Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Thanks, Sherry. That intro was great. I'm David Gladstone. I want to welcome everyone to the quarterly conference call for Gladstone Land, and I appreciate all of you joining us today; we're grateful for the chance to speak with you and hear whatever questions you might have. We'll begin the same way we always do, with Michael LiCalsi, our General Counsel and Secretary. Michael, would you like to give your presentation.

Thank you, David. And a good morning to each of you. The report we're giving today could contain forward-looking statements made under the Securities Act of 1933 and the Securities Exchange Act of 1934, among them statements about how we'll perform going forward. Such forward-looking statements carry specific risks and uncertainties grounded in the plans we currently have, which we consider reasonable. Numerous factors could lead our actual results to differ materially from any results in the future that these forward-looking statements express or imply, among them every risk factor contained in our Forms 10-Q, 10-K and other filings we make with the SEC; through our website GladstoneLand.com, on the Investors page, you'll locate them, and they're also available on the SEC's website at www.sec.gov. We assume no duty to publicly update or revise any of these forward-looking statements, whether from new information, future events or otherwise, unless the law requires it. Today's discussion will cover FFO, meaning funds from operations, a non-GAAP accounting term, whose definition is net income, excluding 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 generally define as FFO adjusted for certain non-recurring revenues and expenses, and adjusted FFO, which further adjusts core FFO for certain non-cash items, for example converting GAAP rents to normalized cash rents; our view is that these give better indications of how we operate and permit better comparability of our performance from one period to the next; and please take a moment to check out our website, again that's GladstoneLand.com, where you're able to sign up for our e-mail notification service, which will keep you up-to-date on the company. You can also locate us on Facebook, search term The Gladstone Companies, and our Twitter handle is @Gladstonecomps. Today's call provides an overview of our results, so we ask that you look at our press release and 10-Q, both issued yesterday, for further details, which once again are available on the Investors page of our website. With that, I'll hand things back to Gladstone — David Gladstone.

Thanks, Michael. Let me give you a quick look at our Farmland Holdings. Right now we hold roughly 116,000 acres across 169 farms, plus around 45,000 acre feet of bank water stored in the aquifers beneath those farms. One acre foot equals about 326,000 gallons, so as you can tell, we're talking about billions of gallons of water available to support us. We don't require it at present, though perhaps we will down the road. Taken together, the land and the water carry a current value of approximately $1.6 billion. Our farms span 15 separate states and, even more significantly, 29 distinct growing regions. They remain roughly 100% occupied and are rented out to approximately 90 different tenants — there's one we'll discuss shortly; it is occupied, but that tenant isn't performing well. Every one of these farms, those 90 tenant farmers, are not related to us, and the people farming them cultivate more than 60 crop types, so we're nicely diversified there; however, the bulk of it — nearly all of it — sits in fruits, vegetables, and nuts. We had to remove a single tenant, the one I wanted to bring up; that tenant had to be removed during the quarter, and we stepped in to run the farm on a temporary basis. When we did this years ago, it was different — this time we brought in a third-party management group that handles farming operations. We've wrapped up talks with that new group about leasing this farm, and we're hopeful a lease gets signed for this farm prior to the close of the second quarter. On top of that, we have two tenants who pay slowly — these aren't the same kind of problem as the one I just described. Those two slow payers are partly a result of too much supply in the market, since the crops they grow in those areas, as many of you probably know, include a massive almond surplus. So please, please go buy some almonds today and push those prices back up. Then our tenant will be fine. At the moment, that tenant is making a partial payment to us, but another grower has expressed interest in leasing this farm, so we'll probably sign a new lease with this new tenant within the next couple of months. The second party who is somewhat slow — collecting from this other tenant — has proven more difficult and will take a bit longer to work through. We've brought in some lawyers, but we're still communicating with the tenant and also holding discussions with several other groups about potentially leasing these farms; so we're hoping to get this situation resolved. Certainly, at some point this year. All told, the year-over-year effect on our business created problems, and those problems lowered our net operating income in the first quarter by $295,000 — which isn't a large figure for us. As you're aware, we bring in quite a bit of income. Like we've said on the last few calls, we're still being pickier about which farms we consider, so compared with earlier years, our acquisition pace is sluggish; given that inflation and interest rates keep climbing and the chance of a recession keeps growing, we simply think this is a sensible moment to be more cautious with our capital. Still, aside from the troubles caused by a small number of tenants, our current farmland holdings keep delivering, I'd say, as we anticipated. My sense is that the current scale of the company will be a topic we revisit annually or every other year. Yet even with those troubles, and helped by the interest patronage we get from our farm credit borrowings — meaning they return a portion of the interest we've paid — we posted another solid quarter for AFFO, and AFFO is something we monitor closely; that's adjusted funds from operation, so we're performing well. Last, we keep managing to renew every expiring lease with no downtime whatsoever across any of our farms, and typically at a rent that's higher. Turning to leasing, from the start of the year we've renewed five leases on farms located in three separate states, and altogether those renewals should produce a bump in yearly net operating income of $598,000, roughly 12% above certain earlier leases. Going forward, just two leases are set to expire within six months, and combined they represent under 3% of our overall annualized lease revenue. We're talking with the existing tenants at each of these three farms and each of these farms and two farms. And each of these farms about extending, and we think we can secure a modest rent bump from these two renewals. So at present we don't anticipate any downtime arising from any of our forthcoming expirations. There are several other points I want to raise before we continue. Inflation, naturally, isn't showing any indication of easing, even if it did ease somewhat in the most recent reading, as the effect of the Fed's rate increases is now being experienced across the economy. That said, the most recent headline inflation figure came in at 5%, which is lower than the 6% or so recorded previously, yet it's still extraordinarily elevated and above the Fed's target level, which is 2%. Almost every crop cultivated on our farms belongs to a single category, namely food-from-home, meaning it gets consumed at home instead of in restaurants or in manufacturing plants where it would be processed. So the majority of what we grow goes to grocery stores. If you walk into a supermarket and check out the produce aisle, that's where you'll find most of our goods winding up. The nuts aisle might be a short distance off, but it's close by. Food prices are likewise beginning to show signs of easing, and in our food-from-home segment, the increase is just 8.5%. Our belief is that food prices will keep exceeding inflation, and that ought to help offset rising operating costs for a lot of the farmers. They're seeing some fairly significant increases. Turning to the water picture in California, there's been a total reversal there — the substantial rainfall that came to California earlier in the year has been a blessing for the majority of farmers in the states, and most reservoirs sit at or above their historical averages, while the statewide snow pack level in the mountains stands at roughly 260% of normal, and that means the state's water project just announced 100% water allocation to it. And that really hasn't occurred since 2006 — 2006 was a wonderful time — and our farmers are quite pleased to receive all the water they require nowadays. You might have come across this too, but a lot of the reservoirs throughout the state of California are approaching capacity, and they're starting to release water in expectation of further storms, and in particular the snow melt that's going to take place this summer as warm weather moves up to the snow that's sitting out there. This lets the farmers capture this runoff for their own personal use at extremely low cost. So a great many of our tenants, especially permanent crop growers such as almonds and pistachios, have been seizing this chance to make the most of the floodwaters — or what we refer to as the surface water — instead of groundwater, or even deliberately flooding their fields. And a benefit for restoring the groundwater levels; we're also seeing this as a chance to look into acquiring some extra water; so we may purchase a little more, but we're in excellent shape for this year and possibly even next year when it comes to how much water we have. Supplies or investments in infrastructure is something we examine so that we can shift the water from one location to another. And so how we can capture additional water at our farms at appealing prices currently. We did have one farm that endured roughly $855,000 of damages stemming from the flood; this was a blueberry farm in the Central Valley of California. It has large shade structures over the blueberry bushes, and that protects it from wind and rain and other adverse weather. Not a single one of the blueberry bushes was harmed itself, but plenty of the shade structures were damaged, and the tenants are presently talking this over with their insurance provider on this matter, and we don't anticipate having to pay anything out of pocket for this. Alright, I'll pause at this point and turn things over to Lewis Parrish, our CFO, so he can share some figures with you. Lewis, go ahead.

Thanks, Dave, and good morning to all of you. To start, I'll quickly walk through what we did on the financing side. No new borrowings were taken on during the quarter, though roughly $22 million of loans that had maturity dates on the calendar were paid off since the start of the year. Turning to equity, since the year began we've brought in approximately $2 million of net proceeds from selling Series E Preferred stock, plus $13 million of net proceeds from common stock sales made under the ATM program, at an average price of $19.72 per share. Now to operations. First, a note that in Q1 we posted net income of roughly $1.8 million, alongside a net loss to common shareholders of $4.3 million, or $0.12 per common; and one more thing before I discuss operations — my comparisons for the first quarter of 2023 will be against the matching quarter of 2022, not against the quarter right before it the way we previously did things. Adjusted FFO came in at approximately $6 million, or $0.17 per share, for the current quarter, versus $6.4 million, or $0.185 per share, a year earlier. Dividends declared per common share totaled $0.138 this quarter, against $13.6 in the comparable prior year period. What mainly drove the AFFO decline was extra financing costs together with rises in certain operating expenses, partly offset by stronger top line revenues and lower related party fees. Fixed base cash rents grew by roughly $850,000, or 4%, versus the prior year quarter. The main reason for that gain was added revenues from new farms picked up during the past year, partly offset by lower revenue from the self-operated and non-accrual properties I mentioned earlier. As for those non-accrual properties, revenue from those leases will keep being recognized on a cash basis until we once again consider full collection of future rental payments to be profitable; beyond that, we recorded $195,000 of participation rents this quarter, compared with none a year ago; those were payments originally due to be made in Q4 of 2022. Even so, we didn't have enough information to record those amounts until Q1 of 2023. On a same-property basis, with participation rents included, our Q1 2023 lease revenues rose by roughly $258,000, or 1.3%, over the prior year quarter; on the expense side, after excluding reimbursable expenses and certain non-recurring or non-cash items, our core operating expenses for the current quarter fell by approximately $443,000 from last year. Total related party fees dropped by around $900,000, which came from a $1.1 million incentive fee our advisor earned in the prior year quarter versus none this year. Once related party fees are removed, our recurring core operating expenses were up by roughly $460,000 from the prior year. On the operations side, property operating expenses rose roughly $300,000, mostly from extra legal fees tied to defending water rights on some California farms, plus help with collecting rent from certain tenants. We also took on added costs at the self-operated farm. Beyond that, general and administrative expenses were up roughly $160,000, largely because of costs tied to our upcoming shareholders meeting along with higher costs. One last operations item: we booked approximately $2.3 million of interest patronage from our farm credit borrowings, which is roughly $500,000 below what we recorded in Q1 of 2022; however, the bulk of that decline was offset by more income earned on balances in our money market accounts. Now to net asset value: 34 farms were revalued this quarter, all through third-party appraisals, and on the whole those farms rose in value by roughly $12 million, or 3.4%, versus their prior valuations from a year earlier. At March 31, our portfolio was valued at approximately $1.6 billion, and that entire valuation was backed either by third-party appraisals or by actual purchase prices. Using these updated valuations and including the fair value of our debt in all preferred stock, net asset value per common share at March 31 came to $17.12, a modest increase of $0.04 from the December 31 figure. Turning to liquidity: counting what's available on our lines of credit and other undrawn notes, we now hold more than $190 million of dry powder. On top of that, we hold $130 million of unpledged properties. More than 99.9% of our borrowings sit at fixed rates today, and on a weighted average basis those rates are locked at 3.34% for a further 4.8 years. Consequently, the recent rise in interest rates has had only a minimal effect on us; even so, those higher rates do affect our capacity to finance new acquisitions and factor into the choice to repay rather than refinance loans as they mature. As for the debt we carry right now, we think we're well shielded from any additional rate increases for the foreseeable future. On upcoming debt maturities: roughly $40 million comes due within the next 12 months. That said, about $23 million of it consists of various loan maturities, and the properties collateralizing those loans have collectively gained $7 million in value since their respective acquisitions; so we don't anticipate any trouble refinancing any of those loans should we decide to. Taking those out, we're left with only about $17 million of amortizing principal payments due within the next 12 months, or under 3% of our current debt outstanding. Lastly, on our common distributions: we just raised our common dividend once more, to $0.046 per share per month; that makes the 30th increase of our common dividend across the past 33 quarters, amounting to a total rise of more than 53% during that span. Having said that, I'll now hand things back to David.

Thanks for the update, Lewis. We're still keeping ourselves involved in the market in case a solid chance comes along. But like we've said all along, we've grown a lot more careful when it comes to buying properties. I'm simply staying away from the market until things calm down a bit from everything the government is doing and all the rest that's happening out there. One last thing or two before we open it up for questions: we think putting money into farmland — the kind we own, where the crops support healthy living, things like fruits, vegetables, and nuts — matches what's happening in today's market. So we feel we've got the right crops in the right spot. In nearly every region where our farms sit, demand for top-tier farmland — the type growing berries and vegetables — has held steady or stayed strong. That's especially so along the West Coast, covering most of California, Oregon, and Washington — the State of Washington — plus the East Coast, above all Florida and a few other states. And on the whole, farmland keeps delivering solid results next to other kinds of assets. There's an organization known as NCREIF, and they run a farmland index — I believe every one of our farms falls within it — and they track roughly $15.9 billion in agricultural properties. Over the last 25 years, the average yearly return comes to 11.4%, and there wasn't a single down year in that stretch. That beats both the S&P index and the broader REIT index by a wide margin, since each of those has posted six or more losing years across the same timeframe. Meanwhile, down years in this farmland index number zero, which makes you feel good whenever you buy into this stock. Keep in mind that buying shares in a business such as ours amounts to a long-term commitment to farmland. I'd say owning our stock really breaks into two pieces; it's a lot like gold in being hard assets — farmland, soil — which carries intrinsic worth, since the supply of farmland is limited, above all in the regions where we operate, and urban developers keep consuming it, particularly in California and Florida, where many of our farms sit. Yet unlike gold and other alternative assets, this is an active investment that generates cash flow for investors, and we think we beat a bond fund or anything similar, because we keep raising the dividends as farmland values climb, and we can raise rents, so it's a gradual rise as we move ahead. We anticipate inflation, especially within the food sector, will keep climbing, and we expect the value of the underlying farmland to rise because of that. And we think that holds especially true in the fresh produce segment, as more people across the U.S. eat healthy foods and that trend keeps expanding. At this point, I'll pause and have Sherry, who is our operator, join in and explain the way we can take a few questions from those folks who track us.

Thanks. Morning. I'd like to ask about the acquisition market — you mentioned your cautious outflow there. I was hoping for a bit more detail on what you're observing in the market regarding farm valuations, and what sort of activity and product flow you're seeing out there?

A couple of things stand out here, I'd say. To begin with, selling a farm has become a lot more expensive lately, particularly across the Midwest, and hires are the same way. The trouble is that farmers simply won't part with their land for anything under roughly a 5% cap. Consequently, we previously acquired these at far lower cap rates, and that's no longer possible — which is one reason we pulled back: there's not much profit to be had when you purchase at a 5% cap while financing at a 5% cap. So we've kept our distance from that for some time now. At some point this will shift — farmers will decide they want to sell, and they'll have to accept a discount to bring the price to a level where buyers would step in. I believe there are some active purchasers out there doing this with pure equity. We've chosen against that, simply because we want to preserve our equity during these tough times. And from a different angle, the cost of money for buying anything at all is far greater than it previously was. We used to borrow at roughly 3.5%, and now it's 5%, 5.5% — though many lenders are telling themselves they won't write many loans if they continue raising the rate. So we'll need to watch where this inflation push leads us before we re-enter the marketplace. Gaurav, I just don't — I don't really know how it works until things settle out, and you don't have the government settling out and you don't have the buyers settling out. So right now it's a bit of a slow grind. Does that answer your question?

Yes.

Any other question?

For my second question — right, I'd like to ask about the $40 million of debt you have expiring across the coming 12 months. Could you give us some detail regarding the interest rate attached to that maturing debt? And what's your approach for refinancing it?

Out of that $40 million reaching maturity, $17 million of it consists of nothing more than standard amortizing payments, so we'll simply settle that using cash currently available to us. As for the $23 million maturing, the bulk of it comes due early in 2024. My recollection is roughly $6 million or $7 million matures during the summer. The remainder falls due in January. What happens this summer hinges on the rates available to us at that point, and that will shape whether we keep paying down or go the refinancing route. My sense is — the landscape could look quite different 11, 12 months out, early in 2024, when most of it reaches maturity. With luck, rates will sit at a more appealing level and we can refinance those. Should that not be the case, we still hold excess cash and liquidity to pay them down.

Any further questions, Gaurav?

No, that covers everything from my side. Thanks.

All right, Sherry. There's another person in line who would like to ask us something.

Hi there, good morning. For the self-operated farm, should we anticipate a comparable amount of operating expenses until a lease is signed, or did the first quarter include additional onetime costs?

We do anticipate getting this leased, likely either this month or next month. So as soon as a lease is in place, those operating expenses disappear. Should that plan work out, we wouldn't anticipate incurring any operating expenses tied to this farm. The figure we saw in Q1, I believe, came to roughly $100,000, so with luck you'll notice a reduction in Q2. If that doesn't happen, though — if we can't secure a lease — then that figure would rise, since that $100,000 represents approximately one month's operating expenses for this single farm. With luck, though, it does come back down, because we will — we do anticipate having one before too long.

Craig, this one’s a solid farm. We ought to turn a profit here, even if we’re the farmer — and really, we aren’t the farmer, since we’ve brought in a team that also handles farming work for other people. So on this particular one, we should earn a little money. Please continue with your following question.

Understood. Right, my intention was simply to ask a bit more about those floods. I realize you aren't trying to predict your participation income or what sort of effect it will have. Even so, I'd like to hear your broad sense of how this fall's harvest yields could be affected, and roughly how you're approaching that question.

My take is that the nut business — all that additional water they've received is making them quite happy, and with certain other crops, blueberries are set for a strong season, I believe, in California and Oregon and those places. A few of the crops that came in early this year took a beating, meaning strawberries performed poorly while rain was hammering them. As a result, they gave up some potential gains on strawberries. And in many respects I believe it's a net positive; nothing like this has happened since 2006, and 2006 was an excellent year for products coming out; so I believe we'll be in good shape. Knowing what the remainder of the year holds is genuinely difficult. My sense is that no floods will occur over the coming six months there. I went out forecasted…

That helps. And I suppose only one additional item from me. Based on simply where cap rates stand and where the cost of capital sits — at that, this year could be more of a year of paying down leverage rather than one of expansion. Would that be accurate?