Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Okay, thanks, Sherry. Good intro. I'm David Gladstone, and I'd like to welcome everyone to the quarterly conference call for Gladstone Land. I want to thank all of you for joining us today. We're grateful that you set aside part of your day to hear our presentation. We'll begin with Michael LiCalsi. He serves as our General Counsel and Secretary. He is also President of Gladstone Administration, which acts as administrator for each of our funds. Michael, please go ahead. $534,000.

Thank you, David. Good morning, everyone. The report we're giving today might contain forward-looking statements made under the Securities Act of 1933 and the Securities Exchange Act of 1934, and those statements cover things like how we expect to perform down the road. These forward-looking statements carry specific risks and uncertainties, and they rest on the plans we currently have, which we consider reasonable. A number of factors could make what actually happens differ materially from any results in the future that these forward-looking statements express or suggest, and that includes every risk factor listed in our Form 10-Q, our 10-K, and the other filings we make with the SEC — you can locate those on our website at www.gladstoneland.com, on the investors page in particular, or through the SEC's site, sec.gov. We are under no obligation 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. Today we will talk about FFO, meaning funds from operations. FFO is a non-GAAP accounting term, and it's defined as net income, leaving out gains or losses on real estate sales and impairment losses on property, then adding back depreciation and amortization of real estate assets. We might also cover Core FFO, which we generally describe as FFO with adjustments for particular non-recurring revenues and expenses, and Adjusted FFO, which takes Core FFO and further adjusts it for certain non-cash items, for example converting GAAP rents into normalized cash rents. In our view, these give better indications of how our operations are doing and let investors compare our period-over-period performance more easily. Please take a moment to check out our website. Again, that's gladstoneland.com. Sign up for our email notification service so you can stay current on the company. You can find us on Facebook too — search for the Gladstone Companies — and on Twitter, @GladstoneComps. This call serves as an overview of our results, so please look at our press release and Form 10-Q, both of which came out yesterday, for more detailed information. Once more, head to the investors page of our website to find them. Now I'll hand the presentation back over to David Gladstone.

Okay. Thanks, Michael. Let me begin with a quick look at our farmland holdings. Right now we hold more than 115,000 acres across 169 separate farms, plus 45,000 acre-feet of bank water. As all of you know, one acre-foot equals 326,000 gallons, which means we're talking about billions of gallons of water that we own and that sits stored beneath the ground, available to draw on whenever needed. Combined, the land and the water carry an approximate total value of $1.6 billion. Our farms span 15 states and, even more significantly, 29 distinct farming regions. Occupancy remains at 100%, with leases to more than 90 tenant farmers, none of whom are related to us. Those tenants are cultivating in excess of 60 crop varieties, including fruits, vegetables, and nuts. As we've noted on the last couple of calls, acquisition activity has been slow for us, and we're staying more selective about the kinds of farms we pursue at this point. Given that inflation and interest rates keep climbing and the odds of a recession even deeper than the current one appear to be growing, we think now is a smart moment to be far more cautious with our capital. On the whole, our current farmland portfolio is doing just about what we expected, and we turned in another very strong quarter, as the remainder of my remarks and certainly those of Lewis, our CFO, will show. Leases on these farms include particular provisions, among them participation rents. During this third quarter, we bought four vineyards located in Washington State and Oregon, paying roughly $37 million. Net cash yields to us on these investments come to approximately 6.2%, close to the long-term average we've recorded. As I said a few minutes back, we're going to turn to the leases on these farms that carry particular provisions. I bring that up because we're approaching the year-end, when participation rents or escalations kick in. That ought to nudge the figure I cited somewhat higher down the road. Keep in mind, this isn't rocket science, so rents don't move quickly. They rise steadily year after year, which we like since it asks very little of us. On the leasing side, we've renewed six farm leases in three separate states since the third quarter began. Altogether, those renewals should produce an annual operating income gain of roughly $281,000, or approximately 10% above the prior leases. Were every lease to roll over and capture 10%, we'd be far ahead of the growth record we're all examining. Going forward, just one lease is set to expire within the next six months, representing under 0.5% of our total annualized lease revenue. We're talking with prospective renters for that farm that's about to become available, and we don't anticipate any gap in operations as we proceed with this. A few other things to note. Inflation is still sitting close to the biggest increases we've witnessed in more than 40 years. The most recent headline inflation figure came in at 8.2%, and it has now stayed above 8% for seven months running. In the newest data, though, for food prepared and consumed at home, that segment rose 13%. That's a segment the crops from our farms belong to, and it consists mostly of crops we grow and that get sold through grocery stores. That's the at-home piece; our view is that rising food prices will keep exceeding inflation generally, the standard inflation figures, and ought to offset some of the higher input costs our farm operators are facing. We were very lucky that Hurricane Ian left us with just small damage to a handful of buildings and structures, and insurance covered all of it. A number of farmers did mention planting delays from all the water sitting in the cropland, but crop losses in certain fields from the surface water the hurricane left behind were quite minimal. Even so, those farms have been replanted since then and are back on schedule now. Our thoughts remain with everyone who got hurt or suffered losses from the hurricane. It was terrible for many people across Florida. Though all of us are hoping for a wet winter, and it looks like that's what's headed our way since it's raining in California right now, to ease the drought out West, our attention has been on making the water supply for our existing asset portfolio more secure. That could involve, though it isn't limited to, purchasing water on the open market. We're able to buy water and apply it to our farms, or even more significantly, secure long-term water contracts and obtain extra water credits by buying more open ground. Much of the unplanted ground in California does carry water rights, and we might want to acquire some of it to expand the water delivery infrastructure we already have and swap out aging, inefficient equipment while upgrading irrigation systems. Every one of these sorts of improvements is something we'd typically handle regardless, so doing them early just means we're staying ahead of things; we're constantly coordinating with our tenants to evaluate water availability at each property we own, along with the financial circumstances of each tenant. As you know, they've all got their banks to deal with, and those banks are charging higher rates on loans for planting and loans for harvesting, so they're encountering some fairly significant shifts there. The persistent drought has put pressure on California's aquifers. Surface water supplies throughout California have been in strong demand, naturally, and these effects don't spare us either. Even so, we've consistently taken a forward-leaning approach and worked to get ahead of the bigger issues. Up to now, no shortage of water has stopped any of our tenants from meeting what they owe — meaning the rent they're required to pay us. But with almond prices still weak because there's too much supply — hard as it may be to believe, an excess of almonds can happen — and with water costs rising as both groundwater and surface water become less available, some of our almond-growing tenants are starting to see output decline. In other words, their harvests are smaller. We're talking with those tenants about ways to help them get through this tough period, and those options could involve extra capital improvements or a short-term decrease in rent. Something to remember is that these cycles of wet and dry conditions are entirely typical in the West, particularly in California. What's made the effect of the present drought a bit worse is that it came so quickly after the prior drought cycle, which wrapped up in late 2016. Earlier wet cycles simply didn't get sufficient time to fill every reservoir back up prior to the current drought cycle.

We can only hope that the snowfall happening right now dumps a great deal up in the mountains, since that's the primary water source these farmers depend on through the summer months. With any investment we hold long term in California, it's understood that dry spells and wet spells will both occur, and we factor those scenarios into the underwriting models we rely on. At present, a small number of our tenants have fallen a few months behind on what they owe; taken together, that amounts to roughly $1.3 million in overdue rent owed to us. We're collaborating with every tenant and partner to get that back rent settled across the coming three months or thereabouts; right now our expectation is that we'll collect the full amount of all those payments prior to the conclusion of the year. It could get a bit dicey with one or two of the almond growers, though I believe things will work out. Turning to our capital plans, back in August we told you we had amended the stock offering for Series C preferred stock, shrinking the size of the offering and cutting down how long it would run. With those changes, we anticipate selling just around $10 million additional through the offering following this week's close, ahead of the offering ending when the year wraps up. We've essentially exhausted that Series C preferred stock and are now evaluating possible replacements for it down the road. Because interest rates keep climbing, acquisition activity has decelerated. As you'd expect, on nearly every acquisition we pursue, some portion requires debt to make the economics work; putting the proceeds we've received from the Series C to productive use has become difficult, so getting accretive deals closed takes more effort; at the moment we're looking into alternative ways to raise capital; we'll come up with something that fits, and pausing for a stretch to watch how this economy turns around isn't the worst outcome. Oh, and one more thing regarding ESG. That topic seems to draw interest from everyone. We published a brief report covering where we stand on particular ESG initiatives. On the governance side, things look okay for us; the effort involves reaching out to each tenant and coordinating with them. I'll pause here and hand things to Lewis. Lewis, please go ahead and take it from here.

Absolutely, and thanks, David. Good morning to all of you. Let me start with a quick word on our financing activity. No fresh borrowings were taken on during the quarter, though we did pay back roughly $17 million in loans that had reached their scheduled maturity; over on the equity side, starting from the beginning of the third quarter, we brought in net proceeds of approximately $75 million through sales of the Series C preferred stock, plus $5 million from common stock sales via the ATM program. Now to our operating results. To start, I'd point out that in the third quarter we posted net income of roughly $1.8 million, along with a net loss to common shareholders of $3.6 million, which works out to $0.104 per common share. Looking quarter over quarter, adjusted FFO came in at approximately $7.2 million for the third quarter, up against $4.5 million in the second quarter, while AFFO per share stood at $0.207 in the third quarter compared with $0.129 in the second quarter. Dividends declared per share came to about $0.137 in the third quarter, versus $0.136 in the second quarter. What mainly drove the AFFO increase was roughly $3 million in participation rents booked this quarter, against just $20,000 the quarter before. That gain was partly offset by a higher incentive fee, up by around $500,000 in the current quarter. Fixed base cash rents rose by approximately $877,000, or 4%. The main reasons behind that are additional revenues from recent acquisitions and completed CapEx projects, along with recent lease amendments and renewals. Turning to expenses, if you set aside reimbursable expenses and certain non-recurring or non-cash items, our core operating expenses were up by roughly $534,000 thousand quarter over quarter. Total related party fees grew by about $629 thousand in the current quarter, largely because of a $505 thousand incentive fee earned this quarter versus no fee at all in the prior quarter. Property operating expenses held roughly steady, while recurring G&A expenses fell by about $78 thousand; that's mostly attributable to costs tied to the annual shareholders meeting in the previous quarter. One expense note for the third quarter: we wrote off approximately $800,000 of deferred and unallocated costs connected to the Series C offering, following the amendment that cut the offering size. Now on to net asset value. During the quarter, 39 farms were revalued; all of these came through third-party appraisals, aside from three that were valued internally. On the whole, those farms gained about $17 million, or 3.7%, in value relative to their prior valuations from roughly a year earlier. We saw especially strong appreciation among our Florida farms, which averaged an 11% increase; worth noting too, the California farms we had reappraised rose by 2%. Even with the ongoing drought and water concerns throughout the state, we keep seeing the values of our farms climb. We think that highlights the work our team has done in finding good farms with secure water sources. By the end of September 30th, the worth of our portfolio came to roughly $1.6 billion. Every bit of that value was backed either by appraisals from third parties or by the prices we paid to purchase. Taking into account these refreshed valuations, plus the fair value of our debt and every share of preferred stock, our net asset value per common share on September 30th stood at $16.56 — a figure that rose by 0.96 compared with the prior quarter. Driving this gain were mainly two things: the effect that climbing market interest rates had on the worth of our fixed long-term borrowings, and the appreciation realized on the farms we revalued during the quarter. Now on to liquidity: when you count what's available through our lines of credit along with other committed but undrawn notes, we right now hold more than $175 million in dry powder, on top of over $100 million in unpledged properties. More than 99% of what we owe is presently at fixed rates, and those rates, on a weighted average basis, are locked in at 3.26% for another 5+ years. Higher interest rates do affect our capacity to fund new acquisitions and naturally factor into whether we pay off or refinance any loans reaching maturity. That said, when it comes to the debt we currently carry, the recent rate hikes have barely touched us, and we think we're fairly well shielded from any future increases in interest rates for the foreseeable future too. As for debt maturities on the horizon, roughly $56 million will come due across the next 12 months. Around $31 million of that figure consists of assorted loan maturities, and the properties securing those loans have collectively gained $13 million in value since each was acquired. Should we decide to do so, we don't anticipate any trouble refinancing any of these loans. Once you set those maturities aside, only about $25 million in amortizing principal payments will come due across the next 12 months, amounting to under 4% of the debt we currently have outstanding. Last, on our common distributions: we just lifted our common dividend once more, to $0.0458 per share each month. Across the past 31 quarters, we've boosted our common dividend 28x, producing a cumulative rise exceeding 52% during that span. Farmland remains a steady asset class and keeps performing nicely amid all the uncertainty and volatility presently affecting the markets. We still think this stock presents a compelling investment option, particularly given inflationary and recessionary worries; with that, I'll hand the program back to David. $78,000.

All right, thanks. That was a solid report, and it gives everyone the latest on where our business stands numerically. We remain quite active out in the market. Attractive opportunities do come along, but as I said, we're taking a far more careful stance when it comes to buying. I'm not certain how this inflation will shake out for the farmers and the challenges they face. A handful of closing thoughts I want to share. In our view, putting money into farmland and raising crops that support a healthy way of living — things like fruits, vegetables, and nuts — aligns with the direction the market is heading right now. Demand generally for top-quality farmland, along with berries and vegetables being grown, is steady to robust in nearly every region where our farms sit, especially down the West Coast, covering California, Oregon, and Washington. Not to be left behind, our Florida properties are also progressing at quite strong rates when it comes to value. On the whole, farmland keeps delivering solid results relative to other kinds of assets. I bring this up nearly every quarter: the NCREIF Farmland Index, holding roughly $14.9 billion in agricultural properties at present, has posted an average yearly return of approximately 12.6% annually across the last 20 years, and not one of those years was negative. That beats the S&P Index and the REIT Index. Those two — the S&P and the REIT Index — both recorded negative years across that identical stretch, while the Farmland Index had zero. Keep in mind that buying shares in this company is an investment for the long haul. After all, this is farmland — it isn't going to wander off; it's extremely steady. I see our stock as having really two components. Like gold, it's a tangible asset. Farmland is simply soil, and it carries intrinsic worth since there's only so much good farmland out there, particularly in places we operate, such as Florida and California. Urban developers keep consuming it, above all in California and Florida, where we own many farms. But unlike gold, another alternative asset, this is an active investment that generates cash flows for investors. We think we beat a bond fund, since we raise the dividends annually, which bond funds typically don't do; we anticipate inflation, especially within the food sector, will keep rising, and we anticipate that the value of the underlying farmland will rise because of that; we expect this to hold true particularly in fresh produce regions. The shift toward more Americans eating healthy foods instead of some of the unhealthy options keeps expanding, so I believe we're positioned in the right place. Now we'll take some questions from those following us. Operator, would you join us, please, and explain to listeners how to ask a question?

Morning. Lewis, regarding the rise in NAV, how much of the farms saw a quarter-over-quarter value adjustment, and how much remains to be revalued in the quarters ahead?

In this quarter — Q3 — roughly one-third of our portfolio got revalued, I believe. It doesn't come out to precisely 25% per quarter. It fluctuates. Q4, I'd say, is somewhat lighter, with around 18%-20% of our portfolio value undergoing revaluation in Q4.

All right. How much did the debt adjustment affect the NAV calculation?

Let me pull that up. The debt component came to, one moment please, $0.55 per share.

Alright. So, more or less 50% came from the debt, and more or less 50% came from a change in value on a third of the portfolio?

Yeah, that's right.

Alright. Since I've got you, could you tell me what new borrowing costs us at present, and if we required debt—whether to refinance an existing obligation or to make an acquisition—where would we most likely turn?

Right now, we'd likely land in the mid-5s—5.5%, 5.6%. Suppose, for instance, we approached a Farm Credit Association; that figure would represent the effective rate on the debt once interest patronage comes back to us. Before patronage enters the calculation, the stated rate would run roughly a point two, or a point and a quarter, higher. For us at this moment, Farmer Mac would likely offer comparable pricing, in a comparable band—5.5 to 5.6.

All right, that's useful. You said you're hitting pause on the Series C, which wraps up at the end of the year, and that you'll sort out the equity later on. What's your thinking on that right now? I mean, the rate market is clearly always shifting, so preferreds have been somewhat difficult. Do you consider converts? Or simply tap common stock through the ATM? Obviously, the situation will evolve going forward, but as of today, how are you approaching that, and where would your cheapest cost of equity sit past the Series C?

Well, we'd be happy to keep the Series C going, but as you're aware, roughly 60% of the funds we deploy to purchase a farm comes from one of those Farm Credit associations or somewhere in that space. Passing along yet another 2% shift to the farmer through higher rent is simply not acceptable to a lot of farmers right now. They've taken hits from several directions there. To start with, the growth in the debt they carry to farm, like the money required for the sorts of tasks on the farm that must be handled at the start of each year, and afterward, once each year ends, their lines of credit have climbed considerably. On top of that, I'm not sure anyone tracks it, but across the globe, they've been shutting down plants that make any of the chemicals required for farming, particularly fertilizer. My understanding is that half the fertilizer plants worldwide have shut down over the past 3 to 4 years. It's an extremely tough period for farmers when it comes to that, and they're handing that cost along to the consumer. The consumer is paying more for everything we do, plus all the other items like corn and wheat, and those prices have skyrocketed. While we observe this correction, we don't want to stand in the way of whatever is happening out there in the market. That's the reason we aren't completing many deals at present. We have certain ones we'd be thrilled to complete, but we must wait until we reach a stage where we can fund it in a manner that's highly accretive for us. Some folks here have an urge to pursue things that aren't accretive and shed a bit of money across the next few years, but that's not something I want. I want us to remain extremely strong and ensure we're able to get things done. As long as the banking sector hasn't recovered and interest rates remain elevated — and I see no likelihood of that shifting in the near term — we will keep gradually ramping up everything we undertake, above all the signing of new transactions. Our expansion trajectory is unhurried. That said, when you step back, this may actually be a sensible moment to pause. We hold $1.5 billion in farmland, and there's never a shortage of work to do on it, like adding more infrastructure, which we do routinely. Honestly, over the past three or four months, that's where the bulk of our effort has gone. From my perspective, now is the time to observe all the shifts taking place. You might recall we've discussed this before: acquiring farms and entering the farming operation ourselves would be wonderful, yet no such opportunity exists at present. We simply keep plugging away as best we can. Your opening question, I believe, deserves people's attention — namely, the acreage we own is appreciating rather than losing value. Were you to combine that appreciation in farmland value with the dividends we distribute, the result would be an excellent return for virtually anyone seeking something to place in their portfolio without needing to fret over it. As you're aware, Warren Buffett constantly emphasizes the rise in his net asset value. We devote less effort to that. Our focus is on doing it for cash. Naturally, Warren Buffett distributes no dividends from his Berkshire Hathaway. Consequently, we aim simply to keep improving the property we already own and to grow the income. Whenever leases come due, we must adjust them and confirm that tenants can afford the rent. These are highly unusual times, and all of us appreciated the previous seven or eight years, when interest stayed quite low and nothing seemed amiss. Now comes the period of readjustment. We'll watch what the government does to curb the quantity of dollars it prints and spends to keep itself running, and we'll likewise watch how food prices move. My expectation is that you'll witness fairly significant increases within the coming year. I'm not certain I gave you what you were after, but that's my current outlook on the world.

That helps. I've got one final item. Is there anything that ties together the $1.3 million in late rent payments—whether by the kind of crop or by where it's located?

Well, you likely already realize this, since we keep repeating it, that almonds are our trouble spot right now, and nearly every one of those is in California. A handful aren't in California, but the ones giving us trouble are there. When I say trouble, it isn't really trouble—it's simply that the harvests didn't perform as well as they typically do. It's almonds, and it's California. That's what those unpaid amounts have in common. Trust me, they're working on it. Sitting right across from me is a woman who handles collections, and she's effective. We'll get it handled. We'll get it handled and they will pay. We've got everything we like to have in the fourth quarter, meaning all the fourth quarter extras arrive, and how much of that did we accrue during this quarter?

$3 million.

Within this quarter, $3 million came from that. My hope is that we bring in an additional $3-$4 million during the next quarter—and in this one too; by this one, I mean the third quarter, where we brought in $3 million. When it comes to the fourth quarter, my hope is that receipts give us $3-$4 million more. In any case, plenty of excitement, though nothing out of the ordinary.

All right. Thanks, everyone. I’m grateful for the time today.

All right. Are there any further questions?

Hey there, everyone. Appreciate you letting me ask something. What I'm wondering about is the shift in wording regarding water in that press release, where it says farms with permanent plantings have enough water. Could you go a bit deeper on how the water picture looks for farms growing row crops?

Sure. Row crops aren't hurting us much right now. The trees are the ones that need the water; a lot of money goes toward keeping those trees alive. Naturally, once you harvest the nut or pistachio off those trees, it's been quite costly for those. Pistachios appear to be holding up well. Almonds are what have caused us the biggest headaches. Roughly 50% of the almonds grown in the United States get sent abroad. Until we entered this business, I simply had no idea how much we export. A great deal of it heads to countries such as Spain and France and those regions, plus India consumes an enormous quantity of almonds, and they've faced their own difficulties within that nation. Ed, my sense is that in time this will be a situation that resolves on its own eventually, as all those almonds get moved through. The upside is that they aren't fragile the way strawberries are. With strawberries, you have to get them into someone's mouth within 14 days. An almond can sit for years, and that's not what we're doing. The majority of our farmers expect to sell out around January or February; we'll just have to see what we end up collecting. At this moment, it's uncertain and risky, and payments have been arriving somewhat more slowly for us. We'll get past this small surplus we're dealing with, both in the volume of almonds produced and in the payments side.