Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Much appreciated, Latania, for the kind words of introduction. David Gladstone here, and I'd like to welcome everyone to this quarterly conference call for Gladstone Land. Thanks to each of you for joining us today. We're grateful that you've carved time from your busy schedule to hear our presentation. As always, we'll begin with Michael LiCalsi. He serves as our General Counsel, Secretary, and he's also President of the administration side of the business. Michael?

Thank you, David. Hello, everyone, and good morning. This report we're giving today could contain forward-looking statements made under the Securities Act of 1933 as well as the Securities Exchange Act of 1934, and those statements include things about how we'll perform in the future; such forward-looking statements carry specific risks and uncertainties, and they rest on our present plans, which we consider reasonable. Numerous factors could make our actual results differ materially from any future results stated or suggested by these forward-looking statements, and that includes every risk factor found in our Forms 10-Q and 10-K filed with the SEC. Those documents are available on the Investors page at gladstoneland.com. They're also posted on the SEC's site, sec.gov. We're not obligated to publicly update or revise any of these forward-looking statements, whether because of new information, future events or otherwise, unless the law requires it. Later, we'll cover FFO, meaning funds from operations; FFO is a non-GAAP accounting term, and it's defined as net income excluding gains or losses from real estate sales and any impairment losses on property, plus depreciation and amortization of real estate assets. We might also cover core FFO, which is generally FFO adjusted for certain nonrecurring revenues and expenses, and adjusted FFO, which takes core FFO and further adjusts it for certain noncash items, like converting GAAP rents into normalized cash rents. Our view is that these give better indications of our operating results and permit better comparability of how we perform from one period to the next. Please take a moment to visit our website, gladstoneland.com, once more. Sign up for our e-mail notification service to keep yourself current on the company. We're on Facebook too. The keyword there is The Gladstone Companies, and on Twitter it's @Gladstonecomps. This call provides an overview of our results, so please review our press release and 10-Q, both issued yesterday, for more detailed information. Once again, head to the Investors page of our website to locate them. With that said, I'll hand the presentation back over to David Gladstone.

All right, thanks, Michael. As I do every time, we'll open with a quick reminder: right now we hold more than 115,000 acres of farmland across the United States, spread over 169 farms. Beyond that, as a number of you will recall, we hold 45,000 acre-feet of water that's banked. One acre-foot equals 325,861 gallons. When you run the math, that comes to roughly 14.6 million gallons sitting in storage underground. Taken together, those two items carried a value above $1.5 billion as of this quarter's end — that covers both the acreage and the water. Our farms sit in 15 states, and what matters more is that they're spread across 29 distinct farming regions. Occupancy on the farms stays at 100%, with leases to 90 separate tenant farmers, every one of them unaffiliated with us; and the people farming these properties are cultivating more than 60 kinds of crops. The bulk of those fall under fruits, vegetables, and nuts. With so many growing regions, tenants, and crop types across these properties, we figure we're diversified enough to give the rental cash flows both safety and stability; that spread, we believe, helps safeguard the dividends paid out to our shareholders. As we said three months ago, and as we keep doing this quarter and are still doing right now, we've grown far pickier about which farms we're willing to acquire. With the economy this unpredictable, we believe it makes sense right now to take a more careful approach with our capital. During this year, the team acquired 5 farms for about $60 million. When it comes to operations, we just had our strongest quarter in a long time. Normally, interest patronage from our banks and participation rents barely show up during any year's second quarter, so looking at FFO and AFFO per share, this quarter is pretty clean, and it stands as one of our strongest second quarters in years. Every lease that reaches expiration somehow gets rolled over, and we never lose a single day to vacancy at any property. And for farms in our core regions along the two U.S. coasts — California and Florida — we keep completing renewals at higher rents. Broadly speaking, conditions on our farms are still solid, and appetite for what's grown on the majority of them is still robust. Think items such as berries, vegetables, and nuts, and their prices, much like plenty of other food categories, keep climbing. The most recent headline inflation figure, 9.1%, obviously startled everyone. That's the steepest in almost 43 years. Within the category labeled food at home, though, the increase was 12.2%. And I'm certain those of you shopping at grocery stores will agree that this is the category where all of us are simply stunned. Now, when it comes to that category—the crops that come from our own farmland—most of what we produce ends up being sold in what people refer to as grocery stores. That covers plenty of smaller grocery outlets along with the large chains. Farmers are adapting to shifts in the economy, since a lot of what they have to pay for is going up. To start with, banks have raised interest rates on every one of those credit lines farmers hold, and they tap into those when planting season arrives. Beyond that, they draw more money from banks to pay for harvest costs; and of course, there are many other obligations during the year that need additional cash prior to harvest getting underway. Beyond that, farmers are paying much more for fertilizer. The price is just insane. In some regions, fertilizer that cost you a certain amount a year ago now costs 3x that amount. Fertilizer obviously produces more crops, but past a certain price level, it becomes too expensive. Gas prices are also very high, especially out west, and we need to — obviously, our growers require gas to operate their trucks and tractors and harvesting equipment. The price of water has gone up, particularly out west, though at this point our farms appear to be holding up fine. A lot of those higher costs have been passed along by farmers to the buyers of food, such as grocery stores, and households everywhere are absorbing that added expense as it works its way through the broader economy. Worry that inflection will cut into many farmers' capacity to pay rent has led us to pull back on farm acquisitions. Right now, two farmers are behind on their rent payments. That works out to under 3% of our rents. According to one of those two, the money is coming. Naturally, that tends to be what a lot of farmers say once they've fallen a bit behind. It's only a slight delay. Roughly fifty percent of the almonds grown here in America get shipped abroad. This gentleman is one of the people selling them in overseas markets. If there's any area where we rely on foreign countries, it's that one. One of our farmers had a terrible accident — a catastrophic one. These days his son runs the operation, and things are progressing, so I expect we'll get our money before too long. While that plays out, we're exploring options for reworking our overall cost of capital so it lines up better with what's happening in the market for buying farmland. The problem we face is that both our preferred stock and what we owe on borrowings have grown pricey relative to today's farmland values and rental rates. We do have credit lines available. Those funds aren't being utilized at all. Every one of them has been sitting idle, and there's simply no justification for us to pull money down and deploy it unless we can deploy it at a spread between what we pay and what comes in. Internally, we're presently talking through a strategy to handle our cost of capital more effectively. If we end up making meaningful changes, we'll reach back out to you about them. In Q2, our team acquired one farm in California for about $25 million. Then, right after that quarter ended, we added 4 more farms in Washington State and Oregon, at a cost of roughly $37 million. On the whole, the starting cash yield we're seeing from these investments comes to roughly 6%. Beyond that, every lease tied to these properties includes particular terms — things like participation rents or yearly escalations — that ought to drive that number upward going forward. Turning to leasing activity, we have renewed 2 leases since Q2 began, and together they should generate a boost in yearly rent and operating income for us. Approximately $179,000 relative to the earlier leases we held on that property. Looking forward, just one lease is set to expire within the coming 6 months, representing under 1% of our overall annualized lease revenue; we're currently talking with prospective tenants about this farm, and at present we don't anticipate any downtime there. A few other points you routinely raise: we keep watching the persistent drought out West. They experienced a really good, wet winter in that region, though that appears to be the extent of it.

Once in a while, a bit of rain comes through; since that point, conditions have been extremely dry. Across all our California holdings, the situation remains that growers have sufficient water to finish out this crop year. Naturally, we can't predict how the next year will shape up, yet out West, water is still a precious commodity. Looking at what the independent appraisers determined our farms are worth, land values keep rising at a consistent pace. Those appraised figures, however, aren't climbing rapidly—not as quickly as I'd prefer to see them reflect the prices currently being paid. The core issue, honestly, is that past transactions form the basis for most appraisers' work. Current market activity doesn't factor much into what they do. Sometimes their numbers trail reality by a considerable margin. On the ESG policy front, efforts are ongoing as we build out formal guidelines and the associated disclosures we deem pertinent. My goal is simply to have something in place that lets us share our narrative. Also, for your awareness, solar panels sit on a number of our farms. Those panels supply power for on-farm activities; not long ago, we struck a deal with an organization that evaluated one of our properties and wishes to install wind as well as solar power installations there. Our priority is always making sure any arrangement we sign won't disrupt our tenant. Perhaps a minor disruption, but not the tenants presently farming our land, since our main business partner is that tenant. Not the individual planning to place solar arrays on the property. We're handling that and aiming to capture additional value there; plenty of parties out there are attempting to aggregate these deals. Letters and calls flood in on us. As brought up during earlier calls, occasionally we encounter farmland owners interested in selling us their land together with the operation as one bundled transaction. As a real estate investment trust, Gladstone Land faces restrictions on its capacity to hold operating companies. That's because operating income generated by those operations is quite constrained within a real estate investment trust. I'll pause here since operations have been covered sufficiently, and hand things over now to our CFO, Lewis Parrish, who will walk you through the numbers in greater detail. Lewis?

Thanks, David, and good morning, everyone. First, a quick update on the financing side of things. During the quarter, we received loan proceeds of about $5 million; we expect an effective interest rate of 2.89% on those funds, fixed for the next 5 years. On the equity side, beginning in the second quarter, we generated approximately $70 million in net proceeds from sales of our Series C stock. Now for operations: net income in the second quarter was about $613,000, with a net loss to common shareholders of $3.9 million, or $0.112 per common share. On a sequential basis, adjusted FFO was roughly $4.5 million in the second quarter, down from $6.4 million in the first quarter. AFFO per share was $0.129 in the second quarter versus $0.185 in the first quarter. Dividends declared per share were about $0.136 in both quarters. The primary reason AFFO declined was approximately $2.8 million of interest patronage, or refunded interest, recorded in the first quarter related to our Farm Credit loans. Partially offsetting that was a $1.1 million incentive fee earned by our adviser in the prior quarter, compared with none in the second quarter. Fixed base cash rents increased by about $320,000, or 2%, mainly due to additional revenues from recent lease amendments and renewals. On expenses, excluding reimbursable expenses and certain nonrecurring noncash items, core operating expenses decreased by roughly $1 million quarter over quarter. Most of that stemmed from lower related party fees, reflecting the incentive fee earned in the first quarter. G&A expenses increased by about $77,000, largely related to the Annual Shareholders' Meeting. Other related party fees and property operating expenses were essentially flat quarter over quarter. Turning to net asset value: we had 61 farms revalued in the quarter, all through third-party appraisals. Overall, these farms' values remained relatively stable versus their prior valuations from about a year earlier, rising by roughly $500,000. As of June 30, our portfolio was valued at just over $1.5 billion, all of which was supported by either third-party appraisals or purchase prices. Using those updated valuations and also taking into account the fair value of our debt and all preferred stock, our net asset value per common share as of June 30 was $15.60, up $0.06 from last quarter. That increase was mainly driven by how rising market interest rates affected the fair value of our fixed long-term borrowings, partly offset by preferred equity issuances and ongoing capital improvement projects on certain farms that haven't yet been revalued. We also recently raised our common dividend again, to $0.456 per share per month. Now, let's move on to our capital structure and overall liquidity position. Turning to leverage and our outstanding obligations: on a fair value basis, net of cash, the loan-to-value ratio for our entire farmland portfolio came in at 38% as of June 30. Currently, over 99% of our borrowings are at fixed rates. On a weighted average basis, those rates are secured at 3.26% for another 5-plus years. Regarding the debt on our books at the moment, we've been lucky enough to be reasonably shielded from the recent uptick in interest rates, and that ought to hold true in the near term. On the subject of upcoming debt maturities, about $55 million is set to mature over the coming 12 months; however, roughly $31 million of that amount is made up of various loan maturities, and the properties backing those loans have collectively appreciated by $12 million since each was acquired; should we choose to refinance any of these loans, we don't expect any trouble doing so. Apart from those maturities, we have approximately $24 million in amortizing principal payments due over the coming 12 months. On liquidity, taking into account what's accessible under our credit lines plus other undrawn notes, we currently have about $135 million in dry powder, which sits on top of $129 million in unpledged profits. Finally, I'd like to discuss our common distributions. We recently raised our common dividend yet again, to $0.0456 per share per month. Over the past 30 quarters, we've boosted our common dividend 27 times, amounting to a cumulative increase exceeding 52% over that stretch. Farming continues to be a steady asset class and keeps delivering solid results despite all the uncertainty and volatility presently in the markets. Our stance remains that this stock offers a compelling investment option, especially amid today's inflationary and recessionary concerns. With that, I'll turn the program back over to David.

Okay, thanks, Lewis. Good presentation. Like I said earlier, we're still actively looking for new farms to purchase. But as I've repeated many times, we're being far more careful when it comes to acquisitions right now. We currently have offer letters out to a handful of sellers, and we'll attempt to keep pushing those ahead, but this might be a smart moment to keep taking it slowly. Just a handful of closing remarks I want to share. We think putting money into farmland and raising crops that support a healthy way of living, things like fruits and vegetables and nuts, aligns with the trends we're observing in today's marketplace. On the whole, demand for top-quality farmland used for growing berries and vegetables is holding steady to robust in nearly every region where we farm, and in particular places such as California, Oregon, the State of Washington and the East Coast, especially Florida; and on the whole, farmland keeps performing strongly relative to other asset classes. The NCRI Farmland Index, which holds roughly $14.6 billion in agricultural properties, including every one of those we've listed with them so that they have ours along with others in the business, has averaged roughly a 12.6% total return across the last 20 years without a single down year. As you probably know, a number of the indexes have turned negative during the year. That beats both the S&P Index and the overall REIT Index, each of which has seen 3 or 4 down years during those same periods. Compared with 0 for the Farmland Index. Keep in mind that buying stock in this company amounts to a long-term investment in farmland. In my view, putting money into a stock like ours has 2 components. First, it resembles hard assets such as gold. When you get down to it, farmland is essentially just dirt; and that carries an intrinsic value since there's only so much good farmland and it's getting used up. I say used up because it's being taken over by those who are building houses along with other kinds of properties in California and Florida, where many of our farms are located. And unlike gold, most alternative assets, it's an active investment from which cash flows reach investors; and we think that beats a bond fund since we keep raising the dividend as additional money flows in to us. We anticipate inflation, especially within the food sector, to keep climbing, and we anticipate the values of the underlying farmland to climb because of that. We expect this to be especially true in the fresh produce food section trend as more people eat healthy foods and keep growing healthy foods. Now we'll take a few questions from those who follow us. Operator, if you'd come on and explain how people can ask us questions, we'd appreciate that.

David, what does pricing look like right now for the farms you have your eye on, compared with what the same farm would have cost 12 months back or 24 months back?

It has risen no less than 20% compared with 12 months ago, and the climb keeps going. Sadly, the majority of growers we've purchased from previously, the ones who were looking to bring in capital, aren't under the same pressure to bring in as much capital, since their appetite for growing their operations is just gone until they can get a read on where both inflation and prices are headed. The market feels somewhat flat at the moment, yet it's still no less than 20% higher. And I believe the figure — and as you're quite aware, our involvement in corn, wheat, and rice is minimal, and those kinds of farmland are up no less than 20% if we examined the situation in Iowa, which without question offers the finest soil anywhere on earth for agriculture. In any case, that's roughly our position, Rob.

Alright. Prices have climbed 20%; and then, where exactly are — it's hard to get a clear picture, since this isn't like apartments or office space or anything where you get dependable volume figures. But when it comes to properties that have either already hit the market or might hit it if a bid showed up, what are you observing regarding the number of farms available or the volume of deals? With prices having risen, has the supply also shrunk? Are farmers clinging to their holdings compared with how they behaved years back? Is there less trading activity at the moment, or fewer properties that farmers are actually willing to part with? How would you describe the availability of assets, leaving price aside?

Well, when you look at what we do, it's not the same as what most folks involved in farming do. They're into wheat and all those seed crops; that's not our line; and that segment has really exploded. You've likely noticed that the quantity of wheat and corn has dropped sharply in the market, and because of that, prices have skyrocketed. The fortunate farmers growing those crops now have cash. And while they're not quite like drunken sailors on a Saturday night, they're going around spending money on every sort of thing. And I imagine Deere along with other makers of farm machinery are enjoying really strong years. But the key point is, the products we focus on don't come onto the market all that frequently to start with; we're out there talking with the farmers. You have to go — in Iowa, there's typically a farm or an auction happening for the land in that area. In California or Florida, there isn't much when it comes to auctions. We've attended one that I can recall over the past 20 years. It's a pretty dominant marketplace for those who will work out what might be up for sale. And that's exactly what we do; we visit the farmers, chat with the farmers and devote time to the farmers. And it's a great place because farmers are all friendly folks; we've had a good — I believe I've encountered perhaps 5 or 6 farmers over the last 20 years whom I wouldn't do business with, and the rest have been decent people. We're pleased about that. But I think if you examined what's happening in our specific marketplace, you'd find people simply telling themselves, I can get more for blueberries, I can get more for strawberries, cabbage has gone up. Every one of those items you'd find in a grocery store produce section has risen; and so, they're holding off to see how high it will climb before they go out and begin selling; we've run into some of them and they simply want — I don't know. There was this one property in California — we own quite a few parcels near it — and it just sold for more than $1,000 per acre. Actually, $100,000 per acre. Sorry, I believe it was $101,000. Meanwhile, a few of our own holdings in that same region are appraised at only $70,000 to $80,000 per acre at most. That gap speaks for itself. Today's market is truly fascinating, since there's no way to know what's going on inside the heads of potential sellers. Our greatest opportunities arise when a farmer we work with phones us and tells us the neighbor, Joe, is considering selling his place, but he lacks the funds — so could we purchase it and lease it back to him? That's exactly why we focus our conversations on farmers. My team, I believe, is on the phone with someone daily, attempting to learn what opportunities may surface. When something does surface, the odds are at least even — 50 to 50 — that it will be priced such that we simply can't match it, since our borrowing costs are too steep. So we must bide our time until those costs decline. There was a particular individual in California I spent a solid 10 years working on, hoping he'd sell. Eventually — and this may sound blunt — he passed away, and his sister sold me the farm. That was in a different region. When people purchase land, they purchase all of it. And if you're familiar with the history of California farmers, plenty of them have occupied their land for 2, 3, or even 4 generations. Some situations are genuinely complex — a couple of properties I'd love to acquire have upwards of 20 individuals each holding a stake, and nothing can be sold unless every single one consents. Getting 20 people to all agree on a sale is extraordinarily difficult. Still, we remain present, and naturally, since this is a forever corporation, there's no obligation for us to ever sell any of our holdings. When the moment arrives, we'll be ready. And the majority of farmers across the agricultural regions where we operate — and as I said earlier, we're now in several different farming areas — they're all familiar with who we are. They know us — and every so often, they put us to the test. What would you offer for the farm right now? We provide a figure, yet they simply aren't prepared to sell. Most are content to sit back and collect the rental income flowing in. Others, though, are prepared to sell. I recall, years back, purchasing a farm from a mother and father in their 60s who had 2 children holding partial ownership of the property. Those children had no interest in the farm and advised mom and dad to sell it and start enjoying the proceeds immediately. We completed the purchase, and it has proven to be a very good deal for us. Those properties were being leased out—the owners weren't doing the actual farming themselves. That's the kind of chance we're looking for. There are some we're aware of in the market; we've given people pricing, and at times they're only checking what the value could be. Even so, we stay active in this line of work. And, as you're aware, our California team is fully staffed, plus we've got a solid group of folks in Florida. Because of that, we have connections with many individuals in those areas. Rob, I'm unable to tell you much about what a farm might sell for right now, but purchases are happening on our end. At year-end, we laid out $37 million to acquire farms located in Washington State and Oregon. We're present in the market, making buys. When something becomes available, our concern is typically that it will disappear; that's about the most I can offer to alert you to what we could possibly finalize during the remaining months of the year.

All right. So considering what you said about taking a more careful approach to acquisitions these days, are there particular crops or regions that you were glad to purchase a year ago, or even during 2020, that you'd likely feel less enthusiastic about now?

No. Each crop comes with its own set of data. So provided it fits within those parameters regarding how that crop gets cultivated and marketed, we're open to it. There isn't any where we've drawn a line saying we're done with this one or that one. We're becoming somewhat concentrated in certain tree nut crops. I have no desire to run a nut-focused operation, though it's a solid business too. The key point is no, nothing is excluded, but we prefer to focus on places where strawberries and vegetables are grown in large quantities, just because we understand that sector extremely well. So we're not out in Kansas attempting to cultivate strawberries, even if it's possible to grow them there, because the window for strawberries in Kansas might only last 3 weeks, while in California it stretches to 9 months. The key point is, each transaction we complete carries its own unique characteristics, and you simply need to examine it and evaluate it. We have capable staff who can handle that; however, nothing is ruled out at this moment, except that I have no wish to operate in Texas. I also don't want more exposure in certain other grain-producing regions. We aren't grain specialists.

All right. So the last thing I had. During earlier conversations and business updates, you brought up putting wind turbines and solar panels on properties. Usually, are those placed on acreage that isn't usable for development? Does that take the place of crops? What is the proper way for us to consider where this fits? Are they just mounted on the roofs of barns? When we observe you erecting wind turbines or solar panels, how ought we to think about that? Do they stand in for a crop in a field? Or are they located on acreage that couldn't be used for crops in any case?

No, all of it is — consider wind turbines, for example. Clearly, a wind turbine has to go where wind exists, and it blows pretty steadily there. A number of our farms in the Midwest have quite a bit of wind, and plenty of power-generating companies contact us wanting to install turbines. That's perfectly fine. A turbine can be installed, and if you go with the tall ones reaching a couple of stories in height, that's okay, it does the job. You end up killing a lot of birds unless you get up around 3 stories. So doing short turbines isn't something we're very happy about, but there's a turbine company that wants to put probably a dozen turbines at the top of the hill on one of our farms. And they're ready to pay us, I believe it's $350 a month, correct? That works out to $32,000 across a year, which is not a bad return for a patch of ground.

$332,000 on a yearly basis.

$332,000 to reserve that spot so they can install the turbines. So we haven't cleared away even the soil yet so they can install those turbines. This is turning into quite a revealing region. Over in New Jersey, the state subsidizes every one of these projects, and eventually they had to enact legislation stating that's no longer allowed on farmland; we want farmers growing agricultural goods there, because they were seizing the farms and simply placing — I mean, they were all over the place. There was zero space left for any crop; we don't — we're not — our operations are in New Jersey, and we do have crops there. We cultivate strawberries in New Jersey, believe it or not, along with blueberries; but when you get down to it, it is the Garden State of New Jersey. In any case, fantastic location. And I believe ultimately, when you examine these turbines and everything else, those are excellent methods for harnessing the wind and harnessing the sun, but they won't replace the mainstay for quite a while as the primary source for us or anyone else producing electricity. But there's little more I can add beyond that, Rob. Let's take question number 2. Anyone?

Question from Edward Reilly at EF Hutton, Managing Director, Research: Excuse me, just a couple of administrative items. Regarding your debt, what portion did you mention is variable as opposed to fixed?

Actually, essentially the entirety of our debt carries a fixed rate, correct, Lewis?

Roughly 99.98% of that is locked in, typically, for slightly more than 5 years starting today.