Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Thanks, Kevin. That was a good intro. I'm David Gladstone, and I'd like to welcome everyone to the conference call we hold each quarter for Gladstone Land. We're grateful that all of you dialed in today; it always means a lot that you set aside the time to hear what we have to present. To get us started, I'll turn things over to Michael LiCalsi. He serves as our General Counsel and Secretary. In addition, he holds the title of President at Gladstone Administration, the entity that acts as administrator for every one of the Gladstone funds; so Michael, please go ahead.

Appreciate that, David, and hello everyone. This morning's discussion might contain forward-looking statements made under the Securities Act of 1933 as well as the Securities Exchange Act of 1934, and those cover things like how we'll perform going forward; such statements carry specific risks and uncertainties grounded in our present plans, which we consider reasonable, even though numerous factors could lead our actual results to differ materially from any results anticipated or suggested by such statements, and that includes every risk factor described in our forms 10-K along with other filings we make with the SEC. Those documents are available on our site, www.gladstonefarms.com — look at the Investor Relations page — or through the SEC's site, sec.gov; we assume no duty to publicly update or revise any such statements, whether from fresh information, later events, or anything else, unless the law demands it. Later on, we'll cover FFO, meaning funds from operations, a non-GAAP accounting term whose definition is net income, leaving out gains or losses tied to selling any real estate plus impairment losses on property, then adding depreciation and amortization of real estate assets. We'll also cover core FFO, which we typically describe as FFO with adjustments for particular nonrecurring revenues and expenses; plus adjusted FFO, which takes core FFO and further adjusts it for specific noncash items, for example converting GAAP rents into normalized cash rents; in our view these give a clearer picture of operating results and permit stronger comparability of how we perform from one period to the next. Please take a moment to check out our site, once more, gladstonefarms.com, and register for our e-mail notification service so you can remain current regarding the company. You can locate us on Facebook too, where the keyword is The Gladstone Companies. Our very own Twitter handle is @GladstoneComps; and since this call provides an overview of our results, please look at our press release and Form 10-K, each released yesterday, to get more detailed information. Once more, those are posted on the Investor Relations page of our site. Having said all that, I'll hand the presentation back over to David Gladstone.

Alright, Michael — thanks. We delivered another solid quarter, capping off what turned out to be a rather eventful banner year. The deals we've closed recently are generating somewhat better yields than the ones we did earlier. On top of that, we managed to secure low fixed interest rates on these farms. Going forward, that combination ought to deliver a pleasant lift to our income. Rents started showing modest upward movement, and naturally, in the areas where we operate, we've been positioned to capture that through renewals of our leases along with the scheduled step-ups embedded in those agreements. That ought to contribute a meaningful chunk of extra income affecting earnings down the road; on top of that, participation rents rose substantially this year. Participations had a banner year. Turning to the farmland we own in total. Right now we hold roughly 88,000 acres, 113 farms spread across 10 states; and whether we use third-party appraisals or what we paid for newly acquired farms, the estimated aggregate fair value of our properties comes to approximately $885 million. Even more significant than how many states contain our farms, 24 — they sit within 24 distinct growing regions, and the tenant farmers working that land cultivate roughly 50 different crop types. The wonderful part is that our farms remain 100% occupied by no fewer than 70 tenants, every one of them unrelated to us. My sense is we now hold a solid number of farms across enough separate regions, with as many distinct farmers as we have and so many crop varieties; that gives us adequate diversification, which provides protection for the cash flows coming in and therefore the dividends distributed to our shareholders. I believe we've reached that point. Diversification is in place, though we continuously seek ways to improve it. A few recent moves in Q4. The team picked up an additional $52 million in new farms, at a blended net yield near 6.5%. That figure excludes any participation rents we may collect from those properties. And after year-end, we added 2 more farms — a smaller transaction, $8 million. We'll find out how this quarter shakes out. Taken together, the initial net cash yield to us from these purchases comes to roughly 6.4%, and these leases carry certain terms, like yearly escalations or participation rents, which ought to drive that number higher down the road. Consequently — and keep in mind this cap rate factors in operating expenses we're on the hook for under the — each lease. That said, the majority of these leases are triple net, so our company shouldn't incur too many expenses moving forward. Regarding leasing activity, during and after the quarter that closed December 31, 2019, we either signed new leases or extended and modified existing ones across 13 of our properties. At this point, 2 of those leases shifted away from a single net arrangement—where we bore responsibility for property taxes, repairs, and certain other operating costs—into a partially triple net lease, leaving us responsible only for the property taxes on those farms. Once you factor in the altered obligations for some of those operational expenses, the new leases should produce roughly a $1 million boost in yearly net income compared with the earlier lease. After the year ended, we also ended the leases on 4 farms, collecting $3 million in termination payments; those farms were promptly re-leased to a new unrelated third-party tenant without any downtime. So that worked out well for us. Going forward, 7 additional leases are set to expire during 2020. All of them end in the back half of the year, and combined they represent roughly 7% of our total annualized lease revenue. We're talking with both of the current tenants as well as some possible new tenants—partially new tenants, potentially new tenants—and we don't anticipate any downtime across these farms. Let's now shift to what we've been doing on the capital-raising side. Since September 30, '19, we brought in another $6 million of net proceeds by selling our common stock through our ATM Program, and we also generated about $50 million in net proceeds from selling our nontraded Series B Preferred Stock. As of today, we've sold roughly $140 million of that $150 million Series B Preferred Stock. So this offering is nearly sold out. Reaching that point took us close to 2 years, but the timing was just right. We required the money to acquire additional farms. And I'd like to remind everybody that while selling the Series B Preferred Stock, the company has paid certain commissions and fees to a wholly-owned subsidiary and the management company, Gladstone Securities. That said, Gladstone Securities serves merely as a conduit for this offering, and roughly 94% of those fees earned go to third-parties, including brokers and wholesalers who assist in selling—sell the shares and earn commissions through those sales. As for the fees Gladstone Securities keeps, the remaining 6% of the fees covers expenses like printing prospectuses, books, and information pamphlets, plus attending conferences and other travel-related costs tied to selling the stock. All together, those additional expenses actually exceed the 6% that Gladstone Securities retains. As you can tell, selling nontraded stock isn't cheap. But honestly, when all is said and done, it's no more than what a typical secondary public offering—an overnight stock offering—would cost. And folks, the single reason we turn to preferred stock is to prevent dilution of the common stock. As all of you know, I hold a large stake in the common stock, and most common stockholders like me don't care for dilution. Also, I want to point out that preferred stock isn't factored in when calculating what the adviser gets paid, and it has never led to any extra payments going to the adviser. A few folks got confused about the way the fee worked, and there were some mix-ups around that. So after the year ended, we changed our adviser's agreement to alter the method used for figuring the management fee. Instead of tying the fee to the quantity of common equity in the fund, we determined it made more sense to tie it to the quantity of real estate assets the fund owns. After all, those are the assets we're on the hook for, as the adviser handling the oversight and management of them. We're also told that a number of stockholders were running into genuine trouble trying to reproduce the fee math; so this will fix that and make it simpler for anyone who wants to know it to work out. We didn't set the new fee at the old rate — instead it sits at 0.5% per year of the gross tangible real estate the fund owns. In my view this lines up better with other externally managed funds, like those the adviser manages; 0.5% sits at the low end of the range and is far below any fees paid in other situations; and naturally it relates to the expenses tied to managing those assets. And our Board of Directors reviewed this change and approved it unanimously, which I think makes things straightforward. But keep in mind that this fee relies on the historical cost basis of the assets, not fair value. When fair value goes up, as it has for most of our farms, that won't cause fees to go up. So it's only on the base amount that we manage. That covers enough on the operations side. I'll now hand things over to our CFO, Lewis Parrish, who will walk you through the other numbers.

Okay. Thanks, David, and good morning to all of you. I'll start with a review of our balance sheet. In Q4, our total assets grew roughly $60 million, or 8%, largely because of those new acquisitions, which we funded using a mix of new fixed rate loans and cash proceeds from equity issuances. On the financing side — sorry, from a financing standpoint, since Q4 began, beyond the equity issuance proceeds David referenced earlier, we also closed 7 new loans with 4 separate lenders, bringing in total proceeds of roughly $57 million. These new loans will have an effective interest rate of 3.35% on a weighted average basis and will remain fixed for the next 6 years. Looking at leverage, on a fair value basis, our loan-to-value ratio across all farmland holdings stood at approximately 54% as of December 31. Given how relatively low-risk high-quality farmland is as an asset class overall, we're comfortable with that level. Although interest rates remain somewhat volatile, more than 99% of our borrowings are presently at fixed rates. And on a weighted average basis, those rates are locked at 3.6% for another 6 years; thus we believe we're currently well shielded on the debt side from any future increases in interest rates. Plus, with the weighted average maturity of those borrowings sitting 10-plus years out, we also feel protected against any potential liquidity problems if another recession were to occur. As for upcoming debt maturities, roughly $26 million comes due within the next 12 months. But about $15 million of that amount is the maturities of 3 bullet loans due toward the end of this year. The 3 properties securing those loans have risen in value by a combined $2.3 million since their respective acquisitions. So we don't anticipate any difficulty refinancing those loans, whether with the same lender or possibly new lenders; so excluding those maturities, we have only about $11 million of amortizing principal payments due within the next 12 months, or roughly 2% of our total debt outstanding. Now I'll turn to our operating results. First, I'll point out that in the fourth quarter, we had net income of approximately $958,000 and a net loss to common shareholders of roughly $627,000, or $0.03 per common share. For the full year, we had net income of about $1.8 million and a net loss to common shareholders of approximately $2.5 million, or $0.13 per common share. Comparing quarter over quarter, our adjusted FFO for Q4 rose by roughly $589,000, or 20%; on a per share basis, AFFO went up by $0.026 per share, reaching $0.167 per share in the current quarter versus $0.141 per share last quarter. Dividends declared came to $0.134 per share in each quarter; comparing year over year, our AFFO for 2019 grew by about $2.9 million, or 34%. Turning to a per-share view, AFFO rose by $0.054 per share, reaching $0.568 per share in 2019 versus $0.514 per share the prior year. Our declared dividends across 2019 came to $0.543 per share, which means the payout ratio for the year, measured against AFFO, landed at 94%. Higher top line revenues served as the primary catalyst for the AFFO gain. Looking at it through a cash rate lens, rental income grew roughly $2.5 million, or 23%, quarter over quarter, and roughly $11.3 million, or 39%, year over year. That stems mainly from extra revenues generated by our recent acquisitions, along with additional participation rents booked in the current period. In the fourth quarter, we booked approximately $1.5 million in participation rents, versus $848,000 in the preceding quarter. Across 2019, for the year, we had 19 — sorry, for the year ended December 31, 2019, we had $2.3 million in participation rents, nearly double the $1.2 million figure from the previous year; and in 2019, 19 farms under leases carried an active participation rent component, compared with 11 in 2018. We're capturing additional participation rents on 1 more farm in 2020, and then a good number more will begin in 2021. Turning to expenses, our core operating expenses rose by approximately $986,000 quarter over quarter. The primary cause is an incentive fee our adviser earned this quarter, since our pre-incentive fee FFO exceeded the required hurdle rate. Excluding related-party fees, core operating expenses were up only about $90,000, or 10%, from the previous quarter. That's mainly attributable to marginally higher professional fees and extra spending on marketing and advertising. Worth noting, our property operating expenses stayed relatively flat quarter over quarter. Year over year, core operating expenses climbed by roughly $1 million, or 14%; the rise this year came from higher related-party fees, chiefly the incentive fee just referenced, plus additional property operating expenses incurred in the first half of the year. Now I'll turn to net asset value. We had 10 farms revalued this quarter, all through independent third-party appraisers. On the whole, those farms gained about $1.3 million, or 1.2%, in value relative to their prior valuations from roughly a year earlier. As of December 31, our farms were valued at approximately $877 million, all of it valued using either third-party appraisals or the actual purchase prices. Using these updated valuations, and factoring in the fair value of our debt along with all preferred stock, our net asset value per common share at December 31 came to $11.41, a decline of $0.08, or 0.7%, from the prior quarter. The chief reasons for that drop were ongoing capital improvements on certain properties and the dilutive effect of equity issuances during the quarter, mostly offset by valuation increases. Now, on the liquidity front, counting what's available through our credit lines, we've got more than $50 million in dry powder right now. That gives us over $125 million in purchasing power when it comes to all-cash acquisitions. Beyond that, if an opportunity comes up, we have both the capability and the intention to issue new OP units as part of the consideration for acquisitions. And then, just last night, we finished an amendment with MetLife covering a fresh $75 million term note commitment. So there's plenty of availability through our biggest borrowing facility, and talks are ongoing with prospective new lenders regarding either extra facilities or standalone borrowings. By and large, credit remains easily accessible to us on attractive terms. We've got lots of capacity and the means to keep borrowing and keep acquiring new farms that fit our investment criteria. Finally, a quick word about our common distributions. We just lifted our common dividend once more, to $0.04465 per share each month. Across the last 20 quarters, we've increased that common dividend 17x, which works out to a 48.8% total rise in the monthly distribution rate paid to common shareholders during that period. And going back to 2013, we've made 84 straight monthly dividend payments to common shareholders, amounting to $4.44 per share in cumulative distributions. Returning dividends to our shareholders sits at the heart of our business plan, and we remain focused on growing the dividend at a pace that beats inflation. With that, I'll hand the program back to David.

All right, thanks. That was a solid report. I realize everyone is eager to hear how the acquisitions will shape up in 2020. Everyone has constructed their model, and we've built one as well. It's always a challenge to predict the acquisitions. The year 2020 got off to a sluggish start, quite similar to the prior year, yet on the whole, the roster of farms we might purchase stays robust. So we're hopeful that we can stay quite busy and bring you encouraging updates as 2020 progresses. That said, nothing is assured when it comes to deals getting done, though it does seem to work out that they materialize during stretches like the one we're in. A couple of last thoughts. Our investments go toward farmland producing crops that support healthy ways of living, including fruits, vegetables and nuts, and we're riding the wave we observe in today's marketplace. Right now, roughly 85% of all our revenue is generated by farms cultivating the kinds of foods located either in the produce aisle or the nut aisle of the grocery store near you; in our view, these rank among the most healthful foods available, and among them we're noticing a rising shift toward organics. More than 45% of the acreage we devote to fresh produce is either certified organic or in the process of transitioning to organic; and roughly 10% of our permanent crops — that acreage — falls within the organic designation; we expect the organic segment to remain a robust growth area. On top of that, more than 95% of what we hold is free of GMOs. One more key factor behind our approach of targeting farmland that grows fresh produce relates to how inflation affects that segment. Per the Bureau of Labor Statistics, the food CPI on the whole tends to track inflation. That said, across the last 40 years, the fresh fruit and vegetable portion of the food categories exceeded the overall food CPI by a factor of 1.6x. And listen, price inflation benefits our growers. These healthful foods earn them more money; therefore, we're able to ask them a bit more in rent. Meanwhile, prices for commodity crops such as corn, oats and wheat tend to swing more widely, since they're exposed to worldwide supply and demand, while fresh produce enjoys greater insulation from global swings, largely because these crops are usually eaten nearby not long after they're picked. All in all, appetite for prime farmland producing fruits and vegetables stays steady to robust across virtually every region where we operate, where our farms sit, especially along the West Coast — and by that I mean California, Oregon and Washington on the West Coast; and on the East Coast, above all Florida plus a bit further north of Florida and Georgia. On balance, farmland keeps delivering strong results relative to other assets, even with some recent declines in particular areas. The NCREIF index — that's a farmland index — right now consists of roughly $11.4 billion in agricultural properties, and that includes the ones we own. Over the last 20 years, it's delivered an average yearly return of approximately 12.3%. Meanwhile, I believe the S&P index came in at 5.6% across that same stretch. And as you probably are aware, throughout those 20 years, the farmland index has not once posted a losing year, which stands in contrast to the S&P, which I believe recorded 6 negative years during that identical window — down years within that same period. During rocky stretches in the financial markets, farmland has typically served investors as a safe haven, since both land values and food prices — particularly fresh produce — have kept climbing at a steady pace. Our present distribution run rate, based on where the share price sits today at $13.90. Given how relatively stable these underlying assets are, you would think the share price ought to be significantly, significantly higher; and in my view stock offerings are a fantastic alternative, and for folks purchasing right now at $13.90, we're yielding them roughly 3.9%, or close to 4%. To wrap up, please keep in mind to purchase stock — that what you're buying is stock in a company with a genuinely long-term commitment to farmland. This isn't some technology stock where you'll wake up tomorrow morning and there'll be a big aha moment. I think there are 2 aspects of investing in our stock that I love the most. First, it resembles gold. It's a hard asset — dirt, farmland. It carries an intrinsic value since only a limited quantity exists, and urban developers are consuming it, particularly in California and Florida, where we have many farms. And second, in contrast to gold and other alternative assets, it's an active investment that generates cash flows for investors. And we feel this beats any bond fund, because we're able to keep raising the dividend. I think a great way to view our farmland fund is as a wonderful hedge against inflation. I think this is a terrific fund. And once we grow a bit larger in terms of asset size, my hope is that we'll get listed on the RMZ Index. Should that occur, it ought to bring in additional institutional ownership, which hopefully will push the price up a little bit more along with some added liquidity. I noticed that Vanguard, which runs the largest REIT fund, recently bought a nice amount of the stock. But Gladstone Land wouldn't amount to anything today without the good people we have operating and managing it. Purchasing and leasing farmland is a complex business, and farming is a very complex operation; learning it takes years, and you need a lot of smart people in the farming business. It's not as simple as some of the presidential hopefuls would think it is; so if you like what we're doing, please buy some stock, keep eating fresh fruits and vegetables and nuts. And this is the best economy that we've ever seen. Nothing quite like this has crossed my path during my whole career. That means all of us are in a stronger position now, helped by what the government has done — by its reversal regarding matters that could deliver additional water to agricultural land in California. Yesterday evening, the government put its signature on a bill designed to bring more water to California's farmers. Seeing that caught me off guard, yet there it is. All right, let's step away from political discussion. And we'll take a few inquiries from the folks who track us. Operator, please join us at this point and explain to our audience the way they can submit questions.

Could you describe the way your key crop exposures split out at present? In terms either of revenue or of acreage, what portion is soybeans, blueberries, strawberries, corn and potatoes, and so on?

Lewis, what do you have?

Yeah, so, look — in our view, revenue tells you more than acreage does, since a single acre of strawberries in California doesn't carry the same value or bring in the same revenue as one acre of corn in Nebraska. So if you look at it from a revenue standpoint, pistachios are probably sitting at just under 20% for us at the moment. Then there was that big $70 million acquisition at the end of last — at the end of 2019, and that gave it a real lift. Coming in second and third, it's likely a tie between prime strawberry ground and miscellaneous vegetable ground, each at roughly 18%. After those, you're probably talking almonds at right around 10%.

All right, that's quite useful. When it comes to 2019, what portion of the revenues was participating as opposed to contractual?

As a percentage, I don't — I would need to — give me a moment to pull up my calculator; it comes to $2.3 million against roughly $40.6 million.

All right, that works well. That's something I'm able to handle — we'll run the numbers right here. And after that...

5%, 6%.

All right. What remains outstanding on the Series B? You mentioned it had nearly sold out; and are you going to launch another nontraded preferred series? Or does that essentially exhaust what you're willing to have in the capital structure right now for preferred?

I believe we have under 5% left...

Just slightly below $10 million.

There's less than $10 million remaining to be sold, and it's moving very fast. Selling stock has turned into a wonderful opportunity within this nontraded space. My guess is we'll assemble a C and take another look at it. How big or the timing, I can't say, but it's something we need to revisit, largely since selling is fairly inexpensive; locating shareholders isn't nearly as hard for us. They arrive at a steady rate, and typically we can finance farms at the very rate we bring in capital. It also prevents us from watering down the common shares. I firmly believe the common shares deserve a far higher price than where they sit now, given that there's a hard asset behind them that was, I don't know, as ancient as the earth, if you look at it that way, and it isn't leaving. So the production foundation for these fruits and vegetables is quite solid. Thus, in my view, we ought to shield the common shareholders from dilution to the greatest extent we can. What level of preferred versus common we could all tolerate, I can't say, and we'll definitely keep an eye on it. My sense is we shouldn't exceed roughly a 1:1 ratio of leverage, but we'll simply need to observe how it plays out...

All right. So what you're aiming for right now isn't — what I mean is, a number of REITs have jumped on that nontraded preferred trend, and once you factor in the preferred, their effective leverage sits at something like 80%, 90%, which is massively over-leveraged when the preferred is counted. So how are you folks viewing preferred as a piece of the capital stack?

Right, we're nowhere near 80%. At this moment, my general way of thinking about it is roughly a 1:1 ratio. Things could shift substantially, both in today's market and — for common and preferred stock, and that ratio could move quite fast. If suddenly folks were ready to hand us preferred stock at a 3% yield, I'm afraid we'd be issuing a great deal more preferred stock. As of now, I figure it'll be around 1:1. That's my best guess.

Alright. Could you go into somewhat greater depth regarding how the Arizona property's lease ended and how it was leased again afterward? What caused the prior tenant to walk away? Also, had you built any connection with the incoming tenant beforehand? And how does the new rent compare with the old one?

Well, the gap comes to roughly $1 million...

On a gross rent basis, I believe the new lease comes in slightly lower. That said, as David pointed out, these are leases where we moved away from a single net structure toward a partial net one. As a result, many of the operating expenses we'd been bearing ought to disappear. Once you factor those in — I don't recall the precise figure for those specific leases, but I'd say it's roughly a $300,000 increase from those by themselves.