Earnings Call Transcript - LAND Q2 2024

Operator, Operator

Welcome to the Gladstone Land Corporation Second Quarter 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 event is being recorded. And now I'll turn the call over to David Gladstone, Chief Executive Officer and President. Please go ahead.

David Gladstone, CEO

Thank you, Darrell. Nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate that you take time out of your busy day to listen to our presentations. Before we begin, though, we need to hear from Michael LiCalsi. He's our General Counsel. Michael?

Michael LiCalsi, General Counsel

Thanks, David. 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 the risk factors you can find in our 10-Q, 10-K, and other documents that we file with the SEC. You can find those on our website, specifically the Investors page or on the SEC's website. Now 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. 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. We may also discuss core FFO, which we generally define as FFO, adjusted for certain non-recurring revenues and expenses, also 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 better comparability of our period-over-period performance. Please visit our website for more detailed information.

David Gladstone, CEO

Okay, thank you, Michael. I'll start with a brief overview of our farmland holdings. We currently own about 112,000 acres on 168 farms and about 54,000 acre-feet of water assets. One acre-foot is about 326,000 gallons, so we own about 18 billion gallons of water. The total value of the land and the water together is about $1.5 billion. Our farms are in 15 different states and, more importantly, in 29 different growing areas. While our water assets are primarily in California, we also have one clean water asset in Florida, where we produce cleaner water for the Florida area. Our farms are leased to over 90 different tenant farmers, all of whom are unrelated to us. The tenants on these farms are growing 60 different types of crops, mostly in three categories: fruits, nuts, and vegetables. You can find these in the produce section of the grocery store, which is where most of the crops that are grown on our farms are sold. Since the beginning of the second quarter, we executed 11 new leases or amended leases on farms in five different states, including two leases on farms that were previously vacant. In total, these renewals are expected to result in an increase in our annual net operating income of about $465,000 over the prior leases. Our direct renewals equal about a 7% increase compared to our previous leases. Looking ahead, we have nine leases scheduled to expire over the next six months and are currently in negotiations with potential renters. With 168 farms, only nine leases are coming due, which is quite good. We're in discussions with groups to either lease these farms or operate them on our behalf. Seven of the nine expiring leases are nut farms in California, which will likely decrease in the base rent in exchange for increases in participation rents. During the quarter, we acquired an additional 4,899 acre-feet of water for a total cash price of $1.5 million, which is about $300 per acre-foot. Subsequent to the quarter-end, we purchased an additional 1,985 acre-feet of water for approximately $800,000, or about $400 per acre-foot. As a reference point, NASDAQ tracks a California Water Index, which has a weighted average price of about $440 per acre-foot across five different markets. Our team's efforts over the past year and a half to implement specific water projects and strategies have allowed us to acquire water at below-market prices because we've been in the right place at the right time. Currently, farms are not facing water shortages as we've secured enough water for this season and the next without issues. However, lower prices for permanent crops, such as almonds and pistachios, are a challenge. We're seeing signs of pricing on these crops starting to rebound, which is essential for our farmers to sell their crops at reasonable prices to cover costs, including rents. Recently, we've received reports that pistachio shipments are up 35% year-over-year, driven primarily by increased demand in Central South America, Europe, and Asia. While Turkey has experienced a decrease in pistachio production due to extreme weather conditions, we remain optimistic about future pricing increases for almonds and pistachios. We've observed rising almond prices recently due to strong demand, especially from India. It's notable that our portfolio currently has adequate water supply, and none of the farms are required to go fallow due to water shortages or governmental regulations. These water projects are primarily forward-looking to ensure the long-term security of our assets. We acknowledge one farm is vacant and five properties, encompassing 12 farms, are operated under management agreements with third parties. We're in discussions with various potential buyers to either lease or farm these properties on our behalf, aiming to establish agreements by the end of this calendar year, and might list some farms for sale as well. The year-over-year impact of tenant issues resulted in a decrease in net operating income of about $794,000 this quarter. Diversifying our operations can lead to problems arising in different areas at different times. For instance, some crop types in the Western U.S. have faced price drops in the last 12 to 18 months, compounded by increased input and borrowing costs, negatively impacting profit margins. We do have valuations that are fine, but the crops such as almonds and pistachios, along with two others, apples and wine grapes, are trailing behind. We're evaluating the risk-return profiles of our properties and looking at options, including renewed leases at decreased fixed base rents to exchange fixed costs for shared crop participation. Our focus is to find solutions to improve profitability levels on some of these farms in the near-term, with possible third-party management groups taking the lead. We've reviewed our properties comprehensively, noting that we sold one property in Florida and made about $10 million in profit. We have a number of properties that might also exceed current valuations if we were to sell. However, as mentioned, we need to continue monitoring market conditions, especially concerning interest rates. Our hope is for the Federal Reserve to cut interest rates, providing relief to our farmers and easing some acquisition hesitance.

Lewis Parrish, CFO

Thanks, David. Good morning, everyone. I'll begin by briefly going over our recent financing activity. We did not borrow any new money during the quarter, but we did repay a $6 million loan subsequent to quarter-end that was scheduled to re-price. On the equity side, since the beginning of the quarter, we've raised approximately $90,000 in net proceeds from the sales of Series E Preferred Stock. We've also implemented a share repurchase program for Series B and Series C Preferred Stock that has been effective for us. Since commencing the program in May, we have repurchased 249,290 shares of Preferred Stock at a total cost of about $5.2 million, resulting in a book gain of about $415,000. The average repurchase cost was $20.84 per share, resulting in a dividend yield savings of approximately 7.2%. Given our current borrowing costs and the economics surrounding acquisitions, we believe these repurchase transactions are among the best uses of our capital at this time. Moving on to our operating results, for the second quarter, we reported a net loss of $823,000 and a net loss to common shareholders of $6.7 million or $0.19 per share. Adjusted FFO for the current quarter was approximately $3.7 million or $0.103 per share compared to $3.6 million or $0.102 per share in the prior year quarter. Dividends declared per common share were $0.140 in the current quarter, compared to $0.138 in the prior year. AFFO increased slightly from the second quarter of 2023 as the increase in participation rents was largely offset by lost income from the farm sold in January and decreased revenues connected to properties that were either vacant, directly operated, or non-accrual during parts of the quarter. A decrease in interest expense was offset by an increase in certain operating expenses. Fixed base cash rents decreased by approximately $1.1 million year-over-year, primarily due to lost revenue from the farm we sold and other workout properties. However, this was offset by a $1.1 million increase in participation rents recorded during the current quarter, primarily due to late information regarding previous harvests. On the expense side, core operating expenses increased by about $450,000 during the current quarter. Total related party fees decreased slightly from the prior year period. Other expenses decreased primarily due to lower interest expense due to loan repayments made over the past year. We had 62 farms revalued during the quarter via third-party appraisals, resulting in overall valuation decreases of $13.8 million or 4% from their prior valuations a year ago. These decreases were restricted to certain of our permanent crop farms, with row crop farms appreciating in value. As of June 30th, our portfolio was valued at approximately $1.5 billion, supported by third-party appraisals or purchase prices. The net asset value per common share at June 30th was $17.59, which is a decline from $18.50 at March 31st. The majority of this decrease stemmed from valuation declines of certain farms that were revalued during the quarter and changes in the fair value of our preferred securities. We currently have access to about $180 million of liquidity, which includes over $30 million of cash on hand. Approximately 99.9% of our borrowings are at fixed rates with a weighted average fixed rate of 3.4% for another 3.9 years, meaning minimal impact on operating results from increased interest rates over the past couple of years. We have around $46 million coming due over the next 12 months, mainly various loan maturities, but we do not foresee refinancing issues with the underlying collateral value. Regarding our common distributions, we recently raised our common dividend again to $0.0467 per share per month, marking the 35th time we've raised it over the past 38 quarters, resulting in nearly a 56% overall increase.

David Gladstone, CEO

Thank you, Lewis, for the nice report. We remain active in the market should good acquisition opportunities arise, especially as interest rates may be decreasing. However, we're cautious on the acquisition front due to high capital costs and have observed decreasing prices for certain permanent crop farms in the west, while row crop farms, especially those growing strawberries, maintain high values. So, acquisition activity remains slow, and it may take a couple of quarters for new activity. The Federal Reserve is discussing potential interest rate cuts, which we hope will benefit us and our farmers moving forward. Investing in farmland and growing crops that support a healthy lifestyle aligns with current market trends as demand remains stable to strong. Crop prices for certain fruits and nuts have been challenging; however, we are optimistic due to early signs of recovery. Remember, investing in our company is a long-term commitment in farmland, where swings in performance can occur but have historically yielded strong returns over time. With that said, we now have some questions from our audience. Operator, how can they ask?

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question has come from the line of Gaurav Mehta with Alliance Global Partners. Please proceed with your questions.

Gaurav Mehta, Analyst

Thank you. Good morning. I wanted to ask you about your comments regarding almonds and pistachios. Can you remind us how much exposure your portfolio has to these crops?

Lewis Parrish, CFO

On a revenue basis, probably about 20% is pistachio and around 8% to 9% is almonds.

Gaurav Mehta, Analyst

Thank you. Regarding your balance sheet, I believe you mentioned $46 million of debt expiring in the next 12 months. Can you provide some insights regarding current interest rates if you need to refinance that debt?

David Gladstone, CEO

Sure. Currently, our weighted average interest rate is about 3.4%. If we were to reprice today, it would be around 200 basis points above that. We'll approach each situation on a case-by-case basis, considering the cash we have on hand and our plans for the specific farm.

Gaurav Mehta, Analyst

Thank you. That's all I have.

Operator, Operator

Our next question has come from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your questions.

Rob Stevenson, Analyst

Good morning, guys. Regarding the four California farms that are vacant, direct operated, and non-accrual, are those all nut farms?

David Gladstone, CEO

Yes, they are.

Lewis Parrish, CFO

I believe one is not a nut farm, but yes, you are generally correct.

Rob Stevenson, Analyst

I think back last quarter, there were 20 farms in that category. What happened to the other one? Did it get rented or catch up on rent payments?

David Gladstone, CEO

It got leased. We secured a lease on it.

Rob Stevenson, Analyst

Are these 19 farms something you want to hold long-term? Is it a matter of getting leases at satisfactory prices, or do you intend to sell them?

David Gladstone, CEO

As long as we have water, I think we'll keep them. We believe that someone will eventually want to farm on it.

Rob Stevenson, Analyst

Lastly, how much participation rent did you collect in the second half of '23 and do you expect similar amounts in '24?

Lewis Parrish, CFO

In '23, I don't believe we recorded anything significant aside from maybe $200,000 in the second half. For '24, we expect somewhere close to this year's range, but we cannot confirm at this time.

Operator, Operator

Our next question has come from the line of John Massocca with B. Riley Securities. Please proceed with your questions.

John Massocca, Analyst

Good morning.

David Gladstone, CEO

Good morning, John.

John Massocca, Analyst

Regarding participation rents, you discussed some moving pieces regarding the $1.1 million collected this quarter. Can you elaborate on why this was recorded now?

Lewis Parrish, CFO

It stemmed from three farms. One farm prepaid us $250,000, which is normally recognized in the second half of the year. We were not expecting that payment. The rest was due to unique situations regarding accurate harvest information, which was processed late.

David Gladstone, CEO

Go ahead.

John Massocca, Analyst

If there’s a recovery in pricing for almonds and pistachios, how will that impact participation rent for 2024 or beyond?

David Gladstone, CEO

That will impact 2025 primarily. If prices improve, it will influence the upcoming harvests, but the records come later for us.

John Massocca, Analyst

Which assets are you considering for potential dispositions? Is there a strategic rationale behind these decisions?

David Gladstone, CEO

Currently, a bad time to sell crops like almonds and pistachios, but we maintain good credit capabilities with the farm credits. Our focus is on assessing which assets may need to pivot, but we have the leverage for the right opportunities.

John Massocca, Analyst

Lastly, was the increase in operating expense driven solely by those non-accrual farms?

Lewis Parrish, CFO

Yes, the increase was significantly due to that bucket of farms. We incurred real estate taxes on behalf of a tenant we had to terminate the lease with. Those costs drove the overall increase in operating expenses.

John Massocca, Analyst

That's it for me. Thank you.

Operator, Operator

Thank you, Mr. Gladstone. There are no further questions at this time.

David Gladstone, CEO

That's too bad. We enjoy answering questions. Thank you very much to everyone for joining us today.

Operator, Operator

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.