Earnings Call Transcript - LAND Q1 2023

Operator, Operator

Greetings, welcome to the Gladstone Land Corporation First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to David Gladstone, Chief Executive Officer and President. Thank you, you may begin.

David Gladstone, CEO

Thank you, Sherry. That was a nice introduction. This is David Gladstone. Welcome to the quarterly conference call for Gladstone Land and thank you all for calling in today. We appreciate the time to talk to you and listen to questions that you'll have. And we start off as we always do with Michael LiCalsi, our General Counsel and Secretary. Michael, do you want to give your presentation?

Michael LiCalsi, General Counsel

Thanks, David. And good morning, everybody. 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. 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 risk factors in our Forms 10-Q, 10-K, and other documents we file with the SEC through our website. 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. Today we will discuss FFO, which is funds from operations, a non-GAAP accounting term, defined as net income, excluding the gains or losses from the sale of real estate and the impairment losses from property, plus depreciation and amortization of real estate assets. 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 performance and allow better comparability of our period-over-period performance. Please take the opportunity to visit our website, where you can sign up for our email notification service to stay up-to-date on the company. You can also find us on Facebook and Twitter. Today's call is an overview of our results, so we ask that you review our press release and 10-Q issued yesterday for more details. And with that, I’m going to turn it back over to David Gladstone.

David Gladstone, CEO

Thank you, Michael. Let’s start with a brief overview of our Farmland Holdings. We currently own about 116,000 acres on 169 farms and about 45,000 acre-feet of bank water in the aquifers underneath our farms. An acre-foot is about 326,000 gallons, so you can see we are getting into the billions of gallons of water that we have ready to help us out. We don't need it today, but maybe in the future. Together, all of these assets, the land and the water, are now valued at $1.6 billion. Our farms are in 15 different states and more importantly in 29 different growing regions. Our farms continue to be about 100% occupied and are leased to about 90 different tenants. We have one tenant we're going to talk about in a minute. It's occupied, but they are not doing very well. All of these farms, the 90 different tenant farmers are unrelated to us, and the tenants on these farms are growing over 60 different crop types, so we are well diversified there, mostly in fruits, vegetables, and nuts. We had to remove one tenant during the quarter, and we stepped in to temporarily operate the farm. This time, we did it with a third-party management group that manages farming operations. We are in discussions with that new group to lease this farm, and we hope to have a lease executed before the end of the second quarter. Additionally, we have two slow-paying tenants, not related to the tenant I just mentioned. These issues are partly due to an excess supply in the market. There is a huge surplus of almonds. If you could please buy some almonds today to help get the prices back up, our tenant will be okay. Right now, the tenant is making a partial payment to us, but we have another grower interested in leasing this farm, so we'll likely sign a new lease soon. The second tenant has also been slow to pay, and that situation is more challenging and will take longer to resolve. We are in communication with the tenant and discussions with several other groups to potentially lease these farms. We hope to have this sorted out sometime this year. The total year-over-year impact on our operations from these issues decreased our net operating income during the first quarter by $295,000; that's not a big number for us. As we’ve mentioned in past calls, we continue to be more selective about the types of farms we pursue, leading to slower acquisition activity compared to previous years. With inflation and interest rates rising, along with the increasing likelihood of a recession, we believe it's a prudent time to be conservative with our capital. Overall, our existing farmland portfolio continues to perform well with the exception of the mentioned tenant issues. We are pleased to report that we have had another strong quarter from AFFO, which is adjusted funds from operation that we closely monitor. We continue to renew all expiring leases without incurring any downtime, generally at a higher rental rate. Since the beginning of the year, we renewed five leases across three different states, which are expected to increase our annual net operating income by $598,000, or about 12% from some prior leases. Looking ahead, only two leases are scheduled to expire in six months, representing less than 3% of our total annualized lease revenue. We are in discussions regarding extensions and expect to achieve slight rent increases from these renewals, so we don't anticipate any downtime. Inflation currently shows no signs of slowing down, even though there has been a slight decrease recently due to the Federal Reserve's interest rate hikes. The latest headline inflation number was 5%, down from 6% previously but still significantly above the Fed's target of 2%. Most crops grown on our farms fall into the food-from-home category, meaning they are eaten at home rather than in restaurants or manufacturing facilities. Food prices show signs of moderation, with prices in our food-from-home category increasing by only 8.5%. We believe food prices will continue to outpace inflation and help mitigate rising operating costs for many farmers. Regarding the water situation in California, the heavy rainfall experienced earlier this year has greatly benefited most farmers. Most reservoirs are at or above historic averages, with the statewide snowpack levels at about 260% of normal, leading to a recent announcement of 100% water allocation. This has not happened since 2006, and our farmers are thrilled to receive all the water they need. Many reservoirs across California are nearing capacity and are releasing water in anticipation of additional storms. This allows farmers to capture runoff for personal use at little cost. Our tenants, particularly permanent crop growers like almonds and pistachios, are taking advantage of this surface water instead of groundwater. Many are even intentionally flooding their fields to help restore groundwater levels. We are also exploring opportunities to acquire additional water at attractive prices. Supplies or investments in infrastructure to move water are important for capturing additional water at our farms. We did have one farm that suffered about $855,000 in damages from the flood; this was a blueberry farm in Central Valley of California. Fortunately, none of the blueberry bushes were harmed, but several shade structures were damaged. The tenant is currently discussing this matter with their insurance provider, and we do not anticipate any out-of-pocket expenses. Now I'll turn it over to Lewis Parrish, our CFO, to share more numbers.

Lewis Parrish, CFO

Thank you, Dave, and good morning, everyone. I'll begin by briefly going over our financing activity. We did not incur any new borrowings during the quarter but repaid about $22 million of loans maturing since the beginning of the year. On the equity side, we've raised about $2 million in net proceeds from sales of Series E Preferred stock and $13 million in net proceeds from sales of common stock through the ATM program at an average sales price of $19.72 per share. Moving onto our operating results, first, I'll note that for the first quarter, we had net income of about $1.8 million and a net loss to common shareholders of $4.3 million or $0.12 per common share. One other note for the following discussion of operations is that I'll be comparing the current quarter's results to the first quarter of 2022 rather than the preceding quarter. Adjusted FFO for the current quarter was approximately $6 million or $0.17 per share, compared to $6.4 million or $0.185 per share in the prior year quarter. Dividends declared per common share were $0.138 in the current quarter, compared to $0.136 in the prior year quarter. The primary driver behind the decrease in AFFO was additional financing costs and increases in certain operating expenses, partially offset by higher top-line revenues and a decrease in related-party fees. Fixed base cash rents increased by about $850,000 or 4% over the prior year quarter, primarily driven by additional revenues from new farms acquired over the past year, partially offset by a decrease in revenue from self-operated and non-accrual properties previously mentioned. Regarding the non-accrual properties, we will continue to recognize revenues from these leases on a cash basis until full collection of future rental payments is deemed profitable. Additionally, we recorded $195,000 in participation rents during the current quarter, compared to none in the prior year quarter. These payments were originally scheduled for Q4 of 2022 but weren't recognized until Q1 of 2023. On a same-property basis, including participation rents, our Q1 2023 lease revenues increased by about $258,000 or 1.3% compared to the previous year quarter. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses for the current quarter decreased by about $443,000 from last year. Total related-party fees decreased by about $900,000, driven by a $1.1 million incentive fee earned by our advisor in the previous year quarter versus none this year. Removing related-party fees, our recurring core operating expenses increased by about $460,000 from the prior year. Property operating expenses increased by about $300,000, primarily due to extra legal fees incurred in connection with protecting water rights on specific farms in California and to assist with rent collection efforts from certain tenants. General and administrative expenses also increased by around $160,000, primarily due to costs associated with our upcoming shareholders meeting. We recorded about $2.3 million of interest patronage from our farm credit borrowings, which is roughly $500,000 less than the amount recorded in Q1 of 2022. However, much of this decrease was offset by an increase in income from our money market accounts. Now moving on to our net asset value, we had 34 farms revalued during the quarter through third-party appraisals, with an overall increase in value of about $12 million or 3.4% from previous valuations a year ago. As of March 31, our portfolio was valued at around $1.6 billion, supported by third-party appraisals or actual purchase prices. Based on these updated valuations and including the fair value of our debt and preferred stock, our net asset value per common share as of March 31 was $17.12, up slightly by $0.04 from December 31. In terms of liquidity, we currently have over $190 million in available credit lines and other undrawn notes. We also have $130 million of unpledged properties. Over 99.9% of our borrowings are at fixed rates, averaging 3.34% for another 4.8 years, so we have experienced minimal impact from recent rate increases. However, these increases do affect our ability to finance new acquisitions and influence our decisions regarding repayment versus refinancing of maturing loans. We are confident regarding our current debt load and protections against further interest rate hikes. Concerning upcoming debt maturities, we have about $40 million coming due over the next 12 months. However, $23 million of that relates to various loan maturities, and the collateralizing properties have increased in value since their respective acquisitions. This should make refinancing manageable. Moreover, we have only about $17 million of amortizing principal payments due within the next 12 months, which is less than 3% of our existing debt. Lastly, we raised our common dividend to $0.046 per share per month, marking the 30th increase over the past 33 quarters, resulting in an overall increase of over 53% during that period.

David Gladstone, CEO

Nice report, Lewis. We continue to stay active in the market should a good opportunity present itself. However, as we mentioned, we are being much more cautious on the acquisition front and not actively looking to enter the marketplace until there’s more stability from governmental policies and other ongoing situations. Just a final point or two before we open for questions: we believe investing in farmland, like ours that grows crops contributing to healthy lifestyles, aligns with current market trends. Demand for prime farmland, particularly those growing berries and vegetables, remains stable to strong almost everywhere our farms are located, especially on the West Coast, including California, Oregon, and Washington, and the East Coast, particularly Florida and other states. Farmland continues to perform well compared to other asset classes. NCREIF, which covers approximately $15.9 billion in agricultural properties, reports an average annual return of 11.4% over the past 25 years with no negative years during that time. This is significantly better than the S&P index and the overall REIT index, both of which have experienced six or more negative years within that same period. Purchasing shares in a company like ours is a long-term investment in a hard asset: farmland. This investment has intrinsic value due to the limited supply of farmland, especially in our busy areas, which are also being urbanized rapidly, particularly in California and Florida where many of our farms are based. Unlike gold and other alternative assets, it's an active investment with cash flow. We believe we are superior to bond funds, as we are continually increasing our dividends as the value of farmland rises, allowing for steady upward movement. We anticipate inflation, especially in the food sector, to keep rising, positively impacting the underlying farmland values.

Operator, Operator

Thank you. Our first question is from Gaurav Mehta with EF Hutton. Please proceed.

Gaurav Mehta, Analyst

Thank you. Good morning. I wanted to ask you about the acquisition market. You talked about your conservative approach to acquisition. Could you provide more detail on what you are observing in terms of farm valuations and the activity in the market?

David Gladstone, CEO

There are a couple of key points to note here. First, farm sales have increased significantly, particularly in the Midwest, affecting prices there as well. Farmers are not willing to sell for less than roughly a 5% cap. Consequently, our previous strategy of purchasing at lower cap rates has slowed as these conditions do not yield good returns. There are some active buyers using pure equity, but we have opted to conserve our equity in these challenging times. Additionally, the cost of borrowing has also risen sharply, with rates now at about 5% to 5.5%. Many lenders are concerned that continuing to raise rates will hinder loan origination. Therefore, we’ll need to see where inflation takes us before engaging the market again. Gaurav, to answer your question, it’s hard to evaluate until things stabilize with government policy and market buyers. It’s a slow grind right now.

Gaurav Mehta, Analyst

Yes, that's clear. Thanks. My second question is regarding the $40 million in debt maturing over the next 12 months. Can you share more information about the interest rates on this expiring debt and your refinancing plans?

Lewis Parrish, CFO

Out of the $40 million coming due, about $17 million represents normal amortizing payments which we will cover with cash on hand. The remaining $23 million matures early in 2024, with about $6 million to $7 million due this summer. The decision to either refinance or pay down debt will depend on interest rates at that time. The market may look different in early 2024, and we hope rates are more favorable by then.

David Gladstone, CEO

Any further questions, Gaurav?

Gaurav Mehta, Analyst

That’s all I had, thank you.

Operator, Operator

Our next question is from Craig Kucera with B. Riley. Please proceed.

Craig Kucera, Analyst

Hey, good morning. Should we expect similar levels of operating expenses from the self-operated farm until it's leased, or were there more one-time costs booked in the first quarter?

Lewis Parrish, CFO

Once we finalize a lease, we expect those operating expenses will decrease. We are hopeful that we can secure a lease by next month, eliminating about $100,000 in expenses from Q1. If we don't secure a lease, that amount will likely increase as $100,000 is roughly one month's operating cost for that farm.

David Gladstone, CEO

This is a good farm, and even though we are temporarily farming it ourselves, we believe we can make a profit.

Craig Kucera, Analyst

Got it. Yes, I wanted to follow up on the floods. While it's difficult to predict, what are your thoughts on potential impacts to yields this fall based on the current situation?

David Gladstone, CEO

The nut growers are benefiting significantly from the extra water, and blueberry yields should also be robust this year. However, some early-season crops like strawberries faced challenges from excessive rain. Overall, it appears to be a net positive, reminiscent of 2006, a great year for production. We remain optimistic, though we’ll have to wait to fully assess impacts as we move through the year.

Craig Kucera, Analyst

Understood. Given current cap rates and capital costs, it seems this year may be leaner in terms of growth. Is that a fair assessment?

David Gladstone, CEO

I can't predict with certainty. However, we are examining numbers and if we can secure tenants who can afford higher rents, we will approach growth cautiously. Interest rate increases complicate financing, but there might be opportunities depending on the situation in the next six months.

Craig Kucera, Analyst

Thank you for the insight.

David Gladstone, CEO

Any more questions, Sherry?

Operator, Operator

Our next question is from John Massocca with Ladenburg Thalmann. Please proceed.

John Massocca, Analyst

Good morning.

David Gladstone, CEO

Good morning, John.

John Massocca, Analyst

With the self-operated farm, is it generating any revenue for land right now due to the seasonal nature of the business?

Lewis Parrish, CFO

Currently, no revenue is being generated under the management agreement we have in place, which operates on a full crop share lease basis. We are responsible for the operating costs and will earn revenue post-harvest when the crops are sold. We are working on a lease arrangement with that management group.

John Massocca, Analyst

Understood. So we shouldn't expect any revenue until a new lease is signed, or later in the season?

Lewis Parrish, CFO

Correct.

John Massocca, Analyst

How are the other properties operating on a cash basis affecting your financials?

Lewis Parrish, CFO

Our NOI decreased quarter-over-quarter by about $300,000. Of that, $100,000 was due to revenue decrease, and $200,000 was due to increased expenses. Half of the expense increase was from operating costs of the self-operated farm, and the other half was related to legal costs incurred on those farms.

John Massocca, Analyst

Is the increase in G&A line item being impacted by those tenants, and should it decrease with net leases in place?

Lewis Parrish, CFO

Those costs fall under property operating expenses, so they don’t affect G&A. The G&A increase was around $160,000, primarily due to rising auto fees and proxy solicitation expenses for our upcoming shareholders meeting. This cost was incurred earlier compared to last year but should balance out over the first half of the year.

John Massocca, Analyst

Guidance aside, how could participation rents develop in the second half versus last year?

David Gladstone, CEO

Participation rents may decline since we shifted some leases from participation to fixed payments, which started rising earlier. While some crops could generate higher participation rents this year, it’s uncertain overall given we haven't seen conditions like this since 2006. The crops' performance is what will ultimately determine rents for 2024.

Lewis Parrish, CFO

It’s important to note that participation rates this year are based on the crop harvest from late 2022, a period of intense drought. The water benefits we see this year can potentially yield more favorable rents in 2024.

John Massocca, Analyst

Thank you very much.

David Gladstone, CEO

Sherry, do we have any more questions?

Operator, Operator

There are no more questions at this time, so I would like for you to do your closing comments.

David Gladstone, CEO

Thank you, Sherry, for all your efforts. We are in excellent shape as a company and have sufficient resources to ensure our continuous growth. We are taking care to be prepared for any potential governmental or agricultural disruptions. Currently, we're performing well and expect to be strong this time next year when we reconvene for the first quarter call. Thank you for joining us today.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.