Earnings Call Transcript - LAND Q2 2022

Operator, Operator

Greetings, and welcome to the Gladstone Land Second Quarter Earnings and Webcast Conference Call. At this time, all participants are in a listen-only mode. A brief 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, David Gladstone, Chief Executive Officer and President. Thank you, sir. You may begin.

David Gladstone, CEO

Thank you, Latonia, for that nice introduction. This is David Gladstone, and welcome to the quarter, the conference call for Gladstone Land. Thank you all for calling in today. We appreciate you taking time on your busy day to listen to our presentation. We always start out with Michael LiCalsi. He's our General Counsel and Secretary. He's also president of the administration side of the business. Michael?

Michael LiCalsi, General Counsel

Thanks, David. Good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our forms 10-K and 10-Q that we file with the SEC. You can find them on the investors page of our website at gladstoneland.com. You’d also find them on the SEC's website at sec.gov. 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 is generally 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. Please take the opportunity to visit our website, once again gladstoneland.com, to sign up for our email notification service, so you can stay up-to-date on the company. You can also find us on Facebook, keyword there is, The Gladstone Companies, and on Twitter is @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, go to the investors page of our website to find them there. Now, with that, I’ll turn the presentation back to David Gladstone.

David Gladstone, CEO

Okay. Thank you, Michael. We'll start with a brief note as I do each time. We currently own over 115,000 acres of farmland in the United States and 169 farms. In addition to that, as some of you will remember, we have 45,000 acre-feet of banked water; an acre-foot is equal to 325,861 gallons of water. So that pencils out to about 14.6 million gallons of water that we have stored in the ground. Together, those two are valued at over $1.5 billion at this quarter end, which includes both the land and the water. Our farms are in 15 different states and more importantly, they're in 29 different farming areas. Farms continue to be 100% occupied and leased to 90 different tenant farmers, all of whom are unrelated to us. The tenants on these farms are growing over 60 different crops, mostly those that fit into fruits, vegetables, and nuts. Given the number of different growing regions, tenants, and types of crops on these farms, we think we are sufficiently diversified to provide safety and security for the cash flows coming from the rents. We believe that diversification helps us protect the dividends that we pay to our shareholders. As we mentioned last quarter and continue to do it this quarter, we are much more selective in the type of farms that we're looking to buy. In light of the uncertainties in the economy, we believe now is a good time to be more conservative with our capital. The team purchased five farms for about $60 million this year; from an operating standpoint, it was the strongest quarter we've had in a while. We don't generally have much in the way of interest patronage from our banks or participation rents during the second quarter of every year. So this is a pretty straightforward quarter for FFO and AFFO per share basis, and it is one of our strongest second quarters in several years. We continue to be able to renew all the expiring leases without incurring any downtime on any of the farms, and for farms in our primary regions along both coasts in the United States, both California and Florida, we continue to execute renewals at higher rental rates. Overall, operations on our farms remain strong and the demand for products grown on almost all of our farms remains high. These are products like berries, vegetables, and nuts, and prices for many of these, like many other types of foods, continue to increase. The latest headline inflation number of 9.1% shocked us all, obviously, it's the highest in nearly 43 years. In the category, which is called Food At Home, that category was up 12.2%. I'm sure those of you who shop at grocery stores can echo that this category is where all of us are shocked. This category where the crops are grown on our farms falls into the most of our crops sold in grocery stores and includes a lot of small grocery stores as well as the big ones. Farmers are adjusting for the changes in our economy, as many of their input costs are increasing. First of all, the banks have increased the interest rates on all these lines of credit that farmers have, which they draw down when it's time to plant their crops, and they also draw down additional funding from the banks for harvesting costs. There are all kinds of things they do during the year that they need extra money before they start harvesting. Farmers are also paying much more for fertilizer; it's just outrageous in price. In some places, what you paid last year is now costing you 3x what you paid last year in fertilizer. Fertilizer obviously brings in more crops, but at some price, it's prohibitive. Gas prices are also extremely high, especially out west, and our growers need gas in order to run their trucks, tractors, and harvesting equipment. Water costs have increased, especially in the West, but our farms seem to be okay today. Farmers have passed on many of the increased costs to the food sellers like grocery stores, and every family is feeling this extra cost that drives through the economy. So, we've slowed the purchases of farms due to worries that inflation will reduce many farmers' ability to pay rent. Currently, we have two farmers who are slow on their rent payments, which is below 3% of our rents; one of them tells us that the payment is on the way. Of course, that seems to be the answer for a lot of farmers when they get a little behind. It's just slightly behind; the seller sells almonds outside the United States. About half of the almonds that are grown in the United States are sold outside the United States, so that's the closest thing we have to being independent of the nations. We have one farmer that was in a catastrophic accident, so his son is working the farm now, but it's coming along, and I think will be paid soon enough. In the meantime, we're looking for ways to adjust our overall cost of capital to better match the changes that we're seeing in the farmland acquisition market. Our issue is that our preferred stock and our borrowings have both become expensive for current farmland prices and rents. We have lines of credit; we're not using them. We've left them all follow, and there is no reason for us to draw down money and put it to work if we can't find ways to make a profit on those investments. We're currently discussing internally a strategy for better managing our cost of capital. If we make some big changes, we'll be back to you on that. During the second quarter, our team acquired one farm in California for about $25 million. In addition, right after the quarter end, we acquired four more farms in Washington State and Oregon, paying about $37 million for those. Overall, the initial cash yields to us on these investments are about 6%, and in addition, all the leases on these farms contain certain provisions such as participation rents or annual escalations that should push that figure higher as we move forward. On the leasing front, since the beginning of the second quarter, we renewed two leases, which in total are expected to result in an increase in annual rent and operating income for us, about $179,000 based on the prior leases that we had on the property. Looking ahead, we only have one lease scheduled to expire in the next six months, and it makes up less than 1% of our total annualized lease revenue. So, we're in discussions with potential tenants for this farm, and we aren't currently expecting any downtime on that. A couple of other items that you always ask about, we continue to monitor the ongoing drought in the West. They had a very nice winter out there, but that is about the last of it; every now and then they get a little bit of rain. It's very, very dry since then. All of our properties in California continue to be in a position where the farmer has enough water to complete the current crop year. We never know what next year will look like, but water remains a premium out west. When I look at the valuations of our farms as performed by independent appraisals, we continue to see a steady increase in the value of the land. The appraisal values aren't moving very fast, though, and as quickly as I would like them to pick up with the current prices we're seeing. The problem is that most of the appraisers rely on past transactions; they don't do much with current events, so their values are sometimes lagging quite a bit. Regarding the progress of our ESG policy, we continue to work on that, developing formal prices, policies, and related disclosures. We consider the relevant factors to tell our story. Just so you know, several of our farms have solar arrays on them that are used to power operations on the farm. We recently reached an agreement with a group that looked at one of our farms and wants to put both wind and solar energy facilities on the farm. We always want to be careful that we enter into agreements that aren’t going to disturb our tenants. Maybe a small disturbance is acceptable, but tenants currently on our farm are our primary business partners, not the companies looking to put solar arrays on the property. So, we're working on that, and trying to make sure that we gather more information there. There are many entities attempting to aggregate these resources, so we get bombarded with letters and phone calls. As mentioned on previous calls, we sometimes come across farmland owners who want to sell both their farmland and the operation as a package deal. As a real estate investment trust, Gladstone Land is limited in its ability to own operating companies because the operations generate income that is very limited in a real estate investment trust. While I'll stop here, as that's enough on operations, now I'll turn it over to our CFO, Lewis Parrish, to talk to you more about the numbers.

Lewis Parrish, CFO

Thank you, David, and good morning, everyone. I'll begin by briefly mentioning our financing activity. During the quarter, we received about $5 million in loan proceeds. These proceeds are expected to bear interest at an effective rate of 2.89%, which is fixed for the next five years. On the equity side, since the beginning of the second quarter, we've raised about $70 million of net proceeds from sales of the Series C preferred stock. Moving on to our operating results. First, I'll note that for the second quarter, we had net income of about $613,000 and a net loss to common shareholders of $3.9 million or $0.112 per common share. On a quarter-over-quarter basis, adjusted FFO for the second quarter was approximately $4.5 million compared to $6.4 million in the first quarter. AFFO per share was $0.129 in the second quarter versus $0.185 in the first quarter. Dividends declared per share were about $0.136 in both quarters. The primary driver behind the decrease in AFFO was about $2.8 million of interest patronage or refunded interest recorded during the first quarter related to our loans from farm credit. That was partially offset by a $1.1 million incentive fee earned by our adviser in the prior quarter versus none in the second quarter. Fixed base cash rents increased by about $320,000 or 2%, primarily driven by additional revenues earned from recent lease amendments and renewals. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, core operating expenses decreased by about $1 million on a quarter-over-quarter basis. Most of this decrease was driven by a reduction in related party fees due to the incentive fee earned during the first quarter, while G&A expenses increased by about $77,000, mainly related to the annual shareholders' meeting. Other related party fees and property operating expenses remained relatively flat on a quarter-over-quarter basis. Moving on to net asset value, we had 61 farms revalued during the quarter, all via third-party appraisals. Overall, the values of these farms remained relatively flat from their previous valuations about a year ago, increasing by about $500,000. As of June 30th, our portfolio was valued at just over $1.5 billion, all of which was supported by either third-party appraisals or the purchase prices. Based on these updated valuations and also including the fair value of our debt and all preferred stock, our net asset value per common share at June 30th was $15.60, which is up by $0.06 from last quarter. The primary driver of this increase was the impact of increases in market interest rates on the fair value of our fixed long-term borrowings, which was partially offset by the impact of preferred equity issuances and ongoing capital improvement projects on certain farms that have not yet been revalued. Turning to our capital makeup and overall liquidity; from a leverage standpoint with respect to our borrowings, our loan-to-value ratio on our total farmland holdings on a fair value basis, net of cash, was 38% at June 30. Over 99% of our borrowings are currently at fixed rates, and on a weighted average basis, these rates are fixed at 3.26% for another five-plus years. With regards to our current debt load, we've fortunately been pretty well protected against the recent interest rate hikes and should be for the near future. Regarding upcoming debt maturities, we have about $55 million coming due over the next 12 months; however, about $31 million of that represents various loan maturities, and the properties collateralizing these loans have increased in value by a total of $12 million since their respective acquisitions. Thus, we do not foresee any problems refinancing any of these loans, if we choose to do so. Moving on from those maturities, we only have about $24 million of amortizing principal payments coming due over the next 12 months. From a liquidity standpoint, including availability on our lines of credit and other undrawn notes, we currently have about $135 million of dry powder, in addition to $129 million of unpledged profits. Lastly, I'll touch on our common distributions. We recently raised our common dividend again to $0.456 per share per month. Over the past 30 quarters, we have increased our common dividend 27 times, resulting in an overall increase of more than 52% over this time. Farmland continues to be a stable asset class and performs well amidst all the uncertainty and volatility currently in the markets. We continue to believe this stock offers a compelling investment alternative, especially in light of today's inflationary recessionary concerns. With that, I'll turn the program back over to David.

David Gladstone, CEO

All right. Thank you, Lewis. Nice presentation. As I mentioned before, we're still actively seeking new farms to buy. However, we are being much more cautious in the acquisition front these days. We have some offer letters out to a few sellers and will try to continue moving forward with those but perhaps it's a good time to take things slow. Just a few final points I'd like to make: we believe investing in farmland and growing crops that contribute to a healthy lifestyle such as fruits, vegetables, and nuts aligns with the trends that we're seeing in the marketplace today. Overall demand for prime farmland for growing berries and vegetables remains stable to strong in almost all the areas where we farm, particularly including places like California, Oregon, the State of Washington, and the East Coast, especially Florida. Farmland continues to perform well compared to other asset classes. The NCREIF Farmland Index, which has about $14.6 billion worth of agricultural properties, including all of those that we've listed with them, as well as others in the business have been averaging about a 12.6% overall return over the last 20 years with no negative years. As you may know, some of the indices have gone negative during that time, while the Farmland Index has not. Please remember that purchasing stock in this company is a long-term investment in farmland. Investing in stock such as ours has two parts. Firstly, it's similar to hard assets like gold; after all, farmland is mostly just dirt, and there's an intrinsic value in that because there is a limited amount of good farmland, and it's being used up by developments of houses and other properties in California and Florida, where we have many of our farms. Unlike gold and most alternative assets, it's an active investment where cash flows come into investors, which we believe is better than a bond fund, given that we keep raising dividends as more money comes in. We expect inflation, particularly in the food sector, to continue to increase, leading to higher values in the underlying farmland. As we anticipated, this is especially true in the fresh produce food sector. The trend is that more people are consuming healthy foods and we continue to grow those healthy foods. Now, we will have some questions from those who follow us. So, operator, if you'll come on and provide instructions on how people can ask us questions, we'd appreciate it.

Operator, Operator

Thank you. We will now conduct a question-and-answer session. Our first question comes from Rob Stevenson with Janney. Please proceed.

Rob Stevenson, Analyst

Hey, guys. David, where is pricing for farms that you're interested in today versus what it would have been for the same farm last year or two years ago?

David Gladstone, CEO

It's up at least 20% from what it was a year ago, so it's continuing to go up. Unfortunately, most of the farmers from whom we bought in the past who wanted to raise money don’t need to raise as much now, as they’re not interested in expanding until they can see which way inflation as well as prices are going to go. Thus, the marketplace is a bit stagnant today, but it is up at least 20%. And as you know, we don't engage much in the corn, wheat, and rice sectors, and those farmlands have gone up at least 20%. Looking at what's happening in Iowa, which is easily the best dirt for farming in the world, that’s where we are, Rob.

Rob Stevenson, Analyst

Pricing has increased by 20%. It’s challenging to analyze the situation because unlike apartments or offices, there isn’t consistent volume data available. However, regarding the availability of farms, have you noticed a decrease in the amount or volume of farms coming to market? With prices rising, are farmers holding onto their assets more than they did in the past? Is there less trading occurring or are farmers generally less willing to sell right now? How would you describe the availability of assets when price is not considered?

David Gladstone, CEO

Well, if you look at our business, it differs from the business that most people are in when they're in farming. They're in fleet and all the seeds areas. We're not in that business. That one really has taken off. You've probably seen that the amount of wheat and corn is down dramatically in the marketplace, and therefore, prices have skyrocketed. The fortunate farmers farming those products now have money and are spending on all kinds of things; manufacturers of farming equipment are indeed having really good years. But the bottom line is the products that we deal in don't typically become available often. So we’re talking with farmers; you have to go to Iowa, where there's usually a farm or an auction happening for farmland. If you're situated in California or Florida, there's not that much on the auction front. I remember only one auction in the last 20 years. It's a relatively dominant marketplace for those before selling. So we circulate among the farmers, and for those who have been in the industry for decades, we have a positive reputation, as we've had in-depth discussions with them. However, what you'll see in our particular marketplace is that farmers are saying to themselves, 'I can get more for my blueberries or strawberries, as prices continue to increase.' So they are waiting to see how high it will go before considering selling. We've encountered instances where we've seen farms in California that sold for over $1,000 an acre, while some of our valuations are topped at $70,000 to $80,000 an acre in that area. You can observe the discrepancy there. It’s a fascinating market today since you can't readily gauge the sentiments of those who are considering selling. Our best opportunities emerge when a farmer reaches out and says, 'Next door is selling his farm, but I don't have the funds; would you buy it and let me rent it?' So, that is where we heavily concentrate on communicating with farmers. As you know, we have a full staff in California and a strong presence in Florida, which assists our engagement with many individuals in the field. But I cannot provide you with specific information on what farmland would go for today, but we are making purchases. We spent $37 million in recent times to acquire farms in Washington State and Oregon. So, we’re on the lookout, and if a farm comes to market, we become concerned that it might be beyond us to buy it. That's the best summary I can give you on what to anticipate the rest of the year.

Rob Stevenson, Analyst

Okay. And then given your comments about being more cautious today with acquisitions, are there certain crops or geographies that you were happy to buy last year or even in 2020 that you probably wouldn't be as interested in today?

David Gladstone, CEO

No. Every crop has its own statistics. As long as it falls within those parameters and we can grow and sell it, we’re interested. So, there is nothing that we've completely ruled out. We are leaning towards some specific crops, especially nuts. While there’s good profitability, we don’t want to be overly focused on the nut business. Ultimately, each deal must be analyzed based on its unique characteristics. We have a good team that can handle these evaluations. However, there’s nothing currently off the table, with the exception of my disinterest in Texas or certain grain crop areas; we don’t engage in grain farming.

Rob Stevenson, Analyst

Okay. And then the last one for me. You guys have discussed in the past, and in business updates about adding wind turbines and solar panels to properties. Are those generally going on undevelopable land? Is this in place of crops? How should we be thinking about how that fits in? Are these on the roofs of barns? How should we approach these wind turbine or solar panel installations?

David Gladstone, CEO

No, everything is strategically placed. For example, with wind turbines, they must be positioned where the wind blows consistently. We have some farms in the Midwest that are quite windy, and numerous power generation companies want to set up turbines. This arrangement is acceptable, and if we get large turbines a couple of stories tall, it becomes beneficial. However, shorter turbines tend to cause environmental concerns. There’s a company approaching us that wishes to install a dozen turbines on one of our farms, and they are offering us $332,000 per year for leasing the land for their wind turbines. We haven’t even started the preliminary work to accommodate these turbines yet. In New Jersey, there are restrictions placed by the government limiting the installation of wind energy facilities on farmland because they previously saturated the market, reducing space for crops. We're in New Jersey, and we grow strawberries and blueberries, asserting its reputation as The Garden State. So at the end of the day, installing wind and solar facilities is a significant way to harness renewable energy, but they won’t overtake farming soon. We can farm underneath these wind structures, which works well for everyone. It’s a growing area of focus for us.

Rob Stevenson, Analyst

Okay. Thanks guys. Appreciate the time.

David Gladstone, CEO

Okay. We can proceed to question number two; anyone?

Operator, Operator

Our question comes from Edward Riley with EF Hutton. Please proceed.

Edward Riley, Analyst

Morning, guys. Sorry, just some housekeeping. How much of your debt, did you say is variable versus fixed?

David Gladstone, CEO

Almost all of our debt is fixed, isn’t it Lewis?

Lewis Parrish, CFO

99.98% of it is fixed on average for a little over five years from now.

Edward Riley, Analyst

Okay. Got you. And then wondering if you could give us an expectation for participation rents this year versus last year that you expect?

David Gladstone, CEO

If I can believe what we're being told by all the farmers and the people who are following them, it's going to be up substantially.

Edward Riley, Analyst

Okay. I just want to dig in a little bit more on that question. Do you know how many more farms you have with participation rents versus last year?

Lewis Parrish, CFO

I forget how many we had last year; I think it was about 40 farms that had participation rent components. I'd have to go back to the 10-K to see what it was for 2021. However, as I said, we expect to see increases, and that is largely due to many of the farms we've purchased recently either coming into full maturity or that participation rate component now coming online for the first time this year, coupled with additional farms we bought in the past few years. A lot of that driver is just the increased number of acres and farms falling into that participation category. But I think the number is around 40 as of today.

Edward Riley, Analyst

Okay. Thanks. And then when you're talking with your farmers, do they mention that their expectations for harvest yields this year versus last year are roughly the same or lower?

David Gladstone, CEO

I think it's about the same; not a huge amount of difference from last year.

Lewis Parrish, CFO

It's a little bit higher.

David Gladstone, CEO

While we have more farms this year than we had last year, that’s the increase. I can’t predict if those who are facing a drought this year will fare better, but we do engage in irrigated farming. With decent water supply and productive soil in California and Florida, a good crop is likely. Therefore, we think we will perform at least as well as we did last year. We may be slightly better given that we have more land than previous years.

Edward Riley, Analyst

Okay. Great. That’s it for me. Thanks.

David Gladstone, CEO

Okay. We’ve got a third question.

Operator, Operator

Our next question comes from John Massocca with Ladenburg Thalmann. Please proceed.

John Massocca, Analyst

Good morning.

David Gladstone, CEO

Good morning, John.

John Massocca, Analyst

So maybe going back to the wind turbines and solar arrays. How big is the opportunity set for similar deals to the one in Colorado? Is that something that you kind of add a little bit of incremental rents beyond that transaction a quarter here, a quarter there?

David Gladstone, CEO

If the power company comes in, they will rent the whole farm, and we'll make much more money than we would growing crops on the farm. So it’s an opportunity. You just don't have power companies like those with a lot of money in their systems that can do this kind of stuff. However, many people understand the necessity of wind and solar generation to please their shareholders. We're receiving better offers today than we did two years ago, and I believe it will continue that way. Eventually, we may blanket the country with wind power, similar to what is seen in Europe. Nevertheless, it's hard to realistically predict how many wind turbines we can put up, and I expect they may erect more turbines offshore, such as in Massachusetts. We're one of the few nations investing in this type of energy generation. Other countries, like China, continue to rely heavily on coal, opening new coal mines weekly. Thus, for the future outlook, I'm unable to offer a clear projection. We challenge this discussion from time to time, particularly when approached by entities wanting to utilize farmland for such projects. You can farm under these wind generation structures, allowing farmers to continue farming while taking advantage of wind resources. This subject has come up for us frequently now.

John Massocca, Analyst

Do you need the farmer or tenant's consent to implement these projects if they're on currently leased properties?

David Gladstone, CEO

Certainly. You must consult with your farmer before commencing any heavy machinery operations or significant installations. Typically, these projects can occur during off-seasons to minimize disruption, which works well for all parties involved. Additionally, unless the wind turbines create excessive noise, disturbances have minimal impact. It's all part of the development process, and as with any development areas, we cannot predict future trends. However, the growing pressure to transition further into renewable resources is an avenue we want to benefit from.

John Massocca, Analyst

Okay. And then in terms of lease expirations, particularly looking into 2023 at this point, what are you seeing in terms of rent versus currently in-place rents, especially given your comments on farmland values and crop inflation?

David Gladstone, CEO

I believe we'll see many more increases than decreases in rents. Therefore, I think you should remain optimistic about that aspect of increasing rents.

John Massocca, Analyst

Okay. That's it for me. Thank you very much.

David Gladstone, CEO

Okay. Do we have another question?

Operator, Operator

Our next question comes from Tony Dibon, a Private Investor. Please proceed.

Unidentified Analyst, Analyst

I'm sorry, my question was previously answered. So I have no further questions.

David Gladstone, CEO

All right. Tony, if you don't have any questions, we'll move to the next one.

Operator, Operator

And Mr. Gladstone, there are no further questions in queue at this time. I would like to turn it back to you for closing comments.

David Gladstone, CEO

All right. Thank you all for calling in. Go out and buy lots of strawberries and blueberries and eat more vegetables and don't forget the nuts, as we need all the help we can get on that front. Also, consider buying more of our stock. That's the end of this presentation, and we'll see you next quarter.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's teleconference and webcast. You may disconnect at this time, and have a great day.