Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, thanks, Latonya — that was a pleasant introduction. And as she mentioned, I'm David Gladstone, and we're glad to have all of you join the conference call we hold each quarter for Gladstone Land. We appreciate everyone dialing in today and for setting aside part of your day to hear what we have to present. Before I get started, we'll have Michael LiCalsi, who serves as our General Counsel, take it from here. Michael, please go ahead.

Thanks, David. Today's report could include forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934, among them statements regarding our future performance. Such forward-looking statements involve specific risks and uncertainties based on our present plans, which we believe are reasonable. That said, numerous factors might cause our actual results to differ materially. Regarding the various future outcomes expressed or implied in these forward-looking statements, including every risk factor contained in our Forms 10-K and 10-Q along with other filings we make with the SEC, those can be found on our website, www.gladstoneland.com. Specifically, visit the investors section, or you can find them on the SEC's site at www.sec.gov; furthermore, we assume no duty to publicly update or revise any of these forward-looking statements, whether due to fresh information, upcoming occurrences, or anything else, unless legally mandated. Today, we'll discuss FFO, meaning Funds From Operations. FFO is a non-GAAP accounting term that refers to net income minus gains or losses from real estate sales and any property impairment losses, plus depreciation and amortization of real estate assets. Next, let's cover core FFO, which we typically describe as FFO with adjustments made for specific revenues and expenses that don't recur, along with adjusted FFO, which takes core FFO and further modifies it for particular non-cash items — for example, translating GAAP rents into normalized cash rents. In our view, these metrics provide clearer insight into how our operations are performing and make it easier to compare results across different periods. Head over to our website — again, that address is gladstoneland.com. Please subscribe to our email notification service. We're on Facebook too. Search for the keyword The Gladstone Companies. You can also find us on Twitter at @gladstonecomps. This call is just meant to give you a summary of how we did, so please take a look at the press release and the Form 10-Q we put out yesterday if you want the fuller picture. With that said, I'll hand things back to David Gladstone. David?

All right, thanks, Michael. As usual, I’ll begin with a quick summary. Right now we hold roughly 112,000 acres spread across 168 farms, plus water assets of about 49,000 acre-feet, and that amount is growing at present. A single acre-foot works out to roughly 326,000 gallons, which means we have close to 16 billion gallons of water. That water safeguards our land, since land has little value without it. Taken together, the acreage and water carry an approximate total valuation of $1.5 billion. Our farms sit in 15 states and, more significantly, 29 growing regions, while every one of our water assets is located in California. Those farms are rented out to 90 tenant farmers, and the tenants cultivate 60 crop varieties, largely fruits, largely vegetables, along with plenty of nuts. All of it shows up in the produce aisle at your supermarket, and that’s where the majority of these crops get sold. Let me pause here for a moment. With diversification of this kind — and we are indeed well diversified — you’ll encounter issues in certain regions, and that’s simply part of the diversification you’re working to preserve. Take almonds and pistachios: demand for both has fallen, so prices are weak right now, and rebalancing could take years. Almonds are a globally traded crop, and consumption has dropped compared with earlier times, while inflation and farming expenses have pushed up the cost of growing them. As a result, some consumers can no longer afford almonds and pistachios, and that weaker demand creates trouble for every farmer we have in that area. Certain farms do run into trouble. Michigan blueberries, for instance, enjoyed a fairly strong harvest this season and decent sales, yet one of our farmers there suffered a very tragic accident. He got hurt and was unable to work his farm. So we’re proceeding with selling those farms, and we expect to be fine once the sale is complete. With luck, that closes before this year ends. We also have a handful of grape farms lacking the varietals that wine producers are looking for, so those are going up for sale too — we’ll attempt to sell a few of them. That’s simply what farmland ownership is like. It resembles owning businesses. You don’t want stock. I didn’t want shareholders to believe farmland ownership is shielded from the economy’s highs and lows or from the farming business itself. I expect that over the remainder of calendar year 2024, we’ll resolve these issues. Other areas of farming face difficulties as well, tomatoes being one. Mexico has been providing subsidies for tomatoes, which has damaged tomato growers. We’re extremely fortunate to have no tomato farms, so that difficulty passes us by. In the same way, we never put money into citrus. Florida’s citrus growers have had an awful time. We own a small number of citrus trees, though none of them are in Florida. Florida's groves have been ravaged by disease, and a recovery might never happen. Oranges are being brought in from production elsewhere around the globe, plus people are drinking less orange juice. As a kid, I recall consuming a great deal of orange juice. Consumption today is lower than it was 20 years back, so avoiding the Florida orange juice sector is a wise move on our part. That's the big picture, and I came up with that thought last evening and chose to include it in what we're discussing. Next, a brief report on the tenant matters we've been addressing, which we've described to you before. Right now, 2 properties covering 4 of the 168 farms we own sit empty, along with properties covering 11 farms run directly through the management agreement; we've had to step in and operate quite a few farms ourselves. On top of that, we recognize revenue on a cash basis from leases with 2 tenants who together lease 4 of our farms. As for the vacant properties and the farms we're operating, talks are underway with a range of possible buyers or tenants to purchase or lease these properties, and I believe much of this will get resolved over the next six months; so my hope is that when we report in July, a great deal of it will be behind us. Two tenants are on non-accrual status. One has now caught up on rental payments owed to us, and we keep working to collect from the others. The overall year-over-year effect on our operating results — these tenant problems lowered our net operating income by roughly $750,000 in the Q1. As we've said on the last several calls, we stay cautious about new investments since our cost of capital is still high. Farmland rental rates haven't risen enough to offset all the added costs farmers face. And since farmland values stay elevated — meaning the landowners' values remain high and they insist on a high price — we simply don't believe the risk is worth taking. Consequently, acquisition activity stays slow for us and likely will for another couple of quarters. With inflation still running above the Fed's target, that's the core issue at present: the Federal Reserve has to cut rates, which could start at some point this year, yet it won't come close to being sufficient for the very large farmers. We don't own many of those, but for the small farmer, it really weighs them down quite badly. Still, on the whole, the farmland portfolio we already hold keeps performing roughly as anticipated, apart from those matters I just raised. As you're aware, we sold one property that produced a nice gain for us; it was a big farm in Florida that we acquired for approximately $54 million seven years ago. Throughout our ownership, we enjoyed solid rental income from that property, yet we ultimately divested it for $66 million. After closing costs are accounted for, we realized a gain of roughly $10 million, making it an outstanding success for us. I should point out that the sale price exceeded the appraisal value we had obtained before the transaction by approximately $2 million; consequently, we had marked it down during the quarter, then proceeded to sell it. This strikes me as solid evidence that we have not set excessively high prices across many of our farms. Turning to leasing activity, from the start of the quarter onward, we renegotiated or extended 4 leases covering farms located in 2 separate states. Collectively, these extensions should produce a reduction—rather than a rise—in yearly net operating income of roughly $800,000 each year, measured against the previous leases. That said, most of this decline stems from a single lease arrangement on a nut farm in California, where we lowered the fixed base rent in return for greater participation rent upside. Going forward, 5 leases are set to lapse within the coming 6 months.

All told, that represents roughly 9% of the lease revenue we bring in. Conversations are underway with various groups about leasing these farms, and at this point we don't expect these to create any further vacancies. That said, a pair of the leases that are ending cover nut farms located in California, and in all likelihood the base rent on those will go down while participation rents go up. Those are a few of the issues currently in play. There's one more thing I want to bring up. As we said during the previous quarterly call, our California team has been putting in place a range of projects and strategies aimed at capitalizing on the excess water that has become available in California. A lot of you are aware that the rains have been enormous. We've gone through 2 extremely wet winters, which California doesn't normally get, and these weren't the small rains we occasionally get back east; the rainfall was of biblical proportions. I mean, people got washed away, and a handful of our farms took a bit of a hit from it. One farm ended up with more water than it could handle, so they weren't able to do as much with it, and now it's coming back this year. One of those projects was building the final groundwater recharge facility across 2 of our farms, and both wrapped up last year. Essentially, these function as water banks, which let us strike a variety of agreements with local water districts as well as private individuals, and those are anticipated to generate extra groundwater credits by permitting water to be held in our water banks. Over the quarter, we also managed to secure 2,676 acre-feet, which works out to about 872 million gallons, in water credits, at a total cash cost of roughly $345,000, or just about $129 per acre-foot, a figure well under market. These are going to be useful down the road. Farm valuations these days hinge on how much water a farm holds, and as a rule they need 2 water sources. Our view remains that projects like these matter for securing sustainable water supplies over the long term for our California farms, and we plan to keep concentrating on water security for our farms across all of 2024. Worth pointing out that, as of now, our portfolio has a sufficient water supply. Not one of our farms has been fallowed or left unfarmed over irrigation issues. Water shortages in certain areas have caused difficulties, and that isn't something we're experiencing on our farms. We also have questions about what government regulations might do. They do have rules governing water usage, and we've been through that process with a great many of our farms, and we appear to be sitting in good shape there; we do anticipate that these projects, together with the reserved water we hold for them, could continue for no less than 1 year without interruption, though my sense is they might last as long as 2 years given the volume of water we've captured. I'll leave it there. Lewis Parrish is going to take over now. Our CFO is the one who has a handle on the figures. Lewis, over to you?

Thanks, David, and good morning, everyone. I'll start with a quick review of our recent financing activity. We didn't take on any new borrowings this quarter, though we did pay off roughly $16 million in bonds that came due. On the equity side, sales of the Series E preferred stock brought in net proceeds of approximately $250,000 during the quarter. Now on to operating results. For Q1, net income came to about $13.6 million, with net income to common shareholders of $7.4 million, or $0.21 per share. Adjusted FFO for the current quarter was roughly $5.1 million, or $0.143 per share, versus $5.9 million, or $0.166 per share, in the prior year quarter. Dividends declared per common share were $0.14 this quarter, compared with $0.138 in the prior year quarter. The main reasons for the drop in AFFO were lost income from the farm we sold in January and lower revenues tied to certain properties that sat vacant or in non-accrual status for parts of the quarter. Declines in certain operating expenses during Q1 2024 partly offset that. Fixed base cash rents fell by roughly $1 million year-over-year. That's mostly because of the factors I just described — namely, lost revenues from the farm we sold and certain other workout properties. Additional rents earned from capital improvements on some of our farms partly offset this decline. Participation rents were down by about $200,000 in the current quarter. This really comes down to the timing of when we receive certain information about crop sales. As of filing, we hadn't yet gotten enough information to record certain participation rent amounts for Q1, so we'll keep pushing for that information and hopefully finalize it in time for the Q2 filing. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses fell by more than $500,000 in the current quarter. Property operating expenses were lower this quarter thanks to reduced spending on protecting water rights at certain California farms, along with declines in both legal fees and property management fees. G&A expenses fell because of lower amounts recorded for the upcoming shareholders' meeting and a decrease in certain professional fees. Notably, total related party fees were relatively flat year-over-year. Lastly, other expenses declined mainly from lower interest expense resulting from loan repayments we've made over the past year. With that, let's turn to net asset value. We had 35 farms revalued during the quarter, all through third-party appraisals. Overall, these valuations dropped by about $3.7 million, or 1%, from their previous valuations roughly a year ago. As of March 31st, our portfolio was valued at about $1.5 billion, and all of that value was supported by either third-party appraisals or actual purchase prices. Taking those revised valuations into account, along with the fair value of our debt and every preferred security, net asset value per common share came to $18.50 as of March 31st. That figure is lower than the $19.06 recorded at December 31st. Most of that decline stemmed from the change in fair value of our preferred securities, plus a drop in valuations for certain farms that were reappraised during the quarter. Moving to liquidity, when you factor in what's available on our lines of credit and other undrawn notes, we currently can access more than $200 million of liquidity, which includes nearly $60 million of cash on hand. On top of that, we hold over $130 million of unpledged properties. More than 99.9% of what we currently borrow carries fixed rates, and those rates, on a weighted average basis, are locked in at 3.39% for another 4.2 years. Because of that, rising interest rates have had only a minimal effect on our operating results. As for our current borrowings, our view is that we are well protected if interest rates stay elevated for a longer stretch. On the subject of debt maturities coming up, roughly $35 million is due over the next 12 months. That said, approximately $17 million of it consists of various loan maturities. Considering the value of the collateral behind them, we don't anticipate any trouble refinancing any of these loans should we decide to do so. Setting those maturities aside, roughly $18 million of amortizing principal payments comes due over the next 12 months, equal to about 3% of our current debt outstanding. Beyond that, we have roughly $6 million of loans that aren't maturing, though their fixed-rate term expires within the next 6 months, pardon me, within the next 12 months. Last, on our common distributions, we just increased our common dividend once more, to $0.0466 per share per month. This is the 34th time we've raised our common dividend across the past 37 quarters, producing a total increase of more than 55% during that span. With that, I'll hand the program back to David.

Thank you, Lewis. We remain engaged in the marketplace whenever solid chances come along, yet a large number of these growers will simply hold off. Selling their property at a reduced price isn't something they'll do, even though that's what conditions today would require. As a result, farm values haven't gone down. They haven't gone down. A few have dipped slightly, but they need to fall substantially before we stop struggling so much to lease them out. Rates remain elevated right now, though we hold out hope they'll come down by the time autumn arrives, allowing us to resume acquiring additional farms. One last point I want to raise. Our view is that putting money into this acreage and into crops that support a healthy way of living, like fruits, vegetables, and nuts, aligns with the direction the current market is showing us. When it comes to choosing where our capital goes, we're in solid position in that respect. On the whole, appetite for top-tier farmland for cultivating berries and vegetables is, without question, steady to robust, and nearly every region in which we operate sits along the East Coast and the West Coast, specifically Florida's East Coast and California's West Coast. That's where the quality farmland for our purposes can be found. Keep in mind that buying shares of this business amounts to a long-term commitment to farmland. It resembles other tangible holdings, gold being one example. Land that simply remains in place and keeps yielding is a marvelous thing, and provided California has water, I believe we'll be fine. Urban builders are pushing a great deal of what's happening, above all in California and Florida, where a great many of our farms sit. In contrast to gold and other substitute assets, this represents an active holding that generates cash flow for investors, and our view is that we outperform a bond, since with a bond, the interest rate on the one you already hold doesn't rise; thus we anticipate inflation, especially within the food segment, will keep climbing as time goes on, and we anticipate that the worth of the farmland beneath will rise accordingly. We think this holds particularly true for fresh produce and within the food segment. And the pattern of a greater number of Americans consuming wholesome foods keeps expanding. So instead of having me keep describing our activities, perhaps we should take some questions. Latonya, would you like to step in and explain to them the way to do that?

Hi. We're waiting for the Q&A, please.

Morning, everyone. David, those 14 Michigan farms — does one single operator hold the leases on all of them, the same one you mentioned had the accident? Or do several different operators run them?

There are several, though I believe just two remain at this point. We've gotten it down to two.

The same operator had it under lease, but at this point we're in talks with a few separate parties about leasing it, running it, and maybe selling it later on.

Alright, so every one of those 14 farms in Michigan you mentioned — those are all blueberry farms?

That's right.

All right. And so, of those 5 farms in California, are they all nut farms, or does something else there also create problems for you?

No. Every one of them is nuts. I hate to phrase it that way.

Okay. And then, I guess, to wrap things up, what is that Washington farm that landed in the non-accruals producing?

Cherries, apples, and wine grapes were part of it. At the moment we're removing the permanent plantings and putting it on the market for sale or lease as open ground, or pretty much as a new development opportunity for a potential buyer. On the subject of upcoming debt maturities, roughly $31 million is scheduled to come due within the next 12 months.

All right. And while we're on the subject of what was being cultivated on those farms — that Florida property where you recorded the sizable gain, what was grown there? Oranges, or something different?

No, it was vegetables — the type of produce you'd find in a supermarket. Lettuce, I don't believe, was among them, but I think a great deal of what was grown was the sort of item you'd see in the produce aisle of a grocery store. A really fine farm. Sadly, you're under pressure from folks in Mexico, and they're unable to earn as much, so there were requests for us to reduce the rent, and we chose not to engage in that contest of trying to outdo the people in Mexico. So we listed it for sale, and as you've likely figured out, plenty of parties are interested in Florida farmland since it's undergoing redevelopment; in fact, if you look nearby, not far from that farm's location, you'll see quite a few new golf outing spots. As a side note, we own the large farm adjacent to this one, so another one might come up down the road. We'll see. The water there is a different type, and the state of Florida is compensating us for cleaning the water flowing in. On that front we're in good shape, so we'll hold onto that one for some time, though eventually we may want to — we may want to exit that, and there are parties who enjoy owning farmland leased to Florida.

All right. Then, I suppose, to close out this subject, Lewis, that $750,000 effect stemming from the 20 farms — does it land fairly evenly per farm across those 20, or do some of those farms account for an outsized share of that $750?

The nut farms would carry greater weight when it comes to the income differential.

All right, that's useful. Then, I suppose my next question is this: you folks spent a lot of time explaining the water situation. You picked up additional supplies. At this point, quite a bit of it sits on the balance sheet. Is it revalued to market on a routine schedule?