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Section 1: 10-Q (10-Q)

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Table of Contents 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to

 

Commission File Number: 001-36405

 


 

FARMLAND PARTNERS INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Maryland

 

46-3769850

(State or Other Jurisdiction

of Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

 

 

4600 South Syracuse Street, Suite 1450

Denver, Colorado

 

80237-2766

(Address of Principal Executive Offices)

 

(Zip Code)

(720) 452-3100

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒  Yes   ☐ No

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).   ☒  Yes   ☐  No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

☐  

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐  Yes   ☒  No

As of November  7, 2018, 31,213,649 shares of the Registrant’s common stock were outstanding.

 

 

 


 

Table of Contents 

Farmland Partners Inc.

 

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

Page

 

 

 

 

Item 1. 

Financial Statements

 

 

 

Consolidated Financial Statements

 

 

 

Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

3

 

Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)

 

4

 

Statements of Changes in Equity for the nine months ended September 30, 2018 and 2017 (unaudited)

 

5

 

Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

 

6

 

Notes to Consolidated Financial Statements (unaudited)

 

7

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

50

Item 4. 

Controls and Procedures

 

51

 

 

 

 

PART II. OTHER INFORMATION 

 

51

 

 

 

 

Item 1. 

Legal Proceedings

 

51

Item 1A. 

Risk Factors

 

51

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

Item 3. 

Defaults Upon Senior Securities

 

52

Item 4. 

Mine Safety Disclosures

 

52

Item 5. 

Other Information

 

52

Item 6. 

Exhibits

 

52

 

 

2


 

Table of Contents 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Farmland Partners Inc.

Consolidated Balance Sheets

As of September 30, 2018 (Unaudited) and December 31, 2017

(in thousands except par value and share data)

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

ASSETS

 

 

 

 

 

 

Land, at cost

 

$

953,502

 

$

947,899

Grain facilities

 

 

11,093

 

 

11,463

Groundwater

 

 

11,473

 

 

12,107

Irrigation improvements

 

 

52,391

 

 

51,678

Drainage improvements

 

 

11,981

 

 

9,964

Permanent plantings

 

 

52,989

 

 

52,870

Other

 

 

8,184

 

 

8,245

Construction in progress

 

 

15,380

 

 

8,137

Real estate, at cost

 

 

1,116,993

 

 

1,102,363

Less accumulated depreciation

 

 

(16,173)

 

 

(10,285)

Total real estate, net

 

 

1,100,820

 

 

1,092,078

Deposits

 

 

 6

 

 

239

Cash

 

 

23,808

 

 

53,536

Notes and interest receivable, net

 

 

12,381

 

 

9,760

Deferred offering costs

 

 

217

 

 

292

Deferred financing fees, net

 

 

290

 

 

348

Accounts receivable, net

 

 

5,454

 

 

6,650

Inventory

 

 

295

 

 

126

Prepaid and other assets

 

 

1,904

 

 

3,057

TOTAL ASSETS

 

$

1,145,175

 

$

1,166,086

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Mortgage notes and bonds payable, net

 

$

523,625

 

$

514,071

Dividends payable

 

 

1,806

 

 

4,847

Derivative liability

 

 

173

 

 

 —

Accrued interest

 

 

5,832

 

 

3,193

Accrued property taxes

 

 

2,342

 

 

1,584

Deferred revenue

 

 

636

 

 

3,907

Accrued expenses

 

 

2,489

 

 

2,800

Total liabilities

 

 

536,903

 

 

530,402

 

 

 

 

 

 

 

Commitments and contingencies (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Participating Preferred Stock, $0.01 par value, 100,000,000 shares authorized; 6,033,134 shares issued and outstanding at September 30, 2018, and 6,037,500 outstanding at December 31, 2017

 

 

146,383

 

 

144,223

Redeemable non-controlling interest in operating partnership, Series A preferred units

 

 

119,633

 

 

120,510

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Common stock, $0.01 par value, 500,000,000 shares authorized; 31,695,673 shares issued and outstanding at September 30, 2018, and 33,334,849 shares issued and outstanding at December 31, 2017

 

 

311

 

 

329

Additional paid in capital

 

 

338,975

 

 

350,147

Retained earnings

 

 

678

 

 

5,161

Cumulative dividends

 

 

(41,165)

 

 

(31,199)

Other comprehensive income

 

 

(173)

 

 

 —

Non-controlling interests in operating partnership

 

 

43,630

 

 

46,513

Total equity

 

 

342,256

 

 

370,951

 

 

 

 

 

 

 

TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS IN OPERATING PARTNERSHIP AND EQUITY

 

$

1,145,175

 

$

1,166,086

 

See accompanying notes.

3


 

Table of Contents 

Farmland Partners Inc.

Consolidated Statements of Operations

For the three and nine months ended September 30, 2018 and 2017

(Unaudited)

(in thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2018

    

2017

    

2018

    

2017

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

11,216

 

$

11,107

 

$

31,214

 

$

28,381

Tenant reimbursements

 

 

984

 

 

474

 

 

2,526

 

 

1,230

Crop sales

 

 

 —

 

 

212

 

 

410

 

 

649

Other revenue

 

 

349

 

 

253

 

 

1,026

 

 

395

Total operating revenues

 

 

12,549

 

 

12,046

 

 

35,176

 

 

30,655

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

2,154

 

 

2,107

 

 

6,410

 

 

5,651

Property operating expenses

 

 

1,502

 

 

1,400

 

 

5,299

 

 

4,399

Acquisition and due diligence costs

 

 

34

 

 

180

 

 

175

 

 

878

General and administrative expenses

 

 

1,688

 

 

1,707

 

 

5,352

 

 

5,840

Legal and accounting

 

 

1,016

 

 

450

 

 

1,764

 

 

1,151

Other operating expenses

 

 

 —

 

 

88

 

 

11

 

 

363

Total operating expenses

 

 

6,394

 

 

5,932

 

 

19,011

 

 

18,282

OPERATING INCOME

 

 

6,155

 

 

6,114

 

 

16,165

 

 

12,373

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (INCOME) EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

(53)

 

 

(135)

 

 

(224)

 

 

(157)

(Gain) loss on disposition of assets

 

 

(2,950)

 

 

(44)

 

 

(3,086)

 

 

48

Interest expense

 

 

5,001

 

 

3,683

 

 

13,833

 

 

9,852

Total other expense

 

 

1,998

 

 

3,504

 

 

10,523

 

 

9,743

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before income tax expense

 

 

4,157

 

 

2,610

 

 

5,642

 

 

2,630

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

4,157

 

 

2,610

 

 

5,642

 

 

2,630

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to non-controlling interests in operating partnership

 

 

(518)

 

 

(394)

 

 

(701)

 

 

(353)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

 

3,639

 

 

2,216

 

 

4,941

 

 

2,277

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonforfeitable distributions allocated to unvested restricted shares

 

 

(15)

 

 

(36)

 

 

(99)

 

 

(116)

Distributions on redeemable non-controlling interests in operating partnership, Series A preferred units and dividends on Series B Participating Preferred Stock

 

 

(3,140)

 

 

(1,959)

 

 

(9,423)

 

 

(3,714)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders of Farmland Partners Inc.

 

$

484

 

$

221

 

$

(4,581)

 

$

(1,553)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) available to common stockholders

 

$

0.02

 

$

0.01

 

$

(0.14)

 

$

(0.05)

Diluted net income (loss) available to common stockholders

 

$

0.02

 

$

0.01

 

$

(0.14)

 

$

(0.05)

Basic weighted average common shares outstanding

 

 

32,222

 

 

32,862

 

 

32,590

 

 

30,695

Diluted weighted average common shares outstanding

 

 

32,222

 

 

32,862

 

 

32,590

 

 

30,695

Dividends declared per common share

 

$

0.0500

 

$

0.1275

 

$

0.3050

 

$

0.3825

 

 

See accompanying notes.

 

 

4


 

Table of Contents 

 

 

Farmland Partners Inc.

Consolidated Statements of Changes in Equity

For the nine months ended September 30, 2018 and 2017

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Non‑controlling

 

 

 

 

 

 

 

    

 

    

 

 

    

Additional

    

 

    

 

    

Interests in

 

Other

 

 

 

 

 

 

 

 

 

Paid in

 

Retained

 

Cumulative

 

Operating

 

Comprehensive

 

Total

 

    

Shares

    

Par Value

    

Capital

    

Earnings

    

Dividends

    

Partnership

 

Income

 

Equity

Balance at December 31, 2016

 

17,351

 

$

172

 

$

172,100

 

$

4,103

 

$

(14,473)

 

$

53,692

 

$

 —

 

$

215,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

2,277

 

 

 —

 

 

353

 

 

 —

 

 

2,630

Costs incured related to the at-the-market offering

 

 —

 

 

 —

 

 

(119)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(119)

Grant of unvested restricted stock

 

205

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock based compensation

 

 —

 

 

 —

 

 

1,100

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,100

Dividends and distributions accrued or paid

 

 —

 

 

 —

 

 

 —

 

 

(3,715)

 

 

(12,475)

 

 

(2,398)

 

 

 —

 

 

(18,588)

Repurchase and cancellation of shares

 

(841)

 

 

(9)

 

 

(7,437)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,446)

Forfeiture of unvested restricted stock

 

(6)

 

 

 —

 

 

(9)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9)

Issuance of stock as partial consideration for business combination

 

14,815

 

 

148

 

 

168,835

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

168,983

Issuance of Common units as partial consideration for business combination

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,494

 

 

 —

 

 

2,494

Issuance of Common units as partial consideration for asset acquisition

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,035

 

 

 —

 

 

10,035

Conversion of Common units to shares of common stock

 

1,108

 

 

11

 

 

10,944

 

 

 —

 

 

 —

 

 

(10,955)

 

 

 —

 

 

 —

Adjustments to non-controlling interests resulting from changes in ownership of operating partnership

 

 —

 

 

 —

 

 

(3,101)

 

 

 —

 

 

 —

 

 

3,101

 

 

 —

 

 

 —

Balance at September 30, 2017

 

32,632

 

$

322

 

$

342,313

 

$

2,665

 

$

(26,948)

 

$

56,322

 

 

 -

 

$

374,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

33,334

 

 

329

 

 

350,147

 

 

5,161

 

 

(31,199)

 

 

46,513

 

 

 —

 

 

370,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

4,940

 

 

 —

 

 

701

 

 

 —

 

 

5,641

Issuance of stock under the at-the-market offering, net of costs of $219

 

 —

 

 

 —

 

 

(219)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

(219)

Grant of unvested restricted stock

 

160

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock based compensation

 

 —

 

 

 —

 

 

1,134

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,134

Dividends and distributions accrued or paid

 

 —

 

 

 —

 

 

 —

 

 

(9,423)

 

 

(9,966)

 

 

(1,397)

 

 

 —

 

 

(20,786)

Repurchase and cancellation of shares

 

(1,949)

 

 

(20)

 

 

(14,272)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(14,292)

Forfeiture of unvested restricted stock

 

(6)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Derivative liability

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(173)

 

 

(173)

Conversion of Common units to shares of common stock

 

157

 

 

 2

 

 

1,543

 

 

 —

 

 

 —

 

 

(1,545)

 

 

 —

 

 

 —

Adjustments to non-controlling interests resulting from changes in ownership of operating partnership

 

 —

 

 

 —

 

 

642

 

 

 —

 

 

 —

 

 

(642)

 

 

 —

 

 

 —

Balance at September 30, 2018

 

31,696

 

$

311

 

$

338,975

 

$

678

 

$

(41,165)

 

$

43,630

 

$

(173)

 

$

342,256

 

See accompanying notes.

 

 

 

5


 

Table of Contents 

 

Farmland Partners Inc.

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2018 and 2017

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

September 30,

 

    

2018

    

2017

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

5,642

 

$

2,630

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

6,410

 

 

5,651

Amortization of deferred financing fees and discounts/premiums on debt

 

 

309

 

 

162

Amortization of net origination fees related to notes receivable

 

 

(5)

 

 

(11)

Stock based compensation

 

 

1,134

 

 

1,091

(Gain) loss on disposition of assets

 

 

(3,086)

 

 

48

Bad debt expense

 

 

497

 

 

329

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease in accounts receivable

 

 

1,292

 

 

2,739

(Increase) in interest receivable

 

 

(25)

 

 

(556)

Decrease (increase) in other assets

 

 

810

 

 

(433)

(Increase) decrease in inventory

 

 

(170)

 

 

289

Increase in accrued interest

 

 

2,639

 

 

1,348

(Decrease) in accrued expenses

 

 

1,112

 

 

(14,358)

Decrease in deferred revenue

 

 

(3,841)

 

 

(2,028)

Increase in accrued property taxes

 

 

915

 

 

(302)

Net cash provided by (used in) operating activities

 

 

13,633

 

 

(3,401)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Real estate acquisitions

 

 

(32,703)

 

 

(92,680)

Real estate and other improvements

 

 

(11,923)

 

 

(17,650)

Principal receipts on notes receivable

 

 

3,944

 

 

 —

Casualty loss insurance recovery

 

 

(9)

 

 

 —

Issuance of note receivable

 

 

(6,534)

 

 

(3,870)

Proceeds from the sale of property

 

 

31,560

 

 

 —

Net cash used in investing activities

 

 

(15,665)

 

 

(114,200)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Borrowings from mortgage notes payable

 

 

21,000

 

 

101,790

Repayments on mortgage notes payable

 

 

(11,466)

 

 

(20,819)

Proceeds from issuance of Series B Participating Preferred Stock

 

 

 —

 

 

144,523

Common stock repurchased

 

 

(14,292)

 

 

(7,446)

Payment of offering costs

 

 

(157)

 

 

(572)

Payment of debt issuance costs

 

 

(236)

 

 

(817)

Dividends on common stock

 

 

(12,666)

 

 

(10,535)

Distributions on Series A preferred units

 

 

(3,510)

 

 

(2,915)

Dividends on Series B participating preferred stock

 

 

(4,528)

 

 

(1,082)

Distributions to non-controlling interests in operating partnership, common

 

 

(1,841)

 

 

(2,394)

Net cash (used in) provided by financing activities

 

 

(27,696)

 

 

199,733

 

 

 

 

 

 

 

NET DECREASE IN CASH

 

 

(29,728)

 

 

82,132

CASH, BEGINNING OF PERIOD

 

 

53,536

 

 

47,166

CASH, END OF PERIOD

 

$

23,808

 

$

129,298

Cash paid during period for interest

 

$

10,833

 

$

8,491

Cash paid during period for taxes

 

$

 —

 

$

 —

 

 

 

 

 

 

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING TRANSACTIONS:

 

 

 

 

 

 

Transfer of deferred offering costs to equity, offset by deferred costs included in accrued expenses related to offering

 

$

 —

 

$

419

Dividend payable, common stock

 

$

1,585

 

$

4,152

Distributions payable, Common units

 

$

229

 

$

730

Distibutions payable, Series A preferred units

 

$

2,633

 

$

2,633

Distibutions payable, Series B participating preferred stock

 

$

2,263

 

$

 —

Additions to real estate improvements included in accrued expenses

 

$

186

 

$

1,155

Financing fees included in accrued expenses

 

$

11

 

$

25

Issuance of equity and contributions from redeemable non-controlling interests and non-controlling interest in operating partnership in conjunction with acquisitions

 

$

 —

 

$

181,510

Deferred offering costs amortized through equity in the period

 

$

218

 

$

 —

Property tax liability assumed in acquisitions

 

$

 5

 

$

 —

See accompanying notes.

 

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Note 1—Organization and Significant Accounting Policies

 

Organization

 

Farmland Partners Inc., collectively with its subsidiaries (the “Company”), is an internally managed real estate company that owns and seeks to acquire high-quality farmland located in agricultural markets throughout North America. The Company was incorporated in Maryland on September 27, 2013. The Company is the sole member of the general partner of Farmland Partners Operating Partnership, LP (the “Operating Partnership”), which was formed in Delaware on September 27, 2013. As of September 30, 2018, the Company owned a portfolio of approximately 163,000 acres which are consolidated in these financial statements. All of the Company’s assets are held by, and its operations are primarily conducted through, the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership. As of September 30, 2018, the Company owned an 87.9% interest in the Operating Partnership (see “Note 9—Stockholders’ Equity and Non-controlling Interests” for additional discussion regarding Class A Common units of limited partnership interest in the Operating Partnership (“Common units”), Series A preferred units of limited partnership interest in the Operating Partnership (“Series A preferred units”) and Series B participating preferred units of limited partnership interest in the Operating Partnership (“Series B participating preferred units”)). Unlike holders of the Company’s common stock, holders of Common units and Series A preferred units do not have voting rights or the power to direct our affairs. On August 17, 2017, the Company issued 6,037,500 shares of its newly designated 6.00% Series B Participating Preferred Stock, $0.01 par value per share (the “Series B Participating Preferred Stock”) in an underwritten public offering.  Shares of Series B Participating Preferred Stock, which represent equity interests in the Company, generally have no voting rights and rank senior to the Company’s common stock with respect to dividend rights and rights upon liquidation (See “Note 9—Stockholders’ Equity—Series B Participating Preferred Stock” for more information on the Series B Participating Preferred Stock).

 

The Company elected  to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year ended December 31, 2014.

 

On March 16, 2015, the Company formed FPI Agribusiness Inc., a wholly owned subsidiary (the “TRS” or “FPI Agribusiness”), as a taxable REIT subsidiary.  The TRS was formed to provide volume purchasing services to the Company’s tenants and also to operate a small-scale custom farming business. As of September 30, 2018, the TRS performs these custom farming operations on 625 acres of farmland owned by the Company located in Florida. 

  

AFCO Mergers

 

On February 2, 2017, the Company completed a merger with American Farmland Company (“AFCO”), at which time one of the Company’s wholly owned subsidiaries was merged with and into American Farmland Company L.P. (“AFCO OP”) with AFCO OP surviving as a wholly owned subsidiary of the Operating Partnership (the “Partnership Merger”), and AFCO merged with and into another one of our wholly owned subsidiaries with such wholly owned subsidiary surviving (the “Company Merger” and together with the Partnership Merger, the “AFCO Mergers”).

 

At the effective time of the Company Merger, each share of common stock of AFCO, par value $0.01 per share (“AFCO Common Stock”), issued and outstanding immediately prior to the effective time of the Company Merger (other than any shares of AFCO Common Stock owned by any wholly owned subsidiary of AFCO or by the Company or the Operating Partnership or any wholly owned subsidiary of the Company or the Operating Partnership), was automatically converted into the right to receive, subject to certain adjustments, 0.7417 shares of the Company’s common stock (the “Company Merger Consideration”). In addition, in connection with the Company Merger, each outstanding AFCO restricted stock unit that had become fully earned and vested in accordance with its terms was, at the effective time of the Company Merger, converted into the right to receive the Company Merger Consideration. The Company issued 14,763,604 shares of its common stock as consideration in the Company Merger, 17,373 shares of its common stock in respect of fully earned and vested AFCO restricted stock units, and 218,535 Common units in connection with the Partnership Merger at a share price of $11.41 per share on the date of the merger for a total consideration of $171.1 million, net of $75.0 million in assumed debt.

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Principles of Consolidation

 

The accompanying consolidated financial statements for the periods ended September 30, 2018 and 2017 are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Interim Financial Information

 

The information in the Company’s consolidated financial statements for the three and nine months ended September 30, 2018 and 2017 is unaudited.  The accompanying financial statements for the three and nine months ended September 30, 2018 and 2017 include adjustments based on management’s estimates (consisting of normal and recurring accruals), which the Company considers necessary for a fair statement of the results for the periods.  The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K, which the Company filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 2, 2018.  Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of actual operating results for the entire year ending December 31, 2018.

 

The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC for interim financial statements.  Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

 

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Real Estate Acquisitions 

   

When the Company acquires farmland where substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets it is not considered a business. As such, the Company accounts for these types of acquisitions as asset acquisitions. When substantially all of the fair value of the gross assets acquired is not concentrated in a single identifiable asset or a group of similar assets and contains acquired inputs and processes which have the ability to contribute to the creation of outputs, these acquisitions are accounted for as business combinations.

 

The Company considers single identifiable assets as tangible assets that are attached to and cannot be physically removed and used separately from another tangible asset without incurring significant cost or significant diminution in utility or fair value. The Company considers similar assets as assets that have a similar nature and risk characteristics.

 

Whether the Company’s acquisitions are treated as an asset acquisition under ASC 360 or a business combination under ASC 805, the fair value of the purchase price is allocated among the assets acquired and any liabilities assumed by valuing the property as if it was vacant.  The “as-if-vacant” value is allocated to land, buildings, improvements, permanent plantings and any liabilities, based on management’s determination of the relative fair values of such assets and liabilities as of the date of acquisition.

   

Upon acquisition of real estate, the Company allocates the purchase price of the real estate based upon the fair value of the assets and liabilities acquired, which historically have consisted of land, drainage improvements, irrigation improvements, groundwater, permanent plantings (bushes, shrubs, vines and perennial crops) and grain facilities, and may also consist of intangible assets including in-place leases, above market and below market leases and tenant relationships. The Company allocates the purchase price to the fair value of the tangible assets by valuing the land as if it were

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unimproved. The Company values improvements, including permanent plantings and grain facilities, at replacement cost, adjusted for depreciation. 

 

Management’s estimates of land value are made using a comparable sales analysis. Factors considered by management in its analysis of land value include soil types and water availability and the sales prices of comparable farms. Management’s estimates of groundwater value are made using historical information obtained regarding the applicable aquifer.  Factors considered by management in its analysis of groundwater value are related to the location of the aquifer and whether or not the aquifer is a depletable resource or a replenishing resource.  If the aquifer is a replenishing resource, no value is allocated to the groundwater.  The Company includes an estimate of property taxes in the purchase price allocation of acquisitions to account for the expected liability that was assumed. 

   

When above or below market leases are acquired, the Company values the intangible assets based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the term of any below market fixed rate renewal options for below market leases that are considered bargain renewal options. The above market lease values are amortized as a reduction of rental income over the remaining term of the respective leases. The fair value of acquired below market leases, included in deferred revenue on the accompanying consolidated balance sheets, is amortized as an increase to rental income on a straight-line basis over the remaining non-cancelable terms of the respective leases, plus the terms of any below market fixed rate renewal options that are considered bargain renewal options of the respective leases.

   

As of September 30, 2018 and December 31, 2017, the Company had $1.3 million and $1.4 million, respectively, recorded for tenant relationship intangibles, net of accumulated amortization of $0.4 million and $0.6 million, respectively. The purchase price is allocated to in-place lease values and tenant relationships, if they are acquired, based on the Company’s evaluation of the specific characteristics of each tenant’s lease, availability of replacement tenants, probability of lease renewal, estimated down time and its overall relationship with the tenant. The value of in-place lease intangibles and tenant relationships are included as an intangible asset and will be amortized over the remaining lease term (including expected renewal periods of the respective leases for tenant relationships) as amortization expense. If a tenant terminates its lease prior to its stated expiration, any unamortized amounts relating to that lease, including (i) above and below market leases, (ii) in-place lease values, and (iii) tenant relationships, would be recorded to revenue or expense as appropriate.

   

The Company capitalizes acquisition costs and due diligence costs if the asset is expected to qualify as an asset acquisition. If the asset acquisition is abandoned, the capitalized asset acquisition costs are expensed to acquisition and due diligence costs in the period of abandonment. Costs associated with a business combination are expensed to acquisition and due diligence costs as incurred. During the three and nine months ended September 30, 2018, the company expensed an immaterial amount of costs in relation to business combinations during the periods.

   

Total consideration for acquisitions may include a combination of cash and equity securities.  When equity securities are issued, the Company determines the fair value of the equity securities issued based on the number of shares of common stock and Common units issued multiplied by the price per share of the Company’s common stock on the date of closing in the case of common stock and Common units and by liquidation preference in the case of preferred stock and preferred units.

   

Using information available at the time of business combination, the Company allocates the total consideration to tangible assets and liabilities and identified intangible assets and liabilities.  During the measurement period, which may be up to one year from the acquisition date, the Company may adjust the preliminary purchase price allocations after obtaining more information about assets acquired and liabilities assumed at the date of acquisition. 

 

Real Estate Sales

 

We recognize gains from the sales of real estate assets, generally at the time the title is transferred, consideration is received and we no longer have substantial continuing involvement with the real estate sold.

 

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Allowance for Doubtful Accounts

 

The Company records an allowance for doubtful accounts, reducing the receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable and periodic credit evaluations of our customers’ financial condition. We write off accounts receivable when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected. As of September 30, 2018 and December 31, 2017, we had an allowance of $0.3 million and $0.5 million, respectively. 

 

Inventory

 

The costs of growing crops are accumulated until the time of harvest at the lower of cost or market value and are included in inventory in the consolidated balance sheets. Costs are allocated to growing crops based on a percentage of the total costs of production and total operating costs that are attributable to the portion of the crops that remain in inventory at the end of the period. The costs of growing crops incurred by FPI Agribusiness consist primarily of costs related to land preparation, cultivation, irrigation and fertilization. Growing crop inventory is charged to cost of products sold when the related crop is harvested and sold and is included in other operating expenses. The cost of harvested crop was $0.1 million and $0.1 million, and $0.2 million and $0.4 million, respectively, for the three and nine months ended September 30, 2018 and 2017.

 

Harvested crop inventory includes costs accumulated both during the growing and harvesting phases and are stated at the lower of those costs or the estimated net realizable value, which is the market price, based upon the nearest market in the geographic region, less any cost of disposition. Cost of disposition includes broker’s commissions, freight and other marketing costs.   

 

General inventory, such as fertilizer, seeds and pesticides, is valued at the lower of cost or market.

 

As of September 30, 2018 and December 31, 2017 inventory consisted of the following:

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2018

 

December 31, 2017

Harvested crop

 

$

 —

 

$

126

Growing crop

 

 

176

 

 

 —

General inventory

 

 

119

 

 

 —

 

 

$

295

 

$

126

Hedge Accounting

 

ASC 815 requires the Company to recognize all of its derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the consolidated statements of operations during the period.

 

The Company uses derivative instruments to manage certain interest rate risks. More specifically, interest rate swaps are entered into to manage the risk associated with the Company’s floating-rate borrowings when such risk management is deemed appropriate by the Company’s management and a fixed interest rate is not available or not economical, or when it is contractually required by a lender. In accordance with ASC 815, the Company designates interest rate swaps as cash flow hedges of said floating-rate borrowings.

 

The Company entered into an interest rate swap effective April 1, 2018 and chose to early adopt ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities effective on that date. As a result of the adoption of ASU 2017-12 the entire change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income, a component of shareholders’ equity in the

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Company’s consolidated balance sheets.

 

The Company has entered into an interest rate swap agreement to manage interest rate risk exposure. An interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to a fixed rate basis for the next five years on 50% of the currently outstanding amount to Rabobank, thus reducing the impact of interest rate changes on future interest expense. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.

 

As of September 30, 2018, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was $33.2 million. For a summary of the fair value and related disclosures in relation to hedge accounting, please refer to “Note 10 – Hedge Accounting.”

 

 

New or Revised Accounting Standards 

 

Adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: (Topic 606) (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The Company completed its assessment of the impact of this guidance and determined that the primary impact relates to reporting crop sales revenue separately from other revenue the Company records in relation to interest income received from the Company’s loan program on the Consolidated Statements of Operations. There was no cumulative effect to retained earnings upon adoption. The majority of the Company’s contracts with customers relate to leases that fall within the scope of ASC 840 and ASU No. 2016-02, Leases: (Topic 842) (“ASU 2016-02”).

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  ASU 2016-15 is intended to reduce diversity in practice across all industries.  The amendments in this update provide guidance on the following eight specific cash flow issues: 1) Debt Prepayment or Debt Extinguishment Costs; 2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; 3) Contingent Consideration Payments Made after a Business Combination; 4) Proceeds from the Settlement of Insurance Claims; 5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; 6) Distributions Received from Equity Method Investees; 7) Beneficial Interests in Securitization Transactions; and 8) Separately Identifiable Cash Flows and Application of the Predominance Principle.  ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and retrospective restatement is required.  Early adoption is permitted. The Company has assessed the impact and determined that the only impact would be to separately recognize cash receipts from casualty insurance claims on damaged company assets.

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”).  ASU 2017-12 is intended to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and reduce the complexity of and simplify the application of hedge accounting by preparers. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 with early application permitted in any interim period after the issuance of the updated guidance. The Company entered into an interest rate swap effective April 1, 2018 and as such chose to early adopt the new guidance effective April 1, 2018. The impact on the Company is set out in the accounting policies above and in “Note 10 – Hedge Accounting.”

 

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Not Yet Adopted

   

In February 2016, the FASB issued ASU 2016-02, Leases: (Topic 842) (“ASU 2016-02”) which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors).  The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.  While the Company is still completing its assessment of the impact of this guidance, the following is anticipated to reflect the primary effects of this guidance on the Company’s reporting:

 

(i)

For leases in which the Company is the lessee, the Company does not expect the guidance to have a material impact as there are only two operating leases for office space and for subleased property in Nebraska. Once of these leases has terms less than 12 months, and the Company will elect not to apply the recognition requirements of ASU 2016-02. The Company will record a right-of-use asset and a lease liability for the second lease that has a term greater than 12 months, but the Company does not expect it to have a significant impact on the consolidated financial statements;

 

(ii)

For leases in which the Company is the lessor, the Company does not expect there to be a material impact as the majority of the Company’s leases do not contain a non-lease component. While the Company is expecting there to be other ancillary impacts for leases in which the Company is the lessor, they are not expected to be material to the consolidated financial statements. Under the new guidance, lease procurement costs that were previously capitalized will be expensed as incurred. Lastly, under the new guidance, there are certain circumstances in which buyer-lessors in sale and leaseback transactions could potentially result in recording the transaction as a financial receivable if such transaction fails sale and leaseback criteria, which the Company is still evaluating.

 

The standard is effective for annual and interim reporting periods beginning after December 15, 2018, with modified retrospective restatement for each reporting period presented at the time of adoption. Early adoption is permitted. The Company has determined that this guidance will not be early adopted.

 

Note 2—Revenue Recognition

 

For the majority of its leases, the Company receives at least 50% of the annual lease payment from tenants either during the first quarter of the year or at the time of acquisition of the related farm, with the remaining 50% of the lease payment due in the second half of the year.  Rental income is recorded on a straight-line basis over the lease term. The lease term generally includes periods when a tenant: (1) may not terminate its lease obligation early; (2) may terminate its lease obligation early in exchange for a fee or penalty that the Company considers material enough such that termination would not be probable; (3) possesses renewal rights and the tenant’s failure to exercise such rights imposes a penalty on the tenant material enough such that renewal appears reasonably assured; or (4) possesses bargain renewal options for such periods.  Payments received in advance are included in deferred revenue until they are earned.

 

Certain of the Company’s leases provide for a rent payment determined as a percentage of the gross farm proceeds (contingent rent). Revenue under leases providing for a payment equal to a percentage of the gross farm proceeds are recorded at the guaranteed crop insurance minimums and recognized ratably over the lease term during the crop year. Upon notification from the grain or packing facility that a future contract for delivery of the harvest has been finalized or when the tenant has notified the Company of the total amount of gross farm proceeds, revenue is recognized for the excess of the actual gross farm proceeds and the previously recognized minimum guaranteed insurance. Contingent rent recognized for the three and nine months ended September 30, 2018 and 2017 totaled $1.8 million and $2.9 million, and $2.0 million and $4.0 million, respectively.

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Most of our farming leases range from two to three years for row crops and one to seven years for permanent crops. Leases in place as of September 30, 2018 have terms ranging from one to 25 years. Payments received in advance are included in deferred revenue until they are earned. As of September 30, 2018 and December 31, 2017, the Company had $0.6 million and $3.9 million, respectively, in deferred revenue.

 

The following sets forth a summary of rental income recognized for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income recognized

 

 

For the three months ended

 

For the nine months ended

 

 

September 30,

 

September 30,

(in thousands)

    

2018

    

2017

    

2018

    

 

2017

Leases in effect at the beginning of the year

 

$

7,663

 

$

3,187

 

$

21,343