GLADSTONE LAND Corp Q1 FY2024 Earnings Call

Greetings and welcome to the Gladstone Land Corporation First Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Well, thank you, Latonya. That was a nice introduction. This is, as she said, David Gladstone. We welcome you all to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate you taking time out of your day to listen to our presentation. Before I begin, we are going to start with Michael LiCalsi. He is our General Counsel. Michael, go ahead.

Thanks, David. Today’s report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. The many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-K and 10-Q and other documents that we file with the SEC. You can find them on our website, which is www.gladstoneland.com. Specifically, go to the Investors page or you can find them on the SEC’s website at www.sec.gov. And we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Now, today we’ll discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. Now, we may also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses, and adjusted FFO, which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating results and allow for better comparability of our period-over-period performance. Please visit our website once again, that’s gladstoneland.com, sign-up for our email notification service. You can also find us on Facebook. Keyword there is the Gladstone Companies. We’re also on Twitter, and that’s @gladstonecomps. Today’s call is simply an overview of our results, so we ask that you review our press release and our Form 10-Q, both issued yesterday for more detailed information. Now, with that, I’m going to turn it back over to David Gladstone. David?

Okay. Thank you, Michael. I will start with a brief overview, as I always do. We currently own about 112,000 acres on 168 different farms and about 49,000 acre-feet of water assets, and we are currently increasing that. One acre-foot is equal to about 326,000 gallons, so we’re nearly 16 billion gallons of water. This is protecting our land, because without water, the land is not worth much. Together, the land and all the water are valued at a total of approximately $1.5 billion. Our farms are in 15 different states, more importantly, in 29 different growing regions, and our water assets are all in California. Our farms are leased to 90 different tenant farmers, and the tenants on these farms are growing 60 different types of crops, mostly fruits, mostly vegetables, and a lot of nuts. You can find all of these in the produce section of your grocery store, which is where most of these crops are sold. Let me just deviate here a minute. When we have diversification like this, and we are well diversified, you have some problems in each of the regions. And those are in the diversification that you are trying to maintain. For example, almonds and pistachios both have reduced demand, so prices are low today, and it may take years for the balance to come back. Almonds are an international crop, and people are not eating as many almonds as they did in the past, and the price of producing almonds has risen due to inflation in farming costs. Some people cannot afford to buy almonds and pistachios, and that reduced demand makes it a problem for all our farmers in that area. And there are farms that have problems. For example, Michigan blueberries had a pretty good crop this year and reasonably good sales. But our farmers, one farmer there had a very tragic accident. He was injured and couldn’t farm. So we are moving forward with a sale of those farms. We believe we will be okay once we have sold them. Hopefully that happens this year. We have a few grape farms that do not have the varieties that people want who make wine. We are going to try to sell a couple of those as well. Such is the nature of owning farmland. It’s just like owning businesses. You don’t want – I didn’t want stockholders to think that owning farmland is immune from the ups and downs of the economy or the business of farming. I think during the rest of the calendar year 2024, we will sort out these problems. There are other parts of farming that have problems, such as tomatoes. Mexico has been subsidizing tomatoes and hurt tomato farmers. We are very lucky not to be in tomato farms. Likewise, we did not invest in citrus. It’s been terrible for the citrus farmers in Florida. We have a few citrus trees, but they are not in Florida. The trees have been devastated in Florida by disease and they may never turn around. There are oranges coming in from being produced at other countries, and there is reduced drinking of orange juice. I remember as a child drinking lots of orange juice. People don’t drink as much orange juice as they did 20 years ago. So we are smart not to be in the Florida orange juice business. I thought of that last night and decided to put that into our discussion. I’ll give you a quick update of some of the tenants’ issues that we’ve been working through and we’ve been telling you about them. We currently have two properties encompassing 4 out of the 168 farms that we have. These are vacant, and properties encompass 11 farms in direct operating via the management agreement. We have had to take over a number of farms and do them on our own. Additionally, we are recognizing revenue from leases with two tenants who are collectively leasing four of our farms on a cash basis. Regarding the vacant and farms that are operating farms, we are in discussions with various potential buyers or tenants to buy or lease these properties. I think we will have a lot of this done during the next 6 months. I am hopeful that when we report to you in July, we will have fixed a lot of that. There are two tenants on non-accrual status. One of them is now current on their rental payments to us, and we are continuing to work with a collection of other tenants. Overall, these tenants decreased our net operating income by about $750,000 for the first quarter. As mentioned in the past several calls, we continue to be cautious with new investments because our cost of capital remains high. Farmland rental rates haven’t increased enough to cover all the extra costs that farmers have. Since farmland values remain high, the farmers, the people who own the land, want high prices for it, but we don’t feel like it’s worth taking that risk. As a result, acquisition activity remains slow for us and probably will be for another couple of quarters. With inflation still above the Fed’s target, that's the main problem right now; the Federal Reserve needs to cut rates, and that might begin sometime this year, but it won’t be nearly good enough for the very large farmers. For the small farmer, that really pushes them down pretty bad. Overall, the existing farmland portfolio continues to perform more or less as expected, with the exception of those issues I just mentioned. We sold one of the properties that resulted in a nice gain for us. This was a large farm in Florida that we bought for about $54 million seven years ago. We have gotten nice rents on it as we’ve gone along. We sold it and received $66 million for it. Net of closing costs is about a $10 million gain for us. This has been tremendous for us, and the price was sold for about $2 million more than we had it appraised at prior to the sale. During the quarter, we valued it lower than we sold it for. I think that’s a good indication that we haven’t overpriced a lot of our farms. On the leasing front, since the beginning of the quarter, we renewed or amended four leases on farms in two different states. These renewals are expected to result in a decrease, not an increase, in the annual net operating income of about $800,000 per year. However, the majority of the decrease is due to one lease agreement executed on a nut farm in California in which we reduced the fixed base rent in exchange for increasing the upside potential in participation rents. Looking ahead, we have five leases scheduled to expire over the next 6 months, which makes up about 9% of our total lease revenue. We are currently in discussion with groups to lease these farms and aren’t anticipating additional vacancies. However, two of the expiring leases are on nut farms in California, and those will likely decrease the base rent in exchange for increasing participation rents. As mentioned on the last quarterly call, our team in California has been working to implement various projects and strategies to take advantage of the surplus water supplies that have become available. There have been huge rains. We have had two very wet winters, which is unusual for California. These have been rains of biblical proportions. We have had a few farms that were impacted a bit. One farm actually took on too much water, so they couldn’t do as much for it. One such project involved the construction of a large groundwater recharge facility on two of our farms, both of which were completed last year. These are, in essence, water banks allowing us to enter into various agreements with both local water districts and private individuals expected to result in additional groundwater credits by allowing water to be stored in our water banks. We obtained an additional 2,676 acre-feet or about 872 million gallons of water credits for a total cash cost of approximately $345,000 or right at $129 per acre-foot, significantly below market. These will come in handy as time goes on. Valuations of farms are now based on how much water they have, and usually, they have to have two sources of water. We still believe these types of projects are important in achieving long-term sustainable water supplies for our farms in California. Our portfolio currently has adequate supplies of water. None of our farms have been fallowed or not farmed because of irrigation problems due to the inadequacy of water. We also wonder about the effects of government regulations. They do regulate how we use water, and we have gone through that with many of our farms. We seem to be in good shape there. We believe these projects that we have with the reserved water could go at least one year unabated, and possibly two years based on how much water we have captured. Let me stop here and turn it over to Lewis Parrish; he is our CFO, and he knows the numbers. Lewis?

Thank you, Dave, and good morning, everyone. I’ll begin by briefly going over our recent financing activity. We did not incur any new borrowings during the quarter, but we did repay about $16 million of bonds that matured. On the equity side, we raised about $250,000 of net proceeds from sales of the Series E preferred stock during the quarter. Moving on to operating results, for the first quarter, we had net income of about $13.6 million and net income to common shareholders of $7.4 million, or $0.21 per share. Adjusted FFO for the current quarter was approximately $5.1 million, or $0.143 per share, compared to $5.9 million, or $0.166 per share in the prior year quarter. Dividends declared per common share were $0.14 in the third quarter compared to $0.138 in the prior year quarter. The primary drivers behind a decrease in AFFO were the lost income from the farm we sold in January and a decrease in the revenues associated with certain properties that were either vacant or on non-accrual status during portions of the quarter. This was partially offset by decreases in certain operating expenses during Q1 2024. Fixed base cash rents decreased by about $1 million on a year-over-year basis, primarily due to the lost revenues from the farm we sold and certain other workout properties. This decrease is partially offset by additional rents earned from capital improvements we made on certain of our farms. Participation rents decreased by about $200,000 during the current quarter. This is due to the timing of when certain information about crop sales is made available to us. As of filing, we had not yet received enough information to record certain participation rent amounts during the first quarter, so we’ll continue to press for that information and hopefully finalize it for the second quarter filing. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses decreased by over $500,000 during the current quarter. Property operating expenses decreased in the current quarter due to lower amounts spent to protect water rights on certain farms in California, as well as a decrease in both legal fees and property management fees. G&A expenses decreased due to lower amounts recorded related to the upcoming shareholders meeting and a decrease in certain professional fees. Of note, total related party fees remain relatively flat year-over-year. Finally, other expenses decreased primarily due to lower interest expense incurred as a result of loan repayments we’ve made over the past year. Moving on to net asset value, we had 35 farms revalued during the quarter, all via third-party appraisals. Overall, these valuations decreased by about $3.7 million, or 1% from their previous valuations from about a year ago. As of March 31st, our portfolio was valued at about $1.5 billion, supported by either third-party appraisals or the actual purchase prices. Based on these updated valuations, including the fair value of our debt and all preferred securities, net asset value per common share at March 31st was $18.50, down from $19.06 at December 31st. The majority of this decrease is due to the change in fair value of our preferred securities, as well as a decrease in valuations of certain farms that were reappraised during the quarter. Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have access to over $200 million of liquidity, including nearly $60 million of cash on hand. We also have over $130 million of unpledged properties. Over 99.9% of our current borrowings are at fixed rates, and on a weighted average basis, these rates are fixed at 3.39% for another 4.2 years. As a result, we have experienced minimal impact on our operating results from increases in interest rates. Regarding upcoming debt maturities, we have about $35 million coming due over the next 12 months. However, about $17 million of that represents various loan maturities. Given the value of the underlying collateral, we do not foresee any problems refinancing any of these loans if we choose to do so. Removing those maturities, we have about $18 million of amortizing principal payments coming due over the next 12 months, which is about 3% of our current debt outstanding. In addition, we have about $6 million of loans that aren’t maturing, but have a fixed rate term expiring over the next 12 months. Finally, regarding our common distributions, we recently raised our common dividend again to $0.466 per share per month. This marks the 34th time we’ve raised our common dividend over the past 37 quarters, resulting in an overall increase of more than 55% over that period. With that, I’ll turn the program back over to David.

Thank you, Lewis. We continue to stay active in the market should good opportunities present themselves, but many of these farmers will just wait it out. They’re not going to sell their farm at a discount, which they would need to do in today’s market. Prices of farms have not decreased. Some of them have a little but need to decrease a lot so that we don’t have as many problems renting them out. Interest rates are still too high today, but we’re hopeful that rates will be lower by this fall, so we can start buying more farms again. A final note I’d like to make: We believe that investing in farmland and farming crops that contribute to health, such as fruits and vegetables and nuts, follows the trend that we’re seeing in the market today. So we are in good shape on that area of selecting where we’re going to put our money. Overall demand for prime farmland, growing berries and vegetables, is stable to strong, particularly along both coasts: the east coast of Florida and the west coast of California. Please remember that purchasing stock in this company is a long-term investment in farmland. It’s similar to other hard assets such as gold. Farmland, which remains productive, is wonderful. As long as we have water in California, I believe we’re going to be in good shape. A lot of things are being driven by urban developers, especially in California and Florida, where we have many farms. Unlike gold and other alternate assets, this is an active investment with cash flows to investors. We believe we’re better than a bond because bonds don’t provide the bond interest rate going up on existing bonds. We’re expecting inflation, particularly in the food sector, to continue increasing over time. We expect that the values of the underlying farmland will increase as a result—especially in fresh produce and on the food sector. The trend of more people in the U.S. eating healthy foods continues to grow. Rather than continue to explain what we’re doing, I think we should get to some questions. Latonya, could you tell them how to do that?

Hi, we’re ready for the Q&A, please.

Thank you. Our first question comes from Rob Stevenson with Janney. Please proceed.

Hi, good morning, guys. David, are all of the 14 Michigan farms leased to the same operator that you talked about as having the accident? Or are there multiple operators in there?

There’s multiple, but I think it’s only two now. We’re down to two.

It was the same operator, but now we are working with a couple of different groups to lease, operate, and potentially sell down the road.

Okay. So all of the 14 Michigan farms that you talked about are blueberry farms?

Yes.

Okay. And then are all five of the California farms nut farms, or is there something else in there as well that’s causing you issues?

No, it’s all nuts. Sorry to say it that way.

Okay. And then I guess lastly, just to wrap it up, what is the Washington farm growing that’s in the non-accruals?

That was cherries, apples, and wine grapes. We’re in the process of removing the permanent plantings and marketing it to either be sold or leased as open ground or as a potential new development project.

Okay. And then I guess while we’re talking about what farms were growing, the Florida farm that you had the big gain on, what was that growing? Was that oranges or something else?

No, it was vegetable produce kind of stuff that you’d see in the grocery store. I don’t think there was lettuce there, but there was a lot of produce that you’d see in the grocery store. It was a very nice farm. Unfortunately, you’re getting bombarded from the people in Mexico, and they can’t make as much money, so people wanted us to lower the rent. We refused to play the game of trying to beat the people in Mexico, so we put it up for sale. There are a lot of people who want farmland in Florida because it’s being redeveloped. If you look around not too far from where that farm is, you’ll find many new golf courses coming in. We have the big farm right next to this one, so there may be another opportunity there. We’ll see. It’s a different kind of farm, a water farm, and the state of Florida is paying us to clean up the water there. We’re in good shape on that. We’ll have to keep that one for a while, but ultimately we may want to get out of that. There are people that like having farmland that’s leased in Florida.

Okay. And then I guess to wrap up this topic, Lewis, the $750,000 impact from the 20 farms, is that spread relatively evenly on a per farm basis among the 20? Or are certain of those farms representing a disproportionate amount of that $750,000?

The nut farms would be weighted more heavily in terms of the income differential.

Okay. That’s helpful. And then I guess the other question I have is, you talked in detail about the water. You bought some more. You have a bunch of it on the books now. Does that get marked to market on a regular basis? In light of all the rain and everything in the aquifers being full, is that water worth less today than if we were in a drought situation, and is it going to fluctuate like securities mark-to-market on a quarterly basis, or is GAAP not treating it similarly?

No, these are being held at cost on our books. The water we’ve acquired lately, including the cash we paid of about $130 per acre-foot, some of that we did get granted from a water district, so we didn’t pay any money directly for the water. On our books, including the cash we paid and the income recognized as a result of receiving that water, I think it’s on our books for maybe $290 or $300 per acre-foot. That is still below market, even in a wet year as we were last year, but keep in mind that just a few years ago, water was trading regularly for between $1,500 to $2,000 plus per acre-foot. We are holding it for various uses. We may keep it to use our own farms and ensure that our farms optimize their production potential. Even in an average or wet year, the rate that we are able to acquire water at is still below market and will be better off during critical drier years.

Okay. And then last one for me. How are you guys thinking about selective pruning in the portfolio? Obviously, you may wind up selling some or all of the 20 farms that you talked about that are having issues. Are there any other farms, similar to that Florida asset, which isn’t under any real duress, that you guys are thinking about monetizing and either redeploying into something else or buying back stock or reducing debt or anything along those lines at this point, given the market prices for land in certain of your markets?

Well, if you pay us enough, we will sell it all to you. The prices aren’t drastically different. We aren’t out marketing right now. However, I think marketing some of the farms we have identified may tell us we should sell some other land as well. We are not out there looking for sales every day. It’s an interesting market, Rob. I see these farmers who go back two or three generations when they sell. Selling their farm becomes an emotional thing. We are the same way. We have good farms, and it wouldn’t make sense to sell them if we can keep them rented and making money for us. Our business is holding farms and renting them out. We are not desirous to exit, despite the slight differences in what we value them at compared to the market price. The analysts and brokers know the farm's worth, but many have been hired to work with families wanting to transfer farms, leading them to provide low-ball values. We are not likely to go and sell everything we have since the dirt remains productive and has value.

Yes, David, that did and thank you very much.

Okay. Do we have any more questions?

The next question comes from John Massocca with B. Riley. Please proceed.

Good morning.

Good morning, John.

Maybe as I think about the farms you currently are operating or have under a management agreement as opposed to a lease, what’s the likelihood of any of those moving to a more traditional lease here in the next couple of quarters, just given maybe where we are in terms of the growing season for whatever the affected farms are?

Yes, your point is very pertinent. People don’t buy farms when they’re out of the season they use. They like to buy it a month or so before their season starts. However, we are into that time frame, and we know things will come along in due time. If I had a farm that was going to be leased and we were holding it as an operating business, we would make that known to everyone, so all involved feel the effects of leasing. Many of these farms depend on the economy; if it’s rolling along, people will buy berries and nuts, but with the economy showing lower strength now, that could impact purchases. While it’s not really true with strawberries, berry prices have increased and many other things have increased. We won’t be rushing to sell every single farm tomorrow—it’s just not our business.

Okay. I guess maybe regarding the other operating revenue line item, is the expectation that is maybe not where it is in 1Q, but kind of notable for the next couple of quarters, just given you may have some operating farms in the portfolio here until 4Q?

A couple of things on that. First, that other operating revenue was not due to direct farm operating revenue. It was from water we got granted by a water district for allowing others to store water in our water banks. That was non-cash income based on the fair value of the water credits we received from those projects. Regarding the farms under operating management agreements, I expect revenue recognition from those in the coming quarters to be minimal. Converting those properties to a standard lease versus outright selling them is something we are currently working through. I can't assign a probability of X percent will be leased versus sold, as many moving parts are at play right now.

Okay. I appreciate the clarification there. And regarding the two tenants that are on a cash basis, one of them had paid either all or partial rents. Was that in the quarter? Was that subsequent to quarter end, and how should I think about how much of maybe the annual rent owed would have been paid in that period?

So, of those properties, nothing was recognized in Q1, because the tenant who is current, his payments are due in May and November. We’ve recognized effectively six months of that revenue in Q4 and nothing in Q1. His next payment is due this month, so assuming we do receive those amounts, we will recognize them in Q2. That’s probably about $300,000 or $400,000 of revenue across all of the farms of that one tenant leases from us.

That’s per period, per payment period or annually?

That is the six-month amount. So, twice that amount would be the annual rent from those farms.

Okay. And then with the California farm leases that are expiring in the quarter, what percentage or what kind of amount of leases expiring this year does that make up?

So, I think we said we have five leases expiring over the next six months. Two of those are on nut farms. However, I don’t know the exact percentage, but the majority of that… five of the five leases, they make up about 9% of our annualized revenues. More than two out of five leases, about 40%, but more than 40% of that revenue is attributed to those nut farms. I don’t have that exact breakout right now, but it is more than half of that 9% of annualized revenue amount.

That’s helpful. And then kind of more big picture, given some of the stress we have seen in the California market, you have had some bankruptcies. Are you seeing distressed acquisition opportunities, things where you have corporate farmers that are in a lot of trouble, or maybe with all the risks associated with the current operating environment in California, does it make sense for you to acquire assets?

We haven’t seen that many favorable purchases. There have been some huge bankruptcies—not us, but some others going under, with some potential fire sales. We have seen one or two small farms that might be fire sales. It hasn't had the impact yet you would expect, as many farmers are, if you want to say it the right way, small businesses. Small businesses, especially in this environment, probably are impacted much more than large businesses because of the interest rates. We have farms that lenders contact us regarding borrowing, as they love us for always paying our debts. As a result, we have not had issues regarding the lack of funding, primarily with the cost of money. If you examine small businesses throughout America, today’s rates and inflation have hurt small businesses more than large businesses. Large businesses have large reserves they are holding. I’m uncertain how to judge this. We spend time worrying about what the next quarter will be—it’s a moving target trying to project California’s future. Florida seems more stable, so we are glad for that as we have land there. Ultimately, the dirt doesn’t go away; it will be utilized for farming at some point. The downside is pinpointing when some farmers will be able to step up and rent additional land to grow food. The government needs to reduce inflation as all input prices elevate, but it doesn’t always reflect on sale prices. Grocery stores increased the prices of some of our goods, but they didn’t share more profits with producers. It’s happening more now with some farms, now that they’re facing less competition, but it’s still not a straightforward ratio.

No, that’s really helpful color. I appreciate it. And that’s it for me. Thank you very much.

Okay. Latonya, I don’t think we have any more questions, do we?

No more questions, back to you for closing comments.

We are disappointed. We like people asking questions because we get to answer those, and hopefully it helps everybody understand the business we are in. That concludes this conference, and we thank you all for calling in.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.