UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) | | |
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31 2019, 2022
or
For the transition period from to
Commission file number 001-36405
FARMLAND PARTNERS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland |
| 46-3769850 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
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4600 South Syracuse Street, Suite 1450 Denver, Colorado | | 80237 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code (720) (720) 452-3100
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name Of Each Exchange On Which Registered |
Common Stock, $0.01 par value per share | | New York Stock Exchange |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No☑ No ☑
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2019,2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $210,402,661$680,814,251 based on the closing sales price of $7.05$13.80 per share as reported on the New York Stock Exchange. (For purposes of this calculation all of the registrant’s directors and executive officers are deemed affiliates of the registrant.)
As of March 9, 2020,February 17, 2023, the registrant had 29,851,68554,340,190 shares of common stock (31,755,477(55,577,529 on a fully diluted basis, including 1,903,7921,237,339 Common Units of limited partnership interests in the registrant’s operating partnership)Operating Partnership) held by non-affiliates of the registrant outstanding for an aggregate market value of $176,423,458$622,412,632 ($187,674,869637,891,743 on a fully diluted basis) based on the closing sales price of $5.91$12.51 on the New York Stock Exchange on March 9, 2020.February 17, 2023.
Documents Incorporated by Reference
Portions of the registrant’s Definitive Proxy Statement relating to its 20202023 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. The registrant expects to file its Definitive Proxy Statement with the Securities and Exchange Commission within 120 days after December 31, 2019.2022.
FARMLAND PARTNERS Inc.
Form 10-K
For the Fiscal Year Ended December 31, 20192022
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 43 | ||
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Changes and Disagreements with Accountants on Accounting and Financial Disclosure | ||||
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | | 59 | ||
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 59 | ||
Certain Relationships and Related Transactions, and Director Independence | | 59 | ||
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this Annual Report on Form 10-K that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These forward-looking statements include, without limitation, statements concerning pending acquisitions and dispositions, projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results, future stock repurchases and other transactions affecting our capitalization, our dividend policy, future economic performance, crop yields and prices and future rental rates for our properties, and the outcomes of ongoing litigation, as well as statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance, and our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: the ongoing war in Ukraine and its impact on our tenant’s businesses and the farm economy generally, high inflation and increasing interest rates, the onset of an economic recession in the United States and other countries that impact the farm economy, extreme weather events, such as droughts, tornadoes, hurricanes or floods, the impact of future public health crises on our business and on the economy and capital markets generally, general volatility of the capital markets and the market price of our common stock, changes in our business strategy, availability, terms and deployment of capital, our ability to refinance existing indebtedness at or prior to maturity on favorable terms, or at all, availability of qualified personnel, changes in our industry interest rates or the general economy, the degree and nature of our competition, the outcomes of ongoing litigation, our ability to identify new acquisitions or dispositions and close on pending acquisitions or dispositions and the other factors described in the risk factors includeddescribed in Item 1A, herein“Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, and in other documents that we file from time to time with the Securities and Exchange Commission (the “SEC”).SEC. Given these uncertainties, contained or reflected in forward-looking statements, undue reliance should not be placed on such statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by law.
Summary Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. The following is an overview of the most significant risks to which we are exposed to in the normal course of our business and which are discussed more fully in “Item 1A. Risk Factors” herein. These risks include, but are not limited to, the following:
• | Our business is dependent in part upon the profitability of our tenants' farming operations, and a sustained downturn in the profitability of their farming operations could have a material adverse effect on the amount of rent we can collect and, consequently, our cash flow and ability to make distributions to our stockholders. |
• | We have a substantial amount of indebtedness outstanding, which may expose us to the risk of default under our debt obligations, restrict our operations and our ability to grow our business and revenues, and restrict our ability to pay distributions to our stockholders. |
• | Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt. |
• | Increases in benchmark interest rates will increase our borrowing costs, which will negatively impact our financial condition, results of operations, growth prospects and ability to make distributions to stockholders. |
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• | Increases in interest rates will increase our tenants’ borrowing costs and may make it more difficult for them to obtain credit. |
• | Global economic conditions, including inflation and supply chain disruptions, could adversely affect our and our tenants’ operations. |
• | Approximately 70% of our portfolio is comprised of properties used to grow primary crops such as corn, soybeans, wheat, rice and cotton, which subjects us to risks associated with primary row crops. |
• | Our farms are exposed to the possibility of extreme weather events, such as droughts, tornadoes, hurricanes and floods, which could damage the farmland and equipment, adversely affect crop yields and the ability of farmers to pay rent to us or adversely impact the financing of such properties. |
• | Investments in farmland used for permanent/specialty crops have a different risk profile than farmland used for annual row crops. |
• | Our failure to continue to identify and consummate suitable acquisitions would significantly impede our growth and our ability to further diversify our portfolio by geography, crop type and tenant, which could materially and adversely affect our results of operations and cash available for distribution to our stockholders. |
• | We do not intend to continuously monitor and evaluate tenant credit quality and our financial performance may be subject to risks associated with our tenants' financial condition and liquidity position. |
• | Our short-term leases make us more susceptible to any decreases in prevailing market rental rates than would be the case if we entered into longer-term leases, which could have a material adverse effect on our results of operations and ability to make distributions to our stockholders. |
• | We depend on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability to, among other things, acquire additional properties, meet our capital and operating needs or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT. |
• | Laws in certain states where we own property prohibit or restrict the ownership of agricultural land by business entities, which could impede the growth of our portfolio and our ability to diversify geographically. |
• | We may be subject to unknown or contingent liabilities related to acquired properties and properties that we may acquire in the future, which could have a material adverse effect on us. |
• | We may be required to permit the owners of certain third-party access rights on our properties to enter and occupy parts of the properties, including owners of mineral rights and power generation and transportation infrastructure, which could materially and adversely impact the rental value of our properties. |
• | We have previously been subject to, and may in the future be subject to, litigation or threatened litigation, which may require us to pay damages and expenses or restrict the operation of our business. |
• | Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of units in our Operating Partnership, which may impede business decisions that could benefit our stockholders. |
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• | Our charter contains certain provisions restricting the ownership and transfer of our stock that may delay, defer or prevent a change of control transaction that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests. |
• | We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval, which may delay, defer or prevent a transaction that our stockholders believe to be in their best interests. |
• | Our Board of Directors may change our strategies, policies and procedures without stockholder approval. |
• | Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management. |
• | Failure to maintain qualification as a REIT for U.S. federal income tax purposes would subject us to U.S. federal income tax on our taxable income at regular corporate rates, which would substantially reduce our ability to make distributions to our stockholders. |
• | Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or sell properties earlier than we wish. |
• | We may be unable to make distributions at expected levels, which could result in a decrease in the market price of our common stock. |
• | We are subject to risks associated with public health crises, such as pandemics and epidemics, including the COVID-19 pandemic, which may have a material adverse effect on our business. The nature and extent of future impacts are highly uncertain and unpredictable. |
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PART I
Our Company
References to “we,” “our,” “us” and “our company” refer to Farmland Partners Inc., a Maryland corporation, together with our consolidated subsidiaries, including Farmland Partners Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership” (“FPI”), collectively with its subsidiaries, is an internally managed real estate company that owns and seeks to acquire high-quality farmland located in agricultural markets throughout North America. FPI was incorporated in Maryland on September 27, 2013. FPI elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of which we arethe Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year ended December 31, 2014.
FPI is the sole member of the sole general partner.partner of Farmland Partners Operating Partnership, LP (the “Operating Partnership”), which was formed in Delaware on September 27, 2013. All of FPI’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 December 31, 2022, FPI owned a 97.8% 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 FPI’s common stock, par value $0.01 per share (“common stock”), holders of the Operating Partnership’s Common units and Series A preferred units generally do not have voting rights or the power to direct the affairs of FPI.
We areReferences to the largest public“Company,” “we,” “us,” or “our” mean collectively FPI and its consolidated subsidiaries, including the Operating Partnership.
Our primary strategic objective is to utilize our position as a leading institutional acquirer, owner and manager of high-quality farmland real estate investment trustlocated in the nation, withagricultural markets throughout North America to deliver strong risk adjusted returns to investors through a portfolio spanning approximately 158,500 acres across 17 states. Our company is currently diversified across more than 100 tenant farmers who grow more than 26 major commercial crops. combination of cash dividends and asset appreciation. As of December 31, 2022, we owned farms with an aggregate of approximately 165,200 acres in Alabama, Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Carolina, South Carolina, Texas, and Virginia. In addition, as of December 31, 2022, we owned land and buildings for four agriculture equipment dealerships in Ohio leased to Ag-Pro Ohio, LLC (“Ag Pro”) under the dateJohn Deere brand and served as property manager for approximately 30,900 acres, including farms in Iowa (see “Note 4—Related Party Transactions”). As of this Annual Report on Form 10-K,December 31, 2022, the Operating Partnership owned a 9.97% equity interest in Promised Land Opportunity Zone Farms I, LLC (the “OZ Fund”), an unconsolidated equity method investment, that holds 12 properties (see “Note 1, Convertible Notes Receivable”). As of December 31, 2022, approximately 70% of our farmlandowned portfolio (by value) iswas used to grow primary crops, such as corn, soybeans, wheat, rice and cotton, and the remainingapproximately 30% iswas used to growproduce specialty crops, such as almonds, citrus, blueberries, vegetables and edible beans.vegetables. We believe our portfolio gives investors exposure to the economic benefit of increasing global food demand trend in the face of growing scarcity of high qualityhigh-quality farmland and reflectswill continue to reflect the approximate breakdownallocation of U.S. agricultural output between primary crops and animal protein (whose production relies principally on primary crops as feed), on one hand, and specialty crops, on the other.
In addition, under the FPIwe offer a loan program (the “FPI Loan Program,Program”) pursuant to which we make loans to third-party farmers (both tenant and non-tenant) to provide financing for property acquisitions, working capital requirements, and operational farming activities, farming infrastructure projects and for other farming and agricultural real estate related purposes.projects.
All of our assets are held by, and our operations are primarily conducted through, the Operating Partnership and its wholly owned subsidiaries. As of the date of this Annual Report on Form 10-K, we own 94.0% of the Class A Common units of limited partnership interest in the Operating Partnership (“Common units”) and none of the Series A preferred units of limited partnership interest in the Operating Partnership (“Series A preferred units”) or shares of our 6.00% Series B Participating Preferred Stock (the “Series B Participating Preferred Stock”). Unlike holders of our common stock, holders of Common units, Series A preferred units, and Series B Participating Preferred Stock, generally do not have voting rights or the power to direct our affairs. See Note 9 to our consolidated financial statements for additional information regarding the Series A preferred units and our Series B Participating Preferred Stock.
In addition to farmland, we own the improvements on our farms, such as irrigation, drainage and grain storage facilities. We also may acquire properties related to farming, such as grain storage facilities, grain elevators, feedlots, processing plants and distribution centers, as well as livestock farms or ranches. In 2019 we had lease options on nineteen of our farms for solar and wind production. In addition, during 2019, we engaged directly in farming through FPI Agribusiness Inc., our taxable REITa wholly owned subsidiary (the “TRS” or “FPI Agribusiness”), whereby weis a taxable REIT subsidiary that was formed to provide volume purchasing servicesto the Company’s tenants and to directly operate a small numberfarms under certain circumstances. As of December 31, 2022, the TRS performed direct farming operations on 2,175 acres (approximately 1,857of permanent crop farmland owned by the Company located in California.
FPI strategically seeks opportunities to promote environmentally friendly usage of our farmland. We have long-term lease arrangements on certain farm properties pursuant to which operators engage in solar and wind energy production.
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As of December 31, 2022, 20 of our farms, which collectively comprised approximately 13,345 acres, during 2019) relying on custom farming contracts with local farm operators.had leases for operational or under-construction renewable energy production, and 23 of our farms, which collectively comprise approximately 15,211 acres, had options for potential future solar or wind development and operating lease. Refer to “– Environmental, Social and Governance–Environmental Sustainability” for more information.
Our principal source of revenue is rent from tenants that conduct farming operations on our farmland.farmland pursuant to leases with terms ranging primarily from one to three years. The majority of the leases that are in place as of the date of this Annual Report on Form 10-K have fixed annual rentalrent payments. Some of our leases have a variable rent componentrents based on the revenue generated by our farm-operator tenants. We believe that thisa mix of fixed and variable rents helpswill help insulate us from the variability of farming operations and reduce our credit-risk exposure to farm-operator tenants while generating attractive risk-adjusted returns and making us an attractive landlord in certain regions where variable leases are customary. However, we may be exposed to tenant credit risk and farming operation risks, particularly with respect to leases that do not require advance payment of at least 50%100% of the annualfixed rent, leases for which thevariable rent is based on a percentage of a tenant's farming revenues,arrangements and leases with terms greater than one year.
We elected and qualified 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 our short taxable year ended December 31, 2014.
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Full Year 2019 and Recent2022 Highlights
During 2019:2022:
| Operating |
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| Net income increased |
| Adjusted Funds from |
| Total indebtedness decreased 14.4% from $513.4 million at December 31, 2021 to $439.5 million at December 31, 2022; |
● | We completed |
| We completed |
| We |
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● | We increased liquidity to $176.7 million as of December 31, 2022, compared to $30.2 million as of December 31, 2021. |
For a definition of AFFO and a reconciliation of net income to AFFO, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.”
Investment Focus
We seek to invest in farmland that will give our stockholders exposure to a well-diversified portfolio of high-quality U.S. farmland, while offering an attractive risk-adjusted combination of stable rental income generation and value appreciation. Our principal investment focus is on farmland located in agricultural markets throughout North America; however, we may seek to acquire farmland outside of North America in the future. We also may acquire propertiesreal estate assets related to farming, such as grain storage facilities, grain elevators, feedlots, cold storage facilities, controlled environment agriculture facilities, land and facilities leased to agriculture equipment dealerships, processing plants and distribution centers, as well as livestock farms or ranches. In addition, under the FPI Loan Program, we may provide loans to farm
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operators secured by farmland, properties related to farming, crops (growing or stored), and/or agricultural equipment. We may also invest in other agriculture-related business, typically through our TRS.
Crop Categories
Primary vs Specialty Crops
Farm crops generally can be divided into two principal categories: primary crops and specialty crops. Primary crops include, among others, corn, soybeans, wheat, rice and cotton. Primary crops are generally grown in rows and are often referred to as row crops. Specialty crops can be again divided into two categories: annual specialty crops (generally vegetables) and permanent specialty crops (fruits and nuts grown on trees, bushes or vines). Over the long term, we expect that our farmland portfolio will continue to be comprised of approximately 75%70% primary crop farmland and 25%30% specialty crop farmland by value, which we believe will give investors exposure to the economic benefit from increasing global food demand trend in the face of growing scarcity of high quality farmland and will reflect the approximate compositionallocation of U.S. agricultural output between primary crops and animal protein (whose production relies principally on primary crops as feed), on one hand, and specialty crops, on the other.
Primary Crops
The most widely grown crop in the United States is corn, at approximately 87 million acres. The uses of corn and approximate percent of total uses during the 2021/2022 marketing year (September 2021 to August 2022) are as follows: animal feed and residual products (34%); ethanol and its animal feed byproducts known as distillers’ dried grains with solubles or DDGS (34%); exports (14%); other sugars, starches, cereals, seeds (9%); and ending stocks or inventory (8%).
The second most widely grown crop in the United States is soybeans, at approximately 87 million acres. The uses of soybeans and approximate percent of total uses during the 2021/2022 marketing year (September 2021 to August 2022) are as follows: crushings (48%); exports (46%); seed and residual (3%); and ending stocks or inventory (4%). The process of crushing soybean produces soybean oil, soybean meal, hulls and waste. Soybean meal is used as animal feed both domestically and in the export market. Soybean oil is used for food, biofuel, and is exported.
The third most widely grown crop in the United States is wheat, at approximately 47 million acres. The uses of wheat and approximate percent of total uses during the 2021/2022 marketing year (June 2021 to May 2022) are as follows: food (40%); exports (32%); seed, feed and residual (5%); and ending stocks or inventory (24%).
Annual andvs. Permanent Crops
Our portfolio includes farms that produce both annual and permanent crops. Annual crops, such as wheat, corn and soybeans, are planted every year whereas permanent crops, such as trees, bushes and vines, are planted and bear crops over multiple years.years without replanting. We believe
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exposure to both annual and permanent crops is an attractive strategy and offers diversification benefits to our portfolio. Annual and permanent crops typically serve different end-markets and generally have uncorrelated pricing.
U.S. Farmland Property
We believe that the United States offers farmland investors exposure to financial benefits driven by the fundamentals of agricultural production and farmland appreciation without many of the risks that come with farmland investments in many other countries. In the United States, the farmland market is relatively liquid and there is virtually no land title risk. As an asset class, United States farmland has lower leverage compared to other real estate sectors. According to the United States Department of Agriculture (“USDA”) forecast data from December 2022, real estate debt on farms is $348 billion, compared to a real estate value of $3.2 trillion, representing an 11% debt-to-equity ratio. The United States has the largest, lowest-cost grain transportation infrastructure in the world, leaving more margin to the grain producer and landowner. Moreover, the United States is one of the largest domestic markets for commodityprimary crops, which are typically priced in U.S. dollars. Lastly, we believe that in most major U.S. agricultural markets, multiple quality farm-operator tenants compete for farmland lease opportunities.
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We may consider investing in farmland in other countries that, like the United States, offer virtually no land title risk, a sophisticated farm-operator tenant environment and attractive rental rates, such as Canada, Australia or New Zealand.
Leased Properties
FarmingThe business of farming carries materially more operating risk than owning and leasing farmland to farm operators, although such risk can be mitigated through crop insurance and other risk management tools. We expect to continue to lease a majority of our properties on a fixed-rent basis that does not depend on the success of the tenant's farming operations. Moreover, a majority of the leases in our portfolio provide that at least 50% (and oftensometimes 100%) of the annual fixed rent is due and payable in advance of each spring planting season, and we expect that a majority of the fixed-rent leases we enter into in the future will have a similar requirement, which reduces our credit-risk exposure in the event of operational issues with the farm-operator tenant. However, to the extent we enter into leases that do not require advance payment of 100% of the annual rent or have terms greater than one year, we may be subject to tenant credit risk and more susceptible to the risks associated with declines in the profitability of tenants’ farming operations, and we take such risk into consideration when evaluating the potential return on a farm. We may use variable-rent leases, which depend in part on crop yields and prices, in regions where such arrangements are prevalent or when we expect that such arrangements will be more profitable to us on a risk-adjusted basis. We also may utilize hybrid lease arrangements that requireprovide for a modestcombination of fixed rent payment at lease inception and an additional rent payment based on a percentage of the revenue from the tenant's harvest for that year.variable rent.
We expect to continue to lease the majority of our primary crop farmland and other farming related properties under leases that require the tenant to either pay or reimburse us for substantially all of the property’s operating expenses, including maintenance, water usage and insurance. Consistent with industry practices, we expect that we will generally be responsible for plantings and associated improvements on our permanent crop farmland while our tenants will be responsible for all operating costs. SeveralMany of our leases provide for the reimbursement by the tenant of the property’s real estate taxes that we pay in connection with the farms they rent from us. The rental payments we receive from the farm operators are the primary source of any distributions that we make to our stockholders.
We expect that over time rental income will increase. Most farmland in the areas where we own or intend to acquire land is leased under short-term leases (typically five years or less), and we plan to lease our primary crop properties under short-term leases when possible. By entering into short-term leases, we believe we will be in a position to increase our rental rates when the leases expire and are renewed or the land is re-leased, if prevailing rental rates have increased.expire. However, we can provide no assurances that we will be able to increase our rental rates, or even maintain them at the same level, when the leases are renewed or the land is re-leased.
We believe quality farmland has a near-zero vacancy rate, and we believe that all high-quality farmland in an area with a competitive tenant environment is generally leased and farmed each year. For leases that provide that a substantial portion of rental payments for a crop year are due in advance of the spring planting season, inIn the event of a tenant's failure to pay rent when due in advance of the spring planting season, we will seek to terminate the lease and rent the property to another tenant that could then plant and harvest a crop that year. As a result, we believe there is a reduced risk of vacancy on our properties when compared to most other types of commercial properties, such as office buildings or retail properties.
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Tenants
Tenants
We believe the areas where we own and intend to acquire farmland are characterized by a competitive farm-operator tenant environment, with multiple experienced farm operators seeking to expand their operations by leasing additional farmland. Farmers have long rented land to increase operations without having to invest the capital required to own the land. USDA data shows that rented land as a percentage of total farmland acres has been in the 35% to 45% range going back to the 1920s.
Non-Farming Leases
In addition to leases entered into in connection with farming operations, we seek additional sources of income from our properties that are either incremental, such as wind easements and recreational leases, or are higher than farming rents, such as leases for solar power installations. While we do not believe that such other sources ofnon-farming lease income will constitute a
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significant percentage of our total revenues, they offer opportunities to enhance returns to stockholders at little or no cost to us.
Family-Owned Properties
According to America’s Farms and Ranches at a Glance 2022 Edition, a USDA report, family farms accounted for approximately 98% of the USDA, as of 2017, approximately 96% oftotal farms in the United States were owned by families.States. As shown below, small family farms represent the greatest number of farms and amount of land, while large-scale family farms represent the greatest value of production.
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Farm Category |
| Annual Gross Farm Cash Income |
| Number of Farms |
| Percent of Farms | |
| Percent of Land Area | |
| Value of Production | |
Small Family Farms | | Less than $350,000 | | 1,784,536 | | 89.1 | % | | 45.2 | % | | 17.8 | % |
Midsize Family Farms | | Less than $1,000,000 | | 113,005 | | 5.6 | % | | 17.8 | % | | 18.4 | % |
Large-Scale Family Farms | | Greater than $1,000,000 | | 63,153 | | 3.2 | % | | 26.9 | % | | 46.5 | % |
Nonfamily Farms | | | | 43,058 | | 2.1 | % | | 10.1 | % | | 17.3 | % |
Total | | | | 2,003,752 | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Farmland leases allow farm operators to unlock personal or family capital/net worth that would otherwise be tied up in land ownership while retaining the ability to conduct their livelihoods on land that is familiar to them. We believe that many farm families and individuals may wish to simultaneously sell some of their property and lease it back, continuing their operation of such property under a leasing arrangement. Sellersengage in these sale-leaseback transactions can use the sale proceeds to repay existing indebtedness, for growth ofgrow their farming operations or in other business endeavors. Under some circumstances, these sale-leaseback transactions might be driven byendeavors, or for estate planning reasons. We believe that the farmland that we acquire and do not simultaneously lease back to the seller can be leased at attractive rental rates to other farm operators.reasons, providing a continuous pipeline of prospective acquisitions.
As an alternative to selling their farmland to us in an all-cash transaction, we believe that manysome farm owners may be interested in selling their farmland to us in exchange for Operating Partnership units in order to have an equity interest in our company and participate in any appreciation in value of our properties. By making such an exchange, these farm owners would become investors inown a more diversified portfolio of agricultural real estate. Under certain circumstances, the exchange of real estate for Partnership units isin transactions that may qualify as tax-deferred contributions to a tax-deferred exchangepartnership under U.S. federal income tax laws. In addition, because we intend to make cash distributions quarterly or annually, Partnership unit holders would receive regular cash distributions.distributions, and their investment would be diversified across a much larger number of properties than the single property in which they were invested before such contribution. Finally, Partnership unit holders would have the flexibility to tender their Partnership units in the future for redemption by us for cash, or, at our election, shares of our common stock that they could then sell in the public market, thereby allowing these sellers to determine the timing of recognizing taxable gain. Because we expect the issuance of Partnership units in exchange for farmland generally will be driven by the desires of prospective sellers, we do not know how frequently we will issue Partnership units in exchange for farmland properties. However, we believe that using Partnership units as acquisition consideration can be a significant part of our property acquisition strategy.
Other Investments
In addition to farmland, we also may acquire propertiesreal estate assets related to farming, such as grain storage facilities, grain elevators, feedlots, cold storage facilities, controlled environment agriculture facilities, land and facilities leased to agriculture equipment dealerships, processing plants and distribution centers, as well as livestock properties.farms or ranches.
Underwriting Criteria and Due Diligence Process
Identifying and Selecting the PropertyAttractive Properties
We seek to acquire high qualityhigh-quality farmland that offers an attractive risk-adjusted balance of current returnsincome and value appreciation potential. We believe our management team’s deep understanding of agribusiness fundamentals and insight into factors affecting the value of farmland allow us to identify properties consistent with our investment criteria. We believe the following factors are important in the selection of farmland:
| Soil Quality—Soil quality is a fundamental determinant of farmland productivity and therefore of its value. In |
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| Water Availability—Appropriate water availability is an essential input to farming and a key consideration in determining the productivity and value of farmland. We seek to acquire farmland where water availability through |
10
precipitation and irrigation meets the agronomic needs of the crops expected to be grown. As part of our acquisition due diligence process, we evaluate properties for water availability and any associated ground or surface water rights. Where appropriate, we may also invest in irrigation infrastructure to improve the productivity of properties we own. Occasionally we may acquire farmland at prices that more than compensate us for any potential reduction in water availability, which, in the future may result in a shift to different crops or production systems. |
| Robust and Competitive Tenant Environment—We focus primarily on farmland located in areas characterized by a robust and competitive tenant environment, with a relatively large population of experienced farm operators as potential tenants. |
| Market Access—Due to the higher costs of road transportation, the location of primary crop farmland relative to points of demand (e.g., grain elevators, feedlots and ethanol plants) or access to low-cost transportation (e.g., river ports and rail loading facilities) determines the premium or discount in farm-gate commodity prices compared to the general market prices (also known as “basis”), and therefore is one of the factors that impacts its value. We focus on acquiring primary crop farmland in areas with substantial farming infrastructure and low transportation costs, including markets with access to river and rail transportation. |
| Climate—Crops have particular climatic growing requirements. |
We perform a due diligence review with respect to each potential property acquisition. The due diligence investigation includes both property-specific factors (e.g., soil types and fertility, water availability and rights, topographical characteristics and property taxes) and location-specific factors (e.g., climate, tenant availability and quality, and market access). As part of our due diligence process, we also perform a valuation of each target property and estimate expected lease rates.
Identifying and Selecting Tenants
We intend to continue to focus primarily on farm properties located in areas with a robust and competitive environment of experienced tenants. In general, the tenant selection process focuses primarily on candidates' experience and reputation based upon background and reference checks, of potential tenants, as well as their willingness and ability to pay competitive rental rates. We consider similar factors in analyzing sale-leaseback transactions. In geographic areas where we already own one or more properties, we may give our existing local tenants priority consideration, especially in exchange for sourcingwhen a tenant sources the property acquisition opportunity. We often mitigate tenant credit risk by requiring a significant portionbelieve our use of a year'sleases pursuant to which at least 50% of the annual rent is typically payable in advance of each spring planting season whenever possible,mitigates the tenant credit risk associated with the variability of farming operations that could be adversely impacted by requiring a tenant to adoptpoor crop yields, weather conditions, mismanagement, undercapitalization or other factors affecting our tenants. Tenant credit risk is further mitigated by the farming industry practice of purchasing crop insurance and/orin almost every circumstance because it is required by securing agricultural or statutory liens onlenders who provide working capital financing to our tenants and due to requirements in our leases. In certain cases, the Company perfects its security interest in the crop insurance proceeds and the underlying growing crops.crops using practices applicable in the state where the farm is located. In addition, we monitor our existing tenants by periodically conducting site visits of the farms and meeting with the tenants to discuss their farming operations and the condition of the farms. However, in some circumstances, we may be exposed to tenant credit risk and may be subject to farming operation risks, such as adverse weather conditions and declines in commodity prices, particularly with respect to leases that do not require advance payment of 100% of the annual rent, variable-rent leases for which the rent is based on a percentage of a tenant's farming revenues and leases with terms greater than one year. See "Risk“Risk Factors—Risks Related to Our Business and Properties.” We do not intend to continuously monitor and evaluate tenant credit quality and may be subject to risks associated with our tenants' financial condition and liquidity position.
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Complementary Businesses
FPI Loan Program
We believe that our existing systems and personnel are well suited to source, conduct due diligence evaluations with respect to, close and manageservice loans under the FPI Loan Program at little or no additional operating cost to us. We believe that the business of making loans to farm operators secured by farmland, properties related to farmland, crops (growing or stored), and/or agricultural equipment leverages the substantial expertise in agribusiness possessed by the FPI team and is highly
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complementary to and synergistic with, our core business of investing in farmland. We generally find potential borrowers during the process of sourcing farm acquisitions. We conduct due diligence on loan collateral largely the same way we conduct due diligence on potential farm acquisitions, and we screen potential borrowers the same way weusing criteria similar to those used to screen potential tenants. The FPI Loan Program offering gives us an increased visibility in the marketplace, thereby benefiting our core farmland investing business.
SeasonalityAsset Management for Third Parties
Because the leasesWe believe that our existing systems and personnel are well suited to source, conduct due diligence evaluations with respect to, close and manage farmland on behalf of third parties at little or no additional cost to us, generating fee income without capital investment. As of December 31, 2022, we managed approximately 30,900 acres on behalf of third parties.
Brokerage and Auction Services
The acquisition of Murray Wise Associates, LLC (“MWA”) in November 2021 also added brokerage and auction business activities for manyclients seeking to sell farmland. This increases our breadth of the properties in our portfolio require significant payments in advance of the spring planting season, we receive a significant portion of our fixed cash rental paymentsactivities in the first calendar quarterfarmland sector, while adding additional sources of each year, although werevenue and market insight.
Seasonality
We recognize rental revenue from thesefixed-rate farmland leases on a pro rata basis over the non-cancellable term of the lease in accordance with GAAP.accounting principles generally accepted in the United States (“GAAP”). Notwithstanding GAAP accounting requirements to spread rental revenue over the lease term, a significant portion of fixed rent is received in a lump sum before planting season, generally in the first quarter, and after harvest, in the fourth quarter or in the following year. We receive a significant portion of our variable rental payments following harvest in the fourth calendar quarter of each year, following harvest, with only a portion of such payments being recognized ratably through the year in accordance with GAAP, in relation to crop insurance contracts entered into by our tenants. The highly seasonal nature of the agriculture industry causes seasonality in our business to some extent.extent, with revenue in the first and fourth quarter tending to be meaningfully higher than revenue in the second and third quarters. Our financial performance should be evaluated on an annual basis, which eliminates quarterly performance variability due to crop share revenues, lease periods not matching fiscal years,impacts of seasonality and other similar factors that may cause our quarterly results to vary during the course of the year.
Our Properties
As of December 31, 2022, we owned farms with an aggregate of approximately 165,200 acres in Alabama, Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Carolina, South Carolina, Texas, and Virginia. In addition, as of December 31, 2022, we owned land and buildings for four agriculture equipment dealerships in Ohio leased to Ag Pro under the date of this Annual Report on Form 10-K, we ownJohn Deere brand and served as property manager for approximately 158,500 total30,900 acres, of farmland.including farms in Iowa (see “Note 4—Related Party Transactions”). During the year ended December 31, 2019,2022, the Company completed two17 acquisitions, consisting of 20 properties, in Illinoisthe Corn Belt and Colorado, which wereHigh Plains regions. Aggregate cash consideration for these acquisitions totaled $54.4 million for real estate purchases accounted for as asset acquisitions. Consideration totaled $3.3acquisitions plus $17.3 million for the purchase of land and was comprised of cash and reduction of notes receivable.buildings for four agriculture equipment dealerships in Ohio leased to Ag Pro under the John Deere brand which are accounted for as financing receivables. Also, during the year ended December 31, 2019,2022, the Company completed fourfive dispositions consisting of seven farms in Illinois, Michigan, Florida,the Corn Belt, High Plains and Arkansas. Cash receipts onSoutheast regions. We received cash consideration for these dispositions totaled $34.1totaling $17.0 million with a totaland recognized an
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aggregate gain on sale of $7.9$2.6 million. See “Managements’“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about our portfolio. The distribution of farms owned by regions is as follows:
| | | | | | |
Region (1) |
| Owned Acres |
| Managed Acres |
| Total Acres |
Corn Belt (2) | | 47,182 | | 21,961 | | 69,143 |
Delta and South | | 32,878 | | 1,489 | | 34,367 |
High Plains | | 33,006 | | 1,380 | | 34,386 |
Southeast | | 40,354 | | 6,107 | | 46,461 |
West Coast | | 11,752 | | — | | 11,752 |
| | 165,172 | | 30,937 | | 196,109 |
(1) | ||
|
| |
Corn Belt |
| |
includes farms located in Illinois, Indiana, Iowa, Michigan, Missouri and eastern Nebraska. Delta and South |
| |
includes farms located in Arkansas, Louisiana, and Mississippi. High Plains |
| |
includes farms located in Colorado, Kansas, western Nebraska and Texas. Southeast |
| |
includes farms located in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. West Coast |
| |
|
Corn Belt includes farms located in Illinois, Michigan and eastern Nebraska. Delta and South includes farms located in Arkansas, Louisiana and Mississippi. High Plains includes farms located in Colorado, Kansas, western Nebraska, South Dakota and Texas. Southeast includes farms located in Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia. West Coast includes farms located in California.
As of the date of this Annual Report on Form 10-K, our portfolio has the following rents or rent estimates for 2020 by lease type or status. This table does not include additional rents from properties not yet put in service due to improvement projects, loan interest income from loans outstanding under the FPI Loan Program, and other revenues:
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
Lease Type or Status - as of the date of this Annual Report |
| 2020 Rent |
| % |
| |
Leases in place with third parties |
|
|
|
|
|
|
Fixed rent (1) |
| $ | 32,381 |
| 72.8 | % |
Variable rent (2) |
|
| 11,093 |
| 24.9 | % |
|
|
|
|
|
|
|
Leases being negotiated (3) |
|
| 1,029 |
| 2.3 | % |
|
| $ | 44,503 |
| 100.0 | % |
Tenant Reimbursements |
|
| 3,882 |
|
|
|
|
| $ | 48,385 |
|
|
|
(2) |
|
|
|
|
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Tax Status
We elected and qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2014. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes.
As a REIT, we generally willare not be subject to U.S. federal income tax on our taxable income that we distribute to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute on an annual basis at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be subject to tax at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to U.S. federal income and excise taxes on our undistributed income. Additionally, any income earned by FPI Agribusiness Inc., our taxable REIT subsidiary, and any other taxable REIT subsidiaries that we form or acquire in the future will be fully subject to U.S. federal, state and local corporate income tax.
Insurance
The Company maintains comprehensive property and casualty and general liability insurance through its relationship with a national insurance brokerage firm with extensive agricultural experience. The Company’s workers’ compensation is provided through a professional employee organization and the Company maintains liability insurance covering its directors and officers. Certain other insurance programs are maintained as required by contract or deemed necessary by our management team, including crop insurance for farms operated by the Company. Under the terms and conditions of the leases on our current properties, tenants are generally required, at their expense, to obtain and keep in full force during the term of the lease, liability and property damage insurance policies and to name us an additional insured party. To the extent required, tenants also maintain workers’ compensation policies for their businesses. These policies include liability coverage for bodily injury and property damage arising out of the ownership, use, occupancy or maintenance of the properties and all of their appurtenant areas. In addition to our tenants' insurance policies under which we will be an additional insured party, we also maintain comprehensive liability and casualty insurance covering all of our properties under a blanket insurance policy, which provides coverage to the extent there is insufficient coverage under our tenants' policies. The terms of leases that include variable rent payments generally require the tenant to carry crop insurance protecting against crop failures andand/or crop price declines.
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Regulation
Regulation
Farming Regulations
The farmland that we own and intend to acquire in the future is typically used for growing crops and is subject to the laws, ordinances and regulations of state, local and federal governments, including laws, ordinances and regulations involving land use and usage, water rights, treatment methods, disturbance, the environment and eminent domain.
Farmland is principally subject to environmental and agricultural laws, ordinances and regulations. Each governmental jurisdiction has its own distinct laws, ordinances and regulations governing the use of farmland. Many such laws, ordinances and regulations seek to regulate water usage and water runoff because water can be in limited supply, as is the case where certain of the properties in our portfolio are located.
All of the farms in our portfolio have sources of water, including expected precipitation, existing and planned wells and/or surface water, that currently provide sufficient amounts of water necessary for the current farming operations at each location. However, should the need arise for additional water from wells and/or surface water sources, such permits and approvals may be difficult to obtain in areas with limited supply of available water. We believe that as of the date of this Annual Report on
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Form 10-K our farms are in compliance with applicable state, county and federal environmental and agricultural regulations.
In addition to the regulation of water usage and water runoff, state, local and federal governments also seek to regulate the type, quantity and method of use of chemicals and materials for growing crops, including fertilizers, pesticides and nutrient rich materials. Such regulations could include restricting or preventing the use of such chemicals and materials near residential housing or near water sources. Further, some regulations have strictly forbidden or significantly limited the use of certain chemicals and materials.
As an owner of farmland, we may be liable or responsible for the actions or inactions of our tenants with respect to these laws, regulations and ordinances.
Real Estate Industry Regulation
Generally, the ownership and operation of real properties is subject to various laws, ordinances and regulations, including regulations relating to zoning, land use, water rights, wastewater, storm water runoff and lien sale rights and procedures. These laws, ordinances or regulations, such as the Comprehensive Environmental Response and Compensation Liability Act (“CERCLA”) and its state analogs, or any changes to any such laws, ordinances or regulations, could result in or increase the potential liability for environmental conditions or circumstances existing, or created by tenants or others, on our properties. Laws related to upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of our properties or other impairments to operations, any of which would adversely affect our cash flows from operating activities.
Environmental Matters
As an owner of real estate, we will be subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties resulting from environmental contamination or noncompliance at our properties. Environmental laws often impose liability without regard to whether the owner or operator knew of or was responsible for the presence of the contaminants. The costs of any required investigation or cleanup of these substances could be substantial. The liability is generally not limited under such laws and could exceed the property’s value and the aggregate assets of the liable party. The presence of contamination or the failure to remediate contamination at our properties also may expose us to third-party liability for personal injury or property damage or adversely affect our ability to lease the real property or to borrow using the real estate as collateral. These and other risks related to environmental matters are described in more detail in “Item 1A. Risk Factors.”
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Environmental, Social and Governance (“ESG”)
Competition
We believe a strong commitment to ESG supports our business model, promotes environmental stewardship, sustains a safe and healthy workplace, and upholds high standards of business ethics and conduct. Our ESG policy is founded on the principle of helping feed the world, especially people in poverty, with the least negative environmental impact possible.
Competition
Environmental Sustainability
Farmland is more environmentally friendly than most types of commercial real estate, as agriculture naturally uses solar energy to capture carbon dioxide from the atmosphere and convert it into food, feed, fuel, and fiber. Principles of environmental sustainability are deeply interwoven into modern agricultural practices and are embedded into our farmland acquisition criteria and management practices. We foster long-term relationships with our tenants, who are incentivized to provide good stewardship for the land they rent from us. The use of farmland as a carbon sink to generate carbon credits is a double-impact (environmental and financial) opportunity that we believe will continue to increase in significance in coming years.
Renewable energy generation (wind and solar) is a component of our business model of growing importance. As of December 31, 2022, we leased acres to support 6 solar energy operational or under-construction projects across 11 farms and 3 wind energy projects across 9 farms, which have the capacity to generate approximately 214 and 47 megawatts of renewable energy, respectively. We own 23 additional farms which have options for future solar projects. We expect to continue to take advantage of opportunities to place solar panels and windmills on farmland owned by FPI.
We place significant emphasis on the support of biodiversity and wildlife. Our portfolio supports biodiversity through the enrollment of acres, in partnership with our tenants, in the U.S. Department of Agriculture’s Conservation Reserve Program (CRP). In exchange for a yearly rental payment, CRP participants agree to remove less-productive land from agricultural production and re-establish native vegetation to improve water quality, prevent erosion, and protect wildlife habitat. We also formed a partnership with Ducks Unlimited in 2021 to sell approximately 1,268 acres in a three-part conservation transaction to support habitat restoration and protection in Virginia. Many more of our farms provide habitat for waterfowl and other wildlife.
Social Impact, Human Rights, and Company Culture
Utilizing land for farming creates a more sustainable future for all by affordably feeding the world’s growing population and supplying food products that support better nutrition, both quantitatively and qualitatively. Moreover, we are a channel to bring capital, and therefore economic activity, to rural communities throughout the United States, supporting farming as a livelihood as it has been for thousands of years. We support the United Nations’ Universal Declaration of Human Rights and are committed to ensuring that human rights are respected throughout our extended community of employees, tenants and suppliers. We require our tenants to comply with all applicable labor and environmental regulations. We foster a company culture based on open communication and professional growth, and support employees engaged with non-profit organizations.
Governance Fiduciary Duties and Ethics
We recognize that transparency and employing an array of best practices in corporate governance better serves all stakeholders. As of the date of this Annual Report, we have five independent directors who have diverse backgrounds and bring different perspectives to our board, which promotes better strategic thinking and planning in addition to thoughtful and robust oversight. Our Board of Directors, management team and employees are all subject to a Code of Business Conduct and Ethics and are committed to always maintaining the highest ethical standards across our processes, business practices, and policies.
ESG Leadership and Strategy
ESG is considered a high priority topic at all levels in our organization, with a commitment formulated by the Board of Directors and senior management team. Going forward, we intend to maintain and expand our focus on ESG principles
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already embedded in our culture, policies and practices, gradually implementing efforts to measure, improve and communicate our performance. We expect our ESG objectives and the resources allocated to ESG matters will continue to evolve over time as we assess strategies that are most appropriate for our organization.
ESG Plan and Reporting
In 2023, we intend to adopt written ESG Policies and publish our first ESG-focused report, outlining in more detail our ESG-focused efforts, results and objectives.
Competition
Competition to acquire farmland can come from many different entities.sources. Individual farmers are the most active buyers of farmland. Institutional investors, investment funds, other farmland REITs, individual investors and others also compete for farmland acreage. Investment firms that we might compete directly against could include agricultural investment firms such as Westchester Agriculture Asset Management (a TIAA company), Hancock AgriculturalManulife Investment Group,Management, International Farming Corporation, Ceres Partners, Gladstone Land Corp, and UBS Agrivest, LLC.AgIS Capital, Homestead Capital, and Goldcrest Farm Trust Advisors. These firms engage in the acquisition, asset management, valuation and disposition of farmland properties.
EmployeesHuman Capital Resources
Our employees are vital to our success. Our goal is to ensure that we have the right talent, in the right place, at the right time. We do that through our commitment to attracting, developing and retaining our employees.
We have designed a compensation structure, including an array of benefit and long-term incentive plans, that we believe is attractive to our current and prospective employees. We also offer employees the opportunity to participate in conferences and continuing education.
We seek to retain our employees by using their feedback to create and continually enhance programs that support their needs. We have a formal performance review process for our employees. We have a values-based culture, an important factor in retaining our employees. We are committed to having a diverse workforce, and an inclusive work environment is a natural extension of our culture.
At March 9, 2020,December 31, 2022, we had 1330 employees, 1228 of which are full time. None of our employees are a member of a labor union.
Corporate Information
Our executive offices are located at 4600 South Syracuse Street, Suite 1450, Denver, Colorado 80237. Our telephone number at our executive offices is (720) 452-3100 and our corporate website is www.farmlandpartners.com. The
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information on, or accessible through, our website is not incorporated into and does not constitute a part of this Annual Report on Form 10-K or any other report or document we file with or furnish to the SEC.
Available Information
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the SEC. You may obtain copies of these documents by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public free of charge through our website or by contacting our Secretary at the address set forth above under “—Corporate Information.”
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of our audit committee, compensation committee, and nominating and corporate governance committee are all available in the Governance
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Documents section of the Corporate Information section of our website. The information accessible on our website is not incorporated in, nor should be considered a part of, this Annual Report on Form 10-K.
Financial Information
For required financial information related to our operations, please refer to our consolidated financial statements, including the notes thereto, included within this Annual Report on Form 10-K.
Set forth below are the risks that we believe are material to our stockholders. You should carefully consider the following risks in evaluating our Company and our business. The occurrence of any of the following risksfactors, events or circumstances described below could materially adversely impact our financial condition, results of operations, cash flow, the market price of shares of our common stock and preferred stock and our ability to, among other things, satisfy our debt service obligations and to make distributions to our stockholders, which in turn could cause our stockholders to lose all or a part of their investment. Some statements in this report including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Special Note Regarding Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.
Risks Related to Our Business and Properties
Our business is dependent in part upon the profitability of our tenants' farming operations, and a sustained downturn in the profitability of their farming operations could have a material adverse effect on the amount of rent we can collect and, consequently, our cash flow and ability to make distributions to our stockholders.
We depend on our tenants to operate the farms we own in a manner that generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent and real estate taxes, maintain certain insurance coverage and maintain the properties generally. The ability of our tenants to fulfill their obligations under our leases depends, in part, upon the overall profitability of their farming operations, which could be adversely impacted by, among other things, adverse weather conditions, crop prices, crop disease, pests, and unfavorable or uncertain political, economic, business, trade or regulatory conditions. We are susceptible to any decline in the profitability of our tenants' farming operations, for our variable-rent leases, pursuant to which the amount of rent depends on crop yields and prices realized by our tenants, as well as for our leases with terms longer than one year.extent that it would impact their ability to pay rents. In addition, many farms are dependent on a limited number of key individuals whose injury or death may affect the successful operation of the farm. We can provide no assurances that, if a tenant defaults on its obligations to us under a lease, we will be able to lease or re-lease that farm on economically favorable terms in a timely manner, or at all. In addition, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
As a result, any downturn in the profitability of the farming operations of our tenants or a downturn in the farming industry as a whole could have a material adverse effect on our financial condition, results of operations, cash flow and ability to make distributions to our stockholders.
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We have a substantial amount of indebtedness outstanding, which may expose us to the risk of default under our debt obligations, restrict our operations and our ability to grow our business and revenues and restrict our ability to pay distributions to our stockholders.
As of December 31, 2019,2022, we had approximately $512.9$439.5 million of outstanding indebtedness excluding debt issuance costs, most of which is secured by mortgages on our farms. We intend to incur additional debt in connection with refinancingsrefinancing of existing indebtedness, future acquisitions or for other purposes and, if necessary, we may borrow funds to make distributions to our stockholders in order to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes. We have $48.3 million of outstanding indebtedness that matures in June and July of 2020. As of the date of this Annual Report on Form 10-K, we have not secured a financing source to refinance this amount and we can provide no assurances that we will secure a financing source to refinance our near-term maturities. It may be necessary to refinance the debt through new debt or equity financings, which may not be available on acceptable terms or at all and which could be dilutive to our stockholders. In addition, we have sold farms in order to repay indebtedness in the past and may do so in the future. Such dispositions may come at inopportune times or on disadvantageous tems,terms, which could result in losses.
In addition, our debt agreements include customary events of default, the occurrence of any of which, after any applicable cure period, would permit the lenders to, among other things, accelerate payment of all amounts outstanding
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under the loans and to exercise their remedies with respect to the collateral, including foreclosure and sale of the agricultural real estate securing the loans. Certain of our debt agreements also contain cross-default provisions that give the lender the right, in certain circumstances, to declare a default if we are in default under other loans. If we default on our debt coming due in 2020, it could cause the acceleration of a significant portion of our indebtedness as a result of these cross-default provisions If any one of these events were to occur, our financial condition, results of operations, cash flow and ability to pay distributions to our stockholders could be materially and adversely affected.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.
As of December 31, 2019,2022, we had approximately $512.9$439.5 million of outstanding mortgage indebtedness excluding debt issuance costs, of which $48.3 million matures in June and July of 2020.costs. We intend to finance future property acquisitions, in part, with mortgage indebtedness. Mortgage and other secured debt obligations increase our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
Our debt financing agreements restrict our ability to engage in certain business activities, including our ability to incur additional indebtedness, make capital expenditures and make certain investments.
Our existing debt financing agreements contain, and other debt financing agreements we may enter into in the future may contain, customary negative covenants and other financial and operating covenants that, among other things:
| restrict our ability to incur additional indebtedness; |
| restrict our ability to incur additional liens; |
| restrict our ability to make certain investments (including certain capital expenditures); |
| restrict our ability to merge with another company; |
| restrict our ability to sell or dispose of assets; |
| restrict our ability to make distributions to stockholders; and |
● | require us to satisfy minimum financial coverage ratios, minimum tangible net worth requirements and maximum leverage ratios. |
Increases in benchmark interest rates will increase our borrowing costs, which will negatively impact our financial condition, results of operations, growth prospects and ability to make distributions to stockholders.
Over the past year, the Board of Governors of the United States Federal Reserve Bank (the “Federal Reserve”) has undertaken a significant tightening of monetary policy, which has increased borrowing costs (through the resulting increase in interest rates) and decreased credit availability. The Federal Reserve has indicated that it expects to maintain elevated benchmark interest rates during 2023 and 2024 to help curb inflation. Rising interest rates will increase our borrowing costs on our existing floating-rate indebtedness as well as on any future fixed or floating rate indebtedness used to refinance existing indebtedness or to acquire new properties. As of December 31, 2022, $262.0 million of our outstanding indebtedness was subject to interest rates that reset from time to time (excluding our floating rate debt), of which $174.1 million was subject to interest rates that will be reset in 2023. As of December 31, 2022, the weighted average interest rate of the indebtedness subject to interest rate resets in 2023 was 3.23%, which we expect to increase significantly if benchmark interest rate levels remain constant or increase as we expect them to during the course of 2023 (for more information on rate resets see “Note 7—Mortgage Notes, Lines of Credit and Bonds Payable”). These expected increases in borrowing costs could reduce our income and cash flow and materially and adversely impact our results of operations, financial condition and our ability to make distributions to our stockholders.
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Increases in interest rates will increase our tenants’ borrowing costs and make it more difficult for them to obtain credit and may cause land prices to decline .
Increasing interest rates result in higher borrowing costs for farmers and may make it more difficult for farm operators to obtain indebtedness to fund their operations, which could have an adverse impact on our tenant’s ability to make rental payments to us. Higher interest rates also tend to decrease U.S. and world economic growth, thus decreasing the demand for agricultural commodities.
All of these consequences could reduce farm income. If increases in interest rates are not accompanied by higher levels of farm income, this could lead to a reduction in our profitability, either of which would have a material adverse effect on our business or results of operations, financial condition, and ability to make distributions to our stockholders.
Global economic conditions, including inflation and supply chain disruptions, could adversely affect our and our tenants’ operations.
General global economic downturns and macroeconomic trends, including heightened inflation, volatility in the capital markets, interest rate and currency rate fluctuations, the war in Ukraine and economic slowdown or recession, may result in unfavorable conditions that could negatively affect demand for our tenants’ crops and exacerbate some of the other risks that affect our business, financial condition and results of operations. Both domestic and international markets experienced significant inflationary pressures in 2022, and inflation rates in the U.S. are currently expected to continue at elevated levels for the near-term. In addition, the Federal Reserve has raised, and is expected to continue to raise, interest rates in response to concerns about inflation, which, coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. Interest rate increases or other government actions taken to reduce inflation could also result in an economic recession.
Our tenants have experienced challenges in their supply chains and related price increases. Continued deterioration in the domestic or international economic environment may cause decreased demand for our tenants’ crops, which could result in lower sales volume and lower prices for their crops, as well as increase the cost of operating their businesses and a corresponding adverse effect on their ability to make rental payments to us, which would adversely impact our financial condition and results of operations.
Approximately 70% of our portfolio is comprised of properties used to grow primary crops such as corn, soybeans, wheat, rice and cotton, which subjects us to risks associated with primary row crops.
By value, approximately 70% of our portfolio is used for primary crops, such ascorn, soybeans, wheat, rice and cotton. As a result, any development or situation that adversely affects the value of properties generally or the prices of corn, soybeans, wheat, rice or cotton could have a more significant adverse impact on us than if our portfolio had less exposure to primary crops, which could materially and adversely impact our financial condition, results of operations and ability to make distributions to our stockholders.
Investments in farmland used for permanent/specialty crops have a different risk profile than farmland used for annual row crops.
By value, approximately 30% of our portfolio is used for permanent crops, and, in the future, we may add to our investments in farmland used for permanent crops, as opposed to annual row crops. Permanent crops have plant structures (such as trees, vines or bushes) that produce yearly crops without being replanted. Examples include blueberries, oranges, apples, almonds and grapes. Permanent crops require more time and capital to plant and bear fruit and are more expensive to replace. If a farmer loses a permanent/specialty crop to drought, flooding, fire or disease, there generally would be significant time and capital needed to return the land to production because a tree or vine may take years to grow before bearing fruit.
Permanent crop plantings also reduce a farmer’s ability to adapt to changing market conditions by changing crops. If demand for one type of permanent crop decreases, the permanent crop farmer cannot easily convert the farm to another type of crop because permanent crop farmland is dedicated to one crop during the lifespan of the trees or vines and therefore cannot easily be rotated to adapt to changing environmental or market conditions.
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Our failure to continue to identify and consummate suitable acquisitions would significantly impede our growth and our ability to further diversify our portfolio by geography, crop type and tenant, which could materially and adversely affect our results of operations and cash available for distribution to our stockholders.
Our ability to expand through acquisitions is important to our business strategy and requires that we identify and consummate suitable acquisition or investment opportunities that meet our investment criteria and are compatible with our growth strategy. We compete for the acquisition of farmland and real estate assets related to farming with many other entities engaged in agricultural and real estate investment activities, including individual and family operators of farming businesses, corporate agriculture companies, financial institutions, institutional pension funds, public REITs, other real estate companies, private equity funds and other private real estate investors. These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for such properties. Our competitors may adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties, our profitability may decrease, and you may experience a lower return on your investment. Our failure to identify and consummate suitable acquisitions would significantly impede our growth, which would adversely affect our results of operations and cash available for distribution to our stockholders.
Failure to succeed in new markets may have adverse consequences.
We intend to continue to acquire properties across the U.S. and may from time to time evaluate potential international acquisitions. When we acquire properties located in new geographic areas in the U.S. or internationally, or properties primarily devoted to a crop or industry with which we are less familiar (such as certain specialty crops, energy production, dairy farms or hog farms), we may face risks associated with a lack of market knowledge or understanding of the local market, including the availability and identity of quality tenants, forging new business relationships in the area, developing an understanding of a crop or industry unfamiliar to us, and unfamiliarity with local or crop-specific government requirements and procedures. Furthermore, the negotiation of a potential expansion into new markets or industries may divert management time and other resources. As a result, we may have difficulties executing our business strategy in these new markets, which could have a negative impact on our results of operations and ability to make distributions to our stockholders.
We do not continuously monitor and evaluate tenant credit quality, and our financial performance may be subject to risks associated with our tenants' financial condition and liquidity position.
Certain of our leases do not require the full payment of rent in cash in advance of the planting season, which subjects us to credit risk exposure to our farm-operator tenants and the risks associated with farming operations, such as weather, commodity price fluctuations and other factors. We also are exposed to these risks with respect to leases for which the rent is based on a percentage of a tenant's farming revenues and leases with terms greater than one year.Because we do not monitor and evaluate the credit risk exposure related to farm-operator tenants on an ongoing basis, we are subject to the risk that our tenants, particularly those that may depend on debt and leverage to finance their operations, could be susceptible to bankruptcy in the event that their cash flows are insufficient to satisfy their financial obligations, including meeting their obligations to us under their leases. As a result, we may not become aware of a tenant's financial distress until the tenant fails to make payments to us when due, which may significantly reduce the amount of time we have to evict the tenant and re-lease the farmland to a new tenant before the start of the spring planting season, and in the event of a tenant bankruptcy we may not be able to terminate the lease. If we are unable to re-lease the farmland on a timely basis, it could have a material adverse effect on our revenues.
Our short-term leases make us more susceptible to any decreases in prevailing market rental rates than would be the case if we entered into longer-term leases, which could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Our leases with tenants engaged in farming operations have terms customary in the farming industry, ranging from one to three years, with some extending up to 40 years (e.g., renewable energy leases). We expect that most of the leases
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we enter into in the future will have two to seven-year terms. As a result, we are required to frequently re-lease our properties upon the expiration of our leases, which will make us more susceptible to declines in market rental rates than we would be if we were to enter into longer term leases. As a result, any decreases in the prevailing market rental rates in the geographic areas in which we own properties could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
We may be unable to collect balances due on our leases from any tenants in financial distress or bankruptcy, which could materially and adversely affect our financial condition, results of operations and cash flow.
We are subject to tenant credit risk. Our tenants, particularly those that may depend on debt and leverage, could be susceptible to defaults under their leases or bankruptcy in the event that their cash flows are insufficient to satisfy their financial obligations. Certain of our tenants have defaulted on their lease payments, and we have been forced to pursue alternative arrangements with those tenants in order to recover amounts due under the leases. In the future, we may be forced to enter into similar alternative arrangements or pursue litigation in order to collect payments from tenants who are unable make their lease payments as they come due. We can provide no assurances that we will be able to collect the full amount due under a particular lease if we are forced to pursue alternative payment arrangements or litigation with any of our tenants.
If a bankrupt tenant rejects a lease with us, any claim we might have for breach of the lease, excluding a claim against collateral securing the lease, would be treated as a general unsecured claim. In the event of a tenant's default under its lease or its rejection of the lease in bankruptcy proceedings, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms. As a result, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.
We depend on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability to, among other things, acquire additional properties, meet our capital and operating needs or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
In order to maintain our qualification as a REIT, we are required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including acquisition opportunities and principal and interest payments on any outstanding debt, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms, in the time period we desire, or at all. Any debt we incur will increase our leverage, expose us to the risk of default and may impose operating restrictions on us, and any additional equity we raise (including the issuance of common or preferred units) could be dilutive to existing stockholders. Our access to third-party sources of capital depends, in part, on:
● | general market conditions, including conditions that are out of our control, such as actions or proposed actions of the current U.S. Presidential administration and the Federal Reserve to curb inflation or the impact of future public health crises; |
● | novel and unforeseen market volatility and trading strategies, such as short squeeze-rallies caused by retail investors on retail trading platforms; |
● | the market’s view of the quality of our assets; |
● | the market’s perception of our growth potential; |
● | our debt levels; |
● | our current and expected future earnings; |
● | our cash flow and cash distributions; and |
● | the market price per share of our common stock. |
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If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
The real estate investments made, and to be made, by us may be difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our portfolio in response to liquidity needs, changing economic, financial and investment conditions may be limited or we may have to sell properties at a loss. In addition, we seek to opportunistically dispose of properties when we are able to do so at a price we consider attractive and/or recognize a gain on sale. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We have used dispositions of assets in the past in order to meet our liquidity requirements. If we are required to dispose of additional assets for liquidity purposes, we may be unable to realize our investment objectives by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. Opportunities to dispose of assets at a gain may not be available to us, which would reduce our cash on hand for stock repurchases, distributions to stockholders, or for any other purpose. In particular, weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located, in each case may limit our ability to dispose of a property.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interests. Moreover, if we acquire properties from C corporations (i.e., corporations generally subject to full corporate-level tax) in certain non-taxable transactions, as we have done in the past, built-in gain recognized on the non-taxable disposition of such properties within 5 years of our acquisition will be subject to tax at the highest applicable U.S. federal corporate income tax rate. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms.
Some state laws prohibit or restrict the ownership of agricultural land by business entities, which could impede the growth of our portfolio and our ability to diversify geographically.
Certain states, including Iowa, North Dakota, South Dakota, Minnesota, Oklahoma, Wisconsin, Missouri and Kansas, in which a substantial amount of primary crop farmland is located, have laws that prohibit or restrict to varying degrees the ownership of agricultural land by corporations or business entities like us. As of December 31, 2022, we owned 1,959 acres of farmland in Kansas and 815 acres in Missouri, and our ownership of those farms may be challenged under Kansas, or Missouri law, in which case we may be required to sell those farms at an unfavorable time and on unfavorable terms. Additional states may, in the future, pass similar or more restrictive laws, and we may not be legally permitted, or it may become overly burdensome or expensive, to acquire properties in these states, which could impede the growth of our portfolio and our ability to diversify geographically in states that might otherwise have attractive investment opportunities.
Our farms are subject to adverse weather conditions, seasonal variability, crop disease and other contaminants, which may adversely affect the amount of variable rent or income from direct operations and/or our tenants' ability to pay fixed or variable rent and thereby have a material adverse effect on our results of operations, financial condition, and our ability to make distributions to stockholders.
Crops are vulnerable to adverse weather conditions, including windstorms, tornados, floods, drought and temperature extremes, which are common but difficult to predict. Unfavorable growing conditions can reduce both crop yield and quality. Seasonal factors, including supply and consumer demand, may also have an effect on the value of crops grown by our tenants. In extreme cases, entire harvests may be lost in some geographic areas.
In addition, crops are vulnerable to disease and pests. Damages to tenants' crops may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic
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conditions. The costs to control these infestations vary depending on the severity of the damage and the extent of the plantings affected. These infestations can increase the costs and decrease the revenues of our tenants. Tenants may also incur losses from product recalls, fines or litigation due to other contaminants that may cause food borne illness. It is difficult to predict the occurrence or severity of such product recalls, fines or litigation as well as their impact upon our tenants.
We are particularly susceptible to adverse weather conditions (such as windstorms, tornados, floods, drought, hail and temperature extremes), transportation conditions (including navigation of the Mississippi River), crop disease, pests and other adverse growing conditions in California, Illinois, North Carolina, Colorado and Arkansas, which generate a significant portion of our revenues.
While many of our leases are on a fixed-rent basis that does not change based on the success of the farming operations, we also utilize variable-rent leases pursuant to which the amount of the rent depends on crop yields and prices in regions where such arrangements are prevalent. Adverse weather conditions, seasonal variability, crop disease, pests and contaminants could adversely affect the value of production on properties. This could impact our variable rent proceeds and our tenants' ability to continue to meet their obligations to us. This could have a material adverse effect on the value of our properties, our results of operations, financial condition, and our ability to make distributions to our stockholders.
The market prices of the crops that our tenants may produce on our agricultural properties have exhibited periods of volatility, which may affect our tenants' ability to pay rent and thereby have a material adverse effect on our results of operations and our ability to make distributions to stockholders.
The value of a crop is affected by many factors that can differ on a yearly basis. The unpredictability of weather and crop yields in the major crop production regions worldwide creates a significant risk of price volatility, which may either increase or decrease the value of the crops that our tenants produce each year. Other material factors adding to the volatility of crop prices are changes in government regulations and policy, fluctuations in global prosperity, fluctuations in foreign trade and export markets, and eruptions of military conflicts or civil unrest. Although rental payments under the majority of our leases typically are not based on the quality or profitability of our tenants' harvests, any of these factors could adversely affect our tenants' ability to meet their obligations to us and our ability to lease or re-lease properties on favorable terms, or at all, which could have a material adverse effect on the value of our properties, our results of operations and our ability to make distributions to our stockholders.
The impacts of trade disputes and geopolitical conflicts, such as the ongoing war in Ukraine, could adversely affect the profitability of our tenants’ farming operations, which could have a material adverse effect on our results of operations, financial condition, ability to make distributions to our stockholders and the value of our properties.
The potential for trade disputes between the United States and its primary agricultural trade partners has increased in recent years. This impacts the volatility of the market prices of certain crops that our tenants grow on our properties. There can be no assurances as to the impact of any change in trade policy on market prices of crops.
Similarly, our and our tenants’ operations are subject to risks stemming from geopolitical conflicts, such as the ongoing war in Ukraine. Food prices were at near record highs before the beginning of the war in Ukraine and have increased as a result of the war. U.S. farmers have seen increased profitability as a result of rising prices. However, we can provide no assurances that this increased profitability is sustainable in light of inflationary pressures on farming costs, rising interest rates and other economic factors or that such increase will result in commensurate increases in rental rates.
A reduction in crop prices could adversely affect the profitability of our tenants and negatively impact their ability to make rental payments as they come due. If we are unable to recover the rental payments, our results of operations, financial condition and ability to make distributions to our stockholders could be materially and adversely affected. If we are required to remove a tenant, we may not be able to re-lease the property at current rental rates or at all. Furthermore, prolonged trade disputes or geopolitical conflicts that lead to a continuation of depressed crop prices could materially and adversely affect the underlying value of our properties.
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Adverse changes in government policies related to farming could affect the prices of crops and the profitability of farming operations, which could materially and adversely affect the value of our properties and our results of operations.
There are a number of government programs that directly or indirectly affect the profitability of farm operators. These include marketing, export, renewable fuel and insurance policies and programs. Significant changes to or the elimination of programs and policies could adversely affect crop prices and the profitability of farming operations, which could materially and adversely impact the value of our farms and our ability to lease them on favorable terms, or at all, which would have a material adverse effect on our results of operations.
We may be subject to unknown or contingent liabilities related to acquired properties and properties that we may acquire in the future, which could have a material adverse effect on us.
Properties that we have acquired, and properties that we may acquire in the future, may be subject to unknown or contingent liabilities (for example, environmental or related liabilities or liabilities related to water usage) for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to the purchase of properties that we acquire may not survive the completion of the transactions. Furthermore, indemnification under such agreements may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these properties may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may materially and adversely affect us.
The loss of key management personnel, particularly Paul A. Pittman and Luca Fabbri, could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.
Our future success depends to a significant extent on the continued service and coordination of our senior management team and the successful implementation of our Chief Executive Officer transition announced in November 2022. Effective following the filing of this Annual Report on Form 10-K, Luca Fabbri will assume the position of Chief Executive Officer and be appointed to the Board of Directors and Paul A. Pittman will continue to serve as Executive Chairman of the Board of Directors. We can provide no assurances that any of our key personnel will continue their employment with us. The loss of the services of Messrs. Pittman or Fabbri could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.
We have entered into joint investments (including our ownership interest in the OZ Fund) and may in the future, co-invest with third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for developing properties and managing the affairs of a property, partnership, joint venture or other entity. With respect to our ownership interest in the OZ Fund and any similar arrangements that we may enter into in the future, we are not, and in the future may not be, in a position to exercise any decision-making authority regarding the property, partnership, joint venture or other entity. Such joint investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not otherwise present with a direct investment in farmland properties, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives, and they may have competing interests in our markets that could create conflicts of interest. Such investments may also have the potential risk of impasses on decisions, such as a sale or financing, because neither we nor the partner(s) or co-venturer(s) would have full control over the partnership or joint venture. In addition, a sale or transfer by us to a third party of our interests in the joint venture may be subject to consent rights or rights of first refusal, in favor of our joint venture partners, which would in each case restrict our ability to dispose of our interest in the joint venture. Where we are a limited partner or non-managing member in any partnership or limited liability company, if such entity takes or expects to take actions that could
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jeopardize our status as a REIT or require us to satisfy minimumpay tax, we may be forced to dispose of our interest in such entity. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Our joint ventures may be subject to debt and, during periods of volatile credit markets, the refinancing of such debt may require equity capital calls.
We may fail to realize some or all of the anticipated benefits of our ownership interest in the OZ Fund, our long-term management agreement with the OZ Fund, the acquisition of MWA and the launch of a joint asset management platform with MWA, or those benefits may take longer to realize than expected. We may also encounter significant difficulties in managing the business and operations of OZ Fund and MWA client properties. The future results of our Company will suffer if we do not effectively manage properties on behalf of the OZ Fund and MWA clients.
Our ability to realize the anticipated benefits of our ownership interest in the OZ Fund, our long-term management agreement with the OZ Fund, the acquisition of MWA and the launch of a joint asset management platform with MWA depends, in part, on our ability to successfully manage the business and operations of OZ Fund and MWA client properties. Following the consummation of the long-term management agreement with the OZ Fund and the acquisition of MWA, the number of acres of third-party farmland under our management increased significantly. If we fail to operate these new business lines successfully, we may suffer losses.
Furthermore, our ownership interest in the OZ Fund, the acquisition of MWA and our management of OZ Fund and MWA client properties could expose us to unknown or contingent liabilities that were not discovered during the course of due diligence. These liabilities could include exposure to unexpected environmental problems, compliance and regulatory violations, key employee and client retention problems and other problems that could result in significant costs to us. Many of these factors are outside our control, and any one of them could result in increased costs and liabilities, decreases in the amount of expected revenues, earnings and cash flows, and diversion of management’s time and energy, which could have a material adverse effect on the business of the OZ Fund, MWA and/or us. All of these factors could negatively impact the asset management fees we expect to earn from the management of OZ Fund and MWA client properties and the returns we anticipate receiving from our ownership interest in the OZ Fund and the acquisition of MWA, all of which could negatively impact the price of our common stock, or have a material adverse effect on our business, financial coverage ratios, minimum tangible net worthcondition and results of operations.
We are exposed to risks associated with the management of third-party owned farmland and ancillary agricultural business activities and failure to succeed in new markets and these new lines of business may have adverse consequences.
Through our long-term management agreement with the OZ Fund, property management business activity within MWA and our November 2022 purchase of land and buildings for four agriculture equipment dealerships in Ohio leased to Ag Pro under the John Deere brand, we engage in property management activities on behalf of third-party property owners and lease out new agricultural-related properties, and may continue to pursue similar strategic activities if appropriate opportunities arise. Our historical experience in our existing markets in acquiring, owning and leasing farmland does not ensure that we will be able to operate successfully in new markets or in new lines of business. We may be exposed to a variety of risks when we enter a new market, property management opportunity or ancillary agricultural business activity, including an inability to accurately evaluate local market conditions and a lack of familiarity with local tenants. We may be unsuccessful in managing farmland properties on behalf of third-parties or leasing out agricultural equipment dealerships, which could have a material adverse effect on our results of operations and we may be liable and/or our status as a REIT may be jeopardized if the third-party farmland management or agricultural equipment dealership facilities cause us to fail to comply with various tax or other regulatory matters.
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If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately report our financial results, which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. While our Annual Report on Form 10-K for the year ended December 31, 2019 contained an independent auditor’s attestation report pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), we are not required to include such an audit report in this Annual Report. We have identified material weaknesses in the past. While we believe we have remediated all past material weaknesses, we cannot give any assurances that other material weaknesses will not be identified in the future in connection with our compliance with the provisions of Section 404 of the Sarbanes-Oxley Act. The existence of any material weakness would preclude a conclusion by management and our independent auditors that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and expense to remediate any material weaknesses that may be discovered and may not be able to remediate any material weakness in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the per-share trading price of our common stock. In addition, at the time we no longer qualify as a smaller reporting company, we will be required to include an auditor attestation report pursuant to Section 404 of the Sarbanes Oxley Act, which will cause us to incur additional expenses, which may be significant.
Under the FPI Loan Program, we provide loans to third-party farmers, which exposes us to risks associated with being a lender, including the risk that borrowers default on their obligations to us, which could adversely affect our results of operations and financial condition.
Under the FPI Loan Program, we make loans to third-party farmers (both tenant and non-tenant) to provide financing for borrowers’ working capital requirements and maximum leverage ratios.
operational farming activities, farming infrastructure projects, and for other farming and agricultural real estate related purposes. As of the date of this Annual Report on Form 10-K, we have made loans to nine distinct borrowers with original principal amounts totaling $24.9 million. These loans consist of: 12 loan agreements which were originally secured by senior first-lien mortgage loans secured against farmland; three loan agreements which were originally secured by working capital assets of the borrower; and one loan agreement which was originally secured by equipment of the borrower. The remaining loan balances are secured exclusively by senior first-lien mortgages, with $4.8 million outstanding at December 31, 2022 (representing less than 1% of our total assets as of December 31, 2022), and we intend to make similar loans under the FPI Loan Program in the future. Payments on such loans depend on the profitable operation or management of the farmland or farmland-related property securing the loan or the maintenance of any equipment, or other assets securing the loan. The success of the farmland or farm-related property may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower's ability to repay the loan may be impaired. If a borrower defaults under a loan for which we are the lender, we may attempt to foreclose on the collateral securing the loan, including by acquiring title to the subject property, crops, or equipment, to protect our investment. In response, the defaulting borrower may contest our enforcement of foreclosure or other available remedies, seek bankruptcy protection against our exercise of enforcement or other available remedies, or bring claims against us for lender liability. If a defaulting borrower seeks bankruptcy protection, the automatic stay provisions of the U.S. Bankruptcy Code would preclude us from enforcing foreclosure or other available remedies against the borrower unless relief is first obtained from the court with jurisdiction over the bankruptcy case. In addition, we may be subject to intercreditor agreements that delay, impact, govern or limit our ability to foreclose on a lien securing a loan or otherwise delay or limit our pursuit of our rights and remedies. Any such delay or limit on our ability to pursue our rights or remedies could adversely affect our business, results of operations and ability to make distributions to our stockholders. In the event of a foreclosure, we may assume direct ownership of the underlying farm. Even if we successfully foreclose on the collateral securing our mortgage loans, foreclosure-related costs, high loan-to-value ratios or
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declines in property values could prevent us from realizing the full amount of our mortgage loans, and we could be required to record a valuation allowance for such losses.
Liability for uninsured or underinsured losses could materially and adversely affect our financial condition and cash flow.
Our properties may be damaged by adverse weather conditions and natural disasters, such as earthquakes, floods and tornadoes. Our insurance may not be adequate to cover all damages or losses from these events, or we may view it as not economically prudent to purchase insurance for certain types of losses. Should an uninsured loss occur, we could lose our capital investment or anticipated profits and cash flows from one or more properties. If any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss, which could have an adverse effect on our cash flow.
We are currentlyhave previously been subject to, and may in the future be subject to, litigation or threatened litigation, which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.
We are currentlyhave previously been subject to, and may be subject in the future, to litigation or threatened litigation, including claims relating to the actions of our tenants, claims brought by shareholders,stockholders, and otherwise in the ordinary course of business. In particular, we are subject to the risk of complaints by our tenants involving premises liability claims and alleged violations of landlord-tenant laws, which may give rise to litigation or governmental investigations, as well as claims and litigation relating to real estate rights or uses of our properties. We are also subject to shareholder litigation and subject to a risk of additional shareholder litigation in the future. Some of the pending and potential future claims against the company may result in significant defense costs and potentially significant judgments against us, some of which are not, may not be, or cannot be, insured against. Additionally, whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its successful resolution (through litigation, settlement or otherwise), which would detract from our management's ability to focus on our business. Any such resolution could involve the payment ofpay damages or expenses, by us, which may be significant, or involve our agreement with terms that restrict the operation of our business. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of pending claims against the Company or of those claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage and could expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors, which could adversely impact our results of operations, cash flows and our ability to pay distributions on, and the value of, our common and preferred stock. For more information about our resolved and ongoing legal proceedings see Note 8 to our Consolidated Financial Statements included in Part IV, Item 3, Legal Proceedings, included elsewhere in8 of this Annual Report on Form 10-K.
Approximately 70% of our portfolio is comprised of properties used to grow primary crops such as corn, soybeans, wheat, rice and cotton, which subjects us to risks associated with primary row crops.
By value, approximately 70% of our portfolio is used for primary crops, such ascorn, soybeans, wheat, rice and cotton. As a result, any development or situation that adversely affects the value of properties generally or the prices of corn, soybeans, wheat, rice or cotton could have a more significant adverse impact on us than if our portfolio had less exposure to primary crops, which could materially and adversely impact our financial condition, results of operations and ability to make distributions to our stockholders.
Investments in farmland used for permanent/specialty crops have a different risk profile than farmland used for annual row crops.
By value, approximately 30% of our portfolio is used for permanent crops, and, in the future, we may add to our investments in farmland used for permanent crops, as opposed to annual row crops. Permanent crops have plant structures (such as trees, vines or bushes) that produce yearly crops without being replanted. Examples include blueberries, oranges, apples, almonds and grapes. Permanent crops require more time and capital to plant and bear fruit and are more expensive to replace. If a farmer loses a permanent/specialty crop to drought, flooding, fire or disease, there generally would be significant time and capital needed to return the land to production because a tree or vine may take years to grow before bearing fruit.
Permanent crop plantings also reduce a farmer’s ability to adapt to changing market conditions by changing crops. If demand for one type of permanent crop decreases, the permanent crop farmer cannot easily convert the farm to another type of crop because permanent crop farmland is dedicated to one crop during the lifespan of the trees or vines and therefore cannot easily be rotated to adapt to changing environmental or market conditions.
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Our failure to continue to identify and consummate suitable acquisitions would significantly impede our growth and our ability to further diversify our portfolio by geography, crop type and tenant, which could materially and adversely affect our results of operations and cash available for distribution to our stockholders.
Our ability to expand through acquisitions is important to our business strategy and requires that we identify and consummate suitable acquisition or investment opportunities that meet our investment criteria and are compatible with our growth strategy. We compete for the acquisition of farmland and properties related to farming with many other entities engaged in agricultural and real estate investment activities, including individual and family operators of farming businesses, corporate agriculture companies, financial institutions, institutional pension funds, public REITS, other real estate companies, private equity funds and other private real estate investors. These competitors may prevent us from acquiring desirable properties or may cause an increase in the price we must pay for such properties. Our competitors may adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties, our profitability may decrease, and you may experience a lower return on your investment. Our failure to identify and consummate suitable acquisitions would significantly impede our growth, which would adversely affect our results of operations and cash available for distribution to our stockholders.
Failure to succeed in new markets may have adverse consequences.
We intend to continue to acquire properties across the U.S. and may from time to time evaluate potential international acquisitions. When we acquire properties located in new geographic areas in the U.S. or internationally, or properties primarily devoted to a crop or industry with which we are less familiar (such as certain specialty crops, energy production, dairy farms or hog farms), we may face risks associated with a lack of market knowledge or understanding of the local market, including the availability and identity of quality tenants, forging new business relationships in the area, developing an understanding of a crop or industry unfamiliar to us, and unfamiliarity with local or crop-specific government requirements and procedures. Furthermore, the negotiation of a potential expansion into new markets or industries may divert management time and other resources. As a result, we may have difficulties executing our business strategy in these new markets, which could have a negative impact on our results of operations and ability to make distributions to our stockholders.
We do not intend to continuously monitor and evaluate tenant credit quality and our financial performance may be subject to risks associated with our tenants' financial condition and liquidity position.
Certain of our leases do not require the full payment of rent in cash in advance of the planting season, which subjects us to credit risk exposure to our farm-operator tenants and the risks associated with farming operations, such as weather, commodity price fluctuations and other factors. We also are exposed to these risks with respect to leases for which the rent is based on a percentage of a tenant's farming revenues and leases with terms greater than one year.Because we do not intend to monitor and evaluate the credit risk exposure related to farm-operator tenants on an ongoing basis, we are subject to the risk that our tenants, particularly those that may depend on debt and leverage to finance their operations, could be susceptible to bankruptcy in the event that their cash flows are insufficient to satisfy their financial obligations, including meeting their obligations to us under their leases. As a result, we may not become aware of a tenant's financial distress until the tenant fails to make payments to us when due, which may significantly reduce the amount of time we have to evict the tenant and re-lease the farmland to a new tenant before the start of the spring planting season, and in the event of a tenant bankruptcy we may not be able to terminate the lease. If we are unable to re-lease the farmland on a timely basis, it could have a material adverse effect on our revenues.
Our short-term leases, albeit an industry standard, make us more susceptible to any decreases in prevailing market rental rates than would be the case if we entered into longer-term leases, which could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
Our leases with tenants engaged in farming operations have terms customary in the farming industry, ranging mostly from two to three years for row crops and one to seven years for permanent crops, with some permanent crop leases exceeding twenty years. We expect that most of the leases we enter into in the future will have two to seven-year terms.
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As a result, we will be required to frequently re-lease our properties upon the expiration of our leases, which will make us more susceptible to declines in market rental rates than we would be if we were to enter into longer term leases. As a result, any decreases in the prevailing market rental rates in the geographic areas in which we own properties could have a material adverse effect on our results of operations and ability to make distributions to our stockholders.
We may be unable to collect balances due on our leases from any tenants in financial distress or bankruptcy, which could materially and adversely affect our financial condition, results of operations and cash flow.
We are subject to tenant credit risk. Our tenants, particularly those that may depend on debt and leverage, could be susceptible to defaults under their leases or bankruptcy in the event that their cash flows are insufficient to satisfy their financial obligations.Certain of our tenants have defaulted on their lease payments, and we have been forced to pursue alternative arrangements with those tenants in order to recover amounts due under the leases. In the future, we may be forced to enter into similar alternative arrangements or pursue litigation in order to collect payments from tenants who are unable make their lease payments as they come due. We can provide no assurances that we will be able to collect the full amount due under a particular leaseincur significant unrecoverable costs if we are forced pursue alternative payment arrangements or litigation with any of our tenants.
If a bankrupt tenant rejects a lease with us, any claim we might have for breach of the lease, excluding a claim against collateral securing the lease, would be treated as a general unsecured claim. In the event of a tenant's default under its lease or its rejection of the lease in bankruptcy proceedings, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms. As a result, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.
We depend on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability to, among other things, acquire additional properties, meet our capital and operating needs or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
In order to maintain our qualification as a REIT, we are required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including acquisition opportunities and principal and interest payments on any outstanding debt, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms, in the time period we desire, or at all. Any debt we incur will increase our leverage, expose us to the risk of default and may impose operating restrictions on us, and any additional equity we raise (including the issuance of Common or preferred units) could be dilutive to existing stockholders. Our access to third-party sources of capital depends, in part, on:
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If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.
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Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
The real estate investments made, and to be made, by us may be difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our portfolio in response to liquidity needs, changing economic, financial and investment conditions may be limited or we may have to sell properties at a loss. In addition, we seek to opportunistically dispose of properties when we are able to do so at an a price we consider attractive and/or recognize a gain on sale. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We have used dispositions of assets in the past in order to meet our liquidity requirements. If we are required to dispose of additional assets for liquidity purposes, we may be unable to realize our investment objectives by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. Opportunities to dispose of assets at a gain may not be available to us, which would reduce our cash on hand for stock repurchases, distributions to stockholders, or for any other purpose. In particular, weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located, in each case may limit our ability to dispose of a property.
In addition, the Code imposes restrictions on a REIT's ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interests. Moreover, if we acquire properties from C corporations (i.e., corporations generally subject to full corporate-level tax) in certain non-taxable transactions, as was the case with our acquisition of the Hudye Farm in 2014, built-in gain recognized on the non-taxable disposition of such properties within 5 years of our acquisition will be subject to tax at the highest applicable U.S. federal corporate income tax rate. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms.
Some state laws prohibit or restrict the ownership of agricultural land by business entities, which could impede the growth of our portfolio and our ability to diversify geographically.
Certain states, including Iowa, North Dakota, South Dakota, Minnesota, Oklahoma, Wisconsin, Missouri and Kansas, in which a substantial amount of primary crop farmland is located, have laws that prohibit or restrict to varying degrees the ownership of agricultural land by corporations or business entities like us. As of December 31, 2019, we owned 1,959 acres of farmland in Kansas and 1,690 in South Dakota, and our ownership of those farms may be challenged under Kansas or South Dakota law, in which case we may be required to sell those farms at an unfavorable time and on unfavorable terms. Additional states may, in the future, pass similar or more restrictive laws, and we may not be legally permitted, or it may become overly burdensome or expensive, to acquire properties in these states, which could impede the growth of our portfolio and our ability to diversify geographically in states that might otherwise have attractive investment opportunities.
Our farms are subject to adverse weather conditions, seasonal variability, crop disease and other contaminants, which may affect our tenants' ability to pay rent and thereby have a material adverse effect on our results of operations, financial condition, and our ability to make distributions to stockholders.
Crops are vulnerable to adverse weather conditions, including windstorms, tornados, floods, drought and temperature extremes, which are common but difficult to predict. Unfavorable growing conditions can reduce both crop yield and quality. Seasonal factors, including supply and consumer demand, may also have an effect on the value of crops grown by our tenants. In extreme cases, entire harvests may be lost in some geographic areas.
In addition, crops are vulnerable to disease and pests. Damages to tenants' crops may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions. The costs to control these infestations vary depending on the severity of the damage and the extent of the plantings affected. These infestations can increase the costs and decrease the revenues of our tenants. Tenants may also incur losses from product recalls, fines or litigation due to other contaminants that may cause food borne illness. It is
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difficult to predict the occurrence or severity of such product recalls, fines or litigation as well as their impact upon our tenants.
We are particularly susceptible to adverse weather conditions (such as windstorms, tornados, floods, drought, hail and temperature extremes), transportation conditions (including navigation of the Mississippi River), crop disease, pests and other adverse growing conditions in California, Illinois, North Carolina, Colorado and Arkansas, which generate a significant portion of our revenues.
While many of our leases are on a fixed-rent basis that does not change based on the success of the farming operations, we also utilize variable-rent leases pursuant to which the amount of the rent depends on crop yields and prices in regions where such arrangements are prevalent. Adverse weather conditions, seasonal variability, crop disease, pests and contaminants could adversely affect the value of production on properties. This could impact our variable rent proceeds and our tenants' ability to continue to meet their obligations to us. This could have a material adverse effect on the value of our properties, our results of operations, financial condition, and our ability to make distributions to our stockholders.
For example, our tenants’ profitability and, to some degree, our variable rent revenue were negatively impacted by extreme weather events in 2018 and 2019. Specifically, hurricane Michael affected our pecan farms in Alabama and Georgia, and excess rainfall affected several row crop farms in the Corn Belt, Delta and South, and Southeast regions. Furthermore, a heat wave affected an avocado farm in California, with a negative impact on 2019 revenue.
The market prices of the crops that our tenants may produce on our agricultural properties have exhibited periods of volatility, which may affect our tenants' ability to pay rent and thereby have a material adverse effect on our results of operations and our ability to make distributions to stockholders.
The value of a crop is affected by many factors that can differ on a yearly basis. The unpredictability of weather and crop yields in the major crop production regions worldwide creates a significant risk of price volatility, which may either increase or decrease the value of the crops that our tenants produce each year. Other material factors adding to the volatility of crop prices are changes in government regulations and policy, fluctuations in global prosperity, fluctuations in foreign trade and export markets, and eruptions of military conflicts or civil unrest. Although rental payments under the majority of our leases typically are not based on the quality or profitability of our tenants' harvests, any of these factors could adversely affect our tenants' ability to meet their obligations to us and our ability to lease or re-lease properties on favorable terms, or at all, which could have a material adverse effect on the value of our properties, our results of operations and our ability to make distributions to our stockholders.
The impacts of trade disputes could adversely affect the profitability of our tenants’ farming operations, which could have a material adverse effect on our results of operations, financial condition, ability to make distributions to our stockholders and the value of our properties.
Recent trade disputes between the United States and its primary agricultural trade partners have negatively impacted the market prices of certain crops that our tenants grow on our properties. For example, China announced a 25% tariff on agricultural products including soybeans, corn, wheat and other agricultural products, which significantly reduced U.S. agricultural exports to China. Prior to the trade tensions, the U.S. exported 50% of its soybean crop, and 58% of those exports were to China, worth approximately U.S. $14 billion. In light of the trade disputes with the United States, China has been sourcing its agricultural products from other markets. The recently announced “Phase 1” trade deal with China may not lead to increased agricultural exports, and U.S. agricultural exports to China may never reach prior levels. A reduction in crop prices could adversely affect the profitability of our tenants and negatively impact their ability to make rental payments as they come due. If we are unable to recover the rental payments, our results of operations, financial condition and ability to make distributions to our stockholders could be materially and adversely effected. If we are required to remove a tenant, we may not be able to release the property at current rental rates or at all. Furthermore, prolonged trade disputes that lead to a continuation of depressed crop prices could materially and adversely affect the underlying value of our properties.
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Adverse changes in government policies related to farming could affect the prices of crops and the profitability of farming operations, which could materially and adversely affect the value of our properties and our results of operations.
There are a number of government programs that directly or indirectly affect the profitability of farm operators. These include marketing, export, renewable fuel and insurance policies and programs. Significant changes to or the elimination of programs and policies could adversely affect crop prices and the profitability of farming operations, which could materially and adversely impact the value of our farms and our ability to lease them on favorable terms, or at all, which would have a material adverse effect on our results of operations.
If the U.S. Federal Reserve or other central banks embark on a substantial tightening of monetary policy in the future that causes real interest rates to rise substantially, it may cause land prices to decline if the rise in interest rates is not accompanied by rises in the general levels of inflation.
A substantial tightening of monetary policy by the U.S. Federal Reserve or other central banks would increase credit costs (through the resulting increase in interest rates) and decrease credit availability. This could hurt farm operators because higher real interest rates (which is defined as nominal interest rates minus the inflation rate) make it more difficult for farm operators to qualify for loans and increase their borrowing costs. Higher interest rates also tend to decrease U.S. and world economic growth, thus decreasing the demand for agricultural commodities.
All of these consequences could reduce farm income. If increases in real interest rates are not accompanied by higher levels of farm income and rents, this could lead to declines in agricultural land values and a reduction in our profitability, either of which would have a material adverse effect on our business or results of operations, financial condition, and ability to make distributions to our stockholders.
The loss of key management personnel, particularly Paul A. Pittman and Luca Fabbri, could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.
Our future success depends to a significant extent on the continued service and coordination of our senior management team, which is comprised of Paul A. Pittman, our Executive Chairman and Chief Executive Officer and Luca Fabbri, our Chief Financial Officer. We can provide no assurances that any of our key personnel will continue their employment with us. The loss of services of Messrs. Pittman and Fabbri could have a material adverse effect on our ability to implement our business strategy and to achieve our investment objectives.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.
In the future, we may co-invest with third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for developing properties and managing the affairs of a property, partnership, joint venture or other entity. With respect to any such arrangement or any similar arrangement that we may enter into in the future, we may not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present where a third party is not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives, and they may have competing interests in our markets that could create conflicts of interest. Such investments may also have the potential risk of impasses on decisions, such as a sale or financing, because neither we nor the partner(s) or co-venturer(s) would have full control over the partnership or joint venture. In addition, a sale or transfer by us to a third party of our interests in the joint venture may be subject to consent rights or rights of first refusal, in favor of our joint venture partners, which would in each case restrict our ability to dispose of our interest in the joint venture. Where we are a limited partner or non-managing member in any partnership or limited liability company, if such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers
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might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Our joint ventures may be subject to debt and, during periods of volatile credit markets, the refinancing of such debt may require equity capital calls.
We will continue to incur costs as a result of being a public company.
As a public company, we expect to continue to incur significant legal, accounting, insurance, and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect compliance with these public reporting requirements and associated rules and regulations to increase expenses, particularly now that we are no longer an emerging growth company, although we are currently unable to estimate these costs with any degree of certainty.
We are required to have an independent auditor assess the effectiveness of our internal control over financial reporting.
As of December 31, 2019, we are no longer an emerging growth company under the Jumpstart Our Business Startups Act (“JOBS Act”), and management is required to have an independent auditor assess the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. We cannot give any assurances that material weaknesses will not be identified in the futuresuccessful in connection with the litigation we have filed against Sabrepoint.
As described in further detail in Note 8 to our compliance with the provisions of Section 404 of the Sarbanes-Oxley Act. In connection with our audit for the year ended December 31, 2019, our independent registered public accounting firm identified and communicated a material weakness related to the failure of management to timely comply with compensating controls with respect to the separation of dutiesConsolidated Financial Statements included in our accounting IT systems. The material weakness was primarily caused by the Company’s limited staffing. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. We cannot give any assurances that the material weakness identified by our independent registered public accounting firm will be remediated on a timely basis or at all or that additional material weaknesses will not be identified in the future in connection with our compliance with the provisions of Section 404 of the Sarbanes-Oxley Act. The existence of the material weakness described above has precluded management and our independent auditors from being able to reach a conclusion that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and expense to remediate this material weakness and any other material weaknesses that may be discovered in the future and may not be able to remediate such material weaknesses in a timely manner. The existence of any future material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations, and cause investors to lose confidence in our reported financial information, any of which could lead to a decline in the per share trading price of our common stock.
Under the FPI Loan Program, we provide loans to third-party farmers, which exposes us to risks associated with being a lender, including the risk that borrowers default on their obligations to us, which could adversely affect our results of operations and financial condition.
Under the FPI Loan Program, we make loans to third-party farmers (both tenant and non-tenant) to provide financing for working capital requirements and operational farming activities, farming infrastructure projects, and for other farming and agricultural real estate related purposes. As of the datePart IV, Item 8 of this Annual Report on Form 10-K, we have made seven senior secured first-lien mortgage loans securedon July 2, 2021, the Company filed a complaint against farmland or farm related propertiesFirst Sabrepoint Capital Management, LP, Sabrepoint Capital Partners, LP, Sabrepoint Capital Participation, LP, George Baxter, and one loan secured against cropDonald Marchiony (collectively, “Sabrepoint”) seeking relief for Sabrepoint’s alleged role in a “short and distort scheme” to farmers totaling $19.1 million, with $4.8 million outstanding at December 31, 2019 (representing less than 0.01% of our total assets as of December 31, 2019), and we intend to make similar loans under the FPI Loan Programprofit from an artificial decline in the future. PaymentsCompany’s stock price stemming from an article posted on such loans dependSeeking Alpha, which contained numerous false statements about the Company. On December 17, 2021, the Company's claims against Sabrepoint were dismissed by the court. We are pursuing an appeal of that order. The parties have briefed the narrowed appeal before the Texas Court of Appeals and oral argument was conducted on the profitable operation or management of the farmland or farmland-related property securing the loan or the maintenance of any equipment securing the loan. The success of the farmland or farm-related propertyNovember 30, 2022. We may not be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields, declinessuccessful in market prices for agricultural products (both domesticallythis litigation, in which case we would have incurred significant costs and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower's ability to repay the loan may be impaired. If a borrower defaults under a loan for whichexpenses. Even if we are
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successful, there can be no assurance that we will be able to recover damages. To the lender,extent that any such adverse effects exceed any benefits we may attempt to foreclose on the collateral securing the loan, including by acquiring title to the subject property, crops, or equipment, to protectrealize from pursuing this litigation, our investment. In response, the defaulting borrower may contest our enforcement of foreclosure or other available remedies, seek bankruptcy protection against our exercise of enforcement or other available remedies, or bring claims against us for lender liability. If a defaulting borrower seeks bankruptcy protection, the automatic stay provisions of the U.S. Bankruptcy Code would preclude us from enforcing foreclosure or other available remedies against the borrower unless relief is first obtained from the court with jurisdiction over the bankruptcy case. In addition, we may be subject to intercreditor agreements that delay, impact, govern or limit our ability to foreclose on a lien securing a loan or otherwise delay or limit our pursuit of our rightsbusiness, prospects, financial condition and remedies. Any such delay or limit on our ability to pursue our rights or remedies could adversely affect our business, results of operations and ability to make distributions to our stockholders. In the eventmay suffer materially.
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Liability for uninsured or underinsured losses could materially and adversely affect our financial condition and cash flow.
Our properties may be damaged by adverse weather conditions and natural disasters, such as earthquakes, floods and tornados. Our insurance may not be adequate to cover all damages or losses from these events, or we may view it as not economically prudent to purchase insurance for certain types of losses. Should an uninsured loss occur, we could lose our capital investment or anticipated profits and cash flows from one or more properties. If any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss, which could have an adverse effect on our cash flow.
A cybersecurity incident and other technology disruptions could result in a violation of law or negatively impact our reputation and relationships with our tenants, any of which could have a material adverse effect on our results of operations and our financial condition.
Information and security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. We use computers in substantially all aspects of our business operations, and we also use mobile devices and other online activities to connect with our employees and tenants. Such uses give rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. We have in the past experienced cyberattacks on our computers and computer networks, and, while none to date have been material, we expect that additional cyberattacks will occur in the future. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including tenants’, suppliers’ and employees’ personally identifiable information and financial and strategic information about us.
If we fail to assess and identify cybersecurity risks associated with our operations, we may become increasingly vulnerable to such risks. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we and our suppliers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us and our suppliers to entirely mitigate this risk. Further, in the future we may be required to expend additional resources to continue to enhance information security measures and/or to investigate and remediate any information security vulnerabilities. We can provide no assurances that the measures we have implemented to prevent security breaches and cyber incidents will be effective in the event of a cyber-attack.
The theft, destruction, loss, misappropriation or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third-parties on which we rely, could result in business disruption, negative publicity, violation of privacy laws, loss of tenants, potential liability and competitive disadvantage, any of which could result in a material adverse effect on financial condition or results of operations.
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Potential liability for environmental matters could materially and adversely affect our results of operations and financial condition.
We are subject to the risk of liabilities under federal, state and local environmental laws applicable to agricultural properties, including those related to wetlands, groundwater and water runoff. Some of these laws could subject us to:
| responsibility and liability for the cost of removal or remediation of hazardous substances released on our properties, generally without regard to our knowledge of or responsibility for the presence of the contaminants; |
| liability for the costs of investigation, removal or remediation of hazardous substances or chemical releases at disposal facilities for persons who arrange for the disposal or treatment of these substances; and |
| potential liability for claims by third parties for damages resulting from environmental contaminants. |
Environmental site assessments were not conducted on all the farms in our portfolio and we do not expect to conduct environment site assessments on all farms we acquire in the future. Our costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or lease the property or to borrow using the property as collateral. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Additionally, we could become subject to new, stricter environmental regulations, which could diminish the utility of our properties and have a material adverse impact on our results of operations and financial condition.
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We may be required to permit the owners of certain third-party access rights on our properties to enter and occupy parts of the properties, including owners of mineral rights and power generation and transportation infrastructure, which could materially and adversely impact the rental value of our properties.
Although we own the surface rights to our farms and expect to own the surface rights to properties that we acquire in the future, other persons or entities may own third-party access rights on our properties based upon their ownership of certain minerals, power generation and transportation infrastructure or similar property rights. Some of these third-party access rights, such as those related to oil, water or natural gas may be located under the surfaces of these properties, while others, particularly those third-party access rights related to power generation and transportation infrastructure such as wind turbines or oil pipelines, may be located on or above the surfaces of these properties. For example, in connection with our acquisition of a group of farms in Colorado and Kansas, we granted the seller retained 50% of the mineral rights related to the farm. Currently there is no mineral development or significant power generation and transportation infrastructure on the farms in our portfolio other than on properties for which we own the rights, but we can provide no assurances that third parties will not assert claims for mineral rights, third-party access rights related to power generation and transportation infrastructure and other related property rights on the farms in our portfolio or that farmland that we acquire in the future will not be subject to these third-party access rights. To the extent that third parties have third-party rights on farmland that we currently own or acquire in the future, we expect that we would be required to permit third parties to enter our properties for the purpose of such activities as drilling and operating oil or gas wells, operating and maintaining oil pipelines and operating and maintaining wind turbines on the premises. We may also be required to set aside a reasonable portion of the surface area of our properties to accommodate these operations. The devotion of a portion of our properties to these operations would reduce the amount of the surface available for farming or farm-related uses. Such activities might also disrupt the productivity of the farmland or property related to farming or increase the risk of environmental liabilities, any of which could adversely impact the rents that we receive from leasing these properties.
Increases in mortgage rates or unavailability of mortgage debt may make it difficult for us to finance or refinance our debt, which could have a material adverse effect on our financial condition, results of operations, growth prospects and our ability to make distributions to stockholders.
If mortgage debt is unavailable to us at reasonable rates or at all, we may not be able to finance the purchase of additional properties or refinance existing debt when it becomes due. If interest rates are higher when we refinance our
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debt, our income and cash flow could be reduced, which would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Changes to the base rate on our floating rate indebtedness could increase our borrowing costs.
As of December 31, 2019, $181.22022, $59.5 million of our outstanding indebtedness bears interest at floating rates based on the London interbank offered rate (“LIBOR”) and has maturity dates beyond December 31, 2021. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it will stop compelling banks to submit rates for the calculation2022. The use of LIBOR after 2021. Itwas phased out at the end of 2021, although the phase out of U.S. dollar LIBOR has been delayed until mid-2023. Currently, the Company is not possiblein process of converting its remaining LIBOR-based indebtedness to predicta Secured Overnight Financing Rate (“SOFR”) based instrument. The impact of the effect of these changes, other reforms or the establishment of alternative reference rates. The discontinuation or modification oftransition from LIBOR on us could result in interest rate increases on our debt, which could adversely affect our cash flow, operating results and ability to make distributions to our stockholders at expected levels or at all.
Risks Related to Our Organizational Structure
We may beare subject to unknown or contingent liabilities related to acquired propertiesrisks associated with public health crises, such as pandemics and properties that weepidemics, including the COVID-19 pandemic, which may acquire in the future, which could have a material adverse effect on us.our business. The nature and extent of future impacts are highly uncertain and unpredictable.
We are subject to risks associated with public health crises, such as pandemics and epidemics, including the COVID-19 pandemic. While many countries around the world have removed or reduced the restrictions taken in response to the COVID-19 pandemic, the emergence of new variants of COVID-19 virus may result in new governmental lockdowns, quarantine requirements or other restrictions to slow the spread of the virus. In addition, any such measures could also impact the global economy more broadly, for example by leading to further economic slowdowns. While COVID-19 case volumes have decreased in the U.S and certain other countries, the global outlook remains uncertain as case counts fluctuate and vaccination and booster rates remain relatively low in many parts of the world. In particular, as COVID-19 cases increase in China, demand for U.S. agricultural products in that market may be reduced, which could reduce our tenants’ profitability.
PropertiesOur rental revenue and operating results depend significantly on the ability of our tenants to meet their rent and other obligations to us. While in general our tenants’ businesses were not materially affected, certain sectors of the agricultural industry saw a decreased demand for their products as a result of the economic disruptions caused by COVID-19. Such decreases in demands could further exacerbate, and demand may never recover to its pre-pandemic levels. If the impacts of the pandemic or a future public health crisis continue for an extended period of time, we expect that we have acquired, and properties that wecertain tenants may acquire
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experience greater financial distress, which could result in the future, may be subject to unknownlate payments, requests for rental relief, business closures, rent concessions or contingent liabilities for whichother accommodations, as applicable. In some cases, we may have no recourse, or only limited recourse, against the sellers. In general, the representationsto restructure tenants’ long-term rent obligations and warranties provided under the transaction agreements related to the purchase of properties that we acquire may not survivebe able to do so on terms that are as favorable to us as those currently in place.
The scope and duration of any future public health crisis, including the completionpotential emergence of new variants of the transactions. Furthermore, indemnification underCOVID-19 virus, the pace at which government restrictions are imposed and lifted, the scope of additional actions taken to mitigate the spread of disease, global vaccination and booster rates, the speed and extent to which global markets and utilization rates for our products fully recover from the disruptions caused by such agreements maya public health crisis, and the impact of these factors on our business, financial condition and results of operations, will depend on future developments that are highly uncertain and cannot be limited and subject to various materiality thresholds, a significant deductiblepredicted with confidence.
To the extent the COVID-19 pandemic or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these properties may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may materially andpublic health crises adversely affect us.our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described herein.
Risks Related to Our Organizational Structure
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of units in our operating partnership,Operating Partnership, which may impede business decisions that could benefit our stockholders.
Although holders of our Common units do not have voting rights or the power to direct the Company’s affairs, there could be potential conflicts, conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnershipOperating Partnership or any partner thereof.
Our directors and officers have duties to our company under Maryland law in connection with their management of our company.Company. At the same time, our wholly owned subsidiary, Farmland Partners OP GP, LLC, as the general partner of our operating partnership,Operating Partnership, has fiduciary duties and obligations to our operating partnershipOperating Partnership and its limited partners under Delaware law and the partnership agreement in connection with the management of our operating partnership.Operating Partnership. The general partner's fiduciary duties and obligations as the general partner of our operating partnershipOperating Partnership may come into conflict with the duties of our directors and officers to our company.Company. These conflicts of interest could lead to decisions that are not in the best interests of the Company and its stockholders.
Unless otherwise provided for in a partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The partnership agreement provides that, in the event of a conflict between the interests of the limited partners of our operating partnership,Operating Partnership, on the one hand, and the separate interests of our stockholders, on the other hand, the general partner, in its capacity as the general partner of our operating partnership,Operating Partnership, shall act in the interests of our stockholders and is under no obligation to consider the separate interests of the limited partners of our operating partnershipOperating Partnership in deciding whether to cause our operating partnershipOperating Partnership to take or not to take any actions. The partnership agreement further provides that any decisions or actions not taken by the general partner in accordance with the partnership agreement will not violate any duties, including the duty of loyalty, that the general partner, in its capacity as the general partner of our operating partnership,Operating Partnership, owes to our operating partnershipOperating Partnership and its partners.
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Additionally, the partnership agreement provides that the general partner will not be liable to our operating partnershipOperating Partnership or any partner for monetary damages for losses sustained, liabilities incurred or benefits not derived by our operating partnershipOperating Partnership or any limited partner unless the general partner acted in bad faith and the act or omission was material to the matter giving rise to the loss, liability or benefit not derived. Our operating partnershipOperating Partnership must indemnify the general partner, us, our directors and officers, officers of our operating partnershipOperating Partnership and others designated by the general partner from and against any and all claims that relate to the operations of our operating partnership,Operating Partnership, unless (1) an act or omission of the indemnified person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (2) the indemnified person actually received an improper personal benefit in money, property or services or (3) in the case of a criminal proceeding, the indemnified person had
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reasonable cause to believe that the act or omission was unlawful. Our operating partnershipOperating Partnership must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the person's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. Our operating partnershipOperating Partnership will not indemnify or advance funds to any person with respect to any action initiated by the person seeking indemnification without our approval (except for any proceeding brought to enforce such person's right to indemnification under the partnership agreement) or if the person is found to be liable to our operating partnershipOperating Partnership on any portion of any claim in the action. No reported decision of a Delaware appellate court has interpreted provisions similar to the provisions of the partnership agreement that modify and reduce our fiduciary duties or obligations as the sole member of the general partner or reduce or eliminate our liability for money damages to our operating partnershipOperating Partnership and its partners, and we have not obtained an opinion of counsel as to the enforceability of the provisions set forth in the partnership agreement that purport to modify or reduce the fiduciary duties that would be in effect were it not for the partnership agreement.
Our charter contains certain provisions restricting the ownership and transfer of our stock that may delay, defer or prevent a change of control transaction that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.
Our charter contains certain ownership limits with respect to our stock. Our charter, among other restrictions, prohibits the beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our stock, excluding any shares that are not treated as outstanding for U.S. federal income tax purposes. Our Board of Directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from this ownership limit if certain conditions are satisfied. This ownership limit as well as other restrictions on ownership and transfer of our stock in our charter may:
| discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; and |
| result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of certain of the benefits of owning the additional shares. |
We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval, which may delay, defer or prevent a transaction that our stockholders believe to be in their best interests.
Our Board of Directors, without stockholder approval, has the power under our charter to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue. In addition, under our charter, our Board of Directors, without stockholder approval, has the power to authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the preference, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms or conditions of redemption for such newly classified or reclassified shares. As a result, we may issue series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common stock. Although our Board of Directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.
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Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under certain circumstances that otherwise
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could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
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By resolution of our Board of Directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our Board of Directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our Board of Directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Additionally, certain provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently employ. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our companyCompany or of delaying, deferring, or preventing a change in control of our companyCompany under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price. Our charter contains a provision whereby we elect to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our Board of Directors.
Our charter, our bylaws and Maryland law also contain other provisions, including the provisions of our charter on removal of directors and the advance notice provisions of our bylaws, that may delay, defer, or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Certain provisions in the partnership agreement may delay or prevent unsolicited acquisitions of us.
Provisions in the partnership agreement may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some of our stockholders might consider such proposals, if made, desirable. These provisions include, among others:
| redemption rights; |
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| a requirement that the general partner may not be removed as the general partner of our |
| transfer restrictions on Common units; |
| our ability, as general partner, in some cases, to amend the partnership agreement and to cause our |
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| the right of the limited partners to consent to direct or indirect transfers of the general partnership interest, including as a result of a merger or a sale of all or substantially all of our assets, in the event that such transfer requires approval by our common stockholders. |
Our Board of Directors may change our strategies, policies and procedures without stockholder approval.
Our investment, financing, leverage and distribution policies, and our policies with respect to all other activities, including growth, capitalization and operations, are determined exclusively by our Board of Directors, and may be amended or revised at any time by our Board of Directors without notice to or a vote of our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this Annual Report on Form 10-K. Further, our charter and bylaws do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our Board of Directors may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could materially adversely affect our financial condition, results of operations and cash flow.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event that we take certain actions which are not in our stockholders' best interests.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner that he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Under the MGCL, directors are presumed to have acted with this standard of care. As permitted by Maryland law, our charter eliminates the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
| actual receipt of an improper benefit or profit in money, property or services; or |
| active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated. |
Our charter and bylaws obligate us to indemnify each present and former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. We also have entered into indemnification agreements with our officers and directors granting them express indemnification rights. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter, bylaws and indemnification agreements or that might exist for other public companies.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our senior management and may prevent a change in control of our companyCompany that is in the best interests of our stockholders. Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of two-thirds of all the votes entitled to be cast generally in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make
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it more difficult to change our senior management by removing and replacing directors and may prevent a change in control of our companyCompany that is in the best interests of our stockholders.
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Our operating partnershipOperating Partnership may issue additional Common units or one or more classes of preferred units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnershipOperating Partnership and could have a dilutive effect on the amount of distributions made to us by our operating partnershipOperating Partnership and, therefore, the amount of distributions we can make to our stockholders.
As of the date of this Annual Report on Form 10-K,December 31, 2022, we owned approximately 94.0%97.8% of the outstanding Common units in our operating partnershipOperating Partnership (on a fully diluted basis). Since our initial public offering, we have issued a total of 8.0 million Common units and a total of 117,000 Series A preferred units as consideration in connection with our acquisition of properties, and we may issue additional Common units and Series A preferred units of one or more classes in connection with our acquisition of properties, as compensation or otherwise. Such issuances would reduce our ownership percentage in our operating partnershipOperating Partnership and could affect the amount of distributions made to us by our operating partnershipOperating Partnership and, therefore, the amount of distributions we can make to our stockholders. Our common stockholders do not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.Operating Partnership.
Certain aspects of our Series A preferred units and Series B Participating Preferred Stock may limit our ability to make distributions to our common stockholders.
The distribution ratesrate on our Series A preferred units and Series B Participating Preferred Stock areis fixed, and no distributions can be paid to our common stockholders unless we have paid all cumulative dividends on our Series A preferred units and Series B Participating Preferred Stock.units. The distribution preference of our Series A preferred units and Series B Participating Preferred Stock could materially and adversely affect our cash flow and ability to make distributions to our common stockholders.
In addition to the fixed payments on our Series A preferred units and Series B Participating Preferred Stock, holders of our Series B Participating Preferred Stock may receive a Farmland Value Appreciation (“FVA”) payment that represents the cumulative change from the 2018 estimated average value per acre of farmland in the 17 states in which we owned farmland as of June 30, 2018 weighted by the percentage of the total unaudited book value of our properties held in each of the 17 states as of June 30, 2019. The FVA payment may be realized by a holder of Series B Participating Preferred Stock only upon (i) the exercise of our optional redemption right or conversion right after September 30, 2021, (ii) any conversion or redemption in connection with a change in control or (iii) the liquidation, dissolution or winding up of the Company. Any of these events could occur during a time in which the FVA amount has substantially appreciated from its 2018 level, which may require a significant distribution from the Company to holders of Series B Participating Preferred Stock, and could materially and adversely affect our cash available to make distributions to our common stockholders. Further, in addition to the FVA amount if a redemption or liquidation occurs on or before September 30, 2021, we will be required to pay a premium amount that is calculated based on the FVA amount, which could further reduce our cash available to make distributions to our common stockholders.
U.S. Federal Income Tax Risks
Failure to maintain qualification as a REIT for U.S. federal income tax purposes would subject us to U.S. federal income tax on our taxable income at regular corporate rates, which would substantially reduce our ability to make distributions to our stockholders.
We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year ended December 31, 2014. To maintain qualification as a REIT, we must meet various requirements set forth in the Code concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions. The REIT qualification requirements are extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. We believe that our current organization and method of operation will enable us to continue to qualify as a REIT. However, at any time, new laws, interpretations or court decisions may change the U.S. federal tax laws relating to, or the U.S. federal income tax consequences of, qualification as a REIT. It is possible that future economic, market, legal, tax or other considerations may cause our Board
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of Directors to determine that it is not in our best interest to qualify as a REIT and to revoke our REIT election, which it may do without stockholder approval.
If we fail to qualify as a REIT for any taxable year, we will be subject to U.S. federal income tax (including, for periods prior to 2018, any applicable alternative minimum tax) on our taxable income at regular corporate rates. In addition, we generally would be disqualified from treatment as a REIT for the four taxable years following the year in which we lost our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution because of the additional tax liability. In addition, distributions would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would substantially reduce our ability to make distributions to our stockholders.
To qualify as a REIT and to avoid the payment of U.S. federal income and excise taxes, we may be forced to borrow funds, use proceeds from the issuance of securities, pay taxable dividends of our stock or debt securities or sell assets to make distributions, which may result in our distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally are required each year to distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. We will be subject to U.S. federal income tax on our undistributed taxable income and net
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capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on acquisitions of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities, pay taxable dividends of our stock or debt securities or sell assets in order to distribute enough of our taxable income to maintain our qualification as a REIT and to avoid the payment of U.S. federal income and excise taxes.
Future sales of properties may result in penalty taxes or may be made through TRSs, each of which would diminish the return to you.
It is possible that one or more sales of our properties may be "prohibited transactions"“prohibited transactions” under provisions of the Code. If we are deemed to have engaged in a "prohibited transaction"“prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all income that we derive from such sale would be subject to a 100% tax. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax. A principal requirement of the safe harbor is that the REIT must hold the applicable property for not less than two years prior to its sale for the production of rental income. It is entirely possible that a future sale of one or more of our properties will not fall within the prohibited transaction safe harbor.
If we acquire a property that we anticipate will not fall within the safe harbor from the 100% penalty tax upon disposition, we may acquire such property through a TRS in order to avoid the possibility that the sale of such property will be a prohibited transaction and subject to the 100% penalty tax. If we already own such a property directly or indirectly through an entity other than a TRS, we may contribute the property to a TRS. Though a sale of such property by a TRS likely would mitigate the risk of incurring a 100% penalty tax, the TRS itself would be subject to regular corporate income tax at the U.S. federal level, and potentially at the state and local levels, on the gain recognized on the sale of the property as well as any income earned while the property is operated by the TRS. Such tax would diminish the amount of proceeds from the sale of such property ultimately distributable to our stockholders. Our ability to use TRSs in the foregoing manner is subject to limitation. Among other things, the value of our securities in TRSs may not exceed 20% of the value of our assets and dividends from our TRSs, when aggregated with all other non-real estate income with respect to any one year, generally may not exceed 25% of our gross income with respect to such year. No assurances can be provided that we would be able to successfully avoid the 100% penalty tax through the use of TRSs.
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In addition, if we acquire any asset from a C corporation (i.e., a corporation generally subject to full corporate-level tax) in a merger or other transaction in which we acquire a basis in the asset determined by reference either to the C corporation'scorporation’s basis in the asset or to another asset, we will pay tax, at the highest U.S. federal corporate income tax rate, on any built-in gain recognized on a taxable disposition of the asset during the 5-year period after its acquisition. As a result of the manner in which we acquired the Hudye Farm in 2014, a subsequent taxable disposition by us of any such assets generally would be subject to the foregoing built-in gain rules.
In certain circumstances, we may be subject to U.S. federal and state income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even if we qualify as a REIT, we may be subject to U.S. federal income taxes or state taxes. As discussed above, net income from a "prohibited transaction"“prohibited transaction” will be subject to a 100% penalty tax and built-in gain recognized on the taxable disposition of assets acquired from C corporations in certain non-taxable transactions will be subject to tax at the highest applicable U.S. federal corporate income tax rate. To the extent we satisfy the distribution requirements applicable to REITs, but distribute less than 100% or our taxable income, we will be subject to U.S. federal income tax at regular corporate rates on our undistributed income. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain capital gains we earn from the sale or other disposition of our properties and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, our stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the companies through which we indirectly own our assets. Any U.S. federal or state taxes we pay will reduce our cash available for distribution to our stockholders.
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The ability of our Board of Directors to revoke or otherwise terminate our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income at regular corporate rates and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.
If our operating partnershipOperating Partnership were classified as a "publicly“publicly traded partnership"partnership” taxable as a corporation for U.S. federal income tax purposes, we would fail to qualify as a REIT and would suffer other adverse tax consequences.
We intend for our operating partnershipOperating Partnership to be treated as a "partnership"“partnership” for U.S. federal income tax purposes. If the IRS were to successfully assert our operating partnershipOperating Partnership was “publicly traded,” our operating partnershipOperating Partnership could be taxable as a corporation if less than 90% of its gross income consisted of certain qualifying passive income. In such event, we likely would fail to qualify as a REIT for U.S. federal income tax purposes, and the resulting corporate income tax burden would reduce the amount of distributions that our operating partnershipOperating Partnership could make to us. This would substantially reduce the cash available to pay distributions to our stockholders.
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or sell properties earlier than we wish.
To maintain our qualification as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to forego or liquidate otherwise attractive investments in order to comply with the REIT tests. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
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You may be restricted from acquiring or transferring certain amounts of our common stockor ourSeries B Participating Preferred Stock.
Certain provisions of the Code and the stock ownership limits in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities. In order to maintain our qualification as a REIT, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year. To help insureensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.
Our charter, with certain exceptions, authorizes our Board of Directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our Board of Directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our Board of Directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of such ownership limit would result in our failing to qualify as a REIT.
Dividends paid by REITs generally do not qualify for the favorable tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to qualified dividend income paid to U.S. stockholders that are individuals, trusts and estates currently is 20%. Dividends paid by REITs generally are not eligible for such reduced tax rate. Instead, our ordinary dividends generally are taxed at the higher tax rates applicable to ordinary income, the current maximum rate of which is 37%. Although the favorable tax rates applicable to qualified dividend income do not adversely affect the taxation of REITs or dividends paid by REITs, such favorable tax rates could cause investors who are individuals,
36
trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock and Series B Participating Preferred Stock. stock. However, for taxable years prior to 2026, individual stockholders are generally allowed to deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations, which would reduce the maximum marginal effective federal income tax rate for individuals on the receipt of such ordinary dividends to 29.6%.
Changes to the U.S. federal income tax laws, including the enactment of certain tax reform measures, could have an adverse impact on our business and financial results.
In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. federal income tax laws applicable to investments in real estate and REITs, including the passage of the Tax Cuts and Jobs Act of 2017, the full impact of which may not become evident for some period of time.REITs. There can be no assurance that future changes to the U.S. federal income tax laws or regulatory changes will not be proposed or enacted that could impact our business and financial results. The REIT rules are regularly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain of such changes could have an adverse impact on our business and financial results.
We cannot predict whether, when or to what extent any new U.S. federal tax laws, regulations, interpretations or rulings will impact the real estate investment industry or REITs. Prospective investors are urged to consult their tax advisors regarding the effect of potential future changes to the federal tax laws on an investment in our shares.
30
Risks Related to the Market for Our Capital Stock
We may be unable to make distributions at expected levels, which could result in a decrease in the market price of our common stock.
We intend to continue to pay regular quarterly distributions to our stockholders. However, we significantly reduced the amount of distributions on our common stock beginning in the third quarter of 2018, and we may be required to reduce our distributions further in the future. All distributions will be made at the discretion of our Board of Directors and will be based upon, among other factors, our historical and projected results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations, capital expenditure and other expense obligations, debt covenants, contractual prohibitions or other limitations and applicable law and such other matters as our Board of Directors may deem relevant from time to time. If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such distributions, or reduce the amount of such distributions. To the extent we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. If cash available for distribution generated by our assets is less than our current estimate, or if such cash available for distribution decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market price of our common stock.
Continued increases in market interest rates may have an adverse effect on the market price of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution yield, which is our distribution rate as a percentage of the share price of our common stock, relative to market interest rates. If market interest rates continue to increase, prospective investors may desire a higher distribution yield on our common stock or Series B Participating Preferred Stock.may seek securities paying higher dividends or interest. The market price of our common stock is driven partly by the earnings that we derive from rental income with respect to our properties and our related distributions to stockholders, and also from the current market value of the properties themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our common stock and such effects could be significant.
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The market price and trading volume of our common stock and Series B Participating Preferred Stock may be highly volatile and low, respectively.
The stock markets, including the New York Stock Exchange (the “NYSE”), on which our common stock and our Series B Participating Preferred Stock is listed, historically have experienced significant price and volume fluctuations. As a result, the market price of our common stock and Series B Participating Preferred Stock is likely to be similarly volatile, and investors in our common stock and Series B Participating Preferred Stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The price of our common stock and Series B Participating Preferred Stock could be subject to wide fluctuations in response to a number of factors, including those listed in this "Risk Factors"“Risk Factors” section of this Annual Report on Form 10-K and others such as:
| actual or anticipated variations in our quarterly results of operations or dividends; |
| changes in our funds from operations or earnings estimates; |
| changes in government regulations or policies affecting our business or the farming business; |
| publication of research reports about us or the real estate or farming industries; |
| sustained decreases in agricultural commodity and crop prices; |
| increases in market interest rates that lead purchasers of our common stock to demand a higher yield; |
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| changes in market valuations of similar companies; |
| adverse market reaction to any additional debt we incur in the future; |
| additions or departures of key management personnel; |
| actions by institutional stockholders; |
| speculation in the press or investment community; |
| the realization of any of the other risk factors presented in this Annual Report on Form 10-K; |
| the extent of investor interest in our securities; |
| the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies; |
| our underlying asset value; |
| investor confidence in the stock and bond markets generally; |
| changes in tax laws; |
| future equity issuances; |
| failure to meet earnings estimates; |
| failure to meet and maintain REIT qualifications and requirements; |
| low trading volume of our common |
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| general market and economic conditions, including conditions that are outside of our control, such as the |
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management's attention and resources, which could have a material adverse effect on us, including our financial condition, results of operations, cash flow and the per share trading price of our common stock.
Our common stock is subject to trading risks created by the spread of false information and manipulative trading.
Our common stock is widely traded and held by a diverse group of investors, including retail investors, and these investors are subject to the influence of information provided by third party investor websites and independent authors distributing information on the internet. This information is often widely distributed, in some cases anonymously, including through platforms that mainly serve as hosts seeking advertising revenue. These sites and internet distribution strategies create opportunities for individuals to pursue both “pump and dump” and “short and distort” strategies. We believe that many of these websites have little or no requirements for authors to have professional qualifications. While these sites sometimes require disclosure of stock positions by authors, as far as we are aware these sites do not audit the accuracy of such conflict of interest disclosures. In addition, we believe that many of these websites have few or lax editorial standards, and thin or non-existent editorial staffs. Despite our best efforts, we may not be able to obtain corrections to information provided on these websites about our Company, and any corrections that are obtained may not be achieved prior to the majority of audience impressions being formed for a given article. These conditions create volatility and risk for holders of our common stock and should be considered by investors. While we have sought to engage
38
regulators to address activities that we believe are intentionally misleading, we can make no guarantees that regulatory authorities will take action on these types of activities, and we cannot guarantee that any action taken by regulators or legislators will timely address damage done by the activities of these websites and authors.
The number of shares of our common stock available for future issuance or sale may have adverse effects on the market price of our common stock.
As of December 31, 2019,2022, approximately 30.054.3 million shares of our common stock were outstanding. In addition, as of the date of this Annual Report on Form 10-K, other than the Common units held by us, approximately 1.91.2 million Common units in our operating partnershipOperating Partnership were outstanding, 1.91.2 million of which currently may be tendered for redemption by the holders, for cash, or at our option, for shares of our common stock, on a one-for-one basis. We have registered the issuance of 1.91.2 million of the shares issuable upon redemption of Common units, and we intend to register the issuance of additional shares that may be issued upon redemption of Common units so that such shares will be freely tradable under the securities laws.
We cannot predict whether future issuances or sales of shares of our common stock or the availability of shares for resale in the open market will decrease the per share trading price per share of our common stock. The per share trading price of our common stock may decline significantly when we register the shares of our common stock issuable upon redemption of outstanding Common units.
Future offerings of debt, which would be senior to our common stock upon liquidation, our Series B Participating Preferred Stock and otherany outstanding preferred equity securities upon liquidation, which may be senior to our common stock for purposes of dividend distributions or upon liquidation, and Common units in connection with future acquisitions may materially adversely affect us, including the per share trading price of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing our operating partnershipOperating Partnership to issue debt securities), including medium-term notes, senior or subordinated notes and classes or series of preferred stock. Upon liquidation, holders of our debt securities, and shares of preferred stock including our Series B Participating Preferred Stock, and lenders with respect to other borrowings will be entitled to receive payments prior to distributions to the holders of our common stock. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those
32
of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our Series B Participating Preferred Stock hasAny future series of preferred stock could have a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay dividends to the holders of our common stock, as could any future series of preferred stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk that our future offerings could reduce the per share trading price of our common stock and dilute their interest in us. In addition, the issuance of Common units in connection with future acquisitions and the redemption of such Common units for common stock may be dilutive to our stockholders and could have an adverse effect on the per share trading price of our common stock.
Our Series B Participating Preferred Stock is subordinate to our existing and future debt and other liabilities, and could be diluted by the issuance of additional preferred stock and by other transactions.
Our Series B Participating Preferred Stock is subordinate to all of our existing and future debt. Our existing debt restricts, and our future debt may include restrictions on, our ability to pay dividends to preferred stockholders in the event of a default under the debt facilities. Additionally, the issuance of additional shares of preferred stock on parity with or senior to the Series B Participating Preferred Stock would dilute the interests of the holders of the Series B Participating Preferred Stock, and any issuance of shares of preferred stock senior to the Series B Participating Preferred Stock or of additional indebtedness could affect our ability to pay dividends on, redeem or pay the liquidation preference on our Series B Participating Preferred Stock.
None of the provisions relating to the Series B Participating Preferred Stock relate to or limit our indebtedness or afford the holders of the Series B Participating Preferred Stock protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all of our assets or business, that might adversely affect the holders of the Series B Participating Preferred Stock.
An increase in market interest rates may have an adverse effect on the market price of our common stock or Series B Participating Preferred Stock
One of the factors that investors may consider in deciding whether to buy or sell our common stock or Series B Participating Preferred Stock is our distribution yield, which is our distribution rate as a percentage of the share price of our common stock or Series B Participating Preferred Stock, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution yield on our common stock or Series B Participating Preferred Stock or may seek securities paying higher dividends or interest. The market price of our common stock or Series B Participating Preferred Stock likely will be based primarily on the earnings that we derive from rental income with respect to our properties and our related distributions to stockholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our common stock and our Series B Participating Preferred Stock, and such effects could be significant. For instance, if interest rates rise without an increase in our distribution rate, the market price of our common stock or Series B Participating Preferred Stock could decrease because potential investors may require a higher distribution yield on our common stock or Series B Participating Preferred Stock as market rates on interest-bearing securities, such as bonds, rise.
Item 1B. Unresolved Staff Comments
None.
The information set forth under the caption “Our Properties” in Item 1 of this Annual Report on Form 10-K is incorporated by reference herein.
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On July 11, 2018, a purported class action lawsuit, captioned Kachmar v. Farmland Partners, Inc. (the Kachmar Action”),was filedFor information regarding legal proceedings as of December 31, 2022, see Note 8 to our Consolidated Financial Statements included in the United States District Court for the District of Colorado against the Company and certain of our officers by a purported Company stockholder. The complaint alleges, among other things, that our disclosure related to the FPI Loan Program was materially false and misleading in violation of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On August 17, 2018, a second purported class action, captioned Mariconda v. Farmland Partners Inc. (the “Mariconda Action”) was filed in the United States District Court for the District of Colorado, alleging substantially identical claims as the Kachmar Action. Several purported shareholders moved to consolidate the Kachmar Action and the Mariconda Action and for appointment as Lead Plaintiff. On November 13, 2018, the plaintiff in the Kachmar action voluntarily dismissed the Kachmar Action. On December 3, 2018, the court appointed two purported stockholders of the Company, the Turner Insurance Agency, Inc. and Cecilia Turner (the “Turners”), as lead plaintiffs in the Mariconda Action. On March 11, 2019, the court-appointed lead plaintiffs and additional plaintiff Obelisk Capital Management filed an amended complaint in the Turner Action. On April 15, 2019, the defendants moved to dismiss the amended complaint in the Turner Action. On June 18, 2019, the court denied the defendants’ motion to dismiss the amended complaint in the Turner Action. The defendants answered the amended complaint on July 2, 2019. On December 6, 2019, plaintiffs voluntarily dismissed Obelisk Capital Management from the case. In connection with Obelisk Capital Management’s dismissal from the case, defendants filed a motion for judgment on the pleadings on December 10, 2019, which automatically stayed discovery in the action pending the court’s determination of the motion. On December 16, 2019, plaintiffs filed a motion for class certification. On December 27, 2019, plaintiffs filed a motion for leave to file a second amended complaint. Defendants filed a response opposing the motion for leave to file a second amended complaint on January 17, 2020, and filed a motion to adjourn the class certification briefing schedule in light of the discovery stay on January 29, 2020. These motions remain pending and discovery remains stayed pending decision on defendants’ motion for judgment on the pleadings. At this time, no class has been certified in the Turner Action and we do not know the amount of damages or other remedies being sought by the plaintiffs. The Company can provide no assurances as to the outcomePart IV, Item 8 of this litigation or provide an estimate of related expenses at this time.
On December 18, 2018, a purported stockholder of the Company, Jack Winter, filed a complaint in the Circuit Court for Montgomery County, Maryland (the “Winter Action”), purporting to assert breach of fiduciary duty claims derivativelyAnnual Report on the Company’s behalf against the Company’s directors and certain of the Company’s officers. The Winter Action alleges, among other things, that the Company’s directors and certain of the Company’s officers breached their fiduciary duties to the Company by allowing the Company to make allegedly false and misleading disclosures related to the FPI Loan Program, as alleged in the Turner Action. On April 26, 2019, Winter voluntarily dismissed his complaint in the Circuit Court for Montgomery County Maryland. On May 14, 2019, Winter re-filed his complaint in the United States District Court for the District of Colorado. The Winter Action has been stayed pending further proceedings in the Turner Action.
On November 25, 2019, another purported shareholder, Shawn Luger, filed a complaint derivatively on behalf of the Company and against certain of our officers in the Circuit Court for Baltimore City, Maryland (the “Luger Action”). The Luger Action complaint makes similar claims to those in the Turner and Winter Actions. The parties to the Luger Action stipulated to a stay of the case pending further proceedings in the Turner Action and filed a joint motion to stay on February 7, 2020.
On November 26, 2019, another purported shareholder, Anna Barber, filed a complaint derivatively on behalf of the Company and against certain of our officers in the United States District Court for the District of Colorado (the “Barber Action”). The Barber Action complaint makes similar claims to those in the Turner, Winter, and Luger Actions. The Barber Action has been stayed pending further proceedings in the Turner Action.
On February 14, 2020, another purported shareholder, Brent Hustedde, filed a complaint derivatively on behalf of the Company and against certain of our officers in Maryland state court (the “Hustedde Action”). The Hustedde Action complaint makes similar claims to those in the Turner, Winter, Luger, and Barber Actions. None of the defendants have yet been served in the Hustedde Action.
Form 10-K.
3439
The Company believes that costs associated with the Turner, Winter, Luger, Barber, and Hustedde Actions in excess of $0.35 million will be covered by insurance.
On July 24, 2018, we filed a lawsuit in the District Court, Denver County, Colorado, against “Rota Fortunae” (a pseudonym) and numerous co-conspirators (collectively, “Wheel of Fortune”) in response to an article posted on Seeking Alpha that makes numerous allegations about the Company that we believe to be false or materially misleading. We believe that as a consequence of Wheel of Fortune’s internet posting and related postings on social media, the trading price of our common stock declined by approximately 40%. We believe that Wheel of Fortune’s internet posting was made in connection with a “short and distort” scheme to profit from a decline in our stock price based on false and misleading information. The lawsuit that we filed alleges that Wheel of Fortune disseminated material false, misleading and defamatory information about us that has harmed us and our stockholders. The Company does not expect insurance proceeds to cover a substantial portion of the costs related to the lawsuit we filed against Wheel of Fortune. The case is currently in the discovery phase with numerous motions pending before the court.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the NYSE under the symbol “FPI.” On December 31, 2019 and March 9, 2020, the closing price of our common stock as reported on the NYSE was $6.78 and $5.91, respectively.
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Stock Performance Graph
The following graph compares the total stockholder return of our common stock (assuming reinvestment of dividends) against the cumulative returns of the Standard & Poor’s Corporation Composite 500 Index and the SNL FinancialDow Jones Equity All REIT Index or the SNLUS REITs for the period from April 16, 2014, the date of the initial listing of our common stock on the NYSE MKT to December 31, 2019.past five years. Our common stock began trading on the NYSE on September 8, 2015.2015 and was previously traded on the NYSE MKT following our initial public offering on April 19, 2014.
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Index | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 |
Farmland Partners Inc. | 100.00 | 110.24 | 117.39 | 96.41 | 52.91 | 81.39 |
S&P 500 Index | 100.00 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 |
SNL U.S. REIT Equity Index | 100.00 | 102.76 | 111.89 | 121.25 | 115.57 | 148.45 |
SNL U.S. REITs < $250M Implied Cap Index | 100.00 | 94.87 | 123.64 | 130.12 | 104.49 | 73.27 |
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| Period Ending | |||||
Index | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 |
Farmland Partners Inc. | 100.00 | 54.88 | 84.42 | 111.49 | 155.76 | 165.29 |
S&P 500 Index | 100.00 | 95.61 | 125.70 | 148.81 | 191.48 | 156.77 |
Dow Jones Equity All REIT Index | 100.00 | 95.90 | 123.46 | 117.54 | 165.97 | 124.47 |
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Distribution Information
Since our initial quarter as a publicly traded REIT, we have made regular quarterly distributions to our stockholders. We intend to continue to declare quarterly distributions. However, beginning with the third quarter of 2018, we significantly reduced distribution amounts on our common stock, anddistributions, but we cannot provide any assurance as to the amount or timing of future distributions.
Our ability to make distributions in the future will depend upon our actual results of operations and earnings, economic conditions and other factors that could differ materially from our current expectations, including the impact of ongoing litigation. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see "Risk“Risk Factors."” Any future distributions will be authorized by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law, the capital requirements of our companyCompany and the distribution requirements necessary to qualify and
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maintain our qualification as a REIT. We may be required to fund distributions from working capital or borrow to provide funds for such distributions, or we may choose to make a portion of the required distributions in the form of a taxable stock dividend to preserve our cash balance or reduce our distribution. No distributions can be paid on our common stock unless we have paid all cumulative dividends on our Series A preferred units and Series B Participating Preferred Stock.units. The distribution preference of our Series A preferred units and Series B Participating Preferred Stock could limit our ability to make distributions to the holders of our common stock.
Holders of our Series A preferred units are entitled to receive cash distributions at a rate of 3.00% per annum on the $1,000 liquidation preference of the Series A preferred units, which is payable annually in arrears on January 15 of each year. See “Risk Factors — Certain aspects of our Series A preferred units may limit our ability to make distributions to our common stockholders.” Holders of shares of our Series B Participating Preferred Stock are entitled to receivereceived cash dividends at a rate of 6.00% per annum on the initial liquidation preference per share of $25.00 (equivalent to the fixed annual rate of $1.50 per share). Beginning on September 30, 2024, dividends will accrue or be paid on any FVA Amount. See “Risk Factors— Certain aspects until the Company converted all outstanding shares of our Series A preferred units and Series B Participating Preferred Units may limit our ability to make distributions to ourStock into shares of common stockholders.”stock on October 4, 2021.
In order to maintain qualification as a REIT, we must distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified under applicable U.S. federal income tax laws. We intend to distribute our net income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid any U.S. federal income tax liability on our income and the 4% nondeductible excise tax. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy the REIT 90% distribution requirement and to avoid U.S. federal income tax and the 4% nondeductible excise tax.
We anticipate that, from time to time, our distributions will exceed our then current and accumulated earnings and profits for the relevant taxable year, as determined for U.S. federal income tax purposes, due to non-cash expenses such as certain stock-based compensation and depreciation and amortization. Therefore, a portion of our distributions may represent a return of capital for U.S. federal income tax purposes. The extent to which our distributions exceed our current and accumulated earnings and profits may vary substantially from year to year. To the extent a distribution is treated as a return of capital for U.S. federal income tax purposes, it will reduce a stockholder's adjusted tax basis in the holder's shares and, to the extent it exceeds the holder's adjusted tax basis, will be treated as gain resulting from a sale or exchange of such shares. As a result, the gain (or loss) recognized on a sale of that common stock or upon our liquidation would be increased (or decreased) accordingly.
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Stockholder Information
As of March 9, 2020,February 17, 2023, there were approximately 4661 direct holders of record of our common stock. However, because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock than record holders. As of March 9, 2020,February 17, 2023, there were approximately 1811 holders (other than our company and management)Company) of our Common units. Our Common units are redeemable for cash or, at our election, for shares of our common stock, on a one-for-one basis. As of March 9, 2020,February 17, 2023, there were six holders of our Series A preferred units. As of March 9, 2020, there was one holder of record of our Series B Participating Preferred Stock. However, because many shares of our Series B Participating Preferred Stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our Series B Participating Preferred Stock than record holders.
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Issuer Purchases of Equity Securities
Share Repurchase Program
On March 15, 2017, our Board of Directors approved a program to repurchase up to $25,000,000$25.0 million in shares of our common stock. Repurchases under this program may be made from time to time, in amounts and prices as we deem appropriate. Repurchases may be made in open market or privately negotiated transactions in compliance with Rule 10b-18 under the Exchange Act, subject to market conditions, applicable legal requirements, trading restrictions under our insider trading policy and other relevant factors. In November 2017, our Board of Directors approved repurchases of our Series B participating preferred stock from time to time under the share repurchase program. This share repurchase program does not obligate us to acquire any particular amount of common stock or Series B participating preferred stock, and it may be modified or suspended at any time at our discretion. We expect to fund repurchases under the program using cash on our balance sheet. Our repurchase activity for the three months ended December 31, 2019 under the share repurchase program is presented in the following table. On August 1, 2018, our Board of Directors increased the authority under the share repurchase to $38.5 million. On November 7, 2019, the Board of Directors approved an additional $50 million under the share repurchase program. Our repurchase activity for the three months ended December 31, 2022 under the share repurchase program is presented in the following table. As of the date of this report, we had $1.0$40.5 million of availability under the program:program.
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| Purchased |
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| per Share |
| Repurchased |
| Paid Per Share |
| Programs |
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October |
| — |
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| $ | — |
| — |
| $ | — |
| — |
| $ | 1,843 |
November |
| — |
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December |
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| $ | 6.74 |
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| $ | 6.74 |
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| 122 |
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| Total |
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| Total |
| Approximate | |||
October 1, 2022 - October 31, 2022 | | — | | $ | — | | — | | $ | — | | — | | $ | 40,456 |
November 1, 2022 - November 30, 2022 | | — | | | — | | — | | | — | | — | | | 40,456 |
December 1, 2022 - December 31, 2022 | | — | | | — | | — | | | — | | — | | | 40,456 |
Total | | — | | $ | — | | — | | $ | — | | — | | $ | 40,456 |
From January 1, 2020 through the date of this report,Subsequent to December 31, 2022, the Company has repuchased 127,269did not repurchase any shares of common stock under the share repurchase program for an aggregate of $0.9 million at a weighted average price of $6.83 per share.or preferred stock.
Item 6. [Reserved]
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Item 6. Selected Financial Data
The following selected financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 is derived from our audited consolidated financial statements. The data should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and notes thereto, included elsewhere in this Annual Report on Form 10-K, and “7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report.
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| As of and for the years ended December 31, 2019 | |||||||||||||
($ in thousands) |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | |||||
Operating Data |
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Total operating revenues |
| $ | 53,564 |
| $ | 56,069 |
| $ | 46,219 |
| $ | 31,001 |
| $ | 13,756 |
Net income (loss) |
| $ | 14,850 |
| $ | 14,040 |
| $ | 9,158 |
| $ | 5,999 |
| $ | 1,689 |
Per Share Data |
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Basic net income (loss) available to common stockholders |
| $ | 0.04 |
| $ | (0.01) |
| $ | 0.03 |
| $ | 0.09 |
| $ | 0.08 |
Diluted net income (loss) available to common stockholders |
| $ | 0.04 |
| $ | (0.01) |
| $ | 0.03 |
| $ | 0.09 |
| $ | 0.08 |
Distributions declared per common share |
| $ | 0.20 |
| $ | 0.36 |
| $ | 0.51 |
| $ | 0.51 |
| $ | 0.50 |
Basic weighted average common shares outstanding |
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| 30,169 |
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| 32,162 |
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| 31,210 |
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| 13,204 |
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| 9,619 |
Diluted weighted average common shares outstanding |
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| 30,169 |
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| 32,162 |
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| 31,210 |
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| 13,204 |
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| 9,629 |
Supplemental Data |
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EBITDAre(1) |
| $ | 34,917 |
| $ | 38,501 |
| $ | 30,711 |
| $ | 17,523 |
| $ | 7,208 |
Adjusted EBITDAre(1) |
| $ | 36,444 |
| $ | 40,335 |
| $ | 33,931 |
| $ | 21,624 |
| $ | 8,678 |
FFO(1) |
| $ | 15,329 |
| $ | 19,702 |
| $ | 17,150 |
| $ | 7,553 |
| $ | 2,582 |
AFFO(1) |
| $ | 4,370 |
| $ | 8,973 |
| $ | 13,514 |
| $ | 11,011 |
| $ | 4,052 |
Balance Sheet Data |
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Total assets |
| $ | 1,102,553 |
| $ | 1,139,509 |
| $ | 1,166,086 |
| $ | 655,529 |
| $ | 344,954 |
Total gross indebtedness |
| $ | 512,852 |
| $ | 525,326 |
| $ | 515,833 |
| $ | 309,862 |
| $ | 187,225 |
Total liabilities |
| $ | 525,636 |
| $ | 535,968 |
| $ | 530,402 |
| $ | 320,020 |
| $ | 196,726 |
Redeemable non-controlling interest in operating partnership, common units |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 9,694 |
Redeemable non-controlling interest in operating partnership, preferred units |
| $ | 120,510 |
| $ | 120,510 |
| $ | 120,510 |
| $ | 119,915 |
| $ | — |
Series B Participating Preferred Stock |
|
| 142,861 |
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| 143,758 |
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| 144,223 |
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| — |
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| — |
Total equity (deficit) |
| $ | 313,546 |
| $ | 339,273 |
| $ | 370,951 |
| $ | 215,594 |
| $ | 138,534 |
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39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with ourthe consolidated financial statements and the notes thereto containedincluded elsewhere in this Annual Report on Form 10-K.
Overview and Background
We are an internally managed real estate company that ownsOur primary strategic objective is to utilize our position as a leading institutional acquirer, owner and seeks to acquiremanager of high-quality farmland located in agricultural markets throughout North America.America to deliver strong risk adjusted returns to investors through a combination of cash dividends and asset appreciation. As of the date of this Annual Report on Form 10-K,December 31, 2022, we ownowned farms with an aggregate of approximately 158,500165,200 acres in Alabama, Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Carolina, South Carolina, South Dakota, Texas, and Virginia. In addition, as of December 31, 2022, we owned land and buildings for four agriculture equipment dealerships in Ohio leased to Ag Pro under the John Deere brand and served as property manager for approximately 30,900 acres, including farms in Iowa. As of the date of this Annual Report on Form 10-K,December 31, 2022, approximately 70% of our portfolio (by value) iswas used to grow primary crops, such as corn, soybeans, wheat, rice and cotton, with the balanceand approximately 30% was used to produce specialty crops, such as almonds, citrus, blueberries, vegetables, citrus, nuts and edible beans.vegetables. We believe our portfolio gives investors exposure to the economic benefit of increasing global food demand trend in the face of growing scarcity of high qualityhigh-quality farmland and will continue to reflect the approximate breakdownallocation of U.S. agricultural output between primary crops and animal protein (whose production relies principally on primary crops as feed), on one hand, and specialty crops, on the other.
In addition, under the FPI Loan Program, we make loans to third-party farmers (both tenant and non-tenant) to provide financing for property acquisitions, working capital requirements, and operational farming activities, farming infrastructure projects and for other farming and agricultural real estate related purposes.projects.
We wereFPI was incorporated in Maryland on September 27, 2013, and we areis the sole member of the sole general partner of the Operating Partnership, which is a Delaware limited partnership that was formed on September 27, 2013. All of ourFPI’s assets are held by, and ourits operations are primarily conducted through, the Operating Partnership and its wholly owned subsidiaries. As of the date of this Annual Report on Form 10-K we own 94.0%December 31, 2022, FPI owned 97.8% of the Common units and none of the Series A preferred units norunits. See “Note 9—Stockholders’ Equity and Non-controlling Interests” within the Series B Participating Preferred Stock. See Note 9notes to ourthe consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding the Series A preferred units.non-controlling interests.
As of December 31, 2019, we owned 94.0% of the Common units in the Operating Partnership.
WeFPI has elected and qualified to be taxed as a REIT for U.S. federal income tax purposesunder Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with ourits short taxable year ended December 31, 2014.
Recent Developments
20192022 Completed Acquisitions and Dispositions
During 2019,2022, we completed two17 asset acquisitions.acquisitions, consisting of 20 properties, in the Corn Belt and High Plains regions. Aggregate cash consideration for the twothese acquisitions totaled $3.3$54.4 million for real estate purchases accounted for as asset acquisitions plus $17.3 million for the purchase of land and consisted of cash and reduction of notes receivable.buildings for four agriculture equipment dealerships in Ohio leased to Ag Pro under the John Deere brand which are accounted for as financing receivables. No intangible assets were acquired through these acquisitions. We also completed fourfive dispositions consisting of seven farmsfive properties in the Corn Belt, High Plains and Southeast regions. The Company received cash consideration for totalthese dispositions totaling $17.0 million in cash consideration and recognized an aggregate gain on sale of $34.1$2.6 million.
ATM Sales
During the year ended December 31, 2022, we sold 8,594,940 shares of common stock and generated $122.7 million for a total gain overand $121.3 million in gross and net book valueproceeds, respectively, under our at-the-market equity offering program (“ATM Program”). $50.5 million remains available under the $100.0 million ATM Program as of $7.9December 31, 2022 and we have an effective shelf registration statement with approximately $100 million of capacity whereby we could issue additional
43
equity or 22.4%debt securities. For more information on the ATM Program please see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”.
Stock RepurchasesDeleveraging and Enhanced Liquidity Position
During 2019,the year ended December 31, 2022, we repurchased 3,523,509reduced our overall indebtedness by $73.9 million, largely with proceeds from the sale of shares of common sharesstock under the ATM Program.
In addition, in 2022, we entered into credit agreements with Federal Agricultural Mortgage Corporation and its wholly owned subsidiary, Farmer Mac Mortgage Securities Corporation, (collectively, “Farmer Mac”), Metropolitan Life Insurance Company (“MetLife”), and Rutledge Investment Company (“Rutledge”) for revolving credit facilities in an aggregate principal amount of $262.0 million. As of December 31, 2022, $169.0 million remains available under these facilities. For more information on our deleveraging efforts and liquidity please see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”.
Impact of COVID-19 on Our Business
The COVID-19 pandemic and related stay-at-home orders caused significant declines in gasoline consumption, dining out, and other consumer spending patterns, which impacted demand for agricultural products. Though demand for food, fuel, and agricultural products in general has recovered since 2020, some experts believe the stimulus programs funded by the United States government of approximately $4 trillion in response to the COVID-19 pandemic have contributed to elevated inflation levels in the United States in recent quarters. Inflation in food products is generally favorable for our tenants, while inflation in fuel, nutrients, agricultural chemicals, and other products is generally unfavorable for our tenants. We are unable to quantify the ultimate impact of the COVID-19 pandemic, related government responses, and inflation on our business.
Impact of the War in Ukraine
Food prices were near record highs even before the invasion of Ukraine. Ukraine and the Russian Federation represent large portions of global trade in a variety of agricultural products (e.g., 34% of global wheat exports, according to the International Food Policy Research Institute). The disruption in farming operations in Ukraine, and trade from the Black Sea region has stressed the food supply for many countries that depend on imports of agricultural products from the region, such as Egypt (wheat for food products) and China (corn for livestock).
In July 2022, Ukraine and Russia reached an agreement to allow exports of grain and other agricultural products from Ukrainian Black Sea ports to resume after months of Russian blockade. The agreement was reached at a weighted average price per sharetime when storage capacity was reaching its limits. There is a great deal of $6.24uncertainty surrounding this agreement, as less than 24 hours after it was signed, Russian rockets struck port facilities in Odessa, damaging grain loading facilities and casting doubts on insurers’ willingness to cover ships operating in the region.
The Russian Federation is also a major exporter of fertilizers and trade restrictions have hampered the flow of fertilizers to countries dependent on imports from the Black Sea region. United States farmers, including our tenants, however, generally source fertilizers from the United States and Canada.
We anticipate that U.S. farmers will continue to be an important contributor to global food imports as Russia continues its aggression against Ukraine, and high demand for primary crops, which are the core of our business, together with high commodity prices, will enhance profitability for U.S. farmers. We can provide no assurances as to whether this anticipated increase in profitability will have an impact on rental rates in the regions in which we operate.
Inflation and Interest Rates
Most of our farming leases have lease terms of two to three years for row crops and one to seven years for permanent crops, pursuant to which each tenant is responsible for substantially all of the operating expenses related to the property, including maintenance, water usage and insurance. As a total costresult, we believe that the effect on us of $22.0 millioninflationary increases in
44
operating expenses may be offset in part by the operating expenses that are passed through to our tenants and 41,528 sharesby contractual rent increases because many of Series B preferred stock at a weighted average price per shareour leases will be renegotiated every one to five years. Furthermore, high levels of $21.60inflation are causing the Federal Reserve to increase interest rates which may increase interest expense for a total cost of $0.9 million.many businesses, including the Company.
Factors That May Influence Future Results of Operations and Farmland Values
The principal factors affecting our operating results and the value of our farmland include long-term global demand for food relative to the global supply of food, farmland fundamentals and economic conditions in the markets in which we own farmland and our ability to increase or maintain rental revenues while controlling expenses. We are currently in an environment of appreciating land values, driven by, among other things, inflation, strong commodity prices (further exacerbated by the war in Ukraine) and a positive outlook for farmer profitability. Rapidly rising interest rates can serve as a counter-balancing external factor to this favorable environment. Each year additional farmland in various portions of the world, including the United States, is repurposed for commercial development, thus decreasing the land acreage available for production of grains, oil seeds, permanent and specialty crops necessary to feed the world’s growing population. Although farmland prices may show a decline from time to time, we believe that any reduction in U.S. farmland values overall is likely to be short-
40
livedshort-lived as global demand for food and agricultural commodities typically exceeds global supply. In addition, although prices for many crops experienced significant declines in 2014supply and 2015 and many crops have still not recovered to their pre-2014 prices, we do not believe that such declines represent a trend that will continue over the long term. Rather, we believe that long-term growth trends in global population and GDP per capita will result in increased prices for primary crops over time.quality farmland becomes more scarce.
Demand
We expect that global demand for food, driven primarily by significant increases in the gross domestic product (“GDP”) per capita and global population, and GDP per capita, will continue to be the key driver of farmland values. We further expect that global demand for most crops will continue to grow to keep pace with global population growth, which we anticipate will lead to either higher prices and/or higher yields and, therefore, higher rental rates on our farmland, as well as sustained growth in farmland values over the long-term.growth. We also believe that growth in global GDP per capita, particularly in developing nations, will contribute significantly to increasing demand for primary crops. As global GDP per capita increases, the composition of daily caloric intake is expected to shift away from the direct consumption of primary crops toward more fruits, vegetables and animal-based proteins, which is expected to result in increased demand for primary crops as feed for livestock. We anticipate these factors will lead to either higher crop prices and/or higher yields and, therefore, higher rental rates on our farmland, as well as sustained growth in farmland values over the long term.
According to “How to Feed the World in 2050,” a report by the United Nations’ Food and Agriculture Organization (“UN FAO”), these factors are expected to require more than one billion additional tons of global annual grain production by 2050 to feed a global population in excess of 9 billion. The projected growth in grain production represents a 43% increase from 2005-2007 levels and more than two times the 446 million tons of grain produced in the United States in 2014. Furthermore, we believe that, as GDP per capita grows, a significant portion of additional household income is allocated to food and that once individuals increase consumption of, and spending on, higher quality food, they will strongly resist returning to their former dietary habits, resulting in greater inelasticity in the demand for food. As a result, we believe that, as global demand for food increases, rental rates on our farmland and the value of our farmland will increase over the long-term.long term. Global demand for corn and soybeans as inputs in the production of biofuels such as ethanol and soy diesel also could impact the prices of corn and soybeans, which, in the long-term,long term, could impact our rental revenues and our results of operations. However, theThe success of our long-term business strategy is not dependent on growth in demand for biofuels, and we do not believe that demand for corn and soybeans as inputs in the production of biofuels will materially impact our results of operations or the value of our farmland, primarily because we believe that growth in global population and GDP per capita will be more significant drivers of global demand for primary crops over the long term.
SupplyDespite advances in income, according to “The State of Food Security and Nutrition in the World 2022,” a report by the UN FAO, almost 3.1 billion people were unable to afford a healthy diet, reflecting the rising consumer food prices coming out of the pandemic. The ongoing war in Ukraine has disrupted supply chains and affected the prices of grain, fertilizer, and energy, further stressing food supplies for developing countries that are dependent on food imports.
Supply
Global supply of agricultural commodities is driven by two primary factors, the number of tillablearable acres available for crop production and the productivity of the acres being farmed. Although the amount of global cropland in use has
45
gradually increased over time, growth has plateaued over the last 20 years. Typically, additions to cropland are in areas of marginal productivity, while cropland loss, driven by urban development, tends to affect primarily highly productive areas. Cropland area continues to increase in developing countries, but after accounting for expected continuing cropland loss, the UN FAO projects only 173 million acres will be added from 2005-2007 to 2050, an approximate 5% increase. In comparison, world population is expected to grow over the same period to 9.1 billion, a nearly 40% increase. According to the World Bank Group arable land per capita has decreased by approximately 50% from 1961 to 2015.2018. While we expect growth in the global supply of arable land, we also expect that landowners will only put that land into production if increases in commodity prices and the value of farmland cause landowners to benefit economically from using the land for farming rather than alternative uses. We also believe that decreases in the amount of arable land in the United States and globally as a result of increasing urbanization will partially offset the impact of additional supply of farmland. Additionally, we believe that farmland lost to urban development disproportionately impacts higher quality farmland. According to a study published in 2017 in the Proceedings of the National Academy of Sciences, urban expansion is expected to take place on cropland that is 1.77 times more productive than the global average.Theaverage. The global supply of food is also impacted by the productivity per acre of tillable land. Historically, productivity gains (measured by average crop yields) have been driven by advances in seed technology, farm equipment, irrigation techniques, and improvements in soil health, chemical nutrients and chemical fertilizers and pesticides.pest control. Furthermore, we expect the increasing shortage of water in many irrigated growing regions in the United States and other growing regions around the globe, often as a result of new water restrictions imposed by laws or regulations, to lead to decreased productivity growth on many acres and, in some cases, cause yields to decline on those acres. The supply and farmability of arable land is also impacted by international conflicts, as we are seeing with the ongoing war in Ukraine.
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Conditions in Our Existing Markets
Our portfolio spans numerous farmland markets and crop types, which provides us broad diversification across conditions in these markets. Across all regions, farmland acquisitions continue to be dominated by buyers who are existing farm owners and operators;operators, whereas institutional and investor acquirors remaininvestors constitute a small fraction of the industry.industry (less than 5% of total farmland in the United States). We generally see firm demand for high quality properties across all regions and crop types.
With regardFarmland values are typically very stable, often showing modest increases even in years of commodity price weakness. We expect this trend to continue, with modest but consistent annual increases that compound into significant appreciation in the long term. Under certain market conditions, as in 2021 and 2022, with strong commodity prices and farmer profitability, there are periods of accelerating appreciation in farmland values. Leases being renegotiated under the robust market conditions experienced in 2021 and 2022, the first leasing dynamics, wecycles since the farm economy improved, reflected significant rent increases.
We believe quality farmland in the United States has a near-zero vacancy rate as a result of the supply and demand fundamentals discussed above. We believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators choose to rent additional acres of farmland when it becomes available in order to allocate their fixed costs over additional acres. Our view is that rental rates for farmland are a function of farmland operators’ view of the long-term profitability of farmland, and that many farm operators will compete for farmland even during periods of decreased profitability due to the scarcity of farmland available to rent. In particular, we believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators in some circumstances will rent additional acres of farmland when it becomes available in order to allocate their fixed costs over additional acres. Furthermore, because it is generally customary in the industry to provide the existing tenant with the opportunity to re-lease the land at the end of each lease term, we believe that many farm operators will rent additional land that becomes available in order to control the ability to farm that land in future periods. As a result, in our experience, many farm operators will aggressively pursue rental opportunities in their operable geographic area, even when the farmer anticipates lower currentprofits returns or even short-term losses.
In our primaryWe renewed approximately 95% of row crop farmland,fixed farm rent leases expiring in 2022 (representing approximately 13% of 2022 total revenue) at average rent increases of approximately 16%. As the farm economy continues to be very strong, we see flatexpect to modestly higherbenefit from rent rates in connection with 2020 lease renewals.growth into 2023. This is consistent with on the one hand, headwindsrobust prices in primary crop markets and on the other, tenant demand for leasing high quality farmland. Due to the short term nature of most of our primary crop leases, we believe that a recovery of crop prices and farm profitability will be reflected relatively rapidly in our revenues via increases in rent rates. Across specialty crops, operator profitability is under some pressure. Participating lease structures are common in many specialty crops and base lease rates are consistent with or somewhat lower than 2019. recovering.
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Lease Expirations
Farm leases are often short-termgenerally one to three years in nature among row crop farms, and longer term in nature among permanent crop farms in our portfolio.duration. As of December 31, 20192022, our portfolio had the following lease expirations as a percentage of approximate acres leased and annualizedannual minimum cashfixed rents:
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($ in thousands) |
| Approximate |
| Approximate |
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| Annual |
| Annual |
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Year Ending December 31, |
| Acres |
| Acres |
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| Cash Rents |
| Cash Rents |
| |
2020 |
| 41,163 |
| 28.4 | % |
| $ | 10,225 |
| 19.5 | % |
2021 |
| 46,424 |
| 32.1 | % |
|
| 9,396 |
| 17.9 | % |
2022 |
| 20,156 |
| 13.9 | % |
|
| 4,516 |
| 8.6 | % |
2023 |
| 14,126 |
| 9.8 | % |
|
| 2,671 |
| 5.1 | % |
2024 |
| 10,933 |
| 7.6 | % |
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| 727 |
| 1.4 | % |
2025 and beyond |
| 11,863 |
| 8.2 | % |
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| 25,033 |
| 47.6 | % |
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| 144,665 |
| 100 | % |
| $ | 52,568 |
| 100 | % |
| | | | | | | | | | |
($ in thousands) | | | | | | | | |
| |
Year Ending December 31, |
| Approximate Acres |
| % of Approximate |
| Annual Fixed |
| % of Annual |
| |
2023 | | 48,372 | | 29.3 | % | $ | 9,236 |
| 27.5 | % |
2024 |
| 37,852 | | 22.9 | % | | 10,687 |
| 31.8 | % |
2025 |
| 31,221 | | 18.9 | % | | 6,828 |
| 20.3 | % |
2026 | | 7,118 | | 4.3 | % | | 1,788 | | 5.3 | % |
2027 | | 17,606 | | 10.7 | % | | 1,700 | | 5.1 | % |
Thereafter | | 23,003 | | 13.9 | % | | 3,361 | | 10.0 | % |
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| 165,172 | | 100.0 | % | $ | 33,600 | | 100.0 | % |
As of the date of this report, 674 total acres are unleased and we are currently negotiating leases for all of them.
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Rental Revenues
Our revenues are primarily generated from renting farmland to operators of farming businesses. Our leases generally have terms ranging from one to 25three years, with three being the most common.some extending up to 40 years (e.g., renewable energy leases). Although the majority of our leases do not provide the tenant with a contractual right to renew the lease upon its expiration, we believe it is customary to provide the existing tenant with the opportunity to renew the lease, subject to any increase in the rental rate that we may establish. If the tenant elects not to renew the lease at the end of the lease term, the land will be offered to a new tenant. As discussed above, the vacancy rate for quality U.S. farmland is near-zero and there is often competition among tenants for quality farmland; accordingly, we do not believe that re-leasing farmland upon the expiration of existing leases is a significant risk for FPI.
The leases for the majority of the row-crop properties in our portfolio provide that tenants must pay us, at leasttypically, 50% of the annualtheir fixed farm rent in advance of each spring planting season. As a result, we collect a significant portion of total annual rents in the first calendar quarter of each year. Weyear, which we believe our use of leases pursuant to which at least 50% of the annual rent is payable
42
in advance of each spring planting season mitigates the tenant credit risk associated with the variability of farming operations that could be adversely impacted by poor crop yields, weather conditions, mismanagement, undercapitalization or other factors affecting our tenants. Tenant credit risk is further mitigated by requiring thatthe farming industry practice of purchasing crop insurance in almost every circumstance because it is required by lenders who provide working capital financing to our tenants maintain crop insurance and bydue to requirements in our claim on a portion ofleases. In certain cases, the related proceeds, if any, as well as by ourCompany perfects its security interest in the crop insurance proceeds and the underlying growing crop.crops using practices applicable in the state where the farm is located. Prior to acquiring farmland property, we take into consideration the competitiveness of the local farm-operator tenant environment in order to enhance our ability to quickly replace a tenant that is unwilling to renew a lease or is unable to pay a rent payment when it is due. SomeMany of our leases provide for athe reimbursement by the tenant of the propertyproperty’s real estate taxes that we pay.pay in connection with the farms they rent from us.
Expenses
Substantially all of our farm leases are structured in such a way that we are responsible for major maintenance expenses, certain liability and casualty insurance and taxes (which are sometimes reimbursed to us by our tenants), while our tenant is responsible for operating expenses, minor maintenance, water usage and all of the additional input costs related to farming operations on the property, such as seed, fertilizer, labor and fuel. We expect that substantially all of the leases for farmland we acquire in the future will continuecontain similar features related to be structured in a manner consistent with substantially all of our existing leases.expenses. As the owner of the land, we generally only bear costs related to major capital improvements permanently attached to the property, such as irrigation systems, drainage tile, grain storage facilities, permanent plantings or other physical structures customary for farms. In cases where capital expenditures are necessary, we typically seek to offset, over a period of multiple years, the costs of such capital expenditures by increasing rental rates. We also incur the costs associated with maintaining liability and casualty insurance.
We incur costs associated with running a public company and managing farmland assets, including, among others, costs associated with employing our personnel, our Board of Directors, compliance, legal and compliance costs. We incur costs associated withaccounting, due diligence and acquisitions, including, among others, travel expenses, and consulting fees,fees. Over the past 12 months, we have resumed
47
our growth strategy, and legalour continued growth is likely to result in increases in certain general and accounting fees. administrative expenses. Inflation in personnel costs, which is impacting many United States businesses, is also likely to contribute to this increase.
We also incur costs associated with managing our farmland. The management of our farmland, generally, is not labor or capital intensive becausehas significant economies of scale, as farmland generally has minimal physical structures that require routine inspection and maintenance, and our leases, generally, are structured to require the tenant to pay many of the costsoperating expenses associated with the property. Furthermore, we believe that our platform is scalable, and weWe do not expect the expenses associated with managing our portfolio of farmland to increase significantly as the number of farm properties we own increases over time.
Crop Prices
WeWhile many people assume that short-term crop prices have a great impact on farm values, we believe short-termthat long-term farmer profitability and revenue per acre, expressed as crop prices multiplied by crop yield, is a much more significant driver of farm value. Crop-yield trends in corn and soybeans have been steadily increasing over the last thirty years. After yields for the 2021/2022 marketing year (September 2021 to August 2022) increased for both corn and soybeans compared to the previous year, the U.S. Department of Agriculture projects lower yields for the 2022/2023 marketing year (September 2022 to August 2023), partly due to late planting and adverse weather conditions. Short-term crop price changes have had little effect historically on farmland values. They also have a limited impact on our rental revenue, as most of our leases provide for a fixed cash rental rate,farm rents, a common approach in agricultural markets, especially with respect to row crops, for several reasons. This approach recognizes that the value of leased land to a tenant is more closely linked to the total revenue produced on the property which is driven by crop yield and crop price. This approachcrops. Fixed farm rent simplifies the administrative requirements for the landlord and the tenant significantly. This approach supports the tenants' desire to maintain access to their leased farms which are in short supply, a concept expanded upon below, by providing the landlord consistent rents. Crop price exposure is also limited because tenants alsosignificantly, as farmers benefit from the fundamental revenue hedging that occurs when large crop yields mitigate the effect of lower crop prices. Similarly, lower crop yields have a tendency to trigger higher crop prices and help increase revenue even when confronted by a lower crop yields. Such hedging effect also limits the impact of short-term crop price changes on revenues generated by leases with a bonusvariable rent component based on farm revenues. Further risk mitigation is available to tenants, and indirectly to us, via crop insurance and hedging programs implemented by tenants. Our TRS also takes advantage of these risk mitigation programs and strategies also.
We believe quality farmland in the United States has a near-zero vacancy rate as a result of the supply and demand fundamentals. Our view is that rental rates for farmland are a function of farmland operators’ view of the long-term profitability of farmland, and that many farm operators will compete for farmland even during periods of decreased profitability duewith respect to the scarcity of farmland available to rent. In particular, we believe that due to the relatively high fixed costs associated with farming operations (including equipment, labor and knowledge), many farm operators in some circumstances will rent additional acres of farmland whenproperties it becomes available in order to allocate their fixed costs over additional acres. Furthermore, because it is generally customary in the industry to provide the existing tenant with the opportunity to re-lease the land at the end of each lease term, we believe that many farm operators will rent additional land that becomes available in order to control the ability to farm that land in future periods. As a result, in our experience,
43
many farm operators will aggressively pursue rental opportunities in their operable geography, even when the farmer anticipates lower current returns or short-term losses.owns.
The value of a crop is
Crop prices are affected by many factors that can differ on a yearly basis. Weather conditions and crop disease in major crop production regions worldwide createsdiseases can create a significant risk of price volatility, which may either increase or decrease the value of the crops that our tenants produce each year. Other material factors adding to the volatility of crop prices are changesvolatility. Changes in government regulations and policy, fluctuations in global prosperity, fluctuations in foreign trade and export markets and eruptions of military conflicts, as we are seeing in Ukraine, or civil unrest. Pricesunrest also impact crop prices.
Since late 2020, prices rebounded to, or near, prior highs, driven by increased demand expectations from China and modest adverse weather conditions around the world.
Interest Rates
The Federal Reserve has engaged in a series of significant increases in the discount rate, which is the rate the Federal Reserve charges member banks for many primary crops, particularly corn, experienced meaningful declinesovernight funds. These increases affect all borrowing rates, and for variable rate debt and debt with rates that reset periodically, such increases have a direct and relatively immediate impact.
As of December 31, 2022, $262.0 million of our outstanding indebtedness was subject to interest rates that reset from time to time (excluding our floating rate debt), of which $174.1 million was subject to interest rates that will be reset in 2014 and 2015, and have still not recovered2023. As of December 31, 2022, the weighted average interest rate of the indebtedness subject to their pre-2014 pricesinterest rate resets in 2023 was 3.23%. We do not believe such declines representhave agreed with the lender on a trend overreset interest rate of 5.55% with respect to $104.2 million (MetLife Term loans #1, #4 and #6) and 5.63% with respect to $5.2 million (MetLife Term Loan #5). All four loan modifications include an increased ability for the long term. Rather, we believe those declines represented a combinationCompany to prepay these loans without penalty. We have conducted no negotiations yet with respect to the $64.7 million of correctionremaining loans subject to historical norms (adjusted for inflation) and high yields due to favorable weather patterns. We expect that continued long-term growth trendsrate resets in global population and GDP per capita will result in increased revenue per acre for primary crops over time. We expect pricing across specialty crops to generally remain firm relative to 2019 as U.S. and global consumer demand remains strong and supply is broadly balanced to demand. Although annual rental payments under the majority2023.
At December 31, 2022, $152.5 million, or 34.7%, of our leases are not based expressly ondebt had variable interest rates, however, as stated in “Note 10—Hedge Accounting” to the quality or profitabilityaccompanying consolidated financial statements, the Company has an interest rate swap with Rabobank for $33.2 million, which reduces floating rate exposure. Assuming no increase in the level of our tenants' harvests, anyvariable rate debt spreads, if interest rates increased by 1.0%, our cash flow would decrease by approximately $1.2 million per year. If interest rates decreased by 1.0%, our cash flow would increase approximately $1.2 million per year.
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Interest Rates
We expect that future changes in interest rates will impact our overall operating performance by, among other things, affecting our borrowing costs.costs and borrowing costs of our tenants. While we may seek to manage our exposure to future changes in rates through interest rate swap agreements or interest rate caps, portions of our overall outstanding debt will likely remain at floating rates.rates or subject to interest rates that reset periodically. In addition, a sustained material increase in interest rates may cause farmland prices to decline if the rise in real interest rates (which is defined as nominal(nominal interest rates minus the inflation rate) is not accompanied by rises in the general levels of inflation. However, our business model anticipates that over time the value of our farmland will increase, as it has in the past, at a rate that is equal to or greater than the rate of inflation, which may in part offset the impact of rising interest rates on the value of our farmland, but there can be no guarantee that this appreciation will occur to the extent that we anticipate or at all.
International Trade
As trade tensions have increased betweenAfter a 55% increase in exports of corn for the 2020/2021 marketing year (September 2020 to August 2021), the USDA estimates corn exports will be down 10% for the 2021/2022 marketing year (September 2021 to August 2022) and a further 22% for the 2022/2023 marketing year (September 2022 to August 2023), based on a smaller crop and higher expected prices. After a 35% increase in exports of soybeans for the 2020/2021 marketing year (September 2020 to August 2021), the USDA estimates soybean exports will be down 5% for the 2021/2022 marketing year (September 2021 to August 2022) and a further 8% for the 2022/2023 marketing year (September 2022 to August 2023), based on lower supplies.
According to the USDA Outlook for Agricultural Trade, the top three export countries from the United States are China, Canada, and its key agricultural trading partners, agricultural products have become the targetMexico. Exports to China for many international tariff increases. We believe thatfiscal year 2022 (October 2021 to September 2022) were a prolonged international trade conflict could significantly impact farmsrecord of $36.4 billion, up 9% from 2021. Exports to Canada were $28.4 billion, up 17% from 2021. Exports to Mexico were $28.0 billion, up 17% from 2021. Exports to China for fiscal year 2023 are forecast to decrease to $34 billion, while exports to Canada and farmers across the United States and that our tenants’ financial results could be negatively impacted. Specifically, trade tensions have reduced the prices our tenants received for soybeans, almonds, and walnuts, among other crops, with an impact on the variable rents we recognized.
We anticipate that a “Phase 1” trade deal with China will lead to increased volumes of most agricultural goods exported to that country, but we can provide no assurance that volumes will increase or the timing of any increase.
The U.S. Federal government has announced a farmer safety net program to help farmers impacted by other countries’ newly imposed import tariffs. While we believe this program will help farmers in the United States in the short-term, a prolonged trade conflict may lead to adverse financial results for farms despite the implementation of the safety net program.
The short to medium-term impact on the Company’s financial performance due to a trade conflict may be mitigated by the multi-year term structure of many of our leases and limited to contingent rent components. However, a long-term trade conflict would likely impact our rents and thereby negatively impact our business. Additionally, a long-term trade conflict would likely motivate non-US. agricultural businesses to strengthen their logistics and trade infrastructure. This may also lead to the weakening of U.S. agricultural trade relationships that would be difficult for the United States to reestablish in the future.
Another potential source of disruption in international trade flows is the outbreak of the novel coronavirus COVID-19. While the demand for U.S. agricultural is notMexico are expected to be materially affected, the outbreak could slow down the
44
flow of products through ports, distribution and retail channels, resulting in an ultimate impact expected to be modest and temporary.same for 2023.
Impact of Extreme Weather Events
Our tenants’ profitability and, to some degree, our variable rent revenue were negatively impacted by extreme weather events in 2018 and 2019. Specifically, hurricane Michael affected our pecan farms in Alabama and Georgia, and excess rainfall affected several row crop farms in the Corn Belt, Delta and South, and Southeast regions. Furthermore, a heat wave affected an avocado farm in California, with a negative impact on 2019 revenue.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires that management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the historical consolidated financial statements included elsewhere in this filing. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.
Real Estate Acquisitions
When we acquire farmland where substantially allallocating the purchase price of properties acquired using the relative fair value, a number of significant assumptions can be used by management. We may utilize various sources, including third-party appraisals, our own analysis of recently acquired or developed and existing comparable properties in our portfolio, other market data and property specific characteristics such as soil types, water availability and the existence of leases acquired with the acquisition. The allocations of purchase price are sensitive and involve a degree of uncertainty due to the nature of the inputs and judgements, as well as the number, magnitude and complexity of these inputs and judgements made by management. See “Note 5—Real Estate” for additional discussion regarding acquisitions completed by the Company.
Impairment of Real Estate Assets
Assessing impairment can be complex and involves a high degree of subjectivity in determining if impairment indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset. In particular, these estimates are sensitive to significant assumptions, including the gross assets acquired is concentrated in a single identifiableestimation of future rental revenues, operating expenses,
49
discount and capitalization rates and our intent and ability to hold the related asset, or group of similar identifiable assets it is not considered a business. As such, we account for these types of acquisitions as asset acquisitions. When substantially all of which could be affected by our expectations about future market or economic conditions. Assumptions are primarily subject to property-specific characteristics, especially with respect to our intent and ability to hold the related asset. While these property-specific assumptions can have a significant impact on the undiscounted cash flows or estimated fair value of the gross assets acquired is not concentrated in a single identifiableparticular asset, or a group of similar assets and contains acquired inputs, processes and outputs, these acquisitions are accounted for as a business combination.
We consider 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. We consider similar assets as assets that have a similar nature and risk characteristics.
Whether our 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, we allocate 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. We allocate the purchase price to the fair value of the tangible assets by valuing the land as if it were unimproved. We value improvements, including permanent plantings and grain facilities, at replacement cost, adjusted for depreciation.
Our estimates of land value are made using a comparable sales analysis. Factors considered by us in our analysis of land value include soil types and water availability and the sales prices of comparable farms. Our estimates of groundwater value are made using historical information obtained regarding the applicable aquifer. Factors considered by us in our 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. We include an estimate of property taxes in the purchase price allocation of acquisitions to account for the expected liability that was assumed.
45
When above or below market leases are acquired, we value 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 will be 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.
The purchase price is allocated to in-place lease values and tenant relationships, if they are acquired, based on our evaluation of the specific characteristicsreported carrying values of each tenant’s lease, availability of replacement tenants, probability of lease renewal, estimated down time, and our overall relationship withlong-lived assets during the tenant. The value of in-place lease intangibles and tenant relationships will be 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 priorcurrent year were not particularly sensitive to its stated expiration, any unamortized amounts relating to that lease, including (i) above and belowexternal or market leases, (ii) in-place lease values, and (iii) tenant relationships, would be recorded to revenue or expense as appropriate.
We capitalize 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 will be 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.
Total consideration for acquisitions may include a combination of cash and equity securities. When equity securities are issued, we determine the fair value of the equity securities issued based on the number of shares of common stock and Common units issued multiplied by the stock price 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 a business combination, we allocate 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
Our real estate consists of land, groundwater, permanent crops (consisting of trees and vines) and improvements made to the land consisting of grain facilities, irrigation improvements, other assets and drainage improvements. We record real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as such costs are incurred. We begin depreciating assets when the asset is ready for its intended use. We compute depreciation and depletion for assets classified as improvements using the straight-line method over the estimated useful life of 10-40 years for grain facilities, 2-40 years for irrigation improvements, 20-65 for drainage improvements, 3-50 years for groundwater, 13-40 years for permanent plantings, and 5-40 years for other assets acquired. We periodically evaluate the estimated useful lives for groundwater based on current state water regulations and depletion levels of the aquifers.
When a sale occurs, we recognize the associated gain when all consideration has been transferred, the sale has closed, and there is no material continuing involvement. If a sale is expected to generate a loss, we first assess it through the impairment evaluation process. See ‘‘—Impairment of Real Estate Assets’’ below
Impairment of Real Estate Assets
We evaluate our tangible and identifiable intangible real estate assets for impairment indicators whenever events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. If such events are present, we project the total undiscounted cash flows of the asset, including proceeds from disposition, and compare it to the net book value of
46
the asset. If this evaluation indicates that the carrying value may not be recoverable, an impairment loss is recorded in earnings equal to the amount by which the carrying value exceeds the fair value of the asset.assumptions. There have been no impairments recognized on real estate assets in the accompanying financial statements.
Inventory of our TRS
The costs of growing crop are accumulated until the time of harvest at the lower of cost or market value and are included in inventory in our consolidated financial statements. 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 year. Growing crop consists primarily of land preparation, cultivation, irrigation and fertilization costs incurred by FPI Agribusiness. Growing crop inventory is charged to cost of products sold when the related crop is harvested and sold.
Harvested crop inventory includes costs accumulated during both the growing and harvesting phases and is 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.
Revenue Recognition
Rental income includes rents that each tenant pays in accordance with the terms of its lease. Minimum rents pursuant to leases are recognized as revenue on a straight-line basis over the lease term, including renewal options in the case of bargain renewal options. Deferred revenue includes the cumulative difference between the rental revenue recorded on a straight-line basis and the cash rent received from tenants in accordance with the lease terms. Acquired below market leases are included in deferred revenue on the accompanying consolidated balance sheets, which are amortized into rental income over the life of the respective leases, plus the terms of the below market renewal options, if any.
Farm leases in place as of December 31, 2019 had terms ranging from one to twenty five years. As of December 31, 2019, we had 97 leases over 214 properties with rent escalations. The majority of our leases provide for a fixed annual or semi-annual cash rent payment. Tenant leases on acquired farms generally require the tenant to pay us rent for the entire initial year regardless of the date of acquisition, if the acquisition is closed prior to, or shortly after, planting of crops. If the acquisition is closed later in the year, we typically receive a partial rent payment or no rent payment at all.
Certain of our leases provide for a portion of the rent determined as a percentage of the gross farm proceeds. 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 us 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. Revenue derived from a percentage of the farm gross proceeds that is over and above the crop insurance minimums is recognized once crop price and quantity are known (typically at the time the crops are harvested). As a result, we are only able to recognize revenue from such leases once annually.
Certain of our leases provide for minimum cash rent plus a bonus based on gross farm proceeds. Revenue under this type of lease is recognized on a straight-line basis over the lease term based on the minimum cash rent. Bonus rent is recognized 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 us of the total amount of gross farm proceeds
Tenant reimbursements include reimbursements for real estate taxes that each tenant pays in accordance with the terms of its lease. When leases require that the tenant reimburse us for property taxes paid by us, the reimbursement is reflected as tenant reimbursement revenue on the statements of operations, as earned, and the related property tax as property operating expense, as incurred.
We recognize interest income on notes receivable on an accrual basis over the life of the note. Direct origination costs are netted against loan origination fees and are amortized over the life of the note using the straight-line method, which
47
approximates the effective interest method, as an adjustment to interest income which is included in other revenue in the Company’s Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017.
Crop sales revenue
We record revenue from the sale of harvested crops when the harvested crop has been contracted to be delivered to a grain or packing facility and title has transferred. Harvested crops delivered under marketing contracts are recorded using the fixed price of the marketing contract at the time of delivery to a grain or packing facility. Harvested crops delivered without a marketing contract are recorded using the market price at the date the harvested crop is delivered to the grain or packing facility and title has transferred.
Other revenue
We recognize interest income on notes receivable on an accrual basis over the life of the note. Direct origination costs are netted against loan origination fees and are amortized over the life of the note using the straight-line method, which approximates the effective interest method, as an adjustment to interest income which is included in other revenue in the Company’s Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017.
Income Taxes
As a REIT, for income tax purposes we are permitted to deduct dividends paid to our stockholders, thereby eliminating the U.S. federal taxation of income represented by such distributions at the Company level, provided certain requirements are met. REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax (including, for periods prior to 2018, any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.
The Operating Partnership leases certain of its farms to the TRS, which is subject to federal and state income taxes. We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis of assets and liabilities and their respective income tax basis and for operating loss, capital loss and tax credit carryforwards based on enacted income tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. There was $(0.2) million in taxable income from the TRS for the year ended December 31, 2019, and $(0.2) million in taxable income for the year ended December 31, 2018, and $0.03 million for the year ended December 31, 2017.
We perform an annual review for any uncertain tax positions and, if necessary, will record future tax consequences of uncertain tax positions in the financial statements. An uncertain tax position is defined as a position taken or expected to be taken in a tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. At December 31, 2019, we did not identify any uncertain tax positions.
When we acquire a property in a business combination, we evaluate such acquisition for any related deferred tax assets or liabilities and determine if a deferred tax asset or liability should be recorded in conjunction with the purchase price allocation. If a built-in gain is acquired, we evaluate the required holding period (generally 5 years) and determine if we have the ability and intent to hold the underlying assets for the necessary holding period. If we have the ability to hold the underlying assets for the required holding period, no deferred tax liability will be recorded with respect to the built-in gain. We determined that no deferred tax asset or liability was recorded through the asset acquisition that we undertook during the year ended December 31, 2019.
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New or Revised Accounting Standards
For a summary of the new or revised accounting standards please refer to “Note 1 – Organization and Significant Accounting Policies” within the notes to the combined consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Results of Operations
This section of this Form 10-K generally discusses 20192022 and 20182021 items and year-to-year comparisons between 20192022 and 2018. Discussions of 2017 items and year-to-year2021. Year-to-year comparisons between 20182021 and 20172020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2021.
Comparison of the year ended December 31, 20192022 to the year ended December 31, 20182021
| | | | | | | | | | | | |
| | For the years ended December 31, | | | | | |
| ||||
($ in thousands) |
| 2022 |
| 2021 |
| $ Change |
| % Change | | |||
OPERATING REVENUES: | | | | | | | | | | | | |
Rental income | | $ | 45,615 | | $ | 45,251 | | $ | 364 |
| 0.8 | % |
Tenant reimbursements | |
| 3,264 | |
| 3,450 | |
| (186) |
| (5.4) | % |
Crop sales | | | 5,372 | | | 880 | | | 4,492 | | 510.5 | % |
Other revenue | |
| 6,959 | |
| 2,158 | |
| 4,801 |
| 222.5 | % |
Total operating revenues | |
| 61,210 | |
| 51,739 | |
| 9,471 |
| 18.3 | % |
| | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | |
Depreciation, depletion and amortization | |
| 6,960 | |
| 7,629 | |
| (669) |
| (8.8) | % |
Property operating expenses | |
| 8,190 | |
| 7,331 | |
| 859 |
| 11.7 | % |
Cost of goods sold | | | 5,966 | | | 1,525 | | | 4,441 | | 291.2 | % |
Acquisition and due diligence costs | |
| 111 | |
| 55 | |
| 56 |
| 101.8 | % |
General and administrative expenses | |
| 12,005 | |
| 8,208 | |
| 3,797 |
| 46.3 | % |
Legal and accounting | |
| 2,874 | |
| 10,147 | |
| (7,273) |
| (71.7) | % |
Other operating expenses | | | 130 | | | 31 | | | 99 | | 319.4 | % |
Total operating expenses | |
| 36,236 | |
| 34,926 | |
| 1,310 |
| 3.8 | % |
OPERATING INCOME | |
| 24,974 | |
| 16,813 | |
| 8,161 |
| 48.5 | % |
| | | | | | | | | | | | |
OTHER (INCOME) EXPENSE: | | | | | | | | | | | | |
Other (income) | | | (663) | | | (66) | | | (597) | | 904.5 | % |
(Income) from equity method investment | | | (52) | | | (19) | | | (33) | | 173.7 | % |
(Gain) on disposition of assets | | | (2,641) | | | (9,290) | | | 6,649 | | (71.6) | % |
Interest expense | |
| 16,143 | |
| 15,929 | |
| 214 |
| 1.3 | % |
Total other expense | |
| 12,787 | |
| 6,554 | |
| 6,233 |
| 95.1 | % |
| | | | | | | | | | | | |
Net income before income tax expense | | | 12,187 | | | 10,259 | | | 1,928 | | 18.8 | % |
| | | | | | | | | | | | |
Income tax expense | | | 227 | | | — | | | 227 | | NM | |
| | | | | | | | | | | | |
NET INCOME | | $ | 11,960 | | $ | 10,259 | | $ | 1,701 |
| 16.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
|
|
|
|
|
| ||||
($ in thousands) |
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
OPERATING REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
| $ | 48,119 |
| $ | 51,185 |
| $ | (3,066) |
| (6.0) | % |
Tenant reimbursements |
|
| 3,146 |
|
| 3,158 |
|
| (12) |
| (0.4) | % |
Crop Sales |
|
| 978 |
|
| 410 |
|
| 568 |
| 138.5 | % |
Other revenue |
|
| 1,321 |
|
| 1,316 |
|
| 5 |
| 0.4 | % |
Total operating revenues |
|
| 53,564 |
|
| 56,069 |
|
| (2,505) |
| (4.5) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and depletion |
|
| 8,320 |
|
| 8,544 |
|
| (224) |
| (2.6) | % |
Property operating expenses |
|
| 7,897 |
|
| 7,834 |
|
| 63 |
| 0.8 | % |
Cost of goods sold |
|
| 927 |
|
| 125 |
|
| 802 |
| NM |
|
Acquisition and due diligence costs |
|
| 6 |
|
| 180 |
|
| (174) |
| (96.7) | % |
General and administrative expenses |
|
| 6,102 |
|
| 7,352 |
|
| (1,250) |
| (17.0) | % |
Legal and accounting |
|
| 3,971 |
|
| 2,330 |
|
| 1,641 |
| 70.4 | % |
Other operating expenses |
|
| 4 |
|
| 11 |
|
| (7) |
| NM |
|
Total operating expenses |
|
| 27,227 |
|
| 26,376 |
|
| 851 |
| 3.2 | % |
OPERATING INCOME |
|
| 26,337 |
|
| 29,693 |
|
| (3,356) |
| (11.3) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (INCOME) EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
| (260) |
|
| (264) |
|
| 4 |
| (1.5) | % |
Gain on sale of assets |
|
| (7,841) |
|
| (2,882) |
|
| (4,959) |
| NM |
|
Interest expense |
|
| 19,588 |
|
| 18,799 |
|
| 789 |
| 4.2 | % |
Total other expense |
|
| 11,487 |
|
| 15,653 |
|
| (4,166) |
| (26.6) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income tax expense |
|
| 14,850 |
|
| 14,040 |
|
| 810 |
| 5.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| — |
|
| — |
|
| — |
| NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
| $ | 14,850 |
| $ | 14,040 |
| $ | 810 |
| 5.8 | % |
NM = Not Meaningful
Our rentalnet income for 20192022 was impactedaffected partially by the six acquisitionsacquisition of 20 properties and five dispositions that took place in 2018, in addition to the two acquisitions2022, as well as substantially lower legal and four dispositions, consisting of seven farms that took place in 2019. To highlight the effect of changes due to acquisitions, we have separately discussed the rental income for the same-property portfolio, which includes only properties ownedaccounting expense and operated for the entirety of both periods presented, excluding properties that generated one-time revenues such as termination fees. Total rental income under leases for the same-property portfolio decreased 2.2 million, or 4.65%,additional revenue from $48.4 million for the year ended December 31, 2018 to $46.2 million for the year ended December 31, 2019, largely due to a decrease in crop share in the permanent crop portfolio.auction and brokerage activities.
Rental income decreased $3.1increased $0.4 million, or 6.0%0.8%, for the year ended December 31, 2019 as2022 compared to the prior year asended December 31, 2021, resulting primarily from an increase in fixed farm rent of $2.1 million, solar rent of $1.3 million and recreation rent of $0.1 million partially offset by a result of the timing of certaindecrease in variable rent payments, asset sales, andof $3.1 million in part due to certain farms in the impactWest Coast region converting to direct operations in the second half of lower crop prices and low cyclical yields on participating rents.
2021.
4950
Revenues recognized from tenant reimbursement of property taxes did not change materially during the year ended December 31, 2019 as compared to the prior year. This is the result of a decreased number of supplemental property tax invoices charged to us and reimbursed by tenants, which are largely related to leases on properties in the state of California, offset by an increase in property taxes reimbursed.
Crop sales increased $0.6$0.2 million, or 138.5%5.4%, for the year ended December 31, 2019 as2022 compared to the prior year. Theyear ended December 31, 2021. This decrease is the result of asset dispositions and the conversion of certain farms to direct operations.
Crop sales increased $4.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase is the result of a larger numberhigher volume of propertiescrop sold on our directly operated by the Company.properties.
Other revenues totaled $1.3revenue increased $4.8 million during bothfor the year ended December 31, 20192022 compared to the year ended December 31, 2021. This increase was primarily due to increased auction and the prior year.brokerage income, crop insurance proceeds from farms under direct operations, management fees, and interest income on loans and financing receivables, partially offset by lower revenue from litigation-related proceeds.
Depreciation, depletion and amortization expense decreased $0.2$0.7 million, or 2.6%8.8%, for the year ended December 31, 2019 as2022 compared to the prior year asended December 31, 2021. This decrease is a result of selling approximately $5.1 million inasset dispositions and more assets becoming fully depreciated partially offset by depreciable assets in 2019.being placed into service.
Property operating expenses increased $0.1$0.9 million, or 0.8%11.7%, infor the year ended December 31, 2019 as2022 compared to the prior year. The increase largely relates to clean up costs on farms in the Southeast region as a result of Hurricane Michael in the fourth quarter of 2018year ended December 31, 2021, resulting from higher tax and the initial accounting of a sales-type equipment lease in the third quarter of 2019,insurance expenses, partially offset by a reduction due to asset sales.lower repairs.
Acquisition and due diligence costsCost of goods sold totaled $0.0$6.0 million for the year ended December 31, 2019 as2022 compared to $0.2$1.5 million recognizedfor the year ended December 31, 2021. This increase is the result of a higher volume of crop sold as the Company directly operated more farms in the prior year. The decrease isyear ended December 31, 2022 compared to the year ended December 31, 2021.
Acquisition and due diligence costs increased $0.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, This increase was primarily due to a reductionan increase in acquisition activity.property acquisitions and related costs including travel and due diligence.
General and administrative expenses declined by $1.4increased $3.8 million, or 18.4%46.3%, for the year ended December 31, 2019 as2022 compared to the prior year.year ended December 31, 2021, $2.7 million of this increase was related to the November 2021 acquisition of MWA. The decrease isremaining increase was largely due to lower overall payrolldriven by higher personnel costs for employees.and travel.
Legal and accounting expenses increased $1.6decreased $7.3 million, or 70.4%71.7%, for the year ended December 31, 2019 as2022 compared to the prior year. The increaseyear ended December 31, 2021, which was primarily athe result of lower legal fees incurred in relation to a “short and distort” attack against the Company conducted by anonymous parties under the pseudonym Rota Fortunae,litigation, as discussed below under Part III, Item 1 “Legal Proceedings.” The Company is pursuing litigation against Rota Fortunae“Note 8—Commitments and is defending stockholder class action lawsuits that are related to the claims made by Rota Fortunae. The Company believes that costs associated with the stockholder class action litigation in excess of $0.35 million will be covered by insurance. However, because the Company is still in negotiations with its insurance carrier regarding the coverage of defense costs incurred to date, the Company has not recognized any receivable for insurance recoveries that the Company believes it will be entitled to upon completion of the claim review process. The Company does not expect insurance proceeds to cover a substantial portion of the costs related to the lawsuit it filed against Rota Fortunae. In addition to the increase in legal fees discussed above, the Company experienced an increase in accounting and audit fees because in 2019 the Company became subject to section 404(b) of the Sarbanes-Oxley Act of 2002.Contingencies—Litigation”.
Other operating expenses increased $0.9$0.1 million for the year ended December 31, 2019 as2022 compared to the prior year as a result of an increase in cost of crops sold in the period because of an increase in farms operated by the Company.
Other income totaled $0.3 million during both the year ended December 31, 2019 and the prior year.2021, This increase was primarily due to increased auction costs.
The gain / loss on disposition of assetsOther income increased $5.0$0.6 million for the year ended December 31, 2019 as2022 compared to the prior year ended December 31, 2021. This increase is primarily due primarly to proceeds from a property insurance claim due to weather-related damage and increased interest income on cash and our swap position, partially offset by a loss on early extinguishment of debt as the gainCompany reduced its leverage during the year.
Income from equity method investment remained relatively flat at $0.1 million and $0.0 million for the years ended December 31, 2022 and 2021, respectively.
Gain on salesdisposition of properties in the Corn Belt and the Southeast regions.
Interest expense increased $0.8assets decreased $6.6 million, or 4.2%71.6%, for the year ended December 31, 20192022 compared to the year ended December 31, 2021, primarily due to fewer property dispositions in 2022 as compared to 2021, as well as the prior year.Company incurring $1.3 million in losses on grape vine and citrus tree removal as part of redevelopment projects on certain properties during the year ended December 31, 2022.
51
Interest expense increased $0.2 million, or 1.3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase is the result of increasedan increase in interest rates.rates on our variable rate debt, significantly offset by a lower outstanding balance of debt.
50
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay any outstanding borrowings, fund and maintain our assets and operations, acquire new properties, make distributions to our stockholders and to Common unitholders, and fund other general business needs.
Our short-term In addition, high levels of inflation are causing the Federal Reserve to increase interest rates which may increase interest expense for many businesses, including the Company. We expect to meet our liquidity requirements consist primarily of funds necessary to acquire additional farmland, pay legal fees in relation to the Rota Fortunae litigation in excess of the Company’s insurance coverage, make other investments consistent with our investment strategy, make principal and interest payments on outstanding borrowings, make distributions on our Series A preferred units and Series B Participating Preferred Stock and make distributions necessary to qualify for taxation as a REIT and fund our operations. Our sources of funds primarily will beneeds through cash on hand, undrawn availability under lines of credit, operating cash flows, borrowings, proceeds from equity issuances and borrowings from prospective lenders. selective asset dispositions where such dispositions are deemed to be in the best interests of the Company.
In addition, we have $48.3 million of outstanding indebtedness that matures in June and July of 2020. We do not have the cash on hand to repay this indebtedness when it comes due. We have been in advanced discussions with lenders regarding the refinancing of this debt prior to maturity. However, we have not entered into a definitive agreementequity distribution agreements on October 29, 2021 in connection with respectthe ATM Program, under which we were authorized to issue and sell from time to time, through the refinancing assales agents, shares of the date of this report. If we are unable to refinance this debt, we may be required to dispose of farms to repay it at maturity.
Our long-term liquidity needs consist primarily of funds necessary to acquire additional farmland, make other investments and certain long-term capital expenditures, make principal and interest payments on outstanding borrowings, and make distributions necessary to qualify for taxation as a REIT. In light of the level at which our common stock has traded in recent years,having an aggregate gross sales price of up to $75.0 million (the “$75.0 million ATM Program”). In connection with our entry into the distribution agreements, we have not been able to accessterminated the equity distribution agreements, each dated as of May 14, 2021, for our prior $50.0 million ATM Program. On May 6, 2022, we entered into equity distribution agreements under which we may issue and sell from time to time, through sales agents, shares of our common stock having an aggregate gross sales price of up to $100.0 million (the “$100.0 million ATM Program”). During the year ended December 31, 2022, the Company generated $73.2 million in gross proceeds and $72.4 million in net proceeds under the $75.0 million ATM Program and $49.5 million in gross proceeds and $48.9 million in net proceeds under the $100.0 million ATM Program for a total of $122.7 million and $121.3 million in gross and net proceeds, respectively. As of December 31, 2022, we had $0.0 million in availability under the $75.0 million ATM Program and $50.5 million in availability under the $100.0 million ATM Program. The ATM Program is intended to provide cost-effective financing alternatives in the capital markets in ordermarkets. We intend to fund our liquidity needs and we will not be ablecontinue to do so unless and until our stock price recovers significantly. Furthermore, because ofutilize the tradingATM Program when the market price of our common stock remains at levels which are deemed appropriate by our Board of Directors. The Company may increase the size of the ATM Program in the future. In addition, in 2022, we have been unableentered into credit agreements with Farmer Mac, MetLife and Rutledge for revolving credit facilities in an aggregate principal amount of $262.0 million. As of December 31, 2022, $169.0 million remains available under these credit facilities and the Company has no material debt maturities due before 2025.
During the year ended December 31, 2022, we reduced our overall indebtedness by $73.9 million, largely with proceeds from the sale of shares of common stock under the ATM Program. We believe that the use of proceeds from the ATM Program in the manner discussed above has substantially strengthened our balance sheet, positioned us to fund acquisitionstake advantage of farmland with Common units. We expectgrowth opportunities that we believe will arise over the coming several quarters and will be significantly accretive to meet our long-term liquidity requirements through various sources of capital, including net cash provided by operations, long-term mortgage indebtednessflow and other secured and unsecured borrowings, asset dispositions and, if our stock price recovers, future equity issuances (including issuances of Common units).to shareholder value.
Our ability to incur additional debt will depend on a number of factors, including our degree of leverage, the value of our unencumbered assets, compliance with the covenants under our existing debt agreements, borrowing restrictions that may be imposed by lenders and the conditions of debt markets. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions for REITs and market perceptions about us.
We manage our liquidity position and expected liquidity needs taking into consideration current cash balances and reasonably expected cash receipts. Our business model, and the business model of real estate investment companies in general, relies on debt as a structural source of financing. When debt becomes due, it is generally refinanced rather than repaid using our cash flow from operations. As of December 31, 2019, we had liquidity requirements that are not anticipated to be funded from ongoing operating cash flows in the foreseeable future which were largely impacted by debt repayments which are coming due in 2020. When material debt repayments are due within the following 12 months, we work with current and new lenders and other potential sources of capital sufficiently in advance of the debt maturity to ensure that all of our obligations are satisfied in a timely manner. We have a history of being able to refinance or extend our debt obligations to manage our debt maturities. Furthermore,Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions. We have an effective shelf registration statement with approximately $100 million of capacity whereby we could issue additional equity or debt securities, which we have a large portfolio of high-quality real estate assets which we believe could be selectively and readily liquidated if necessary to fund our immediate liquidity needs. Our first course of action is to work with our lenders to refinance debt which is coming due on terms acceptable to us. Indone successfully in the event that we are unsuccessful in refinancing our debt on terms acceptable to us, we would look to liquidate certain assets to fund our liquidity shortfall. We believe our plans are sufficient to overcomepast as mentioned above.
During the liquidity pressures which existed atyear ended December 31, 2019.2022, the Company repurchased no shares of its common stock. We currently have authority to repurchase up to an aggregate of $40.5 million in additional shares of our common stock or shares.
5152
Consolidated Indebtedness
For further details relating to our consolidated indebtnessindebtedness refer to “– Recent Developments – Financing Activity” and Note 7 – Mortgage Notes, Line of Credit and Bonds Payable included in the financial statement section of this Annual Report on Form 10-K.
Sources and Uses of Cash and Cash Equivalents
The following table summarizes our cash flows for the years ended December 31, 2019, 20182022 and 2017:2021:
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, | |||||||
($ in thousands) |
| 2019 |
| 2018 |
| 2017 | |||
Net cash provided by operating activities |
| $ | 17,994 |
| $ | 20,003 |
| $ | 929 |
Net cash used in investing activities |
| $ | 31,052 |
| $ | (15,864) |
| $ | (234,107) |
Net cash provided by (used in) financing activities |
| $ | (53,376) |
| $ | (40,784) |
| $ | 239,548 |
| | | | | | |
| | For the years ended December 31, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Net cash and cash equivalents provided by operating activities | | $ | 17,051 | | $ | 7,856 |
Net cash and cash equivalents (used in) investing activities | | $ | (60,398) | | $ | (18,769) |
Net cash and cash equivalents provided by financing activities | | $ | 20,830 | | $ | 13,867 |
Comparison of the year ended December 31, 20192022 to the year ended December 31, 20182021
As of December 31, 2019,2022, we had $12.6$7.7 million of cash and cash equivalents compared to $16.9$30.2 million at December 31, 2018.2021.
Cash Flows from Operating Activities
Net cash and cash equivalents provided by operating activities decreased $2.0increased by $9.2 million primarily as a result of the following:
| Receipt of $35.8 million in fixed rents, $9.5 million in variable rent and $2.2 million in tenant reimbursements for the year ended December 31, 2022 as compared to the receipt of $34.4 million in fixed rents, $9.4 million in variable rents, and $4.7 million in tenant reimbursements in the year ended December 31, 2021; |
| Stock-based compensation and incentive during the year ended December 31, 2022 of $1.9 million as compared to $1.3 million during the year ended December 31, 2021; |
● | Gain on disposition of assets during the year ended December 31, 2022 of $2.6 million as compared to $9.3 million during the year ended December 31, 2021; |
● | A change in accounts receivable of $(2.3) million for the year ended December 31, 2022 compared to $(1.0) million for the year ended December 31, 2021; |
● | A change in other assets of $(0.1) million for the year ended December 31, 2022 compared to $(0.6) million for the year ended December 31, 2021; |
● | A change in accrued interest of |
|
|
|
|
|
|
Cash Flows from Investing Activities
Net cash and cash equivalents used forin investing activities increased $46.9by $41.6 million primarily as a result of the following:
|
|
|
|
|
|
|
|
● | Property dispositions during the year ended December 31, 2022 for cash consideration of $17.0 million as compared to $70.6 million during the year ended December 31, 2021; |
● | An increase of $1.5 million in real estate improvements as compared to the year ended December 31, 2021; |
53
● | Collections on notes receivable under the FPI Loan Program and financing receivables of $2.8 million during the year ended December 31, 2022 as compared to $0.0 million during the year ended December 31, 2021; and |
● | Issuances of notes receivable under the FPI Loan Program and financing receivables of $20.8 million during the year ended December 31, 2022, including $17.3 million for the purchase of land and buildings for four agriculture equipment dealerships in Ohio leased to Ag Pro under the John Deere brand which are accounted for as financing receivables, as compared to $3.7 million during the year ended December 31, 2021. |
Cash Flows from Financing Activities
Net cash used inand cash equivalents provided by financing activities increased $12.6by $7.0 million primarily as a result of the following:
| Borrowings from mortgage notes payable during the year ended December 31, 2022 of $223.0 million as compared to $41.1 million during the year ended December 31, 2021; |
● | Repayments on mortgage notes payable during the year ended December 31, 2022 of $296.9 million as compared to $35.9 million during the year ended December 31, 2021; |
● | Net proceeds from the ATM Program during the year ended December 31, 2022 of $121.3 million as compared to $27.2 million during the year ended December 31, 2021; |
● | A decrease of $0.7 million in participating preferred stock repurchases as compared to the year ended December 31, 2021; |
● | Redemption of Series A preferred units during the year ended December 31, 2022 of $10.2 million as compared to $0.0 million during the |
● | Dividends on common stock during the year ended December 31, 2022 of $11.1 million as compared to |
|
|
|
|
|
|
|
|
52
|
|
|
|
Contractual Obligations
The following table sets forth our contractual obligations and commitments as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| Payments Due by Period | |||||||||||||
Contractual Obligations |
| 2020 |
| 2021-2023 |
| 2024-2026 |
| 2027 & beyond |
| Total | |||||
Principal Payments of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Indebtedness |
| $ | 48,574 |
| $ | 116,615 |
| $ | 171,914 |
| $ | 175,749 |
| $ | 512,852 |
Interest Payments on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Long-Term Indebtedness |
|
| 11,167 |
|
| 30,836 |
|
| 29,455 |
|
| 32,501 |
|
| 103,959 |
Variable-Rate Long-Term Indebtedness |
|
| 6,311 |
|
| 11,174 |
|
| 6,708 |
|
| 2,605 |
|
| 26,798 |
Commitment on Mortgage Note Receivable |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Lease Payments |
|
| 75 |
|
| - |
|
| - |
|
| - |
|
| 75 |
Capital Commitments |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Total |
| $ | 66,127 |
| $ | 158,625 |
| $ | 208,077 |
| $ | 210,855 |
| $ | 643,684 |
|
|
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements.
Non-GAAP Financial Measures
Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”)
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT. NAREITNareit. Nareit defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, plus real estate related depreciation, depletion and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures. FFO is a supplemental non-GAAP financial measure. Management presents FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating properties, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures necessary to maintain the operating performance of improvements on our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREITNareit definition as we do, and, accordingly, our FFO may not be comparable to such other REITs’ FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
54
We do not, however, believe that FFO is the only measure of the sustainability of our operating performance. Changes in GAAP accounting and reporting rules that were put in effect after the establishment of NAREIT’sNareit’s definition of FFO in 1999 result in the inclusion of a number of items in FFO that do not correlate with the sustainability of our operating
53
performance. Therefore, in addition to FFO, we present AFFO and AFFO per share, fully diluted, both of which are non-GAAP measures. Management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO. AFFO is not intended to represent cash flow or liquidity for the period and is only intended to provide an additional measure of our operating performance. Even AFFO, however, does not properly capture the timing of cash receipts, especially in connection with full-year rent payments under lease agreements entered into in connection with newly acquired farms. Management considers AFFO per share, fully diluted to be a supplemental metric to GAAP earnings per share. AFFO per share, fully diluted provides additional insight into how our operating performance could be allocated to potential shares outstanding at a specific point in time. Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs. However, other REITs may use different methodologies for calculating AFFO and AFFO per share, fully diluted, and, accordingly, our AFFO and AFFO per share, fully diluted may not always be comparable to AFFO and AFFO per share amounts calculated by other REITs. AFFO and AFFO per share, fully diluted should not be considered as an alternative to net income (loss) or earnings per share (determined in accordance with GAAP) as an indication of financial performance or as an alternative to net income (loss) earnings per share (determined in accordance with GAAP) as a measure of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions.
AFFO is calculated by adjusting FFO to exclude or include the income and expenses that we believe are not reflective of the sustainability of our ongoing operating performance, as further explained below:
| Real estate related acquisition and due diligence costs. Acquisition (including audit fees associated with these acquisitions) and due diligence costs are incurred for investment purposes and, therefore, do not correlate with the ongoing operations of our portfolio. We believe that excluding these costs from AFFO provides useful supplemental information reflective of the realized economic impact of our leases, which is useful in assessing the sustainability of our operating performance. |
|
|
|
|
| Distributions on Series A preferred units. Dividends on Series A preferred units, which are convertible into Common units on or after |
| Dividends on Series B Participating Preferred Stock. Dividends on the previously outstanding shares of Series B Participating Preferred Stock, which |
54
and certain impact on our cash flow, |
55
| Common shares fully diluted. In accordance with GAAP, common shares used to calculate earnings per share are presented on a weighted average basis. Common shares on a fully diluted basis includes shares of common stock, Common units, and unvested shares of restricted stock outstanding at the end of the period on a share equivalent basis, because all shares are participating securities and thus share in the performance of the Company. The conversion of Series A preferred units is excluded from the calculation of common shares fully diluted as they are not participating securities, |
The following table sets forth a reconciliation of net income (loss) to FFO, AFFO and net income (loss) available to common stockholders per share to AFFO per share, fully diluted, the most directly comparable GAAP equivalents, respectively, for the periods indicated below (unaudited):
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, | |||||||
($ in thousands except per share data) |
| 2019 |
| 2018 |
| 2017 | |||
Net income (loss) |
| $ | 14,850 |
| $ | 14,040 |
| $ | 9,158 |
(Gain) loss on disposition of assets |
|
| (7,841) |
|
| (2,882) |
|
| 200 |
Depreciation and depletion |
|
| 8,320 |
|
| 8,544 |
|
| 7,792 |
FFO |
|
| 15,329 |
|
| 19,702 |
|
| 17,150 |
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
| 1,527 |
|
| 1,653 |
|
| 1,409 |
Indirect equity offering costs |
|
| — |
|
| — |
|
| — |
Real estate related acquisition and due diligence costs |
|
| — |
|
| 181 |
|
| 1,811 |
Distributions on preferred units |
|
| (12,486) |
|
| (12,563) |
|
| (6,856) |
AFFO |
| $ | 4,370 |
| $ | 8,973 |
| $ | 13,514 |
|
|
|
|
|
|
|
|
|
|
AFFO per diluted weighted average share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFO weighted average common shares |
|
| 32,938 |
|
| 37,083 |
|
| 37,358 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
| $ | 0.04 |
| $ | (0.01) |
|
| 0.03 |
Income attributable to redeemable non-controlling interest and non-controlling interest in operating partnership |
|
| 0.40 |
|
| 0.39 |
|
| 0.21 |
Depreciation and depletion |
|
| 0.25 |
|
| 0.23 |
|
| 0.21 |
Stock based compensation |
|
| 0.05 |
|
| 0.04 |
|
| 0.04 |
(Gain) loss on disposition of assets |
|
| (0.24) |
|
| (0.08) |
|
| — |
Real estate related acquisition and due diligence costs |
|
| — |
|
| 0.01 |
|
| 0.05 |
Distributions on preferred units |
|
| (0.37) |
|
| (0.34) |
|
| (0.18) |
AFFO per diluted weighted average share |
| $ | 0.13 |
| $ | 0.24 |
|
| 0.36 |
| | | | | | |
| | For the years ended December 31, | ||||
(in thousands except per share amounts) |
| 2022 |
| 2021 | ||
Net income | | $ | 11,960 | | $ | 10,259 |
(Gain) on disposition of assets | | | (2,641) | | | (9,290) |
Depreciation, depletion and amortization | |
| 6,960 | | | 7,629 |
FFO | | $ | 16,279 | | $ | 8,598 |
| | | | | | |
Stock-based compensation and incentive | |
| 1,999 | | | 1,263 |
Deferred impact of interest rate swap terminations | | | 582 |
|
| 546 |
Real estate related acquisition and due diligence costs | | | 111 | | | 55 |
Distributions on Preferred units and stock | | | (3,210) | | | (10,052) |
AFFO | | $ | 15,761 | | $ | 410 |
| | | | | | |
AFFO per diluted weighted average share data: | | | | | | |
| | | | | | |
AFFO weighted average common shares | |
| 52,531 | |
| 36,410 |
| | | | | | |
Net income (loss) available to common stockholders of Farmland Partners Inc. | | $ | 0.16 | | $ | (0.17) |
Income available to redeemable non-controlling interest and non-controlling interest in operating partnership | | | 0.08 |
|
| 0.48 |
Depreciation, depletion and amortization | |
| 0.13 | |
| 0.21 |
Stock-based compensation and incentive | |
| 0.04 | |
| 0.03 |
(Gain) on disposition of assets | | | (0.05) | | | (0.26) |
Distributions on Preferred units and stock | |
| (0.06) | | | (0.28) |
AFFO per diluted weighted average share | | $ | 0.30 | | $ | 0.01 |
The following table sets forth a reconciliation of AFFO share information to basic weighted average common shares outstanding, the most directly comparable GAAP equivalent, for the periods indicated below (unaudited):
|
|
|
|
|
|
| ||||||
|
| For the year ended December 31, | ||||||||||
($ in thousands) |
| 2019 |
| 2018 |
| 2017 | ||||||
| | | | | | | ||||||
|
| | For the years ended December 31, | |||||||||
(in thousands) |
| | 2022 |
| | 2021 | ||||||
Basic weighted average shares outstanding |
| 30,169 |
| 32,162 |
| 31,210 |
| | 50,953 |
|
| 34,641 |
Weighted average OP units on an as if converted basis |
| 2,415 |
| 4,610 |
| 5,870 | ||||||
Weighted average OP units on an as-if converted basis |
| | 1,292 |
|
| 1,484 | ||||||
Weighted average unvested restricted stock |
| 354 |
| 311 |
| 278 |
| | 286 |
|
| 285 |
Weighted average redeemable non-controlling interest |
| — |
| — |
| — | ||||||
AFFO weighted average common shares |
| 32,938 |
| 37,083 |
| 37,358 |
| | 52,531 |
|
| 36,410 |
AsEBITDAre
The Company calculates Earnings Before Interest Taxes Depreciation and Amortization for real estate (“EBITDAre”) in accordance with the standards established by NAREIT in its September 2017 White Paper. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) excluding interest expense, income tax, depreciation and amortization, gains or losses on disposition of December 31, 2019, 2018depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and 2017 we had 31,856,400, 35,176,571of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and 38,074,221 sharesadjustments to reflect the entity’s pro rata share of common stock and Common units outstanding onEBITDAre of unconsolidated affiliates. EBITDAre is a fully diluted basis, respectively.
key financial measure used to evaluate the Company’s operating performance but should not be construed as an alternative to operating income, cash flows from operating activities or net income, in each case as determined in accordance with GAAP. The Company believes that EBITDAre is a useful performance
5556
measure commonly reported and will be widely used by analysts and investors in the Company’s industry. However, while EBITDAre is a performance measure widely used across the Company’s industry, the Company does not believe that it correctly captures the Company’s business operating performance because it includes non-cash expenses and recurring adjustments that are necessary to better understand the Company’s business operating performance. Therefore, in addition to EBITDAre, management uses Adjusted EBITDAre, a non-GAAP measure.
We further adjust EBITDAre for certain additional items such as stock-based compensation and incentive, indirect offering costs, real estate acquisition related audit fees and real estate related acquisition and due diligence costs (for a full discussion of these adjustments, see AFFO adjustments discussed above) that we consider necessary to understand our operating performance. We believe that Adjusted EBITDAre provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and EBITDAre, is beneficial to an investor’s understanding of our operating performance.
EBITDAre and Adjusted EBITDAre have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
● | EBITDAre and Adjusted EBITDAre do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
● | EBITDAre and Adjusted EBITDAre do not reflect changes in, or cash requirements for, our working capital needs; |
● | EBITDAre and Adjusted EBITDAre do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDAre and Adjusted EBITDAre do not reflect any cash requirements for these replacements; and |
● | Other companies in our industry may calculate EBITDAre and Adjusted EBITDAre differently than we do, limiting the usefulness as a comparative measure. |
Because of these limitations, EBITDAre and Adjusted EBITDAre should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results of operations and using EBITDAre and Adjusted EBITDAre only as a supplemental measure of our performance.
The following table sets forth a reconciliation of our net income to our EBITDAre and Adjusted EBITDAre for the periods indicated below (unaudited):
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| | For the years ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) |
| 2022 |
| 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | | $ | 11,960 | | $ | 10,259 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense | | | 16,143 | |
| 15,929 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax expense | | | 227 | |
| — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation, depletion and amortization | | | 6,960 | |
| 7,629 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Gain) on disposition of assets | | | (2,641) | | | (9,290) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDAre | |
| 32,649 | | $ | 24,527 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation and | |
| 1,999 | | | 1,263 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate related acquisition and due diligence costs | | | 111 | | | 55 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDAre | |
| 34,759
Seasonality We recognize rental revenue from fixed-rate farmland leases on a pro rata basis over the non-cancellable term of the lease in accordance with accounting principles generally accepted in the United States (“GAAP”). Notwithstanding GAAP accounting requirements to spread rental revenue over the lease term, a significant portion of fixed rent is received in a lump sum before planting season, in the first quarter, and after harvest, in the fourth quarter. We receive a significant
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portion of our variable rental payments in the fourth calendar quarter of each year, following harvest, with only a portion of such payments being recognized ratably through the year in accordance with GAAP, in relation to crop insurance contracts entered into by our tenants. The highly seasonal nature of the agriculture industry causes seasonality in our business to some extent. Our financial performance should be evaluated on an annual basis, which eliminates impacts of seasonality and other similar factors that may cause our quarterly results to vary during the course of the year. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business strategies, the primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure will be LIBOR and SOFR. We may use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis, we also use derivative financial instruments to manage interest rate risk. We do not use such derivatives for trading or other speculative purposes. At December 31, 2022, $152.5 million, or 34.7%, of our debt had variable interest rates, however, as stated in “Note 10—Hedge Accounting” to the accompanying consolidated financial statements, the Company has an interest rate swap with Rabobank for $33.2 million, which reduces floating rate exposure. Assuming no increase in the level of our variable rate debt spreads, if interest rates increased by 1.0%, our cash flow would decrease by approximately $1.2 million per year. If interest rates decreased by 1.0%, our cash flow would increase approximately $1.2 million per year. Item 8. Financial Statements and Supplementary Data Our consolidated financial statements and supplementary data are included as a separate section of this Annual Report on Form 10-K commencing on page F-1 and are incorporated herein by reference. Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We have established disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. We have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosures and procedures were effective at a reasonable level of assurance as of the end of the period covered by this report. Limitations on the Effectiveness of Controls Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become 58 inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Management’s Annual Report on Internal Controls over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, the Company’s management concluded that our internal controls over financial reporting were effective as of December 31, 2022. Changes in Internal Controls over Financial Reporting There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2023 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2023. Item 11. Executive Compensation This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2023 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2023. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2023 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2023. Item 13. Certain Relationships and Related Transactions, and Director Independence This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2023 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2023. Item 14. Principal Accountant Fees and Services Information about aggregate fees billed to us by our principal accountant, Plante & Moran, PLLC, Denver, Colorado (PCAOB ID No. 166) will be incorporated by reference from the Company’s Proxy Statement with respect to the 2023 Annual Meeting of Stockholders to be filed with the SEC no later than April 28, 2023. 59 PART IV Item 15. Exhibits and Financial Statement Schedules The following is a list of documents filed as a part of this report:
Included herein at pages F-1 through F-36.
The following financial statement schedule is included herein at pages F-37 through F-42: Schedule III—Combined Real Estate and Accumulated Depreciation All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions, are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index on pages 61, 62 and 63 of this report, which is incorporated by reference herein. Item 16. Form 10-K Summary The Company has elected to not include a summary. 60 Exhibit Index
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