Q1 2020 Earnings Call
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Okay. Thank you Dexter nice introduction this is David Gladstone and welcome to the quarterly conference call a Gladstone land and thank you for calling in today, we always appreciate taking some time to.
Talk to you and listen to the presentation that we haven't hopefully we'll have some good questions at the end, we always start with Michael accounts. They use our general counsel and Secretaries also president of Gladstone Administration, which is the administrator for all the Gladstone funds, so Michael taken away.
Thanks, David and good morning. Please report May include forward looking statements under the Securities Act 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, which we believed to be reasonable than many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors that are forms 10-K 10-Q, one other documents that we filed with the FCC.
You can find all of these on our website, which is W.W., Doug Gladstone farms Dot com.
Typically the Investor Relations page, where you can go to the Fccs website, and that's www Dot FCC Dot G O V.
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's discussion, we will discuss FFO, which is funds from operations.
People are not eating less but they are buying food now mostly from grocery stores.
There's a tremendous spike in the price of produce at the grocery stores and the for several weeks of all the closings.
Our farmers were able to take a little bit advantage of that.
Well pricing has come down to more normal level I don't believe it's going to fall anymore.
Regarding disruptions in supply chains, we're not hearing of problems with delivery from our farmers most of the large farmers who settled with large grocery stores are fine companies like Walmart and Kroger have over have locked logistics of <unk> have control over the logistics and shipping.
Food to their stores the supply of available trucks, but produce and transportation files and higher demand.
Has just remained steady.
In addition to most of our tenants have contracted for the sale of their produce for delivery contracts.
Lawn mowers outside here.
In addition, most of the tenets of contract for sale of their produce and delivery contracts in place as well before the season begins this is a shut down where.
We can [laughter].
We're on the first floor and their lawn mowers are going outside.
[noise] most of these sales produce as well as the delivery contracts and <unk> in in place well before the season begins if this shut down where to continue for another year or so maybe start seeing some disruption as some of the people who are set who we're selling to the other part of our business.
Pivot over and come to the grocery stores, but we don't see anything like this happening at this time.
The only place where we have seen an impact on our businesses on the acquisition of new farms.
It's been a significant.
But we've seen slight slowdown.
And the transactions and market participations or just waiting for more certainty to come along before they commit to selling or even entering into a long term contract and least.
We're looking at several new farm acquisitions, and I signed off on a couple already I'm sure, we'll get the buying process over in the next several months but.
I don't know what the future will be for the year, but I think it's going to be strong.
Looking at the total farm land ownership, we currently own about 88000 acres on 113 farms and 10 different states based on either third party appraisals are prices, we paid for the new farms.
Our farms have estimated total fair value of about $892 million.
More importantly than the number of states that we're in our farms are located in 24 different growing regions and the tenets operate. These forms are growing about 50 different types of crops.
Great News is that our farms continue to be 100 per cent occupied or at least to 70 different tenets all of whom are unrelated to us.
We do have some slow payers one owes us one payment there about a month overdue in their late payment that farmers process is mostly recent harvests is that he hasn't been paid for where he sold them. So he's a little bit behind because of that.
We've been with this guy for over seven years and years credit history with US is excellent. This is one we know a cure soon and while we get some farmers that bumper, along and pay a little slow we're still doing very very well in this area.
We're now on a good number of farms and they are in enough different regions with many different farmers in many different types of crops. So that there is sufficient diversification.
Five safety for the cash flows coming in and that's the dividends, we're paying out to our shareholders.
I think with regard to diversification. We are there will I always want to improve it but at the same time, we're trying to do.
Right.
Looking outside is pretty funny, but we're always looking to improve the diversification and as we go forward I'm looking forward to getting some different states and some different growing areas.
During the first quarter the team acquired to new farms, seven and a half million dollars of initial cash yield to us of about 5.5% on that seven and a half million and the lease on these farms is also contain certain provisions such as annual Escalations that show.
If you push that figure even higher in the future years as the Escalations kick in.
And just as a reminder, that you'll figure does account for operating expenses, we're responsible for under the respected leases. These neat leases mostly are triple net so they shouldn't be too many expenses incurred by us.
On the leasing front during and after the quarter in March 31st 2020, we either executed a new lease or extended amended some existing leases on 11 of our properties not to these leases were changed from a single net structure without paying some of the property tax and repairs and a few other expenses.
Oh, we changed that over to a double net lease with only are only responsibility is for the property taxes and maybe next time. The least comes up we can move that property tax over as well after accounting for these changes some of these operating expenses the new leases are expecting to result in.
Total increase in annual net income of about 649000 or an increase on that lease over that that <unk> I have about 13.5%.
In the quarter were terminated the least on four farms and received at 3 million dollar termination payment.
<unk> wanted to get out of the farming business that a long term least so as a result, they paid us something to cancel bullies. These farms were released to a new unrelated third party tenant with no downturn.
Looking ahead, we have four more lisa's schedule to expire and late 2020, I think they're in the last month of 2020 and these all expire in the fourth quarter I think it's in December and a total makeup is less than 5% of our total annualized lease revenue. We are in negotiations with both of the existing.
Tenets and actually talking to some potential new tenants for these properties.
We aren't expecting any downturn on these forms.
We recently and this is an important one you should know because this is different from a lot of people. We recently amended the agreement with our adviser to change how the management C. is calculated.
The than calculating that c. based on the amount of common equity in the fun.
It just seemed to make more sense that the fee is on the real estate assets owned by that fun.
These are they assets that the advisors responsible for.
So the board changed the Formula from determining you management fee set to be calculated at one half of 1% annually.
The amount of gross intangible real estate owned by the fun the amount being paid under this new formula is about the same as the C. paid under the old formula.
We think this is more in line with the fees and expenses of asset managers like in the real estate feel.
This fee is based on historical costs.
<unk> of these assets and not their fair value. So as the farms increase in value as almost all of our farms have in the past you know not result in increased the to the advisor.
Now, let's talk about some capital raising because that's important for the next year. Since January 1st 2020 were raised about $5 million net proceeds through the sale of our <unk>.
At the market program and during the quarter. We also sold about $28 million of net proceeds through the our Nontraded series the preferred stock and this completes that offering that we registered about 21 months ago. So that was a nice quick rays of about $133 million and proceeds.
All of which we put to work.
Since we had success with that series be offering up preferred stock, we launched a new offering called R. series see preferred stock. It turns on seriously are almost identical to the series be aside from being a larger offering.
Just as we did with the series be with land the series C. to be sold in small amounts over the course of the next several years. So that we <unk> that are able to find farms to buy as the proceeds come in so far was only sold a few small sales or the series see.
Because we didn't have selling agreements in place and I think we have about 10 now and we'll probably have 50 before we start ramping up pretty heavily.
Just want to remind everyone that this proceeds of selling shares under the series D. and now the series C. is the company paid certain commissions to fees to Gladstone security.
Which is an affiliate affiliated broker dealer. However, Gladstone Securities is just a conduit for this offering as it pays out about 94% of the fees. It earns two other third parties, including brokers and wholesalers, who are helping sell the shares.
And the rest of the fee is retained by Gladstone secured is used to cover all the related selling expenses printing of prospectuses et cetera. In total. These additional expenses are actually greater than the fees kept by Gladstone security.
It's very costly to sell or nontraded stop, but not much more than those typical overnight public offerings.
Folks one reason, we use preferred stock is to board the resolution of the Comstock solution is not a good thing as you all know I'm the largest stockholder common stock.
And just like most common stock holders I don't like dilution because I want to maintain my equity position.
And please also note that preferred stock is not included in the calculation as if he paid by the adviser and never has resulted in additional fees paid by the adviser.
And certainly want going for unless we take that money and by five farms with it.
That's sort of enough of the operation So I'll turn it over to our Chief Financial Officer Lewis parish to talk to you about the numbers Lewis.
Thank you David Good morning, everyone I begin like going over the balance sheets during the first quarter little assets increased by about $24 million, primarily due to the proceeds of equity issuances, David mentioned earlier.
In addition to these equations and also secured one new loan for about $8 million.
Area fixed interest rate of 2.66% for the next four years.
From a letter standpoint in on a fair value bases are loan devalue ratio in our total finally moldings, 51% at March 31st.
<unk> this level getting the relative low risk of high quality farmland is an overall asset class.
In addition over 99% of our bombings are currently at fixed rates in our weighted average basis. These rates are fixed at 3.57% for another six years out.
We believe we are currently well protected on the debt side against any future interest rate volatility.
And with the weighted average maturity borrowing being 10 plus years out. We also feel that were protected against potential liquidity issues shitty recession hit.
Right now based on discussions we've had with their lender we do not believe there will be credit for even near term future right now credit generally remained readily available to us and favorable apparently.
Regarding upcoming <unk>, we have a $26 million coming do over the next 12 months, however, about $15 million of that represents the maturity the three bullet load coming due toward the end of the year.
The three properties collateralizing either loans have increased invited by about $2.7 million since their respective acquisition. So we do not foresee any problems refinancing these loans either with the same lender or potentially newsletters.
So we're moving those are <unk>, we only have about $11 million of advertising principal payment coming do over the next 12 months or about two per cent of our total debt outstanding.
Now and we want to our operating results for the quarter.
So those will be a net income about $3.1 million and net income to comment shareholders for about $934000 for four and a half cents per common share.
When a quarter over a quarter comparison or just apropos for their first quarter increased by about $1.9 million or 53 per cent on.
On a per fair basis, apropos increased by about eight and a half cent per share up to 25.3 cents per share in the current Porter compared to 16.7 cents a share last quarter.
It was declared with 13.4 cents per share in each quarter.
Driver's behind the increase in at a boat early early least termination payment we receive an interest patronage receiving or loans with foreign credit partially offset by increases in certain operating expenses.
From the cash rent perspective, and excluding both participation romance and least termination payments rental income increased by about $443000 or 4% on the court over a quarter basis, primarily due to additional revenue earn from recent acquisitions.
Participation rest decrease coral record by about $1.4 million due to the timing of wind fish.
Due to the timing such payments and do.
And we also received an early extermination payment of about $3 million from an outgoing can it until the four of our farms.
After writing off certain balances relates to the priorities is we recognize additional belief net lease revenues of about $2.8 million related to this transaction.
We also received about $1.3 million of interest patronage or refund his interest from various foreign trade associations Lady to our loans with them overall this patriots reduce the interest rates and or borrowing from them by about 98 basis points.
When they say side or core operating expenses increase by about $773000 on a quarter over quarter basis.
Primarily driven by increasing certain related parties be [noise].
Instead of feeling by or Bizer during the current quarter increased by about $487000 due to our <unk>, surpassing to require hurtle rate by a larger amount than the prior border.
Do you think this increase of course, driven by the least termination payment Andy interest patronage, we received during the quarter.
In addition are based may just be increased by about $153000 due to the additional assets acquired during the prior quarter.
Are moving related party fees or core operating expenses only increased by about $93000 from their prior quarter and this was primarily due to additional costs associated with the upcoming annual shareholders meetings as well as slightly higher appraisal fees incurred during the current order.
Of notes for the third consecutive quarter now our property operating expenses were relatively flat when a quarter or recorder basis.
Now move onto net asset value.
30 farms revalued during the quarter all of these via independent third party appraisals overall, the farms the vitally farms increased by about $6.6 million or 2.2% over there prior evaluations, which were about a year ago.
So there's a march 31st ER fires are valued at $892 million in all of this was based on need a third party appraisals or the actual purchase price.
So basically update evaluation, including the fair value of our debt and all preferred stock.
That's a diaper common share at March 31st was $11.46, which is up by five cents from backward.
Driver to the increase where the appreciation in value of certain farms, largely offset by the net dilutive impact of equity agents is during the quarter and ongoing capital improvements on certain properties.
Turning to liquidity, including availability our lines of credit. We currently have over $50 million of Drypowder that translates into over $140 million are buying power for straight cash acquisitions. However, we also have the ability and intent tuition, new opie and it's a consideration for purchases shitty opportunities.
And finally would be added capacity on our Metlife facility through our recent amendment, we had ample availability under our largest borrowing facility and we continue to be in discussions with potential new letters for additional borrowings.
Have plenty of room and ability to continue borrowing buying a new farms that need our investment criteria.
And lastly here all such on our common distributions.
We raise our common dividend again to 4.47 cents per share Vermont over the past 21 quarter, we raised our common give it in 18 times, resulting in an overall increase of 49 per cent in our must become a distribution is over this time.
Since 2013, we paid 87 consecutive monthly dividends to common share but.
$4.50 per share unfolding distributions.
Paying dividends to shareholders is paramount to our business plan and our goal continues to be to increase the dividend at a rate that outpaces inflation.
At our current distribution run rate and with the stock price where it is today the children are sockets about 4%.
And when considering the relative stability and security.
Assets, we believe this stock offers a compelling and that's an alternative.
Would that apparent program back over to David Alright. Thank you Lewis our list potential firms my to buy remains very healthy and expect to be very active over the next couple of quarters.
We should be able to continue to report positive news to you and I think will be over a billion dollars in assets. This time next year.
And just a few final points before we get some questions. We do believe that investing in farm land and growing crops that contribute to healthy lifestyles, such as fruits and vegetables and that.
As following the trend that we're seeing in the markets today.
Currently about 85% of our total revenue comes from farms that are growing this type of food that you can find in either the Proto us not section of your local grocery store. We consider these those to be among the healthiest type foods that and we continue to see a growing trend towards organic among these foods.
Over 45% of our fresh produce acreage is either organic or transitioning to organic.
And about 10% of our permanent crops. These are the trees that are out there growing enough that we have fall into this organic category. We believe organic sector will continue to be a strong growing area. In addition crops classified as being G.M. low grown on less than five for.
Center of our farm land and I think.
Change over time to zero.
Another major reason why our business strategy is to focus on farmland growing fresh produce due to effects of inflation and this particular segment. According to the Bureau of Labor statistics, the overall annual food C.P. I generally keep space with inflation.
Over the past 40 years, the fresh fruits and vegetables segment of the food category has outpaced the total food C.P. I buy a multiple at 1.6 times.
So for US inflation is good because our farmers make them more money and we hope hope, we can pay and get them to pay more.
The way of.
<unk> to us and while prices up commodity crops, like corn, and wheat, and Sawyer typically more volatile and susceptible to global supplies and demand fresh produce a mostly insulated from global volatility mainly because the crops are generally consumed locally and within a short time after harvest.
I'm, telling all of this because we are often confused with farmers that are growing corn soy wheat, and we are staying clear those because.
We have to compete if we went in that area would be competing with Brazil, and the Ukraine or prices are very low and they come into the United States or some of the other consumers that much lower rates than we can do we can grow.
Overall demand for prime farmland growing berries, and vegetables remain stable to strong and almost all of the areas where farms are located but particular, along the west coast, including most of California, Oregon, and Washington, and the East Coast, especially Florida.
And overall farmland continues to perform well compared to other asset classes. Despite some recent downturns.
Decreased farmland index, which is currently made up of about $11.7 billion worth of agricultural properties.
<unk>.
Average annual return about 13.6% per year over the past 15 years that compares favorably with the 10.5% for the S. and P. 500, and even lower than for the overall <unk> index.
During those 15 years the farmland index has never had a negative year I think that's unbelievable, but that's true unlike the s. and P., which had three very negative years over that same period farmland has not.
Generally provided investors with a safe Haven during turbulent times in financial markets as both land prices and food prices, especially for fresh produce have continue to rise steadily.
Purchasing stock in this company is a long term investment in farmland thanking investment in our stock is really two parts first of all it's similar to go it's hard assets.
Homeland, it's dirt.
That is having a intrinsic value because there's a limited amount of it.
And is being used up by urban development, especially in California, and Florida, where we have many farm.
And second unlike goal and other alternative assets, it's an active investment with cash flows to investors. We believe that we're keeping them better than bomb fun, then because we keep increasing the dividend. So it's not just a flat and everything forever kind of approach, we expect inflation, particularly.
In the food section to grow and we expected values on the underlying farmland to increase as a result.
We expect this especially to be true and the fresh produce food sector as people in the U.S. or printing toward eating more healthy foods I think a good way to look at our farmland fern on his first it's a hedge against inflation and I think all of us so looking forward to that considering how much the money the government spending.
Days.
I think this is a great fun, it's a great stock to own.
Once we get just a little bit larger in terms of asset size I'm very hopeful that we'll get listed on there are in Z. index for rates, which will bring in additional institution ownership and increase the daily liquidity over our stock, but Gladstone <unk> land wouldn't be anything without the good.
People, we have operating in managing at buying and leasing farmland sounds like it's easy, but it's a very complex business.
So if you like what we're doing please buy some stock and certainly keep eating fresh fruits and vegetables now let's have some questions. If our operator will come on we'll have some questions from those are you are listening in.
Yeah.
Dexter are you out there.
Yeah, It seems too bad stone fingers for that and after a reminder, do outside aggressor newly depressed star one on your telephone to enjoy a question pressed upon you can again that star wants to actually Christians <unk> pilots you any loss.
Yeah.
Any questions.
Yeah.
Again to ask the question that star one.
<unk>.
Oh, I guess, we aren't going to have any questions. This time, we just produced so much income and so much dividends people just do a hack in not needing to ask any questions. So thank you all calling in.
And next or I think we'll close it up. Thank you. That's the end of this call.
<unk>, ladies and gentlemen, I'm, just going to boost the base Clark in school thing <unk>.
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