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, 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 123 farms we owned as of September 30, 2020 (dollars in thousands, except for footnotes):


Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis(1)		Encumbrances(2)
California(3)	46	17,954	16,660	$	467,464	$	275,844
Florida	23	20,770	16,256	210,427		130,667
Arizona(4)	6	6,280	5,228	59,216		22,097
Colorado	12	32,773	25,577	48,583		31,406
Nebraska	9	7,782	7,050	30,744		19,331
Michigan	15	962	682	12,105		7,619
Texas	1	3,667	2,219	8,346		5,173
Washington	1	746	417	7,895		4,909
Maryland	4	759	693	6,316		3,728
Oregon	3	418	363	6,163		3,999
North Carolina	2	310	295	2,255		1,206
Delaware	1	180	140	1,276		753
	123	92,601	75,580	$	860,790	$	506,732

(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 $3.2 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 September 30, 2020, this investment had a net carrying value of approximately $874,000 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 $1.7 million as of September 30, 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 September 30, 2020, and December 31, 2019 (dollars in thousands):


	September 30, 2020		December 31, 2019
Real estate:
Land and land improvements	$	632,178	$	583,247
Irrigation and drainage systems	121,826		108,222
Horticulture	120,684		107,941
Farm-related facilities	21,879		20,665
Other site improvements	7,245		7,180
Real estate, at gross cost	903,812		827,255
Accumulated depreciation	(45,059)		(35,174)
Real estate, net	$	858,753	$	792,081

Real estate depreciation expense on these tangible assets was approximately $3.6 million and $10.6 million for the three and nine months ended September 30, 2020, respectively, and approximately $3.0 million and $7.8 million for the three and nine months ended September 30, 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 September 30, 2020, and December 31, 2019, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.0 million and $2.2 million, respectively. We recorded both depreciation expense and additional lease revenue related to these tenant improvements of approximately $76,000 and $228,000 for the three and nine months ended September 30, 2020, respectively, and approximately $72,000 and $218,000 for the three and nine months ended September 30, 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 September 30, 2020, and December 31, 2019 (dollars in thousands):


	September 30, 2020		December 31, 2019
Lease intangibles:
Leasehold interest – land	$	3,498	$	3,498
In-place leases	1,881		2,293
Leasing costs	1,565		2,066
Tenant relationships	180		414
Lease intangibles, at cost	7,124		8,271
Accumulated amortization	(3,498)		(3,444)
Lease intangibles, net	$	3,626	$	4,827

Total amortization expense related to these lease intangible assets, including amounts charged to amortization expense due to early lease terminations, was approximately $294,000 and $1.4 million for the three and nine months ended September 30, 2020, respectively, and approximately $460,000 and $1.1 million for the three and nine months ended September 30, 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 September 30, 2020, and December 31, 2019 (dollars in thousands):


	September 30, 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)	$	255	$	(135)	$	111	$	(41)
Below-market lease values and other deferred revenue(2)	(943)		335		(886)		257
	$	(688)	$	200	$	(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 $32,000 and $94,000 for the three and nine months ended September 30, 2020, respectively, and approximately $31,000 and $97,000 for the three and nine months ended September 30, 2019, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $28,000 and $78,000 for the three and nine months ended September 30, 2020, respectively, and approximately $46,000 and $123,000 for the three and nine months ended September 30, 2019, respectively.

Acquisitions

2020 Acquisitions

During the nine months ended September 30, 2020, we acquired 12 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	$	4,500
Lamar Valley	Chase, NE	5/7/2020	678	1	Potatoes, edible beans, & corn	6.7 years	2 (5 years)	3,500		42		204		2,100
Driver Road(3)	Kern, CA	6/5/2020	590	1	Pecans	4.7 years	2 (10 years)	14,169		52		784		8,500
Mt. Hermon	Wicomico & Caroline, MD, and Sussex, DE	8/31/2020	939	5	Sod & vegetables	10.0 years	2 (5 years)	7,346		211		432		4,481
Firestone Avenue(4)(5)(6)	Fresno, CA	9/3/2020	2,534	3	Pistachios and misc. organic & conventional vegetables	1.2 years	2 (5 years)	31,833		74		1,734		—
			6,066	12				$	64,348	$	418	$	3,571	$	19,581

(1)Includes approximately $38,000 of aggregate external legal fees associated with negotiating and originating the leases associated with these acquisitions, which costs were 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.

(3)The lease provides for an initial term of 14.7 years and includes six tenant termination options throughout the initial term. The lease term stated above represents the term through the first available termination option, and the annualized straight-line rent amount represents the rent guaranteed through the noncancellable term of the lease.

(4)Lease provides for a participation rent component based on the gross crop revenues earned on the farm. The rent figure above represents only the minimum cash guaranteed under the lease.

(5)Lease provides for an initial term of 8.2 years but also includes an annual tenant termination option, effective as of the end of the then-current lease year (as defined within the lease). The lease term stated above represents the term through the first available termination option, and the annualized straight-line rent amount represents the rent guaranteed through the noncancellable term of the lease.

(6)In connection with the acquisition of this property, we also acquired an ownership interest in a related LLC, the sole purpose of which is to own and maintain a pipeline conveying water to this and other neighboring properties. Our acquired ownership, which equated to a 12.5% interest in the LLC, was valued at approximately $280,000 at the time of acquisition and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets. See “Investments in Unconsolidated Entities” below for further information on our aggregate ownership interest in this LLC.

During the three and nine months ended September 30, 2020, we recognized lease revenue of approximately $527,000 and $808,000, respectively, and net income of approximately $253,000 and $448,000, respectively, related to the above acquisitions.

2019 Acquisitions

During the nine months ended September 30, 2019, we acquired 20 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) / 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
Greenhills Boulevard(3)	Madera, CA	4/9/2019	928	1	Pistachios	10.6 years	2 (5 years)	28,550		141		1,721		17,130
Van Buren Trail	Van Buren, MI	5/29/2019	159	2	Blueberries & cranberries	10.6 years	2 (5 years)	2,682		26		206		1,609
Blue Star Highway	Allegran & Van Buren, MI	6/4/2019	357	8	Blueberries	10.6 years	2 (5 years)	5,100		30		390		3,060
Yolo County Line Road	Yolo, CA	6/13/2019	542	1	Olives for olive oil	14.6 years	1 (5 years)	9,190		68		624		5,514
San Juan Grade Road(4)	Monterey, CA	7/11/2019	324	1	Strawberries & vegetables	0.3 years	None	9,000		68		632		5,400
West Citrus Boulevard(5)	Martin, FL	7/22/2019	3,586	1	Water retention	8.4 years	2 (10 years)	57,790		516		3,696		37,700
Sutter Avenue (Phase I)(3)(6)	Fresno, CA	8/16/2019	1,011	1	Pistachios	8.2 years	2 (5 years)	33,000		146		2,106		16,500
Las Posas Road(7)	Ventura, CA	8/28/2019	413	3	Sod & vegetables	3.3 years	1 (2 years)	21,320		111		1,283		12,792
Withers Road(8)	Napa, CA	8/29/2019	366	1	Wine grapes	10.3 years	2 (10 years)	32,000		84		2,256		19,254
			8,381	20				$	201,032	$	1,223	$	13,040	$	120,399

(1)Includes approximately $63,000 of external legal fees associated with negotiating and originating the lease associated with this acquisition, which cost was expensed in the period incurred.

(3)Lease provides for a participation rent component based on the gross crop revenues earned on the farm. The rent figure above represents only the minimum cash guaranteed under the lease.

(4)In connection with the acquisition of this property, we executed a six-year, follow-on lease with a new tenant that will commence upon the expiration of the four-month lease executed on the date of acquisition. The follow-on lease includes one, four-year extension option and provides for minimum annualized straight-line rents of approximately $606,000. In connection with the follow-on lease, we committed to provide up to $100,000 for certain irrigation improvements on the property.

(5)As partial consideration for the acquisition of this property, we issued 288,303 OP Units, constituting an aggregate fair value of approximately $3.3 million as of the acquisition date.

(6)In connection with the acquisition of this property, 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. Our acquired ownership, which equated to an 11.75% interest in the LLC, was valued at approximately $280,000 at the time of acquisition and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

(7)In connection with this acquisition, we executed two separate lease agreements with two different, unrelated third-party tenants. The lease term of 3.3 years represents the weighted-average term of the two leases. In addition, pursuant to one of these lease agreements, we committed to provide up to $1.0 million for certain irrigation improvements on the property.

(8)In connection with the acquisition of this property, we committed to provide up to approximately $4.0 million as additional compensation, contingent upon the County of Napa approving the planting of additional vineyards on up to 47 acres of the property. Subject to such approval, we also committed to contribute up to $40,000 per approved acre for the development of such vineyards. As provided for in the lease, we will earn additional rent on all of the aforementioned costs, if any, incurred by us. See below, under “Significant Existing Real Estate Activity—Property Add-on” for additional information on the subsequent approval of additional vineyard plantings.

During the three and nine months ended September 30, 2019, we recognized operating revenues of approximately $2.2 million and $2.8 million, respectively, and net income of approximately $574,000 and $793,000, respectively, related to the above acquisitions.

Purchase Price Allocations

The allocation of the aggregate purchase price for the farms acquired during each of the nine months ended September 30, 2020 and 2019 is as follows (dollars in thousands):


Assets (Liabilities) Acquired	2020 Acquisitions		2019 Acquisitions
Land and Land Improvements	$	44,154	$	138,253
Irrigation & Drainage Systems	7,250		17,789
Horticulture	12,245		41,746
Farm-related Facilities	189		2,013
Other Site Improvements	—		358
In-Place Leases	101		560
Leasing Costs	133		118
Above-market Lease Values(1)	54		—
Below-market Lease Values(2)	(58)		(85)
Investment in LLC(1)	280		280
Total Purchase Price	$	64,348	201,032

(1)Included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

(2)Included within Other liabilities, net on the accompanying Condensed Consolidated Balance Sheets.

Significant Existing Real Estate Activity

Property Add-on

In connection with the acquisition of Withers Road, we committed to provide up to approximately $4.0 million as additional compensation, contingent upon the County of Napa approving the planting of additional vineyards on up to 47 acres of the property by February 25, 2020 (the “Permit Deadline”). In addition, if approval was obtained, we also committed to contribute up to $40,000 per approved acre for the development of such vineyards. While approval of the additional plantings was not received from the County of Napa by the Permit Deadline, in March 2020, we executed an agreement with the tenant on Withers Road to extend the Permit Deadline until August 24, 2020.

In April 2020, we received notification from the County of Napa informing us that it had approved of additional vineyard plantings on 38.7 acres of the property. As such, in May 2020, we paid additional compensation related to this acquisition of approximately $3.2 million. As a result, and pursuant to a lease amendment, we will earn additional straight-line rental income of approximately $335,000 per year throughout the remaining term of the lease, which expires on December 31, 2029. We will also earn additional rent on any of the aforementioned development costs as they are incurred by us.

Leasing Activity

The following table summarizes certain leasing activity that occurred on our existing properties during the nine months ended September 30, 2020 (dollars in thousands):

PRIOR LEASES

NEW LEASES(1)

Farm
Locations

Number
of
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, FL, & NE

7,141

6,420

8 / 4 / 2

6,554

9 / 5 / 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 nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 certain farmland located in Fresno County, California, we also acquired an ownership in a related LLC, the sole purpose of which is to own and maintain a pipeline conveying water to our and other neighboring properties. As of September 30, 2020, our aggregate ownership interest in the LLC was 37.5%. 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 and nine months ended September 30, 2020, we recorded (loss) income of approximately $(19,000) and $7,000, respectively (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 (loss) income recognized by the LLC. Prior to fiscal year 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 $874,000 and $587,000, as of September 30, 2020, and December 31, 2019, respectively, is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

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 nine months ended September 30, 2020 and 2019 (dollars in thousands):


	As of and For the nine months ended September 30, 2020						As of and For the nine months ended September 30, 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)	46	17,954	19.4%	$	22,153	52.9%	41	13,731	16.8%	$	13,872	51.0%
Florida	23	20,770	22.4%	10,006		23.9%	23	20,770	25.5%	7,785		28.6%
Arizona	6	6,280	6.8%	4,272		10.2%	6	6,280	7.7%	1,609		5.9%
Colorado	12	32,773	35.4%	2,501		6.0%	10	31,448	38.5%	2,126		7.8%
Nebraska	9	7,782	8.4%	1,159		2.7%	3	3,254	4.0%	264		1.0%
Michigan	15	962	1.0%	554		1.3%	15	962	1.2%	259		1.0%
Oregon	3	418	0.5%	395		0.9%	3	418	0.5%	386		1.4%
Washington	1	746	0.8%	368		0.9%	1	746	0.9%	383		1.4%
Texas	1	3,667	4.0%	337		0.8%	1	3,667	4.5%	394		1.4%
North Carolina	2	310	0.3%	120		0.3%	2	310	0.4%	125		0.5%
Maryland	4	759	0.8%	35		0.1%	—	—	—%	—		—%
Delaware	1	180	0.2%	7		—%	—	—	—%	—		—%
TOTALS	123	92,601	100.0%	$	41,907	100.0%	105	81,586	100.0%	$	27,203	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 September 30, 2020, our farms were leased to 73 different, unrelated third-party tenants, with certain tenants leasing more than one farm. No individual tenant represented greater than 10.0% of the total lease revenue recorded during the nine months ended September 30, 2020.

Geographic Risk

Farms located in California, Florida, and Arizona accounted for approximately $22.2 million (52.9%), $10.0 million (23.9%) and $4.3 million (10.2%), respectively, of the total lease revenue recorded during the nine months ended September 30, 2020. Though we seek to continue to further diversify geographically, as may be desirable or feasible, should an unexpected natural disaster (such as an earthquake, wildfire, or flood) occur or climactic change impact the regions 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 have been materially impacted by the recent wildfires or hurricanes that occurred in those respective regions. No other single state accounted for more than 10.0% of our total lease revenue recorded during the nine months ended September 30, 2020.