Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks, Donna. That introduction was well done. I'm David Gladstone, and I'd like to welcome everyone to the quarterly conference call for Gladstone Land. Things are rough for us this morning, so we're keeping it on mute. I appreciate that kind introduction, Donna. My name is David Gladstone, and I'm glad you could join the quarterly conference call for Gladstone Land. Thanks for dialing in today; we're grateful you've taken the time to hear our presentation, and we're eager for some solid questions. To kick things off, we'll turn to Michael LiCalsi. He serves as our General Counsel and Secretary, and he also holds the role of President at Gladstone Administration. Michael, the floor is yours.

Thanks, David. Today's report could include forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934 — among them, statements regarding our future performance. Such forward-looking statements involve specific risks and uncertainties tied to our present plans, which we view as reasonable, and numerous factors might cause our actual results to differ materially from any future results expressed or implied by these forward-looking statements, including every risk factor described in our Forms 10-K and 10-Q and other documents we file with the SEC. You can locate those on our website — more specifically, the Investors page, found at gladstoneland.com — or on the SEC's website, sec.gov. We don't have a duty to publicly update or revise these forward-looking statements, whether due to fresh information, upcoming events, or any other reason, unless the law mandates it. Now, during today's discussion, we'll cover FFO, or funds from operations. This is a non-GAAP accounting term, described as net income, minus gains and losses from real estate sales and any property impairment losses, plus depreciation and amortization on real estate assets. We might also discuss core FFO, which we typically describe as FFO modified for specific non-recurring revenues and expenses, along with adjusted FFO, which takes core FFO and makes further adjustments for particular non-cash items, like converting GAAP rents into normalized cash rents. We think these provide clearer insight into how we're performing and make it easier to compare one period against another. Please take a moment to check out our site. Again, that's gladstoneland.com. You can subscribe to our email alerts to keep current with what's happening at the company. You'll also find us on Facebook — search for The Gladstone Companies — and on Twitter at @GladstoneComps. This call offers a summary of what we've reported, so please look at our press release and 10-Q, both of which came out yesterday, if you want the full details. As I mentioned, those are available under the Investors section of the site. At this point, I'll hand things back over to David.

Alright, thank you, Michael. Let's begin with a quick look at what we hold right now. At present, roughly 113,000 acres of farmland are owned by us. Those acres are spread across 162 farms. On top of that, we hold around 45,000 acre-feet of banked water, worth. Combined, everything here — the banked water plus every one of those farms — carries a value of roughly $1.5 billion. Our farmland sits in 15 separate states and, even more significantly, within 29 distinct growing regions. Every one of our farms remains 100% occupied, and they're rented out to 86 separate tenant farmers, none of whom have any relation to us. Over 60 varieties of crops are being cultivated by the tenants on these properties. With so many growing regions, so many tenants, and so many crop types across our land, we regard that level of diversification as enough to safeguard and secure the cash flows generated by rental income. In our view, this diversification also helps shield the dividends distributed to our shareholders. Following the close of almost $150 million in farm purchases during the fourth quarter of 2021 last year, we've stayed fairly quiet on the buying side over the past three months. Activity is ramping up for us during the final six or seven months of this year, which, as you should see, tend to be our busiest stretches. You'll watch us finalize some transactions, and we put out an announcement on each one as it gets done; still, mostly because of those acquisitions made last quarter, and with help from interest patronage we received from the Farm Credit folks we borrow from, we turned in yet another solid quarter operationally. We're just finishing up a year in which $5.2 million of participations from our last rents was reported by us, and a handful of additional farms carrying participation rent provisions are set to come online this year that weren't in place last year; we're feeling optimistic about delivering a good result for 2022. That said, these figures depend heavily on the yields the farms achieve and the prices at which crops get sold. We'll have to hold off until later in the year before we can estimate and report those numbers. So that we can keep renewing every expiring lease without any downtime on any of our farms — that's exactly what we did, and we're hopeful we can keep that going. As for farms in our main regions of focus, which run along each of the coast, we keep executing renewals at higher rent levels. When a lease structure changes, as happened on one of our farms, it cost us a bit of income, but we'll cover that shortly. Broadly speaking, operations across our farms stay strong, and demand for what's grown on most of our farms stays elevated. Think products such as berries, vegetables, and nuts. Anyone walking into a grocery store can see that prices for these goods keep climbing. The main factor behind our reduced acquisition activity through this point in the year is simply that we've grown far pickier about which farms we're willing to consider. Given the widespread economic turbulence across the country at the moment, we think this is the right moment to take a more cautious stance with our capital, so our focus is limited to deals we view as considerably lower-risk than other investments available to us than many alternatives on the market. This, naturally, works to the benefit of our shareholders. Turning to leasing activity, we have completed seven lease renewals since the year began, covering properties in four separate states. Taken together, those renewals should produce a roughly $580,000 drop in yearly net operating income. One particular lease is largely responsible for that. Apart from that situation, we're doing very well. That single renewal concerns a property where we put in $560,000 to cover part of the farm's operating cost, and in return we added a meaningful participation rent element to the lease. The tenant wanted to test how the arrangement performed before committing to a long-term fixed rate lease; we will receive 80% of the gross revenue the farm earns this year. Given today's commodity prices and yield projections, we anticipate landing in a comparable position to where the prior lease on this farm would have put us, though the final outcome won't be clear until year-end, once the crops are sold. Setting that one lease aside, our remaining renewals should generate an increase in yearly net operating income of roughly $55,000, which works out to about a 3% gain relative to the old leases they replaced. Going forward, just a single lease is set to expire within the coming six months. It represents under 0.5% of our total annualized lease revenues. We're talking with the current tenant on that farm, along with some possible new tenants, and at present we don't anticipate any downtime there. Our current expectation is that the new lease on that farm will come in relatively flat, perhaps slightly above where it stands now. There are a couple of additional points I want to raise before we continue. The first is the persistent drought out West. Even with record-breaking rainfall across the Western United States this winter, plus a fairly wet April, the whole region is still coping with a drought that has lasted multiple years. That said, every property remains in a position where our farmers have sufficient water right now to finish out this year's crop at minimum, and I believe we'll be in good shape in the years ahead. For farms we hold within water districts, those districts possess stored water or backup sources sufficient to cover our farms. The water has to be purchased. As you’re aware, a significant amount of the water beneath our land belongs to us. Wells exist on virtually every one of our farms, and for the majority of those properties, groundwater serves as the primary irrigation source. On these holdings, we’re observing the usual seasonal declines in underground water levels. Something worth noting: out West, particularly in California, alternating wet and dry cycles are simply normal. Across any long-term investment, we recognize that drought years and wet years will both occur. Whenever we evaluate a possible acquisition, we seek out properties that have several water sources, we factor drought conditions into our models, and we also account for possible government rules that could require us to cut back on water usage. On the ESG front, this is a relatively new area for us. We keep working toward creating a formal policy regarding the disclosures we believe are material. No other companies or REITs resemble ours, so we haven’t seen anyone make an announcement that would suit what we’re currently doing. Just so you’re aware, quite a few of our farms host large solar arrays that supply power for farm operations, and we’ve held talks with various groups about adding wind power and solar leases to additional farms too. We simply want to make sure such additions won’t disrupt the tenants already on those farms, since those existing tenants are, at the end of the day, our key business partners. Lastly, as we’ve noted on earlier calls, occasionally we encounter farmland owners who wish to sell their land together with their operation as one package. As a real estate investment trust, Gladstone Land cannot accept operating income, since REITs generally aren’t allowed to earn it; we do have certain other initiatives underway that might let us capitalize on such opportunities in which Gladstone Land itself couldn’t take part. I’ll pause there. That’s plenty on the day-to-day operations. I’ll hand things over to Lewis Parrish, our CFO, who will discuss the financials with you further.

Okay, thanks, David, and good morning to all of you. I want to start with a quick look at what we've been doing on the financing front. From the start of this year, we've brought in roughly $4 million in fresh long-term borrowings, sourced from three separate lenders, carrying a weighted average rate of 3.18%. That rate is locked in for the coming 7+ years. Turning to equity, since the year began, we've generated approximately $10 million in net proceeds by selling shares of our common stock through the ATM program, plus roughly $15 million in net proceeds from sales of the Series C preferred stock. Now on to how operations performed. To kick things off, I'd point out that in the first quarter we posted net income of roughly $1.2 million, alongside a net loss to common shareholders of $2.7 million, which works out to $0.079 per common share; looking at it quarter over quarter, adjusted FFO came in at approximately $6.4 million for the first quarter, versus $6.7 million during last year's fourth quarter. AFFO per share landed at $0.185 in the first quarter, compared with $0.199 in the fourth quarter of 2021. Dividends declared per share came to about $0.136 in each of those two quarters. What mainly drove the drop in AFFO was $3.4 million in participation rents booked in the fourth quarter of 2021, against none booked in the first quarter of 2022. Partly making up for that was roughly $2.8 million of interest patronage, or refunded interest, recorded in the current quarter tied to our loans from Farm Credit. Fixed base cash rents rose by roughly $700,000, or 4%, mostly because of extra revenues generated by acquisitions completed recently. Looking at expenses, if you set aside reimbursable expenses along with certain non-recurring or non-cash items, our core operating expenses stayed more or less level quarter over quarter. Total related party fees declined in the quarter, largely because our advisor earned a smaller incentive fee during the current quarter. That said, it was offset by growth in both property operating expenses and G&A expenses. The rise in property operating expenses came from added property tax obligations on certain properties, plus annual state filing fees we must pay on every one of our properties. The G&A increase stemmed mostly from higher professional fees, especially additional audit and appraisal costs. Shifting to net asset value; 34 farms underwent revaluation in the current quarter, every one of them through third-party appraisals. Taken together, those farms gained about $13.2 million in value relative to their prior valuations from roughly a year earlier; those gains amounted to roughly a 4% bump in the value of these properties. We saw particularly strong appreciation across the board on our California properties, which included properties growing fresh produce row crops in the Central Coast, along with farms growing nuts in the Central Valley. To me, that speaks to how well our team has done at finding farms with solid water sources that can hold up under severe drought conditions such as the ones we're seeing out there right now. Out west, water is scarce, particularly right now, so we're observing that land with just a single water source is losing value, whereas pricing for farms that have more than one water source keeps climbing. By March 31st, the worth of our portfolio came to roughly $1.5 billion, and every bit of that figure rested on either appraisals done by third parties or the prices we actually paid. Using those refreshed valuations, and factoring in the fair value of our debt along with all preferred stock, net asset value per common share as of March 31st stood at $15.54 — a gain of $1.23 versus the prior quarter. Driving that rise were mainly the farm value appreciation I mentioned earlier, plus how rising market interest rates affected the worth of our fixed long-term borrowings. Now to our capital structure and total liquidity. Looking at leverage, and in terms of our borrowings, our loan-to-value ratio across all farms and holdings measured on a fair value basis and net of cash came in around 40% as of March 31. Right now, more than 99% of what we owe carries fixed rates, and those rates are locked at a weighted average of 3.25% for another 5+ years. Our view is that on the debt side, we're presently well shielded against any additional rate increases. As for debt maturities ahead, roughly $66 million dollars comes due within the next 12 months. That said, approximately $48 million dollars of it consists of assorted loan maturities, and the properties backing those loans have collectively risen in value by around $20 million dollars since each was acquired; should we decide to refinance any of them, we don't anticipate difficulties. Setting those aside, only about $18 million of amortizing principal payments falls due in the next 12 months, which is under 3% of our total debt outstanding. On liquidity, counting what's available through our lines of credit and other undrawn notes, we've got more than $175 million of dry powder right now, plus $30 million of unpledged properties. We just upsized our MetLife facility; that leaves us with plenty of room under both of our biggest borrowing facilities, and we're still approaching new lenders for extra borrowings too. Last, on our common distributions, we just lifted our common dividend once more, to $0.0454 per share each month. Across the last 29 quarters, we've boosted our common dividend 26 times, which amounts to a total increase exceeding 51% during that period. Starting in 2013, we've made 111 straight monthly dividend payments to common shareholders, and our aim is to keep raising the dividend on a regular schedule. Farming remains a steady asset class and keeps performing nicely despite all the uncertainty and volatility in the markets today; our view stays that this stock provides an attractive investment option, particularly given today's inflation and recession worries. Having said that, I'll now hand things back to David.

All right, Lewis. Thanks. Good report. For us, acquisition activity is still strong. Opportunities to buy keep coming our way; a handful of farms are either under contract or nearly under contract, and we're hoping to share news of some closings in the coming months. Our diligence process still has to be finished, and at times it moves quite slowly, since you're waiting on appraisals and other items required to get one of these investments closed. Certain of these properties haven't changed hands in the last 100 years, so cleaning them up and getting them ready for us to purchase takes some time. Another point I want to make: we believe putting money into farmland and raising crops that support healthy lifestyles, like fruits, vegetables, and nuts, aligns with the trend visible in today's market. In nearly every region where our farms sit, overall demand for top-quality farmland growing berries and vegetables is stable to strong, especially along the West Coast, covering most of California, Oregon, Washington, and the East Coast, above all Florida and certain other eastern states. On the whole, farmland keeps performing well relative to other asset classes. There's an index of farmland prices known as the NCREIF Index, and right now it consists of roughly $14.4 billion in agricultural properties, which includes nearly all of ours. Measured as an average annual return, it has been 12.6% across the past 20 years, with no negative years in that stretch. That beats both the S&P Index and the overall REIT Index, each of which has posted three, and at times four, negative years when their value declined. Through NCREIF's analysis, at least, those of us in farmland have no zero years. Kindly keep in mind that buying stock in this company amounts to a long-term investment in farmland. In my view, an investment in the stock truly has two components. Much like gold, our stock is a hard asset. It's farmland. It's dirt. That's where the intrinsic value lies, because only a limited supply of good farmland exists, available to us and available to people who want to grow things in the United States. As you know, it's being consumed by urban developments, particularly in California and Florida, where many of our farms are located. The second component, I think, is that unlike gold and other alternative assets, this is an active investment generating cash flows for investors, and we believe we're superior to a bond fund since we keep raising the dividend, whereas a bond fund typically doesn't. Keep in mind, you get the dividend plus appreciation from the farms; on a valuation basis, we had roughly $13.2 million this quarter. We anticipate inflation, especially in the food sector, will keep rising, and we anticipate the values of the underlying farmland will rise as a result. We think this will particularly hold in the fresh produce food sector, since the shift toward more and more individuals consuming healthy foods is set to keep expanding. Certain farmland located in the grain-producing states, such as the properties we hold, is performing well this year thanks to reduced present output of stuff from Argentina, Brazil, and Ukraine. I simply recognize that a problem is going to emerge at some point down the road, given that not enough grain is being produced, and we will see how that plays out. So now I will pause and, Donna, if you would join in, we will take some questions from our friends on the line.

Good morning.

John, good morning.

That's an interesting point. When you're looking at the pipeline and possible acquisitions, in what ways are sellers being affected by commodity price shifts and climbing interest rates — does that push them toward making deals, or does it perhaps lead some of them to keep holding their properties?

Honestly, it hinges on who you happen to be speaking with. A number of them point to both factors, or just one, as their motivation for leaving the business. I believe it benefits us when we reach a position where we're able to purchase farms and farm operations. If the goal is simply to sell the land, then they have to begin making rent payments. Though that works well for many folks, it isn't suited to every circumstance. We pay attention to what's happening, and the majority of these farmers are quite clever about running the numbers to figure out whether selling makes sense for them. My guess is that as the economy becomes increasingly hard for people to understand — I mean, these folks are forking over enormous sums for fertilizer and other farm operation inputs, and every one of them is working the math. If the amount I must pay for fertilizer is double what it was a year ago, what would I have to do to compensate for that gap? It's true that most of them are receiving higher payments for their berries or nuts or whatever else. Yet simultaneously, much of that profit remains at the grocery store level; it isn't reaching them, since they must spend more to move those goods into the grocery store. I'm not sure, John. It's always the case that sitting down and speaking with people is what brings us to the purchase price and to the purchase agreement. We have a few purchase agreements already signed that will ultimately be completed. To be honest, getting closings finished takes quite a while these days, because individuals in government roles, for instance, who must grant approval for what you're doing, whether for insurance or whatever else, simply take longer to get these matters handled. I don't know what our move will be if things continue at the sluggish pace we're seeing currently. I believe we'll have ample opportunity down the road, since people can't live forever, as the saying goes, so they're attempting to work out what will become of their farm. Typically the children don't want the farm, so consequently, they're seeking a means of exit. Although selling the land definitely brings them a great deal of money, certain ones are selling so they can purchase another piece of property elsewhere. I think the going rate we're seeing at present is likely as favorable as anything that's going to come along. If I had to put a figure on it, I'd say somewhere between $150 million and $200 million for this year. We'll simply have to wait and find out. That's only an estimate, mind you, since deals don't necessarily wrap up on the schedule people promise. I realize that isn't a satisfying response, John, but it's all I can offer.

No, no, that makes sense; regarding the balance sheet, what are you currently observing when it comes to pricing on secured debt and perhaps even pricing on unsecured debt, as you consider that portion of the capital stack for upcoming growth and some of the refinancing that will happen or might happen later this year?

Were we to seek some quotes at this moment, pricing would likely land somewhere between the low 4s and mid-4s. From what we're picking up currently, that clearly might be somewhat greater as we approach the end of the year. We'll review those figures, and we have preferred, common and debt. There are several capital sources available to us. Once we have all those figures prepared to finalize the deal and secure financing, then, well, at that point, we'll evaluate the optimal, I suppose, mix of capital sources to proceed with.

Keep in mind, when we take loans from the federal banks, there is a partial refund that comes our way later on in the year. For instance, in Q1, how much came back to us? An additional $2.8 million. That amounted to roughly 1.3%, or 139 basis points, if I recall correctly. The reason is that, indirectly, as a borrower, we're what you'd call the "owners" of those banks. It isn't a way to turn a profit the way a typical bank would. Consequently, we received roughly 1.3% back on everything we borrowed. So when borrowing rises on the federal side, the amount returned to us grows each quarter, and that definitely made our first quarter look quite strong. That said, Q1 tends to be sluggish since we've already collected the bulk of our participation rents, so because of that, we performed well this quarter.

Okay.

Go ahead.

On the leverage front, I believe I picked up during this call that it's roughly 40% loan-to-farmland value; that's somewhat below what it's typically been. Is that simply a matter of caution given the economic, you know, broader economic circumstances we find ourselves in, or is it perhaps just something that might edge higher down the road as you get some deals closed later in the year?

It definitely could edge higher down the road. A big part of that is because, you know, we leaned fairly heavily on the common ATM during last year's second half; we had preferred proceeds coming in. At present, for instance, within our MetLife facility, we've pledged enough properties that we're able to draw $110 million on it anytime we like. At present, those funds aren't something we need. Naturally, should every deal presently in our pipeline wind up closing across the coming several months, then you'd see us begin drawing on a portion of those funds.

Alright, I’m finished. Thanks a lot.

Thanks.

All right, let's take the next one.

Hi there, everyone. I've got a couple of things to ask. I was hoping to get a bit more detail on whether any growers are running into trouble when it comes to handing off higher expenses to the people buying from them. I'd really like to hear additional color on that.

So, we're aware that costs have climbed for every kind of input, which means they've needed to hand those along, and it appears the grocery stores are in a position to purchase at those levels. As you're aware, the bulk of our fruits and vegetables move through grocery store chains instead of the independent, I'm not sure, fast food outlet. In any case, when you factor that in, I'd say a growing number of our farmers feel quite positive about the pricing they're receiving, and because of that they can hand along nearly all of it. The relationship between the grocery stores and the farmers is a solid one. At most of the grocery stores, there are folks who go out to the farms, observe what's happening, and speak with the farmers. You don't see the kind of gap between the two sides that you might expect. Because of that, I'd say everyone shares the same understanding, and that understanding is that you're going to need to shell out more for fruits and vegetables, plus the nuts on the trees that are being harvested this year. Passing along the prices they're facing strikes me as no issue at all; for fertilizer, they're likely paying double what they did a year ago, and in certain situations perhaps even beyond that, since getting fertilizer is extremely hard at the moment.

Understood. Then regarding the participation rent piece by year-end, might you provide us a breakdown of which crops you anticipate accounting for the overwhelming bulk of participation rents collected?