Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks, Latania, for that kind introduction. You've handled that task on numerous occasions for us, and we're grateful for what you do. I'm David Gladstone, and I'd like to welcome everyone to this quarterly conference call for Gladstone Land. We're glad all of you could join us by phone today. It means a lot that you've set aside part of your day to hear what we have to present. However, prior to getting started, we need to hear from Michael LiCalsi, who serves as our General Counsel; so, Michael.

Appreciate that, David. Morning to everyone. The report we're giving today might contain forward-looking statements covered under the Securities Act of 1933 and the Securities Exchange Act of 1934, and that includes statements about how we'll perform down the road. Such forward-looking statements carry specific risks and uncertainties, built upon our present plans, which we consider reasonable, and numerous factors could lead to our actual outcomes differing materially from any upcoming results stated or suggested by such forward-looking statements, among them every risk factor disclosed in our Forms 10-Q, 10-K and other filings made with the SEC, which you can locate on our site, gladstoneland.com — head specifically to the Investors page — or on the SEC's site, www.sec.gov. We now assume no duty to publicly update or revise any such forward-looking statements, whether because of fresh information, later events or anything else, unless the law demands it. Later today, FFO, meaning funds from operations, will be part of our discussion. FFO is a non-GAAP accounting term whose definition is net income, minus gains or losses tied to real estate sales and any impairment losses on property, with depreciation and amortization of real estate assets added back. Core FFO could also come up, which we typically describe as FFO adjusted for particular nonrecurring revenues and expenses, along with adjusted FFO, which takes core FFO and further adjusts it for specific noncash items, for instance converting GAAP rents into normalized cash rents. Our view is that these give a clearer picture of how we're operating and permit stronger comparability of how we perform from one period to the next. We'd now invite you to check out our website — gladstoneland.com once more — and register for our e-mail notification service, keeping you current on the company. Facebook is another place to find us. The keyword to use there is the Gladstone Companies, plus Twitter, where we're @gladstonecomps. What we're doing on this call is summarizing our results. So please look at our press release and Form 10-Q, each released yesterday, for fuller details. Once more, those are available on the Investors page of our website. And now David Gladstone will pick the presentation back up.

All right, thanks, Michael. Let me begin by giving you a quick rundown of the farmland we hold. Right now, we own roughly 116,000 acres. That's spread across 69 separate farms, and on top of that, we've got around 45,000 acre-feet of water in the bank. As you'll recall, one acre-foot equals 326,000 gallons, so 45,000 acre-feet represents a substantial amount of water; we draw on it for irrigation during periods when supplies run short. Taken together — land plus water — we put the value at approximately $1.6 billion. Our farms sit in 15 states and, even more significantly, within 29 distinct growing regions. Counting the single farm we currently run ourselves, our properties are 100% leased, and that's to upwards of 90 tenant farmers, none of whom are related to us. The people farming these properties are cultivating more than 60 different crops — various crop types, though predominantly fruits, vegetables, and nuts. So we've got strong diversification across the portfolio. During the first quarter, we had to remove one tenant, and we stepped in to run that farm on an interim basis with assistance from a third-party management group; we've been negotiating with a new group of — to lease this farm. Our hope had been to wrap it up by now, in time for this quarter, but we fell a bit short. So we're in the final stages, and hopefully we'll complete it in the third quarter; we're also looking into the possibility of farming this property directly ourselves, though leasing it out remains our preferred route, in addition to slow paying tenants, partly because of oversupply of their products in the markets where they operate. Well, one tenant is paying us in part, but it sounds like they may choose to shut down; we've got a couple of growers we've been speaking with about leasing this farm, so we'll probably sign a new lease with them before long. Getting payment from the second tenant proved harder and is still in progress. We ultimately ended their lease and signed a new short-term lease arrangement with a different grower. That buys us additional time to determine who we'll ultimately lease this farm to. The overall year-over-year effect on our operations from these matters was a reduction in net operating income of roughly $318,000 for the second quarter and approximately $613,000 for the year to date. As we've said on the last couple of calls, we remain more selective about the kinds of farms we pursue. It's mostly about the farmers. So we always need to secure good farmers on these farms. Consequently, acquisition activity continues to be slow for us. Since inflation remains higher than what the Fed is aiming for, rates keep climbing, and a downturn could still happen, we think this is a smart moment to take a more cautious approach with our capital. One more quick point before we proceed. Inflation in grocery store food prices is giving us a lift, but higher rates are working against us when it comes to our borrowing costs for acquiring farms; and the people who own those farms aren't ready yet to lower their asking prices, so values stay elevated — more than we're willing to pay. That said, on the whole, the farmland we already hold keeps delivering just about what we anticipated, apart from the problems with those two tenants. Lastly, we're still able to roll over every lease that comes due with zero interruption across any of our farms, and mostly at a higher rate, aside from a single exception I'll get into shortly. On a positive note, we disposed of part of one of our farms. During the quarter, it was a 138-acre parcel, non-farmable land in Florida, so we booked — through that sale, we booked a $6.4 million gain and achieved a 343% return on what we originally invested. Also, we continue to own and lease what's left of this farm, and that portion is farmable. And because the parcel was nonfarmable ground, this sale won't lower the rent we collect on the rest of the farm. Turning to leasing, since the quarter began, we've renewed 13 leases on farms across 5 different states; altogether, those renewals should produce a drop in yearly net operating income of roughly $469,000 compared with the earlier leases. That said, 4 of those leases were made to swap in a new tenant on some of the blueberry farms in Michigan. We offered the replacement tenant a reduced rent in return for keeping up and restoring the blueberry bushes located on the farm. So ideally that puts us in a stronger spot to lease these farms to a long-term tenant later this year. Counting the 4 Michigan leases to that single farmer, the other 9 leases should generate a rise in yearly net operating income of approximately $209,000, or 3%, compared with the earlier leases. Looking forward, 8 leases are set to expire within the next 6 months. Altogether, that represents roughly 5% of total annualized lease. We're talking with existing tenants at each of these farms about extensions, and with potential new tenants too. Well, we anticipate rental rates on these renewals will be fairly similar to the current leases, but right now we don't expect any downtime to result from those upcoming expirations. There are a few additional things I want to bring up before we continue. Inflation is still ongoing. It's easing somewhat because of the rate increases from the Fed, and that effect is now being experienced across the whole economy. Even so, the most recent headline inflation figure, 3%, is still sitting above the 2% target the Fed has set. So in that sense, this core inflation they keep tracking and referring to — their readings will depend on core inflation. There are indications that food prices are moderating somewhat, yet they keep rising faster than inflation overall. The majority of crops raised on our farms go to grocery stores, which places them in the category known as food at home. For the 12 months that ended June 30, that category was still higher by 4.7%; our expectation is that food prices will keep climbing faster than inflation, and that ought to help offset the rise in operating expenses that a lot of our farmers have been facing. I'd also like to bring up a few water-related projects we've been pursuing in California, ever since we pulled back on buying farms. Since 2023 turned out to be a wet year — you've likely seen the headlines about California — there was plenty of rain there. We've been engaged in a range of water improvement efforts in important parts of our portfolio. We singled out a number of projects to pursue that we think will strengthen our portfolio's ability to meet the state's groundwater restrictions. And the state is showing growing interest in the water projects we've discussed. The aim is to make sure we have sufficient long-term water supplies for the crops we currently grow on our farms. So we're sitting in a fairly solid position on that front. There are a few additional projects we'd like to examine. Incidentally, our broader approach in the state is to carry out projects that let us get the most out of water supply opportunities during wet years such as this one — the year just past. That should lower our water risk when years are dry. There's been a bit of coverage in the papers, some attention in the news, about water levels in the Colorado River being depleted. There's no date — 1 day of water being produced in the United States and Colorado won't make it to the ocean there, using up all of it. Fortunately, not one of our properties relies on the Colorado River or any of its tributaries for water; we do have properties sitting at the edge of that, but not within the need area; therefore we aren't affected if you come across headlines concerning the Colorado River. I'll pause here, that's sufficient regarding operations. And now I'll hand things over to our CFO, Lewis Parrish, who will speak to you further about the actual numbers.

Thanks, David, and good morning to all of you. I'll start with a quick review of what we did on the financing front; no new borrowings were taken on at any point in the quarter. We did pay down roughly $6 million of loans from the start of the quarter that had been slated to come due. Turning to equity, from the start of the quarter we brought in net proceeds of roughly $3 million from selling our Series E Preferred Stock, plus $2 million from common stock sales made under the ATM program. Now to our financial results. In the second quarter, net income came to roughly $7.9 million, with net income to common shareholders of $1.7 million, equaling $0.05 per common share. In the operations discussion that follows, I'll be setting the second quarter of 2023 against the matching second quarter of 2022. Adjusted FFO for this quarter landed at approximately $3.8 million, or $0.107 per share, versus $4.5 million, or $0.129 per share, a year earlier. What mainly drove AFFO lower was the higher cost of carrying uninvested capital on our balance sheet, which was partly offset by growth in top line revenues. Fixed base cash rents rose by roughly $512,000, or 3%, compared with the prior year quarter, largely due to extra revenues earned on new farms acquired within the last year. That gain was partly offset by lower revenues from the self-operated and nonaccrual properties, along with a lease we signed in the fourth quarter of 2022 under which we lowered the fixed base rent in return for a larger participation rent component in that lease, and how that turns out won't be known until later this year. As for the nonaccrual properties, we'll keep recognizing revenues from those leases on a cash basis until the point when collecting the future rental payments in full is once again considered probable. As David noted, we did replace one tenant during the quarter, we're near the finish line on turns to replace a second tenant, and the third tenant is presently current on the rental payments owed to us. So we're optimistic that every one of these properties will be back to full accrual status by year-end; on a same-property basis and counting participation rents, our Q2 2023 lease revenues were up slightly, by a little over $100,000, or about 1%, against the prior year quarter. On the expense side, leaving out reimbursable expenses and certain nonrecurring or noncash expenses, our core operating expenses for the quarter were up by about $210,000 from last year. Total related-party fees rose by about $156,000, mainly because of additional assets added to our portfolio over the past year. If we take out related-party fees, our core operating expenses were up by just $54,000 from last year. Our property operating expenses rose roughly $97,000, and the main reason was extra legal fees tied to drafting new leases and helping with collecting rent from certain tenants, though that was partly offset by lower repairs and maintenance costs this year. On top of that, G&A expenses fell by roughly $43,000, largely because costs tied to the 2023 Annual Shareholders Meeting had already been recognized in the first quarter. And lastly, other income rose thanks to more interest income on balances and money market accounts from higher rates, while interest expense dropped because of loan repayments and payoffs over the last year; now let's turn to net asset value. During the quarter, 62 farms were revalued, every one through third-party appraisals. On the whole, those farms rose modestly in value, by roughly $850,000 compared with their prior valuations from around a year earlier. So at June 30, our portfolio was valued at roughly $1.6 billion, and all of that was backed by either third-party appraisals or purchase prices. Using these updated valuations and factoring in the fair value of our debt along with all preferred securities, our net asset value per common share at June 30 came to $19.15, which is more than $2 higher than the value at March 31. The biggest reason for that gain was the change in valuation of our fixed rate debt and preferred securities, especially the Series C Preferred Stock. Before, this security was carried at its liquidation value under the waterfall approach. But under our valuation policy, once the security listed on NASDAQ in June, we started valuing it using its market price at quarter end, the same way we treat all publicly listed preferred securities. Moving to liquidity, counting availability on our lines of credit and other undrawn notes, we now have more than $185 million of dry powder, plus roughly $145 million of unpledged properties. More than 99.9% of our borrowings are presently at fixed rates, and on a weighted average basis, those rates are locked at 3.35% for another 4.6 years. Because of that, the recent rise in interest rates has had only a minimal effect on us; even so, those increases do affect our capacity to finance new acquisitions and also factor into whether we repay or refinance maturing loans. Still, when it comes to our existing debt load, we think we are well shielded against any future — any additional interest rate hikes for the foreseeable future. As for upcoming debt maturities, roughly $34 million comes due within the next 12 months. That said, about $17 million of it consists of various loan maturities. The properties securing those loans have gained a total of $7 million in value since their respective acquisitions. So we don't expect any trouble refinancing any of these loans if we decide to do so. Once those maturities are taken out, roughly $17 million in amortizing principal payments remains due within the next 12 months, which works out to under 3% of the debt we currently have outstanding. Then, on the topic of our common distributions: we just increased our common dividend once more, bringing it to $0.0462 per share each month. That represents the 31st occasion we have boosted the common dividend across the last 34 quarters, amounting to a cumulative rise of 54% during that stretch. With that said, I'll hand the program back to David.

All right, thanks, Lewis. That was a solid update. We're still out there looking in the market in case something attractive comes along. That said, as I noted, we've grown more careful when it comes to buying. The reason really comes down to what it costs to borrow money and what farms are selling for. Even with borrowing costs far above where they stood before the Fed's rate hikes, farm prices haven't come down. A handful of final points. Our view is that putting money into farmland that grows crops tied to a healthy way of living — things like fruits, vegetables, and nuts — is the right direction for us. We're already seeing that play out in today's market. That's a favorable spot to sit, since it doesn't get hit by the same shifts in demand you'd face if you were concentrated only in corn or in those kinds of corn crops. On the whole, appetite for top-tier farmland producing berries and vegetables is holding steady to robust across nearly every region where we own farms, especially along both coasts; and taken as a whole, U.S. farmland is doing quite well. Take the NCREIF Farmland Index, for instance, which holds roughly $16.2 billion in farms, and our full $1.6 billion factors into that NCREIF figure. That agricultural property index is a strong benchmark. Our goal is to mirror it precisely, since its return over the last 25 years has been 11.4%, with not one down year along the way. That beats the S&P Index and the broader REIT indexes, and each of those posted 6 or more losing years across that same stretch, compared with 0 for the farmland index. So to wrap up, we can touch on a few things and then take your questions. Keep in mind that buying shares in this company is a long-term play. It's DIRTT, it's farmland. And our stock, this investment, 2 — comes with 2 components. It resembles gold in being a hard asset, farmland with real intrinsic worth, since the supply of quality farmland in the United States is finite; and urban sprawl keeps consuming it, particularly in California and Florida, where a great many of our farms sit. And second, in contrast to gold and other alternative assets, it's a working asset that generates cash flow for investors, and we think we beat a bond fund since our dividend keeps rising. We anticipate inflation, especially within the food segment, will keep climbing, and we anticipate the value of the farmland underneath will climb along with it. And we think that will prove especially true in fresh produce, as the trends favor us: more Americans are choosing healthy foods, and that movement keeps expanding. Now I'll pause and ask the operator, Latania, to come on and explain how to submit questions.

David, do we have any acquisitions under contract as of today? And with what you said about how strong pricing is for farms right now, are you thinking about divesting more properties during the second half of this year?

If we could locate a buyer for the nonperforming ones, or the troubled ones that certain farms are dealing with, we would absolutely be ready to sell. That said, Rob, what I'm aiming for is to accumulate as many farming assets as I can. Prices have kept climbing — farms I purchased 20 years ago now command roughly 4x what I paid. So it's a solid space, with limited risk on the downside. At this moment, nothing is under contract. We're having a few conversations with farmers. And trust me, the men and women working here are eager to snap something up. So I won't purchase a farm yielding me, let's say, a 5.5% cap rate and then take on debt at 5.5%. That's a fine method for ending up long term heading the wrong way. Still, I really wish interest rates would decline. The federal lenders are able and have been able for quite a while to lower their rates and let us return to the business of acquiring farms. The farmers we purchase from aren't rushing. They'll only move forward if the price matches what they're after. So we're essentially paused; a great deal of our focus these days is on water. As you're aware, we now have abundant water. Even so, we're modifying certain farms so water can be stored there by installing some firms and letting us move in that direction; and strange as it may sound, California's state government is urging everybody to do so. In my view, we're far ahead of the curve when it comes to getting water in place. I believe we currently have sufficient water for the coming 2 years, and we have a couple of deals that would carry us toward 2040 in terms of having adequate water in — underground; those aquifers have dropped somewhat, so everyone's trying to refill them all during this period of abundant water. But when it comes to acquiring new farms, we don't want to buy farms and merely proceed at the same pace we bought them before. So we'll need to find our way through that. And things are shifting. You can see some farmers beginning to mention different cap rates, and I believe it will occur. Some of them — as you know, the typical farmer is around 58 years old at this point. Also, individuals hold ownership of over 40% of American farms. So at some point, as these folks keep aging and eventually have to close out their estates, events will unfold. We will be prepared for that provided we're able to secure water at a sensible cost. There's been discussion about doing an offering and bringing in additional equity. My view is that the moment isn't right for that yet, though we will definitely speak with your team if we move in that direction. Hopefully that addresses what you asked.

That's useful. And Lewis, where exactly are the problems with the operator — these operators turning up? Is it on the revenue line? Is it on the property expense line, or both? The reason I'm asking is that property operating expenses during the first half rose by over $600,000, which works out to roughly 44%, and that's a sizable jump for a net lease REIT. So I was hoping for some detail on that, and also whether the $2 million of first half operating expense is a solid run rate for the back half?

So it's turning up somewhat in both places. For those properties, apart from the amounts we received in cash, no revenue has been recognized. And as I believe David said, for the first half of the year, the year-over-year effect on our net operating income comes to roughly $600,000; that reflects a mix of the revenue line item and the property operating expenses. Looking at the revenue side by itself, I believe we saw a decline of approximately $400,000 year-over-year. The remainder sits in the property operating expense line item, and the majority of those costs are legal fees we've incurred in order to, as we mentioned, the script, release — get new leases signed on those properties, plus a large portion also legal fees incurred to sort of assist with collecting those amounts, both the rent amounts, and while they were our tenants and potentially pursuing them after they vacated those properties. Beyond that, the increase has mainly come from 2 factors. One — and I don't have the precise number broken out for these 2 categories; but one, we did incur some repairs, maintenance expense on the Florida farms to — for repairs related to the hurricane damage, and also a couple of hundred thousand dollars on the West Coast to fix damage from flooding. And the other bucket of that was simply higher cost to protect water rights on farms in California.