Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Thanks, Daryl. That was a good way to kick things off. Once more, this is David Gladstone, and I'm glad to have you join the conference call we hold each quarter. This one also marks the close of our year. I appreciate everyone dialing in today, and we're grateful you've set aside time to hear what we have to present. Prior to getting started, Michael LiCalsi, who serves as our General Counsel, needs to speak. Michael?

Appreciate that, David. Morning to all of you. The report we're giving today might contain forward-looking statements as defined under the Securities Act of 1933 and the Securities Exchange Act of 1934, and those cover things like how we expect to perform going forward. Such statements carry specific risks and uncertainties, all built on our present plans, which we consider reasonable. A number of factors could lead our actual results to differ materially from any results in the future that these forward-looking statements express or imply, and that includes every risk factor listed in our Forms 10-K, 10-Q, and the other documents we submit to the SEC. Head over to our site, gladstoneland.com, and look specifically at the Investors' page, or visit the SEC's site at www.sec.gov, and you'll locate all of them there; we hold no duty to publicly update or revise any of these forward-looking statements, whether prompted by new information, future events, or anything else, unless the law demands it; so, on today's agenda, we'll be talking about FFO, meaning Funds From Operations. FFO, you should know, is a non-GAAP accounting term. The definition is net income with the gains or losses from real estate sales and any property impairment losses removed, then adding back depreciation and amortization of real estate assets. We might also bring up Core FFO, which we typically describe as FFO with adjustments made for particular non-recurring revenues and expenses, and beyond that adjusted FFO, which takes Core FFO and adjusts it further for specific non-cash items, for example converting GAAP rents into normalized cash rents, and the reason we do this is our belief that these give better indications of how our operations are performing and permit better comparability of how we do from one period to the next. So, we'd like to ask you again to check out our website; it's gladstoneland.com. And while you're on it, you're able to sign up for our email notification service. We're also on Facebook. The keyword to search is the Gladstone Companies, and on X, the platform formerly called Twitter, you'll find our handle @gladstonecomps. What we're doing on today's call is giving an overview of our results, so please go through our press release and the Form 10-K, both of which came out yesterday, to get more detailed information. So, with that said, I'll hand the presentation back over to David Gladstone.

Thanks, Michael. As always, I'll begin with a quick summary. Our farmland holdings are substantial. Right now, we possess roughly 103,000 acres spread across 150 farms, plus more than 55,000 acre-feet — that's the standard unit for measuring water rights. An acre-foot works out to approximately 326,000 gallons. That means our water holdings exceed 18 billion gallons. Combined, the property and the water carry an estimated total value of roughly $1.3 billion. Our farms span 15 states and — what matters more — 29 distinct growing regions, while our water assets sit primarily in California. Over 65 separate tenant farmers lease these farms, and the folks overseeing the operations involve quite a few people. Those tenants cultivate more than 60 distinct crop types, largely fruits, vegetables, and nuts. This produce shows up both in other areas of the grocery store and in the produce aisle, where the majority of what grows on our farms gets sold. On earlier calls, we noted that we remain careful about fresh investments since our cost of capital is still elevated. Cap rates across most row crops and farmland are so depressed that presently, because of these conditions, crop and land values stay quite high. We likewise think it's wise to preserve cash right now, considering how unpredictable the produce and nut markets are. Today the Federal Reserve keeps interest rates excessively high, so with luck they'll reconsider and bring them down eventually. We closed a few farmland divestitures lately. During December, 11 blueberry farms in Michigan were sold. These particular farms had been causing difficulties for us. We took an impairment charge on them in the third quarter, then booked a modest loss in the fourth quarter upon finishing the sale. Still, throughout 2024 these farms dragged net operating income down by roughly $400,000. With no obvious route back to profitability, we divested them. Come January, five Florida farms were sold at a considerable gain — roughly a 40% premium above our purchase price from six and a half years earlier. Florida farmland values in most areas keep climbing faster than the broader market, yet it was still the right moment for us to part with some. Lastly, in February, two Midwest farms were sold, netting a total gain of approximately 9% above our acquisition cost. We'd initially planned these as potato farms, but this region's market tilted toward corn and soybean, so the resulting cap rates struck us as unreasonable for continued ownership. When it comes to leasing activity from the start of Q4, we've completed 4 new leases along with amended or amendment agreements, and all of them are on permanent crop farms out west. For 2 of those leases, we changed the lease structure in a way that mirrors what we've recently done at a handful of other farms. Specifically, we removed the base rent, or in certain instances, gave tenants cash allowances so they could grow the produce. What we got in return was a substantial boost to the participation rent portion of those leases, and most of that won't be recognized until the second half of 2025. So near term, there's no income from these leases, but once the crops are sold, we'll capture a large share of it. Let me go a bit further: as we've said on earlier calls, market conditions for a lot of the permanent crop farms in the West—especially nuts and certain grapes—have been hurt by weaker crop prices and rising input costs, meaning fertilizer and similar items, and naturally, borrowing costs are still elevated. Because of that, we chose to rework the lease structure across 5 farms, which helps the grower reduce that fixed cost while also letting us share substantially in the upside. Basically, rather than fixed rent payments, we're taking a percentage of gross crop sales. That could turn out to be a major win for us by next year, by the end of this year. If we take the worst-case view and assume a total crop loss across all 5 of these farms—no crop proceeds at all from the harvest—we still expect crop insurance on these farms to pay us enough to cover every cost and give us a profit as well. It would be a modest profit, but a profit regardless. Since this is government insurance, we aren't concerned about being unable to pay. We haven't done this very often. Naturally, we're hoping for strong production overall and that crop insurance never comes into play. There are a few more properties where we're considering a similar structure. We're still going over the projections, and my guess is they'll look favorable for another 2 or 3 of them, so we might go that route. Right now, our plan is to proceed with this structure for 2025 and the harvest on these farms, then ideally go back to a more traditional structure next year, or we might sell some of these properties along the way. As for the other 2 leases we recently signed on permanent crop farms, they're anticipated to cause a year-over-year drop in annual NOI of roughly $180,000. Net operating income is the primary way we gauge most things in our business, so that's a setback. I hate to admit it. It isn't a huge amount, but even so, I really dislike giving up anything at all. As a quick point about our annual row crops, roughly 50% of the total, we keep witnessing solid value gains and dependable rent increases in that segment. Across 2024, we signed renewals on 12 separate annual row crop leases — those are not permanent crops. Those renewals should produce a combined rise in yearly net operating income of roughly $556,000, which works out to an increase of about 14% versus the earlier leases. Going forward, 3 leases are set to roll off within the coming 6 months, and altogether they represent only around 1.5% of the lease revenue we bring in overall. Hopefully we'll finish those this year and give up nothing there. We're talking with both the existing tenants and possible new tenants about leasing these farms, or, should the pricing be attractive, we might also consider selling a few of these farms. We think several of our farms are quite valuable, so a sale remains one path open to us. Now I'll provide a brief update on a few of the other tenancy matters we're still addressing. In the quarter, we signed lease agreements covering certain farms and disposed of other farms that had earlier been either empty or run directly by us. As things stand, we have 5 farms sitting vacant. A single farm is run directly through a management agreement with an unrelated third party. I realize a number of folks in this industry handle it their own way using a captive. Ours are third parties, and we've got solid people in place there. Beyond that, we're booking revenue from leases with 3 tenants who together lease 6 of our farms on a cash basis; normally that's handled on an accrual basis, yet we'll use cash for those simply to keep them current. As for these farms, we're in talks with assorted potential buyers or tenants about purchasing or leasing these properties. We're hoping to have these outstanding matters settled later in the year. Should we fail to reach an acceptable resolution, we might wind up listing a number of these farms for sale. Listing them for sale is a fairly solid route to exit them. The overall year-over-year effect on our operations stemming from tenant matters is that properties will see net operating income drop by roughly $236,000; that will land on us in Q4. I'll pause here. That's merely a taste, and I'm hoping we receive some strong questions at the end; but Lewis will take it from here now as the company's CFO. He deals with the numbers daily, so Lewis, please continue.

Okay, thanks, David. Good morning, everybody. I want to start with a quick review of what we've been doing on the financing front lately. No fresh borrowings were taken on during the quarter, though we did retire roughly $23.5 million of loans across the fourth quarter and afterward, tied to some property dispositions. Most of those loans had repricing dates set for later in the current year. Turning to equity, we've sold approximately $20,000 of our Series E Preferred Stock along with roughly $4.7 million of common stock through the ATM program since the fourth quarter got underway. Now for operations. Adjusted FFO came in at about $3.4 million for the fourth quarter, which works out to $0.09 per share, versus $5.4 million, or $0.15 per share, in the same quarter a year earlier. Common dividends declared were roughly $0.14 per share in each of those quarters. Looking at the full year, adjusted FFO for 2024 totaled approximately $16.7 million, down from $20.3 million in 2023. On a per-share basis, AFFO was $0.47 in 2024 compared with $0.57 in 2023. Dividends declared per share came to $0.56 in 2024 and $0.55 in 2023. Our FFO, as Nareit defines it, was $0.58 per share in 2024, versus $0.62 per share in 2023. What drove the AFFO declines? A few things: recent modifications to lease structures at certain farms, income we no longer receive from the big Florida farm sold back in January of 2024, and some tenancy problems that left certain farms vacant, costing us revenue and raising expenses. Fixed base cash rents fell by roughly $4.9 million quarter over quarter and $9.7 million for the full year, mainly for the reasons I just described — namely, revenue lost from the Q1 farm sale and the vacancies, plus structural lease changes where, as we've discussed, we lowered, removed, or in certain cases offered lease incentives to some tenants in return for substantially raising the crop share portions of those leases. We won't know how those crop share portions perform until harvest wraps up in the fourth quarter of this year. Partly offsetting the drop in fixed base cash rents was a gain in participation rents booked during 2024. In the fourth quarter, participation rents totaled approximately $4.8 million, up from $3.3 million in the prior year quarter; for the full year, we booked $9.4 million in participation rents versus $5.9 million last year. Higher yields on certain almond and pistachio farms drove most of that participation rent increase — partly a function of the alternate bearing nature of those crops — and it was partially offset by weaker prices through the 2023, 2024 marketing period; we covered this on last quarter's call, but I believe it's worth revisiting and giving you an update on some of those figures. Because we altered the lease structures on a handful of farms, we anticipate a total swing in fixed base rents from one year to the next of roughly $13 million when comparing 2025 against 2024. That amount is made up of the base rents recorded during 2024 under the earlier leases, together with the cash allowances provided to those tenants for the 2025 crop year. It will appear as a reduction in our fixed base rents of approximately during 2025 at a pace of somewhere between $3 million and $3.5 million each quarter, and afterward the bulk of the crop share proceeds that result from these leases would be booked as participation rent during the back half of 2025, while the smaller remaining piece would be booked in the back half of 2026. If matters unfold the way we currently anticipate, this will essentially amount to shifting that money out of the fixed base rent bucket and into the participation rent bucket across the coming couple of years. Turning to expenses, if we leave out reimbursable expenses along with certain non-recurring or non-cash items, our core operating expenses came down across both comparable periods. Related party fees in total fell by $1 million on a quarterly basis and by $1.8 million on an annual basis, driven by the incentive fees earned in each of the comparable prior year periods. Looking at it quarterly, the rest of our core operating expenses stayed roughly level. It is a bit higher. Property operating expenses were offset by general and administrative expenses that were slightly lower. On an annual basis, the rise in property operating expenses came mainly from added costs incurred on properties that were vacant, directly operated, or in non-accrual status at some point during the year, and those costs encompassed additional real estate taxes, legal costs, and property management fees. Lastly, other expenses declined mostly because of reduced interest expense stemming from loan repayments made over the last year. With that, let's turn to net asset value. During the quarter, 37 farms were revalued, and on the whole, those valuations dropped by approximately $50 million relative to their prior valuations from a year earlier. The declines were confined to certain of our current crop farms, since our annual row crop farms kept appreciating in value. As of December 31st, our portfolio carried a value of approximately $1.4 billion. 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 on December 31st came to $14.91, down from $15.57 as of September 30th. Most of that movement stemmed from the decreases in valuations of certain farms that were reappraised during the quarter, partly offset by the change in fair value of certain preferred securities resulting from shifts in market rates. Keep in mind that this marks the final occasion on which we will voluntarily publish our NAV calculation in our quarterly reports. With the expansion of our portfolio, the expense associated with these periodic valuations has grown rather significant. While searching for cost-cutting opportunities, we've concluded that the hours and dollars this procedure demands no longer serve the best interests of either our company or its shareholders. Moving on to liquidity, which encompasses what's available through our credit facilities and other subordinated notes, we presently can tap into more than $195 million in capital, comprising roughly $50 million in cash on hand. Beyond that, we hold close to $150 million in unpledged properties. Right now, more than 99.9% of what we owe carries fixed rates, and on a weighted average basis, those rates stay locked at 3.35% for an additional 3.6 years. Consequently, rising interest rates over the last couple of years haven't had much effect on our operating results, and when it comes to our existing debt, we feel strongly protected if rates remain at heightened levels. As for debt maturities ahead, roughly $38 million comes due within the next 12 months. That said, approximately $20 million of that figure consists of assorted loan maturities, and considering the collateral's underlying value, we anticipate no difficulties refinancing any of those loans should we decide to pursue that path. So once you strip out those maturities, only around $18 million in amortizing principal payments comes due within the next 12 months, which equals under 4% of our present debt outstanding. Last, on the topic of our common distributions, during January we declared a dividend of $0.0467 per share per month for the first quarter of 2025. With our stock currently priced at $11.52, that translates to a 4.9% yield, exceeding the typical dividend yield throughout the whole REIT sector. In light of the recent adjustments we've made to lease structures at certain properties, we consider it wise to keep the dividend unchanged at this point and will keep evaluating as additional details about the 2025 harvest emerge. Having said all that, I'll hand the program back to David.

Thanks, Lewis. Good report. We'll keep being active in the market if a solid acquisition opportunity shows up, and so we're prepared in case interest rates come down too, but like we said on earlier calls and again today, we're still leaning cautious when it comes to acquisitions since our cost of capital is still high. Even though pricing has dropped for some permanent crops, with farms in the West valued the most, and much of the value of farms such as those growing strawberries is still elevated, cap rates on the majority of these farms are only just sufficient to cover what we pay for financing, so renting them out isn't particularly advantageous for anyone, and because of that, acquisition activity for us stays slow and will likely continue that way for another couple of quarters. Interest rates remain too high right now, and forecasts for additional cuts appear to be getting trimmed at a fairly sharp pace, so how much more cuts happen and when is still unclear to us. We're hopeful that rates will decline at some point soon so we can begin exploring buying additional farms. A few closing thoughts: we think putting money into farmland and raising crops that support a healthy lifestyle, like fruits, vegetables, and nuts, aligns with the trend we're seeing in today's market. In general, demand for prime farmland producing berries and vegetables is stable to strong across most regions where we operate. As noted before, crop prices certainly, and permanent crops, especially nuts and grapes, have been weak as of late. Folks simply aren't consuming enough nuts; we need more of that to drive the price higher. It has affected the values of our underlying farmland, particularly nuts and grapes, and we're seeing prices that overall economics of some of these crops are only now beginning to recover. Yesterday we received a report indicating that pretty much the entire country has run out of all the old nuts and pistachios, and we have a fresh sense that things will rise since so few remain. When people stop eating, that doesn't mean the trees stop producing; they continue producing. So we wound up with prices being pushed down to a level that didn't work well for us, but please keep in mind that buying stock in this company is truly a long-term investment in farmland. Looking back historically, long-term returns stay strong, though there are sometimes ups and downs in the marketplace, just as with any investment in areas like this. Now, a portion of our portfolio is in a down cycle that we're working to navigate through. We anticipate inflation, especially in the food sector, to keep rising over time, and we anticipate the values of underlying farmland to rise over time as a result. We think that's particularly going to be the case for fresh produce, the sector around fresh produce, every one of those areas, along with the patterns we're seeing as an increasing number of Americans who eat healthy foods keeps expanding. Please remember that putting money into our shares actually consists of 2 components. To start with, much like gold, this is a hard asset. It's farmland. It's soil. It isn't disappearing. It carries an intrinsic worth since there's only a finite supply of quality farmland across the United States, and urban development keeps consuming it. The property we divested in Florida will need to become some housing. Even though that benefits us on a one-time basis, after they're gone, they're gone. Next, in contrast to gold and other alternative assets, this is an active investment that generates cash flows for investors. Thus, for that reason, we think farmland serves as a superior inflation hedge compared with gold. At this point, we'll take some questions from those who track us. Operator, if you'd join us, could you kindly explain to them how to submit some questions? We're hoping for a lot of questions today.

Yes, thanks. Morning to everyone. I'd like some clarity regarding what you mentioned about participation along with the fixed base rent amendment. From what I gathered, you referenced a reduction of $3.5 million in fixed base rent. Does that $3.5 million decrease compare against the figure you all disclosed in 4Q?

Not exactly — what I'm referring to is the typical base rent across 2024 measured against the typical base rent across 2025. So this isn't about Q4 against what's ahead. Were you to take the yearly base rent for 2024 and split it into four parts, that figure would serve as the reference point behind the $3 million-$3.5 million movement.

All right. So as for that reduced base rent, you're figuring on collecting most of it across the third and fourth quarters of 2025, correct?

That's right. Most of it will be — well, going by what we currently anticipate, we do expect to bring in the bulk of it, and ideally beyond that, should the harvest come in strong during this year's second half, and once the marketing period wraps up, bonuses and adjustments will be recorded in the back half of next year.

So looking ahead to 2026, will the leases on these farms revert to their 2024 structure? Or do you anticipate they'll stay the same as in 2025?

That's still uncertain. We're hoping to return these to a traditional lease arrangement, but ultimately we'll be subject to market conditions. Just like this time around, we might have been able to lease it out for an extremely low base rent with minimal or no upside potential. However, after running the numbers, we determined this was the better choice for us. So when these leases expire at the conclusion of this crop year, we'll need to run that analysis once more.

All right. Then perhaps as a final point, regarding the Florida farm sale, I believe you said some debt was retired using the money from it. How did you use whatever proceeds were left over from that transaction?

At this moment, that amount sits within the $50 million in cash we currently hold on our balance sheet. For now, we are simply keeping it available for other purposes.

Alright, thanks. That was everything from my side.

All right, let's take the following question.

Yeah. Morning, everyone. This initial question goes out to Lew. When it comes to interest patronage in Q1, what sort of expectations do you have?

The percentage we receive back on the Farm Credit borrowings ought to be comparable, though during the last 12 months we've repaid some of those loans. So my rough estimate at this moment would be roughly 10% lower, simply because my understanding is that we've retired around 10% of those loans over the past 12 months.

Understood, that's clear. You said there were 3 leases coming due within the next 6 months, with rent that's fairly minor — perhaps 1.5%. For this year, though, it's actually quite significant. From what I recall in the K, more than 17% is expiring. Could you provide some detail on the rest of this year's lease expirations, perhaps breaking it down between permanent and row crop?

Right. The leases that run out over the coming six months are largely row crop farms. That said, exactly as you mentioned, that represents a modest share of the total. As for the rest of the leases ending in the back half of the year, most of them — likely 60%-70% — involve permanent crop farms. A portion of these are the ones we talked about, where there's a lease incentive along with significant crop share upside; so roughly 50% of the expiring leases sit in that category. The remaining 50% are permanent crop farms currently held under traditional leases. For that 50% on traditional leases, our expectation is they stay flat, and we might even manage to negotiate an increase in rent, though it's too early to tell. As we just said, for the other permanent crop farm leases in that lease incentive and high upside category, the outcome is still uncertain. Our preference would be to convert them back to traditional leases, but at this moment we can't predict which way we'll need to go with those.

Understood, that's useful. Given the level where the preferred is currently trading, my guess is you've been acquiring it somewhere between $20 and $50. It remains roughly in that area. Do you expect you folks will keep going into the market, repurchasing the preferred, and perhaps realizing a modest gain?

Yeah. It's an easy way for us to make money.

I’ve got one more. When I look at what you spent on real estate this quarter, it went up fairly meaningfully. Is that mostly tied to taxes and a few added costs from the farms you run directly, or is there something else driving it?