Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Well, thanks, Sherry — I appreciated that kind introduction. David Gladstone here, and I'd like to welcome everyone to this quarterly conference call for Gladstone Land. We're grateful that all of you dialed in today. We really do appreciate that you set aside time from your busy schedules to hear what we have to present. Before I get going, we'll have Michael LiCalsi kick things off. He serves as our General Counsel. Michael?

Appreciate that, David. Morning, everyone. The report we're giving today might contain forward-looking statements made under the Securities Act of 1933 as well as the Securities Exchange Act of 1934, and those cover things like how we expect to perform going forward; such forward-looking statements carry specific risks and uncertainties rooted in the plans we currently have, which we consider reasonable. Numerous factors could lead our actual results to differ materially from any future results stated or suggested by such forward-looking statements, and that includes every risk factor disclosed in our Forms 10-K, 10-Q and the other filings we made with the SEC, which you can locate on our website, gladstoneland.com — more precisely, head to the Investors page — and you may also visit the SEC's site at www.sec.gov. Also, we're not obligated to publicly update or revise any of those forward-looking statements, whether because of fresh information, later events or anything else, unless the law demands it. Later on, we'll talk about FFO, meaning funds from operations. FFO is a non-GAAP accounting term, and it's defined as net income, leaving out gains or losses tied to real estate sales and any impairment losses on property, then adding depreciation and amortization of real estate assets. In addition, we might talk about core FFO, which we generally define as FFO adjusted for particular non-recurring revenues and expenses, plus adjusted FFO, which takes core FFO and further adjusts it for certain non-cash items, for example converting GAAP rents into normalized cash rents. We think these give better indications of how we're operating and let you compare our performance from one period to the next more effectively. And please check out our website — again, gladstoneland.com — and sign up for our email notification service. You can find us on Facebook too, where the keyword is the Gladstone Companies, and on X, formerly known as Twitter, where the handle is @GladstoneComps. This call provides an overview of our results, so we'd ask you to look at our press release and Form 10-Q, both of which came out yesterday, for more detailed information. With that, I'll hand things back to David.

Michael, thanks. As always, I'll begin with a quick summary so everyone has the same picture. Right now we hold roughly 112,000 acres, along with ownership of 168 farms and approximately 54,000 acre-feet of water assets. A single acre-foot works out to around 326,000 gallons. That means we control close to 18 billion gallons of water. Taken together, the land plus the water carry an estimated value of roughly $1.5 billion. Our farms sit in 15 states, and what matters more, they span 29 distinct growing regions; meanwhile, every one of our water assets is located in California. There isn't much need for storage of water. In Florida, for instance, you can simply drill down and access water quite fast. More than 90 separate tenant farmers hold leases on our farms, and those tenants cultivate in excess of 60 crop varieties. For the most part, though, these consist of fruits and vegetables, and we also have plenty of nut trees. You'll spot these items in the grocery store's produce aisle, and that's where the majority of what our farms grow gets sold; since the start of the third quarter, we've been quite busy on the leasing front. Across farms in eight states, we completed 21 new or amended leases, among them leases covering just a small number of previously empty farms. On the annual row crop side, we renewed or amended eight separate leases, and those renewals should produce a combined bump in net operating income of roughly $309,000, or 11%, relative to the earlier leases. On the whole, we keep observing stable appreciation with rents holding firm across our annual row crops, which represent roughly half of the portfolio. Turning to our permanent crop farms, we renewed approximately 13 separate leases there. For four of those leases, we restructured the arrangement by doing away with base rent while giving the tenant some cash along with the ability to grow crops. Rather than base rent, we sharply raised the participation in the rent component of those leases, and the bulk of that will be booked in the latter half of 2025; so we'll move through a short stretch here where base rents run lower. As we mentioned on earlier calls, market conditions affecting a great many permanent crop farms out West have suffered from weaker crop prices, elevated input costs and, naturally, higher borrowing costs too. Given these conditions, tenants find it hard to sign long-term leases carrying high base rents. Because of that, we chose to restructure the leases on those few farms, which helps them expand while trimming their fixed costs, and it also lets us share in the upside whenever a farmer enjoys a strong year. Our view is that these arrangements give us the greatest likelihood of earning solid profits from those farms in the years ahead. And we think there's a solid rationale behind this view, especially when it comes to two pistachio farms that we're working with right now. Those two pistachio farms are extremely productive properties. And because they've historically produced so much, that means crop insurance will work in our favor — in other words, we qualify for a better rate there, a better chance of recovering what we put in. We're also still seeing pricing move favorably for pistachios as well as almonds. On top of that, California has gotten rainfall above the average in recent years, and the majority of reservoirs remain at or above their historical averages. As things stand, our plan is to proceed with the structure for the 2025 harvest on these few farms, and then ideally go back to more conventional lease arrangements with rent starting next year — or we might sell a portion of these farms too, if we conclude we won't be able to farm them properly. The remaining non-lease amendments tied to our permanent crops should bring net operating income down by roughly $441,000 compared with the previous leases. So essentially, we traded base rents for a share of the upside. This is the ancient English approach to farming — the King owned all the land and essentially leased it to his farmers, who handed him the bulk of the crop while keeping some for themselves. Going forward, seven leases are set to expire within the coming six months, and together they represent roughly 2.5% of total lease revenue. We're talking with a number of groups about either leasing these farms or having them operated on our behalf, and we might also consider selling a few of them. We do have one we've agreed to sell, and we think several of these farms are quite valuable. So this new path is the approach — it's a fresh option available to us. After the quarter ended, we also entered an agreement to sell 11 blueberry farms located in Michigan for roughly $5 million. These rank among our oldest farms. And as you may recall, this is one where the entrepreneur — the farmer — had suffered some very severe accidents. I believe he spent many months in the hospital, so we had to bring in other people to handle things at the farms. Ultimately, we chose to simply exit that Michigan area. These are farms whose tenants are producing results under rising operating costs. So we're glad to put these matters to rest, and everything there ought to be wrapped up before the year is over. Now I'll provide a brief update on some of the other tenancy matters. At present, one farm sits vacant, so we're down to that. One farm is being operated directly through a management agreement with an unaffiliated third party. Additionally, we're booking revenue from leases with two tenants, and this involves collecting lease payments on five of our farms. Five of our farms are in their hands, yet we are receiving rent payments from just two of those tenants. When it comes to these properties, talks are underway with a range of possible purchasers and lessees about acquiring them. A situation exists where many parties are once again seeking out farms, which is consistently encouraging to observe. It's also possible that we'll bring in some of them to employ workers and manage our properties, and our goal is to finalize an arrangement covering these remaining two before the year concludes. It's conceivable that we'll put a number of these farms up for auction, mirroring what we did in Michigan, though my expectation is that this will apply to only a small portion of them. Altogether, the impact these tenant problems had on our operating results compared with the prior year amounted to a reduction in net operating income to roughly $638,000 during the third quarter. With any luck, come this time next year, we'll be recording substantial profit from running several farms alongside the operators who step in to handle that work. This seems like a good place to pause, and we'll have Lewis join us to walk through the figures he has prepared for you.

Alright. Thanks, David, and good morning to all of you. I want to start with a quick review of what we've been doing on the financing side lately. No new debt was taken on this quarter, though roughly $13 million in loans that had maturity or re-pricing dates coming up were paid off; when it comes to equity, starting in the third quarter we've generated net proceeds of approximately $80,000 from selling Series E preferred stock, along with about $4.5 million from common stock sales made under the ATM program. The buyback plan for our Series B and Series C preferred stock, which began in the second quarter, is also still underway. In the third quarter, we bought back 176,045 preferred shares in total, spending roughly $3.7 million and realizing a book gain of approximately $231,000. With an average cost of $21.22 per share on those repurchases, we achieved dividend yield savings of 7.1%. Now let's turn to how operations performed. Net income for the third quarter came to $6,000, while net loss to common shareholders was $5.8 million, or $0.16 per share. Adjusted FFO for this quarter landed at approximately $4.5 million, or $0.13 per share, versus $5.4 million, or $0.15 per share, in the quarter before. Common share dividends declared came to about $0.14 in each of those quarters. The drop in AFFO for Q3 2023 was mostly caused by revenue we no longer receive from the farm divested in January, along with lower income tied to certain properties that sat vacant, were direct operated, or were on non-accrual status for parts of the quarter. Fixed base cash rents fell by roughly $2.6 million year over year, mainly for the reasons I just listed. To repeat, those are the lost revenues from the farm we sold, plus extra costs tied to certain vacancies we're still working through, lease incentives given to certain tenants in connection with the lease structure changes I just referenced, and a portion of one rent payment that came in the form of water. Partially offsetting all of that was a $1.1 million rise in participation rents recorded this quarter. Those amounts depend heavily on when tenants pass certain information along to us, but so far the uptick has mostly been fueled by better production at a few of our pistachio farms. One thing to flag regarding revenue over the coming quarters. Because of the lease structure changes made on a handful of farms, we anticipate a total year-over-year swing in fixed base rents of about $20 million. That number includes the base rent we used to get under the old leases, plus the cash allowances extended to some of those tenants. It will appear as a reduction in fixed base rents across the next five quarters, starting with Q4 2024, at a pace of between $3.5 million to $4.5 million each quarter. After that, most of the crops produced from these leases will be recorded as participation rent across the latter six months of 2025, while a smaller remaining piece gets recognized in the back half of 2026. At this point, we anticipate recovering the entire $20 million, and perhaps a bit more, though those figures won't be clear to us until later in 2025. So, if everything unfolds the way we presently anticipate, we'll be shifting roughly $20 million out of the fixed base rent category and into the participation rent category across the coming couple of years. Turning to expenses, if you set aside reimbursable costs along with certain non-recurring or non-cash items, our core operating expenses fell by roughly $140,000 in the quarter just reported. Related party fees dropped by $800,000, reflecting a larger incentive fee that was earned in the same quarter a year earlier. Mostly counterbalancing that was a $590,000 rise in property operating expenses, driven mainly by extra costs on properties that were vacant, direct operated, or on non-accrual status. Those costs encompassed added legal expenses, property management fees, and real estate taxes. Once we resolve these matters — which we anticipate occurring by year-end — such costs ought to come down to a more typical level. Lastly, G&A expenses rose modestly because of added stockholder related costs and greater professional fees. We also booked an impairment charge of roughly $2 million in the quarter, stemming from writing down the net book value of certain Michigan blueberry farms to their sales prices, in line with agreements we signed after 9/30. Lastly, other expenses declined mainly from reduced interest expense tied to loan repayments completed during the past year. That brings us to net asset value. In the quarter, 43 farms were revalued, every one through third-party appraisals. On the whole, those valuations dropped by roughly $23 million, or 4.5%, versus their prior valuations from around a year earlier. The declines were confined to certain of our permanent crop farms, since our annual row crop farms keep rising in value. So at September 30, our portfolio was valued at roughly $1.5 billion, and every bit of that valuation was backed either by third-party appraisals or, for water, by purchase prices. Using these updated valuations and factoring in the fair value of our debt and preferred securities, our net asset value per common share on September 30 came to $15.57, which is lower than $17.59 on June 30. Most of that stems from the certain farms reappraised during the quarter, along with the change in fair value of our debt and preferred securities from shifts in market rates. Moving to liquidity, and counting availability under our lines of credit and other undrawn notes, we can currently tap more than $160 million of liquidity, which includes about $20 million of cash on hand. We also hold close to $160 million of unpledged properties. Right now, more than 99.9% of what we owe carries fixed interest, and when you weight it all together, those rates stay locked at 3.4% for a further 3.7 years. Because of that, the higher rates we've seen across the last couple of years have barely touched our operating results. And when it comes to the debt we currently hold, we feel we're strongly shielded if rates stay up at these high levels. Turning to maturities coming up, roughly $39 million is due within the next 12 months. That said, $21 million of it consists of assorted loan maturities; and since the collateral behind them holds good value, we don't anticipate any trouble refinancing should we decide to go that route. Setting those aside, roughly $18 million in amortizing principal payments comes due within the next 12 months, which is approximately 3% of the debt we presently have outstanding. On top of that, we hold about $19 million in loans that aren't maturing, yet their fixed rate term runs out within the next 12 months. Last, on the subject of our common distributions, back in October we declared a dividend of $4.67 per share per month for the fourth quarter. With our stock currently priced at $13.66 per share, that comes to a 4.1% yield, which sits right in line with the average dividend yield throughout the whole REIT sector. Because of the lease structure changes we made recently at certain properties, we think it's prudent to keep the dividend flat for now, and we'll keep reassessing as we learn more about the 2025 crop share amount. With that, I'll hand things back to David.

Appreciate that, Lewis. Solid report. We remain active out there in the market in case a solid acquisition target comes along. The banks are quite fond of us and would be happy to extend additional financing. That said, we won't move in that direction until rates decline. As we've noted on earlier calls, we're still taking a more careful stance when it comes to acquisitions, since our cost of capital is still elevated. And although prices have dropped for some permanent crops and Western farms, the value of most row crops—such as those where strawberries are grown—is still quite high. On top of that, cap rates across most of those farms aren't rising enough to offset what we pay to finance. Consequently, deal activity has stayed—well, calling it non-existent might be a bit much, saying slow would understate it—but we aren't pursuing any new transactions given what capital costs and what returns you can get from it. Rates remain somewhat too elevated for our liking even after the Fed lowered them by 0.5% in September. As for how much more they'll cut and when, I simply can't say when the next reduction will come. They've been inconsistent. Still, we're optimistic that rates will come down soon, which would let us begin exploring more farm purchases again. One last thing I want to mention: we think putting money into farmland that grows crops supporting healthy lifestyles—things like fruits, vegetables, and nuts—is a strong trend, and we're on board with it, and we'll work to keep securing quality farmland. All-around demand for top-tier farmland and for growing berries and vegetables stays steady to robust. Actually, the vegetable and berry segment is comparatively stronger than nearly any period I can recall. In almost every region where our farms sit, as I said before, prices for some permanent crops—especially nuts and wine grapes—have been weak as of late. We aren't heavy in wine grapes. We do hold grapes, though not a large amount. Those have been soft recently, and that has dragged down the value of the farmland beneath them. We're beginning to see prices recover for a few of these crops, particularly almonds and pistachios, which got hit quite hard since demand for them hasn't been strong. So we're hoping the bottom has passed for both of those crops, though it isn't yet obvious which direction things will go. Also, in case you've heard anything regarding West Coast farms, a couple of our team members—one specifically—had to leave his house due to the ongoing fire. Keep in mind, though, those fires are largely up in the mountains, not down in the areas where our crops are. And so, please keep in mind that buying stock in this Company is a long-term proposition, so you will experience ups and downs. If we look back over time, the long-term picture holds up well, though now and then there are swings that catch us off guard. It's no different from any other investment — you get good stretches and bad ones. These are crops, after all. Take grain crops like soy and corn: as you've likely seen if you follow the news, their prices have fallen, and the farmers growing them aren't faring well. They're going through a tough stretch right now. Our expectation is that inflation, especially in food-related areas, will keep climbing as time goes on. Everyone grumbles about how much groceries cost, I realize, but we believe the value of the land underneath will rise as the output from that land keeps flowing — and we think that's particularly true when it comes to fresh produce. If you've been to a store lately and checked the prices, you've seen the pattern: an increasing number of shoppers want healthier food, and that very demand is pushing prices higher. There's one point I wanted to raise that I don't believe has ever come up here before. When we purchase farmland, there are really 2 kinds of value in it. One is what I call intrinsic value — simply the soil itself, which isn't going anywhere. Like any real asset, you hang onto it, since that value only keeps growing with time. Some people purchase farmland and never work it; they simply keep it as a hedge against inflation, the same way they'd buy gold. Then there's usage value, which applies to land like most of ours that gets planted with crops and sold for income. Gold offers nothing comparable. So really, I'd argue farmland is a far superior thing to hold for inflation purposes. Whenever we've sold a property, it's because someone came to us with a genuinely high price. So let's pause here, and operator, if you'd come on and explain how people can submit questions, that would be great.

Yes, thank you. Good morning. I'd like to follow up regarding the expiration of your leases. I believe you mentioned that seven leases are ending within a period exceeding six months. Could you provide a figure for 2025, specifically how many leases will expire and how many of those involve permanent crops?

Yes, for 2025, please give me a moment to verify that figure. Our typical approach is to look ahead, and the reason we consistently reference a six-month horizon is that we focus on the properties we want to renew, while also accepting backup offers, and we tend to finalize these lease extensions rather quickly; so, when something is nine months or 12 months away, it doesn't feel as urgent to us. For 2025, overall, we have 17 leases reaching maturity in 2025, and that represents a significant share of our revenue, roughly one-fifth, or 20%. We were observing any communication with the existing tenants on those. And looking at the—sorry, give me a moment to pull up the 25 leases. You're simply trying to figure out which are berries and which are nuts and similar categories. Okay. I don't have that figure available right now.

Okay, so roughly 50% of the farms we have are dedicated to row crops, berries, that sort of thing. And then the remaining 50% involves nuts and similar categories; there are certain crops we’re really pleased with, including some olive trees that have existed for a very long time and they keep on yielding olives quite well. Apologies, were you saying something, Gaurav?

No, I was only trying to clear that up. So half of what you hold consists of permanent crops, and the other half is annual growth?

Correct. So, when I glance through the ‘25 list, it appears likely that it leans more heavily when you count the leases falling on the annual row crop side. I’m unable to provide you a precise figure — probably 60% of the leases are arriving on our row crop, while 40% would fall under the permanent crop category.

All right, that clears things up. Regarding the lease changes we made during the third quarter, did those agreements reach their end date in Q3, or did we modify them for other purposes?

You mean the ones we revised in Q3?

Right. Had those reached their expiration dates, or did you change them for other purposes?

There were several distinct causes. Certain ones had 2024 end dates, and we extended those. Others actually ran out in 2028, and we moved them past that point too. Beyond those, a handful of additional agreements got modified for separate reasons. Still, when it comes to the ones granted more time, those were mostly upcoming expirations — likely just a small number.

Do you have anything else you'd like to ask, Gaurav?

That covers everything. Thanks.

All right. Let's take the following question.

Morning, everyone. Lewis, those 11 Blueberry Farms fall within the 20 vacant direct operated and non-accrual properties, is that right?

That's right, yes.

That's what you're offering for sale? Alright. Also, I believe David mentioned there's one more farm you've committed to selling. Does that also fall within those 20?

No, that particular one is under lease until the middle of next year. Nothing is happening right away, obviously — it's simply an agreement we've signed that might complete early next year, though nothing is guaranteed as of now.

All right, then, when you report the fourth quarter — that's 3 months out — and assuming that Blueberry Farm transaction is completed, at that moment the count of vacant direct operated non-accrual properties ought to be cut roughly in half, correct?

Yeah, I'd say if we take it as given that the deal does go through — and it ought to go through during this year — then what remains, I believe, is a single vacant property, 1 direct operated, plus 5 farms sitting on a non-accrual basis.

Alright, that helps; is there anything else right now that seems likely to move to non-accrual, or do you feel pretty at ease about the rest of the farms in the portfolio as things stand?

At this moment, we feel at ease about collecting rent from the other tenants; the problems really involve just 2 tenants across 5 of our farms altogether; we have additional leases that end later in this year, and we're working on amendments to those leases. Since these are on perma crop farms, it might be a mix of, well, the ones ending later in this year will probably be a comparable case, where we need to take out the base rent and shift it more into the participation rent bucket for next year, but we don't anticipate those going onto a non-accrual basis.

Okay, so one last item from my end — about that NAV decline. Looking at the $4.76 versus the reduction, I think you said a big chunk of it related to permanent crops. But is any portion of it tied to row crops? How should we frame row crops here? In other words, row crops are essentially unchanged, whereas permanent crops have fallen?

That's right — the whole thing is permanent crops. And regarding that $4 figure, I take it you're referring to the year-over-year comparison with 9/30/2023 — about half of that decline, roughly $2-ish, comes from portfolio valuation, while the other $2 stems from movements in market rates along with changes in preferred stock and debt valuation. When it comes to the portfolio, however, it's entirely the permanent crop piece. The ground we hold in row crops is rising in value at basically the same rate as it has from the beginning — the typical 2%, 3%, 4% each year. That's what we continue to observe today, and the decreases in value are occurring only on the permanent crop side. Also, we declared a dividend of $0.0467 per share per month for the fourth quarter.

All right, that's useful.

And when it comes to how many crops, the ones in Michigan that went to auction — there are plenty of small farms in that state. Those got recorded when we were very small and only just starting out in that region; so we erred by choosing that single tenant, who was extremely neglectful and landed himself in difficulty. But every bit of that will be resolved during this year.

All right. Thanks, folks. I appreciate you making time for us this morning.