Gladstone Land Corp (LAND) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation third-quarter 2016 earnings call and webcast.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference call over to David Gladstone. Please go ahead, sir.

All right, thank you, Abigail. Nice introduction.

This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. I want to thank all of you for calling in today, and appreciate your ability to listen to our presentation. And always enjoy talking to you on the phone, and hope we have some good questions at the end of the day.

Perhaps we should have mid-quarter calls and do a little extra give you an update, but we haven't decided to do that. So hope we have a lot of good questions at the end of this, and we can fill you in on things that you may not have heard us cover during this presentation.

Feel free that when you're in the Washington, DC area, we are located in a nearby suburb so stop by and say hello and you will see some of the great team that we have working here. We have over 60 people now, we're in excess of $2 billion in assets across all of our public companies.

So we will start with Michael LiCalsi. Michael is the General Counsel and Secretary, he's also serves as the President of Gladstone Administration which is the administrator for all the Gladstone funds. So Michael, you are up.

Good morning, everyone.

Our report today may include forward-looking statements within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934, including those with regard to the Company's future performance. The forward-looking statements involve certain risks and uncertainties that are based on our current plan which we believe to be reasonable.

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 on our Forms 10-K and 10-Q that we file with the SEC. But those all can be found at our website GladstoneLand.com, and on the SEC's website, SEC.gov. And 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 real estate investment trust, we'll 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.

And we may also discuss two other FFO measures. One, core FFO, or CFFO, which adjusts FFO for certain non-recurring charges such as acquisition-related costs. And two, 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. And to stay up to date on the latest news involving Gladstone Land and our other affiliated public funds, please follow us on Twitter, username GladstoneComps, and on Facebook, keywords The Gladstone Companies. Please also go to our general website to see more information about this Company and our other 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 all listeners 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, www.GladstoneLand.com. Now I'll turn the presentation back to David Gladstone.

Okay, Michael. Good report. We're ending 2016 on a very strong note, and I don't like to give forward-looking statements but it looks like 2016 will be a great year for us.

I would like to give you a brief overview of the nature of our business before we get into the numbers. Our business consists solely of owning high-quality farmland and leasing it to top-tier farmers. We don't farm any of the land ourselves, and thus don't take any direct risk. However, as you might know, many of the farmers that we will mention in the report rent our farmland and buy crop insurance from the federal government that protects them against potential losses. So thanks to the United States taxpayer, many of the farmers who buy the insurance can, if their crop fails, get back enough money to plant for the next crop year, and that helps us too. So thanks, hats off to the US taxpayer.

Farmers we lease our farms to are in the top tier, the largest and best farmers in the growing regions that we are in. We prefer to keep the same farm on the property for as long as possible because 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 that they know they have the farm for as long a term as they want.

Most of the farms are located where farmers are able to grow high-value annual crops. These are row crops such as berries and vegetables, and where our investment focus will continue to be. However over the past year, we've taken advantage of some low land prices in the Midwest where we have found some excellent investment opportunities. We also furthered our expansion by buying farms to grow permanent crops. These are such as almonds and pistachio orchards, and we've taken advantage of some of those higher-yielding investment opportunities with great tenants.

But you should expect the large majority of the farmland portfolio will continue to lease to farmers to grow to fresh produce. Currently about 90% of our total crop revenue comes from farms that are growing foods that you'd find either in the produce section or the nut section of your local grocery store. We consider these foods to be among the healthiest type foods out there, and we are seeing a growing trend toward organic in some of these sectors as well.

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. Partly because we're usually only purchasing irrigated crop land with great soil and plenty of access to water, and allowing farmers to grow a high variety of high-value crops.

We currently own about 34,000 acres in 57 different farms, seven states in the US and the acreage we own is among the highest quality farmland in the strongest rental marketplaces in the United States. We also own some farm buildings such as cooler facilities, packing houses and processing facilities that we've been able to earn some rent on as well.

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 rates of over 17% on all the lease renewals that we've had over the past three years, all without incurring any downtime on the farms.

The trend, this is sort of a megatrend that we're seeing, is a steady decrease in the number of farms in our growing regions as they are being sold and converted into suburban uses. And if I had to point to one thing that's driving up rental rates, I'd say it's this. [Farms] in these regions where our farms are located is relatively finite, there's no new farms being developed, there's no trees to cut down, no land that can be converted in these areas, and all of this arable land is currently being farmed or it has already been converted to farms. Now it's being converted to other uses such as housing, school, factories. And once it goes in that direction, it doesn't ever come back out.

California alone has been losing about 100,000 acres of farmland per year for many years now. This causes farms that are left like the ones we own to be highly sought after, and they've been rented for decades without ever being vacant.

And speaking of California, we continue to closely monitor the drought situation there. Conditions throughout the state are noticeably better this year at this time than last year at this time. And this percentage of areas that are in the designated drought zone has been reduced by about 50% from last year.

Whenever we are buying a farm, as you would imagine, as part of our due diligence and really I can't stress this enough, we always spend a lot of time determining the water conditions on each of the farms that we look at to make sure the farm will have plenty of water for the long term. We want to know that the water availability is sufficient enough to withstand situations such as the one that's been going on in California. Believe it or not, this is not the first time California has had a drought. They've gone through this many times in the last 50 years.

We only select properties that have been irrigated and overall water availability in place at the time we buy the farm. And partly because of this time and effort we spend analyzing the farm before we buy it, our California farms continue to have significant access to water on site with on-site wells or water turnouts from the city has been the case throughout this drought for our farms.

For example, cities in California like Watsonville and Oxnard have built water processing plants that purify the effluent water coming from the city so that it can be used for farming. We have turnouts on our farms, and we also have wells that we can use for irrigation. So our farmers can either turn on the wells or turn out, or I guess turn on both, I've never seen that but I guess they could do that if they wanted to.

Water access and availability is another factor driving up rental rates and land prices. Farmers are not farming land where water is too difficult or expensive to obtain, they're just leaving it fallow. This drives up the rent and the prices though of all the land like the ones we have with wells and multiple sources of water, so we're in a good position.

Now let me turn to some details of the recent activity. We were very, very active this quarter. We purchased nine new farms totaling over 10,000 acres, about $40 million of purchases on a weighted average basis. The initial cash yield on these acquisitions is about 4.7%. And while overall or straight-line, it's yield was about 4.8%. So we start off a little low, but we get very low-cost loans in order to buy these with.

Some of these leases contain CPI adjustments and market rents resets that we expect will push the figure higher as time goes on and inflation continues to move up. And after the quarter end, we acquired a 20-acre almond orchard in California for about $7 million. The cash yield on the farm was fixed at about 5%, however in this case and this is true of many of the permanent farms like trees that grow nuts and fruits, it also contains a variable rent component that will allow us to share in the gross revenues earned on the farm.

So we will get our 5% return on our purchase price, plus a share of the revenue. And we expect the crop share component will push the next year's cash yield to about 8%, and then continue to increase afterwards because the orchard will reach maturity and producing almonds in the next few years. So it's a great investment.

We believe that [Welder Sprout] portfolio provides added security to investors, and this quarter is a good example of how we've continued to diversify the farms we own. The farms we acquired this quarter are in three different states and growing a variety of different crops.

So across our portfolio now, we own farms in 15 different growing regions, growing over 35 different crop types, and they're leased to 40 different tenants, all of whom are unrelated to us. And this is just perfect diversification as we go forward and continue to diversify our purchases.

We renewed one lease during the quarter at an annual rental rate of about 20% increase, however, part of the lease we did agree to take on the property taxes. And property taxes are not much, but they're going to lower the increase to about 9%. So we don't have any more leases expiring in 2016, but we have nine leases that will expire in the second half of 2017 so we'll be talking to you about those as we go forward next year.

We've already begun negotiations with some of the current tenants, and expect to be able to renew all the leases maybe at modest increases right now in rent without incurring any downtime on any of the farms. No guarantee that we are going to be able to do that, but that's what we expect and I hope you continue to believe in us.

Our other 2016 lease renewal results at about 18% increase in rents combined with our 2015 lease renewals which resulted in an average rental increase of over 15%. We believe our 2016 renewals underscore the trend that we continue to see in the areas where our farms are located, and that is the demand for prime farmland and the rents they command is continuing to increase.

As you know, we issued about $29 million of five-year term preferred stock a few months ago at a coupon of 6.375%. This probably looks expensive to you at first glance, but when we leverage that with our cheap borrowing sources and acquiring new farms we still are able to get a great return on our equity. And most important, it allows us to continue to grow the Company.

That's enough of the business discussion now, I'm going to turn it over to the Chief Financial Officer, Lewis Parrish. Lewis, go ahead and talk about the financials.

All right, good morning, everybody. We will begin by discussing our balance sheet.

During the third quarter, our total assets increased by about $41 million or 15%. Mainly due to new farm acquisitions which were funded primarily with new fixed-rate debt and proceeds from the term-preferred issuance that David just mentioned.

In connection with certain farm acquisitions during the quarter, we acquired an additional $4 million of new long-term borrowings at an expected weighted average effective interest rate of 3.1%, and the rates are fixed for the next seven years. And subsequent to quarter end, we obtained an additional $25 million of new long-term borrowings at a weighted average interest rate of 3.2% and these rates are fixed for the next 10 years. $21 million of these new borrowings were used to pay down our variable-rate line of credit.

We also amended our credit facility with MetLife. And through the amendment, we expanded the overall size of the facility from $125 million to $200 million, and we reduced the interest rate on about $86 million of term borrowings by 19 basis points which resulted in annual savings of over $163,000. The new rate on all current-term note borrowings under the MetLife facility is now 3.16%, and that rate is fixed to the next 10 years.

In addition, we also had certain properties that were pledged under the facility reappraise and increase the overall loan-to-value ratio from 58% to 60%. Together, these two events resulted in about $28 million of additional borrowing availability for us.

From an overall leverage standpoint, when we use the fair value of our portfolio and if we include the term preferred stock in our debt bucket, our loan-to-value ratio was 58% at September 30. And we're comfortable at this level given the relative low risk of farmland as an overall asset class. While interest rate volatility remains a concern of ours, about 97% of our total indebtedness is currently at fixed rates. And on a weighted average basis, these rates are fixed for another five years out. So we believe we are pretty well protected against any near-term interest rate hikes.

The overall weighted average effective interest rate on our borrowings is currently 3.06%, and that's down by about 11 basis points from 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 our upcoming debt maturities, only about 2.4% of our total debt outstanding or about $4.7 million is coming due over the next 12 months.

Now we'll move on to our operating results. But first, I'll note that net income for the quarter was about $35,000 or $0.00 per share on a rounded basis. For the sixth consecutive quarter, we've continue to grow our adjusted FFO as it increased by 7% over the prior quarter. Our operating revenues increased by over 5% for the last quarter, primarily due to our recent acquisitions. 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 over 7%. That was mostly due to the leases on those properties being renewed at higher rates, as well as additional income earned on capital improvements made on some of our existing farms.

Going into detail on the expense side, our core operating expenses, which strips out depreciation and amortization, acquisition-related expenses and any fee credits received, decreased by about 14% from last quarter or about $182,000. This was mainly due to a higher performance-based incentive fee earned by our Advisor during the last quarter than in the current quarter. This fee is earned based on our pre-incentive fee FFO surpassing a required hurdle rate.

And just a quick note on our related party fees. Our management fee is calculated based on the cost basis of the Company's 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'll be discussing in just a bit.

Continuing on with our expenses, if you exclude the incentive fee from each quarter, our core operating expenses decreased by 4% from last quarter or about $45,000. The majority of this change took place within the G&A expense line item, as we recorded about $64,000 of bad debt expense last quarter related to a lease that we terminated early and we also incurred lower stockholder-related expenses this quarter. These decreases were partially offset by higher professional fees incurred during the current quarter, and those were mainly accounting fees related to recent acquisitions and third-party appraisal fees for having certain properties pledged under the MetLife facility reappraised.

Moving on to our per-share numbers. Earnings from adjusted FFO for the quarter were $0.143 per share. This represents a 6% increase from last quarter and fully covered our distribution of $0.124 per share. This is the fourth consecutive quarter in which we've covered our dividend with AFFO, and we expect this to continue to be the case in the future.

Now I'll move on to net asset value. During the quarter, we updated valuations on 18 of our farms, 5 of which were valued internally and 13 of which we had reappraised by independent third-party appraisers. In aggregate, these updated valuations resulted in an increase of about $2.5 million over their prior valuations, and the majority of this increase, about 70% of it, came from valuations as determined by those third-party appraisals.

As of September 30, 2016, our farms were valued at about $380 million, with 83% of this value based on either third-party appraisals or the actual purchase price. And 17% of the total value, or about $66 million, was determined internally. However of this amount valued internally, 98% of it or about $65 million was supported by appraisals performed between 14 and 29 months ago.

Based on these updated valuations, our net asset value per share at September 30 remained flat at $13.68. This was due to the appreciation of our portfolio being offset by the distributions we paid out to our shareholders, as well as issuing OP units at prices slightly below our NAV of $13.68. While there may be some quarter-over-quarter volatility, over the long term we expect that our net asset value will trend upwards as the value of our farmland portfolio appreciates due in part to increasing rents and neighboring farms increasing in price.

Turning to liquidity. We currently have about $31 million of available funds, and our current buying power for straight cash acquisitions is about $75 million. However, this figure does not factor in our ability to issue new OP units as consideration for purchases. We recently expanded the sizes of our two largest borrowing facilities, so we have plenty of room to continue borrowing and buying new farms.

We're looking forward to closing out the year on a high note. And with the continued stabilization of our operating expenses, we expect that you'll see additional revenues arising from new acquisitions on lease renewals have a more direct and positive impact on our bottom line, thus enhancing the dividend coverage ability provided by our AFFO.

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

Okay, Lewis. Nice report, good financials, coming along. This Company just continues to get better and better every quarter, and we continue to execute our growth plan.

In the backlog, we selectively invested in over $287 million in new farms and assets since 2013 and we continue to have a good backlog going forward. So we expect to be adding to that figure as our backlog remains very strong.

We currently have one property for about $13 million under signed purchase agreement, and we expect to close that, I hope it's later this quarter. And we have over $50 million in farms under signed letters of intent, and we hope to sign up a few more of those soon. The closing expected in the first quarter really of 2017.

We currently have the ability to close on all of these farms without a need for additional capital, and some of the purchase will involve some issuance of OP units. However, we still continue our due diligence of these farms and these properties, so as a result there's no guarantee that we will end up closing on them. I have a strong feeling that they're going to close, but nothing we can guarantee. As you know, with the increase in number of farms we own comes greater diversification and protection for investors and we also expect it to point to better earnings as well.

As most people know, our fund specializes in farms that grow fresh fruits and vegetables and we have historically avoided being heavily in farmland that grows traditional commodity crops such as corn or wheat. One reason for this is we believe investing in farmland growing crops that contribute to healthier lifestyles such as fruits and vegetables, and as we've mentioned before the nuts that we're in now.

In addition, more than 90% of our portfolio is GMO free. We do have a little corn that has some GMO, but we're continuing to expand our ownership in organic farmland through both new acquisitions and conversions of existing farmland into organic ground.

We also like the fresh produce segment because it provides greater returns and less volatility than other type of crops. According to the Bureau of Labor Statistics, the fresh fruits and vegetables segment of the food category has increased at a rate of 1.7 times greater than the increase in the overall annual food CPI. And while prices of commodity crops are more volatile and susceptible to global supply of demand and sales, fresh produce is highly insulated from global volatility because crops are -- well they are grown locally and consumed locally within a very short timeframe.

It's that unpredictable nature of grain prices and other commodity crops that will prevent us from ever weighting our farmland portfolio to heavily in farms that grow traditional commodity crops. Currently less than 10% of the total value of our portfolio is invested in farmland growing corn, wheat or soybean, those are the three primary volatile crops, and we believe this is just a great mix. At this point in the farming cycle, farmers can't make much money when they are growing corn as the corn prices are extremely low today.

Ultimately, we believe that farmland is GMO free and growing healthier crops such as fruits and vegetables and nuts are going to continue to outperform the overall farm market in terms of both cash returns and long-term value and appreciation. As a farmland real estate company, it's our responsibility to be in the know with these markets and I think we are glued in to keeping up with them. We really take pride in having built a foundation of our Company across the healthiest sectors of the agricultural industry, and believe it's one of the Company's core strengths.

In terms of the economic outlook, in general, farmland continues to perform extremely well compared to other asset classes. The NCREIF index, which is the farmland index that everybody follows, it currently has 729 agricultural properties worth about $7.8 billion and had a total annual return of 10.4% in 2015 and has been averaging about 14.3% over the past three years compared with the S&P at 9.1%. All of our farms, I think all of them are in or most of them are in that 729 properties, so we are part of that index.

Farmland has provided investors with a safe haven during the recent turbulence in the financial marketplace, as both land prices and food prices, especially fresh produce, have continued to rise steadily. And most of all, farmland has historically been an excellent hedge against inflation.

However, as you all know, not all farmland is created equal. According to the Department of Agriculture, farmland that grows corn earns about $200 in rent per acre in the Midwest, whereas California farmland growing strawberries would earn about $3,900 in rent per acre. So for every acre of the strawberries, you'd need about 20 acres of corn farmland to get the same returns.

The number of acres then is not nearly as important in determining revenue per -- as the revenue per acre. Said another way, someone that owns 1,000 acres of corn land could receive rent of about $200,000 per year, whereas we only need about 51 acres of strawberry land to earn the same amount of rent. You all know, we specialize in these higher-rent higher-quality farmlands, and that's what differentiates us from most of the farm owners in the United States.

We are very optimistic that the President-Elect Trump work with the Congress to work pragmatic solutions to the key agricultural issues, including water supply, environmental regulations and international trade. He's already promised to eliminate the water of the US rule which unfairly restricts the use of water by farmers in certain bodies of water that are on their own land, and he has said he will appoint a pro-farm administrator of the EPA and hopefully of the Department of Agriculture.

As you know, we recently raised our dividend again to $0.0425 per share per month. Over the past 22 months, we've raised our dividend four times, resulting in an overall increase of 42% in our monthly distribution rate to shareholders over this timeframe. I think this reflects a very nice job that the team that's working on buying farmland has continued to do. Since 2013, we've made 45 consecutive monthly distributions to shareholders totaling $2.73 per share in total distributions. Paying distributions to our stockholders is paramount in our business plan, and we are, as we say, a dividend paying company.

We projected good production and income growth for the rest of 2016, and I think 2017 will show a similar kind of result. If our expectations are met, we hope to be able to increase the dividend again in the near future. As the largest shareholder, I am working hard to increase the distributions. I like receiving dividends as much as anybody does.

Our stock is currently trading about $10.60 a share, significantly below the net asset value, thus we're hopeful the stock price will rise in the near future. So if you buy the stock today, you're getting a wonderful discount from our estimated net asset value. It's about 23%. By buying stock today, you are getting $13.68 of assets for $10.60. It's just a wonderful purchase in the marketplace today.

Along the way, you will be getting a dividend, $0.0425 per share per month in cash distributions or about a 4.8% yield on today's stock price. This yield is a little bit higher than the average return you'd get on the entire REIT index if you were buying the REIT index today. That's about 4.6% according to the numbers that I have.

In closing, please remember to purchase stock in this Company as a long-term investment in farmland. It's not part of the get-rich-quick tomorrow morning, it's an asset that you'd invest in just like gold except it has an active investment in cash flows to investors as opposed to gold which doesn't. We always love to point out that Warren Buffett's comment that he'd rather have all the farmland in the US than all the gold in the world. We obviously agree with Warren on that one.

We expect inflation, particularly in the food sector, to be strong. We expect the values of farmland to increase as a result. We expect especially true in fresh produce sector like we're in as people in the US are trending toward eating more healthy foods. I think a good way to look at our farmland REIT is it's a hedge against inflation in food prices and other areas. And for those looking for an asset that doesn't correlate to the stock market, I think this one, as it continues to grow, will certainly meet that test.

Now we will have some questions from our loyal stockholders and some of the analysts that have come on, and I think we can get some good questions. So, operator, would you come on and please tell them how to make their questions.

Thank you.

(Operator Instructions)

Rob Stevenson, Janney.

Good morning, this is Venkat in for Rob. Lewis, you had previously mentioned that we'd start to see stabilization in the operating expenses, and I think it was about $159,000 in 2Q and $160,000 in 3Q.

Is that a more normalized figure going forward? I know you had mentioned there was some bad debt in the numbers and some professional fees.

Right, I think what we have now is a pretty good run rate going forward at our current portfolio sites. However in Q1 and slightly in Q2, we will have slightly higher expenses due to the additional state tax filing fees and the annual shareholder meeting. But for Q4, you should expect a pretty similar run rate.

Okay, thank you. David, you had touched on this during your remarks. Just curious from a policy perspective, you had mentioned the water of the US rule. Are there any other significant pieces of legislation that we should be following that's going to significantly effect the sector going forward?

Yes, I don't know of any other than EPA. They have so many rules and regulations. Unfortunately some of those regulations are California regulations, and those probably won't change.

But there are -- if you get the right people in the EPA, perhaps they can eliminate some of the restrictions on the farmers especially in the Midwest and the East Coast. But unfortunately, I think California is all governed by Jerry Brown and the people in the legislature there. So it probably won't be a lot of changes there.

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

Okay. Next question please.

John Roberts, Hilliard Lyons.

Morning, David.

Morning.

Just wondered, obviously had a very active Q3. I was wondering if there's any specific reasons for that activity, or that it just -- was it just by accident or by happenstance that all those farms came up at once?

You're onto something, it's happenstance. We would like to close one every month and make it nice and level, but unfortunately the world doesn't work that way. And when you are as small as we are, every transaction of course has a big impact on where we are going.

And so we're still in that age of needing to get more deals done, and I think you will see maybe Q4 won't be quite as great as Q1 in 2017. But 2017's Q1 looks like it's going to be a whopper, but heck, John, those could slide as well. It's always hard to know, but I think we're onto something now and we've got a good backlog and the funnel is -- it's not huge, but it's big enough to take care of us for the first couple of quarters next quarter -- next year.

Do you think that's pricing -- is it good pricing or is it just a lot of deals falling into your lap all at once?

We see a lot of deals, and I think we are on the radar screen for all the brokers and even a lot of the farmers. We get calls from farmers who want to sell us their farm, and sometimes they want to lease it back and sometimes they have somebody that's going to lease it. But in those situations, it's always a matter of price.

Some of the people just can't believe that their farm is not worth a gazillion dollars, and it's really hard to negotiate with somebody who starts out with an extremely high price. We're pretty good at being able to put together information about farms that have sold in the area, and even some of the numbers we have from farms that are close to us. So we are able to show them that their numbers aren't realistic, and so far they still haven't -- those people that we've negotiated with, many of them just can't believe that they are going to get what we are offering for it.

But ultimately, they've got to sell. A we've mentioned many times on the phone, most of the farmland in the United States is still owned by independent farmers or people who just own it and are living off the rents.

That's going to change, maybe not in my lifetime but over the next 50 years you're going to have some tremendous changes in the farmland area. So I think long term, a company like ours, even in the next 10 years, is going to do extremely well.

Great. Thanks, David.

Okay, next question.

(Operator Instructions)

Abigail, we need some questions.

[Robert Sennett, Seifer Hill Capital].

Good morning, David.

Good morning.

Congratulations on another strong quarter. I think your Company is a terrific way to own land, with just a couple clicks of a mouse you can buy into very productive farmland yielding a very good return, conservative return. So thank you for that opportunity.

Well we aim to please. As you know, I am a large shareholder, so I am a believer.

I am to. Can you talk to -- David, can you talk to the $64,000 I believe of bad debt nonperformance I take on some sort of a lease? Can you analyze that a little bit more? How that happened?

Sure, Lewis has gone through that many times. So, Lewis, why don't you talk about that?

There was a lease on one of our Florida properties that the tenant just wanted to retire early, so we let them out of the lease about two years early. It was -- the $64,000 was just a deferred rent asset that had built up on the books. So in connection with the early termination, we had to write that off.

I think we had about $20,000 more of -- the total deferment asset was $84,000. $64,000 was written off last quarter and about $20,000 was written off this quarter. But we've already released that property to a new tenant, so there's no vacancy.

Right. In the future, how could you avoid a loss like that?

Trying to pick young farmers, unfortunately they are hard to find. This fellow had finally just worn out in farming. A great farmer, understood the land as good as anybody can and tremendous ability, but he was at a point in time and just needed to walk away from it. We could have held him to it and made him pay it for the next two years.

We could have probably stored a little bit, that's the wrong term. We probably could've gotten some money out of him for terminating early, but we don't try to play the game that way. Farmers are a separate group of people in this world, and they all remember things that you've done or haven't done and so we try to make sure that we stay above board with all of our farmers and support them.

Yes, thanks, David, and, Lewis, for the explanation. I'm sure the farmer that you get in there is going to be as productive as the land can be and you'll do fine on it going forward.

The new farmer is very strong. We've known him for a long time, and the land is right in the middle of a good area so that it would be very reasonable to assume that we could lease it out again should something happen to this fellow.

Okay. Thank you for your perspective there. Thanks.

Okay, Abigail, you got anybody else wants to ask a question?

I am showing no further questions at this time. I would like to turn the call back to David Gladstone for closing remarks.

Well shucks, we're disappointed that no more questions have come on board, so now you've got to wait till next quarter. Thank you very much. That's the end of this call.

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