Gladstone Land Corp (LAND) 2023 Q1 法說會逐字稿

Greetings. Welcome to Gladstone Land Corporation First Quarter 2023 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to David Gladstone, Chief Executive Officer and President. Thank you. You may begin.

Thank you, Sherry. That was a nice introduction. This is David Gladstone. Welcome to the quarterly conference call for Gladstone Land, and thank you all for calling in today. We appreciate the time to talk to you and listen to questions that you'll have and we start off, as we always do, with Michael LiCalsi. He's our General Counsel and Secretary. Michael, do you want to give your presentation?

Thanks, David, and good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Now many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-K, 10-Q and other documents that we file with the SEC to our website, gladstoneland.com. Go to the Investors page, you can find them there. You can also find them on the SEC's website and its sec.gov. And we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Today, we'll discuss FFO, which is Funds From Operations, a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We may also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses and adjusted FFO, which further adjusts core FFO for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating performance and allow better comparability of our period-over-period performance.

And please take the opportunity to visit our website, once again, at gladstoneland.com. We'd sign up for our e-mail notification service there. We could stay up to date on the company by doing that. You could also find us on Facebook. Keyword there is The Gladstone Companies. And the Twitter handle is at Gladstone comps. Today's call is an overview of our results, so we ask that you review our press release and 10-Q both issued yesterday for more details. Again, you can find them on the Investors page of our website. And with that, I'm going to turn it back over to David Gladstone.

Thank you, Michael. I'll start with a brief overview of farmland holdings. We currently own about 116,000 acres on 169 farms and about 45,000- acre feet of bank water. It's in the aquifers that are underneath our farms. -- an acre foot is about 326,000 gallons. So you can see we're getting into the billions of gallons of water that we have ready to help us out. I don't need it today but may in the future. And to together all of these things, that is the land and the water is about valued now at $1.6 billion for both the land and the water. Our farms are in 15 different states and more importantly, in 29 different growing regions. Our farms continue to be about 100% occupied and are leased to about 90 different tenants.

We have one we're going to talk about in a minute. It's occupied, but it's not doing very well. All of these farms, the 90 different tenant farmers are unrelated to us, and the tenants on these farms are growing over 60 different crop types. So we're well diversified there. But mostly, all of it's in -- almost all of it's in fruits and vegetables and nuts. We had to remove one tenant -- this is the one I wanted to mention. We had to remove that one tenant during the quarter and stepped in to temporarily operate the farm. But this time, we did it many years ago, this time, we did it with a third-party management group that does manage farming operations.

We are in discussions with that new group to lease this farm, and we hope we have a lease executed on this farm before the end of the second quarter. In addition, we have 2 slow paying tenants. These are not the kind of trouble that we've got with that one that I've just mentioned. To slow paying tenants are partly due to excess supply in the market. So the crops they have in these areas, as most of you may know, there's a huge surplus of almonds and if you would, please buy some almonds today and get the prices back up. So our tenant will be okay. Right now, the tenant is making a partial payment to us, but we have another grower who is interested in leasing this farm. So we'll likely end up signing a new lease with this new tenant in the next couple of months.

The second person who is a little slow is collecting from this other tenant has been more challenging and will take a bit longer to resolve. We have some lawyers involved, but we continue to be in communications with the tenant and also in discussions with several other groups to potentially lease these forms. So we hope to have this situation sorted out, certainly sometime this year. In total, year-over-year impact on our operations resulted in issues which decreased our net operating income during the first quarter by $295,000. That's not a big number for us. As you know, we have a lot of income. As we've mentioned in the past couple of calls, we continue to be more selective in the type of farms we're looking at. And as a result, acquisition activity for us compared to prior years is slow.

With inflation and interest rates continue to rise and the risk of recession becoming more and more likely, we just believe it's a good time to be more conservative with our capital. But overall, our existing farmland portfolio continues to perform I think, as expected with the exception of the issues of having a couple of tenants. I think that's probably the size we are now is going to be something we talk about every year or every couple of years. But despite those issues and aided by the interest patronage that we receive from the farm credit borrowings we have, that is they give us back some of the interest that we paid. But we had another strong quarter from AFFO, and AFFO is one we watch closely, that's Adjusted Funds From Operation, and so we're doing well.

Finally, we continue to be able to renew all expiring leases without incurring any downtime on any of our farms and generally at a higher rental rate. On the leasing front, since the beginning of the year, we renewed 5 leases on farms in 3 different states in total, these renewals expected to result in an increase in annual net operating income of $598,000 or about a 12% increase from the prior leases. Looking ahead, we only have 2 leases scheduled for expiration next 6 months. And in total, that makes up less than 3% of our total [agilized] lease revenue. We're in discussion with the current tenants on each of these 3 farms in each of these farms and 2 farms.

And each of these farms are regarding the extension, and we believe we'll be able to achieve a slight rent increase as a result of these 2 renewals. So we aren't currently expecting any downtime to occur as a result of any of our upcoming expirations. There are a few other items I'd like to mention before we move on. Inflation, of course, it shows no signs of slowing down even though it slowed down a little bit this last time around as an impact of Fed's interest rate hikes that are now being felt throughout the economy. However, the latest headline inflation number was 5%.

That's down from 6 something before, but still remains incredibly high and beyond the Fed's target level that they're shooting for, which is 2%. Nearly all the crops grown on our farms all fall into one category, and that's food from home. And that means that it's being eaten at home rather than in restaurants or manufacturing facilities that is being processed. So most of our crops are sold are grocery stores. So if you go on a grocery store and look at the produce section, you're going to see where most of our products end up. The nut section may be a little ways away, but it's nearby.

Food prices are also showing signs of cooling down and cooling down in our food from home category is up only by 11 -- 8.5%. We believe the food prices will continue to outpace inflation, which should help mitigate increases in operating costs for many of the farmers, they're experiencing some pretty good increases. Regarding the water situation in California, there's a complete turnabout there, the heavy rainfall experienced in California earlier this year, has been a gone for most of the farmers in the States, and most reservoirs are at or above their historic averages and statewide snowpack level in the mountains is about 260% of normal, and that means the States Water project recently announced a 100% Water allocation day.

And that really hasn't happened since 2006. That was a wonderful time in 2006, and our farmers are very happy to get all the water that they need these days. You may have read about it also, but many of the reservoirs across the state in California are nearing capacity, and they're beginning to release water in anticipation of additional storms and especially the snow melt that will happen this summer as a warm weather moves up to the snow that's out there. This allows the farmers to capture this runoff or their own personal use at very little cost.

So many of our tenants, particularly permanent crop growers like almonds and pistachios have been using this opportunity to take advantage of the floodwaters. Or as we call it, the surface water in place of groundwater or even intentionally flooding their fields in a benefit for the restoring the groundwater levels. We are also viewing this as an opportunity to explore acquiring some additional water. So we may buy a little bit more, but we are in great shape for this year and maybe even next year in terms of the amount of water that we have. Supplies or investments in infrastructure is something that we look at, so that we can move the water from one place to another.

And so how we can capture additional water in our farms at attractive prices these days. We did have one farm that suffered about 855,000 of damages resulting from the flood. This was a blueberry farm in Central Valley of California. -- that has big shade structures over the blueberry bushes and it keeps it from wind and rain and other adverse weather. None of the bluebird bushes were hurt themselves, but many of the shade structures were damaged and the tenants currently discussing this with their insurance provider on this matter, and we don't expect to have to pay anything out of pocket for this. So I'm going to stop right here and let you get some numbers from Lewis Parrish. He's our CFO, and he's going to talk to you more about the numbers he has. Lewis go ahead.

Right. Thank you, Dave, and good morning, everyone. I'll begin by briefly going over our financing activity. We did not incur any new borrowings during the quarter, but we did repay about $22 million of loans since the beginning of the year that were scheduled to mature. On the equity side, since the beginning of the year, we've raised about $2 million of net proceeds from sales of the Series E preferred stock and we raised $13 million of net proceeds from sales of our common stock through the ATM program at an average sales price of $19.72 per share.

Moving on to our operating results. First, I'll note that for the first quarter, we had net income of about $1.8 million and a net loss to common shareholders of $4.3 million or $0.12 per common share. And one other note for the following discussion of operations, I'll be comparing the first quarter of 2023 with the corresponding first quarter of 2022 rather than comparing it to the immediately preceding quarter as we used to do. Adjusted FFO for the current quarter was approximately $6 million or $0.17 per share compared to $6.4 million or $0.185 per share in the prior year quarter.

Dividends declared per common share were $0.138 in the current quarter compared to $0.136 in the prior year quarter. The primary driver behind the decrease in AFFO was additional financing costs and increases in certain operating expenses. Partially offset by higher top line revenues and a decrease in related party fees. Fixed base cash rents increased by about $850,000 or 4% over the prior year quarter. This increase was primarily driven by additional revenues earned on new farms acquired over the past year, partially offset by a decrease in revenue from the self-operated and nonaccrual properties previously mentioned.

Regarding the nonaccrual properties, we will continue to recognize revenues from these leases on a cash basis until such time the full collection of the future rental payments is again deemed to be probable. In addition, we recorded $195,000 of participation rents during the current quarter versus none in the prior year quarter. These were payments that were originally scheduled to be paid during Q4 of 2022. However, sufficient information to allow us to record these amounts was not made available to us until Q1 of '23.

On a same-property basis and including participation rents, our Q1 2023 lease revenues increased by about $258,000 or 1.3% over that of the prior year quarter. On the expense side, excluding reimbursable expenses and certain nonrecurring or noncash expenses, our core operating expenses for the current quarter decreased by about $443,000 from last year. Total related party fees decreased by about $900,000. This was driven by a $1.1 million incentive fee earned by adviser in the prior year quarter versus none this year.

Removing related party fees, our recurring core operating expenses increased by about $460,000 from the prior year. Property operating expenses increased by about $300,000, primarily driven by additional legal fees incurred in connection with protecting water rights on certain farms in California and also to aid with rent collection efforts from certain tenants. And we also incurred additional expenses on the self-operated farm. In addition, general and administrative expenses increased by about $160,000 primarily due to costs incurred in connection with our upcoming shareholders' meeting and increased audit costs. One final note on operations.

We recorded about $2.3 million of interest patronage from our farm credit borrowings, and this is about $500,000 less than the amount we recorded in Q1 of 2022. However, most of this decrease was offset by an increase in the interest income earned on balances in our money market accounts. Now I'll move on to net asset value. We had 34 farms revalued during the quarter, all via third-party appraisals.

And overall, these farms increased in value by about $12 million or 3.4% over their previous valuations from a year ago. As of March 31, our portfolio was valued at about $1.6 billion, and all of this valuation was supported by either third-party appraisals or the actual purchase prices. Based on these updated valuations and including the fair value of our debt and all preferred stock, our net asset value per common share at March 31 was $17.12 and this is up slightly by $0.04 from the value at December 31.

Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have over $190 million of dry powder. In addition, we also have $130 million of unpledged properties. Over 99.9% of our borrowings are currently at fixed rates and on a weighted average basis, these rates are fixed at 3.34% for another 4.8 years. So as a result, we have experienced minimal impact from the recent increases in interest rates. However, these rate increases do impact our ability to finance new acquisitions and also play a factor in our decision to repay versus refinance maturing loans.

With respect to our current debt load, we believe we are well protected against any further interest rate hikes for the foreseeable future. Regarding upcoming debt maturities, we have about $40 million coming due over the next 12 months. However, about $23 million of that represents various loan maturities and the properties collateralizing these loans have increased in value by a total of $7 million since their respective acquisitions. So we don't foresee any problems refinancing any of these loans if we choose to do so.

So removing those maturities, we only have about $7 million of amortizing principal payments coming due over the next 12 months or less than 3% of our current debt outstanding. Finally, moving on to our common distributions. We recently raised our common dividend again to $0.046 per share per month. This marks the 30th time we've raised our common dividend over the past 33 quarters, resulting in an overall increase of over 53% over that period. And with that, I'll turn it back over to David.

Nice report, Lewis. We continue to stay active in the market should a good opportunity present itself. But as we mentioned throughout, we're being much more cautious in the acquisition front. I'm just not getting into the marketplace until we get some settling down from all the things the government is doing and all the other things that are going on. Just a final point or 2 before we get some questions, we believe that investing in farmland like our farmland that grow crops that contribute to healthy lifestyles, such as fruits and vegetables and nuts, follow the trend that we're seeing in the market today. So we think we're in the right place with the right crops. Overall demand for prime farm line like the ones we have, growing berries and vegetables remains stable to strong in almost all areas where our farms are located, particularly along the West Coast, including most of California, Oregon and Washington, the state of Washington and the East Coast, especially in Florida and some other states.

And overall, farmland continues to perform well compared to other asset classes. And there's a group called NCREIF and they have a NCREIF Farmland Index, and I think all of our farms are in their index. So they have about $15.9 billion worth of agricultural properties that they cover. And the average annual return is 11.4% over the past 25 years with no negative years during that period. This is so much better than both the S&P Index and the overall REIT index, each of which have had 6 or more negative years over that same period of time. And it's negative years in this farmland index is 0. So that makes you feel good every time you get into this stock.

Please remember that purchasing stock in a company like ours is a long-term investment in farmland. I think investments in our stock really has 2 parts. It's very similar to gold in that it's hard assets, it's farmland, it's dirt that has an intrinsic value because there's just a limited supply of farmland, especially in the areas we're in, and it's being used up by urban developers, especially in California and Florida, where we have many of our farms. And unlike gold and other alternative assets, it's an active investment with cash flow to investors. And we believe we are better than a bond fund or one of those that we keep increasing the dividends as value as a farmland goes up, we are able to increase rents.

And so it's just a slow movement up as we go forward. We expect inflation, particularly in the food sector, to continue to increase, and we expect values in the underlying farmland to increase as a result, and we expect this to be especially true in the fresh produce food section as trends more people in the U.S. that are eating healthy foods and continue to grow. And now I'm going to stop and ask Sherry, our operator to come on board and tell us how we can get some questions from some of those people who follow us.

(Operator Instructions) Our first question is from Gaurav Mehta with EF Hutton.

I wanted to ask you on the acquisition market. You talked about your conservative outlook on the acquisition market. I was hoping to get some more color on what you're seeing in the market as far as the valuation of the farms and what kind of activity product flow you're seeing in the market?

I think there are a couple of points to note here. First of all, the sale of a farm these days has gone up pretty dramatically, especially in the Midwest, and ours are no different. And the problem there is that farmers are just not willing to sell for a lower price than sort of a 5 cap. And so as a result, we used to buy them at much lower cap rates and now you can't. So that's one reason we slowed down is you can't make much money if you're buying at a 5 cap and financing at a 5 cap. So we've sort of stayed away from that for a while. It will change at some point in time, the farmers want to sell their farms and they're going to have to take a discount in order to get it to a point where people will buy it.

I think there's some active buyers out there that are using pure equity to do that. We've decided not to do that just because we want to conserve our equity in these difficult times. And then I think from another perspective, it's just the price of money to buy anything is so much higher than it was before. We used to get money at about 3.5%. It's now 5%, 5.5%. Although many of the lenders are saying to themselves, they're not going to get many loans if they keep jacking up the rate. So we'll have to see where this inflation drive is going to take us before we jump back in the marketplace. Though our budget -- I just don't -- I don't know how it works very well until things settle out and you don't have the government settling out, you don't have the buyer settling out. So it's kind of a slow grind right now. Does that answer your question?

Yes.

Any other question?

Yes, I wanted to ask you on your $40 million debt expiration over the next 12 months. Can you provide some color on what's the interest rate on that expiring debt? And how do you plan to refinance that?

So of the $40 million that's coming due the $17 million of that is just normal amortizing payment, so we'll just pay that down with the cash we have on hand. The $23 million that's maturing about -- most of that is maturing early in 2024. I think we have about $6 million or $7 million that's maturing over the summer and the rest is coming due in January. This summer depends on what kind of rates we can get at that time, that will influence our decision whether we continue to pay down versus refinance. I think it's -- it could be a very different landscape come 11, 12 months from now, early in 2024 when the majority of that is coming through. Hopefully, rates are at a more attractive level and we can refinance those. But if not, we do have excess cash and liquidity on hand to pay those down.

Our next question is from Craig Kucera with B. Riley.

Should we expect a similar level of operating expenses affiliated with the self-operated farm until it's leased? Or were there more onetime costs booked in the first quarter?

If we -- so we do expect to have this leased probably, if not this month and next month. So once we had a lease rent will go away, if that plan comes to fruition, then we wouldn't expect to have to have any operating expenses related to this farm. I think the number for Q1 that we expensed was about $100,000. So hopefully, you'll be able to see a decrease in Q2. But if not, then -- if we aren't able to get a lease in place, then that number would increase because that $100,000 is just about a month's worth of operating expenses on this one farm. But hopefully, it does go back down because we will -- we do expect to have at lease period pretty soon.

And Craig, this is a good farm. We should make some money on this farm even though we're the farmer, and we're really not the farmer. We've hired a group that does farming operations for others as well. So we should make a few bucks on this one. Go ahead with your next question.

Yes, I was just going to follow up on the floods. I know you don't attempt to crystal ball your participation income and what the impact is going to be, but I'd be curious just to get your general thoughts on what the impact might be this fall on yields and harvest and kind of how you're thinking about that?

I think the nut business is, they're relishing in all of this extra water that they've got. And some of the others, the blueberries are going to be a good year for blueberries, I think, from California and Oregon in those areas. Some of the crops that were early this year got smashed in the sense that strawberries didn't do very well when they were being pounded with rain. So they lost some upside on strawberries. And I think it is a net positive in so many ways. We haven't seen this since 2006 and 2006 was a great year in terms of products coming out. So I think we'll be in good shape. It's really hard to know what the rest of the year is going to be. I don't think you're going to see any floods during the next 6 months there. I went out forecasted for...

That's helpful. And I guess just one more for me. It sounds like just given where cap rates are or the cost of capital are is that, that this year might be more potentially a deleveraging year versus growth. Is that fair?

I don't know. We've been playing around with numbers here. We may be able to get into some of these deals at rents that are much higher. And if we can get higher rents that might make things work. The numbers tell you almost everything in this. And so if we get the right tenant that can pay more, everything works out after that. But I give it a 50-50 chance that we'll find another way of doing the same deals we did before. I mean, obviously, they won't be lending at 3.5% but they may be lending at 5% or 4.5% and we can make those numbers work in certain products and certain things that are going on out there in the field. And so we're very optimistic at this point that it's going to turn soon and I don't know. It's really one of those things that everybody in the business is contemplating of what's going to happen in the next 6 months. So yes, we're probably bound by interest rate increases, although they're going down now. So who knows where they will go.

(Operator Instructions) And our next question is from John Massocca with Ladenburg Thalmann.

So with the self-operated farm, is that generating any revenue for land right now just given the seasonality of that business when it's not a net lease asset?

Right now, no, the current management agreement we have in place it would basically be like a full crop share lease, we would be paying the operating costs. And then at the -- after the harvest when the cross were sold, we would get all of the crops in. That's what we have in place today. But again, we are trying to work out a lease arrangement with the -- with that management group right now.

Okay. But you see any revenue contribution and new leases signed or later in the season.

Correct, correct, correct.

And then with the other -- the properties that are on a cash basis accounting, how much rent were they contributing versus contractual?

Right. so as David said, I think we had an NOI decrease quarter-over-quarter of about $300,000. $100,000 of that was due to a decrease in revenue and $200,000 of that was due to an increase in expenses. And half of that, about $100,000 was the operating cost of the self-operated farm. The other half of that was legal costs incurred on those farms.

Okay. And then one last one on kind of those 3 farms. I mean, how is that impacting the G&A line item? Is that something that as you put in place net leases should go down? Or is some of that increase in G&A, just the impacts of inflation on operating business?

So those costs are all in the property operating expense line item. So no impact on G&A from those issues, all the legal costs we're incurring are in that operating cost line item. The G&A was increased there. I think it's about $160,000. Half of that was due to increased audit fees. The other half was proxy solicitation costs for our upcoming shareholders meeting. Typically, that's incurred, and I think it was incurred in Q2 last year, but those costs came a little bit earlier this year. So from a 6-month -- first half of the year perspective, it should be a wash, but it's just a factor of recognizing the quarter earlier this year.

Okay. And then I know you don't provide guidance on this, but maybe just kind of broad strokes, how should we think about participation rents in the back half of this year versus last year just given maybe some of the kind of puts and takes of the almond market versus some other things going on in the portfolio?

I think it will be down simply because of 2 things. First of all, we converted some of the leases from participation into fixed payment and when we redid the leases. So that got the rents going up on a monthly basis or an annual basis, but decrease the amount that we get in participations. And then I guess, participations will be up in some crops this year and down in some others. So we really just don't know. I mean, this hasn't happened since 2006. So we're unlikely to know until it happens, whether we're going to get much in the way of participations because of the floods.

And John, keep in mind participation rent from this year is based on the crop that was harvested at the end of '22. And during that period, the drought was still very intense. So all the water that's benefiting the crops this year, we hope that, that will result in additional yields for us in additional revenue participation rents next year for us in '24.

There are no more questions at this time. So I would like for you to do your closing comments.

Well, thank you very much, Sherry, for all your work you did, and we are in great shape in this company. We've got plenty of money to run it forward. We keep making sure that we get our position so that if something happens at the government level or at the farming level, we can plough them through it. So today, we're strong. I think we'll be strong this time next year when we talk to you about the first quarter. And so right now, all I can say is we're cruising along and doing well. That's the end of this, and thank you all for calling in.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.