Earnings Call Transcript - LAND Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Land Corporation’s First Quarter Ended March 31, 2020 Earnings Call and Webcast Conference. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Mr. David Gladstone. Thank you, sir. Please go ahead.

David Gladstone, CEO

Okay. Thank you, Dexter. Nice introduction. This is David Gladstone and welcome to the quarterly conference call of Gladstone Land and thank you for calling in today. We always appreciate taking some time to talk to you and listen to the presentation that we have and hopefully we will have some good questions at the end. We always start with Michael LiCalsi. He is our General Counsel and Secretary. He is also the President of Gladstone Administration, which is the administrator for all the Gladstone funds. So, Michael, take it away.

Michael LiCalsi, General Counsel and President

Thanks, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-K, 10-Q and other documents that we file with the SEC. You can find all these on our website, specifically the Investor Relations page, or you can go to the SEC's website. And 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. In today’s discussion, 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 will 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 that we believe these are better indications of our operating performance and results and allow better comparability of our period-over-period performance. We ask everyone to take the opportunity to visit our website, once again, gladstonefarms.com, sign up for e-mail notification service, so that you can stay up-to-date on the company and everything that goes on. You can also find us on Facebook, keyword there is The Gladstone Companies, and we’re even on Twitter and the handle there is @glatstonecomps. Today's call is simply an overview of our results. So we ask that you review our press release and Form 10-K, both issued yesterday for more detailed information. Again, you can find them on the Investor Relations page of our website. And with that, I'll turn the presentation back over to David Gladstone.

David Gladstone, CEO

Okay, thank you, Michael. Much like last year, by the way, was a terrific year for acquisitions. 2020 has begun from an acquisition standpoint, just getting off to a slow start. However, we do have another strong quarter operationally and the team continues to have success with lease renewals and continues to renew leases on our existing farms at increased levels. We believe these increases in rental rates are indicative of the strong demand for the company's farms and are also signs of continued appreciation in the value that we're seeing in the farms that we own. Now, just to touch on the impact of the government closings that seem to be top of mind for everybody, in just a few words, the closings are not having a significant impact on our farmers and tenants. This is because about 90% to 95% of the produce grown on our farms is sold to grocery stores like Kroger, Safeway, Costco, and Walmart, similar outlets. Very little of the produce is being sold to the food servicing industry, including restaurants and institutions like schools, which is where the produce sales have been hurt the most. There's been no shortage of demand for produce and most other foods at the grocery store, as consumers have been forced to shift their spending on food from restaurants to almost exclusively grocery stores and related businesses. People are not eating less; they are buying food mostly from grocery stores. There's been a tremendous spike in the price of produce at grocery stores in the first several weeks of the closings, and our farmers were able to take a little bit advantage of that. While pricing has come down to a more normal level, I don't believe it's going to fall anymore. Regarding disruptions in supply chains, we're not hearing problems with delivery from our farmers. Most of the large farmers who sell to large grocery stores are fine. Companies like Walmart and Kroger have a lot of logistics control over shipping food to their stores. The supply of available trucks for produce and transportation remains steady in higher demand. In addition, most of our tenants have contracted for the sale of their produce with delivery contracts in place before the season begins. If this shutdown were to continue for another year or so, we might start seeing some disruption as some of the sellers from our other business pivot to grocery stores, but we don't see anything like this happening at this time. The only place where we have seen an impact on our business is in the acquisition of new farms. It's been significant; however, we've seen a slight slowdown in transactions. Market participants are just waiting for more certainty before committing to selling or entering into long-term contracts and leases. We're looking at several new farm acquisitions and I’ve signed off on a couple already; I'm sure we'll get the buying process rolling in the next several months. I think it's going to be strong. Looking at the total farmland ownership, we currently own about 88,000 acres on 113 farms in 10 different states. Based on either third-party appraisals or prices we paid for the new farms, our farms have an estimated total fair value of about $892 million and, more importantly than the number of states we’re in, our farms are located in 24 different growing regions, and the tenants operating these farms are growing about 50 different types of crops. The great news is that our farms continue to be 100% occupied and are leased to 70 different tenants, all of whom are unrelated to us. We do have some slow payers, one owes us one payment and they are about a month overdue on their late payment. That farmer processes mostly recent harvests that he hasn't been paid for, so he's a little bit behind because of that. We've been with this individual for over seven years, and their credit history with us is excellent. This is one we expect to cure soon, and while we get some farmers that bump along and pay a little slow, we're still doing very well in this area. We now own a good number of farms and they are in enough different regions with many farmers and many different types of crops so that there's sufficient diversification to provide safety for the cash flows coming in and thus the dividends we’re paying out to our shareholders. With regard to diversification, we're there. I always want to improve it, but at the same time, we’re looking to further enhance the diversification. As we move forward, I'm looking forward to entering some different states and some different growing areas. During the first quarter, the team acquired two new farms, which initially yielded us about $7.5 million with an initial cash yield of about 5.5%. The lease on these farms also contained certain provisions, such as annual escalations, that could push that figure even higher in future years as the escalations kick in. Just as a reminder, the yield figure accounts for operating expenses for which we are responsible under the respective leases. These leases are mostly triple net, so there shouldn't be too many expenses incurred by us. On the leasing front, during and after the quarter ending March 31, 2020, we either executed a new lease or extended and amended some existing leases on 11 of our properties. Now, two of these leases were changed from a single net structure, with us paying some property tax and repairs and a few other expenses, to a double net lease with only our responsibility being property taxes. Maybe next time the lease comes up, we can move that property tax over as well. After accounting for these changes in operating expenses, the new leases are expected to result in a total increase in annual net income of about $649,000, or an increase on that lease over the prior lease of about 13.5%. During the quarter, we terminated the lease on four farms and received a $3 million termination payment; the former tenant wanted to exit the farming business despite having a long-term lease, so they compensated us to cancel it. These farms were re-leased to a new unrelated third-party tenant with no downturn. Looking ahead, we have four more leases scheduled to expire in late 2020, I believe it's in the last month of 2020. These all expire in the fourth quarter and together make up less than 5% of our total annualized lease revenue. We are in negotiations with both the existing tenants and potential new tenants for these properties. We aren’t expecting any downturn on these farms. Recently – and this is an important one you should know because this is different from a lot of companies – we recently amended the agreement with our advisor to change how the management fee is calculated. Instead of calculating the fee based on the amount of common equity in the fund, it made more sense that the fee should be on the real estate assets owned by the fund. These assets are the responsibility of the advisor. So the board changed the fee formula to be calculated at one half of 1% annually based on the gross intangible real estate owned by the fund. The amount being paid under this new formula is about the same as the fee under the old formula. We think this is more in line with the fees and expenses of asset managers in the real estate field. This fee is based on historical cost of these assets and not their fair value. Therefore, as the farms increase in value, which nearly all of them have in the past, it will not result in an increased fee to the advisor. Now, let's talk about some capital raising because that’s important for the next year. Since January 1, 2020, we raised about $5 million in net proceeds through the sale of our aftermarket program. Additionally, during the quarter, we sold about $28 million through our non-traded series B preferred stock. This completes the offering we registered about 21 months ago, which resulted in a quick raise of about $133 million in proceeds, all of which we have put to work. Since we had success with the series B offering of preferred stock, we launched a new offering called our series C preferred stock. Returns on series C are almost identical to the series B aside from being a larger offering. Just as we did with the series B, we plan for the series C to be sold in small amounts over the course of the next several years, allowing us to find farms to buy as the proceeds come in. So far, we’ve only had a few small sales of series C because we didn't have selling agreements in place; I believe we have about 10 now, and we should have 50 before we start ramping up significantly. I want to remind everyone that the proceeds from selling shares under series B and now series C enable the company to pay certain commissions and fees to Gladstone Securities, which is an affiliated broker dealer. However, Gladstone Securities is merely a conduit for this offering, paying out about 94% of the fees to other third parties, including brokers and wholesalers assisting in selling the shares. The remainder of the fee retained by Gladstone Securities covers related selling expenses such as printing the prospectuses. Overall, these additional expenses are actually greater than the fees kept by Gladstone Securities. Selling non-traded stock is costly, but not significantly more than typical overnight public offerings. One reason we use preferred stock is to avoid dilution of the common stock. Dilution is not favorable. As you all know, I am the largest stockholder in common stock. Like most common stockholders, I share a dislike for dilution as I wish to maintain my equity position. Please also note that preferred stock is not included in calculating the fee paid by the adviser and has never resulted in additional fees paid by the advisor, nor will it going forward unless we leverage that capital to buy five farms with it. Well, that’s enough of the operations for now, so I’ll turn it over to our Chief Financial Officer, Lewis Parrish, to discuss the numbers.

Lewis Parrish, CFO

All right, thank you, David, and good morning everyone. I begin by going over the balance sheet. During the first quarter, our total assets increased by about $24 million primarily due to the proceeds from the equity issuances David mentioned earlier. From a financing perspective, in addition to these equity issuances, we also secured one new loan for about $8 million, which will carry a fixed interest rate of 2.66% for the next four years. From a leverage standpoint and on a fair value basis, our loan-to-value ratio on our total farmland holdings was about 51% at March 31. We're comfortable at this level, given the relatively low risk of high-quality farmland as an overall asset class. Over 99% of our volumes are currently at fixed rates, and our weighted average basis on these rates is fixed at 3.57% for another six years out. We believe we are currently well-protected on the debt side against any future interest rate volatility. With the weighted average maturity of these borrowings at over 10 years, we also feel protected against potential liquidity issues should a recession hit. Based on discussions we've had with our lenders, we do not expect a credit freeze in the near-term future. Currently, credit generally remains readily available to us at favorable terms. Regarding upcoming debt maturities, we have about $26 million coming due over the next 12 months. However, about $15 million of that represents the maturities of three bullet loans due towards the end of the year. The properties collateralizing these loans have increased in value by about $2.7 million since their respective acquisitions, so we do not foresee any problems refinancing these loans with either the same or potentially new lenders. Removing those maturities, we only have about $11 million of amortizing principal payments coming due over the next year, which amounts to about 2% of our total debt outstanding. Now I will move on to our operating results for the quarter. First, I'll note that we had net income of about $3.1 million and net income to common shareholders of about $934,000, or $0.045 per common share. On a quarter-over-quarter comparison, our adjusted FFO for the first quarter increased by about $1.9 million, or 53%. On a per share basis, AFFO increased by about $0.085 per share, up to $0.253 per share in the current quarter compared to $0.167 per share last quarter. Dividends declared were $0.134 per share in each quarter. The main drivers behind the increase in AFFO were early lease termination payments we received and interest patronage from our loans with Farm Credit, partially offset by increases in certain operating expenses. From a cash rent perspective, and excluding both participation rents and lease termination payments, rental income increased by about $443,000, or 4%, on a quarter-over-quarter basis, primarily due to additional revenue earned from recent acquisitions. Participation rates decreased quarter-over-quarter by about $1.4 million due to the timing of when such payments are due. We received an early lease termination payment of about $3 million from an outgoing tenant who leased four of our farms. After writing off certain balances related to the prior leases, we recognized additional net lease revenues of about $2.8 million from this transaction. We also received about $1.3 million of interest patronage, or refunded interest from various Farm Credit associations related to our loans with them. Overall, this patronage reduced the interest rates on our borrowings from them by about 98 basis points. On the expense side, our core operating expenses increased by about $773,000 on a quarter-over-quarter basis. This was primarily driven by an increase in certain related party fees. The incentive fee earned by our advisors during the current quarter increased by about $487,000, as our pre-incentive fee FFO surpassed the required hurdle rate by a larger margin than in the prior quarter. This increase was, of course, driven by the lease termination payment and interest patronage we received during the quarter. Additionally, our base management fee increased by about $153,000 due to the additional assets acquired during the previous quarter. Removing related party fees, our core operating expenses only increased by about $93,000 from the prior quarter; this increase was primarily due to additional costs associated with the upcoming annual shareholders meeting and slightly higher appraisal fees incurred during the current quarter. Notably, for the third consecutive quarter, our property operating expenses were relatively flat on a quarter-over-quarter basis. Now, let’s discuss net asset value. We had 30 farms revalued during the quarter; all of these via independent third-party appraisals. Overall, the values of these farms increased by about $6.6 million, or 2.2%, over their previous valuations approximately one year ago. As of March 31, our farms were valued at $892 million 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 all preferred stocks, our net asset value for common share at March 31 was $11.46, which is up by $0.05 from last quarter. The primary drivers of the increase were the appreciation in the value of certain farms largely offset by the net dilutive impact of equity issuances during the quarter and ongoing capital improvements on certain properties. Turning to liquidity, including availability on our lines of credit, we currently have over $50 million of dry powder, translating into over $140 million of buying power for cash acquisitions. However, we also have the ability and intent to issue new OP Units as consideration for acquisitions should the opportunity arise. Finally, with the added capacity on our MetLife facility through our recent amendment, we have ample availability under our largest borrowing facility and continue to be in discussions with potential new lenders for additional borrowings. We have plenty of room and the ability to continue borrowing and acquiring new farms that meet our investment criteria. Lastly, I’ll touch on our common distributions. We recently raised our common dividend again to $0.0447 per share per month. Over the past 21 quarters, we have raised our common dividend 18 times, amounting to an overall increase of 49% in our monthly common distributions during this time. Since 2013, we have paid 87 consecutive monthly dividends to common shareholders, totaling $4.58 per share in total distributions. Paying dividends to shareholders remains paramount to our business plan. Our goal is to continue increasing the dividend at a rate that outpaces inflation. At our current distribution run rate and with the stock price as it currently is, the yield on our stock is about 4%. Considering the relative stability and security of the underlying assets, we believe this stock offers a compelling investment alternative. And with that, I’ll turn the program back over to David.

David Gladstone, CEO

All right, thank you, Lewis. Our list of potential farms to buy remains very healthy, and we expect to be very active over the next couple of quarters. We should be able to continue reporting positive news to you, and I think we'll exceed $1 billion in assets this time next year. Just a few final points before we take questions: we believe investing in farmland and growing crops that contribute to a healthy lifestyle, such as fruits, vegetables, and nuts, aligns with the trends in current markets. Currently, about 85% of our total revenue comes from farms growing this kind of food, which you can find in either the produce or nut sections of your local grocery store. We consider these foods to be among the healthiest types, and we continue to see a growing trend toward organic among these foods. Over 45% of our fresh produce acreage is either organic or transitioning to organic, and about 10% of our permanent crops, which consists of nut-bearing trees, fall into this organic category. We believe the organic sector will continue to be a strong growth area. Furthermore, crops classified as GMO are grown on less than 5% of our farmland, and I believe that number will decrease to zero over time. Another major reason for our business strategy focus on farmland growing fresh produce is because of the effects of inflation in this particular segment. According to the Bureau of Labor Statistics, the overall annual food Consumer Price Index (CPI) typically keeps pace with inflation. However, over the past 40 years, the fresh fruits and vegetables segment of the food category has outpaced the total food CPI by a multiple of 1.6 times. For us, inflation is advantageous because our farmers earn more, enabling them to pay us higher rents. While prices for commodity crops like corn, wheat, and soybeans tend to be more volatile and susceptible to global supply and demand fluctuations, fresh produce is generally insulated from global volatility. This is mainly due to crops being consumed locally soon after harvest. I mention this because we're often confused with farmers growing corn or soy, but we are steering clear of those competitors, as it is a challenging landscape. Overall demand for prime farmland growing berries and vegetables remains stable to strong in virtually all areas where our farms are located, particularly along the West Coast, encompassing most of California, Oregon, and Washington, and the East Coast, especially Florida. Moreover, farmland continues to perform well compared to other asset classes. Despite some recent downturns, the NCREIF farmland index, which consists of about $11.7 billion worth of agricultural properties, including our own, has averaged an annual return of about 13.6% per year over the past 15 years. This outperformance compares favorably with the 10.5% for the S&P 500 and even lower performance figures for the overall REIT index. Throughout those 15 years, the farmland index has never recorded a negative year, which is unparalleled when compared to the S&P, which had three very negative years during that period. Farmland has consistently offered investors a safe haven during turbulent financial market times, as both land prices and food prices—especially for fresh produce—have steadily increased. Investing in stock in our company is a long-term investment in farmland. In many ways, it's akin to gold; farmland is a hard asset with intrinsic value derived from its limited availability and the ongoing urban development pressures it faces. Unlike gold and other alternative assets, farmland represents an active investment with cash flows to investors. We believe farmland is a better option than bond funds, as we keep increasing the dividend rather than offering just a flat dividend indefinitely. We expect inflation, especially in the food sector, to rise, contributing to the appreciation of underlying farmland values. Furthermore, this expectation is reinforced by a trend towards healthier food choices among consumers in the U.S. I believe it’s key to position our farmland strategy as a hedge against inflation, especially in light of current government spending. I think this is a great opportunity—it's a great stock to hold as we continue to scale our asset size. I am very hopeful that we'll be listed on the RMZ index for REITs, which will foster increased institutional ownership and improve the daily liquidity of our stock. However, Gladstone Land is only as good as the team managing it. While buying and leasing farmland might sound simple, it's quite complex. If you support what we're doing, please consider purchasing our stocks and continue enjoying fresh fruits and vegetables. Now let's entertain some questions. If our operator will come on, we’ll proceed to questions from those of you listening in. Dexter, are you out there?

Operator, Operator

Yes, Mr. Gladstone. Thank you for that.

David Gladstone, CEO

Any questions?

Operator, Operator

Thank you for your attention. We are now open to questions from our listeners. Dexter, are you there?

David Gladstone, CEO

I guess we aren't going to have any questions this time. We just produce so much income and dividends that people are just happy and don't need to ask any questions. So thank you all for calling in. Dexter, I think we'll close it up. Thank you. That's the end of this call.

Operator, Operator

You're welcome, Mr. Gladstone. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.