Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks, Donna. Good intro. I’m David Gladstone, and I’d like to welcome everyone to this quarterly call for Gladstone Land, and I appreciate all of you joining us today. We’re grateful that you’ve set aside time to hear what we have to present. Let’s get started with Michael LiCalsi, our General Counsel and Secretary. He also serves as President of Gladstone Administration, the administrator for every Gladstone fund, this one included. Michael, over to you.

Thanks, David, and good morning. This morning's report might contain forward-looking statements made under the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements about how we'll perform in the future. Such forward-looking statements carry specific risks and uncertainties grounded in our present plans, which we consider reasonable, and numerous factors could cause what actually happens to differ materially from any results in the future that these forward-looking statements express or imply, including every risk factor described in our Forms 10-Q and 10-K along with other filings we make with the SEC, all of which are available on our website, www.gladstonefarms.com, on the Investor's page in particular, or through the SEC's site at www.sec.gov. We assume no duty to publicly update or revise any such forward-looking statements, whether because of new information, future events, or anything else, unless the law requires it. Also, we'll be talking today about FFO, meaning funds from operations, a non-GAAP accounting term that we define as net income without gains or losses on real estate sales and any property impairment losses, plus depreciation and amortization on real estate assets; core FFO will come up too, which we generally define as FFO adjusted for particular non-recurring revenues and expenses, as well as adjusted FFO, which takes core FFO and further adjusts it for certain non-cash items, for example converting GAAP rents into normalized cash rents. In our view, these give a better picture of operating results and permit better comparability of how we perform from one period to the next. Please take a moment to check out our website again, gladstonefarms.com, and sign up for the email notification service. That way you'll stay current on everything related to the company. You can find us on Facebook as well — search for The Gladstone Companies — and we even have our own Twitter handle, @gladstonecomps. This call offers an overview of our results. So we'd ask you to look at our press release and Form 10-Q, both of which came out yesterday, for additional detail. Once again, those are on the Investor's page of our website; with that, I'll hand the presentation back to David.

All right, thanks, Michael. We've seen acquisition activity ramp up lately — roughly $75 million worth of new farms came into the portfolio across the last couple of months. And the pipeline keeps showing us far more opportunities than has been typical for a good while now. We started receiving yield and price data on certain farms, which let us book around $1.1 million of participation rents this quarter. That brings us to about $1.2 million of participation rents year to date through Q3; for the full year, we presently anticipate total participation rents roughly in line with last year's figure, which was about $2.3 million. We hope to report growth in participation rents next year — that's 2021 — since additional farms are set to pay participation rents in 2021. Broadly speaking, farm operations are holding up well. Our team keeps succeeding at re-leasing properties we already own at higher rental rates. In my view, these rental rate gains signal that demand stays robust for our farms and for everything cultivated on them. Turning to the government shutdowns tied to COVID-19, demand remains elevated for the products grown on the majority of our farms. Think items such as berries, vegetables and nuts. My sense is that's because most crops raised by the farmers we lease to get sold through grocery chains such as Kroger, Safeway, Costco, Walmart and comparable stores. Only a small share of our produce goes to the food service sector, restaurants and institutions such as schools included, and that's exactly where produce sales have suffered the worst damage from COVID-19. Grocery store demand for produce and plenty of other foods has stayed high — above where it stood in 2019 — and we look for that pattern to hold at minimum through the remainder of this year and on into 2021. The farmers we work with still aren't experiencing meaningful fallout from the government shutdowns in their operations; supply chains remain unbroken and functioning well, and prices continue to be quite favorable for most of what they grow. We provided a short-term — actually, two of them — we provided two farmers a deferral back in July, and those payments have now been made and collected in full. As things stand, every tenant of ours is current on rental payments apart from a single tenant owing us roughly $43,000. That situation, though, has nothing to do with COVID. He simply fell behind on rent a few weeks back, and we anticipate settling the matter during the fourth quarter. Bear in mind that the trees and plants on our farms have no awareness of a pandemic; provided plants receive sunshine and water, they'll keep yielding fruits and vegetables. So that dimension of the business remains solid. Switching to farmland ownership, we presently hold roughly 94,000 acres across 127 farms, valued at slightly more than $1 billion. We're genuinely thrilled to have crossed the $1 billion threshold. Just a few years ago, we went public and brought in $50 million. Now we've got $1 billion in farmland. Our farms span 13 or more key growing areas — actually, 26 distinct growing regions. So that's 13 states, but what really matters here is that they're spread across 26 different growing regions; and those growing regions are what truly dictate the farmland out there. Our farms remain 100% occupied, leased to at least 275 separate tenants, none of whom are connected to us; and the tenants running these farms cultivate roughly 50 different crop varieties, so there's substantial diversification. So because we own quite a few farms and are present in enough distinct growing regions with numerous different farmers and numerous different crop types, we believe there's adequate diversification to deliver safety and security for the cash flows generated by our rents. And that helps safeguard the dividends we distribute to our shareholders. Nothing in life is guaranteed, but we're certainly in a strong position right now. In the third quarter, the team bought eight farms for $39 million, and we picked up another four farms for roughly $36 million after the quarter closed. Altogether, the net cash yield to us on these investments comes to about 52% — 5.2%, sorry, I wish it were 52%. Additionally, every one of these farm leases includes certain terms like participation rents and annual escalations that ought to drive that number even higher down the road; and just to remind you, the yield figure does factor in operating expenses that fall on us under the respective leases. But the majority of these leases are triple net, so our company shouldn't incur many expenses; on the leasing side. In Q3, we signed new leases or renewed an additional lease, our existing leases for four of our properties situated partly in California and partly in Florida; overall, the new leases should produce a total boost in annual net income of roughly $118,000 across those four, which works out to an approximately 11% gain compared with the prior leases we held. Going forward, two more leases are set to lapse at the close of 2020 and one more expires near the end of Q1 and 2021; combined, these leases represent under 4% of our total annualized lease revenue; so we're sitting in really good shape regarding leases coming due; we're talking with the current tenants on these farms as well as some prospective new tenants and we don't anticipate any downtime or any of these farms. All in all, we presently expect new leases on these renewals to be fairly flat versus where they stand today, perhaps slightly higher. To wrap things up, I want to briefly share that not a single one of our farms took any meaningful hit from the wildfires that recently hit California and Colorado, nor from any of the hurricanes along the East Coast. As a number of you are aware, we operate some quite sizable organic potato farms in Colorado, and those fields sit out on the flats, away from any trees that could catch fire. Alright, that covers the operational side. I'll now hand things over to Lewis Parrish, our CFO, who will walk you through the financials.

Hello there, and thanks, David — good morning to all of you. Once more, taking a look at our balance sheet: total assets for the third quarter rose by roughly $22 million, and the main driver there was the farms we newly acquired. Turning to how we financed things, after the third quarter ended we locked in approximately $45 million in fresh long-term borrowings, carrying a weighted average rate of 2.59%, and that rate stays fixed across the next eight years. Over on the equity side, we brought in roughly $8 million of net proceeds by selling shares of our common stock through the ATM program, at an average issuance price of $16.13 per share. Then, last month, we wrapped up a follow-on offering of common stock, generating about $26 million in net proceeds, with the public offering price set at $14.40 per share. We needed those proceeds to help fund new acquisitions that we hope to close on in the months ahead. Every one of these potential new acquisitions should be accreted to AFFO in year one. We also brought in roughly $11 million in net proceeds from selling the Series C Preferred Stock. Just like the Series B Preferred Stock, which we recently listed on NASDAQ under the ticker LANDO, our intention with the Series C Preferred Stock is to sell it in small amounts across the next several years, so we can better locate new farms to buy as those proceeds come in. And a reminder for everyone: in the course of selling the Series B and now the Series C Preferred Stock, certain commissions and fees get paid to Gladstone Securities, an affiliated broker dealer of ours. That said, Gladstone Securities serves merely as a conduit in these offerings, since it pays out about 94% of these fees to other third parties, including brokers and wholesalers who help sell the shares. The remaining fees that Gladstone Securities keeps go toward covering various other expenses tied to selling the stock. Please also keep in mind that preferred stock isn't part of the calculation for fees paid to the advisor, and it has never led to additional fees paid to the advisor. Now on to our operating results for the quarter. First, I'll point out that net income came to about $1.6 million, along with a net loss to common shareholders of about $837,000, or $3.7 per common share. Adjusted FFO for the third quarter was approximately $3.1 million, versus $2.2 million in the second quarter. AFFO per share came in at $0.143 for the third quarter, compared with $0.101 in the prior quarter. Dividends declared were $0.134 per share in each quarter. We saw a sizable increase in adjusted FFO, driven mainly by the $1.1 million of participation rents recorded during the quarter, versus only $44,000 in the previous quarter. Base cash rents rose quarter-over-quarter by approximately $461,000, or 4%, largely because of additional rent earned on recent acquisitions. Looking at costs, if you strip out reimbursable items along with some non-recurring or non-cash charges, our core operating expenses rose roughly $584,000 compared with the prior quarter. The biggest reason is an incentive fee our advisor earned this quarter totaling 821,000, whereas nothing of that kind was earned the quarter before. Once we set aside those related party fees, core operating expenses in fact fell by roughly $256,000, which works out to 28%. What drove that decline was lower property operating expenses, since we incurred fewer repair and maintenance costs at certain properties, plus reductions in legal fees at the property level and in annual State filing fees. Now for net asset value. During the quarter we valued 28 farms, every one of them through third-party appraisals. On the whole, those farms rose in value by roughly $20 million, or 6%, relative to their earlier valuations from a year back. A total of $8 million of that gain was on farms where we finished approximately $5 million of certain capital improvements, while the other $12 million of appreciation resulted from organic appreciation and value, and that was especially the case for certain farms of ours in California and Florida. As of September 30, our farms carried a value of approximately $971 million, and every bit of that is based either on third-party appraisals or on the actual purchase prices. Using these updated valuations, and factoring in the fair value of our debt and our preferred stock, our net asset value for common shares on September 30 came to $11.97, an increase of $0.91, or 8%, versus last quarter. The primary cause of that gain was the affirmation depreciation and property values. Shifting to our capital makeup and overall liquidity. From a leverage standpoint, our loan to value ratio, measured against our total farmland holdings on a fair value basis and net of cash, stood at roughly 52% as of September 30. Given how relatively low the risk is for high quality farmland as an asset class overall, we're comfortable at this level; what's more, more than 99% of our borrowings right now carry fixed rates. And on a weighted average basis, those rates are locked in at 3.46% for another six years out; so on the debt side we believe we're currently well protected against any future interest rate volatility; and since the weighted average maturity of these borrowings sits 10 years out, we also feel protected against any potential liquidity issues should today's economic uncertainty drag on for a prolonged period. As for debt maturities ahead, roughly $33 million comes due across the next 12 months; however, approximately $21 million of that consists of maturities on four bullet loans. The properties collateralizing those loans have risen in value by a total of $3 million since their respective acquisitions, so we don't anticipate any trouble refinancing any of them; so setting those maturities aside, we have only about $12 million of amortizing principal payments arriving over the next 12 months, which is about 2% of our total debt outstanding. Looking at our liquidity position, counting what we can draw on our credit lines, we've got more than $50 million in dry powder right now. There's plenty of room available under our biggest borrowing facility, and we're in talks with additional lenders about fresh borrowings and possibly new credit facilities. As things stand, we don't see a credit freeze hitting ag lending in the near term, since borrowings keep coming to us readily and on very attractive terms. Last, let me address our common distributions. We just lifted the common dividend once more, to $4.49 per share per month. Across the last 23 quarters, we've increased that common dividend 20 times, which works out to a 49.7% cumulative rise in our monthly common distributions during that stretch. Starting in 2013, we've made 93 straight monthly dividend payments to common shareholders, amounting to $4.80 per share in total distributions. Naturally, that comes on top of what holders of our preferred securities receive. Distributing dividends to our shareholders sits at the heart of our business plan. Our objective remains lifting the common dividend faster than inflation. We haven't reached that point just yet, but we think we're moving the right way. At our present distribution run rate, and based on today's price for our common stock, the yield on our shares comes to roughly 3.9%. Given how relatively stable and secure the underlying assets and their related cash flows are, we see this stock as an appealing investment option. With that, I'll hand the program back to David. That's $0.037 per common share, or $0.0449 per share per month.

All right, thanks, Lewis. That was a solid report. As I noted at the start, we're seeing more acquisition activity, though some parts of our due diligence are moving slower than usual because of assorted travel limitations and offices being shut. Take title checks, for instance — figuring out whether a title is clean takes more time now. Same goes for determining whether a lien exists on a property, or arranging a survey and sending someone out to survey it, which we do in nearly every case, plus getting appraisers out to perform their work, since we need that appraisal to support the price we're paying, along with securing bank loans on these properties. So a solid number of buying opportunities are coming our way right now; it's simply that completing the due diligence items we insist on doing ourselves, just to confirm we're getting the right deal done, is taking somewhat longer than usual. A couple of closing points I'll offer. We think putting money into farmland and raising crops that support a healthy lifestyle — things like fruits, vegetables, and nuts — aligns with the trend we're observing in today's market. Right now, roughly 85% of our revenue originates from farms growing the kinds of foods you'd find in the produce and nuts section of your neighborhood grocery store, and we regard these foods as being among the healthiest. We also keep seeing a growing trend toward organic among these foods. Roughly 40% of our fresh produce acreage is either organic or in transition to becoming organic, and around 10% of our permanent crops — that's the acreage — falls into the organic category. We believe in organic, and we want it to remain a strong area for us to grow in; on top of that, over 95% of the crops on our farmland are classified as non-GMO, and we're taking steps toward ESG compliance for both our operations and those of our tenant farmers. Another big reason our business strategy centers on farmland growing fresh produce has to do with the effect of inflation on this particular segment. Per the Bureau of Labor Statistics, the overall annual food CPI generally keeps pace with inflation. That said, across the past 40 years, fresh fruits and vegetables as a segment of the food category has outpaced the total CPI by a multiple of 1.6 times. That's why a lot of financial advisors recommend their clients invest in farmland, since it works as a hedge against inflation. Prices for commodity grain crops like corn and wheat tend to be more volatile and consequently — susceptible to global supply and demand. Fresh produce is largely insulated from global volatility, mostly because these crops are generally consumed in the USA within a short period after being harvested. The reason I mention this is that people frequently mix us up with companies that own farms where corn, soy, and wheat are grown by farmers. And for the most part, we avoid those crops, since they must compete with nations such as Brazil or Ukraine, where production costs are extremely low even once shipping is factored in; and those farmers are able to undercut what grain farmers in the United States charge. This has been going on for quite a few years, and it has placed substantial pressure on Midwest farmers, a region that has seen a significant number of bankruptcies. On the whole, demand for top-quality farmland used for berries and vegetables ranges from stable to strong, in nearly every area where our farms sit, especially along the West Coast, which includes most of California, Oregon, and Washington. And the East Coast, particularly Florida, plus certain other states, also on the East Coast. Marijuana or tobacco is not what our farmers grow. Fruits and vegetables are all they grow. And because of that, we're keeping our company in — in solid shape. Keep in mind that buying shares in this company amounts to a long term investment. In my view, an investment in our stock truly consists of two parts. To begin with, it resembles gold in that it is a hard asset; farmland, naturally, is dirt, and it carries an intrinsic value, since the supply of good farmland is limited, and it is being consumed by Urban Development, particularly in California and Florida, where many of our farms are. And next, in contrast to gold and other alternative assets, it is an active investment that generates cash flow for investors. And we feel it beats a bond fund, since we continue raising the dividend. That keeps us ahead of inflation. We anticipate inflation, especially, in the food sector, will grow. And we anticipate that the values of the underlying farmland will rise as a result, as farmers can charge more for their produce nuts; and we anticipate this holds true, especially, for fresh produce and the food sector, as a trend of more and more people eating healthy foods that we grow. Gladstone land would be nothing, though, without the people operating and managing it. Purchasing and leasing farmland is a complicated business. It isn't something where you can go to the stock market somewhere and buy some shares, except ours, of course. We're entering a time to designate some of the team members. For the future, we've we have appointed two members of the team to the Executive Vice President, as announced in the press release, and those would be Bill Frisbie and Bill Reiman, in combination with our Chief Financial Officer, Lewis Parrish, and also our President of Administration whom you heard from at the beginning, Michael LiCalsi. These are the key people right now. And I'm sure there'll be others as time goes on. They're all working together. They all have responsibilities and can be members of the leading team to ensure that we continue success now long-term growth to shareholders. However, I want to make it clear that I have no plans to leave. What we're demonstrating is that this team, along with numerous other areas of the business, has a strong pool of skilled individuals. I'll pause at this point and let the operator step in to explain to operators how they can let everyone know — there are some questions we can respond to for him. So Donna, please come on.

Yes. Hi, good morning, guys. David, I wanted to follow up with you about what you said on deal flow. You said you're seeing far more deals than you have in some time. Does that fall outside of what you kind of talked about in your recent equity offering, or does it include that?

I believe it includes that; what we've picked up, mainly, I think, is that some of the folks who own farms have decided the time has come to sell, and they no longer want to farm. So an opportunity is coming our way that, I think, will turn out quite successful for this year too. As you know, we had a terrific run last year. And I think this one is going to be good. We could probably close $100 million to $120 million before the year is over — that would be aggressive. But I'm hopeful we can get all of that done. It's really tough to get some of these appraisers out to the farm. And we have to go look at all the farms, so people are boarding airplanes, and that's turned into a pain. So because of that, I think we will do well, Craig. So that's where we stand today.

Can you give any sense of why, or is there something specific that might get some of these deals across the finish line? In the past, I believe you've mentioned that with certain of these transactions, you'd been in talks with the farmers for as long as 10 years, and then all at once a number came together. Any thoughts on that?