Gladstone Land Corp

NASDAQ:LAND

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Gladstone Land Corporation's Second Quarter Earnings Call. [Operator Instructions]



Please note, this event is being recorded.



And now I'll turn the call over to David Gladstone, Chief Executive Officer and President. Please go ahead.

[David Gladstone, executive]

Thank you, Darryl. Nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate that you take time out of your busy day to listen to our presentations.



Before we begin though, we need to hear from Michael LiCalsi. He's our General Counsel. Michael?

[Michael LiCalsi, executive]

Thanks, David. Good morning, everybody. 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. There are many factors that 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 you can find in our 10-Q, 10-K and other documents that we file with the SEC. You can find those on our website, that's gladstoneland.com, specifically, the Investors page, or on the SEC's website, which is 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.



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 may also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses; also 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 results and allow better comparability of our period-over-period performance.



Now please visit our website; once again, that's gladstoneland.com. You can also sign up for our email notification service there. You can also find us on Facebook, and that's -- the Gladstone Companies is the keyword there. And then Twitter is @GladstoneComps.



Now 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.



With that, I'll turn it back to David Gladstone. David?

[David Gladstone, executive]

Okay. Thank you, Michael. I'll start with a brief overview of our farmland holdings. We currently own about 112,000 acres on 168 farms and about 54,000 acre-feet of water assets. 1 acre-foot is about 326,000 gallons. So we own about 18 billion gallons of water. And together, the land and the water together total a value of about $1.5 billion.



Our farms are in 15 different states and, more importantly, in 29 different growing areas. The growing areas are key. And our water assets are all in California, but we do have one clean water asset in Florida, where we produce cleaner water for the Florida area.



Our farms are leased to over 90 different tenant farmers, all of whom are unrelated to us, and the tenants on these farms are growing 60 different types of crops. But mostly, everything is in 3 categories: fruits, nuts and vegetables. You can find these in the produce section of the grocery store, which is where most of the crops that are grown on our farms are sold.



On the leasing front, since the beginning of the second quarter, we executed 11 new leases or amended leases on farms in 5 different states, including 2 leases on farms that were previously vacant. In total, these renewals are expected to result in an increase in our annual net operating income of about $465,000 over the prior lease. On our direct renewals, it equals about 7% increase in our prior leases.



Looking ahead, we have 9 leases scheduled to expire over the next 6 months and currently in negotiations with people that want to rent these. That's 168 farms. We only have 9 leases coming due. That's quite good. We're in discussions with groups to either lease these farms or operate them on our behalf. 7 of the 9 expiring leases are nut farms in California, and those will likely decrease in the base rent in exchange for increasing participation rents.



So during the quarter, we obtained an additional 4,899 acre-feet of water for a total cash price of $1.5 million. And that's about $300 per acre-foot in cost to us. And subsequent to the quarter-end, we purchased an additional 1,985 acre-feet of water for approximately $800,000, or about $400 per acre-foot.



And as a reference point for pricing, NASDAQ does have a California Water Index, which we track as well. It has a weighted-average price of each of these acre-feet. There are 5 different markets they're in, in California, and they estimate it's worth about $440 per acre-foot. In addition, the market price in specific regions where we are acquiring water range anywhere from $450 to $550 an acre-foot.



So the result of our team has done over the past year, well, really 1.5 years, to implement certain water projects and strategies. We're able to work to acquire water at below-market prices because we're in the right place at the right time.



The water we're acquiring in areas where we have several farms -- and this will make our farms more desirable to renters and to people who farm these farms. But the current problem facing our farms is not water. We've gotten enough water to take care of the farms for probably this season and next season without any problems. The lower prices they are receiving really for the permanent crops that they're getting such as almonds and pistachios, those markets have been down, and the farmers are making back some money, but they're not making enough to make it worthwhile.



However, we are seeing signs of pricing on these crops starting to rebound. So we're hopeful that it continues. This is important, as our farmers have to be able to sell their crops at a reasonable price to be able to cover the higher input costs. Not only our rents, but they have all the other things that they have to pay.



And really, if you look at the situation, it's not because the almond itself is expensive to grow or the pistachios. It's the fact that you've got to keep the tree alive for all of that period. Just recently, we got a report from some folks, and pistachios shipments are up 35% year-over-year, as of July 2022, driven by a spike in exports; particularly, more demand in Central and South America, Europe and Asia. As you probably remember, we don't sell much on our produce side outside the U.S., but nuts can be shipped all over the world. They're usually packed in 55-gallon containers and you send them anywhere.



Turkey has also had a decrease in the price and the number of pistachios they're going to be able to produce due to the extreme weather. They've had a real difficult time over there.



And there isn't much crops left over. As you might imagine, pistachios can be put in a box and kept for several years before they have to be sold. But there's not much carryover.



Then on the almond side, year-over-year, they've risen in the past few months. There's optimism for future price increases. Recent increases, where prices have been driven by the 2024 crop, recently are being adjusted down; namely, the price per common. Demand has been strong, especially in India. I know you may not know this, but India is a good area for us to ship almonds. Inventory carryout levels, again, these are the ones that left over from a prior year, not much there. And so as a result, we are very optimistic that things are going to change.



Thankfully, we're in many other markets and seem to be doing fine.



Just to note, our portfolio currently has adequate supply of water. And to date, none of the farms have to be fallowed due to inadequate water supplies and the effect of the government regulations. These projects are largely forward-looking to help ensure our assets are secure in the long term. So we need water, and we're an active buyer of water and banking it.



And now I'll give a quick update on some of the tenant issues continuing to work through. We currently have 1 farm that is vacant and 5 properties encompassing 12 farms that are directly operated by a management agreement with an unrelated third party.



Regarding the vacant and directly operated farms, we're in discussions with various potential buyers or tenants to buy or lease these properties or possibly farm them on our behalf, and we hope that we'll have an agreement in place in most of these by the end of this calendar year.



And we may end up listing some of these farms for sale. We do have 1 auction that we put in place, but we think the guys who are interested in these farms are trying to get in there before we go through an auction. It makes people come look at the farms.



The total year-over-year impact on our operating results of these tenant issues was a decrease in net operating income of about $794,000 in the quarter. That is, we've got to make that up in participation rent, which we should do.



When you're diversifying as much as we are, you're bound to have problems arise in different areas from different things at different times. For example, certain crop types in Western United States have experienced a drop in crop pricing over the past 12 to 18 months. When combined with an increase in input cost and borrowing costs, it's negatively impacted the growing profit margins.



We do have valuations that are fine, but 2 crops, obviously, almonds and pistachios, that I mentioned, there are 2 others that are dragging along, and that's the apple crop, although apples seem to be up in my grocery store, and wine grapes. I don't have a lot to say on that. We don't have that much there. And this has also led to a valuation decrease in certain of our permanent tree crops.



So it continues to grow and continues to go. Remember, all of these crops are -- if you think about what we own, these are hard assets. This dirt is not going anywhere, and it's been farmed for many, many years. We continue to look at the risk-return profiles on our properties, and we currently are focused on evaluating the profitability outlook on certain of these permanent crop farms, particularly where the current lease is expiring.



Certain options we've reviewed, including renewed leases that decrease fixed base rents, where we exchange that for participations in the crop. This option helps the grower minimize their fixed costs, but also allows us to participate in the upside. And in those cases, the farmers, if they have a good year, we will also have a good year.



We're looking at possibly operating some of these properties ourselves in a short-term basis, that is, where we hire an operator to go in and operate it for us, or until the market turns around. This would be held for third-party management groups.



And if we are able to find solutions to get some of these farms back on high enough profitability levels in the near term, we may also look to sell some of these properties. As you know, we sold 1 of our properties in Florida, made about $10 million in profit. And I think we have a number of properties that are either equal to or greater than, if we were selling them, the amount of money that we have now in them. As you know, we do depreciate the tree crops. We can't depreciate land. So the land price is just pure out there in the marketplace. Either individually or as part of a group of properties may be the next thing you read about us. We haven't signed anything, but we might end up listing some of the farms later this year.



Such is the nature of owning farmland. Just like any other type of business, owning farmland is not immune from ups and downs in the economy or irregular business cycles. And farming is also sensitive to interest rates. We're hopeful that the Federal Reserve will drop interest rates, and that would help us and our farmers.



I'm going to stop here and let Lewis Parrish, our CFO, talk to you more about the numbers on the financial statement. Louis?

[Lewis Parrish, executive]

Thank you, David. Good morning, everyone. I'll begin by briefly going over our recent financing activity.



We did not borrow any new money during the quarter, but we did repay a $6 million loan subsequent to quarter-end that was scheduled to reprice.



On the equity side, since the beginning of the quarter we've raised about $90,000 of net proceeds from the sales of a Series E Preferred Stock.



We've also implemented a share repurchase program on our Series B and Series C Preferred Stock that has been working well for us thus far. Since commencing the program in May, we have repurchased 249,290 shares of Preferred Stock at a total cost of about $5.2 million, resulting in a book gain of about $415,000. At an average repurchase cost of $20.84 per share, the resulting savings on the dividend yield has been about 7.2%. Given our current borrowing costs and overall economics around acquisitions, we believe these repurchase transactions are among the best uses of our capital at this time.



Moving on to our operating results. For the second quarter, we had a net loss of $823,000 and a net loss to common shareholders of $6.7 million, or $0.19 per share.



Adjusted FFO for the current quarter was approximately $3.7 million, or $0.103 per share, compared to $3.6 million, or $0.102 per share, in the prior year quarter.



Dividends declared per common share were $0.140 in the current quarter, compared to $0.138 in the prior year quarter.



AFFO increased slightly from the second quarter of 2023, as the increase in participation rents was largely offset by the lost income from the farm we sold in January and a decrease in revenues associated with certain properties that were either vacant, direct-operated or on nonaccrual status during portions of the quarter. Likewise, the decrease in interest expense was offset by an increase in certain operating expenses.



Fixed base cash rents decreased by about $1.1 million on a year-over-year basis, primarily due to the reasons just mentioned; that is, the lost revenue from the farm we sold and certain other workout properties. However, this was offset by a $1.1 million increase in participation rents recorded during the current quarter.



Now the majority of this amount was the result of additional information related to prior harvests becoming known to us during the quarter, thus allowing us to estimate and record such amounts. So it shouldn't really take anything away from the amount of participation rents we expect to record in the second half of this year.



On the expense side, excluding reimbursable expenses and certain nonrecurring or noncash expenses, our core operating expenses increased by about $450,000 during the current quarter. Property operating expenses increased in the current quarter due to additional property taxes paid on behalf of certain tenants and increased property management fees paid on certain of our farms. And G&A expenses increased due to additional costs incurred related to the annual shareholders' meeting and higher professional fees. Total related-party fees decreased slightly from the prior year period. Finally, other expenses decreased primarily due to lower interest expense incurred as a result of loan repayments made over the past year.



With that, we'll move on to net asset value. We had 62 farms revalued during the quarter, all via third-party appraisals. Overall, these valuations decreased by $13.8 million, or 4%, from their previous valuations from a year ago. These decreases were limited to certain of our permanent crop farms, as our row crop farms continue to appreciate in value.



So as of June 30, our portfolio was valued at approximately $1.5 billion, and all of this was supported by either third-party appraisals or the purchase prices.



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 June 30 was $17.59 per share, which is down from $18.50 at March 31. The majority of this decrease was due to the decrease in the valuations of certain farms that were revalued during the quarter as well as a change in fair value of our preferred securities.



Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have access to about $180 million of liquidity. This includes over $30 million of cash on hand. We also have nearly $150 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 3.4% for another 3.9 years. As a result, we have experienced minimal impact on our operating results from increased interest rates over the past couple of years. And with respect to our current borrowings, we believe we are well protected should interest rates continue at elevated levels.



Regarding upcoming debt maturities, we have about $46 million coming due over the next 12 months. However, about $28 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 only have about $18 million of amortizing principal payments coming due over the next 12 months, or about 3% of our current debt outstanding.



In addition, we have about $20 million of loans that they are not maturing, but they have a fixed-rate term that is expiring over the next 12 months.



And finally, regarding our common distributions, we recently raised our common dividend again to $0.0467 per share per month. This marked the 35th time we've raised our common dividend over the past 38 quarters, resulting in an overall increase of nearly 56% over that period.



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

[David Gladstone, executive]

Okay. Thank you, Lewis. This was a nice report.



We continue to stay active in the market should good acquisition opportunities present themselves, especially now that interest rates may be coming down. We live, as most asset-based people do, with the rate we have to pay for our capital.



But as mentioned on the prior calls, we're still being more cautious on the acquisition front because the cost of capital remains high for us. And while we've seen a decrease in pricing for certain permanent crop farms in the West, value of most row crop farms, like those growing strawberries, those remain high. The cap rates on most of those farms have not increased enough yet to cover our financing costs. So we've got to see the rates come down before we can get active in buying or selling any of our stuff.



So as a result, acquisition activity remains very slow for us. Probably it will be another couple of quarters before anything happens. As you probably heard, the Federal Reserve people are now talking about a jumbo change, that is, 50 to 75 basis points, when they get back in gear in September.



While interest rates are still a bit too high for us, it seems more likely that the Fed will be cutting rates. So we are hopeful that rates will be lowered in the near future and can start to look at new farms.



As just a few final points before I quit, we believe that investing in farmland and growing crops that contribute to a healthy lifestyle such as fruits and vegetables and nuts follows the trends that we're seeing in the market today. Overall demand for prime farmland growing berries and vegetables remains stable to strong in almost all the areas that we're in where farms are located, particularly along the East and West Coast.



As mentioned earlier, crop prices of certain permanent crops, particularly nuts and wine grapes, they've been depressed lately and have an impact on the value of the underlying farmland. We're seeing prices start to turn around on some of these crops, specifically almonds and pistachios, that have been depressed by 2% to 3% in terms of 2 or 3 basis points as some of them.



So we're hopeful that the worst is over with this, but we're not in the clear yet.



Please remember that purchasing this stock in the company is a long-term investment in farmland. Historically speaking, long-term returns remain strong to mediocre, but there are occasionally some ups and downs, just like any other investment. And right now, there is a portion of our portfolio in a down cycle, that's the almonds and pistachios, but we're hearing good things from our farmers.



We expect inflation, particularly in the food sector, to continue to increase over time, and we expect the value of underlying farmland to increase over time as a result. And we expect this is especially true of fresh produce in the fresh produce section. As the trend of more people in the U.S. continue to move toward eating healthy foods, this will mean our properties will be more welcomed, everybody.



Now we have some questions from those who follow us. So Operator, would you please come on and tell them how they can ask a question?

[Operator]

[Operator Instructions] Our first questions come from the line of Gaurav Mehta, with Alliance Global Partners.

[Gaurav Mehta, analyst]

I wanted to ask you on your comments on almond infrastructure. Can you remind us how much exposure does your portfolio has to almonds and pistachios?

[Lewis Parrish, executive]

So on a revenue basis, probably about 20% is pistachio and probably just a little under 10%, 8% or 9%, is almonds.

[Gaurav Mehta, analyst]

Okay. Second question, on your balance sheet. I think you mentioned $46 million of debt expiring in the next 12 months. Can you provide some color on where the current interest rates are in case you need to refinance that debt?

[Lewis Parrish, executive]

Sure. So right now, our weighted-average interest rate is about 3.4%. If we were to reprice today, we'd probably be 200 basis points above that right now. But those loans, with the cash we have on hand, each situation on a case-by-case basis, depending on what the interest rate is when those loans mature, depending on what our plan for that particular farm is, that will determine whether we decide to pay it off or refinance.

[David Gladstone, executive]

So Operator, if you'll come back on we'll see if there's a second question for us out there.

[Operator]

Our next questions come from the line of Rob Stevenson, with Janney Montgomery Scott.

[Robert Stevenson, analyst]

The 4 California farms that are vacant, direct-operated, nonaccrual, are those all nuts?

[Lewis Parrish, executive]

Yes, they are. I believe 1 is -- actually, I think they are all nuts. You're correct, yes.

[Robert Stevenson, analyst]

Okay. And I think if I look back last quarter, there were 20 farms. So there was an extra farm in California that was in that bucket. What happened to this other one? Did this get rented? Did they catch up on their rent payments and are no longer nonaccrual? What accounted for the sequential change there?

[Lewis Parrish, executive]

It got leased. We put a lease on it.

[Robert Stevenson, analyst]

Okay. Perfect. All right. And then I guess the question winds up being, at this point, are these 19 farms stuff that you want to own longer term? I mean, you've talked about selling them, potentially selling some assets, et cetera. I mean, is it just a matter of trying to get a lease on it or trying to sell it at a higher price than where it would be valued today and that you don't really want to own any of these 19 longer term? Or was it just operator issues and you're happy to own these? How should we be thinking about these 19 assets as you go forward over the next couple of years?

[David Gladstone, executive]

Well, as long as we have water for those, I think we'll hang on to them, simply because somebody will want to grow something on there. But you just never know. The farmers have been pretty picky over the last 2 years, really. And it may -- you've got to have a good farmer. There's no use jumping into a farming relationship with somebody who's not a very good farmer. We've done that a few times. We know how that bites back. But it's one of those things that everybody goes through. We've got an asset we need to keep it working for us. And I think we'll get -- most of those 19 farms will stay with us for a considerable amount of time.

[Robert Stevenson, analyst]

Okay. And then I guess the question, the last one for me, Lewis, how much -- you talked about those participating rents that you collected this quarter not impacting the back half of the year. How much in participating rents did you collect in the second half of '23? And are you expecting a similar or more or less than that in the second half of '24 at this point?

[Lewis Parrish, executive]

So in '23, I don't believe we -- I think all except for maybe $200,000 was recorded in the second half of the year. As for this year, of course, we're still -- we haven't even gotten much information from tenants at this point. But if I had to guess, we'd probably be somewhere between the past 2 years. Hopefully, at least as much as last year, but not sure that we'll get as much as we did in 2022.

[Operator]

[Operator Instructions] Our next questions come from the line of John Massocca, with B. Riley Securities.

[John Massocca, analyst]

Maybe sticking with participation rents, I mean, you kind of mentioned a little bit of the moving pieces of why you collected the $1.1 million in the quarter, but just is that something that could potentially happen in future years? Maybe kind of why was that data recorded in the current quarter? Just any additional color there would be helpful.

[Lewis Parrish, executive]

It was really from 3 farms. One farm did prepay us about $250,000 that in a normal year would be recorded in the second half of the year. We weren't expecting a payment. They just prepaid us a certain amount. So we recorded that.



The rest of it was kind of unique situations. One is one of the wine grape farms that we recently -- one of those leases where we reduced the base rent and increased the participation rent component. We recorded a little bit of income from that farm in Q4 of last year. Initially, we thought all the wine sales would be completed in December and January, for us to be able to record that revenue in Q4. But the sales kind of lingered on and continued on into Q1 and Q2, and we weren't able to get information in Q4 or Q1. That information came to us in Q2. And so we recorded it in this quarter. Hopefully, next year we are able to get information more real-time and record it earlier, but we just weren't able to this year.



The other one was one that we participated in heavily in the crop. We had a very high crop share percentage. So we were able to get payment directly from the processor. So that payment just got accelerated. But we also have a payment coming due from them later on this year, which is why I say that it really shouldn't impact what we're getting this year because it's the same as what we would get in a normal year, if that makes sense.



Basically, just kind of unique structures of the leases we have on those 2 properties.

[John Massocca, analyst]

Understood. And then maybe kind of going forward on the participation rent side of things, to the extent we get some kind of recovery in [indiscernible] pricing pistachios and diamonds, specifically, how could that impact 2024 participation rent, if at all? Or is that more going to be something that impacts 2025, just given the nature of your leases and contracts?

[Lewis Parrish, executive]

It will be a 2025 impact. If prices come up, that will impact the harvest coming up, which would be recorded later for us. So it wouldn't impact 2024 numbers.

[John Massocca, analyst]

Okay. And then maybe just on the potential dispositions, what kind of assets in the portfolio would you potentially be targeting for dispositions? Is there a strategic rationale? Or is it just kind of assets where you feel like the performance isn't going to recover some of the headwinds they've faced in recent years?

[David Gladstone, executive]

We're going through that now on the dispositions. It's really a bad time to be selling almonds or pistachio crops. They're down. And they're coming back. We've seen this happen many times in many of our products, and it's just something you have to live with. The main thing is you can't be not able to borrow money and pay back your banks or pay whoever. And right now, we have tremendous credit ability with the farm credits. And if the rates are cut, we will probably not get down to 3%, where we are in some of these, but hopefully get further down than we are today. And it's just a difficult period for those 2 crop types.

[John Massocca, analyst]

And then lastly, I know, obviously, there's that bucket of farms that are kind of either being managed or on nonaccrual status, but operating expense came up a little bit on a quarter-over-quarter basis and a year-over-year basis. Was there anything beyond that kind of bucket of farms that maybe drove that increase?

[Lewis Parrish, executive]

No. The full increase for the property operating expenses came from that bucket of farms. One tenant, we had to terminate the lease after quarter-end. We ended up having to pay real estate taxes on their behalf. That farm is now being direct-operated. We hope to get a lease on it by the end of the year. And the rest of it was just management fees we're paying to operate sort of these farms.

[Operator]

Thank you. Mr. Gladstone, there are no further questions at this time.

[David Gladstone, executive]

That's too bad. We like answering questions. But I understand that people are going to save them until next quarter and give us a lot more questions.



So that's the end of this. Thank you very much, all of you.

[Operator]

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.