Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Okay, thanks, Jesse. That was a good intro. I'm David Gladstone, and I'd like to welcome everyone to the conference call covering both the quarter and the year for Gladstone Land. We're grateful to all of you for dialing in today. It means a lot that you've set aside time to hear what we have to present. To get us started, we'll turn things over to Michael LiCalsi. He serves as our General Counsel and Secretary, and he also holds the title of President at Gladstone Administration, the entity that acts as administrator for each of the Gladstone funds. Michael, would you like to take it from here?

Thank you, David — I appreciate that, and I'd like to wish everyone a good morning. Today's report may include forward-looking statements as defined under the Securities Act of 1933 and the Securities Exchange Act of 1934, and those statements address how we expect to perform going forward. Such forward-looking statements come with specific risks and uncertainties, and they are based on the plans we currently hold, which we believe to be reasonable. A number of factors could cause our actual results to differ materially from any future results expressed or implied by these forward-looking statements, including all the Risk Factors described in our Form 10-K and the other documents we file with the SEC. You can find those on our website, www.gladstoneland.com. In particular, head to the investors page or the SEC's website, sec.gov. In addition, there's no requirement for us to make public updates or revisions to any of these forward-looking statements—whether that's due to fresh information, upcoming events, or anything else—unless the law mandates it. During today's discussion, we'll be referring to FFO, or funds from operations. As a non-GAAP accounting term, FFO is calculated by taking net income and removing gains or losses tied to real estate sales along with any property impairment losses, then adding back depreciation and amortization on real estate assets. We might also discuss Core FFO, which we typically describe as FFO with adjustments made for specific revenues and expenses that don't recur. We also look at Adjusted FFO, which takes Core FFO and makes additional adjustments for certain non-cash items — for example, turning GAAP rents into normalized cash rents. Our view is that these figures provide a clearer picture of how we're operating and make it easier for you to evaluate our results across different periods. We'd encourage you to stop by our website while you're at it. That address, once more, is gladstoneland.com. You can sign up for our email notification service, which will keep you informed about developments at the company. We're also on Facebook. Search for the Gladstone Companies, and on Twitter you can find us at @gladstonecomps. This call will just walk through the highlights of what we reported, so for the full picture please take a look at the press release and the Form 10-K, which both came out yesterday. Those documents are available on the investors section of our site. And with that, I'll hand things back over to David.

All right, thank you, Michael. Let me begin by giving you a quick overview of the farmland we hold right now. At present, we possess roughly 113,000 acres across 164 farms, plus approximately 45,000 acre feet of water held in banking. Taken together, the land and the water carry a value of around $1.5 billion. The farm spans 15 separate states and, even more significantly, 29 distinct growing regions; those growing regions shape nearly everything about the operation and what it can produce. Our farms remain 100% occupied, leased out to 85 separate tenant farmers, every one of them unaffiliated with us. The people renting these farms are cultivating more than 60 distinct crops. With so many growing regions, tenants, farms, and crop types, I'd say the diversification is broad enough to deliver safety and security for the cash flows generated by rents. In our view, that diversification serves to safeguard the dividends we distribute to shareholders. We enjoyed another busy quarter in the year that ended 2021. Across that year, new acquisitions totaled $294 million. Roughly half of that figure, $147 million, was completed in the fourth quarter. Though it was a solid year on the earnings front, the acquisitions made in 2021 didn't have as large an effect as we'd have liked; we're eager to report what we anticipate will be even better results in 2022. Participation rents had a strong year; in fact, it was an outstanding year; we booked roughly $3.4 million in extra income in the fourth quarter; that brought total participation rents to approximately $5.2 million for the year, over double what was recorded in either of the two preceding years. The gain mostly stemmed from participation rents and their components on particular farms turning active for the first time in 2021; a handful of additional farms with participation rents are set to begin in 2022, so we ought to see a modest bump there. That said, we can't yet put a figure on participation rents for 2022, since those amounts depend heavily on yields realized on the farms and on the prices at which crops are sold. We'll have to hold off until later in the year before any of those numbers can be announced. We keep managing to renew every expiring lease without any interruption on any of our farms, specifically the farms in our main area of focus, meaning both coasts. As you're aware, we have substantial exposure in California and Florida; we keep completing renewals at elevated rental rates; we restructured the lease on one of our Midwest farms, which had been producing a smaller amount of rent recognized up front, and I'll cover that shortly. On the whole, activity on our farms stays robust and appetite for products grown on the majority of these farms stays elevated. Take items such as berries, vegetables, and nuts. Anyone who shops at a grocery store knows that costs for these and numerous other food categories keep climbing. When it comes to the crops growing on these farms, we're experiencing inflation. In Q4, the team picked up 7 farms along with roughly 20,000 acre feet of water — banked water. Altogether, that came to approximately $147 million in spending. On the whole, the initial net cash yield we're getting from these acquisitions sits at around 5%. Beyond that, every lease tied to these farms includes particular terms — participation rents or annual escalations, for instance — that ought to drive that number upward going forward. Keep in mind, this banked water belongs to us. That said, it sits in storage within a water district. We're able to apply that water to any farmland in Kern County — the sub-basin located there — where we hold a number of farms, or alternatively we can dispose of it to third parties through the open market. Our intention is to retain the water so it helps protect our regional assets from any water shortages down the road. Every one of our farms right now has sufficient water, yet we value the reassurance that comes with having surplus water. Turning to leasing activity, starting in Q4 we completed 10 leases and renewed properties across 4 separate states. On the whole, those renewals should bring about a drop in annual net operating income of roughly $138,000 relative to the earlier leases. That said, this drop stems mostly from a single lease renewal on a single property where we put in $560,000 to offset part of the farm's operating cost, in return for added substantial participation rent components reaching about 80% of gross revenue generated by that farm. We took that step since the farm required some extra support. Given present commodity prices and yield projections, we believe we'll wind up at minimum comparable to what we'd have gotten under the farm's earlier lease. Possibly even stronger should the farmer enjoy a good year. We won't find out the outcome until year-end for this arrangement we entered into. Setting that single lease aside, our remaining lease renewals should produce gains in annual net operating income of roughly $247,000, or near 8%, compared with the earlier lease. Going forward, just 1 lease is set to lapse within the coming 6 months, and it represents under 0.5% of our overall annualized lease revenue. We're talking with the farm's current tenant plus a few prospective new tenants, and at present we don't anticipate any downtime; as things stand, we expect the new lease on this farm to stay fairly flat versus today's level. There are a few things I want to bring up before we continue. First, there's the persistent drought out West. Water remains an issue there, even though I believe they received some extra water during that most recent round out that way. Even with some record-setting rainfall recently in certain parts of the Western U.S., the whole region is still grappling with drought. That said, every one of our properties remains situated so that they currently have enough water to finish at minimum the present crop and in all likelihood the remaining crops they'll plant over the coming six to nine months. For farms we own inside water districts, those districts possess stored water or other backup supplies to serve our farms over the near term. Nearly every farm we have in the West has wells located on it, and the majority depend on groundwater as their primary irrigation source. On those properties, we're observing the usual seasonal decline in water levels, though it isn't significant enough to concern us. Something you ought to understand: cycles of wet and dry conditions are standard in the West, particularly in California. Across any long-term investment, we recognize there will be periods of drought as well as periods of wetness. Whenever we underwrite a possible investment in the West, we seek out properties that have several water sources. We factor in a drought scenario, and we additionally account for possible government regulations. Turning to how our ESG policy is progressing, the work continues; we now have a solid list of items that would be included in our ESG disclosure. We'll keep updating you as we move nearer to completing these policies. As we've noted on earlier calls, occasionally we encounter farmland owners interested in selling both their farmland and their operations. As a real estate investment trust, Gladstone Land has limited capacity to run or own operating companies, since operating income generally isn't allowed within a real estate investment trust. The Gladstone Acquisition SPAC was formed to potentially seize these opportunities in which Gladstone Land couldn't take part. I'll pause there; that covers enough regarding operations. I'll hand things over to our CFO, Lewis Parrish, who will discuss the numbers with you further. Lewis?

Okay, thanks David, and good morning to all of you. Let's start with a quick look at the balance sheet. In Q4, we saw total assets rise by roughly $90 million, driven by acquisitions we completed. Those were funded through a combination of debt and equity. On the financing side, since Q4 began, we've taken on approximately $31 million in new long-term debt at a weighted average rate of 3.4%, locked in for over 9 years. When it comes to equity, since the start of Q4, we brought in around $49 million in net proceeds from common stock sales through our ATM program, plus roughly $35 million in net proceeds from Series C preferred stock sales. Now turning to operations. Net income for Q4 came in at roughly $2 million, with a net loss to common shareholders of $1.4 million, or $0.042 per common share. For the full year, net income was about $3.5 million, and net loss to common shareholders was $8.7 million, or $0.286 per common share. Looking quarter over quarter, adjusted FFO in Q4 was approximately $6.7 million, up from $5.3 million in Q3 — a rise of about 28%. AFFO per share was $0.199 in Q4 compared to $0.166 in Q3, which is a 19% increase. Dividends declared per share came to about $0.136 in Q4 versus $0.135 in Q3. On an annual basis, Adjusted FFO for 2021 was roughly $20.4 million, compared to $14.3 million in 2020 — up 42%. AFFO per share was $0.668 in 2021 versus $0.641 in 2020, a 4% increase. The year-over-year gain in per share figures was somewhat held back by an early lease termination fee we received in Q1 2020, which added about $0.10 per share to AFFO last year. Dividends declared per share were $0.541 in 2021 and $0.537 in 2020. Our common dividend payout ratio was about 81% of AFFO in 2021, compared to 84% in 2020. The main factor driving AFFO higher was increased top-line revenues, partly offset by higher related party fees and additional borrowing costs. Fixed-base cash rents grew by about $1.2 million, or 7%, quarter over quarter, and by about $17.6 million, or 35%, year over year; these gains were largely due to additional revenues from recent acquisitions. As David noted, in Q4 we recorded about $3.4 million in participation rents, compared to $1.8 million in the prior quarter. For the full year, that brought participation rents to about $5.2 million, versus $2.4 million last year. During 2021, we had 39 farms under leases with an active participation rent component, compared to 19 farms in 2020. We also have a few more farms with participation rent components set to come online later in 2022. When you look at things on a same-property basis, and if we include participation rents—though we leave out income from early lease terminations—our lease revenues for 2021 rose roughly $2.3 million, which works out to 4.5% more than what we saw in 2020. Now flipping to expenses: if we set aside reimbursable expenses along with certain non-recurring or non-cash items, our core operating expenses went up by roughly $679,000 comparing one quarter to the next, and by approximately $3.6 million when comparing one year to the next. Higher related party fees were mainly what drove both of those increases. The base management fee we pay our advisor went up because of additional assets we acquired during the year, and the incentive fee rose because of higher pre-incentive fee FFO that we achieved in each of the current periods. If you take out related party fees, core operating expenses actually dropped by roughly $256 thousand quarter-over-quarter but grew by approximately $652 thousand year-over-year. The quarter-over-quarter decline came mostly from lower water costs at one of our Colorado properties, though that was partly offset by extra legal fees we spent protecting water rights on some California farms. The year-over-year increase came mainly from additional water costs at those Colorado and California properties, plus a rise in property tax expenses tied to certain recent acquisitions and changes in some lease structures. One final point on expenses. In 2021, we spent roughly $572,000 in extra water costs connected to the Colorado property. We don't anticipate those costs carrying over into 2022. On top of that, we recorded about $282,000 in costs for protecting our water rights on certain California farms; right now we do expect those costs to keep going at comparable levels over the next few years. Now let's talk net asset value. During the quarter, 24 farms and one cooling facility were revalued, every one of them using third-party appraisals. On the whole, these farms gained about $2.1 million in value compared to their prior valuations from roughly a year earlier. At December 31st, our portfolio was valued at approximately $1.5 billion, and third-party appraisals or actual purchase prices backed all of it. Using these updated valuations, and factoring in the fair value of our debt along with all preferred stock, our net asset value per common share at December 31st came to $14.31, an increase of $0.51 from the prior quarter. Shifting to our capital makeup and overall liquidity. From a leverage perspective, and when it comes to our borrowings, our loan-to-value ratio and our total farmland holdings on a fair value basis and net of cash stood at roughly 44% at December 31st. More than 99% of our borrowings are at fixed rates right now, and on a weighted average basis, those rates are locked in at 3.36% for another six years; we think we're well-protected on the debt side at present against any future interest rate hikes. As for debt maturities coming up, we've got about $65 million due over the next 12 months. But roughly $48 million of that comes from a variety of loan maturities, and the properties serving as collateral for those loans have risen in value by a combined total of roughly $24 million since each was respectively acquired. Should we decide to refinance any of these loans, we don't anticipate any difficulties in doing so. If you set those maturities aside, we have only about $17 million of amortizing principal payments scheduled to come due in the next 12 months, which works out to roughly 3% of our total debt outstanding. Looking at liquidity, counting what's available on our lines of credit and other undrawn notes, we presently have roughly $115 million of dry powder, plus more than $35 million of unpledged properties. We increased the size of our MetLife facility not long ago. That leaves us with ample availability under each of our two largest borrowing facilities, and we're also still contacting new lenders for additional borrowings. On the whole, credit remains readily available to us from multiple lenders. Last, I'll address our Common Distributions. We recently raised our common dividend once more, to $0.0453 per share per month. Across the past 28 quarters, we've raised our common dividend 25x, which produced an overall increase of 51% during that period. Starting in 2013, we've paid 108 consecutive monthly dividends to common shareholders, amounting to $5.52 per share in total distributions. Our aim is to keep increasing the dividend at regular intervals. Given the relative stability and security of the underlying assets and the related cash flows, we still believe this stock offers a compelling investment alternative, especially considering today's inflationary environment. With that, I'll hand the program back to David.

All right, thanks, Lewis. That was a solid report. Buying opportunities keep coming our way, and acquisition activity is still strong for us. Before we take some questions, there are just a few last things I want to mention. Our view is that putting money into farmland and raising crops tied to healthy living—things like fruits, vegetables, and nuts—lines up with what we're seeing in today's marketplace. All told, among every region where our farms sit, demand for top-quality farmland used to grow berries and vegetables is holding steady or running strong, above all down the West Coast—covering the bulk of California, Oregon, and Washington—and along the East Coast, particularly Florida plus a handful of other states. All in all, farmland keeps delivering solid results relative to other assets. The NCREIF index—I bring it up frequently, since NCREIF is the farmland index, and right now it represents roughly $13.8 billion in U.S. agricultural properties, posting an average yearly return near 12.6% across the last 20 years, without a single down year in that stretch. That matches the broader REIT index and beats the S&P index, and both of those saw four losing years during the same window. To wrap up, keep in mind that buying shares in this company amounts to a long-term commitment. This is a slow-moving piece of machinery that earns money every single day. In my view, there are really two things to say about putting money into our stock. To start with, it resembles gold in being hard assets. I'm talking about dirt here. It's been around for centuries, possibly longer. It carries intrinsic worth, since good farmland is finite and urban development keeps consuming it, above all in California and Florida. We hold lots of farms in those places, and eventually someone will come along and purchase one of our farms in order to put houses on it. Next, in contrast to gold and other alternative assets, this is an active investment asset with cash flows going to investors, and in our view that beats a bond fund, because our dividend keeps rising. We anticipate inflation, above all in the food sector, will climb, and we anticipate that underlying farmland values will climb along with it. Our expectation is that this holds especially true for the fresh produce food sector, and that the trend of a growing number of people across the U.S. eating healthy foods keeps expanding. Now let's take some questions from those who follow us. Operator, would you come on and explain how they can ask a few questions.

Good morning, guys.

Good morning.

Morning.

Hey, in Q4 you folks really put a tremendous amount of money to work. Could you maybe talk about where the pipeline stands right now, and perhaps share some details on how much capital you figure you might be able to deploy next year? You know, it looks like each year compared with the one before, you keep putting more and more money out the door. Do you expect that pattern to keep going?

That's our expectation. As you're aware, during 2019 and 2020, we completed roughly $250 million worth of acquisitions annually, nearly $300 million, and $294 million in the current year. Every one of those years typically gets off to a slow start. I recall we closed over $100 million, I believe approaching $200 million, in acquisitions during last year's fourth quarter. This year it's near $150 million; replenishing the pipeline we drained in Q4 takes us some time at the start of the next year, and that's what we're observing at the moment. There are deals we're currently evaluating. They sit at different stages. It's difficult to predict what we'll accomplish for the year at this point, though internally we do sort of set a target of somewhere between $200 million and $300 million. We recognize that's quite a broad range to pencil in, yet it simply hinges on the opportunities we come across and which of them match our investment criteria. At present, we have somewhere between two and five deals that have moved past the initial review stage and are being evaluated. I can't say whether we'll close anything during Q1, but with luck, by early Q2 we'll have something to announce.

All right, that's helpful. For financing these fresh transactions, which places are you intending to pull capital from?

Okay, at present, thanks to what’s accessible through our credit line, the MetLife facility, and some other loans we’ve finalized but haven’t drawn down, because we don’t need the cash immediately, we’re sitting on $115 million of dry powder ready to be put to work today. And that isn’t even levered, so when you divide it by — you know, at a 6% LTV — it brings us to roughly $300 million in acquisitions; on top of that, we hold $35 million in unpledged properties. So that would be the initial source. Beyond that, though, we do have Series C sales still coming in at a strong pace. There’s capacity under our common ATM, which we used quite effectively in 2021. I believe we sold just over $170 million worth; that pricing continues to look very appealing to us. Naturally, extra borrowings whenever we require them too; at this moment we have abundant funding sources.

Awesome. Could you remind me of the interest rate on the line of credit?

There's a minimum on it of 2.5%, and that's the level it currently sits at; it equals LIBOR plus a margin of 2%.

All right, I see. I'd like to understand what was going on with that Midwest farmer's operations — the one whose operating costs you've decided to take on in return for participation rents. What kinds of issues was that farmer dealing with?

There was a single farmer who had been renting a pair of properties from us. That individual was heading toward bankruptcy, so we ended up freeing him from the agreement and lining up a replacement tenant. With regard to the first of those two farms, the incoming operator already knew it well and felt secure enough to commit to a multiyear arrangement with us. As for the second property, it was fairly unfamiliar to him, which meant he wasn't at ease putting his name on a long-term contract there. So here's what we arranged: we signed a single-season deal under which we extend him most of the operating expenses up front, as a set figure, and then at year-end we receive the bulk of the revenue generated by that farm — 80% of gross proceeds. Everybody knows that right now commodity prices are quite robust, and we have faith in this farmer's skill along with what that land can produce. Our expectation is that we'll end up profitable, though naturally there's no certainty of that. Once this initial lease term wraps up, our hope is that the tenant grows more at ease with the property, allowing us to get a long-term agreement signed with him when the year closes.

Okay. Regarding the rise in operating expenses, I think the figure mentioned was $560,000. Is that correct?

Yeah, that was the fixed commitment that we gave to this new tenant. Yes.

Understood. Last thing from me — is there anything new you can share about the SPAC and where that stands? And congrats on the asset management firm's new IPO. I'd also really like to hear what their goals are.

It's tough to discuss other funds while we're on this call, but honestly, there are some opportunities we have, and we're going to attempt to complete them quickly so the SPAC can be funded. There's no certainty — these things are always difficult to pull off and far harder than we ever anticipated when we entered that line of business. At present, the SPAC is moving forward smoothly, and we're hoping to be able to share an announcement within the coming, I'm not sure, 60 days. When it comes to the remaining companies, every one of them is performing very well. If you were to examine all four of our public companies individually, they are performing very well, and that includes this one, naturally.