Gladstone Land Corporation (LANDO) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Gladstone Land Corporation’s Third Quarter 2015 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 this conference today is being recorded. I would now turn the call over to your host, David Gladstone. Please go ahead.

All right. Welcome to the conference call for Gladstone Land. This is David Gladstone. And thank you Stephanie for that nice introduction. She is very efficient and thanks to all you people we have on the line today. We really appreciate these call-ins and having time with you and we enjoy them. Hope you do too. I wish there were a lot more times to talk about the company and give you more information about it and by the way, as I do every time if you are ever in the Washington DC area we are located in a new branch suburb called McLean Virginia and if you have a chance, stop by, say hello, you will see some of the great team that we have working here, about 60 people. We are nearing $2 billion in assets under management in our four public companies. So we start every session with Michael LiCalsi. He is our General Counsel and Secretary. He also serves as a President of Gladstone Administration that Administrates all of the Gladstone funds. Michael?

Good morning. This report you are about to hear may include forward-looking statements as defined in the Securities Act of 1933, and the Securities Exchange Act of 1934, including statements with regard to the Company’s future performance and these 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 risk factors listed in our Forms 10-K and 10-Q that we file with the SEC and they can be found on our website at www.gladstoneland.com and the SEC’s website, 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 has endorsed FFO as one of the non-GAAP accounting standards that we can use in discussing REITs. We’ll also be discussing core FFO or CFFO, which adjusts FFO for certain non-recurring charges and adjusted funds from operations or AFFO, which further adjusts CFFO for certain non-cash items. And we believe these metrics improves comparability of our results period-over-period. And please review our quarterly report on Form 10-Q filed yesterday with the SEC for a more detailed description of FFO, CFFO and AFFO. Now the reports from our President and CFO, that you are about to hear will be an overview of our operations and performance. We encourage all listeners to read yesterday’s press release and the Form 10-Q, which includes a wealth of information for our investors. You can find them at our website gladstoneland.com. And to stay up-to-date on the latest news involving Gladstone Land and our other affiliated publicly traded funds, please follow us on Twitter, username GladstoneComps; and on Facebook, keywords, The Gladstone Companies. And you can go to our general website to see more information about this company and our other affiliated public funds at www.gladstone.com. And now, I will turn the presentation back to David Gladstone.

All right. Nice report, Michael. And before we get into the results of this third quarter, as I do every time, I’d like to review the market environment and the nature of our business for all of our listeners follow this as a new company and a new condo company. Our business consists solely of owning farmland and leasing it to independent and corporate farmers. The independent farmers we lease to, these are farmers who are usually in the top 10% or 20% of the largest and best farmers in any of the farming growing areas that we are in. So we try to pick the best farmers for all of our tenants. We don’t farm any of the land ourselves, and thus we 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. As you may have read about, we’ve taken advantage of the depressed farmland prices in the Midwest and we acquired two quality farms in Nebraska producing a variety of both greens and produce and if we find more farmland in the Midwest, we’d plan to go back farmers growers primarily produce, produce such as potatoes and onions and those kinds of things. Almost all of our tenant farmers that we have growing items, these are items that you’d see in the produce section of a grocery store and that’s because, I used to own one of these farms. I owned a farm that was in the produce area and it was the second largest produce of strawberries and other berries in the US and I sold that produce company to Dole and kept the land. And that’s how we got the beginning of this farmland REIT. The geographic region that our fruit and vegetable farms are located in continue to experience steady appreciation in both the underlying land values and the rents charged on the land, which is evidenced by several strong leases that we renewed and executed this year. This is because the fruits and vegetables they are growing have not gone down in price, unlike, say some of the corn crops in which corn has gone down dramatically in price. I would like to address the people’s concerns regarding the drought in California and its effect on the water availability for our farms in particular. There is a drought in parts of the state, namely the Central Valley, which is not where our farms are concentrated. Most of our farms are in California on the coast which has experienced minimal impact in terms of water restrictions or cost. All of our farms including the few in the Valley and we have one in the Valley, have very nice wells on the sides and provide water to –for our farmers. Wells on the coast sometimes do have problems with salt or nitrate intrusions into the water, primarily from the ocean and the mix can occasionally get so bad that you have to drill a new well. We had to do that and one of our properties in Watsonville, California few years back and that new well is producing beautifully and the farmer on that property has plenty of clean, fresh water. We are currently in the process of doing that in another farm, however, that well is not yet completed. So, it’s little hard to report on the quality of the water that we expect to find there. A number of the California communities that where we have farms have large processing plants that take the affluent from the city and convert it into clean water and that can be used to grow crops. This water is piped out from the city’s processing plant to our farms and other farms obviously, which allow the farmer on that property to use either on a well water or the city water that’s being pumped out to them. So they have multiple sources of water. California also, many of the coastal cities in California is constructing plants that convert sea water into drinking water for the citizens, which will have a great impact on relieving the water shortages on the cities that are close enough to the ocean. We are also continuing to track and it’s getting closer and closer, El Nino this year, it typically brings very heavy rainfalls in California during the fall and winter season and this year’s El Nino is still expected to ravel the strongest one that they had on record back in 1998. This one should last until the spring of 2016 and so significantly drought relief is expected to occur in California this winter, but god only knows what will happen. It rain –it was raining in California in parts in the last few weeks. So, we are starting to see the beginning of El Nino as it moves into the coast there. We have – just going into a discussion of the type of leases that we do, people ask us about that and we really have two types of leases now. First, we have, what I call, a cash fixed rate lease and that’s an annual rent increase as modest I’d say 2% or 3% every year and then, it resets to the current market rate after a year or two. Now the rent never goes down, but it can go up if the market rate is greater than the 2% or 3% that we’ve been charging as we move it up. So we do that and the second type of lease that we’ve just started doing, or call participating leases, my family in the south use those type of leases and these kind of leases, we charge a slightly lower cash basis. And so you might be at a 4% return on the land that you own. But in return for the lower fixed cash rents, we get a percentage of the gross sales of the crops in the lands and it may be around 20% or 30%, in some cases, it’s been as high as 40%. These types of leases make more sense for crops with more variable revenue from year-to-year such as almonds or pistachios, usually puts a floor on the yield. For us, and that might be on our original cost, maybe 4% or 6%, but it potentially allows us to earn a very high return, say, around 10% or even more in some cases on years where there is higher commodity prices such as how they’ve been, the prices have been in 2015, growing season for almonds. Let me switch back to the business that we are in. We currently own about 15,500 acres on 42 farms across six states in the United States. We also own some cooling facilities in several of the structures on the site. And some of those cooling facilities are critical to the farming there, they need to cool berries down and vegetables down before they ship them. But, investors should expect the bulk of the assets to be in farm land they have leased the farmers that grow fresh food that you can find in the produce section of your local grocery store. We like in the health conscious side of our business, the food production and we don’t have any of those GMO products that are out there in the marketplace today. We’ve been extremely successful with our leasing strategy to-date and it’s been able to average an increase in rental rates over the periods of about 16% on all the lease renewals since our IPO back in 2013. We believe the underscore here is that the value that we have and farmers see in the underlying land where the properties are located it’s just such that, it’s going to put an upward pressure on the market and predicted for these areas, we predict that the prices will continue to rise. Generally, rental rates are driven up by the following factors, superior farmland like those we own and it’s just decreasing in California and Florida and other areas and that of course drives up demand for the remaining farms, prime farmland that can deliver high yields and superior crops is a very high demand these days and farmland continues to go out of the process of farming into other areas. This strong demand is driven by these upward – that drives these prices upwards, this strong demand for fruits and vegetables and nuts, because people are eating more healthy food, especially organic. We have some organic farms, obviously, we have lots of berry farms and vegetable farms. So we are in that zone of people eating more healthy-oriented food and we actually have some farmers that are converting their farms into organic ground. So we like to see that as well. Another thing that’s pushing prices up is, increasing population as the population increases, a lot of the upward pressure is put on the value of the farmland, I mean, just look at the prices and how they have increased in the produce section of your local grocery store and you will see what’s going on with our land, because that all comes back to the land. And finally, the buying power of the dollar is just going down as the government prints bullions more in dollars and this makes farmland especially produce-oriented farmland a great hedge against inflation. If I had to point to one thing, I’d say that the amount of farms in our region is relatively finite. There are no new farms being developed in most of these areas that we are in because all arable land currently being farmed or it has already has been converted to other uses. So the trend that we are seeing is a steady decrease in the number of farms in the growing regions as they are being sold to build homes and apartments and offices and schools and industrial buildings, all of this land is being converted, once it’s converted to suburban uses, they never go back to being farms. So this causes the farms that we own to be highly sought after and they’ve been rented for decades without being vacant. And just a footnote on our leasing practices, I want everybody to know that, we prefer keeping the same farm on the property for as long as possible. We are not really in the business of just seeking out the highest prices we can get from any farmer that comes along. Our objective is to be a long-term real estate partner for all of our farmers, so that they know that they are going to have that farm as long as they want it, as long as they are within range of good rent payment to us. So, now some details on the recent activity. We invested $30 million in five new farms during the quarter. We’ve acquired one farm for $4 million or so after September 30. We closed on our first Midwest deal acquiring two farms in Nebraska that will be growing potatoes and edible beans and then on the off-season alpha alfalfa. They also may switch into corn and soy bean in a rotation if they want to and these farms have combined 22 wells on site giving them plenty of water for those farms. In addition, our second investment included a development plan. This is the first one that we’ve done like this. I don’t know how many will do, but we are converting ground into almond origin, which we expect to cost about $8 million for the conversion and we will be earning additional rent on every time we – the farmer they plants new trees and we advance money for those new trees. They will be paying us even though those trees are not yet ready to yield any almonds. So, we are not going to lose any money on this development deal. It will be paid for the land and the things that we put on the land during this period until the almond trees begin to produce and then we will get a piece of that action because we also have a participating lease there as well. When all said and done, we expect these farms to result in a total investment of about $38 million. So the $8 million and the $30 million is going to be what we all average and we think the net rent will be about 6.9% on the $38 million that we are investing in that farm. We have financed these acquisitions with long-term debt at a weighted-average fixed interest rate of about 3.1%. So if you do the math, you will figure out what we are getting in terms of all-in return on our equity. Just the other day, on one more farm in Florida, we did a $4 million and we – current rent on that is 5.6% before we leverage or put a mortgage on it. I think the pipeline is we call it, this is all the marketing activity that were up to, we are just gaining significant traction in all the marketplaces that we are in. There is a long list of possible acquisitions that should continue to help us grow nicely. At this point in time, we have seven farms worth about $17 million under signed purchase agreements. We expect to close them within the next few months. We also have a couple of extra farms worth about $26 million under sign. And these are non-bonding letters, but it’s a letter of intent we believe they will go all away to get purchased, but that is a little less bonding in terms of where you have a purchase agreement in place. But we are still continuing our diligence process on a number of these properties and this time, there is certainly no guarantee that any of these will close although, my best guess is that they will. And now let’s talk about net asset value. This is one of my favorites, because most of the people who invest in real estate investment trust don’t get this discussion. During the quarter, we updated the valuation on eight of our farms, six of which were valued internally, we’ll go into – Lewis can go into that a little later and two of which were reappraised. So we had appraisals come in on those two. In the aggregate, the farms increased by about $4 million or about 10% over the prior valuations which were between 12 and 15 months ago. That was a nice increase in terms of net asset value. In September, our portfolio was valued at $265 million with 48% of a fair value based on either third-party appraisals, or actual purchase prices and 52% of the total value or about $138 million was determined internally. However, of the amount valued internally, about 97% of that amount or about $133 million is supported by third-party appraisals performed with 13 and 32 months ago. So this difference represents a strong increase in value since that time. Based on the new valuations, our net asset value per share at September 30 is $13.64 per share, up $0.22 from June 30, last quarter. So three months ago, it’s up 22% - $0.22 and so that’s a good movement up. We’ve made some significant amount of improvements or capital improvements on some of these properties, most in the form of irrigation upgrades as we always like to have those in first-class condition and the full cost of these improvements hasn’t really been included in the corresponding increase in the property value. So we’ve been spending money and it’s not reflected in the property values yet until the project is still ongoing. Until so we complete them, we won’t put those in the numbers. So fart this year, we made about $1.3 million of improvements on certain of our properties and that figure hasn’t gone into the property valuations, that’s about $0.14 a share. So, once those projects are completed, we will have the properties re-appraised and we expect they capture a significant portion, if not all of it, in the cost-through valuation – value appreciation. And one additional note, these projects - the majority of these, we begin receiving additional rent income on the total cost of the project once they are completed. So, we are not just investing to maintain the property, we are investing to improve the property and increase the rents that we receive on the property. We expect to see our net asset value to continue to trickle upwards and hopefully recent larger ones along the way is appreciation continues to complete the portfolio. All right, our stock is currently $9.26, which is significantly below our net asset value. We hope our stock price will rise in the future. So, if you buy the stock today, you are getting a discount from my estimated net asset value of about 32%. You are buying something at $13.64, I mean, you are buying at $13.64 of assets for just $9.26. I think that’s a wonderful purchase in today’s marketplace. Also, along the way, you are getting a $0.04 per share per month cash distribution. We cover our distributions with our income which is a 5% return. I think that’s wonderful, you get a 5% return while you watch your net asset value continue to trickle up. Well, that’s enough for the business discussion. I will turn it over to our Chief Financial Officer, Lewis Parrish now to talk to you about the numbers that we have for the quarter.

All right, thank you, David, and good morning everybody. I’ll begin our discussion with our portfolio activity and the balance sheet. [Audio gap]

Ladies and gentlemen, please standby. Again, please remain on your lines. Your conference will resume momentarily. Please standby.

Mr. Gladstone, you may resume your conference.

Okay, thank you

Okay, good morning everybody. Sorry about the interruption there. For this portion, I will begin with our discussion on the portfolio activity and the balance sheet. We acquired five new farms during the quarter, adding about $30 million of new assets to our books. We invested $11 million into two farms in Nebraska representing our first foray into the Midwest and $19 million into three farms in California that will be planted with almond trees. The two Nebraska farms were acquired at a net cap rate, net rental income, net of property expenses were responsible to cover such as property taxes of 5.3%. And the leases we put in place will run for about 3.5 years. Our $19 million California acquisition also includes the development plan to convert the current grounds into an almond project. We expect this project to be completed during the summer of 2016 at a total cost of about $8 million on which we will earn additional rent as the costs are expended by us. In addition, as David mentioned, we will also be sharing in a portion of the tenants’ gross revenues from crop sales. As GAAP only allows us to record the minimum rental amounts guaranteed and leased, our initial cap rate on this deal is 4.4%. However, using conservative estimates for prices in crop yields, we expect an overall cap rate that’s over 7.5% once these contingent variable amounts are figured in. The lease we’ve put in place rents are 15.5 years and includes one ten year extension option. In the first quarter we’ve acquired one additional farm at Florida for about $3.8 million. We put a six year lease on the property that will give us a 5.6% net return. No leases were renewed or extended during the quarter, but given that the four leases we have renewed this year have resulted in average rental increases of over 15%. We believe this underscores the trend we are seeing in areas where our farms are located, and that’s the demand for prime farmland such as ours, as well as – as the value of such farmland and the rents they command is continuing to increase. And this sentiment seems to be shared by tenant farmers in those areas as well. We have no agricultural leases coming due in 2015 and only two sets will expire in 2016. We’ve begun negotiations with the current tenants and expect to be able to renew both of those leases at increased rates about any time. Moving to our balance sheet, during the third quarter, our total assets increased by $30 million or about 16% due to the new farm acquisitions, which were funded almost entirely with debt. We obtained $28 million in new long-term borrowings during the quarter at a weighted average interest rate of 3.1% and the rates are fixed for the next three to five years. In addition, we amended our credit facility with MetLife to reduce the interest rates on both the mortgage note and the line of credit by 26 and 25 basis points respectively, which should result in about $190,000 of interest savings per year. We also extended the fixed rate term of the mortgage note by almost four years, pushed up the interest-only portion by an additional six months and extended the draw up period by one year. And just a quick note on the Florida farm that we acquired subsequent to 09/30, it was financed with borrowings from farm credit that should – at an effective weighted average interest rate of 3.0%. The majority of which is fixed for the next six years. Now onto our operating results. The first thing that I’d like to point out is that every single per share metric increased significantly over the prior quarter. And that was due to our operating revenues increasing by about 11% while our operating expenses remained relatively flat, only increasing by 1% from the prior quarter. Over the past four quarters, our operating revenues have increased by an average of 10% per quarter while our operating expenses have only increased by an average of 2%. Going a bit more in detail, our core operating expenses will strip out depreciation and amortization expense, acquisition-related expenses, and any fee credits received only increased by about $45,000 from last quarter. This increase was due to additional property operating expenses and professional fees incurred partially offset by decreases in certain G&A expenses namely stock order related expenses and insurance fees. And just a quick note on real-estate taxes, due to leases on two of our properties that became effective on November 1, 2015, the burden – our burden for real estate taxes on these two farms converted back to the tenant, which will result in annual savings to us of about $180,000. In addition, beginning in January 2016, four of our other farms will be placed in the land conservation acts which should further reduce our annual property tax burden by an additional $122,000. And just a reminder, before taking, a quick look at our per share numbers. Core FFO and FFO adjusted for certain one-time charges such as acquisition-related costs and AFFO further adjusts core FFO for certain non-cash items such as converting GAAP rents to cash rents. Per share earnings from core FFO and AFFO for the quarter was 11.3 cents and 10.3 cents respectively, compared to distributions of $0.12. These figures represent increases of 1.2 cents and 1.8 cents per share respectively from the previous quarter. For a nine month period, our per share earnings from core FFO and AFFO were 34.5 cents and 30.9 cents respectively, compared to distributions of 34.5 cents. And turning to our liquidity, we currently have about $3 million of cash on hand and $4 million of availability under our MetLife facility. In addition, we are currently in discussions with one of our lenders for – that would provide us with additional borrowing availability. We received a non-binding term sheet from them, but there is no guarantee that we will be able to finalize this deal. After factoring in certain operating obligations, and assuming that we are able to close on this new borrowing facility, we estimate that our current buying power is about $25 million. We also have plenty of room to leverage up on our MetLife and Farmer Mac facilities, should we plan new properties to that. In addition, we implemented an ATM program during the quarter that we hope will eventually provide us with additional capital to deploy towards new deals. Regarding upcoming debt maturities, we don’t have any principal payments coming due through the remainder of 2015 and we only have $3.6 million of principal payments due throughout 2016. This includes a $1.5 million payment on our MetLife mortgage note that’s due in July of 2016 and the $1.5 million short-term loan from Farm Credit that we expect to be refinanced before its maturity. Going into the final quarter of 2015, we believe we are beginning to achieve the scale resulting into stabilization of our operating expenses. And moving forward, we expect that you will see revenues from new acquisitions that are more direct and positive impacts on our bottom-line. And with that, I will turn the program back over to David.

Okay. Sorry about the problems with the phones. This is the second time we’ve had some problem, but thank you Lewis. That was good presentation. The main point again to report is to tell you that we are continuing to execute the plan that we promised we would do. It’s over $184 million in new farm acquisitions since 2013 when we went public and we have several other deals in the pipeline that we expect to close in the coming months. With an increase in the portfolio of farms comes greater diversification and protection for investors and we also expect to see some increased earnings. We expect that many of the farms that we’ve acquired will be purchased from farm owners that don’t own the farm in terms – don’t farm their farm everyday, but rather lease it to other farmers, and it’s about 38% of all the farms in the United States owned by individuals, but not farmed by them. They rent the land out to different farmers just as we do. So many times we buy those and we just become the new owner and the farmer that’s there, stays on that farm. In those situations, we want to add new things in our leases, but it’s straightforward for all of these leases that we do. In general, we want to keep the same farm on the property forever. We don’t want to kick anybody off and so as long as we can agree on things going forward, there is not going to be a problem with leasing the land. In addition to the drought in California we’re asked questions about why we are not investing so much in growing of corn and other hard grains out in the Midwest and the reason is, price unpredictability. For example, corn can be as low as $3.60 a bushel and has been as high as, I think $8.50 a bushel. Corn farmers don’t make any money when it’s under $4, I mean they make a little bit so to stay in business, but we don’t want to be in that business where people are marginal so that prices of corn would go up or on the other hand, if we could get prices of property as much lower then that might work for us. We’ve stayed away from corn in the past because the large variation in price, but the recent decrease in corn land values, we’ve begun looking at some of those properties, but don’t expect us to do a lot. Our sweet spot is vegetables, berries, and we don’t grow a lot of those out in inter-land but you do grow a lot of potatoes, and onions and peppers and those kind of things. So, we will see, just like our Nebraska acquisition, you should see us in that area more often. As most people know, we farmed fresh fruits and vegetables in farms have avoided investing in heavily farmland that grows traditional commodity crops. Less than 10% of the total value of our portfolio is invested in farmland that would grow corn, soybean, and the major reason again is we believe investing in farmland growing crops that compete to healthy lifestyle such as fruits, vegetables and nuts is where we should be. According to the USDA, 92% of the corn acreage, 94% of soybean and these two crops are very interesting in the – most of the GMO varieties, and more than 90% of our portfolio is not invested in anything to relate it with GMO. So it’s got a 100% on the berries and vegetable side. So the new GMO labeling requirements that are coming out, they are on the horizon now, we think that farmlands that is GMO-oriented is going to be much less desirable and the GMO free farmland is growing fruits and vegetables and nuts that’s going to be outperforming all of the farmland marketplace that are out there today, both cash returns and long-term value appreciation. As it comes to a real estate company, our responsibility to be in the know about these marketplace and we take pride of having built the foundation for a company across all of these healthy sectors and the agricultural industry. Looking at the economy, there is still lots of things out there that give us haul. The economic outlook for produce growing farmland, I think has performed extremely well over the last 10 plus years compared to other asset classes and farmland has provided investors with a safe payment during the recent turbulence in the financial marketplace. You didn’t see the prices of farmland go down during those periods of time. And this is also evidenced by the increase in prices of fruits and vegetables that we are seeing at the grocery store and most of all, farmland has historically been an excellent hedge against inflation. Again the thesis for this company is very simple, there are more people in the world every year, people have to eat, so they need farmland. Farmers need farmland to grow food, I often reminded that there is some greenhouses out there and when I say this, I am telling you we will all starve to death if we have to produce all of our food through greenhouses. It’s just a tiny amount of food that’s grown in greenhouses. It’s a nice idea. It’s just not going to compete with farmland in terms of feeding the world. Farmland today is being converted to non-farm uses that took the huge pressure on the existing farmland to grow the food because you have farmland going away and at the same time the existing farmland is not growing more food. It’s growing the same amount or maybe a little more. There is no replenishment for farmland and those areas that we are in. There is no more trees to cut down to turn into farmland where our farms are. So, from that perspective, if you just don’t see any new farms coming along much like you would in the real estate industry where you know you have a very profitable apartment building in a certain area, you can bet somebody is trying to build another apartment building right next to it. The buying power of the dollar continues to decrease and the government continues to print more and more money. We are up to $19 trillion that we owe, so they keep printing to stay off the inevitable which is one day we have to pay back that money. And that will be a coming event, just can’t keep increasing the debt load out there. Farmland is becoming more valuable every year and I think it’s due to such a limited supply and it’s also due to the fact that more money is being printed. Increase in our monthly cash distributions, we’ve increased it twice this year. We had a 33% increase since the beginning of the year. In October, the Board voted to maintain the monthly cash distribution of $0.04 per common share per month before the quarter for each of the months in the quarter. As of today, we made 33 consecutive monthly distributions to shareholders. And we’re projecting strong production of income over the rest of 2016 and if our expectations are met, I hope we will be able to increase the dividend again in the future. As the largest shareholder of the company, I am working hard to increase distribution, I like dividends as much as anybody else out there. With the stock price around $9.26, the distribution run rate is above 5%. It’s higher than all of the entire index of the REIT index currently trading at about 4.5% these days. So, as a result, we are in that zone and these writers who write about farmland REITs and all REITs fro that matter, always talk about how the stock has not grown, but they forget that we pay out all of our income in the form of dividends and never seem to count the dividends that we paid out. Since the IPO in 2013, we’ve paid out $2.24 per share, and we will keep rolling along and paying that out. So, please remember purchasing this stock is a more long-term investment in farmlands. It is in part of an asset class, just like gold except that it has an active investment with cash flow to investors. We always like to point out that Warren Buffet’s comment that he would rather own all the farmland in the U.S. than all the gold in the world. And his son is a large owner of farmland out in the Midwest and we agree with Warren on this. We expect inflation of food to be strong and that will push up the value of farmland that we own. That’s our business model and it seems to be working. I look at this farmland REIT as a way to hedge against inflation, and as food prices and other inflation aspects and they are commonly, I think it’s better than gold. All those looking for an asset that does not correlate to the stock market, this is it. And now, we’ll have some questions from our loyal stockholders and some of the analysts. So operator, if you’ll come on and get us to questions?

[Operator Instructions] Our first question comes from John Roberts with Hilliard Lyons. Your line is open.

Morning, David.

Good morning, John.

This is more a high-level strategic question. Lewis, addressed this to some degree, but given the stock price - I am sure you don't want to be issuing stock at these levels given as dilutive as it would be to asset value. And you are coming up against, sort of the limit of your ability to add debt. Do you see strategically, if the stock stays here more operating the company just to generate the best possible outcome from the existing properties, rather than to continue leveraging up, and potentially causes some risk on that side of things?

Sure, we look at it everyday, trying to figure out which way to go. Obviously, if you could put the money to work at a very high rate, which is not exactly what we can do, you’d raise money at this price. We do have an ATM program working for us. We haven’t done much, we sold maybe, 2000 shares to-date. So, we are not really in that marketplace and I think the next thing we need to look at is, where we go in terms of the equity side and the debt side, we will spend more time on that and see what we do. But you are right, maybe the right thing to do if we have to is just sit and let the increase in rents continue to go up and pass that on to shareholders. I hate to do that but tell on your inside people that are working on this go increase your golf game, but we don’t want to do that. So, we are working hard to figure out what’s the next round for us. Some people had mentioned we should do some preferred stock. We haven’t looked at that very close, but that’s another option. I don’t want to get too far out there on the leverage and as you know, I am not a great believer in leverage, but this asset does have some stability beyond what you would find in the normal real estate marketplace and as a result of that, I feel more comfortable about leveraging this up with mortgages. I mean, if you kind of mortgage to a real fixed rate long-term and you got your rents going up, it’s a good multiplier. So, we are doing the numbers and I don’t have a good answer for you today, John.

Right, thanks, David.

Okay, we have another question?

Our next question comes from Amit Nihalani with Oppenheimer. Your line is open.

Hi, good morning. I'd like to know, if you could provide what the CapEx run rate is going forward? And if there is any additional CapEx to model out for drilling and so on?

Yes, you should remember two things about CapEx, most of the time when we have CapEx, we actually increase the rent to the farmer for that. So it’s not typical CapEx where it’s just shot at the ground or into a building and you don’t get anymore rents for it. So from that standpoint, it’s a little bit different. And I would say, maybe we spend $1 million or so every year in terms of CapEx. It’s just an ongoing thing. There is a well here or something over there that we have to do, but it’s not a lot and you should expect it to be anything like you would see in – say an office building, CapEx model or industrial REIT cap model. How much will we spend in that Lewis?

It varies right now, because some of the properties we agreed upon acquisitions we’ve improved the property and then increased the rent thereafter. But, Amit, if you take a look at our commitment and you see, footnote you will see a lot of operating obligations that we have detailed there. And most – everything that we have listed in the footnote there should be completed by December of 2016. So, it’s hard to say a run rate right now, because we have a lot of one-off projects going on, but, after December 2016, these should start to normalize a bit.

Got it, and could you provide some more color on the pipeline? For example, what the expected cap rate is, the type of assets and how you expect to finance it?

Yes, most of that – if you look at the cap rates, this business has been running on the same cap rate for as long as I’ve been in it and I talk to some of the appraisers that go back into the 30s and your cap rates are running in the 5% to 6% rate right now on the things that we are looking at, but you end up, if you are doing, say, tomatoes and water melon, you are going to get a higher cap rate than if you are doing strawberries. And so, the cap rates do vary by crops, by farms and by a lot of different things. But if you use the cap rate in just that, I am going to assume it’s going to be 5.5%, you’d probably be okay. Every now and then as you mentioned, as we mentioned the almond farm is going to be at a lower start rate because we are putting money into the ground and you got to get the trees up and running in terms of producing almonds. So as a result, that one starts out a little lower, but it will have a much deeper period on it over time. And all of these are going up by a rate of 2%, 3% per year, but every two to three years, we go in and determine that rates have gone, I mean, rates have gone up, but the value of the properties have gone up and therefore if you use the same cap rate, let’s say 5.5% on a higher number, you are able to raise the rents to that number and this is pretty standard across the United States. If you are in the Midwest doing corn for example, just to use that as the first example, corn would be rented once and then, I mean, per year. And so, every year, the negotiations go on between the farmer and the holder of that property. It’s a little different out west and down in Florida, you are normally doing two and three year rents with 2% to 3% bumps every year and then, you are going in and sampling the marketplace and coming to an agreement of what the new rent should be. So this is a different business model than you see in an apartment rent. Although an apartment, you are obviously renting new apartments and people are leaving and coming and so the rates did move up, but it’s different in the sense that, you are sort of locking people in for two to three years, that they do that in apartments. But certainly different from office rents, triple net rents. It really is a triple net deal, but at the same time it’s short-term duration in the sense that we might sign a 10 year lease but have the transaction re-negotiated every three years just based on the model that we put together.

Great, thank you.

Do you have another question?

Yes, like what type of farmland specifically is in the pipeline right now? And, how you expect to finance it?

Yes, we’ve got a lot of stuff that we are looking at and all of the things we’ve got a number of farms that are in potatoes, potatoes if you go into the part of the grocery store, potatoes are probably one of the largest areas in the grocery store in a sense that they pump out a lot with the different others in terms of the amount of throughput that’s going through the stores. It’s a staple obviously, so we like that area. We’ve got some peppers that we are doing, we’ve got – and some of these are in tomatoes and we’ve got one water melon and these are all things that are going to have good rates to them. We do have a number of things that are coming along in the berry area. So, you look – I hate to mention these, because, I think to mention these kinds of things that the deal falls through and so I’ve got to replace it with something else. So just generally speaking, if you are in the produce section of your grocery store, that’s what we are looking for. Now, some of these farms, even strawberry farms during the interim period will plant lettuce and some of them will plant barley, some of the farms that are in potatoes will go to alfalfa for a short period of time. These are all rotational crops. They go back and forth. So there is no one crop that’s on one property for ever. Yes, every year, they may plant strawberries, but in the interim they will plant barley and it’s just a way of farming that goes on in everywhere in the world. Any other questions?

That's it. Thank you.

Well, the financing part of this is, all related to three of four very aggressive lenders in the business. The mortgages come from these government-related industry entities such as Farm Credit, and they use the ability to sell-off the loans at very, very low rates because suppose to live the guarantee, although they are not correctly, you got Farmer Mac, who is another, it’s a public company. But at the same time, they are having tremendous volume of financing farms and then we deal with MetLife who is the largest mortgage lender in the United States and maybe the world, but in the United States. We have a very large credit line with them. We’ve dealt with others over the years. But none of them standout the way that those three do. So, those would be the preferred way of going. We may find somebody else that we haven’t done. We haven’t done any of that today.

Our next question comes from Rob Stevenson with Janney. Your line is open.

Thanks. Good morning. David, and Lewis, can you just talk a little bit about the pricing recently on some of the Farmer Mac and some of these other deadlines, I mean, have you heard or seen anything? I know it's probably a little too soon. But you've had some disruption or some people talking about what's going on with Freddie Mac. Any of that flowing its way through to Farmer Mac and any of the other sort of capital sources you’ve seen any sort of bump up in rates or lack of availability on any of the financing?

We have actually seen a slight decrease in rates from the previous quarter. I mean, you know that that will continue especially with the meeting upcoming in December, but rates continue to be favorable and there don’t seem – we haven't experienced any restrictions on lending from the lenders that we have dealt with.

Yes, in fact, it’s been very nice because they’ve all been relatively aggressive in terms of looking for transactions and we enjoy that and getting berry a little late. So, at this point in time, the farmers of the United States, the whole Midwest particularly is very aggressive in terms of locking Congress to get things. They got a very nice farm bill through over the last time which have been a year and a half, but that was passed and what has happened that’s interesting on the farming side it used to be very heavily subsidized and so a farmer would get paid to do certain things. They don’t do that anymore, they’ve now gone to an insurance model whereby the farmer can buy insurance and the smaller farmers normally do that and pretty much it will get you to breakeven and even if your corn doesn’t perform very well, you can live to another day to farm again because you get most of your money back. And that’s going to stabilize the food production in the United States, I think dramatically, because it used to be some of the smaller farmers would blow up and do lot of business. And I think that’s going to be reduced with all of this insurance that’s now being written.

In terms of that insurance, I mean, is there any movements – so this quarter, you guys are doing the redevelopment of the almond in the California farms. Has there been any movement to ensure the, sort of permanent crops for more than just one year from the farmer standpoint, because, I mean obviously, if they have the first year or whatever, on strawberries or some sort of fresh produce, that basically covers you and then, they can go and plant them for the next year and it's unaffected. But in something like almonds, where it's a multi-year period to grow the trees or whatever if you are only really being protected in the first year or so, there is potential downside there. Is there programs that are coming up that are producing?

There is only in this case with the government cop insurance, meaning that the crop is insured, so you get your money there. Obviously, when you are growing trees, you insure the trees, so as the trees blow down or die from some insects, you can get paid through that insurance, you are buying that insurance as well. I think most people, maybe some of the large ones and I don’t know, the strategy of some of the really large ones like Del Monte and Dole what they are doing with regard to insurance, but I am assuming they don’t insure. They self-insure if you want to think about it that way. This is primarily for the mid-size and smaller farmers. Anytime we are with the mid-sized farmer, we are asking them and make it a condition that we get insurance. So, we are protecting ourselves, obviously it’s trees, we want to know that all the trees are being insured. So that we get paid back on that, but there really is no insurance that says, we will insure your crops for the next 20 years.

Okay. Thank you, guys.

All right. We have other questions?

Our next question comes from John Massocca with Ladenburg Thalmann. Your line is open.

Good morning, everyone.

Good morning.

Just touching again on the development deal, I know, it didn't sound like – just, is there anymore opportunities to do these kind of deals, the cap rate was very attractive? It seems like your cadence with it was kind of a one-time thing; but, is this, kind of a transaction that there are more of in the market?

Yes, they are literally hundreds of those out there. We are tiptoeing into that marketplace. Even though it’s a nice cap rate, there is development risk and so, as you develop, you have development risk, just as if you were building a building, you are building a business, a new business and so, we are tiptoeing into that business. We may do more of it. There are people out there that will finance that and so, we do have competition for those deals, but those are highly lucrative on the upside, you make an enormous amount of money when we take some farmland and convert it to really new tree or buying crops. So, yes, we will do more of that as time goes on until we get bigger, I just don’t want to make a big debt on that today.

And is that cap rate you get on that development typical of cap rates for those types of deals?

I’d say it is. I’d say it’s a very good deal for the farmer and it’s a very good deal for us, because there is some risk there. So, they are paying up for the risk and I think it will be one that you will see great benefit from and an increase in. I know on some of these questions, people are going to start asking me, well, what was the yield on the farm and you have for almond that we are going to ask and start getting into some kind of discussion about the production capacity and the sellers and all of those kind of intermediaries, because you go from, I don’t know, if you know it or not, but one of our other companies has a company that manufactures the machinery that harvest these almonds. And so, as a result, that company would hopefully make a lot more money as more almonds are grown, but that point being is that, we like the permanent side of the business and that you don’t have planting risk every year like you do in the annual crops. We like it because it’s long-term. You plant it once and you don’t have to think about it anymore. And then the other side of it is that, these trees are very long-lasting. You can get an almond tree to produce for 20, 30 years. So, it’s like a wonderful thing. Every year you get good crop of almonds, you make a lot of money. And the almond business has been extremely strong. A lot of it’s driven by almonds converted into almond milk and that is a product that has ballooned in terms of sales as against the just regular milk or coconut milk. So it’s become a very strong product out there and it’s chewing up a lot of – unintended chewing up a lot of the product in terms of that. The other side of that which is a little bit scary is that the Chinese and Asians have been eating more and more almonds. So as they become more middle-class, they are stepping up to buy almonds and that has jacked up the price dramatically, there is huge demand from Asia for almonds coming out of California. So, I think it’s a typical deal. We believe this is a typical deal. The person that we back there is a long-term farmer in that area. That family is probably been growing almonds for the last 50 years. They know everything to know about it. They’ve got other huge amounts of almond growth. So we just partnered with him and we became their real estate partner for developing new transactions and we think that family is one of the best in California for growing almonds.

And then, touching on kind of cap rates again, if you were to buy, say, permanent crops, orchard-based crops - the land on kind of, an already established basis. Are those pieces of land generally going at higher cap rates than even more like the berry and vegetable farms?

No, they are actually in the same ranges that we have and that’s why it was acceptable. So, if you found an almond orchard and you wanted to buy it, it might be slightly less, because there is less risk in it, so that you might get a 4.5 or 5 cap rate on an existing farm and that has its own risk profile and if the tree is five years old, there is less risk, if the tree is ten years old, you are starting to turn the corner and if it’s 15 or 20 years old, you are going to have the program some money and to plant trees again 25 or 30 years. So there is a lot of sinking, you need to have a sinking fund to be ready to plant those and quite frankly, a lot of the trees don’t make it that long and you will take out one tree out of, say, 10,000 that you have on the farm, you might take out one or two in the first year and then you plant new ones obviously and they would be a little behind the existing ones. And then some more will die and then as time goes on, you are replacing trees that aren’t producing as well and putting in new trees and it becomes a farm that’s rotating in and out of old trees to new trees. Other questions?

All right, that's it for me. Thanks very much.

[Operator Instructions] I am showing no further questions. I will now turn the call back over to David Gladstone for closing remarks.

All right, thank you all for calling in. And we will try to edit this down. We’ve got a pretty long presentation and we’ve done that primarily because, this is a relatively new area and new people want to learn about it. So, we will edit this back so that, Lewis and I aren’t covering the same things so many times. And that’s the end of this conference call. Thank you all for calling in.

Thank you ladies and gentlemen. That does conclude today’s conference. You may all disconnect and everyone have a great day.