Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks Devin — appreciate that kind opening. I'm David Gladstone, and we're glad to have everyone join us for Gladstone Land's quarterly conference call. Thanks once more to each of you for dialing in and listening. To get us started, here's Michael LiCalsi, our General Counsel and Secretary, who also serves as President of Gladstone Administration, the administrator for all the Gladstone funds. Michael, please go ahead.

Thank you, David, and good morning to everyone. Our report today might contain forward-looking statements made under the Securities Act of 1933 as well as the Securities Exchange Act of 1934, and these cover things like how we expect to perform going forward. Such statements carry specific risks and uncertainties, all built on our present plans, which we consider reasonable; however, numerous factors could lead to actual outcomes differing materially from any results anticipated or suggested by these statements, and that includes every risk factor listed in our forms 10-Q, 10-K, and the other filings we make with the SEC. Those documents are available on our site, www.gladstoneland.com — just navigate to the Investors page. They're also always accessible through the SEC's site, www.sec.gov. We assume no duty to publicly update or revise any such forward-looking statements, whether because of fresh information, later events, or anything else, unless the law demands it. Moving on to today's discussion, we'll be talking about FFO, meaning funds from operations. This is a non-GAAP accounting term whose definition is net income, minus gains and losses tied to real estate sales and any impairment losses on property, then adding back depreciation and amortization of real estate assets. We might also bring up core FFO, which we typically describe as FFO with adjustments for particular nonrecurring revenues and expenses. Then there's adjusted FFO, which takes core FFO and further adjusts it for specific noncash items, for instance converting GAAP rents into normalized cash rents, and in our view all of these give a clearer picture of how we're operating and make comparing our performance across periods easier. So please, take a moment once more to check out our site, gladstoneland.com, and subscribe to our e-mail alerts so you remain informed about the company. We're on Facebook too. Search for the Gladstone companies, and our Twitter handle is @gladstonecomps. This call serves as a summary 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 Investors page of our website. With all that said, I'll hand things back over to David Gladstone. David?

Alright, thank you, Michael. Everyone listening knows, and yesterday's press release made clear, that we hold roughly 104,000 acres of farmland right now, spread across 141 separate farms, with a valuation north of $1.2 billion. These farms sit in 13 states, and even more significantly, they fall within 27 distinct growing regions. I saw that you folks noticed the Wall Street Journal piece about Mr. Gates owning 120,000 acres and being described as the biggest farmland owner. Well, watch out, Mr. Gates — here we come. Occupancy across our farms remains at 100%, and 79 separate tenants lease them, every one of them unaffiliated with us. On top of that, those tenants are cultivating more than 55 crops. So when you take stock of these figures — the farm count, the range of growing regions, the many farmers, the many crop types — I believe our diversification is adequate to give safety and security to the cash flows generated by rents; in our view, this diversification will serve to safeguard the dividends we distribute to shareholders. And our assets, naturally, consist of farms producing food, which makes them extremely valuable. Given how many farms we bought as 2020 came to a close, we enter 2021 on a strong footing, with solid operating results, having completed $156 million in farm purchases during the final 3 weeks of 2020. Acquisitions in the first quarter came in somewhat slow. And — that mirrors what happened to us a year ago, when we got off to a sluggish start. As we rebuild our pipeline of prospective farms to acquire, it could take some time before we reach the pace everyone hopes to see, where we're buying $100,000 or $200,000 worth of farms each quarter. That said, we did complete the purchase of one more large olive ranch — the term they use out west — and these olive orchards closed just after the quarter ended, and we anticipate further acquisition activity over the coming months. We keep managing to renew every lease that expires without losing any days of occupancy on any farm we own. Rental payments keep arriving pretty much in line with what we projected. There was a single tenant on a small Michigan farm that appeared bound for bankruptcy. Because of that, we ended the lease with that tenant and promptly signed a new lease with a stronger tenant at a favorable rate, slightly above the prior one, though only modestly so. On the whole, farm operations stay robust, and appetite for what's grown on the majority of these farms stayed elevated. I'm talking about items such as berries, vegetables, and nuts — areas where we have deep expertise. Most of the vegetable and berry crops — grown on our farms — get sold through grocery stores, and grocery store demand currently is extremely strong. I realize restaurants are making a comeback, and plenty of them sell directly to households, but these days grocery stores truly are the best-positioned channel. In Q1, the team bought 3 farms for roughly $6 million, and around $4 million of that was settled by issuing OP Units. Those function much like our company's common stock. Essentially, we exchanged some common stock for farmland; on top of that, as mentioned before, immediately following the quarter's close, we picked up one more sizable olive farm for approximately $38 million. So we now have substantial exposure to olive farms. On the whole, the initial net cash yield to us from these investments comes to roughly 5.3%. Beyond that, every lease tied to these farms includes particular clauses, for instance participation rents, through which we hold a share of the agricultural products harvested from them. One more practice we employ occasionally involves annual escalations — meaning rent rises by 2% or 3% every year. That ought to nudge the figure somewhat upward going forward; still, these aren't dramatic shifts, merely a sound business approach; and to reiterate, this yield number factors in every operating expense that falls under the leases. Furthermore, the majority of these leases are triple-net. So additional expenses shouldn't amount to much regardless, yet the figures do capture whatever expenses we do bear. Turning to leasing activity, from the start of the year we signed new leases or renewed certain existing ones across 4 properties of ours situated in California, Colorado, Florida and Michigan. We did encounter a rent reduction upon renewing a Midwest farm, though that renewal ran 1 year and we signed it anticipating we could raise rents once the year wraps up. Given how commodity prices have climbed recently, we believe we'll be better positioned with that farm next year in any case. Looking forward, merely 2 leases are set to lapse within the coming 6 months, and together they represent under 1% of our annualized leases. We're in talks with the current tenants at these farms plus a few prospective new tenants, and we anticipate no decline — no downtime — regarding these leases. Broadly speaking, we presently expect fresh leases on these farms to match or come in slightly above current levels. One further note, we booked roughly $2.4 million in participation rents across each of the last 2 years. The precise figure isn't known yet, but we anticipate a considerable jump in participation rents for 2021. That's due to the fact that multiple farms in our portfolio carry participation rent clauses within their leases. Naturally, we won't learn how much, if anything, will be collected for several additional months. Come December, likely, we'll have a clearer picture. When it comes to where we stand on environmental, social, and governance standards—ESG, as people refer to it—we are hard at work creating formal policies tied to each of our disclosures. Looking at diversity on the Board, women make up 1/3 of the independent members serving there. We see no reason to doubt that we'll manage to satisfy every Board diversification requirement along with the other obligations involved. A number of those have been put forward, yet few have actually been approved and made official in a way that means they take effect during this year. A great deal of that will unfold next year. Once more, I'd like to touch on the Gladstone acquisition, which is the SPAC we filed not long ago. During the last several years, we've come across certain owners of sizable farm operations who were interested in selling both their land and their business. Sometimes we proposed purchasing only the land, yet they preferred to hold onto the land and the operations as one unit. Since we're a real estate investment trust, Gladstone Land is unable to hold operating companies, as the operating income doesn't fall under < > for REIT status. Gladstone Acquisition therefore came into being as a possible means of pursuing these kinds of opportunities in which Gladstone Land cannot take part. I'll pause there—that covers operations sufficiently. Now I'll hand things to our CFO, Lewis Parrish, who can tell you more about the numbers. Lewis?

Okay. Thanks, David, and good morning to all of you. I'll start by covering our balance sheet. Total assets rose roughly $67 million during the first quarter. That's mostly because of net proceeds from stock issuances that haven't been fully invested yet. Turning to financing, in the first quarter we obtained approximately $10 million in new long-term bonds, with a weighted average rate of 2.96%, fixed for the next 8 plus years. Also, in January, we brought in roughly $58 million in net proceeds by issuing a new 5% Series D term preferred stock, which trades on NASDAQ under the ticker LANDM. Then in February, we tapped about $29 million of those proceeds to redeem our Series A term preferred stock, which had a coupon of 6.375% and a mandatory redemption date of September 2021. On the equity front, since the year began, we've brought in approximately $16 million in net proceeds from sales of our Series C preferred stock; and during that same period, we've also brought in roughly $59 million in net proceeds from sales of our common stock under the ATM Program. Our current ATM Program originally permitted $100 million of sales, and we have since sold out of it. So we'll probably look to grow the ATM Program's size before long. Now to our operating results. First, note that in the first quarter we had net income of roughly $554,000 and a net loss to common shareholders of $2.2 million, or $0.082 cents per common share. Comparing quarters, adjusted FFO for the first quarter came to approximately $4.7 million versus $3.6 million in the fourth quarter of 2020, a rise of roughly 31%; and AFFO per share was $0.174 in the first quarter against $0.147 in the prior quarter, up about 18%. The per-share increase was somewhat muted because of the recent equity issuances, whose proceeds are still not yet fully invested. Dividends declared per share came to about $0.135 in both quarters. The primary factors driving the AFFO increase were higher top line revenues and roughly $2 million of interest patronage recorded in connection with our loans from Farm Credit. Fixed base cash rents grew by approximately $2 million, or 15%, quarter over quarter, mainly from additional revenue earned on recent acquisitions. That was partly offset by a decline in participation rents, since we recorded about $1.2 million more than the prior quarter. On the expense side, if we exclude reimbursable expenses and certain nonrecurring or noncash expenses, our core operating expenses rose by roughly $688,000 quarter over quarter; that's mainly due to higher base management and incentive fees earned by our adviser during the current quarter. Taking out related party fees, our core operating expenses rose by approximately $176,000. The main reason for this bump was extra property taxes we paid on some of our farms, plus various operating costs tied to the acquisitions we closed recently. On the whole, we saw this as an exceptionally robust quarter from an operations standpoint. First off, operating revenues came in at slightly above $16 million, which stands as the largest quarterly figure we have ever posted. And bear in mind this happened with just roughly $26,000 in participation rents being booked. Naturally, that stemmed from every new property we added to the books late in 2020; on top of that, both our AFFO and AFFO per share figures ranked as the second best we have ever posted. They trailed only Q1 of 2020, when we booked a onetime lease termination fee of roughly $3 million. Now shifting to net asset value. During the quarter, 32 farms underwent revaluation, every one of them through third-party appraisals. On the whole, those farms rose in value by roughly $2.2 million, or 0.7%, compared with their prior valuations from around a year earlier. So as of March 31, the value of our farms came to a bit more than — to roughly $1.2 billion, and every bit of that rested on third-party appraisal valuations or the actual purchase price. Drawing on those refreshed valuations, and factoring in the fair value of our debt along with all preferred stock, net asset value per common share on March 31 came to $12.69, an increase of $0.46, or 4%, versus the prior quarter. The primary forces behind that gain were a decline in the fair value of our fixed long-term borrowings, driven by rising market interest rates, along with common stock issuances through our ATM Program at prices above our estimated NAV as of December 31. Now turning to our capital structure and overall liquidity. From a leverage perspective, and regarding our borrowings, our loan-to-value ratio across all farmland holdings, measured on a fair value basis and net of cash, stood at roughly 47% on March 31. We remain at ease with where our leverage sits, given how comparatively low the risk is for high-quality farmland as an asset class overall, and given the dependability of the cash flows it generates. Beyond that, more than 99% of what we owe is presently at fixed rates. And on a weighted age basis, those rates are locked in at 3.38% across the coming 6 years; so on the debt side, we figure we are reasonably shielded against any interest rate swings down the road. And since the weighted average maturity of those borrowings stretches beyond 9 years, we likewise believe we are shielded from any possible liquidity problems. As for debt maturities ahead, we have approximately $31 million falling due within the next 12 months. That said, roughly $16 million of it consists of bullet maturities on 4 loans that are reaching their due dates. Those 4 properties that serve as collateral for these loans have gone up in value by a combined $6 million since each was acquired, so if we decide to refinance any of these loans, we don't anticipate any issues. So if we take out these maturities, we're left with roughly $15 million of amortizing principal payments that come due in the next 12 months, which is around 2% of our total debt outstanding. Looking at liquidity, counting what's available on our lines of credit, we have more than $100 million of dry powder right now, plus we have roughly $40 million in unpledged properties. During 2020, we expanded our credit facilities with both MetLife and Farmer Mac, so we now have plenty of availability under our 2 largest borrowing facilities, and we're still in talks with other lenders about new borrowings and possibly new credit facilities too. But on the whole, credit remains easy for us to access from a number of lenders and on very attractive terms. And last, I'll discuss our common distributions. We just increased our common dividend once more, to $0.045 per share each month. Across the last 25 quarters, we've increased our common dividend 22x, which amounts to a total rise of more than 50% in our monthly common distributions over that period. Starting in 2013, we've paid 99 consecutive monthly dividends to common shareholders, amounting to $5.12 per share in total distributions. Distributing dividends to our shareholders is central to our business plan, and we aim to keep raising the dividend on a regular basis. Given our current distribution run rate and where our common stock price stands today, the yield on our common stock comes to about 2.4%. And given how relatively stable and secure the underlying assets and the cash flows tied to them are, we think the stock still provides an appealing investment option, especially considering today's inflationary concerns. And with that, I'll hand the program back to David.

All right. Thanks, Lewis. Good report. I realize everyone listening is probably wondering whether we've got a big pipeline of things we intend to purchase and develop. Well, we keep seeing a solid number of acquisition possibilities come across our desk, and we're hopeful that we can share news about further purchases over the next few months. As you might expect, some parts of our due diligence work have wound up dragging on for a very long time because of the different travel bans and office shutdowns. Because of the numerous government rules tied to COVID-19, a lot of government offices permit just a single individual inside the building at any one time; but with luck, the bulk of these rules will begin easing before long, and that should let us pick up the pace compared with how things went during last year; and only a handful of closing thoughts, we still hold the view that putting money into farmland and raising crops that support a healthy lifestyle, like the ones we own, fruits, vegetables and nuts, tracks a powerful trend we're witnessing in the markets we serve right now here in the United States. Right now, roughly 85% of our total crop revenue is generated by farms that grow foods you could locate in either the produce aisle or the nut aisle of the grocery store near you. We regard these foods as belonging to the healthiest categories of food, and we keep observing rising trends toward organic within our foods. And roughly 40% of our fresh produce acreage is either organic or in the process of converting to organic. That trend pleases us. And more than 10% of our permanent crops fall within the organic category. And we're hoping to build on that over the next year. We think the organic segment remains a robust growth area. In addition, just to mention, 95% of the crops grown on our farmland is classified as non-GMO, which is a significant designation that we're trying to stay away from. Yet another key reason our business strategy centers on farmland growing fresh produce relates to how inflation affects this specific segment. Per the Bureau of Labor Statistics, the overall annual food, CPI generally keeps pace with inflation. However, across the last 40 plus years, the fresh fruit and vegetable segment of the food category has outpaced the total CPI by a multiple of 1.5x. That's the reason a lot of financial advisers urge their clients to put money into farmland, since it works as a hedge against inflation. And although prices for commodity grain crops like corn and wheat tend to be more volatile and more exposed to global supply and demand, fresh produce is largely shielded from global volatility, because these crops are usually eaten locally not long after they're harvested. The reason I'm bringing this up is that people frequently mix us up with other companies that possess farms where corn, soy, or wheat is being grown by the farmers. For the most part, we avoid those crops since they must go head-to-head with nations such as Brazil and the Ukraine, places where production costs—and even shipping costs afterward—are extremely low, which lets them take on our American growers in global markets. This year, grain prices have been significantly elevated, in contrast to earlier years when they were quite depressed throughout the last 6 years. One factor behind that, though, is that a drought period is being experienced by Brazil and Argentina; and rainfall is largely what farms in those nations rely on for water. And at present, very dry conditions exist in certain sections of the U.S. Southwest. Yet as you're aware, nearly every one of our farms possesses its own water sources, even several of them. In almost every location where our farms sit, overall demand for top-tier farmland used for berries and vegetables is holding steady or is robust, especially down the West Coast, encompassing the bulk of California, Oregon, Washington, and Florida. These days they're particularly robust, well, because water is available on every one of those farms. When measured against other asset classes, farmland keeps delivering solid results. Even with recent declines in a few areas, roughly $13 billion in agricultural properties currently comprise the NCREIF Farmland Index, and it has averaged an annual return of approximately 12.3% across the last 20 years. By contrast, the overall REIT Index came in at 11%, and the S&P Index was even lower. Across that 20-year span, not one negative year was recorded by the Farmland Index, while roughly 4 negative years were experienced by both the REIT Index and the S&P Index during that period. Investors have typically been given a safe haven by farmland when times are turbulent. Some of that may be happening right now; both land prices and food prices, particularly for produce, have kept climbing steadily. Keep in mind that buying stock in this company amounts to a long-term investment in farmland. In my view, there are really 2 components to investing in our stock; it's a lot like gold. It's a hard asset. It's farmland. It's dirt. A million years is how long it's been here. Intrinsic value is something it has, owing to the finite quantity of quality farmland in the United States and across the globe. In California, it's being gobbled up. Roughly 50,000 acres are lost every couple of years, and urban development is where they go. In Florida, where many of our farms are located, the same problem exists; expansion there keeps happening. And in contrast to gold and other alternative assets, farmland is a very active investment; cash flows are generated from it, whereas with gold, you're simply sitting there holding the gold. Inflation is being seen by us, especially within the food sector, and we anticipate it will rise over time, with underlying farmland rising as a consequence. Since that's what we anticipated, we figure this will hold especially in the fresh produce aisle, with more and more Americans moving toward healthy eating and that segment carrying on its expansion; even so, Gladstone Land would amount to little without the capable individuals running it, a number of whom are seated at this table with me right now. The business of acquiring farmland and leasing it out is quite complicated. It isn't comparable to purchasing a share on an exchange. You must devote considerable hours to working alongside farmers. Having people physically present on the ground is essential. We have plenty of those folks across our West Coast operations and our East Coast ones too. My request to all of you is simply to please purchase a few shares and continue consuming fresh fruit, and over the coming 10 years we'll be sitting pretty; at this point I have a few questions. So if the operator would join us, we'll field the questions to the best of our ability. Who's going to start?

Could you expand a bit on what's currently in the pipeline? We realize formal guidance isn't something you provide, but what would you say are the primary positives and negatives affecting the pipeline at this moment? Does anything fall under PSA? And from what I recall, your target has generally been roughly $200 million annually. Do you believe that figure can be reached in this year?

Honestly, I would like to provide a response that serves you better, one you could plug into your model and use to forecast our position at year-end; that's something we aim for annually. Sadly, though, acquiring farms isn't a simple task. Consequently, there isn't much beyond that which I can offer you. What's the size of your backlog?

There's roughly $150 million worth of deals we're currently evaluating, and they're at different points in the process — not every one of them has a signed PSA in place. Right now, perhaps half to 2/3 of them do have PSAs signed. Even so, diligence is still underway on every single one. Our hope is that we can get most of them, or possibly even all of them, across the finish line during the coming two quarters, Q2 and Q3. That said, there are certainly no guarantees.

Honestly, we have no idea — we truly have no idea what the government is going to do. There's discussion of raising capital gains, and that would hurt these folks, plus there's talk about cutting back on how much you're allowed to pass along to your — to your family members or gift away, and honestly, when it comes to taxes on individuals, this is a really nerve-racking period for us. Our hope is that certain people who can no longer complete a 1031 exchange will accept our UPREIT shares, since in most situations that's a transaction free of tax, and they'll be receiving, just as you do, dividend payments on a monthly basis. Shall we take the next question?

Yeah, so my question was whether OP Units have become a larger topic in your discussions while you're pursuing transactions, given all the possible tax law shifts?

Well, it definitely made a difference for us in getting things signed last December, since folks preferred completing their transactions during 2020 instead of taking a chance with the incoming administration. Who knows — this incoming administration might pull something foolish, the way certain earlier presidents did. If you think back to the eras of a few of those presidents, they'd wait until around this point or even later in the summer to put these things into effect, yet they'd apply them retroactively to the 1st of January. So there's no way to prepare when you don't know their plans. And this is simply one of those stretches marked by widespread uncertainty, with people unsure if they ought to act right away, hold off, and watch what unfolds over the next 6 months; so I'd like to offer something stronger — it would benefit me considerably if my forecasting were more precise, but that's the most I can provide.

All right, that works. Perhaps you could briefly discuss how pricing is trending. I mean, my sense is that the cap rates on what you've closed so far in 2022 are somewhat below those from 2020. Is there something worth pointing out there? Or does it simply come down to the individual deal? And are you noticing any uptick in competition?

Competition hasn't really shown up much for us. Sure, there are folks out there looking to acquire farms, but they lack anyone locally. And in our experience, the farmers in California and Florida guard their information closely and aren't about to hand it over to just anybody. Since we're a familiar presence purchasing in those markets, they're at ease dealing with us, and my expectation is that this will keep going. When it comes to predicting which direction tax policy will go, I simply can't say; and I believe that will play a major role in whether folks choose to work with us or simply wait it out over the next 10 years. There's no telling what a farmer will decide to do; but as you're aware, today's average farmer is roughly 58 years old, and there's no path for them to exit their operation unless they strike a deal with someone like us or with the neighboring farmer; that's typically how it goes. Joe might tell himself, "I'm going to sell my farm." Then he informs Ben next door about his plan to sell; and Ben responds, "Well, I'd like to buy it," and the sale happens that way; and it never ends up on some kind of listing anywhere. There's no broker involved. So you need to keep your ear to the ground. You need to understand what's happening in that community, in that growing area if you want a chance at it. And I believe we've now reached a level in the minds of everyone out there who's considering a sale; we receive a lot of inbound calls about that these days. So I believe we're positioned to expand quickly, but I simply can't predict what people will do right now. And I think if the government settles on what it will do regarding taxes, that will help everything loosen up and people will make their decisions; it's a sensitive area at the moment. Roughly half the farms that are — I believe it's 80% or so of the farms are still owned by individuals; and around half of those aren't even worked by the owners themselves, they're rented out. We'd be glad to purchase those. In such situations, we'd simply step in as the new landlord. That approach has served us well for expansion, and right now it's somewhat difficult to make any kind of forecasts; our plan is simply to stay focused and keep collaborating with folks; and as months pass, my sense is that 2025 will bring us plenty of chances.

I can never remember what share of your portfolio gets appraised annually. That said, inside the portfolio, which geographies and crop types are producing the largest appraisal value increases?

Rob, every property of ours is appraised no less than one time per year; these days, once per 3 years we conduct a full appraisal. During the years in between, desk appraisals are what we use, and the same groups handle everything — both the full appraisals and the desk appraisals come from that same group; and recently, we've observed fairly solid increases in — for example, the Salinas/Watsonville area of California. Florida keeps appreciating at a fairly strong pace. The Midwest Fort, however, has remained more or less flat, even as we keep getting those properties appraised over the next 12 months. Should trends hold, that might shift. Southern California has been flat to down a couple of percentage points across the past year or so. Those, I'd say, are the primary areas where we're seeing jumps.

All right, that's useful. So has Gladstone Acquisition completed any deals so far? Or is anything lined up for them should it finalize?

No, we have not finalized yet. And you might be aware that while you're in the process of raising a SPAC, no talks are permitted until the initial tranche of capital comes in. So we're basically waiting on the periphery while all these matters get resolved. The SEC has been quite aggressively involved in the SPAC space over the last, I'm not sure, 6 months. Consequently, Rob, everything has decelerated, and I have no idea when we'll be able to go out and get something done. We're acquainted with some folks who are interested in doing a transaction, but per the SEC's rules, we aren't speaking with them or negotiating.

All right. So regarding that vehicle, do you expect it to be sizable? Is that the reason you avoided setting up a taxable REIT subsidiary — because you would have run into a cap?

Yes, that's one factor. Another factor is my reluctance to create taxable REIT subsidiaries, since they have a tendency to land you in hot water. As you're aware, Rob, if you fail the test, you're barred from being a REIT for 5 years. So we've steered clear of any possibility of that sort of catastrophic outcome occurring within our company. Our company is now large and robust. There's no justification for taking extraordinary risk, and taxable REIT subsidiaries represent that type of scenario. So my hope is that we can acquire the land and acquire the business within the SPAC, but that would be the optimal approach, since then the SPAC wouldn't be in some way contending with certain of our tenants.