Earnings Call Transcript - LAND Q1 2022

Operator, Operator

Greetings and welcome to Gladstone Land Corporation First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer and President. Thank you, sir. Please, go ahead.

David Gladstone, CEO

Okay. Thank you, Donna. That’s a nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. We appreciate you taking the time to listen to our presentation, and we're looking forward to some good questions. We'll start with Michael LiCals. He's our General Counsel and Secretary, and he's also President of Gladstone Administration. So Michael, take it away.

Michael LiCals, General Counsel

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. 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 we file with the SEC. You can find them on our website, specifically the Investors page of the website at gladstoneland.com or on the SEC's website, which is sec.gov. 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'll discuss FFO, which is Funds From Operations. FFO is a non-GAAP accounting term, defined as net income, excluding the gains and 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, 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 better comparability of our period-over-period performance. We ask that you take the opportunity to visit our website, once again gladstoneland.com, and sign up for our email notification service, so you can stay up-to-date on the company. It can also be found on Facebook, keyword The Gladstone Companies, and Twitter @GladstoneComps. Today's call is an overview of our results, so we ask that you review our press release and 10-Q, both issued yesterday, for more detailed information. Again, they’re on the Investors page of our website. With that, I’ll turn the presentation back to David.

David Gladstone, CEO

Okay. Thank you, Michael. I'll start with a brief overview of our current holdings. We currently own approximately 113,000 acres of farmland across 162 farms, and we also own about 45,000 acre-feet of banked water valued overall at approximately $1.5 billion. Our farms are located in 15 different states, more importantly, in 29 different growing areas. Our farms continue to be 100% occupied and are leased to 86 different tenant farmers, all of whom are unrelated to us. The tenants on these farms are growing over 60 different types of crops. Given the number of different growing regions, tenants, and types of crops on our farms, we think this diversity provides safety and security for the cash flows coming in from rents. These diversifications help protect the dividends that we pay to our shareholders. After closing nearly $150 million of farm acquisitions in the fourth quarter of last year, we've been pretty quiet on the acquisition front for the last three months. But things are picking up for us in the last six or seven months. You will see us close some deals, and we will announce each one as they come to fruition. However, largely as a result of those acquisitions last quarter and aided by interest patronage received from the farm credit institutions that we borrow from, we had another strong operational quarter. We're coming off a year in which we reported $5.2 million of participations from our last rents, and we have a few more farms with participation rent provisions scheduled to come online for this year that we didn't have last year. So we're optimistic about being able to report a good result for 2022. However, these numbers are largely dependent upon the yields achieved on the farms and the prices at which the crops are sold, so we'll need to wait until later in the year before we can estimate and announce those figures. To continue to be able to renew all expiring leases without incurring any downtime on any of our farms, that's what we did, and we're hopeful that we can continue to do that. In our primary regions of focus, along each coast, we continue to execute renewals at higher rent levels. Upon a change in a lease structure, as we did on one of our farms, it hurt our income a little bit, but we'll go over that in more detail shortly. Overall operations on our farms remain strong, and the demand for products growing on most of our farms remains high. Products like berries, vegetables, and nuts, as anyone who goes to the grocery store can tell you, prices on these products continue to rise. One reason we have been less active with acquisitions so far this year is that we are being more selective in the types of farms that we're looking at right now. In light of the economic uncertainties surrounding our nation right now, we believe it's prudent to be more conservative with our capital. We're trying to only look at acquisitions that we feel are significantly safer than investments for us compared to some of the others in the market. This benefits our shareholders, of course. On the leasing front, since the beginning of the year, we executed seven lease renewals on properties located in four different states. Overall, these renewals are expected to result in a decrease in the annual net operating income of about $580,000, primarily due to one of the leases. Other than that, we're in great shape. The result of this one lease renewal on our property involved an investment of $560,000 to cover a portion of the farm's operating costs in exchange for adding a significant participation rent component to the lease. The tenant wanted to see how it worked before committing to a long-term fixed-rate lease, so we are set to receive 80% of the gross revenue earned on the farm this year based on current commodity prices and yield estimates. We think we will end up in a similar place where we would have been on the previous lease on this farm, but we will not know the results until the end of the year when the crops are sold. Excluding this one lease, our other leases renewals are expected to result in an increase in annual net operating income of approximately $55,000, about a 3% increase over the old leases that we replaced. Looking ahead, we only have one lease scheduled to expire over the next six months, which makes up less than one-half of 1% of our total annualized lease revenues. We're in discussions with the existing tenant on the farm as well as with some potentially new tenants, and we are not currently expecting any downtime on this one. We currently expect that the new lease on the farm will be relatively flat, maybe up a little bit from where it is today. There are a couple of other items I'd like to mention before we move on. First, the ongoing drought in the West, despite some record-breaking rainfall in the Western United States over the winter, including a relatively wet April; the entire region continues to deal with a multiyear drought. However, all the properties continue to be in a position where our farmers currently have enough water to complete certainly the crop for this year, and I think we'll be fine in the years going forward. Where we have farms located in water districts, those districts do have stored water or supplemental sources to cover our farms, and we have enough water in the ground as ours. Almost all of our farms have wells on-site, and most rely on groundwater as their main source of irrigation. For these properties, we are seeing typical seasonal drops in the water levels in the ground. One thing you should know is that wet and dry weather cycles are the norm out West, especially in California. Throughout any long-term investment, we know that we will encounter both drought periods and wet periods. So when we underwrite any potential investment, we look for properties with multiple sources of water; we build in drought scenarios, and we also account for potential government regulations that might ask us to reduce our water consumption. Regarding our progress on ESG, this is something new for us. We're continuing to work on developing a formal policy related to disclosures that we consider to be relevant. There aren't any companies out there or any REITs that are similar to ours. So we've not seen anybody announce anything that would be good for what we're doing these days. Just so you know, several of our farms have large solar arrays on them used to power their operations, and we've been in discussions with groups to add wind power and solar leases onto other farms as well. We just always want to be careful that these additions aren't going to disturb our current tenants, as they are our primary business partners. Finally, as mentioned on previous calls, we sometimes come across farmland owners who want to sell both their farmland and their operation as a package deal. As a real estate investment trust, Gladstone Land can't take operating income, as it's generally not permitted. We do have additional strategies to potentially take advantage of such opportunities where Gladstone Land could not participate. I'm going to stop here; that's the operating day-to-day. So I’ll turn it over to our CFO, Lewis Parrish, to talk more about the financials.

Lewis Parrish, CFO

All right. Thank you, David, and good morning, everyone. I'll begin by briefly discussing our financing activity. Since the beginning of the year, we secured about $10 million in new long-term borrowings from three different lenders at a weighted average rate of 3.18%. This rate is fixed for the next seven plus years. On the equity side, since the beginning of the year, we've raised about $1 million of net proceeds through sales of our common stock under the ATM program and about $50 million of net proceeds from the sales of Series C preferred stock. Moving into the operating results, first I'll note that for the first quarter, we had net income of about $1.2 million and a net loss attributable to common shareholders of $2.7 million or $0.079 per common share. On a quarter-over-quarter basis, adjusted FFO for the first quarter was approximately $6.4 million compared to $6.7 million in the fourth quarter of last year. AFFO per share was $0.185 in the first quarter versus $0.199 in the fourth quarter of '21. Dividends declared per share were about $0.136 in both quarters. The primary driver behind the decrease in AFFO was $3.4 million of participation rents recorded during the fourth quarter of 2021 versus none reported in the first quarter of ’22. Partially offsetting this was about $2.8 million of interest patronage or refunded interest recorded during the current quarter related to our loans from farm credit. Fixed base cash rents increased by about $700,000 or 4%, primarily driven by additional revenues earned from recent acquisitions. On the expense side, excluding reimbursable expenses and certain nonrecurring or noncash expenses, our core operating expenses remained relatively flat on a quarter-over-quarter basis. Total related-party fees decreased during the quarter, primarily due to a lower incentive fee earned by our adviser during the current quarter. However, this was offset by increases in both property operating expenses and G&A expenses. The increase in property operating expenses was driven by additional property tax obligations on certain properties, as well as annual state filing fees that we have to pay on each of our properties. The increase in G&A expenses was largely due to higher professional fees, particularly additional audit and appraisal costs. Moving on to net asset value, we had 34 farms revalued during the current quarter, all via third-party appraisals. Overall, these farms increased in value by about $13.2 million over their previous valuations from about a year ago. These increases represented about a 4% increase in the value of these properties. We especially saw strong value appreciation across the board on our California properties, including those growing fresh produce row crops in the Central Coast as well as farms growing nuts in the Central Valley. That reflects the job our team has done in locating farms with good sources of water that can withstand severe drought conditions like we're currently experiencing. With water at a premium out West, especially these days, we're seeing values declining for farms that only have one water source, while prices of farms with multiple water sources are continuing to go up. As of March 31, our portfolio is valued at about $1.5 billion, all of which was supported by either third-party appraisals or the actual purchase prices. Based on these updated valuations and including the fair value of our debt and all preferred stock, net asset value per common share at March 31 was $15.54, which is up by $1.23 from last quarter. The primary drivers of this increase were the aforementioned appreciation of the value of our farms as well as the impact of increases in market interest rates on the value of our fixed long-term borrowings. Turning to our capital makeup and overall liquidity, from a leverage standpoint and with respect to our borrowings, our loan-to-value ratio on our total farm holdings on a fair value basis and net of cash was about 40% as of March 31. Over 99% of our borrowings are currently at fixed rates, and on a weighted average basis, those rates are fixed at 3.25% for another five plus years, so we believe we are currently well protected on the debt side against further interest rate hikes. Regarding our upcoming debt maturities, we have about $66 million coming due over the next 12 months. However, about $48 million of that represents various loan maturities, and the properties collateralizing these loans have increased in value by a total of about $20 million since their respective acquisitions. We do not foresee any problems refinancing any of these loans if we choose to do so. Removing those maturities, we only have about $18 million of amortizing principal payments due over the next 12 months, or less than 3% of our total debt outstanding. From a liquidity standpoint, including availability on our lines of credit and other undrawn notes, we currently have over $175 million of dry powder in addition to $30 million of unpledged properties. We recently increased the size of our MetLife facility. This gives us ample availability under each of our two largest borrowing facilities, and we continue to reach out to new lenders for additional borrowings. Finally, regarding our common distributions, we recently raised our common dividend again to $0.0454 per share per month. Over the past 29 quarters, we raised our common dividend 26 times, resulting in an overall increase of more than 51% during this time. Since 2013, we have paid 111 consecutive monthly dividends to common shareholders, and our goal is to continue to increase the dividend at regular intervals. Farmland continues to be a stable asset class and continues to perform well amid all the uncertainty and volatility currently in the markets. We believe that this stock offers a compelling investment alternative, especially in light of today's inflationary and recessionary concerns. And with that, I'll turn the program back over to Dave.

David Gladstone, CEO

Okay. Lewis, thank you. Nice report. Acquisition activity remains strong for us, and we continue to see buying opportunities coming our way. We have a few farms that are either signed up or close to being signed up, and we hope to announce some closings over the next few months, but we still have to complete our due diligence process and sometimes that goes slowly as you're trying to get appraisals and other things that are necessary to close one of these investments. Some of these properties have not been sold for the last 100 years, so it takes a while to clean them up and make them suitable for us to buy. Additional points I'd like to make include the optimism I see in investing in farmland, growing crops that contribute to healthy lifestyles, such as fruits, vegetables, and nuts, which follows the trend we're seeing in the market today. Overall, demand for prime farmland growing berries and vegetables remains stable to strong in almost all areas where our farms are located, particularly along the West Coast, including most of California, Oregon, and Washington, as well as the East Coast, especially Florida and other states. Overall, farmland continues to perform well compared to other asset classes. There's an index of farmland prices called the NCREIF Index, which is currently composed of about $14.4 billion worth of agricultural properties, including almost all of ours. Their average annual return has been 12.6% over the past 20 years with no negative years during that period. This outperforms both the S&P Index and the overall REIT index, both of which have had three, sometimes four negative years in which they've gone down in value. We, in the farmland business, based on our analysis, have not experienced any zero years. Please remember that purchasing stock in this company is a long-term investment in farmland. I believe an investment in stock contains two parts. Similar to gold, our stock is a hard asset. It is farmland; it is dirt. That’s the intrinsic value because there's a limited amount of good farmland available in the United States, and it's being used up by urban development, especially in California and Florida, where we have many of our farms. The second thing, unlike gold and other alternative assets, it is an active investment with cash flows to investors, and we believe we are better than bond funds because we continually increase the dividend, whereas bond funds usually do not. Remember, you have the dividend plus appreciation from the farms. This quarter we had about $13.2 million in valuation appreciation. We expect inflation, particularly in the food sector, to continue to increase, and we expect the values of the underlying farmland to rise as a result, especially true in the fresh produce food sector as trends show that more people are eating healthy foods. Some farmland in grain-producing states, like the ones we have, is strong this year due to lower production levels from Argentina, Brazil, and Ukraine. I anticipate there will be some problems along the way because there's just not enough grain being produced. Now I'm going to stop, and Donna, please come on board so we can get some questions from our friends on the line.

Operator, Operator

Thank you. The floor is now open for questions. Our first question is coming from John Massocca of Ladenburg Thalmann. Please go ahead.

John Massocca, Analyst

Good morning.

David Gladstone, CEO

John, good morning.

John Massocca, Analyst

Just interested, as you look at the pipeline and potential acquisitions, how are sellers being impacted by both commodity price movements and rising interest rates in terms of whether that incentivizes them to pursue new deals or maybe causes some to hold on to their properties?

David Gladstone, CEO

Well, it depends on the person you're talking to; some of them cite both of those, or one of those, as a reason for them to exit the business. I think it will help us if we are positioned to buy farms and farm operations. But just selling the land means that we need to start paying rent. While it's good for a lot of people, it doesn't work in every situation. So we listen to what's going on. Most of these farmers are quite adept at calculating the numbers to determine whether they should sell or not. My guess is that as the economy becomes more challenging, it will become easier for us. These farmers are paying huge prices for fertilizer and other inputs for operations, and they are calculating how to make up for the difference. While they receive more money for their crops, a significant portion of that profit stays at the grocery store level; they have to pay more to get those products into grocery stores. It’s a negotiation process that will lead us to purchase agreements. We have some purchase agreements that have been signed and will eventually come through. But quite frankly, it takes a long time to complete closings now because government approvals, for example, take longer. If it keeps moving at the slow pace it currently is, I think we will have plenty of opportunities going forward, as people can't hold on forever. They are seeking ways to exit from their farms, and often their children don't want to continue the business.

John Massocca, Analyst

Understood. And then on the balance sheet side of things, what are you seeing today in terms of secured debt pricing and even unsecured debt pricing as you look at that side of the capital stack for future growth and some of the refinancing that might occur later this year?

David Gladstone, CEO

If we were to get quotes right now, we'd probably be in the low fours to mid-fours as far as pricing goes. Obviously, that could be a bit higher towards the end of the year. We'll consider those numbers as we have preferred common and debt sources we can tap. Once we have those numbers ready to close a deal and finance it, we’ll look at the best combination of capital sources to move forward with.

Lewis Parrish, CFO

Remember, if we're borrowing money from the federal banks, we do receive some repayments later in the year. For example, during the first quarter, we received another $2.8 million, which is up 1.3% or 139 basis points, I think it was.

David Gladstone, CEO

Since we are actually the “owners” of those banks directly as borrowers, it’s not a profit-making opportunity like you'd see at a regular bank. Thus, we get about 1.3% back from all of our borrowings. As borrowings increase from the federal side, we receive more funds back each quarter, which certainly enhanced our appearance during the first quarter. The first quarter is always slow since we've received most of our participation rents.

John Massocca, Analyst

In terms of leverage, I think I heard on the call an explanation of around 40% loan-to-farmland value. That’s somewhat lower than historically; is that a result of being prudent given broad economic conditions, or is that just something that could drift up over time as you close some deals later in the year?

Lewis Parrish, CFO

It could certainly drift up over time. Part of it is due to our abundant use of the common ATM in the second half of last year and the preferred proceeds coming in. For example, in our MetLife facility, we have enough properties slated that we can draw $110 million down at any time. But right now, we don't need those funds. If all the deals currently in our pipeline close over the next several months, you will see us start to draw on some of those funds.

John Massocca, Analyst

That’s it for me. Thank you very much.

Lewis Parrish, CFO

Thank you.

David Gladstone, CEO

Okay. Next question.

Operator, Operator

Thank you. The next question is coming from Edward Riley of EF Hutton. Please go ahead.

Edward Riley, Analyst

Hey, guys. Two questions for me. Just wanted to hear more on whether any farmers are having issues passing on increased costs to their customers?

David Gladstone, CEO

We know the price has been going up on all inputs, so they’ve had to pass that on, and grocery stores seem to be willing to accept that. Most of our sales, fruits, and vegetables go through grocery store chains rather than independent venues. Overall, I think our farmers feel good about the prices they are getting and can pass on the costs. There's a good relationship between grocery stores and farmers; grocery stores have representatives who maintain communication with farmers. So, I don’t sense a disconnect between the two parties; this relationship ensures everyone is aware that prices for fruits, vegetables, and nuts will rise along with the cost to farmers. They're likely paying about twice what they paid last year for fertilizer and possibly even more, as it's currently very challenging to obtain fertilizer.

Edward Riley, Analyst

Understood, got it. For the participation rent component, could you give us a breakdown of the crops expected to make up the vast majority of the participation rights collected by year-end?

David Gladstone, CEO

Most of it will come from pistachios. We have some participation rent provisions primarily related to our permanent plantings, but the bulk will be derived from pistachios, along with some almonds and wine grapes. Additionally, we have a few farms involved in commodity crops in the Midwest, but the majority will come from pistachios, which is beneficial for us since pistachio prices are currently strong. So Ed, we need you to go out and buy a lot of pistachios and almonds.

Edward Riley, Analyst

Well, I have a bag of almonds sitting next to me right now. So I’ve got it covered.

David Gladstone, CEO

All right.

Edward Riley, Analyst

On the property expenses, you noted some increases there due to taxes. Will there be variability with that throughout the year by quarter, or how should we think about that going forward?

David Gladstone, CEO

Yes. Some of the expenses incurred this quarter were one-time costs that won't recur or at least not on a quarter-to-quarter basis. For example, we incurred about $65,000 to $70,000 in annual state filing fees; that is an annually recurring fee, but not quarter-over-quarter. Regarding taxes, two factors drove that increase: one being an increased assessment on one property, which required us to record a true-up expense of approximately $50,000 to $60,000, and the other portion relates to some leases transitioning from triple net to partial net. However, overall, I would say $100,000 to $125,000 of that increase should not recur.

Edward Riley, Analyst

Okay, great. Thank you, guys. I appreciate it.

David Gladstone, CEO

Okay. Next question.

Operator, Operator

The next question is coming from Craig Kucera of B. Riley Securities. Please go ahead.

Craig Kucera, Analyst

Yeah, good morning, guys. David, you raised about $50 million in preferred stock year-to-date at 6%, while your common cost of equity appears significantly lower, certainly based on your dividend yield or published NAV. Could you comment on how you're thinking about the cost of your various sources of capital?

David Gladstone, CEO

Yes, we think about it every day. My CFO repeatedly reminds me that we're paying too much for the money we are using. However, think about this for a moment, Craig. As you likely know, when you're raising money through the sale of preferred stock, it's a continuous process, and turning it on and off isn't easy. The good news is they can usually sell during challenging times. Thus, you get your funds to buy more farms when most are hesitant to invest in stocks. Consequently, we don’t want to stop that activity until we ascertain there is no longer a need for it. While I’m pleased that we can utilize our capacity to sell new shares when the price shifts from $40 to $31 today, that was disappointing. Still, it has been better than what we are doing with our preferred shares.

Craig Kucera, Analyst

No, I appreciate the candidness on that. Just one more from me: a lot of news on the drought out West. I'm curious to hear how meaningful you think having multiple sources of water might be to pricing.

Lewis Parrish, CFO

Well, if you've got multiple water sources and you are out west, you've got a very valuable piece of property. We work to maintain that property by ensuring our growing ratios reflect the water needed for successful cultivation. Drought conditions particularly affect the value of land; thus, it’s critical to find ways to utilize the water resources available.

David Gladstone, CEO

The issue is complicated when you consider the competition for water resources. There are two rivers that funnel into certain areas, but much of that water is diverted for ecological purposes, which reduces the available water for farming. It’s essential to recognize that urban development is converting farmland into office buildings, schools, and parks, which utilize less water. Ultimately, we all face the same challenge of balancing water availability for farming and other needs. I believe we'll manage through this over the next 10 to 15 years, but one must also consider what the conditions might be in 20 years. Each year, there are unpredictable elements regarding drought conditions and water availability.

Craig Kucera, Analyst

I think we all have the same uncertainties. Thanks, Dave.

David Gladstone, CEO

Okay. Any further questions, Craig? No? Any other questions, Donna?

Operator, Operator

We do not, sir. At this point, I'd like to turn it back to you for closing comments.

David Gladstone, CEO

Okay. Thank you all for the questions. Hopefully, you are now up-to-date. If not, please check the 10-Q we just filed, which contains a lot of information. We know we provide ten times more information than anyone reads, but that's the government requirement. Have fun reading, and we will see you again next quarter. That concludes this call.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.