Gladstone Land Corp (LAND) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Gladstone Land Corporation second-quarter earnings ended June 30, 2016 earnings call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to David Gladstone, you may begin.

Thank you and welcome to the quarterly conference call for Gladstone Land. This is David Gladstone. Thank you, Nicole, for that nice introduction, and thanks to all of you for coming on the line today. We appreciate you calling in. We always enjoy this time with you and hope we have a lot of good questions at the end of this presentation. We wish we had more time like this, been thinking about ways to talk to you, but, unfortunately, we don't have one. So this is your chance to ask some good questions.

By the way, if you are ever in the Washington, D.C. area, we say this every time, we are located in a nearby suburb called McLean, Virginia, and if you have a chance, come by and say hello. You'll see a great team at work here. We have over 60 people in the team and we manage about $2 billion in assets across all four of our public companies.

Now, we're going to start with Michael LiCalsi. He is our General Counsel and Secretary. He also serves as the President of Gladstone Administration, which is the administrator for all of the Gladstone funds, including this one. Michael, go ahead.

Good morning everyone. Our report today may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding the Company's future performance. 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 in these forward-looking statements, including all risk factors listed in our 10-K and 10-Q that we file with the SEC. These can be found on our website, 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, except as required by law.

And in our report today, as a real estate investment trust, we will 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 can be used in discussing REITs.

We'll also discuss core FFO, or CFFO, which adjusts FFO for certain nonrecurring charges such as acquisition related costs, and adjusted FFO, or AFFO, which further adjusts CFFO for certain non-cash items such as converting GAAP rents to cash rents. We believe these metrics improve comparability of our results period-over-period.

Another real estate term we will discuss is capitalization rate, or just cap rate, which is the annual return yield on investment and is calculated by dividing the annual net income by the purchase price. To stay up-to-date on the latest news involving Gladstone Land and our other related public funds, please follow us on Twitter, username GladstoneComps, and on Facebook, keywords the Gladstone Companies. Please go to our general website to see more information about this Company and our affiliated publicly traded funds at www.Gladstone.com.

Now, today's reports from our President and CFO will be an overview of our operations and performance, so we encourage everyone to read yesterday's press release and Form 10-Q filing, which include a wealth of information for our investors. You can find them all at our website, Gladstoneland.com. Now I will turn the presentation back to our President, David Gladstone.

That was good information for everybody. As you saw from the filing yesterday, 2016 continues to be a strong year for this company. But before we get to results, I always like to give a brief overview of the nature of our business and the overall market environment.

Our business consists solely of owning high-quality, and I want to emphasize that over and over again, high-quality farmland and leasing at what we consider top-tier farmers. We don't farm any of the farmland ourselves, and thus we don't take direct farming risk. Many of the farms that we rent out these farmlands buy crop insurance from the federal government that protects them against potential losses and, by the way, indirectly protect us and our rents. The farmers we lease our farms to are usually in the top 20% of the largest and best farmers in any of the farming regions that we are in, and we generally prefer to keep the same farming group or farmer on the property for as long as possible as they tend to know the nuances of operating a particular farm. Our objective is to be the long-term real estate partner for all of our farmers so they know that they have the farm for the long-term.

Most of our farms are located where farmers are able to grow high-value annual row crops such as berries and vegetables. That's where our investment focus continues to be. However, over the past year, we've taken advantage of some of the favorable circumstances in the Midwest where we found some excellent investment opportunities. We also furthered our expansion into permanent crops such as almonds and pistachios orchards out West. But you should expect the large majority of our farmland portfolio to continue to be leased to farmers who grow fresh produce and sometimes investment in permanent crops such as nuts and berries.

Currently, about 90% of our total crops, maybe more than that now, revenue comes from farms that are growing foods that you can find in either the produce section or the nut section of your local grocery store. We consider these foods to be among the healthiest type foods, and we are seeing a growing trend toward organic in some of these sectors as well. We are investing in some other areas for diversification, but these healthier foods are the areas we prefer.

Almost all of the geographic regions where our farms are located continue to experience steady appreciation in both the underlying land values and the rents charged on the land. This is partly because we only purchase irrigated crop land with great soil and plenty of access to water that allows the farmer to grow a variety of high-value crops.

Farmland regions will sometimes have short-lived periods where they decrease in value, but they almost always rebound and continue their upward trend over the long-term.

We now own 23,857 acres. There are 48 different farms in seven states in the United States, and the acreage we own is among the highest quality and most expensive farmland in the United States. We also own some cooling facilities, packing houses, and processing facilities as well as several other structures that are part of the farming operation on these farms.

We have a couple of different lease structures that we offer our tenants. We've been extremely successful with our leasing strategy as we've been able to average an increase in rental over 16% on all the lease renewals over the past three years, all without incurring any downtime on the properties.

The trend we are seeing is a steady decrease in the number of farms in our growing areas for high-value growing regions, and this is being sold -- and these farms are being sold or converted into suburban uses.

And if I had to point to one thing that's driving up rental rates, I'd say it's the amount of farms in the regions where our farms are very finite. There's no farms being developed in most of these high-value growing areas because arable land is currently being farmed and there's just nothing there that you can convert into other uses, such as -- there's nothing there that you can convert into farmland. They are all in uses of such things as housing, schools, offices, shopping centers, factories have all been converted.

California alone is losing about 100,000 acres of farmland per year. This causes the farms we own to be highly sought after, and they have been rented for decades without being vacant.

And speaking of California, we continue to closely monitor the long-term drought situation there. Due to the heavy rainfall received in much of California this past winter along with the heavy snow packs accumulated in the mountains which will melt this summer and provide water to the farmers, there's been a dramatic improvement in the water availability for many of the farms in California. And the governor of California has now lifted the water restrictions.

As a note, the agricultural business in California had its best year ever in 2015 and we think 2016 is going to be a good year as well.

In our due diligence phase, and I can't stress this enough, we always spend a lot of time determining water conditions on each of the farms to make sure that the farm will have plenty of water for the long-term. We want to know that water availability is sufficient enough to withstand situations such as what's been going on in California for the last four years.

We only select properties that have the best irrigation and overall water availability in the place and time when we buy the farm. And partly because of all the time and effort we spend on the front end, our California farms continue to have significant access to water through on-site wells or city turnouts, as has been the case throughout the drought. For example, cities like Watsonville, Oxnard and several others have built-in water plants and purify the water from the city so it can be used in farming. We have turnouts on our farms and we can use either the water for -- we can use that water for irrigation but we can also use the wells that we have.

Water access and availability is another factor driving up rent rates and farmers are following land where water -- fallowing land where water is too difficult and expensive to obtain, and driving up the rent prices of land and good wells and multiple sources of water. So we are very, very conscious of the water needs.

Now some details about recent activity. During the quarter, we purchased a pistachio orchard in California just over $15 million. The 10-year lease on the farm requires a minimum cash rent that will give us a current 5% current yield. And the lease also includes a variable part of it which allows us to share in a percentage of the revenue on the farm. So we should do better than 5%, but at least we have that as our minimum. The farm has three strong wells on site, giving access to plenty of water.

Since the quarter end, we also acquired a vegetable farm in Florida for $5 million with a seven-year lease, current rent that provides about 5% yield on our investments. And overall, as they call it in the business, straight line, accounting yield will be 5.5%. Lots of good water in Florida. Nobody worries much about water in Florida. These returns are before placing a mortgage on the property. We usually can mortgage a property up to 60% or so and with mortgage rates being very low today, 2.5% to 3.2%, you can see how we make a lot of money on these properties.

Also, we have several additional farms under either signed purchase agreement or nonbinding letter of intent that we can work on. That's about $60 million worth of things that we are looking at. We're hopeful of closing on these acquisitions during the second half of 2016. However, we are still continuing our diligence process on these properties, and while I think we will get all of these done, there's no guarantee that any of them will close.

We renewed one lease last quarter at an annual rent increase of 18%. We only have one more agricultural lease that expires this year. We are working on that, and that one, negotiations our current, and expect to be able to renew the lease and increase the rent without incurring any downtime.

Combined with the 2015 lease renewals, which resulted in an average rental increase of over 15%, we believe our 2016 renewals underscore the trend that continues in the areas where our farms are located, and that is that demand for prime farmland rents that they command, it's just continuing to increase. This sentiment seems to be shared by farmers in these areas as well. We all know that rents have to go up because there is a limited supply of land.

That's enough of the business discussion. Let's get into some numbers. And for that, our Chief Financial Officer, Lewis Parrish, is going to talk about the numbers. Lewis?

Thank you David. Good morning everybody. I'll begin by discussing our balance sheet.

During the second quarter, our total assets increased by about $18 million, or 7%, mainly due to new farm acquisitions which were funded primarily with new fixed-rate debt. In connection with the purchase of the pistachio farm in California, we obtained an additional $9 million of new long-term borrowings at an expected effective interest rate of 2.79%, which is fixed for the next five years. We borrowed these funds from a new source, expanding our lending base to four different lenders now.

In connection with the Florida farm that we acquired subsequent to quarter end, we obtained an additional $3 million of new long-term borrowings at an expected effective interest rate of 3.17%, which is fixed for the next seven years.

From an overall leverage standpoint, our loan-to-value ratio based on the fair value of our portfolio was just under 54% at June 30, and we are comfortable at this level given the relative low risk of farmland as an overall asset class.

While interest-rate volatility remains a concern, as of June 30, about 91% of our total indebtedness was at fixed rates and on a weighted average basis, these rates are fixed for another four years out. So we believe we are pretty well protected against any near-term interest rate hikes. The weighted average effective interest rate on these borrowings as of June 30 was 3.11%, down from 3.35% a year ago. We continue to decrease our overall borrowing costs and further diversifying our lending base has provided us with even greater access to cheaper sources of capital.

And regarding upcoming debt maturities, only 1.3% of our total debt outstanding, or about $2.5 million, is coming do throughout the remainder of 2016.

Now we'll move on to our operating results. First, I'll note that net income for the quarter was approximately $0.1 million, or $0.01 per share. For the fifth consecutive quarter, we've continued to grow our adjusted FFO as it increased by 16% over the prior quarter.

Our operating revenues increased by over 15% from last quarter primarily due to our recent acquisitions and additional income earned on capital improvements made on some of our existing farms.

I'd also like to point out that, when compared to the same quarter last year, our rental revenues on a same property basis increased by 4%, and that was mostly due to leases on those properties being renewed at higher rates.

Going into detail on the expense side, our core operating expenses, which strips out depreciation and amortization expense, acquisition related expenses and any fee credits received, increased by about 7% from last quarter. This is mainly because of a performance-based incentive fee earned by our advisor during the current quarter which fee was not earned in the prior quarter. This fee was earned due to our pre-incentive FFO surpassing a required hurdle rate.

Just a quick note on our intercompany fees, our management fee is calculated based on the cost basis of Company stockholders equity as it appears on our balance sheet. And our incentive fee is based on FFO as defined by NAREIT. So neither of these fee calculations is tied to our net asset value, which we will be discussing in just a bit.

Continuing on with our expenses, if you exclude the incentive fee earned this quarter, our core operating expenses actually decreased by 6% from last quarter, or by about $79,000. Broadly speaking, the main drivers behind this decrease were lower professional fees, a decrease in stockholder related expenses, and lower property operating expenses, mainly property taxes.

We did record about $64,000 to bad debt expense included in the G&A expense line item due to a lease we expect to terminate early on one of our Florida properties. We anticipate terminating this lease and releasing the property to a new tenant during Q3. However, there's no guarantee that either of these events will happen.

Moving onto our per share numbers, per share earnings from adjusted FFO for the quarter were $0.136 fully covering our distributions of $0.124 per share. This is the third consecutive quarter in which we've covered it with AFFO and we expect this to continue to be the case in the future. Further, as our operating expenses have begun to stabilize over the past several quarters, we expect additional revenues earned on future acquisitions and lease renewals to increase our margins, thus enhancing the coverage ability provided by AFFO.

Now I'll move on to net asset value. During the quarter, we updated the valuations on nine of our farms, six of which were valued internally and three of which we had appraised by independent third-party appraisers. In aggregate, these farms increased by about $3.6 million over their prior valuations and the majority of this appreciation, over 90% of it, came from valuations as determined by appraisals.

As of June 30, 2016, our farms were valued at about $337 million with 65% of this value based on either appraisals or the actual purchase price. And 35% of the total value, about $119 million, was determined internally. And of the amount valued internally, 95% of it, or about $113 million, is supported by appraisals performed between 13 and 41 months ago with the difference of $6 million representing the increases in value since that time. Based on these new valuations, our net asset value per share at June 30 was $13.68, which is down by about 1.4% from last quarter. There were two main drivers behind this decrease.

First, we incurred about $3.7 million or $0.34 per share of additional capital improvements on our existing properties during the quarter, which costs have not yet been included at the corresponding increase to the properties' fair values. Most of the improvements were for the almond orchard development project on our Bear Mountain property. We expect this project to be finished during Q3, at which time we will have it reappraised and we expect to recapture a significant portion, if not all, of these costs through an increase in the property's fair value.

The second driver was a drop in long-term U.S. Treasury rates between March 31 and June 30, which led to an increase in the fair value of our fixed-rate borrowings. However, these should reverse once rates begin rising again.

While there may be some quarter-over-quarter volatility, over the long-term we expect our net asset value to trend upwards as the value of our farmland portfolio appreciates due in part to increasing rents and the neighboring farms increasing in price.

Turning to liquidity, we currently have about $8 million of dry powder and our current buying power for straight cash acquisitions is about $20 million. However, this figure does not factor in our ability to issue new OP units as consideration for purchases.

We recently expanded the size of our Farmer Mac facility by 67%, increasing it to $125 million. And we're also finalizing discussions with another lender to modify and expand our existing facility with them, which should result in additional borrowing availability for us. While there's no guarantee that anything will materialize, we expect to be able to finalize this during Q3. So we have plenty of room to leverage up on our borrowing facility should we pledge new properties to them. And we also have about $29 million available under our ATM program should our share price reach an attractive level.

We are looking forward to be very active during the second half of 2016 and we expect that, with the stabilization of our operating expenses, you'll see additional revenues arising from new acquisitions and lease renewals have a more direct and positive impact on our bottom-line.

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

Very nice report, Lewis. The Company just continues to get better every quarter as we continue to execute our plan. We've invested now over $244 million in new farm assets since our IPO in 2013, and we expect to add to that figure during the remainder of 2016.

Our backlog of possible farm purchases remains very strong. We currently have over $60 million of farms that are either under signed purchase agreement or signed letter of intent, and we expect all of these acquisitions to close in the second half of the year. We currently have the ability to close on all of them without a need for additional capital. As some of the purchases will involve issuance of OP units as consideration, that's very tax-advantageous to the farmers who are selling.

As you know, with the increase in the portfolio comes greater diversification, and that protects us all, investors and yours truly as a big investor, that we expect better earnings out of it as well. As most people know, our fund specializes in farms that grow fresh fruits and vegetables, and now a few nut farms. And we have historically avoided investing heavily in farmland that grows traditional commodity crops such as corn and wheat. One reason for this is we believe investing in farmland growing crops that contribute to healthier lifestyles such as fruits and vegetables and nuts, that's one reason we like that area, is it has strong growth. In addition, more than 90% of the rents from our farms is farms that do not have GMO crops on them. And we are continually expanding our ownership of organic farmland through both new acquisitions. I think some of the farms are being converted from existing farms to organic ground. However, corn prices and corn land values continue at depress levels. We've begun to look at some in the Midwest properties that grow corn as long as they are complementary by -- complemented by other crops on a portion of the property, like our recent acquisition in Nebraska and Colorado.

As many of you know, rents in many parts of the Midwest are down anywhere from 8% to 12%. This decrease is mostly a single crop ground kind of situation such as farms that grow only corn. So far, we've only bought irrigated farmland that can grow rotational crops and multiple different kind of crops so you can swap out if you need to, and we are confident that our farms are insulated from most of the price and rental volatility that you would see coming out of the Midwest.

It's that unpredictable part of the grain prices that really gives us concern, and so as a result, we weighed our farmland purchases very heavily in those that don't grow these traditional commodity crops. Currently, less than 10% of the total value of the portfolio is invested in farmland that grows corn, wheat or soybeans, and we believe this is really a good mix for the future. At this point in the farming cycle, farmers just can't make much money when they grow corn, prices are so low as they are today.

In terms of the economic outlook, generally farmland continues to perform extremely well compared with other assets. The NCREIF Farmland Index, which currently is made up of 696 agricultural properties worth about $7.5 billion, had a total annual return of 10.4% in 2015 and has averaged 14.3% over the past 10 years compared to 9.1% for the S&P. We hope to buy enough farmland so that we will be exactly like the Index over time.

Farmland has provided investors with a safe haven during recent turbulence in the financial marketplace as both land prices and food prices, especially fresh produce like we have, have continued to rise steadily. And most of all, farmland has historically been an excellent hedge against inflation. However, not all farmland is created equal. According to the Department of Agriculture, farmland that grows corn earns about $200 in rent per year in the Midwest, whereas California farmland that grows strawberries, the rents are $3,900 per acre. So for every acre of strawberries, you need about 20 acres of corn farmland to get the same rents. The number of acres is not nearly as important as the revenue per acre. Said another way, someone who owns 1,000 acres of corn land would receive rents of about $200 a year -- $200,000 a year. We only need 51 acres of strawberries to earn the same amount of rent.

We specialize in higher rents, higher-quality farms. That's what differentiates us from most of the farm owners in the United States.

Over the past 19 months, we've raised our dividend three times, resulting in an overall increase of 37.5% in our monthly distribution rates to shareholders. Our board voted last month to maintain the monthly distribution of $0.0418 per share for the third quarter. They will be meeting again in October to vote on the fourth quarter. They are considering whether it should be increased or not. We have to look at the revenues and how it's growing before we make that decision.

Since 2013, we've made 42 consecutive monthly distributions to shareholders totaling $2.60 per share in total distributions. Paying distributions to our shareholders is paramount to our business. We are, as they say in the business, a dividend paying company.

We project -- we are projecting good production and income growth in the rest of 2016, and if our expectations are met, we hope to be able to increase the dividend again.

The largest -- as the largest stockholder, I'm working hard to increase the distributions. I certainly like receiving dividends as much as anybody else. Stock is currently trading at $11.33. That's significantly below our net asset value. Thus we hope our stock price will rise in the near future. If you are buying the stock today, you're getting a discount from the estimated net value of about 15%, 16%, so you're buying $13.68 in assets for $11.33. What a wonderful purchase that is. And along the way, you're getting $0.04125 per share per month in cash distributions or 4.3% yield today. This is higher than the average return you get from the entire REIT Index today, which is currently about 3.6%.

In closing, please remember to purchase -- that purchasing this stock is really a very long-term investment in farmland. It is in part an asset investment just like gold except that it's an active investment with cash flows to investors. We expect inflation, particularly in the food sector, to be strong, and we expect the value of farmland to increase as a result. We are expecting this to especially be true in the fresh produce sector as people in the United States are trending toward eating more healthy foods.

I think a good way to look at the farmland REIT is a hedge against inflation and food prices in other areas. And for those looking for an asset that doesn't correlate to the stock market, this is certainly it.

Now, we will get Nicole to come back on and we will have some questions from our loyal stockholders and analysts who follow this wonderful Company. Operator, would you please come on and tell them how to do that?

(Operator Instructions). Rob Stevenson, Janney.

Good morning guys. Can you talk a little bit about what's going on that you're terminating the lease in Florida and re-leasing it?

The person there is retiring, and so we are going to find somebody. He will stay on, he has a lease for two more years but he wants to retire, so we are getting a new tenant there.

Okay. And then you talked about $60 million of farms under contract (technical difficulty) with a healthy OP unit mix to that consideration. When you are issuing OP units these days, where are they being issued? Are they being issued at market price? Are they being issued above where the stock is currently trading given the tax protection? Can you help frame that for us?

Yes, we usually start out at about 15% premium to the current price and try to start at that price. And sometimes we are above that, sometimes we are below, but that's generally where we are.

Okay. And then just in terms of that $60 million, is that -- how much of that is being governed by what you see out there that you are finding attractive from a valuation standpoint, and from an actual farm standpoint, versus the restrictions on you from a capital perspective? If your stock price was higher, does that $60 million go to $100 million in a pipeline to $200 million in a pipeline? How scalable is that today given your acquisitions, people on the ground, and what you are seeing from availability and attractiveness from a pricing standpoint on assets that you want to own?

Think about it this way as a funnel. At the top of the funnel, there are really, I don't know, $800 million worth of stuff that we have that's coming through the funnel. It's come down to this point in time where there's $60 million that we feel pretty comfortable about that we are going to close.

And you're exactly right. If somebody -- some of these farmers think their farm is worth more than we do, and the yield is pushed down to 2% or 3% in some cases. I know we were looking at some farms in Delmarva, which is really near Baltimore. There are too many gentlemen farmers over there, so farm prices go for very steep amounts and very low yields.

So, you're right on target. If we somehow could have a stock price that was yielding 1% because of -- obviously we could sell a lot of stock and buy a lot of these very high price farms. Most of the farms we look at are not going to fit our basic requirements, which are high quality, and then high quality tenants. And so as a result, we are very peculiar at this point in time.

I know I've said this to you before, but we cannot afford at this point in time to have farms that need a lot of work. We are not out there in the marketplace trying to redo things. There are a lot of opportunities for us to buy farms that need lots of work done to them in order to make them -- and we do some of that. We'll buy a farm and drill a well or drill two wells. The wells we probably drilled, I don't know, 20, 30 well in our history. So we know how to do that. And it makes a farm much more valuable.

So, yes, if you gave me very high price stock, sure I could buy some properties that I can't afford to buy now because the yield is far too low. And so that's one of the governing factors. But I would say that's not the big governing factor. The major governing factor is that we want high quality farms as opposed to farms that would be sort of in the middle or maybe even lower part of the farms out there today.

Okay. And then just Lewis, you said about the dry powder there was $8 million and there was a $20 million number. Which one of those is the total buying power? Is the $8 million the equity and the $20 million the total buying power with leverage?

$20 million is the buying power, yes, with leverage.

Thank you.

(Operator Instructions). I'm showing no further questions at this time. I'd like to hand the call back over to David for any closing remarks.

All right. We thank you all for calling in. We wish we had more questions because those are more fun, but as a result, we will have to hold out until next quarter. So thank you all for calling in at the end of this conference call.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day everyone.