Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Thanks, Darrell. That was a good intro. I'm David Gladstone, and I'd like to welcome everyone to the quarterly conference call for Gladstone Land. We appreciate all of you joining us today. It means a lot that you'd set aside time from your busy schedules to hear what we have to present. But ahead of getting started, we should hear from Michael LiCalsi. He serves as our General Counsel. Michael?

Thank you, David. Good morning, everyone. This presentation might contain forward-looking statements made under the Securities Act of 1933 and the Securities Exchange Act of 1934, covering things like our performance going forward. Such statements carry specific risks and uncertainties rooted in our present plans, which we consider reasonable. Numerous factors could lead our actual outcomes to differ materially from any projected or suggested future results in these statements, including every risk factor detailed in our 10-Q, 10-K, and other filings submitted to the SEC. Those are available on our site, gladstoneland.com, under the Investors section, or via the SEC's site at www.sec.gov. We assume no duty to publicly update or revise any such forward-looking statements, whether due to fresh information, upcoming events, or other reasons, unless the law demands it. Also, we'll be talking about FFO today, meaning funds from operations. FFO is a non-GAAP term for net income, minus gains or losses on real estate sales and any property impairment losses, plus depreciation and amortization on real estate assets. We might also cover core FFO, typically described as FFO with adjustments for specific non-recurring revenues and expenses, plus adjusted FFO, which takes core FFO further by adjusting for certain non-cash items, like turning GAAP rents into normalized cash rents; we think these give clearer views of how we're operating and make comparing our performance across periods easier; please check out our website. Again, it's gladstoneland.com. There, you can also enroll in our email alerts. Find us on Facebook at @TheGladstoneCompanies and on Twitter at @GladstoneComps. This call provides a summary of our results, so please look over our press release and Form 10-Q, both from yesterday, for additional details. Now, I'll hand it back to David Gladstone. David?

Thanks, Michael. To kick things off, I'll give you a quick look at the farmland we hold. Right now, we have roughly 112,000 acres spread across 168 farms, plus water assets of about 54,000 acre-feet. Since a single acre-foot equals roughly 326,000 gallons, that works out to around 18 billion gallons of water we own. Combined, the land and the water carry a total value of roughly $1.5 billion. Our farms sit in 15 states. Even more significant, they're in 29 separate growing areas. Those growing areas matter a great deal, and while every one of our water assets is located in California, we do hold one clean water asset in Florida, where we generate cleaner water for that region. More than 90 tenant farmers lease our farms, and none of them are related to us. The tenants farming this land grow 60 distinct crop types. For the most part, though, everything falls into three buckets: fruits, nuts, and vegetables. You'll find these in the grocery store's produce section, and that's where the majority of what our farms grow gets sold. Turning to leasing, starting in the second quarter we've closed 11 new or amended leases across farms in five states, among them two leases on farms that had been sitting vacant. All told, these renewals should lift our yearly net operating income by roughly $465,000 compared with the earlier lease; for our direct renewals, that works out to an approximately 7% bump over the previous leases. Going forward, nine leases are set to run out within the next six months, and we're currently talking with parties interested in renting them. Out of 168 farms, only nine leases are coming due. That's pretty solid. We're speaking with groups about either leasing these farms or running them for us. Of those nine expiring leases, seven are nut farms located in California, and those will probably see a drop in base rent in return for higher participation rents. During the quarter, we also picked up an extra 4,899 acre-feet of water for a total cash outlay of $1.5 million. That comes to roughly $300 per acre-foot for us. After the quarter closed, we bought another 1,985 acre-feet of water for about $800,000, which is around $400 per acre-foot; and for a pricing benchmark, there's a California Water Index on NASDAQ that we also monitor; it gives a weighted average price for each acre-foot. Five separate markets exist within California, and they figure it's worth roughly $440 per acre-foot; on top of that, market pricing in the specific regions where we're buying water runs anywhere from $450 to $550 per acre-foot. So the results — what our team has accomplished over the past year, or really the past year-and-a-half, in putting certain water projects and strategies in place — mean we can buy water below market prices, since we happen to be in the right place at the right time. The water we're buying sits in regions where we already run multiple farms, and that's going to boost how attractive those properties look to tenants and to folks who work that land. What's really hurting our farms right now, though, isn't water — we've secured sufficient supplies to handle their operations through roughly this season and the one after that with no issues at all. What they're getting paid is just too low, mainly on the permanent crops like almonds and pistachios; those markets have slumped, and while growers are recouping a bit of money, it isn't sufficient to justify the effort. That said, we're noticing indications that prices for these crops are beginning to recover, so we're keeping our fingers crossed that the trend holds. This matters because our farmers need to move their crops at a fair price so they can absorb the steeper input costs — not just what they owe us in rent, but everything else on their plate too. Honestly, when you examine it, the issue isn't that growing an almond is costly, or a pistachio either; it's that you have to sustain that tree through the entire stretch. Not long ago, some contacts passed along a report showing pistachio shipments climbing 35% compared with a year earlier, and that's as of July 2022, fueled by a surge in exports, with stronger demand especially in Central South America, Europe and Asia. You likely recall that our produce side barely sells beyond the US, whereas nuts can go just about anywhere globally. Typically they get loaded into 55 gallon containers and shipped off wherever. Turkey has also seen both a drop in price and in the volume of pistachios it will be able to grow because of severe weather. Conditions there have been genuinely tough, and little of the crop remains. As you can picture, pistachios can go into a box and sit for several years prior to being sold, yet carryover is minimal. Turning to almonds, compared with a year ago, prices have climbed over the last few months. There's hope for additional price gains ahead. The recent uptick comes after the 2024 crop was revised downward, specifically the price per almond. Demand has remained robust, particularly in India. You might not be aware, but India is a solid destination for our almond shipments. On inventory, carry out levels — again, those are what's left from an earlier year — there's not much sitting around. Consequently, we're quite confident things will turn around. Fortunately, we operate in plenty of other markets and appear to be performing well. One more thing worth mentioning: our portfolio right now holds an adequate water supply. And up to this point, no farm has needed to be fallowed because of insufficient water or because of government regulations. A lot of what we're doing with these projects is looking ahead, making sure our assets stay protected over the long haul; water is essential for that, and we purchase it actively and hold it in reserve; and I'll now provide a brief update on a few of the tenant matters we keep working through. At present, we have a single farm sitting empty, plus five properties covering 12 farms run directly through a management agreement with unrelated third parties. As for the vacant farm and the ones we operate directly, talks are ongoing with a number of prospective purchasers or lessees to acquire or rent these properties, or perhaps farm them for us, and we're hopeful that agreements will be reached on most of them before this calendar year wraps up, and we might list some of these farms for sale; we do have one auction already arranged, though we suspect the parties who want these farms are attempting to move in ahead of any auction. It kind of draws people in to take a look at the farms. The overall effect these tenant matters had on our operating results compared with a year earlier was a decline — net operating income fell by roughly $794,000 during the quarter. Which means we need to recover that through participation rents, and we ought to be able to.

With the level of diversification we've got, it's inevitable that issues will pop up across various segments, driven by different factors at different moments. Take, for instance, a few kinds of crops out in the Western United States—they've seen crop prices fall across the last 12 to 18 months. Add to that rising input costs and higher borrowing costs, and it's put negative pressure on the margins growers are earning. Our valuations are okay, but two crops—clearly almonds and pistachios, which I brought up—plus a couple of others are lagging, and that's the apple crop. Even though apples appear to be priced higher at my local grocery store, and wine grapes—well, I don't have much to add there since our exposure is limited. This situation has likewise caused a writedown in value for some of our permanent tree crops; so it keeps expanding and keeps moving forward. Keep in mind, all these crops—if you consider what we hold—are hard assets; this soil isn't disappearing anywhere and has been cultivated for a great many years. We keep examining the risk-return dynamics of our properties, and right now our attention is on assessing the profit potential for certain of these permanent crop farms, especially those where the existing lease is running out. Some alternatives we've considered include new leases with lower fixed base rents, trading that for a share in the crop. This approach lets us expand, lets the grower cut down their fixed expenses, and gives us a piece of the upside; in those situations, if the farmers enjoy a strong year, we'll enjoy one too. We're exploring the possibility of running some of these properties on our own for a brief period. That means bringing in an operator to manage it for us, or doing so until conditions improve. This could be beneficial for third-party management firms; and if we can come up with ways to bring some of these farms back to sufficiently high profit levels soon, we might also consider selling a few of these properties. As you're aware, we offloaded one of our properties in Florida, netting roughly $10 million in profit. And I believe we've got quite a few properties that would sell for at least as much as, or more than, what we currently have invested in them. As you know, we do take depreciation on the tree crops. Land can't be depreciated. So the land value is simply out there in the open market. Whether on their own or bundled with a set of properties, that could be the next update you hear from us. Nothing's been signed yet, but we may put some of the farms on the market later this year. That's just how it goes with owning farmland. Much like any other business, farmland ownership isn't shielded from economic swings or typical business cycles, and farming is likewise affected by interest rates. We're keeping our fingers crossed that the Federal Reserve cuts interest rates, since that would be a boost for us as well as for our farmers. I'll wrap up my remarks at this point and hand things over to Lewis Parrish, who serves as our CFO, so he can walk you through additional detail regarding the figures on the financial statement. Lewis?

Appreciate that, David. Morning, everybody. I want to start with a quick review of what we've been doing on the financing front lately. No fresh debt was taken on over the quarter, though after the quarter closed we paid off a $6 million loan that had been set to re-price. Turning to equity, from the start of the quarter we've brought in roughly $90,000 in net proceeds through sales of our Series E Preferred Stock. We also put a share repurchase program in place covering our Series B and Series C Preferred Stock, and it's been performing nicely for us so far. Since we kicked that program off in May, we've bought back 249,290 shares of Preferred Stock for a total of about $5.2 million, which produced a book gain of roughly $415,000. With an average repurchase cost of $20.84 per share, the dividend yield savings that resulted come to about 7.2%. Considering where our borrowing costs stand right now and the overall economics of acquisitions, we see these repurchase transactions as one of the strongest ways to deploy our capital at present. Turning now to operations, in the second quarter we posted a net loss of $823,000 and a net loss to common shareholders of $6.7 million, or $0.19 per share. Adjusted FFO for this quarter came in at approximately $3.7 million, or $0.103 per share, versus $3.6 million, or $0.102 per share, in the same quarter last year. Dividends declared per common share totaled $0.140 this quarter, up against $0.138 in the prior year quarter. AFFO rose modestly from the second quarter of 2023, since higher participation rents were mostly offset by income lost from the farm we divested in January along with reduced revenues tied to certain properties that spent parts of the quarter either vacant, direct operated, or on non-accrual status. In the same way, lower interest expense was offset by higher certain operating expenses. Fixed base cash rents fell by roughly $1.1 million year over year, mainly for the reasons I just described — namely lost revenue from the farm we sold plus certain other workout properties. That decline, though, was offset by a $1.1 million rise in participation rents booked during the current quarter. Most of that figure stemmed from additional information about prior harvests that came to light during the quarter, which let us estimate and record those amounts. So it really shouldn't detract from the participation rents we anticipate recording in this year's second half. On expenses, once you exclude reimbursable expenses and certain non-recurring or non-cash items, our core operating expenses were up by about $450,000 this quarter. Property operating expenses rose this quarter because of extra property taxes paid on behalf of certain tenants and higher property management fees paid on some of our farms, while G&A expenses grew due to additional costs tied to the annual shareholders meeting and higher professional fees. Related party fees overall came in a bit lower than they did a year earlier. And lastly, other expenses were down, mainly because interest expense was smaller after we paid down loans across the last 12 months. That brings us to net asset value. During the quarter, 62 farms were revalued, and every one of those was done through third-party appraisals. Taken together, those valuations fell $13.8 million, or 4%, compared with where they stood a year before. The declines were confined to some of our permanent crop farms, since our row crop farms keep gaining value; so at June 30th, our portfolio carried a value of roughly $1.5 billion, and every bit of that was backed either by third-party appraisals or by purchase prices; and 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 stood at $17.59 as of June 30th, down from $18.50 on March 31st. Most of that drop came from the lower valuations on certain farms that got revalued during the quarter, plus a shift in the fair value of our preferred securities. Moving to liquidity, counting what's available on our lines of credit and other undrawn notes, we can currently tap roughly $180 million of liquidity. That figure includes more than $30 million of cash on hand; on top of that, we hold close to $150 million of unpledged properties. Right now, more than 99.9% of our borrowings carry fixed rates. And on a weighted average basis, those rates stay fixed at 3.4% for another 3.9 years. Because of that, rising interest rates over the last couple of years have had only a minimal effect on our operating results. And when it comes to our existing borrowings, we think we're well protected if interest rates stay elevated. As for debt maturities ahead, roughly $46 million comes due within the next 12 months. But around $28 million of that is made up of various loan maturities; and with the value of the underlying collateral, we don't expect any trouble refinancing any of these loans should we decide to; we're taking those maturities out. Only about $18 million of amortizing principal payments comes due within the next 12 months, which is roughly 3% of our current debt outstanding. On top of that, we have about $20 million in loans that aren't maturing, though their fixed rate term expires within the next 12 months. And last, on our common distributions, we just raised our common dividend once more, to $0.0467 per share each month. That was the 35th increase of our common dividend across the past 38 quarters, which works out to a total rise of almost 56% during that stretch. With that, I'll hand the program back to David.

All right, thanks, Lewis. That was a solid update. We're still out there looking to stay active whenever attractive buyout chances come along, particularly given that interest rates might be headed lower. Like most folks in the asset-based world, we have to live with whatever rate we pay on our capital. But as we said on earlier calls, we're still leaning toward caution when it comes to acquisitions, since our cost of capital is still elevated. And although pricing has dropped for some permanent crop farms out west, the value of most row crop farms—such as those growing strawberries—is still high. Plus, cap rates on the majority of those farms haven't risen enough yet to offset what we pay to finance them. So we need to see rates decline before we can get busy buying or selling any of our properties. Consequently, our acquisition pace remains quite slow. It'll likely be a few more quarters before anything gets done. As you've probably heard, folks at the Federal Reserve are now discussing a jumbo move—meaning 50 basis points to 75 basis points—when they resume action in September. Even though interest rates are still somewhat too high for us, it appears more probable that the Fed will be reducing rates. So we're optimistic that rates will come down soon and we can begin evaluating new farms. Just a few last thoughts before I wrap up. We think that putting money into farmland and raising crops that support a healthy lifestyle—like fruits and vegetables and nuts—aligns with the trends we're observing in today's market. In nearly every region where our farms sit, especially along the East and West Coast, overall demand for prime farmland producing berries and vegetables is holding steady to strong. As I noted before, prices for certain permanent crops—especially nuts and wine grapes—have been weak recently and that affects the value of the farmland underneath. We're seeing prices begin to recover for some of these crops, in particular almonds and pistachios, which had been depressed by 2%, 3% in terms of 2 basis points or 3 basis points for some of them. So we hope the worst is behind us on this, though we're not out of the woods yet. Keep in mind that buying this stock in the company amounts to a long-term investment in farmland. Looking back historically, long-term returns have ranged from strong to mediocre, but there are occasional ups and downs just like with any other investment. And at present, a portion of our portfolio is in a down cycle. That would be almonds and pistachios, but our farmers are telling us positive things. Our expectation is that inflation will keep climbing as time goes on, especially when it comes to food, and because of that we anticipate the worth of the farmland underneath will also keep rising as time goes on; and we believe this holds particularly for fresh produce within the fresh produce section, given the trend of a growing number of people in the US continuing to shift toward consuming healthy foods. And that this will result in our properties becoming more welcome to everybody. Now, we've got some questions from those who follow us. So, operator, would you please come on and tell them how they can ask a question?

Thank you. Good morning.

Good morning.

Good morning, Gaurav. Regarding what you said about almonds and pistachios, I'd like to follow up on that. Could you remind us what portion of your portfolio is exposed to almonds and pistachios?

On a revenue basis, pistachios account for roughly 20%, while almonds come in at slightly below 10% — somewhere around 8% or 9%.

Alright. Moving to my next one. Regarding the balance sheet, I believe you said there's $46 million in debt coming due over the next 12 months. Could you give us some detail on where interest rates stand currently, should we have to refinance that debt?

Absolutely. At present, our weighted average interest rate sits at roughly 3.4%. Were we to reprice as of today, we'd likely be 200 basis points, or 200 basis points, higher than that. Those loans, together with the cash we're holding, get evaluated one at a time, based on what the interest rate happens to be, when each loan reaches maturity, and what we intend to do with that specific farm — all of which shapes whether we choose to pay it off or refinance.

Alright, thanks. That covers everything I wanted to ask.

Please, go for it. Go for it, Gaurav. Oh, that's simply it. So, operator, if you could rejoin us, we'll check whether another question exists for us from anyone out there.

Morning, everyone. Those 4 farms in California — empty, run by us directly, and not accruing — are they all nut operations?

That's right.

All right.

I think one of them is — no, wait, actually, I believe they all are. Every one of them is nuts. You've got that right. Yes.

All right. And looking at the prior quarter, I believe the count was 20 farms. That meant California had one more farm sitting in that category. So what became of that additional one? Was it rented out? Did they get current on what they owed and come off non-accrual status? What drove the change from one quarter to the next?

We leased it out. A lease was placed on it.

Okay, that's great. All right, so then I suppose what we're really asking is this: at this stage, are those 19 farms something you'd prefer to hold onto for a longer stretch? I mean, you've mentioned possibly selling them, maybe selling off certain assets, and so forth. In other words, is it simply about attempting to secure a lease on the land, or attempting to unload it at a price above what it's worth today, and that you'd really rather not keep any of those 19 over the long haul — or was it purely problems with the operator, and you're content to hold them? What's the right way for us to think about those 19 assets as you move ahead across the coming couple of years?

Well, provided we've got water for them, I believe we'll keep them, for the simple reason that someone out there will want to plant something on that land. You simply never can tell. Over the past 2 years, honestly, the farmers have been quite selective. And that could happen. You need a solid farmer. There's no point in entering a farming arrangement with a person who isn't a very good farmer; we've made that mistake on a few occasions. We're aware of how that comes back to haunt you, but it's the sort of thing everyone encounters. We hold an asset; we have to keep it generating value for us, and my sense is that most of those 19 farms are going to remain with us for quite a long period.

All right. Then I suppose my final question, Lewis, concerns what you said regarding the participating rents you gathered this quarter not having an effect on the back half of the year. In the second half of 23, what amount of participating rents did you collect? And at this point, do you anticipate that the second half of '24 will be similar, greater, or smaller?