Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Well, I appreciate that kind opening; I'm David Gladstone, and I'd like to welcome everyone to the quarterly conference calls for Gladstone Land. And once more, I want to thank each of you for dialing in today; we're grateful that you set aside part of your day to hear what we have to present. To get us going, we'll turn things over to Erich. Erich Hellmold has come into the office today to fill in for Michael LiCalsi. Erich serves as our Deputy General Counsel, and he's also one of the key players on the administrative side of our operations. He's the administrator for all the Gladstone funds. Erich, please go ahead and begin.

Appreciate that, David, and hello everyone. Our remarks this morning could contain forward-looking statements made under the Securities Act of 1933 as well as the Securities Exchange Act of 1934, and those statements cover things like how we expect to perform going forward. Such forward-looking statements carry specific risks and uncertainties rooted in the plans we currently have, and we consider those plans reasonable. A number of factors could make what actually happens differ materially from whatever future results these forward-looking statements express or imply, and that includes every risk factor laid out in our Form 10-K along with the other filings we make with the SEC. You can locate those on our site, www.gladstoneland.com, on the Investors page in particular, or through the SEC's site, www.sec.gov; we are not obligated to publicly update or revise any of these forward-looking statements, whether because of fresh information, later events, or anything else, unless the law demands it. Later on, we'll talk about FFO, meaning funds from operations. FFO is a non-GAAP accounting term whose definition is net income without the gains or losses tied to real estate sales and without any property impairment losses, then adding back depreciation and amortization of real estate assets. We will also cover core FFO, which we typically describe as FFO with adjustments for particular non-recurring 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. Our view is that these give a clearer picture of how we're operating and make comparing one period against another easier. We'd encourage you to go to our website, www.gladstoneland.com, and register for our e-mail notification service, which keeps you current on the company. You can find us on Facebook too, with the keyword the Gladstone companies, and we also have a Twitter handle of our own, @GladstoneComps. This call serves as a summary of our results, so please look over our press release and Form 10-Q, both of which came out yesterday, for additional detail. Once more, you'll find those on the Investors page of our website. At this point I'll hand the presentation back over to David Gladstone.

Okay, thanks, Erich. Let's begin with a quick look at what we hold in farmland right now. At present, we possess roughly 108,000 acres across 160 farms, plus around 45,000 acre-feet of water that's been banked. Combined, those represent approximately $1.4 billion in assets owned by us. Our farms span 14 separate states and, even more significantly, 28 distinct growing regions, and they remain fully occupied at 100%, leased out to 82 separate tenant farmers, every one of them unaffiliated with us, and the tenants farming these properties are cultivating more than 60 distinct crop varieties. With so many growing regions, tenants, and crop types, our farms — in our view, on our farms, there's — we believe there's enough diversification to deliver safety and security. The cash flow generated by rents, and we think this — such diversification assists in safeguarding the dividends we pay out to both our preferred and our common shareholders. Nothing is guaranteed in this world; anything can occur in this life. Still, at this moment, we feel quite good about collecting money from rents and distributing it as dividends. We enjoyed yet another robust quarter when it comes to acquisitions, and a reasonable volume of purchasing opportunities keeps coming our way. And in Q4, we've had a favorable beginning. A handful of farms remain that we're trying to finalize before the year wraps up. With luck, we complete all of them. It's been somewhat of a sluggish year regarding — the pandemic has prevented folks from being in the office, and that invariably decelerates matters. We remain capable of renewing every expiring lease without suffering any downtime across any of our farms, and a significant rise in those renewals mirrors the favorable momentum in all the rental rates we are presently observing across numerous regions. On the whole, activity on our farms stays solid, and appetite for the output grown on the majority of our farms stays comparatively solid. And these are items such as berries, vegetables, and nuts. As anyone visiting the supermarket, these — can confirm. Plenty of these food categories keep climbing in price, which benefits our farmers and benefits us over the long haul. Throughout Q3, the team bought 5 farms, 5,000 acre-feet of banked water, for a combined price of roughly $62 million. Furthermore, immediately following quarter end, we purchased 2 additional farms, about 2,000 more acre-feet of banked water, for a combined sum of roughly $46 million. So we have fresh investments totaling about 108,000 — $108 million since last time. Overall initial net cash yield to us on these comes to roughly 5.5%. Moreover, every lease on these farms includes certain provisions, for instance participation rents or annual escalations, which ought to drive that number upward as we move ahead in the future. Just to remind everyone, this stored water is owned by us and the local water district. We're able to apply that water in those districts to farmland in Kern County — that sub-basin where the water sits and where we've got multiple farms — and either sell it to a third party or put it to use on our own farms. Our intention is to keep this water as protection for the assets we hold in that area. Right now, none of it is being used by us. We are drawing on the water from wells on the farms, as in the past; according to them, they hadn't tapped any of it and just kept purchasing a small amount. So when a sale opportunity arose, they wanted to pass along to us that same water insurance tied to these wells. Every one of our farms presently has sufficient water, yet we appreciate the reassurance of additional water. Turning to leasing, from the start of the third quarter weeks, we completed 10 lease renewals on properties in California, Colorado, Florida and Michigan. Taken together, those renewals should produce a rise in yearly net operating income of roughly $227,000, or approximately 8%, compared with the prior leases we held. Going forward, just 3 leases are set to expire within the next 6 months, representing under 2% of our total annualized lease revenue. We're talking with current tenants on those farms and with some prospective new tenants too, and we don't anticipate any downturn — any downtime on these farms. On the whole, we still expect new leases on these farms to come in relatively flat versus where they stand now. There are a handful of other matters I want to mention before we continue. The first is going — the persistent drought out west, even with some recent record-breaking rainfall in portions of California. In Oregon and Washington, certainly, the farms have received a solid amount of water, but the mountains there have also accumulated many feet of snow. Once that snow melts, it supplies every farm in the valley. Even so, all our properties remain in a situation where ample water exists right now to finish both the current crop and next year's crop. For farms we have inside water districts, those districts possess stored water or other supplemental sources to serve our farms in the near term. Nearly every farm out west has well sites, and the majority depend on groundwater as their primary irrigation source. At these properties, we're observing a normal seasonal decline in the water table level. And none of them, naturally, have run dry. And every one of our farms right now has the pumping capacity to meet its crop needs. Something you ought to keep in mind is that cycles of wet and dry weather are standard out west. For anyone listening from the Midwest or the South, you probably wouldn't have a clue how to deal with this, but out west — California in particular — it's extremely tough. With any investment held over the long haul, we understand that dry spells and wet spells are both going to happen. That's why, when we evaluate a possible purchase out west, we seek out properties that have more than one water source, we factor drought conditions into our forecasts, and we also consider what government regulators might do, since every so often they'll simply step in and tell you they want you pumping 25% less water from the ground. We've been through that, and we've kept the government satisfied with how we manage our water; we still anticipate a robust year when it comes to participation rents. My guess is this will end up being our biggest year ever. We've posted roughly $2.4 million in participation rents in each of the last 2 years, and for 2021 we anticipate a meaningful jump in that figure. Nothing is guaranteed, but that's our current projection; the main reason is that more farms will have participation rents this year. Through the third quarter, we've booked approximately $1.8 million of participation rents. Payments have started coming in and people are giving us solid projections, so that cash is flowing to us now. On the ESG front, we're still in the process of crafting a formal policy covering the disclosures we believe remain important, and we'll keep you posted as we move nearer to completing those policies. One challenge we face with ESG is simply locating somebody capable of determining and confirming that we've done things the right way. There's considerable disagreement in Europe about what should count as part of ESG policies. Last, I'd like to touch once more, briefly, on that Gladstone acquisition — the SPAC of ours that filed recently — and restate how it connects to Gladstone Land. At present it holds a bit more than $100 million in cash; and as we've said on earlier calls, occasionally we run into farms — owners who aren't interested in selling only their land, but instead want to sell the farmland together with the operations as one package. As you're aware, a REIT such as Gladstone Land can only own operating companies to a limited degree, since operating income generally isn't allowed within a real estate investment trust. Gladstone acquisition, then, came into being to potentially seize such opportunities. We're currently evaluating a couple of them. Nothing has been signed, so no press releases have gone out. But keep watching, you'll find out what we do there. I'll pause here on operations and hand things over to Lewis Parrish, our Chief Financial Officer, who will walk you through the numbers he released last night.

Thanks, Dave, and good morning to all of you. I want to start by discussing the balance sheet. In Q3, our total assets grew by roughly $60 million as a result of newly completed acquisitions, which we funded through a combination of debt and equity proceeds. In that quarter, we obtained approximately $31 million in new long-term borrowings carrying a weighted average rate of 2.75%, fixed for a period of 10 years; regarding equity, from the start of Q3 onward, we brought in roughly $86 million in net proceeds by selling shares of our common stock through the ATM Program, which works out to a net cost of capital of 2.35% given our recently raised dividend. Over that same stretch, we also generated approximately $22 million in net proceeds from sales of the Series C Preferred Stock. Now let's turn to operating results. To start, I want to point out that in Q3 we posted net income of roughly $1.5 million along with a net loss to common shareholders of $1.6 million, or $0.052 per common share. Looking at quarter-over-quarter figures, adjusted FFO for Q3 came in at approximately $5.3 million, up from $3.7 million in Q2, which represents growth of about 41%. AFFO per share reached $0.166 in Q3 compared with $0.126 in Q2, a 32% rise. Dividends declared per share came to approximately $0.135 in both quarters. The main factor driving the AFFO increase was greater participation in rent recorded. This gain was partly offset by an incentive fee that our adviser earned during the current quarter. In Q3, we recorded roughly $1.8 million in participation rents, whereas the prior quarter showed just $19,000. Fixed base cash rents rose by approximately $1 million, or 6%, on a quarter-over-quarter basis, mostly because of additional revenue from recent acquisitions. Turning to expenses, if we exclude reimbursable expenses and certain nonrecurring or noncash items, our core operating expenses went up by about $1.1 million, a change attributable to higher related-party fees. The quarter-over-quarter rise in related-party fees reflects a higher rate used to set the base management fee rate, which took effect on July 1 and includes an incentive fee of $945,000 that our adviser earned in the current quarter, versus none earned in the prior quarter. If we set aside related-party fees, our core operating expenses fell by roughly $250,000. That decline stemmed mainly from lower property operating expenses, largely because one of our Colorado properties incurred less in water costs, along with a reduced annual filing fee, plus a drop in our general and administrative expenses owing to the extra costs recorded in the prior quarter tied to our annual shareholders' meeting. As for those additional water costs in Colorado, the effect on the current quarter's figures was approximately $260,000, or $0.01 per share, which is down from roughly $350,000 in the prior quarter. Right now, we expect to spend an extra $100,000 to $150,000 in Q4 tied to these water expenses, yet at present we don't expect those costs to persist past 2021. Now for net asset value. During the quarter, 37 farms were revalued — all through third-party appraisals, apart from 3 farms that got internal valuations. On the whole, compared with their prior valuations from a year earlier, those farms rose in value by roughly $2 million. Therefore, at September 30, our portfolio carried a value of slightly more than $1.3 billion, every bit of it backed either by third-party appraisals or by actual purchase prices; and using those updated valuations, while also factoring in the fair value of our debt along with all preferred stock, our net asset value per common share on September 30 came to $13.80, an increase of $0.64 versus last quarter. Shifting to our capital makeup and overall liquidity. Looking at leverage, and regarding our borrowings, our loan-to-value ratio across total farmland holdings on a fair value basis and net of cash stood at roughly 44% as of September 30. More than 99% of our borrowings presently carry fixed rates, and on a weighted average basis, those rates stay fixed at 3.35% for another 6 years out; thus we think that on the debt side we are currently well shielded against any future interest rate volatility. Beyond that, these borrowings have a weighted average maturity of roughly 10 years out. As for debt maturities ahead, roughly $43 million comes due across the next 12 months. Even so, approximately $27 million of that figure consists of maturities tied to 8 loans. Since their respective acquisitions, the 8 properties collateralizing those loans have risen in value by a combined $14 million; therefore, should we decide to refinance any of these loans, we don't anticipate any difficulties. So once those maturities are set aside, just about $16 million of amortized and principal payments come due across the next 12 months, or roughly 2% of our total debt outstanding. From a liquidity perspective, counting what's available on our lines of credit plus other undrawn notes, we presently hold more than $125 million of dry powder, on top of over $100 million of unpledged properties. Under our 2 largest borrowing facilities, we have ample availability, and with these lenders and others, we remain in discussions regarding new borrowings and credit facilities. All the same, credit keeps being readily available to us from multiple lenders on very favorable terms. Last, I'll address our common distributions. We just lifted our common dividend once more, to $0.0452 per share per month. Across the past 27 quarters, we've raised our dividend — our common dividend 24x, producing a total increase of 50.7% in our monthly common distributions during that period. Starting in 2013, we've paid 105 consecutive monthly dividends to common shareholders, amounting to $5.39 per share in total distributions. For our business plan, returning cash to shareholders through dividends is absolutely essential, and we aim to keep raising that dividend on a consistent schedule. Taking into account how stable and secure the underlying assets are, along with the cash flows tied to them, we feel this stock remains an attractive investment option, particularly given the inflation worries we're seeing right now. With that said, I'll hand the program back to David.

Okay, thanks, Lewis. That was a great report, and Erich gave us a great intro. So things are moving along. We're still seeing solid acquisition activity. Buying opportunities keep coming our way. We keep putting in offers; we get people signed up and positioned so we can move ahead and close. The market out there has been somewhat slow, and that's simply because folks are still responding to COVID-19. Just a handful of closing thoughts I want to share before we get too far along. We think putting money into farmland and raising crops that support healthy lifestyles — things like fruits, vegetables, and nuts — follows the trend we're seeing in today's market. Right now, roughly 85% of our total crop revenues come from farms growing the kinds of food you'd find in either the produce section or the nut section of your neighborhood grocery store; so if you'd like to know what we grow, just head to the grocery store and you'll see it. We regard these foods as being among the healthiest categories, and we keep seeing a growing trend toward organic within these food groups. Roughly 40% of our fresh produce acreage is either organic or in transition to becoming organic, and roughly 15% of the permanent crop acreage falls within this organic category. We think the organic sector will stay strong — a very strong area of growth. On top of that, more than 95% of the crops grown on our farmland is classified as non-GMO. Another big reason our business strategy focuses on pharma and raising fresh produce has to do with how inflation affects this particular segment. As the Bureau of Labor puts it, the overall annual food CPI generally keeps pace with inflation. That's why so many financial advisers urge their clients to put money into farmland, since it works as a hedge against inflation. That said, across the 40 plus years, the fresh fruit and vegetable portion of the food category has exceeded total food CPI by a multiple of 1.5x. And that's a big reason we like being in this segment too. And while prices for commodity grain crops like corn and wheat tend to be more volatile and more susceptible to global supply and demand, fresh produce is largely insulated from global volatility, mostly because these crops are generally eaten locally and within a short time after harvest, and you've got about 14 days to get a strawberry off the vine and into somebody's mouth before it goes bad. I'm telling you this because we're often confused with owning farms where farmers grow corn, soy, wheat, and we've mostly stayed away from these crops because we have to compete, they have to compete with other countries like Brazil, Argentina, the Ukraine where cost of production, even after shipping cost, is very low. Also, those growers are able to offer lower prices than American grain producers. In the U.S., grain prices have climbed significantly this year. One factor behind that is the severe drought conditions in Brazil and Argentina. Agriculture in those nations relies heavily on rainfall for irrigation. So on the whole, interest in top-quality farmland for berries and vegetables has stayed steady to robust in nearly every region where our properties sit, especially along the West Coast — covering the bulk of California, Oregon, and Washington — and let's not leave out the East Coast, above all Florida plus a few other Eastern states; things are moving along nicely everywhere; and on balance, farmland keeps delivering solid results relative to other asset classes. There's an organization known as NCREIF, which maintains a Farmland Index, and right now it consists of roughly $13.2 billion in agricultural properties, which includes everything we own. Over the past 20 years, that has produced an average return of approximately 12.3%, versus 11% for the broader REIT Index, with the S&P Index coming in lower still. And across that same 20-year stretch, the Farmland Index has never recorded one negative yield, while the REIT Index and the S&P Index each saw 4 down years during that period. Farmland has typically given investors a safe harbor when times are rough and financial markets are unsettled, since both land values and food prices — particularly for fresh produce — have kept climbing at a steady rate; so to wrap up, please keep in mind that buying shares in this company amounts to a long-term investment in farmland. In my view, putting money into our stock truly involves 2 components. It resembles gold in that it's a tangible asset — farmland, or dirt — and it's the quality farmland capable of producing food. It carries inherent worth since good farmland is finite, and urban sprawl keeps consuming it, above all in California and Florida, where many of our farms are situated. Second, I want to draw a comparison between gold and other alternative assets, because this beats them since it's an active investment that generates cash flows for investors. And we think that's superior to a bond fund given that we continue raising the dividend. We anticipate inflation, especially within the food sector, will rise, and climb to levels that drive up the value of the farmland underneath, increasing as a consequence. And we expect this to hold true particularly for fresh produce. < > Food sector, the trends are more, people in the U.S. are eating healthy foods, continuing to grow such products for distribution through < > And Gladstone Land would be nothing without the fine individuals who run and oversee it. Purchasing and leasing farmland is a complicated endeavor; so if you appreciate what we're doing, please purchase some stock and keep consuming fresh fruits, vegetables, and nuts; at this point we'll pause and take some questions from those who track us. Operator, could you please join us and explain to everyone how they can ask us some questions?

David, how do farmland prices now compare with what they were a few years back, before the pandemic, for similar properties? Have they risen 5%, 10%, or stayed about flat? How would you describe things across the different kinds of properties and markets you deal with?

Sure. If you look at the Midwest, which is the region most commonly reported on, values have climbed quite a lot this year, purely because folks are profitable. They're also purchasing plenty of tractors and that type of machinery. In the regions where we operate, there's been a fairly consistent rise across the past 10 years, and definitely across the past 3 or 4 years, as people have come to see that crops besides corn and wheat are being grown. And I'd say there's been a solid 15% gain across the past 3 years.

All right, and with the housing market as hot as it is, have you considered offloading a portion of your land to homebuilders in certain markets where the farms are adjacent to development?

We own a handful of farms situated within such areas, California being one example. You simply cannot offload your land to a developer and let them go build whatever they please on it. In California, you must secure approval from the local city, and you have to be within the city districts; so if your property is in Watsonville, it has to fall inside the town limits of Watsonville; at that point the local government officials are the ones who make that call. Should you be located outside those boundaries, the matter has to go on the ballot for a vote; and if you have ever laid eyes on a California ballot, they stretch roughly 4 feet long; those ballots are absolutely packed with items. And one such item would be — I want to take that lot sitting right beside the — right beside this one or that one and put houses on it, and those proposals invariably get voted down. People in California have no appetite for constructing additional houses; and as a result, you now have California pushing to take neighborhoods and demolish the houses and put up apartment buildings or condos, anything to boost the quantity of land being utilized for that purpose. And the situation in California is genuinely tough. They are likely 15% short on house built or places to live, and they simply cannot seem to get out of their own way when it comes to regulations. And I am aware of plenty of farms that would do that. We have one sitting right inside of Watsonville. It is a small — mostly — no, mostly strawberries on that one. And I believe someday should someone turn up and want to purchase it, but that is not going to be a big hit; it is going to be a nice hit. But nobody has turned up as of yet. And one reason is, frankly, the strawberry fields sit in an area that is not the best part of town. Consequently, we have plenty of old houses surrounding it, and they have not made many changes. And unlike plenty of cities in California, not many people are moving to Watsonville. Consequently, we have not faced the pressures that would exist if we were next to Los Angeles or San Francisco or even some of the other large cities. So I would say, one day, someone will turn up and want our big farm, which is — it is probably 500 acres, and it sits right next to the ocean, and somebody is going to be able to get that through and build on it because it is an hour and 20 minutes to LAX, and that is going to be a big one. We paid about $25,000 in total for everything on that farm. It is probably worth $80,000 an acre today. Suppose you were able to get it zoned for townhouses — then that land would be valued at $1.5 million per acre. So sure, at some point down the road, once I'm no longer around, all of you fortunate folks will reap the rewards when we sell off a portion of these farms. At this moment, though, selling anything isn't something we're interested in. Our goal is to create an amazing company that holds plenty of farms and to try to close the gap with certain larger agricultural operators in the United States. As everyone is aware, there's a gentleman who has — well, he's really no longer active in the business, yet he keeps acquiring a great deal of land across the country. He holds roughly 230,000 acres, making him the biggest farmer, and we've got to catch up to him; that will take some time, since he's purchasing farms with tax-free dollars. Still, I believe we're in good shape, Rob, and I believe we'll simply keep doing the same thing daily over the next 10 years until we've built up a truly large farming operation.

Alright. Then my final question. Regarding that acquisition entity, I'm asking whether there are chances you're reviewing that would be too large for a taxable REIT subsidiary. Is that why you're choosing that path instead of simply placing a lot of the operations into a taxable REIT subsidiary for now?

Yes. They exceed the size limit and they would eclipse everything else. And as you're aware, if we violate that rule, we're barred from the REIT business for 5 years; so I don't want to break it. So that's the reason we're doing this. And we continue to have these opportunities come up saying, we'd like to sell the whole thing, and we say, well, hold on. Once we're public, we'll be able to distribute some of the $100 million that we have in that — our SPAC and also give you some publicly traded stock; we're working on some right now. We've got some in here. And when's our acquisition call? Did we have a date? Anybody know?

Not as of now.

There isn't a date available at this point. All right. He's submitting paperwork in 7 days, right? No, that hasn't happened. So it'll take place before long. Naturally, you'll receive one, Rob. And possibly around that time, we'll have something, slightly more settled. Finding acquisitions to make, I doubt that will be an issue. Plenty of those have come across our radar. Our goal is to acquire a number of fairly sizable properties and launch as a varied portfolio instead of one focused on a single activity, then keep adding smaller farms and operations while building a solid operating crew. Currently, we lack an operating team. We'd need to approach one of our tenants for help with part of that. But until we've purchased the first 2 farms, I can't say how everything will pan out.

Nice work on a solid quarter; seems like for a second straight quarter, lease renewals added more than 10% to net operating income growth. Does that say more about the specific farms that had leases renewed? Or does it reflect the broader inflation environment, in your view?

A bit of each, we'd say. Clearly, certain regions of the country exist where, had we been renewing leases there, the bump might have been smaller or possibly even nonexistent. However, several of the farms we've worked through — negotiations happened in Northern California, Michigan, parts of Florida, the Midwest. Rents in those specific markets are ticking up somewhat, especially in the Midwest, as David noted, given this year's commodity prices; Florida, though, has remained quite a robust market throughout. Central and Northern California has — in Southern California, cap rates have tightened somewhat, yet lately none of our renewals have occurred there. So a bit of each.

Understood. Understood. And in the next year, roughly, where are the majority of lease renewals going to happen?

For the remainder of 2021, there's only a single farm; 3 leases expire in '21 during the coming — well, actually, I suppose within the coming 6 months, 3 leases; however, 2 of those are tenant termination options that can be exercised in the next 5 days. Our belief is the tenant will not exercise the option on either of them. So really there's only one renewal we're working on. It's for a farm located in Colorado, and we're near to wrapping up negotiations with that tenant. Gross rent will probably stay flat, though we anticipate a meaningful drop in the operating expenses that will fall on us. Thus, we'd hope to see an NOI increase for us in that case.

Understood, understood. Now onto how we're funding things. At present, it looks like your loan-to-value ratio is fairly solid. Could you share a bit about what you intend to do to finance fresh transactions moving forward?