Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Appreciate that, Laura. That intro was quite pleasant; David Gladstone here. And I'd like to welcome everyone to the quarterly conference call for Gladstone Land. Thanks to each of you for dialing in today; we're grateful that you've taken the time to hear our presentation. We'll begin with Michael LiCalsi, who serves as our General Counsel and Secretary. He's also President of Gladstone Administration, the administrator for all the Gladstone Funds, Michael, please proceed.

Thank you, David, and hello everyone, good morning. The report we're giving today might contain forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934, and these cover things like how we'll perform in the future; these statements carry specific risks and uncertainties, and they rest on the plans we currently have, which we consider reasonable. A number of elements could lead to our actual outcomes differing substantially from any results in the future that these statements express or suggest, and that includes every risk factor described in our Forms 10-K, 10-Q, and the other filings we make with the SEC. Those are available on our site, www.gladstoneland.com — look at the Investor's page — or through the SEC's site at www.sec.gov. We're not committing to publicly refresh or amend any of these statements about the future, whether because of fresh information, later events, or anything else, unless the law demands it. Our discussion today covers FFO, meaning funds from operations. This is a non-GAAP accounting term, and it means net income without gains or losses tied to selling real estate and without any property impairment losses, then adding back depreciation and amortization on real estate assets. We might also talk about core FFO, which we typically describe as FFO with adjustments for particular revenues and expenses that don't recur, plus adjusted FFO, which takes core FFO and makes a further adjustment for some non-cash items, for instance converting GAAP rents into normalized cash rents; in our view these give a clearer picture of how we're operating and make it easier to compare one period against another. Please go to our website — gladstoneland.com, as I mentioned — and register for our email alerts so you'll always be current regarding the company. We're on Facebook too. The keyword to search there is The Gladstone Companies. We also have a Twitter handle of our own: @GladstoneComps. This call provides a summary of what we achieved. So please look over our press release and Form 10-Q, which both came out yesterday, to get more complete details. Once again, you'll find those on the Investors page of our website; now I'll hand things back over to David Gladstone.

All right, thanks, Michael. Let me begin by giving a quick overview of the farmland we hold right now. At present, we possess 105,000 acres — that breaks down to 53 farms, plus roughly 20,000 acre feet of banked water, with a combined value of approximately $1.3 billion. These farms sit across 14 states, and even more significantly, across 28 distinct growing regions. And, as Lewis will get into shortly, occupancy stands at 100%, with leases in place for 79 separate tenants. None of those tenants have any connection to us. The growers on these properties cultivate more than 55 kinds of crops. That amounts to a great deal of diversification. We're believers in diversification — it's what helps safeguard the dividend we distribute to our shareholders. Nothing is guaranteed in this world, but diversification certainly helps. We posted a solid second quarter, and we keep managing to roll over leases as they expire with zero downtime at any of the farms, and every renewal we completed came with an increase, which mirrors a favorable direction in rental rates across particular areas. By and large, activity on our farms stayed robust, and appetite for what's produced on the majority of our farms stayed elevated. Think items such as berries, vegetables, and nuts. In the second quarter, the team picked up 13 farms along with more than 20,000 acre feet of banked water. For context, water gets measured in acre feet, and a single acre foot equals slightly more than 125,000 gallons — so that's a substantial volume of water. We put roughly $80 million to work across these — across the second quarter. The overall initial net cash yield on those investments comes to roughly 5.1%. On top of that, every lease tied to these farms includes particular terms, like participation rents or yearly escalations, and that ought to nudge this number somewhat upward. One of the farm purchases we completed this time was located in New Jersey, a state that's new to us; we'd attempted to get in there on multiple prior occasions. We finally closed one. New Jersey carries the nickname the Garden State, for anyone familiar with the whole state, and the reason is that the lower portion of the state — the southern half — produces a great variety of crops very efficiently. The banked water represented a fresh category of acquisition for us, and with this one we put local water into storage in a district; we're able to apply that water to any farmland within the Kern County sub-basin, where we hold a number of farms, or alternatively sell it to third parties through the open market. The present price runs around $856 per acre foot, and it's carried today on our P&L — on our balance sheet at $728. Our intention is to retain the water so we can protect our own assets in that region against potential water shortages down the road. Every one of our farms currently has sufficient water. We've got plenty of wells drilled out there, so we're sitting in good shape, but having that additional water gives us peace of mind. Turning to leasing, we've completed five renewals since Q2 began, on properties in California, Florida, and Michigan. Those renewed leases should generate roughly $168,000 more in operating income, an increase of approximately 10% compared with the earlier leases on those same properties. Going forward, just three leases are set to expire within the coming six months, representing roughly 2% of total annualized lease revenue. Talks are underway with the current tenants on those farms, and with some prospective new tenants as well. We don't anticipate any decline in income from those farms overall. At present, we expect new leases across all the farms ahead to come in roughly flat versus today's levels. So a significant increase isn't what we're anticipating. A few other matters I want to address, the first being the drought in the West. I'm certain you've seen coverage on television or heard reports on the radio. The western United States is facing a serious drought. Every one of our properties sits in a position where there is presently sufficient water to finish at minimum the current crops, meaning this year's and next year's. On one farm, we intend to remove roughly half of the trees. Those trees are older, though when we acquired that farm it was just dirt, and none of the trees were part of the purchase. So we'll be taking out some of the older ones there. Some of our farms fall within water districts that have stored water or alternative supplemental supplies to meet our farms' water requirements near term. The farms we hold out west have wells on site, and groundwater serves as the primary irrigation source for most of them. On those properties, we're observing the usual seasonal decline in water levels, yet no well has gone dry. As far as I can tell, every one of our farms presently has enough pumping capacity to meet all crop needs. Jumping ahead, something worth noting is that cycles of wet and dry conditions are standard out west, particularly in California. Across any long-term investment horizon, we recognize there will be drought years as well as wet ones. That's why, when we evaluate a possible investment out west, well, in all our underwriting we examine properties having several water sources. We incorporate drought scenarios and factor in possible government regulations too. It's a substantial endeavor whenever we enter a new situation. While we're on that subject, regarding California, let me note that no damage has hit any of our farms from wildfires. You see stories about them in the news constantly. It's an annual reality for people living in California. The wildfires, for the most part, are up in the hills — that's where you find all the brush and the different kinds of trees — while our farms sit down in the valleys, on the flat ground close to the coast or right in the middle of the valley. Our view is that none of our farms are threatened by the wildfires currently burning. The next item I want to touch on briefly is the bump in the base management fee we implemented this year. You might have noticed that the fee went up by a modest amount. The figure was one-tenth of 1%. That lets us grow the team, bring on additional staff, and acquire additional farms. As you're aware, the asset class we manage doesn't look like what most other public REITs hold. Running this properly costs more along the lines of a private equity REIT, a real estate investment fund, and the benchmark in that world involves considerably higher fees. So the fees charged by those private equity players sit well above what we charge. At present we're at sixth-tenths of 1% of assets as our management fee for operating the business. Our expectation of a strong year when it comes to participation rents hasn't changed. Everybody knows we booked roughly $2.4 million of participating rents in each of the last two years. This year, though, we anticipate a rise for the 2021 period. The main reason is that additional farms carry participation rent provisions and are set to go active during this year. How much exactly is still unknown; we've run some estimates. I'd rather not share those numbers. Within the coming month or so, and certainly by the fourth quarter, we'll be able to provide you a clearer figure regarding what will happen on that front. We're also putting work into our ESG policy. This is an area that has turned extremely, extremely timely. We keep actively developing formal policies tied to the disclosures we view as relevant. We'll keep bringing you updates as we move toward finalizing those policies we're publishing and placing on our website. On that same topic, you probably saw that the SEC gave the go-ahead to NASDAQ's proposed changes aimed at enhancing board diversity. I have confidence that we will satisfy the new standards once they take effect. Turning back, some of you are aware that we launched Gladstone Acquisition. It's a special purpose acquisition company that we filed for not long ago. At this point it holds $100 million in funding, and we're searching for situations that fit that objective, and a number of the folks selling their properties aren't interested in only selling the properties; they want to sell — they're now financing their farmland operations and we'd like to purchase those, but a REIT can't do that. Gladstone Land is unable to own operating companies since operating income isn't allowed in a REIT. Gladstone Acquisitions, this public company, was formed to potentially seize such opportunities, ones where Gladstone Land couldn't take part. Gladstone Acquisition is public, and it now trades under the symbol GLEE. Alright, if you're looking for additional information on that topic, that's the place to locate it. I'll pause at this point and hand things over to Lewis Parrish, our CFO, who can walk you through further specifics regarding the figures. The floor is yours, Lewis.

Thanks, David, and good morning, everybody. I want to begin with the balance sheet. During Q2, acquisitions we recently completed pushed total assets up by about $67 million; we took on no new borrowings in that stretch, because each acquisition was financed with equity proceeds, most of which came from common stock sales through the ATM program. Since the beginning of the second quarter, we've generated net proceeds of roughly $83 million from selling common stock under the ATM program, which equates to a net cost of capital of 2.47% together with our recently increased dividend; we also upsized the ATM program during the quarter. About $113 million remains available under the current program. Over that same period, we also raised net proceeds of approximately $13 million from a Series C Preferred Stock sale. Now let's move to operating results. First, let me note that in the second quarter we posted a net loss of about $531,000, as well as a net loss to common shareholders of $3.5 million, or $11.07 per common share. Adjusted FFO was approximately $3.7 million in Q2, compared with roughly $4.7 million in Q1. AFFO per share was $12.06 in the second quarter versus $17.04 in the first quarter. Dividends declared per share came to about $13.5 in each quarter. The primary driver of the AFFO decrease was roughly $2 million of interest patronage booked in the prior quarter related to our Farm Credit loans, partly offset by a $1 million incentive fee our advisor earned in that prior quarter. Neither item occurred this quarter. AFFO per share this quarter was also affected by additional common shares issued under the ATM program, whose proceeds aren't yet fully invested. Fixed base cash rents increased by roughly $830,000, or 5%, quarter over quarter. That largely reflects added revenues from recent acquisitions; on the expense side, excluding reimbursable expenses and certain non-recurring or non-cash items, our core operating expenses dropped by about $626,000 quarter over quarter. That's primarily because related party fees were lower, as our advisor earned no incentive fee this quarter. Excluding related party fees, core operating expenses rose by approximately $539,000. Higher property operating expenses mostly drove that, mainly from added water costs at one of our Colorado properties, along with an increase in general administrative expenses from additional costs tied to the Annual Shareholders Meeting. As for those added water costs, they reduced this quarter's results by about $350,000, or $1.02 per share; we currently expect to incur an additional $350,000 to $400,000 in total over the second half of the year, with most of it in the third quarter. Based on our current share count, that equates to an extra $1.02 per share for the rest of the year. Even so, right now we don't expect to keep incurring those costs beyond 2021. So if you set aside those additional water expenses, FFO per share would have been $14.03 and AFFO per share would have been $13.08 for the quarter. Turning to net asset value: during the quarter, 46 farms underwent revaluation, and third-party appraisals were used for all of them. All together, the value of those farms increased by about $336,000 compared with the earlier valuations made roughly 12 months before. So as of June 30, our portfolio is worth approximately $1.3 billion, and each piece of it was valued either by third-party appraisal or at the price actually paid to acquire it. Using those refreshed valuations, and taking into account the fair value of our debt as well as all preferred stock, net asset value per common share on June 30 worked out to $13.16, which is $0.47 higher than the previous quarter. Moving to our capital structure and overall liquidity: from a leverage standpoint, and with respect to our borrowings, the loan-to-value ratio for all our farmland holdings, calculated on a fair value basis and net of cash, was about 45% on June 30. Over 99% of our debt currently carries fixed rates; on a weighted average basis, those rates remain locked at 3.38% for a further six years. So we believe that at present we are well protected on the debt side against any future interest rate volatility; in addition, these borrowings have a weighted average maturity extending beyond nine years. Regarding the debt maturities we face, approximately $33 million is due over the coming 12 months; within that amount, however, about $17 million is made up of bullet maturities on five loans. The five properties collateralizing those loans have together appreciated by $6 million in value since each was acquired. So if we choose to do so, we don't expect to encounter any trouble refinancing any of those loans. Apart from those maturities, we have only about $16 million of amortizing principal payments coming due over the next 12 months, which represents roughly 2% of our total debt outstanding. On the liquidity side, including what is available under our lines of credit and other undrawn notes, we currently have over $125 million of dry powder, plus approximately $44 million in unpledged properties. We have ample availability through our two largest borrowing facilities, and we continue talking with other lenders about new borrowings and potentially new credit facilities. Overall, credit remains readily available to us from a number of lenders on highly attractive terms. Finally, let me discuss our common distributions; we have just raised our common dividend yet again, to $4.51 per share per month. Over the past 26 quarters, we have boosted our common dividend 23 times, generating a cumulative increase of 50.3% in our monthly common distributions during that period. Separately, per-share figures of $0.012 and $0.0451 per month, along with amounts of $0.117, $0.126, $0.135, $0.138, $0.143, and $0.174 per common share, also factor into these distribution calculations. Since 2013 up to the present, we have delivered 102 consecutive monthly distributions to holders of our common stock, which adds up to $5.25 per share in total payouts. Those monthly amounts have included figures such as $0.012 per share, $0.117 per common share, and a stretch of increases running through $0.126, $0.135, $0.138, $0.143, and $0.174, along with $0.0451 per share per month. Putting capital back in the hands of our investors is central to the way we operate this company, and our intention is to continue lifting the dividend on a steady cadence. Because the assets beneath everything are so steady and safe, and because of the cash flows connected to them, we believe the shares stay a compelling choice for investors, particularly with the inflation concerns people have these days. Having said that, I'll turn it back over to David.

Okay, thanks, Lewis. That was a good report, and it's great to hear about the standard dividends being distributed. Our acquisition activity ramped up once more during this quarter, and we keep seeing a solid number of buying opportunities headed our way. Hopefully we'll be in a position to share news of some further acquisitions over the next few months — we were discussing that before we got started, and it sounds like one is about to come through — all the steps required to pull these deals off amount to an endless pile of paperwork just to keep up with every method of purchasing these operations; and I believe you'll see something from us within the next few days or weeks, or some farms out West. A handful of closing remarks I want to offer before we take questions: putting money into farmland and raising crops that support a healthy lifestyle, things like fruits, vegetables, and nuts, aligns with the trend we're witnessing in today's market. Right now, roughly 85% of our total crop revenue originates from farms that grow these kinds of foods, the ones you'd locate in either the produce or nuts aisle of your neighborhood grocery store. We regard these foods as being among the healthier options available, and we keep observing a rising trend toward organic within this category. Roughly 40% of our fresh produce today sits on acreage that is organic or in transition to organic; and beyond 10% of our permanent crops acreage belongs in that same organic category; we think the organic segment will remain a strong area of growth. On top of that, over 95% of our farmland is classified as non-GMO. Yet another key reason our business strategy centers on farmland that grows fresh produce relates to how inflation affects that specific segment. Based on the Bureau of Labor Statistics, the overall annual food CPI tends to track inflation. That's why a lot of financial advisors recommend farmland to their clients, since it works as a solid hedge against inflation. That said, across the last 40-plus years, the fresh produce and vegetable portion of the food category has exceeded the total food CPI by a factor of 1.5 times. That's a big reason, once again, we favor this segment. And although prices for commodity grain crops like corn and wheat and others tend to be more volatile than those in the segments we occupy, worldwide supply and demand for fresh produce is largely shielded from global volatility, since these crops are raised in the United States and eaten locally, mostly within a brief window after being harvested. Here's something I want to clear up, since people frequently mix us up with outfits that own farms where corn, soy, and wheat get grown by farmers. For the most part, we've avoided those crops, since they're up against competition from places such as Brazil, Argentina, and certainly the Ukraine, where production costs stay extremely low even once you add shipping; and the growers there can sell grain below what farmers in the United States charge. This year, grain prices have come in far higher, though part of the reason is that right now Brazil and Argentina are stuck in a drought and aren't producing as much. That translates into a better price for our farms, which will be a help to certain folks involved on the grain side of things. For us, though, it doesn't really matter. Farms in those countries mostly rely on rain, while here we've got wells doing most of the watering work for us. Demand overall for prime farmland used to grow berries and vegetables is holding steady to strong across nearly every region where our farms sit, above all along the West Coast, covering most of California, Oregon, and Washington, plus the East Coast, in particular Florida and certain other East Coast states where we operate; and compared with other assets, farmland overall keeps performing well. There's a decline — that's an association — a decreased Farmland Index, which right now consists of roughly 13.2 billion in agricultural properties. I believe every one of ours is in there — aren't they all, yes; and over the last 20 years, agricultural properties have delivered an average annual return of 12.3% versus 11% for the REIT index, with the Standard and Poor's Index showing an even smaller figure. And across that 20-year stretch, the Farmland Index never posted a single negative year, while the REIT Index and the S&P Index each recorded four negative years during the same span. During turbulent periods in the financial marketplace, farmland typically offers investors a safe haven, since land prices and food prices — particularly for fresh produce — have kept climbing. So to wrap up, please keep in mind that you should purchase stock in the company, and that buying stock in this company amounts to a long-term investment. Don't count on a big jump overnight the way you see with certain technology stocks. We anticipate inflation, especially within the food sector, will increase, and we anticipate that values underlying farmland will rise because of it. And we anticipate this holds especially true for fresh produce in the food sector. This trend of eating healthy foods instead of all those that aren't quite as healthy — but Gladstone Land wouldn't amount to much without the operating people here. Buying and leasing farms is truly a complex business; it sounds simple, yet it's complex, and it takes a lot of time and energy; so if you like what we're doing, please buy some of the stock in our company, and above all keep eating fresh fruits and vegetables and nuts. At this point we're going to take some questions. So Laura, if you'd come on, the operator is going to walk you through what to do in order to pose a question.

David, how big do you expect any of those participating rents to be in 2025? Is it mainly a Q4 thing, or will some land in Q3, with others arriving in Q1 of 2022? With your crops, pricing, and everything as they stand right now, how should we frame that for the back half of this year?

Rob, every one of those points holds. Q3 brings us a few hints. Q4 tells us far more, and we even collect a portion of the money then, but the actual figure becomes clear only in Q1 of next year.

Okay, then. Considering the current levels of crop prices, how significant do you anticipate that turning out to be for your team during this year?

We certainly anticipate it will have a considerable impact. Even so, at this moment I can't offer you a firm assessment. It's just too early. Nothing has been harvested yet, so as of now we don't have a clear grasp of it. That said, roughly 35% of our portfolio is exposed to this dynamic.

Also, looking back twelve months, NAV stood at about $11, and it's now above $13. That means a 19% increase compared with a year ago. In terms of geography and crops, which areas saw the largest gains during roughly the last year? And where are you noticing slower appreciation when it comes to crop and region?

California probably takes the prize on both counts. I haven't actually run the figures, but without question, things shifted there. In California, as you're aware, many farms end up swallowed for higher and better use — that's what they call it — whether for government buildings, playgrounds, schools, apartment buildings, and similar projects. So annually, somewhere between 25,000 and 50,000 farms are removed by that type of development. That's a significant shift, and each time it occurs, the acreage we own grows more valuable, since people view it from two angles. First, they need farmland to produce crops, so they'll pay higher rents. Second, some of those parcels will be zoned for higher and better use. So I'd say California takes that one. Oregon would rank second, in my view, and Florida definitely competes for either first or second place. Florida has something remarkable going on. I believe 10,000 families relocate to Florida each week.

So which areas do you expect to see that more modest appreciation, and what's likely to come in under that 19% typical figure?

The State of Washington definitely has a portion of that, and Arizona as well. I simply don't — I'm aware of which one would be the slowest; if you'd assist me in figuring that out, I'll avoid those states.

When you examine the strongest performers or the laggards, do you see any particular crop overlap? Put another way, within those regions, is there anything specific where acreage suited to one type of crop proves much more valuable than property just a few miles off growing something else?

Indeed. We moved into New Jersey during this year, and pursuing deals there has proven difficult because values in that market have climbed repeatedly. As Northern New Jersey grows down toward the southern part of the state, a great deal is going to shift. On top of that, something is going on in New Jersey that has put enormous strain on farmland: the state hands a farmer a substantial sum of cash simply for installing solar panel arrays that capture sunlight. Officials there were so aggressive about it that a statute had to be enacted to stop much more of this from taking place. That statute has since been repealed. Still, the encouraging part is that a farmer who continues working the land will be okay. Nothing is held against them, nor against other types of development. Still, some folks have gotten frustrated seeing so many ordinary farms turned into solar panel fields, all to generate additional power for the state. I'm not sure. Rob, you could sink hours into studying that; our approach starts at the local level. When a farm approaches us and we believe it's a solid fit, we assemble a proposal, and then it either moves ahead or it doesn't. We've never really gone around declaring, wow, New Jersey strikes me as the greatest spot on earth. We should direct every dollar we have into that, so I’m not able to point you to specific ones, but if you’re aware of any farms on the market, feel free to pass them along to us.

This is Eric sitting in for Nate. I appreciate you fielding our questions. To kick things off, could you share a bit more detail regarding where the pipeline stands at present? I realize formal guidance isn't something you provide, but would you walk us through what's currently sitting under PSA? And looking back, my understanding is you've aimed for roughly $250 million annually. Do you view that as reachable in the current year?

At this moment, we've closed on approximately $85 million, and assuming every deal we've already signed gets to the finish line, we'd exceed that figure during this year. Beyond that, we currently hold a fair number of properties tied to executed PSAs, and those total more than $100 million in value. For most of them, our expectation is a Q3 closing, though a handful could push into Q4, and we also have additional ones nearing the point of being signed. So once the year wraps up, our target is landing somewhere between $250 million and $300 million in acquisitions on an all-in basis.