Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Much appreciated, Latanya; that was a pleasant introduction. David Gladstone here, and I'd like to welcome everyone to Gladstone Land's quarterly conference call. Thank you all for joining us today. We're grateful that you've set aside time to hear our presentation. Before we get started, we customarily turn things over to Catherine Gerkis — she holds the title of Director of Investor Relations and ESG. Catherine, please go ahead with your portion now?

Thank you, David, and good morning to everyone. During this call, we might make forward-looking statements, and those rest on management's estimates, assumptions and projections. No assurance can be given regarding future performance, and actual outcomes could differ materially from what those statements express or imply, owing to a range of uncertainties, among them the risk factors described in our SEC filings, which are available on the Investors page of our website, gladstoneland.com. Unless the law requires it, we take on no duty to revise any of these statements. For a copy of our Form 10-Q and the earnings press release, both of which went out yesterday, please go to our website, where you'll find more detailed information. You can also register for our e-mail notification service and locate details about reaching our Investor Relations department. Additionally, we're on X at GladstoneComps, and on Facebook and LinkedIn too. The keyword for all of them is the Gladstone Companies. Today we'll talk about FFO, or funds from operations — a non-GAAP accounting term whose definition is net income, excluding gains or losses on real estate sales and any impairment losses on property, plus depreciation and amortization of real estate assets. We may also cover core FFO, which we generally describe as FFO adjusted for particular nonrecurring revenues and expenses, and adjusted FFO, which takes core FFO and further adjusts it for certain noncash items, for instance converting GAAP rents into normalized cash rents. Our view is that these metrics can offer a better sense of how we're operating and permit improved comparability of our performance from one period to the next. I'll now hand things back to David Gladstone.

Okay, thanks, Catherine. As always, I’ll begin with a quick look at what we hold in farmland. Right now, we have roughly 100,000 acres. That spans about 148 farms, plus close to 56,000 acre feet of water assets — that’s over 18 billion gallons. Our farms sit in 15 states, while the water assets are all in California — that’s where it’s driest. More than 80 tenant farmers lease from us, and they grow more than 60 crop types across our land. A lot of that is the kind of food you’d see in the produce aisle at your local grocery store — things like fruits, vegetables, and nuts. Our strategy for deploying capital into new ventures remains very strict. In fact, we aren't making any such moves outside of the farms we already own. We are not adding any new farms, purely because the current interest rate environment makes financing them impossible. Consequently, we are maintaining that disciplined stance regarding investments, since rates and the associated cost of capital are still quite high. We are optimistic that financial institutions might lower their rates down the road. Meanwhile, capitalization rates for the majority of row crop farmland haven't risen enough for the math to be viable. In the last quarter, we closed on the divestiture of a single property that contained two farms. Located in Florida, that transaction fetched $21.5 million. The deal comes at a price that's 36% above what we originally paid, which means we're recognizing a gain of roughly $6 million. As we keep reviewing our portfolio, we might look at selling a few more select farms in the coming quarters. That said, we remain in evaluation mode on those possibilities, staying quite cautious whenever a new deal comes across our desk. Turning now to an update: we've adjusted certain lease arrangements along with some of our permanent crops farms out West. On previous calls, we've mentioned that because of market pressures on some permanent crops—nuts and grapes especially—we restructured the leases at 6 properties. The goal was to support growth and, together with our partner, the grower, bring down their fixed expenses, while still letting us share in the upside, given that we're contributing part of the capital. Basically, rather than collecting a set rent, we take a cut of gross crop sales. Beyond that, we chose to run 2 properties on our own, relying on third-party operators for assistance. What gave us confidence to take this approach at those specific farms was their track record of consistently strong yields. Since the protection offered by crop insurance mostly hinges on what those fields produced in prior seasons, we managed to lock in substantial coverage for these farms, giving us confidence we'd reach our targets. In fact, we surpassed them this year across quite a few of those farms. Work is still underway tied to the previous year's harvest — specifically the tasks that follow harvest on the almond, pistachio, and grape acreage within this portfolio. But earlier this month we finished up the pistachio harvest on 3 farms, and now proceeds statements are coming in that confirm the volume delivered to the seller, or to the people working for us to sell the various items like almonds and pistachios, together with the first cash installment. According to those statements, we anticipate recognizing roughly $17 million of revenue in the fourth quarter from just these 3 orchards. We also got the first cash payment, a bit more than $5 million. On top of that, after the quarter closed, we moved one lease on a big vineyard in Napa, California away from a structure that had a sizable lease incentive payment and back to traditional crop share arrangements. Eventually, our aim is to move all our leases back to a more traditional structure. What that means is we prefer getting fixed-based rents that arrive each month instead of waiting until year-end for a share of the crop, even though that second option tends to be far more profitable than collecting monthly payments from somebody leasing our property. On the other leasing front, after the quarter closed we signed 2 renewals, which should produce a combined rise in annual NOI of roughly $65,000, or around 7%, on those farms. Going forward, we have 11 leases — 11 leases are set to expire at various points during the remainder of 2025, since some of them carry no fixed base rent and others include cash lease incentives, both in return for a bigger participation rent component; these leases in fact represent negative $651,000 of lease revenue, but they don't — none of the payments we'll receive from selling the crops under our percentage gets accrued. The main reason for that is the participation rents on those leases. We won't record them until Q4 is over. At that point, the figures arrive and we'll learn what we made. And I get the feeling our nut crops are doing well. So everyone here is happy about that. We're in discussions with tenants we already have as well as potential new ones about leasing out these farms. That includes moving some of these leases back to the standard lease we started with — meaning fixed rents each month or each quarter, but basically with no significant share of the sale. So the farmer handles the farming, and we just lease the land to them. However, with these farms, we've moved to an arrangement in which we contribute a portion of the capital and receive a substantial percentage of the proceeds generated by sales. So we'll find out how that turns out. The initial one we talked about looks positive. Therefore, aside from grapes, I think the rest of the ones we own look okay. Now, a quick update on several tenant matters we're currently working through. At present, 6 farms are vacant, while 2 properties encompassing 4 farms are operated straight through management agreements with an outside third party. In addition, for leases held by 4 tenants who collectively rent 7 of our farms, revenue gets recorded on a cash basis. For every one of these cases, we are pursuing solutions and expect several to be settled within the coming — well, I'd say several months, though typically nothing happens until roughly 6 months past the year-end. So, I'll wrap up here. Bill Reiman is with us on the line, and Bill will share some encouraging developments. Bill, the floor is yours.

Thank you, David. Sure — I'll add a bit more detail regarding those 8 properties that either have modified lease arrangements or are run directly with third-party operators. For the 2025 crops of pistachios, almonds and grapes, we're almost through harvest. Every pistachio is in the barn, as we like to say. And as David noted, the first payment on that crop has come in. Only a few tons of grapes are still out there waiting to be picked, and while some of the almond crop is sitting in stockpiles overall, nothing remains in the field. That should be finished within a few weeks. During the last quarter, we told you growing conditions had been close to perfect, and those beneficial conditions largely held up through the fall. We got somewhat heavier rain than usual in California's Central Valley, yet the harvest went very smoothly and without surprises, which is exactly what we want. Our pistachio orchards beat state averages by a wide margin and also came in above our own internal forecasts, in both crop quality and volume. A handful of almond blocks did worse than expected, but most of them also topped our internal projections. For a few blocks that came up short, we anticipate collecting crop insurance payments, which ought to cover our growing costs fully. Fine grapes likewise produced robust yields across every category, with outstanding quality. The superb growing and harvest conditions we saw in 2025 have set the trees and vines up very nicely for the coming 2026 season. Of course, we still require adequate chilling hours, winter moisture and good weather next year, and it's early yet, but the 2026 crop is starting off well. Irrigation and fertilization work is already happening, and we'll begin some curing work too as winter arrives. A quick note on crop markets. Tariffs, trade friction and geopolitical talk keep generating uncertainty in a lot of export markets. The nut crop markets are demonstrating remarkable resilience and strength, especially pistachios. We're seeing demand that's stronger than anticipated coming from — really from 2 particular markets at the moment for pistachios, the EU and the Middle East; that matters a great deal since it lowers how much we depend on the Chinese market. China remains hugely important, but dispersing the crop among more buyers definitely cuts that risk. As for the outcome in pistachios, our base guaranteed price for the current crop is unchanged from 2024, and we think there's a good chance that the final price — though it won't be revealed until a year from now, and we have plenty of marketing left to do — we think that final price for the 2025 crop will be similar to 2024 levels. Almond prices bounced back after their mid-summer slide, getting back to where they stood in early spring. Since then, prices have kept climbing, adding a few cents per pound weekly. The sellers I've spoken with, the marketers, are all happy about this, with pricing and demand rising every week, and everyone anticipates that will keep going for the next several months. Things are reversed when it comes to wine grapes, which keep doing worse. Over the last 2 years, output has been strong, and at the same time worldwide drinking has fallen off, which produced an oversupply crunch more extreme than anything this industry has faced before. Consequently, vineyards are being pulled out in many places across the globe. Given how quickly that's occurring, our expectation — with luck, in the coming 12 months or 18 months — is that these markets will begin to recover; and on the whole, from a macroeconomic standpoint, a softening U.S. dollar genuinely benefits us across all the goods we ship abroad, especially since it makes what we sell far more appealing to purchasers overseas. Finally, let me address water. The report is almost the same as what we gave 3 months ago. For the last several years, including this most recent winter, we've been in a normal-to-wet pattern. Our emphasis stays on improving the infrastructure for delivering and storing water throughout the portfolio. Given these wet years, cheap water is plentiful; therefore, we've taken a highly deliberate approach to those purchases. As a result, we keep expanding our water assets, which total just about 56,000 acre feet, and we've placed a number of our farms so they have sufficient supply to cover near-term irrigation requirements no matter what the weather does; so our confidence there is fairly high no matter how this winter turns out. As for storage in the 2 federal systems, we anticipate an allocation of at least 35% and up to 50% should winter be dry. So if winter turns out normal to wet, we'd expect that figure to rise even higher. So it's quite encouraging news regarding water. I'll now hand things over to Lewis Parrish, our CFO.

Thanks, Bill, and good morning to all of you. I want to begin by giving you a quick rundown on the financing moves we've made lately. Over the quarter, we paid off a bond of $10 million that had come due, and that bond had been backed by a property we likewise divested during the period. On the equity front, starting from the beginning of the third quarter, we brought in roughly $10 million via our ATM program. We issued those shares in preparation for redeeming our Series B term preferred stock, which comes due at the end of January 2026. Doing so lets us sidestep the planned bump in the coupon rate from 5% to 8% and lessens how much we lean on our variable rate line of credit to cover that redemption. Now to our operating results. In the third quarter, we posted net income of approximately $2.1 million along with a net loss to common shareholders of $3.9 million, or $0.11 per share. Adjusted FFO came in at $1.4 million, or $0.04 per share, versus $4.5 million, or $0.13 per share, in the equivalent quarter a year ago. The drop in AFFO year over year stemmed from recent adjustments to lease structures on certain farms, revenue lost from farm sales in prior years, and continuing tenancy problems that produced vacancies, which brought about both reduced revenues and elevated costs. Fixed base cash rents ran roughly $5.4 million below the prior year quarter because of the reasons I just noted, but chiefly the lease modifications on certain properties where we cut or removed fixed base rents or, in some instances, offered cash lease incentives in return for substantially greater crop share participation. The outcome of those crop share components won't be clear until harvest wraps up and the crops are sold, which is happening right now. Participation rents rose by roughly $1.9 million, mostly because of accelerated recognition payments tied to the 2024 harvest on certain farms as more information reached us earlier this year. That gain was also fueled by considerably stronger pistachio pricing than a year ago. We still anticipate greater participation rents in the fourth quarter of 2025 owing to the lease modifications we implemented on certain permanent crop farms. As we've mentioned on earlier calls, these changes produced lower fixed base rents in fiscal year 2025 relative to '24, and the bulk of the crop share proceeds that result should be recognized as participation rent in the fourth quarter of 2025, while most of the smaller remainder will be recognized in the second half of '26. So basically, we're moving revenues away from fixed base rents and toward participation rents across the next couple of years. Consequently, the majority of our 2025 earnings will land in the fourth quarter, with broader earnings across the first 9 months of the year. Regarding expenses, once you exclude reimbursable items and certain nonrecurring or noncash charges, our core operating expenses fell by roughly $140,000 this year — this quarter. Related party fees overall went down roughly $110,000, and the reason was a smaller base management fee tied to sales completed recently. As for the rest of our recurring cash operating expenses, they stayed more or less level, since greater property operating costs got offset by reduced G&A expenses. Last, other expenses came in lower, largely because interest expense declined thanks to loan repayments we made during the past year. Now on to liquidity: right now we hold more than $170 million in capital that's immediately available; on top of that, we have close to $150 million in unpledged properties that could serve as extra collateral should the need arise. More than 99% of what we've borrowed carries fixed rates, with a weighted average interest rate of 3.39% locked in for a minimum of 3 years. That has helped protect us from interest rate swings over the last few years. Going forward, roughly $17 million in scheduled principal amortization payments come due across the next 12 months. We also hold about $25 million in loans whose fixed rate terms expire within the next year, meaning the loans themselves aren't maturing. And last, on our common distributions, during October we declared a monthly dividend of $0.0467 per share for the fourth quarter of 2025. Given our current stock price of $9.24, that works out to a 6.1% annualized yield, which sits well above the average for the REIT sector. With that, I'll hand things back to David.

Thanks, Lewis. We're still out there looking at the market in case a solid acquisition shows up. Honestly, though, I doubt we'll complete any deals within this year, yet we'll keep our eyes open — perhaps someday something appealing will appear. As I've said on earlier calls, we remain far more careful when it comes to buying things, since capital costs are still extremely elevated. On the market outlook: demand overall for top-quality farmland used to grow berries and vegetables has held steady across nearly every region where our farms sit. There's substantial embedded value in those properties. As noted before, pricing for some permanent crops has been weak lately, and that — together with other elements — has dragged down what the underlying farmland is worth. Even so, we're noticing indications of recovery, both in crop pricing and in the wider economics tied to a number of these crops. That leaves us well positioned over the long haul. So with luck, the toughest stretch is now behind us. Back when every crop was struggling, the value of the land we hold clearly provided us protection. To wrap up: we anticipate inflation, especially within food, will keep climbing as time goes on, and we anticipate that farmland values underneath will rise over time as a result; we think this holds particularly for healthy foods like fresh nuts, fruits and other vegetables — that's the direction in America and across the globe, for that matter. The trend leans toward people in the U.S.A. consuming healthy foods, and that keeps expanding; at this point we'll pause and take some questions from those who track us. Operator, could you please join in and assist them with how to submit their questions?

David or Bill, I may have overlooked this, though could you explain how that $16.9 million of revenue from the Pistachio harvest compared with your expectations? Also, how does it stack up against what that crop would have brought in a few years back?

Well, when you refer to a few years back, those were under lease arrangements. Consequently, everything you'd have received amounts to whatever lease charges we applied; at present we've shifted and raised the likelihood of securing better rates, though it's anyone's guess. However, as things stand right now, we're likely at 2 or 3x what we'd have collected; thus it's been quite a favorable development that we're now seeing from feedback on how the leases have evolved, meaning a shift from fixed rate to variable rate. Plus the variable has performed really well; at this point we've brought in some strong figures. We think that when you listen to us during the fourth quarter, much of this will be sorted out and you'll understand what we earned on what we put in. That's about as precise as I can make it without simply handing you a direct figure.

All right. Then, Lewis, regarding what you mentioned about buying back the Series B — what would that run us, and when would it happen?

The Series D matures on January 31, 2026. Currently the coupon sits at 5%. Once that date arrives, should we fail to redeem it, the rate climbs to 8%. So our intention — as things stand, we've reviewed every possibility, including simply letting it ride and paying that 8%, which clearly isn't our preference. Going the refinancing route remains costly, plus it carries substantial upfront expenses. Therefore, our current approach is to retire it, cashing it out so we dodge that higher coupon, funded through a blend of common stock and our line of credit. We've been selling common stock at roughly 6.1%. The line of credit comes in at just under 6%. That puts the cost right now at approximately 6% — above the 5% the instrument pays today, yet naturally far below the 8% it would otherwise jump to.

All right, so the debt sitting out there is about $60 million, is that right?

That's right. Yes, $60.4 million.

I believe you said you could potentially offload a few of those permanent crop farms in the West should the lease prove impossible to restructure, and clearly you're weighing quite a few alternatives on that front. Still, I'd like to hear what you think about how deep the transaction market is right now on the West Coast.

The banks simply aren't offering rates as low as they did back when these were first acquired, though they're moving in that direction, and our hope is that a lower rate will emerge. The good part about this note we're retiring is that it has no maturity date — only its rate adjusts. That means liquidity isn't an issue. We're certain the funds are available, and returning them isn't required. Conversely, if we do hand it back, the rate drops to 0, naturally. So I'd say our position is quite strong. At this point 12 months ago, things looked rather bleak around the office as we thought about market conditions. Now, though, we can breathe — there's perhaps a single farmer facing serious difficulties, and that farmer might be one we lose. Apart from that, the marketplace out there feels like a breath of fresh air; I'm referring mainly to California, while our other holdings in Florida and the Midwest continue paying per the agreement, so we're sitting in good shape.