Gladstone Land Corporation (LAND) Earnings Call Transcript & Summary

Greetings, and welcome to the Gladstone Land Corporation Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. David Gladstone, Chief Executive Officer. Please go ahead, sir.

Well, thank you, Melissa, for that nice introduction. This is David Gladstone, and this is the quarterly call for Gladstone Land. And thank you all for calling in today. We appreciate you taking time out of your busy day to listen to our presentation and get some updates from us. First, we'll hear from Catherine Gerkis, she is our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters concerning this call. Catherine, go ahead.

Thank you, David, and good morning, all. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstoneland.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release, both issued yesterday for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X at Gladstone Comp as well as Facebook and LinkedIn, keyword for both is the Gladstone Company. Today, we'll discuss FFO, which is funds from operations, a non-GAAP accounting term defined as net income, excluding gains or losses from the sale of real estate and any impairment losses on property plus depreciation and amortization of real estate assets. We may also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses and adjusted FFO, which further adjusts core FFO for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now I'll turn it back to David Gladstone.

All right. Thank you. Let me just talk about the portfolio we have. We currently own about 98,000 acres across 142 farms and about 56,000 acre feet of water, which is about 18 billion gallons. Our farms are in 14 different states and our water assets are all in California. We didn't have any acquisitions or dispositions this active quarter. But quarter end, we sold a property consisting of 2 citrus farms in Florida for about $3 million. It was a small amount of acreage. The original tenant had defaulted on the lease and the replacement tenant was at a substantially lower rental rate. And given the continued weakness of the citrus markets, we felt it was best to sell the property and use the proceeds to pay off some related mortgages or some other assets that we want to do something with. We may consider selling some additional farms over the next few quarters as part of our ongoing portfolio review. If we use most of the proceeds to pay down debt and buy back preferred stock, it will be very strong for us. We continue to take a disciplined approach to the acquisitions and staying active in the market, so we're ready when the conditions improve. And it makes sense for us to start growing the portfolio again. And that will be when interest rates have gone down. So anything you can do talking to the Fed and telling them to lower that rate, we'll be pleased to do some more transactions. As we've discussed in all of our prior calls, I think, forever now, due to the market permanent crops, particularly nuts and wine grapes, we modified the lease structure there so that a handful of farms to reduce the grower's fixed cost while allowing us to participate more in the upside with higher crop share participation. So we are becoming much more involved in the operations. Overall, the 2025 almond and pistachio harvest were very strong with yields generally exceeding expectations. While the final pricing of the pistachio crop has not yet been determined, believe that, it just takes forever to get all these things done. We received indications from certain processes that our final price is expected to be higher than the prior year. So we expect to recognize a meaningful amount of additional revenues from that harvest in the fourth quarter of this year. We entered into similar arrangements for most of these farms for 2026 crop. So we're continuing down the same path that we set up to get us through all of that past problems. Majority of the related revenues and earnings again being recognized during the fourth quarter. So you'll hear from our accounting staff about how much we've got of that later. And I also want to remind everyone that the crop insurance continues to play an important role here as it helps to limit the downside risk on the farms, particularly given their strong production history. If we could be a big year and then have some problems insurance always protects us from the big downside. Our goal is still eventually transition these farms that we're doing on a shared basis back to more traditional lease structures with fixed base rent. But the time of that will depend on several factors, such as crop production, pricing, interest rates, input costs and most importantly, water availability, we're finding some problems out there with the water availability. Looking ahead, we have 6 leases scheduled to expire over the next 6 months. In total, these leases are about 3.5% of our leasing revenue for the year ending 2026. We're currently in discussions with both existing and prospective tenants that we expect to be able to renew each of the leases prior to the expiration. We're also pursuing several alternative revenue opportunities, including water leases. We've got farms that have water, and we can lease that out. And following the programs and some of the solar things that have been talking about in 4 of our tenants, we've received some cash rent payments from a couple of these tenants during the quarter. But we'll keep them on nonaccrual status until we see a consistent pattern of timely payments. We'll stop here and turn it over to our Executive Vice President, Bill Reiman. He's out in California. Is that where you are today, Bill?

Yes. Actually in Idaho today, David. Thank you. As David said, the second quarter really is highlighted by really strong demand in almond and pistachio markets. We've seen almost weekly price increases in almonds and really strong bumps in pistachio grower pricing. We also reported last quarter about early marketing bonus that was announced in February. We received that in April. So yes, and I also read that just yesterday that these are the strongest almond prices we've had in 10 years. Haven't done that research myself, but those trends are really good. This upward trend in crop prices, coupled with really a largely uneventful quarter as far as weather and growing conditions are concerned, has kept our budget projections on track to outperform the 2025 crop year and tracking really well for 2026. Our primary pistachio processor recently announced an expected final pricing for 2025 crop of at least $2.70 a pound per split in-shell, certainly is higher than we have projected all year. They also announced initial pricing for 2026 of $2.50 a pound per split in-shell, which is 2/3 higher than it was for last year. So these are significant gold price increases that will have a major impact on all of our properties under modified lease arrangements, ones we operate directly and even our crop share lease agreements. We began shaking almonds on July 28. So harvest season is here. The almond crop in our properties looks slightly larger than last year's crop. So we expect at least the same yields, maybe a little bit better. Reports across the state are saying yields in general are slightly lower, which is one of the factors supporting these price increases. Pistachio ordered everywhere extremely light like we reported last quarter. We believe the overall industry was a little overly optimistic initially, but because we were projecting a much lower crop than many of our neighbors. But in the last 30 days or so, that reality has settled in. And that in turn has caused buyers to bump up offers for new crop to levels that are way above last year. Crop expenses continue to track within our original budgets. There's been a lot of discussion in marketing circles about how to handle such a down year without jeopardizing what's likely to be a very strong production year in 2027. We feel our processors are positioned in the industry to maintain pricing so that 2027 will be 2025, even if we have a barn door busting crop yield. Wine grape market really hasn't changed a lot. The 2026 crop is early, harvest has started all over the West. So we expect that '26 crop to be down and not just because of removals, just the crop looks light. It's an encouraging sign and couple that with bulk wine inventories finally getting closer to manageable levels. We hope to see better demand for new crop this year and in the next couple of seasons. So we may be finally -- we may finally be at a place where the industry is on the backside of the oversupply situation. In real estate markets, we talked last quarter, we think in the Western U.S., we think most real estate markets have bottomed out and are starting to get stronger again, are seeing a strong divergence in valuations around water cost and availability. So properties with good cash flow potential are also getting strong attention. Coastal California values remain flat with higher than normal inventory. Pacific Northwest is stable with really good properties transacting swiftly. I'd say values and rents are stable. Stable interest rates, combined with profitable crop price and tree nuts is resulting in a little more lending activity. We're seeing growers a little bit easier getting lines of credit, appears these banks have money to lend. There's a clear path to cover debt payments, financing deals can get done. And I'll end my portion on water. Winter was a little disappointing, particularly from a snowpack perspective and federal water allocations were really disappointing. We did get an additional 3% bump in allocation yesterday, which doesn't sound like a lot, but it helps not only free up a little bit of water, but lowers the pricing in some of our water deals that we have in place. We're finding decent purchase opportunities, but we remain diligent and conservative with what we go after. Our goal is to only acquire water at a price that fits into the economics of a particular crop in a particular area. Look at the long-term forecast, weather forecast, I think everybody sees it in the newspapers and online, a very strong El Nino situation coming this winter. So we're making preparations for a long water situation for next -- this upcoming winter. So there should be some really good opportunities for water acquisitions and beyond just acquisitions, flood flows, that's kind of what we're keeping an eye on being able -- being prepared to take on excess water during storming periods. So the team continues to evaluate all these opportunities and the goal continues to be to strengthen the overall water security of the portfolio, both through long-term, short-term strategic water purchases and continue to invest in water delivery, storage infrastructure and identifying opportunities to create synergies across our farm assets. That's it for me, and I'll turn it over to our CFO, Lewis Parrish.

All right. Thank you, Bill. Good morning, everyone. I'll start with a brief update on some recent financing activity. We did not secure any new borrowings or repay any loans during the quarter. However, after quarter end, we repaid a $3 million mortgage loan in connection with the property sale that David mentioned earlier. In addition, during the quarter, we added several unencumbered properties to certain existing and new credit facilities that increased our immediately available capital by about $50 million. We issued about $14 million of common stock under the ATM program earlier in the quarter at an average cost of capital of about 5.5%. Those proceeds were used to repay our line of credit and fund preferred stock repurchases. We have not issued any additional shares since April, given where the stock has been trading. Also since April 1, we've repurchased $13 million of preferred stock at an average repurchase yield of 7.2%, resulting in a total gain of about $1.1 million over that time. Turning to our operating results. For the second quarter, we reported a net loss of about $8.5 million and a net loss to common shareholders of $13.5 million or $0.32 per share. Adjusted FFO for the second quarter was negative $1.6 million or negative $0.04 per share compared to negative $3.5 million or negative $0.10 per share in the same quarter last year. The improvement in AFFO was primarily driven by higher operating cash revenue and lower interest costs, partially offset by higher property operating expenses. Year-over-year fixed base cash rents increased by about $900,000 and it was driven by rent that we collected from certain tenants that remain on nonaccrual status as well as leases executed over the past year. These increases were partially offset by the lost revenue from farms that were sold over the past year. Participation rents increased slightly, primarily due to higher almond prices for the 2025 crop. Direct farming operations generated a net profit of about $590,000 during the quarter, primarily driven by the harvest and sale of an orange crop on a Florida farm following the early termination of a prior tenant's lease as well as higher almond prices. On the expense side, our recurring cash operating expenses increased by about $560,000. Total related party fees increased primarily due to a higher administration fee and the increase in property operating expenses was largely driven by higher professional fees associated with protecting water rights on certain farms in California and also additional costs related to properties that were vacant, directly operated or on nonaccrual status. And G&A expenses increased primarily due to higher stock-related expenses and increased professional fees. And finally, cash flows from operations increased largely as a result of higher cash receipts from participation rates and crop sales, a decrease in cash allowances paid to certain tenants and lower interest payments. Turning to liquidity. We currently have about $125 million of immediately available capital, and we also have about $110 million of unpledged properties that could be used as additional collateral. Over 95% of our borrowings are currently at fixed rates with a weighted average interest rate of 3.45% locked in for an average of another 2.3 years. Looking at upcoming debt maturities, we have roughly $33 million of loans maturing over the next 12 months. Given the value of the underlying collateral, we do not anticipate any issue refinancing these loans should we choose to do so. In addition, we had $17 million of scheduled principal amortization payments over that time, representing less than 4% of our total debt outstanding. We also have about $148 million of loans with fixed rate terms that are scheduled to reset over the next year, though the loans themselves are not maturing. This includes about $130 million of loans under our MetLife facility that are scheduled to reprice in January of 2027. We are actively evaluating all of our options with respect to these loans ahead of the scheduled resets. Finally, regarding the common distributions in July, we declared a monthly dividend of $0.0467 per share for the third quarter of 2026, keeping the dividend flat. At current stock price of $8.21, a 6.8% annualized yield, which is well above the REIT sector average. With that, I'll turn it back over to David.

Well, thank you, Lewis. Overall, demand for prime farmland growing berries and vegetables remains stable across most of the regions, particularly along the coast of California. We're also starting to see some signs of improvement in certain permanent crops, both the pricing and the broader economics around those crops. So we are very hopeful that the worst is over and behind us, but it's still too early to say that we are fully in the clear. In closing, over the long run, we expect inflation, particularly in food sectors that we're in to continue to move higher, and we expect the values of the underlying farmland to increase over time as a result. And we expect this especially to be true with regard to healthy foods such as fresh fruits and vegetables and nuts, and long-term trends toward healthier eating habits continue to grow. Now I'll open up for questions. Operator, would you come on and please direct us?

[Operator Instructions] Our first question comes from the line of Gaurav Mehta with Alliance Global Partners.

I wanted to ask you on the participation rents. If you could provide some color on how much participation rents are you expecting in the second half of this year?

I don't think we're prepared to give a final number yet just because the pistachio pricing is still in flux, the bonus for the '25 crop. We do have a pretty good handle. We know what the initial pricing for the '26 crop is, but yields are still unknown at this point. But I'll let Bill comment on this more. But given where we think we see yields and given higher pricing, we are expecting higher amounts this year, but I don't think we're prepared to give a final range of what that number is going to be. But Bill, anything you want to add to it as far as what yields are looking like?

Yes. I would just say it's so early. Of course, we're starting almonds, like I mentioned, but it's -- we're literally just less than 2 weeks in. So it's just too early to have a lot of confidence in any trends we see so far. So far, so good, but there's a long way to go. And then pistachios, we probably aren't going to start anything until closer to the 1st of September. So yes, just way too early on the crop yield side to give any decent guidance there. But pricing is so much stronger than a year ago. So we feel that those things are pushing us towards the positive.

Second question on the -- second question, a follow-up on the second quarter fixed revenues. Were there any nonrecurring onetime items in the revenue number for the second quarter?

There was one item that we received some cash payment from a tenant who we placed on nonaccrual status last quarter, Q1 of '26. We did receive a cash payment from them this quarter. I think for the quarterly revenue, that was about $700,000. We would like for that to be recurring. But given that we're keeping that same on nonaccrual status, I wouldn't bake it in as a recurring payment at this time.

All right. And the last question, can you provide some details on the impairment charge you recognized on 4 farms in Arizona?

Yes. That was one property that property has -- consists of 4 different farms down in Arizona, we signed a PSA with a buyer subsequent to -- well, subsequent to quarter end. So we marked it down to the purchase price -- sale price per that agreement. That transaction has not closed, but we are expecting it to close hopefully in late Q3, possibly early Q4 at this point.

Our next question comes from the line of Craig Kucera with Lucid Capital Markets.

I want to walk through the pistachio market update. I appreciate the additional color. I think last quarter, we were discussing how you received about $0.50 a pound in your first quarter marketing bonus. I thought it might be anywhere from an additional $0.40 to $0.90. Based on this update, it looks like you may be expecting towards the high end of that range, like an additional dollar per pound this year.

I would definitely say it's on the upper end of that range.

Craig, just to add to that, just based on what the processor said, they didn't kind of commit -- would necessarily commit to it, but with the expectation being at least $2.70, that would imply an additional bonus of at least $0.70 per pound. Read into that "at least part" what you will, but that does have us thinking that it's going to be on the higher end of that range that we gave.

Got it. Okay. And I guess just mechanically, how should we think -- you're starting here at $2.50, which is up 2/3 from last year. How should we think about the timing of when that's recognized? Like should we think maybe 1/3 this year and then 2/3 next year? Or how should we think about that?

Well I think a lot of it is going to play into the -- a lot of it is going to depend on the yield. But just speaking from a pricing standpoint, that $2.50 is the initial guaranteed price. So we will get $2.50 per pound that gets delivered to the processor. The bonus on top of that, which could be $1, could be more, that will be recognized in 2027 of Q4. Now the yield piece of that equation is what's not known yet. Again, I won't -- I'll let Bill comment further, but this is an off year for pistachios, couple that with the weather event, the yields are expected to be down from last year. Is it going to be fully offset by the large increase in pricing? That's kind of TBD at this point. Bill, any further from your side on that?