Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks Paul. That was a kind intro, and I’m David Gladstone. Welcome to the quarterly conference call for Gladstone Land. This also marks our year end, so you’re getting a double dose in our systems, so to speak, of what we’re going to share with you, and thanks to everyone for joining today. We’re grateful you’ve taken the time to hear our presentation; as always, we begin with Michael LiCalsi. He serves as our General Counsel and Secretary, and he’s President of Gladstone Administration, which is the administrator for all Gladstone funds. Michael, the floor is yours.

Appreciate that, David. Morning to all of you. The report we're giving today might contain forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, and those include statements about how we'll perform going forward; such statements carry specific risks and uncertainties, built on our present plans, which we consider reasonable. Numerous factors could lead our actual results to differ materially from any future results stated or suggested by such forward-looking statements, covering all risk factors contained in our Forms 10-Q, 10-K and other filings we make with the SEC. Those are available on our site, gladstoneland.com, on the Investors page specifically, or through the SEC's site, www.sec.gov. We assume no duty to publicly update or revise any such forward-looking statements, whether from new information, future events or otherwise, unless the law requires it. Later we'll talk about FFO, meaning funds from operations. FFO is a non-GAAP accounting term, described as net income, leaving out gains or losses on real estate sales and impairment losses on property, plus depreciation and amortization of real estate assets. We might also cover core FFO, which we typically describe as FFO adjusted for particular non-recurring revenues and expenses, and adjusted FFO, which takes core FFO further and adjusts it for specific non-cash items, for instance converting GAAP rents into normalized cash rents. In our view, these give better indications of how we're operating and permit better comparability of our performance across periods. Please take a moment to check out our site, again, gladstoneland.com, and register for our e-mail notification service, keeping you current on the company. We're also on Facebook, where the keyword is The Gladstone Companies, and on Twitter @Gladstonecomps; since today's call is an overview of our results, we ask that you look at our press release and 10-K, both issued yesterday, for more detailed information, and those are available on the Investors page of our site. With that, I'll hand things back to David Gladstone.

Okay, thanks, Michael. Let me begin with a quick look at the farmland we own. Right now we hold roughly 116,000 acres spread across 169 farms, plus around 45,000 acre feet of banked water — one acre foot works out to roughly 327,000 gallons. That means we've got something like 14.6 billion gallons of water stored underground, mostly in California. Taken together, the land and the water carry a value of roughly $1.6 billion. Our farms sit in 15 states, and what matters even more, they're located across 29 growing regions. Occupancy on the farms remains at 100%, leased out to roughly 90 tenant farmers, none of whom are related to us. The farmers working this land cultivate roughly 60 different crops, with fruits, vegetables, and nuts making up most of that total. A pair of tenants have lagged on what they owe, driven in part by an abundance of supply along with the market situation for what they're growing. It's true that markets can become oversupplied at times and be slow to correct on their own, but generally they bounce back eventually — the pace of selling simply decelerates, meaning recovery takes longer to arrive. During the past two calls, we've noted that our acquisition activity has remained below what we saw in prior stretches, given that we continue to be much more selective about the farms we'll even look at. Higher rates mean any fresh acquisition brings in less return for us. That situation won't last forever, either. Since inflation and interest rates keep rising and the odds of a recession keep getting bigger, we believe now is a good time to be much more cautious with our money. That said, overall, the farmland holdings we currently own continue to do pretty much what we expected, other than the issues with those two tenants, which led us to reverse about $1 million in revenue during the fourth quarter — we hope to recover that money later on, but there's no certainty. Despite those difficulties, we turned in yet another really solid quarter for you, and from an operational standpoint as well. Results from our participation rents were good, adding about $4.7 million of income in the quarter; that brought total participation rents to a record of roughly $7.7 million this year, versus about $5.2 million in 2021 — so a good gain in participation rents. Most of that increase came from strong yields at our pistachio farms, along with continuing robust demand for that crop. Our almond farms produced weaker results, which stems from softer almond prices, since that market keeps struggling with oversupply, made worse by the supply chain disruptions that emerged during the COVID pandemic. Almonds get sold worldwide, and honestly, California almonds wind up throughout Europe and particularly in India, for instance. Last, we've kept renewing every expiring lease with no downtime at all on any of our farms. We did restructure a few of the leases, cutting the fixed base rent while raising the crop share portion; with this wonderfully wet year in California, we'll find out whether that was the smart move; we believe we're well positioned on those once the figures arrive, though proof will only come at year-end. Apart from those leases, we keep completing renewals at higher rental rates. During the fourth quarter we picked up a small acquisition of 443 acres. It's a piece of open ground. The price was roughly $3 million. So this piece of land is adjacent to the farm that's already in our portfolio — it's immediately beside it — and it comes with rights to both surface water and groundwater pumping. So what we intend to do is draw on those water rights as one more supply source for the farm nearby. On top of that, we have the ability to sell water credits from our property to tenants on neighboring farms. When the year wrapped up, the team had brought in more than 3,000 additional acres across six separate states, amounting to $65 million. When you look at these investments, the cash yield we get right at the start comes to roughly 5.8%. Within the farm leases, you'll find specific terms — participation rents, which we just talked about, are one example — and on top of that, we build in yearly increases. So moving from one year into the next, that figure could climb by 3% or 4%, and going forward that ought to lift the numbers for these farms. Turning to leasing activity, we signed renewals on nine farm leases spread across four states. All told, those lease renewals should bring annual net operating income down by roughly $857,000 compared with the earlier leases, largely due to our shift of certain leases away from fixed rent toward participation rents. That decline, though, came about through lease amendments, and we closed on three of our permanent planting farms under which the base rent was either lowered or held steady, or we agreed to absorb a set portion of the farm's operating costs. Setting those three leases aside, renewals completed on farms where we grow row crops should lift net operating income by around $66,000, which works out to roughly a 12% gain relative to the prior leases. Turning to what's ahead, just a single lease is set to run out within the coming six months, and that accounts for under 1% of the annualized lease revenue we bring in overall. Conversations are underway with the existing tenant on that farm about extending things, and our sense is that we can secure a modest bump in rent for this firm, though at present we don't anticipate any downtime stemming from that expiration on the horizon. A handful of other points worth noting before we hand things to Lewis in the financial world: inflation remains top of mind for most people, ourselves included. When it comes to headline inflation, we're looking at roughly 6.4% on an annual basis, and that's well above the level we'd like to see. On the flip side, there's a segment that stands to gain from this situation. That segment is food-at-home. It rose 11.3%, which puts it far above the 6.4% figure for the country as a whole. In this segment, almost every crop our farms produce belongs to it, and the majority of what we grow gets sold through grocery stores. So if you walk into a grocery store and check out the produce aisle, that's exactly where you'd see what our farmers grow. Our view is that the rise in food prices is going to differ a great deal and will surpass the inflation currently underway. That ought to offset the higher operating costs a lot of our farmers are dealing with right now. As for the recent flooding in California, that's a fresh topic to bring up — there is flooding in California. It always saddens us to learn of the destruction brought on by natural disasters, particularly this one in California.

Even so, every bit of that precipitation delivered some relief to a region that had been dealing with dry conditions for the bulk of the last 3 years. You're referring to additional feet of snow up in the mountains, which will melt when summer arrives and cause flooding in all the lower-lying places, and I'm aware that everyone we have in California is quite pleased with how things are unfolding. Because of those storms, snowpack measurements now stand at almost 2 times what they average over a 20-year history. The majority of reservoirs across the state are likewise approaching their normal historical levels; on top of that, California no longer contained any zones falling into the 2 worst drought severity categories, marking the first occasion in 3 years that this has been true. Naturally, nobody is declaring the drought finished; far more precipitation is still required before most aquifers can be replenished. It would be great if the water supply could be fully recharged. This particular storm won't accomplish that for us; though perhaps, as things unfold across the coming couple of years, we might reach that point. Every one of our farms located in the West has wells on the property, just like those in the East, and up to now, not a single one of our farms has dealt with water shortages caused by wells failing to reach the aquifers. Beyond that, we keep examining chances to supply our farms with extra water sources, and we work on this continually. California's state government has not taken every possible step to assist us in capturing that falling water. One last point about the recent flooding out West: none of our farms endured any significant damage from those storms. A single farm of ours did lose some shade structures that had been shielding blueberry bushes from wind and other harsh weather conditions. Broadly though, the bushes came through fine, and insurance covers the structures, so we'll simply rebuild them; the forecast out there calls for rain all day today and through the following 6 days, meaning we're set to see considerably more water arriving. Lastly, on the subject of our capital plans, we terminated the offering of our Series C preferred stock in December, after having sold roughly $254 million in securities across the preceding 3 years. Rising interest rates caused acquisition activity to decelerate, and placing those proceeds to work effectively grew difficult, so we simply withdrew it. Last month, in January 2023, we started selling a new Series E preferred stock, which comes with a 5% interest rate. Sales are off to a slow start, which matches what we anticipated; so don't count on this selling as quickly as Series C did, but we appreciate having several capital sources at our disposal. That way, we know it's there whenever we require it. Also, we began utilizing our ATM, or at-the-market, program, which permits us to continue offering common stock directly to anybody who comes along once it, again, a few months back, with the intention of continuing that practice so long as the price makes sense for us; we halted sales of that once the price fell under 2019, and we will observe what occurs across the coming six months. We have a really solid, strong company, so we believe it will begin selling once more. I will pause here, that is sufficient regarding operations, and now I will hand things over to our CFO, Lewis Parrish, to discuss the numbers further. Lewis?

Thank you, David, and good morning to all of you. I'll start with a quick review of our balance sheet. No fresh borrowings were taken on in the quarter, though we did pay back roughly $19 million in loans that had reached maturity during the fourth quarter. Setting that aside, since the fourth quarter got underway, we brought in net proceeds of approximately $27 million from selling our Series C preferred stock, around $800,000 from selling our new Series E preferred stock, and $20 million from common stock sales via the ATM program. Now turning to how we performed operationally. To start, I'd point out that net income for the fourth quarter came to $1.1 million, with a net loss to account shareholders of $4.8 million, or $0.14 per common share. Across the full year, net income was roughly $4.7 million, alongside a net loss to shareholders of $15 million, or $0.43 per share. Looking quarter over quarter, adjusted FFO for Q4 landed at approximately $6.8 million, or $0.195 per share, versus $7.2 million, or $0.207 per share, in Q3. Dividends declared per common share came to $0.137 in each of those quarters; and for the full year, adjusted FFO in 2022 totaled approximately $24.8 million, up against $20.4 million in 2021 — a rise of 22%. On a per-share basis, comparable AFFO was $0.716 in 2022 against $0.668 in 2021, which is a 7% gain. Dividends declared went from $0.541 in 2021 to $0.546 in 2022. The common dividend payout ratio stood at roughly 76% of AFFO in 2022, compared with 81% in 2021. The main factor driving AFFO higher was greater topline revenues, partly offset by larger related party fees and added financing costs. Fixed base cash rents fell by around $1 million, or 5%, quarter over quarter, while rising by approximately $11 million, or 16%, year over year. That annual gain came mainly from extra revenues generated by recent acquisitions and CapEx projects we finished. Partially countering this was the execution of certain lease amendments, under which fixed base rent was lowered in return for a bigger participation rent component. Also, as David noted, we reversed roughly $1 million of revenue recognized earlier in Q4 because of credit problems involving two tenants. From here on, revenue tied to those leases will be recorded on a cash basis until full collection of future rental payments is once again considered probable. In the fourth quarter, we booked approximately $4.7 million in participation rents, versus $3 million the quarter before. For the year overall, participation rents came to about $7.7 million, compared with $5.2 million a year earlier. On a same property basis, and counting participation rents, our 2022 lease revenues rose by roughly $418,000 compared with 2021. Looking at costs, if you strip out reimbursable expenses along with some non-recurring or non-cash items, our core operating expenses were up roughly $890,000 versus the prior quarter and roughly $2.5 million versus the prior year. On a quarter-over-quarter basis, total related party fees rose roughly $1.1 million, which came from a larger incentive fee our adviser earned in Q4. Year over year, related party fees were up roughly $1.8 million, mostly because of a bigger base management fee tied to additional assets we acquired. If you take out related party fees, our core operating expenses fell roughly $240,000 quarter over quarter, and rose roughly $735,000 year over year. The annual fee increase came mostly from higher professional fees, especially audit fees and appraisal costs, plus a rise in certain property tax obligations. One last item on 2022 expenses: in Q3, we wrote off roughly $800,000 of deferred and unallocated costs tied to the Series C offering, because an amendment cut the size of that offering. Now let's turn to net asset value. We had 30 farms revalued in the quarter, all through 30 — third-party appraisals. On the whole, those farms were up roughly $9 million, or 2.5%, compared with prior valuations from roughly a year earlier; so at December 31st, our portfolio was valued at roughly $1.6 billion, and every bit of that valuation was backed by either third-party appraisals or purchase prices. Using these updated valuations, and factoring in the fair value of our debt plus all preferred stock, our net asset value per common share on December 31st came to $17.08, which is $0.52 higher than the prior quarter. Moving to liquidity, counting what's available on our lines of credit and other undrawn notes, we currently hold more than $200 million of dry powder, and we also have more than $90 million of unpledged properties. More than 99.8% of our borrowings sit at fixed rates right now, and on a weighted average basis, those rates stay fixed at 3.26% for another five years. Because of that, the recent jump in interest rates has barely affected us; even so, those rate increases do affect how we can finance new acquisitions and factor into whether we repay or refinance loans as they mature. As for our present debt load, we think we're well shielded against few — further rate hikes for the foreseeable future. On the subject of debt maturities ahead, we have up $53 million due within the next 12 months; however, roughly $36 million of that is various loan maturities, and the properties securing those loans have risen by about — by a total of $14 million since their respective acquisitions. Therefore, should we decide to go ahead, we don't anticipate any difficulties when it comes to refinancing these loans. By taking those maturities out of the picture, just about $17 million in amortizing principal payments will come due across the coming 12 months, which works out to under 3% of the debt we currently have outstanding. Last, on the subject of our common distributions, we lifted the common dividend once more not long ago, bringing it to $0.459 per share each month. That represents the 29th instance in which we have increased our common dividend across the last 32 quarters, which adds up to a total rise of 53% during that stretch. With that said, I'll hand the program back to David.

Thanks, Lewis. That was a really solid report — it's always good when we've got actual figures, positive figures, to share with the market. We're still out there looking for deals in the market if a strong opportunity comes along, but like I've said repeatedly throughout this whole process, we're taking a very careful, selective approach when it comes to buying anything. This is a moment that calls for caution. Before we wrap up and open things for questions, a few last things I want to touch on. I believe in putting money into farmland and raising crops that support healthy living, things like produce, vegetables, and tree nuts. We're riding the trends we're seeing in today's marketplace. All in all, demand for top-quality farmland growing berries and vegetables is holding steady or running strong in just about every region where our farms sit, especially on the West Coast — that includes properties in California, Oregon, Washington State — and on the East Coast too, particularly Florida and a few other states as we've moved up the eastern seaboard. And on the whole, farmland keeps outperforming most other kinds of assets. There's an organization known as NCREIF that puts out the NCREIF Farmland Index, and right now that index consists of roughly $15.3 billion in farmland value, with our 116 acres counted among it. So we're aware that they've posted an average yearly return of roughly 12.8% across the last 20 years per year, without a single down year in that stretch. That beats both the S&P Index and the broader NCREIF Index, and each of those had at least three negative years during that same span, compared to none at all for farming. One more thing I'd like to bring up. As all of you know, our shares trade publicly and the stock price isn't something we can control. However, if we operated as a fund — a closed-in fund with no market — our return in percentage gain terms would have been 23.17% last year and 21.43% in 2021. Those are genuinely impressive returns in the private market, where you have no way to sell your shares. If our company were a fixed fund these days, we believe institutional shareholders would be quite happy with how far we've come. But keep in mind that buying stock in this company means making a long-term commitment to farmland. I look at investing in our stock as having two components, kind of like gold — and there are plenty of gold bugs out there in the world these days. It's tough — this is a hard asset; it's farmland; it's dirt. It carries intrinsic value since there's only so much good farmland around, and it's getting consumed by urban sprawl, particularly in California and Florida, where we hold a lot of farms; and unlike gold or other alternative assets, this is an active asset with cash flows coming in, and in our view it's far superior to a bond fund, since it keeps raising the dividend and the value of the assets keeps climbing. We anticipate that inflation will keep rising, especially within the food category, and as a result we anticipate that underlying farmland values will go up, and we anticipate this will be particularly the case in the fresh produce and food sector where we operate. In the United States, the trend is toward consuming more healthy foods, and thank goodness, we are positioned well for that. Regarding what lies ahead, I believe we will have income — strong income over the next few years, and one thing you can say about that is that since people must eat and we are producing food, we will get it sold; the question is at what price. Now I will take some questions from those who follow us. Operator, if you would come on, please, and help the listeners ask some questions.

Good morning. Let me start with the $1 million write-off — can you walk us through what drove it, and is there any possibility we might collect those rents?

Of course. We're dealing with two tenants here. One of them is an almond grower based in California. The other is a blueberry grower located up in Michigan. Across those two tenants, we had three leases apiece, and it was those arrangements that led to this write-off. As I recall, the figure came to about $939,000 in revenue that we had recognized earlier. On top of that, we obviously incurred roughly $400,000 in net loss, even though we didn't record $400,000 of revenue that we would have recorded if they had stayed on an accrual basis. Regarding that California almond farmer, I'd characterize this renter as being among our more modest-sized ones when measured against the rest of our almond renters — smaller than the others in that group. Beyond that, they run a processing facility too, handling about $30 million worth of almonds annually. Consequently, with the almond market having weakened, they essentially took a double blow — both in their growing business and in their processing business. So the combination of their scale and getting hurt in two areas impacted them to a greater degree than our other almond renters. Turning to the Michigan grower — there are a few points to cover there. On the operations side, he's made solid profits from our farms. However, earlier this year he went through something that was essentially a medical crisis. Several months were spent by him in intensive care, which led to a slowdown — because of what he was dealing with, we chose not to push him hard at that time — and there's also a possibility, in our view, that he stretched himself too thin by growing his business at too fast a pace. As a result, they ended up short on cash; despite that, we're collaborating with these two tenants in an effort to bring their payments current. However, absent a defined roadmap ahead, income from every one of these leases — from all of them — is going to be recorded using the cash method, meaning we book it at the moment funds arrive; after the year closed, we did collect a few payments from one such tenant. As a result, some revenue will be reported during 2023 tied to these agreements. That said, at this point we simply are unable to place complete confidence in all of the upcoming rent amounts owed under each of these leases.

All right, moving to my second question — I was hoping you might give us some detail on what cap rates look like right now in the market where farms get bought.

There hasn't been a lot of movement in cap rates. Unless you're prepared to let them farm the land for 5%, 5.5%, then at that cap rate, they're not going to sign a lease; and because our borrowing costs sit at roughly that same level, justifying the risk-reward of acquiring farms and merely pulling in enough to cover that cap rate is genuinely tough for us. That's why things are moving quite slowly at the moment. This will shift, Gaurav. What tends to happen is you get rates adjusting upward, and growers are content to hold off and see. A number of them simply can't hold off; so down the road we should come across some solid chances. Taking land at that kind of rate isn't something I enjoy, but for our shareholders it's really quite favorable.

Alright, thanks.

Is there anything else anyone would like to ask?

Hello, and good morning, everyone. David, will you have to find new tenants for that California almond farmer and the Michigan blueberry producer during this year?

I'm not sure. My guess is the almond grower will get back on his feet. Eventually, he'll sell sufficient almonds to make good on what he owes us. So even though we've recorded some of that amount as a write-off or hold, whatever term you prefer, we will recover that one. As for the blueberry guy, he truly has us concerned. He endured something terrible — an explosion occurred on his farm, and it burned him quite seriously. So our hope is that he pulls through. At present his son is assisting him. It appears he's recovering, though it's difficult to tell. We dislike applying pressure to these farmers when circumstances like that arise, since it communicates the wrong thing. Our farmers are genuine partners, and pushing them too hard is something we dislike doing. That said, a woman is seated at the table with me right now who handles collections on every one of these. And I intend to dispatch her to California. She'll gather the payment for us. I'm only joking, of course. She's sitting right here laughing. In any case, the key point is that these folks will pay. Money is flowing in from every one of our farms apart from these; and ultimately, we'll receive this money and everything will be fine; so that doesn't trouble me. This isn't some sort of catastrophe like — like what everyone experienced back in 2008 and 2009.

Rob, on the cost of new debt—if we went out and raised something fresh, what would we pay, and is our cheapest net option the line of credit or one of the farm bureaus?

The least expensive route is unquestionably a farm credit association. Our line of credit currently sits in the high 6s, which is fairly pricey, so that's why we barely draw on it. Borrowing through a farm credit association, net of patronage, would likely land us in the high 5s—possibly low 6s at the upper end.

All right, that’s useful.

Perhaps slightly more than double, up 150 basis points from there.

Okay. There's a decent amount of cash parked on the balance sheet. Given your comment that deal activity has been sluggish through the first six months, what's the plan for the common ATM and the Series E preferred in that same period, assuming the stock price bounces back enough that selling ATM shares makes sense? Would you continue issuing at a steady pace during the first half and, ideally, get ahead on funding additional acquisitions in the second half? Or would you pause both entirely, given that you already have enough capital on hand? What's the thinking there?

The company is in very strong condition right now. Cash is flowing in from all the other farms. We only brought up those two farmers who aren't performing as well. So we're well positioned to cover our dividends and keep moving ahead. That said, you're correct — the real question, both now and going forward, and I've got others at the table listening in on this one, is what will we do with our cash? Could we acquire additional farms? We have folks reviewing solid opportunities, but at this moment there's no justification for taking on that level of risk within our farmland fund. We're not in any rush to spend down our equity, and we won't get out in front of ourselves. On top of that, if farmers are paying rent at a 5% or 6% cap rate, their profits are going to be thin. So there's no point in forcing this — putting assets on the books now in hopes that we can refinance them or take some other action down the road. Given how robust our cash flows are from the remaining farms, my preference right now is to stay cautious. Hopefully, that's the response you were hoping for, which gives you the green light to go ahead and purchase shares based on this.

One more thing before I let you go, David. What's your take on indoor vertical farms? Realty Income said yesterday that it's teaming up with Plenty. I'm just wondering whether that's a space you guys pay attention to at all?

Yeah. I'm quite familiar with them. One of the big strawberry growers has the State of Virginia behind it, and that's definitely something we'd have interest in. Broadly, though, there's one big issue with indoor farms: once you stack more than a single story, you lose a tremendous amount of sunlight energy. And on top of that, even with high wattage bulbs, there's nothing strong enough to match how the sun grows things. Take 1 acre of lettuce farms in California — that yields more lettuce than anything you could ever produce indoors. So we're keeping an eye on it. There's a fellow in our office, in fact he's seated at the table right now, who came out of that industry. His parents built those vertical farms. But I've yet to see any of the 2-story or 3-story ones — I believe there are even some 6-story ones out there — grow anything besides small greens, and those appear to do fine. Small greens aren't a business we're in, and not many restaurants will pay what those small greens cost. A few will. Generally they're cleaner and higher quality, so it's coming. When, I can't say, but if it comes we'll be there. We're watching all these folks pour money into them. I don't know, Rob, I don't think any of them make a decent amount of money. And the glass ones still beat the ones that are 6 stories tall. Someday I think we'll find one that strikes us as right and do it just to be in the business. But as of now, we're on the sidelines and not doing those.

All right. That's useful. Thank you, everyone. I appreciate you making the time.

All right; does anyone else have a question?

Good morning.

Good morning, John.