Gladstone Land Corp (LAND) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Gladstone Land Corporation's third-quarter 2015 earnings call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to your host, David Gladstone. Please go ahead.

All right. Welcome to the conference call for Gladstone Land. This is David Gladstone. And thank you, Stephanie, for that nice introduction; she's very efficient.

And thanks to all of you we have on the line today. We really appreciate these call-ins and having time with you. And we enjoy them, hope you do too; wish there were a lot more times to talk about the Company and give you more information about it.

By the way, as I do every time, if you're ever in the Washington, DC, area, we're located in a nearby suburb called McLean, Virginia. If you have a chance, stop by, say hello. You'll see some of the great team that we have working here, about 60 people. We're nearing $2 billion in assets under management in our four public companies.

We start every session with Michael LiCalsi. He's our General Counsel and Secretary. He also serves as the President of Gladstone Administration that administrates all of the Gladstone funds. Michael?

Good morning. This report you are about to hear may include forward-looking statements as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the Company's future performance. These 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 risk factors listed in our Forms 10-K and 10-Q that we file with the SEC. They can be found on our website, www.GladstoneLand.com, and the SEC's website, 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, except as required by law.

In our report today, as a real estate investment trust or REIT, we plan to discuss funds from operations or FFO. 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, plus depreciation and amortization of real estate assets. The National Association of REITs has endorsed FFO as one of the non-GAAP accounting standards that we can use in discussing REITs.

We will also be discussing core FFO or CFFO, which adjusts FFO for certain nonrecurring charges, and adjusted funds from operations or AFFO, which further adjusts CFFO for certain noncash items. We believe these metrics improve comparability of our results period-over-period. Please review our quarterly report on Form 10-Q filed yesterday with the SEC for a more detailed description of FFO, CFFO, and AFFO.

Now the reports from our President and CFO that you are about to hear will be an overview of our operations and performance. We encourage all listeners to read yesterday's press release and the Form 10-Q, which includes a wealth of information for our investors. You can find them at our website, gladstoneland.com. And to stay up-to-date on the latest news involving Gladstone Land and our other affiliated publicly traded funds, please follow us on Twitter, username GladstoneComps, and on Facebook, keywords The Gladstone Companies. You can go to our general website to see more information about this Company and our affiliated public funds at www.Gladstone.com.

Now I'll turn the presentation back to David Gladstone.

All right. Nice report, Michael.

Before we get into the results of this third-quarter, as I do every time, I like to give a brief overview of the market environment and (technical difficulty) for our listeners who (technical difficulty) new company and a new kind of company. Our business consists solely of owning farmland and leasing it to independent and corporate farmers. The independent farmers we lease to, these are farmers who are usually in the top 10% or 20% of the largest and best farmers in any of the farming growing areas that we're in, so we try to pick the best farmers for all of our tenants.

We don't farm any of the land ourselves, and thus we don't take any direct farming risk. Almost all of the farms we own are concentrated in locations where farmers are able to grow high-value annual row crops, such as berries and vegetables.

As you may have read about, we've taken advantage of the depressed farmland prices in the Midwest, and we acquired two quality farms in Nebraska producing a variety of both grains and produce. And if we find more farmland in the Midwest we plan to go back -- to back farmers, growers, primarily produce such as potatoes, and onions, and those kind of things. Almost all of our tenant farmers that we have growing items, these are items that you'd see in the produce section of the grocery store.

And that's because I used to own one of these farms. I owned a farm that was in the produce area, and it was the second largest producer of strawberries and other berries in the US. I sold that produce company to Dole and kept the land, and that's how we got the beginning of this farmland REIT.

The geographic region that our fruit and vegetable farms are located in continue to experience steady appreciation in both the underlying land values and the rents charged on the land, which is evidenced by several strong leases that we renewed and executed this year. This is because the fruits and vegetables they are growing have not gone down in price unlike, say, some of the corn crops in which corn has going down dramatically in price.

I'd like to address the people's concerns regarding the drought in California and its effect on the water availability for our farms in particular. There is a drought in parts of the state, mainly the Central Valley, which is not where our farms are concentrated.

Most of our farms are in California on the coast, which has experienced minimal impact in terms of water restrictions or cost. All of our farms including the few in the Valley -- and we have one in the Valley -- have very nice wells on the site and provide water for our farmers.

Wells on the coast sometimes do have problems with salt or nitrate intrusions into the water, primarily from the ocean. It can occasionally get so bad that you have to drill a new well. We had to do that in one of our properties in Watsonville, California, a few years back, and that new well is producing beautifully. The farmer on that property has plenty of clean, fresh water.

We are currently in the process of doing that on another farm. However, that well is not yet completed so it's a little hard to report on the quality of the water that we expect to find there.

A number of the California communities where we have farms have large processing plants that take the effluent from the city and convert it into clean water, and that can be used to grow crops. This water is piped out from the city's processing plant to our farms -- and other farms, obviously -- which allow the farmer on that property to use either well water or the city water that's being pumped out to them. So they have multiple sources of water.

California also -- many of the coastal cities in California are constructing plants that convert seawater into drinking water for the citizens, which will have a great impact on relieving the water shortages on the cities that are close enough to the ocean.

We are also continuing to track -- and it's getting closer and closer -- El Nino, this year. It typically brings very heavy rainfalls in California during the fall and winter season. This year's El Nino is still expected to rival the strongest one that they had on record back in 1998.

This one should last into the spring of 2016. So significantly, drought relief is expected to occur in California this winter, but God only knows what will happen. It rained -- it was raining in California in parts in the last few weeks, so we're starting to see the beginning of El Nino as it moves into the coast there.

Just going into a discussion of the type of leases that we do -- people ask us about that, and we really have two types of leases now. First, we have what I call a cash fixed-rate lease. That's an annual rent increase as modest as, say, 2% or 3% every year, and then it resets to the current market rate after a year or two. Now the rent never goes down, but it can go up if the market rate is greater than the 2% or 3% that we've been charging as we move it up. So we do that.

The second type of lease that we've just started doing are called participating leases. My family in the South used those type of leases.

These kind of leases, we charge a slightly lower cash basis, and so you might be at a 4% return on the land that you own. But in return for the lower fixed-cash rents we get a percentage of the gross sales of the crops in the lands. It may be around 20% or 30%; in some cases it's been as high as 40%.

These types of leases make more sense for crops with more variable revenue from year to year, such as almonds or pistachios. It usually puts a floor on the yield for us, and that might be on our original cost maybe 4% or 6%; but it potentially allows us to earn a very high return, say around 10% or even more in some cases on the years where there's higher commodity prices such as how they've been -- the prices have been in 2015 growing season for almonds.

Let me switch back to the business that we're in. We currently own about 15,500 acres on 42 farms across six states in the United States. We also own some cooling facilities and several of the structures on the sites.

Some of those cooling facilities are critical to the farming there. They need to cool berries down and vegetables down before they ship them.

But investors should expect the bulk of the assets to be in farmland that is leased to farmers that grow fresh foods that you can find in the produce section of your local grocery store. We like, in the health conscious side of our business, the food production; and we don't have any of those GMO products that are out there in the marketplace today.

We've been extremely successful with our leasing strategy to date, as it's been able to average an increase in rental rates over the period of about 16% on all the lease renewals since our IPO back in 2013. We believe the underscore here is that the value that we have and that farmers see in the underlying land where the properties are located, it's just such that it's going to put an upward pressure on the market. And for these areas we predict that the prices will continue to rise.

Generally, rental rates are driven up by the following factors: superior farmland, like those we own. It's just decreasing in California and Florida and other areas; and that of course drives up demand for the remaining farms.

Prime farmland that can deliver high yields and superior crops is a very high demand these days, and farmland continues to go out of the process of farming into other areas. This strong demand is driven by these upward -- that drives these prices upwards, this strong demand for fruits and vegetables and nuts, because people are eating more healthy foods, especially organic.

We have some organic farms. Obviously we have lots of berry farms and vegetable farms. So we're in that zone of people eating more healthy-oriented food. We actually have some farmers that are converting their farms into organic grounds; we like to see that as well.

Another thing that's pushing prices up is increasing population. As the population increases, a lot of the upward pressure is put on the value of the farmland. Just look at the prices and how they've increased in the produce section of your local grocery store, and you'll see what's going on with our land, because that all comes back to the land.

Finally, the buying power of the dollar is just going down as the government prints billions more in dollars. This makes farmland, especially produce-oriented farmland, a great hedge against inflation.

If I had to point at one thing, I'd say that the amount of farms in our region is relatively finite. There are no new farms being developed in most of these areas that we're in because all the arable land is currently being farmed, or it has already been converted to other uses. So the trend that we're seeing is a steady decrease in the number of farms in the growing regions, as they are being sold to build homes and apartments and offices and schools and industrial buildings.

All of this land is being converted, and once it's converted to suburban uses they never go back to being farms. So this causes the farms that we own to be highly sought after, and they've been rented for decades without being vacant.

Just a footnote on our leasing practices. I want everybody to know that we prefer keeping the same farm on the property for as long as possible. We're not really in the business of just seeking out the highest prices we can get from any farmer that comes along. Our objective is to be a long-term real estate partner for all of our farmers, so that they know that they're going to have that form as long as they want it, as long as they're within range of a good rent payment to us.

Now some details on the recent activity. We invested $30 million in five new farms during the quarter. We've acquired one farm for $4 million or so after September 30.

We closed on our first Midwest deal, acquiring two farms in Nebraska that will be growing potatoes and edible beans and then on the off-season alfalfa. They also may switch into corn and soybean in a rotation if they want to. These farms have combined 22 wells on-site, giving them plenty of water for those farms.

In addition, our second investment included a development plan. This is the first one that we've done like this. I don't know how many we'll do, but we're converting ground into almond orchards, which we expect to cost about $8 million for the conversion. We'll be earning additional rent on every time we -- they -- farmer there plants new trees and we advance money for those new trees, they'll be paying us even though those trees are not yet ready to yield any almonds.

So we're not going to lose any money on this development deal. We'll be paid for the land and the things that we put on the land during this period until the almonds trees begin to produce, and then we'll get a piece of that action because we also have a participating piece there as well.

When all is said and done, we expect these farms to result in a total investment of about $38 million. The $8 million and the $30 million are going to be what we will average; and we think the net rent will be about 6.9% on the $38 million that we are investing in that farm.

We financed these acquisitions with long-term debt at a weighted average fixed-interest rate of about 3.1%. So if you do the math, you'll figure out what we're getting in terms of all-in return on our equity.

Just the other day on one more farm in Florida we did a $4 million, and current rent on that is 5.6% before we leverage or put a mortgage on it.

I think the pipeline as we call it is -- this is all the marketing activity that we're up to. We're just gaining significant traction in all the marketplaces that we're in. There is a long list of possible acquisitions that should continue to help us grow nicely.

At this point in time we have seven farms worth about $17 million under signed purchase agreements. We expect to close them within the next few months.

We also have a couple of extra farms worth about $26 million under sign. These are nonbinding letters, but it's a Letter of Intent.

We believe they will go all the way to get purchased, but that is a little less binding in terms of where you have a purchase agreement in place. But we're still continuing our diligence process on a number of these properties, and at this time there is certainly no guarantee that any of these will close, although my best guess is that they will.

Now let's talk about net asset value. This is one of my favorites because most of the people who invest in real estate investment trusts don't get this discussion.

During the quarter we updated the valuation on eight of our farms, six of which were valued internally. We'll go into -- Lewis can go into that a little later -- and two of which were reappraised. So we had appraisals come in on those two.

In the aggregate, the farms increased by about $4 million or about 10% over the prior valuations, which were between 12 and 15 months ago. So that was a nice increase in terms of net asset value.

In September, our portfolio was valued at $265 million, with 48% of the fair value based on either third-party appraisals or actual purchase prices. And 52% of the total value or about $138 million was determined internally.

However, of the amount valued internally, about 97% of that amount or about $133 million is supported by third-party appraisals performed between 13 and 32 months ago. So this difference represents a strong increase in value since that time.

Based on the new valuations, our net asset value per share at September 30 is $13.64 per share, up $0.22 from June 30 last quarter. So three months ago it's upped $0.22, and so that's a good movement up.

We've made some significant amount of capital improvements on some of these properties, most in the form of irrigation upgrades, as we always like to have those in first-class condition. The full cost of these improvements hasn't really been included in the corresponding increase in the property value. So we've been spending money and it's not reflected in the property values yet until the projects -- they're still ongoing -- until we complete them we won't put those in the numbers.

So far this year we've made about $1.3 million of improvements on certain of our properties, and that figure hasn't gone into the property valuations. That's about $0.14 a share. So once those projects are completed, we'll have the properties reappraised and we expect to capture a significant portion, if not all of it, in the cost through valuation -- value appreciation.

One additional note, these projects -- on the majority of these we begin receiving additional rent income on the total cost of the project once they are completed. So we're not just investing to maintain the property; we're investing to improve the property and increase the rent that we receive on the property.

We expect to see our net asset value to continue to trickle upward. Hopefully there will be some larger ones along the way as appreciation continues to come through the portfolio.

All right. Our stock is currently $9.26, which is significantly below our net asset value. We're hopeful our stock price will rise in the future.

So if you buy the stock today, you're getting a discount from my estimated net asset value of about 32%. You're buying something at $13.64 -- I mean you're buying at $13.64 of assets for just $9.26. I think that's a wonderful purchase in today's marketplace.

Also, along the way you're getting a $0.04 per share per month cash distribution. We cover our distributions with our income, which is a 5% return.

I think that's wonderful. You get a 5% return while you watch your net asset value continue to trickle up.

Well, that's enough of the business discussion. I'll turn it over to our Chief Financial Officer, Lewis Parrish, now to talk to you about the numbers that we have for the quarter.

All right. Thank you, David, and good morning, everybody. I'll begin our discussion with our portfolio activity and the balance sheet. (technical difficulty)

(Operator Instructions) Mr. Gladstone, you may resume your conference.

Okay; thank you.

Okay. Good morning, everybody. Sorry about the interruption there. For this portion I'll begin with our discussion on the portfolio activity and the balance sheet.

We acquired five new farms during the quarter, adding about $30 million of new assets to our books. We invested $11 million into two farms in Nebraska, representing our first foray into the Midwest, and $19 million into three farms in California that will be planted with almond trees.

The two Nebraska farms were acquired at a net cap rate -- and that's rental income net of any property expenses we're responsible to cover, such as property taxes -- of 5.3%. The leases we put in place will run for about three and a half years.

Our $19 million California acquisition also includes the development plan to convert the current grounds into an almond orchard. We expect this project to be completed during the summer of 2016 at a total cost of about $8 million on which we'll earn additional rent as the costs are expended by us.

In addition, as David mentioned, we'll also be sharing in a portion of the tenant's gross revenues from crop sales. As GAAP only allows us to record the minimum rental amounts guaranteed in the lease, our initial cap rate on this deal is 4.4%. However, using conservative estimates for prices in crop fields, we expect an overall cap rate of over 7.5% once these contingent rental amounts are figured in. The lease we put in place runs for 15.5 years and includes one 10-year extension option.

Since quarter end we've acquired one additional farm in Florida for about $3.8 million. We put a six-year lease on a property that will give us a 5.6% net return.

No leases were renewed or extended during the quarter. But given that the four leases we have renewed this year have resulted in average rental increases of over 15%, we believe this quarter is a trend we're seeing in areas where our farms are located, and that's a demand for prime farmland such as ours, as well as the values of such farmland and the rents they command is continuing to increase. This sentiment seems to be shared by the tenant farmers in those areas as well.

We have no agricultural leases coming due in 2015 and only two set to expire in 2016. We've begun negotiations with the current tenants and expect to be able to renew both of those leases at increased rates without any downtime.

Moving to our balance sheet, during the third quarter our total assets increased by $30 million or about 16% due to the new farm acquisitions, which were funded almost entirely with debt. We obtained $28 million in new long-term borrowings during the quarter at a weighted average interest rate of 3.1%, and the rates are fixed for the next three to five years.

In addition, we amended our credit facility with MetLife to reduce the interest rates on both the mortgage note and the line of credit by 26 and 25 basis points, respectively, which should result in about $190,000 of interest savings per year. We also extended the fixed-rate term of the mortgage note by almost four years, pushed out the interest-only portion by an additional six months, and extended the draw period by one year.

Just a quick note on the Florida farm that we acquired subsequent to 9/30: it was financed with borrowings from Farm Credit that should bear interest at an effective weighted average interest rate of 3.0%, the majority of which is fixed for the next six years.

Now on to our operating results. The first thing that I'd like to point out is that every single per-share metric increased significantly over the prior quarter. That was due to our operating revenues increasing by about 11% while our operating expenses remained relatively flat, only increasing by 1% from the prior quarter.

Over the past four quarters, our operating revenues have increased by an average of 10% per quarter, while our operating expenses have only increased by an average of 2%. Going a bit more in detail, our core operating expenses -- which strips out depreciation and amortization expense, acquisition-related expenses, and any fee credits received -- only increased by about $45,000 from last quarter. This increase was due to additional property operating expenses and professional fees incurred, partially offset by decreases in certain G&A expenses, namely stockholder-related expenses and insurance premiums.

And just a quick note on real estate taxes: due to leases on two of our properties that became effective on November 1, our burden for real estate taxes on these two farms reverted back to the tenant, which will result in annual savings to us of about $180,000. In addition, beginning in January 2016 all of our other farms will be placed into Land Conservation Acts which should further reduce our annual property tax burden by an additional $122,000.

Just a reminder before taking a quick look at our per-share numbers, core FFO is FFO adjusted for certain one-time charges such as acquisition-related costs; and AFFO further adjusts core FFO for certain noncash items, such as converting GAAP rents to cash rents.

Per-share earnings from Core FFO and AFFO for the quarter was $0.113 and $0.103, respectively, compared to distributions of $0.12. These figures represent increases of $0.012 and $0.018 per share, respectively, from the previous quarter.

For the nine-month period, our per-share earnings from core FFO and AFFO were $0.345 and $0.309, respectively, compared to distributions of $0.345.

Turning to our liquidity, we currently have about $3 million of cash on hand and $4 million of availability under our MetLife facility. In addition, we are currently in discussions with one of our lenders for a facility that would provide us with additional borrowing availability. We received a nonbinding term sheet from them, but there is no guarantee that we'll be able to finalize this deal.

After factoring in certain operating obligations and assuming that we are able to close on this new borrowing facility, we estimate that our current buying power is about $25 million. We also have plenty of room to leverage up in our MetLife and Farmer Mac facilities should we pledge new properties to them. In addition, we implemented an ATM program during the quarter that we hope will eventually provide us with additional capital to deploy towards new deals.

Regarding upcoming debt maturities, we don't have any principal payments coming due through the remainder of 2015; and we only have $3.6 million of principal payments to do throughout 2016. This includes a $1.5 million payment on our MetLife mortgage note that's due in July of 2016 and a $1.5 million short-term loan from Farm Credit that we expect to be refinanced before its maturity.

Going into the final quarter of 2015, we believe we are beginning to achieve economies of scale, resulting in some stabilization of our operating expenses. In moving forward, we expect that you'll see revenues from new acquisitions have a more direct and positive impact on our bottom line.

With that I'll turn the program back over to David.

Okay. Sorry about the problems with the phones. This is the second time we've had some problems.

But thank you, Lewis. That was a good presentation.

The main point again to report is to tell you that we're continuing to execute the plan that we promised we would do, over $184 million in new farm acquisitions since 2013 when we went public, and we have several other deals in the pipeline that we expect to close in the coming months. With an increase in the portfolio of farms comes greater diversification and protection for investors, and we also expect to see some increased earnings.

We expect that many of the firms that we've acquired will be purchased from farm owners that don't own a farm in terms -- don't farm the farm every day but rather lease it to other farmers. This is about 38% of all the farms in the United States are owned by individuals but not farmed by them. They rent the land out to different farmers just as we do.

So many times we buy those and we just become the new owner, and the farmer that's there stays on that farm. In those situations we want to add new things in our leases, but it's pretty straightforward for all of these leases that we do.

In general, we want to keep the same farmer on the property for ever. We don't want to kick anybody off. So as long as we can agree on things going forward, there is not going to be a problem with leasing the land.

In addition to the drought in California, we were asked questions about why the Company is not investing so much in growing of corn and other hard grains out in the Midwest. The reason is price unpredictability. For example, corn can be as low as $3.60 a bushel and has been as high as I think $8.50 a bushel.

Well, corn farmers don't make any money when it's under $4.00. I mean they make a little bit and sort of stay in business, but we don't want to be in that business where people are marginal. So if prices of corn would go up -- or on the other hand, if we could get prices of properties much lower -- then that might work for us. We stayed away from corn in the past because of the large variation in price; but with the recent decrease in corn land values, we've begun looking at some of those properties.

But don't expect us to do a lot. Our sweet spot is vegetables and berries, and they don't grow a lot of those out in the hinterland. But you do grow a lot of potatoes and onions and peppers and those kind of things, so we'll see. Just like our Nebraska acquisition, you should see us in that area more often.

As most people know, we farmed fresh fruits and vegetables. Our farms have avoided investing in heavily farmland that grows traditional commodity crops.

Less than 10% of the total value of our portfolio is invested in farmland that would grow corn, wheat, and soybeans. A major reason, again, is we believe investing in farmland growing crops that contribute to healthy lifestyles such as fruits, vegetables, and nuts is where we should be.

According to the USDA, 92% of the corn acreage and 94% of the soybean -- these two crops are very interesting in that most of them are now GMO varieties. And more than 90% of our portfolio is not invested in anything related with GMO, so we've got 100% on the berries and vegetables side.

So the new GMO labeling requirements that are coming out -- they're on the horizon now -- we think that farmland that is GMO-oriented is going to be much less desirable. And the GMO-free farmland that's growing fruits and vegetables and nuts is going to be outperforming all of the farmland marketplace that are out there today, both cash returns and long-term value appreciation. As an agricultural real estate company, it's our responsibility to be in the know about these marketplace, and we take pride of having built a foundation for our Company across all these healthy sectors and the agricultural industry.

Looking at the economy, there is still lots of things out there that give us pause. The economic outlook for produce-growing farmland I think has performed extremely well over the last 10-plus years compared to other asset classes, and farmland has provided investors with a safe haven during the recent turbulence in the financial marketplace. You didn't see the prices of farmland go down during those periods of time.

This is also evidenced by the increase in prices of fruits and vegetables that we're seeing at the grocery store. Most of all, farmland has historically been an excellent hedge against inflation.

I mean, the thesis for this Company is very simple: there are more people in the world every year; people have to eat, so they need farmland. Farmers need farmland to grow food.

I'm often reminded that there are some greenhouses out there. And when I say this, I'm telling you: we'll all starve to death if we have to produce all of our food through greenhouses. It's just a tiny amount of food that's grown in greenhouses. It's a nice idea; it's just not going to compete with farmland in terms of feeding the world.

Farmland today is being converted to nonfarm uses. That puts a huge pressure on the existing farmland to grow the food, because you have farmland going away. And at the same time the existing farmland is not growing more food; it's growing the same amount or maybe a little more.

There is no replenishment for farmland in those areas that we're in. There's no more trees to cut down to turn into farmland where our farms are.

So from that perspective you just don't see any new farms coming along, much like you would in the real estate industry where, if you have a very profitable apartment building in a certain area, you can bet somebody is trying to build another apartment building right next to it.

The buying power of the dollar continues to decrease and the government continues to print more and more money. We're up to $19 trillion that we owe, so they keep printing to stave off the inevitable, which is one day we have to pay back that money.

That will be a coming event. Just can't keep increasing the debt load out there. Farmland is becoming more valuable every year, and I think it's due to such a limited supply and it's also due to the fact that more money is being printed.

Increase in our monthly cash distributions, we've increased it twice this year. We've had a 33% increase since the beginning of the year. In October the Board voted to maintain the monthly cash distribution of $0.04 per common share per month for the quarter, for each of the months in the quarter. As of today, we've made 33 consecutive monthly distributions to shareholders.

We're projecting strong production of income over the rest of 2016. And if our expectations are met I hope we'll be able to increase the dividend again in the future.

As the largest shareholder of the Company I am working hard to increase distributions. I like dividends as much as anybody else out there.

With the stock price around $9.26, the distribution run rate's above 5%. It's higher than all of the entire index of the REIT index currently trading at about 4.5% these days, so as a result, we're in that zone.

These writers who write about farmland REITs -- and all REITs, for that matter -- always talk about how the stock has not grown. But they forget that we pay out all of our income in the form of dividends. They never seem to count the dividends that we paid out. Since the IPO in 2013 we've paid out $2.24 per share, and we'll keep rolling along and paying that out.

So please remember purchasing this stock is a more long-term investment in farmlands. It's part of an asset class just like gold, except that it has an active investment with cash flow to investors. We always like to point out that Warren Buffett comment, that he would rather own all the farmland in the US than all the gold in the world. His son is a large owner of farmland out in the Midwest, and we agree with Warren on this.

We expect inflation of food to be strong, and that will push up the value of farmland that we own. That's our business model, and it seems to be working.

I look at this farmland REIT is a way to hedge against inflation in food prices and other inflation aspects in the economy. I think it's better than gold. All those looking for an asset that doesn't correlate to the stock market, this is it.

And now we'll have some questions from our loyal stockholders and some of the analysts. So operator, if you'll come on and give us the questions.

(Operator Instructions) John Roberts, Hilliard Lyons.

Morning, David. This is more a high-level strategic question; Lewis addressed this to some degree. But given the stock price, I'm sure you don't want to be issuing stock at these levels given as dilutive as it'd be to asset value. You are coming up against the limit of your ability to add debt.

Do you see strategically if the stock stays here more operating the Company just to generate the best possible outcome from the existing properties, rather than to continue leveraging up and potentially causing some risk on that side of things?

Sure, we look at it every day, trying to figure out which way to go. Obviously, if you could put the money to work at a very high rate, which is not exactly what we can do, you'd raise money at this price.

We do have an ATM program working for us. We haven't done much. We sold maybe 2,000 shares to date, so we're not really in that marketplace.

I think the next thing we need to look at is where we go in terms of the equity side and the debt side. We'll spend more time on that and see what we do.

But you're right. Maybe the right thing to do if we have to is just to sit, and let the increase in rents continue to go up, and pass that on to shareholders.

I hate to do that. You end up telling your inside people that are working on this: go increase your golf game. But we don't want to do that, so we're working hard to figure out what's the next route for us.

Some people have mentioned we should do some preferred stock. We haven't looked at that very close, but that's another option.

I don't want to get too far out there on the leverage in this. As you know, I'm not a great believer in leverage.

But this asset does have some stability beyond what you would find in the normal real estate marketplace, and as a result of that I feel more comfortable about leveraging this up with mortgages. If you tie the mortgage to a real fixed rate long term, and you've got your rents going up, it's a good multiplier.

So we're doing the numbers, and I don't have a good answer for you today, John.

All right. Thanks, David.

Amit Nihalani, Oppenheimer.

Hi, good morning. I'd like to know if you could provide what the CapEx run rate is going forward, and if there is any additional CapEx to model out for drilling and so on.

Yes. You should remember two things about CapEx. Most of the time when we have CapEx we actually increase the rent to the farmer for that, so it's not typical CapEx where it's just shot into the ground or into a building and you don't get any more rents for it. So from that standpoint, it's a little bit different.

I would say maybe we spend $1 million or so every year in terms of CapEx. It's just an ongoing thing. There is a well here or something over there that we have to do, but it's not a lot. You shouldn't expect it to be anything like you'd see in, say, an office building CapEx model or an industrial REIT cap model. How much are we spending now, Lewis?

It varies right now because some of the properties we agreed upon acquisition to improve the property and then increase the rent thereafter. But Amit, if you take a look at our commitment to -- did you see his footnote? You'll see a lot of operating obligations that we have detailed there, and most -- everything that we have listed in the footnotes there should be completed by summer of 2016.

So it's hard to say a run rate right now, because we have a lot of one-off projects going on. But after December 2016, they should start to normalize a bit.

Got it. Could you provide some more color on the pipeline? For example, what the expected cap rate is, the type of assets, and how you expect to finance it?

Yes. Most of the -- if you look at the cap rates, this business has been running on the same cap rate for as long as I've been in it, and I talk to some of the appraisers that go back into the 1930s. Your cap rates are running in the 5% to 6% rate right now on the things that we're looking at.

But you end up -- if you are doing, say, tomatoes and watermelon you're going to get a higher cap rate than if you're doing strawberries. So the cap rates do vary by crops, by farms, and by a lot of different things.

But if you used a cap rate and just said I'm going to assume it's going to be 5.5%, you'd probably be okay. Now every now and then, as you mentioned, as we mentioned, the almond farm is going to be at a lower start rate because we're putting money into the ground; and you've got to get the trees up and running in terms of producing almonds. So as a result, that one starts at a little lower, but it will have a much steeper curve on it over time.

All of these are going up by a rate of 2%, 3% per year. But every two to three years we go in and determine that rates have gone -- I mean, not rates have gone up, but the value of the properties have gone up; and therefore if you use the same cap rate, let's say of 5.5% on a higher number, you're able to raise the rents to that number.

This is pretty standard across the United States. If you were in the Midwest doing corn, for example, just to use that as the first example, corn would be rented once and then -- I mean per year. So every year the negotiations would go on between the farmer and the holder of that property.

It's a little different out West and down in Florida. You're normally doing two- and three-year rents with 2% to 3% bumps every year; and then you're going in and sampling the marketplace and coming to an agreement of what the new rent should be.

So this is a different business model than you'd see in an apartment rent, although an apartment rent you're obviously renting new apartments, and people are leaving and coming, and so the rates do move up. But it's different in the sense that you're locking people in for two to three years. I don't know that they do that in apartments.

But certainly different from office rents, triple-net rents. It really is a triple-net deal; but at the same time it's short-term duration, in the sense that we might sign a 10-year lease but have the transaction renegotiated every three years just based on the model that we put together.

Great, thank you.

Did you have a question for Lewis?

Yes, like what type of farmland specifically is in the pipeline right now, and how do you expect to finance it?

Yes, got a lot of stuff that we're looking at in all of the things. We've got a number of farms that are in potatoes.

Potatoes, if you go into part of the grocery store, potatoes are probably one of the largest areas in the grocery store, in the sense that they bump out a lot of the different others in terms of the amount of throughput that's going through the stores. It's a staple, obviously; so we like that area.

We've got some peppers that we are doing. We've got -- and some of these -- and tomatoes, and we've got one watermelon. These are all things that are going to have good rates to them.

We do have a number of things that are coming along in the berry area. So you look -- I hate to mention these, because no sooner do I seem to mention these kind of things, the deal falls through, and so I've got to replace it with something else.

So just generally speaking, if you're in the produce section of your grocery store, that's what we're looking for. Now some of these farms, even strawberry farms during the interim period, will plant lettuce and some of them will plant barley. Some of the farms that are in potatoes will go to alfalfa for a short period of time.

These are all rotational crops that go back and forth. So there is no one crop that's on one property forever. Yes, every year they may plant strawberries; but in the interim they will plant barley. It's just a way of farming that goes on everywhere in the world. Other questions?

That's it. Thank you.

Well, the financing part of this is all related to three or four very aggressive lenders in the business. The mortgages come from these government-related industry entities such as Farm Credit. They use the ability to sell off the loans at very, very low rates -- because supposedly they are guaranteed, although they are not directly.

You've got Farmer Mac is another. It's a public company, but at the same time they are having tremendous volume of financing farms.

Then we deal with MetLife, who is the largest mortgage lender in the United States -- and maybe the world, but the United States. We have a very large credit line with them.

We've dealt with others over the years, but none of them stand out the way that those three do. So those would be the preferred way of going. We may find somebody else that we (technical difficulty) but we haven't done any of that to date.

Rob Stevenson, Janney.

Thanks. Good morning. David and Lewis, can you just talk a little bit about pricing recently on some of the Farmer Mac and some of these other deadlines? Have you heard or seen anything?

I know it's probably a little too soon. But you've had some disruption or some people talking about what's going on with Freddie Mac. Any of that flowing its way through to Farmer Mac. And any of the other capital sources, have you seen any bump up in rates, or lack of availability on any of the financing?

We have actually seen a slight decrease in rates from the previous quarter. Who knows if that will continue, especially with the meeting upcoming in December. But rates continue to be favorable and there don't seem to -- we haven't experienced any restrictions on lending from the lenders that we have dealt with.

Yes. In fact, it's been very nice because they've all been relatively aggressive in terms of looking for transactions. We enjoy that, and getting very low rates.

So at this point in time the farmers of the United States, the whole Midwest particularly, is very aggressive in terms of lobbying Congress to get things. They got a very nice Farm Bill through the last time. What's it been, a year and a half that that was passed?

What has happened that's interesting on the farming side, it used to be very heavily subsidized, and so a farmer would get paid to do certain things. They don't do that anymore. They've now gone to an insurance model whereby the farmer can buy insurance, and the smaller farmers normally do that and pretty much will get you to breakeven even if your farm doesn't perform very well. You can live to another day to farm again, because you get most of your money back.

That's going to stabilize the food production in the United States, I think, dramatically. Because it used to be some of the small farmers would blow up and go out of business. And I think that's going to be reduced with all of this insurance that's now being written.

In terms of that insurance, is there any movement -- so this quarter you guys are doing the redevelopment of the almond in the California farms. Has there been any movement to ensure the permanent crops for more than just one year from the farmer standpoint?

Because, obviously, if they have the first year, whatever, on strawberries or some sort of fresh produce, that basically covers you; and then they can go and plant for the next year and it's unaffected. But in something like almonds where it's a multiyear period to grow the trees or whatever, if you're only really being protected in the first year or so there's potential downside there. Is there programs that are coming up that are (multiple speakers)?

There is only in this case with the government crop insurance, meaning that a crop is insured so you get your money there. Obviously, when you are growing trees you insure the trees; so if the trees blow down or die from some insect you can get paid for that insurance. You are buying that insurance as well.

I think most people -- maybe some of the large ones, and I don't know the strategy of some of the really large ones like Del Monte and Dole, what they are doing with regard to insurance. But I'm assuming they don't insure. They self-insure, if you want to think about it that way.

This is primarily for the midsize and smaller farmers. Anytime we're with a midsize farmer, we're asking them and make it a condition that we get insurance. So we're protecting ourselves.

Obviously, if it's trees we'd want to know that all the trees are being insured so that we get paid back on that. But there really is no insurance that says we'll ensure your crops for the next 20 years.

Okay. Thank you, guys.

John Massocca, Ladenburg Thalmann.

Good morning, everyone. Just touching again on the development deal, I know it didn't sound like -- is there any more opportunities to do these kind of deals? The cap rate was very attractive. It seems like your cadence with it is a one-time thing; but is this kind of a transaction that there are more of in the market?

Yes, there are literally hundreds of those out there. We are tiptoeing into that marketplace. Even though it's a nice cap rate, there is development risk.

So as you develop, you have development of rest, just as if you were building a building. You're building a business, a new business, and so we are tiptoeing into that business.

We may do more of it. There are people out there that will finance that, and so we do have competition for those deals.

But those are highly lucrative on the upside. You make an enormous amount of money when you take some farmland and convert it to really new tree or vine crops.

So yes, we'll do more of that as time goes on, as we get bigger. I just don't want to make a big bet on that today.

Is that cap rate you got on that development typical of cap rates for those type of deals?

I'd say it is. I'd say it's a very good deal for the farmer and it's a very good deal for us, because there is some risk there, so they are paying up for the risk. And I think it will be one that you'll see great benefit from and an increase in the --.

I know on some of these questions people are going to start asking me: well, what was the yield on the farm? And what did you have for almonds? And we're going to have to start getting into some kind of discussion about the production capacity and the shellers and all of those kind of intermediaries.

Because you go from -- I don't know if you know it or not, but one of our other companies has a company that manufactures the machinery that harvests almonds. So as a result, that company would hopefully make a lot more money as more almonds are grown.

But point being is that we like the permanent side of the business in that you don't have planting risk every year like you do in the annual crops. We like it because it's long-term; you plant it once and you don't have to think about it anymore.

Then the other side of it is that these trees are very long-lasting. You can get an almond tree to produce for 20, 30 years. So it's like a wonderful thing. Every year you get good crop of almonds you make a lot of money.

And the almond business has been extremely strong, a lot of it driven by almonds converted into almond milk. That is a product that has ballooned in terms of sale as against just regular milk or coconut milk. So it's become a very strong product out there and is chewing up a lot of the -- no pun intended -- chewing up a lot of the product in terms of that.

The other side of that, which is a little bit scary, is that the Chinese and Asians have been eating more and more almonds. So as they become more middle-class, they are stepping up to buy almonds and that has jacked up the price dramatically. There is huge demand from Asia for almonds coming out of California.

So I think it's a typical deal. We believe it's a typical deal.

The person that we back there is a long-term farmer in that area. That family has probably been growing almonds for the last 50 years. They know everything to know about it. They've got other huge amounts of almond groves.

So we just partnered with them. We became their real estate partner for developing new transactions, and we think that family is one of the best in California for growing almonds.

Then touching on cap rates again, if you were to buy, say, permanent crops, orchard-based crops -- sorry, not crops, the land, on an already established basis, are those pieces of land generally going at higher cap rates than even more like the berry and vegetable farms?

No, they're actually in the same ranges that we have, and that's why it was acceptable. So if you found an almond orchard and you wanted to buy it, it might be slightly less because there is less risk in it; so you might get a 4.5% or 5% cap rate on an existing farm.

That has its own risk profile in it, that if the tree is five years old, there is less risk. If the tree is 10 years old, you're starting to turn the corner. And if it's 15 or 20 years old, you're going to have to program some money in to plant trees again in 25 or 30 years.

So there's a lot of sinking. You need to have a sinking fund to be ready to plant those.

Quite frankly, a lot of the trees don't make it that long, and you'll take out one tree. Out of, say, 10,000 that you have on a farm, you might take out one or two in the first year; then you plant new ones obviously, and they would be a little behind the existing ones. And then some more will die.

Then as time goes on you're replacing trees that aren't producing as well and putting in new trees, and it becomes a farm that's rotating in and out of old trees to new trees.

All right. That's it for me. Thanks very much.

Other questions?

(Operator Instructions) I am showing no further questions. I will now turn the call back over to David Gladstone for closing remarks.

All right. Thank you all for calling in and we'll try to edit this down. We've got a pretty long presentation, and we've done that primarily because this is a relatively new area and new people want to learn about it.

So we'll edit this back so that Lewis and I aren't covering the same thing so many times. That's the end of this conference call. Thank you all for calling in.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. Everyone have a great day.