Gladstone Land Corporation (LANDO) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation's First Quarter Ended 3/31/15 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I’d now like to introduce your host for this conference call Mr. David Gladstone. You may begin sir.

All right. Thank you, Kevin. That was a nice introduction. This is David Gladstone. I am the Chairman of Gladstone Land. And I want to thank you all for calling in. It's always nice to have a call with our shareholders and we enjoy having these calls. Really wish there was more opportunity to communicate, but we do this once a quarter, so hopefully that’s enough. If you're in the Washington DC area, please come by and visit us, say hello, we are located in a suburb called McLean, Virginia and if you have -- and you do have an open invitation to stop by and see us here. You will see a great team at work. It’s about 60 members now, the team -- no longer a small business, even though this fund is relatively small. We have about $1.7 billion in assets across all of our Company. So we'll start now with Michael LiCalsi. He is our General Counsel and Secretary. He also serves as President and Administrator. Michael?

Good morning, everyone. This report you are about to hear may include forward-looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. And these forward-looking statements involve certain risks and uncertainties that are based on our current plan, which we believe to be reasonable, and there are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all of the items listed under the caption Risk Factors in our Forms 10-K and 10-Q that we filed with the Securities and Exchange Commission. And these filings can be found on our Web site www.gladstoneland.com and on the SEC's Web site at www.sec.gov. The Company undertakes 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. And in our report today as a Real Estate Investment Trust or REIT, we plan to discuss funds from operations or FFO. 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, plus depreciation and amortization of real estate assets. The National Association of REITs or NAREIT has endorsed FFO as one of the non-GAAP accounting standards that we can use in discussion of REITs. We will also be discussing adjusted funds from operations or AFFO, which we define as FFO adjusted for certain non-cash items and nonrecurring charges which we believe makes it a more useful comparison metric period-over-period. Please review our quarterly report on Form 10-Q filed on Friday with the SEC for a more detailed description of both FFO and AFFO. The report from our President and CFO, that you are about to hear is an overview of our operations and performance, and we encourage all listeners to read Friday’s press release and the Form 10-Q which includes a wealth of information for all of our investors. You can find them at our Web site gladstoneland.com and in the SEC's Web site as well. To stay up-to-date on the latest news involving Gladstone Land and our other affiliated public funds, please follow us on Twitter, username GladstoneComps; and on Facebook, keywords “The Gladstone Companies.” And you can go to our general Web site to see more information about this Company and our other affiliated publicly traded funds at www.gladstone.com. Now, I’ll turn the presentation back to David Gladstone.

Okay. Thank you, Michael. Good report. We have another nice quarter to report to shareholders, but before I get into the results, I always like to give a brief overview of the nature of our business for any new listeners. Our business consists solely of owning farmland and leasing it to independent and corporate farmers. We don't farm the land ourselves, and thus don't take any direct farming risk. Almost all of the farms we own are concentrated in locations where farmers are able to grow high value annual row crops such as berries and vegetables. If you're in the grocery store and you go by the fresh produce section, you will see the type of crops that our farmers are growing. There is some media coverage recently about the decline in values in Midwest farmland that is growing corn and other grains. However, that sector is not part of our primary focus. However, I’d say that as values become lower in the Midwest, it does provide a nice buying opportunity for grain farmland. Geographic regions of our fruits and vegetable farms are located, in steady appreciating areas; both the underlying value and the rents charged on the land. This is evidenced by the several strong lease renewals that we have executed recently, which we will touch on in just a minute. I’d like to dispel people’s concerns regarding the drought in California, its effect on the water availability of our farms. There is a drought in parts of the State where all of our farms have wells on site and so far the wells are doing fine. And a number of communities where we have farms like Watsonville, California have large processing plants that take the affluent from the city and convert it into potable water that can be used to grow crops. In Watsonville, we have water pipes to our farm from the city, so we can either use the wells that we have on the farm or the city water. Another city where we have farms is Oxnard, California. They finished their plant now and they are running pipes out to the farms. That will help farmers in Oxnard, if the drought should continue, but it doesn't mean that it could not happen. About 24 years ago, California had a long-term drought that did have an impact on some of the farmers and we hope that doesn’t continue and have an impact on farmers today. In addition, many cities near the ocean are constructing plants that convert seawater into drinking water for their citizens. Those desalinization plants will have a great impact on relieving the water shortage for the towns and cities on the coast. Now back to the business at hand, we currently own about 8,800 acres on 34 farms, 15 in California, 10 in Florida, 4 in Michigan, 4 in Oregon, and 1 in Arizona. We also own three cooling facilities and several other structures on site on these farms that are critical to the farming operations on our property. However, investors should expect the bulk of the assets that we own to be farmland and to be leased to farmers to grow food. Our annual row crop farmland, we generally intend to enter into leases that have a term of three to seven years long. However, when we lease properties that are growing long-term crops such as blueberries, we anticipate entering into long-term leases such as 10 or more years, and this would be true if any tree crops such as almonds, walnuts, or pistachios, should we decided to go in that direction. For our properties with short-term leases, we expect that we will renew the leases with the same farmers and we believe this strategy will also permit us to frequently increase our rental prices as inflation pushes up the price of produce. When we enter into long-term leases, we seek to place provisions in the leases such as escalation clauses that provide for a fixed increase in the amount of rents, such as annual escalations of 2% or 3% in the rent. This is standard in the institutional and commercial leases, and we are using it as well. In addition, though some of our leases or most of our leases have periodic market resets to the rent base on local rental rates, if those local rents increased faster than the built-in escalations that we have in there, and we have those come into contact with us every year. Our leasing strategy has been successful to date as evidenced by the lease renewal so far this year, which we are able to increase the average rate of over 15% or we were able to increase our 2014 lease renewals by over 25%. Not entirely sure what drives up all the rental rates, except that we know that farm acreage is decreasing in California and to some extent in Florida as well. There is a strong demand for fruits and vegetables and nuts because people are eating more healthy foods, especially organic berries and vegetables. There are more people to feed in the population as it continues to increase. That means the buy -- and also the buying power of the dollar is going down as the government prints billions of more dollars. So all of that leads to inflation. If I had to point to one thing, I’d say that the amount of farms in the area where we own farms is relatively finite, and there is not any new farms being developed in most of these areas. The trend we are seeing is a steady decrease in the number of farms in our growing regions as they are being sold to build homes, apartment buildings, office, schools, industrial buildings, all of those kind of things are taking away the farmland. Once they're converted to suburban users, they never go back to being farms. This causes the farms we own to be highly sought after and they have been rented for many, many years as we look back over time to these farms that we own. And just a note on our leasing practices, everybody wants to know what we do and we generally prefer to keep the same farmer on the property for as long as possible. Our objective is to be the long-term real estate partner for our farmers, so that they know they have that farm for as long term as they would like. Let me just hit a couple of details. We acquired two farms during the quarter. One in California, one in Florida for an aggregate purchase price of $21 million at a weighted average income of 5.8%, that was impacted some by the credits that we gave from a fee that we received. We also renewed four leases that were coming due over the next 18 months at an average increase of about 15%. So over that period of time, you'll see those rents go up and hopefully the income continues to come in and go to the bottom line. We have increased our monthly cash distribution rate to stockholders twice so far this year, once in January and again in April resulting in a 33% increase in our monthly cash distributions to stockholders so far in this calendar year 2015. And just last week, we completed a secondary offering raising about $14 million gross proceeds which will provide us with some added capital to buy more farms. Our marketing activity has been increasing and our list of possible acquisitions continues to grow nicely. This offering we just completed will have a good amount of money to buy more farms. At this point, we have submitted letters of intent on eight properties, worth about $64 million and we’re now moving to purchase agreements on about $40 million of these. That is $40 million has been accepted, and so we are working out the full purchase price, but we're still continuing to do due diligence on all of these properties that I feel confident that most of them will make it across to the finish line. And now let me talk about my favorite part of this, because we are the only REIT that does this, and that's the net asset value per share. During the quarter, we updated the valuation on six farms, three of which were valued by third-party appraisers and three of which were valued internally, total farms by about $1 million or about 2% from their prior valuations, which were between 8 and 15 months ago, so relatively new farms. As of March 31, 2015, our portfolio was valued at about $215 million, with 49% of this value based on third-party appraisers or actual purchase prices, and 51% of the total value of about $110 million was determined internally, and of that amount valued internally, over 94% of that amount or $103 million is supported by third-party appraisers performed between 12 and 26 months ago. So not too far away from external ones with the difference representing an increase in value since that time. This schedule of valuations is discussed in much more detail in our 10-Q and that was filed on Friday. You should go read that if you have any doubts about how we do our valuations. And when we then substitute these new values on just these farms for carrying values of all of the properties in our financial statements, we come up with a new net worth number that moves from $59 million of book value to $108 million as the current fair value. Using this net worth number, our net asset value of share in March 31, 2015 is $13.91 per share, was down actually $0.03 from December 31, and let me explain that. This is a thing that happens all the time to us. At one point, we decreased that made -- because we made a significant amount of capital improvements to some of our properties. So we pushed up the cost basis, but at the same time we didn't get the valuation. And most of the -- this increase is from irrigation upgrades, the cost of improvements, we drilled new wells, we also lay more pipe, and this enhances the value of the property. And that fair value doesn’t come through until the properties are completed. For example, this quarter ending, we accrued over $700,000 of ongoing capital improvements on certain properties and until those are finished, they won't go into the net asset value. And that $700,000 represents about $0.09 per share. So assuming for the sake of argument that that valuation comes through, that's another $0.09 which runs at up to about $0.14 for the quarter. Once these projects are all completed, and we have to wait till they are completed, sometimes they take a good amount of time, we expect to see at least an equivalent increase in the properties’ fair value, if not more. After we get past the dilutive effect of our recent offering, we expect to see our net asset values to begin ticking upward again on a regular basis, as the value of our farmland appreciates due in part of the increasing rents in the surrounding farms and our growing areas and the increase of [technical difficulty] of properties. Our stock is currently trading at $11.24. That was the close on Friday, which is significantly below the net asset value that I just discussed. Thus we are hopeful that our stock price will rise in the future as people realize what a bargain they’re getting. If you buy the stock today, you're getting a discount from an estimated net asset value of about 19%. So you're buying $13.91 worth of assets for just $11.24. What a wonderful purchase that is because you're also getting $0.04 per share in cash distributions every month, which is about a 4.3% current cash return in addition to the underlying value of the properties. Well, that is really enough of an overview on the business side. I want to turn it over now to the Chief Financial Officer, Lewis Parrish, and Lewis why don’t you give your report?

Sure. Good morning, everybody. I'll begin the discussion with our portfolio activity and then the balance sheet. We acquired two farms during the quarter, adding about $21 million in new assets to our books. Our Salinas, California, property was acquired at an NOI cap rate of 4.6%. However, if you figure in the finder's fee that our adviser earned and credited back to us, the effective cap rate increases to 5.6%. The lease we assume with this acquisition expires in October of 2016, and we expect to [indiscernible] to renew this lease at a significantly higher rate by that time. Our second acquisition in Duette, Florida currently has a cap rate of 6.4%. However, one certain capital order improvements are made on the property and we began earning additional income on these improvements to cap rate share increased to about 6.7%. We expect these improvements to be in place before the second lease year begins. Coming into the year, we had three leases yet to expire in 2015, and we have renewed them all at an average increase in straight-line rents of over 9%. Furthermore, one lease coming due in 2016, which we have already renewed at a 33% increase. Coupled with our 2014 lease renewals, which averaged more than 25% rent increases, we think this underscores our belief that demand for prime farmland such as ours, as well as the values of such farmland is continuing to increase in areas where our farms are located. And this sentiment seemed to be shared by tenant farmers in these areas. We have no agricultural leases coming due in 2015 and only one set to expire in 2016 and that's from the Salinas, California property we just acquired in January. Okay, on to our balance sheet. During the first quarter, our total assets increased by $20 million or about 13% due to new property acquisitions, which were funded almost entirely with new debt. So far in 2015, we’ve obtained about $16 million in new long-term borrowings at an expected weighted average effective interest rate of just under 3%. And these rates are all fixed for the next 3 to 5 years. We are continuing to use cheaper debt that’s available to us including our Farmer Mac Facility, new notes to the farm credit, and our line of credit with MetLife. And we have plenty of room to leverage upon each of these facilities to replace new properties to them. And now on to our operating results. Per share earnings from FFO and AFFO were $0.105 and $0.113 respectively, each fully covering the distribution of $0.105 per share. Compared to the December 31 quarter, our FFO increased by $0.012 per share and our AFFO decreased by $0.055 per share. Our operating revenues increased by 12% over the prior quarter driven by our new acquisitions over the past several months. Our core operating expenses which we define as total operating expenses less depreciation and amortization expense, acquisition related expenses, and fee credits received and certain other one-time expenses increased by about $129,000. However about $50,000 of this was in annual expense, which we incurred in connection with the annual shareholders meeting we had just last week, and about $23,000 related to a 2014 supplemental tax assessment on one of 2014 acquisitions. So taking away these non-recurring charges, our core operating expenses increased by about $56,000 from the prior -- for the previous quarter. And speaking of real estate [technical difficulty] beginning November 1, 2015, due to the terms of the leases we have on certain of those properties, the tax burden for two of those 19 farms will revert to the tenant and this should result in annual savings to us of just over $170,000. And just a quick update on the property and casualty issue, we are still in discussions with one of the insurance companies. We are still expecting to receive between $36,000 and $98,000 in reimbursement proceeds over the next few months. And this will be recorded straight to the recovery line-item upon receipt. Turning to liquidity, we currently have about $7 million in cash on hand and $19 million of availability under our MetLife facility. All of our current properties are now pledged under one of our borrowing facilities and assuming an LTV of 60%, our current buying power is just over $55 million. And regarding upcoming debt maturities, we only have about $400,000 in principal payments coming due during the remainder of 2015. Going into the second half of 2015, we are very excited about being able to use the proceeds from the offering and the additional availability provided by it for us further expanding our portfolio and adding farms that will help improve our operating results moving further. And with that, I’ll turn the program back over to David.

That was a good report, Lewis. The main point of this report is to tell you the [technical difficulty] the plan that we talked about so many times. Invested over a $127 million in farm acquisition since our IPO, and with the closing of the recent offering, we now have the ability to acquire more farms over this summer. With the increase in portfolio of farms comes greater diversification and protection for investors, we also expect better earnings as evidenced by recent increases in our monthly distribution. We anticipate that many of the farms that we purchased will be acquired from farmers, or agricultural companies, and that they or another farmer will simultaneously lease that farm from us, so we don't have any downtime. We also expect that many of these farms we acquire will be purchased from farm owners that don’t really farm the property, but rather lease the property out to the farmers. A lot of the farms in the United States are owned by individuals, but not farmed by the owner, and they rent that land to different farmers. In situation such as these, we intend to put our lease in place prior to or shortly after acquiring the farm. Points to make here in addition to the drought in California, another question many people ask are why aren’t we investing in corn and other hard grains? And the reason is prices are very unpredictable. Corn was about $3.90 recently and that's per bushel. Now it was as high as $8.50 a few seasons back. We don’t like these huge variations in prices that are all really happening because of international things that go on. If the Ukraine has a grain crop, it hurts the prices in the United States. We can't store grain, but that's very expensive. But if the land prices for grain farmers fall low enough, it will be a time for somebody to buy. So, however, some prices we want to buy some of the farm, if the prices drop low enough, we want to buy some grain farms, but that's not in the picture right now. We believe that as an investment in U.S farmland, it has performed extremely well in the last 10 plus years compared to other asset classes. And farmland has provided investors with a safe haven during the recent turbulence in the financial marketplace. This is evidenced by the increase in price in fruits and vegetables that you see in the produce section of the grocery store. Most all of the farmland have historically been an excellent hedge against inflation. Our business thesis is very straightforward. There are more people in the world every year. People have to eat, farmers need farmland to grow food, farmland has been converted to non-farm uses, so there is less farmland to grow food, and there is no replenishment of farmland. There really is no more trees to cut down and turn into farmland, where our farms are. So the buying power of the dollar again is decreasing as the government [indiscernible] more money, therefore farmland is becoming more valuable every year and it's an excellent hedge against inflation. In January, the Board voted a monthly cash distribution by 17% and then in April the Board voted again an additional 14% in our monthly cash distributions. So we are now paying out about $0.04 per common share and as of today we have made 27 consecutive monthly distributions to shareholder. We are projecting strong production and income growth in 2015. And if we -- our expectations are achieved, we hope to be able to increase the distributions further sometime later this year. As the largest shareholder, as you know, I’m alluding [ph] for that as well. With the stock price currently around $11.24, the distribution run rate is about 4.3%, which is a bit higher than the average of all equity REITs in the United States. So we are ahead of the pack. But please remember that purchasing this stock is a long-term investment in farmland. It is in part an asset investment just like gold, except it's an active investment with cash flow to investors. We expect inflation of food to be strong and the value of farmland to increase. That's our business model and it seems to be working to date. I look very forward to farmland REIT as a way to hedge against inflation and food prices and other inflations that come our way; I think it's really a better hedge than gold. For all those looking for an asset, that doesn't correlate to the stock market, this is it. Now let me just stop at this point and we will have some questions from our loyal stockholders and analysts who are out there follows. So Kevin, would you come on please and help the listeners ask questions.

[Operator Instructions] Our first question comes from Amit Nahawli with Oppenheimer.

Good morning.

Good morning.

Are you guys able to provide any guidance going forward for AFFO and G&A?

No, we haven't done that in the past. We stayed away from that. When you are small like this, it's almost impossible to do that, because every transaction has a very material impact. In fact, some of the farms that we buy, we actually have to notice out to shareholders before we even buy them, because of the potential impact. So no AFO, FFO or any other kind of guidance, I'm very sorry to say.

Okay. And just going back to your pipeline, correct me if I’m wrong, you mentioned eight farms with $64 million of letter of interest?

Yes, with four of those have signed letter of intents and are proceeding to sign up the purchase agreement, which will mean that the certainty of clause becomes much higher.

Got it. Are you able to discuss or mention now the location or the expected cap rates?

Oh let’s see, I think I have a little bit of information on that, we might be able to share. What do you say Lewis? We’ve got -- we have the …

The ones that are executed otherwise were in Florida, Georgia, and California.

We have two in Florida, and one in California and one in Georgia and then the -- there is two others -- a couple of others in different areas after that, that we don't have a signed letter of intent.

Okay. And just lastly are you able to provide some color on the credit quality of the tenants?

Most of the tenants that we have are the best growers in those regions. We don't deal with them. This is usually the top 20% of the growers in the areas. So we are very conscious that the best growers are the people to go with. Most of them have pretty good sized balance sheets and income statements. Every now and then we will take on a smaller farmer that has good ratings by other farmers in the area. I would say that most farms as you can imagine, I don't think there is anyone other than Dow [ph] that has a credit rating and Driscoll may have one now, but I'm not sure. The credit ratings of farmers has never been one that Standard and Poor's and others have gone out and done credit ratings on it. We do internal credit ratings and the credit ratings tend to be in the BB range, sometimes as a B, but that tends to be the range simply because these are small business -- smaller mid sized businesses.

All right. Thank you. That's it from me.

Okay. Next question?

Our next question comes from Rob Stevenson with Janney.

Hi. Good morning, guys.

Good morning.

David, can you talk a little bit about you have alluded to in the past, and alluded to on this call about looking at Midwest grain farmland when the price gets cheap enough. May I know how far away are we from being sort of cheap enough and sort of what are the catalysts that you’re really looking forward to be able to pull the trigger on one of those deals?

If we thought a farmer could make money at the rate we would have to charge them for buying the farm, then we would be interested. Right now they are paying fairly high rents. The rents haven’t moved down as much. The price of farmland has moved down, but the rents on existing farms I know there is a lot of negotiations going on out in the farm belt right now with regard to what the farmers are willing to pay. And just by the way most of the farmland in the Midwest is an annual renewal. So when there is a bad year, the farmer comes in and ask for a discount on rents and we’re seeing farmland rents drop pretty much down 8% to 12%. So from my perspective, when the economics work, we would be interested in looking at that, but it's just not there right now.

Okay. And Lewis, can you talk about what you see -- have you seen any changes in pricing on the Farmer Mac stuff in the last 30 days with the volatility in interest rates?

We’ve been -- we're going very -- the last one we have with them is back in January, and rates have come down since 12/31 about, let's say 20%, but we haven't gone back to them with any new debt for pricing yet.

Okay. I mean, is this -- so you think that today you would be pricing inside of where you price the last deal?

Yes, we believe so.

Okay. And is there -- I mean, what's the -- in terms of at this point of the year, I mean is that for them -- is that do you have any sense as to where they’re in their book yet?

Well, all of the stuff is pass-through. They near -- they batch it up and sell it off into the marketplace. So it's really just whatever the market has for them and right now it seems to be still very good for [indiscernible].

Okay. Thanks guys.

Other questions?

[Operator Instructions] And I'm not showing any further questions at this time. I’d like to turn the call back over to our host.

All right. Thank you very much, and thanks to all of you who called in and those of you’ve listened -- who were listening to this. Again, we are in great shape today and I expect this quarter to be a good quarter and the rest of the year to be a good year as well. That's the end of this conference call.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.