Earnings Call Transcript - LAND Q3 2020

Operator, Operator

Greetings and welcome to the Gladstone Land Corporation Earnings Call for the Quarter ended September 30, 2020. 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. Thank you, sir. Please go ahead.

David Gladstone, CEO

Well, thank you, Donna. Nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land. And I want to thank you all for calling in today. We appreciate you taking the time to listen to our presentation. Let's start with Michael LiCalsi, he’s the General Counsel and Secretary. He is also the President of Gladstone Administration, which is the administrator for all of the Gladstone funds including this one. Michael, it's your turn.

Michael LiCalsi, General Counsel and Secretary

Thanks, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933, 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 and 10-K and other documents we filed with the SEC. You can find them all on our website, www.gladstonefarms.com, specifically the Investor’s page, or on the SEC's website at www.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. And today, we’ll discuss FFO, which is funds from operations, 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'll 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. Now, please take the opportunity to visit our website once again, gladstonefarms.com, and sign up for our email notification service so you can stay up-to-date on everything involving the company. You can also find us on Facebook with the keyword The Gladstone Companies, and we even have our own Twitter handle, and that’s @gladstonecomps. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, you can find them on the Investor’s page on our website. With that, I'll turn the presentation back over to David.

David Gladstone, CEO

Okay. Thanks, Michael. Acquisition activity has picked up for us recently, and we acquired about $75 million in new farms over the past two months or so. We're continuing to see significantly more opportunities than we've seen in quite a while. We began getting information on some of our farms regarding crop yields and pricing, which allows us to record approximately $1.1 million in participation rents during this quarter. That puts us about $1.2 million in participation rents for the year through the third quarter. We're currently expecting total participation rent for the year to be similar to what we had last year, at about $2.3 million. We're hopeful to be able to report an increase in participation rents for the next year, 2021, as we have a few more farms that are scheduled to pay participation rents in 2021. Overall, the operations of the farms remain strong. Our team continues to have success in leasing our existing farms at increased rental rates. I think these increases in rental rates are indicative of continued strong demand for what we're seeing from our farms and all the products that are grown on those farms. Regarding the government closings from COVID-19, the demand for products grown on most of our farms remains high. These are products like berries, vegetables, and nuts. I think that's because the vast majority of the crops grown by the farmers we lease to are sold in grocery stores like Kroger, Safeway, Costco, Walmart, and similar outlets. Very little of our produce is sold to the food service industry, including restaurants and institutions like schools, which is where produce sales have been hurt the most due to COVID-19. Demand for produce and many other foods in grocery stores remains high, above 2019 levels. We expect this trend to continue for at least the rest of the year and into 2021. Our farmers are still not seeing a significant impact from the government shutdowns on their operations; supply chains are still intact and running smoothly, and pricing remains very favorable for most of their crops. We granted a short-term deferral to two farmers back in July, and those payments have all been made and collected in full. Right now, all of our tenants are current on their rental payments, except one tenant who owes us about $43,000. But that's unrelated to COVID; he just laid down his rent a few weeks ago, but we expect to resolve the situation in the fourth quarter. Please keep in mind that trees and plants on our farms don’t know there's a pandemic. As long as plants get sunshine and water, they'll continue producing fruits and vegetables. So that side of the business is strong. Moving on to farmland ownership, we currently own about 94,000 acres, 127 farms, valued at just over $1 billion. We're really excited to have passed the $1 billion mark. Just a few years back, we did our public offering and raised $50 million, and here we are with $1 billion in farmland now. Our farms are located in 13 states across 26 different growing regions. The most important aspect is that they are in 26 different growing regions. Our farms continue to be 100% occupied, leased to 275 different tenants, all of whom are unrelated to us. The tenants operating these farms are growing about 50 different types of crops, showcasing a lot of diversification. Given that we own a good number of farms and operate in several different growing regions with various farmers and crop types, we believe there is sufficient diversification to provide safety and security for the cash flows coming from our rents. This helps protect the dividends we pay to our shareholders. There are no guarantees in life, but we certainly are strong right now. During the third quarter, the team acquired eight farms for $39 million, and we acquired an additional four farms for about $36 million subsequent to the quarter-end. Overall, the net cash yield to us on these investments is about 5.2%. In addition, all of these leases on the farms contain certain provisions such as participation rents and annual escalations that should push that figure higher in the future. Just as a reminder, the yield figure does account for operating expenses that we're responsible for under the respective leases. Most of these leases are triple net, so there shouldn't be many expenses incurred by our company. On the leasing front, during the third quarter, we executed new leases or extended additional leases for four of our properties located in California and Florida. In total, the new leases are expected to result in a total increase in annual net income of about $118,000 on those four, representing an 11% increase over the prior leases that we had. Looking ahead, we have two more leases scheduled to expire at the end of 2020 and one more expiring towards the end of Q1 in 2021. These leases comprise less than 4% of our total annualized lease revenue. So we're in very good shape regarding our leases coming due. We're in discussions with the existing tenants on these farms and some potential new tenants, and we do not expect any downtime on these farms. Overall, we currently expect new leases on these renewals to be pretty neutral from where they are today, maybe up a little bit. Finally, just a quick note to let everyone know that none of our farms suffered any significant damage from the recent wildfires in California and Colorado, or from any of the hurricanes on the East Coast. As some of you know, we have some very large organic potato farms in Colorado, and they are located in the flats, not near trees that might be burned. That’s enough on operations, so I’ll turn it over to our CFO, Lewis Parrish. He’s going to discuss the numbers.

Lewis Parrish, CFO

Hi. Thank you, David, and good morning, everyone. I'm going to go over our balance sheet. During the third quarter, our total assets increased by about $22 million. This was primarily due to new farm acquisitions. From a financing perspective, subsequent to the third quarter, we secured about $45 million of new long-term borrowings at a weighted average rate of 2.59%, which is fixed for the next eight years. On the equity side, we raised about $8 million in net proceeds through sales of our common stock under the ATM program, with an average issuance price of $16.13 per share. Last month, we completed a follow-on offering of common stock in which we raised about $26 million in net proceeds at a public offering price of $14.40 per share. These proceeds were needed to help fund new acquisitions that we're hopeful of closing on in the coming months. All of these potential new acquisitions are expected to be accretive to AFFO in year one. We also raised about $11 million in net proceeds from sales of the Series C Preferred Stock. Similar to the Series B Preferred Stock, which we recently listed on NASDAQ under the ticker LANDO, our plan with the Series C Preferred Stock is to sell in small amounts over the course of the next several years to better fund new farms to buy as the proceeds come in. As a reminder, in the process of selling the Series B and now the Series C Preferred Stock, we pay certain commissions and fees to Gladstone Securities, an affiliated broker-dealer of ours. However, Gladstone Securities is just a conduit in these offerings, as it pays out about 94% of these fees to other third parties, including brokers and wholesalers who help sell the shares. The rest of the fees kept by Gladstone Securities cover various other expenses related to selling the stock. Please note that the preferred stock is not included in the calculation of the fees paid to the advisor and has never resulted in additional fees being paid to the advisor. Moving on to our operating results for the quarter. First, I'll note that we had a net income of about $1.6 million, and a net loss for common shareholders of about $837,000, or $3.7 per common share. Adjusted FFO for the third quarter was approximately $3.1 million, compared to $2.2 million in the second quarter. AFFO per share was $0.143 in the third quarter versus $0.101 in the prior quarter. Dividends declared were $0.134 per share in each quarter. We had a sizable increase in adjusted FFO, primarily due to the $1.1 million of participation rents recorded during the quarter versus only $44,000 in the previous quarter. Quarter-over-quarter base cash rents increased by approximately $461,000 or 4%, primarily due to additional rent earned on recent acquisitions. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses increased by about $584,000 on a quarter-over-quarter basis. This was primarily due to incentive fees earned by our advisor in the current quarter of $821,000 versus none earned in the prior quarter. When removing related party fees, our core operating expenses actually decreased by about $256,000 or 28%. The main driver behind this was a decrease in our property operating expenses, as we had fewer repair and maintenance costs on certain properties, as well as decreases in property-level legal fees and annual state filing fees. Moving on to net asset value. We had 28 farms valued during the quarter, all via third-party appraisals. Overall, these farms increased in value by about $20 million or 6% over their prior valuations from a year ago. $8 million of this increase came on farms where we completed about $5 million worth of certain capital improvements, while the remaining $12 million of appreciation came from organic appreciation in value, particularly true for certain of our farms in California and Florida. As of September 30, our farms were valued at about $971 million, all of which is valued based on either third-party appraisals or the actual purchase prices. Based on these updated valuations and including the fair value of our debt and our preferred stock, our net asset value for common shares as of September 30 was $11.97, which is up by $0.91 or 8% from last quarter. The main driver of the increase was the appreciation in property values. Turning to our capital makeup and overall liquidity, from a leverage standpoint, our loan-to-value ratio on our total farmland holdings based on fair value and net of cash was about 52% as of September 30. We're comfortable at this level, given the relative low risk of high-quality farmland as an overall asset class. Additionally, over 99% of our borrowings are currently at fixed rates, and on a weighted average basis, these rates are fixed at 3.46% for another six years out. We believe we are well protected on the debt side against any future interest rate volatility. With the weighted average maturity of these borrowings being ten years out, we also feel that we're protected against any potential liquidity issues should the current economic uncertainty continue for a prolonged period. Regarding upcoming debt maturities, we have about $33 million coming due over the next 12 months. However, about $21 million of that represents maturities of four bullet loans coming due before properties collateralizing these loans have increased in value by total of $3 million since their respective acquisitions. Thus, we do not foresee any problems refinancing any of these loans. Moving away from these maturities, we only have about $12 million of amortizing principal payments due over the next 12 months, about 2% of our total debt outstanding. From a liquidity standpoint, including availability in our lines of credit, we currently have over $50 million of dry powder. We have ample availability under our largest borrowing facility, and we are currently in discussions with other lenders for new borrowings and potentially new credit facilities. We don't foresee a credit freeze on ag lending in the near future, as borrowings continue to be readily available to us on very favorable terms. Finally, I'll touch on our common distributions. We recently raised our common dividend again to $4.49 per share per month. Over the past 23 quarters, we have raised our common dividend 20 times, resulting in an overall increase of 49.7% in our monthly common distributions over this time. Since 2013, we've paid out 93 consecutive monthly dividends to common shareholders, totaling $4.80 per share in total distributions. And of course, this is on top of dividends paid to shareholders of our preferred securities. Paying dividends to our shareholders is paramount to our business plan, and our goal continues to be to increase the common dividend at a rate that outpaces inflation. We're not quite there yet, but we believe we're heading in the right direction. With our current distribution run rate and the price of our common stock today, the yield on our stock is about 3.9%. Considering the relative stability and security of the underlying assets and the related cash flows, we believe this stock offers a compelling investment alternative. And with that, I'll turn the program back over to David.

David Gladstone, CEO

Okay. Thank you, Lewis. Nice report. Acquisition activity is picking up as I mentioned at the beginning, but certain aspects of our due diligence process are taking longer than normal, due to various travel restrictions and office closures. For example, it's taking longer to determine if a title is clean or if there's a lien on the property, getting a survey or out to survey the property; we almost always do that, as well as getting appraisers to go out and do their duty. We need the appraisals done in order to justify what we're paying, as well as securing loans from the banks on these properties. We're seeing a good amount of buying opportunities coming our way; it’s just taking a little bit longer than normal to get through the due diligence items required to ensure we have the right deal. Just a few final points I'll make: We believe investing in farmland growing crops that contribute to a healthy lifestyle, such as fruits, vegetables, and nuts, follows the trend we see in the market today. Currently, about 85% of our revenue comes from farms that grow the type of foods you can find in the produce and nuts section of your local grocery store. We consider these foods to be among the healthiest categories. We continue to see a growing trend toward organic among these foods; about 40% of our fresh produce acreage is either organic or transitioning to become organic, and about 10% of our permanent crops fall into the organic category. We're believers in organic and want to continue this strong growth area. Furthermore, over 95% of our crops on our farmland are classified as non-GMO, and we're taking steps toward ESG compliance for both our operations as well as those of our tenant farmers. Another major reason why our business strategy focuses on farmland growing fresh produce is due to the effect of inflation on this segment. According to the Bureau of Labor Statistics, the overall annual food CPI generally keeps pace with inflation, but over the past 40 years, fresh fruits and vegetables have outpaced the total CPI by a multiple of 1.6 times. This is why many financial advisors tell their clients to invest in farmland; it acts as a hedge against inflation. Our prices of commodity grain crops such as corn and wheat are typically more volatile and susceptible to global supply and demand. In contrast, fresh produce is mostly insulated from global volatility, as these crops are generally consumed in the USA within a short period of being harvested. I'm mentioning this because we're often confused with owning farms where farmers grow corn, soy, and wheat. We're mostly staying clear of these crops because they have to compete with countries like Brazil or Ukraine, where the cost of production, even after accounting for shipping costs, is very low. Those farmers can undercut the price of grain farmers in the United States. That has been happening for many years and has resulted in considerable pressure on Midwest farmers, leading to a significant number of bankruptcies. 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 California, Oregon, and Washington, and the East Coast, especially Florida. Our farmers are not growing marijuana or tobacco; they are growing fruits and vegetables. This keeps our company in good condition. Please remember that purchasing stock in this company is a long-term investment. I think an investment in our stock has two parts. First, it's similar to gold; as a hard asset, farmland of course has intrinsic value because there's a limited amount of good farmland, especially being used up by urban development, particularly in California and Florida, where we have many farms. Second, unlike gold and other alternative assets, it’s an active investment with cash flow to investors. We believe it's better than a bond fund because we continue to increase the dividend. This keeps us ahead of inflation. We expect inflation, particularly in the food sector to grow, and we expect values of the underlying farmland to increase as farmers can charge more for their produce and nuts. We believe this is particularly true for fresh produce, as the trend of people eating healthy foods continues. Gladstone Land wouldn’t be anything without the people operating and managing it. Buying and leasing farmland is a complex business—it’s not something you can just go to the stock market and buy shares of, except ours, of course. We're entering a time to designate some of the team members for future leadership. We've appointed two members of the team to Executive Vice President, as announced in the press release, Bill Frisbie and Bill Reiman, in combination with our Chief Financial Officer, Lewis Parrish, and our President of Administration, Michael LiCalsi. These are the key people right now, and I'm sure there will be others as time goes on. They’re all working together as members of the leading team to ensure continued success and long-term growth for our shareholders. And I want you to know that I'm not going anywhere. We have a deep bench of talented people on our team, as well as many individuals in other parts of the company. I’ll stop here and have the operator come on to tell everyone how they can ask questions.

Operator, Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Craig Kucera of Wunderlich Securities. Please go ahead.

Craig Kucera, Analyst

Yes. Hi, good morning, guys. David, I wanted to circle back with you on your commentary regarding deal flow. You mentioned that you're seeing a lot more deals than you have in a while. Is that outside of what you discussed in your recent equity offering or is that just inclusive of that?

David Gladstone, CEO

I think it's inclusive. We picked up, primarily, a number of people who own farms deciding it's time to sell, as they no longer want to farm. This gives us an opportunity that should prove successful for this year as well. As you know, we had a strong year last year, and I think this year will be good too. We could probably close $100 million to $120 million before the end of the year; that would be aggressive, but I'm hopeful we can get all of that done. It’s really hard to get some of these appraisers up to the farm. We have to go see all the farms; people have to get on airplanes, which has become a hassle. So overall, I think we will perform well, Craig. That's where we are today.

Craig Kucera, Analyst

Do you have a sense of why or if there's anything in particular that could push some of these deals over the finish line? I feel like in the past, you've mentioned that some of these transactions take upwards of 10 years to come together.

David Gladstone, CEO

Craig, there was one farm I worked on for quite some time before we finally closed the deal, but Bill Reimann also played a role and closed the deal later. It usually takes about six months to negotiate a farm deal and get everything in place. As I mentioned, we have a very long list of farms in the queue, and we’ve worked on many of them. We have purchase agreements in place and are now going through our due diligence. As I mentioned, that process can slow down. Banks won’t give you a commitment until they have the signed lease in hand, and many of them are working from home, which affects timelines. I think we’re going to perform well this year, and next year should be another great year.

Craig Kucera, Analyst

Got it. And one more for me. I appreciated the color on the decline in operating expenses year-over-year and sequentially. As we think forward, what do you expect for operating expenses, given it was notably below $300,000 this quarter?

David Gladstone, CEO

I’d say we would expect somewhere in between last quarter's number and this quarter's number. This quarter was lower than we typically expect due to repairs and maintenance costs. Outside of some reimbursable expenses we classify as tenant recovery revenue—this was about $225,000—but the largest decrease was in repairs and maintenance, which was close to $100,000 down from last quarter. Any time we could have a motor go down or need irrigation repairs, it’s challenging to predict these expenses. I would say we expect to fall somewhere between the last two quarters. Okay. Next question?

Operator, Operator

Mr. Gladstone, we’re not seeing any further questions in the queue. Do you have any closing comments today?

David Gladstone, CEO

No, Donna. I think everything is doing well, and we don’t want to comment further and potentially jinx things. Everything is great right now, and we look forward to a successful quarter ending December 31. With that, we’ll say goodbye to all of you until next quarter.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and have a wonderful day.