Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks Stacy — that was a pleasant intro. I'm David Gladstone, and I'd like to welcome everyone to the quarterly conference call for Gladstone Land. Thanks to each of you for joining us today. We truly appreciate the time you've taken to hear our presentation. What we're doing today will be a shortened version. Should you wish to hear the complete presentation we gave previously: visit the IR page on our website, which is at Gladstone Land. Then head to the events and presentation page, and you're able to listen to it however many times you'd like. We'll begin today with Michael LiCalsi. He serves as our General Counsel and Secretary. He's also President of Gladstone Administration, the administrator for this fund as well as our other funds that we manage. Michael, please go ahead.

Appreciate that, David. Greetings to all of you as well. Today's report may include forward-looking statements issued pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, among them being statements regarding our anticipated future performance. Such forward-looking statements involve specific risks and uncertainties, and they are based on our current plans, which we believe to be reasonable. A number of factors could cause our actual results to differ materially from any future results expressed or implied by these forward-looking statements, including each risk factor disclosed in our Forms 10-K and 10-Q, or in the documents you observe that we have filed with the SEC. Those are available, again, on our website at www.gladstonefarms.com — head specifically to the investor relations page — or on the SEC's website at www.sec.gov. We take on no obligation to publicly update or revise any of these forward-looking statements, whether because of new information, future events, or anything else, unless the law requires it. In today's discussion, we'll also cover FFO, meaning funds from operations. FFO is a non-GAAP accounting term whose definition is net income excluding gains or losses from real estate sales and any impairment losses on property, plus depreciation and amortization of real estate assets. We're going to talk about core FFO as well — that's funds from operations with certain nonrecurring revenues and expenses taken out, which is how we usually describe it. Then there's adjusted FFO, which takes core FFO and makes more changes for certain noncash items, like turning GAAP rents into normalized cash rents. Our view is that these measures provide a clearer picture of our operations and make it easier to compare how we perform across different periods. As we always do, we'd encourage you to stop by our website when you get a chance — that's gladstonefarms.com, once again. You can sign up for our e-mail notification service too. You'll also find it on Facebook, where the keyword to search is "the Gladstone companies." Over on Twitter, you can find us at the handle @GladstoneComps. To start, this conversation will just summarize what we reported, so please look at our press release and Form 10-Q, which both came out 2 days ago, if you want the fuller details. Also, you're able to hear the initial recording of this earnings call from yesterday at 8:30, which is available on the investor relations section of our site. At this point, I'll hand things over to David Gladstone. David?

Thank you, Michael. As many of you are aware, March 31, 2019, got off to a very sluggish beginning and ended up being an outstanding year where acquisitions were concerned. Now, quite similar to the prior year, this year finishing March 31, 2020, has opened from an acquisition perspective with a really sluggish beginning. That said, we delivered yet another robust quarter operationally, which you can see reflected in the figures for March 31, 2020. Lease renewals keep going well for our team, and we remain capable of renewing leases on the farms we already hold while raising the net rent rates on certain of our newer farms. In our view, these higher rental rates signal how strongly the company's farms are in demand, and they also point to ongoing recognition of the worth we see in the properties we possess, along with many farms throughout the West Coast and in California too. Let me now briefly address how the government's closures have affected the farm business. Honestly, there is no meaningful effect on any portion of the farming tenants and tenant business. The reason is simply that between 90% and 95% of what gets grown on our farms is sold through grocery stores such as Krogers and Safeways and Costco and Walmart and comparable outlets. Only a tiny share of the produce going to the food services industry originates from our farms. That industry consists mainly of restaurants and institutions, including schools and other locations where meals are provided. And I believe, when you examine it, the entire movement has been in the direction of grocery stores. Nobody has quit eating. They're simply consuming more of it — from grocery stores, so this has been a favorable transition that has helped our farmers and our farm-related products. As for the supply disruption. Someone raised a question about that. We haven't heard about any delivery issues from our farmers. The majority of large farmers who sell to the big grocery stores are doing just fine. Firms such as Walmart and Kroger maintain control over their distribution and logistics and shipping and all of that. Our farmers typically aren't part of that, apart from loading the trucks from the coolers they operate out in California or in Florida. The availability of trucks appears adequate, and although demand is high, it has stayed steady. Gasoline is abundant and inexpensive, so transporting produce to market doesn't cost much. Furthermore, most of our tenants have sales contracts for their produce and delivery agreements lined up long before the season starts. This is simply how the program works. Back in December and January, people were signing contracts for strawberry delivery across the spring and summer. So we aren't seeing anything occur right now with respect to any of that. As I believe most of you are aware, and as our press releases have discussed, we hold roughly 88,000 acres across 113 farms, spanning 10 states. Whether we look at third-party appraisals or what we actually paid for these farms, the total fair value is currently estimated at approximately $892 million. My expectation is that by this time next year, we will comfortably exceed $1 billion. Here's some great news: our farms remain 100% occupied, and they're leased out to 70 different tenants, none of whom are related to us. There is 1 tenant who pays slowly and owes us roughly one payment, and that's because of a delayed payment this farmer has experienced from their processing plants. I believe we've been working with this particular farmer for 7 years; his credit history with us has been solid, and I expect this situation will be resolved fairly quickly. I want to emphasize just this one point. We now own a substantial number of farms, and they're spread across enough distinct regions, with so many different farmers and so many different crop types, that we have sufficient diversification to safeguard the cash flows coming in — and therefore the dividends we distribute. When it comes to diversification, I'd say we're in good shape and fully diversified. In the first quarter, the team purchased 2 new farms for $7.5 million; and the leases on these farms include certain provisions, like annual escalations, so you're going to see those prices rise. And one quick note: these yield figures do factor in the operating expense that falls to us. At this point I'm going to slow down and simply ask whether you have any questions, because I'd prefer to spend this time answering them. And if you'd like to read about us from what we've posted on our website, you're welcome to do so. Are there any questions out there, Stacy? We'll come on, and let's see whether any questions exist from some of the folks who are signed on.

David, in the current environment — whether we mean right now or before COVID — how fierce is the competition for farm sales and leasebacks in your markets? Basically, how many well-funded rivals operate in your main markets today, doing deals in which the farmer sells you the land and remains on it, or where you acquire farms for a larger operator to work, and so forth? Give us your take on the competitive landscape.

Of course. Our rivals tend to be neighboring farmers who own the adjacent farm, and they show up to place bids. Conditions aren't as tough as they once were, yet a number of private groups have concluded that what we do is extremely, extremely solid; and they're competing out there. You notice them most often on the West Coast. Florida is a curious case, since it fluctuates week to week, and figuring out who's active there and who will bid is genuinely difficult. Occasionally, folks we've partnered with purchase a farm without involving us. That happened once in the last year. So people are present there, but it doesn't resemble, say, certain Midwestern states. In Iowa, buyers are plentiful. Folks examine what the land is truly rated at and decide what price they'll offer; and in my view, every square inch of Iowa is recognized for soil quality, and nearly everyone bidding understands that soil quality and bids on that basis; that marketplace isn't where we operate. As you're aware, we've completed some deals in the Midwest, but not in the corn, wheat, and soy regions; we're in Colorado doing potatoes and similar things. We don't encounter that type of buyer in those places. So it's a one-on-one kind of relationship. And unless you're prepared to head out and knock on doors and collaborate with people, you need folks on the ground doing that work. And as you're aware, we have staff in every one of these marketplaces where we operate. So competition is really competition for the seller's attention. And I believe a massive transfer of wealth lies ahead as people start selling their farms and moving on. Farms are — achieving any kind of scale in this business is hard. You need hundreds and hundreds of acres for a farm to work. A 100-acre farm alone won't do, the way it could 20, 30 years ago. So I'm not sure whether we've answered your question, Rob.

Yes, that's quite useful. Then, Lewis, since you folks are starting the Series C, what goal does the company have regarding the preferred portion within the capital stack? And what would you consider your upper limit for how much you'd be prepared to raise it before you'd have to sell common to pull it back toward a more typical day-to-day level?

At this moment, the objective is — we absolutely don't want to exceed a 1:1 equity split of common versus preferred. So as of now, we sit at 50% leverage on a debt basis, and that figure leaves out all preferred stock. Therefore, I believe we've got some room to proceed with the Series C.

Can you hear me all right?

We can.

Thanks. I've got a quick one. In your press releases, I saw mention that certain farmers are actually seeing sales volumes that are unusually strong because of the virus, and I'm curious whether that might carry an implication or a read-through for your participation rents. I suppose my question has 2 parts. To begin with, we're aware that you've been bringing on additional rents featuring those participation components, but setting that to one side, based on what you've observed so far, would you anticipate this being an especially strong year for those participation rents? Also, could those come in earlier in the year — maybe starting to show up gradually during the second quarter — since farmers have had such a strong beginning to the year?

Ben, the major surge came about when the shutdown started and folks went to supermarkets for their food. Since they were at the supermarket, they decided to grab some produce as well. That led to a significant shift. My sense is that in those initial two weeks, prices rose 20% to 30%. After that, things kind of stabilized and dropped back, and what we've observed is inconsistent pricing. At times, the onion category underperformed for a period, and then unexpectedly rebounded with real strength. My sense is that Vidalia onions arriving from Georgia played a role in lifting onion sales. The U.S. government supplies us with the statistics, and while that data arrives with some delay, my expectation is that pricing will stay fairly stable, aside from the customary annual bump that certain farms implement. That said, I don't anticipate any percentage rent payouts happening ahead of schedule, and with luck, percentage rents will deliver another solid year. At this point, my expectation is roughly flat versus a year ago, maybe slightly down. Honestly, I can't say where the — when everything shakes out, what the final figure will be. Every year that late-arriving unknown shows up, and we keep attempting to predict how it will land. I'm constantly pushing the folks on my team for a projection, and they push back, since their visibility is no better than anyone throwing dice in Las Vegas. So predicting what actually arrives is really tough. Apologies. That's the best picture I can offer you, Ben.

No, no — that's still useful. I suppose I'm just shifting over to the market and how quickly new acquisitions are happening. You said you had a slower beginning to the year, which I assume is typical since, the way I see it, activity can sometimes be pushed ahead into the fourth quarter annually. And you recently announced an acquisition worth $3.5 million, so could you describe how you view your liquidity position at quarter end, given the operating environment and your pipeline for the near to intermediate term?

I'll address the liquidity side. What I mean is, at present, we hold a lot of cash. Our liquidity sits at roughly $55 million; that figure includes somewhere around $25 million, $30 million in cash on hand; plus $25 million of availability under the — under our credit lines. There are a couple of unencumbered properties we could also leverage. So when it comes to liquidity, we have ample capital, and our lenders continue extending credit to us on favorable terms, so nothing worries us on the capital front.

When it comes to deals in the works, we have quite a few listed here, and ideally they all land at once — I'd prefer a cluster of closings over a scattered pace with nothing finalizing. So there are plenty of opportunities in motion. I'm not sure. One item on the list is a potato farm, roughly $20 million. Basic terms are agreed, but it won't move forward until June. Many of these farmers are extremely busy. Early in the year, they were putting crops in the ground, making their plans, purchasing seeds and plants, which explains the slow pace. We've removed a few from the list I have here, simply because their asking price for the farm is too high, so we'll wait on them. Should they decide to return and accept our figure, that's fine. Looking at some of the newer entries on the list — I've probably got 30 or 40 here — some are early stage. Others are a bit further along. Just to give you a sense of what's in the pipeline: organic feed grains and oil seeds. We've taken a look at that. I'm not sure. I'd estimate a solid $100 million that we'll complete over time. And considering what's currently out there, perhaps $95 million carries high probability, and I believe those will close; it's — I'm not sure. We finalized one of our best deals a year ago. That one sat in the pipeline for roughly 10 years, ever since I spoke with them long ago; so these farmers will engage with you for quite a while. We've also attempted to move into other regions; there are a couple of individuals in North Carolina we're evaluating who ought to materialize at some point; it would be great to have more presence in North Carolina. Once you establish yourself in a region and word spreads among those in that farming area — John nearby sold his farm and leased it back — they grow curious and begin asking questions; so it's a matter of penetration, of breaking into the farming community and building relationships with people, but I believe we're in good shape. I'm not certain we'll match last year's volume. I'm optimistic, though — we ought to post a strong figure and push ourselves to the $1 billion mark.

That's useful. Regarding the farm you recently acquired in Nebraska — I noticed it's a triple net lease property. Could you share whether participation rents apply to it as well, and what the initial going-in cap rate would be?

The cap rate comes to 5.5%. Participation rents aren't part of that arrangement.

All right, that's great. And the final thing from my side. Clearly, the new Series C preferred program has just been rolled out. I suppose, would it be reasonable to think that in today's climate — does investor appetite exist for that? How would you characterize the demand from investors right out of the gate under these conditions for the Series C compared with the extraordinary speed at which Series B shares were sold? Just so we can factor that in and incorporate it into our model.

Well, we need to determine the number of contracts that will be signed. My sense is we've only got 5 or 6, possibly as many as 10; we had been operating at roughly 55 sales contracts. You must enter into an agreement with the brokerage firm that employs the men and women doing the selling before they can even head out into the streets and begin selling; therefore, I'd say it will take some time for us to reach the 50 or so that we required to move at a solid pace. The positive side is that this is a significantly bigger transaction, and we may complete deals — we are completing deals with some considerably larger groups; and should we land 1 or 2 of those, things will move quite quickly. I don't particularly enjoy moving quickly because that means I must locate farms and close them. We cannot keep a great deal of money sitting on the balance sheet, not generating income; so my expectation is that it will probably begin to ramp up in the fall, rather than early summer, and that stems from the fact that it's more difficult to get people through the due diligence process. Every one of these groups has due diligence officers, and they must give their approval; and although they approved the B, they now have to go back and approve the C. So from that angle it's a bureaucratic tangle, but they are performing their duties; so Ben, I believe it will go smoothly once we have all the selling agreements in place.

Understood. So I suppose the positive here is that with the new management fee structure, although you'd incur interest expense tied to excess liquidity from the preferred offering, that fee won't go up until the capital has actually been put to work. So I think investors can take a bit of reassurance from that. That's all I had, everyone.

The press only seems to report the negative side. Given the variety of properties, farm types, and product types in your holdings, which areas are genuinely performing well? Which areas are genuinely struggling within the portfolio?

The best part, naturally, is that every farm we acquired is paying according to the terms. So I'd say the portfolio right now is as solid as it has ever been, Henry. On the downside, naturally, you can't predict what weather will bring, since what you're growing out there is a living crop sitting in the open. And so we got plenty of rain this year in California; it helped for a time and then became excessive. All the planting is done at this point, which is a positive. If you consider the Midwest, those folks got rain last year that prevented them from getting crops in the ground. And so I believe we're in fine shape in that region. Potatoes are seeing strong demand. I suppose, while you're at home, having a potato beats heading out; and because of that, some operations simply can't harvest them fast enough to meet orders, while others proceed at their usual rate; so nothing out there right now is threatening us. COVID-19 isn't the issue. The issue is what the crazy government is doing to halt COVID-19; and until people are back out working and eating and visiting restaurants and doing all those things, I think for us things will continue as they are at present. We're in a solid position. We haven't endured any — nobody in the group has — we don't — I'm not even aware of anyone who has contracted COVID-19. Consequently, every one of our employees is doing well. Everyone we deal with is doing well, and everything is proceeding as though there's no tomorrow when it comes to people purchasing food. I feel very confident about it right now, Henry; and we truly don't see anyone out there close to bankruptcy or facing difficulties. Those few deals that were lagging, we eliminated them, in terms of bringing in new participants. So at this moment, everything looks bright. That doesn't guarantee it'll look bright next week, but it looks bright today.

It also doesn't seem as though any of your farms are struggling with labor, whether that's bringing folks in to bring in the harvest and take care of the crops, and so on.