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, 2020

All of our properties are wholly-owned on a fee-simple basis, except where noted. The following table provides certain summary information about the 113 farms we owned as of March 31, 2020 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California⁽³⁾	42	14,830	13,610	$	420,149	$	259,322
Florida	23	20,770	16,256	210,535		132,492
Arizona⁽⁴⁾	6	6,280	5,228	56,987		22,087
Colorado	12	32,773	25,577	49,141		26,687
Nebraska	8	7,104	6,402	27,364		17,246
Michigan	15	962	682	12,344		7,573
Texas	1	3,667	2,219	8,317		5,227
Washington	1	746	417	8,166		5,005
Oregon	3	418	363	6,233		3,785
North Carolina	2	310	295	2,274		1,238
	113	87,860	71,049	$	801,510	$	480,662

⁽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. Specifically, includes Investments in real estate, net (excluding improvements paid for by the tenant) and Lease intangibles, net; plus net above-market lease values, lease incentives, and investments in special-purpose LLCs 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 Sheets.


⁽²⁾	Excludes approximately $3.1 million of debt issuance costs related to notes and bonds payable, included in Notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheet.


⁽³⁾	Includes ownership in a special-purpose LLC that owns a pipeline conveying water to one of our properties. As of March 31, 2020, this investment had a net carrying value of approximately $621,000 and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheet.

⁽⁴⁾

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 $2.0 million as of March 31, 2020 (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, 2020, and December 31, 2019 (dollars in thousands):



	March 31, 2020			December 31, 2019
Real estate:
Land and land improvements	$	590,137		$	583,247
Irrigation and drainage systems	111,519			108,222
Horticulture	108,102			107,941
Farm-related facilities	20,665			20,665
Other site improvements	7,180			7,180
Real estate, at gross cost	837,603			827,255
Accumulated depreciation	(38,147		)	(35,174		)
Real estate, net	$	799,456		$	792,081

Real estate depreciation expense on these tangible assets was approximately $3.4 million and $2.3 million for the three months ended March 31, 2020 and 2019, 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 March 31, 2020, and December 31, 2019, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.1 million and $2.2 million, respectively. We recorded both depreciation expense and additional lease revenue related to these tenant improvements of approximately $75,000 and $74,000 during the three months ended March 31, 2020 and 2019, 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, 2020, and December 31, 2019 (dollars in thousands):



	March 31, 2020			December 31, 2019
Lease intangibles:
Leasehold interest – land	$	3,498		$	3,498
In-place leases	2,007			2,293
Leasing costs	1,585			2,066
Tenant relationships	414			414
Lease intangibles, at cost	7,504			8,271
Accumulated amortization	(3,503		)	(3,444		)
Lease intangibles, net	$	4,001		$	4,827

Total amortization expense related to these lease intangible assets, including amounts charged to amortization expense due to early lease terminations, was approximately $826,000 and $324,000 for the three months ended March 31, 2020 and 2019, respectively. See below, under “Significant Existing Real Estate Activity—Leasing Activity—Lease Termination” for further discussion of this lease termination.

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 March 31, 2020, and December 31, 2019 (dollars in thousands):



	March 31, 2020						December 31, 2019
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⁾	$	201		$	(72	)	$	111		$	(41	)
Below-market lease values and other deferred revenues⁽²⁾	(886		)	282			(886		)	257
	$	(685	)	$	210		$	(775	)	$	216


⁽¹⁾	Net 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 Lease revenue on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.


⁽²⁾	Net 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 Lease revenue on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

Total amortization related to above-market lease values and lease incentives was approximately $31,000 and $33,000 for the three months ended March 31, 2020 and 2019, respectively. Total accretion related to below-market lease values and other deferred revenues was approximately $25,000 and $38,000 for the three months ended March 31, 2020 and 2019, respectively.

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, other than those costs that directly related to either originating new leases we execute upon acquisition or reviewing in-place leases we assumed upon acquisition, are capitalized and included as part of the fair value allocation of the identifiable tangible and intangible assets acquired or liabilities assumed. Upon our adoption of ASU 2016-02 on January 1, 2019, costs that directly related to either negotiating and originating new leases or reviewing assumed leases (generally, external legal costs) are expensed as incurred, whereas these costs were generally capitalized as part of leasing costs under the previous leasing standard. 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 since our adoption of ASU 2016-02 were accounted for as asset acquisitions under ASC 360.

2020 Acquisitions

During the three months ended March 31, 2020, we acquired two new farms, which are summarized in the table below (dollars in thousands, except for footnotes):



Property Name	Property Location	Acquisition Date	Total Acres	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
County Road 18	Phillips, CO	1/15/2020	1,325	2	Sugar beets, edible beans, potatoes, & corn	6.0 years	None	$	7,500	$	39	$	417	$	—
			1,325	2				$	7,500	$	39	$	417	$	—


⁽¹⁾	Includes approximately $4,000 of external legal fees associated with negotiating and originating the lease associated with this acquisition, which cost was expensed in the period incurred.


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

During the three months ended March 31, 2020, we recognized lease revenue of approximately $88,000 and net income of approximately $70,000 related to the above acquisition.

2019 Acquisitions

During the three months ended March 31, 2019, we acquired one new farm, which is summarized in the table below (dollars in thousands, except for footnotes):



Property Name	Property Location	Acquisition Date	Total Acres	No. of Farms	Primary Crop(s) / Use	Lease Term	Renewal Options	Total Purchase Price		Acquisition Costs⁽¹⁾		Annualized Straight-line Rent⁽²⁾		New Long-term Debt
Somerset Road	Lincoln, NE	1/22/2019	695	1	Popcorn & edible beans	4.9 years	1 (5 years)	$	2,400	$	33	$	126	$	1,440
			695	1				$	2,400	$	33	$	126	$	1,440


⁽¹⁾	Includes approximately $4,000 of external legal fees associated with negotiating and originating the lease associated with this acquisition, which cost was expensed in the period incurred.


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

During the three months ended March 31, 2019, we recognized operating revenues of approximately $24,000, and net income of approximately $2,000 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, 2020 and 2019 is as follows (dollars in thousands):



Acquisition Period	Land and Land Improvements		Irrigation & Drainage Systems		Total Purchase Price
2020 Acquisitions	$	6,843	$	657	$	7,500
2019 Acquisitions	2,090		310		2,400

Significant Existing Real Estate Activity

Leasing Activity

The following table summarizes certain leasing activity that occurred on our existing properties during the three months ended March 31, 2020 (dollars in thousands):

PRIOR LEASES

NEW LEASES⁽¹⁾

Farm
Locations

Number

Leases

Total

Farm

Acres

Total

Annualized

Straight-line

Rent⁽²⁾

# of Leases

with

Participation

Rents

Lease

Structures

(# of NNN

/ NN / N)⁽³⁾

Total
Annualized
Straight-line
Rent⁽²⁾

Wtd. Avg.

Term
(Years)

# of Leases
with
Participation
Rents

Lease
Structures
(# of NNN
/ NN / N)⁽³⁾

AZ, CA, & NE

6,287

4,057

5 / 2 / 2

3,992

5.9

5 / 4 / 0


⁽¹⁾	In connection with certain of these leases, we committed to provide capital for certain improvements on these farms. See Note 7, “Commitments and Contingencies—Operating Obligations,” for additional information on these commitments.


⁽²⁾	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.


⁽³⁾	“NNN” refers to leases under triple-net lease arrangements, “NN” refers to leases under partial-net lease arrangements, and “N” refers to leases under single-net lease arrangements. For a description of each of these types of lease arrangements, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Leases—General.”

Lease Termination

On February 10, 2020, we reached an agreement with a tenant occupying four of our farms in Arizona to terminate the existing leases encompassing those four farms effective February 10, 2020. As part of the termination agreement, the outgoing tenant made a one-time termination payment to us of approximately $3.0 million, which we recognized as additional lease revenue during the three months ended March 31, 2020. The prior leases were scheduled to expire on September 15, 2026 (with two of the farms subject to the renewal of certain state leases currently scheduled to expire on February 14, 2022, and February 14, 2025). In connection with the early termination of these leases, during the three months ended March 31, 2020, we recognized approximately $89,000 of prepaid rent as additional lease revenue and wrote off an aggregate net deferred rent balance of approximately $254,000 against lease revenue. In addition, approximately $470,000 of unamortized lease intangible assets related to the terminated leases were written off and charged to amortization expense during the three months ended March 31, 2020. Upon termination of these leases, we entered into a new, seven-year lease with a new tenant effective immediately. These leases are included in the Leasing Activity table above.

Investments in Unconsolidated Entities

In connection with the acquisition of 2,110 gross acres of farmland located in Fresno County, California (“Sutter Avenue”), which occurred in two phases during the year ended December 31, 2019, we also acquired an ownership in a related LLC, the sole purpose of which is to own and maintain a pipeline conveying water to this and other neighboring properties. On August 16, 2019, we acquired an 11.75% ownership interest in the LLC that was valued at approximately $280,000 at the time of acquisition. On November 1, 2019, we acquired an additional 13.25% interest in the LLC that was valued at approximately $307,000 at the time of acquisition. As our investment in the LLC is deemed to constitute “significant influence,” we have accounted for this investment under the equity method.

During the three months ended March 31, 2020, we recorded approximately $34,000 of additional income (included on our Condensed Consolidated Statements of Operations and Comprehensive Income as Income from investments in unconsolidated entities), which represents our pro-rata share of the income recognized by the LLC. Prior to the three months ended March 31, 2020, we had not recorded any material income or loss related to our ownership interest in the LLC. Our combined ownership interest in the LLC, which had an aggregate carrying value of approximately $621,000 and $587,000, as of March 31, 2020, and December 31, 2019, respectively, is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

Future Minimum Lease Payments

We account for all of our leasing arrangements in which we are the lessor as operating leases. The majority of our leases are subject to fixed rental increases, and a small subset of our lease portfolio includes lease payments based on an index, such as the consumer price index (“CPI”). In addition, several of our leases contain participation rent components based on the gross revenues earned on the respective farms. Most of our leases also include tenant renewal options; however, these renewal options are generally based on then-current market rental rates and are therefore typically excluded from the determination of the minimum lease term. Our leases do not generally include tenant termination options.

The following table summarizes the future lease payments to be received under non-cancelable leases as of March 31, 2020, and December 31, 2019 (dollars in thousands):



		Future Lease Payments⁽¹⁾
Period		March 31, 2020		December 31, 2019
For the remaining nine months ending December 31:	2020	$	33,713	$	46,483
For the fiscal years ending December 31:	2021	41,004		40,799
	2022	40,007		38,793
	2023	40,291		39,351
	2024	34,426		34,080
	Thereafter	124,482		125,137
		$	313,923	$	324,643


⁽¹⁾	Excludes variable rent payments, such as potential rent increases that are based on CPI or future contingent rents based on a percentage of the gross revenues earned on the respective farms.

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 the three months ended March 31, 2020 and 2019 (dollars in thousands):



	As of and For the three months ended March 31, 2020						As of and For the three months ended March 31, 2019
State	Number of Farms	Total Acres	% of Total Acres	Lease Revenue		% of Total Lease Revenue	Number of Farms	Total Acres	% of Total Acres	Lease Revenue		% of Total Lease Revenue
California⁽¹⁾	42	14,830	16.9%	$	6,816	44.6%	33	10,147	13.7%	$	3,734	47.7%
Florida	23	20,770	23.6%	3,335		21.8%	22	17,184	23.2%	2,339		29.9%
Arizona	6	6,280	7.1%	3,331		21.8%	6	6,280	8.5%	539		6.9%
Colorado	12	32,773	37.3%	823		5.4%	10	31,448	42.6%	696		8.9%
Nebraska	8	7,104	8.1%	385		2.5%	3	3,254	4.4%	60		0.8%
Michigan	15	962	1.1%	170		1.1%	5	446	0.6%	21		0.2%
Oregon	3	418	0.5%	130		0.9%	3	418	0.6%	128		1.6%
Washington	1	746	0.8%	123		0.8%	1	746	1.0%	122		1.5%
Texas	1	3,667	4.2%	112		0.7%	1	3,667	5.0%	131		1.7%
North Carolina	2	310	0.4%	55		0.4%	2	310	0.4%	60		0.8%
TOTALS	113	87,860	100.0%	$	15,280	100.0%	86	73,900	100.0%	$	7,830	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 six of these growing regions.

Concentrations

Credit Risk

As of March 31, 2020, our farms were leased to 70 different, unrelated third-party tenants, with certain tenants leasing more than one farm. Due primarily to an early lease termination payment of approximately $3.0 million received from an outgoing tenant (“Tenant A”) during the three months ended March 31, 2020 (see “—Lease Termination” above), aggregate lease revenue attributable to Tenant A accounted for approximately $3.0 million, or 19.6%, of the total lease revenue recorded during the three months ended March 31, 2020. As of March 31, 2020, we are no longer a party to any contractual agreements with Tenant A. No other individual tenant represented greater than 10.0% of the total lease revenue recorded during the three months ended March 31, 2020.

Geographic Risk

Farms located in California, Florida, and Arizona accounted for approximately $6.8 million (44.6%), $3.3 million (21.8%) and $3.3 million (21.8%), respectively, of the total lease revenue recorded during the three months ended March 31, 2020. 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 our total lease revenue recorded during the three months ended March 31, 2020.