Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Thanks, Jessie. That was a good intro; I'm David Gladstone, and this is Gladstone Land's quarterly conference call. We're always grateful for the chance to spend time with you and let you know what we've been up to, and since this marks the close of our year, there's a bit of extra material. So Michael LiCalsi will take his turn. He serves as our General Counsel and also holds the title of President at Gladstone Administration. Michael, the floor is yours.

Appreciate that, David, and good morning to everyone. The report we're giving today might contain forward-looking statements made under the Securities Act of 1933 along with the Securities Exchange Act of 1934, and those cover things like how we'll perform down the road. Such forward-looking statements carry specific risks and uncertainties, and they rest on our present plans, which we consider reasonable; however, numerous factors could make our actual results diverge materially from any future results stated or suggested by such forward-looking statements, and that includes every risk factor listed in our forms 10-Q, 10-K and the other filings we made with the SEC. Those are available on our website, www.gladstoneland.com, on the Investors page in particular, or through the SEC's site at www.sec.gov. Also, we're under no duty to publicly update or revise any of these forward-looking statements, whether because of fresh information, later events or anything else, unless the law requires it. Later on, we'll talk about FFO, meaning funds from operations. FFO is a non-GAAP accounting term whose definition is net income, leaving out gains or losses on real estate sales and any impairment losses on property, then adding depreciation and amortization of real estate assets. We'll talk about core FFO too, which we usually define as FFO adjusted for particular nonrecurring revenues and expenses, plus adjusted FFO, which takes core FFO and further adjusts it for certain noncash items, for example converting GAAP rents into normalized cash rents. In our view, these give better indications of how we're operating and permit better comparability of our performance from one period to the next. Everyone, please take a moment to check out our website, again that's www.gladstoneland.com, and sign up for our e-mail notification service, which keeps you current on the company. You can locate us on Facebook as well, search the Gladstone Companies, and on Twitter we are @Gladstonecomps. What we're doing on today's call is giving an overview of our results, so please look at the press release and the Form 10-K, both of which came out yesterday, for further detail. Once more, those sit on the Investors page of our website; now I'll hand the presentation back over to David Gladstone.

Okay, thanks, Michael. The year got off to a very strong start for us, and as we wrapped it up, we'd completed $256 million in new acquisitions overall. What made this year different is that $156 million of those deals closed during the final 3 weeks of the year. As a result, we barely saw any earnings effect from them in 2020. Still, everyone here is eager to report the really solid numbers we believe we'll deliver in 2021. Participation rents came in close to the prior year. In 2020, we saw roughly $2.4 million compared with $2.3 million in 2019. We're optimistic that we can report a very healthy rise in participation rents in 2021. Some participation rents are arriving this year that ought to lift us past 2.4. We'll find out once we get there; we keep managing to renew every lease that expires without any interruption at any of our farms. We keep completing renewals at generally higher rental rates on farms than — particularly in the regions where we concentrate. Both coasts are performing well, and we keep watching that expand. But we're still seeing — thankfully, we don't own many farms there. We're still seeing minimal rent growth in the Midwest. Rent collections have stayed solid for us. We gathered all base rents due in 2020, aside from roughly $43,000 owed by one tenant. That's the tenant who ran into financial trouble after the government forced his operations to close and conducted an inspection at his farm for something like listeria or another issue, and we don't anticipate being able to recover that amount. He's facing a serious situation, but we did bring in a bigger tenant on that farm under a 10-year lease. The rental rate came in slightly above what we'd had under the prior rent. It was roughly 5% higher. Well, 2020 was an excellent year for us. It would be truly difficult to find any fault with it; so in 2021, we've begun with all base rents collected, except for roughly $97,000 from 2 tenants. Those 2 tenants have simply slipped a bit behind because of the fruits and vegetables they're gathering. So we'll wind up collecting those over the months ahead. On the whole, our farms' operations have stayed comparatively strong. Demand for the products has risen very nicely. And these are items such as berries, vegetables and nuts, which sit at the center of what we're doing. Most of the crop is grown by the farmers to whom we lease our farms or sold to grocery stores. And that matters a great deal to know, since we aren't selling to restaurants or schools or industrial outlets. So because of that, we haven't faced the trouble those areas have. Demand at grocery stores for produce, along with lots of other foods, is still strong. We think that will carry on through 2021. Now turning to the farmland we own in total: right now we hold roughly 101,000 acres across 137 farms, worth about $1.2 billion. So that had us pretty thrilled. No party was thrown here, though we probably ought to have had one — we're delighted to have crossed the $1 billion fair market value mark on the farmland we own. Our firms now sit in 13 separate states and, what matters more, in 27 separate growing areas. The farms stay 100% occupied, rented out to 81 separate tenants, every one of them unaffiliated with us. And the tenants on those farms are cultivating more than 55 separate crops. Since we now hold a solid number of farms — spread across enough distinct growing regions, with lots of distinct farmers and lots of distinct crop types — I believe we're diversified enough to give safety and security for the cash flows those rents generate. Diversification aids in safeguarding the dividend paid out to our shareholders, and that matters to us because we're dividend oriented. In the fourth quarter, the team picked up 14 farms for roughly $192 million. Keep in mind, $156 million of that landed in the last 3 weeks. Things were quite hectic around here during the year-end holidays. All told, the initial net cash yield to us on those investments in that quarter came to roughly 5.5%. Beyond that, our leases on these farms carry certain provisions, like participation increases and annual escalations, which ought to drive that number upward later on. And one reminder, as my accountant likes to tell me, those yield figures do account for all the operating expense we're on the hook for. It isn't much, but the majority of these leases are triple net. So there shouldn't be too many additions on the expense side. Turning to leasing, starting in the fourth quarter, we either signed or renewed leases on 5 of our properties sitting in California and Colorado. The leases at our California properties got renewed at rates that were the same or higher. Our Colorado leases, though, got renewed at somewhat lower rates. That said, with the 2 Colorado leases, we altered the lease structure, so the lower fixed base rent amount went down while the additional participation rent component went up. So we're viewing that one as a way to help the farmer there. What this means is that if the farmer has an average or good year, we figure we'll land similar to where we'd have been under the prior lease, or maybe even better. Naturally, we come out worse if the farmer winds up having a bad year. But we won't know the overall results from that until the farmer gathers up everything he's growing and selling on the properties. As we look forward, just a single lease is set to run out within the coming 6 months, and that represents under one-half of 1% of the lease revenue we bring in each year. Talks are underway with the current tenant. And, well, there are a few possible new tenants as well. On this farm that comes due in this half of the year, we don't anticipate any downtime. Broadly speaking, at present we expect new leases on the farms to look much like they do now. My sense is that keeping that cash flow going won't pose any difficulties. Another item I want to cover is where we stand regarding environmental, social and government standards. This standard goes by the name ESG; we act as stewards of agricultural land across various regions throughout the United States, and we recognize both our ability and our responsibility to make a positive difference to the environment in which we operate; we are building a solid ESG standard, one that is unique to our position within the agricultural industry. And after that work has advanced sufficiently, we will then attempt to spell it out for you and help you grasp what we're aiming to do. Our portfolio is diversified, and our operations place us in a unique position to create a significant impact among a multitude of producers; given all of their unique opportunities, every one of these farms appears to have something different.

So we need to examine this on a really broad level first, and after that dig deeper into the specifics. Our hope is that we can take lessons from that variety and turn ourselves into a place where what we learn gets folded into the different communities and commodities we work with, both right now and going forward. Last thing I wanted to touch on quickly — we've filed for a brand-new company named Gladstone Acquisition. That's a Special Purpose Acquisition Corp., or SPAC. Plenty of folks aren't fans of it, yet it's simply one more route to going public. And in this setup, it works a whole lot like Gladstone Land, with the exception that it's perhaps the first, and maybe — maybe we turn that one into something as large as this one within the next 5 years; it will be purchasing the operating assets belonging to these farms. Throughout the last several years, certain owners have approached us saying, purchase their business. And in certain instances, we'd propose purchasing only the land, yet they preferred keeping the land plus the operations as one unit. So being a REIT, Gladstone Land is unable to own operating companies, since operating income isn't allowed under the REIT standards for tax purposes. And Gladstone Acquisitions, the SPAC, got set up possibly to seize opportunities of that kind when Gladstone Land wouldn't take part. So what we end up doing depends heavily on the sorts of large farming businesses we might acquire. Right now, we haven't identified any large farm operations. But should we find some, we'll keep making certain that every potential conflict of interest involving Gladstone Land gets properly handled alongside our Board of Directors; we'll keep you updated about that. We face this same scenario with our other companies, the 2 BDC's, and a procedure now exists for handling all of that, ensuring it functions properly. And we'll come back to you once we settle on how we'll bring the 2 companies together. But without a doubt, anyone purchasing operations will need to make certain those go into this new company. So I'll pause here. I'll return shortly to discuss it further, and we'll turn things over to Lewis and Lewis.

Absolutely. Thank you, David, and good morning to all of you. I want to start by discussing our balance sheet. Our total assets grew by roughly $189 million in the fourth quarter, largely as a result of the new farms we acquired. Turning to how we financed things, both during and after Q4, we obtained approximately $154 million in new long-term borrowings, carrying a weighted average rate of 2.83%, locked in for the coming 8 plus years. Regarding equity, starting from the beginning of the fourth quarter, we brought in roughly $65 million in net proceeds by selling shares of our common stock. That figure covers a follow-on offering finished in October, where we raised $26 million at an offering price of $14.40 per share, plus approximately $39 million from sales via our ATM program at an average issuance price of $14.70 per share. During that same stretch, we also generated around $22 million in net proceeds from selling Series C preferred stock. Just like the Series B preferred stock, which we recently listed on NASDAQ under the ticker LANDO, our strategy for the Series C preferred stock is to sell it in modest increments across the next several years, so we can better align the timing of incoming proceeds with locating new farms to purchase; and lastly, in just the past month, we brought in approximately $58 million in net proceeds by issuing a new 5% Series B term preferred stock, which also trades on NASDAQ under the ticker LANDM. Roughly $29 million of that money went toward redeeming our Series A term preferred stock, which had a coupon of 6.375% and a mandatory redemption date of September 2021. Now let's shift to our operating results. To start, I should mention that in the fourth quarter, net income came to about $91,000, with a net loss to common shareholders of $2.4 million, or $0.10 per common share. Across the full year, net income was $5 million, and net loss to common shareholders was $4.4 million, or $0.195 per common share. Looking quarter over quarter, adjusted FFO in Q4 was approximately $3.6 million, up from $3.1 million in Q3, which is a rise of about 14%. AFFO per share came in at $0.147 during the fourth quarter, compared with $0.143 in the third quarter, an increase of about 3%. Those per share gains were diluted because of the equity proceeds we raised during the quarter, which haven't been fully invested yet. Dividends declared per share were $0.135 in Q4 and $0.134 in Q3. On an annual basis, adjusted FFO for 2020 totaled about $14.3 million, versus $11.3 million in 2019, which is a 27% increase. AFFO per share was $0.641 in 2020 compared with $0.568 in 2019, a 13% increase. And dividends declared per share were $0.537 in 2020 and $0.534 in 2019. Our payout ratios using AFFO came to about 84% in 2020 versus 94% in 2019. Higher top line revenues were what mainly pushed AFFO upward. Looking at cash rent, we saw rental income rise roughly $1.1 million, which is 8%, compared with the prior quarter, and it went up approximately $12.3 million, or 31%, versus the same period a year earlier. The primary reason for that is the extra revenues we brought in from acquisitions made recently. When you look at same-property results and factor in participation rents while leaving out income from early lease terminations, lease revenues for 2020 came in higher by roughly $748,000, or 2.2%, than what we saw in 2019. That gain largely came from lease renewals or amendments completed recently at net higher rental rates. In the fourth quarter, we booked approximately $1.2 million in participation rents, versus $1.1 million during the third quarter. Across the full year, participation rents came to roughly $2.4 million, compared with $2.3 million the prior year. We had 19 farms with leases containing an active participation rent component in 2020, while 2019 had 18 such farms. Several additional farms carrying participation rate components are set to come online later in 2021. Now for expenses: if we set aside reimbursable expenses along with certain nonrecurring or noncash items, our core operating expenses rose by roughly $141,000 quarter over quarter, mostly because our adviser earned slightly higher management and incentive fees in the current quarter. Once related party fees are removed, core operating expenses stayed relatively flat, up just $8,000 versus the previous quarter. Year over year, core operating expenses grew by approximately $3.8 million, largely because of higher related party fees, and this also partly reflects a credit for certain fees our adviser granted us during 2019. With related party fees taken out, our 2020 core operating expenses fell by roughly $820,000 compared with 2019. That decline stems mainly from lower property operating expenses, since during the first half of 2019 we took on a significant amount of cost tied to generator rentals powering some new wells at one of our properties. Shifting to net asset value: only ten farms were revalued this quarter, all through third-party appraisals, and on the whole those particular farms held steady against their earlier valuations. Therefore, at December 31, our farms carried a value of approximately $1.2 billion, every bit of it based either on third-party appraisals or on 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 share — per common share — stood at $12.23 on December 31, an increase of $0.26, or 2%, from the previous quarter. What drove that gain was mainly issuing common stock at prices above our estimated NAV as of September 30. Moving to our capital makeup and overall liquidity: on the leverage front, our loan-to-value ratio, along with our total farm net holdings on a fair value basis and net of cash, came to roughly 53% at December 31. We remain at ease with where our leverage sits right now, because high-quality farmland as a whole asset class carries comparatively little risk, and the cash flows it generates are dependable. On top of that, more than 99% of what we owe is presently locked in at fixed rates, and on a weighted average basis those rates stay fixed at 3.38% for a further 6 years; therefore, on the debt side, we think we're well shielded at present from any volatility in interest rates down the road. And since these borrowings carry a weighted average maturity of ten years out, we likewise believe we're shielded from any possible liquidity troubles if today's economic uncertainty drags on for an extended stretch. As for debt maturities ahead, $31 million comes due across the next 12 months. That said, roughly $17 million of that figure consists of maturities on 4 loans. The 4 properties backing those loans have collectively risen in value by $6 million since each was respectively acquired. So we anticipate no difficulty refinancing any of those loans. Once those maturities are set aside, just about $14 million of amortizing principal payments falls due across the next 12 months, which works out to roughly 2% of our total debt outstanding. Looking at liquidity, counting what's available on our lines of credit, we presently hold more than $70 million of dry powder. Having expanded our credit facilities with both MetLife and Farmer Mac during 2020, we enjoy ample availability under our 2 largest borrowing facilities, and we remain in talks with additional lenders about new borrowings and possibly new credit facilities; we don't see a credit freeze hitting ag lending in the near-term future right now, since borrowings stay readily available to us from multiple lenders and on very favorable terms. Last, I'll address our common distributions. We just lifted our dividend once more, to $0.04495 per share per month. Across the past 24 quarters, we've increased our common dividend 21x, which amounts to an overall rise of 49.83% in our monthly common distributions during that span. Starting in 2013, we've made 96 consecutive monthly dividend payments to common shareholders, amounting to $4.98 per share in total distributions. And naturally, that comes on top of dividends paid to our preferred shareholders. Distributing dividends to our shareholders sits at the heart of our business plan, and our aim remains to grow the common dividend at a pace that beats inflation. We haven't reached that point just yet, but we do think we're moving in the right direction. At our present distribution run rate and given where our common stock price stands today, the yield on our common stock comes to about 2.9%. And once you weigh the relative stability and security of the underlying assets along with the related cash flows, we think this stock presents a compelling investment alternative; and with that, I'll hand the program back over to David.

Okay, thanks Lewis. That was a good report. From our side, deal-making truly accelerated as we approached the close of the year. Part of that, I believe, came about because of tax regulations that are anticipated to shift. Even now, we keep seeing a solid number of acquisition chances come across our desk — roughly $250 million in backlog, I'd say — and we'll likely finalize around 80% of those. That said, particular pieces of how we vet a deal are now taking far longer than they typically would, because of the different limits on travel and everything else happening in the broader market. A number of our banks operate entirely from home, which adds more time. Certain government agencies aren't open, meaning we're unable to obtain the information we require. With luck, though, a few of those constraints will begin easing before long, letting us pick up the pace compared to where we stand now. One last thing or 2 I want to mention: we remain convinced that putting money into farmland and cultivating crops that support a healthy way of living — items like fruits, vegetables, and nuts, plus the many other tree fruits we grow, from cherries to apples to figs to oranges — well, that's enough to make anyone eager for lunch today. So, in line with what the market is showing us right now, that's exactly where we intend to remain. At present, roughly 85% of all our crop revenue is generated by farms producing the kinds of food you'd spot in the produce aisle or the nut aisle at the grocery store near you. We regard these foods as being among the most healthful, and among them we keep witnessing a rising shift toward organic. Roughly 40% of the acreage we devote to fresh produce is either certified organic or in the process of converting, and over 10% of our permanent crops — meaning the tree crops along with the bushes — falls under that very same organic heading. We're confident the organic segment will remain a powerful area of growth. On top of that, over 95% of what we grow sits in the non-GMO bucket, so our aim is pointed at the healthier end of food production. There's another big factor behind why our company's approach centers on farmland that yields fresh produce: the impact of inflation. As the Bureau of Labor Statistics reports, the general yearly CPI tends to track inflation. Yet across the last 40 years, covering plenty of the present ones, the fruits and vegetables portion of the food group has climbed at 1.6x the rate of the overall food CPI. In other words, they're now charging higher prices for fruits and vegetables and nuts than was the case previously. That's the reason a lot of financial advisers urge their clients to put money into farms and farmland — it functions as protection against inflation. And sure, commodity grain crop prices—things like corn, soy, and wheat—tend to swing more and are more exposed to worldwide supply and demand conditions, whereas fresh produce is largely shielded from that global turbulence, primarily since those crops usually get eaten nearby and soon after they're picked. I bring this up because people frequently mix us up with farms where corn, soy, or wheat is being grown—operations we deliberately avoid, for the simple reason that we'd be going head-to-head with nations such as Brazil, Argentina, and the Ukraine, where production costs, even once you factor in shipping, come in below what we can grow it for here in the United States; and those growers are able to undersell us, which they've already done before. As a result, they push prices down, so a lot of our farmers growing corn or wheat haven't been able to earn a decent living from their land. This year grain prices are considerably higher, since Brazil and Argentina have been dealing with a drought. Farms in those nations mostly rely on rainfall for irrigation; and as you're aware, nearly all of our farms have their own water supply, sometimes even several sources when we're located in areas like California. On the whole, demand for top-tier farmland used for growing assorted vegetables stays stable to robust in virtually every region where our farms are, especially along the West Coast—covering most of California, Oregon, and Washington—and definitely throughout the East Coast, above all in Florida and a number of other states. And taken as a whole, farmland keeps delivering solid results relative to other asset classes. Even with some recent declines in particular areas, the NCREIF Index of farmland, which right now consists of roughly $12.3 billion in agricultural properties, has averaged around 13.6% across the last 15 years, versus roughly 10.5% for the S&P index and an even weaker figure for the broader REIT index. So we must be doing something correctly, and I believe we're positioned well. Over that 15-year stretch, the farmland index never posted a negative year, in contrast to the S&P, which I believe had 2 or 3 negative years during that same span. Farmland has typically offered investors a safe haven when the financial marketplace goes through turbulent periods, since both land prices and food prices—particularly for fresh produce—have kept climbing steadily; and that was clearly demonstrated during this latest pandemic, when we saw grocery store prices go up, and most people purchase their food there regardless. So to wrap up, keep in mind that buying stock in this company amounts to a long-term investment in farmland. I'd say an investment in our stock really consists of 2 parts. One, naturally, is that it resembles gold. After all, it's the hard asset that's existed since the earth began. So that holds real worth since quality farmland is in short supply, and urban sprawl keeps consuming it — particularly across California and Florida, places where we run a great many farms. Plus, in contrast to gold or comparable alternative holdings, this is a working investment that generates cash flow for investors, and we think we beat a bond fund since our dividend keeps rising. We anticipate inflation will climb, above all within the food segment, and we anticipate that farmland values underneath will rise because of it. We believe that's particularly the case for fresh produce within the food segment, given the patterns of more folks consuming healthy foods and — that we keep expanding; yet Gladstone wouldn't amount to much without all these fine individuals running and overseeing it. Acquiring and leasing farmland is complicated, involves a great deal of — a person has to be physically present. Therefore, if what we're doing appeals to you, go ahead and purchase some shares, and keep consuming fresh fruits plus vegetables and nuts. And at this point, operator, if you'd step in, you can let some folks pose questions that we'll attempt to respond to.

Clearly, a ton of deal activity tends to show up late in the year. Could you perhaps walk us through what the pipeline looks like at this moment? I realize you don't provide official guidance, but could you possibly share the key positive and negative factors we ought to keep in mind for 2021? Also, regarding that deal activity, I believe you brought up taxes — possible tax changes. I'm simply wondering whether being able to offer OP Units is assisting you in closing transactions.

OP Units haven't come up all that much, from what we've seen. One of the smaller deals we have, roughly $3 million, involves buyers who do want OP Units. A few other small ones could potentially follow that same path. Broadly, though, if you're discussing something bigger — for instance, we have one in the pipeline at approximately $39 million — they prefer cash, since they intend to immediately deploy those funds toward expanding their operations. I'm unable to address every question about what goes on inside people's heads. Yet should the current administration enact its hefty capital gains tax, that would prove extremely damaging for folks looking to sell. Perhaps more of them would then accept OP Units. The thing is, we've at last grown to a size where people are willing to accept OP Units, because we're solid. We won't vanish suddenly, and we've already made it through one of the harshest recessions this nation has ever faced, one that continues even now. It's — our employees aren't all back working. Plenty of companies aren't up and running. So I believe we'll perform quite strongly during this year, 2021. Any other questions?

Yeah, that helps. You said there was, like, a big deal being worked on. So what ought we, like, be considering for a typical annual volume run rate, sort of with the scale you have at present? I realize that's not a simple thing to respond to, but even a rough marker would be great?

It — we would be glad to assist you in putting your forecasts together on your machine. Lewis is right here, Lewis, how about you take that one? You've got your forecasts.

So across the last 2 years, our acquisition spend came to $256 million annually. The pipeline holds enough for us to keep that pace, though it's only February and we haven't closed anything yet. There's still plenty of time left in the year. I'd say we have roughly $150 million or so under PSAs. Naturally, there's no assurance we'll get all of those across the finish line. As things stand, we'd anticipate completing around $200 million in acquisitions. That figure is more or less our internal floor. It's possible we end up below it. Only 3 years back, I believe we sat at roughly 150 or so. Perhaps we'll even top both last year and the year prior, but it's a bit early to call, though $200 million is basically the internal number we pencil in.

All right, that's useful. Over the past 3 months, has your outlook on how to pay for those acquisitions shifted, simply because your stock has performed so remarkably well?

So what you're suggesting is that we cover those by issuing common stock — is that your point?

I’m not advising you on this. I’m simply wondering whether it leans more heavily toward equity.

Nate, I’m only joking with you. We prefer to combine them, since once you stop the preferred stock sales, restarting them becomes difficult. So we continue selling $4 million or $5 million each month when possible through that offering, and for the common stock we’ll rely on the ATM program, though we have no intention of doing a large common stock offering. All right. Now, who has the second question?