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

6 Months Ended

Jun. 30, 2016

REAL ESTATE AND INTANGIBLE ASSETS

All of our properties are wholly owned on a fee-simple basis. The following table provides certain summary information about our 47 farms as of June 30, 2016:



		Date	Number of	Total	Farm	Lease Expiration		Net Cost
Property Name	Location	Acquired	Farms	Acres	Acres	Date		Basis⁽¹⁾		Encumbrances⁽²⁾
San Andreas	Watsonville, CA	6/16/1997	1	307	238	12/31/2020		$	4,766,850	$	5,419,371
West Gonzales	Oxnard, CA	9/15/1998	1	653	502	6/30/2020		12,087,278		27,572,207
West Beach	Watsonville, CA	1/3/2011	3	196	195	12/31/2023		9,284,807		5,279,214
Dalton Lane	Watsonville, CA	7/7/2011	1	72	70	10/31/2020		2,678,229		1,749,149
Keysville Road	Plant City, FL	10/26/2011	2	61	56	6/30/2020		1,239,809		897,600
Colding Loop	Wimauma, FL	8/9/2012	1	219	181	6/14/2018		3,900,918		2,640,000
Trapnell Road	Plant City, FL	9/12/2012	3	124	110	6/30/2017		3,862,689		2,522,250
38th Avenue	Covert, MI	4/5/2013	1	119	89	4/4/2020		1,255,879		835,331
Sequoia Street	Brooks, OR	5/31/2013	1	218	206	5/31/2028		3,091,791		1,931,041
Natividad Road	Salinas, CA	10/21/2013	1	166	166	10/31/2024		8,952,970		4,360,413
20th Avenue	South Haven, MI	11/5/2013	3	151	94	11/4/2018		1,851,986		1,245,832
Broadway Road	Moorpark, CA	12/16/2013	1	60	46	12/15/2023		2,875,864		1,868,748
Oregon Trail	Echo, OR	12/27/2013	1	1,895	1,640	12/31/2023		13,879,837		8,720,826
East Shelton	Willcox, AZ	12/27/2013	1	1,761	1,320	2/29/2024		7,778,747		4,173,538
Collins Road	Clatskanie, OR	5/30/2014	2	200	157	9/30/2024		2,368,937		1,681,874
Spring Valley	Watsonville, CA	6/13/2014	1	145	110	9/30/2022		5,746,921		3,675,205
McIntosh Road	Dover, FL	6/20/2014	2	94	78	6/30/2017	⁽³⁾	2,453,449		1,519,620
Naumann Road	Oxnard, CA	7/23/2014	1	68	66	7/31/2017		6,793,670		4,291,892
Sycamore Road	Arvin, CA	7/25/2014	1	326	322	10/31/2024		6,848,715		3,612,914
Wauchula Road	Duette, FL	9/29/2014	1	808	590	9/30/2024		13,581,735		7,536,338
Santa Clara Avenue	Oxnard, CA	10/29/2014	2	333	331	7/31/2017		24,170,815		15,572,904
Dufau Road	Oxnard, CA	11/4/2014	1	65	64	11/3/2017		6,031,400		3,675,000
Espinosa Road	Salinas, CA	1/5/2015	1	331	329	10/31/2016		16,358,539		10,178,000
Parrish Road	Duette, FL	3/10/2015	1	419	412	6/30/2025		4,188,751		2,374,680
Immokalee Exchange	Immokalee, FL	6/25/2015	2	2,678	1,644	6/30/2020		15,526,274		9,360,000
Holt County	Stuart, NE	8/20/2015	1	1,276	1,052	12/31/2018		5,441,699		3,301,000
Rock County	Bassett, NE	8/20/2015	1	1,283	1,049	12/31/2018		5,428,714		3,301,000
Bear Mountain	Arvin, CA	9/3/2015	3	854	841	1/9/2031		26,094,518		9,979,735
Corbitt Road	Immokalee, FL	11/2/2015	1	691	390	12/31/2021		3,777,909		3,714,880
Reagan Road	Willcox, AZ	12/22/2015	1	1,239	875	12/31/2025		5,678,064		3,723,000
Gunbarrel Road	Alamosa, CO	3/3/2016	3	6,191	4,730	2/28/2021		25,326,491		15,531,000
Calaveras Avenue	Coalinga, CA	4/5/2016	1	453	442	10/31/2025		15,401,510		9,282,000
			47	23,456	18,395			$	268,725,765	$	181,526,562

⁽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 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 $1.1 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.


⁽³⁾	There are two leases in place on this property, one expiring on June 30, 2017, and the other expiring on June 30, 2019.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of June 30, 2016, and December 31, 2015:



	June 30, 2016			December 31, 2015
Real estate:
Land and land improvements	$	213,659,402		$	192,020,381
Irrigation systems	30,615,816			21,849,508
Buildings	14,623,118			11,184,647
Horticulture	13,679,327			1,490,695
Other improvements	4,575,516			1,872,606
Real estate, at cost	277,153,179			228,417,837
Accumulated depreciation	(8,571,234		)	(6,634,412		)
Real estate, net	$	268,581,945		$	221,783,425

Real estate depreciation expense on these tangible assets was $1,136,838 and $1,936,822 for the three and six months ended June 30, 2016, respectively, and $539,125 and $1,051,639 for the three and six months ended June 30, 2015, 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 June 30, 2016, and December 31, 2015, we recorded tenant improvements, net of accumulated depreciation, of $1,733,422 and $1,302,009, respectively. We recorded both depreciation expense and additional rental revenue related to these tenant improvements of $30,753 and $61,537 during the three and six months ended June 30, 2016, respectively, and $10,825 and $9,021 for the three and six months ended June 30, 2015, respectively.

Intangible Assets and Liabilities

The following table summarizes the carrying values of lease intangible assets and the related accumulated amortization as of June 30, 2016, and December 31, 2015:



	June 30, 2016			December 31, 2015
Lease intangibles:
In-place leases	$	1,607,932		$	1,225,955
Leasing costs	939,676			677,112
Tenant relationships	886,743			886,743
Lease intangibles, at cost	3,434,351			2,789,810
Accumulated amortization	(1,401,130		)	(1,026,269		)
Lease intangibles, net	$	2,033,221		$	1,763,541

Total amortization expense related to these lease intangible assets was $198,135 and $374,861 for the three and six months ended June 30, 2016, respectively, and $172,678 and $451,796 for the three and six months ended June 30, 2015, 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 June 30, 2016, and December 31, 2015.



	June 30, 2016						December 31, 2015
	Deferred Rent Asset			Accumulated (Amortization)			Deferred Rent Asset			Accumulated (Amortization)
Intangible Asset or Liability	(Liability)			Accretion			(Liability)			Accretion
Above-market lease values⁽¹⁾	$	19,528		$	(10,795	)	$	19,528		$	(7,540	)
Below-market lease values and deferred revenue⁽²⁾	(202,579		)	37,867			(202,579		)	23,205
	$	(183,051	)	$	27,072		$	(183,051	)	$	15,665


⁽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.

Total amortization related to above-market lease values and deferred revenue was $1,627 and $3,255 for the three and six months ended June 30, 2016, respectively, and $5,395 and $10,790 for the three and six months ended June 30, 2015, respectively. Total accretion related to below-market lease values and deferred revenue was $7,331 and $14,662 for the three and six months ended June 30, 2016, respectively, and $52,590 and $107,733 for the three and six months ended June 30, 2015, respectively.

New Real Estate Activity

Certain acquisitions during the periods presented 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 that directly related to reviewing or assigning leases we assumed upon acquisition, which were capitalized as part of leasing costs. 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 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.

2016 New Real Estate Activity

During the six months ended June 30, 2016, we acquired four new farms in two separate transactions, which are summarized in the table below.

Number

Total

Annualized

New

Property

Acquisition

Total

Primary

Lease

Renewal

Purchase

Acquisition

Straight-line

Long-term

Name

Location

Date

Acreage

Farms

Crop(s)

Term

Options

Price

Costs

Rent⁽¹⁾

Debt Issued

Gunbarrel Road⁽²⁾

Alamosa, CO

3/3/2016

6,191

Organic Potatoes

5 years

1 (5 years)

25,735,815

93,585

⁽³⁾

1,590,614

15,531,000

Calaveras Avenue

Coalinga, CA

4/5/2016

453

Pistachios

10 years

1 (5 years)

15,470,000

38,501

⁽⁴⁾

773,500

⁽⁵⁾

9,282,000

6,644

41,205,815

132,086

2,364,114

24,813,000


⁽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.


⁽³⁾	Acquisition accounted for as a business combination under ASC 805. As such, all acquisition-related costs were expensed as incurred, other than direct leasing costs, which were capitalized. In aggregate, we incurred $4,670 of direct leasing costs in connection with this acquisition.


⁽⁴⁾	Acquisition accounted for as an asset acquisition under ASC 360. As such, all acquisition-related costs were capitalized and allocated among the identifiable assets acquired.


⁽⁵⁾	This lease provides for a variable rent component based on the gross crop revenues earned on the property. The figure above represents only the minimum cash rents guaranteed under the lease.

We determined the fair value of assets acquired and liabilities assumed related to the property acquired during the six months ended June 30, 2016, to be as follows:



	Land and Land				Irrigation		Other				In-place		Leasing		Total Purchase
Property Name	Improvements		Buildings		Systems		Improvements		Horticulture		Leases		Costs		Price
Gunbarrel Road	$	16,755,814	$	3,438,291	$	2,830,738	$	2,079,102	$	—	$	381,977	$	249,893	$	25,735,815
Calaveras Avenue	3,615,436		—		424,112		—		11,430,452		—		—		15,470,000
	$	20,371,250	$	3,438,291	$	3,254,850	$	2,079,102	$	11,430,452	$	381,977	$	249,893	$	41,205,815

The allocation of the purchase price for the property acquired during the six months ended June 30, 2016, is preliminary and may change during the measurement period if we obtain new information regarding the assets acquired or liabilities assumed at the acquisition date.

Below is a summary of the total operating revenues and earnings recognized on the property acquired during the three and six months ended June 30, 2016:



		For the three months ended June 30, 2016				For the six months ended June 30, 2016
	Acquisition	Operating				Operating
Property Name	Date	Revenues		Earnings⁽¹⁾		Revenues		Earnings⁽¹⁾
Gunbarrel Road	3/3/2016	$	397,654	$	72,522	$	521,653	$	93,597
Calaveras Avenue	4/5/2016	183,865		76,565		183,865		76,565
		$	581,519	$	149,087	$	705,518	$	170,162


⁽¹⁾	Earnings are calculated as net income less interest expense and any acquisition-related costs that are required to be expensed if the acquisition is treated as a business combination under ASC 805.

2015 New Real Estate Activity

During the six months ended June 30, 2015, we acquired four new farms in three separate transactions, which are summarized in the table below.



Property	Property	Acquisition	Total	Number of	Primary	Lease	Renewal	Total Purchase		Acquisition			Annualized Straight-line		Long-term
Name	Location	Date	Acreage	Farms	Crop(s)	Term	Options	Price		Costs			Rent⁽¹⁾		Debt Issued
Espinosa Road⁽²⁾	Salinas, CA	1/5/2015	331	1	Strawberries	1.8 years	None	$	16,905,500	$	89,885	⁽³⁾	$	778,342	$	10,178,000
Parrish Road	Duette, FL	3/10/2015	419	1	Strawberries	10.3 years	2 (5 years)	3,913,280		103,610		⁽³⁾	251,832		2,374,680
Immokalee Exchange	Immokalee, FL	6/25/2015	2,678	2	Misc. Vegetables	5.0 years	2 (5 years)	15,757,700		152,571		⁽³⁾	960,104		9,360,000
			3,428	4				$	36,576,480	$	346,066		$	1,990,278	$	21,912,680


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


⁽²⁾	In connection with this acquisition, our Adviser earned a finder’s fee of $320,905, which the Adviser fully credited back to us during the six months ended June 30, 2015. See Note 5, “Related-Party Transactions” for further discussion on this fee.


⁽³⁾	Acquisition accounted for as a business combination under ASC 805. As such, all acquisition-related costs were expensed as incurred, other than direct leasing costs, which were capitalized. In aggregate, we incurred $7,225 of direct leasing costs in connection with these acquisitions.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the six months ended June 30, 2015, to be as follows:



	Land and Land		Buildings and		Irrigation		In-place		Leasing		Tenant		Total Purchase
Property Name	Improvements		Improvements		System		Leases		Costs		Relationships		Price
Espinosa Road	$	15,852,466	$	84,478	$	497,401	$	246,472	$	43,894	$	180,789	$	16,905,500
Parrish Road	2,403,064		42,619		1,299,851		54,405		77,449		35,892		3,913,280
Immokalee Exchange	14,410,840		273,107		515,879		229,406		148,691		179,777		15,757,700
	$	32,666,370	$	400,204	$	2,313,131	$	530,283	$	270,034	$	396,458	$	36,576,480

Below is a summary of the total operating revenues and earnings recognized on the properties acquired during the three and six months ended June 30, 2015:



		For the three months ended June 30, 2015					For the six months ended June 30, 2015
	Acquisition	Operating					Operating
Property Name	Date	Revenues		Earnings⁽¹⁾			Revenues		Earnings⁽¹⁾
Espinosa Road	1/5/2015	$	194,585	$	101,813		$	380,802	$	198,871
Parrish Road	3/10/2015	62,958		21,770			77,174		28,949
Immokalee Exchange	6/25/2015	—		(1,223		)	—		(1,223		)
		$	257,543	$	122,360		$	457,976	$	226,597


⁽¹⁾	Earnings are calculated as net income less interest expense and any acquisition-related costs that are required to be expensed if the acquisition is treated as a business combination under ASC 805.

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 as part of business combinations during the six months ended June 30, 2016 and 2015:



	Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities	2016	2015
In-place leases	5.1	4.1
Leasing costs	5.1	6.1
Tenant relationships	—	9.5
All intangible assets and liabilities	5.1	6.3

Pro-Forma Financials

During the six months ended June 30, 2016 and 2015, we acquired three farms and four farms, respectively, in transactions that qualified as business combinations. The following table reflects pro-forma consolidated financial information as if each farm acquired as part of a business combination was acquired on January 1 of the respective prior fiscal year. 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.



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2016		2015			2016		2015
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
Operating Data:
Total operating revenue	$	4,244,441	$	2,834,979		$	7,927,117	$	5,629,607
Net income attributable to the company	$	92,512	$	(293,259	)	$	101,372	$	517,789
Share and Per-share Data:
Earnings per share of common stock – basic and diluted	$	0.01	$	(0.03	)	$	0.01	$	0.06
Weighted-average common shares outstanding – basic and diluted	9,992,941		9,060,314			9,992,941		9,060,314

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 respective previous periods, nor do they purport to represent our consolidated financial position or results of operations for future periods.

Significant Existing Real Estate Activity

On February 1, 2016, we completed certain irrigation improvements on Sycamore Road to increase overall water availability at a total cost of $993,319. As stipulated in the lease agreement with our tenant, we will earn additional rent on the total cost commensurate with the annual yield on the farmland, which will result in additional straight-line rental income of $53,550 per year throughout the remaining lease term.

On February 8, 2016, we renewed the lease with the tenant occupying one of our McIntosh Road farms, which was set to expire on June 30, 2016. The lease was renewed for an additional three years, through June 30, 2019, with annualized, straight-line rental income of $63,000, representing a 17.9% increase over that of the previous lease.

On April 5, 2016, we reimbursed the tenant occupying Wauchula Road for $569,607 of costs incurred to construct certain irrigation improvements on the farm. As stipulated in the lease, beginning with the three months ending June 30, 2016, we will earn an additional $92,634 of annualized, straight-line rental income on this farm throughout the remaining lease term.

On April 5, 2016, we reimbursed the tenant occupying Parrish Road for $500,000 of our portion of the costs incurred to construct certain irrigation improvements on the farm. As stipulated in the lease, beginning with the three months ending June 30, 2016, we will earn an additional $139,073 of annualized, straight-line rental income on this farm throughout the remaining lease term. In addition, in connection with our acquisition of Parrish Road in March 2015, we committed to providing $745,000 as additional compensation and reimbursements of certain costs, contingent upon the approval by a local water management district of increases in certain water permits on the property. These water permits were approved on June 28, 2016, and we remitted $745,000 to the tenant, who was also the seller of the property, on June 30, 2016.

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations, by state, of our properties with leases in place as of June 30, 2016 and 2015:



	As of and For the Six Months Ended June 30, 2016								As of and For the Six Months Ended June 30, 2015
	Number of	Total	% of Total		Rental		% of Total Rental		Number of	Total	% of Total		Rental		% of Total Rental
State	Farms	Acres	Acres		Revenue		Revenue		Farms	Acres	Acres		Revenue		Revenue
California	19	4,029	17.2	%	$	4,502,644	56.8	%	15	2,722	23.7	%	$	3,712,894	68.7	%
Florida	13	5,094	21.7	%	1,539,217		19.4	%	12	4,401	38.4	%	820,834		15.2	%
Oregon	4	2,313	9.9	%	584,962		7.4	%	4	2,313	20.2	%	583,763		10.8	%
Colorado	3	6,191	26.4	%	521,653		6.6	%	—	—	—	%	—		—	%
Arizona	2	3,000	12.8	%	358,051		4.5	%	1	1,761	15.4	%	161,935		3.0	%
Nebraska	2	2,559	10.9	%	289,815		3.7	%	—	—	—	%	—		—	%
Michigan	4	270	1.1	%	124,743		1.6	%	4	270	2.3	%	123,357		2.3	%
	47	23,456	100.0	%	$	7,921,085	100.0	%	36	11,467	100.0	%	$	5,402,783	100.0	%

Concentrations

Credit Risk

As of June 30, 2016, our farms were leased to 35 different, third-party tenants, with certain tenants leasing more than one farm. Dole Food Company (“Dole”) leases two of our farms, and aggregate rental revenue attributable to Dole accounted for approximately $1.5 million, or 18.6% of the rental revenue recorded during the six months ended June 30, 2016. If 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 six months ended June 30, 2016.

Geographic Risk

19 of our 47 farms owned as of June 30, 2016, are located in California, and 13 farms are located in Florida. As of June 30, 2016, our farmland in California accounted for 4,029 acres, or 17.2% of the total acreage we owned. Furthermore, these farms accounted for approximately $4.5 million, or 56.8% of the rental revenue recorded during the six months ended June 30, 2016. However, these farms are spread across three of the many different growing regions within California. As of June 30, 2016, our farmland in Florida accounted for 5,094 acres, or 21.7% of the total acreage we owned, and these farms accounted for approximately $1.5 million, or 19.4%, of the rental revenue recorded during the six months ended June 30, 2016. 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 six months ended June 30, 2016.