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 (Tables)

Real Estate and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2019

The following table provides certain summary information about the 97 farms we owned as of September 30, 2019 (dollars in thousands, except for footnotes):



Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis⁽¹⁾		Encumbrances⁽²⁾
California⁽³⁾	41	13,731	12,570	$	383,358	$	243,763
Florida	23	20,770	16,256	211,703		133,742
Arizona⁽⁴⁾	6	6,280	5,228	56,488		21,773
Colorado	10	31,448	24,513	41,317		24,810
Nebraska	3	3,254	2,701	12,758		8,476
Michigan	7	962	682	12,570		7,421
Washington	1	746	417	8,438		5,099
Texas	1	3,667	2,219	8,333		5,280
Oregon	3	418	363	6,150		3,337
North Carolina	2	310	295	2,294		1,238
	97	81,586	65,244	$	743,409	$	454,939

⁽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 net 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 $2.8 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, 2019, this investment was valued at approximately $280,000 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 $2.3 million as of September 30, 2019 (included in Lease intangibles, net on the accompanying Condensed Consolidated Balance Sheet).

Summary of Components of Investments in Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of September 30, 2019, and December 31, 2018 (dollars in thousands):



	September 30, 2019			December 31, 2018
Real estate:
Land and land improvements	$	556,557		$	417,310
Irrigation and drainage systems	96,913			71,583
Horticulture	91,289			48,894
Farm-related facilities	20,579			18,510
Other site improvements	7,097			6,707
Real estate, at gross cost	772,435			563,004
Accumulated depreciation	(31,827		)	(24,051		)
Real estate, net	$	740,608		$	538,953

Carrying Value of Lease Intangibles and Accumulated Amortization for Each Intangible Asset or Liability Class

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, 2019, and December 31, 2018 (dollars in thousands):



	September 30, 2019						December 31, 2018
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⁾	$	216		$	(115	)	$	126		$	(18	)
Below-market lease values and other deferred revenue⁽²⁾	(1,002		)	325			(917		)	202
	$	(786	)	$	210		$	(791	)	$	184


⁽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.

The following table summarizes the carrying values of certain lease intangible assets and the related accumulated amortization as of September 30, 2019, and December 31, 2018 (dollars in thousands):



	September 30, 2019			December 31, 2018
Lease intangibles:
Leasehold interest – land	$	3,498		$	3,498
In-place leases	2,601			2,046
Leasing costs	2,073			1,963
Tenant relationships	414			414
Lease intangibles, at cost	8,586			7,921
Accumulated amortization	(3,329		)	(2,235		)
Lease intangibles, net	$	5,257		$	5,686

Schedule of Asset Acquisitions, by Acquisition

During the nine months ended September 30, 2019, we acquired 12 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) / 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	$	28	$	126	$	1,440
Greenhills Boulevard⁽³⁾	Madera, CA	4/9/2019	928	1	Pistachios	10.6 years	2 (5 years)	28,550		143		1,721		17,130
Van Buren Trail	Van Buren, MI	5/29/2019	159	1	Blueberries & cranberries	10.6 years	2 (5 years)	2,682		28		206		1,609
Blue Star Highway	Allegran & Van Buren, MI	6/4/2019	357	1	Blueberries	10.6 years	2 (5 years)	5,100		31		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		66		624		5,514
San Juan Grade Road⁽⁴⁾	Monterey, CA	7/11/2019	324	1	Strawberries & vegetables	0.3 years	None	9,000		60		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		503		3,696		37,700
Sutter Avenue I⁽³⁾⁽⁶⁾	Fresno, CA	8/16/2019	1,011	1	Pistachios	8.2 years	2 (5 years)	33,000		139		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		67		1,283		12,792
Withers Road⁽⁸⁾	Napa, CA	8/29/2019	366	1	Wine grapes	10.3 years	2 (10 years)	32,000		77		2,256		19,254
			8,381	12				$	201,032	$	1,142	$	13,040	$	120,399


⁽¹⁾	Includes approximately $63,000 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⁾	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.

⁽⁴⁾

In connection with the acquisition of this property, we executed a 6-year, follow-on lease with a new tenant that will commence upon the expiration of the 4-month lease executed on the date of acquisition. The follow-on lease includes one, 4-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 equated to an 11.75% interest in the LLC and 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. As our investment in the LLC is deemed to constitute “significant influence,” we have accounted for this investment under the equity method. From the commencement of our ownership in the LLC through September 30, 2019, there was no material income or loss recognized by the LLC; thus, no net income or loss was recorded by us during the three months ended September 30, 2019.


⁽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 by February 25, 2020. We are currently unable to estimate when this approval will be obtained, if at all. If approval is obtained, we have 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.

During the nine months ended September 30, 2018, we acquired ten 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		58		523		4,110
			6,735	10				$	51,845	$	360	$	2,963	$	30,813


⁽¹⁾	Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the applicable 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 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 follow-on lease).

Subsequent to September 30, 2019, through the date of this filing, we have acquired six 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⁽¹⁾		Annualized Straight-line Rent⁽²⁾
Highway 17⁽³⁾	Hayes, NE	10/7/2019	2,561	3	Corn, soybeans, & edible beans	0.2 years	None	$	9,690	$	39	$	489
Indian Highway⁽⁴⁾	Hayes & Hitchcock, NE	10/7/2019	1,289	2	Corn, soybeans, & edible beans	0.3 years	None	5,000		39		788
Sutter Avenue II	Fresno, CA	11/1/2019	1,098	1	Pistachios	8.0 years	2 (5 Years)	37,000		68		2,365
			4,948	6				$	51,690	$	146	$	3,642


⁽¹⁾	Acquisitions will be accounted for as asset acquisitions in accordance with ASC 360. The figures above represent only costs paid or accrued for as of the date of this filing.


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

⁽³⁾

In connection with the acquisition of this property, we executed a 10-year, follow-on lease with a new, unrelated third-party tenant that will commence upon the expiration of the 3-month lease executed on the date of acquisition. The follow-on lease provides for minimum annualized straight-line rents of approximately $630,000, plus a participation rent component based on the gross revenues earned on the farm. In addition, the farm is expected to be converted to organic farmland by 2021.

⁽⁴⁾

In connection with this acquisition, we executed a 4-month leaseback agreement with the seller that provides for a fixed rental payment of $250,000. In addition, we also executed a 10-year, follow-on lease with a new tenant that will commence upon the expiration of the 4-month leaseback agreement. The follow-on lease provides for minimum annualized straight-line rents of approximately $372,000, plus a participation rent component based on the gross revenues earned on the farm. In addition, the farm is expected to be converted to organic farmland by 2021.

Recognized Identified Assets Acquired and Liabilities Assumed In Asset Acquisitions

The allocation of the aggregate purchase price for the farms acquired during each of the nine months ended September 30, 2019 and 2018 is as follows (dollars in thousands):



Acquisition Period	Land and Land Improvements		Irrigation & Drainage Systems		Horticulture		Farm- related Facilities		Other Site Improvements		In- place Leases		Leasing Costs		Below Market Leases⁽¹⁾			Investment in LLC⁽²⁾		Total Purchase Price
2019 Acquisitions	$	138,245	$	17,804	$	41,739	$	2,014	$	358	$	560	$	118	$	(85	)	$	280	$	201,032
2018 Acquisitions	44,749		1,548		4,288		123		—		626		511		—			—		51,845


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


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

Schedule of Acquired Finite-Lived Intangible Assets by Major Class

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, 2019 and 2018:



	Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities	2019	2018
In-place leases	1.9	7.0
Leasing costs	3.0	7.1
All intangible assets and liabilities	2.1	7.1

Summary of Leasing Activity

The following table summarizes certain leasing activity that occurred on our existing properties during the nine months ended September 30, 2019 (dollars in thousands, except footnotes):

PRIOR LEASES

NEW LEASES

Farm
Locations

Number

Leases

Total

Farm

Acres

Total

Annualized

Straight-line

Rent⁽¹⁾

# of Leases

with

Participation

Rents

Lease

Structures

(# of NNN

/ NN)⁽²⁾

Total
Annualized
Straight-line
Rent⁽¹⁾

Wtd. Avg.

Term
(Years)

# of Leases
with
Participation
Rents

Lease
Structures
(# of NNN
/ NN)⁽²⁾

AZ, CA,
FL, MI, NE

7,364

3,527

10 / 6

3,804

4.0

10 / 6


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


⁽²⁾	“NNN” refers to leases under triple-net lease arrangements, and “NN” refers to leases under partial-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.”

As of September 30, 2019, we had recorded the following as a result of these operating ground leases (dollars in thousands, except for footnotes):



Operating lease right-of-use assets⁽¹⁾	$	188
Operating lease liabilities⁽²⁾	$	171

Weighted-average remaining lease term (years)	4.8
Weighted-average discount rate	4.20		%


⁽¹⁾	Operating lease right-of-use assets are shown net of accrued lease payments of approximately $17,000 and are included within Other assets, net on the accompanying Condensed Consolidated Balance Sheet.


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

The following table sets forth the components of our lease revenues for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands, except for footnotes):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Fixed lease payments⁽¹⁾	$	10,131	$	7,124	$	26,236	$	20,427
Variable lease payments⁽²⁾	881		891		967		917
Lease revenues, net⁽³⁾	$	11,012	$	8,015	$	27,203	$	21,344


⁽¹⁾	Fixed lease payments include contractual rents under lease agreements with tenants recognized on a straight-line basis over the respective lease terms and includes the amortization of above-market lease values and lease incentives and the accretion of below-market lease values and other deferred revenue.

⁽²⁾

Variable lease payments include participation rents, which are generally based on a percentage of the gross crop revenues earned on the farm, and reimbursements of certain property operating expenses by tenants. Participation rents are generally recognized when all contingencies have been resolved and when actual results become known or estimable, enabling us to estimate and/or measure our share of such gross revenues. During the three and nine months ended September 30, 2019, we recorded participation rents of approximately $848,000 and $875,000, respectively, and reimbursements of certain property operating expenses by tenants of approximately $33,000 and $93,000, respectively. During the three and nine months ended September 30, 2018, we recorded participation rents of approximately $889,000 and $906,000, respectively, and reimbursements of certain property operating expenses by tenants of approximately $2,000 and $11,000, respectively.


⁽³⁾	Reflected as a line item on our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

Future Lease Payments to be Received

The following table summarizes the future lease payments to be received under non-cancelable leases as of September 30, 2019, and December 31, 2018 (dollars in thousands):



	Future Lease Payments⁽¹⁾
Period	September 30, 2019		December 31, 2018
2019	$	7,338	$	30,290
2020	40,972		26,917
2021	33,045		20,980
2022	31,602		19,775
2023	31,903		19,413
Thereafter	123,243		59,934
	$	268,103	$	177,309


⁽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.

Summary of Geographic Locations of Properties

The following table summarizes the geographic locations (by state) of our farms owned and with leases in place as of and for the nine months ended September 30, 2019 and 2018 (dollars in thousands):



	As of and For the nine months ended September 30, 2019						As of and For the nine months ended September 30, 2018
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⁾	41	13,731	16.8%	$	13,872	51.0%	31	8,435	12.4%	$	9,887	46.3%
Florida	23	20,770	25.5%	7,785		28.6%	22	17,184	25.3%	5,790		27.1%
Colorado	10	31,448	38.5%	2,126		7.8%	10	31,448	46.4%	2,057		9.7%
Arizona	6	6,280	7.7%	1,609		5.9%	6	6,280	9.3%	1,429		6.7%
Michigan	7	962	1.2%	394		1.4%	5	446	0.7%	270		1.3%
Texas	1	3,667	4.5%	386		1.4%	—	—	—%	—		—%
Washington	1	746	0.9%	383		1.4%	1	746	1.1%	596		2.8%
Oregon	3	418	0.5%	264		1.0%	3	418	0.6%	765		3.6%
North Carolina	2	310	0.4%	259		1.0%	2	310	0.4%	115		0.5%
Nebraska	3	3,254	4.0%	125		0.5%	2	2,559	3.8%	435		2.0%
TOTALS	97	81,586	100.0%	$	27,203	100.0%	82	67,826	100.0%	$	21,344	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.