Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Alright, Paul — thanks for the kind introduction. This is David Gladstone speaking, and I'd like to welcome everyone to Gladstone Land's quarterly conference call. We're grateful to all of you for dialing in today. We know it takes time to join and hear us out, so thanks for listening to what we have to present. To get things started, I'll hand it over to Michael LiCalsi, our General Counsel. Michael?

Thanks, David. Good morning, all. Today's presentation could include forward-looking statements issued pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. Those statements address matters like our expected future performance, and they come with particular risks and uncertainties grounded in our current plans, which we believe to be reasonable. A variety of things might cause what we actually achieve to end up substantially different from any upcoming outcomes described or hinted at in these forward-looking statements. Those include the risk factors laid out in our Form 10-K and 10-Q, which are part of the filings we've made with the SEC — those are available on our site, gladstoneland.com, specifically under the Investors section, and also on the SEC's site, sec.gov. We also take on no obligation to update or revise any of these statements publicly, whether that's due to fresh information, events that happen later, or anything else, unless the law says we have to. On today's call, we're going to discuss FFO. That's a non-GAAP accounting term. Its definition is net income, but it leaves out gains or losses from selling real estate and any impairment losses on property, and then adds back depreciation and amortization of real estate assets. We may also get into core FFO, which is typically FFO with adjustments for particular nonrecurring revenues and expenses, and adjusted FFO, which takes core FFO and makes further adjustments for specific noncash items — for example, converting GAAP rents into normalized cash rents. It's our position that these measures provide stronger signals about how well we're operating and make it easier to compare how we perform from one period to the next. Now, I'd ask you to visit our website — gladstoneland.com — and register for our e-mail notification service. We're also on Facebook — look for the Gladstone Companies there — and on X, the platform that used to be called Twitter, you'll find us at @GladstoneComps. Since what we're giving you today is a summary of how we did, we'd ask you to look over our press release along with our Form 10-Q, both of which came out yesterday, if you want the fuller picture. I'll now hand things back over to David Gladstone.

Thanks, Michael. I'll begin by giving you a quick look at the farmland we own. Right now, we hold roughly 103,000 acres, and we own 50 separate farms plus around 55,000 acre feet of water assets. One acre foot equals approximately 326,000 gallons, so when you do the math, we hold roughly 18 billion gallons of water. That puts us in a strong position, since the West can be arid, yet we're doing well at present. Our farms span 15 states and, even more significantly, 29 distinct growing regions, while every one of our water assets sits in California. More than 80 separate tenant farmers lease our farms, and those tenants cultivate 60 different crops, so our diversification is substantial. Fruits, vegetables, and nuts make up the bulk of what we grow, and those are the wholesome foods people ought to be consuming. They show up in the produce aisle of the supermarket, and that's where the majority of what our farms produce gets sold. As we've said on earlier calls, we're still being careful about making new investments, since interest rates and our cost of capital stay quite elevated, and cap rates for row crops and farmland are simply too low for us to pursue purchasing additional farmland, which continues to carry a very high value, while interest rates and every input that goes into farming are extremely costly nowadays; we also think this is a sensible moment to preserve cash, given how uncertain the times we're all experiencing are. Turning to leasing activity thus far in 2025, we completed 7 new leases or modified some existing ones, primarily involving the permanent crops out West. On one of those leases, we restructured it in a manner similar to what we've done at a few other farms, meaning we lowered or removed the base rent, so we aren't receiving monthly payments, and in one instance, we gave the tenant some cash to cultivate the crops on the farms. That leaves us bearing the operating and capital costs. In return, we substantially boosted the participation rent portion of the lease, and regrettably, most of that will be recorded in the fourth quarter, when the crop is harvested; so with those 8 farms, we're in the growing business. Let me elaborate a bit further; we noted on previous calls that market conditions affecting many permanent crop farms in the West, especially those producing nuts and grapes, have been weighed down by weaker crop prices along with higher inputs and borrowing costs. Accordingly, we made the choice to rework the leasing arrangements covering 6 properties, which lets the grower hold down their fixed expenses while still giving us a share of the upside. What that means, basically, is that rather than collecting the rental payments we used to receive, we take a cut of the gross crops that get sold. On top of that, we chose to run 2 of these properties on our own, bringing in a third-party operator to assist. That operator handles the growing, and we're picking up part of the expense. We're planning for the worst case. If that happens, and things simply don't go our way — suppose, for instance, that a bizarre weather event wiped out the entire crop — we figure the crop insurance we carry on this will be sufficient to cover every cost we have and still leave us with a modest gain. Naturally, we neither want nor hope to ever tap into that. Obviously, what we're hoping for is solid output across all of these farms, so there's no need to depend on crop insurance — and if that's how it plays out, it could be substantial. We simply don't know, and we won't until the fourth quarter, once we actually sell the crops. On pricing, we've been looking for favorable momentum with almonds. That's now showing up, and pistachios are performing nicely. Production-wise, this is expected to be a strong year. So when we collect this information in the fourth quarter, we're optimistic about a robust result. Still, we truly won't have much clarity on it. As we learn what's happening out on the farms, we'll provide progress reports along the way. Right now, our intention is to keep this structure in place through 2025 and harvest these 8 farms under it. After that, hopefully we go back to a more conventional lease arrangement next year, or we might explore selling some of these properties we hold; and the 6 leases we've already signed this year should produce a year-over-year drop in our annual NOI, though we'll see how that shapes up by year-end. So, a fairly flat year. Going forward, 16 lease schedules are set to expire over the remainder of 2025, and since certain of these leases carry no fixed rent base while others involve cash leases — both in return for greater participation in the rent — these leases in fact represent a negative $1.1 million in lease revenues during the first quarter of 2025; so we've surrendered some straight-line income, mainly because we want a share of what results from these leases. And once more, I'll repeat it, we won't have much knowledge about it until the fourth quarter, and at that point we'll receive our report card, so to speak, as we sell everything they're growing on the farm. We are talking with a number of existing renters as well as potential new renters about leasing these farms. That includes converting a portion of these leases back into standard leases that carry fixed base rents. If we cannot reach an agreement on certain of these leases, then in all likelihood we will sell a couple of these farms. We think we hold some extremely valuable farms for sale purposes, and selling always remains an option. Now I'll provide a brief update on certain of the remaining tenant matters we are dealing with. At present we have 5 farms — that is a subset of the 8 that sit vacant — plus 2 properties and companies, and 4 farms that are directly operated. So we have 8 of these properties where we moved from fixed rent leases into participation leases, and we are recognizing revenues from the leases with 3 tenants who together are leasing 5 of our farms on a cash basis. With respect to these farms, we are holding discussions with a range of potential buyers and tenants to purchase or lease these properties, and we are hopeful that these remaining matters get resolved later this year. If we cannot arrive at an acceptable resolution by year-end, we will probably be listing some of these farms for sale. Just a note on tariffs, which everyone is discussing these days: most fresh produce, things like berries and vegetables, is somewhat shielded from the effects of tariffs, since with strong domestic consumption we are simply selling those to other Americans. The nut sector, by contrast, is exposed, because roughly 78% of U.S. grown almonds and pistachios get exported annually. They put them in boxes and send them abroad. China has historically accounted for a significant portion of those; that is down substantially now, and other countries have become more involved in purchasing our almonds and pistachios. Prior to the tariff announcement, almond prices had increased significantly year-over-year, while pistachios stayed flat but edged up slightly. Although the complete effect of tariffs on pricing is still playing out, we continue to watch the situation. In reaction to earlier rounds of tariffs, China moved much of its almond demand to other countries, and it has also cut back its imports of U.S. pistachios because of more recent tariffs. Consequently, some of the biggest importers of U.S. almonds and pistachios are now located in India, the European Union and in Turkey, and none of those have announced any tariffs on the U.S. goods. Such demand shifts might help steady prices for U.S. nuts, though market dynamics continue to evolve as they always do — this is not an exceptional year. It's simply a straightforward year in that respect. One more factor affecting export demand is the weakening of the U.S. dollar. As the dollar weakens against other currencies, say, the EU, for instance, the global market helps offset any of the negative effects from tariffs. At this point, I want to hand it over to Lewis, and Lewis, of course, will walk through the numbers.

Alright, thank you, David, and good morning everyone. Let me begin with what we did on the financing side. In connection with certain property sales, we paid down about $19.5 million of debt that had been scheduled to reprice at market rates later in the year. No new borrowings were taken on, and no equity was issued during the quarter. I should also mention $19.65 here. Moving on to operations. For the first quarter, net income was roughly $15.1 million, and net income attributable to common shareholders was $9.1 million, equal to $0.25 per share. Adjusted FFO came to about $2 million, or $0.06 per share, compared with $5.1 million, or $0.14 per share, a year earlier. Dividends declared per common share stood at $0.14 in each of the two quarters. The year-over-year AFFO decrease largely reflected recent changes to lease structures on certain farms along with tenancy issues that created farm vacancies, which meant lower revenues and higher costs, as well as revenues lost from farms that were sold during the past year. Fixed base cash rents fell by about $5.7 million versus the prior-year quarter for the reasons I just described — again, primarily the vacancies we continue to work through and structural lease modifications where we reduced or eliminated fixed base cash rents, or in certain cases provided cash lease incentives to some tenants in exchange for a considerably larger crop share component within the leases. And as David pointed out, the performance of those crop share components won't be known until harvest finishes later this year. Partially offsetting the decline in fixed base cash rents was a $2.4 million lease termination fee from a departing tenant that had previously leased 3 of our farms, along with roughly $465,000 of participation rents recorded in the quarter, primarily from cash collected on the wine group sales. We've discussed this on the past couple of calls, but with more agreements now in place, I believe it's worthwhile to update you on the figures. Given the lease structure changes we implemented on certain farms, we anticipate a total year-over-year reduction of approximately $17 million in fixed base rents for fiscal year 2025 relative to '24. That amount reflects the base rents recognized last year under the previous leases plus the cash allowances provided to certain tenants for the 2025 crop year. This will appear as a decrease in fixed base rents at a rate of about $4 million to $5 million each quarter in 2025, consistent with the impact seen in the first quarter. In turn, we expect the majority of the resulting crop share proceeds from these leases to be recognized as participation rent in the fourth quarter of 2025, with the smaller remaining portion recognized during the second half of 2026. Essentially, we're shifting that revenue away from fixed base rents and toward participation rents over the next couple of years. As a result, we expect earnings this year to be weighted much more heavily toward Q4, with weaker earnings in the first 3 quarters compared with prior years. On the expense side, if you exclude reimbursable items and certain nonrecurring or noncash charges, our core operating expenses increased by about $365,000 in the quarter just reported. Regarding related party fees, after backing out the capital gains fee triggered by recent sales, total related party fees decreased by approximately $60,000, driven by a lower base management fee due to farm sales completed recently. That capital gains fee isn't payable until the fiscal year ends, and it remains subject to adjustment throughout 2025 depending on asset sales or dispositions still to come; so for now, it has been added back to AFFO. Our remaining core operating expenses increased by about $425,000. That's mainly due to higher property operating expenses associated with farms that were either vacant, direct operated, or on nonaccrual status. This included additional property taxes, which prior tenants used to cover, plus higher legal fees related to leasing activity, establishing direct farming operations on certain farms, and protecting water rights on certain farms in California. Finally, our other expenses decreased primarily due to lower interest expense and reduced preferred dividend payments, both resulting from loan repayments and preferred repurchases completed over the past year. Turning to liquidity, when you include availability on our lines of credit and other undrawn notes, we can currently access more than $180 million of capital, which includes roughly $40 million of cash on hand; in addition, we hold close to $150 million of unpledged properties. More than 99.9% of what we've borrowed is at fixed rates, with a weighted average rate of 3.41% locked in for another 3.4 years. As a result, rising interest rates over the last few years have hardly affected our operating results, and we believe our current borrowing structure provides solid protection if interest rates remain at elevated levels. As for upcoming debt maturities, approximately $28 million comes due within the next 12 months. Of that amount, about $11 million consists of individual loan maturities. And given the value of the collateral behind them, we don't anticipate any difficulty refinancing those loans should we choose to. So apart from those maturities, we have around $17 million of scheduled principal amortization due within the next 12 months, which works out to under 4% of our total debt outstanding. In addition, we hold about $7 million of loans with fixed rate terms scheduled to expire within the coming year, even though the loans themselves aren't maturing. Last, on our common distribution: in April, we declared a monthly dividend of $0.0467 per share for the second quarter of 2025. With the stock currently trading at $9.65, that comes out to an annualized yield of 5.8%, which is above what the broader REIT sector generally pays in dividends. For now, we're leaving the dividend unchanged, and as we get more information about the 2025 harvest, we'll continue to evaluate it. With that, I'll turn things back over to David.

Okay. Thank you, Lewis. Nice report; we remain active in the market in case a solid acquisition target shows up, so we’re positioned if interest rates decline—because there’s no point making a purchase unless you can access low-cost capital. That said, as we’ve noted on earlier calls, we’re still being more careful on the acquisition side since our cost of capital is still quite elevated. And although we’ve seen price declines for some permanent crops and farms out west, most row crop farm values—like those producing strawberries—are still high, and cap rates on most of those properties are just high enough to make financing costs a concern for the growers. So, as a result, acquisition activity is still minimal to nonexistent for us, and that will likely continue for at least the next, I don’t know, 12 months. Interest rates are still very high and banks are charging very high prices, which is very tough on farming, especially for farmers who need to borrow money both to plant their crops and to harvest them. Those costs keep getting reduced or pushed further out. So the amounts and timing of any additional rate cuts remain uncertain. We simply don’t know what the Federal Reserve will do, and they almost dictate straight through to all the federal banks where we hold our loans. But we do hope that at some point in the near future rates will come down so we can start looking at buying more farms again. And just one last point: we believe investing in farmland that grows crops supporting a healthy lifestyle—such as fruits, vegetables, and nuts—follows the trend we’re seeing in today’s market. Overall demand for prime farmland producing berries and vegetables remains stable to strong in nearly all areas where farms are located, particularly on both the East and West Coasts. As mentioned earlier, crop prices for certain permanent crops such as nuts and wine grapes have been depressed lately, and that has affected the value of our underlying farmland. Please keep in mind, though, for this company—and I suppose for all companies, really—buying stock in this company is a long-term investment in farmland. Historically speaking, long-term returns stay strong over time, but there are occasionally some ups and downs, as there have been for the last 1.5 years since the pandemic. Right now, a portion of our portfolio is in what we call a down cycle, and we’re working hard to manage through it. We expect inflation, particularly in the food sector, to keep rising over time, and we expect underlying farmland values to increase over time, as they have mostly done in the past. We expect this to be especially true for fresh produce in the food section and for the trend of more people eating those foods rather than some of the bad foods that are out there. We’ll now take questions from those who track our progress.

About that $17 million figure for lower revenues in '25 compared with '24, I was hoping you could clear up your remarks, since it looked bigger than the $13 million I believe you guys brought up on the previous call. So did you add any further farms to the fixed to participation rent structure, which pushed that number up for '25?

Yes. One extra farm was involved, where a new lease was executed and the tenant received a lease incentive, plus we took over one property so it could be direct operated. So the revenues that were lost and recognized last year from those 2 farms got added into that, along with the lease incentive provided to one tenant.

All right. So regarding the overall participation rents you anticipate during '25 — meaning that $17 million along with some extra sum, correct, if we go by the prior year's run rate?

Right. As David mentioned, those 8 properties that fall into this category — either having a lease incentive or being directly operated — we anticipate recovering the full $17 million, and insurance ought to cover that figure plus a modest amount of profit. Naturally, our hope is that we won't need to tap into it and can instead report a greater profit. But the way revenues arrive will be divided between Q4 '25 and Q4. If we had to estimate, perhaps somewhere from 60% to 70% of it comes in this year; the rest would land in 2026, during the second half of '26.

So on top of the $17 million, if I remember correctly, there was $9.4 million in participation rent last year — meaning this year would be last year's run rate plus that extra $17 million, is that right?

Not quite, since a portion of that participation rent was generated by farms that have since moved into what you could call this adjusted lease structure. As a result, that $9.4 million would likely come in somewhat below that figure this year, and then you would add the $17 million along with whatever profit we can earn from these farms during the current year.

Alright. Then one final item — that termination fee of $2.4 million, could you share a bit of detail about that farm?

Sure. What we had there was simply 3 almond farms under a single tenant's lease, and at this point all 3 of those farms sit empty. In exchange for releasing them from some of their lease obligations, we received a termination fee. Naturally, it's a onetime occurrence and we won't see it happen again, but with regard to those 3 farms, we're exploring a range of possibilities so that income starts flowing from them once more.

In terms of more sales in Q2 and then moving ahead across 2025, what's the right way for us to frame that? As of March 31, it appears nothing is being held for sale.

That's right — there are certain farms we've put on the market, yet no agreements exist that we're ready to act on.

Okay. Next, regarding those 5 vacant assets — my understanding is that includes the 3 almond farms and 2 additional ones. What's the current thinking on them? Are the remaining properties also empty? Is there anything growing there that your team is handling itself? Or is it simply bare land? How ought we to frame that, along with the possibility of it acting as a bit of an upside later in the year?

Of those, 2 are open ground. There's nothing growing on them, so keeping them going costs very little — only the real estate taxes, and those run pretty low there. The remaining 3 are the almond properties. Those trees have reached the end of their life, so eventually they'll be pulled out. As for maintenance expenses, it's likewise only the real estate taxes on those 3 farms that we currently have to carry. We're evaluating several different options for each one — I mean, we might enter into flowering programs, lease off water rights, or explore potential new crops to plant there, figuring out which crops make the most sense in these regions given water availability, market demand, and tenant demand; but nothing is in stone yet. We're in the process of throwing around a few different options and seeing which makes most sense. Hopefully, we'll get a few of these turned into income-producing properties through the end of the year, but a couple of them could swing into next year as well.

Could the almond farms be situated near enough to populated regions that selling to a homebuilder might be viable?