Yahoo Finance Gladstone Land Corporation (NASDAQ:LAND) Q3 2023 Earnings Call Transcript
Gladstone Land Corporation (NASDAQ:LAND) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Greetings and welcome to the Gladstone Land Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Please proceed, sir.
David Gladstone: [Technical Difficulty] quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate the time you take to listen to our presentation. Before I begin the presentation, we are going to hear from Michael LiCalsi, he is our General Counsel and Head of Administration. Michael?
Michael LiCalsi: Thanks, David. Good morning, everybody. Today’s report may include forward-looking statements under the Securities Act of 1933, Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-Q, 10-K and other documents that we file with the SEC. You can find them on our website, the Investors page at gladstoneland.com and on the SEC’s website, which is www.sec.gov.
And we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. Today, we will discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term, defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses and an adjusted FFO, which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. And we believe these are better indications of our operating results and allow better comparability for a period-over-period performance.
Once again, please visit our website gladstoneland.com and sign-up for our e-mail notification service. You can also find us on Facebook, keyword there is the Gladstone Companies and on Twitter, that’s @gladstonecomps. Today’s call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. And with that, I will turn it back to David Gladstone.
David Gladstone: Alright. Thank you, Michael. I’ll start with a brief overview of our Farmland Holdings that currently own about 116,000 acres on 169 farms and about 45,000 acre feet of banked water, that’s water that’s in the acre foot we can tap into. One acre foot is equal to about 326,000 gallons, so we own nearly 15 billion gallons of water. And together, they are valued at approximately $1.6 billion for both the land and the water. Our farms are in 15 different states and more importantly, in 29 different growing regions. So stored water, mostly in California. So you can see we are pretty well diversified. Just to show you a little more diversification, our farms are leased to over 90 different tenant farmers and all of whom are unrelated to us.
And the tenants in these farms are growing 60 different types of crops, but mostly fruits and vegetables and nuts like you’d see in the produce section of a grocery store, which is where most of our products are sold. And now, I’ll give you a quick update on some of the tenant issues we have been working through, still farming on one farm in California with the help of a third-party farm management group. We have been in discussions with the same group to sign leases and not just farm it for us. Property of the lease will be closed and finalized a lease agreement hopefully soon. In addition, short-term leases on 4 blueberry properties in Michigan, encompassing about 14 different farms expired in October. And since then, we’ve been farming three of these properties to 11 other farms with the help of third-party management groups.
The fourth property, which consists of 3 farms currently vacant and it’s okay to be vacant this time of year, because no strawberries on this – no blueberries on the blueberry bushes this time of year. We are in discussions with groups to take over all of these farms and we hope to also have an agreement in place by the end of the year. Finally, during the year, we had two other tenants, who had gotten behind in their rental payments to us, one tenant was replaced, farm being fully leased as of July 1 and the other tenant was able to catch up on their rents and is now no longer falling behind. Total year-over-year impact on our operations as a result of these issues that I mentioned above was a decrease in operating income of about $201,000 in the third quarter and about $814,000 for the year so far.
I think a lot of that will be replaced by the fact, we will get some properties that actually sell their crops and actually make up some of those problems that we had. As mentioned on the past couple of calls, we continue to have more selective approach to the type of farms we review for potential acquisition, because our cost of capital is so much higher. For example, we financed most of them number, most of our farms that we buy with a first mortgage for about 60% or 70% of the price we pay. And as a result, acquisition activity remains slow for us, because those costs have gone up so much. It is changing and it will change over time. With inflation still above the Fed’s target rate, interest rates remain high for us for the foreseeable future.
But having gone through these cycles before we know it will change. But overall, our existing Farmland portfolio continues to perform pretty much as we expected, it would with the exception of those issues I mentioned above. We are having a couple of tenants that have problems, but we always work through those. On the leasing front since the beginning of the quarter, we renewed and amended 9 leases, farms in two different states in total renewed as expected and results of increasing annual net operating income about $275,000 or 4.7% above that of the prior leases. Looking ahead, we have 3 leases scheduled to expire over the next 6 months and in total that makes up less than 5% of our total annualized lease revenue. We are in discussion with groups to lease these farms and we are also looking into possibly selling one of these farms as it’s in one of those development areas.
And hopefully we will have some information for you before the end of the year. But we are not currently anticipating any vacancies on any of these farms as a result of upcoming explorations. We also recently entered into a water transfer agreement with a local water district in California that will allow us to purchase up to 15,000 acre feet or nearly 5 billion gallons of water per year through February 2031. So far, we have purchased about 7,000 acre feet of water for 2023 and total consideration for that was about $1.2 million. We have recently completed construction of some groundwater recharge basins. These basins own some of the unformed acreage on a couple of our large properties in California. This will enable us to pump the water onto these basins, so that we can store it as it goes underground for further use in our farms.
So we are in good shape in terms of needing water in the future. I think this year is going to be a wet year, but who knows maybe it’s beginning of a 5 or 6-year drought period. So we have got a lot of water to get us through any kind of problems we have. Inflation continues to slow down the impact of the impact of Fed’s interest rate hikes now being felt throughout the economy. However, the latest headline inflation is about 3.7% still remains above the Fed’s target of 2% and core inflation has not been moving in the right directions according to the Federal Reserve. Food prices are also showing signs of cooling down. They went up substantially after the pandemic, but we continued to keep pace and outpace inflation as we see them now.
We believe food prices will continue to keep pace or again outpace inflation, which should help mitigate the increases in the operating costs many of our farms the tenant farmers have been experiencing just we look forward to the future. I want to stop here and turn it over to our CFO, Lewis, talk to you more about the numbers. Lewis?
Lewis Parrish: Alright. Thank you, David and good morning everyone. I’ll begin by briefly going over our financing activity. We do not incur any new borrowings during the quarter, but we have repaid about $7 million of loans since the beginning of the quarter. On the equity side, since the beginning of the quarter, we have raised net proceeds of about $2 million from sales of our Series E preferred stock and $1 million from sales of our common stock to the ATM program early in the quarter. Moving on to our operating results. For the third quarter, we had net income of about $3.1 million and a net loss to common shareholders of $3 million or $0.08 per common share. For the following discussion of operations, I will be comparing the third quarter of 2023 with the corresponding third quarter of 2022.
Adjusted FFO for the current quarter was approximately $5.6 million or $0.155 per share compared to $7.2 million or $0.207 per share in the prior year quarter. Dividends declared per common share were $0.139 in the current quarter compared to $0.137 in the prior quarter. The primary driver behind the decrease in AFFO was lower year-over-year revenues coupled with an increase in related party fees and higher financing costs with the proceeds from a portion of such financings remaining uninvisted. Fixed base cash rents decreased by about $400,000 or 2% from their prior year quarter. This is primarily driven by a decrease in revenues from the self-operated and non-accrual properties as well as a lease we executed in the fourth quarter of 2022, in which we reduced the fixed base rent in exchange for increasing the participation rate component in the lease.
And the result of this increase in the participation rate component won’t be known until the fourth quarter. Participation rents also decreased by about $600,000 from Q3 of last year. These figures are largely dependent upon the timing of when such information is made available to us. But from what we’ve received so far, we are seeing lower yields coupled with lower pricing for last year’s crop. The lower yields were expected due to the alternate year bearing nature of the trees and also due to the fact that these crops were harvested at the end of a multi-year drought. Pricing continues to be somewhat lower due to oversupply and this is particularly true in the almond market. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses for the current quarter increased by about $370,000 from last year, This is primarily driven by an increase in related party fees, particularly a higher incentive fee earned by our adviser during the current quarter.
Removing related party fees, our recurring core operating expenses remain relatively flat from the prior year quarter. Finally, other expenses decreased due primarily to lower interest expense incurred as a result of loan repayments made over the past year. With that, we will move on to net asset value. We had 43 farms and our banked water all valued during the quarter and these were all done via third-party appraisals. Overall, these valuations increased by about $1.1 million over their previous valuations from about a year ago. So as of September 30, our portfolio was valued at approximately $1.6 billion, all of which was supported by either third-party appraisals or the purchase prices. So based on these updated valuations and including the fair value of our debt and all preferred securities, our net asset value per common share at September 30 was $20.33, which is up from $19.15 at June 30 and up from $16.56 at Q3 of last year.
Majority of this change was due to a decrease in the fair value of our preferred securities, which has been driven by the high interest rate environment. Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have access to over $170 million of liquidity in addition to about $155 million of unpledged properties. Over 99.9% of our borrowings are currently at fixed rates and on a weighted average basis these rates are fixed at 3.35% for another 4.3 years. As a result, we have experienced minimal impact on our operating results from increases in interest rates. And with respect to our current debt load, we believe we are well protected against any further interest rate hikes for the foreseeable future.
Regarding upcoming debt maturities, we have about $41 million coming due over the next 12 months. However, about $24 million of that represents various loan maturities and the properties collateralizing these loans have increased in value by a total of $7 million since their respective acquisitions. So we don’t foresee any problems refinancing any of these loans if we choose to do so. But if we remove those maturities, we only have about $17 million of amortizing principal payments coming due over the next 12 months or less than 3% of our current debt outstanding. One other item to note here, our lines of credit with MetLife are currently set to expire in April of 2024. We are close to finalizing a long-term extension with MetLife for each of these and we hope to have this wrapped up during the fourth quarter.
And finally, regarding our common distributions, we recently raised our common dividend again to $0.464 per share per month. This marks the 32nd time we have raised our common dividend over the past 35 quarters, resulting in an overall increase of 55% over that period. And with that, I’ll turn the program back over to David.
David Gladstone: Okay. Thank you, Lewis. That’s a nice report. We continue to stay active in the market should a good opportunity present itself. But we are being more cautious on the acquisition front. As changing out there, people have begun to reduce the price on some of their farms. It happens much quicker in other REITs. But on the land side, the owner of the property can always continue to operate the farm and make a few bucks. Additional points to make, just the final point I’d like to make. We believe that investing in farmland, growing crops that contribute to a healthy lifestyle such as fruits and vegetables and nuts follows a trend that we are seeing in the market today. Overall, demand for prime farmland, growing berries and vegetables remains stable to strong in almost all areas that we are in today.
When our farms are located today, particularly on both the coast, East and West, we are getting good value increases. And overall, Farmland continues to perform well compared to other asset classes. For example, the NCREIF Index, Farmland Index, which is currently made up of about $16.4 billion worth of agricultural properties, has an average annual return over the last 25 years of 11.4% with no negative years going down. This is so much better than the S&P index and the overall REIT index, each of which have had 6 or more negative years in which, if you were getting out, you were going to lose money, if you were in at a certain amount. We have had zero in the farmland index. So it shows its strength by being something that is always available for us to go out and finance.
The banks that we use are very interested in lending us more money of course there at a higher price. In closing, just remember that purchasing stock of this company is a long-term investment in Farmland. I think an investment in stock is two parts. It’s similar to gold. It’s a hard asset, its Farmland, its dirt. That has an intrinsic value because there is a limited amount of good farmland and is being used up by urban developers, especially in California and Florida, where our many farms are located. And second, it’s unlike gold and that it’s an alternate asset, but it’s an active investment with cash flows and investors getting money every month. We believe in it. It’s better than a bond fund, because we keep increasing the dividend, which doesn’t happen in a bond fund.
We expect inflation, particularly in the food sector, to continue increasing overtime and we expect the values of the underlying farmland to increase as a result and we expect this especially to be true in the fresh produce food sector as the trends of more and more people in the U.S. eating healthy foods and continue to grow in that area. Now, we will have some questions from those who follow us. Operator, would you please come on and help us listen to some of these questions?
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