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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

or

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

For the transition period from                   to

Commission File Number: 001-36405

FARMLAND PARTNERS INC.

(Exact Name of Registrant as Specified in its Charter)

Maryland

46-3769850

(State or Other Jurisdiction

of Incorporation or Organization)

(IRS Employer

Identification No.)

4600 South Syracuse Street, Suite 1450

Denver, Colorado

80237-2766

(Address of Principal Executive Offices)

(Zip Code)

(720) 452-3100

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FPI

New York Stock Exchange

6.00% Series B Participating Preferred Stock

FPI.PRB

New York Stock Exchange

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of November 4, 2020, 29,351,271 shares of the Registrant’s common stock (30,990,063 on a fully diluted basis, including 1,638,792 Common Units of limited partnership interests in the registrant’s operating partnership) held by non-affiliates of the registrant were outstanding.

Table of Contents

Farmland Partners Inc.

FORM 10-Q FOR THE QUARTER ENDED

September 30, 2020

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

Consolidated Financial Statements

Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3

Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)

4

Consolidated Statements of Comprehensive Income (Loss)

5

Statements of Changes in Equity for the nine months ended September 30, 2020 and 2019 (unaudited)

6

Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

7

Notes to Consolidated Financial Statements (unaudited)

8

Item 2.

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

30

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

47

Item 4.

Controls and Procedures

47

PART II. OTHER INFORMATION

48

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults Upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

49

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Farmland Partners Inc.

Consolidated Balance Sheets

As of September 30, 2020 (Unaudited) and December 31, 2019

(in thousands except par value and share data)

September 30,

December 31,

    

2020

    

2019

ASSETS

Land, at cost

$

930,653

$

937,813

Grain facilities

 

12,091

 

12,091

Groundwater

 

10,214

 

11,473

Irrigation improvements

 

53,833

 

53,871

Drainage improvements

 

12,790

 

12,674

Permanent plantings

54,430

52,089

Other

8,032

 

7,827

Construction in progress

 

9,275

 

11,911

Real estate, at cost

 

1,091,318

 

1,099,749

Less accumulated depreciation

 

(30,722)

 

(25,277)

Total real estate, net

 

1,060,596

 

1,074,472

Deposits

 

 

1

Cash

 

7,108

 

12,561

Notes and interest receivable, net

 

2,412

 

4,767

Right of use asset

128

73

Deferred financing fees, net

109

174

Accounts receivable, net

 

6,494

 

5,515

Inventory

 

1,505

 

1,550

Prepaid and other assets

 

1,453

 

3,440

TOTAL ASSETS

$

1,079,805

$

1,102,553

LIABILITIES AND EQUITY

LIABILITIES

Mortgage notes and bonds payable, net

$

508,432

$

511,403

Lease liability

128

73

Dividends payable

 

1,550

 

1,593

Derivative liability

3,182

1,644

Accrued interest

 

3,221

 

3,111

Accrued property taxes

 

2,645

 

1,873

Deferred revenue

 

50

 

71

Accrued expenses

 

7,482

 

5,868

Total liabilities

 

526,690

 

525,636

Commitments and contingencies (See Note 8)

Series B Participating Preferred Stock, $0.01 par value, 6,037,500 shares authorized; 5,831,870 shares issued and outstanding at September 30, 2020, and 5,972,059 at December 31, 2019

139,766

 

142,861

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

119,633

120,510

EQUITY

Common stock, $0.01 par value, 500,000,000 shares authorized; 29,086,271 shares issued and outstanding at September 30, 2020, and 29,952,608 shares issued and outstanding at December 31, 2019

 

282

 

292

Additional paid in capital

 

333,037

 

338,387

Retained earnings

 

(1,934)

 

6,251

Cumulative dividends

 

(53,224)

 

(48,784)

Other comprehensive income

 

(2,853)

 

(1,644)

Non-controlling interests in operating partnership

 

18,408

 

19,044

Total equity

 

293,716

 

313,546

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

$

1,079,805

$

1,102,553

See accompanying notes.

3

Table of Contents

Farmland Partners Inc.

Consolidated Statements of Operations

For the three and nine months ended September 30, 2020 and 2019

(Unaudited)

(in thousands except per share amounts)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

OPERATING REVENUES:

Rental income

$

8,701

$

9,111

$

27,916

$

28,480

Tenant reimbursements

 

911

 

458

 

2,655

 

1,392

Crop sales

748

(145)

1,445

788

Other revenue

 

244

 

424

 

755

 

1,024

Total operating revenues

 

10,604

 

9,848

 

32,771

 

31,684

OPERATING EXPENSES

Depreciation, depletion and amortization

 

1,979

 

2,087

 

5,982

 

6,294

Property operating expenses

 

1,961

 

2,050

 

5,640

 

6,171

Cost of goods sold

1,332

619

2,643

842

Acquisition and due diligence costs

 

 

 

11

 

1

General and administrative expenses

 

1,395

 

1,444

 

4,248

 

4,237

Legal and accounting

 

287

 

421

 

1,617

 

2,437

Other operating expenses

1

1

2

1

Total operating expenses

 

6,955

 

6,622

 

20,143

 

19,983

OPERATING INCOME

 

3,649

 

3,226

 

12,628

 

11,701

OTHER (INCOME) EXPENSE:

Other income

25

(147)

113

(283)

Loss (gain) on disposition of assets

(1,348)

18

(2,179)

(7,891)

Interest expense

 

4,411

 

4,818

 

13,541

14,805

Total other expense

 

3,088

 

4,689

 

11,475

 

6,631

Net income before income tax expense

561

(1,463)

1,153

5,070

Income tax expense

 

 

NET INCOME (LOSS)

 

561

 

(1,463)

 

1,153

 

5,070

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

 

(34)

 

99

 

(70)

(375)

Net income (loss) attributable to the Company

527

(1,364)

1,083

4,695

Nonforfeitable distributions allocated to unvested restricted shares

(16)

(18)

(48)

(60)

Distributions on Series A Preferred Units and Series B Preferred Stock

(3,064)

(3,117)

(9,269)

(9,368)

Net loss available to common stockholders of Farmland Partners Inc.

$

(2,553)

$

(4,499)

$

(8,234)

$

(4,733)

Basic and diluted per common share data:

Basic net (loss) available to common stockholders

$

(0.09)

$

(0.15)

$

(0.28)

$

(0.16)

Diluted net (loss) available to common stockholders

$

(0.09)

$

(0.15)

$

(0.28)

$

(0.16)

Basic weighted average common shares outstanding

 

29,206

 

29,497

 

29,392

 

30,319

Diluted weighted average common shares outstanding

 

29,206

 

29,497

 

29,392

 

30,319

Dividends declared per common share

$

0.05

$

0.05

$

0.15

$

0.15

See accompanying notes.

4

Table of Contents

Farmland Partners Inc.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

Net Income (loss)

$

561

$

(1,463)

$

1,153

$

5,070

Amortization of OCI

301

547

Net change associated with current period hedging activities

226

(80)

(1,756)

(950)

Comprehensive Income

1,088

(1,543)

(56)

4,120

Comprehensive income attributable to non-controlling interests

(34)

99

(70)

(375)

Net income (loss) attributable to Farmland Partners Inc.

$

1,054

$

(1,444)

$

(126)

$

3,745

See accompanying notes.

5

Table of Contents

Farmland Partners Inc.

Consolidated Statements of Changes in Equity and Other Comprehensive Income

For the nine months ended September 30, 2020 and 2019

(Unaudited)

(in thousands)

Stockholders’ Equity

Common Stock

Non-controlling

    

    

    

Additional

    

    

    

Other

    

Interests in

    

Paid in

Retained

Cumulative

Comprehensive

Operating

Total

    

Shares

    

Par Value

    

Capital

    

Earnings

    

Dividends

    

Income

    

Partnership

    

Equity

Balance at December 31, 2018

30,594

$

300

$

332,996

$

4,852

$

(42,695)

$

(865)

$

44,685

$

339,273

Net income

4,695

375

5,070

Issuance of stock

(218)

(218)

Grant of unvested restricted stock

224

Stock based compensation

2

1,259

1,259

Dividends accrued or paid

(9,368)

(4,573)

(335)

(14,276)

Repurchase and cancellation of shares

(3,401)

(34)

(21,146)

(21,180)

Forfeiture of unvested restricted stock

(21)

(1)

(98)

(99)

Net change associated with current period hedging transactions

(950)

(950)

Conversion of Common units to shares of common stock

2,678

27

26,217

(26,244)

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

(219)

219

Balance at September 30, 2019

30,076

$

292

$

338,791

$

179

$

(47,268)

$

(1,815)

$

18,700

$

308,879

Balance at December 31, 2019

29,952

$

292

$

338,387

$

6,251

$

(48,784)

$

(1,644)

$

19,044

$

313,546

Net income

1,083

70

1,153

Grant of unvested restricted stock

139

Stock based compensation

788

788

Dividends accrued or paid

(9,268)

(4,440)

(286)

(13,994)

Net change associated with current period hedging transactions

(1,209)

(1,209)

Repurchase and cancellation of shares

(1,005)

(10)

(6,558)

(6,568)

Adjustment to non-controlling interest resulting from changes in ownership of the Operating Partnership

420

(420)

Balance at September 30, 2020

29,086

$

282

$

333,037

$

(1,934)

$

(53,224)

$

(2,853)

$

18,408

$

293,716

See accompanying notes.

6

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Farmland Partners Inc.

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2020 and 2019

(Unaudited)

(in thousands)

For the Nine Months Ended

September 30,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

1,153

$

5,070

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

Depreciation, depletion and amortization

 

5,982

 

6,294

Amortization of deferred financing fees and discounts/premiums on debt

 

218

 

247

Stock based compensation

 

788

 

1,161

(Gain) loss on disposition of assets

 

(2,179)

 

(7,891)

Bad debt expense

325

341

Amortization of dedesignated interest rate swap

547

Changes in operating assets and liabilities:

(Decrease) Increase in accounts receivable

 

(1,256)

 

930

Increase (Decrease) in interest receivable

7

(653)

Decrease in other assets

 

1,734

 

1,395

Increase (Decrease) in inventory

45

 

(911)

Increase (Decrease) in accrued interest

 

88

 

(666)

Decrease in accrued expenses

 

1,757

 

614

Increase in deferred revenue

 

166

 

62

Increase in accrued property taxes

 

786

 

984

Net cash provided by operating activities

 

10,161

 

6,977

CASH FLOWS FROM INVESTING ACTIVITIES

Real estate acquisitions

 

(884)

Real estate and other improvements

 

(2,026)

(5,074)

Principal receipts on notes receivable

1,762

5,936

Issuance of note receivable

(8)

(1,653)

Proceeds from sale of property

13,427

34,141

Net cash provided by investing activities

 

12,271

 

33,350

CASH FLOWS FROM FINANCING ACTIVITIES

Repayments on mortgage notes payable

(2,994)

(11,342)

Participating preferred stock repurchased

(3,095)

(897)

Common stock repurchased

(6,568)

(21,180)

Payment of debt issuance costs

(130)

Payment of swap fees

(182)

Dividends on common stock

(4,484)

(4,656)

Distribution on Series A preferred units

(3,510)

(3,510)

Distribution on Series B participating preferred stock

(6,637)

(6,735)

Distributions to non-controlling interests in operating partnership, common

(285)

(335)

Net cash used in financing activities

 

(27,885)

 

(48,655)

NET INCREASE (DECREASE) IN CASH

 

(5,453)

 

(8,328)

CASH, BEGINNING OF PERIOD

 

12,561

 

16,891

CASH, END OF PERIOD

$

7,108

$

8,563

Cash paid during period for interest

$

12,650

$

15,407

Cash paid during period for taxes

$

$

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING TRANSACTIONS:

Dividend payable, common stock

$

1,454

$

1,504

Dividend payable, common units

$

95

$

95

Distributions payable, Series A preferred units

$

2,633

$

2,633

Additions to real estate improvements included in accrued expenses

$

141

$

412

Swap fees payable included in accrued interest

$

36

$

Deferred offering costs amortized through equity in the period

$

$

218

Settlement of outstanding notes receivable with property acquisitions

$

487

$

Net Investment In Lease

$

$

210

Right of Use Asset

$

128

$

104

Lease Liability

$

128

$

104

See accompanying notes.

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Farmland Partners, Inc.

Notes to the Unaudited Financial Statements as of September 30, 2020

Note 1—Organization and Significant Accounting Policies

Organization

 

Farmland Partners Inc., collectively with its subsidiaries (the “Company”), is an internally managed real estate company that owns and seeks to acquire high-quality farmland located in agricultural markets throughout North America. The Company was incorporated in Maryland on September 27, 2013. The Company is the sole member of the general partner of Farmland Partners Operating Partnership, LP (the “Operating Partnership”), which was formed in Delaware on September 27, 2013. As of September 30, 2020, the Company owned a portfolio of approximately 156,000 acres which are consolidated in these financial statements. All of the Company’s assets are held by, and its operations are primarily conducted through, the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership. As of September 30, 2020, the Company owned a 93.9% interest in the Operating Partnership (see “Note 9—Stockholders’ Equity and Non-controlling Interests” for additional discussion regarding Class A Common units of limited partnership interest in the Operating Partnership (“Common units”), Series A preferred units of limited partnership interest in the Operating Partnership (“Series A preferred units”) and Series B participating preferred units of limited partnership interest in the Operating Partnership (“Series B participating preferred units”)). Unlike holders of the Company’s common stock, holders of Common units and Series A preferred units generally do not have voting rights or the power to direct our affairs. On August 17, 2017, the Company issued 6,037,500 shares of its newly designated 6.00% Series B Participating Preferred Stock, $0.01 par value per share (the “Series B Participating Preferred Stock”) in an underwritten public offering.  Shares of Series B Participating Preferred Stock, which represent equity interests in the Company, generally have no voting rights and rank senior to the Company’s common stock with respect to dividend rights and rights upon liquidation (See “Note 9—Stockholders’ Equity—Series B Participating Preferred Stock” for more information on the Series B Participating Preferred Stock).

 

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

On March 16, 2015, the Company formed FPI Agribusiness Inc., a wholly owned subsidiary (the “TRS” or “FPI Agribusiness”), as a taxable REIT subsidiary.  The TRS was formed to provide volume purchasing services to the Company’s tenants and also to operate a small-scale custom farming business. As of September 30, 2020, the TRS performed these custom farming operations on 3,676 acres of farmland owned by the Company located in California, Michigan, South Carolina, and Florida.

Principles of Consolidation

The accompanying consolidated financial statements for the periods ended September 30, 2020 and 2019 are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified in the prior year financial statements to conform to the current year presentation. Such reclassification had no effect on net income or loss.

Interim Financial Information

The information in the Company’s consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 is unaudited.  The accompanying financial statements for the three and nine months ended September 30, 2020 and 2019 include adjustments based on management’s estimates (consisting of normal and recurring accruals), which the Company considers necessary for a fair statement of the results for the periods. The financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019, included in the

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Company’s Annual Report on Form 10-K, which the Company filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 13, 2020. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of actual operating results for the entire year ending December 31, 2020.

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

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates, particularly in light of the novel coronavirus (“COVID-19”) pandemic and its effects on the domestic and global economies. So far, the direct impact of the COVID-19 pandemic on our business and operations has been limited. As broader sectors of the U.S. agricultural economy are affected through supply chain and commodity price disruptions, we believe that we may experience some yet largely unidentified impact in the medium term. In the long term, we do not expect that the pandemic will affect materially the global demand for food, feed, fuel and fiber, and therefore the value of its farmland portfolio. We are unable to quantify what the ultimate impact of the virus on our business will be.

Real Estate Acquisitions

 

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

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

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

 

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

Management’s estimates of land value are made using a comparable sales analysis. Factors considered by management in its analysis of land value include soil types and water availability and the sales prices of comparable farms. Management’s estimates of groundwater value are made using historical information obtained regarding the applicable aquifer.  Factors considered by management in its analysis of groundwater value are related to the location of the aquifer and whether or not the aquifer is a depletable resource or a replenishing resource.  If the aquifer is a replenishing resource,

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no value is allocated to the groundwater.  The Company includes an estimate of property taxes in the purchase price allocation of acquisitions to account for the expected liability that was assumed. 

 

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

 

As of September 30, 2020 and December 31, 2019, the Company had $1.3 million and $1.3 million in tenant relationship intangibles, respectively, gross of accumulated amortization of $1.3 million and $1.2 million, respectively. The purchase price is allocated to in-place lease values and tenant relationships, if they are acquired, based on the Company’s evaluation of the specific characteristics of each tenant’s lease, availability of replacement tenants, probability of lease renewal, estimated down time and its overall relationship with the tenant. The value of in-place lease intangibles and tenant relationships are included as an intangible asset and have been amortized over the remaining lease term (including expected renewal periods of the respective leases for tenant relationships) as amortization expense. If a tenant terminates its lease prior to its stated expiration, any unamortized amounts relating to that lease, including (i) above and below market leases, (ii) in-place lease values, and (iii) tenant relationships, would be recorded to revenue or expense as appropriate.

 

The Company capitalizes acquisition costs and due diligence costs if the asset is expected to qualify as an asset acquisition. If the asset acquisition is abandoned, the capitalized asset acquisition costs are expensed to acquisition and due diligence costs in the period of abandonment. Costs associated with a business combination are expensed to acquisition and due diligence costs as incurred. During the three and nine months ended September 30, 2020, the company incurred an immaterial amount of costs related to acquisition and due diligence during the periods.

 

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

 

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

Real Estate Sales

The Company recognizes gains from the sales of real estate assets, generally at the time the title is transferred, consideration is received and the Company no longer has substantial continuing involvement with the real estate sold.

Liquidity Policy

The Company manages its liquidity position and expected liquidity needs taking into consideration current cash balances and reasonably expected cash receipts. The business model of the Company, and of real estate investment companies in general, relies on debt as a structural source of financing. When debt becomes due, it is generally refinanced rather than repaid using the Company’s cash flow from operations. The Company has a history of being able to refinance its debt obligations to manage its debt maturities. Furthermore, the Company also has a deep portfolio of real estate assets which management believes could be readily liquidated if necessary to fund any immediate liquidity needs. Management’s first course of action is to work with its lenders to refinance debt which is coming due on terms acceptable to the Company.

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In the event the Company is unsuccessful in refinancing its debt on terms acceptable to the Company, management would look to liquidate certain assets to fund its liquidity shortfall.

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts, reducing the receivables balance to an amount that it estimates is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable and periodic credit evaluations of the Company’s customers’ financial condition. The Company writes off accounts receivable when it becomes apparent, based upon age or customer circumstances, such that all current expected losses are sufficiently reserved for at each reporting period. The Company considered its current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts. As of September 30, 2020 and December 31, 2019, the Company had an allowance of $0.3 million and $0.1 million, respectively.

Inventory

The costs of growing crops are accumulated until the time of harvest at the lower of cost or net realizable value and are included in inventory in the consolidated balance sheets. Costs are allocated to growing crops based on a percentage of the total costs of production and total operating costs that are attributable to the portion of the crops that remain in inventory at the end of the period. The costs of growing crops incurred by FPI Agribusiness consist primarily of costs related to land preparation, cultivation, irrigation and fertilization. Growing crop inventory is charged to cost of products sold when the related crop is harvested and sold and is included in other operating expenses. The cost of harvested crop was $1.3 million and $2.6 million, and $0.6 million and $0.8 million for the three and nine months ended September 30, 2020 and 2019, respectively.

 

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

 

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

As of September 30, 2020 and December 31, 2019, inventory consisted of the following:

(in thousands)

    

September 30, 2020

 

December 31, 2019

Harvested crop

$

391

$

171

Growing crop

1,114

1,379

General inventory

$

1,505

$

1,550

Hedge Accounting

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

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

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consolidated balance sheets.

The Company terminated its old interest rate swap at the end of March 2020 and entered into a new interest rate swap agreement to manage interest rate risk exposure, effective April 1, 2020. An interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to a fixed rate basis for the next six years on 50% of the currently outstanding amount to Rabobank, thus reducing the impact of interest rate changes on future interest expense. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.

As of September 30, 2020, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was $33.2 million. For a summary of the fair value and related disclosures in relation to hedge accounting, please refer to “Note 10 – Hedge Accounting.” 

New or Revised Accounting Standards

Recent Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), that provided practical expedients to address existing guidance on contract modifications and hedge accounting due to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) and other interbank offered rates (together “IBORs”) to alternative reference rates, such as the Secured Overnight Financing Rate. In July 2017, the Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. We refer to this transition as “reference rate reform.”

The first practical expedient allows companies to elect to not apply certain modification accounting requirements to debt, derivative and lease contracts affected by reference rate reform if certain criteria are met. These criteria include the following: (i) the contract referenced an IBOR rate that is expected to be discontinued; (ii) the modified terms directly replace or have the potential to replace the IBOR rate that is expected to be discontinued; and (iii) any contemporaneous changes to other terms that change or have the potential to change the amount and timing of contractual cash flows must be related to the replacement of the IBOR rate. If the contract meets all three criteria, there is no requirement for remeasurement of the contract at the modification date or reassessment of the previous hedging relationship accounting determination.

The second practical expedient allows companies to change the reference rate and other critical terms related to the reference rate reform in derivative hedge documentation without having to de-designate the hedging relationship. This allows for companies to continue applying hedge accounting to existing cash flow and net investment hedges.

The ASU was effective upon issuance on a prospective basis beginning January 1, 2020 and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting practical expedient to its cash flow hedge. The Company will continue to evaluate its debt, derivative and lease contracts that are eligible for modification relief and may apply those elections as needed.

Recently adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the method and timing of the recognition of credit losses on financial assets. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. This credit loss standard is required to be applied using a modified-retrospective approach and requires a cumulative-effect adjustment to retained earnings be recorded as of the date of adoption. The Company adopted the new standard on January 1, 2020. The adoption of the standard did not have a material impact on its financial position or results of operations.

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Note 2—Revenue Recognition

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

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

Certain of the Company’s leases provide for minimum cash rent plus a bonus based on gross farm proceeds. Revenue under this type of lease is recognized on a straight-line basis over the lease term based on the minimum cash rent. Bonus rent is recognized upon notification from the tenant of the gross farm proceeds for the year.

Most of the Company’s farming leases range from two to three years for row crops and one to seven years for permanent crops. Leases in place as of September 30, 2020 have terms ranging from one to 40 years. Payments received in advance are included in deferred revenue until they are earned. As of September 30, 2020 and December 31, 2019, the Company had $0.0 million and $0.1 million, respectively, in deferred revenue.

The following sets forth a summary of rental income recognized for the three and nine months ended September 30, 2020 and 2019:

Rental income recognized

For the three months ended

For the nine months ended

September 30,

September 30,

(in thousands)

    

2020

    

2019

    

2020

    

2019

Leases in effect at the beginning of the year

$

7,789

$

8,729

$

25,468

$

27,610

Leases entered into during the year

 

912

 

382

 

2,448

 

870

$

8,701

$

9,111

$

27,916

$

28,480

Future minimum lease payments from tenants under all non-cancelable leases in place as of September 30, 2020, including lease advances when contractually due, but excluding crop share and tenant reimbursement of expenses, for the remainder of 2020 and each of the next four years and thereafter as of September 30, 2020 are as follows:

(in thousands)

    

Future rental

 

Year Ending December 31,

payments

 

2020 (remaining three months)

$