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, 2017

All of our farms are owned on a fee-simple basis, except where noted. The following table provides certain summary information about our 65 farms as of June 30, 2017 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California	22	6,713	6,240	$	182,226	$	137,868
Florida	16	9,315	7,664	107,960		64,800
Colorado	9	30,170	23,257	42,140		25,227
Arizona⁽³⁾	6	6,280	5,228	40,748		23,314
Oregon	4	2,313	2,003	19,568		12,927
Nebraska	2	2,559	2,101	10,708		6,602
Michigan	4	270	183	2,993		1,653
North Carolina	2	310	295	2,317		1,301
	65	57,930	46,971	$	408,660	$	273,692

⁽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 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 $1.7 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⁾

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 $3.5 million as of June 30, 2017 (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 June 30, 2017, and December 31, 2016 (dollars in thousands):



	June 30, 2017			December 31, 2016
Real estate:
Land and land improvements	$	332,035		$	265,985
Irrigation systems	45,829			33,969
Buildings	16,805			14,671
Horticulture	18,870			17,759
Other improvements	5,472			4,993
Real estate, at cost	419,011			337,377
Accumulated depreciation	(13,789		)	(11,066		)
Real estate, net	$	405,222		$	326,311

Real estate depreciation expense on these tangible assets was approximately $1.4 million and $2.7 million for the three and six months ended June 30, 2017, respectively, and $1.1 million and $1.9 million for the three and six months ended June 30, 2016, 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 each of June 30, 2017, and December 31, 2016, we recorded tenant improvements, net of accumulated depreciation, of approximately $1.8 million. We recorded both depreciation expense and additional rental revenue related to these tenant improvements of approximately $53,000 and $89,000 for the three and six months ended June 30, 2017, respectively, and $31,000 and $62,000 for the three and six months ended June 30, 2016, 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, 2017, and December 31, 2016 (dollars in thousands):



	June 30, 2017			December 31, 2016
Lease intangibles:
Leasehold interest – land	$	3,498		$	—
In-place leases	1,675			1,481
Leasing costs	1,540			1,086
Tenant relationships	668			706
Lease intangibles, at cost	7,381			3,273
Accumulated amortization	(1,476		)	(1,273		)
Lease intangibles, net	$	5,905		$	2,000

Total amortization expense related to these lease intangible assets was approximately $210,000 and $348,000 for the three and six months ended June 30, 2017, respectively, and $198,000 and $375,000 for the three and six months ended June 30, 2016, 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, 2017, and December 31, 2016 (dollars in thousands).



	June 30, 2017						December 31, 2016
Intangible Asset or Liability	Deferred Rent Asset (Liability)			Accumulated (Amortization) Accretion			Deferred Rent Asset (Liability)			Accumulated (Amortization) Accretion
Above-market lease values⁽¹⁾	$	35		$	(18	)	$	19		$	(14	)
Below-market lease values and deferred revenue⁽²⁾	(800		)	91			(785		)	61
	$	(765	)	$	73		$	(766	)	$	47


⁽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 approximately $2,000 and $4,000 for the three and six months ended June 30, 2017, respectively, and $2,000 and $3,000 for the three and six months ended June 30, 2016, respectively. Total accretion related to below-market lease values and deferred revenue was approximately $15,000 and $30,000 for the three and six months ended June 30, 2017, respectively, and $7,000 and $15,000 for the three and six months ended June 30, 2016, respectively.

New Real Estate Activity

Until our adoption of ASU 2017-01, which clarified the definition of a business, certain acquisitions during the prior-year period 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 directly related to reviewing or assigning leases that we assumed upon acquisition, which were capitalized as part of leasing costs. Upon our early adoption of ASU 2017-01, effective October 1, 2016, most acquisitions, including those with a prior leasing history, are now generally treated as an asset acquisition under ASC 360. 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 and intangible 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.

2017 New Real Estate Activity

During the six months ended June 30, 2017, we acquired seven new farms in three separate transactions, 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⁽²⁾		Annualized Straight-line Rent⁽³⁾			New Long-term Debt
Citrus Boulevard	Martin, FL	1/12/2017	3,748	1	Organic Vegetables	7 years	3 (5 years)	$	54,000	$	80	$	2,926		$	32,400
Spot Road⁽⁴⁾	Yuma, AZ	6/1/2017	3,280	4	Melons and Alfalfa Hay	8.2 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		⁽⁵⁾	1,301
			7,338	7				$	83,669	$	217	$	4,721		$	49,001


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


⁽²⁾	Unless noted otherwise, acquisitions were accounted for as asset acquisitions under ASC 360.


⁽³⁾	Annualized straight-line amount is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.

⁽⁴⁾

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.


⁽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.

The allocation of the purchase price for the farm acquired during the six months ended June 30, 2017, is as follows (dollars in thousands, except for footnotes):



Property Name	Land and Land Improvements		Buildings		Irrigation Systems		Other Improvements		Horticulture		Leasehold Interest – Land		In-place Leases		Leasing Cost		Total Purchase Price
Citrus Boulevard	$	52,375	$	178	$	1,447	$	—	$	—	$	—	$	—	$	—	$	54,000
Spot Road⁽¹⁾	12,354		1,897		8,584		455		—		3,488		254		468		27,500
Poplar Street	1,110		48		305		—		706		—		—		—		2,169
	$	65,839	$	2,123	$	10,336	$	455	$	706	$	3,488	$	254	$	468	$	83,669


⁽¹⁾	In connection with the acquisition of this property, we recorded an above-market lease value of approximately $15,000 related to one agricultural lease assumed and a below-market lease value of approximately $15,000 related to the residential lease assumed.

Below is a summary of the total operating revenues and earnings (loss) recognized on the property acquired during the three and six months ended June 30, 2017 (dollars in thousands):



		For the three months ended June 30, 2017					For the six months ended June 30, 2017
Property Name	Acquisition Date	Operating Revenues		Earnings (Loss)			Operating Revenues		Earnings (Loss)
Citrus Boulevard	1/12/2017	$	732	$	430		$	1,377	$	810
Spot Road	6/1/2017	141		(5		)	141		(5		)
Poplar Street	6/2/2017	10		4			10		4
		$	883	$	429		$	1,528	$	809

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 (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⁾			Net Long-term Debt Issued
Gunbarrel Road ⁽²⁾	Saguache, CO	3/3/2016	6,191	3	Organic Potatoes	5 years	1 (5 years)	$	25,736	$	119	⁽³⁾	$	1,591		$	15,531
Calaveras Avenue	Fresno, CA	4/5/2016	453	1	Pistachios	10 years	1 (5 years)	15,470		39		⁽⁴⁾	774		⁽⁵⁾	9,282
			6,644	4				$	41,206	$	158		$	2,365		$	24,813


⁽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. We incurred $25,500 of legal costs in connection with the issuance of these OP Units.


⁽³⁾	Acquisition accounted for as a business combination under ASC 805. In aggregate, $4,670 of these costs were direct leasing costs incurred in connection with these acquisitions.


⁽⁴⁾	Acquisition accounted for as an asset acquisition under ASC 360.


⁽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.

The allocation of the purchase price for the farms acquired during the six months ended June 30, 2016, were as follows (dollars in thousands):



Property Name	Land and Land Improvements		Buildings and Improvements		Irrigation System		Other Improvements		Horticulture		In-place Leases		Leasing Costs		Total Purchase Price
Gunbarrel Road	$	16,756	$	3,438	$	2,831	$	2,079	$	—	$	382	$	250	$	25,736
Calaveras Avenue	3,615		—		424		—		11,431		—		—		15,470
	$	20,371	$	3,438	$	3,255	$	2,079	$	11,431	$	382	$	250	$	41,206

Below is a summary of the total operating revenues and loss recognized on the properties acquired during the three and six months ended June 30, 2016 (dollars in thousands, except for footnotes):



		For the three months ended June 30, 2016					For the six months ended June 30, 2016
Property Name	Acquisition Date	Operating Revenues		Loss⁽¹⁾			Operating Revenues		Loss⁽¹⁾
Gunbarrel Road	3/3/2016	$	398	$	(51	)	$	522	$	(152	)
Calaveras Avenue	4/5/2016	184		(3		)	184		(3		)
		$	582	$	(54	)	$	706	$	(155	)


⁽¹⁾	Includes approximately $5,000 and $89,000 of non-recurring acquisition-related costs during the three and six months ended June 30, 2016, respectively.

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 six months ended June 30, 2017 and 2016:



	Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities	2017	2016
Leasehold interest – land	6.9	0.0
In-place leases	9.1	5.1
Leasing costs	9.2	5.1
Above-market lease values	2.1	0.0
Below-market lease values and deferred revenue	2.3	0.0
All intangible assets and liabilities	7.3	5.1

Pro-Forma Financials

During the six months ended June 30, 2016, we acquired three farms that qualified as business combinations. No farms were acquired during the six months ended June 30, 2017 that were treated as business combinations. The following table reflects pro-forma consolidated financial information as if each farm acquired during the six months ended June 30, 2016, as part of a business combination was acquired on January 1, 2015. 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 (dollars in thousands, except share and per-share amounts).



	For the three months ended June 30, 2016		For the six months ended June 30, 2016
	(Unaudited)		(Unaudited)
Operating Data:
Total operating revenue	$	4,244	$	7,927
Net income attributable to the company	$	93	$	101
Share and Per-share Data:
Earnings per share of common stock – basic and diluted	$	0.01	$	0.01
Weighted-average common shares outstanding – basic and diluted	9,992,941		9,992,941

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

Significant Existing Real Estate Activity

Lease Extensions and Renewals

During the six months ended June 30, 2017, we extended or renewed eight separate leases on seven different farms in California and Florida that had leases expiring in either 2017 or 2018. In total, these leases were renewed for additional terms ranging between one and five years and for total annualized rents of approximately $1.1 million, representing a decrease of approximately $4,000 (approximately 0.3%) from that of the prior leases. These renewals were executed without incurring any downtime on the respective farms, and no leasing commissions or tenant improvements were incurred in connection with these renewals.

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, 2017 and 2016 (dollars in thousands):



	As of and For the Six Months Ended June 30, 2017						As of and For the Six Months Ended June 30, 2016
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	22	6,713	11.6%	$	5,728	48.8%	19	4,029	17.2%	$	4,502	56.8%
Florida	16	9,315	16.1%	3,143		26.8%	13	5,094	21.7%	1,539		19.4%
Colorado	9	30,170	52.1%	1,345		11.4%	3	6,191	26.4%	522		6.6%
Oregon	4	2,313	4.0%	589		5.0%	4	2,313	9.9%	585		7.4%
Arizona	6	6,280	10.8%	512		4.3%	2	3,000	12.8%	358		4.5%
Nebraska	2	2,559	4.4%	290		2.5%	2	2,559	10.9%	290		3.7%
Michigan	4	270	0.5%	125		1.1%	4	270	1.1%	125		1.6%
North Carolina	2	310	0.5%	10		0.1%	—	—	—%	—		—%
TOTALS	65	57,930	100.0%	$	11,742	100.0%	47	23,456	100.0%	$	7,921	100.0%

Concentrations

Credit Risk

As of June 30, 2017, our farms were leased to 44 different, 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 $2.1 million, or 18.1% of the rental revenue recorded during the six months ended June 30, 2017. In addition, Dole Food Company (“Dole”) leases two of our farms, and aggregate rental revenue attributable to Dole accounted for approximately $1.5 million, or 12.6% of the rental revenue recorded during the six months ended June 30, 2017. If either Tenant A or Dole fail to make rental payments or elect to terminate their respective 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, 2017.

Geographic Risk

As of June 30, 2017, 22 of the 65 farms we owned were located in California, 16 farms were located in Florida and 9 farms were located in Colorado. Further, our California, Florida, and Colorado farms accounted for approximately $5.7 million (48.8%), $3.1 million (26.8%), and $1.3 million (11.4%), respectively, of the rental revenue recorded during the six months ended June 30, 2017. 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, 2017.