Gladstone Land Corporation (NASDAQ:LAND) Q3 2023 Earnings Call Transcript

Gladstone Land Corporation (NASDAQ:LAND) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Greetings and welcome to the Gladstone Land Corporation Third Quarter Earnings Conference Call. [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. Please proceed, sir.

David Gladstone: [Technical Difficulty] quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate the time you take to listen to our presentation. Before I begin the presentation, we are going to hear from Michael LiCalsi, he is our General Counsel and Head of Administration. Michael?

Michael LiCalsi: Thanks, David. Good morning, everybody. Today’s report may include forward-looking statements under the Securities Act of 1933, 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 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 the risk factors in our Forms 10-Q, 10-K and other documents that we file with the SEC. You can find them on our website, the Investors page at gladstoneland.com and on the SEC’s website, which is 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. Today, 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 also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses and an 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 better comparability for a period-over-period performance.

Once again, please visit our website gladstoneland.com and sign-up for our e-mail notification service. You can also find us on Facebook, keyword there is the Gladstone Companies and on Twitter, that’s @gladstonecomps. 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. And with that, I will turn it back to David Gladstone.

David Gladstone: Alright. Thank you, Michael. I’ll start with a brief overview of our Farmland Holdings that currently own about 116,000 acres on 169 farms and about 45,000 acre feet of banked water, that’s water that’s in the acre foot we can tap into. One acre foot is equal to about 326,000 gallons, so we own nearly 15 billion gallons of water. And together, they are valued at approximately $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. So stored water, mostly in California. So you can see we are pretty well diversified. Just to show you a little more diversification, our farms are leased to over 90 different tenant farmers and all of whom are unrelated to us.

And the tenants in these farms are growing 60 different types of crops, but mostly fruits and vegetables and nuts like you’d see in the produce section of a grocery store, which is where most of our products are sold. And now, I’ll give you a quick update on some of the tenant issues we have been working through, still farming on one farm in California with the help of a third-party farm management group. We have been in discussions with the same group to sign leases and not just farm it for us. Property of the lease will be closed and finalized a lease agreement hopefully soon. In addition, short-term leases on 4 blueberry properties in Michigan, encompassing about 14 different farms expired in October. And since then, we’ve been farming three of these properties to 11 other farms with the help of third-party management groups.

The fourth property, which consists of 3 farms currently vacant and it’s okay to be vacant this time of year, because no strawberries on this – no blueberries on the blueberry bushes this time of year. We are in discussions with groups to take over all of these farms and we hope to also have an agreement in place by the end of the year. Finally, during the year, we had two other tenants, who had gotten behind in their rental payments to us, one tenant was replaced, farm being fully leased as of July 1 and the other tenant was able to catch up on their rents and is now no longer falling behind. Total year-over-year impact on our operations as a result of these issues that I mentioned above was a decrease in operating income of about $201,000 in the third quarter and about $814,000 for the year so far.

I think a lot of that will be replaced by the fact, we will get some properties that actually sell their crops and actually make up some of those problems that we had. As mentioned on the past couple of calls, we continue to have more selective approach to the type of farms we review for potential acquisition, because our cost of capital is so much higher. For example, we financed most of them number, most of our farms that we buy with a first mortgage for about 60% or 70% of the price we pay. And as a result, acquisition activity remains slow for us, because those costs have gone up so much. It is changing and it will change over time. With inflation still above the Fed’s target rate, interest rates remain high for us for the foreseeable future.

But having gone through these cycles before we know it will change. But overall, our existing Farmland portfolio continues to perform pretty much as we expected, it would with the exception of those issues I mentioned above. We are having a couple of tenants that have problems, but we always work through those. On the leasing front since the beginning of the quarter, we renewed and amended 9 leases, farms in two different states in total renewed as expected and results of increasing annual net operating income about $275,000 or 4.7% above that of the prior leases. Looking ahead, we have 3 leases scheduled to expire over the next 6 months and in total that makes up less than 5% of our total annualized lease revenue. We are in discussion with groups to lease these farms and we are also looking into possibly selling one of these farms as it’s in one of those development areas.

And hopefully we will have some information for you before the end of the year. But we are not currently anticipating any vacancies on any of these farms as a result of upcoming explorations. We also recently entered into a water transfer agreement with a local water district in California that will allow us to purchase up to 15,000 acre feet or nearly 5 billion gallons of water per year through February 2031. So far, we have purchased about 7,000 acre feet of water for 2023 and total consideration for that was about $1.2 million. We have recently completed construction of some groundwater recharge basins. These basins own some of the unformed acreage on a couple of our large properties in California. This will enable us to pump the water onto these basins, so that we can store it as it goes underground for further use in our farms.

So we are in good shape in terms of needing water in the future. I think this year is going to be a wet year, but who knows maybe it’s beginning of a 5 or 6-year drought period. So we have got a lot of water to get us through any kind of problems we have. Inflation continues to slow down the impact of the impact of Fed’s interest rate hikes now being felt throughout the economy. However, the latest headline inflation is about 3.7% still remains above the Fed’s target of 2% and core inflation has not been moving in the right directions according to the Federal Reserve. Food prices are also showing signs of cooling down. They went up substantially after the pandemic, but we continued to keep pace and outpace inflation as we see them now.

We believe food prices will continue to keep pace or again outpace inflation, which should help mitigate the increases in the operating costs many of our farms the tenant farmers have been experiencing just we look forward to the future. I want to stop here and turn it over to our CFO, Lewis, talk to you more about the numbers. Lewis?

Lewis Parrish: Alright. Thank you, David and good morning everyone. I’ll begin by briefly going over our financing activity. We do not incur any new borrowings during the quarter, but we have repaid about $7 million of loans since the beginning of the quarter. On the equity side, since the beginning of the quarter, we have raised net proceeds of about $2 million from sales of our Series E preferred stock and $1 million from sales of our common stock to the ATM program early in the quarter. Moving on to our operating results. For the third quarter, we had net income of about $3.1 million and a net loss to common shareholders of $3 million or $0.08 per common share. For the following discussion of operations, I will be comparing the third quarter of 2023 with the corresponding third quarter of 2022.

Adjusted FFO for the current quarter was approximately $5.6 million or $0.155 per share compared to $7.2 million or $0.207 per share in the prior year quarter. Dividends declared per common share were $0.139 in the current quarter compared to $0.137 in the prior quarter. The primary driver behind the decrease in AFFO was lower year-over-year revenues coupled with an increase in related party fees and higher financing costs with the proceeds from a portion of such financings remaining uninvisted. Fixed base cash rents decreased by about $400,000 or 2% from their prior year quarter. This is primarily driven by a decrease in revenues from the self-operated and non-accrual properties as well as a lease we executed in the fourth quarter of 2022, in which we reduced the fixed base rent in exchange for increasing the participation rate component in the lease.

And the result of this increase in the participation rate component won’t be known until the fourth quarter. Participation rents also decreased by about $600,000 from Q3 of last year. These figures are largely dependent upon the timing of when such information is made available to us. But from what we’ve received so far, we are seeing lower yields coupled with lower pricing for last year’s crop. The lower yields were expected due to the alternate year bearing nature of the trees and also due to the fact that these crops were harvested at the end of a multi-year drought. Pricing continues to be somewhat lower due to oversupply and this is particularly true in the almond market. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses for the current quarter increased by about $370,000 from last year, This is primarily driven by an increase in related party fees, particularly a higher incentive fee earned by our adviser during the current quarter.

Removing related party fees, our recurring core operating expenses remain relatively flat from the prior year quarter. Finally, other expenses decreased due primarily to lower interest expense incurred as a result of loan repayments made over the past year. With that, we will move on to net asset value. We had 43 farms and our banked water all valued during the quarter and these were all done via third-party appraisals. Overall, these valuations increased by about $1.1 million over their previous valuations from about a year ago. So as of September 30, our portfolio was valued at approximately $1.6 billion, all of which was supported by either third-party appraisals or the purchase prices. So based on these updated valuations and including the fair value of our debt and all preferred securities, our net asset value per common share at September 30 was $20.33, which is up from $19.15 at June 30 and up from $16.56 at Q3 of last year.

Majority of this change was due to a decrease in the fair value of our preferred securities, which has been driven by the high interest rate environment. Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have access to over $170 million of liquidity in addition to about $155 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 3.35% for another 4.3 years. As a result, we have experienced minimal impact on our operating results from increases in interest rates. And 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 $41 million coming due over the next 12 months. However, about $24 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. But if we remove those maturities, we only have about $17 million of amortizing principal payments coming due over the next 12 months or less than 3% of our current debt outstanding. One other item to note here, our lines of credit with MetLife are currently set to expire in April of 2024. We are close to finalizing a long-term extension with MetLife for each of these and we hope to have this wrapped up during the fourth quarter.

And finally, regarding our common distributions, we recently raised our common dividend again to $0.464 per share per month. This marks the 32nd time we have raised our common dividend over the past 35 quarters, resulting in an overall increase of 55% over that period. And with that, I’ll turn the program back over to David.

David Gladstone: Okay. Thank you, Lewis. That’s a nice report. We continue to stay active in the market should a good opportunity present itself. But we are being more cautious on the acquisition front. As changing out there, people have begun to reduce the price on some of their farms. It happens much quicker in other REITs. But on the land side, the owner of the property can always continue to operate the farm and make a few bucks. Additional points to make, just the final point I’d like to make. We believe that investing in farmland, growing crops that contribute to a healthy lifestyle such as fruits and vegetables and nuts follows a trend that we are seeing in the market today. Overall, demand for prime farmland, growing berries and vegetables remains stable to strong in almost all areas that we are in today.

When our farms are located today, particularly on both the coast, East and West, we are getting good value increases. And overall, Farmland continues to perform well compared to other asset classes. For example, the NCREIF Index, Farmland Index, which is currently made up of about $16.4 billion worth of agricultural properties, has an average annual return over the last 25 years of 11.4% with no negative years going down. This is so much better than the S&P index and the overall REIT index, each of which have had 6 or more negative years in which, if you were getting out, you were going to lose money, if you were in at a certain amount. We have had zero in the farmland index. So it shows its strength by being something that is always available for us to go out and finance.

The banks that we use are very interested in lending us more money of course there at a higher price. In closing, just remember that purchasing stock of this company is a long-term investment in Farmland. I think an investment in stock is two parts. It’s similar to gold. It’s a hard asset, its Farmland, its dirt. That has an intrinsic value because there is a limited amount of good farmland and is being used up by urban developers, especially in California and Florida, where our many farms are located. And second, it’s unlike gold and that it’s an alternate asset, but it’s an active investment with cash flows and investors getting money every month. We believe in it. It’s better than a bond fund, because we keep increasing the dividend, which doesn’t happen in a bond fund.

We expect inflation, particularly in the food sector, to continue increasing overtime and we expect the values of the underlying farmland to increase as a result and we expect this especially to be true in the fresh produce food sector as the trends of more and more people in the U.S. eating healthy foods and continue to grow in that area. Now, we will have some questions from those who follow us. Operator, would you please come on and help us listen to some of these questions?

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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: Good morning, guys. David, other than the 4 blueberry properties what are the other crops that are among the challenged operator farms that you guys are talking about?

David Gladstone: Well, we have an oversupply of almonds in the marketplace today. So I would count that as one that is a problem. But the good thing about almonds is they are nuts and you can pack them up and hold them for a while. We found that international purchases of almonds have been down substantially and I don’t know why that is other than very expensive, but we think that will change and it will change I think in the next year.

Rob Stevenson: Okay.

David Gladstone: Go ahead.

Rob Stevenson: No, I was just going to ask, beyond the Michigan blueberry stuff. I think you said that there was one in California. Are there any other markets where you’re having issues at this point?

David Gladstone: We have a vineyard that’s not making as much money as it should. So I keep an eye on that.

Rob Stevenson: Okay. And how are you guys thinking about, the opportunity to release these assets and what you’d get from that versus just selling them taking the proceeds and either repaying debt or buying something else and moving on?

David Gladstone: Yes, that’s daily conversation in this place. And so as a result, we have one property in Florida, it’s a fairly large, large farm, it’s growing berries and produce now, but the push in that direction is directly competing with a Mexican produce that’s coming out. So as a result, most of the produce guys don’t want to pay as much. So what we did is we located a couple of people who want to buy that it is directly in the line of development in Florida, and somebody will make a buku of money. But if you think about it, we’d have to carry it with a negative carry, in order to get to the period where we’d be able to sell that off. There are some investors out there that don’t really care for income, they just want to hold it and sell it to some of the developers.

And so hopefully, we get that done before the end of the year, but maybe not. Anyway, I don’t want to get myself in trouble. I’ve done this before mentioning that something is going to happen. But it’s moved along, we have a letter of understanding, but it’s not binding. And we’re currently getting the property in shape. So it will be transferred. And I think it’ll happen in the next 90 days, for sure.

Rob Stevenson: Okay. And then last one for me, is what’s the rationale for buying incremental water at this point, right, given the environment right now, and given your cost of capital is it versus spending that money on a income producing farm?

David Gladstone: Well, an income producing farm would be lovely, but we don’t have many of those for sale, because the price they’re willing to take is so much higher than you can justify based on the cash flows. And that’s throughout the industry. So this is not something that’s just in strawberries, or blueberries, or almonds, or anything else, it’s very expensive out there. Now, inflation is driven up the price of all the inputs to grow. So almonds, and pistachios are much more expensive to grow today than they were 2, 3 years ago. And the guys who are running our farms and renting from us are able to sell and make money, but they’re not making a lot of money. And so as a result, as soon as the Fed stops raising rates for good, and things level out, we’ll go back into a mode that will allow us to do that.

We’re already seeing some of the farms in California, and certainly in Florida, come up for sale at lower prices. And if you want to get out now, which as you probably remember about FDA, 80% of the farms are in the hands of families that are wanting to get out of the business or to somehow find a way to be more profitable. That for us, that’s the thing that’s driving everything right now is if you want to get out, you got to sell at a lower price than they had hoped they would get. And that’ll change. In a year or 2, those prices will be back. And they’ll sell to us the financing that we use will be in vogue again. And therefore we’ll be back in business. We’ve already seen three or four farms that are coming up for sale that we turned down because the price was too high.

And they’re now starting to walk down the price. So I think we’ll be back in the business of buying farms within the next year.

Rob Stevenson: Okay, thanks, guys. Appreciate the time this morning.

David Gladstone: Okay, Latanya, who is next?

Operator: Our next question comes from Mike Albanese with EF Hutton. Please proceed.

Mike Albanese: Yes. Hey, guys, thanks for taking my questions. Despite the tenant issues, I think that was largely a nice quarter. Just I guess a couple of quick ones for me. Again, on the acquisition front, you talked a little bit about pricing any insight into implied cap rates, are there any deals out there that have closed? Obviously not with you guys, that was – you could point to or just to give us some sense of where cap rate stands for that.

David Gladstone: I think cap rates around 5.5%, maybe higher today. But it’s got to go back down for us to get involved. But there are some non-profits that buy properties just for some ESG reason and they don’t really care about making money. They want to make money, but they don’t, that’s not the primary driver. So there’s some of those. And I’d say, if you wanted to pay eight cap rates, you could have all the deals you want. But I don’t know how you’d ever finance that in today’s marketplace. So, for us, it means a time of making sure that the farms we have are in good shape. We’re currently doing some of these deals now that with our existing farmers that will give us more income on a straight-line basis, as opposed to having extra money at the end of the year and paying us.

So trying to even out everything and make it work for us. And we’re in great shape, we got cash, we can stay alive for 3 or 4 years if we needed to do that. But I’m expecting the marketplace to change pretty substantially in 2024.

Mike Albanese: Yes, you’re right, you do have a healthy balance sheet, you have plenty of liquidity, you are in a position where you can kind of, I guess, wait this out a little bit just to dig into the tenant issues a little bit more from their perspective. Obviously, they’re seeing, properties or just expenses going up in general from an inflationary expenses, financing gets more difficult. And then you mentioned then like an oversupply and almonds, and I guess where are you seeing more of the issues arising from? Is it really on the supply demand side? Is it the inflationary side? I mean, what – I guess the better question is what would help them out more, this inflation coming down or just kind of a balancing out in their particular crops, you had two tenants that fell behind, you were able to replaced one, I think you said at a higher lease.

At a higher lease income and then the other caught up, I mean, I guess, using the one that caught up as an example, what changed for them?

David Gladstone: Probably got a hold of all of their cost and recharge the way that they doing things, the difficulty in selling to who we sell to, which is the grocery stores, that’s where they most of our products end up. In that the grocery stores aren’t passing all of that on, they’re keeping a lot of it. So we’re not getting better prices for our almonds and pistachios and strawberries, we’re getting good returns. But if we could get past the markup that Safeways and others are doing, we’d be better off it. It all changes once. Once the grocery stores realize that they need us more than anybody else almost because they got a have product to sell. You’ll see things change in the marketplace out there. And for the person who caught up.

They’re good farmers, but they just had a 4-year and so they’re in better shape today than they were when they stopped paying or ask us to accrue something and not get paid cash for it. We are in the business of course of paying dividends. And we and that’s our cost, if you want to think about it that way. So we look at this as just another blip in the marketplace. And hopefully in the next 30 to 90 days things will change. I know people are surprised at what’s going on in the marketplace in terms of interest rates. This has happened I remember Rogers mortgage was about 7.8%. And of course, they’re back to those numbers now, but it doesn’t last long. And I think a lot of people are going ahead and paying the 7% or 8% for mortgages.

And quite frankly think that in a year there will be refinancing things down to a lower rate. And as all of that’s happening, I think most of the people that are farmers out there today are in a good shape in terms of where they are in the marketplace and who they’re selling to it just as it gets tight every now and then people go through those problems. One of our situations is, the farmer died. So is about the third time it’s happened to us. And the lady who is trying to make a go of it with her son is not nearly as strong as she had been, she and the farmer had been in the past and we’re working with her, we are probably find somebody else to take over that farm, if she wants to do that. I’m just afraid she’ll get so deep. And so we’ve been trying to work with her.

There isn’t one thing that’s going to fix everything other than interest rates are just too high, but the markets change. And everybody knows corn and wheat are high priced items today because of the war in Ukraine, which is a big producer and the droughts that have happened in Brazil and Argentina. So they’re riding high, and people are paying big prices for that. We went through 6 years of that being the reverse in which you could almost not give away some of the corn farms. But I think in the long-term, it all works out for everybody in the farming business. And you heard Lewis talk about our net asset value continues to go along and I just think farmland side of the business is never going to be zero, might go down or go up depending on what’s going on in the marketplace.

But it’s never going to be like it was in 1929, where the crops couldn’t get grown because it didn’t have water today. In California, we may drill down 1,000 people to get to water, or we’re banking our water that is putting it in the aquifer to be taken out later, when we need it. And this increase or decrease in the need for water is going to be going on in California. As long as California exists, there just isn’t any chance of one long period of time in which we have all the water we need out there. So that’s why we’re banking, we’re probably well bank for the next 2 years. I’d say this year that’s coming up the one in summer of 2024. We are in extremely good shape on that. It’ll go down as we use the water. And hopefully we don’t have to use any water, that would just mean that we are in better shape going forward.

I don’t know, like it’s hard to figure out this business because we are like the weatherman that you listen to on TV, he has got a 50-50 chance of calling it right. And that’s about what we have. But on the long-term, we do well.

Mike Albanese: Certainly, there is definitely a lot of moving pieces. And I think the velocity at which rates have risen has put a lot of you guys on their heels. Just two more from me, I want to go back to I guess pricing particularly on like blueberries, on the strawberries, things like that. I mean you have got there a few cycles. Here, what is the propensity for, I guess grocery stores to basically for you to be able to start to pass on some of those costs. Do the groceries just kind of hold the cards there as a consumer driven, what have you seen in the past?

David Gladstone: The grocery stores got to have the produce. And as long as there is produce at a lower price, they are going to go with the lower price ones unless you are a high-end grocery store, and then you are going to want the best berries that you can get, and you are willing to pay for them. For us right now, I think we are just in the middle of the cycle. And at some point in time, the grocery stores are going to realize that they have to pay up and they will pay up. But they are – grocery stores are making money today. And they probably always will, because people got to eat. And so as a result, the grocery stores will be places that they go. We are not in the places that are difficult to defend. And that would be like, for example, some of the places that people buy groceries in the smaller stores and also the one-off places, you can get good pricing if you go to the right grocery stores.

And there is one thing that all of our people realize is that if you say, you are going to be there for the grocery store, strawberries on Monday, and people go shopping, you better be there, because they are depending on you. They don’t have any spare strawberries in the back, or anything else. So, as a result, there is a symbiotic relationship between the two groups, and they will be fine and we will be fine. And our farmers all know these grocers. I remember when I had a farm out there, and we would entertain the people from Kroger or Safeway. And we couldn’t do much in the way of the entertainment because they have these rules that their buyers can’t get perks or anything from any of the sellers. But it changes and they will have to cap the products that we are making.

And we have got 60 products, and most of them are in front of the store where the produce section is. And so as a result, those are fast moving, and they have got to be fast moving, because you have got a limited time to keep a strawberry on the shelf or a salad on the shelf. And so as a result, we will be fine, people are going to want food, and they are going to go to the grocery store to buy it. And that’s where we dominate. Our farmers are there. But I can’t tell you what’s going to happen with the grocery stores. I am not a grocery store expert. And I think if we have a lot of supply, prices will go down. If we have a limited supply, prices will go up. That happens in every product, and in every region. If you are growing strawberries in Michigan, you are going to get a good – you got a good price last year, all of those guys all made a lot of money, will they make it next year, I don’t know.

I don’t think anybody knows, because with the amount of strawberries coming out of Michigan are going to be next year.

Mike Albanese: Got it. Thank you very much.

David Gladstone: Any other questions?

Mike Albanese: Yes, that was really very helpful context, much appreciated. My last question here, this is really geared towards Lewis. Just regarding NAV, excuse me, the NAV increase, I mean just drivers, I mean is this more so on property pricing and what kind of changes in the cap stack that there are rates, or I should say, valuation techniques with the balance sheet items that are driving the increase in NAV.

Lewis Parrish: Yes. The majority of the increase for both the quarter-over-quarter and from Q3 of last year was just due to the preferred valuation, particularly for the year-over-year period of the Series C, once we listed that. Previously, we had valued it based on a waterfall approach, so held it at par $25. Once it got listed, its mark-to-market based on its closing stock pricing is, as you know, they have been trading in the $17 and $18 range compared to the par value of $25. So, that’s been the bulk of it. And there is – there are components that were driven by the increases in fair value of our portfolio, that has continued to increase, but it hasn’t been as significant as the change in valuation of preferred.

David Gladstone: Also, if you remember, we do value our properties every quarter. And when we get these third-parties in, and they have been impacted, the pricing for all the farms has been impacted about high interest rates. And so as a result, prices of farms have been impacted by the fact that you can’t borrow cheap money now. And so you can’t do the deals that you wanted to do. And so those properties and those valuations are taking into account the very extremes that are going on in the interest rate marketplace now. If the interest rates come back down, you may see a big bump in our valuations, because right now, their valuation people are saying, well, you can’t sell it for that per day. And so that’s what we are waiting on as those people that run the Fed, that a guy try to get off the dime and stop increasing rates. When they do as they do each time that happens, things will change in the valuations.

Mike Albanese: Yes, that was a great point. That was really the basis for my question because I am surprised or – surprised for lack of a better term at how well the NAV has held up, given how quickly and dramatically interest rates have gone up. But obviously, you see that affect you in kind of a couple of different places. So, no, that makes sense, that’s very helpful. Thank you. And that’s it on my end. Appreciate you guys taking my question.

David Gladstone: Okay. Latanya, you got – anybody wants to ask another question?

Operator: Yes. The next question comes from John Massocca with B. Riley. Please proceed.

John Massocca: Good morning.

David Gladstone: Good morning.

John Massocca: So, just kind of participation rents in the quarter were kind of down about 20% year-over-year, I know you didn’t really give guidance for participation rents. But as we kind of think about 4Q, which is obviously a big quarter, from a participation rent perspective is –should we expect a similar kind of downtick or is there something kind of unique about the third quarter?

David Gladstone: I would say it’s difficult to analyze the participation rent amounts in any one single quarter, because for example, last year, we may have gotten information from properties A, B and C, and this time, we get properties from B, C, and D. So, it’s not always a one-to-one match. So, I think we really need to be able to be looking at it on a kind of a full year basis, so that we are really capturing the full population. As far as where Q4 is going to come in, we are still gathering data. But I know in the past, we have said that on an annual basis, we do expect the 2023 participation rent amounts to come in somewhere between the ‘21 amount of slightly north of $5 million and the ‘22 amount of close to $7 million. Hopefully, we are on the upper end of that range. But we are still gathering data and finalizing the numbers vetting the information on our end.

John Massocca: Okay. That’s very helpful. And then in terms of kind of some of the leases where you are either self-operating or you have had some tenant issues. I mean is there any of that that wasn’t really reflected yet in the 3Q numbers and will kind of flow through 4Q or any kind of immediate recovery? Just how should we kind of think about that impacting NOI or maybe any other line items that some of the self-operating stuff might be going through?

David Gladstone: Everything has been captured so far. The self-operated properties and they haven’t been – we didn’t record any revenue from them in Q3. The tenants that were on a cash basis, once well, assuming they do eventually return to full accrual status, get back on GAAP rents. You will see a small increase in GAAP lease revenue just from capturing data, the straight line effect again, just as we reverse that, I think back in Q1. But it’s – we are still – we still want to see more from those tenants continued on-time rent payments among other factors to before we put them back on accrual status. But of the issues that we have talked about everything has – was fully reflected in the Q3 numbers.

John Massocca: Okay. If you do get something from the self-operated properties back in the beat, you have kind of a one-time hit and then in a quarter out there, the next 12 months or so, or is that just kind of how should we think about the potential impact from that.

David Gladstone: So, the self-operated properties under the costs so far, they have been deferred on the balance sheet as kind of crop inventory. So, once those crops are harvested, the gross revenue – those costs will offset the gross revenues as they come in as cost of sales. And we will just recognize the net amount is in the P&L.

John Massocca: Okay. That’s it for me. Thanks very much.

David Gladstone: Latanya, we got another question?

Operator: Yes. The next question is from Mike Whitaker with Newbridge Securities. Please proceed.

Mike Whitaker: Good morning. This will be brief. I think most of the answers have probably already been given, but I am looking at from an investor standpoint, I used to have LANDO when it went public. I had LANDP before it went public and now it’s public. And as I am talking to all my clients, and it’s down almost 30%. Is there anything outside of interest rates inflation or any of the things that you have been speaking of, that’s caused us to go down roughly 30% since June. And is there any anticipation outside on interest rates going down and inflation going down that might cause these valuations to go back up?

David Gladstone: Well, remember, these securities are first out, so they get in front of the common stock. So, these are guys are in great position. The fact that it’s going down is just the fact that interest rates have been changed by the Fed. And so as a result, you are competing with 5%, that you can get T-bills and 5-year T-bills are wonderful to hold. And these are good properties that are in this things. You just can’t get something as secure as this is, because it has all of our land as the first call on that. So, I can’t believe that people are willing to give up the return, but it’s just pure numbers. What do you want, your piece of property to – I mean your security to generate, and if it’s got to generate more than 5%, that’s absolutely secure, then going to have to do that.

So, the price has to come down. And this is a good reflection also on the people who own land, because they used to get real high prices for their property. And now they can’t get the high prices. And so the only way to get that property sold is to drop the price of the property, something that somebody will pay for. And the same thing is happening with those preferred positions that those and those securities that your clients own. It’s the same thing, they are going to get their dividend. But that’s not enough today, when they can jump out of, well, they can jump out at all the price, but they can sell and get something else to generate just as much income.

Mike Whitaker: LANDO went public and went down and then obviously went back up to like $27 a share for a period of time. So, it’s just sort of like a, just the time that we are in right now. We feel that this is going to be possibly going back up at some point when the market starts to come back up. Is there anything that’s causing this outside of what we are talking about with inflation, interest rates, and so on?

David Gladstone: No, inflation and interest rates that are very high now that people have many other alternatives to get the returns they are looking.

Mike Whitaker: I agree with you. Okay. That’s the only question I had. Appreciate it. Thanks for your time.

David Gladstone: Latanya, we got any others?

Operator: There are no further questions. Thank you. I would like to turn it back to you Mr. Gladstone for closing comments.

David Gladstone: I don’t think anybody wants to hear any more closing comments. But nonetheless, we had a good quarter. It’s a lousy quarter when you think about it in terms of interest rates, but we are bound by those markets that are out there for securities that pay dividends and we are very happy that we are in good shape, no downsides that we are looking at today. So, thank you all for calling in and we will see you next quarter. That’s the end of this call.

Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.