IPO Preview: Gladstone Land

Jan.28.13 | About: Gladstone Land (LAND)

Based in McLean, Va., Gladstone Land (NASDAQ:LAND) scheduled a $50 million IPO with a market capitalization of $91 million at $15 per share for Tuesday, Jan. 29, 2013. FIve IPOs are scheduled for the week of Jan. 28, 2013. The full IPO calendar is available here.

The S-11 was filed Dec. 27, 2012. The S-11 was first filed in August 2010 for a $226 million IPO.

Summary

LAND intends to be a U.S.-based farmland REIT. It filed with the SEC in August 2008 for a $226 million IPO. The current filing is for $50 million with a market cap of $91 million.

Things have obviously not gone as expected for LAND (not necessarily unusual given the economic conditions). However, LAND stumbled its way to an IPO, and that's a negative.

In the current IPO attempt, LAND expects to sell 54% of the company. That is relatively high and is a sign of weakness.

To REIT or Not to REIT

LAND can't even guarantee it is going to be a REIT. According to the S-1 (page 8):

It is possible that our monthly distributions will not be sufficient to eliminate our non-REIT earnings and profits by Dec. 31, 2013, in which case we would likely not elect to be taxed as a REIT until our taxable year ending Dec. 31, 2014.

LAND's price to book appears high at 1.7. It looks as if it expect to make an arbitrage profit based on buying farmland and then doing an IPO at almost twice the price paid.

Conclusion

Pass on the LAND IPO.

Business

LAND is an externally managed real estate company formed to invest in farmland located in major agricultural markets throughout the United States. LAND expects to earn rental and interest income from its investments.

LAND's farmland is predominantly concentrated in locations where tenants are able to grow annual row crops such as berries, lettuce, and melons, among others, which are planted and harvested annually or more frequently. LAND currently owns 12 farms, leased to six separate corporate and independent farmer tenants, in California and Florida. Additionally, LAND owns two cooler buildings and a facility utilized for storage and packing.

LAND acquired several properties in 2011 and 2012:

  • West Beach Farms: On Jan. 3, 2011, LAND acquired three farms on 198 acres of row crop farmland near Watsonville, Calif., for an aggregate purchase price of approximately $8.5 million.
  • Dalton Lane Farm: On July 5, 2011, LAND acquired one farm on 72 acres of row crop farmland near Watsonville, Calif., for a purchase price of approximately $2.8 million..
  • Keysville Road Farms: On Oct. 26, 2011, LAND acquired two farms on 59 acres of row crop farmland near Plant City, Fla., for an aggregate purchase price of approximately $1.2 million

Management Fees

In terms of fees, 2% is on the high side.

Adviser

  • 1.0% of total stockholders' equity, measured at the end of each quarter.
  • In 2014, the fee increases to 2.0% of adjusted stockholders' equity.

Quarterly Incentive Fee

LAND will pay the Adviser an incentive fee with respect to pre-incentive fee FFO (funds from operations) in each calendar quarter as follows:

  • No incentive fee in any calendar quarter in which the pre-incentive fee FFO does not exceed the hurdle rate of 1.75% (7% annualized) of adjusted stockholders' equity at the end of the quarter;
  • 100% of the amount of the pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of adjusted stockholders' equity at the end of any calendar quarter (8.75% annualized); and
  • 20% of the amount of the pre-incentive fee FFO that exceeds 2.1875% of adjusted stockholders' equity at the end of any calendar quarter (8.75% annualized).

Adjusted stockholders equity will exclude the uninvested cash proceeds of the IPO during 2013.

Lease Expirations

Farm leases are generally short term in nature, so in any given year LAND expects to have multiple leases up for renewal or extension. LAND has three leases expiring in 2013 on its West Beach, West Gonzales, and Colding Loop farms. These leases collectively account for 76% of 2012 annualized GAAP straight-line rent.

The current rental rate on the Colding Loop Farm was negotiated in 2012. The current rental rate on the West Beach Farms was negotiated in 2012, and the current rental rate on West Gonzales Farm was negotiated in 2011.

Because the rental rates on all three of these leases have been recently negotiated, LAND anticipates being able to renew each of these leases prior to their expiration in 2013 at the same, if not better, rental rates.

Use of Proceeds

LAND expects to net $45 million from its IPO. Proceeds are allocated to to buy farms and farm-related properties, such as coolers, processing plants, packing buildings, and distribution centers for lease to tenants and, to a lesser extent, make to loans secured by agricultural real estate and to make payments to LAND's Adviser and LAND's Administrator pursuant to agreements.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This IPO report is based on a reading and analysis of LAND's S-11 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.