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, 2018

All of our properties are wholly-owned on a fee-simple basis, except where noted. The following table provides certain summary information about our 75 farms as of March 31, 2018 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California	29	8,241	7,465	$	211,816	$	146,767
Florida	16	11,006	8,846	115,140		73,003
Arizona⁽³⁾	6	6,280	5,228	45,126		22,691
Colorado	10	31,450	24,513	42,081		24,538
Oregon	4	2,313	2,003	19,794		11,970
Nebraska	2	2,559	2,101	10,585		6,602
Washington	1	746	417	9,250		5,368
Michigan	5	446	291	5,042		2,790
North Carolina	2	310	295	2,352		1,301
	75	63,351	51,159	$	461,186	$	295,030

⁽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 and lease incentives included in Other assets, net; and less net below-market lease values and deferred revenue included in Other liabilities, net; each as shown on the accompanying Condensed Consolidated Balance Sheet.


⁽²⁾	Excludes approximately $2.1 million of debt issuance costs related to mortgage notes and bonds payable, included in Mortgage notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheet.

⁽³⁾

Includes two farms in which we own a leasehold interest via ground leases with the State of Arizona that expire in February 2022 and February 2025, respectively. In total, these two farms consist of 1,368 total acres and 1,221 farm acres and had a net cost basis of approximately $3.1 million as of March 31, 2018 (included in Lease intangibles, 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, 2018, and December 31, 2017 (dollars in thousands):



	March 31, 2018			December 31, 2017
Real estate:
Land and land improvements	$	360,381		$	356,316
Irrigation systems	56,234			50,282
Buildings	18,429			18,191
Horticulture	35,837			34,803
Other improvements	6,584			6,551
Real estate, at cost	477,465			466,143
Accumulated depreciation	(18,550		)	(16,657		)
Real estate, net	$	458,915		$	449,486

Real estate depreciation expense on these tangible assets was approximately $1.9 million and $1.3 million for the three months ended March 31, 2018 and 2017, respectively.

Included in the figures above are amounts related to tenant improvements, which are improvements made on certain of our properties paid for by our tenants but owned by us. As of each of March 31, 2018, and December 31, 2017, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.4 million. We recorded both depreciation expense and additional rental revenue related to these tenant improvements of approximately $76,000 and $37,000 during the three months ended March 31, 2018 and 2017, respectively.

Intangible Assets and Liabilities

The following table summarizes the carrying values of certain lease intangible assets and the related accumulated amortization as of March 31, 2018, and December 31, 2017 (dollars in thousands):



	March 31, 2018			December 31, 2017
Lease intangibles:
Leasehold interest – land	$	3,498		$	3,498
In-place leases	1,404			1,451
Leasing costs	1,523			1,490
Tenant relationships	439			439
Lease intangibles, at cost	6,864			6,878
Accumulated amortization	(1,536		)	(1,386		)
Lease intangibles, net	$	5,328		$	5,492

Total amortization expense related to these lease intangible assets was approximately $293,000 and $139,000 for the three months ended March 31, 2018 and 2017, respectively.

The following table summarizes the carrying values of certain lease intangible assets or liabilities included in Other assets, net and Other liabilities, net, respectively, on the accompanying Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of March 31, 2018, and December 31, 2017 (dollars in thousands).



	March 31, 2018						December 31, 2017
Intangible Asset or Liability	Deferred Rent Asset (Liability)			Accumulated (Amortization) Accretion			Deferred Rent Asset (Liability)			Accumulated (Amortization) Accretion
Above-market lease values and lease incentives⁽¹⁾	$	26		$	(7	)	$	26		$	(5	)
Below-market lease values and deferred revenue⁽²⁾	(823		)	142			(823		)	125
	$	(797	)	$	135		$	(797	)	$	120


⁽¹⁾	Above-market lease values and lease incentives are included as part of Other assets, net on 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, net on the accompanying Condensed Consolidated Balance Sheets, and the related accretion is recorded as an increase to rental income.

Total amortization related to above-market lease values and lease incentives was approximately $2,000 for each of the three months ended March 31, 2018 and 2017. Total accretion related to below-market lease values and deferred revenue was approximately $17,000 and $15,000 for the three months ended March 31, 2018 and 2017, respectively.

Acquisitions

Upon our adoption of ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” during the three months ended December 31, 2016, most acquisitions, including those with a prior leasing history, are generally treated as an asset acquisition under ASC 360. For acquisitions accounted for as asset acquisitions under ASC 360, all acquisition-related costs are 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 execute upon acquisition, which are 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.

2018 Acquisitions

During the three months ended March 31, 2018, we acquired two new farms, which are 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⁽¹⁾		Annualized Straight-line Rent⁽²⁾		New Long-term Debt
Taft Highway⁽³⁾	Kern, CA	1/31/2018	161	1	Potatoes and Melons	N/A	N/A	$	2,945	$	33	$	—	$	—	⁽⁴⁾
Cemetery Road	Van Buren, MI	3/13/2018	176	1	Blueberries	9.6 years	N/A	2,100		39		150		1,260
			337	2				$	5,045	$	72	$	150	$	1,260


⁽¹⁾	Unless noted otherwise, acquisitions were accounted for as asset acquisitions under ASC 360.


⁽²⁾	Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.


⁽³⁾	Farm was purchased with no lease in place at the time of acquisition.


⁽⁴⁾	Subsequent to March 31, 2018, we entered into a loan agreement with an existing lender collateralized by this farm (see Note 10, “Subsequent Events” for additional information on the loan).

During the three months ended March 31, 2018, in the aggregate, we recognized operating revenues of approximately $8,000 and a net loss of approximately $5,000 related to the above acquisitions.

2017 Acquisitions

During the three months ended March 31, 2017, we acquired one new farm, 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⁽¹⁾

Annualized
Straight-line
Rent⁽²⁾

Net
Long-term
Debt

Citrus Boulevard

Martin, FL

1/12/2017

3,748

Organic Vegetables

7.0 years

3 (5 years)

54,000

⁽²⁾

2,926

32,400


⁽¹⁾	Unless noted otherwise, acquisitions were accounted for as asset acquisitions under ASC 360.


⁽²⁾	Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.

During the three months ended March 31, 2017, in the aggregate, we recognized operating revenues of approximately $645,000 and earnings of approximately $380,000 related to the above acquisition.

Purchase Price Allocations

The allocation of the aggregate purchase price for the farms acquired during each of the three months ended March 31, 2018 and 2017 is as follows (dollars in thousands):



Acquisition Period	Land and Land Improvements		Buildings		Irrigation & Drainage Systems		Horticulture		In-place Leases	Leasing Costs		Total Purchase Price
2018 Acquisitions	$	3,256	$	123	$	582	$	961	76	$	47	$	5,045
2017 Acquisitions	52,375		178		1,447		—		—	—		54,000

Acquired Intangibles and Liabilities

The following table shows the weighted-average amortization periods (in years) for the intangible assets acquired and liabilities assumed in connection with new real estate acquired during the three months ended March 31, 2018. There were no intangible assets acquired or liabilities assumed in connection with new real estate acquired during the three months ended March 31, 2017.



Intangible Assets and Liabilities		Weighted-Average Amortization Period (in Years)
In-place leases		9.6
Leasing costs		9.6
All intangible assets and liabilities		9.6

Significant Existing Real Estate Activity

Lease Renewals

During the three months ended March 31, 2018, we terminated the leases on two of our farms in Cochise County, Arizona, early and entered into two new lease agreements with a new tenant. Each of the new leases is for a term of one year and provides for aggregate minimum rents of approximately $480,000, which represents a decrease of approximately $203,000 (approximately 29.7%) from that of the prior leases (before each of their terminations). However, each of the new leases also contains a variable rent component based on the total gross revenues earned by the tenants on the respective farms, whereas the prior leases were both fixed-rent leases. In addition, both of the new leases are pure, triple-net lease agreements, whereas one of the prior leases was a partial-net lease (with us responsible for the property taxes on the farm). In connection with one of the early lease terminations, on the termination date, the lease had a deferred rent liability balance of approximately $84,000. In accordance with ASC 360-10, we recognized this balance as additional rental income during the three months ended March 31, 2018 (on the lease termination date). In connection with the other early lease termination, a full allowance of the respective lease’s deferred rent asset balance (which was approximately $50,000) was recorded to bad debt expense during the three months ended December 31, 2017. No downtime was incurred as a result of the early terminations and re-leasing of these farms, nor were any leasing commissions or tenant improvements incurred in connection with the new leases.

Project Completion

In connection with a lease amendment executed on one of our Florida properties in June 2017, we committed to providing additional capital to expand and upgrade the existing cooler on the property. These improvements were completed during the three months ended March 31, 2018, at a total cost of approximately $748,000. As a result of these improvements (and pursuant to the lease amendment), we expect to receive approximately $302,000 of additional rental income throughout the term of the lease, which expires on June 30, 2022.

Property and Casualty Loss

In January 2018, a lightning strike damaged the power plant that supplies power to one of our Arizona properties, causing damage to certain irrigation improvements on our property. We estimated the carrying value of the improvements damaged by the lightning strike to be approximately $129,000. During the three months ended March 31, 2018, we wrote down the carrying values of the damaged improvements by approximately $129,000, and, in accordance with ASC 610-30, “Revenue Recognition—Other Income—Gains and Losses on Involuntary Conversions,” recorded a corresponding property and casualty loss on the accompanying Condensed Consolidated Statement of Operations.

Repairs were completed on the damaged irrigation improvements during the three months ended March 31, 2018. During the three months ended March 31, 2018, we incurred approximately $81,000 to repair the damaged improvements, of which approximately $34,000 was capitalized as real estate additions and $47,000 was recorded as repairs and maintenance expense, which is included within Property operating expenses on the accompanying Condensed Consolidated Statements of Operations.

All of the improvements damaged on this property were insured, either by us or the tenant, at the time of the lightning strike, and we believe at least partial recovery of the damage-related costs incurred is probable. However, we are still in the process of assessing the amount expected to be recovered, as well as the collectability of such amounts; thus, no offset to the loss has been recorded as of March 31, 2018.

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations, by state, of our farms with leases with third-party tenants in place as of March 31, 2018 and 2017 (dollars in thousands):



	As of and For the Three Months Ended March 31, 2018						As of and For the Three Months Ended March 31, 2017
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	29	8,241	13.0%	$	3,028	45.3%	22	6,713	12.4%	$	2,857	49.7%
Florida	16	11,006	17.4%	1,754		26.2%	16	9,315	17.1%	1,531		26.6%
Colorado	10	31,450	49.6%	686		10.3%	9	30,170	55.5%	673		11.7%
Arizona	6	6,280	9.9%	528		7.9%	2	3,000	5.5%	186		3.2%
Oregon	4	2,313	3.7%	307		4.6%	4	2,313	4.3%	294		5.1%
Nebraska	2	2,559	4.0%	145		2.2%	2	2,559	4.7%	145		2.6%
Washington	1	746	1.2%	121		1.8%	—	—	—%	—		—%
Michigan	5	446	0.7%	70		1.0%	4	270	0.5%	62		1.1%
North Carolina	2	310	0.5%	49		0.7%	—	—	—%	—		—%
TOTALS	75	63,351	100.0%	$	6,688	100.0%	59	54,340	100.0%	$	5,748	100.0%

Concentrations

Credit Risk

As of March 31, 2018, our farms were leased to 52 different, third-party tenants (plus one related-party tenant), 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 $1.1 million, or 16.6%, of the rental revenue recorded during the three months ended March 31, 2018. If Tenant A fails to make rental payments, elects to terminate its leases prior to their expirations, or does not renew its leases (and we cannot re-lease the farms 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, 2018.

Geographic Risk

As of March 31, 2018, 29 of the 75 farms we owned were located in California, 16 farms were located in Florida, and 10 farms were located in Colorado. Further, our California, Florida, and Colorado farms accounted for approximately $3.0 million (45.3%), $1.8 million (26.2%), and $0.7 million (10.3%), respectively, of the rental revenue recorded during the three months ended March 31, 2018. Our 29 California farms are spread across four of the many different growing regions within the state. 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. None of our farms in California or Florida were materially impacted by the recent wildfires or hurricanes in those respective areas. No other single state accounted for more than 10.0% of the total rental revenue recorded during the three months ended March 31, 2018.