Gladstone Land Corp (LAND) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation's first-quarter 2014 earnings call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today's program, Mr. David Gladstone. Mr. Gladstone, you may begin.

All right, welcome to the conference call for Gladstone Land. This is David Gladstone. Thank you, Andrew, for that nice introduction. Thanks to all of you people who are on the line today and have called in. We enjoy this time that we all have with shareholders. Please come visit us if you are ever in the Washington, DC area. We're located in a suburb called McLean, Virginia, and you have an open invitation to stop by and say hello. You'll see a great team at work, and there are over 60 members of the team now running these four funds that we have. We have about $1.5 billion in assets across all the companies. Also, some of the people here bring their puppy dogs to work, so we're a very dog-friendly environment.

We have a team presentation for you today. First we're going to begin with Michael LiCalsi, and our Internal Counsel and Secretary who also serves as President of the Administrator. And we asked Michael to do this part of it, because I go too fast.

So, Michael, take it away.

Good morning, everyone. This report we are about to give may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the Company.

These forward-looking statements involve certain risks and uncertainties that are based on our current plan which we believe to be reasonable. And there are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all of the factors listed under the caption Risk Factors in our Company's Form 10-K and Form 10-Q reports that we file with the Securities and Exchange Commission. These Form 10-Ks and 10-Qs can be found on our website at www.GladstoneLand.com, and on the SEC's website at www.SEC.gov.

The Company undertakes no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or otherwise. And in our talk today, we will note that we intend to be -- elect to be a real estate investment trust, or REIT; and, therefore, we plan to talk about funds from operations, or FFO.

Since FFO is a non-GAAP accounting term, we need to explain that FFO is defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses, plus depreciation and amortization of real estate assets.

The National Association of REITs, or NAREIT, has endorsed FFO as one of the non-accounting standards that we can use in discussing REITs. Please review our Form 10-Q filed yesterday with the SEC, and our financial statements, for a detailed description of FFO.

The report from the Company's President and CFO that you are about to hear is an overview of the Company's operations and performance. And we encourage all listeners to read yesterday's press release and the Annual Report on Form 10-Q that was filed with the SEC. There's a lot of interesting material in those documents that will help any investor. You can find them all on our website at www.GladstoneLand.com, and on the SEC's website at www.SEC.gov.

And to stay up to date on the latest news involving Gladstone Land and our other publicly traded funds, please follow us on Twitter, username GladstoneComps; and on Facebook, keywords, The Gladstone Companies. And you can go to our general website to see more information about this Company and our affiliated publicly traded funds at www.Gladstone.com.

I would also like to take this opportunity to mention that we will have our first Annual Meeting of stockholders in McLean, Virginia, this Thursday, May 8, and we invite you all to attend the Annual Meeting. The meeting will be held at the Hilton McLean Tysons Corner, which is located at 7920 Jones Branch Drive, in McLean, Virginia. We hope you all have voted your shares so that we can get a quorum for the meeting. And you have not yet voted your shares, would you please go to www.proxyvote.com and vote your shares.

Now I'd like to turn the presentation back over to David Gladstone.

All right, thank you, Michael. Before we go into the numbers, let's update any newcomers to the call, and I'll do this for a few more sessions and then we won't do it anymore. But we began operations in 1997 as a fully integrated berry and vegetable grower. We were a (technical difficulty) marketer; had many of the name brand grocery stores and wholesalers as our clients. We had about 2500 employees, and we were certainly the largest integrated strawberry operation in the United States.

In 2004, we sold the agricultural operating business -- that is the growing and the shipping and all of that -- to Dole, but we kept the farmland and Dole became our largest tenant. And they still are today, although they are a smaller percentage today than they were back then.

Since the sale of our business part, we consist solely now of operating and owning farmland, and leasing it to independent and corporate farmers. And since 2004, we've been buying up farms and adding to our list of properties at a rather slow pace, but now we're beginning to move a lot faster.

The farms we own are predominantly concentrated in a location where farmers are able to grow high-value annual crops such as berries and vegetables, and these are row crops which are planted and harvested annually, and sometimes even more frequently. We also have a small amount of farmland that is farmed for blueberries, which are permanent crops in that the blueberry bushes may last up to forty years. So, typically, blueberry farmers are farmed by the same fruit farmers that grow other berries and vegetables, and they also sold in similar customers such as supermarkets and wholesalers. So we like the berry and vegetable area, and that's where our concentration is.

Now, we like these blueberry businesses because some of the varieties can be harvested by machinery, and labor is a constant cost in this business, so machinery is a nice thing to have. Also, we have acquired some farm-related properties such as coolers, which are facilities utilized to cool the produce down before it's shipped. And we own one box barn on one of our properties, which is used to store and assemble boxes for shipping. And you'd be amazed how many boxes are used to ship strawberries and vegetables out of the farm area.

We're also looking at processing plant, packaging buildings, distribution centers. We haven't done any of those. And investors really should expect the bulk of our assets in the future, as they are now, to be in farmland that's leased to farmers to grow food.

We currently own 21 farms. Eight of our farms are in California, six in Florida, four in Michigan, two in Oregon; one is in Arizona. We also own two coolers and one box barn -- one of those coolers in Florida, and the one cooler and one box barn is in California. There's some other smaller buildings on these farms, as well, but not really material to the discussion.

As is customary in agricultural leases, we generally intend to enter leases which our farmers have terms of 2 to 5 years. However, when we lease properties that grow longer-term, permanent plants such as blueberry bushes, we anticipate entering into longer-term leases, as we did with a couple of the blueberry farms that we acquired last year which have leases that range from 5 to 15 years.

We will be required to frequently renew short-term leases, as we have on our properties upon the expiration of the lease, and we expect that we will generally be able to renew these leases with the same farmers. And we believe that this strategy will also permit us to increase the rental rates over time, as is customary in the business. And we've been successful with this strategy to date.

When we entered into the longer-term leases, we'll seek to put provisions in the leases, such as escalation clauses that provide for periodic increases -- that is on an annual basis, usually. And as well as having that periodic increase, we have periodic market resets to the rental rates, based on local rental rates if they've gone up in price. We don't adjust them down.

And just as a footnote on our leasing practices, we generally prefer to keep the same tenants on the property for as long as possible. Farmers really enjoy working the same farm over and over again. So that's our goal, as well, is not to throw the farmers off the property.

Our shares of common stock began trading in January 2013 on NASDAQ under the symbol LAND. We raised a total net proceeds of $51 million in the offering, and we deployed about $38 million of those proceeds in the acquisition of nine new farms, as in past years; and this past year, and on capital improvements -- and only a small amount was in capital improvements on the existing properties.

Most of the remainder of these proceeds were used to make distributions to our stockholders in order to pay out prior years -- what's known as earnings and profits for prior years. We have to do that so we'll be able to qualify as a real estate investment trust during the tax year that ended December 31, 2013. We don't make that election until we file a tax return, and that probably won't be filed until August or September.

Now just another footnote on the talk: we currently have no plans to make mortgage loans on the farms. We may do some if there is an extraordinary opportunity, but you shouldn't expect to see any mortgages put out by us.

Over the last year or so, we've increased our list of farms that we're trying to buy. We have a very strong list today. We didn't acquire any farms during the quarter, and that was due to the inability to close our mortgage agreement with our lender. More on that a little bit later.

Our existing portfolio of farms continues to be 100% leased, and all are paying is agreed. We had two leases that were set to expire in 2014. One lease on our West Beach farms in Watsonville, California, was extended at an increase in rent of about 21%. I think this was factored into the value of the farm, next time we do our evaluation of that farm property.

The other lease is expiring at the end of 2014 is on our San Andreas farm, also in Watsonville, California. We're far along in the negotiations to renew this lease. And given that it's in Watsonville, California, farms are in that region that have gone up in price, so we expect to be able to renew this lease at a higher rate, as well. There's no guarantee, of course, that we're going to meet that goal, but that's what we're shooting for.

Our list of possible acquisitions of farms remain strong. We're expected to close on more properties in the upcoming months. At this point in time, we have three properties under signed purchase and sale agreements that are currently in due diligence phase. I think one of them is near closing. We are moving toward completion of all of these transactions.

We also have other properties under letter of intent the marketing activity has gained, significantly, traction toward, and that will allow us to buy more farms located throughout the United States. We don't buy any foreign farms. We are only in the United States.

Additionally, in order to speed up this process, we hired a Managing Director of Marketing and Acquisitions in California to work on contracts to find farms -- work on our contacts to find farms in the Western growing area. Next, will be looking for someone in Florida that can handle the Southeastern region.

Just as a note on borrowing here, because that's something that held us up during the first quarter, we've been working with our lender to increase our line of credit to expand our mortgage line, and we're very close to the finish line here.

Yesterday, I signed what looked like several pounds of legal documents that I think went out yesterday. So the new line is for $125 million, if it closes, obviously. Terms are very similar to the existing line and loan, so we're hopeful that we can finalize those documents; and, really, the exhibits to the documents are the only thing left out now. Hope to have an announcement on this in the upcoming weeks.

We have also begun to talk with other potential lenders. As you can imagine, there are other lenders in the business. It's not that we don't like our existing lender; it's just that it's better to have a diversification of lenders when you are in any business of borrowing.

And now I'd like to talk about my favorite part of the call, and that's net asset value. Most real estate investment trusts don't update the value of their properties because it's expensive. However, we intend to update the valuation of our properties on at least an annual basis, through either an independent or third-party appraisal or internal valuations. So our idea is that we will change these. It may be through our valuation that we use internally, or from an external valuation source. And we intend to report these updated evaluations in each of the quarterly reports to you and to the SEC.

For the quarter ending March 31, 2014, all of our properties were valued based on appraisals. So we're starting out with appraisals on all of the properties that are less than -- all of these appraisals are less than one year old, except those properties that we purchased within the last 12 months. And there, we just use of the purchase price.

This schedule of valuations, on a quarter report on 10-Q, is what we use. That was filed yesterday. There's a lot of details in there about this valuation and how we do it.

And when we substitute those values for carrying values of the properties in our financial statements for March 31, we come up with a new net worth number that moves from $48 million to $92 million now. Now, please remember that we just purchased some of these properties, so new appraisals really wouldn't change the value, we don't think. So, as a result, don't expect a big jumps in the valuations in (technical difficulty), but over the long-term, there should be good movement.

Using these values that we had on the appraisals for the quarter ending March 31, it resulted in a new net worth number per share. And our net asset value per share at March 31, 2014, is now $14.03 per share, which is in my estimation, a big jump from where we were at December 31, which was $13.51 per share. That's a 3.85% increase in three months, annualized. There's no guarantee of this being true annually, but that's about (technical difficulty) increase. Don't expect this every quarter. There's no way we can forecast what it will continue and be as the quarters go out there.

And, of course, we paid out $0.09 per share in dividends for the quarter. That's $0.36 per share annualized basis, or a 2.5% yield based on the stock price at March 31, 2014. We will have to see how that works. I think if now we get our loan closed, we'll be able to put a lot more deals on the books and make some more money for shareholders.

Now, some math to put in a timeframe that (technical difficulty) the same frame of mind that we look at it. From the $15 per share that investors paid on the IPO, an investor should have deducted from it the payout of earnings and profits from prior years of $1.47, as we gave back $1.47 on the earnings that we had in prior years that had been used to buy properties. That was returned to stockholders from the distributions of prior years' earnings and profits, leaving the cost basis, if you think about it the way I do, at $13.53. And that compares favorably with a net asset value per share of $14.03 today, especially after the cost of the IPO, which was very expensive. So there's been no decline in the net asset value per share for those who purchased on the IPO, the way I think about it.

Our stock is currently trading at $12.55, which is below our NAV; thus, we're hopeful our stock price will rise this year. And if you buy stock today, you're getting a discount from our estimated net value of the assets of about 11.5%. So you're buying $14.03 of assets for $12.55.

This net asset value per share is the mark that we gauge our progress by as we move forward. And we're judging this as -- we see, or don't see, appreciation in the numbers. This is the metric that Berkshire Hathaway uses. We like to use it the same, to show you that the appreciation continues to move forward. So let's see if we can grow faster than the Berkshire Hathaway people. And remember, we also pay a dividend that Berkshire does not pay.

I think all those holders who purchased on the IPO should be very happy, and we expect in the coming years to be much better. We have leases that are increasing. (technical difficulty) the amounts, the one that we are working on for San Andreas Road soon, so we'll see what that comes out at. So I look at this REIT as a way to hedge against inflation and food prices and other inflation items, and I think it's better hedged than buying gold.

That's really enough on the business side of the discussion. So now we'll turn it over to our Chief Financial Officer and Treasurer, Danielle Jones, for a report on the financial results.

Thanks, Dave, and good morning, everybody. I'll start by discussing our status of converting to a REIT. As discussed on the last call, we completed all significant actions necessary to elect to convert to a REIT during 2013, including the distribution of all accumulated earnings and profits from prior years. Thus, management believes we qualify, and intends to elect to be taxed as a REIT for federal tax purposes, beginning with the year ended December 31, 2013. This election will be made when we file our 2013 tax return this summer.

Management intends to be organized, and to operate in a manner that will allow us to continue to be qualified and taxed as a REIT. As long as we qualify as a REIT, and we generally will not be subject to US federal income tax if we distribute at least 90% of our taxable income to our stockholders.

And now I will discuss the operating results, beginning with the balance sheet. While we did not acquire any farms during the current quarter, our pipeline of deals remains strong, and our portfolio of properties and tenants are much more diversified than they were a year ago. Our 21 farms are located in five states. And while the majority of our farms and rental operations remain concentrated in California, our reliance on income from those farms continues to decrease.

Over 75% of our total acreage and 87% of our revenues came from California farms a year ago. However, [this year] they're down to 24% and 68% as of March 31, 2014.

We are also more diversified with regards to our crop type, as we now own several farms with permanent crops, and have also expanded into the green market. And our tenant base continues to expand as we add additional growers on our properties. We intend to continue to further diversify our portfolio by acquiring additional farms in our regions of focus.

During the first quarter, our total assets remained relatively flat at $91.6 million because we didn't acquire any new farms. But we expect to grow our asset base during the remainder of 2014. [Pushing] to mortgages, we have a mortgage loan agreement with MetLife for $45.2 million that matures in January 2026, and it currently accrues interest at a rate of 3.5% per year, and the interest rate is subject to adjustment in January 2017.

As of March 31, the facility was fully drawn with $41.3 million outstanding. As David mentioned, we are currently in discussions with our lender to increase the commitment under this loan.

We also have a $4.8 million line of credit with MetLife that matures in April 2017. And as of March 31, we had $100,000 outstanding on the line, which is the minimum balance required, at an interest rate of 3.25%. We are also currently in talks to expand and extend this line of credit.

Regarding upcoming principal payments on our long-term debt commitment, we made a $1.7 million normal amortization payment on our mortgage loan in January, and we have no other payments due on this facility for the remainder of 2014.

Turning to our operating results, pre-tax FFO available to common stockholders increased from the prior quarter to $316,000. While our operating revenues increased by 27% as a result of a full quarter of earnings on the seven farms we acquired during the fourth quarter, we saw a similar increase in our operating expenses during the quarter.

The increase in operating expenses was primarily due to additional depreciation and amortization expense recorded on our Q4 additions; an increase in the management fee paid to our advisor; and additional stockholder-related expenses incurred, relating to the Annual Report and proxy.

The increase in the management fee was expected. As per our management agreement, the fee was limited to 1% of stockholders' equity, less any uninvested proceeds from the IPO for 2013. However, beginning in 2014, the fee increased to 2% of stockholders' equity, and we are no longer deducting any uninvested proceeds. During the current quarter, we also recorded additional professional fees related to our REIT conversion and work surrounding the valuations of our Q4 acquisitions.

We anticipate continued growth in 2014 as we expect to deploy the remaining cash we have on hand, as well as any cash we may receive as a result of obtaining additional financing.

And now I will turn the program back over to David.

All right. That was a good report, Danielle. We just finished our first years of public company at the end of January, and end of that year, and it was very expensive to make that transition. Now that we're on to our second year, it should be less expensive, and a lot easier for all of us. And once we close the new mortgage financing, we expect to be operating (technical difficulty).

The main point of this report is to tell you that we're executing the plan. We used our proceeds from the IPO to acquire nine new properties for about $38 million during 2013. And we also have a nice list of potential properties that we are interested in acquiring through that list, and we hope to be able to grow the farm portfolio significantly for the rest of 2014.

Since we've used all the money from the IPO, we're now using money that we have from our mortgage line. And we also have availability to borrow some under our line of credit when the new line closes; that is, we've got to close this new relationship. As mentioned, we're currently finalizing the deal with our lender to expand the line of credit and the mortgage line, and once that happens I'll be able to buy quite a few more farms. And we hope to finish that in the upcoming weeks.

With the increase in portfolio farms comes greater diversification, and that's a protection for investors. We all expect to have better earnings in the quarter ending June 30. We anticipate that many of the farms we've purchased will be acquired from farmers or agricultural companies, or that an independent farmer will simultaneously lease the farm for us. This is our mode of operation. We buy some farms that are turned around and leased out quickly, and we buy other farms that are always under lease.

These type of transactions provide the tenant with alternative to financing sources, such as borrowing or mortgaging the real estate, or selling securities or selling part of their farm. So as a result, this is just another way for them to grow their business.

We also expect that many of the farms that we are acquiring will be purchased from farm owners that don't farm the property, but rather lease the property to farmers. In situations such as these, we intend to put our lease in place prior to, or simultaneously with, acquiring the farm. If that's not possible, we do it as soon afterward as the lease on the property comes due.

We believe that an investment in farmland has performed extremely well in the last 10 years compared with other asset classes. And farmland has provided investors with a safe haven during the recent turbulence in the financial marketplace. This is evident by the increase in prices of fruits and vegetables that we're all seeing in the grocery store, which allows us to increase the cost of farmland to the farmer.

Most of all, farmland has historically been an excellent hedge against inflation. And our business thesis is very straightforward. First of all, there are more people in the world every year. And, second, people have to eat. So farmers need farmland to grow the food. Farmland is being converted to non-farm uses, so there's less farmland to grow food. And there's no replenishment of farmland, especially in the United States, to become -- and so each of farm, then, becomes more valuable every year. And it's just as simple as that math, and it has gone on for the last 10 years, probably for 25 or 30 years. But it's just that simple.

Distributions -- in April of 2014, the Board voted to maintain the monthly distribution of $0.03 per common share for each of the months of April, May, and June. And as of today, we've made 15 consecutive monthly distributions to shareholders, for a total payout of $1.85 per share since the IPO.

There was a lot of confusion about the payout, and I apologize for that. I tried to be clear. The dividend has been $0.03 per share since the beginning, but we were also paying out the past earnings of the Company that we had to do to become a REIT. That was about $0.09. And although I thought I said that in -- that there were two types of payouts -- in all of the calls that we talked to, we look at that now and maybe we should have been much more clear in that we were paying out two streams of income to shareholders.

We stopped paying the amount of the past earnings. We had to finish that up by December 31, 2013. And we didn't really cut the dividend, but we did stop that portion of the payout. So we didn't cut the dividend, as some people have said, but rather finished paying out the past profits so we could become a real estate investment trust.

With the stock price now at around $12.55, the distribution yield on the stock is about 2.8%. The entire REIT index is trading at about 3.5%. So in terms of yield versus other REITs out there, the dividend -- on the dividend yield index of all the other REITs -- I think we're close. And I think over the next couple of years, we'll certainly catch up with them, and pass them. And I'm hopeful that we can increase the dividend in the not-too-distant future, although I don't have any information for you as to when we might be able to do that.

But please remember that purchasing this stock is a long-term investment in farmland. It is, in part, an asset investment, just like gold. But it's a yielding asset, and it is an active asset, unlike gold that is a fully passive asset. We expect inflation of food to be strong, and the value of farmland that we own to increase. Certainly there are no guarantees that this is going to happen, but it's what we expect to happen. So consider buying farmland in place of gold; and unlike gold, farmland is an active asset that is used to feed people and generate (technical difficulty).

We'll vote early in July, during our regular scheduled quarterly Board meeting, on the declaration of the monthly distribution for July, August, and September. But please note that our July Board meeting is now scheduled for mid-July, more toward the middle of July, so this time versus the early July that we normally meet in. Thus, we'll be announcing the dividend the second week in July.

Now we'll have some questions from our loyal shareholders and analysts who follow our wonderful Company.

Would the operator please come on and help the listeners so they can ask some questions?

(Operator Instructions). John Roberts, Hilliard Lyons.

First, you said three properties in the due diligence. What size are you -- what size are those?

Let me just [trot] out the number. Now, what's the number? About $11.2 million for those three in diligence. Letter of intent -- I thought we had two of those -- $3.5 million. And then -- so we've had letters of intent that have been signed. And then we have indications of interest where we're trying to close on about $55 million. And there's about $860 million of things in what everybody refers to as a pipeline, but it's really just a list of people that have contacted us and have something for sale.

Okay. Been hearing a little bit about weakening of farmland prices in general. Article in the Wall Street Journal a few months back talking about that. Have you seen any weakness in pricing? And if so, how are you expecting that to impact you going forward?

A large number of farms that are sold -- which we don't even look at, are not counted in this -- are farms and that do grain; hard grain such as corn, wheat, soy. We're not in that marketplace today. Someday we may get into that marketplace. There has been a weakening of prices there simply because grain prices have gone down.

For example, corn has gone from about $8.50 a bushel to $4.60 a bushel, I think it is today. And so, as a result, you can't make as much money growing corn; and, as a result, prices of land went down some. Not much, but they went down a little bit. There was some weakening.

In the area that we're in, which are fruits and vegetables, we've seen none. And in fact, I've seen prices in Oxnard, in Watsonville, Santa Maria -- which are the three big growing areas in California -- go up. Florida has been a little bit weaker in terms of growth rate, but we haven't seen any big problems in terms of weakness in the areas that we're in.

Great. Thanks, David.

Okay. Other questions, please?

Dan Donlan, Ladenburg Thalmann.

David, for what it's worth, I like your version of the forward-looking statements much better than the General Counsel's.

(laughter) We won't fire Michael, because he's really good at other things as well than reading the statement, but thank you for that complement, Dan.

You are definitely much quicker. David, the first question would be on the asset management fee. And I know it moved up from 1% to 2%; was just curious if you could talk about that. It was well documented in your prospectus. But given how much lower the yields are on your farm properties -- call it anywhere from 5% to 5.25% -- versus, let's say, the other REIT that you guys have, where [going in] yields can be as much 9% to 10%, was just curious what you thought it was reasonable to bump that up after just one year of operations.

The truth, Dan, is I need the money to hire more people. We need to get busier than we are. We got stymied, and I didn't hire anybody for Florida, primarily because I wasn't sure we were going to get our MetLife loan in place. They assured us, but I've learned the hard way to believe it when the check clears, as they say. So I really need the money in order to hire people. So that's the goal now, is to beef up the management team.

And here I'm talking about not people here in the central office, where we all are right now, but people like the person that we have on the West Coast who is in the middle of the farms. He actually lives in Oxnard, and he's out there with the farmers, and he's been a farmer. We're also looking at someone like that in the Florida space. And then as time goes on, we'll have to add more people along that way.

But we've not made any money, certainly during the first year, in terms of the management company. And I really can't ask the other funds to subsidize the growth of management talent in this fund. So, we raised it a little back to the 2%, which is where most people are in this business, and so we'll have to see.

I've considered that with the Board at the last meeting, of cutting that back, so we'll have to take a look at that again at the next Board meeting in July.

Okay. Yes, no, completely understood. Given the amount of G&A that you have, which isn't a lot at all relative to the rents, it seems like you really need to get bigger quickly to move the needle here, which it sounds like you're definitely trying to do.

But as far as what you have in negotiation with the lenders, how much would you anticipate this might increase your debt capacity by?

What we're we saying? About $70 million of buying power with the new line?

(inaudible - microphone inaccessible)

$68 million to $70 million, depending on how close you want to get to using every nickel on the line.

Right, right, understood. Okay.

We have some padding built into that, so that if we get -- if we do that amount of money, we'll still have money to do whatever we need to do internally.

Okay. And then as far as how should we look at potential deals with OP units? It's something you talked about at the IPO quite a bit. Haven't seen any quite yet, but it would seem like another way to increase the size of your company, that you may or may not necessarily need to use any debt for.

Yes, we want to use that, and we've had inquiries and talked with people about it. Unfortunately, I think we're a little bit small in order to convince people that we are, I don't know, a real company I guess is the way of thinking about it; that we're still so small.

But I remember, I was on the board of Capital Automotive REIT, and it wasn't until they were around $200 million to $300 million in assets before they started being able to use [operating] units, or OP units, to make those acquisitions.

We do have one family that I know very well that's very interested in OP units. And Bill Reiman, our man on the West Coast, has a family that's very interested in OP units. We'll just have to see how that comes out. But you're right, I would love to do two or three of those with some very large farmers, and move up the equity base that we have in the Company.

Okay. And then as far as the new lease you executed in West Beach, it sounded like that was a new tenant, not necessarily renewal. Was just curious how that transpired, maybe who the new tenant is, and why the decision to go with a nine-year lease versus maybe a shorter-term lease of three or four years?

Yes, we don't mind doing that, especially when the tenant considers this to be a key piece of property for themselves, and wants to know they're going to be able to lease it for the long term. And what we did in that case is that every three years we have a mark-to-market on the amount of the lease; that is the lease rent. And so it will go up just as if we had three-year leases and renegotiated every time.

What it does -- and we do this; we've done it with a several other, very large tenants -- what it does is it gives them the assurance that if they're willing to pay market price for the farm, they can stay on the farm. We've done this several times. And, in fact, the first lease with Dole was a 10-year lease, if you remember that. That was in the prospectus. And our leases with the larger companies, and they want to know that they're going to get the land and keep it, even though they know they may have to pay a higher price every two or three years when we mark to market. And remember, mark-to-market means it can go up, but not go down.

So the new lease was with a new tenant, a much larger tenant, a tenant that has what -- one of the pieces of problems in strawberry growing is labor. And this new tenant has their own labor pool that they try to keep year-round; and so, as a result, much more certainty that they'll have labor to make sure that they can harvest their crops.

As you may remember, we had about 2500 Mexican-Americans that were our workers for our farm before we sold it to Dole. They still have many of those people. And we were paying, at the time we sold, at about $10.50 an hour, and our workers were with us for at least nine months, in many cases. So, and at the time the minimum wage was about $6.50, so these were not underpaid. And we paid their health insurance, their life insurance, and dental insurance. We paid all of that, free for them.

Labor is becoming a very critical part of all the farming operations. And one thing that would change our mind a lot about going into the rice or the wheat or the corn business is labor is not necessary there, because you have these big combines and machinery that do almost everything.

So, there are people working very hard to figure out how to pick strawberries and blueberries and other items. There's a new machine out now that will pick cabbage without having -- and it runs down the road and picks the cabbage heads up, and puts them in a box. So, people are working on mechanical ways of harvesting, but it's still very labor-intensive for almost all parts of that.

So we're very attuned to any new leases that we do with people who have some kind of guarantee that they're going to have the labor pool there for the harvesting.

Understood. So the 20% increase in GAAP rents, is there any way that can actually be more if, let's just say, the farm value rises? Or are those just fixed bumps? You said mark-to-market, but I'm assuming that they are -- are they fixed, or is there any variability in that?

There's actually two parts to it. One part is fixed, and I forget what the percentage is, but it would be much like a commercial lease where you have 2% or 3% bumps every year.

And then there's the second part that at the end of two years and going into the third year, you'll do some kind of market survey. They may do their survey; we would do ours; we present it to each other. And for the fourth year -- is it a three-year bump or a two-year bump? Three years.

So at the end of -- somewhere toward the end of the third year, you would have a negotiation that said this is -- we all agree on this; and, therefore, beginning the fourth year, it might move up by 20% depending on what the market is doing.

So you've got the best of both worlds. You've got your fixed-rate movement up, and then you've got a market rate adjustment at the end of the third year and at the end of the sixth year.

Okay, so I guess, therefore, you can probably -- for GAAP purposes -- you can only model in the fixed bumps. You can't actually model in what the variability could be.

That's exactly right. You're going to be straight-line rents. And remember, when it bumps up -- and let's just assume that we're at the end of year three, it was up by 20% -- that new number is also going to start going up by 3% in years six, seven, and eight. So you're going to see additions on top of that.

I'm astounded at how fast the marketplace is moving in Watsonville and in Oxnard. We're seeing -- if you remember, we have a large farm there that's valued at about $85,000 per acre. I think, next year, that will probably come out at $100,000 an acre.

That's pretty significant growth. Okay, David, I very much appreciate the answers.

Brian Hollenden, Sidoti.

In the current quarter, looking at the cash flow statement, you had a $50,000 deposit down on a property that was returned. Can you just give us a little flavor what happened with that acquisition? Why would you not have purchased that property?

I'm trying to remember. What was that again?

Oh, it was the (multiple speakers).

And so we sold that to -- what's his name? (multiple speakers). Yes. We had a property down in Florida and we were going to buy it, and there was some questions about the ability to get water there. And it was a development deal, as well. And while we have a great farmer there, we decided to let them buy the farm. And so we assigned the contract to them. We got our $50,000 back from the farmer.

The farmer is going to buy it. He's going to develop it. And then once it's developed and everything is in place, he's going to sell it to us. Or, at least, that's what he said. He has two farms that he's doing that with, so we're waiting (technical difficulty) both of those to be completed. And then we will buy from him, and lease it back to him.

Okay, great. And then if I could just ask one more question. With FFO at about $0.05 this quarter, and the dividend payout at $0.09, how and when do you get to a place where FFO can cover that dividend?

Hard to guess. It depends on closings, obviously. And we did closings in the first quarter because -- and even though we projected that we were going to close, we actually just shut down until that we could get our line of credit in place. As I mentioned before, I think we are 99% of the way there. No guarantees in this life, but we're waiting for the lender to sign off on the documents that we sent them signed. I think that's all done; we're just waiting for a few exhibits to come. And my hope is that either this week, next week, we can close and make an announcement. And then we can turn on the spigot.

We've got enough money to close the deals that we have in this projection that I gave you of the deals, but we wouldn't be able to keep growing. And so I'm one of those people that won't make commitments unless I know that I have the money. So we're waiting to get this closed, and then we can go out and hopefully tackle some of these that are sitting on the sidelines waiting for us, and get those done. And that will jack up the return, because we will be borrowing at 3.5%, and hopefully making 5% on all of that -- or a big chunk of it, obviously, will drop to the bottom line.

And I would expect us to be very close to the $0.09 per quarter.

I don't know, what you think? Just looking at --.

(inaudible - microphone inaccessible)

Yes, by the time we're at the end of the year, we should be there. So we're going to be a little bit slow getting there, unless -- got a lot of big deals in the pipeline. If we can hit some of those it will be wonderful, but we have to be conservative and not lead you on to think that it's automatic. But I think we're going to get there relatively quick.

Okay, great. Thank you very much.

Other questions?

Dan Donlan, Ladenburg Thalmann.

David, just real quick on the acquisitions -- I know this is farmland, and not necessarily net leased real estate, although it is a triple-net lease that you enter into with farmers. But was just curious if you could comment on pricing for, let's say, assets between $3 million to $10 million, and maybe assets that are over $50 million.

Is there a premium being paid right now for farms of large size, relative to smaller farms? Or any commentary there would be helpful.

Sure. There was one in Watsonville, fairly large -- attracted a lot of attention from probably half a dozen pension funds and insurance companies. We got behind one of the tenants and said, we will buy if you will go to market and bid, because you are already farming this stuff.

Unfortunately for us, we let them drive the cart, and they bid low. Someone bid higher, so they lost it. And that -- we would have bid probably around $55,000 an acre, and it went for about $52,000, we believe. It's not closed yet.

So yes, the larger transactions will bring in the pension funds and insurance companies who are huge buyers of farmland. And I think -- I'm trying to remember the amount TIAA-CREF announced at the last convention, but it's a huge, huge number that they have in their portfolio. Now, that's all over the world. They only come to bid on the larger transactions now.

For our purposes, that one that I mentioned in Watsonville, that would've been right at a 4.5% cap rate, so probably 0.5 point off the norm, which is about a 5% cap rate. So that sort of gives you an indication that it's the big, very nice, well-placed farm -- you will get big buyers.

But remember, most of the big buyers are doing really large transactions in the Midwest. And if we go into the Midwest, we are going to be competing with -- at least for grain land -- would be competing with the big pension funds, the big insurance companies, and the farmers.

The farmers will bid -- if it's a next-door farm, they will bid at 2% or 3% cap rate. You just can't beat the local farmer. But if it's something that's a little bit off the norm for a farmer next door, then you will actually get something in the 4% to 5% range for cap rates in farms.

But the smaller farms, we do get a better transaction in terms of cap rates. And, quite frankly, most of the farms in the California and Florida area are smaller transactions. We've seen some large transactions in Florida, which were almost all development-type deals: that is, they were citrus, or they were cattle ranches, and people were buying them with either in mind that they were going to develop them into houses over the next 10 years, or they were buying them -- as we mentioned, in the one farm where the farmer is going to convert some open property that hasn't been farmed before into farming property, and there's a development time lag of a year two in which there's really no income during that period of time.

So, yes, for bigger conversions, and I expect to see some of these in the future in our portfolio. We're just not big enough to take on something today that wouldn't pay us anything for a year as it's turned into farmland. So, from our perspective, we look at the hundreds of acres in Florida, for example, that have citrus on it, and citrus is dying in Florida due to the [greening]. They've not found anything to stop it. So over time, some of that will be converted into farming of fruits and vegetables. Unlikely for us to do anything in that, in the near-term.

Okay. Thank you, David.

Sure. Other questions, please?

(Operator Instructions). And I am seeing no further questions in the queue at this time.

Okay. Thank you all for calling in, and keep your eye on net asset value. This is going to be an appreciation play, more than an income play. And we'll see you all next (technical difficulty).

Ladies and gentlemen, thank you for participating in today's conference. This now concludes the program, and you may all disconnect. Everyone have a great day.