Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Okay, thanks. That intro was quite good. I'm David Gladstone, and I'd like to welcome everyone to the quarterly conference call for Gladstone Land. I appreciate all of you spending part of your day listening to what we have to present. Before we get started, Katharine Gorka, who is our Director of Investor Relations and also takes care of ESG matters, will speak to you. Katharine, please go ahead and introduce things here.

David, thank you — and a good morning to all of you. Certain things we say during this call may look ahead, resting on estimates, assumptions, and projections from management. No promise attaches to how we'll perform down the road, and what actually happens may diverge substantially from anything stated or suggested here, because of a range of unknowns — among them the risk factors described in the filings we make with the SEC, which you can find under the Investors section of gladstoneland.com. Apart from situations where the law demands it, we assume no duty to revise any such statements. If you'd like fuller detail, our website has both our Form 10-Q and the earnings press release, each of which came out yesterday. Additionally, registration for email alerts is available, and you can locate details about reaching our Investor Relations team. We also maintain a presence on X under @GladstoneComps, plus Facebook and LinkedIn. For all of those, the search term is The Gladstone Company. During this call, we'll cover FFO — Funds From Operations — which is a non-GAAP accounting term. It's calculated as net income, without gains or losses tied to real estate sales and any property impairment losses, then adding back depreciation and amortization of real estate assets. Additionally, we could cover core FFO, typically described as FFO with adjustments for specific revenues and expenses that don't recur, plus adjusted FFO, which takes core FFO further by accounting for particular noncash items—for instance, translating GAAP rents into normalized cash rents. In our view, these measures may offer a clearer picture of how we're performing operationally and make it easier to compare results from one period to the next. At this point, I'll hand things back over to David Gladstone.

Alright, thanks Katharine. Let me give everyone a quick recap of what we hold in Farmland. Across 150 separate farms, we've got approximately 103,000 acres. As for water, we now hold more than 55,000 acre feet — that figure may not mean a lot to you, but it works out to roughly 18 billion gallons that belong to us, stored in aquifers and various locations. Fifteen states are where our farms sit, while every one of our water assets is located in California. More than 80 tenant farmers lease from us, and on our land they cultivate 60 distinct crop types. The bulk of what they grow falls into the category of items you'd see in the produce aisle at your neighborhood supermarket — things like fruits, vegetables, and nuts as well. We're staying careful and haven't put money into anything new, since interest rates and the costs associated with operating these farms look nothing like they did back when we began. Our cost of capital is still extremely elevated, and cap rates across most row crops remain high. Should you purchase one of these farms and then actually work it, the current period is really tough on farmers. No sales got done this quarter, yet we do have a single property, located in Florida, that our financials list as held for sale; it's made up of 2 farms there that are under a signed purchase agreement, and we anticipate closing shortly, which should give us a pleasant gain. Incidentally, down in Florida, many farms are getting bought up so they can be converted or reclassified for housing. Housing isn't our line of work, so when the housing crowd turns up needing more land, we sell our farms. I'd like to address a few changes we implemented to the lease structure on some of our farms. I realize we've brought this up before, but I want to be certain it's clear, since it meaningfully affects how our earnings are patterned. I believe we brought it up on the previous call — market conditions surrounding quite a few of those permanent crops out West, especially the ones growing nuts and grapes, involve prices that differ, and they're not — they weren't particularly elevated, though this year has a somewhat different set of legs to it. Take almonds — we have plenty, and I'm hopeful. Each year the government releases its estimate of what — the quantity of almonds that will come out. Over the last 5 years, the last 5 estimates weren't conclusive, yet during the first 2 of those 5 years, the government and its projections were. Okay, so they weren't spot on, yet the almond count came in above what the government had projected; after that, in year three, their figure hit the mark precisely, and then across the most recent 2, we simply got — honestly, should the government prove accurate this time around, we stand to earn quite a bit. In any case, we chose to restructure the lease terms across 6 properties, which explains why we lean on these projections so heavily — to keep fixed costs as low as possible while still letting us share in the gains. We've shifted away from functioning purely as a lessor toward something closer to an operator, or even a grower of sorts, since a portion of our lease compensation now comes from part of the crop being cultivated; basically, rather than a set rental amount, we agreed to take a share of gross crop sales. The reason we made that move is that farmers faced an extremely tough stretch over the past 2 years — really the past 3. We also chose to run 2 properties on our own, with assistance from third-party operators. That doesn't mean you'll spot me or anyone else out in the fields bringing in the harvest or anything like that. Like plenty of others in this line of work, we've brought in third-party operators to manage the farms. Our aim is to convert every one of these back toward the more conventional arrangement, fixed base rents included. Whether we can pull that off hinges on a number of outside variables — crop output, pricing, interest rates, and input costs, which haven't fallen. They haven't gone anywhere in the world except upward. Water availability matters too — that one's crucial. On our farms, we bought and stored sufficient water, so we're set for many years ahead. Part of what gave us confidence to take this path is that the specific farms involved — we now have 8 in this — performed really well in earlier years. Thanks to the crop insurance coverage we've secured, you're able to purchase crop guarantees tied to your historical yields. That translates into solid, high-level crop insurance protection. All 8 of these farms carry crop insurance. If a hurricane swept through and flattened everything, we'd still collect what we would have collected; we believe we would have collected that on our existing farms; naturally we're hoping that despite having crop insurance, the base rent reflects strong output from these farms. They've delivered that before, so we needn't depend on crop insurance, in which case our profit could be substantial. As for leasing activity, plenty of farms remain under leases, obviously, and since we're a real estate investment trust, our leasing naturally aligns with that type of structure. On the leasing side, we signed 4 new standard lease agreements this quarter, and we anticipate those will drive a strong lift to annual NOI — roughly $166,000, or about 9%. That portion of the business continues to perform quite well, and we'll see how it shakes out when we harvest the crops that we'll have an ownership stake in down the road. Going forward, 14 leases are set to roll off over the remainder of the period, partly because a number of them carry no fixed base rent, cash leases among them that we're actively working on. During the first half of 2024, these leases in fact represent negative $2.8 million of leasing revenue. Keep in mind, we aren't able to factor that into our estimates even with insurance in place, so they remain a negative drag until the crop arrives. We won't have that answer until the fourth quarter. We'll have a bit more clarity when we next get together in the third quarter. The main reason is that participation rents tied to these leases really won't be recognized until we reach the fourth quarter. That's how the accounting standards work. I'm not sure why we can't recognize a portion of it, but those are the rules. And unless you've sold something and are attempting to collect on it, none of it can be accrued. We're holding discussions with tenants who are both existing and prospective regarding the leasing of these farms, which includes converting some of them back to standard leases carrying fixed base rent. Alternatively, should the price be attractive, we might also consider selling a few of these farms. As I noted, we have one in Florida that's slated for sale. The reason is that the housing boom in that area is extraordinary. I'll pause here and hand things over to Bill Ryman. Bill has been handling everything in California and working diligently, since we've shifted from simply collecting rents to actually collaborating with the folks we brought on to farm the land. Bill, please come on and walk us through that, during the first half of 2020.

Thank you, David. Yes, of course. Good morning, everyone. I'd like to spend a moment discussing those 8 properties that fall under modified lease agreements or are run directly by third parties. Three of them are wine grape vineyards, and given where wine grape economics stand, we're hopeful we can recoup the bulk of our costs on those. Breaking even would be an enormous victory. The other 5 properties are made up of 2 pistachio orchards, 2 almond orchards, and one large property containing both. Looking at planted acreage, roughly 60% of those 8 properties sit in pistachios, while about 35% of the acreage is in almonds. Our attention is overwhelmingly on these 2 nut crops. Across all 8 properties, we're really pleased with the crop conditions; we expect above-average yields, and quality looks excellent. As David mentioned, every one of these properties carries full insurance coverage. Production history on the nut properties is genuinely strong. They all look above — I'd describe the crop as excellent. Across the 8 assets, we've been working with 5 separate tenants or operators, and all 5 growers are delivering at a very high level for us, hitting what we regard as an acceptable standard. All of it's positive. Beyond that, this past winter brought us an average amount of rain — a wet one, you could say — and across the whole Western U.S., the growing season has been close to ideal, in my view. Obviously, that isn't within our control, yet we've enjoyed a great deal of good fortune. Now, on to crop markets. Generally, prices for a great many of the crops and commodities we deal in have moved downward during recent months. Trade negotiations and tariff discussions definitely contribute significantly to that, though the primary forces are really the classic supply-and-demand factors — especially when it comes to crops like almonds and wine grapes, both of which matter enormously to us. In these industries, orchards and vineyards have been taken out on a scale never seen before. At some point soon, those markets should reverse course. Almond markets have clearly rounded a bend during the last twelve months, moving higher. David mentioned the USDA's objective forecast for almonds that came out in July. What they published was enormous — beyond anyone's projections — and frankly, no one truly accepts it. Even so, roughly four weeks ago it triggered a drop of about 20% in almond prices. That erased every pricing gain achieved over the prior year and pushed things back to where prices stood a year earlier. During roughly the last fourteen days, prices have really come back, rising between 5% and 8%. That reflected where things stood seven days back, and in the week that just closed, we gained an additional $0.03 to $0.04 per pound. Momentum in the almond market is clearly solid, and we look for it to carry forward. Harvest has only just begun. Right now we are shaking trees across every one of our almond orchards. Over the next several weeks, we'll start to learn how the industry's real figures compare with the target. Everybody is tracking that intently, because a slower pace than the USDA forecast would support further price hikes. As of right now, the chatter among coffee shops is that the crop is coming in light. That's likely a plus for us, since it will firm up the market. The fine grape market remains stuck at its lows, and getting contracts has been sluggish this summer, yet over the past 10 days, we've received quite a few inquiries regarding some of our crops for contracts, and pricing is notably above where it stood 12 months ago. Those are a couple of encouraging signs. Pistachio is honestly likely the strongest market around at the moment. Similarly, tariffs and trade discussions have generated a fair amount of uncertainty, yet we're seeing very robust demand, rising demand. In fact, some of that caught us off guard and led the 2024 crop to sell out ahead of schedule. As things stand right now, with harvest of the '25 crop a month off, there's minimal activity because product is so scarce. Our inventories entering 2025 are quite low, so 2025 should deliver what's probably the biggest U.S. pistachio crop ever recorded, yet demand is solid and pricing is stable. In fact, our guaranteed base price was released a few weeks back, and it matches last year's, which is precisely what we budgeted for. One of the unknowns has now become known. Our base pricing for the pistachio crops is settled, so that's a positive. We're pleased with that. Profitability in pistachios is nowhere close to what we saw during the boom five or ten years back, but the fundamentals of this market are still quite solid. Generally, bearing acreage keeps widening and the pistachio harvest keeps getting bigger each year, and at the same time there's some trade ambiguity, particularly where China is concerned. In our view, those two negatives are balanced out by a slowdown in new plantings, with few new trees being put in the ground, plus well water pumping limits connected to Sigma in California, which will hurt certain orchards established in the past ten or fifteen years in areas holding weaker water rights. We're seeing consumption climb very sharply throughout the EU, mostly driven by the Dubai chocolate trend. There are plenty of positives to counterbalance the negatives. I'll wrap up with some comments on water; we've always — in past reports we've described how the Western U.S. has experienced a normal to wet cycle over the last few years, this most recent one included. That has opened up quite a few chances to buy water at prices that genuinely work within our crop budgets. We've been quite aggressive and focused on upgrading our delivery and storage infrastructure throughout the portfolio. Thanks to the fact that water can be obtained cheaply, our efforts to enhance the water security of the farms have truly paid off. To that 55,000 acre feet of water, we keep making additions. There are certain locations where our farms possess sufficient water. Even if no rain fell for 10 years, we would still be able to irrigate them for roughly a decade. A great deal of our time is being spent attempting to determine how to synergize our properties, get them coordinating with one another so they can share water, and simply boost the overall security of the portfolio. This is something we will keep doing — examining long-term and short-term water purchases, enhancing — continuing to enhance infrastructure, and simply striving toward genuinely having a secure portfolio in that respect. That's all from me. I'll hand things over to Lewis Parrish, our CFO.

Okay, thanks, Bill, and good morning to everybody. I want to begin by giving a brief report on what we've been doing lately on the financing side. In the quarter, we completed a refinancing of a $10 million loan that was coming due with MetLife, and once the quarter had closed, we paid off a $10 million bond that was maturing, because we expect to sell the property behind it later this month. No new equity was issued by us in the quarter. Now for how operations performed. In Q2, our net loss came to roughly $7.9 million, with a net loss attributable to common shareholders of $13.9 million, which works out to $0.38 per share. Adjusted FFO came in at negative $3.4 million, or $0.10 per share, versus a positive $3.7 million, or $0.10 per share, during the equivalent quarter a year ago. Common share dividends declared came to $0.14 in each of those quarters. The drop in AFFO compared with last year came from recent adjustments to lease structures on some farms plus continuing tenancy problems that left farms vacant, which cut revenues and raised costs, together with revenue lost from farms that were sold during the past year. Fixed base cash rents fell by roughly $6.8 million versus the prior-year quarter because of the factors I just described, chiefly the vacancies we're still working through and the structural modifications to some leases, under which we lowered or removed fixed base cash rents or, in certain cases, gave cash lease incentives to particular tenants in exchange for substantially raising the crop share components. As other people have pointed out, we won't know what those crop share components produce until harvest finishes and the crops get sold. Participation rents also declined year over year, mostly because certain revenue was recognized on an accelerated basis in 2024. A year ago, some information reached us sooner than expected, letting us record certain revenue amounts during the first half of the year; this year so far, participation rents have largely come from cash collections on wine grape sales. I should mention that we still anticipate greater participation rent levels during the back half of 2025 thanks to lease modifications made on some permanent crop farms; we've talked about this on earlier calls, but those lease changes should lower fixed base rents by approximately $17 million for fiscal year 2025 relative to '24. That number covers both base rents recognized last year under the previous leases and the cash allowances given to certain tenants for the 2025 crop year. It's presented as a reduction in fixed base rents at a pace of about $4 million to $5 million each quarter in 2025, consistent with the first half of the year. In turn, most of the crop share proceeds that result from these leases should be recognized as participation rent in Q4 of 2025, while the bulk of the smaller remaining piece should be recognized during the second half of 2026. Basically, what we're doing is moving that revenue away from fixed base rents and toward participation rents across the next 2 years, so this year's earnings will lean much more toward Q4, with weaker earnings in the first half. On the cost side, if you strip out reimbursable items and certain non-recurring or non-cash charges, our core operating expenses were down roughly $200,000 in the quarter. The capital gain fee triggered during Q1 by property sales got reversed in Q2 because of additional losses on some asset dispositions. If you set aside that reversal, total related party fees dropped by roughly $67,000, mostly from a lower base management fee after recent farm sales. Now, the capital gains fee, should there be one, isn't payable until the fiscal year ends, and it remains subject to further adjustment through '25 if and when we sell more assets. Our remaining cash operating expenses declined by roughly $135,000, as lower G&A costs were partly offset by higher property operating expenses. That rise in property operating expenses came mostly from extra costs to protect water rights on some California farms, along with higher expenses tied to farms that were vacant, direct operated, or on non-accrual status — especially increased property taxes, which used to be the former tenants' responsibility. The drop in G&A expense was primarily from lower shareholder-related costs and reduced professional fees. Lastly, other expenses declined mainly because of lower interest expense, driven by loan repayments made during the past year. Moving to liquidity. Right now we have more than $150 million of available capital, plus nearly $170 million of unpledged properties we could use as additional collateral if necessary. More than 99% of our borrowings carry fixed rates, with a weighted average rate of 3.39% locked in for another 3.3 years. That has helped shield us from rising interest rates over the past few years. Going forward, we have roughly $17 million of scheduled principal amortization payments due across the next 12 months, under 4% of our total debt. We also have about $11 million in loans with fixed rate terms expiring within the next year, though the loans themselves aren't maturing. Finally, on our common distribution. In July, we declared a monthly dividend of $0.0467 per share for the third quarter of '25. At our current stock price of $9.14, that works out to a 6.1% annualized yield, well above the sector average. We're keeping the dividend at its current level for now, and we'll take another look in the coming months as we get more clarity on the 2025 harvest results. With that, I'll hand it back to David.

Alright, thanks, Lewis. I believe everyone is starting to understand the situation here. The timing for when we can book revenue has been altered, and during Q2, we recorded almost nothing. With any luck, in Q3 and Q4 — especially Q4, when we move a large volume of our crops — we'll return to generating substantial earnings. Something you might be unaware of: I didn't know this was happening until Friday, when Lewis and our legal department gave me a call. A group was out there trading on the market under the ticker dollar sign LAND. These meme traders were simply enjoying themselves manipulating the price amongst one another, and it shaved roughly 1 point off our stock's value. That hurt us, and recovering from being a meme stock and getting back to normal trading takes quite a while. Turning to the acquisition picture, we remain busy in the market, and we're observing many shifts in what farmers can get for their land. I believe we'll manage to divest additional properties down the road. Again, simply progressing in the direction we must, given how we now run this company; with the cost of capital still so elevated, it genuinely concerns me that the marketplace will need to undergo some adjustments. Demand overall for top-quality farmland growing berries and vegetables is holding steady across all regions where we own properties, particularly along California's coastline. As was stated before, pricing for some permanent crops has been weak. By permanent crops, I mean mainly the nut sector — plenty of trees out there. The sole upside regarding all those trees is that machines handle the harvesting. We aren't really troubled by shifts in what you must pay workers to pick crops; that still concerns us, though, since so many of our properties involve strawberries and other items that get picked fast and shipped fast. For us, the difficulty has been that we cannot book any anticipated revenue. Right now we're all sitting around idly, attempting to determine when we'll finally complete some genuine transactions. As Bill noted, he said they're beginning to sell and deliver a portion of the crops — the nut crops. I don't wish to sell anything at this moment, and Bill prefers to hold off and see how the crops actually turn out; we all anticipate inflation, especially within the food segment, will keep rising as time goes on. We anticipate that the worth of the land beneath our farms will rise as time goes on, since crop prices have the potential to climb, and provided that farmers can turn a profit, they'll keep at it. This strikes us as particularly likely when it comes to nutritious items — the fresh fruits and vegetables we cultivate, plus our nut crop. There's a movement of more individuals shifting toward consuming wholesome foods, and in particular the new HDA fellow — let's be honest, he isn't fond of all the junk that people in this country are consuming, which creates numerous issues across the population; we anticipate Mr. Kennedy will keep making noise about it. To my mind that benefits us, because a greater number of consumers purchase wholesome items such as nuts and berries. Among everyone I'm aware of, we run the biggest cabbage-focused operation. Consequently, that continues to generate profit. At this point we'll take some inquiries instead of me rambling on, or we'll have someone join us and pose a few solid questions.

I'd like to ask a bit more about what you said regarding participation rents. That $17 million figure you mentioned — how much do you expect to land in the fourth quarter of '25? And how much will carry over into the following year?

As for that $17 million, it's hard for us to give a firm answer at this point, since we can't predict what the final total will look like. If, say, harvest results come in weak, then the participation rent generated by those leases might end up below that figure. Should we see a strong harvest along with strong pricing, it could come in above it. When it comes to how it's divided between this year and the next one, our current estimate is roughly 60% to 65% falling in this year, with the remainder spread somewhat across the year, though the bulk of it would likely arrive in Q4 of next year.

With the structure of these leases, do they just switch over on their own into fixed rents, or will renewal happen at the participation rents?

There's no automatic conversion into fixed — that never happens. So once that time period arrives, we'll need to negotiate it once more, and typically that occurs ahead of this year-end, the calendar year-end.

Right. Those leases are up at the end of this year. We're going to renegotiate them. Should we reach an agreement on a standard lease, wonderful, but should we fail, we might need to keep the structure going for one more year.

So let's move over to the balance sheet, if we can. Could you share what you're anticipating for the Series D, which is set to be redeemed in January of '26?

Sure. All our options remain on the table at this point. We've been communicating with underwriters, and internally we're discussing how much cash we have available and drawing on the line of credit. The choices in front of us include retiring it, possibly funded by money coming in from property sales, or using the line of credit, whose rate sits roughly 1.7% beneath what the Series D rate would climb to. Another path is simply leaving it in place. Its rate would rise from 5% to 8%. Given where refinancing rates stand in the market right now, that likely remains the better route, when you consider what the refinancing rate itself would be along with every upfront cost, commission and so forth. As of today, we're continuing to evaluate matters internally — cash on hand, the line of credit — and figure out what the right move is when January arrives: either retire it, or leave it in place for a while, dispose of properties, and then retire it.

Gaurav, one of the great things about the current situation is the potential for us to earn a substantial amount from these product sales. Take, for instance, a rough estimate we could put together at this moment: $8 million from the sale of a single one of our nut crops. We've observed others doing this over many years. Sadly, the expense of capital, along with all the shifts that have occurred in farming, has wiped out many of our excellent tenants. I recall one individual who earned substantial sums in earlier years, yet today has suffered losses of roughly $8 million due to those shifts, so our hope is for a large harvest and for everyone to profit. Another dynamic at play is that a large harvest drives prices downward. If you're the first to reach the market and sell off your supply, the returns can exceed what you'd get by holding back. At present, we think this initial tranche now arriving, the earliest purchasers showing up, includes folks who are far behind and require it since they lack supply. Should you be in the candy industry and require large quantities of nuts, you've got a real issue. I'm not sure where they'll source them, but it's going to be quite fascinating. My expectation is that you'll witness prices climbing quite rapidly over the coming year. From where I sit, I believe we'll see a surge of many individuals eager to enter the business of cultivating crops in the nut sector. The nut sector has proven tough for us; we entered it at precisely the wrong moment. At this point, it's recovering, and it will be a big help if those who've purchased large volumes of nuts internationally — like, everyone involved in this industry leans heavily on the Chinese to purchase large quantities of nuts, and they lean heavily on other nations. I was taken aback when I went through all the reports on this, that much of the crop we cultivate in the almond category gets sold in Spain, sold across numerous Middle Eastern nations; in our case, we typically have little presence internationally; take, for instance, strawberry cultivation — those are grown and eaten right here very quickly. Consequently, they never reach the international marketplace. To me, it's a distinct segment. I don't enjoy it as much as the standard leasing operation we've practiced from the start. I believe that eventually, once profitability returns to the nut-side markets, well, we'll simply switch back to leasing. I'm eager for that since I prefer that aspect of our business. Any other questions, Gaurav?

Alright. Perhaps as a final point, you mentioned some encouraging movement in almonds and pistachios. I was curious whether any other crop category in your portfolio isn't experiencing favorable trends and is still facing weakness when it comes to pricing?

I believe that's accurate. Lewis, anything you'd like to add?

Bill, do you want to give some commentary on that?

Gaurav, the question was whether other crop types are also displaying weakness or softness in the market — did I get that right?