Gladstone Land Corporation (NASDAQ:LAND) Q1 2024 Earnings Call Transcript

Gladstone Land Corporation (NASDAQ:LAND) Q1 2024 Earnings Call Transcript May 8, 2024

Gladstone Land Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Gladstone Land Corporation First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

David Gladstone: Well, thank you, Latonya. That was nice introduction. And this is, as she said, David Gladstone. We welcome you all to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate you taking time out of your day to listen to our presentation. Before I begin, we are going to start with Michael LiCalsi. He is our General Counsel. And Michael, go ahead.

Michael LiCalsi: Thanks, David. Today’s report may include forward-looking statements under the Securities Act of 1933 and 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. The 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 the risk factors in our Forms 10-K and 10-Q and other documents that we file with the SEC. You can find them on our website, which is www.gladstoneland.com. Specifically, go to the Investors page or you can find them 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. Now, 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 and any impairment losses from property, plus depreciation and amortization of real estate assets. Now, we may also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses, and adjusted FFO, which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. And we believe these are better indications of our operating results and allow for better comparability of our period-over-period performance.

Please visit our website once again, that’s gladstoneland.com, sign-up for our e-mail notification service. You can also find us on Facebook. Keyword there is the Gladstone Companies. We’re also on Twitter, and that’s @gladstonecomps. Today’s call is simply an overview of our results, so we ask that you review our press release and our Form 10-Q, both issued yesterday for more detailed information. Now, with that, I’m going to turn it back over to David Gladstone. David?

David Gladstone: Okay. Thank you, Michael. I will start with a brief overview, as I always do. We currently own about 112,000 acres on 168 different farms and about 49,000 acre feet of water assets and we are currently increasing that. One acre foot is equal to about 326,000 gallons, so we’re nearly 16 billion gallons of water. This is protecting our land, because without water, the land is not worth much. And together, the land and all the water are valued at a total of approximately $1.5 billion. Our farms are in 15 different states, more importantly, in 29 different growing regions, and our water assets are all in California. Our farms are leased to 90 different tenant farmers and the tenants on these farms are growing 60 different types of crops, mostly fruits, mostly vegetables, and a lot of nuts.

You can find all of these in the produce section of your grocery store, which is where most of these crops are sold. Let me just deviate here a minute. When we have diversification like this and we are well diversified. You have some problems in each of the regions. And so those are in the diversification that you are trying to maintain. For example, almonds and pistachios both have reduced demand, so prices are low today and it may take years for the balance to come back. Almonds are an international crop and people are not eating as many almonds as they did in the past and the price of producing almonds has risen due to inflation in farming cost. So, some people cannot afford to buy almonds and pistachios and that reduced demand makes it a problem for all our farmers in that area.

And there are farms that have problems. For example, Michigan blueberries had a pretty good crop this year and reasonably good sales. But our farmers, one farmer there had a very tragic accident. He was injured and he couldn’t farm. So we are moving forward with a sale of those farms. And we believe we will be okay once we have sold them. Hopefully that happens this year. And we have a few grape farms that do not have the varieties that people want who make wine. So, selling them, we are going to try to sell a couple of those as well. Such is the nature of owning farmland. It’s just like owning businesses. You don’t want – I didn’t want stockholders to think that owning farmland is immune from the ups and downs of the economy or the business of farming.

I think during the rest of the calendar year, 2024, we will sort out these problems. There are other parts of farming that have problems such as tomatoes. Mexico has been subsidizing tomatoes and hurt tomato farmers. We are very lucky not to be in tomato farms. So we missed that problem. Likewise, we did not invest in citrus. It’s been terrible for the citrus farmers in Florida. We have a few citrus trees, but they are not in Florida. The trees have been devastated in Florida by disease and they may never turn around. There are oranges coming in from being produced at other countries. And there is reduced drinking of orange juice. I remember as a child drinking lots of orange juice. People don’t drink as much orange juice as they did 20 years ago.

So we are smart not to be in Florida orange juice business. So just to give you that overview, I thought of that last night and decided to put that into our discussion. And now I’ll give you a quick update of some of the tenants’ issues that we’ve been working through and we’ve been telling you about them. We currently have two properties encompassing 4 out of the 168 farms that we have. And these are vacant. And properties encompass 11 farms in direct operating via the management agreement. So we have had to take over a number of farms and do them on our own. In addition, we are recognizing revenue from leases with two tenants who are collectively leasing four of our farms on a cash basis. Regarding the vacant and farms that are operating farms, we are in discussions with various potential buyers or tenants to buy or lease these properties.

And I think we will have a lot of this done during the next 6 months. So I am hopeful that when we report to you in July that we fixed a lot of that. There are two tenants on non-accrual status. One of them is now current on their rental payments to us and we are continuing to work with a collection of other tenants. On a total year-over-year impact on our operating results, these tenants issued decreased our net operating income by about $750,000 for the first quarter. And as mentioned on the past several calls, we continue to be cautious with new investments, because our cost of capital remains high. More farmland rental rates haven’t increased enough to cover all the extra costs that farmers have. And because farmland values remain high, that is, the farmers, the people who own the land, the values have remained high and they want the high price for it.

We just don’t feel like it’s worth taking that risk. So as a result, acquisition activity remains slow for us and probably be for another couple of quarters. With inflation still above the Fed’s target, that’s the main problem right now, is the Federal Reserve needs to cut rates and that might begin sometime this year, but it won’t be nearly good enough for the very large farmers. We don’t have many of those. But for the small farmer, that really pushes them down pretty bad. But overall, the existing farmland portfolio continues to perform more or less as expected, with the exception of those issues I just mentioned. As you know, we sold one of the properties that resulted in a nice gain for us. This was a large farm in Florida that we bought for about $54 million 7 years ago.

We have gotten nice rents on it as we’ve gone along. But we sold it and we got $66 million for it. Net of closing costs is about a $10 million gain for us and that’s been a tremendous winner for us. And I will note that the price was sold, it was sold for about $2 million more than we had it appraised at prior to the sale. So during the quarter, we valued it lower than we sold it for. I think that’s a good indication that we haven’t overpriced a lot of our farms. On the leasing front, since the beginning of the quarter, we renewed or amended four leases on farms in two different states. In total, these renewals are expected to result in a decrease, not an increase, of the annual net operating income of about $800,000 per year. That’s on the prior leases.

However, a majority of the decrease is due to one lease agreement executed on a nut farm in California in which we reduced the fixed base rent in exchange for increasing the upside potential in participation rents. Looking ahead, we have five leases scheduled to expire over the next 6 months. In total, it makes up about 9% of our total lease revenue. We are in discussion with groups to lease these farms and aren’t currently anticipating any additional vacancies as a result of these. However, two of the expiring leases are on nut farms in California. And those will likely decrease the base rent in exchange for increasing participation rents. That’s some of the problems that are out. Just one other item I’d like to mention. As mentioned on the last quarterly call, our team in California has been working to implement various projects and strategies to take advantage of the surplus water supplies that have come to be available in California.

As many of you know, there have been huge rains. We have had two very wet winters, which is unusual for California. And the rains have not just been the little things that we sometimes see in the east. These have been rains of biblical proportions. I mean, people have had a lot of water wash away. And we have had a few farms that were impacted a bit. But one farm actually took on too much water, so they couldn’t do as much for it. So it’s coming back this year. One such project involved construction of a large groundwater recharge facility on two of our farms, both of which were completed last year. These are, in essence, water banks allowing us to enter into various agreements with both local water districts and private individuals they are expected to result in additional groundwater credits by allowing water to be stored in our water banks.

During the quarter, we were able to obtain an addition 2,676 acre feet or about 872 million gallons of water credits for a total cash cost of approximately $345,000 or right at $129 per acre foot, which is significantly below market. These will come in handy as time goes on. Valuations of farms are now based on how much water they have and usually they have to have two sources of water. We still believe these type of projects are important in achieving long-term sustainable water supplies for our farms in California. And we intend to continue to focus on water security for our farms throughout 2024. And just to note, our portfolio currently has adequate supply of water to-date. None of our farms have been fallowed or not farmed because of irrigation problems due to the inadequacy of water.

In some places, there have been problems and we are not seeing that on our farms. We also wonder about the effects of government regulations. They do regulate how we used. And so we have gone through that with many of our farms and we seem to be in good shape there. We do look forward that these projects that we have with the reserved water that we have for them could go at least 1 year unabated, but I think they may go on as much as 2 years based on how much water we have captured. So let me stop here and I’ll turn it over to Lewis Parrish, he is our CFO and he knows the numbers. Lewis?

Lewis Parrish: Thank you, Dave, and good morning, everyone. I’ll begin by briefly going over our recent financing activity. We did not incur any new borrowings during the quarter, but we did repay about $16 million of bonds that matured. And on the equity side, we raised about $250,000 of net proceeds from sales of the Series E preferred stock during the quarter. Now moving on to operating results. For the first quarter, we had net income of about $13.6 million and net income to common shareholders of $7.4 million, or $0.21 per share. Adjusted FFO for the current quarter was approximately $5.1 million, or $0.143 per share, compared to $5.9 million, or $0.166 per share in the prior year quarter. Dividends declared per common share were $0.14 in the third quarter compared to $0.138 in the prior year quarter.

Primary drivers behind a decrease in AFFO were the lost income from the farm we sold in January and a decrease in the revenues associated with certain properties that were either vacant or on non-accrual status during portions of the quarter. This was partially offset by decreases in certain operating expenses during Q1 2024. Fixed base cash rents decreased by about $1 million on a year-over-year basis. That’s primarily due to the reasons just mentioned, that is the lost revenues from the farm we sold and certain other workout properties. This decrease is partially offset by additional rents earned from capital improvements we made on certain of our farms. Participation rents decreased by about $200,000 during the current quarter. This is really just due to the timing of when a certain information about crop sales is made available to us.

As of filing, we had not yet received enough information to record certain participation rent amounts during the first quarter, so we’ll continue to press for that information and hopefully be able to finalize it in time for the second quarter filing. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses decreased by over $500,000 during the current quarter. Property operating expenses decreased in the current quarter due to lower amounts spent to protect water rights on certain farms in California, as well as a decrease in both legal fees and property management fees. And G&A expenses decreased due to lower amounts recorded related to the upcoming shareholders meeting and also a decrease in certain professional fees.

Of note, total related party fees remain relatively flat year-over-year. Finally, other expenses decreased primarily due to lower interest expense incurred as a result of loan repayments we’ve made over the past year. With that, we’ll move on to net asset value. We had 35 farms revalued during the quarter, all via third-party appraisals. Overall, these valuations decreased by about $3.7 million, or 1% from their previous valuations from about a year ago. So as of March 31st, our portfolio was valued at about $1.5 billion, and all of this value 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 securities, Net asset value per common share at March 31st was $18.50.

That’s down from $19.06 at December 31st. The majority of this decrease is due to the change in fair value of our preferred securities, as well as a decrease in valuations of certain farms that were reappraised during the quarter. Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have access to over $200 million of liquidity, including nearly $60 million of cash on hand. We also have over $130 million of unpledged properties. Over 99.9% of our current borrowings are at fixed rates, and on a weighted average basis, these rates are fixed at 3.39% for another 4.2 years. As a result, we have experienced minimal impact on our operating results from increases in interest rates. And with respect to our current borrowings, we believe we are well protected should interest rates remain higher for longer.

Regarding upcoming debt maturities, we have about $35 million coming due over the next 12 months. However, about $17 million of that represents various loan maturities. And given the value of the underlying collateral, we do not foresee any problems refinancing any of these loans if we choose to do so. So removing those maturities, we have about $18 million of amortizing principal payments coming due over the next 12 months, which is about 3% of our current debt outstanding. In addition, we have about $6 million of loans that – they aren’t maturing, but they have a fixed rate term that is expiring over the next 6 months, sorry, over the next 12 months. Finally, regarding our common distributions, we recently raised our common dividend again to $0.466 cents per share per month.

This marks the 34th time we’ve raised our common dividend over the past 37 quarters, resulting in an overall increase of more than 55% over that period. With that, I’ll turn the program back over to David.

David Gladstone: Thank you, Lewis. We continue to stay active in the market should good opportunities present themselves, but many of these farmers will just wait it out. They’re not going to sell their farm at a discount, which they would need to do in today’s market. So prices of farms have not decreased. Some of them have a little bit, but need to decrease a lot so that we don’t have as much problems renting them out. Interest rates are still too high today, but we’re hopeful that rates will be lower by this fall so that we can start buying more farms again. And just a final note I’d like to make. We believe that investing in this farmland and the farming crops that contribute to the health of the lifestyle, such as fruits and vegetables and nuts, follows the trend that we’re seeing in the market today.

So we are in good shape on that area of selecting where we’re going to put our money. Overall demand for prime farmland, growing berries and vegetables, certainly that side is stable to strong, and almost all the areas where we farm are located, particularly along both the coast – east cost and west coast, the east coast of Florida and the west coast of California. This is where the good farmland is for us. And please remember that purchasing stock in this company is a long-term investment in farmland. It’s similar to other hard assets such as gold. Farmland dirt that just stays where it is and continues to produce is wonderful. And as long as we have water in California, I think we’re going to be in good shape. A lot of things are being driven by urban developers, especially California and Florida, where we have many farms.

And unlike gold and other alternate assets, this is an active investment with cash flows to investors. And we believe we’re better than a bond because bonds – don’t, you don’t get the bond interest rate going up on the existing bonds. So we’re expecting inflation, particularly in the food sector to continue to increase over time. And we expect the values of the underlying farmland to increase as a result. We expect this especially to be true in fresh produce and on the food sector. And the trend of more people in the U.S. eating healthy foods continues to grow. So rather than may continue to explain what we’re doing, maybe we get some questions. Latonya, you want to come in and tell them how to do that?

Michael LiCalsi: Hi, we’re ready for the Q&A, please.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Rob Stevenson with Janney. Please proceed.

Rob Stevenson: Hi, good morning, guys. David, are all of the 14 of the Michigan farms leased to the same operator that you talked about as having the accident? or there are multiple operators in there?

David Gladstone: There’s multiple, but I think it’s only two now. We’re down to two.

Lewis Parrish: It was the same operator, but now we are working with a couple of different groups to lease, operate, and potentially sell down the road.

Rob Stevenson: Okay. So all of the 14 Michigan farms that you talked about are blueberry farms?

David Gladstone: Yes.

Rob Stevenson: Okay. And then are all five of the California farms nut farms or is there something else in there as well that’s causing you issues?

David Gladstone: No, it’s all nuts. Sorry to say it that way.

Rob Stevenson: Okay. And then I guess lastly, just to wrap it up, what is the Washington farm growing that’s in the non-accruals?

David Gladstone: That was cherries, apples, and wine grapes. We’re in the process of removing the permanent plantings and marketing it to either to be sold or leased as open ground or kind of like a new development project for a potential buyer.

Rob Stevenson: Okay. And then I guess while we’re talking about what farms were growing, the Florida farm that you had the big gain on, what was that growing? Was that oranges or is that something else?

David Gladstone: No, it was vegetable produce kind of stuff that you’d see in the grocery store. I don’t think there was lettuce there, but I think it was a lot of produce that you’d see in the grocery store in the produce section. It was a very nice farm. Unfortunately, you’re getting bombarded from the people in Mexico, and they can’t make as much money, so people wanted us to lower the rent, and we decided we wouldn’t play that game of trying to beat the people in Mexico. So we put it up for sale, and as you probably have guessed, there are a lot of people who want farmland in Florida because it’s being redeveloped. In fact, if you look around not too far from where that farm is, you’ll find a lot of new golf outing places.

And just as a note, we have the big farm right next to this one, so there may be another one that comes along. We’ll see. It’s a different kind of farm, water farm, and the state of Florida is paying us to clean up the water that’s coming down there. So we’re in good shape on that. So we’ll have to keep that one for a while, but ultimately we may want to get out of that. And there are people that like having farmland that’s leased to Florida.

Rob Stevenson: Okay. And then I guess to wrap up this topic, Lewis, the $750,000 impact from the 20 farms, is that spread relatively evenly on a per farm basis among the 20? Or is there certain of those farms that represent a disproportionate amount of that $750,000?

Lewis Parrish: The nut farms would be weighted more heavily in terms of the income differential.

Rob Stevenson: Okay. That’s helpful. And then I guess the other question I have is, you guys talked in detail about the water. You bought some more. You have a bunch of it on the books now. Does that get marked-to-market on a regular basis? And I guess the question here is, is it with all of the rain and everything in the aquifers full, is that water worth less today than if we were in a drought situation, and so that that’s going to fluctuate like securities mark-to-market on a quarterly basis, or is GAAP not treating it similarly?

Lewis Parrish: No, these are being held at cost on our books, and the water we’ve acquired lately, including the cash amount we paid of about $130 per acre foot some of that we did get granted from a water district, so we didn’t pay any money directly for the water. But so on our books, including the cash we paid plus the income recognized as a result of receiving that water, I think it’s on our books for maybe $290 or $300 per acre foot. That is still below market, even in a wet year as we were last year, or average year as they’re calling it right now. But keep in mind that just a few years ago, water was trading regularly for between 1,500 to 2,000 plus per acre foot. So, that’s the time that we are really holding it for.

It doesn’t mean we are going to sell it for that amount. We very well may keep it to use our own farms and make sure that our farms are optimizing their production potential. But even in an average or wet year, it’s – the rate that we are able to acquire water at as a result of some of these projects is still below market and will be just even that much more so better off during a drier critical years.

Rob Stevenson: Okay. And then last one for me. How are you guys thinking about selective pruning in the portfolio? So, obviously, you may wind up selling some or all of the 20 farms that you talked about, etcetera, there that are having issues. But any other farms, similar to the Florida asset, which isn’t under any real duress, etcetera, that you guys are thinking about monetizing and either redeploying into something else or buying back stock or reducing debt or anything along those lines at this point, given the market prices for land in certain of your markets?

David Gladstone: Well, if you pay us enough, we will sell it all to you. But it’s not, the prices aren’t that different. So, we aren’t out marketing right now. However, I do think that marketing on some of the farms that we have that we have identified, as we have talked about for you, to sell may tell us we should sell some other land as well. But we are not out there looking for sales every day. It’s an interesting market, Rob. I look at that and I see these farmers and you talk to them about selling the farm and to us, and they go back to two or three generations that they have owned the property. And so it’s like an emotional thing to make a sale. We are the same way. We have good farms, and it would be kind of silly to sell them if we can keep them rented and making money for us.