Gladstone Land Corp (LAND) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gladstone Corporation First Quarter Ended March 31, 2020 Earnings Call and Webcast Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. David Gladstone. Thank you, sir. Please go ahead.

Okay. Thank you, Dexter. Nice introduction. This is David Gladstone, and welcome to the quarterly conference call of Gladstone Land, and thank you for calling in today. We always appreciate taking some time to talk to you and listen to the presentation that we have. And hopefully, we'll have some good questions at the end.

We always start with Michael LiCalsi. He's our General Counsel and Secretary. He's also President of Gladstone Administration, which is the administrator for all the Gladstone funds. So Michael, take it away.

Thanks, David, and good morning. 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. And 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.

You can find all of these on our website, which is www.gladstonefarms.com, specifically the Investor Relations page. Or you can go to the SEC's website, and that's www.sec.gov. Now 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.

In today's discussion, we will 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 and any impairment losses from 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. Now we believe these are better indications of our operating performance and results and allow better comparability of our period-over-period performance.

We ask everyone to take the opportunity to visit our website; once again, gladstonefarms.com. Sign up for our e-mail notification service so you can stay up to date on the company and everything that goes on. You can also find us on Facebook. Keyword there is The Gladstone Companies. And we even are on Twitter, and the handle there is @GladstoneComps.

Now today's call is simply 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 Investor Relations page of our website.

Now with that, I'll turn the presentation back over to David Gladstone. David?

Okay. Thank you, Michael. Much like last year, which, by the way, was a terrific year for acquisitions, 2020 has begun from, again, an acquisition standpoint. It's just getting off to a slow start. However, we do have another strong quarter operationally, and the team continues to have success with lease renewals and continue to be able to renew leases on our existing farms at increased levels. We believe these increases in rental rates are indicative of the strong demand for the company's farms and are also signs of continued appreciation in the value that we're seeing in the farms that we own.

Now just to touch on the impact of all the government closings. That seems to be top of mind of everybody. We're -- in just a few words, the closings are not having a significant impact on our farmers and tenants. And this is because about 90% to 95% of the produce grown on our farms are sold to grocery stores like Kroger and Safeway and Costco and Walmart and similar outlets. Very little of the produce is being sold to food servicing industry, including restaurants and institutions like schools, which is where the produce sales have been hurt the most.

There's been no shortage of demand for produce and most other foods at the grocery store as consumers have been forced to shift their spending on food from restaurants to almost exclusively from grocery stores and related businesses. People are not eating less, but they are buying food now mostly from grocery stores. There's a tremendous spike in the price of produce at the grocery stores in the first several weeks of all the closings, and our farmers were able to take a little bit of advantage of that. While pricing has come down to a more normal level, I don't believe it's going to fall anymore.

Regarding disruptions in supply chains, we're not hearing of problems with delivery from our farmers. Most of the large farmers who sell to large grocery stores are fine. Companies like Walmart and Kroger have over -- have logistics -- have control over logistics and shipping food to their stores. The supply of available trucks for produce and transportation, while it's in higher demand, has just remained steady.

In addition, most of our tenants have contracted for the sale of their produce for delivery contract -- lawn mowers outside here. In addition, most of the tenants have contract for sale of their produce and delivery contracts in places well before the season begins. This is a shutdown where we continue. We are on the first floor and the lawn mowers are going outside. Most of these sales of produce as well as the delivery contracts in place well before the season begins. If this shutdown were to continue for another year or so, maybe start seeing some disruption as some of the people who were selling to the other part of our business will pivot over and come to the grocery stores. But we don't see anything like this happening at this time.

About the only place where we have seen an impact on our business is on the acquisition of new farms. It's been insignificant, but we've seen slight slowdown in the transactions. And market participations are just waiting for more certainty to come along before they commit to selling or even entering into a long-term contracting lease. We're looking at several new farm acquisitions, and I've signed off on a couple already. I'm sure we'll get the buying process over in the next several months. But I don't know what the future will be for the year, but I think it's going to be strong.

Looking at the total farmland ownership, we currently own about 88,000 acres on 113 farms in 10 different states. Based on either third-party appraisals or prices we paid for the new farms, our farms have estimated total fair value of about $892 million. And more importantly than the number of states that we're in, our farms are located in 24 different growing regions, and the tenants who operate these farms are growing about 50 different types of crops. The great news is that our farms continue to be 100% occupied and are leased to 70 different tenants, all of whom are unrelated to us.

We do have some slow payers. 1 owes us 1 payment. They're about a month overdue in their late payment. That farmer's process is mostly recent harvests that he hasn't been paid for where he sold them. So he's a little bit behind because of that. We've been with this guy for over 7 years, and his credit history with us is excellent. This is one we know will cure soon. And while we get some farmers that bump along and pay a little slow, we're still doing very, very well in this area.

We now own a good number of farms, and they are in enough different regions with many different farmers and many different types of crops so that there's sufficient diversification to provide safety for the cash flows coming in and, thus, the dividends we're paying out to our shareholders.

I think with regard to diversification, we are there. We're -- I always want to improve it, but at the same time, we're trying to do -- I'm just looking outside. It's pretty funny. But we are always looking to improve the diversification. And as we go forward, I'm looking forward to getting in some different states and some different growing areas.

During the first quarter, the team acquired 2 new farms, $7.5 million of initial cash yield to us of about 5.5% on that $7.5 million. And the lease on these farms has also contained certain provisions such as annual escalations that show if you push that figure even higher in the future years as the escalations kick in. And just as a reminder, the yield figure does account for operating expenses we're responsible for under the respective leases. These leases mostly are triple net, so there shouldn't be too many expenses incurred by us.

On the leasing front, during and after the quarter end March 31, 2020, we either executed a new lease or extended and amended some existing leases on 11 of our properties. Now 2 of these leases were changed from a single net structure, with us paying some of the property tax and repairs and a few other expenses. We changed that over to a double net lease with only -- our only responsibility is for the property taxes. And maybe next time the lease comes up, we can move that property tax over as well. After accounting for these changes, some of these operating expenses, the new leases are expecting to result in a total increase in annual net income of about $649,000 or an increase on that lease over that prior lease of about 13.5%.

During the quarter, we terminated the lease on 4 farms and received a $3 million termination payment. The old tenant wanted to get out of the farming business. They had a long-term lease. So as a result, they paid us something to cancel the lease. These farms were re-leased to a new unrelated third-party tenant with no downturn.

Looking ahead, we have 4 more leases scheduled to expire in late 2020. I think they're in the last month of 2020. These all expire in the fourth quarter, and I think it's in December. And total makeup is less than 5% of our total annualized lease revenue. We are in negotiations with both of the existing tenants and actually talking to some potential new tenants for these properties. We aren't expecting any downturn on these farms.

We recently -- and this is an important one you should know because this is different from a lot of people. We recently amended the agreement with our adviser to change how the management fee is calculated. Rather than calculating the fee based on the amount of common equity in the fund, it just seemed to make more sense that the fee is on the real estate assets owned by the fund. These are the assets that the adviser is responsible for.

So the Board changed the formula from determining a management fee set to be calculated at 0.5% annually of the amount of gross intangible real estate owned by the fund. The amount being paid under this new formula is about the same as the fee paid under the old formula. We think this is more in line with the fees and expenses of asset managers like in the real estate field. This fee is based on historical cost of these assets and not their fair value. So as the farms increase in value, as almost all of our farms have in the past, it will not result in an increased fee to the adviser.

Now let's talk about some capital raising because that's important for the next year. Since January 1, 2020, we raised about $5 million in net proceeds through the sale of our at-the-market program. And during the quarter, we also sold about $28 million of net proceeds through our non-traded Series B preferred stock. And this completes that offering that we registered about 21 months ago. So that was a nice quick raise of about $133 million in proceeds, all of which we put to work.

And since we had success with that Series B offering of preferred stock, we launched a new offering called our Series C preferred stock. Returns on the Series C are almost identical to the Series B, aside from being a larger offering. But just as we did with the Series B, we planned the Series C to be sold in small amounts over the course of the next several years so that we are better able to find farms to buy as the proceeds come in. So far, we've only sold a few small sales of the Series C because we didn't have selling agreements in place. I think we have about 10 now, and we'll probably have 50 before we start ramping up pretty heavily.

Just want to remind everyone that these proceeds of selling shares under the Series B and now the Series C is the company paid certain commissions to fees to the Gladstone Securities, which is an affiliated broker-dealer. However, Gladstone Securities is just a conduit for this offering as it pays out about 94% of the fees it earns to other third parties, including brokers and wholesalers who are helping sell the shares. And the rest of the fee is retained by Gladstone Securities used to cover all the related selling expenses, the printing of prospectuses, et cetera. In total, these additional expenses are actually greater than the fees kept by Gladstone Securities. It's very costly to sell a non-traded stock, but not much more than those of typical overnight public offerings.

And folks, 1 reason we use preferred stock is to avoid dilution of the common stock. Dilution is not a good thing. As you all know, I'm the largest stockholder of common stock. And just like most common stockholders, I don't like dilution because I want to maintain my equity position.

And please also note that preferred stock is not included in the calculation of the fee paid by the adviser and never has resulted in additional fees paid by the adviser, and certainly won't going forward, unless we take that money and buy farms with it.

Well, that's sort of enough of the operations. So I'll turn it over to our Chief Financial Officer, Lewis Parrish, to talk to you about the numbers. Lewis?

All right. Thank you, David, and good morning, everyone. I'll begin by going over the balance sheet.

During the first quarter, our total assets increased by about $24 million, primarily due to the proceeds from the equity issuances David mentioned earlier. From a financing perspective, in addition to these equity issuances, we also secured 1 new loan for about $8 million, which will carry a fixed interest rate of 2.66% for the next 4 years. From a leverage standpoint and on a fair value basis, our loan-to-value ratio and our total farmland holdings was up 51% at March 31. We're comfortable at this level given the 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 3.57% 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 these borrowings being 10-plus years out, we also feel that we're protected against potential liquidity issues should a recession hit. But right now, based on discussions we've had with our lenders, we do not believe there will be a credit freeze in the near-term future. Right now, credit generally remains readily available to us and at favorable terms.

Regarding upcoming debt maturities, we have about $26 million coming due over the next 12 months. However, about $15 million of that represents the maturities of 3 bullet loans coming due towards the end of the year. The 3 properties collateralizing these loans have increased in value by about $2.7 million since their respective acquisitions, so we do not foresee any problems refinancing these loans either with the same lender or potentially new lenders. So removing those maturities, we only have about $11 million of amortizing principal payments coming due over the next 12 months or about 2% of our total debt outstanding.

Now I'll move on to our operating results for the quarter. First, I'll note that we had net income of about $3.1 million and net income to common shareholders of about $934,000 or $0.045 per common share. On a quarter-over-quarter comparison, our adjusted FFO for the first quarter increased by about $1.9 million or 53%. On a per share basis, AFFO increased by about $0.085 per share, up to $0.253 per share in the current quarter compared to $0.167 per share last quarter. Dividends declared were $0.134 per share in each quarter. The main drivers behind the increase in AFFO were early lease termination payment we received and interest patronage received on our loans with Farm Credit, partially offset by increases in certain operating expenses.

From a cash rent perspective and excluding both participation rents and lease termination payments, rental income increased by about $443,000 or 4% on a quarter-over-quarter basis, primarily due to additional revenue earned from recent acquisitions. Participation rents decreased quarter-over-quarter by about $1.4 million due to the timing of when such payments are due. And we also received an early lease termination payment of about $3 million from an outgoing tenant who leased 4 of our farms.

After writing off certain balances related to the prior leases, we recognized additional lease -- net lease revenues of about $2.8 million related to this transaction. We also received about $1.3 million of interest patronage or refunded interest from various farm credit associations related to our loans with them. Overall, this patronage reduced the interest rates in our borrowings from them by about 98 basis points.

On the expense side, our core operating expenses increased by about $773,000 on a quarter-over-quarter basis. And this was primarily driven by an increase in certain related-party fees. The incentive fee earned by our adviser during the current quarter increased by about $487,000 due to our pre-incentive fee FFO surpassing the required hurdle rate by a larger amount than in the prior quarter. This increase was, of course, driven by the lease termination payment and the interest patronage we received during the quarter. In addition, our base management fee increased by about $153,000 due to the additional assets acquired during the prior quarter.

Removing related-party fees, our core operating expenses only increased by about $93,000 from the prior quarter, and this was primarily due to additional costs associated with the upcoming Annual Shareholders Meeting as well as slightly higher appraisal fees incurred during the current quarter. Of note, for the third consecutive quarter now, our property operating expenses were relatively flat on a quarter-over-quarter basis.

Now I'll move on to net asset value. We had 30 farms revalued during the quarter, all of these via independent third-party appraisals. And overall, the farms -- the values on these farms increased by about $6.6 million or 2.2% over their prior valuations, which were about a year ago. So as of March 31, our farms are valued at $892 million, and all of this was based on either third-party appraisals or the actual purchase prices. So 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 $11.46, which is up by $0.05 from last quarter. The main drivers of the increase were the appreciation in value of certain farms, largely offset by the net dilutive impact of equity issuances during the quarter and ongoing capital improvements on certain properties.

Turning to liquidity, including availability on our lines of credit. We currently have over $50 million of dry powder, and that translates into over $140 million of buying power for straight cash acquisitions. However, we also have the ability and intent to issue new OP Units in consideration for purchases should the opportunity arise.

And finally, with the added capacity on our MetLife facility through our recent amendment, we have ample availability under our largest borrowing facility, and we continue to be in discussions with potential new lenders for additional borrowings. So we have plenty of room and ability to continue borrowing and buying up new farms that meet our investment criteria.

And lastly here, I'll touch on our common distributions. We recently raised our common dividend again to $0.0447 per share per month. Over the past 21 quarters, we've raised our common dividend 18 times, resulting in an overall increase of 49% in our monthly common distributions over this time. Since 2013, we've paid 87 consecutive monthly dividends to common shareholders, totaling $4.58 per share in total distributions.

Paying dividends to shareholders is paramount to our business plan, and our goal continues to be to increase the dividend at a rate that outpaces inflation. At our current distribution run rate and with the stock price where it is today, the yield on our stock is about 4%. And when considering the relative stability and security of the underlying assets, we believe this stock offers a compelling investment alternative.

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

All right. Thank you, Lewis. Our list of potential firms to buy remains very healthy, and we expect to be very active over the next couple of quarters. We should be able to continue to report positive news to you, and I think we'll be over $1 billion in assets this time next year.

And just a few final points before we get some questions. We do believe that investing in farmland and growing crops that contribute to healthy lifestyles such as fruits and vegetables and nuts is following the trend that we're seeing in the markets today. Currently, about 85% of our total revenue comes from farms that are growing this type of food that you can find in either the produce or nut section of your local grocery store. We consider these foods to be among the healthiest-type foods that -- and we continue to see a growing trend toward organic among these foods.

Over 45% of our fresh produce acreage is either organic or transitioning to organic. And about 10% of our permanent crops, these are the trees that are out there growing the nuts that we have, fall into this organic category. We believe organic sector will continue to be a strong growing area. In addition, crops classified as being GMO are grown on less than 5% of our farmland, and I think that will change over time to 0.

Another major reason why our business strategy is to focus on farmland growing fresh produce due to effects of inflation in 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, the fresh fruits and vegetable segment of the food category has outpaced the total food CPI by a multiple of 1.6x.

So for us, inflation is good because our farmers make more money, and we hope we can pay -- get them to pay more in the way of rent to us. And while prices of commodity crops like corn and wheat and soy are typically more volatile and susceptible to global supplies and demand, fresh produce are mostly insulated from global volatility, mainly because the crops are generally consumed locally and within a short time after harvest.

I'm telling you all of this because we are often confused with farmers that are growing corn, soy or wheat. And we are staying clear of those because we have to compete. If we win in that area, we'll be competing with Brazil and the Ukraine where prices are very low, and they come into the United States or some of the other consumers at much lower rates than we can grow at.

Overall demand for prime farmland growing berries and vegetables remains stable to strong in almost all of the areas where our farms are located, but particularly along the West Coast, including most of California, Oregon and Washington; and the East Coast, especially Florida. And overall, farmland continues to perform well compared to other asset classes. Despite some recent downturns, the NCREIF Farmland Index, which is currently made up of about $11.7 billion worth of agricultural properties, including our own, has averaged an annual return of about 13.6% per year over the past 15 years. That compares favorably with the 10.5% for the S&P 500 and even lower than for the overall REIT index.

During those 15 years, the Farmland Index has never had a negative year. I think that's unbelievable, but that's true. Unlike the S&P, which had 3 very negative years over that same period, Farmland has not. It's generally provided investors with a safe haven during turbulent times in financial markets as both land prices and food prices, especially for fresh produce, have continued to rise steadily.

Purchasing stock in this company is a long-term investment in farmland. I think an investment in our stock is really 2 parts. First of all, it's similar to gold. It's a hard asset. It's farmland. It's dirt. That is having an intrinsic value because there's a limited amount of it and is being used up by urban development, especially in California and Florida, where we have many farms.

And second, unlike gold and other alternative assets, it's an active investment with cash flows to investors. We believe that we're keeping a better than bond fund then because we keep increasing the dividend. So it's not just a flat dividend forever kind of approach. We expect inflation, particularly in the food section, to grow, and we expect the values in the underlying farmland to increase as a result. We expect this especially to be true in the fresh produce food sector as people in the U.S. are trending toward eating more healthy foods.

I think a good way to look at our farmland fund is, first, it's a hedge against inflation. And I think all of us are looking forward to that, considering how much the money the government's spending these days. I think this is a great fund. It's a great stock to own. Once we get just a little bit larger in terms of asset size, I'm very hopeful that we'll get listed on the RMZ Index for REITs, which will bring in additional institutional ownership and increase the daily liquidity of our stock.

But Gladstone Land wouldn't be anything without the good people we have operating and managing it. Buying and leasing farmland sounds like it's easy, but it's a very complex business. So if you like what we're doing, please buy some stock and certainly keep eating fresh fruits and vegetables.

Now let's have some questions. If our operator will come on, we'll have some questions from those of you who are listening in.

Dexter, are you out there?

Yes, Mr. Gladstone. (Operator Instructions)

Any questions?

(Operator Instructions)

I guess we aren't going to have any questions this time. We just produced so much income and so much dividends, people just are happy and not needing to ask any questions. So thank you all for calling in. And Dexter, I think we'll close it up. Thank you. That's the end of this call.

You're welcome, Mr. Gladstone. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.