Gladstone Land Corporation Q1 2023 Earnings Call

May 9, 2023

Greetings and welcome to Gladstone Land Corporation first quarter 2023 earnings call.

At this time all participants are in a listen only mode.

<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

We'll now turn the conference over to David Gladstone, Chief Executive Officer and precedent. Thank you you may begin.

Oh. Thank you Sherry that was a nice introduction this is David Gladstone and welcome to the quarterly conference call for Gladstone land and thank you all for calling in today. We appreciate your time to talk to you in lesson to questions that you all have and we start off as we always do Michael our Cal City. He is our general counsel and Secretary Michael here.

To give you a presentation. Thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance.

These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. There are many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors in our forms 10-K, 10-Q, and other documents that we filed with the SEC.

Our website Gladstone land Dot Com go to the investors page you can find them. There could also find them on the SEC's website, and that's S. C. C. Dot G O V 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 will discuss.

F F O, which is funds from operations, 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 F. F O, which we generally define as <unk> adjusted for certain.

Nonrecurring revenues and expenses and adjusted <unk>, which further adjusts core F F O for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating performance and allow better comparability of our period over period performance. Please take the opportunity to Vince.

Our website once again, that's Gladstone land dotcom sign up for our email notification service there can stay up to date on the company by doing that could also find us on Facebook keyword. There is the Gladstone companies and the Twitter handle is at Gladstone comps, but today's call is an overview of our results. So we ask that you review our press release.

And 10-Q, both issued yesterday for more details again, you can find them on the investors page of our website and with that I'm going to turn it back over to Gladstone David Gladstone.

Well thank you Michael.

Start with a brief overview of farmland holdings currently own about 116000 acres.

On 169 farms in about 45000 acre feet of banked water, it's in the aquifers that.

Underneath our farms.

An acre foot is about 326000 gallons. So you can see we're getting into the billions of gallons of water that we have ready to help us out don't need it today, but may in the future.

And to get it together all of these things that is the land and the water is about that is now at one 6 billion for both the land and the water.

Arms are in 15 different states and more importantly in 29 different growing regions.

Our farms continue to be about 100% occupied and are leased to about 90 different tenants. We have one we're going to talk about in a minute, it's occupied but he's not doing very well.

All of them all of these farms the 90 different tenant farmers are unrelated to us and the tenants on these farms are growing over 60 different crop types. So we're well diversified there.

But mostly all of it's in almost all of it's in fruits and vegetables and nuts.

We had to remove one tenant this is the one I wanted to mention.

I had to remove that one tenant during the quarter and stepped in to temporarily operate the farm, but this time, we did it many years ago. This time, we did it with a third party management group that does manage farming.

Operations.

We and discussions where that new group to lease this farm and we hope we have a lease executed on this farm before the end of the second quarter.

In addition, we have to slow paying tenants these or not.

The kind of trouble that we've got with that one that I've just mentioned too slow paying tenants set partly due to excess supply in the market their crops. They have in these areas as most of you may know, there's a huge suffer a surplus of almonds and.

If you would please please buy some almonds today and get the prices back up Sarah Turner well.

It will be okay, right now the tenants, making a partial payment to us, but we have another grower who is interested in leasing. This farm. So we'll likely end up signing a new lease with this new tenant in the next couple of months.

The second person who's a little slow it's collecting from this other tend to spend more challenging.

It will take a bit longer to resolve we have some lawyers involved but we continue to be in communications with a tenant and also in discussions with several other groups to potentially lease. These farms. So we hope to have this situation sorted out certainly.

Sometime this year.

In total year over year impact on our operations resulted in the issues, which decreased our net operating income during the first quarter by 295000, and that's not a big number for US as you know we have a lot of income.

As we've mentioned in the past couple of calls we continued to be more selective in the type of farms, we're looking at.

And as a result act acquisition activity for us compared to prior years is slow.

With inflation and interest rates can change a rise and the risk of recession, becoming more and more likely we just believe it's a good time to be more conservative with our capital.

But overall, our existing farmland portfolio continues to perform I think as expected with the exception of the issues of having a couple of tenants I think that's probably the size. We are now is it going to be something we talk about every year or every couple of years.

But despite those issues and aided by the interest patronage that we receive from the farm credit borrowings. We have that is they give us back some of the interest that we paid we had another strong quarter from a F. F O N E. F. F. O is one we watch closely that's the act was that's adjusted funds from.

Duration, and so we're doing well.

Finally, we continue to be able to renew all expiring leases without incurring any downtime on any of our farms and generally at a higher rental rate.

On the leasing front since the beginning of the year, where we renewed five leases on farms in three different states. In total these renewals expected result in an increase in annual net operating income.

$598000 or about 12% in the prior leases.

Looking ahead, we only have two leases scheduled for exploration six six months.

And in total that makes up less than 3% of our total annualized lease revenue.

We're in discussion with the current tenants on each of these three farms and each of these farms and two farms and each of these farms regarding the extension and we believe we will be able to achieve a slight rent increase as a result of these two renewals.

So we arent currently expecting any downtime to occur as a result of any of our upcoming expirations.

There are a few other items I'd like to mention before we move on inflation of course Oh.

It shows no signs of slowing down even though it slowed down a little bit this last time around.

As an impact of feds interest rate hikes that are now being felt throughout the economy.

However, the latest headline inflation number was 5% that's down from six something before but still remains incredibly high and beyond the fed's target reliable that they're shooting for which is 2%.

Nearly all the crops grown on our farms all fall into one category and that's food from home and that means that it's being eaten at home rather than in restaurants or in our manufacturing.

Manufacturing facilities that is being processed so most of our crops are sold a grocery stores. So if you go into a grocery store and look at the produce section youre going to see where most of our products end up the nut section, maybe a little ways away, but its nearby.

Food prices are also showing signs of cooling down and cooling down [laughter] hours food from home category is up only by 11th at eight 5%. We believe that food prices will continue to outpace inflation, which should help mitigate increases in operating costs for many of them.

Farmers, they're experiencing some pretty good increases.

Regarding the water situation in California, there's a complete turnabout there the heavy rainfall experienced in California earlier. This year has been a godsend for most of the farmers in the states and most reservoirs are at or above their historic averages and statewide snowpack level in the mountains.

About 260% of normal.

And that means the state's water project recently announced a 100% water allocation to and that really hasn't happened. Since 2006 that was a wonderful time in 2006 in our farmers are very happy to get all the water that they need these days.

You may have read about it also but many of the reservoirs across the state in California are nearing capacity and they are beginning to release water.

In anticipation of additional storms and especially the snow melt that'll happen summer is.

As a warm weather moves up to the the snow that's out there. This allows the farmers to capture this run off or their own personal use it at very little cost.

So many of our tenants, particularly permanent crop growers like almonds and pistachios have been using this opportunity to take advantage of the floodwaters.

Ours, we call it the surface water in place of groundwater or even intentionally letting their fields and a benefit for the restoring the groundwater levels were also viewing this as an opportunity to explore acquiring some additional water. So we might buy a little bit more about.

We're in great shape for this year and maybe even next year in terms of the amount of water that we have.

Supplies are investments in infrastructure is something that we look at so that we can move the water from one place to another.

And so how we can capture additional water our farms at attractive prices. These days.

We did have one farm that suffered about 855000 of damages, resulting from the flood. This was a blueberry farm in Central Canada Central Valley of California.

That has big shade structures over the blueberry bushes and it keeps it from wind and rain and other adverse weather none of the blueberry bushes were hurt themselves.

But many of the shade structures were damaged in the tenants currently discussing this with their insurance provider on this matter and we don't expect to have to pay anything out of pocket for this so I'm going to stop right here and let me get some numbers from Lewis Parrish, who is our CFO and he's going to talk to you more about numbers he has.

Lewis thank.

Thank you, Dave and good morning, everyone I'll begin by briefly going over our financing activity we.

We did not incur any new borrowings during the quarter, but we did repay about $22 million of loans since the beginning of the year that were scheduled to mature on.

On the equity side since the beginning of the year, we raised about $2 million in net proceeds from sales of the series E preferred stock and we raised $13 million of net proceeds from sales of our common stock through the ATM program.

Average sales price of $19 72 per share.

Let me go on to our operating results.

First I'll note that for the first quarter, we had net income of about $1 8 million and a net loss to common shareholders of $4 3 million or 12 cents per common share.

One other note for the following discussion of operations I'll be comparing the first quarter of 2023 with a corresponding first quarter of 2022, rather than comparing it to the immediately preceding quarter as we used to do.

So it just it <unk> for the current quarter was approximately $6 million or <unk> 17 cents per share compared to $6 $4 million or <unk> 18, and a half cents per share in the prior year quarter.

Dividends declared per common share were $13.08 and the costs in the current quarter compared to $13.06 in the prior year quarter.

The primary driver behind the decrease in <unk> was additional find financing costs and increases in certain operating expenses, partially offset by higher topline revenues and a decrease in related party fees.

Fixed base cash rents increased by about $850000 or 4% over the prior year quarter.

This increase was primarily driven by additional revenues earned on new farms acquired over the past year, partially offset by a decrease in revenue from the self operated and non accrual property as previously mentioned.

Regarding the nonaccrual properties, we will continue to recognize revenues from these leases on a cash basis until such time that full collection of the future rental payments as again deemed to be a problem.

In addition, we recorded $195000 of participation rents during the current quarter versus none in the prior year quarter.

These were payments that were originally scheduled to be paid during Q4 of 2022, however, sufficient information to allow us to record. These amounts was not made available to us until Q1 of 'twenty three.

On a same property basis, and including participation rents are Q1, 2023 lease revenues increased by about $258000 or one 3% over that of the prior year quarter.

On the expense side, excluding reimbursable expenses, and certain nonrecurring or non cash expenses, our core operating expenses for the current quarter decreased by about $443000 from last year.

Total related party fees decreased by about $900000. This was driven by a $1 $1 million incentive fee earned by our adviser in the prior year quarter versus none this year.

Removing related party fees, our recurring core operating expenses increased by about $460000 from the prior year.

Property operating expenses increased by about $300000, primarily driven by additional legal fees incurred in connection with protecting water rights on certain farms in California, and also to aid with rent collection efforts from certain tenants and we also incurred additional expenses on the self operated farmer.

In addition, general and administrative expenses increased by about $160000, primarily due to costs incurred in connection with our upcoming shareholders meeting and increased <unk> costs.

One final note on operations, we recorded about $2 $3 million of interest patronage from our farm credit borrowings and this is about $500000 less than the amount we recorded in Q1 of 2022.

Most of this decrease was offset by an increase in the interest income earned on balances in our money market accounts.

Now I'll move on to net asset value, we had 34 farms revalued during the quarter, albeit third party appraisals or.

All of these farms increased in value by about $12 million or three 4% over their previous valuations from a year ago.

So as of March 31st our portfolio was valued at about $1.6 million and all of this valuation was supported by either third party appraisals or the actual purchase prices.

So based on these updated valuations and including the fair value of our debt and all preferred stock our net asset value per common share at March 31 was $17.12. This is up slightly by about by four cents from the value at December 31st.

Turning to liquidity, including availability on our lines of credit and other Undrawn notes, we currently have over $190 million of dry powder.

In addition, we also have $130 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 334% for another four eight years.

So as a result, we have experienced minimal impact from the recent increases in interest rates. However, these rate increases do impact do impact our ability to finance new acquisitions and also play a factor in our decision to repay versus refinance maturing loans.

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 $40 million coming due over the next 12 months, however, about $23 million of that represents various loan maturities and the properties collateralized on 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.

So we're moving 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.

Finally, our moving onto our common distributions. We recently raised our common dividend again to 4.6 cents per share per month. This marks the 30th time, we've raised our common dividend over the past 33 quarters, resulting in an overall increase of over 53% over that period.

With that I'll turn it back over to David.

Oh nice.

Nice report Lewis, we continue to stay active in the market should a good opportunity presented itself, but as we mentioned throughout.

Being much much more cautious in the acquisition front I'm, just not getting into the marketplace until we get some settling down from all the things that governments doing and all the other things that are going on just a final point or two before we get some questions. We believe that investing in farmland like R. R.

Farmland that grow crops that contribute to healthy lifestyles, such as fruits and vegetables and nuts.

Follow the trend that we're seeing in the market today. So we think we're in the right place with the right crops.

Overall demand for prime farmland like the ones, we have growing berries and vegetables.

<unk> remains stable to strong in almost all areas, where our farms are located particularly along the west coast, including most of California, Oregon, and Washington State of Washington, and the East Coast, especially in Florida, and some other states.

And overall farmland continues to perform well compared to other asset classes and there's a group called <unk> and they have a decrease farmland index and thank all of our farms are in their index. So they have about $15 $9 billion worth of agricultural properties that they cover and the average.

Annual return is 11, 4% over the past 25 years with no negative years during that period. This is so much better than both the S&P index and the overall REIT index each of which have had six or more negative years over that same period of time.

And it's negative years in this farmland index is zero. So that makes you feel good every time you get into the stock.

Please remember that purchasing stock in a company like ours is a long term investment in farmland.

I think investments in our stock is really has two parts, it's very similar to gold and that its hard assets. Its farmland. That's dirt that has intrinsic value because there's just a limited supply of farmland, especially in the areas. We're in and it's being used up by urban developers, especially in California, and Florida, where we have.

Many of our farms.

And unlike gold and other alternative assets, it's an active investment with cash flow to investors and we believe we are better than a bond fund or one of those that we keep increasing the dividends as values of farmland goes up we were able to increase rents.

So it's just a slow movement up as we go forward we.

We expect inflation, particularly in the food sector to continue to increase and we expect the values and the underlying farmland to increase as a result.

And we expect this to be especially true in the fresh produce.

Foods section.

Trends more people in the U S or eating healthy foods and continue to grow and now I'm going to stop and ask Sheri, our operator to come on board and tell us how we can get some questions from some of those people who follow us.

Thank you yeah, if he would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You May press star two let's see what they used to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the start he is.

Our first question is from Gaurav Mehta with E F. A N. Please proceed.

Thank you good morning.

I wanted to ask you on the acquisition market.

You talked about Joe comes their way to the outflow in the acquisition market.

I was hoping to get some more color on what you're seeing in the market as far as the valuation of the farms and what kind of activity you're seeing in the market.

I think there are a couple of points to note here are first of all day.

Sale of our farm. These days has gone up pretty dramatically, especially in the Midwest and ours are no different.

And the problem there is that far.

Farmers are just not willing to sell for a lower price than some.

Sort of a five cap and so as a result.

We used to buy them at much lower cap rates and now you can't so that's why one reason, we slowed down because you can't make much money if you.

Buying at a five cap and financing at a five cap. So we sort of stayed away from that for a while it'll change at some point in time, the farmers or want to sell their farms and they're gonna have to take a discount.

In order to get it to a point where people will buy it.

Theres some active buyers out there that are using pure equity to do that we've decided not to do that just because we want to conserve our equity in these in these difficult times and then I think from another perspective, it's just the price of money to buy anything is so much higher than it was before.

We used to get money at about 3.5%, it's now five 5.5%.

Although the many of the lenders are saying to themselves, they're not going to get many loans if they keep jacking up their rates. So we'll have to see where this inflation drive is going to take us before we jump back in the market place Rob I, just don't I don't I don't know how it works very well until things settle out and.

You don't have the government's settling out you don't have the buyers settling out so it. So it's a it's kind of a slow grind right now.

Is that answer your question.

Yes.

And the second question.

Yes, I wanted to ask you on your $40 million that exploration over the next 12 months.

Provide some color on what's the interest paid on debt expiring debt and how do you plan to refinance that.

So of the $40 million that's coming due.

The $17 million of that isn't just normal amortizing payments that will just pay that down with the cash we have on hand and $23 million that's maturing.

It's about most of that is maturing early in 'twenty 'twenty four I think we have about six or $7 million that's maturing over the summer.

And the rest is coming due in January this summer it depends on what kind of what kind of rates, we can get at that time.

That will influence our decision whether we continue to pay down versus refinance Ah I think it said it.

It could be a very different landscape come you know 11 12 months from now early in 2024 win.

The the majority of that is coming due hopefully rates are at a more attractive level and we can refinance those but if not you know we do have excess cash and liquidity on hand to two to pay those down.

Gladstone Land Corporation Q1 2023 Earnings Call

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