rental revenue related to these tenant improvements of approximately $37,000 for each of the three months ended March 31, 2017 and 2016.

Intangible Assets and Liabilities

The following table summarizes the carrying values of lease intangible assets and the related accumulated amortization as of March 31, 2017, and December 31, 2016 (dollars in thousands):



	March 31, 2017			December 31, 2016
Lease intangibles:
In-place leases	$	1,481		$	1,481
Leasing costs	1,097			1,086
Tenant relationships	706			706
Lease intangibles, at cost	3,284			3,273
Accumulated amortization	(1,412		)	(1,273		)
Lease intangibles, net	$	1,872		$	2,000

Total amortization expense related to these lease intangible assets was approximately $139,000 and $177,000 for the three months ended March 31, 2017 and 2016, respectively.

The following table summarizes the carrying values of certain lease intangible assets or liabilities included in Other assets and Other liabilities, respectively, on the accompanying Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of March 31, 2017, and December 31, 2016 (dollars in thousands).



	March 31, 2017						December 31, 2016
Intangible Asset or Liability	Deferred Rent Asset (Liability)			Accumulated (Amortization) Accretion			Deferred Rent Asset (Liability)			Accumulated (Amortization) Accretion
Above-market lease values⁽¹⁾	$	20		$	(16	)	$	19		$	(14	)
Below-market lease values and deferred revenue⁽²⁾	(786		)	76			(785		)	61
	$	(766	)	$	60		$	(766	)	$	47


⁽¹⁾	Above-market lease values are included as part of Other assets in the accompanying Condensed Consolidated Balance Sheets, and the related amortization is recorded as a reduction of rental income.


⁽²⁾	Below-market lease values and deferred revenue are included as a part of Other liabilities in the accompanying Condensed Consolidated Balance Sheets, and the related accretion is recorded as an increase to rental income.

For each of the three months ended March 31, 2017 and 2016, total amortization related to above-market lease values and deferred revenue was approximately $2,000. Total accretion related to below-market lease values and deferred revenue was approximately $15,000 and $7,000 for the three months ended March 31, 2017 and 2016, respectively.

New Real Estate Activity

Until our adoption of ASU 2017-01, which clarified the definition of a business, certain acquisitions during the prior-year period were accounted for as business combinations in accordance with ASC 805, as there was a prior leasing history on the property. As such, the fair value of all assets acquired and liabilities assumed were determined in accordance with ASC 805, and all acquisition-related costs were expensed as incurred, other than those costs directly related to reviewing or assigning leases that we assumed upon acquisition, which were capitalized as part of leasing costs. Upon our early adoption of ASU 2017-01, effective October 1, 2016, acquisitions with a prior leasing history will generally be treated as an asset acquisition under ASC 360. For acquisitions accounted for as asset acquisitions under ASC 360, all acquisition-related costs were capitalized and included as part of the fair value allocation of the identifiable tangible and intangible assets acquired, other than those costs that directly related to originating new leases we executed upon acquisition, which were capitalized as part of leasing costs.

In addition, total consideration for acquisitions may include a combination of cash and equity securities, such as OP Units. When OP Units are issued in connection with acquisitions, we determine the fair value of the OP Units issued based on the number of units issued multiplied by the closing price of the Company’s common stock on the date of acquisition.

2017 New Real Estate Activity

During the three months ended March 31, 2017, we acquired one new farm in one transaction, which is summarized in the table below (dollars in thousands).

Property

Name

Property

Location

Acquisition

Date

Total

Acreage

No. of

Farms

Primary

Crop(s)

Lease

Term

Renewal

Options

Total

Purchase

Price

Acquisition

Costs

Annualized

Straight-line

Rent⁽¹⁾

Net

Long-term

Debt Issued

Citrus Boulevard

Stuart, FL

1/12/2017

3,748

Organic Vegetables

7 years

3 (5 years)

54,000

⁽²⁾

2,926

32,400


⁽¹⁾	Annualized straight-line amount is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.


⁽²⁾	Acquisition accounted for as an asset acquisition under ASC 360.

The allocation of the purchase price for the farm acquired during the three months ended March 31, 2017, is as follows (dollars in thousands):



Property Name	Land and Land Improvements		Buildings		Irrigation Systems		Total Purchase Price
Citrus Boulevard	$	52,375	$	178	$	1,447	$	54,000

Below is a summary of the total operating revenues and earnings recognized on the property acquired during the three months ended March 31, 2017 (dollars in thousands):



		For the three months ended March 31, 2017
Property Name	Acquisition Date	Operating Revenues		Earnings
Citrus Boulevard	1/12/2017	$	645	$	380

2016 New Real Estate Activity

During the three months ended March 31, 2016, we acquired three new farms in one transaction, which is summarized in the table below (dollars in thousands, except for footnotes).

Property
Name

Property
Location

Acquisition
Date

Total
Acreage

No. of
Farms

Primary
Crop(s)

Lease
Term

Renewal
Options

Total
Purchase
Price

Acquisition
Costs

Annualized
Straight-line
Rent⁽¹⁾

Net
Long-term
Debt Issued

Gunbarrel Road ⁽²⁾

Alamosa, CO

3/3/2016

6,191

Organic Potatoes

5 years

1 (5 years)

25,736

119

⁽³⁾

1,591

15,531


⁽¹⁾	Annualized straight-line amount is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.


⁽²⁾	As partial consideration for the acquisition of this property, we issued 745,879 OP Units, constituting an aggregate fair value of approximately $6.5 million as of the acquisition date. We incurred $25,500 of legal costs in connection with the issuance of these OP Units.


⁽³⁾	Acquisition accounted for as a business combination under ASC 805. In aggregate, $4,670 of these costs related to direct leasing costs incurred in connection with these acquisitions.

The allocation of the purchase price for the farms acquired during the three months ended March 31, 2016, were as follows (dollars in thousands):



Property Name	Land and Land Improvements		Buildings and Improvements		Irrigation System		Other Improvements		In-place Leases		Leasing Costs		Total Purchase Price
Gunbarrel Road	$	16,756	$	3,438	$	2,831	$	2,079	$	382	$	250	$	25,736

Below is a summary of the total operating revenues and earnings recognized on the properties acquired during the three months ended March 31, 2016 (dollars in thousands, except for footnotes):



		For the three months ended March 31, 2016
Property Name	Acquisition Date	Operating Revenues		Earnings⁽¹⁾
Gunbarrel Road	3/3/2016	$	124	$	(101	)


⁽¹⁾	Includes approximately $84,000 of non-recurring acquisition-related costs during the three months ended March 31, 2016.

Acquired Intangibles and Liabilities

The following table shows the weighted-average amortization period, in years, for the intangible assets acquired and liabilities assumed in connection with new real estate acquired during the three months ended March 31, 2016. There were intangible assets acquired or liabilities assumed in connection with new real estate acquired during the three months ended March 31, 2017.



		Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities		2016
In-place leases		5.1
Leasing costs		5.1
All intangible assets and liabilities		5.1

Pro-Forma Financials

During the three months ended March 31, 2016, we acquired three farms that qualified as business combinations. No farms were acquired during the three months ended March 31, 2017 that were treated as business combinations. The following table reflects pro-forma consolidated financial information as if each farm acquired during the three months ended March 31, 2016, as part of a business combination was acquired on January 1, 2015. In addition, pro-forma earnings have been adjusted to assume that acquisition-related costs related to these farms were incurred at the beginning of the previous fiscal year (dollars in thousands, except share and per-share amounts).



	For the Three Months Ended
	March 31, 2016
	(Unaudited)
Operating Data:
Total operating revenue	$	3,762
Net income attributable to the company	$	156
Share and Per-share Data:
Earnings per share of common stock – basic and diluted	$	0.01
Weighted-average common shares outstanding – basic and diluted	10,738,820

The pro-forma consolidated results are prepared for informational purposes only. They are not necessarily indicative of what our consolidated financial condition or results of operations actually would have been assuming the acquisitions had occurred at the beginning of the previous fiscal year, nor do they purport to represent our consolidated financial position or results of operations for future periods.

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations, by state, of our properties with leases in place as of March 31, 2017 and 2016 (dollars in thousands):



	As of and For the Three Months Ended March 31, 2017								As of and For the Three Months Ended March 31, 2016
State	Number of Farms	Total Acres	% of Total Acres		Rental Revenue		% of Total Rental Revenue		Number of Farms	Total Acres	% of Total Acres		Rental Revenue		% of Total Rental Revenue
California	22	6,713	12.4	%	$	2,857	49.7	%	18	3,576	15.5	%	$	2,140	58.2	%
Florida	16	9,315	17.1	%	1,531		26.6	%	13	5,094	22.1	%	743		20.2	%
Colorado	9	30,170	55.5	%	673		11.7	%	3	6,191	26.9	%	124		3.4	%
Oregon	4	2,313	4.3	%	294		5.1	%	4	2,313	10.1	%	293		7.9	%
Arizona	2	3,000	5.5	%	186		3.2	%	2	3,000	13.1	%	173		4.7	%
Nebraska	2	2,559	4.7	%	145		2.6	%	2	2,559	11.1	%	145		3.9	%
Michigan	4	270	0.5	%	62		1.1	%	4	270	1.2	%	62		1.7	%
	59	54,340	100.0	%	$	5,748	100.0	%	46	23,003	100.0	%	$	3,680	100.0	%

Concentrations

Credit Risk

As of March 31, 2017, our farms were leased to 40 different, third-party tenants, with certain tenants leasing more than one farm. One unrelated tenant ("Tenant A") leases five of our farms, and aggregate rental revenue attributable to Tenant A accounted for approximately $1.0 million, or 17.8% of the rental revenue recorded during the three months ended March 31, 2017. In addition, Dole Food Company (“Dole”) leases two of our farms, and aggregate rental revenue attributable to Dole accounted for approximately $0.7 million, or 12.9% of the rental revenue recorded during the three months ended March 31, 2017. If either Tenant A or Dole fails to make rental payments or elects to terminate its leases, and the properties cannot be re-leased on satisfactory terms, there could be a material adverse effect on our financial performance and ability to continue operations. No other individual tenant represented greater than 10.0% of the total rental revenue recorded during the three months ended March 31, 2017.

Geographic Risk

22 of our 59 farms owned as of March 31, 2017, are located in California, and 16 farms are located in Florida. As of March 31, 2017, our farmland in California accounted for 6,713 acres, or 12.4% of the total acreage we owned, and these farms accounted for approximately $2.9 million, or 49.7% of the rental revenue recorded during the three months ended March 31, 2017. However, our 22 California farms are spread across three of the many different growing regions within the state. In addition, as of March 31, 2017, our farmland in Florida and Colorado accounted for 9,315 acres and 30,170 acres, respectively, or 17.1% and 55.5%, respectively, of the total acreage we owned. Furthermore, our Florida and Colorado farms accounted for approximately $1.5 million and $0.7 million, respectively, or 26.6% and 11.7%, respectively, of the rental revenue recorded during the three months ended March 31, 2017. Though we seek to continue to further diversify geographically, as may be desirable or feasible, should an unexpected natural disaster occur where our properties are located, there could be a material adverse effect on our financial performance and ability to continue operations. No other single state accounted for more than 10.0% of the total rental revenue recorded during the three months ended March 31, 2017.