Gladstone Land Corp (LAND) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Gladstone Land Corporation Earnings Call for the Quarter Ended September 30, 2020. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. Please go ahead.

Well, thank you, Donna. Nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. And I want to thank you all for calling in today. We appreciate taking the time -- you taking the time to listen to our presentation.

We'll start with Michael LiCalsi, he's the General Counsel and Secretary. He's also the President of Gladstone Administration, which is the administrator for all of the Gladstone funds, including this one.

Michael, it's your turn.

Thanks, David, and good morning. Today's report will 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. 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-Q, 10-K and other documents that we filed with the SEC. You can find them on our website, www.gladstonefarms.com, specifically the Investors page, or on the SEC's website at www.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.

And today, we'll discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate or any impairment losses of the property plus depreciation and amortization of real estate assets. We'll also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenue 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 results and allow better comparability of our period-over-period performance.

And please take the opportunity to visit our website, once again, gladstonefarms.com. Sign up for our e-mail notification service so that you can stay up-to-date on everything involved in the company. You can also find us on Facebook. Keyword there, the Gladstone Companies. We even have our own Twitter handle, and that's @GladstoneComps. And today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Again, you can find them on the Investors page of our website.

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

Okay. Thanks, Michael. Acquisition activity has picked up for us recently, and we acquired about $75 million in new farms over the past 2 months or so. And we're continuing to see significantly more opportunities than we've seen in quite a while, began getting information on some of our farms with regard to crop yields and pricing, which allows us to record approximately $1.1 million in participation rents during this quarter. That puts us about $1.2 million in participation rents for the year through the third quarter. We're currently expecting a total participation rent for the year to be similar to what we had last year. It was about $2.3 million. We are hopeful to be able to report an increase in participation rents for the next year, that's 2021, as we have a few more farms that are scheduled to pay participation rents in 2021.

Overall, the operations of our farms remains strong, our team continues to have success in re-leasing our existing farms at an increased rental rate. I think these increases in rental rate are all indicative of continued strong demand for what we're seeing for our farms and all the products that are grown on those farms.

With regard to the Government closings from COVID-19, the demand for products grown and most of our farms remains high, these are products like berries and vegetables and nuts. I think that's because the vast majority of the crops grown by the farmers we lease to are sold in grocery stores like Kroger, Safeway, Costco, Walmart and similar outlets. Very little of our produce is sold to the foodservicing industry, including restaurants and institutions like schools, which is where produce sales have been hurt from lost because of COVID-19. Demand for produce and the other food grocery stores remains high, it's above 2019 levels. We expect this to continue to be the case for at least the rest of the year and into 2021.

Our farmers are still not seeing significant impact from the Government shutdown on their operations. Supply chains are still intact, running smoothly. And pricing remains very good for most of their crops. We granted a short-term -- well, 2 of those, we granted 2 farmers back in July, a deferral, and those payments have all been made and collected in full.

Right now, all of our tenants are current in their rental payments to us, except one tenant who owes us about $43,000, but that's unrelated to COVID. He just, a few weeks late on his rent. But we expect to resolve this situation in the fourth quarter. Please keep in mind that trees and plants on our farms don't know that there's a pandemic. So as long as plants get sunshine and water, they'll continue producing fruits and vegetables. So that side of the business is strong.

Moving on to farmland ownership, we currently own about 94,000 acres, so 127 farms valued at just over $1 billion. We're really excited to have passed the $1 billion market. It's only a few years back that we did our public offering and raised $50 million. And here we are with $1 billion in farmland now. Our farms are located in 13 or more important different growing -- 26 different growing regions. So we're in 13 States. But the most important thing about this is they're in 26 different growing regions. And these growing regions really control the farm lands out there.

Our farms continue to be 100% occupied and at least to 75 different tenants, all of whom unrelated to us. And the tenants operating these farms are growing about 50 different types of crops. So a lot of diversification there. So given that we own a good number of farms, and are in enough different growing regions with many different farmers and many different types of crops, we think there's a sufficient diversification to provide safety and security for the cash flows coming from our rents. And this helps protect dividends that we pay to our shareholders. There's no guarantees in life, but we sure are strong right now.

During the third quarter, the team acquired 8 farms for $39 million, and we acquired an additional 4 farms for about $36 million subsequent to quarter end. Overall, the net cash yield to us on these investments is about 52% -- 5.2%, excuse me. I wish it was 52%. In addition, all of these leases on the farm contain certain provisions, such as participation rents and annual escalations that should push that figure even higher in the future. And just as a reminder, the yield figure does account for operating expenses that we are responsible for under the respective leases. But most of these leases are triple net, so there shouldn't be many expenses incurred by our company.

On the leasing front, during the third quarter, we either executed new leases or extended additional lease on our existing leases for 4 of our properties located some in California and some in Florida. In total, the new leases are expected to result in a total increase in annual net income of about $118,000 on those 4. And that's about 11% increase over the prior leases that we had.

Looking ahead, we have 2 more leases scheduled to expire at the end of 2020 and 1 more expiring towards the end of Q1 in 2021. And in total, these leases make up less than 4% of our total annualized lease revenue. So we're in very good shape now in terms of our leases coming due. We are in discussions with the existing tenants on these farms and some potential new tenants and we are not expected to have any downtime on any of these farms. Overall, we currently expect new leases on these renewables to be pretty neutral from where they are today, maybe up a little bit.

Finally, just a quick note to let everyone know that none of our farms suffered any significant damage from the recent wildfires in California and Colorado or from any of the hurricanes on the East Coast. As some of you know, we have some very large organic potato farms in Colorado, and they're out in the flats, not near trees that might be burnt.

Well, that's enough on the operations. I'll turn it over to our CFO, Lewis Parrish. He's going to talk about the numbers.

All right. Thank you, David, and good morning, everyone. Again, by going over our balance sheet. During the third quarter, our total assets increased by about $22 million, and that was primarily due to the new farm acquisitions. From a financing perspective, during and subsequent to the third quarter, we secured about $45 million of new long-term borrowings at a weighted average rate of 2.59%, which is fixed for the next 8 years. On the equity side, we raised about $8 million of net proceeds through sales of our common stock under the ATM program at an average issuance price of $16.13 per share.

And last month, we completed a follow-on offering of common stock, in which we raised about $26 million of net proceeds at a public offering price of $14.40 per share. These proceeds were needed to help fund new acquisitions that we're hopeful of closing on in the coming months. And all of these potential new acquisitions are expected to be accretive to AFFO in year 1.

We also raised about $11 million of net proceeds from sales of the Series C preferred stock. As with the Series B preferred stock, which we recently listed on NASDAQ under the ticker LANDO, our plan with the Series C preferred stock is to sell it in small amounts over the course of the next several years, so that we're better able to find new farms to buy as the proceeds come in.

And just to remind everyone, in the process of selling the Series B and now the Series C preferred stock to pay certain commissions and fees to Gladstone Securities and affiliated broker-dealer of ours. However, Gladstone Securities is just a conduit in these offerings as it pays out about 94% of these fees to other third parties, including brokers and wholesalers who are helping to sell their shares. And the rest of the fees kept by Gladstone Securities are used to cover various other expenses related to selling the stock.

Please also note that the preferred stock is not included in the calculation of the fees paid to the adviser, and it has never resulted in additional fees paid to the adviser.

Moving on to our operating results for the quarter. First, I'll note that we had net income of about $1.6 million and a net loss to common shareholders of about $837,000 or $0.037 per common share. Adjusted FFO for the third quarter was approximately $3.1 million compared to $2.2 million in the second quarter. And AFFO per share was $0.143 in the third quarter versus $0.101 in the prior quarter. Dividends declared were $0.134 per share in each quarter.

We had a sizable increase in adjusted FFO, and that was primarily due to the $1.1 million of participation rents recorded during the quarter versus only $44,000 in the previous quarter. Quarter-over-quarter base cash rents increased by approximately $461,000 or 4%, due primarily to additional rent earned on recent acquisitions. On the expense side, excluding reimbursable expenses in certain nonrecurring or noncash expenses, our core operating expenses increased by about $584,000 on a quarter-over-quarter basis. This is primarily due to incentive fee earned by our adviser in the current quarter of $821,000 versus none earned in the prior quarter.

Removing related party fees, our core operating expenses actually decreased by about $256,000 or 28%. The main driver behind this was a decrease in our property operating expenses, as we had fewer repairs and maintenance costs from certain properties as well as decreases in property level legal fees and Annual State Filing fees.

Moving on to net asset value. We had 28 farms revalued during the quarter and all via third party appraisals. Overall, these farms increased in value by about $20 million or 6% over their prior valuations from a year ago. $8 million of this increase came on farms where we completed about $5 million worth of certain capital improvements while the remaining $12 million of appreciation came from organic appreciation and value, and this was particularly true of certain of our farms in California and Florida.

As of September 30, our farms were valued at about $971 million, all of which was valued based on either third-party appraisals or the actual purchase prices. And based on these updated valuations and including the fair value of our debt and all preferred stock, our net asset value per common share as of September 30 was $11.97, which is up by $0.91 or 8% from last quarter. The main driver of the increase was the aforementioned depreciation and property values.

Turning to our capital makeup and overall liquidity. From a leverage standpoint, our loan-to-value ratio on our total farmland holdings on a fair value basis and net of cash was about 52% at September 30. We're comfortable at this level getting relative low-risk of high-quality farmland as an overall asset class. In addition, over 99% of our borrowings are currently at fixed rates. And on a weighted average basis, these rates are fixed at 3.46% for another 6 years out. So we believe we are currently well-protected on the debt side against any future interest rate volatility. And with the weighted average maturity of borrowings being 10 years out, we also feel that we're protected against any potential liquidity issues should the current economic uncertainty continue for a prolonged period.

Regarding upcoming debt maturities, we have about $33 million coming due over the next 12 months. However, about $21 million of that represents the maturities of 4 bullet loans coming due. The 4 properties collateralizing these loans have increased in value by a total of $3 million since their respective acquisitions. So we do not foresee any problems refinancing any of these loans. So removing these maturities, we only have about $12 million of amortizing principal payments coming due over the next 12 months or about 2% of our total debt outstanding.

From a liquidity standpoint, including availability on our lines of credit, we currently have over $50 million of dry powder. We have ample availability under our largest borrowing facility, and we're currently in discussions with other lenders for new borrowings and potentially new credit facilities. We don't currently foresee a credit freeze on ag lending in the near-term future as borrowings continue to be readily available to us in very favorable terms.

And finally, I'll touch on our common distributions. We recently raised our common dividend again to $0.0449 per share per month. Over the past 23 quarters, we raised our common dividend 20 times resulting in an overall increase of 49.7% in our monthly common distributions over this time. Since 2013, we paid out 93 consecutive monthly dividends to common shareholders, totaling $4.80 per share in total distributions. And of course, this is on top of dividends paid to shareholders of our preferred securities.

Paying dividends to our shareholders is paramount to our business plan, and our goal continues to be to increase the common dividend at a rate that outpaces inflation. We're not quite there yet, but we believe we're heading in the right direction. In our current distribution run rate and with where our common stock price is today, the yield on our stock is about 3.9%. And when considering the relative stability and security of the underlying assets and the related cash flows, we believe this stock offers a compelling investment alternative.

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

Okay. Thank you, Lewis. Nice report. Acquisition activity is picking up, as I mentioned at the beginning, but certain aspects of our due diligence process are taking longer than normal to get through due to various travel restrictions and office closures. For example, it's taking longer to determine if a title is clean or if there's a lien on the property, getting a survey or out to survey the property. We almost always do that. And getting appraisers to go out and do their duty that we need the appraisal done in order to justify what we're paying as well as getting loans from the banks on these properties. So we're seeing a good amount of buying opportunities coming our way now. It's just taking a little bit longer than normal to get through the due diligence items that we require ourselves to do just to make sure we got the right deal done.

Just a few final points. I'll make -- we believe investing in farmland growing crops that contribute to healthy lifestyles, such as fruits and vegetables and nuts, follow the trend that we're seeing in the market today. Currently, about 85% of our revenue comes from farms that are growing the type of foods that you can find in either the produce and nut section of your local grocery store. We consider these foods to be among the healthiest type of foods and we continue to see a growing trend toward organic among these foods.

About 40% of our fresh produce acreage is either organic or transitioning to become organic and about 10% of our permanent crops, this is -- of the acreage falls into the organic category. We're a believer in organic, and we want it to continue to be a strong area for us to grow in.

In addition, more than 95% of our crops on our farmland are classified as being non-GMO, and we're taking steps toward ESG compliance for both our operations as well as those of our tenant farmers. Another major reason why our business strategy is to focus on farmland growing fresh produce is due to the effect of inflation on particular -- on this particular segment.

According to the Bureau of Labor Statistics, the overall annual food CPI generally keeps pace with inflation. However, over the past 40 years, fresh fruits and vegetables as a segment of the food category has outpaced the total CPI by a multiple of 1.6x. This is why many financial advisers tell their clients to invest in farmland because it acts as a hedge against inflation.

While prices of commodity grain crops such as corn and wheat are typically more volatile and subsequent -- susceptible to global supply and demand, fresh produce is mostly insulated from global volatility, mainly because the crops are generally consumed in the U.S.A. within a short period of time of being harvested.

I'm telling you this because we're often confused with owning farms where farmers are growing corn, soy and wheat, and we're mostly staying clear of these crops because they have to compete with countries like Brazil or Ukraine, where the cost of production, even after accounting for shipping cost is very low. And those farmers can undercut the price of grain farmers in the United States. That's been happening for many years now and has put a lot of pressure on farmers in the Midwest, where there's been considerable number of bankruptcies.

Overall, demand for prime farmland growing berries and vegetables is stable to strong, I'd say, in almost all areas where our farms are located, particularly along the West Coast, including most of California, Oregon and Washington, and the East Coast, especially in Florida, or some other States also on the East Coast. Our farmers are not growing marijuana or tobacco, they're just growing fruits and vegetables. And so we are keeping our company in good condition. Please remember that purchasing stock in this company is a long-term investment. I think an investment in our stock really has 2 parts. First of all, it's similar to gold is that it's a hard asset. Farmland, of course, is dirt and that has an intrinsic value because there's a limited amount of good farmland. And it's being used up by urban development, especially in California and Florida, where we have many farms.

And second of all, unlike gold and other alternative assets, it's an active investment with cash flow to investors. And we believe it's better than a bond fund because we keep increasing the dividend. This keeps us ahead of inflation. We expect inflation, particularly in the food sector, to grow and we expect values of the underlying farmland to increase as a result as farmers are able to charge more for their produce and nuts. And we expect this is especially true of fresh produce and food sector as the trend more and more people are eating healthy foods that we grow.

Gladstone Land wouldn't be anything, though, without the people that we have operating and managing it. Buying and leasing farmland is a complex business. It's not something you can go to a stock market somewhere and buy some shares, except ours, of course. We're entering a time to designate some of the team members for the future. We have appointed 2 members from the team to Executive Vice President, as announced in the press release that we did, Bill Frisbie and Bill Reiman, in combination with our Chief Financial Officer, Lewis Parrish, and also our President of Administration that you heard from at the beginning, Michael LiCalsi.

These are the key people right now, and I'm sure there'll be others as time goes on. They're all working together. They all have responsibilities and can be members of the leading team to ensure that we have continued success in our long-term growth to shareholders.

But just so you know, I'm not going any place. So we're showing what we have as a deep bench of talented people we have in this team as well as many of the other parts of the company. I'm going to stop here and have the operator come on and tell operators how they can -- tell everybody that have some questions that we can answer for them. So Donna, come on.

(Operator Instructions) Our first question is coming from Craig Kucera of Wunderlich Securities.

David, I wanted to circle back with you on your commentary regarding deal flow. You mentioned that you're seeing a lot more deals than you have in a while. Is that outside of what you sort of discussed in your recent equity offering? Or is that just inclusive of that?

I think it's inclusive. We picked up, primarily, I think, some of the people who own farms are deciding it's time to sell, and they don't want to farm anymore. So we're getting an opportunity that I think will prove pretty successful for this year as well. As you know, we had a bang-up year last year. And I think this one's going to be good. We could probably close $100 million to $120 million before the end of the year. That would be aggressive, but I'm hopeful that we can get all of that done. It's really hard to get some of these appraisers out to the farm. And we have to go see all the farms, so people are getting on airplanes, and that's become a pain. So as a result, I think we'll do well, Craig. So that's where we are today.

Do you have a sense of why or anything in particular that would maybe push some of these deals over the finish line? I feel like in the past, you've said some of these transactions you've been talking to the farmers for upwards of 10 years. And then you said you had a number come together. Any thoughts there?

Craig, that was one farm that I worked on like that, and I had worked with the farmer for a while and then Bill Reiman picked it up and closed the deal later. Maybe it was because he's better than I am. I don't know. But end of the day, it got done. I think a farm from start to finish takes a good 6 months to get negotiated and get everything in place and then get it closed and on the books.

So things do hang around. We have a very long list of farms that are in the queue, and we've worked on a number of them. We have purchase agreements in place, and now we're going through our due diligence. And as I mentioned, that's the hang-up sometime in how it slows down as you get to a certain point. The banks won't give you a commitment until they have the signed lease. They won't give you a commitment until their people show up at the office, and many of them are working from home. So it becomes a longer process than it has in the past. I think we're going to do well this year, and next year should be just another great year.

Got it. And one more for me. I appreciated the color on the decline in operating expense year-over-year and sequentially. But as we think going forward, is operating expense kind of below $300,000 what you would expect? Or was this sort of an unusual quarter because it was considerably short of what you were looking for?

I'd say we would expect somewhere in between where we were at last quarter and this quarter. Repairs and maintenance costs -- outside of some reimbursable expenses, which we used to classify as tenant recovery revenue. So it's also -- it also reduces our top line revenue. That was about $225,000, but the next biggest decrease was in repairs and maintenance, and I think that was down by close to $100,000 from last quarter. These are hard for us to predict. And at any time, we could have a motor go down or another irrigation repair that needs to be taken care of. I think this quarter was lower than we would normally expect. But I would say somewhere between where the expense fell this quarter and last quarter would be where we generally expect it to fall.

Okay, next question.

(Operator Instructions) Mr. Gladstone, we're showing no further questions in queue. Did you have any closing comments today?

No, Donna, I think everything is doing so well. We don't want to comment. We might jinx the place. So everything is going great right now, and we're looking forward to a great quarter that will end December 31. So with that, we'll say goodbye to all of you until next quarter.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time, and have a wonderful day.