Q2 2023 Gladstone Land Corporation Earnings Call
Greetings and welcome to the Gladstone Land Corporation second quarter earnings Conference call. At this time, all participants are in need us and only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance during the conference.
Zero on your telephone keypad.
As a reminder, this conference being recorded it is now my pleasure to introduce your host David Gladstone, Chairman and Chief Executive Officer. Thank you Sir you may begin.
Okay. Thank you latanya for that nice introduction, you've done it many times for us and we appreciate your effort.
This is David Gladstone and welcome to the quarterly conference call for Gladstone land and thank you all for calling in today. We appreciate you taking the time out of your day to listen to our presentation.
But before I begin we have to hear from Michael the Kalsi. He is our general counsel, Michael well, Thanks, David and 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.
Forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable and 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 listed in our forms 10-Q, 10-K, and other documents we file with the SEC.
Find them on our website, that's Gladstone land Dot com, specifically go to the investors page or on the SEC's website at Www Dot FCC that G. L. P. 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.
We will discuss F F O, which is funds from operations <unk> 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 <unk>, which we generally define.
<unk> adjusted for certain nonrecurring revenues and expenses and adjusted <unk>, which further adjusts core F. F. L for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating results and allow better comparability of our period over period performance.
Now we ask that you take the opportunity to visit our website. Once again, that's Gladstone land dotcom sign up for our email notification service. So you can stay up to date on the company. You can also find us on Facebook keyword. There is the Gladstone companies and Twitter, which is at Gladstone comps you know today's call is an overview of our results.
We ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information again go to the investors page of our website to find them now I'll turn the presentation back to David Gladstone.
Okay. Thank you Michael I'll start with a brief overview of the farmland holdings that we have.
Currently own about 116000 acres.
And it's at 69 different farms and we also have about 45000 acre feet banked water. You remember then acre foot is equal to 326000.
No.
45000 acre feet is a lot of water, we use that for irrigation times, when there's not enough water frown.
And together if you looked at both of those together, we valued that at about one 6 billion for both the land and the water. Our farms are in 15 different states and more important and 29 different growing regions.
If we include the one farm that we currently operate ourselves our farms are 100% occupied and leased to over 90 different tenant farmers all of whom are unrelated to us.
And the tenants on these farms are growing over 60 different crops types of crops, but mostly fruits and vegetables and nuts. So we are well diversified across these different farms.
We had to remove one tenant during the first quarter and we stepped in to temporarily operate that farm with the help of third Party management group, we'd been discussions with new group or at least this farm and we had hoped to have it done by this time.
For this quarter, but we didn't quite get there. So we're finishing up now and we'll get that done hopefully in the third quarter.
We are also exploring an option of direct farming. This property ourselves, but leasing the property is our preferred approach.
In addition to slow paying tenants, partly due to excess supply of their products and the markets that their work.
Wow.
One of the tenants is making partial payments to us, but it sounds like there might decide to close up shop.
We have a couple of growers, who we've been talking to and lease to lease. These farm. This farm, so will likely sign a new lease with them soon.
Collecting from the second tenant was more challenging and is still ongoing we ended up terminating their lease and entering into a new short term lease agreement with a new grower. So this will give us more time to figure out who we're going to end up leasing respond to.
The total year over year impact on our operations as a result of these issues with a decrease in net operating income of 318000 for the second quarter and about 613000 and for the total year so far.
As we mentioned in the past couple of calls we continue to be more selective in the type of farms that we're looking for.
Mostly its.
Farmers Oh, we have to always get good farmers on these farms and.
And as a result acquisition activity remains slow for us.
With inflation is still above the fed's target rate interest rates continuing to rise and the risk of a recession is still possible. We believe it's a good time to be more conservative with our capital.
Just another note before we move on while we are helped by inflation food prices in the grocery stores were hurt by interest rates as our cost of capital for buying farms and the farm owners are not yet willing to reduce the price of their farms so that.
And he has remained high.
Too high for us.
But overall the existing farmland portfolio continues to perform pretty much as we expected with the exception of the issues at hand.
With those couple of tenants.
Finally, we continue to be able to renew all expiring leashes without incurring any downtime on any of our farms and.
And renewals at it mostly a higher rate with one exception that I'll talk about a little later.
On the bright side, we sold a portion of one of our farms.
During the quarter. This was 138 <unk> hundred 38 acre parcel on farmed ground in Florida. So we recognized by selling that we recognized a $6 4 million dollar gain on the sale.
Realized a 343% return of our initial investment.
And by the way, we still own and lease the remainder of this farm, which is farmable and since it was a non pharma who'll Graham, let's say it won't reduce our rent on the rest of this farm.
On the leasing front since the beginning of the quarter, we renewed 13 leases on farms in five different states. In total. These renewals are expected to result in a decrease in the annual net operating income of about 469000.
That from that of the prior leases. However, four of these leases were to replace a previous tenant on some of the blueberry farms in Michigan.
We gave the new tender in a lower rent in exchange for them, maintaining and bring back the blueberry bushes that are there on the farm.
So that hopefully will be in a better position to lease these farms to our long term tenants later this year.
Including the four Michigan leases that's to the one farmer the remaining nine leases are expected to result in an increase in annual net operating income of approximately 209000.
Or 3% over that of the prior leases.
Looking ahead.
We have eight leases scheduled to expire over the next six months and then total that makes up about 5% of the total annualized lease.
We're in discussion with current tenants on each of these arms regarding extensions as well as prospective new tenants.
Well, we expect the rental rates on these renewals to be relatively same.
It's the current leases.
We arent currently.
The any downtime to occur as the results on these upcoming expirations.
There are a few other items I'd like to mention before we move on inflation is still continuing its slowing down some.
As an impact from the fed's interest rate hikes now being felt throughout the economy. However, the latest headline inflation numbers of 3% still remain above the fed's target level, which is 2%.
And as as those core inflation that they keep measuring and saying it's their levels are going to be subject to core inflation.
Food prices are slowly showing signs of cooling down a little bit, but still continue to outpace inflation most of the crops grown on our farms are sold to grocery stores and thus fall into a category called food at home.
This category was still up by four 7% for the 12 months ending June 30.
We believe food prices will continue to outpace inflation, which should help mitigate increases in operating expenses that many of our farmers have been experiencing.
I also want to mention some water related projects, we've been working on in California, since we slowed things down on the acquisition front our farms.
With 2023 being a wet year as you've probably read the headlines for California that a lot of rain, we had been working on various water improvement projects within key areas of our portfolio. We identified several kind of several projects to undertake that we believe will improve our.
Portfolio's capability to comply with state ground water restrictions.
In the states, becoming more interested in the water projects that we've talked about.
With the goal of ensuring that we have enough long term water supplies.
Our current crop demands on our farms are in pretty good shape. There got a few more projects we want to look at.
And by the way our overall strategy within the state is to implement projects that will allow us to maximize the water supply opportunities in wet years like we had this year. This past year that will reduce our water risk in dry years.
There's been some mentioned in the newspapers are there've been some tension in the news regarding depleted water levels in the Colorado River. There's no date, one day water being generated in the United States, Colorado rid of or will not reach the ocean, they're taking up all of that thanks.
None of our properties rely on the Colorado Ritter river or any of its tributaries for water.
So we have properties that lay at the edge of that but not in the need area and so we're not impacted if you see some headlines about the Colorado River.
I'm going to stop here, that's enough on the operations and now I'll turn it over to our CFO Lewis Parrish to talk to you more about that.
Actual numbers.
Thank you David 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, we did repay about $6 million of loans since the beginning of the quarter there were scheduled to mature on.
On the equity side since beginning of the quarter raised net proceeds of about $3 million from sales of our series E preferred stock and $2 million from sales of our common stock through the ATM program.
Moving onto our financial results.
For the second quarter, we had net income of about $7 $9 million and net income to common shareholders of $1 7 million or five cents per common share.
The following discussion of operations I'll be comparing the second quarter of 2023 with the corresponding second quarter of 2022.
Adjusted <unk> for the current quarter was approximately $3 $8 million or $10 seven per share compared to $4 $5 million or 12 nine cents per share in the prior year quarter.
The primary driver behind the decrease in <unk> was higher costs incurred to carry uninvested capital and our balance sheet, partially offset by an increase in topline revenues.
Fixed base cash rents increased by about $512000, 3% over the prior year quarter, primarily driven by additional revenues earned on new farms acquired over the past year.
This increase was partially offset by a decrease in revenues from the self self operated and non core properties.
As well as the lease we executed in the fourth quarter of 2022, and which we reduced the fixed base rent in exchange for increasing the participation rent component in the lease and that results won't be known until later this year.
Regarding the nonaccrual properties, we will continue to recognize revenues from these leases on a cash basis until such time that the full collection of their future rental payments as again deemed to be probable.
As David mentioned, we did replace one tenant during the quarter and we are close to finalizing turns to replace a second tenant.
And a third tenant is currently caught up with our rental payments to us. So we are optimistic that all of these properties will return to full accrual status by the end of the year.
On a same property basis, and including participation rents. Our Q2 2023 lease revenues increased slightly by a little over $100000 or about 1% or about 1% 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 quarter increased by about $210000 from last year.
Total total related party fees increased by about $156000 that was primarily driven by additional assets added to our portfolio over the past year.
If we remove related party fees, our core operating expenses increased by just $54000 from last year.
Property operating expenses increased by about $97000 and that was primarily driven by additional legal fees that we incurred in connection with drafting new lease agreements and Avis rent collection efforts from certain tenants.
Partially offset by a decrease in repairs and maintenance expense during the current year.
In addition, G&A expenses decreased by about $43000 that was primarily due to costs related to the 2023 annual shareholders meeting being previously recognized in the first quarter.
Finally, other income increased due to additional interest income earned on balances and money market accounts due to higher rates and interest expense decreased due to loan repayments and payoffs made over the past year.
Now I'll move on to net asset value, we had 62 farms revalued during the quarter, albeit third party appraisals.
Overall these farms increased slightly in value by about $850000 over their previous valuations from about a year ago.
So as of June 30th our portfolio was valued at approximately $1 6 billion.
All of which 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 30th was $19 15.
Which is up by over $2 from the value at March 31.
The main driver of this increase was the change in valuation of our fixed rate debt and preferred securities.
Particularly the series C preferred stock <unk>.
Previously this security was valued at its liquidation value based on a waterfall approach.
However, in accordance with our valuation policy on the security being listed on NASDAQ in June .
Dan buying it based on its market price at quarter end as we do all publicly listed preferred securities.
Turning to liquidity, including availability on our lines of credit. Another Undrawn notes. We currently have over $185 million of dry powder and we also have about $145 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 335% for another four six years out.
As a result, we have experienced minimal impact from the recent increases in interest rates. However, it increases do impact our ability to finance new acquisitions and also play a factor in our decision to repay versus refinance maturing loans.
But with respect to our current debt load. We believe we are well protected against any future any further interest rate hikes for the foreseeable future.
Regarding upcoming debt maturities, we have about 30 $34 million coming due over the next 12 months, however, about $17 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.
Removing 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 outstanding.
And finally regarding our common distributions, we recently raised our common dividend again to four six <unk> per share per month. This marks a 31st time, we've raised our common dividend over the past three four quarters, resulting in an overall increase of 54% over that period.
And with that I'll turn the program back over to David.
Okay. Thank you Louis so its nice to report we continue to stay active in the marketplace should a good opportunity presented itself, but as mentioned we are being more cautious on the acquisition front. This is really due to the cost of borrowing and the price of farms farms haven't fallen even though the cost to be.
For them is really much higher than it was before before.
The fed raising rates.
A few items to finally point too.
We believe that investing in farmland crops that contribute to healthy lifestyles, such as fruits and vegetables and nuts.
Where we should be following this trend we are seeing the market today.
It's a good place to be because it's not susceptible to some of the changes in market demand that you would see if you in only corn or any of those corn crops overall demand for prime farmland that are growing berries and vegetables remains stable to strong.
And almost all the areas, where our farms are located particular, along each of the coast.
And overall farmland in the United States is performing well.
For example, the decrease farmland index has about $16.2 billion worth of farms and all of our $1 6 billion is in that okay.
Calculation that decrease does.
That agricultural property index is a good one we hope to be exactly like them because their return has been 11, 4% over the past 25 years with no negative years doing that period. This is better than both the S&P index and the overall REIT indexes each of which had six.
Or more negative years over this same time frame period.
Versus zero for the farmland index.
So in closing you can go over a couple of items and then move on to questions.
Please remember that if you're purchasing stock in this company. It's a long term investment it's Derek its farmland and this investment is our stock to gives two parts to it it's similar to gold and that it's a hard asset farmland.
That has an intrinsic value because there is a limited amount of good farmland in the United States.
Being used up by urban development, especially in California, and Florida, where we have many farms.
And second unlike gold and other alternative asset its an active asset with cash flows to investors and we believe we are better than a bond fund because we keep increasing the dividend.
We expect inflation, particularly in the food sector to continue to increase and we expect the values of underlying farmland to increase as a result.
And we expect this to be especially true in the fresh produce area.
As the trends are in our favor that more people in the United States are eating healthy Foods, Inc. They continue to grow in that direction.
Going to stop and ask the operator, Latanya, if youll come on in and.
And tell us how to ask questions.
Thank you we will now conduct a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Paul will indicate your line is in the question queue.
Let me first start.
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One moment, while we poll for our first question.
Our first question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Good morning, guys, David any acquisitions under contract today, and then given your commentary on how robust the market pricing for farms is.
Any thoughts about selling more assets.
The back half of this year.
Well, if we could find somebody woodbine the nonperforming or the problem that some farms have we'd certainly be willing to sell but Rob my goal is to amass as many assets as possible in the farming area. They've continued to go up in price farms that I bought.
No.
20 years ago are now about four times the price paid so it's a good area. It has low downside risk and so.
We don't have anything under contract right now we have some discussions going on with farmers and believe me the guys and gals here are chomping at the bits to buy something so I'm not going to I'm not going to buy a farm that would pay me on a cap rate of say, 5.5% and then.
Borrowing money at five 5%.
Good way to be long term in the wrong direction, but I do wish the interest rates would come down these federal Len.
Lenders are are in a position and have been in a position for some time to drop their rates.
Allow us to get back to business of buying arms. These farmers that we buy from are not in a in a hurry and so they're only going to do it if they get the price that they want so we're kind of on how we are concentrating a lot of our effort right now on.
On water.
You know we have plenty of water now however, we're fixing some of our farms. So that we can store water on them.
Putting in some berms and allowing us to go in and believe it or not the state of California is encouraging everyone to do that I think we are way ahead of the curve in terms of putting water in place I think we've got enough water today for the next two years and we've got a couple of transactions.
<unk>.
That would push us into the direction of 2040 in terms of having enough water in underground aquifers that are there have gone down some so they're trying to fill them all back up during this time of plenty of water.
In terms of buying new farms, we don't want to buy farms and just trade war tread along at the same rate that we bought them at so we will have to have to work our way through that and it's changing youre seeing some of the farmers starting to talk about.
Different cap rates and I think it will happen some of them as you know the average farmers about 58 now.
More than 40% of the farms in the United States owned by individuals so somewhere along the way as people continue to get older and have to settle up their state.
Things are going to happen, we'll be ready for that as long as we can borrow some reasonable price water we've talked about.
Having an offering and raising more equity I don't think it's quite the time to do that but we'll certainly be talking to your people. If we get along that line, but I hope I answered your question.
Helpful. Thanks, David.
And Lewis where are the issues with the operator as these operators showing up is it at the revenue line is at the property expense line. Both the reason why I ask is that property operating expenses in the first half were up more than 600000, which is like 44%, which is a big increase for net lease REIT.
So wanted to get a color there and if the $2 million first half operating expenses, a good run rate for the back half.
So it is showing up a little bit in both places.
From those properties other than the amounts received in cash we have not recognized any revenue and I think David mentioned, it's Ed.
For the first half of the year the year over year impact on our <unk>.
Net operating income is about $600000. That's that's a combination of the.
The revenue line item and the property operating expenses.
On the revenue side alone.
I think we had.
A decrease of about $400000 year over year.
The rest of that is in the.
In the.
Property operating expense line item in most of those causes are.
Legal fees, we've incurred two as we said the script.
We lease sign up new leases on those properties and a big chunk also.
Legal fees incurred to kind of help with collection of those amounts both the rent amounts and while they were our tenants and.
Possibly looking to go after right after them vacating those properties.
The rest of that the increases is primarily been.
Two factors, one and I don't have the exact number breakout for these two categories, but one we did have some repairs.
Maintenance expense on the board of farms to for repairs for the hurricane damage and as well as a couple of hundred thousand dollars on the west coast to repair damage from flooding.
And there are other other bucket of that.
Was just increased cost to protect water rights on farms in California.
Okay. That's helpful. And then my last question you guys typically see major jump in revenues call it 10%, 20% quarter over quarter from second to third quarter and then another notable jump between third and fourth some of this has been in the previous years driven by acquisitions. Because you guys have done a bunch of acquisitions that have started benefiting.
Sitting in the back half of the year, but since you haven't really done anything this year on the acquisition side.
Should we be thinking about the seasonality of the revenues in the back half of the year or is it still going to be see that sizable jump because of the percentage rents in some of the crops that are going to get sold et cetera is it going to be less because you're also not adding the acquisitions, how should we be thinking about that.
The jump, we're probably less than in prior years, just because as you say we aren't we don't have the acquisition.
Increase that will that will aid us in that on that front. This year. So from a kind of a fixed base ran if you will it will be a lot more flat than in prior years.
The one caveat I'd add to that is as we sure up these tenant issues with these three tenant issues, we have and restore those properties back to full accrual status right now.
Im hopeful that we can get everything back on in the fourth quarter. So that will add a slight bump, but the majority of the increase in the second half of the year is going to come for the participation rents as they have in the prior years.
I think last year, we had around $7 million of participation rents year before that around $5 million.
Not sure where we're going to land yet we're still.
We're still trying to gather information on yields and pricing.
The SaaS <unk> or <unk>.
The biggest factors, but we're still gathering info on the yield data of our farms.
So it's too early to say, where we'll fall in that but it will probably be slightly less than last year last year was a pretty good year in participation rents but.
We should have more color on that front.
And the next quarter's earnings call.
Okay. Thanks, guys.
Okay. Thank you.
Next question.
Next question comes from Jeremy <unk> with <unk>. Please proceed.
Yeah, Good morning, guys.
Good morning, you mentioned.
You mentioned the.
Biggest change in terms of the valuation of the preferred stock was in the series C.
Wondering if you could kind of go through.
The change in the B C and series E. Real quickly just so we can get sort of a sense of.
How much each of those drove the change in the NAV calculation.
Sure. So the B has been listed for over a year now so that's been valued at its market price.
For several quarters.
That market prices I mean, it's a fixed income securities. So as interest rates go up the demand for that security is going to go down.
But the series is still non listed so that's that's valued at its liquidation value of $25 per share.
The series C is where it's at.
Hi.
I don't want to recording but I want to say don't quote me on this but 90% of the change probably comes from that series C. At security and the reason is last quarter before was listen it was based on a waterfall approach it its liquidation value of $25 per share. However.
However, it got <unk> in June and it was trading closer to $20 per share at June 30th. So once it gets listed is our valuation policy says.
We value it based on its public market price.
That's a quarter over quarter change from $25 $20 on approximately.
I guess <unk>.
$250 million.
At March 31, they've got marked down to close to $200 million at June 30th.
Okay.
Okay. That's helpful. So really the vast majority from the sea and very well actually I guess no change in the <unk> and little change in the B correct correct correct correct.
Okay terrific, thanks very much.
Next question.
Once again to ask a question Thats star one at this time.
The Gladstone there are no further questions in queue I would like to turn the call back over to you for closing comments.
Well. Thank you all very much for asking questions. We always hope there are more questions than we get at these meetings. So we'll have to wait till next quarter to answer your questions. So thanks again and that's the end of this.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.
Okay.
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