Earnings Call Transcript - LAND Q3 2024

Operator, Operator

Greetings. Welcome to Gladstone Land Corporation’s Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Gladstone, Chief Executive Officer and President. Thank you, Mr. Gladstone. You may begin.

David J. Gladstone, CEO

Well, thank you, Sherry, and that was a nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We certainly appreciate you taking time out of your busy day to listen to our presentation. Before I begin, we’ll start with 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 differ materially from any future results expressed or implied by these forward-looking statements, including all the risk factors listed in our Forms 10-K, 10-Q and other documents that we filed with the SEC, and find them on our website, specifically, go to the Investors page, and you can always visit 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 funds from operations (FFO), 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, as well as 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, sign up for our email notification service. You can also find us on Facebook and on X, formerly known as Twitter, with the handle @GladstoneComps. Today’s call is an overview of our results, so we ask that you review our press release and Form 10-Q issued yesterday for more detailed information. With that, I’ll turn it back to David.

David J. Gladstone, CEO

Thank you, Michael. I’ll start with a brief overview as I do each time, just so we all know where we are. We are currently on about 112,000 acres, own 168 farms and about 54,000 acre-feet of water assets. One acre-foot is equal to about 326,000 gallons. So, we have nearly 18 billion gallons of water. Together, the land and the water are valued at about a total price of $1.5 billion. Our farms are located in 15 different states and more importantly, they’re in 29 different growing areas. Our water assets are all in California. You don’t need to store much water; if you’re in Florida, you can drill down and get water pretty quickly. Our farms are leased to over 90 different tenant farmers who are growing over 60 different types of crops, mostly fruits and vegetables, along with a lot of nut trees. Most of the crops that are grown on our farms are sold in the produce section of the grocery store. We’ve been active in leasing since the beginning of the third quarter; we executed 21 new or amended leases on farms in eight different states, including a couple of farms that were previously vacant. On annual row crop farms, we renewed or amended eight leases, which are expected to increase net operating income by about $309,000 or 11% over that of the prior leases. We continue to see steady appreciation in consistent rents growing in our annual row crops, which make up about half the portfolio. For our permanent crop farms, we renewed about 13 leases. In four of these leases, we adjusted the lease structure by eliminating the base rent and providing the tenant with cash to grow the crops. In exchange, we significantly increased the participation in the rent component of these leases, with the major component recognized in the second half of 2025. During this period, we will experience lower base rents. Market conditions around many permanent crop farms in the West have been hampered by lower crop prices, higher inputs, and increased borrowing costs. These conditions make it difficult for tenants to commit to long-term leases with high base rents. Therefore, we adjusted the lease structure on a few farms to help minimize their fixed costs while allowing us to participate in the upside if farmers have a good year. We believe these structures will give us a better chance of making good profit on these farms in the coming years. We are particularly optimistic about two pistachio farms, which are high-yielding properties with a history of high production, allowing for better crop insurance rates. We continue to see positive pricing trends for pistachios and almonds. Additionally, California has experienced above-average rainfall levels recently, and most of the reservoirs are still at or above historic averages. Our current plan is to move forward with the structure for the 2025 harvest on these farms and possibly revert back to traditional lease structures next year, or we may sell some farms if we feel we cannot manage them correctly. We have seven leases scheduled to expire over the next six months, totaling about 2.5% of our total lease revenue. We’re in discussions with various groups either to lease these farms or operate them on our behalf. We have one farm that is agreed to be sold, which we consider very valuable. Subsequently, we have entered into an agreement to sell 11 blueberry farms in Michigan for about $5 million, some of our earliest farms. Due to a significant accident involving the entrepreneur farmer, we decided to leave the Michigan area, as these farms faced increased operating costs. We hope to close all matters by the end of the year, and regarding current tenancy issues, one farm is now vacant, and we are collecting revenues from two tenants leasing five farms. We are in discussions with various potential buyers and tenants, as many people are looking for farms again. We hope to have agreements in place by the end of the year on the remaining two. We may list some of these farms at auction, similar to what we did in Michigan. Year-over-year, these tenant issues resulted in a decrease in net operating income of about $638,000 in the third quarter. However, we anticipate recognizing profit next year from operating these farms with our new operators. I’ll stop here and let Lewis come in to discuss the numbers.

Lewis Parrish, CFO

Okay. Thank you, David, and good morning, everyone. I’ll begin by reviewing our recent financing activity. We did not borrow any new money during the quarter but repaid about $13 million of loans that were scheduled to mature or be repriced. On the equity side, since the beginning of the third quarter, we’ve raised net proceeds of about $80,000 from sales of Series E preferred stock and about $4.5 million from our common stock sales through the ATM program. We also continue our repurchase program on Series B and Series C preferred stock initiated in the second quarter. During the third quarter, we repurchased 176,045 shares of preferred stock for a total cost of about $3.7 million, resulting in a book gain of about $231,000, with an average repurchase cost of $21.22 per share, yielding a savings of 7.1%. Moving to operating results. For the third quarter, we reported net income of $6,000 and a net loss to common shareholders of $5.8 million, which is equivalent to $0.16 per share. Adjusted FFO for the current quarter was approximately $4.5 million or $0.13 per share, compared to $5.4 million or $0.15 per share in the prior quarter. Dividends declared per common share were about $0.14 in both quarters. The decline in AFFO in the third quarter of 2023 was primarily due to lost revenue from the farm sold in January and a decrease in income from properties that were either vacant, directly operated, or on non-accrual status during portions of the quarter. Fixed base cash rents decreased by about $2.6 million year-over-year due to lost revenues from the sold farm and additional expenses related to vacancies, as well as lease incentives granted to some tenants. This was partially offset by a $1.1 million increase in participation rents recorded in the current quarter, largely driven by stronger production at our pistachio farms. Regarding revenue over the next several quarters, we expect a total year-over-year swing in our fixed base rents of about $20 million due to changes in lease structures. This figure includes both previous base rents and cash allowances granted to some tenants. It will show as a reduction in fixed base rents over the next five quarters starting with Q4 2024, at rates between $3.5 million to $4.5 million quarterly. The majority of crop shares from these leases will be recognized as participation rent in the second half of 2025, with a smaller portion in the second half of 2026. Currently, we expect to recover the full $20 million and possibly more, but final numbers will be known later in 2025. Thus, we will essentially move about $20 million from fixed base rent to participation rent over the next couple of years. On the expense side, our core operating expenses decreased by about $140,000 this quarter, primarily due to a decrease in related party fees, offset by an increase in operating expenses driven by additional costs incurred on properties that were either vacant, directly operated, or on non-accrual status. These costs should normalize as we resolve ongoing issues, which we expect to close by year-end. We also recorded an impairment charge of about $2 million this quarter due to adjusting the net book value of Michigan blueberry farms to the agreed sell prices. Other expenses decreased mainly due to lower interest expense from loan repayments made over the past year. During the quarter, we had 43 farms revalued via third-party appraisals. These valuations decreased by about $23 million or 4.5% from a year ago, largely limited to certain permanent crop farms, as our row crop farms continue to appreciate in value. As of September 30, our portfolio was valued at approximately $1.5 billion, supported by third-party appraisals or purchase prices in the case of water. Based on updated valuations, our net asset value per common share as of September 30 was $15.57, down from $17.59 at June 30. This change reflects certain farms' reappraisals and implied fair value changes of our debt and preferred securities due to shifts in market rates. Turning to liquidity, we currently have access to over $160 million of liquidity, including about $20 million in cash, along with nearly $160 million of unpledged properties. Over 99.9% of our borrowings are fixed rates averaging 3.4% for another 3.7 years, resulting in minimal impact from increased interest rates in recent years. Upcoming debt maturities total about $39 million in the next 12 months, but due to underlying collateral values, we don’t foresee any refinancing issues. We’ve declared a dividend of $4.67 per share for the fourth quarter, reflecting a yield of 4.1% at the current stock price of $13.66, consistent with the average yield across the entire REIT sector. Given recent lease structure changes, we believe it’s prudent to keep the dividend flat for now and will reassess based on more information regarding 2025 crop share amounts. With that, I'll turn things back to David.

David J. Gladstone, CEO

Thank you, Lewis. Nice report. We are continuing to stay active in the marketplace should a good acquisition opportunity present itself. The banks are eager to lend us more money, but we’re being cautious unless interest rates come down. As mentioned in prior calls, we remain cautious in acquisitions due to our high cost of capital. While we’ve observed decreases in prices for certain permanent crops and farms in the West, values of most row crops, like strawberries, remain high. Cap rates on those farms are not increasing sufficiently to cover our financing costs. As a result, acquisition activity has slowed significantly; we are not doing any new deals given the high cost of capital. Interest rates remain too high for us despite the Federal cut in September. The timing of future cuts is uncertain, but we are hopeful for lower rates soon so that we can resume acquiring more farms. A final point I’d like to make is that we believe investing in farmland producing healthy crops like fruits, vegetables, and nuts is a positive trend, and we are committed to acquiring quality farmland. Overall demand for prime farmland, especially for growing berries and vegetables, remains stable to strong, with the vegetable and berry sector being stronger than I’ve seen before. However, certain permanent crops, notably nuts and wine grapes, have been depressed recently, impacting underlying farmland value. Some crops are showing signs of turning around, especially almonds and pistachios, which have been notably low due to weak demand. We’re hopeful the worst is behind for these crops. Regarding farms on the West Coast, some of our team members have faced challenges due to fires, but those events are mostly occurring in the mountains, not where our crops are located. Please remember that investing in our Company is a long-term commitment, and there will be fluctuations along the way. Long-term prospects remain strong, but there will be some ups and downs similar to any investment in agriculture. For example, grain crops like soy and corn have low prices and farmers are struggling. We anticipate inflation in the food sector will continue to rise, though costs are currently high, and we expect underlying farmland value to increase as a result. This is particularly true for fresh produce, which is becoming more popular. I also want to mention that there are two components to the value we purchase: intrinsic value, which is the land itself that appreciates over time, and usage value, which refers to the farmland used for crop production that generates income. We believe farmland is a superior hedge against inflation compared to assets like gold. Historically, every time we’ve sold property, it’s been due to high offer prices. I’ll now hand it back to the operator to explain how to ask questions.

Operator, Operator

Yes, of course. Our first question is from Gaurav Mehta with Alliance Global Partners. Please proceed.

Gaurav Mehta, Analyst

Yes, thanks. Good morning. I wanted to ask you about your lease expirations. You mentioned that over six months, seven leases are expiring. Can you provide a number for 2025 concerning how many leases are expiring and how many of those are permanent crops?

Lewis Parrish, CFO

In 2025, we expect to have 17 leases coming due, which constitutes about 20% of our revenue. We're currently in contact with the tenants for these leases.

David J. Gladstone, CEO

About half of our farms are row crops, such as berries, and the other half are in nuts and similar areas.

Gaurav Mehta, Analyst

Okay. That’s helpful. On the third-quarter lease amendments, were these leases expiring in the third quarter, or were they amended for different reasons?

Lewis Parrish, CFO

Some leases amended in Q3 were due for expiration; others were amended for various reasons. A few near-term expirations were pushed out.

David J. Gladstone, CEO

Any further questions, Gaurav?

Gaurav Mehta, Analyst

That’s all. Thank you.

David J. Gladstone, CEO

Okay. Next question.

Operator, Operator

Our next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed.

Rob Stevenson, Analyst

Good morning, guys. Lewis, were the 11 blueberry farms part of the 20 vacant direct-operated and non-accrual properties?

Lewis Parrish, CFO

Yes, that's correct.

Rob Stevenson, Analyst

And I think David said you had another farm you agreed to sell. Is that part of the 20 as well?

Lewis Parrish, CFO

No, that one is leased through the middle of next year. It’s not imminent, though, as we have an agreement for it to potentially close early next year.

Rob Stevenson, Analyst

Okay. So, when you report the fourth quarter, if that blueberry farm sale goes through, the number of vacant direct-operated non-accrual properties should be cut roughly in half, right?

Lewis Parrish, CFO

Yes, assuming that closes this year, we’ll be left with one vacant property, one direct operated, and five on a non-accrual basis.

Rob Stevenson, Analyst

That’s helpful. Is there anything else that’s looking like it’s headed towards non-accrual, or are you comfortable with the remaining farms?

Lewis Parrish, CFO

We're comfortable with the collectability of rent from our other tenants right now. It’s really just two tenants facing issues here.

Rob Stevenson, Analyst

Last one for me: regarding the NAV decline, how much of it was related to permanent crops? Is there any impact from row crops?

Lewis Parrish, CFO

The decline is entirely due to permanent crops. We’re seeing steady appreciation in our row crop land, typically around 2-4% yearly.

David J. Gladstone, CEO

The small farms in Michigan were put on our books when we were just starting out, and we made a mistake in selecting a careless tenant. However, we will resolve this by the end of this year.

Rob Stevenson, Analyst

Thanks, guys. Appreciate the time this morning.

David J. Gladstone, CEO

Sure. Alright. Any further questions?

Operator, Operator

Yes. Our next question is from Craig Kucera with Lucid Capital Markets. Please proceed.

Craig Kucera, Analyst

Hey, good morning, guys. What were the crop types and locations for the four farms where you restructured the leases?

Lewis Parrish, CFO

Two are pistachios and two are wine grapes.

Craig Kucera, Analyst

Was there any impact on fixed rent this quarter from the restructuring, or is that expected beginning in the fourth quarter?

Lewis Parrish, CFO

There was a slight impact this quarter; for instance, the wine grape farms saw a $500,000 to $1 million decrease from normalized levels.

Craig Kucera, Analyst

Looking at participation rents, there was strength year-over-year. From which crops did that strength come?

Lewis Parrish, CFO

The strength of our production at the pistachio farms drove this. Pricing data for others is still forthcoming.

Craig Kucera, Analyst

Given the previous years, your fourth-quarter participation rent has been higher than in the third quarter. Are you expecting something similar this time?

Lewis Parrish, CFO

That's our hope, but we cannot confirm until we see all data.

David J. Gladstone, CEO

Any other questions?

Operator, Operator

We have one final question from John Massocca with B. Riley Securities. Please proceed.

John Massocca, Analyst

Good morning.

David J. Gladstone, CEO

Good morning.

John Massocca, Analyst

Regarding the Michigan blueberry farms sold, what's the NOI impact? Were they generating any cash flow, or were they an NOI drag due to historical operating issues?

Lewis Parrish, CFO

They were definitely an NOI drag, with average quarterly drag being about $125,000, plus another $40,000 in interest expense, totaling approximately $165,000.

John Massocca, Analyst

Concerning lease changes this quarter, the $20 million annualized figure relates specifically to the nine properties shifted into percentage rent, right?

Lewis Parrish, CFO

Yes, it refers to the four properties where we altered the leases.

David J. Gladstone, CEO

As for the California permanent crop market, while we've observed low pricing for nuts and grapes affecting underlying farmland value, we're hopeful that prices will stabilize and recover soon.

John Massocca, Analyst

I appreciate the color. Thank you.

David J. Gladstone, CEO

Any more questions?

Operator, Operator

There are no further questions at this time. I would like to hand it back off to management for closing remarks.

David J. Gladstone, CEO

Thank you all for joining us. We anticipate a successful year ahead, as we shift towards participation rent, and we have promising farms under management. While we are unsure of pricing, we expect solid production in 2025. Thank you, and see you next quarter.

Operator, Operator

Thank you. This will conclude today’s conference. You may disconnect at this time.