Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

All right, Kevin, thanks for the kind words. David Gladstone here, and I’m glad to welcome everyone to this quarterly conference call for Gladstone Land. We’re grateful that all of you dialed in today and took some time from your schedules to hear what we have to share. First up is Michael LiCalsi, our General Counsel and Secretary. He also serves as President of Gladstone Administration, the administrator for every one of the Gladstone funds. Michael, please take it away.

Appreciate that, David. Morning to everyone. The report we're giving today might contain forward-looking statements made under the Securities Act of 1933 and the Securities Exchange Act of 1934, and those statements cover things like how we expect to perform going forward; such statements carry specific risks and uncertainties, built on the plans we currently have, which we consider reasonable, and numerous factors could make what actually happens differ materially from any results in the future that these statements express or suggest, and that includes every risk factor detailed in our Forms 10-K and 10-Q among the filings we've submitted to the SEC — you can locate all of them on our site, www.gladstonefarms.com, and in particular the Investor Relations page there, or you could visit the SEC's site, www.sec.gov. Also, we're not committing to publicly refreshing or amending any of these forward-looking statements, whether because of fresh information, later events, or anything else, unless the law demands it. And on this call we'll cover FFO, meaning funds from operations, a non-GAAP accounting term whose definition is net income minus gains or losses on real estate sales and any impairment losses on property, plus depreciation and amortization on real estate assets. Core FFO will come up too, which we typically describe as FFO with adjustments for particular revenues and expenses that don't recur. Then there's adjusted FFO, which takes core FFO and makes further adjustments for specific non-cash items, for instance converting GAAP rents into normalized cash rents; overall, we think these give a clearer picture of how we're operating and let you compare our performance across periods more easily. Now, I'd encourage you to check out our site again at gladstonefarms.com and register for the email notification service. That way you'll remain current on the Company. We're also on Facebook, where you can search The Gladstone Companies, and on Twitter, where you can find us at @gladstonecomps. This call serves as a summary of what we've reported. So we'd ask you to look at our press release and Form 10-Q, both released yesterday, for fuller details. Once more, those are available on the Investor Relations page of our site. With that, I'll hand things back over to David Gladstone. David?

Alright, thanks, Michael. As far as adding more farms goes, the pace remains somewhat sluggish on our end; even so, the number of opportunities we're seeing is much greater than what showed up earlier in the year, and we anticipate that things will accelerate for us. Purchase agreements are signed on 4 farms, though due diligence is underway and some could drop out at any point — roughly $70 million sits there. Another 4 farms are in the mix, and — we're working through PSA negotiations, and a number of those will likely fall away, but that represents around $80 million. So we're assembling the pipeline, and ideally a good chunk of these can be finalized by year-end. I'm aware that a great many farmers have been incredibly busy, since grocery store sales have been strongly higher, and that's the channel through which most of our tenants move their crops; during the quarter we put about $21 million into new farms. Our farm operations stayed solid, and the team keeps succeeding at re-leasing properties we already hold at higher rental rates. In our view, those higher rates signal the ongoing robust appetite we observe for the farms we own and for what gets grown on them. One item to keep in mind regarding the first quarter: that's when an early lease termination payment came in — a tenant of ours wanted out of their lease, we agreed on the condition of being compensated, and they paid us roughly $3 million; it was a sizable long-term lease. That $3 million is a one-time occurrence, as all of you are certainly aware, and right away we re-leased that farm to another grower on a fresh long-term lease. So there are 2 things to bear in mind as you examine the second quarter. First, leases covering roughly 1/4 of our farms carry what we refer to as participating rents. Under that arrangement, we get a set percentage of the gross revenue the farm generates when the grower sells his or her crops. Such participation rent comes on top of the minimum fixed base that the lease guarantees. Whether we collect anything from it is uncertain. Should the crops turn out robust, we receive a substantial amount. If not, clearly nothing comes our way. That said, these aren't actually determined until the latter half of the year. The hope is that such rents deliver an earnings lift in the third and fourth quarter, just as happened last year, when we booked approximately $2.3 million in participation rents. Naturally, crop size may end up far smaller, which means we'd collect less. I'm not counting on capturing the full amount of that money annually. The next point to be aware of is that, provided we took the funds from the Farm Credit Group at some point in the previous calendar year, we get a refund annually for part of the interest we paid on those loans. Patronage is the term for this, and those payments typically get booked in the year's first quarter — we logged roughly $1.3 million of income. Similar to what happened in the quarter before — and by that I mean the first quarter, not the second — the second quarter tends to be business as usual for us, just as it was a year ago, and from an operating perspective we believe we did just fine. Looking at the year to date, adjusted FFO through the second quarter gives us roughly $0.09 per share of excess dividend coverage. Now, for a quick update on how the government's closings are affecting our farms. Roughly 90%, 95% of what the farmers leasing our farms grow goes to grocery chains such as Kroger, Safeway, Costco, Walmart and outlets of that kind, while a very small share of the produce is going to food service — restaurants and institutions such as schools included. That's the segment where sales have taken a hit from the coronavirus reduction in openings. At grocery stores, demand for produce and most other foods is still strong; I just read an article saying such sales are 10% above 2019, and we anticipate this holding true through the remainder of the year. Obviously people need to eat. Since they aren't dining out at restaurants, they're purchasing their food from grocery stores. So in brief, our farmers aren't experiencing a meaningful effect on their operations from the government shutdown, supply chains continue to move along without trouble, and prices stay very strong for the majority of the crops; therefore, we believe we're in a segment that isn't getting hit very hard. One place where we do see an effect is in the timing of processor payments to growers, especially those raising permanent crops such as nuts and blueberries. As government mandated shutdowns push many offices across the country to close, numerous smaller companies lack the capacity to send out checks and frequently aren't even coming into the office. Payments owed to those processors by other third parties are being held up, and that hold-up flows down to certain growers and in the end to us. It isn't a major issue in the sense that plenty of money exists, but it's simply new, given that you're constantly scrambling to collect a handful of payments. On the fresh produce side, there's less of this, because that product goes straight to market with essentially no middlemen, yet with permanent crops — nuts and items of that sort, blueberries too — even the processor's payment to the grower takes roughly an extra 3 months. So, they have to break those almonds open, take the almonds out of the shell, then dry them, and things like that. While that process is happening, no payments will be made by them until the product is sold. So that creates a slowdown, and it's because of what the marketplace is doing right now. Given this situation, we gave rent deferrals to 2 blueberry growers who are waiting on payments from their respective processors. The products have actually been sold, and the processor is getting them ready for delivery. On the blueberry side, this rent isn't really a concern for us. It's just a timing issue. We've agreed to give them extra time, up to 120 days, and we should receive those payments in October and November. The rent we deferred is about $43,000, which is actually less than 1% of projected 2020 cash rents based on our current farmland holdings. Beyond that, we have other tenants who occasionally fall a few weeks behind. One guy is $53,000 behind on his rent because he had some insurance — he had rain insurance — and he hasn't gotten his payment from the insurance company, even though that processor has been out there and talked to them. So, a few weeks, a few months, they will get it. I expect we'll collect all of that amount by the end of the quarter.

Other than those smaller—those minor—matters, every one of our remaining tenants has paid the rent they owe us on time. Turning to the farmland we own, right now we hold roughly 89,000 acres across 150 farms, worth approximately $912 million. Those farms sit in 10 separate states and, more significantly, in 24 distinct growing regions. Our farms remain 100% occupied, with no fewer than 70 different tenants, none of whom are related to us. And the tenants running these farms are cultivating around 50 different crops. We now hold a solid number of farms spread across enough regions, with a wide variety of farmers and a wide variety of crop types. That gives us enough diversification in what we hold to offer some safety—hopefully a great deal of safety—and security for the cash flows coming in, which are also used, naturally, to pay dividends to our shareholders. Recent activity in the second quarter: the team bought 2 farms for roughly $18 million and put another $3 million into farms we already own. We had to get approval from Napa County, for instance, for additional vineyards to be planted on property we own there. It simply takes extra time to get things finished, and while that $3 million is going in, it counts against us on the valuations. It counts against us since we've spent the money, but those properties haven't been appraised since the improvements went in, and because of that it appears as though values are declining. On the whole, the initial net cash yield to us on investments like this $3 million is about 6.2%, and the leases on these farms include certain provisions, including annual escalations, that ought to drive that number up later on. And just to remind everyone, this year's figure does factor in operating expense obligations under the respective leases; so we're expected to pay the taxes, which occasionally we do agree to; these leases are largely triple net, so the company shouldn't incur too many expenses. On the leasing side, during and after the quarter that ended June 30, we either signed new leases or renewed existing ones on 3 of our properties, located in California and some in Florida. Altogether, the new leases should produce a total rise in annual net income of roughly $173,000, which is approximately 24% above that of the previous leases. Looking forward, we have farm leases due to expire in 2020; all of them run out in the fourth quarter of the year and together represent under 5% of our total annualized leases. We're talking with the current tenants and with some prospective new tenants, though we hope everyone leasing our properties stays on; we don't anticipate any downtime on these leases. On the whole, we expect the new leases on these renewals to be fairly neutral compared with where they stand today, and perhaps a little higher. Lastly, a brief note regarding how the wildfires currently burning in California and the hurricane hitting the East Coast have affected our farms. We got in touch with the tenants we have on the Eastern side, and they told us there was no damage in Florida to our farms. As for California, none of the fires that have started recently have threatened any of our farms, even though the biggest blaze out there, the apple fire, sits over 3 hours from the farm closest to us. Typically those fires stay up in the mountains, an area with plenty of brush. So fires in California aren't really something we anticipate. Actually, we haven't lost a thing in the past. Well, that covers operations, so I'll hand things over to Lewis Parrish, our Chief Financial Officer, who will walk you through the numbers. Lewis?

Alright, thank you David, and good morning, everyone. To revisit the balance sheet for Q2, we saw total assets increase by about $16 million, driven mainly by farms we recently acquired and funds generated via equity issuances. On the financing side, we managed to secure close to $16 million in new long-term debt during the quarter, carrying a weighted average rate of 2.81% and fixed for a period exceeding 9 years. Regarding equity, both during and following the quarter that ended June 30th, we generated approximately $6 million in net proceeds by issuing shares of our common stock under the ATM program. Additionally, we started selling off our Series C Preferred Stock in Q2, after having completed the Series B Preferred Stock offering back in Q1. To date, we've generated approximately $6 million in net proceeds from Series C Preferred Stock sales. Just like with Series B, our approach for the Series C Preferred Stock involves selling it in modest increments across the coming several years, so they could more promptly acquire farms as proceeds arrive. And as a reminder, when selling Series B and now Series C Preferred Stock, we do hand over certain commissions and fees to Gladstone Securities, an affiliated broker dealer of ours. That said, Gladstone Securities serves merely as a conduit in this offering, since it distributes roughly 94% of those fees to other third parties, such as brokers and wholesalers assisting with share sales. Of the remaining fees that Gladstone Securities keeps — that 6% — those funds go toward covering assorted expenses tied to stock sales, and those costs actually exceeded what Gladstone Securities retained. Also, keep in mind the preferred stock isn't factored into the fees we pay our advisor, and it has never led to an extra fee being paid to the advisor. Now I'll shift to our operating results for the quarter. To start, I'll point out that net income came to approximately $182,000, alongside a net loss to common shareholders of around $2.1 million, or $9.5 per common share. Adjusted FFO for this quarter stood at $10.1 per share, compared to $25.3 per share in Q1. Dividends declared hit $13.4 cents per share in both quarters. We saw a considerable drop in adjusted FFO, though that stemmed largely from the 2 major events in Q1 that David brought up, not from weaknesses in the current quarter — namely the $3 million lease termination payment and $1.3 million in interest payments, both logged during Q1. Quarter over quarter, cash rents fell by roughly $139,000, or 1%, mostly because of a lease we signed in Q1 that carries a rent free period for calendar year 2020; that decline was partly offset by extra rent from recent acquisitions. Turning to costs, our core operating expenses were down roughly $1.3 million versus the prior quarter, and the reason for that was the incentive fee our advisor earned during the first quarter, which came to $1.3 million. When we shift related party fees, core operating expenses rose by approximately $92,000, mostly because of extra repairs and maintenance costs and legal fees tied to certain properties, partly offset by a reduction in G&A expenses, particularly lower corporate legal fees and advertising costs. Now for net asset value: 44 farms underwent valuation during the quarter, all through independent third-party appraisals. On the whole, those farms lost about $700,000, or 0.4%, in value relative to their prior valuations from roughly a year earlier. As of June 30th, the value held by our farms came to roughly $912 million, with nearly all of that figure established through either appraisals done by third parties or the price actually paid. When we applied those refreshed valuations and also accounted for the fair value of our debt along with our preferred stock, net asset value per common share came out to $11.6 on June 30th. That represents a drop of $0.40, or 3.5%, compared with the quarter before. Two main factors drove that decrease: ongoing capital improvements at certain properties, plus a rise in the fair value of our long-term borrowings tied to shifts in market rates. One thing to note about those continuing capital improvements: 2 farms we bought in Q3 of last year were acquired with the plan of putting some money into better irrigation, infrastructure, and other upgrades on the farms. In essence, buying a B farm and converting it into an A farm. We put roughly $3 million into fixing up those farms, and since the projects are close to finished, we're hopeful we can recover at least most of those costs, and those farms get reappraised in a couple of months. Now turning to how our capital is structured and the liquidity we have on hand: if you look at leverage, the ratio of our loans to the value of all the farmland we hold, figured on a fair value basis and after subtracting cash, was about 52% as of June 30th. That figure sits fine with us, since high quality farmland as an asset class carries relatively little risk overall. On top of that, right now over 99% of what we've borrowed is at fixed rates; those rates average out to a fixed 3.55% and stay that way for another 6 years. As a result, we believe that on the debt side, we're currently well protected against any interest rate swings that might come later. And since the weighted average maturity of those borrowings runs 10 plus years out, we likewise feel shielded from any potential liquidity problems if the present recession drags on for a prolonged stretch. As for debt maturities ahead, roughly $26 million comes due within the next 12 months. That said, $14 million of it reflects maturities on 2 bullet loans due toward the end of this year. The 2 properties that serve as collateral for these loans have gone up in value by a combined $2.3 million since they were respectively acquired, so we don't anticipate any issues refinancing either one of these loans; so if you take out those maturities, we've got only roughly $11 million of amortizing principal payments that come due in the next 12 months, which works out to roughly 2% of our total debt outstanding. On the liquidity side, when you add up what we can draw from our credit lines, we've got over $50 million in dry powder at this moment. As far as tapping more credit, based on what our lenders have told us, we aren't anticipating any near-term freeze in agricultural lending. For us, credit continues to flow easily and at terms that are quite favorable. There's plenty of room left on our biggest farm facility, and talks are ongoing with prospective new lenders about further borrowings. Should an opportunity come along, we also have both the capacity and the intention to issue additional OP Units as consideration for acquisitions. To sum up, there's ample capacity and flexibility for us to keep taking on debt and acquiring additional farms that satisfy what we look for in an investment. Last, let me address the distributions on our common stock. We just increased the common dividend once more, bringing it to $4.48 per share each month. Across the last 22 quarters, 19 separate increases have been made to that common dividend, which together lifted our monthly common distributions by 49.3% during that period. Starting in 2013, common shareholders have received 90 straight monthly dividends, amounting to $4.71 per share in cumulative distributions. Returning capital to shareholders through dividends sits at the heart of our strategy, and we remain focused on growing that payout faster than inflation picks up; we haven't reached that point just yet, though we're confident we're moving toward it. Based on the distribution pace we're running right now and where our share price stands as of today, our stock yields roughly 3.3%, and given how stable and secure the assets beneath it are, we see the shares as an attractive option for investors. With that said, I'll hand things back to David.

All right. Thanks for the update, Lewis. Right now, in my view, the growers producing items that get sold to supermarkets are working around the clock whenever they can, aiming to earn as much as possible, and that situation is limiting how many additional farms we're able to purchase. Those growers are occupied out in the fields, so there's no time available for them to sit down and hammer out agreements and similar matters. On top of that, while we're examining titles and other legal documentation, a lot of government offices simply aren't open, which means we can't finalize our loan because we don't know if liens exist or if the property has issues; as a result, figuring out the title takes more time — whether it's clear or whether other problems exist with the property. Similarly, some mortgage lending institutions that provide funding for our purchases don't have full staffing, our personnel in those offices, so every task simply takes a bit more time. That said, a solid volume of opportunities is coming toward us; it's just requiring somewhat more time than usual — to move things through the system, what we refer to as that due diligence. A few things worth noting: we think putting money into farmland, cultivating crops, adds to — cultivating crops that add to a healthy way of living, things like fruits, vegetables, and nuts. Following what we observe in today's marketplace, at present roughly 85% of our overall revenue originates from farms cultivating the kinds of foods located either in the produce aisle or the nut aisle of your neighborhood supermarket; we regard these foods as belonging to the healthier categories, and we keep observing an expanding organic trend within those foods. Roughly 40% of our fresh produce acreage is either certified organic or in transition toward that, and beyond 10% of our permanent crop acres are classified as organic; we expect the organic segment to remain a robust area of growth for us. Furthermore, the non-GMO status of our products applies to more than 95% of our non-GMO. One more key reason our business approach centers on farmland producing fresh produce relates to how inflation affects specific segments. Per the Bureau of Labor Statistics, the overall Annual Food CPI broadly tracks inflation. Yet across the last 40 years, the fresh fruits and vegetable segments, that food category, has exceeded the total CPI by a factor of 1.6 times. And although prices for commodity grain crops such as corn and wheat tend to be more volatile and exposed to worldwide supply and demand, fresh produce is largely shielded from global volatility, chiefly since these crops are usually eaten locally not long after harvest. So there's less involved in the way of storage expenses and other steps needed to deliver it to the consumer. The reason I bring this up is that people frequently mix us up with outfits that own farms where growers raise corn, soy, and wheat — those grain crops. We generally avoid those crops, since they must go head-to-head with nations such as Brazil and Ukraine, where production costs are lower, the government provides subsidies, and even once shipping is factored in, their costs come in well below ours. Those growers can undercut what our grain farmers charge quite easily, very easily. On the whole, appetite for top-tier farmland used for berries and vegetables is holding steady or running strong in the current climate across nearly every region where our farms sit, notably on the West Coast, covering the bulk of California, Oregon, and Washington, and on the East Coast, above all Florida. And farmland as a whole keeps delivering solid results relative to other asset classes, notwithstanding a few recent slumps in particular areas. The NCREIF Farmland Index, which today consists of roughly $11.9 billion in agricultural properties, ours included, has posted an average yearly return of approximately 13.6% across the last 15 years, versus 10.5% for the S&P Index. You ought to know that throughout that 15-year stretch, the Farmland Index never recorded a losing year, in contrast to the S&P, which I believe had 3 down years during that same span. Farmland has typically offered investors a safe haven when times are turbulent, and the turbulent times we find ourselves in now are no exception. That holds as both land prices and food prices, particularly for fresh produce, have kept climbing steadily. Keep in mind that buying stock in this Company amounts to a long-term investment — it won't spike tomorrow morning. I'd say putting money into stock — into our stock really breaks down into 2 pieces. Along the lines of go. It's hard asset farmland; dirt isn't disappearing, and it carries intrinsic worth because the supply is simply finite and it keeps getting consumed by urban development, especially in California and Florida, where we hold many; so, one day you wake up and they want to take your farm and turn it into a school, and they will pay you a good amount for it; and second, bear in mind that unlike gold and other alternative assets, this is an active investment with cash flow going to investors, and we think we beat a bond fund since we can keep raising the dividend. We anticipate inflation, especially within the food sector, will grow, and we anticipate the values of the underlying farmland will rise because of that, and we expect the same to hold true for fresh produce as people in the US eat more healthily. To my mind, an excellent lens for viewing our farmland fund is as protection against inflation — in terms of both food costs and the worth of the land beneath, which exists to produce that food. And I believe it's a wonderful beginning to hold once your asset size gets only somewhat bigger. My hope is that we will be listed on the RMZ index, which covers real estate investment companies, and that should draw in extra institutional ownership, which will boost the daily liquidity of a stock. But everyone, Gladstone Land would be nothing absent the fine individuals we have. Our operators are excellent, our buyers are excellent. We're handling that, and we stay on top of all of it. Purchasing farmland and leasing it out is a complicated enterprise, and I believe we're performing well. So, if you enjoy what you're hearing, please purchase some stock, continue eating fresh fruits and vegetables and nuts, and at this point I'm going to halt and the operator will come on, and we'll be able to answer some of your urgent questions. Craig, you're not audible to us.

No worries about that — I'm on the line now. So, my question is this: you said there are more opportunities showing up now than there were earlier in the year. Any idea what you'd credit for that?

Sure. The farmers couldn't be busier, so while they're working the land, I don't leave the farm. They're out in the fields loading up the truck, putting as much as they can into it, and hauling it into town. Right now they're extremely busy. That's created a difficulty, and on top of it, local governments and how they've responded to the coronavirus — the Chinese virus, as we'd say — have gone overboard with shutting things down. So getting folks to do what's required to complete a purchase has been a struggle. The lawyers are available. We can get lawyers working, but certain government employees and some of the other people we depend on to track things down simply aren't at the office, so it takes a bit of time to finish that up. So, I believe we're reaching the stage where a few of the things we kicked off, including last year, are now paying off, and I believe this quarter will be solid — perhaps not quite what we'd hoped for, but by the time year income comes around, we ought to have done a fairly good job of buying this year.

Craig, do you have something else you'd like to ask?

I do, in fact, yes. My intended question was this: it seems as though a great deal of the procedural and institutional side of things was tied purely to COVID. Did that have any effect on pricing whatsoever, or has pricing stayed more or less stable?

Pricing has been quite stable, though grocery store prices have risen roughly 10%, particularly — and possibly even more so — in the produce section. I'm not sure < >. Some data reaches us from the Department of Agriculture, but it's inconsistent. They do a solid job of compiling the prices moving from field to buyer, yet we have no idea how much stores are adding to the product's price and occasionally reducing it so as to move it through — they have, but right now there's an abundance of strawberries and blueberries in the marketplace, and at times the strawberry gets used as a marketing tool to draw the buyer into the store, since someone purchasing strawberries typically buys 4 times more produce than anyone else. So when you open the newspaper, you'll notice discounts on strawberries meant to bring somebody in to purchase strawberries, while simultaneously purchasing all the other items they buy in the fresh fruit section.

Understood. So at the start of this year, my impression was that you believed the early jump in pricing wouldn't stick around, but from what you're saying now, it sounds like we might be looking at a 10% increase. Does that make you somewhat more optimistic about seeing percentage rent climb during the latter half of this year?

I certainly hope that's the case. Percentage rents are something I really like. For us, they're the simple route to sharing in the farming business instead of holding the farm ourselves. To me, it's simply a nice opportunity for a second bite at the apple — no pun intended.

Understood. Given what you said regarding certain possibilities on your radar, my recollection is that you referenced 4 farms that were somewhat nearer to potentially being finalized for roughly $70 million, plus another 4 at $80 million — of that $150 million, would you venture a guess as to what gets done before the year ends?

Oh, you're running your forecasts once more, aren't you? My expectation is those 4 farms at $70 million will get done; regarding the $80 million, how much of it we secure is unknown to me; and it's possible we have — a few folks have told us they'd like to complete things prior to the year ending, and from those parties what we possess is nothing beyond a positive conversation in progress.

Understood.

Craig, <<inaudible>> there's simply no method to predict it — you just can't ever tell.