Gladstone Land Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate and Intangible Assets

Real Estate and Intangible Assets

12 Months Ended

Dec. 31, 2018

REAL ESTATE AND INTANGIBLE ASSETS

All of our properties are wholly-owned on a fee-simple basis, except where noted. The following table provides certain summary information about the 85 farms we owned as of December 31, 2018 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California	33	10,147	9,336	$	249,984	$	168,158
Florida	22	17,184	12,981	154,749		97,262
Arizona⁽³⁾	6	6,280	5,228	53,849		22,359
Colorado	10	31,448	24,513	42,098		25,468
Nebraska	2	2,559	2,101	10,464		7,050
Washington	1	746	417	8,845		5,236
Texas	1	3,667	2,219	8,418		5,280
Oregon	3	418	363	5,946		3,375
Michigan	5	446	291	4,980		2,768
North Carolina	2	310	295	2,323		1,270
	85	73,205	57,744	$	541,656	$	338,226

⁽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 other deferred revenue included in Other liabilities, net; each as shown on the accompanying Consolidated Balance Sheet.


⁽²⁾	Excludes approximately $2.3 million of debt issuance costs related to notes and bonds payable, included in Notes and bonds payable, net on the accompanying 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 an aggregate net cost basis of approximately $2.7 million as of December 31, 2018 (included in Lease intangibles, net on the accompanying Consolidated Balance Sheet).

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of December 31, 2018 and 2017 (dollars in thousands):



	December 31, 2018			December 31, 2017
Real estate:
Land and land improvements	$	417,310		$	356,316
Irrigation systems	71,583			50,282
Horticulture	48,894			34,803
Farm-related facilities	18,510			18,191
Other site improvements	6,707			6,551
Real estate, at gross cost	563,004			466,143
Accumulated depreciation	(24,051		)	(16,657		)
Real estate, net	$	538,953		$	449,486

Real estate depreciation expense on these tangible assets was approximately $8.2 million and $6.2 million for the years ended December 31, 2018 and 2017, respectively.

Included in the figures above are amounts related to improvements made on certain of our properties paid for by our tenants but owned by us, or tenant improvements. As of each of December 31, 2018 and 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 $334,000 and $220,000 during the years ended December 31, 2018 and 2017, respectively.

Intangible Assets and Liabilities

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



	December 31, 2018			December 31, 2017
Lease intangibles:
Leasehold interest – land	$	3,498		$	3,498
In-place leases	2,046			1,451
Leasing costs	1,963			1,490
Tenant relationships	414			439
Lease intangibles, at gross cost	7,921			6,878
Accumulated amortization	(2,235		)	(1,386		)
Lease intangibles, net	$	5,686		$	5,492

Total amortization expense related to these lease intangible assets was approximately $1.1 million for each of the years ended December 31, 2018 and 2017.

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



	December 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⁾	$	126		$	(18	)	$	26		$	(5	)
Below-market lease values and other deferred revenues⁽²⁾	(917		)	202			(823		)	125
	$	(791	)	$	184		$	(797	)	$	120


⁽¹⁾	Net above-market lease values and lease incentives are included as part of Other assets, net on the accompanying Consolidated Balance Sheets, and the related amortization is recorded as a reduction of rental income on the accompanying Consolidated Statements of Operations.


⁽²⁾	Net below-market lease values and other deferred revenue are included as a part of Other liabilities, net on the accompanying Consolidated Balance Sheets, and the related accretion is recorded as an increase to rental income on the accompanying Consolidated Statements of Operations.

Total amortization related to above-market lease values and lease incentives was approximately $13,000 and $10,000 for the years ended December 31, 2018 and 2017, respectively. Total accretion related to below-market lease values and other deferred revenues was approximately $77,000 and $63,000 for the years ended December 31, 2018 and 2017, respectively.

The estimated aggregate amortization expense to be recorded related to in-place lease values, leasing costs, and tenant relationships and the estimated net impact on rental income from the amortization of above-market lease values and lease incentives or accretion of above-market lease values and other deferred revenues for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):



Period		Estimated Amortization Expense		Estimated Net Increase to Rental Income
For the fiscal years ending December 31:	2019	$	959	$	113
	2020	754		27
	2021	549		32
	2022	341		33
	2023	299		30
	Thereafter	2,784		372
		$	5,686	$	607

Acquisitions

Upon our adoption of ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” on October 1, 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 or liabilities assumed, 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. Unless otherwise noted, all properties acquired during 2017 and 2018 were accounted for as asset acquisitions under ASC 360.

2018 Acquisitions

During the year ended December 31, 2018, we acquired 13 new farms, which are 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⁾			New Long-term Debt
Taft Highway⁽²⁾	Kern, CA	1/31/2018	161	1	Potatoes and Melons	N/A	N/A	$	2,945	$	32	$	—		$	1,473
Cemetery Road	Van Buren, MI	3/13/2018	176	1	Blueberries	9.6 years	None	2,100		39		150			1,260
Owl Hammock⁽³⁾	Collier & Hendry, FL	7/12/2018	5,630	5	Vegetables and Melons	7.0 years	2 (5 years)	37,350		196		2,148			22,410
Plantation Road	Jackson, FL	9/6/2018	574	1	Peanuts and Melons	2.3 years	None	2,600		35		142			1,560
Flint Avenue	Kings, CA	9/13/2018	194	2	Cherries	15.3 years	1 (5 years)	6,850		51		523			4,110
Sunnyside Avenue	Madera, CA	11/1/2018	951	1	Figs and Pistachios	8.0 years	2 (5 years)	23,000		41		1,237		⁽⁴⁾	13,800
Bunker Hill⁽⁵⁾	Hartley, TX	11/20/2018	3,667	1	Chip Potatoes	1.1 years	None	8,400		32		356			5,280
Olsen Road⁽⁶⁾	Merced, CA	12/6/2018	761	1	Almonds	0.9 years	3 (5 years) & 1 (3 years)	8,181		40		25		⁽⁴⁾	—
			12,114	13				$	91,426	$	466	$	4,581		$	49,893


⁽¹⁾	Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP, and excludes contingent rental payments, such as participation rents.


⁽²⁾	Farm was purchased with no lease in place at the time of acquisition. See Note 11, “Subsequent Events—Leasing Activity” for discussion on the lease executed on this farm subsequent to December 31, 2018.

⁽³⁾

In connection with the acquisition of this property, we committed to provide up to $2.0 million of capital for certain irrigation and property improvements. As stipulated in the lease, we will earn additional rental income on the total cost of the improvements as disbursements are made by us at a rate commensurate with the annual yield on the farmland (as determined by each year's minimum cash rent per the lease).


⁽⁴⁾	These leases provide for a participation rent component based on the gross crop revenues earned on the respective farms. The rent figures above represent only the minimum cash guaranteed under the respective leases.


⁽⁵⁾	Purchase price is net of a $100,000 credit provided to us by the seller.

⁽⁶⁾

Lease provided for an initial rent payment of approximately $471,000 to be paid upon commencement of the lease, with all subsequent annual rent payments to be participation rents based on the gross revenues earned on the farm. In accordance with GAAP, the initial rent payment (which represents the only cash rental payment guaranteed under the lease) is being recognized over the full term of the lease, including all tenant renewal options (which management believes to represent the minimum lease term, as defined by GAAP).

During the year ended December 31, 2018, in the aggregate, we recognized operating revenues of approximately $1.6 million and net income of approximately $290,000 related to the above acquisitions.

2017 Acquisitions

During the year ended December 31, 2017, we acquired 16 new farms, which are 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⁽¹⁾	Renewal Options	Total Purchase Price		Acquisition Costs		Annualized Straight-line Rent⁽²⁾			New Long-term Debt
Citrus Boulevard	Martin, FL	1/12/2017	3,748	1	Organic Vegetables	7.0 years	3 (5 years)	$	54,000	$	80	$	2,926		$	32,400
Spot Road⁽³⁾	Yuma, AZ	6/1/2017	3,280	4	Melons and Alfalfa Hay	8.6 years	1 (10 years) & 1 (2 years)	27,500		88		1,673			15,300
Poplar Street	Bladen, NC	6/2/2017	310	2	Organic Blueberries	9.6 years	1 (5 years)	2,169		49		122		⁽⁴⁾	1,301
Phelps Avenue	Fresno, CA	7/17/2017	847	4	Pistachios and Almonds	10.3 years	1 (5 years)	13,603		43		681		⁽⁴⁾	8,162
Parrot Avenue⁽⁵⁾	Okeechobee, FL	8/9/2017	1,910	1	Misc. Vegetables	0.5 years	None	9,700		67		488		⁽⁵⁾	5,820
Cat Canyon Road⁽⁶⁾	Santa Barbara, CA	8/30/2017	361	1	Wine Grapes	9.8 years	2 (5 years)	5,375		112		322			3,225
Oasis Road	Walla Walla, WA	9/8/2017	746	1	Apples, Cherries, and Wine Grapes	6.3 years	None	9,500		45		480		⁽⁴⁾	5,460
JJ Road	Baca, CO	10/2/2017	1,280	1	Grass Hay	4.3 years	1 (5 years)	900		26		52			540
Jayne Avenue	Fresno, CA	12/15/2017	159	1	Organic Almonds	19.9 years	2 (5 years)	5,925		44		364		⁽⁴⁾	3,555
			12,641	16				$	128,672	$	554	$	7,108		$	75,763


⁽¹⁾	Where more than one lease was assumed or executed, represents the weighted-average lease term on the property.


⁽²⁾	Annualized straight-line amount is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP, and excludes contingent rental payments, such as participation rents.

⁽³⁾

Includes two farms (1,368 total acres) acquired through a leasehold interest, with the State of Arizona as the lessor. These state leases expire in February 2022 (485 total acres) and February 2025 (883 total acres). In addition, in connection with the acquisition of this property, we assumed four in-place leases with us as the lessor or sublessor. Three of these leases are agricultural leases, with one lease expiring on June 30, 2019, and two leases expiring on September 15, 2026. The fourth lease is a residential lease that expires on September 30, 2019. If either of the state leases is not renewed upon its expiration, the subleases on the respective acreage shall terminate automatically.


⁽⁴⁾	These leases also provide for a participation rent component based on the gross crop revenues earned on the property. The figures above represent only the minimum cash rents guaranteed under the respective leases.

⁽⁵⁾

In connection with the acquisition of this property, we executed a 6-year, follow-on lease with a new tenant that began upon the expiration of the 7-month lease assumed at acquisition. The follow-on lease includes two, 6-year extension options and provides for minimum annualized straight-line rents of approximately $542,000. In addition, in connection with the execution of the follow-on lease, as amended, we committed to provide up to $2.5 million of capital for certain irrigation and property improvements. As stipulated in the follow-on lease, we will earn additional rental income on the total cost of the improvements as disbursements are made by us at a rate commensurate with the annual yield on the farmland (as determined by each year’s minimum cash rent per the follow-on lease).


⁽⁶⁾	In connection with the acquisition of this property, we committed to provide up to $4.0 million of capital to fund the development of additional vineyard acreage on the property. As stipulated in the lease agreement, we will earn additional rental income on the total cost of the project as the capital is disbursed by us at rates specified in the lease.

During the year ended December 31, 2017, in the aggregate, we recognized operating revenues of approximately $4.5 million, and net income of approximately $1.1 million, related to the above acquisitions.

Purchase Price Allocations

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



Acquisition Period	Land and Land Improvements		Irrigation Systems		Horticulture		Farm-related Facilities		Other Improvements		Leasehold Interest – Land		In-place Leases	Leasing Costs		Net Below-Market Leases			Total Purchase Price
2018 Acquisitions	$	72,508	$	4,313	$	13,288	$	123	$	—	$	—	763	$	526	$	(95	)	$	91,426
2017 Acquisitions	92,516		11,844		16,213		2,805		835		3,488		486	508		(23		)	128,672

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 years ended December 31, 2018 and 2017:



	Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities	2018	2017
Leasehold interest – land	0.0	6.9
In-place leases	5.9	6.3
Leasing costs	6.9	8.8
Above-market lease values and lease incentives	0.0	5.4
Below-market lease values and other deferred revenues	1.1	4.7
All intangible assets and liabilities	6.0	7.0

Significant Existing Real Estate Activity

Leasing Activity

The following table summarizes the leasing activity that occurred on our existing properties during the year ended December 31, 2018 (dollars in thousands, except footnotes):

PRIOR LEASES⁽¹⁾

NEW LEASES⁽²⁾

Farm
Locations

Number

Leases

Total

Farm

Acres

Total

Annualized

Straight-line

Rent⁽³⁾

# of Leases

with

Participation

Rents

Lease

Structures

(# of NNN

/ NN)

Total
Annualized
Straight-line
Rent⁽³⁾

Wtd. Avg.

Term
(Years)

# of Leases
with
Participation
Rents

Lease
Structures
(# of NNN
/ NN)

AZ, CA,
FL, & MI

3,659

1,742

4 / 5

2,001

5.3

7 / 2


⁽¹⁾	Includes the farm previously leased to Land Advisers, during which time no rental income was recognized.


⁽²⁾	In connection with certain of these leases, we committed to provide aggregate capital of up to $600,000 for certain irrigation and other improvements on these farms, all of which was expended or accrued for as of December 31, 2018.


⁽³⁾	Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the leases (presented on an annualized basis), as required under GAAP, and excludes contingent rental payments, such as participation rents.

As a result of certain early lease terminations, we recorded approximately $108,000 of aggregate bad debt expense (included within Property operating expenses on our accompanying Consolidated Statements of Operations) during the year ended December 31, 2018, in connection with certain deferred rent asset and rent receivable balances that were written off. In addition, in connection with the early termination of a lease that had a deferred rent liability balance of approximately $84,000, in accordance with ASC 360-10, we recognized this amount as additional rental income on the lease termination date, which occurred during the year ended December 31, 2018.

See Note 11, “Subsequent Events—Leasing Activity” for additional leasing activity that occurred subsequent to December 31, 2018.

Property Dispositions

Land Exchange

On June 7, 2018, we completed a transaction with the current tenant on one of our Florida farms where we exchanged land for total consideration consisting of both land and cash. As a result of the transaction, we sold 26 net acres for total cash proceeds of approximately $132,000 and, after closing costs, recognized a nominal loss on the transaction.

Property Sale

On July 10, 2018, we completed the sale of our 1,895-acre farm in Morrow County, Oregon (“Oregon Trail”), to the existing tenant for $20.5 million. Including closing costs and the write-off of a deferred rent asset balance of approximately $154,000, we recognized a net gain on the sale of approximately $6.4 million. Proceeds from this sale were used to acquire Owl Hammock (as described above) as part of a like-kind exchange under Section 1031 of the Code.

Project Completions

In connection with a lease amendment executed on one of our Florida properties in June 2017, we committed to provide additional capital to expand and upgrade the existing cooling facility on the property. These improvements were completed during the year ended December 31, 2018, at a total cost of approximately $748,000. As a result of these improvements (and pursuant to the lease amendment), we will earn additional straight-line rental income of approximately $75,000 per year throughout the remaining term of the lease, which expires on June 30, 2022.

In connection with the follow-on lease we executed upon our acquisition of a 1,884-acre farm in Florida in August 2017 (which had a commencement date of February 24, 2018), we committed to provide up to $2.5 million of capital in the first year of the lease to support additional plantings and infrastructure on the farm, which improvements were completed during the year ended December 31, 2018, at a total cost of $2.5 million. As a result of this project (as stipulated in the follow-on lease), we will earn additional straight-line rental income of approximately $138,000 per year throughout the remaining term of the lease, which expires on February 23, 2024.

During the year ended December 31, 2018, we replaced 23 irrigation pivots on one of our properties in Colorado at a total cost of approximately $1.4 million. As part of this transaction, we wrote off the net cost basis of the replaced pivots and recognized a loss of approximately $433,000 during the year ended December 31, 2018 (included in Gain (loss) on dispositions of real estate assets, net on our accompanying Consolidated Statement of Operations). Pursuant to a lease amendment executed in connection with this project, we will earn additional straight-line rental income of approximately $104,000 per year throughout the remaining term of the lease, which expires on February 28, 2021. In addition, in connection with the funding of these improvements, we obtained a loan from Diversified Financial Services, LLC (“Diversified Financial”), of approximately $1.3 million (see Note 4, “Borrowings—Diversified Financial Note Payable” for additional information on this loan).

Property and Casualty Loss

During the year ended December 31, 2018, a lightning strike damaged the power plant that supplies power to one of our Arizona properties, causing damage to certain irrigation improvements on the property, and three irrigation pivots on one of our Florida farms were damaged as a result of Hurricane Michael. We estimated the aggregate carrying value of the improvements damaged by these events to be approximately $194,000. During the year ended December 31, 2018, we wrote down the carrying values of the damaged irrigation improvements by approximately $194,000, 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 Consolidated Statement of Operations.

Repairs to the damaged irrigation improvements on our Arizona property were completed during the year ended December 31, 2018, at a total cost of approximately $81,000, of which approximately $47,000 was capitalized as real estate additions and approximately $34,000 was recorded as repairs and maintenance expense (included within Property and operating expenses on the accompanying Consolidated Statements of Operations) during the year ended December 31, 2018. Repairs to the damaged irrigation pivots on our Florida farm are still ongoing, and we are unable to estimate the costs to repair the pivots at this time.

We are still in the process of assessing the amounts expected to be recovered from both instances, as well as the collectability of such amounts; thus, no offset to the loss has been recorded as of December 31, 2018.

Future Rental Payments

Future operating rental payments owed from tenants under all non-cancelable leases (excluding contingent rental payments, such as participation rents, and tenant reimbursement of certain expenses) for each of the five succeeding fiscal years and thereafter as of December 31, 2018, are as follows (dollars in thousands):



Period		Tenant Rental Payments
For the fiscal years ending December 31:	2019	$	30,290
	2020	26,917
	2021	20,980
	2022	19,775
	2023	19,413
	Thereafter	59,934
		$	177,309

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations (by state) of our farms owned and with leases in place as of December 31, 2018 and 2017 (dollars in thousands):



	As of and For the Year Ended December 31, 2018						As of and For the Year Ended December 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⁽¹⁾	33	10,147	13.8%	$	13,637	46.5%	28	8,080	12.8%	$	12,006	47.8%
Florida	22	17,184	23.5%	8,132		27.7%	16	11,006	17.5%	6,585		26.2%
Colorado	10	31,448	42.9%	2,743		9.4%	10	31,450	49.9%	2,704		10.8%
Arizona	6	6,280	8.6%	2,041		7.0%	6	6,280	10.0%	1,572		6.3%
Oregon	3	418	0.6%	893		3.0%	4	2,313	3.7%	1,189		4.7%
Washington	1	746	1.1%	718		2.4%	1	746	1.1%	152		0.6%
Nebraska	2	2,559	3.5%	580		2.0%	2	2,559	4.1%	580		2.3%
Michigan	5	446	0.6%	370		1.3%	4	270	0.4%	249		1.0%
North Carolina	2	310	0.4%	148		0.5%	2	310	0.5%	74		0.3%
Texas	1	3,667	5.0%	60		0.2%	—	—	—%	—		—%
	85	73,205	100.0%	$	29,322	100.0%	73	63,014	100.0%	$	25,111	100.0%


⁽¹⁾	According to the California Chapter of the American Society of Farm Managers and Rural Appraisers, there are eight distinct growing regions within California; our farms are spread across four of these growing regions.

Concentrations

Credit Risk

As of December 31, 2018, our farms were leased to 63 different, unrelated third-party tenants, with certain tenants leasing more than one farm. One unrelated third-party tenant (“Tenant A”) leases five of our farms, and aggregate rental revenue attributable to Tenant A accounted for approximately $4.4 million, or 15.1% of the total rental revenue recorded during the year ended December 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 year ended December 31, 2018.

Geographic Risk

Farms located in California and Florida accounted for approximately $13.6 million (46.5%) and $8.1 million (27.7%), respectively, of the total rental revenue recorded during the year ended December 31, 2018. 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 wildfires or hurricanes that occurred in those respective areas during the year ended December 31, 2018. No other single state accounted for more than 10.0% of the total rental revenue recorded during the year ended December 31, 2018.