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

9 Months Ended

Sep. 30, 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 82 farms as of September 30, 2018 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California	31	8,435	7,655	$	218,056	$	154,098
Florida	22	17,184	12,981	155,219		97,480
Arizona⁽³⁾	6	6,280	5,228	52,488		22,513
Colorado	10	31,448	24,513	41,421		24,499
Nebraska	2	2,559	2,101	10,504		7,050
Washington	1	746	417	8,980		5,281
Oregon	3	418	363	5,980		3,494
Michigan	5	446	291	4,938		2,821
North Carolina	2	310	295	2,333		1,270
	82	67,826	53,844	$	499,919	$	318,506

⁽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 Condensed Consolidated Balance Sheet.


⁽²⁾	Excludes approximately $2.3 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 an aggregate net cost basis of approximately $2.8 million as of September 30, 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 September 30, 2018, and December 31, 2017 (dollars in thousands):



	September 30, 2018			December 31, 2017
Real estate:
Land and land improvements	$	389,333		$	356,316
Irrigation systems	65,427			50,282
Buildings	18,507			18,191
Horticulture	39,320			34,803
Other improvements	6,750			6,551
Real estate, at gross cost	519,337			466,143
Accumulated depreciation	(22,269		)	(16,657		)
Real estate, net	$	497,068		$	449,486

Real estate depreciation expense on these tangible assets was approximately $2.1 million and $6.0 million for the three and nine months ended September 30, 2018, respectively, and $1.7 million and $4.4 million for the three and nine months ended September 30, 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 September 30, 2018, and December 31, 2017, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.3 million. We recorded both depreciation expense and additional rental revenue related to these tenant improvements of approximately $77,000 and $228,000 for the three and nine months ended September 30, 2018, respectively, and $61,000 and $150,000 for three and nine months ended September 30, 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 September 30, 2018, and December 31, 2017 (dollars in thousands):



	September 30, 2018			December 31, 2017
Lease intangibles:
Leasehold interest – land	$	3,498		$	3,498
In-place leases	1,957			1,451
Leasing costs	2,009			1,490
Tenant relationships	439			439
Lease intangibles, at cost	7,903			6,878
Accumulated amortization	(2,074		)	(1,386		)
Lease intangibles, net	$	5,829		$	5,492

Total amortization expense related to these lease intangible assets was approximately $289,000 and $834,768 for the three and nine months ended September 30, 2018, respectively, and $390,000 and $739,000 for the three and nine months ended September 30, 2017, respectively.

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 Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of September 30, 2018, and December 31, 2017 (dollars in thousands):



	September 30, 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		$	(11	)	$	26		$	(5	)
Below-market lease values and other deferred revenue⁽²⁾	(823		)	176			(823		)	125
	$	(797	)	$	165		$	(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 other 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 and $5,000 for the three and nine months ended September 30, 2018, respectively, and $4,000 and $7,000 during the three and nine months ended September 30, 2017, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $17,000 and $50,000 for the three and nine months ended September 30, 2018, respectively, and $17,000 and $47,000 for the three and nine months ended September 30, 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. Unless otherwise noted, all properties acquired during 2017 and 2018 were accounted for as asset acquisitions under ASC 360.

2018 Acquisitions

During the nine months ended September 30, 2018, we acquired ten 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		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		192		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		58		523		4,110
			6,735	10				$	51,845	$	356	$	2,963	$	30,813


⁽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.

⁽³⁾

In connection with the acquisition of this property, we committed to providing 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 follow-on lease).

During the three and nine months ended September 30, 2018, in the aggregate, we recognized operating revenues of approximately $554,000 and $603,000, respectively, and net income of approximately $168,000 and $140,000, respectively, related to the above acquisitions.

2017 Acquisitions

During the nine months ended September 30, 2017, we acquired 14 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⁽¹⁾	Renewal Options	Total Purchase Price		Acquisition Costs		Annualized Straight-line Rent⁽²⁾			Net 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			5,820
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
			11,202	14				$	121,847	$	484	$	6,692		$	71,668


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


⁽²⁾	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.

⁽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.


⁽⁴⁾	These leases provide for a variable rent component based on the gross crop revenues earned on the respective properties. The figures above represent only the minimum cash 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 begins 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 providing 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 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 three and nine months ended September 30, 2017, in the aggregate, we recognized operating revenues of approximately $1.5 million and $3.0 million, respectively, and earnings of approximately $341,000 and $1.2 million, respectively, related to the above acquisition.

Purchase Price Allocations

The allocation of the aggregate purchase price for the farms acquired during each of the nine months ended September 30, 2018 and 2017 is as follows (dollars in thousands):



Acquisition Period	Land and Land Improvements		Irrigation & Drainage Systems		Horticulture		Buildings		Other Improvements		Leasehold Interest – Land		In-place Leases		Leasing Costs		Net Below-Market Leases			Total Purchase Price
2018 Acquisitions	$	44,749	$	1,548	$	4,288	$	123	$	—	$	—	$	626	$	511	$	—		$	51,845
2017 Acquisitions	89,614		11,534		12,611		2,804		824		3,488		487		508		(23		)	121,847

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 nine months ended September 30, 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	7.0	6.3
Leasing costs	7.1	8.8
Above-market lease values	0.0	2.1
Below-market lease values and deferred revenue	0.0	4.7
All intangible assets and liabilities	7.1	7.0

Significant Existing Real Estate Activity

Leasing Activity

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.

On June 11, 2018, we entered into a new 10-year lease agreement with a new, unrelated third-party tenant on the 169-acre farm located in Ventura County, California, previously farmed by Land Advisers. The new lease commenced on August 1, 2018, and provides for annualized straight-line rent of approximately $667,000, which represents a decrease of approximately $91,000, or 12.0%, from that of the previous lease that was assigned to Land Advisers (see Note 6, “Related-Party Transactions—TRS Lease Assumption” for further discussion on this lease assignment). However, the new lease is a pure, triple-net lease, whereas the previous lease was a partial-net lease (with us, as landlord, responsible for the property taxes on the farm, which are currently approximately $112,000 per year).

On August 28, 2018, we reached an agreement with the current tenant on our 72-acre farm in Santa Cruz, California, to terminate the lease (which was originally scheduled to expire on October 31, 2020) on October 31, 2018, and simultaneously entered into a new, 10-year lease with a new, unrelated third-party tenant. The new lease commenced on November 1, 2018, and provides for annualized minimum straight-line rent of approximately $200,000, which represents an increase of approximately $41,000 (approximately 26.0%) over that of the prior lease (before its early termination).

On August 30, 2018, we amended the lease on our 164-acre farm in Ventura County, California, to exclude certain hillside acreage from the lease and extend the term by one additional year (through July 31, 2021). The amendment resulted in a decrease in annualized minimum straight-line rent of approximately $62,000 (approximately 16.2%) from that of the original lease.

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 in Note 3, “Real Estate and Intangible Assets,”) as part of a like-kind exchange under Section 1031 of the Code.

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.

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 September 30, 2018.

Portfolio Diversification and Concentrations

Diversification

The following table summarizes the geographic locations, by state, of our farms with leases in place as of September 30, 2018 and 2017 (dollars in thousands):



	As of and For the Nine Months Ended September 30, 2018						As of and For the Nine Months Ended September 30, 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⁾	31	8,435	12.4%	$	9,880	46.3%	27	7,921	12.8%	$	8,749	47.8%
Florida	22	17,184	25.3%	5,790		27.1%	17	11,225	18.2%	4,839		26.5%
Colorado	10	31,448	46.4%	2,057		9.7%	9	30,170	48.8%	2,018		11.0%
Arizona	6	6,280	9.3%	1,425		6.7%	6	6,280	10.2%	1,114		6.1%
Oregon	3	418	0.6%	765		3.6%	4	2,313	3.7%	887		4.8%
Washington	1	746	1.1%	596		2.8%	1	746	1.2%	31		0.2%
Nebraska	2	2,559	3.8%	435		2.0%	2	2,559	4.2%	435		2.4%
Michigan	5	446	0.7%	270		1.3%	4	270	0.4%	187		1.0%
North Carolina	2	310	0.4%	115		0.5%	2	310	0.5%	42		0.2%
TOTALS	82	67,826	100.0%	$	21,333	100.0%	72	61,794	100.0%	$	18,302	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 September 30, 2018, our farms were leased to 56 different, unrelated 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 $3.3 million, or 15.6%, of the rental revenue recorded during the nine months ended September 30, 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 our total rental revenue recorded during the nine months ended September 30, 2018.

Geographic Risk

Farms located in California and Florida accounted for approximately $9.9 million (46.3%) and $5.8 million (27.1%), respectively, of the rental revenue recorded during the nine months ended September 30, 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 Florida were materially impacted by Hurricane Michael during October 2018. No other single state accounted for more than 10.0% of our total rental revenue recorded during the nine months ended September 30, 2018.