age

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2016

or

For the transition period from         to        

Commission File Number 001-37592

 

AMERICAN FARMLAND COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: (212) 484-3000

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

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

 

 

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

As of November 14, 2016, the registrant had 19,609,309 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

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AMERICAN FARMLAND COMPANY

TABLE OF CONTENTS

 

 

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PART I — FINANCIAL INFORMATION

 

 

AMERICAN FARMLAND COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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AMERICAN FARMLAND COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

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AMERICAN FARMLAND COMPANY AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

(Unaudited)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

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AMERICAN FARMLAND COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Farmland Company

Notes to Consolidated Financial Statements

(Unaudited)

 

 

American Farmland Company (together with its subsidiaries, the “Company”), a Maryland corporation, was established on October 9, 2009, and commenced its operations on October 15, 2009, for the purpose of investing in farmland principally located in the United States. The Company conducts all of its activities through American Farmland Company L.P. (the “Operating Partnership”), a Delaware limited partnership. The Company owned 83.8% of the limited partnership interests in the Operating Partnership as of September 30, 2016 and December 31, 2015.

The Company is the sole general partner of the Operating Partnership.  Prior to its internalization on October 23, 2015 (the “Internalization Transaction”), American Farmland Advisors LLC (“AFA”) was the external advisor of the Operating Partnership as well as its co-general partner.

American Farmland TRS LLC (“AFC TRS LLC”), a Delaware limited liability company, was formed originally to hold part of the interest in AFA held by one of the owners of AFA and was acquired by the Operating Partnership as part of the Internalization Transaction. We have elected for AFC TRS LLC to be taxed as a taxable REIT subsidiary (“TRS”). Its income currently consists of its share of the income earned by AFA. Since we indirectly own 100% of the voting securities of AFC TRS LLC, the financial position and results of operations of AFC TRS LLC are consolidated within our financial statements.  AFCO CA TRS LLC (“California TRS”), a Delaware limited liability company, was formed to acquire the non-real estate related assets from one of our 2015 acquisitions upon the expiration of the lease with the tenant or earlier under certain circumstances.  We have elected for California TRS to be taxed as a TRS. It is currently anticipated that its income will predominately consist of fees earned from the renting of the non-real estate related assets at the end of the lease with the current tenant.  Since we indirectly own 100% of the voting securities of California TRS, the financial position and results of operations of California TRS are consolidated within our financial statements.

All subsequent references in this report to the “Company,” “we,” “us” and “our” refer, collectively, to American Farmland Company, the Operating Partnership, AFA and the Operating Partnership’s subsidiaries, unless the context otherwise requires or where otherwise indicated.

On October 19, 2015, the Securities and Exchange Commission declared effective the Company’s Registration Statement on Form S-11, as amended (File No. 333-205260) in connection with the Company’s initial public offering, pursuant to which it registered and sold 6,000,000 shares of the Company’s common stock, including 419,900 shares pursuant to a directed shares program, at a public offering price of $8.00 per share, which closed on October 23, 2015 (the “Offering”).  The Offering resulted in gross proceeds of approximately $48 million and net proceeds, after deducting underwriting discounts and offering expenses borne by the Company, of approximately $39.2 million. 

On September 12, 2016, the Company and the Operating Partnership entered into a definitive  agreement and plan of merger with Farmland Partners Inc. (“FPI”), Farmland Partners Operating Partnership, LP (“ Farmland Partners OP”), and certain of their respective subsidiaries, pursuant to which the Company will merge with and into one of FPI’s wholly owned subsidiaries with such wholly owned subsidiary of FPI surviving the merger, which we refer to as the “company merger.” At the effective time of the company merger, each share of the Company’s common stock, issued and outstanding immediately prior to the effective time of the company merger (other than any shares of the Company’s common stock owned by any wholly owned subsidiary of the Company or by FPI or Farmland Partners OP or any wholly owned subsidiary of FPI or Farmland Partners OP), will be automatically converted into the right to receive, subject to certain adjustments, 0.7417 shares of FPI common stock, which we refer to as the “company merger consideration.”  In addition, in connection with the company merger, each outstanding Company restricted stock unit that has become fully earned and vested in accordance with its terms will, at the effective time of the company merger, be converted into the right to receive the company merger consideration.

Pursuant to the merger agreement and prior to the company merger, a Farmland Partners OP subsidiary will merge with and into the Operating Partnership, with the Operating Partnership surviving as a wholly owned subsidiary of FPI, which we refer to as the “partnership merger.” At the effective time of the partnership merger, each common unit of limited partnership interest in the Operating Partnership issued and outstanding immediately prior to the effective time of the partnership merger,  will be automatically converted into the right to receive, subject to certain adjustments, 0.7417 Class A common units of limited partnership interest in Farmland Partners OP.        

The closing of the partnership merger and the company merger, which we refer to collectively as the “mergers,” is conditioned, among other things, upon the requisite approval of the company merger by the holders of the Company’s common stock and the holders of FPI’s common stock and the requisite approval of the issuance of shares of FPI common stock in connection with the

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company merger by holders of shares of FPI’s common stock. In addition to those stockholder approvals, the closing of the mergers is subject to other customary closing conditions. Accordingly, there is no assurance that the mergers will occur on the terms described herein, or at all.  See “Item 1A Risk Factors” included in this Quarterly Report on Form 10-Q.  The Company has expensed $2,042,386 and $2,241,738 for the three months and nine months ended September 30, 2016, respectively, in professional fees and other costs associated with its strategic alternatives review process and the negotiation of the mergers.

Subject to the satisfaction of all of the conditions to closing, including the receipt of the separate stockholder approvals, the transactions contemplated by the merger agreement, including the mergers, are expected to close in the first quarter of 2017.

For information regarding the mergers and related matters, please refer to the Company’s other filings with the SEC that have been made in connection with the proposed mergers, including the Registration Statement on Form S-4 filed by FPI with the SEC on October 3, 2016 and the Current Report on Form 8-K filed with the SEC on September 12, 2016.

 

 

The accompanying interim consolidated financial statements are unaudited and include the accounts of the Company, the Operating Partnership and its wholly owned limited liability companies.  All intercompany transactions and balances have been eliminated. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and changes in cash flows have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission.  We have made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.  The results of operations for the interim periods are not necessarily indicative of the operating results for the full year.  

Cash and Cash Equivalents — The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.  There were no such cash equivalents at September 30, 2016 and December 31, 2015.  The Company maintains cash balances in major banks which, at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation (FDIC). The Company had funds on deposit in excess of amounts insured by the FDIC; however, the Company believes the credit risk related to these deposits is minimal.

Investments in Real Estate — Investments in real estate consist of farmland and improvements made to the farmland, consisting of buildings; wells, irrigation and drain systems; and trees and vines acquired in connection with the land purchase. Investments in real estate are recorded at cost. Improvements, replacements and costs of development for new trees and vines or the repurposing of raw land are capitalized when they extend the useful life or improve the use of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight‑line method over the estimated useful lives of the depreciable assets. The estimated useful lives range from seven to eighteen years for land improvements, twenty‑five to thirty years for buildings, five to thirty years for trees and vines, and five to eight years for fixtures and equipment.

In some cases we acquire farmland without a lease in place, with newly‑originated leases where the seller or related party is not the tenant, or in sale‑leaseback transactions with newly‑originated leases. These transactions are accounted for as asset acquisitions under Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment.” In the case of an asset acquisition, the transaction costs incurred are capitalized as part of the purchase price of the asset.

Other acquisitions involve the acquisition of farmland that is already being operated as rental property and has a lease in place that is assumed at the time of acquisition, which are considered to be business combinations under ASC 805 “Business Combinations.” ASC 805 requires that all transaction costs related to the acquisition be expensed as incurred, rather than capitalized.

The Internalization Transaction included, among other things, the acquisition of AFA.  The Internalization Transaction was treated as a business combination under ASC 805, and the excess of the consideration over the fair value of the net liabilities assumed from AFA together with transaction costs associated with the Internalization Transaction were expensed in the fourth quarter of 2015.

Whether an acquisition is treated as an asset acquisition under ASC 360 or a business combination under ASC 805, the purchase price must be allocated to the tangible assets acquired and liabilities assumed (if any) consisting of land, buildings, improvements, trees and vines, long‑term debt (if any), and identifiable intangible assets and liabilities, typically the value of any in‑place leases, as well as above‑market and below‑market leases, based in each case on their fair values.

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Management’s estimates of fair value are made using methods similar to those used by independent appraisers, such as a sales comparison approach, a cost approach, and an income capitalization approach (utilizing a discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical, expected lease‑up periods, taking into consideration current market conditions and costs to execute similar leases and the commodity prices for the crops grown and productivity on such properties, where the lease will include a participation in the gross revenues earned by the tenant. Management also considers information obtained about each property as a result of our pre‑acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rental income at market rates during the hypothetical, expected lease‑up periods, which primarily range from 3 to 12 months, depending on specific local market conditions. Management also estimates costs to execute similar leases, including legal and other related expenses, to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. Management allocates purchase price to the fair value of the tangible assets and liabilities of an acquired property by valuing the property as if it were vacant. The “as‑if‑vacant” value is allocated to land, buildings, improvements and trees and vines based on management’s determination of the fair values of these assets.

Above‑market and below‑market in‑place lease values for acquired properties are recorded based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in‑place leases and (ii) management’s estimate of fair market lease rates for the corresponding in‑place leases, measured over a period equal to the remaining, non‑cancelable term of the lease. The total amount of other intangible assets or liabilities acquired will be further allocated to in‑place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease. When determining the non‑cancelable term of the lease, fixed‑rate renewal options, if any, are evaluated to see if they should be included. The value of in-place leases is amortized over the remaining term of the lease. Should a tenant terminate its lease, the unamortized portion of any above‑market and below‑market lease values, in‑place lease values and any associated intangibles will be immediately charged to the related income or expense. There were no above-market or below-market in-place lease intangibles as of September 30, 2016 and December 31, 2015.

We account for the impairment of real estate, including intangible assets, in accordance with ASC 360‑10‑35, “Property, Plant, and Equipment,” which requires us to periodically review the carrying value of each property to determine whether circumstances indicate impairment of the carrying value of the investment exists or if depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine whether the carrying value of the investment in such property is recoverable. In performing the analysis, we consider such factors as agricultural and business conditions in the regions in which our farms are located, and the development period (if applicable), and whether there are indications that the fair value of the real estate has decreased. If the carrying amount is more than the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.

We evaluate our entire property portfolio each quarter for any impairment indicators and perform an impairment analysis. We concluded that none of our properties were impaired as of September 30, 2016 or December 31, 2015 and we will continue to monitor our portfolio for any indicators of impairment. There have been no impairments recognized on real estate assets since our inception. 

Earnings Per Share — Basic earnings per share is calculated by dividing net income (loss) attributable to the Company by the weighted-average number of shares of common stock outstanding during the period.  Diluted earnings per share is calculated by dividing net income (loss) attributable to the Company by the weighted-average number of shares of common stock outstanding during the period, plus other potentially dilutive securities such as stock grants (if applicable) or shares that would be issued in the event that Common Units are redeemed for shares of common stock.  No adjustment is made for shares that are anti-dilutive during a period.

Shares whose issuance is contingent upon the satisfaction of certain conditions shall be considered outstanding and included in the computation of diluted EPS as follows (i) if all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the grant, if later) or (ii) if all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted EPS shall be based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period (for example, the number of shares that would be issuable based on current period earnings or period-end market price) and if the result would be dilutive. Those contingently issuable shares shall be included in the denominator of diluted EPS as of the beginning of the period (or as of the date of the grant, if later).

Non-Controlling Interests — Non‑controlling interest is the portion of capital in the Operating Partnership not attributable to the Company.  Our non‑controlling interests relate to the capital accounts of affiliates of the members of AFA (the “Founders”),

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the interests acquired by the owners of AFA pursuant to the Internalization Transaction and until October 23, 2015, the de minimis capital account of AFA in the Operating Partnership.  Non‑controlling interests are reported in equity on the consolidated balance sheets but separate from the Company’s stockholders’ equity. On the consolidated statements of operations, the Operating Partnership is reported at the consolidated amount, including both the amount attributable to the Company and non‑controlling interests.

 

Rent Receivable — Rent receivable is presented at face value, net of the allowance for doubtful accounts, if any. The allowance for doubtful accounts is established through provisions charged against income and is maintained at a level believed adequate by management to absorb estimated bad debts based on historical experience and current economic conditions. The allowance for doubtful accounts was $0 as of September 30, 2016 and December 31, 2015.

 

Deferred Financing Costs — Deferred financing costs consist of costs incurred to obtain financing, including legal fees, up-front commitment fees, administrative fees and in some cases, mortgage recording taxes.  Costs associated with our borrowings are deferred and amortized over the terms of the respective credit facilities using the straight-line method, which approximates the effective interest method.  Accumulated amortization of deferred financing costs was $218,577 and $116,793 as of September 30, 2016 and December 31, 2015, respectively.  Total amortization expense related to deferred financing costs amounting to $101,784 and $51,409 for the nine months ended September 30, 2016 and 2015, respectively, is included in interest expense and financing costs on the accompanying consolidated statements of operations. See Note 6, “Borrowings under Credit Facilities,” for further discussion on these related financings.

Other Assets — Other assets primarily comprise prepaid expenses, deposits on potential farm acquisitions ($0 as of September 30, 2016 and $1.5 million as of December 31, 2015), deposits on trees to be acquired for development purposes and other miscellaneous receivables.

Fair Value of Financial Instruments — The fair value of the Company’s assets and liabilities which qualify as financial instruments under ASC 825 “Financial Instruments” approximates the carrying amounts presented in the consolidated balance sheets.

Operating Revenues — All leases on farms are classified as operating leases and the related base or fixed rental income from the farms is recognized on a straight‑line basis commencing from the effective date of the lease or the acquisition date of the property in the case of in‑place leases on properties acquired.  In certain instances the Company receives base rental income from leases that commenced with the crop year which can be prior to the effective date of the lease.  The rental income relating to the period prior to the effective date of the lease is recorded as unearned rent and amortized into rental income over the lease term.  Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to rent receivable. Participating rent is recorded when all contingencies have been resolved such that the tenant is entitled to gross revenues from a packing house, wine producer, shipper, huller processor or other marketing, processing or distributing entity, or crop insurance which enables the Company to estimate and/or measure its share of such gross revenues. As a result, depending on the circumstances described above for a particular lease, in certain instances, participating rent will be recognized by the Company in the year the crop was harvested, and in other instances, participating rent will be recognized partially in the year of the harvest and the balance in the year following the harvest.

Recovery of expenses represents revenues from tenant leases that provide for the recovery of all or a portion of the real estate taxes of the respective property. The revenue is accrued in the same periods as the expense is incurred.

Unearned Rent — A number of the Company’s tenant leases, particularly in the commodity row crop segment, require that tenants pay the full annual rent in advance of planting, or in two semi-annual installments.  For such leases, the advance rent for future periods is recorded to unearned rent as a liability, and is then recorded to income over the periods represented by the payment received.  In addition, as more fully described in “Operating Revenues” above, cash received relating to the period prior to the effective date of a lease is recorded as unearned rent and is released to rental income over the life of the lease.  In the first quarter of 2016, the Company received cash rents in advance of the lease commencement dates for the new leases executed for the Sun Dial properties, and these advance rents were recorded to unearned rent.  The aggregate unearned rent balance on the consolidated balance sheet was $2,398,201 and $834,858 as of September 30, 2016 and December 31, 2015, respectively.

 

Income Taxes — The Operating Partnership qualifies as a partnership for U.S. federal income tax purposes. No provision has been made in the accompanying financial statements for federal, state or local income taxes for the Operating Partnership, as each partner is individually responsible for reporting their share of the Partnership’s income or loss on their own tax returns.  The Company operates in a manner intended to enable it to qualify as a REIT under Sections 856‑860 of the Internal Revenue Code of 1986, as amended (the “Code”). Under these sections, a real estate investment trust, which distributes at least 90% of

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its real estate investment trust taxable income (determined without regard to the deduction for dividends paid and excluding capital gains) to its stockholders each year and that meets certain other conditions, will not be subject to federal income taxes on that portion of its taxable income that is distributed to its stockholders. To the extent that the Company satisfies its annual distribution requirement but distributes less than 100% of taxable income, it will be subject to an excise tax on undistributed taxable income.  The Company is subject to federal income taxation in the event it generates taxable income from prohibited transactions.  The consolidated statement of operations includes $0, for the three months ended September 30, 2016 and 2015, and $141,747 and $79,832, respectively, for the nine months ended September 30, 2016 and 2015, as a provision for income taxation resulting from prohibited transactions. The prohibited transactions arise from revenue received from the sale of crops grown on farms undergoing development before the trees become fully mature and the farms become leasable.  The income tax provision reported represents the 100% tax attributed to the prohibited transactions of the Company.  Additionally, the Company consolidates within its financial statements the results of two TRSs, AFC TRS LLC and California TRS. The income taxes arising from these two TRSs have been de minimis to date.

 

The Company accounts for certain tax positions in accordance with ASC 740 “Income Taxes.” ASC No. 740‑10‑65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740‑10‑65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has greater than 50% likelihood of being realized upon ultimate settlement. ASC No. 740‑10‑65 also provides guidance on de‑recognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased disclosures.

As of September 30, 2016 and December 31, 2015, the Company does not have a liability for uncertain tax positions. Potential interest and penalties associated with such uncertain tax positions would be recorded as a component of the income tax provision. As of September 30, 2016, the tax years ended December 31, 2012 through December 31, 2015 remain open for an audit by the Internal Revenue Service.

Management does not believe the Company has any tax positions for which it is reasonably possible that it will be required to record significant amounts of unrecognized tax benefits within the next twelve months.

New Accounting Pronouncements — In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). ASU 2014‑09 provides additional guidance for management to reassess revenue recognition as it relates to: (1) transfer of control, (2) variable consideration, (3) allocation of transaction price based on relative standalone selling price, (4) licenses, (5) time value of money and (6) contract costs. Further disclosures will be required to provide a better understanding of revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. ASU 2014‑09 is effective for us on January 1, 2018, with early adoption permitted as of January 1, 2017. We are currently evaluating the impact ASU 2014‑09 will have on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014‑15, Presentation of Financial Statements Going Concern (Subtopic 205‑40) (“ASU 2014‑15”). ASU 2014‑15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is still present and (6) require an assessment for a period of one year after the date that the financial statements are issued. ASU 2014‑15 is effective for us on January 1, 2017, with early adoption permitted.  We are currently evaluating the impact ASU 2014‑15 will have on our consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015‑02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015‑02”). ASU 2015‑02 significantly changes the consolidation analysis required under U.S. GAAP.  The new standard changes the way a reporting entity evaluates whether (a) limited partnerships and similar entities should be consolidated, (b) fees paid to decision makers or service providers are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. If the Company has an interest in a VIE but it is not determined to be the primary beneficiary, the Company accounts for its interest under the equity method of accounting. Similarly, for those entities which are not VIEs and over which the Company has the ability to exercise significant influence, but does not have a controlling financial interest, the Company accounts for its interests under the equity method of accounting. The Company continually reconsiders its determination of whether an entity is a VIE and whether the Company qualifies as its primary beneficiary. To the extent such variable interests

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are in entities that cannot be evaluated under the variable interest entity model, the Company evaluates its interests using the voting interest entity model. The Company holds a 83.8% interest in the Operating Partnership and is the sole general partner which gives the Company exclusive and complete responsibility for the day-to-day management, authority to make decisions, and control of the Operating Partnership. Through consideration of new consolidation guidance effective for the Company as of January 1, 2016, it has been concluded that the Operating Partnership is a VIE as the limited partners in the Operating Partnership, although entitled to vote on certain matters, do not possess kick-out rights or substantive participating rights. Accordingly, the Company consolidates its interest in the Operating Partnership. However, as the Company holds what is deemed a majority voting interest in the Operating Partnership, it qualifies for the exemption from providing certain of the disclosure requirements associated with investments in VIEs.  ASU 2015-02 was effective for us on January 1, 2016. This pronouncement has had no impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which simplifies the presentation of debt issuance costs. ASU 2015-03 was effective for us on January 1, 2016.  This pronouncement has had no impact on our consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets.  ASU 2015-15 was effective for us on January 1, 2016.  We have assessed the impact of ASU 2015-15 and identified no material impact on our consolidated financial statements.  We currently have borrowings under credit facilities and the related costs of such credit facilities are deferred and presented as an asset.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which pertains to entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Any adjustments should be calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 was effective for us on January 1, 2016. This pronouncement has had no impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.  ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase.  Lessees are required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases.  Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases.  The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance.  ASU 2016-02 is effective for us on January 1, 2019.  We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.  

In March 2016, the FASB issued an update (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting to ASC Topic 718, Compensation—Stock Compensation.  ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for us on January 1, 2018.  We are currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.

In August 2016, the FASB issued an update (“ASU 2016-15”) Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle.  ASU 2016-15 is effective for us on January 1, 2018, with early adoption permitted.  The adoption of this update is not expected to have a significant impact on our consolidated financial statements.

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ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 establishes a hierarchy for inputs used in valuation techniques to measure fair value and prioritizes those inputs that are observable (inputs based on independent market data) and those inputs that are unobservable (inputs developed internally). Cash equivalents measured at fair value are classified in one of the following fair value hierarchy levels based on the lowest level of input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. Management uses judgment in determining fair value of assets and liabilities; and Level 3 assets and liabilities involve greater judgment than Level 1 or Level 2 assets or liabilities:

Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 — quoted prices in markets that are not active for identical or similar assets or liabilities, quoted prices in active markets for similar assets or liabilities, and inputs other than quoted prices that are observable or can be corroborated by observable market data;

Level 3 — inputs that are unobservable and significant to the fair value measurement, including inputs that are not derived from market data or cannot be corroborated by market data.

The Company does not have any assets or liabilities carried at fair value on a recurring basis.  See Note 6 for a discussion of the estimated fair value of the Company’s borrowings under its credit facilities.

 

 

Investments in real estate as of September 30, 2016 and December 31, 2015 are comprised of the following:

 

 

Depreciation expense for the three months ended September 30, 2016 and 2015 was $1,114,400 and $517,223, respectively.  Depreciation expense for the nine months ended September 30, 2016 and 2015 was $3,178,372 and $1,410,517, respectively.

 

 

Real Estate Activity

 

Real Estate Activity for the Nine Months Ended September 30, 2016

On January 27, 2016, the Company closed on the acquisition of a portfolio of mature permanent crop properties aggregating to approximately 2,186 gross acres and approximately 1,718 net plantable acres for a combined purchase price of $63,513,000, from Sun Dial, LLC and affiliates (the “Sun Dial” properties or acquisition). The Company incurred $1,512,430 in acquisition costs associated with this purchase. The purchase of these properties has been accounted for as an asset acquisition, and accordingly, the acquisition costs were capitalized as part of the purchase price of the assets acquired. 

The seven properties are located across multiple counties in California, each with its own on-site water well(s) and/or surface water, and are being operated as four distinct farms (Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch) based on crop type and location.  Crops planted include almonds, lemons, mandarins and several other fresh citrus varieties as well as a small planting of prunes.  Green Leaf LLC, an affiliate of Sun Dial, LLC, and its affiliates (“Green Leaf”), which is also our tenant on Golden Eagle Ranch, executed operating lease agreements contemporaneously with the Sun Dial acquisition to operate all four farms.

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We determined the allocation of the purchase price of the Sun Dial assets acquired during the first quarter of 2016 to be as follows:

 

 

 

On July 27, 2016, the Company completed the sale of its Hawk Creek Ranch development property for a gross sales price of $11,250,000. The net proceeds (net of transaction costs) of $ 10,777,706 resulted in a gain of $2,239,619 on the sale.

 

Real Estate Activity for the Nine Months Ended September 30, 2015

The Company did not close on any acquisitions in the first two quarters of 2015.  

 

On August 18, 2015, the Company closed on a second tranche of a property for Golden Eagle Ranch located in Merced County, California (135 gross acres—130 tillable) for the purchase price of $5,135,000.  The Company incurred $72,139 in acquisition costs associated with this purchase.  The property is planted with almonds. The purchase of this property was treated as an asset acquisition.

On August 21, 2015, the Company closed on the purchase of a property for Kingfisher Ranch located in Fresno County, California (623 gross acres—511 tillable) for the purchase price of $19,637,000. The Company incurred $231,029 in acquisition costs associated with this purchase. The property is planted with pistachios. The purchase of this property was treated as an asset acquisition.

We determined the allocation of the purchase price of the assets acquired during the period ended September 30, 2015 to be as follows:

 

 

 

 

Accrued expenses and other liabilities as of September 30, 2016 and December 31, 2015 consisted of the following:

 

 

 

 

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On December 5, 2013, the Company entered into a $25.0 million revolving credit facility, arranged by Rutledge Investment Company (“Rutledge”), to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month London Interbank Offered Rate (“LIBOR”) (0.8537% at September 30, 2016 and 0.6127% at December 31, 2015). The Company is required to pay any interest due quarterly in arrears beginning January 1, 2014 and any unpaid interest and drawn principal is due and payable in full on January 1, 2019 (“Maturity Date”). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Maturity Date. The credit facility is secured by a first mortgage over, and assignment of leases from, Pleasant Plains Farm, Macomb Farm, Kane County Farms, Sweetwater Farm and Tillar Farm properties. The Company pays a 0.25% per annum non usage fee.  There was $25.0 million outstanding under this credit facility at September 30, 2016 and no amount outstanding under this credit facility at December 31, 2015.

On January 14, 2015, the Company entered into a second $25.0 million revolving credit facility, arranged by Rutledge, to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month LIBOR (0.8537% at September 30, 2016 and 0.6127% at December 31, 2015). The Company is required to pay any interest due quarterly in arrears beginning April 1, 2015 and any unpaid interest and drawn principal is due and payable in full on January 1, 2020 (“Second Maturity Date”). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Second Maturity Date. The credit facility is secured by a first mortgage over and assignment of leases from Quail Run Vineyard, the first tranche of Golden Eagle Ranch and Blue Heron Farms properties. The Company pays a 0.25% per annum non‑usage fee. The amount outstanding under this credit facility at September 30, 2016 and at December 31, 2015 was $25.0 million.

On August 18, 2015, the Company entered into a third $25.0 million revolving credit facility, arranged by Rutledge, to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month LIBOR (0.8537% at September 30, 2016 and 0.6127% at December 31, 2015). The Company is required to pay any interest due quarterly in arrears beginning October 1, 2015 and any unpaid interest and drawn principal is due and payable in full on August 1, 2020 (“Third Maturity Date”). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Third Maturity Date. The credit facility is secured by a first mortgage over and assignment of leases from the second tranche of Kimberly Vineyard, Roadrunner Ranch, Condor Ranch, Blue Cypress Farm, Grassy Island Groves and Falcon Farms properties. The Company pays a 0.25% per annum non‑usage fee.  There was $25.0 million outstanding under this credit facility at September 30, 2016 and $2.2 million outstanding under this credit facility at December 31, 2015.

On December 22, 2015, the Company entered into a fourth revolving credit facility in the amount of $15.0 million, arranged by Rutledge, to provide funds for potential acquisitions, development of existing properties and other corporate purposes. The facility bears interest on the drawn amount at the rate of 130 basis points (1.3%) above the Three Month LIBOR (0.8537% at September 30, 2016 and 0.6127% at December 31, 2015). The Company is required to pay any interest due quarterly in arrears beginning April 1, 2016 and any unpaid interest and drawn principal is due and payable in full on January 1, 2021 (“Fourth Maturity Date”). The minimum advance under the terms of the facility is $500,000 and may be repaid at any time prior to the Fourth Maturity Date. The credit facility is secured by a first mortgage over and assignment of leases from Kingfisher Ranch, Sandpiper Ranch and Hawk Creek Ranch properties. Hawk Creek Ranch was sold in the third quarter of 2016 and accordingly, no longer secures the fourth revolving credit facility.  The Company pays a 0.25% per annum non‑usage fee. There were no amounts outstanding under this credit facility at September 30, 2016 or   December 31, 2015.

The fair value of the borrowings under the credit facilities fall within Level 3 of the fair value hierarchy.  We believe the fair value of the borrowings under the credit facilities as of September 30, 2016 and December 31, 2015 were approximately comparable to our carrying values at each respective date because (i) the revolving nature of the borrowings allows prepayment at the Company’s option at any time, (ii) the borrowings bear interest at a variable rate, and (iii) the spread on all the borrowings did not change throughout the quarter.

Pursuant to an amendment to the credit facilities entered into in December 2015, the Company is required to maintain loan to value ratios of (i) 50% or less measured by the aggregate amount payable to the lender by the Company pursuant to all four existing credit facilities compared to the aggregate appraised value of the properties pledged as security under the four credit facilities and (ii) 60% or less measured by the amount payable to the lender by the Company pursuant to each individual credit facility compared to the appraised value of all of the properties pledged as security under each respective credit facility.  In addition, aggregate indebtedness of the Company must be less than 40% of the aggregate value of the Company’s investment in real estate.  The values used to determine compliance with the covenants are based on independent third-party appraisals performed at least annually.

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We believe we are in compliance with the covenants of each of these credit facilities.

 

 

Prior to the Internalization Transaction, the limited partnership agreement of the Operating Partnership provided that the Operating Partnership pay AFA a management fee in arrears calculated at the annual rate of (i) 1% of the Company’s share of the gross asset value, as defined, of the Operating Partnership as of the end of the immediately preceding calendar quarter and (ii) 0.5% of the Founders’ share of the gross asset value of the Operating Partnership as of the end of the immediately preceding calendar quarter. The management fee for the three and nine months ended September 30, 2015 amounted to $457,794 and $1,276,061, respectively. Prior to the Internalization Transaction, AFA utilized the management fees it received from the Operating Partnership to pay the Agricultural Sub-Adviser their fees. After the Internalization Transaction, AFA became an indirectly and directly wholly-owned subsidiary of the Operating Partnership and continues to pay the Agricultural Sub-Adviser a sub-advisory fee (see below for detail).

Prior to the Internalization Transaction, AFA was entitled to a performance fee equal to 15% of the Funds From Operations (as defined) allocated to the capital account of the Company in the Operating Partnership each fiscal year and 10% of the Funds From Operations allocated to each Founder’s capital account in the Operating Partnership each fiscal year. The performance fee on Funds From Operations amounted to $113,677 and $522,436, respectively, for the three and nine months ended September 30, 2015.  

Prior to the Internalization Transaction, AFA was entitled to an additional performance fee equal to two‑thirds of 15% of the net capital appreciation allocated to the capital account of the Company in the Operating Partnership each fiscal year and to one‑third of 15% of the net realized capital appreciation allocated to the capital account of the Company in the Operating Partnership each fiscal year. AFA was also entitled to two‑thirds of 10% and one‑third of 10% of net capital appreciation and net realized capital appreciation, respectively, allocated to each Founder’s capital account in the Operating Partnership each fiscal year. The performance fee on net capital appreciation (realized and unrealized) amounted to $143,588 and $941,359, respectively, for the three and nine months ended September 30, 2015.

These performance fees are reflected in management and performance fees-related party on the consolidated statements of operations.  The payment of performance fees to AFA ceased following the Internalization Transaction.

Concurrent with the closing of the Offering on October 23, 2015 (the “Closing Date”), the Company internalized its management functions previously provided by AFA.  The Internalization Transaction was accomplished by having the previous owners of AFA (including AFC TRS LLC) which held a 0.2% interest in AFA, contribute 100% of their interests in AFA to the Operating Partnership. On the Closing Date, any performance fees related to Funds from Operations and capital appreciation that were previously assessable against the capital accounts of the partners in the Operating Partnership, ceased.  The previous owners of AFA received 986,438 Common Units in the Operating Partnership in aggregate in connection with the Offering valued at $8.00 per Common Unit or $7,891,504.  The excess of the fair value of the consideration for the Internalization Transaction amounting to $7,891,504 over the net liabilities assumed of $1,043,241, amounted to $8,934,745.  The excess amount together with $860,000 in transaction costs, which represent the fair value of the cost to terminate the various management contracts with AFA, associated with the Internalization Transaction totaling $9,794,745, were expensed in the fourth quarter of 2015 in the consolidated statement of operations and were allocated based on the percentage ownership of the Operating Partnership prior to the Offering.

 

In addition, the Agricultural Sub-Adviser to AFA, Prudential Mortgage Capital Company, LLC, which includes Prudential Agricultural Investments, a unit of Prudential Mortgage Capital Company, LLC, entered into an Amended and Restated Sub-Advisory Agreement (the “Amended and Restated Sub-Advisory Agreement”) effective on the Closing Date whereby the Agricultural Sub-Adviser receives a sub-advisory fee equal to the annual rate of 1.0% of the appraised value of the Operating Partnership’s properties at the end of each calendar quarter.  The fee for the quarter ended September 30, 2016 amounted to $686,797, and the fee for the nine months ended September 30, 2016 amounted to $2,028,910.  Pursuant to the Amended and Restated Sub-Advisory Agreement, our Agricultural Sub-Adviser was also entitled to an initial public offering capital compensation fee because less money was raised in our initial public offering than contemplated at the time the Amended and Restated Sub-Advisory Agreement was signed.  The initial public offering capital compensation fee required additional make-whole payments calculated, (i) for the acquisition fee based on 2% of the difference between $84.75 million and the gross proceeds raised, (ii) for the management fee based on 1% of the difference between $84.75 million and the gross proceeds raised and (iii) such compensation fee payments are to be based on capital raised between October 31, 2014 and six months after the date of the initial public offering. During the second quarter of 2016, the Company and the Agricultural Sub-Adviser settled and agreed that the initial public offering capital compensation fee due was a one-time payment of $104,020, which has

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been included in the sub-advisory fees for the nine months ended September 30, 2016 included in the consolidated statement of operations.

 

Pursuant to the Amended Sub-Advisory Agreement, the Agricultural Sub-Adviser was entitled to performance fees as of the Closing Date as if all fees under the original Sub-Advisory Agreement were earned and payable (the “Legacy Performance Fee”).  The Legacy Performance Fee is payable in equal annual amounts over four years beginning in the third quarter of 2016.  Interest is payable at the simple rate of 5% on unpaid balances beginning on the Closing Date.  The balance of the Legacy Performance Fee payable to the Agricultural Sub-Adviser in the amount of $1,106,307 was repaid in full on August 3, 2016 out of the proceeds from the sale of the Hawk Creek property. The Legacy Performance Fee was $1,106,307 as of December 31, 2015.

 

The Operating Partnership paid Optima Fund Management LLC (“Optima”), an affiliate of the Managing Member of AFA prior to the Closing Date, $7,500 and $22,500, respectively, for the three and nine months ended September 30, 2015 as a fee for providing administrative and accounting services to the Company and the Operating Partnership.  In connection with the Internalization Transaction, AFA and Optima entered into a Transitional Services Agreement dated as of the Closing Date.  AFA paid Optima $43,809 and $132,663, respectively, for the three and nine months ended September 30, 2016 pursuant to the Transitional Services Agreement in respect of occupancy, data processing and accounting and other administrative services.

 

There were 300,000,000 shares of common stock, par value $0.01 per share, authorized with 16,921,897 issued and outstanding as of September 30, 2016 and 16,890,847 issued and outstanding as of December 31, 2015.  There were 35 8% Series A Cumulative Non‑Voting Preferred Stock, par value $0.01 per share, authorized with zero issued and outstanding as of September 30, 2016 or December 31, 2015.

2015 Initial Public Offering

On October 19, 2015, the Company priced the Offering of 6,000,000 shares of its common stock at a public offering price of $8.00 per share, which closed on October 23, 2015, resulting in gross proceeds of $48.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by the Company, of approximately $39.2 million. 

Non-Controlling Interests in Operating Partnership

The Company consolidates its Operating Partnership, a majority owned partnership.  The Company owned 83.8% of the common limited partnership interests (“Common Units”) in the Operating Partnership at September 30, 2016 and December 31, 2015.

On or after 12 months after becoming a holder of Common Units, each limited partner, other than the Company, has the right, subject to the terms and conditions set forth in the partnership agreement of the Operating Partnership, to require the Operating Partnership to redeem all or a portion of such units in exchange for cash, or at our option, for shares of our common stock on a one-for-one basis.

The Operating Partnership is required to make distributions on each Common Unit in the same amount as those paid on each share of the Company’s common stock, with the distributions on the Common Units held by the Company being utilized to make distributions to the Company’s common stockholders.

There were 3,269,556 Common Units outstanding as of September 30, 2016 and December 31, 2015.

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Dividends

The Company’s Board of Directors declared and paid the following dividends to common stockholders for the nine months ended September 30, 2016 and for the years ended December 31, 2013, 2014 and 2015:

 

 

 

 

 

Subsequent to each year end the Company determines what amounts of the dividends paid during that year represent ordinary income to stockholders for income tax purposes versus capital gains or return of capital. The Company paid distributions of $0.25 per share in calendar year 2015, of which 53% was ordinary income and 47% was a return of capital for U.S. federal income tax purposes. The Company paid distributions of $0.25 per share in calendar year 2014, of which 74% was ordinary income and 26% was a return of capital for U.S. federal income tax purposes.  The Company paid distributions of $0.225 per share in calendar year 2013, of which 42% was ordinary income and 58% was return of capital for U.S. federal income tax purposes.

Equity Incentive Plan

The Company may issue equity-based awards to officers, employees, non-employee directors and other key persons under the Company’s 2014 Equity Incentive Plan (the ‘‘Plan’’), which became effective on the Closing Date.  We initially reserved 806,400 shares of common stock equal to 4.0% of our total outstanding shares of common stock and Common Units immediately following the consummation of the Offering.  The Plan provides for the grant of stock options, share awards (including restricted stock and restricted stock units), stock appreciation rights, dividend equivalent rights, performance awards, annual incentive cash awards and other equity based awards, including LTIP units, which are convertible on a one-for-one basis into Common Units.  The terms of each grant will be determined by the Compensation Committee of our Board of Directors.  No awards were made pursuant to the Plan during the year ended December 31, 2015.  

As of September 30, 2016, as a result of the below mentioned awards granted during the first quarter of 2016, there were 595,470 shares available for future grant under the Plan.

On March 2, 2016, the Compensation Committee of the Board of Directors approved the award of 47,444 shares to officers, employees and a non-employee director under the Company’s Plan for services related to the Offering. The number of shares granted was determined by dividing 25% of each executives’ annual salary by the Offering price of $8.00 per share, so that the value of the grant would reflect the change in the Company’s stock price since the Offering. The shares had a fair market value of $5.95 per share as of the date of the grant.  These shares were immediately vested, but were subject to lock-up agreements entered into in connection with the Offering until April 18, 2016.  The Company recognized $282,292 of stock-based compensation expense associated with this award during the first quarter of 2016.  Following the withholding of shares for tax withholdings, 31,050 additional shares were issued and outstanding in connection with this award.

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On March 23, 2016, the Compensation Committee of the Board of Directors approved the award of 163,486 restricted stock units (“RSUs”) to officers, employees and a non-employee director under the Plan.  The RSUs are subject to vesting over a four-year period based entirely upon the attainment of pre-determined levels of total shareholder returns, as will be measured as of each year end compared to the Company’s common share price on December 31, 2015, and with one-quarter of the RSUs subject to vesting each year.  The RSUs are not entitled to receive dividends while unvested.  Upon a change in control, the grants may accelerate up to one year’s worth of vesting if the change in control price per share meets the pre-determined performance metrics and additional amounts may vest if the change in control price per share exceeds the net asset value per share. The aggregate RSU award fair value as of the March 23, 2016 grant date was estimated to be $102,588 using Monte Carlo simulation techniques and will be amortized over the respective vesting periods for each of the awards. The Company recognized $16,389 and $34,399, respectively, of stock-based compensation expense associated with this award during the three and nine months ended September 30, 2016.

 

 

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

The Company has no potentially dilutive securities outstanding.

 

 

 

The Company’s mature properties, and the mature acres of Condor Ranch which is a development property, are leased to tenants under operating leases, which expire on various dates through 2020. Future minimum rents to be received from tenants under non-cancelable leases in effect at September 30, 2016, are as follows:

 

 

In addition to the minimum lease payments described above, Cougar Ranch, Cheetah Ranch, Puma Ranch, Lynx Ranch, Kimberly Vineyard, Golden Eagle Ranch, Condor Ranch, Quail Run Vineyard, Falcon Farms, Kingfisher Ranch and Blue Heron Farms have leases that require the tenants to pay participating rent above a threshold, based on a percentage of gross revenues, as defined in the leases, derived from the leased property.  Participating rent was $1,978,045 and $545,716 for the three months ended September 30, 2016 and 2015, respectively, and $2,670,162 and $2,875,280 for the nine months ended September 30, 2016 and 2015, respectively. Depending upon each farm’s crop yield and commodity prices, the participating rent can be the majority of the rental revenue received from the tenants on these properties.

 

 

Under the leases in place for the farms in our portfolio, a tenant typically is obligated to indemnify us, as the property owner, from and against all liabilities, costs and expenses imposed upon or asserted against us as owner of the farms due to certain matters relating to the operation of the property by the tenant.

We may be a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.  There can be no assurance that these matters that arise in the future, individually or in aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows in any future period.

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The Company has identified four reporting segments: commodity row crops, specialty/vegetable row crops, permanent crops and properties under development. Each of these segments has different return on capital expectations, may have different forms of revenue (fixed and/or participating) or require an extended number of years before they produce revenue from trees and/or vines as a result of a development or redevelopment program.

Below is a summary of total assets by segment as of September 30, 2016 and December 31, 2015.

 

 

 

Below is a summary of income before income taxes by segment for the three months ended September 30, 2016 and 2015, respectively, and the nine months ended September 30, 2016 and 2015, respectively.

 

 

 

 

 

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No material subsequent events have occurred since September 30, 2016 that required recognition or disclosure in the financial statements, except as disclosed below:

Subsequent to September 30, 2016, limited partners in the Operating Partnership holding 2,687,412 Common Units requested redemption of their Units.  The Company elected to satisfy the redemption request by issuing 2,687,412 shares of common stock in the Company.

On October 26, 2016, a purported class action lawsuit was filed in the Circuit Court for Baltimore County, Maryland against the Company, seeking to represent a proposed class of all Company stockholders captioned Parshall v. American Farmland Company et. al., Case No. 24C16005745. The complaint names as defendants the Company, the members of the Company Board, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC.  The complaint alleges that the Company directors breached their duties to the Company in connection with the evaluation and approval of the mergers. In addition, the complaint alleges, among other things, that the Company, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC aided and abetted those breaches of duties. The complaint seeks equitable relief, including a potential injunction against the mergers. The Company and FPI believe the allegations in the complaint are without merit and intend to defend against those allegations. The Company and FPI cannot assure you as to the outcome of this pending litigation, or any similar future lawsuits, including costs associated with defending these claims, any other liabilities that may be incurred in connection with the litigation or settlement of these claims or any effect on the operations of the Company or FPI or the timing in which the mergers are completed.

 

 

 

 

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Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). These forward-looking statements include information about possible or assumed future results of our business, future events, financial condition or performance, expectations, competitive environment, availability of resources, regulation, liquidity, results of operations, strategies, plans and objectives. These forward-looking statements include, without limitation, statements concerning our proposed merger with FPI, projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance, 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,” “forecasts,” “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. You should not place undue reliance on these forward-looking statements.  Statements regarding the following subjects are forward-looking by their nature:

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information available to us at the time those statements are made or management’s good faith belief as of that time with respect to future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Changes in the following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

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Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking 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 after the date of this Quarterly Report on Form 10-Q, except as required by applicable securities law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

The following discussion and analysis should be read in conjunction with our combined consolidated financial statements and the related notes included in this report.

Executive Summary

We are an internally managed real estate company focused primarily on the acquisition and management of a diversified portfolio of permanent crop, specialty/vegetable row crop and commodity row crop farmland, including farmland development located in the U.S. in select major agricultural states. We lease our farms to experienced professional farmer tenants under a variety of lease structures with staggered durations, including fixed and participating leases. As of September 30, 2016, our portfolio was comprised of 21 farms and approximately 17,800 gross acres with more than 21 crop types (over 40 when including sub-varieties), some of which are planted in rotation, in Alabama, Arkansas, California, Florida, Georgia and Illinois.

We were incorporated in Maryland in October 2009, and elected to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2012. We conduct all of our business activities through our Operating Partnership, of which we are the sole general partner.

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The below table shows the properties owned by the Company as of September 30, 2016 and as of December 31, 2015:

 

 

Objectives and Strategies

Our investment objectives are to achieve annual returns both from income and capital appreciation which meet or exceed returns from comparable farmland properties and which display low correlation to other asset class returns and limited volatility. We pursue our investment objectives primarily through the ownership by our Operating Partnership of our portfolio of farms and we generate virtually all of our revenue by leasing our portfolio of farms. We intend to invest in farms across four key types of property: mature

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permanent crops, specialty/vegetable row crops, commodity row crops and development farmland. Utilizing this investment strategy, we seek to acquire high-quality cropland diversified by crop type, based on the total value of our portfolio.

We intend to engage in all future investment activities in a manner that is consistent with our intention to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes. In addition, we may expand and improve the farms we presently own or other acquired farms, or sell such farms, in whole or in part, when circumstances warrant.

Recent Developments – Nine Months Ended September 30, 2016

New Leases and Lease Renewals

During the first quarter of 2016 we executed a new short term lease which expires December 31, 2016 with a tenant on Blue Cypress Farm for the 2016 crop season.  The lease provided the tenant an early termination option on the earlier of the harvesting of the 2016 spring crop or June 1, 2016.  The tenant did not exercise this early termination option and subsequent to a successful harvest of the spring crop is in the process of planting a second crop on the property for fall harvest.  There were no new or renewal leases executed during the third quarter of 2016.  Leases with the tenants on the first tranche of Kimberly Vineyard, Macomb Farm, Sweetwater Farm, Tillar Farm, Quail Run Vineyards, Falcon Farms and Blue Cypress Farm are set to expire at various dates in the fourth quarter of 2016 and will need to be renewed for 2017. We have commenced lease negotiations with a number of these tenants and have signed lease renewals or amendments to the prior lease with the tenants on our Macomb Farm and Falcon Farms.  On October 17, 2016, the Company executed a lease renewal on Macomb Farm with the same tenant for a one year term. On October 20, 2016, the Company executed an amendment to the prior lease on Falcon Farms with the same tenant for a three year term. As of September 30, 2016, we had no vacancies on any of our non-development farms.

 

Acquisitions

On January 27, 2016, wholly-owned subsidiaries of the Company completed the acquisition of a portfolio of mature permanent crop properties aggregating to approximately 2,186 gross acres and approximately 1,718 net plantable acres, the Sun Dial properties or acquisition, as previously defined, for a combined purchase price of $63.5 million, excluding transaction costs, from Sun Dial, LLC and affiliates (the “Sellers”).  The Sun Dial acquisition substantially increased the Company’s farmland assets by approximately 30% (as measured by appraised value).  The seven acquired properties are located across multiple counties in California, each with its own on-site well(s) and / or surface water, and are being operated as four distinct farms (Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch), with properties grouped into a particular farm based on crop type and location. Crops planted include almonds, lemons, mandarins and several other fresh citrus varieties as well as a small planting of prunes.

The properties were previously owner-occupied and, as a result, do not have a prior leasing history.  Upon closing, the Company entered into four separate participating leases with Green Leaf which are expected to provide a blended first year fixed base rent yield of approximately 5% of the purchase price, with the potential for additional income from formulaic participation in the crop revenue above a fixed threshold and with the base rent and fixed threshold each having annual escalators.  Green Leaf is also the tenant on the Company’s Golden Eagle Ranch property.  The acquisition was funded from cash on hand and additional borrowings under the Company’s existing revolving credit facilities. There were no other acquisitions during the nine months ended September 30, 2016.

Disposition

 

On July 27, 2016, the Company completed the sale of its Hawk Creek Ranch development property for a gross sales price of $11.25 million.  The property, which was not expected to be under commercial lease until 2021, was listed with a broker prior to the Company announcing its strategic alternatives review process in April 2016.  The net proceeds (net of transaction costs) of $10.8 million were used to pay down outstanding balances under the Company’s revolving credit facilities in the amount of $6.0 million, to fully pay down the Legacy performance fee payable to the Agricultural Sub-Adviser (and accrued interest thereon) in the amount of $1.1 million, with the remainder held in cash.  The Company realized a gain of approximately $2.2 million on the sale.  The Company currently has no other individual properties listed for sale.  There were no other dispositions during the nine months ended September 30, 2016.

Review of Strategic Alternatives and Execution of an Agreement and Plan of Merger with Farmland Partners Inc. (NYSE: FPI) ("FPI")

On April 14, 2016, the Company announced that its Board of Directors had authorized the Company to commence a review of strategic alternatives to enhance shareholder value.  Since the Offering, the Company’s shares have consistently traded at a substantial

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discount to net asset value which, as of December 31, 2015, was estimated to be $10.05 per share.  The Company’s net asset value is based upon independent third-party appraisals of its farms which were performed as of December 31, 2015.  The Company retained Citigroup Global Markets Inc. and Raymond James & Associates, Inc. as its financial advisors and Goodwin Procter LLP as legal counsel to assist in a comprehensive analysis of all potential strategic alternatives.  Alternatives to be explored included, among others, joint venture arrangements, a merger of the Company, or a sale of all or part of the Company and/or its assets

On September 12, 2016, the Company entered into a definitive agreement and plan of merger with  Farmland Partners Inc. (“FPI”), Farmland Partners Operating Partnership, LP (“ Farmland Partners OP”), and certain of their respective subsidiaries, pursuant to which the Company will merge with and into one of FPI’s wholly owned subsidiaries with such wholly owned subsidiary of FPI surviving the merger and a Farmland Partners OP subsidiary will merge with and into the Operating Partnership, with the Operating Partnership  surviving as a wholly owned subsidiary of FPI. The transactions contemplated by the merger agreement are expected to close in the first quarter of 2017, subject to the satisfaction of certain closing conditions. For more information about the pending merger, see Note 1 in the notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q..

We cannot assure you that we will be able to complete the mergers on the expected timeline or at all. See “Item 1A Risk Factors” included in this Quarterly Report on Form 10-Q.

 

Reappointment of Mr. Geoffrey M. Lewis as Chief Financial Officer Role

 

On September 10, 2016, Mr. Geoffrey M. Lewis, age 55, was reappointed as the Company’s Chief Financial Officer and remains the Treasurer and a Director. He reassumed the position, after an orderly transition, from Mr. Andreas Spitzer, who held the role until his planned departure on August 26, 2016. Mr. Lewis previously served as the Company’s Chief Financial Officer from the Company’s inception in 2009 through January 2016. Since 2009, Mr. Lewis has also served as the Company’s Treasurer and as a member of the Company’s Board of Directors.

 

Factors That May Affect Our Operating Results and Asset Value

Our operating results and the value of our farms are affected by a number of broad economic or fundamental factors, including global supply and demand trends and crop prices, as well as other more localized or property specific factors, including rental rates and lease structures, our ability to control expenses, weather events, including droughts, seasonality and the portion of our portfolio invested in development farms.

Demand for Farmland and Agricultural Crops

The most significant driver of our operating results and portfolio value is, and we believe will continue to be, global demand for U.S. agricultural crops, which in turn is driven by global demographic and economic trends such as population growth and the increasing size and wealth of the middle class in emerging markets and, to a lesser extent, a trend toward increased reliance on alternative energy sources. Increasing demand for U.S. agricultural crops generally results in the support of and, over the long-term, increase in the value of U.S. farmland and increases in rental rates for those farms. Further, we believe that the U.S. has strong agricultural advantages in its topography and geographic position, with its varied climatic regions allowing for the production of a wide variety of agricultural crops and its central position between industrial centers in Asia, Europe, Canada and South America making it a favorable location for trading.  Additionally, unlike many developing nations, the U.S. is a politically stable nation with well-developed infrastructure, including established railways and ports for transportation and export of crops, and has the financial resources (such as investor capital and government support through crop insurance) to sustain its agriculture industry. These factors, among others, provide the U.S. a comparative advantage even when it is not the lowest-cost producer and should help sustain demand for U.S. agricultural crops over the long term.

The U.S. Census Bureau forecasts that the global population will grow by more than one billion people by 2028. We believe that population size is the primary driver of global demand for agricultural crops and further believe that higher prices for agricultural crops should translate into both higher rental rates for farmland as well as continued growth in the value of farmland, such as our farms, over the long-term.

Another significant demand driver is the increasing size and wealth of the middle class in emerging markets. To the extent that the middle class in emerging markets continues to expand, diets are expected to improve and diversify through increased caloric intake, greater spending on higher quality food and through greater consumption of protein (from both crops and livestock). These improvements to diets and nutrition in emerging markets drive increased demand for commodity row crops used as feedstock and for permanent crops, like nuts, which are an alternate source of protein. We also expect that increased consumer spending power in emerging markets will result in households allocating a larger percentage of their income to food products that may be considered discretionary, including wine and different nut types, which will result in an increased demand for certain of our permanent crops.

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Additionally, the overall trend toward reducing the global ‘‘carbon footprint’’ has increased demand for alternative energy sources, which, in the long term, could impact our rental revenues and our results of operations. Key alternative energy commodities include corn, used in ethanol, and soybeans, used in biodiesel fuel. Further, farmland can also be used to produce other types of alternative energy, including geothermal, solar and wind, as farm owners lease fields as locations for clean electricity generation, including wind farms and/or solar panels. Our business strategy is not significantly dependent on 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 portfolio.

Supply of Arable Farmland and Agricultural Crops

We believe that the global supply of arable land will continue to be limited in the future due to the finite nature of land resources generally. Even with technological advances improving productivity, the availability of arable land for agricultural use continues to diminish, and with an expectation of the global population continuing to expand, the amount of arable land per capita is expected to continue to decline in the future. Additionally, increased urbanization of rural lands as well as land erosion, desertification and degradation, particularly outside of the United States, will also contribute to a reduction in the supply of farmland and potentially increase foreign dependence on agricultural imports from regions such as the U.S. We believe these constraints on the supply of arable farmland will result in increases in the value of farmland.

The global supply of arable land and the productivity of such land is adversely affected by the scarcity of water in many irrigated growing regions, both globally and within the U.S. For example, a significant portion of the U.S. has experienced severe drought conditions over the past few years, most recently in the Pacific region, including a majority of California which still persists despite being somewhat offset by the recent El Nino weather pattern. While such conditions could have negative short-term impacts on U.S. agriculture, including less crop production, increased competition for farmland due to distressed sales and lower farm income, from a long-term perspective, we believe a strategy of holding diversified assets both geographically and on a commodity basis may help to mitigate losses in any one area or crop type. Further, leased farmland may benefit from rental payments and crop insurance even in periods of lower than normal crop production.

In addition, there is often a related and mitigating relationship between crop supply and crop prices in certain crop types or regions. Typically, where there are concerns over supply due to a weather event (i.e. drought or frost) prices will increase, insulating overall gross revenues from potential decreases related to supply concerns. In times of weather uncertainty, properties with higher quality water access and/or soils tend to be more resilient to downturns in value and, accordingly, water and soil quality, along with water availability, are integral components of our pre-acquisition analysis. In that respect, all of our California farms have wells that are either onsite or shared and/or have access to surface water for which we have deeded or contractual rights. The continuance of the current drought or an increase in its severity or the occurrence of additional weather events, including droughts in other regions, may further impact the productivity and supply of arable farmland.

In addition to the amount of land dedicated to agricultural activity, the global supply of crops is affected by the productivity of farmland and technology. Historically, farmland productivity has been driven by advances in seed technology, farm equipment, irrigation techniques and chemical fertilizers and pesticides. We believe that trends toward the urbanization of rural land, erosion, desertification and degradation, collectively will offset the benefits of any technological advances that improve the productivity of farmland generally.

Rental Revenues from Fixed and Participating Leases

In order to maximize the benefit of the demand/supply dynamics discussed above, we use varying lease structures based on crop type and geographic regions.

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The following table summarizes the leases in place as of September 30, 2016 across our farm portfolio and identifies the lease type and lease expiration.  Participating leases can be based on a crop share or can be comprised of fixed base rent and formulaic participating components; all of our current participating leases have both fixed base rents and participating components.

 

We generally use fixed leases of one to three years for our specialty/vegetable and commodity row crop farms, which typically include annual percentage or dollar escalators in some cases for leases of more than one year in duration. These fixed leases provide stability for our revenues and a level of protection against many risks inherent in farming operations, such as weather, drought or shorter-term crop fluctuations. These events generally have only a short-term adverse impact on the farmland because of the ability to replant crops or switch crops the next year. Rental payments for fixed leases on row crops are typically made on an annual basis and are either paid in advance in-whole or semi-annually, with 50% being made in advance of planting and 50% being paid just prior to or post harvest.

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Due to the short term nature of these fixed leases on specialty/vegetable and commodity row crop farms, in any given year we may have multiple leases up for renewal or extension. In general and based on our prior experience, lease renewal rates are impacted by a variety of factors including: (i) land value changes over the span of the lease (i.e., if a lease has a three year term, and in those three years, the value of property increases by 20%, the renewed lease will similarly adjust the rental payment), (ii) crop price trends, (iii) revenue and expense expectations and (iv) public rental data for comparable farms, if known.  

For permanent crop farms, we typically use participating leases because the ability to share in favorable crop prices and yields compensates for the increased risks of owning and developing permanent farmland, which takes several years to yield revenue-producing crops and which can suffer long-term damage from weather events. These leases typically require the tenant to pay a base rent and, after a threshold that allows the tenant to recoup agricultural expenses, revenues are shared formulaically based on one or multiple factors pursuant to the applicable lease. These leases are typically longer-term in nature (four to six years), and have multiple payment installments, some for base rent amounts and others for the participating component. Revenues from participating leases exhibit more variability around fluctuating crop prices and harvest cycles and are subject to seasonality, the timing of crop harvests or when revenues are recognized or received. We expect such variability to continue as long as we continue to use such lease types.

Farms with fixed leases of multiple-year durations are less susceptible to the immediate impacts of changes in crop prices. However, land values for commodity row crop farms and resulting market rental rates are generally impacted by the overall three year average of commodity crop prices, and perhaps sooner in times of notable price volatility. For leases where there is a participating or contingent revenue component, impacts of changing crop prices will have a more direct impact on revenues. Although annual fixed rental payments under our leases will not be 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 farms on favorable terms.   However, crop insurance, which is federally provided for commodity row crops and which we mandate our tenants to obtain with respect to permanent crops, is an important mitigant in adverse years.

Rental revenue from larger farms will have a direct bearing on our overall revenues.  For example, our Golden Eagle Ranch property was responsible for 41.4% of our 2015 fixed and participating rent, which represents rent received for the year ended December 31, 2015 and includes certain rent from participating leases for the 2014 crop year that was not recognized in 2014, but does not include rent still to be paid under participating leases for the 2015 crop year that has been and is yet to be recognized in 2016.  Our Golden Eagle Ranch property represented 19.7% of our fixed and participating rent for the nine months ended September 30, 2016 as compared to 51.4% for the nine months ended September 30, 2015.  As further discussed in “Results of Operations”, the period to period decline in participating rents from Golden Eagle Ranch have significantly impacted the Company’s total operating revenues.

Development Farms

On July 27, 2016, we sold our Hawk Creek Ranch pistachio development property for a gross sales price of $11.25 million.  Excluding Hawk Creek Ranch, four of our farms are either completely or in majority under development and one farm is partially, but less than a majority, under development at present. The farms that are completely (or in majority) under development as of September 30, 2016 include Roadrunner Ranch, Condor Ranch, Pintail Vineyards and Grassy Island Groves. In addition, our Quail Run Vineyard is partially, but less than a majority, under development. Portions of our other farms may contain young non-mature acres that are not yet commercially productive, but are not included in the development segment as such farms do not require the continued capital expenditures associated with development, and such development acreage represents a minority of the property acreage. Further, given that our Golden Eagle Ranch consists of trees that were planted at different times, we will periodically redevelop minor portions of the farm where the trees are nearing the end of their productive lives. Rental revenues will not be generated on these development farms until they become commercially productive, and for farms that are in partial development, any revenues may be offset to a varying degree from development capital expenditures. We expect our current farms under development to become commercially productive and leased to tenants between 2017 and 2019, depending on each property’s current stage of development and the crop type for which it is being developed. While development farms represent one of the four main sub-categories of our farms, our current intent is to seek to acquire income producing farms in order to ensure adequate income generation; therefore, our level of capital expenditures as a percentage of total asset value is expected to decline going forward.

Our Blue Cypress Farm was previously categorized as a development farm but became commercially productive in the first quarter of 2016. A short term lease ending December 31, 2016 and covering the 2016 growing seasons was executed with a new tenant in the first quarter of 2016.  The lease provided the tenant an early termination option on the earlier of the harvesting of the 2016 spring crop or June 1, 2016.  The tenant did not exercise this early termination option and subsequent to a successful harvest of the spring crop is in the process of planting a second crop on the property for fall harvest. Further, the development acreage on our Condor Ranch and Quail Run Vineyard is now under a transitional lease, and while not yet commercially productive, will continue to mature over the next couple of years as its development concludes. Similarly, we are in negotiations in connection with a transitional lease for the majority of the development acres on our Roadrunner Ranch, which is expected to be executed later in the fourth quarter of 2016.

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Capital Expenditures

In connection with our development and redevelopment farms, as well as due to regular operating maintenance costs, capital expenditures during the nine months ended September 30, 2016 were approximately $4.3 million before revenue offsets. We currently estimate approximately $3.4 million before revenue offsets in remaining capital expenditures, of which approximately $0.7 million is planned for the remainder of 2016, to complete our existing development projects on Roadrunner Ranch, Condor Ranch, Quail Run Vineyard, Grassy Island Groves, and Pintail Vineyards (but excluding Hawk Creek Ranch, which was sold on July 27, 2016), which include cultural costs incurred for crops that are producing, but not at commercially productive or leasable levels. Additionally, we currently estimate approximately $2.5 million before revenue offsets in remaining capital expenditures, of which approximately $1.0 million is planned for the remainder of 2016, for redevelopment and partial development projects on our Golden Eagle Ranch, Falcon Farms and Kingfisher Ranch.  Thereafter, we would expect our capital expenditures related to our development and redevelopment farms to decline as we are focusing on acquiring more crop producing farms and fewer development farms until more of our existing development projects are complete.

Expenses

All of our leases provide that we are responsible for major maintenance and insurance costs, while the tenant is responsible for minor maintenance, water usage and all of the additional input costs related to the farming operations on the farms, such as seed, fertilizer, labor and fuel. Generally, real estate taxes are capitalized for acres under development and are expensed for leased acreage. With one exception, currently all leases for our permanent crop segment require our tenants to reimburse us for real estate taxes we pay on the farms. For all of our farms, we will generally bear costs related to major capital improvements, such as irrigation systems or drainage tile. We also will incur the costs associated with maintaining liability and casualty insurance in addition to any insurance provided by the tenant for which we are a named insured. Additionally, we will be responsible for the fees paid to our Agricultural Sub-Adviser and any other third parties, in connection with property acquisition and management, and sales, general and administrative expenses. However, because we believe that our platform is scalable, we do not expect the expenses associated with managing our farms to increase disproportionally as we grow our portfolio.

We also incurred and will incur ongoing costs of running a public company, including, among others, costs associated with employing our personnel, compensation of non-employee directors, and compliance costs.

Crop Prices

Crop prices are impacted by a variety of factors, including, among others, global production and demand estimates, adverse weather conditions, crop disease in important global farming regions, changes in government regulations and policy, fluctuations in global wealth, currency fluctuations, changes in foreign trade and export markets, and military conflicts. Any of these factors may result in crop price volatility, which may either positively or negatively impact the value of our tenants’ crop yields. Prices for many commodity row crops, particularly corn, have generally experienced significant declines in 2013 through the third quarter of 2016, but we do not believe that such declines represent a trend that will continue over the long term. Rather, we believe that those declines in prices for commodity row crops represent a correction to historical norms (adjusted for inflation) after a period of heightened prices stemming in part from the drought that impacted crop supply in the Midwest in 2012, and we believe that long-term growth trends in global population will result in increased prices for commodity row crops over time. Additionally, these declines in commodity row crop pricing have been offset by record crop production and strong permanent crop prices in other regions during certain periods in that time range. With respect to permanent crop prices, almonds and walnuts have declined from record high prices exhibited in 2013 through 2015 and are trading closer to historical averages.  Prices for other permanent crops such as citrus are currently trading above historical averages. While we anticipate prices for crops will generally increase over the long-term due to overarching global trends in population growth and declining supply of arable land, there will likely be future price variability for the reasons discussed above.

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Seasonality

Our revenues are impacted by the seasonality of crop harvests and the timing of when revenue is recognized in connection with such harvests (which can be impacted by exogenous factors including, among others, weather, fluctuations in crop prices and the alternate-bearing nature of certain permanent crops, like pistachios and avocados), as the leases for our permanent crops have both fixed and participating components, with the participating component tied to a percentage of gross revenue generated by a crop yield or a share of the crop yield.

As September 30, 2016, we had eleven farms that were subject to participating leases, and we expect to use similar leasing structures in the future. Payments under such leases are made two to four times annually, with some payments being made in the year subsequent to the relevant harvest, which causes revenue to be concentrated unevenly in the fourth, first and second quarters of each year, varying in amount and timing from year to year. Pistachios, which are planted on Kingfisher Ranch, are generally harvested in the fall with crop sales (and thus the Company’s participating rents) typically occurring and being recognized in both the fourth quarter of the harvest year as well as into the following year. However, Kingfisher Ranch experienced a weak 2015 production yield and, accordingly, the tenant pursued insurance claims under its crop insurance policies which were settled in full in the fourth quarter of 2015 and resulted in the Company’s recognition of higher than otherwise expected participating revenues in 2015 for Kingfisher Ranch because in the event of a normal crop, a portion of the 2015 crop yield would have been recognized as 2016 participating revenues, but due to the insurance settlement, substantially all 2015 crop revenues were recognized in 2015.  The full insurance settlement recognition in 2015 resulted in no 2016 participating revenues at Kingfisher Ranch for the 2015 crop. In addition, our Golden Eagle Ranch generated strong participating revenues in 2015 due to the strength of the 2014 crop production as well as high almond prices throughout the majority of 2015 when the 2014 crop was sold by the tenant.  However, the 2015 crop at Golden Eagle Ranch was significantly lower than the 2014 crop due to poor weather-related growing conditions.  Lower 2015 farm production combined with a more recent decline in almond prices is expected to result in substantially lower participating rents from Golden Eagle Ranch in 2016 than were recorded in 2015, as occurred in the first half of 2016.  As previously discussed, due to the year over year decline in participating rents expected from Golden Eagle Ranch during 2016, the Company expects 2016 operating revenues generated from same-property farms to be lower in 2016 than in 2015.

Variability in crop revenues from year to year is common in the farming industry, and we therefore expect variability in our rents that derive from participating lease types to continue going forward. We also expect that seasonality will continue to impact our results of operations and revenues and that, on average, the fourth calendar quarter of the current year and the first and second calendar quarters of the following year should be expected to receive a disproportionate revenue share, although the timing may vary.

Reportable Segments

We operate our business in four reportable segments: Permanent Crop, Specialty/Vegetable Row Crop, Commodity Row Crop and Development.

Permanent Crop Segment

As of September 30, 2016, our permanent crop segment consisted of our Kimberly Vineyard, Golden Eagle Ranch, Quail Run Vineyard, Blue Heron Farms, Falcon Farms, Kingfisher Ranch, Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch properties, with an aggregate of 5,428 tillable acres and 6,826 gross acres.  However, 77 acres of Quail Run Vineyard are currently subject to development and are under transitional lease. The leases for these farms terminate between 2016 and 2020.  Leases with the tenants on the first tranche of Kimberly Vineyard, Quail Run Vineyard and Falcon Farms are set to expire in 2016, and we expect to begin negotiating renewals for these properties in advance of their expiration. Farms in our permanent crop segment are generally subject to participating leases, under which a part or all of the rent is derived from participation in crop revenues or a share of the final crop, often with a fixed base rental amount, and which tend to have longer lease terms of three to five years.

Specialty/Vegetable Row Crop Segment

Subsequent to December 31, 2015, development of our Blue Cypress Farm property was completed, the property deemed mature, and we executed a 2016 crop season lease with a tenant.  Accordingly, the property was moved from the Development Segment to the Specialty/Vegetable Row Crop Segment during the first quarter of 2016.

As of September 30, 2016, our Specialty/Vegetable Row Crop segment consisted of our Sandpiper Ranch, Sweetwater Farm and Blue Cypress Farm properties, with an aggregate of 3,644 tillable acres and 4,502 gross acres. The leases for these farms terminate in 2016 and 2018. The leases with the tenants on our Sweetwater Farm and Blue Cypress Farm are set to expire in 2016, and we expect to begin negotiating renewals for these properties in advance of their expiration or later in 2016. Farms in our Specialty/Vegetable Row Crop segment are generally subject to fixed leases, with maturities of one to three years that typically include built-in annual escalators at a fixed dollar or percentage amount.

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Commodity Row Crop Segment

As of September 30, 2016, our Commodity Row Crop segment consisted of our Pleasant Plains Farm, Macomb Farm, Kane County Farms and Tillar Farm, with an aggregate of 4,446 tillable acres and 4,726 gross acres. The leases for these farms terminate in 2016 and 2018. Leases with the tenants on Macomb Farm and Tillar Farm are set to expire in 2016, and we expect to begin negotiating renewals for these properties in advance of their expiration.  Farms in our Commodity Row Crop segment are generally subject to fixed leases, with maturities of one to three years that may include built-in annual escalators at a fixed dollar or percentage amount.

Development Segment

As of September 30, 2016, our Development segment consisted of our Roadrunner Ranch, Condor Ranch, Grassy Island Groves and Pintail Vineyards properties, with an aggregate of 1,036 tillable acres and 1,744 gross acres. Development farms for permanent crops generally will not generate lease income for periods of between four and seven years, depending on the crop, with certain permanent crop types, like pistachios, taking up to nine years. The current lease for Condor Ranch provides for all acreage, whether currently commercial, in transition or in development, to fold into the lease during the lease term.

As of September 30, 2016, four of these farms are expected to become mature and productive in the next three years, including 77 acres of Quail Run Vineyard that are currently subject to development, but which is not included in this segment as the majority of the farm is mature and crop producing.

Blue Cypress Farm completed development subsequent to December 31, 2015 and was deemed mature.  In the first quarter of 2016, we entered into a short term lease with a tenant covering the 2016 crop season, and we accordingly moved the property to the Specialty/Vegetable Row Crop Segment.

On July 27, 2016, we completed the sale of Hawk Creek Ranch, which was not expected to be under commercial lease until 2021, for a gross sales price of $11.25 million.

Some of our development acreage is under transitional leases as those acres move towards commercial productivity, and until such time as those acres are leasable under normal commercial terms.

Critical Accounting Policies and Estimates

The most recent Form 10-K we filed with the SEC on March 30, 2016, in accordance with Rule 424(b) of the Securities Act of 1933, as amended, which is accessible on the SEC’s website at www.sec.gov, contains a description of our critical accounting policies, including use of estimates, investments in real estate, impairment, revenue recognition, purchase price allocation and income taxes. For the nine months ended September 30, 2016, there were no significant changes to these policies.

Emerging Growth Company Status

We are an ‘‘emerging growth company,’’ as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we are eligible and have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not ‘‘emerging growth companies,’’ including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.0 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the Offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a ‘‘large accelerated filer’’ under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, the JOBS Act also provides that an “emerging growth company’’ can take advantage of the extended transition period provided in the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. We have irrevocably elected not to take advantage of this extended transition period to comply with new or revised financial accounting standards.

Results of Operations

Comparison of the Three Months ended September 30, 2016 to the Three Months ended September 30, 2015

Consolidated Results

Our operating revenues for the periods presented were significantly impacted by acquisitions made during the first quarter of 2016 and the year ended December 31, 2015, and to a lesser extent by the sale of our Hawk Creek Ranch property in July 2016.  To highlight the effect of changes due to acquisitions and dispositions, we have separately discussed the components of operating revenues for our

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same-property portfolio, which includes only farms (and the specific tranches of farms, in cases where multiple properties acquired at different times have been aggregated into one farm) owned by us for the entirety of both periods presented.  The same-property portfolio for the quarters ended September 30, 2016 and 2015 consisted of 16 farms, including: Kimberly Vineyard, Golden Eagle Ranch (first tranche), Quail Run Vineyard, Blue Heron Farms, Falcon Farms, Sweetwater Farm, Sandpiper Ranch, Blue Cypress Farm, Pleasant Plains Farm, Macomb Farm, Tillar Farm, Kane County Farms, Condor Ranch, Roadrunner Ranch, Grassy Island Groves, and Pintail Vineyards properties.

Excluded from the same-property portfolio for the three months ended September 30, 2016 and 2015 are: Golden Eagle Ranch (second tranche) and Kingfisher Ranch, each acquired during the third quarter of 2015, Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch, each acquired during the first quarter of 2016 in connection with the Sun Dial acquisition and Hawk Creek Ranch which was disposed of in the third quarter of 2016.  

For the segment analysis below, it should be noted that Blue Cypress Farm (while included in the Company-level same-property portfolio) has been excluded from the segment-level same-property portfolio for both the specialty/vegetable row crop segment and the development segment.  Blue Cypress Farm was reclassified from the development segment to the specialty/vegetable row crop segment in the first quarter of 2016 due to the completion of the development project and execution of a tenant lease.

 

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Total Operating Revenues

Total operating revenues increased $2,537,313, or 129.5%, from $1,959,642 for the three months ended September 30, 2015 to $4,496,955 for the three months ended September 30, 2016.  This increase was primarily due to $953,798 of higher fixed rent driven by new leases at acquired properties ($941,561), $1,432,329 of higher participating rent driven by new leases at acquired properties ($1,377,431), higher recovery of real estate taxes in the amount of $115,710 driven by new leases at acquired properties ($108,713) and higher other income of $35,476 described below.

Total operating revenues for our same-property portfolio increased $109,608, or 5.9%, from $1,851,056 for the three months ended September 30, 2015 to $1,960,664 for the three months ended September 30, 2016, due primarily to $54,898 of higher participating rent from Golden Eagle Ranch (first tranche) and Condor Ranch, offset by lower participating rent from Blue Heron Ranch, higher fixed rent in the amount of $12,237 as described below and higher other income of $35,476 as more fully described below.

Fixed rent increased $953,798, or 74.9%, from $1,273,446 for the three months ended September 30, 2015 to $2,227,244 for the three months ended September 30, 2016.  The increase was primarily due to fixed rent from new leases at acquired farms ($941,561), including Kingfisher Ranch, Golden Eagle Ranch (second tranche), Puma Ranch, Cheetah Ranch, Cougar Ranch and Lynx Ranch, and from a net increase of $12,237 at same-property portfolio farms.  Fixed rent for Puma Ranch, Cheetah Ranch, Cougar Ranch and Lynx Ranch was received in cash during the first quarter of 2016 that related to the beginning of the relevant crop year on each of these properties which was prior to the effective date of the respective leases.  The cash received prior to the effective date will be straight-lined to operating revenues over the terms of the leases (four to five years), and the resulting unearned portion at September 30, 2016 in the amount of $1,191,660 is included in “Unearned rent” on the consolidated balance sheet as of that date.   The remaining balance of the unearned rent at September 30, 2016 relates to rental payments received in advance in the normal course of business from leases that require annual, semi-annual or quarterly payments, as the case may be.

Fixed rent for our same-property portfolio increased by $12,237, or 1.0%, from $1,167,370 for the three months ended September 30, 2015 to $1,179,607 for the three months ended September 30, 2016, driven by increases at Blue Cypress Farms ($76,994) due to a new lease executed in the first quarter of 2016, and Condor Ranch ($19,105), somewhat offset by decreases at Golden Eagle Ranch (first tranche) ($34,942) and Quail Run Vineyard in the permanent crop segment ($18,185) and Kane County Farms ($22,614) and Pleasant Plains Farm in the commodity row crop segment ($7,237).

Participating rent increased $1,432,329, or 262.5%, from $545,716 for the three months ended September 30, 2015 to $1,978,045 for the three months ended September 30, 2016. This increase was due primarily to participating rent received from new acquisitions made in the first quarter of 2016  ($1,377,431), increased participating rent from Golden Eagle Ranch (tranche 1) ($63,539) and Condor Ranch ($30,524), offset by a decrease from Blue Heron Ranch of $39,165.

Participating rent for our same-property portfolio increased $54,898, or 10.1%, from $545,716 for the three months ended September 30, 2015 to $600,614 for the three months ended September 30, 2016.  This increase was due to increased participating rent from Golden Eagle Ranch (tranche 1) ($63,539) and Condor Ranch ($30,524), offset by a decrease from Blue Heron Ranch of $39,165.

Recovery of real estate taxes increased $115,710, or 96.8%, from $119,545 for the three months ended September 30, 2015 to $235,255 for the three months ended September 30, 2016.  This increase was primarily due to the real estate taxes incurred and recovered at acquired properties ($108,713).  Recovery of real estate taxes at same-property portfolio farms increased $6,997, or 6.0%, from $117,035 for the three months ended September 30, 2015 to $124,032 for the three months ended September 30, 2016, due in part to an increase in real estate taxes paid by us and recovered from the tenant at Condor Ranch.

Other income increased by $35,476, or 169.5%, from $20,935 for the three months ended September 30, 2015 to $56,411 for the three months ended September 30, 2016.  The increase was due to income earned at Falcon Farms in the third quarter of 2016 related to insurance proceeds of $10,261 and $25,215 in additional revenue received from our Blue Cypress Farm in the third quarter of 2016 for miscellaneous use of the farm.

Total Operating Expenses

Total operating expenses increased by $3,965,282, or 229.9%, from $1,724,775 for the three months ended September 30, 2015 to $5,690,057 for the three months ended September 30, 2016.

Depreciation expense increased by $597,177 as compared to the prior year comparable quarter, due primarily to the depreciation from acquisitions made in the third quarter of 2015 ($94,891) and the first quarter of 2016 ($398,300), as well as higher depreciation from Condor Ranch ($56,508) and Blue Cypress Farm ($45,932).

Management and performance fees-related party ceased following the Internalization Transaction and decreased by $715,060 as compared to the prior year comparable quarter.  Following the Internalization Transaction, the Company directly incurs the costs

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associated with retaining its own employees, and the costs associated with the transitional services agreement with Optima Fund Management LLC, under which the Company is provided certain accounting, information technology, human resources and facilities services, among others.  

Property operating expenses increased by $340,857 as compared to the prior year comparable quarter, driven largely by the operating costs of properties acquired during the third quarter of 2015 ($41,488) and the first quarter of 2016 ($186,144), as well as higher property operating expenses at same-property portfolio farms which increased by $113,230 or 37.0% as compared to the prior year comparable quarter due largely to higher repairs and maintenance on our Roadrunner Ranch, Condor Ranch, Blue Cypress Farm and Blue Heron Farms properties in the amount of $86,320 in aggregate and higher management fees attributable to increased revenues in the quarter.

Professional fees increased by $2,182,935 to $2,321,976 for the third quarter of 2016 as compared to $139,041 in the prior year comparable quarter, and related primarily to $2,008,212 related to the ongoing strategic alternatives review process, and higher professional legal and accounting fees incurred as a public company in general.

Sub-advisory fees increased by $686,797 as compared to the prior year comparable quarter, which had no such expenses, and represent the fees paid to the Company’s Agricultural Sub-Adviser under the Amended and Restated Sub-Advisory Agreement, which took effect upon the consummation of the Offering.  The fees are determined based on a percentage of the appraised value of gross real estate assets under management.  

Lastly, general and administrative expenses increased by $872,576 to $913,286 as compared to $40,710 in the prior year comparable quarter.  The increase was primarily driven by compensation expense ($543,705), costs that were not incurred in the prior year period, as well as higher directors’ fees ($124,187) and insurance expenses ($93,671) than those incurred during the prior year comparable period reflecting the costs of operating as a public company.  Following the Internalization Transaction, the Company incurs costs associated with retaining its own employees, costs associated with the transitional services agreement with Optima Fund Management LLC discussed above, and other incremental costs associated with being a public company, including maintaining a public company board of directors, directors and officers insurance, listing fees and printing fees.

Total Other Expense

Total other expense increased by $232,798, or 123.0%, from $189,311 for the three months ended September 30, 2015 to $422,109 for the three months ended September 30, 2016. The increase in total other expense is due to higher interest paid on our credit facilities due to the higher average balances outstanding under our credit facilities in the third quarter of 2016 as compared to the third quarter of 2015 and  higher amortization of deferred financing fees associated with the origination of the credit facilities during 2015.

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Permanent Crop Segment

Our permanent crop segment operating revenues for the periods presented were impacted by acquisitions made during the first quarter of 2016 and the year ended December 31, 2015. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Kimberly Vineyard, Golden Eagle Ranch (first tranche), Quail Run Vineyard, Blue Heron Farms and Falcon Farms, permanent crop properties owned by us for the entirety of both periods presented.  Properties excluded from the same-property portfolio for the periods ended September 30, 2016 and 2015 are: Golden Eagle Ranch (second tranche) and Kingfisher Ranch, each acquired during the third quarter of 2015, and Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch, each acquired during the first quarter of 2016.

 

 

 

Total Operating Revenues

Total operating revenues for our permanent crop segment increased $2,406,667, or 185.6%, from $1,296,606 for the three months ended September 30, 2015 to $3,703,273 for the three months ended September 30, 2016, which increase was principally due to an increase in fixed rent of $882,333 driven primarily by new leases at acquired properties, an increase in participating rent of $1,401,805 due primarily to new acquisitions made in the first quarter of 2016 and an increase in recovery of real estate taxes from tenants of $112,268 commensurate with the increase in real estate taxes incurred due primarily to acquired properties..  Total operating revenues for our same-property permanent crop portfolio decreased $21,038, or 1.8%, from $1,188,020 for the three months ended September 30, 2015 to $1,166,982 for the three months ended September 30, 2016, due primarily to lower fixed rent of $59,228 primarily due to Golden Eagle Ranch (first tranche) and Quail Run Vineyard, offset by higher participating rent of $24,374 due to higher participating rent at Golden Eagle Ranch (first tranche) as described above, offset itself by lower participating rent from Blue Heron Farms, and higher other income in the amount of $10,261 relating to insurance proceeds earned at Falcon Farms in the third  quarter of 2016.

Fixed rent for our permanent crop segment increased $882,333, or 134.0%, from $658,414 for the three months ended September 30, 2015 to $1,540,747 for the three months ended September 30, 2016. The increase was due to higher fixed rent from acquired properties in the first quarter of 2016 in the amount of $811,685 and acquired properties in the third quarter of 2015 in the amount of $129,876, offset by lower fixed rent from Golden Eagle Ranch (first tranche) ($34,942) and Quail Run Vineyard ($18,185).  Fixed rent for our same-property permanent crop portfolio decreased $59,228, or 10.7%, from $552,338 for the three months ended September 30, 2015 to $493,110 for the three months ended September 30, 2016, due to lower fixed rents from Golden Eagle Ranch (first tranche) due to decreased acreage as certain acres were removed to be redeveloped due to their age ($34,942), and Quail Run Vineyard as certain acreage was folded into the participating lease with the existing tenant, which provides for a lower fixed base rent than the previous fixed lease that governed such acreage plus the potential for additional participation above a threshold ($18,185).

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Participating rent for our permanent crop segment increased $1,401,805, or 256.9%, from $545,716 for the three months ended September 30, 2015 to $1,947,521 for the three months ended September 30, 2016. This increase was due primarily to participating rent received from new acquisitions made in the first quarter of 2016 ($1,377,431), and increased participating rent from Golden Eagle Ranch (tranche 1) ($63,539), offset by a decrease from Blue Heron Farms of $39,165. Participating rent for our same-property permanent crop portfolio increased $24,374, or 4.5%, from $545,716 for the three months ended September 30, 2015 to $570,090 for the three months ended September 30, 2016, due to increased participating rent from Golden Eagle Ranch (tranche 1) ($63,539), offset by a decrease from Blue Heron Farms of $39,165.

Recovery of real estate taxes for our permanent crop segment increased $112,268, or 121.4%, from $92,476 for the three months ended September 30, 2015 to $204,744 for the three months ended September 30, 2016.  This increase is due primarily to the higher real estate tax recovery associated acquired properties in the first quarter of 2016 in the amount of $75,145 and acquired properties in the third quarter of 2015 in the amount of $33,568, , which increase in recovery is commensurate with the higher real estate taxes incurred from ownership of these acquired farms.  Recovery of real estate taxes for our permanent crop segment same-property portfolio was $93,521 for the quarter ended September 30, 2016, an increase of 4.0% compared to the same quarter in the prior year.  

Other income for our permanent crop segment was $10,261 for the quarter ended September 30, 2016 as compared to $0 for the same quarter in the prior year.  The income relates to insurance proceeds earned at Falcon Farms.

Total Operating Expenses

Total operating expenses for our permanent crop segment increased $792,615, or 129.7%, from $611,346 for the three months ended September 30, 2015 to $1,403,961 for the three months ended September 30, 2016. The increase was primarily due to higher depreciation of $512,722 due primarily to depreciation from acquired farms ($493,191) and from higher property operating expenses of $280,682 due to increased operating expenses associated with acquired farms in the third quarter of 2015 and first quarter of 2016 ($227,632) and increased repairs and maintenance of $40,009 primarily on Blue Heron Farms.  Depreciation expense at our same-property portfolio permanent crop properties was $19,531 higher than the corresponding period last year due to increased depreciation from added acreage on our Blue Heron Farms and Quail Run Vineyard properties offset by lower depreciation from Golden Eagle Ranch (tranche 1) due to acreage taken out of production for redevelopment.  Property operating expenses at our same-property portfolio permanent crop properties were $53,050 higher largely due to higher repairs and maintenance expenses primarily on Blue Heron Farms.

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Specialty/Vegetable Row Crop Segment

Our specialty/vegetable row crop segment operating revenues for the periods presented were impacted by the reclassification of Blue Cypress Farm from the development segment to the specialty/vegetable row crop segment during the first quarter of 2016, due to the completion of the development project and execution of a tenant lease for the property during the first quarter of 2016. To highlight the effect of changes due to the reclassification, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Sweetwater Farm and Sandpiper Ranch, properties categorized as specialty/vegetable row crop farms for the entirety of both periods presented. Blue Cypress Farm is excluded from the specialty/vegetable row crop segment same-property portfolio for the periods ended September 30, 2016 and 2015.

 

 

 

Total Operating Revenues

Total operating revenues for our specialty/vegetable row crop segment increased $125,129, or 56.8%, from $220,278 for the three months ended September 30, 2015 to $345,407 for the three months ended September 30, 2016, which increase is primarily due to higher fixed rent from Blue Cypress Farm due to the execution of a new tenant lease for the 2016 crop season ($76,994) ,higher fixed rent from Sandpiper Ranch ($5,217) from a renewed lease and $42,400 in additional revenue received from our Blue Cypress Farm in the third quarter of 2016 for miscellaneous use of the farm.   Total operating revenues for our same-property specialty/vegetable row crop portfolio increased $5,735, or 2.6%, from $220,278 for the three months ended September 30, 2015 to $226,013 for the three months ended September 30, 2016, due primarily to $5,217 of higher fixed rent from Sandpiper Ranch as described above.

Fixed rent for our specialty/vegetable row crop segment increased $82,211, or 42.7%, from $192,725 for the three months ended September 30, 2015 to $274,936 for the three months ended September 30, 2016. The increase was due to higher fixed rent from Blue Cypress Farm due to the execution of a new tenant lease and to Sandpiper Ranch where a lease renewal was executed during 2015 at a higher fixed rent than the previous lease.  Fixed rent for our same-property specialty/vegetable row crop portfolio increased $5,217, or 2.7%, from $192,725 for the three months ended September 30, 2015 to $197,942 for the three months ended September 30, 2016, due to higher fixed rent from Sandpiper Ranch as discussed above.

Recovery of real estate taxes increased $518, or 2.2%, from $23,803 for the three months ended September 30, 2015 to $24,321 for the three months ended September 30, 2016. The increase was attributable to the higher real estate taxes we were required to pay on our Sandpiper Ranch property and, hence, the higher amount for which our tenant was required to reimburse us.

Other income increased by $42,400 due to additional revenue received from our Blue Cypress Farm for miscellaneous use of the farm.  

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Total Operating Expenses

Total operating expenses for our specialty/vegetable row crop segment increased $88,241, or 134.7%, from $65,521 for the three months ended September 30, 2015 to $153,762 for the three months ended September 30, 2016. The increase was primarily due to $54,713 of higher depreciation which was primarily due to the reclassification of Blue Cypress Farm to the specialty/vegetable row crop segment ($53,298) and commencement of depreciation on the assets of this farm, and higher property operating expenses of $33,357 also primarily due to the reclassification of Blue Cypress Farm to this segment ($32,116).  Depreciation expense and property operating expenses at our same-property portfolio specialty/vegetable row crop properties were largely unchanged period to period.  .

Commodity Row Crop Segment

We owned all of our commodity row crop farms (Pleasant Plains Farm, Macomb Farm, Tillar Farm and Kane County Farms) for the entirety of the three months ended September 30, 2016 and September 30, 2015.

 

 

 

Total Operating Revenues

Total operating revenues (comprising fixed rent ) for our commodity row crop segment decreased $29,851, or 7.5%, from $398,707 for the three months ended September 30, 2015 to $368,856 for the three months ended September 30, 2016, due to lower fixed rent at Kane County Farms ($22,614) and Pleasant Plains Farm ($7,237).  Lease renewals were executed during 2015 with the tenants at Kane County Farms and Pleasant Plains Farm at lower fixed rent payments, reflecting the weakened leasing conditions in the commodity row crop category following the decline in commodity row crop prices over the last several years.  A lease renewal was also executed during 2015 with the tenant at Tillar Farm at the same fixed rent as the previous lease.

Total Operating Expenses

Total operating expenses for our commodity row crop segment decreased $2,410, or 3.7%, from $64,287 for the three months ended September 30, 2015 to $61,877 for the three months ended September 30, 2016. The decrease is primarily due to lower management fees related to less fixed rent ($1,940) and lower real estate taxes ($838), offset by $450 in increased repairs and maintenance on the Tillar Farms property.

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Development Segment

Our development segment operating results for the periods presented were impacted by (i)  the sale of Hawk Creek Ranch in the quarter ended September 30, 2016, and (ii) the reclassification of Blue Cypress Farm from the development segment to the specialty/vegetable row crop segment effective for the quarter ended March 31, 2016, due to the completion of the development project and execution of a tenant lease for the property during the first quarter of 2016. To highlight the effect of changes due to the reclassification, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Roadrunner Ranch, Pintail Vineyards, Grassy Island Groves and Condor Ranch properties categorized as development farms for the entirety of both periods presented.  Hawk Creek Ranch and Blue Cypress Farm are excluded from the development segment same-property portfolio for the period ended September 30, 2015 and Hawk Creek Ranch is excluded from the development segment same-property portfolio for the period ended September 30, 2016.

Our development segment operating revenues are generated from Condor Ranch and Grassy Island Groves on the portion of the properties that is not under development. We derived no revenues from our other properties under development including Roadrunner Ranch and Pintail Vineyards in the third quarter of 2016 (and including Blue Cypress in the third quarter of 2015).

 

 

Total Operating Revenues

Total operating revenues for our development segment increased $35,368, or 80.3%, from $44,051 for the three months ended September 30, 2015 to $79,419 for the three months ended September 30, 2016, which increase was primarily due to higher fixed rent  from Condor Ranch ($19,105) due to additional acreage and higher fixed rent under the renewed lease, $30,524 of participating rent from Condor Ranch and from $2,924 of higher recovery of real estate taxes at Condor Ranch.  That was offset by other income earned at Blue Cypress Farm in the second quarter of 2015.

Total operating revenues for our same-property portfolio increased $52,553, or 195.6%, from $26,866 for the three months ended September 30, 2015 to $79,419 for the three months ended September 30, 2016, which increase was primarily due to higher fixed rent from Condor Ranch ($19,105) due to additional acreage and higher fixed rent under the renewed lease, $30,524 of participating rent from the Condor Ranch and from $2,924 of higher recovery of real estate taxes at Condor Ranch.  

Fixed rent (including for the same-property portfolio) increased $19,105, or 81.0%, from $23,600 for the three months ended September 30, 2015 to $42,705 for the three months ended September 30, 2016, due to additional acreage and higher fixed rent under the renewed lease for Condor Ranch.  

Participating rent (including for the same-property portfolio) was $30,524 for the three months ended September 30, 2016 compared to $0 for the three months ended September 30, 2015, due to additional acreage in the Condor Ranch lease and higher commodity prices.

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Recovery of real estate taxes for our development segment (including for the same-property portfolio) increased $2,924, or 89.5%, from $3,266 for the three months ended September 30, 2015 to $6,190 for the three months ended September 30, 2016. This increase was directly related to higher real estate taxes we paid on the Condor Ranch property, which is recovered from the tenant.

There was no other income earned during the three months ended September 30, 2016, whereas Blue Cypress Farm received $17,185 in other income in the third quarter of 2015.

Total Operating Expenses

Total operating expenses for our development segment increased $58,979, or 60.2%, from $97,982 for the three months ended September 30, 2015 to $156,961 for the three months ended September 30, 2016.  The increase was driven primarily by $29,228 of higher property operating expenses primarily due to higher direct operating costs at Roadrunner Ranch (due to repairs and maintenance)  ($10,468) and higher property operating expenses at Condor Ranch ($22,174 primarily due to increased repairs and maintenance).  Property operating expenses for our same-property portfolio development segment increased $32,633 due to higher operating expenses at Roadrunner Ranch and Condor Ranch as described above.  Higher depreciation in the amount of $29,595 also contributed to the increase in total operating expenses and was due to higher depreciation at Condor Ranch ($56,510), offset by the $7,367 of depreciation incurred in the third quarter of 2015 associated with Blue Cypress Farm which was not incurred in the development segment in the second quarter of 2016 and $19,548 of less depreciation incurred on the Hawk Creek Ranch property as it was disposed of at the end of July 2016.  Depreciation expense for our same-property portfolio development segment increased $56,510 due to higher depreciation at Condor Ranch as described above.

 

Comparison of the Nine Months ended September 30, 2016 to the Nine Months ended September 30, 2015

Consolidated Results

Our operating revenues for the periods presented were significantly impacted by acquisitions made during the first quarter of 2016 and the year ended December 31, 2015 and to a lesser extent by the sale of our Hawk Creek Ranch property in the third quarter of 2016.  To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues for our same-property portfolio, which includes only farms (and the specific tranches of farms, in cases where multiple properties acquired at different times have been aggregated into one farm) owned by us for the entirety of both periods presented.  The same-property portfolio for the nine months ended September 30, 2016 and 2015 consisted of 16 farms, including: Kimberly Vineyard, Golden Eagle Ranch (first tranche), Quail Run Vineyard, Blue Heron Farms, Falcon Farms, Sweetwater Farm, Sandpiper Ranch, Blue Cypress Farm, Pleasant Plains Farm, Macomb Farm, Tillar Farm, Kane County Farms, Condor Ranch, Roadrunner Ranch, Grassy Island Groves, and Pintail Vineyards properties.

Excluded from the Company’s same-property portfolio for the nine months ended September 30, 2016 and 2015 are: Golden Eagle Ranch (second tranche) and Kingfisher Ranch, each acquired during the third quarter of 2015, Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch, each acquired during the first quarter of 2016 in connection with the Sun Dial acquisition and Hawk Creek Ranch sold during the third quarter of 2016.

For the segment analysis below, it should be noted that Blue Cypress Farm (while included in the Company-level same-property portfolio) has been excluded from the segment-level same-property portfolio for both the specialty/vegetable row crop segment and the development segment.  Blue Cypress Farm was reclassified from the development segment to the specialty/vegetable row crop segment in the first quarter of 2016 due to the completion of the development project and execution of a tenant lease.

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Total Operating Revenues

Total operating revenues increased $2,902,398, or 40.9%, from $7,098,058 for the nine months ended September 30, 2015 to $10,000,456 for the nine months ended September 30, 2016.  This increase was primarily due to $2,794,039 of higher fixed rent driven largely by new leases at acquired properties, higher recovery of real estate taxes in the amount of $292,301 driven by new leases at acquired properties, largely offset by $205,118 of lower participating rent due to lower participating rent from Golden Eagle Ranch (first tranche), itself offset by participating rent from the properties acquired in the first quarter of 2016.  As previously disclosed by the Company, the 2015 crop yield at Golden Eagle Ranch (first tranche) was significantly lower than the 2014 crop yield, and combined with lower commodity prices for almonds realized in the sale of the 2015 crop during the first half of 2016, resulted in a significant decrease in the gross revenues earned from the farm for the 2015 crop and our participating rent component of such revenues recorded in the first half of 2016.

Total operating revenues for our same-property portfolio decreased $1,546,504, or 22.1%, from $6,989,472 for the nine months ended September 30, 2015 to $5,442,968 for the nine months ended September 30, 2016, due primarily to $1,582,549 of lower participating rent, primarily due to Golden Eagle Ranch (first tranche) as noted above, which decreased by $1,620,857 period to period.  Additionally, a small $17,103 increase in same-property portfolio recovery of real estate taxes and $21,176 increase in other income, was offset by $2,234 same portfolio fixed rent.

Fixed rent increased $2,794,039, or 73.3%, from $3,809,739 for the nine months ended September 30, 2015 to $6,603,778 for the nine months ended September 30, 2016.  The increase was primarily due to fixed rent from new leases at acquired farms ($2,796,273), including Kingfisher Ranch, Golden Eagle Ranch (second tranche), Puma Ranch, Cheetah Ranch, Cougar Ranch and Lynx Ranch, offset by a net decrease of $2,234 at same-property portfolio farms.  Fixed rent for Puma Ranch, Cheetah Ranch, Cougar Ranch and Lynx Ranch was received in cash during the first quarter of 2016 that related to the beginning of the relevant crop year on each of these properties, which crop year commencement was prior to the effective date of the respective leases.  The cash received prior to the effective date is being straight-lined to operating revenues over the terms of the leases (four to five years), and the resulting unearned portion at September 30, 2016 in the amount of $1,191,660 is included in “Unearned rent” on the consolidated balance sheet as of that date.   The remaining balance of the unearned rent at September 30, 2016 relates to rental payments received in advance in the normal course of business from leases that require annual, semi-annual or quarterly payments, as the case may be.

Fixed rent for our same-property portfolio decreased by $2,234, or 0.1%, from $3,703,663 for the nine months ended September 30, 2015 to $3,701,429 for the nine months ended September 30, 2016, driven by increases at Sandpiper Ranch ($15,652) and Blue Cypress Farm ($183,006 and for which a new lease was executed in the first quarter of 2016) in the specialty/vegetable row crop segment, and increases at Condor Ranch ($49,583) and Grassy Island Groves ($21,057) in the development segment, largely offset by decreases at Golden Eagle Ranch (first tranche) ($116,380) and Quail Run Vineyard in the permanent crop segment ($54,554), and Kane County Farms and Pleasant Plains Farm in the commodity row crop segment ($89,519).

Participating rent decreased $205,118, or 7.1%, from $2,875,280 for the nine months ended September 30, 2015 to $2,670,162 for the nine months ended September 30, 2016. This decrease was driven by lower participating rent from Golden Eagle Ranch (first tranche) in the amount of $1,620,857 due to the reasons discussed above, lower participating rent at Quail Run Vineyard ($91,760), offset by higher participating rent from Falcon Farms ($136,767) and participating rent from the properties acquired in the first quarter of 2016 in the amount of $1,377,431.

Participating rent for our same-property portfolio decreased $1,582,549, or 55.0%, from $2,875,280 for the nine months ended September 30, 2015 to $1,292,731 for the nine months ended September 30, 2016. This decrease was driven by lower participating rent from Golden Eagle Ranch (first tranche) in the amount of $1,620,857 due to the reasons discussed above, and lower participating rent at Quail Run Vineyard ($91,760), offset by higher participating rent from Falcon Farms ($136,767).

Recovery of real estate taxes increased by $292,301, or 83.4%, from $350,304 for the nine months ended September 30, 2015 to $642,605 for the nine months ended September 30, 2016.  This increase was primarily due to the real estate taxes incurred and recovered at acquired properties ($275,198), and higher real estate taxes incurred and recovered from the tenant at Blue Heron Farms ($15,439).  Recovery of real estate taxes at same-property portfolio farms increased $17,103, or 4.9%, from $347,794 for the nine months ended September 30, 2015 to $364,897 for the nine months ended September 30, 2016, due largely to the increase at Blue Heron Farms discussed above.

Other income increased $21,176 or 33.8%, from $62,735 for the nine months ended September 30, 2015 to $83,911 for the nine months ended September 30, 2016.  The increase was due to $10,261 in insurance proceeds received by Falcon Farms and $25,215 in additional revenue received by Blue Cypress Farms related the miscellaneous use of the farm, largely offset by $14,000 of lower other income earned at Sandpiper Ranch related to the sale of water rights on the property.

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Total Operating Expenses

Total operating expenses increased $8,219,394, or 141.0%, from $5,828,305 for the nine months ended September 30, 2015 to $14,047,699 for the nine months ended September 30, 2016.

Depreciation expense increased by $1,767,855 as compared to the prior year comparable period, due primarily to the depreciation from acquisitions made in the third quarter of 2015 ($365,824) and the first quarter of 2016 ($1,062,135), as well as higher depreciation from Condor Ranch ($169,513),  Blue Cypress Farm ($122,483), and Blue Heron Farms ($33,824).

Management and performance fees-related party ceased following the Internalization Transaction on October 23, 2015 and decreased by $2,739,856 as compared to the prior year comparable period.  Following the Internalization Transaction, the Company directly incurs the costs associated with retaining its own employees, and the costs associated with the transitional services agreement with Optima Fund Management LLC, under which the Company is provided certain accounting, information technology, human resources and facilities services, among others.  

Property operating expenses increased by $708,309 as compared to the prior year comparable period, driven largely by the operating costs of properties acquired during the third quarter of 2015 ($102,854) and the first quarter of 2016 ($427,818), as well as by higher property operating expenses at same-property portfolio farms which increased by $177,518, or 16.0%, over the prior year comparable period, driven by increases at Grassy Island Groves (due to increased direct operations activity) and Condor Ranch (due to higher repairs and maintenance expenses) offset somewhat by lower expense at Golden Eagle Ranch (first tranche) (due to lower management fees as a result of lower revenues earned at the property).

Due diligence costs on non-consummated transactions increased by $136,862 as compared to the prior year comparable period, which had no such expenses, and related to expenses incurred in the first quarter of 2016 in evaluating certain farms for acquisition which were subsequently not acquired.

Professional fees increased by $2,793,193 to $3,166,545 for the nine months ended September 30, 2015 compared to $373,352 for the nine months ended September 30, 2015 related primarily to $2,197,174 related to the ongoing strategic alternatives review process, and  higher professional legal and accounting fees incurred as a public company in general.

Sub-advisory fees increased by $2,132,930 as compared to the prior year comparable period, which had no such expenses, and represent the fees paid to the Company’s Agricultural Sub-Adviser under the amended agreement with the Agricultural Sub-Adviser, which took effect upon the consummation of the Offering.  The fees are determined based on a percentage of the appraised value of gross real estate assets under management.  This expense includes $104,020 pertaining to the initial public offering capital compensation fee which was settled between us and our Agricultural Sub-Advisor during the second quarter of 2016 (see Note 7 Related Party Transactions of the Notes to Consolidated Financial Statements for more detail).

Lastly, general and administrative expenses increased by $3,420,101 to $3,607,526 as compared to $187,425 in the prior year comparable period.  The increase was primarily driven by compensation expense ($1,883,557), stock based compensation expense ($332,118), and a one-time hiring and recruiting expense ($335,070), each of which represent costs that were not incurred in the prior year period, as well as higher directors’ fees ($372,562) and insurance expenses ($283,217) than those incurred during the prior year comparable period reflecting the higher costs of operating as a public company.  In addition, we incurred general and administrative expenses of $44,564 related to the ongoing strategic alternatives review process.

Following the Internalization Transaction, the Company incurs costs associated with retaining its own employees, costs associated with the transitional services agreement with Optima Fund Management LLC discussed above, and other incremental costs associated with being a public company, including maintaining a public company board of directors, directors and officers insurance, listing fees and printing fees.

Total Other Expense

Total other expense increased by $836,110, or 208.0%, from $401,903 for the nine months ended September 30, 2015 to $1,238,013 for the nine months ended September 30, 2016. The increase in total other expense is primarily due to higher interest paid on our credit facilities ($743,522) due to the higher average balances outstanding under our credit facilities in the first half of 2016 as compared to the first half of 2015, higher amortization of deferred financing fees ($50,375) associated with the origination of the credit facilities during 2015, and interest incurred on the Legacy Performance Fee payable to Agricultural Sub-Adviser.

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Permanent Crop Segment

Our permanent crop segment operating revenues for the periods presented were impacted by acquisitions made during the first quarter of 2016 and the year ended December 31, 2015. To highlight the effect of changes due to acquisitions, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Kimberly Vineyard, Golden Eagle Ranch (first tranche), Quail Run Vineyard, Blue Heron Farms and Falcon Farms, permanent crop properties owned by us for the entirety of both periods presented.  Properties excluded from the same-property portfolio for the nine months ended September 30, 2016 and 2015 are: Golden Eagle Ranch (second tranche) and Kingfisher Ranch, each acquired during the third quarter of 2015, and Cougar Ranch, Cheetah Ranch, Puma Ranch and Lynx Ranch, each acquired during the first quarter of 2016.

 

 

Total Operating Revenues

Total operating revenues for our permanent crop segment increased $2,669,128, or 54.1%, from $4,935,300 for the nine months ended September 30, 2015 to $7,604,428 for the nine months ended September 30, 2016, which increase was due to an increase in fixed rent of $2,614,260 driven by new leases at acquired properties, an increase in recovery of real estate taxes from tenants of $282,171 commensurate with the increase in real estate taxes incurred primarily from acquired properties, largely offset by a decrease in participating rent of $237,564 due to lower participating rent at Golden Eagle Ranch (first tranche), offset by participating rent received from the properties acquired in the first quarter of 2016.  Total operating revenues for our same-property permanent crop portfolio decreased $1,779,774, or 36.9%, from $4,826,714 for the nine months ended September 30, 2015 to $3,046,940 for the nine months ended September 30, 2016, due primarily to lower participating rent of $1,614,995, due to lower participating rent at Golden Eagle Ranch (first tranche) as discussed above, lower fixed rent of $182,013 due to Golden Eagle Ranch (first tranche) and Quail Run Vineyard, slightly offset by higher recovery of real estate taxes.

Fixed rent for our permanent crop segment increased $2,614,260, or 147.9%, from $1,767,419 for the nine months ended September 30, 2015 to $4,381,679 for the nine months ended September 30, 2016. The increase was due to higher fixed rent from acquired properties ($2,796,274), slightly offset by lower fixed rent from Golden Eagle Ranch (first tranche) and Quail Run Vineyard ($54,554) as discussed below.  Fixed rent for our same-property permanent crop portfolio decreased $182,013, or 11.0%, from $1,661,343 for the nine months ended September 30, 2015 to $1,479,330 for the nine months ended September 30, 2016, primarily due to lower fixed rents from Golden Eagle Ranch (first tranche) due to decreased acreage as certain acres were removed to be redeveloped due to their age and Quail Run Vineyard as certain acreage was folded into the participating lease with the existing tenant, which provides for a lower fixed base rent than the previous fixed lease that governed such acreage, plus the potential for additional participation above a threshold.

Participating rent for our permanent crop segment decreased $237,564, or 8.3%, from $2,877,202 for the nine months ended September 30, 2015 to $2,639,638 for the nine months ended September 30, 2016. This decrease was due primarily to a $1,620,857

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decrease in participating rent from Golden Eagle Ranch (first tranche), which as previously disclosed by the Company had a weak 2015 crop yield, which combined with lower almond commodity pricing, has resulted in a substantial decrease in participating rents for 2016 related to the 2015 crop production,  a decrease in participating rent at Quail Run Vineyard ($91,760), as well as a decrease in participating rent at Blue Heron Farms ($39,166) , offset by participating rent from the properties acquired in the first quarter of 2016 ($1,377,431) and higher participating rent at Falcon Farms ($136,767).

Participating rent for our same-property permanent crop segment decreased $1,614,995, or 56.1%, from $2,877,202 for the nine months ended September 30, 2015 to $1,262,207 for the nine months ended September 30, 2016. This decrease was due primarily to a $1,620,857 decrease in participating rent from Golden Eagle Ranch (first tranche) for the reasons discussed above, a decrease in participating rent at Quail Run Vineyard ($91,760), as well as a decrease in participating rent at Blue Heron Farms ($39,166), offset by higher participating rent at Falcon Farms ($136,767).

Recovery of real estate taxes for our permanent crop segment increased $282,171, or 104.2%, from $270,679 for the nine months ended September 30, 2015 to $552,850 for the nine months ended September 30, 2016. This increase is primarily due to the higher real estate tax recovery associated with acquired farms ($275,198), which increase in recovery is commensurate with the higher real estate taxes incurred from ownership of these acquired farms.  Recovery of real estate taxes for our permanent crop segment same-property portfolio was $275,142 for the nine months ended September 30, 2016, essentially unchanged as compared to the same period in the prior year.  

Other income for our permanent crop segment was $30,261 for the nine month period ended September 30, 2016, compared to $20,000 for the comparable prior year period.  This increase related to insurance proceeds received for Falcon Farms.

Total Operating Expenses

Total operating expenses for our permanent crop segment increased $2,008,760, or 114.0%, from $1,762,771 for the nine months ended September 30, 2015 to $3,771,531 for the nine months ended September 30, 2016. The increase was due to higher depreciation of $1,465,531 due primarily to depreciation from acquired farms ($1,427,958), higher property operating expenses of $529,813 due primarily to the operating expenses associated with acquired farms ($530,672), and to higher professional fees of $13,416.  Depreciation expense at same-property portfolio permanent crop properties increased by $37,573 and was primarily due to higher depreciation at Blue Heron Farms, and property operating expenses at our same-property portfolio permanent crop properties were essentially unchanged.

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Specialty/Vegetable Row Crop Segment

Our specialty/vegetable row crop segment operating revenues for the periods presented were impacted by the reclassification of Blue Cypress Farm from the development segment to the specialty/vegetable row crop segment during the first quarter of 2016, due to the completion of the development project and execution of a tenant lease for the property during the first quarter of 2016. To highlight the effect of changes due to the reclassification, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Sweetwater Farm and Sandpiper Ranch, properties categorized as specialty/vegetable row crop farms for the entirety of both periods presented.  Blue Cypress Farm is excluded from the specialty/vegetable row crop segment same-property portfolio for the nine month periods ended September 30, 2016 and 2015.

 

 

Total Operating Revenues

Total operating revenues for our specialty/vegetable row crop segment increased $228,584, or 33.9%, from $673,446 for the nine months ended September 30, 2015 to $902,030 for the nine months ended September 30, 2016, which increase is primarily due to higher fixed rent from Blue Cypress Farm due to the execution of a new tenant lease for the 2016 crop season ($183,006), higher fixed rent from Sandpiper Ranch ($15,652) from a renewed lease and $28,400 of higher other income.  Total operating revenues for our same-property specialty/vegetable row crop portfolio increased $3,178, or 0.5%, from $673,446 for the nine months ended September 30, 2015 to $676,624 for the nine months ended September 30, 2016, due primarily to $15,652 of higher fixed rent from Sandpiper Ranch, offset by $14,000 of lower other income.

Fixed rent for our specialty/vegetable row crop segment increased $198,658, or 34.4%, from $578,175 for the nine months ended September 30, 2015 to $776,833 for the nine months ended September 30, 2016. The increase was due to higher fixed rent from Blue Cypress Farm due to the execution of a new tenant lease and to Sandpiper Ranch where a lease renewal was executed during 2015 at a higher fixed rent than the previous lease. Fixed rent for our same-property specialty/vegetable row crop portfolio increased $15,652, or 2.7%, from $578,175 for the nine months ended September 30, 2015 to $593,827 for the nine months ended September 30, 2016, due to higher fixed rent from Sandpiper Ranch as discussed above.

Recovery of real estate taxes increased $1,526, or 2.2%, from $70,021 for the nine months ended September 30, 2015 to $71,547 for the nine months ended September 30, 2016. The increase was attributable to the higher real estate taxes we were required to pay on our Sandpiper Ranch property and, hence, the higher amount for which our tenant was required to reimburse us.

Other income increased $28,400, or 112.5%, from $25,250 for the nine months ended September 30, 2015 to $53,650 for the nine months ended September 30, 2016.  The increase was due to $42,400 of additional revenues received on our Blue Cypress Farm for the miscellaneous use of the farm, offset by $14,000 lower income from water rights and excess usage of the well on our Sandpiper Ranch property.  Other income for our same-property specialty/vegetable row crop portfolio decreased by $14,000 relating to our Sandpiper Ranch property described above.

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Total Operating Expenses

Total operating expenses for our specialty/vegetable row crop segment increased $213,173, or 109.0%, from $195,591 for the nine months ended September 30, 2015 to $408,764 for the nine months ended September 30, 2016. The increase was primarily due to $148,829 of higher depreciation which was primarily due to the reclassification of Blue Cypress Farm to the specialty/vegetable row crop segment ($144,582) upon commencement of depreciation on the assets of this farm, and higher property operating expenses of $58,287 also primarily due to the reclassification of Blue Cypress Farm to this segment ($54,296).  Depreciation expense and property operating expenses at our same-property portfolio specialty/vegetable row crop properties were largely unchanged period to period.

Commodity Row Crop Segment

We owned all of our commodity row crop farms (Pleasant Plains Farm, Macomb Farm, Tillar Farm and Kane County Farms) for the entirety of the nine months ended September 30, 2016 and September 30, 2015.

 

Total Operating Revenues

Total operating revenues for our commodity row crop segment decreased $89,819, or 7.5%, from $1,196,386 for the nine months ended September 30, 2015 to $1,106,567 for the nine months ended September 30, 2016, due primarily to lower fixed rent of $89,519, driven by decreases at Kane County Farms ($67,807) and Pleasant Plains Farm ($21,712).  Lease renewals were executed during 2015 with the tenants at Kane County Farms and Pleasant Plains Farm at lower fixed rent payments, reflecting the weakened leasing conditions in the commodity row crop category following the decline in commodity row crop prices over the last several years.  A lease renewal was also executed during 2015 with the tenant at Tillar Farm at the same fixed rent as the previous lease.

Fixed rent decreased $89,519, or 7.5%, from $1,196,086 for the nine months ended September 30, 2015 to $1,106,567 for the nine months ended September 30, 2016, due to the reasons discussed above.

Total Operating Expenses

Total operating expenses for our commodity row crop segment decreased $35,519, or 16.6%, from $213,714 for the nine months ended September 30, 2015 to $178,195 for the nine months ended September 30, 2016. The decrease is primarily due to lower real estate taxes ($17,977), lower repair and maintenance ($11,566) and lower management fees due to lower revenues ($5,837).

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Development Segment

Our development segment operating results for the periods presented were impacted by the reclassification of Blue Cypress Farm from the development segment to the specialty/vegetable row crop segment in the first quarter of 2016, due to the completion of the development project and execution of a tenant lease for the property during the first quarter of 2016 and the sale of the Hawk Creek Ranch Property in the third quarter of 2016. To highlight the effect of changes due to the reclassification, we have separately discussed the components of operating revenues and property-specific operating expenses for our same-property portfolio, which includes Roadrunner Ranch, Pintail Vineyards, Grassy Island Groves, and Condor Ranch, properties categorized as development farms for the entirety of both periods presented.  Hawk Creek Ranch is excluded from the development segment same-property portfolio for the nine month periods ended September 30, 2016 and 2015 and Blue Cypress Farm is excluded from the development segment same-property portfolio for the nine month periods ended September 30, 2016 and 2015, but is included in the segment results shown below for the nine months ended September 30, 2015.

Our development segment operating revenues are generated from Condor Ranch and Grassy Island Groves on the portion of the properties that is not under development. We derived no revenues from our other properties under development including Roadrunner Ranch and Pintail Vineyards in the first three quarters of 2016 (and including Blue Cypress in the three quarters of 2015).

 

 

 

Total Operating Revenues

Total operating revenues for our development segment increased $94,505, or 32.3%, from $292,926 for the nine months ended September 30, 2015 to $387,431 for the nine months ended September 30, 2016, which increase was primarily due to $70,640 of higher fixed rent, due to higher fixed rent from Grassy Island Groves ($21,057) due to higher production from the directly-operated portion of the property and to higher fixed rent from Condor Ranch ($49,583) due to additional acreage and higher fixed rent under the renewed lease, $32,446 of higher participating rent primarily due to Condor Ranch, as well as $8,604 of higher recovery of real estate taxes at Condor Ranch, offset by other income earned at Blue Cypress Farm in the three quarters of 2015. Total operating revenues for our same-property development segment increased $111,690, or 40.5%, from $275,741 for the nine months ended September 30, 2015 to $387,431 for the nine months ended September 30, 2016, which increase was primarily due to $70,640 of higher fixed rent, higher participating rent and higher recovery of real estate taxes all as described above.

Fixed rent (including for the same-property portfolio) increased $70,640, or 26.4%, from $268,059 for the nine months ended September 30, 2015 to $338,699 for the nine months ended September 30, 2016, due to the reasons discussed above.  The revenues recorded at Grassy Island Groves, categorized as fixed rent, relate to income generated from direct operations for the mature acres of the property.  

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Participating rent (including for the same-property portfolio) increased $32,446, or 1688.1%, from ($1,922) for the nine months ended September 30, 2015 to $30,524 for the nine months ended September 30, 2016, due to participating rent received from Condor Ranch.

Recovery of real estate taxes for our development segment (including for the same-property portfolio) increased $8,604, or 89.6%, from $9,604 for the nine months ended September 30, 2015 to $18,208 for the nine months ended September 30, 2016. This increase was directly related to higher real estate taxes we paid on the Condor Ranch property, which is recovered from the tenant.

Other income for our development segment decreased by $17,185 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2016.  That income related to our Blue Cypress property, which as discussed above has been reclassified to our specialty/vegetable row crop segment during the first quarter of 2016, and comprises additional revenue for the miscellaneous use of the farm.

Total Operating Expenses

Total operating expenses for our development segment increased $307,525, or 83.1%, from $369,933 for the nine months ended September 30, 2015 to $677,458 for the nine months ended September 30, 2016.  Contributing to the increase was $152,732 of higher depreciation, due to higher depreciation at Condor Ranch ($169,513) due to increased mature and tillable acreage that was previously deemed non-tillable and Hawk Creek Ranch ($5,318) through the date of sale of the property in July 2016, offset by the $22,099 of depreciation incurred in the first three quarters of 2015 associated with Blue Cypress Farm which was not incurred in the development segment in the first three quarters of 2016.  Depreciation expense for our same-property portfolio development segment increased $169,513 due to higher depreciation at Condor Ranch as described above. Property operating expenses for our development segment were $330,957 for the nine months ended September 30, 2016, an increase of $156,046, or 89.2%, over the prior year comparable period.  The increase was driven by higher expenses at Grassy Island Groves (primarily due to higher direct operating costs on the directly-operated portion of the farm) ($79,500) and Condor Ranch (primarily due to higher repairs and maintenance expense) ($63,425).

 

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Liquidity and Capital Resources

We measure liquidity in terms of our ability to meet requests for capital, whether for acquisitions of new farms, to fund capital expenditures, including planned redevelopment expenses and unplanned repairs, for the repayment of existing borrowing arrangements, for distributions to our stockholders and holders of Common Units or other cash demands that may arise in the course of our ordinary business operations.

Our sources of funds to meet our liquidity needs will primarily be, to the extent applicable, existing cash balances, cash flow from operations, available borrowings under our revolving credit facilities, and additional borrowing capacity against our unencumbered properties. We believe that these sources will be sufficient to satisfy our cash requirements for at least the next 12 months. We plan to use our cash primarily to acquire farms consistent with our investment strategy, to repay principal amounts, including interest on any outstanding borrowings, if any, finance capital expenditures on development farms and fund our operations and make distributions to our stockholders and the holders of Common Units.

On October 23, 2015, we completed the Offering, which resulted in aggregate net proceeds to us, after deducting the underwriting discount and commissions and expenses payable by us, of approximately $39.2 million. The Company contributed the net proceeds from the Offering to its Operating Partnership in exchange for Common Units, and the Operating Partnership used $25 million to pay down debt then outstanding under the Company’s revolving credit facilities, and the remainder has been used for other general corporate purposes including partially funding the closing of the Sun Dial acquisition and the redemption of the Company’s 8% Series A Cumulative Non-Voting Preferred Stock.  As of September 30, 2016, our cash and cash equivalents balance was $1.8 million.

Our long-term liquidity needs will mainly be for funds necessary to acquire additional farms, to make certain long-term capital expenditures and to make principal and interest payments on any debt that we may incur in the future. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances (including Common Units), cash flow from operations, and other secured and unsecured borrowings.

We believe that, as a publicly traded company, we have the ability to access multiple sources of capital to fund our long-term liquidity requirements, including the issuance of additional equity securities and the incurrence of additional debt.  However, given that we are a new public company, we cannot assure you that we will have access to all of these sources of capital, if any. Our ability to access the equity capital markets will depend on a variety of factors, many of which are out of our control, including general market conditions and market perceptions regarding our company. Our ability to incur additional debt will also depend on a variety of factors, including our degree of leverage and borrowing restrictions that may be imposed by lenders and overall debt capital market conditions.

 

Credit Facilities

As of September 30, 2016, we had four secured revolving credit facilities in place with an aggregate principal amount of $90 million, of which $75.0 million was drawn on that date.  The key terms of the revolving credit facilities, which were arranged by Rutledge Investment Company (“Rutledge”), are outlined below.  Each of the credit facilities is prepayable without penalty to the Company.

Maturity and Interest

The original secured revolving credit facility of $25 million (i) has a maturity date of January 1, 2019, (ii) bears interest at a rate per annum equal to the 90 day LIBOR, plus 130 basis points, and (iii) requires us to make quarterly interest payments on April 1, July 1, October 1 and January 1 of each calendar quarter. Additionally, the original revolving credit facility requires us to pay a quarterly non-usage fee equal to one-quarter of one percent (0.25%) of the loan amount minus the average outstanding principal balance of the loan amount of the prior three month period.

The second secured revolving credit facility of $25 million (i) has a maturity date of January 1, 2020, (ii) bears interest at a rate per annum equal to the 90 day LIBOR, plus 130 basis points, and (iii) requires us to make quarterly interest payments on April 1, July 1, October 1 and January 1 of each calendar quarter. Additionally, the second revolving credit facility requires us to pay a quarterly non-usage fee equal to one-quarter of one percent (0.25%) of the loan amount minus the average outstanding principal balance of the loan amount of the prior three month period.

The third secured revolving credit facility of $25 million (i) has a maturity date of August 1, 2020, (ii) bears interest at a rate per annum equal to the 90 day LIBOR, plus 130 basis points, and (iii) requires us to make quarterly interest payments on April 1, July 1, October 1 and January 1 of each calendar quarter. Additionally, the third revolving credit facility requires us to pay a quarterly non-usage fee equal to one-quarter of one percent (0.25%) of the loan amount minus the average outstanding principal balance of the loan amount of the prior three month period.

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The fourth secured revolving credit facility of $15 million (i) has a maturity date of January 1, 2021, (ii) bears interest at a rate per annum equal to the 90 day LIBOR, plus 130 basis points, and (iii) requires us to make quarterly interest payments on April 1, July 1, October 1 and January 1 of each calendar quarter. Additionally, the fourth revolving credit facility requires us to pay a quarterly non-usage fee equal to one-quarter of one percent (0.25%) of the loan amount minus the average outstanding principal balance of the loan amount of the prior three month period.

Events of Default

The revolving credit facilities contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance in all material respects with the terms and conditions of the agreement and other documents evidencing the credit facilities, defaults in payments relating to any other indebtedness owed to the lender, and bankruptcy or other insolvency events. As of September 30, 2016, management believes we were in compliance with all covenants contained in the credit facility agreements.

Financial Covenants and Security

The loan agreements for each of the four secured revolving credit facilities requires our Operating Partnership to maintain a debt to asset ratio, as defined in the applicable agreement of 60% or less, based on the amount payable to Rutledge by our Operating Partnership compared to the appraised value of the properties securing each respective facility. Additionally, pursuant to an amendment to the agreements governing each of the revolving credit facilities, our Operating Partnership is required to maintain loan to value ratios of 50% or less measured by the aggregate amount payable to Rutledge by our Operating Partnership pursuant to all four revolving credit facilities compared to the aggregate appraised value of the properties pledged as security under all four revolving credit facilities.  In addition, aggregate indebtedness of the Company must be less than 40% of the aggregate appraised value of the Company’s investment in real estate.  As of September 30, 2016, management believes we were in compliance with all the financial covenants contained in the credit facility agreements.

The original revolving credit facility is secured by first lien mortgages on our Pleasant Plains Farm, Macomb Farm, Sweetwater Farm, Tillar Farm and Kane County Farms properties.

The second revolving credit facility is secured by first lien mortgages on our Quail Run Vineyard, Golden Eagle Ranch (first tranche) and Blue Heron Farms properties.

The third revolving credit facility is secured by first lien mortgages on our Kimberly Vineyard (second tranche), Blue Cypress Farm, Grassy Island Groves, Condor Ranch, Falcon Farms and Roadrunner Ranch properties.

The fourth revolving credit facility is secured by first lien mortgages on our Kingfisher Ranch, Hawk Creek Ranch and Sandpiper Ranch properties.  Hawk Creek Ranch was sold on July 27, 2016 and accordingly removed as security for the fourth revolving credit facility, and the net proceeds of the sale were partially applied to fully pay down the outstanding balance under the fourth revolving credit facility.

Distributions and Equity Transactions

In order to qualify as a REIT, we generally are required to 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. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our Board of Directors could decide to make required distributions in part by using shares of our stock.

On October 23, 2015, we completed the Offering, resulting in gross proceeds of $48.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, of approximately $39.2 million, and the listing of our common stock on the NYSE MKT LLC under the symbol “AFCO”.

Capital Expenditure and Development Activity

We anticipate that obligations related to our development properties can be met with existing cash balances, cash flows from operations, working capital, and availability under our revolving credit facilities.

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The following table summarizes the status of our farms that are undergoing substantial or total development as of September 30, 2016. In addition to the properties listed below, estimated remaining capital expenditures before revenue offsets for redevelopment and partial development projects on our Golden Eagle Ranch, Falcon Farms, and Kingfisher Ranch are expected to be $2.1 million, $0.1 million and $0.4 million, respectively.

 

 

 

 

 

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Contractual Obligations

During the nine months ended September 30, 2016, there were no material changes outside the normal course of business to the contractual obligations identified in our Annual Report on Form 10-K for the year ended December 31, 2015.  

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Cash Flows

Comparison of Nine Months ended September 30, 2016 to Nine Months ended September 30, 2015

 

 

 

Net cash used in operating activities was $151,623 for the nine months ended September 30, 2016 as compared to net cash provided by operating activities of $2,887,898 for the nine months ended September 30, 2015.  A majority of the cash provided by operating activities is generated from the rental payments we receive from our tenants, which we utilize to pay for the property-level operating expenses, professional fees, sub-advisory fees, and other corporate level general and administrative expenses.  The lower cash provided by operating activities was primarily due to an increase in professional fees and general and administrative expenses related to the strategic alternatives review and incurred as a result of the Company being publicly traded compared to the prior period for which the Company was still an externally managed REIT. These costs were partially offset by an increase in unearned rent driven by fixed rent for Puma Ranch, Cheetah Ranch, Cougar Ranch and Lynx Ranch that was received in cash during the first quarter of 2016 that related to the beginning of the relevant crop year on each of these properties which was prior to the effective date of the respective leases.  The cash received prior to the effective date will be straight-lined to operating revenues over the terms of the leases (four to five years), and the unearned portion at September 30, 2016 in the amount of $1,191,660 is included in Unearned rent on the consolidated balance sheet as of that date.

Net cash used in investing activities was $56,437,462 for the nine months ended September 30, 2016 as compared to $32,367,262 for the nine months ended September 30, 2015. We closed the acquisition of the Sun Dial properties in the first quarter of 2016, which used $63.5 million of cash, as compared to two acquisitions in the third quarter of 2015, which used $25.1 million of cash.  In addition, in the third quarter of 2016 we sold the Hawk Creek Ranch property for net proceeds of $10.8 million.

Net cash provided by financing activities was $43,880,342 for the nine months ended September 30, 2016 as compared to $25,340,969 for the nine months ended September 30, 2015. We borrowed an incremental $53,750,000 under our revolving lines of credit during the first quarter of 2016 to partially fund the closing of the Sun Dial acquisition and repaid $5,950,000 of our revolving lines of credit utilizing part of the proceeds from the sale of the Hawk Creek Ranch property. We also paid $3,866,981 of dividends and distributions to our common shareholders and Common Unit holders during the nine months ended September 30, 2016, as compared to $1,693,248 during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, we also commenced paying for the offering costs related to the Offering which closed in the fourth quarter of 2015.

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Non-GAAP Financial Measures

FFO attributable to the Company

The Company believes FFO attributable to the Company is a useful, supplemental measure of its operating performance that is a recognized metric used extensively by the real estate industry and, in particular, REITs.  The Company calculates FFO attributable to the Company in accordance with the standards established by the National Association of Real Estate Investment Trusts (NAREIT).  NAREIT defines Funds From Operations (FFO) as net income (loss) computed in accordance with GAAP,  excluding gains (or losses) from sales of depreciated real estate assets, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures in which the reporting entity holds an interest. The Company believes that net income attributable to the Company is the most directly comparable GAAP measure to FFO attributable to the Company. FFO attributable to the Company, however, does not represent an alternative to net income attributable to the Company as an indicator of the Company’s performance or “Cash Flows from Operating Activities” as determined by GAAP as a measure of the Company’s capacity to fund cash needs, including the payment of dividends.

Management presents FFO attributable to the Company as a supplemental performance measure because it believes that FFO attributable to the Company is beneficial to investors as a starting point in measuring the Company’s operational performance.  Specifically, in excluding real estate related depreciation and amortization and gains and losses from sales of depreciable operating farms, which do not relate to or are not indicative of operating performance, FFO attributable to the Company provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.  Management also believes that, as a widely recognized measure of the performance of REITs, FFO attributable to the Company will be used by investors as a basis to compare the Company’s operating performance with that of other REITs.  However, other REITs may not calculate FFO attributable to the Company in accordance with the NAREIT definition as does the Company, and, accordingly, the Company’s FFO attributable to the Company may not be comparable to such other REITs’ FFO attributable to the Company.

Core FFO attributable to the Company and Adjusted FFO Attributable to the Company (AFFO)

The Company calculates Core FFO attributable to the Company by adding back to FFO attributable to the Company (i) performance fees payable to related parties (which ceased following the Internalization Transaction), (ii) acquisition-related expenses (or due diligence costs incurred in non-consummated transactions), and (iii) other income and expense items considered to be one-time in nature (including the expense related to the Company’s Internalization Transaction incurred concurrent with the Offering).  The Company calculates AFFO attributable to the Company by adding back to Core FFO attributable to the Company (i) amortization of deferred financing costs, (ii) stock-based compensation expense, (iii) non-real estate depreciation and amortization expense, if any (iv) straight-line rent adjustments, and (v) above and below market lease amortization adjustments.

Management believes Core FFO attributable to the Company and AFFO attributable to the Company are important supplemental measures of operating performance because they are measures of cash flow available for stockholders and measures that can be analyzed in conjunction with the ability to pay dividends.  The Company is required in certain instances to expense costs for GAAP purposes related to acquiring farms, such as the acquisition fee paid to its Agricultural Sub-Adviser, and legal, professional and other fees (including transfer taxes in some cases) associated with closing the purchase of each property, which do not correlate with the ongoing operations of its existing properties.  In addition, the amortization of costs to obtain financing is a non-cash expense item, as is stock-based compensation expense.  The Company believes that net income attributable to the Company is the most directly comparable GAAP measure to Core FFO attributable to the Company and AFFO attributable to the Company.  Core FFO attributable to the Company and AFFO attributable to the Company, however, do not represent alternatives to net income attributable to the Company as an indicator of the Company’s performance or “Cash Flows from Operating Activities” as determined by GAAP as a measure of the Company’s capacity to fund cash needs, including the payment of dividends.  Other REITs may not calculate Core FFO attributable to the Company and AFFO attributable to the Company as does the Company, and, accordingly, the Company’s Core FFO attributable to the Company and AFFO attributable to the Company may not be comparable to such other REITs’ calculations of these measures.

Reconciliation of FFO attributable to the Company, Core FFO attributable to the Company and AFFO Attributable to the Company to Net Income Attributable to the Company

The following table sets forth a reconciliation of FFO attributable to the Company, Core FFO attributable to the Company and AFFO attributable to the Company to net income attributable to the Company, the most directly comparable GAAP equivalent, for the periods indicated below:

 

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Net Operating Income (NOI)

Management believes NOI provides useful information to investors regarding the Company’s results of operations because it reflects only those income and expense items that are incurred at the property level and when compared across periods reflects the impact on operations from trends in occupancy, rental rates, including participating rents, property operating costs and acquisition and disposition activity, on an unleveraged basis and excluding general and administrative overhead costs.  Management believes that net income attributable to the Company is the most directly comparable GAAP measure to NOI, which, to calculate NOI, is adjusted to add back net income attributable to non-controlling interests, income tax expense, loss or gain on sale of assets, other expense (principally interest expense), depreciation, straight line rent adjustments, amortization of acquired above and below market lease intangibles, management and performance fees-related party, acquisition-related expenses (or due diligence costs on non-consummated transactions), professional fees (excluding incurred at the property operating level), sub-advisory fees, and general and administrative expenses.  However, NOI should only be used as a supplemental measure of the Company’s financial performance and does not represent an alternative to net income attributable to the Company as an indicator of the Company’s performance or “Cash Flows from Operating Activities” as determined by GAAP.  Other REITs may use different methodologies for calculating NOI and, accordingly, the Company’s NOI may not be comparable to other REITs’ NOI.

Reconciliation of NOI to Net Income Attributable to the Company

The following table sets forth a reconciliation of NOI to Net Income Attributable to the Company, the most directly comparable GAAP equivalent, for the periods presented.

 

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Net Asset Value (NAV) per share

The Company estimates the fair value of its farms based on appraised value, expressed in terms of net asset value (NAV).  NAV is calculated as stockholders’ equity of the Company, as adjusted for the increase or decrease in fair value of the portfolio attributable to the Company, and then divided by the Company’s total common shares outstanding.  For purposes of determining the adjustment between the investment in real estate on a GAAP basis and on a fair value basis, all of the costs associated with the acquisition of all properties were added to the cost thereof (irrespective of whether the acquisition was treated as a business combination or not), and no effect was given to straight-lining rental income. In addition, all capital expenditures and development costs post-acquisition are capitalized and thereafter added to the cost of all of the properties, and included in net book value, for purposes of the fair value analysis. Management presents NAV as a supplemental non-GAAP measure because it believes that NAV is beneficial to investors in measuring whether the company’s investments in real estate have appreciated in value, in aggregate, since their respective dates of acquisition. The Company believes that stockholders’ equity of the Company is the most directly comparable GAAP measure to NAV. Due to possible differences in the calculation or application of the definition of NAV, including the reliance on independent, third-party appraisers in determining fair value, a comparison of the Company's NAV to similar measures utilized by other REITs may not necessarily be meaningful.

In determining the fair value of the investments in real estate, the Company has historically relied on independent third-party appraisal firms that employ a certified appraiser with local knowledge and expertise who is certified as either an A.R.A. or M.A.I. appraiser or state certified as a Certified General Real Estate Appraiser or a Certified General Appraiser and who performed their formal appraisals as of December 31 in each calendar year for each property (except as noted below). The Company’s independent auditors have not audited or reviewed these appraisals. Properties that were purchased in the fourth quarter of any calendar year were not appraised until December 31 of the calendar year end following the year of acquisition. Until first appraised, such properties were valued at cost. Each full appraisal was prepared in conformity with the Uniform Standards of Professional Appraisal Practice and utilized at least one of the following three approaches to value:

(i) the cost approach, which establishes value by estimating the current costs of reproducing the improvements (less loss in value from depreciation) and adding land value to it;

(ii) the income capitalization approach, which establishes value indicated by the subject property's net earning power based on the capitalization of income; and/or

(iii) the comparable sales approach, which establishes value indicated by recent sales of comparable properties in the market place,

 

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with each approach leading to a final opinion of the appraised value of the subject property by the appraiser. The income capitalization approach is very sensitive to the final capitalization rate chosen, with small changes in the capitalization rate resulting in significant changes in market value. Factors considered during the land valuation process utilized for the comparable sales approach, include, among others, prominence of location, size, shape, availability of utilities, zoning, topography, property rights, financing, property improvements, market conditions and land use mix. Though the three approaches are interrelated and one or more of the approaches may be selected by the appraiser depending on applicability, generally in the appraisal of agricultural property, the comparable sales approach is most often utilized. In the case of our development properties, the cost approach tends to be more frequently relied upon due to the lack of (i) income (as the properties are under development and are not bearing crops that generate commercial income) and (ii) comparable sales of cropland farms undergoing development (sales are typically either of raw land or of mature farms), and in the early years of development until the farm is producing a commercially viable crop, despite the potentially significant capital expenditures, development properties are often compared to raw land, which may significantly undervalue the property.  While management believes that values presented fairly reflect current market conditions, such values are subjective and are based on assumptions, judgments and estimates that are dependent upon market conditions that are subject to change without notice and, therefore, may prove to be inaccurate.  Such inaccuracies may have a material impact on the Company’s overall portfolio valuation.  The value of each property will ultimately be determined by the timing of, and market conditions that exist upon, the disposition of each property.

 

Reconciliation of Net Asset Value (NAV) per Share to Company Stockholders’ Equity

The following table provides a reconciliation of Net Asset Value (NAV) per fully diluted share to Company stockholders’ equity as of December 31, 2015.

 

 

 

Subsequent Events

No material subsequent events have occurred since September 30, 2016 that required recognition or disclosure in the financial statements, except as disclosed below.

 

Subsequent to September 30, 2016, limited partners in the Operating Partnership holding 2,687,412 Common Units requested redemption of their Units.  The Company elected to satisfy the redemption request by issuing 2,687,412 shares of common stock in the Company.

 

On October 26, 2016, a purported class action lawsuit was filed in the Circuit Court for Baltimore County, Maryland against the Company, seeking to represent a proposed class of all Company stockholders captioned Parshall v. American Farmland Company et. al., Case No. 24C16005745. The complaint names as defendants the Company, the members of the Company Board, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC.  The complaint alleges that the Company directors breached their duties to the Company in connection with the evaluation and approval of the mergers. In addition, the complaint alleges, among other things, that the Company, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC aided and abetted those breaches of duties. The complaint seeks equitable relief, including a potential injunction against the mergers. The Company and FPI believe the allegations in the complaint are without merit and intend to defend against those allegations. The Company and FPI cannot assure you as to the outcome of this pending litigation, or any similar future lawsuits, including costs associated with defending these claims, any other liabilities that may be incurred in connection with the litigation or settlement of these claims or any effect on the operations of the Company or FPI or the timing in which the mergers are completed.

 

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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 risks to which we are exposed are interest rate risk and commodity price risk for those commodities that impact our participating rents. Our primary interest rate exposure is the daily and/or three month LIBOR. We may use fixed interest rate financing to manage our exposure to long-term fluctuations in interest rates. On a limited basis, we also may use derivative financial instruments to manage interest rate risk. We will not use such derivatives for trading or other speculative purposes and we do not currently have any hedges in place.  Our primary commodity price risks relate to our participating permanent crop leases and include walnuts, pistachios, almonds, pecans, lemons, and avocados, among others.  Commodity prices can vary depending on a number of factors, including production yields (regional, national and global) and consumer demand (national and global). Although our leases require our tenants to purchase crop insurance, which provides a measure of risk mitigation, participating revenue streams under our participating leases are subject to significant variability year to year due in part to fluctuations in commodity prices.

As of September 30, 2016, all of our outstanding debt, approximately $75.0 million, had variable interest rates. Assuming no increase in the amount of our variable rate debt, if interest rates increased by 1.0%, or 100 basis points, our cash flow would decrease by approximately $750,000 per year.  At September 30, 2016, three-month LIBOR was approximately 85 basis points.  The Company has not entered into any hedges to protect against a potential increase in market interest rates, but could take such actions in the future.

Inflation and Interest Rates

All of the leases for the farms in our portfolio have one- to five-year terms, pursuant to which each tenant is responsible for substantially all of the operating expenses related to the property, including taxes (except for commodity row crop leases), maintenance, water usage and insurance. As a result, we believe that the effect on us of inflationary increases in operating expenses may be offset in part by the operating expenses that are passed through to our tenants and by contractual rent increases since our leases will be renegotiated every one to five years.

Inflation may impact the value of our farms over the long term. To the extent that interest rates increase, costs associated with our borrowing arrangements may also increase. Interest rate increases or decreases may also have an effect on farmland values because farmland cash returns and capitalization rates tend to increase as real interest rates increase. However, historical observation of farmland value changes versus interest rate changes show an inconsistent relationship which cannot be relied upon. It appears that interest rates are only one factor among many which may impact farmland value. As may be expected, farmland prices tend to follow crop prices over the long run.

Seasonality

Our revenues are also impacted by the seasonality of crop harvests and the timing of when revenue is recognized in connection with such harvests, as the leases for our permanent crops have both fixed and participating components, with the participating component tied to a percentage of gross revenue generated by a crop yield or a share of the crop yield. We currently have eleven farms that are subject to participating leases and expect to use similar leasing structures in the future. Payments under such leases are made two to four times annually, with some payments being made in the year subsequent to the relevant harvest, which causes revenue to be concentrated unevenly in the fourth, first and second quarters of each year, varying in amount and timing from year to year.

 

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to the members of senior management and the Board of Directors.

Based on management’s evaluation as of September 30, 2016, our chief executive officer and chief financial officer and treasurer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our chief executive officer and our chief financial officer and treasurer to allow timely decisions regarding required disclosure.

There were no changes to our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 

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PART II — OTHER INFORMATION

 

 

On October 26, 2016, a purported class action lawsuit was filed in the Circuit Court for Baltimore County, Maryland against the Company, seeking to represent a proposed class of all Company stockholders captioned Parshall v. American Farmland Company et. al., Case No. 24C16005745. The complaint names as defendants the Company, the members of the Company Board, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC.  The complaint alleges that the Company directors breached their duties to the Company in connection with the evaluation and approval of the mergers. In addition, the complaint alleges, among other things, that the Company, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP aided and abetted those breaches of duties. The complaint seeks equitable relief, including a potential injunction against the mergers. The Company and FPI believe the allegations in the complaint are without merit and intend to defend against those allegations. The Company and FPI cannot assure you as to the outcome of this pending litigation, or any similar future lawsuits, including costs associated with defending these claims, any other liabilities that may be incurred in connection with the litigation or settlement of these claims or any effect on the operations of the Company or FPI or the timing in which the mergers are completed.

Under the leases in place for the farms in our portfolio, a tenant typically is obligated to indemnify us, as the property owner, from and against all liabilities, costs and expenses imposed upon or asserted against it as owner of the farms due to certain matters relating to the operation of the property by the tenant.

We may be party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. There can be no assurance that these matters that arise in the future, individually or in aggregate, will not have a material adverse effect on our financial condition or results of operations in any future period.

 

 

In addition to the other information disclosed elsewhere in this Quarterly Report on Form 10-Q,  we have identified the following additional risks and uncertainties that may have a material adverse effect on our business prospects, financial condition or results of operations. Investors should carefully consider the risks described below, as well as the risks that were discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, which we filed with the SEC on March 30, 2016, before making an investment decisions. Our business faces significant risks and the risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2015 may not be the only risks we face. Additional risks presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business prospects, results of operations or financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.

 

The proposed mergers present certain risks to our business and operations.

 

On September 12, 2016, we entered into an agreement and plan of merger, or the merger agreement, with FPI, Farmland Partners OP, the General Partner, Parent Merger Sub, OP Merger Sub and OP Merger Sub GP, which provides for the merger of us with and into Parent Merger Sub and the merger of OP Merger Sub with and into the Operating Partnership, or collectively, the mergers. Pursuant to the terms and subject to the conditions set forth in the merger agreement, at the respective effective time of the mergers, each outstanding share of our common stock will be converted into the right to receive 0.7417 shares of FPI’s common stock, and each outstanding common unit of partnership interest of the Operating Partnership will be converted into the right to receive 0.7417 Class A common units of partnership interest of Farmland Partners OP. The completion of the mergers is subject to the satisfaction of all of the conditions to closing contained in the merger agreement, including receipt of the separate approvals of our and FPI’s stockholder. Subject satisfaction of these conditions, we expect to complete the transaction in late 2016 or early 2017, although we cannot assure you that the transaction will close on such timetable or at all.

 

There can be no assurance that the mergers will be consummated in accordance with the anticipated timing or at all.

 

Although we expect to close the mergers in the first quarter of 2017, there can be no assurance that the mergers will be completed in accordance with the anticipated timing or at all. The merger agreement contains closing conditions, which may not be satisfied or waived, in which case we will not be obligated to complete the mergers. In addition, under circumstances specified in the merger agreement, we or FPI may terminate the merger agreement. Also, the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the mergers will be consummated.

 

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Failure to consummate the mergers and the other transactions contemplated by the merger agreement as currently contemplated or at all could adversely affect the price of our common stock and our future business and financial results.

 

The consummation of the mergers and the other transactions contemplated by the merger agreement may be delayed, the mergers and the other transactions contemplated by the merger agreement may be consummated on terms different than those contemplated by the merger agreement, or the mergers and the other transactions contemplated by the merger agreement may not be consummated at all. Failure to consummate the mergers and the other transactions contemplated by the merger agreement would prevent our stockholders from realizing the anticipated benefits of the mergers and the other transactions contemplated by the merger agreement and could result in a significant decline in the market price of our common stock and a negative perception of us, generally.

 

We will incur substantial expenses and payments even if the mergers are not completed.

 

We have incurred substantial legal, accounting, financial advisory and other costs and our management has devoted considerable time and effort in connection with the mergers. If the mergers are not completed, we will bear certain fees and expenses associated with the mergers without realizing the benefits of the mergers. The fees and expenses may be significant and could have an adverse impact on our results of operations.

 

Our business and the market price of our common stock may be adversely affected if the mergers are not completed.

 

The mergers are subject to customary and other closing conditions. If the mergers are not completed, we could be subject to a number of risks that may adversely affect our business and the market price of our common stock, including:

 

 

 

 

 

In connection with the announcement of the entry into the merger agreement, a lawsuit has been filed, seeking, among other things, to enjoin the mergers, and an adverse judgment in either of these lawsuits may prevent the AFCO Mergers from being effective or from becoming effective within the expected timeframe.

 

On October 26, 2016, a purported class action lawsuit was filed in the Circuit Court for Baltimore County, Maryland against AFCO, seeking to represent a a proposed class of all AFCO stockholders captioned Parshall v. American Farmland Company et. al., Case No. 24C16005745.The complaint names as defendants the Company, the members of the Company’s board of directors, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC.  The complaint alleges that the Company’s directors breached their duties to the Company in connection with the evaluation and approval of the proposed merger with FPI. In addition, the complaint alleges, among other things, that the Company, the Operating Partnership, FPI, Farmland Partners OP, Farmland Partners OP GP LLC, FPI Heartland LLC, FPI Heartland Operating Partnership, LP and FPI Heartland GP LLC aided and abetted those breaches of duties. The complaint seeks equitable relief, including a potential injunction against the mergers.  The deadline for an answer or other responsive pleading by the defendants has not yet passed. We believe the allegations in the complaint are without merit and intend to defend against those allegations.

 

We cannot assure you as to the outcome of this pending litigation, or any similar future lawsuits, including costs associated with defending these claims, any other liabilities that may be incurred in connection with the litigation or settlement of these claims, or any effect on our operations or the timing in which any merger is approved or completed.

 

 

Additional Merger Information

 

In connection with the proposed merger, FPI filed with the SEC a registration statement on Form S-4 (File No. 333-213925) that includes a joint proxy statement of the Company and FPI that also constitutes a prospectus of FPI.  BEFORE MAKING ANY VOTING DECISION, THE COMPANY’S STOCKHOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT AND

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OTHER RELEVANT DOCUMENTS IN THEIR ENTIRETY IF AND WHEN THEY BECOME AVAILABLE AND ANY OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE MERGERS OR INCORPORATED BY REFERENCE IN THE JOINT PROXY STATEMENT BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE MERGERS. The Company’s stockholders may obtain a free copy of the joint proxy statement (if and when it becomes available) and other relevant documents filed by the Company with the SEC at the SEC’s website at www.sec.gov. In addition, the Company’s stockholders may obtain a copy of the proxy statement, when available, and other relevant documents free of charge from the Company’s website at www.americanfarmlandcompany.com.

 

The Company and its directors, executive officers and certain other members of management and employees of the Company may be deemed to be “participants” in the solicitation of proxies from the Company’s stockholders in connection with the mergers. Information regarding the interests of the persons who may, under the rules of the SEC, be considered participants in the solicitation of the Company’s stockholders in connection with the mergers, which may be different than those of the Company’s stockholders generally, will be set forth in the joint proxy statement and the other relevant documents to be filed with the SEC. The Company stockholders can find information about the Company and its directors and executive officers and their ownership of Company Common Stock in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 30, 2016, and its proxy statement for its 2016 annual meeting of stockholders, which was filed with the SEC on April 28, 2016. These documents can be obtained free of charge from the sources indicated above. Additional information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available.

 

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

 

 

Not applicable.

 

 

Not applicable.

 

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

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