Gladstone Land Corporation (LANDO) Q2 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Gladstone Land Corporation Second Quarter Earnings and June 30, 2016 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to conference over to David Gladstone. You may begin.

Thank you, and welcome to the quarterly conference call for Gladstone Land. This is David Gladstone, and thank you Nicole for that nice introduction. And thanks to all of you for coming on the line today, we appreciate you calling in; we always enjoy these times with you and hope we have a lot of good questions at the end of this presentation. We wish we had more time like this than thinking about ways to talk to you but unfortunately we don't have one, so this is your chance to ask some good questions. By the way, if you're ever in the Washington DC area, we say this every time, we're located in a nearby suburb called McLean Virginia, and if you have a chance come by and say hello, you'll see a great team that work here; we have over 60 people in the team now we manage almost $2 billion in assets across all four of our public companies. Now we're going to start with Michael LiCalsi, he is our General Counsel and Secretary; he also serves as the President of Gladstone Administration, which is the administrator for all the Gladstone funds, including this one. Michael, go ahead.

Good morning, everyone. Our report today may include forward-looking statements within the meaning of the Securities Act of 1933, and Securities Exchange Act of 1934, including those regarding the Company's future performance. 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 the Risk Factors listed in our 10-K and 10-Q that we file with the SEC and these can be found on our website www.gladstoneland.com and on the SEC's website 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, we will 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 can be used in discussing REITs. We'll also discuss core FFO or CFFO, which adjusts FFO for certain non-recurring charges such as acquisition-related costs. And adjusted FFO or AFFO, which further adjusts CFFO for certain non-cash items such as converting GAAP rents to cash rents. And we believe these metrics improve comparability of our results period-over-period. Another real estate term we will discuss is capitalization or just cap rate which is the annual overturn yield on an investment and is calculated by dividing the annual net income by the purchase price. And to stay up-to-date on the latest news involving Gladstone Land and our other related publically funds, please follow us on Twitter; username GladstoneComps and Facebook, keywords, The Gladstone Companies; and please go to our general website to see more information about this company and the other our affiliated publicly traded funds at www.gladstone.com. Now today's reports from our President and CFO will be an overview of our operations and performance. So we encourage everyone to read yesterday's press release and Form 10-Q filing which include a wealth of information for our investors, and you can find them all at our website, www.gladstoneland.com. Now, I will turn the presentation back to our President, David Gladstone.

Okay. Thank you, Michael that was good information for everybody. As you saw from the filing yesterday, 2016 continues to be a strong year for this company but before we get to results I was like to give a brief overview of the nature of our business and the overall market environment. Our business consists solely of owning high quality and I want to emphasize that over and over again, high quality farm landing and leasing at what we consider top tier farmers. We don't farm any of the farm land ourselves and thus we don't take direct farming risks, and many of the farms that we rent out -- these farm land by crop insurance are from the Federal Government that protects them against potential losses and by the way indirectly protect us and our rents. The farmers release their farms too are usually in the top 20% of the largest and best farmers in any of the farming regions that we're in, and we generally prefer to keep the same farming group of farmer on the property for as long as possible as they tend to know the nuances of operating a particular farm. Our objective is to be the long-term real estate partner for all of our farmers so they know that they have the farm for the long-term. Most of our farms are located where farmers are able to grow high value annual row crops such as berries and vegetables, that's where our investment focus continues to be. However, over the past year we've taken advantage of some of the favorable circumstances in the Midwest where we found some excellent investment opportunities. We also further our expansion into permanent crops such as Ahmanson, pistachios, orchards out west, but you should expect the large majority of our farmland portfolio to continue to be leased to farmers who grow fresh produce and sometimes investment in permanent crops such as nuts and berries. Currently about 90% of our total crops -- maybe more than that where our revenue comes from farms that are growing foods that you can find in either of the produce section or the nut section of your local grocery store. We consider these foods to be among the healthiest type foods and we're seeing a growing trend toward organic in some of these sectors as well. We're investing in some other areas for diversification but these healthier foods are the areas we prefer. Almost all the geographic regions where our farms are located continue to experience steady appreciation in both, the underlying land values and the rents charged on the lands, and this is partly because we only purchase irrigated crop land with a great soil and plenty of access to water that allows the farmers to grow variety of high value crops. Farmland regions will sometimes have shortly of periods where it decrease in value but they almost always rebound and continue their upward trend over the long-term. We now own 23,857 acres, there 48 different farms in 7 states in the United States, and the acreage we own was among the highest quality and most extensive farmland in the United States. We also own some cooling facilities, packing houses, and processing facilities, as well as several other structures that are part of the farming operation on these farms. We have a couple of different lease structures that we offer our tenants. We've been extremely successful with our leasing strategy; it has been able to average an increase in rental over 16% on all the lease renewals over the past three years, all without incurring anything downtime on the properties. The trend we are seeing is a steady decrease in the number of farms in our growing areas for high value growing regions and this is being sold and -- these farms are being sold or converted into suburban uses. And if I had to point to one thing that's driving up rental rates, I'd say it's the amount of farms in the regions where our farms are very finite, there is no farms being developed and most of these high value growing areas because arable land is currently being farmed and there is just nothing there that you can convert into other uses such as -- there is nothing there that you can convert into farmland, they are all in uses of such things as housing schools, offices, shopping centers, factories; they've all been converted. California alone is losing about 100,000 acres of farmland per year, this causes the farms we own to be highly sought after and they've been rented for decades without being vacant. And speaking of California, we continue to closely monitor the long-term drought situation there due to the heavy rainfall received in much of California this past winter along with a heavy snow packs accumulated in the mountains which will melt this summer and provide water to the farmers. There has been a dramatic improvement in the water availability for many of the farms in California, and the Governor of California has now lifted the water restrictions. As a note, the agricultural business in California had its best year ever in 2015 and we think 2016 is going to be a good year as well. In our due diligence space, and I can't stress this enough; we always spend a lot of time determining water conditions on each of the farms to make sure that the farm will have plenty of water for the long-term. We want to know that water availability is sufficient enough to withstand situations such as what's been going on in California for the last four years. We only select properties that had the best irrigation and overall water availability in a place in time when we bought a farm, and partly because of all the time and effort we spend on the front end, our California farms continue to have significant access to water through on-site wells or city turn outs; as has been the case throughout the drought. For example; cities like Watsonville, Oxon Art, and several others have built-in water plants and purify the water from the city so that can be used in farming. We have turnouts on our farms and we can use either the water for -- we can use that water for irrigation but we can also use the wells that we have. Water access and availability is another factor driving out rent rates and farmers are following land where water is too difficult and expensive to obtain, and driving up the rent prices in land in good wells and multiple sources of water. So we're very conscious of the water needs. Now some details about recent activity; during the quarter we purchased a pistachio orchard in California, just over $15 million, the 10-year lease on the farm requires a minimum cash rent that will give us a 5% current yield and the lease also includes a variable part of it which allows us to share in a percentage of the revenue on the farm. So we should do better than 5% but at least we have that as our minimum. The farm has three strong wells on-site getting access to plenty of water. Since the quarter end, we also acquired a vegetable farm in Florida for $5 million with a 7-year lease, current rent that provides about 5% yield on our investment and overall as they call it in the business straight line, an accounting yield will be 5.5%, lots of good water in Florida, nobody worries much about water and Florida. These returns are before placing the mortgage on the property, we usually can mortgage the property up to 60% or so and with mortgage rates being very low today, 2.5% to 3.2%, you can see how we make a lot of money on these properties. Also, we have several additional farms under either signed purchase agreement or non-binding letter of intent that we can work on, that's about $60 million worth of things that we're looking at; we're hopeful of closing on these acquisitions due in the second half of 2016. However, we're still continuing on diligence process on these properties and while I think we'll get all of these done, there is no guarantee that any of them will close. We renewed one lease last quarter at an annual rent increase of 18%. We only have one more agricultural lease that expires this year, we're working on that. That one negotiation is current and expects to be able to renew the lease and increase the rent without incurring any downtime. Combined with the 2015 lease renewals which resulted in average rental increase of over 15%, we believe our 2016 renewals underscore the trend that continues in the areas where our farms are located; and that is that demand for prime farmland rents and that they -- it's just continuing to increase. This sentiment be shared by farmers in these areas as well, we all know that rents have to go up because there is a limited supply of land. Well, that's enough for the business discussion let's get into some numbers and for that our Chief Financial Officer, Lewis Parrish, is going to talk about the numbers. Lewis?

Thank you, David. Good morning, everybody. I'll begin by discussing our balance sheet. During the second quarter, our total assets increased by about $18 million or 7%, mainly due to new farm acquisitions which refunded primarily with new fixed rate debt. In connection with the purchase of the pistachio farm in California, we obtained an additional $9 million of new long-term borrowings and an expected effective interest rate of 2.79% which is fixed for the next five years. We borrowed these funds from a new source expanding our lending base to four different lenders now. In connection with the Florida farm, we acquired subsequent a quarter end, we obtain an additional $3 million of new long term borrowing an expected effective interest rate of 3.17% which is fixed for the next seven years. From an overall leverage standpoint our loan-to-value ratio based on the fair value of our portfolio was just under 54% of June 30 and we are comfortable of this level given the relatively low risk of farmland as an overall asset class. While interest rate volatility remains a concern as of June 30 about 91% of our total indebtedness was a fixed rate, and on a weighted average basis these rates are fixed for another four years out. We believe we are pretty well protected against any near term interest rate heights. The weighted average effective interest rate on these borrowings as of June 30 was 3.11%, down from 3.35% a year ago. We continue to decrease our overall borrowing costs and further diversifying our lending base has provided us with even greater access to cheaper sources of capital. And regarding upcoming debt maturities only 1.3% of our total debt outstanding about $2.5 million is coming due throughout the remainder of 2016. And now move on to our operative results. First I not the net income for the quarter was approximately $0.1 million or $0.01 per share. For the fifth consecutive quarter we continued to grow our adjusted FSO has increased by 16% over the prior quarter. Our operating revenues increased by over 15% from last quarter primarily due to our recent acquisitions, and additional income earned on capital improvements made on some of our existing farms. I also like to point out that when compared to the same quarter last year our rental revenues on the same property basis increased by 4% and that was mostly due to leases on those properties being renewed a higher rate. Going into detail on the expense side; core operating expenses which strips out depreciation and amortization expense, acquisition later expenses and any filing fee increased by about 7% from last quarter. This is mainly because of a performance based filing fee aren't firefighter during the current quarter which fee was not earned in the prior quarter. This fee in due to our pre incentive fee FFO surpassing a required -- weight. Just a quick note on our intercompany fees are measured fee is calculated based on the cost basis of company stockholder’s equity as it appears on our balance sheet. In our incentive fee is based on FFO is defined by [16:29]. So neither of this fee recalculation decides for net asset value which will be discussing in just a bit. Continuing on with our expenses; if you exclude the incentive fee for this quarter, our core offerings expenses actually decreased by 6% from last quarter or by about $79,000. Probably speaking the main drivers behind this decrease was our professional fees, a decrease in stock correlated senses and lower property operating expensive, mainly property taxes. We did record about $64,000 in bad debt expense included in G&A expense line item, due to a lease we expected terminate early on one of our Florida properties. We anticipate terminating this lease and releasing the property to a new tenant during Q3, however there is no guarantee that either of these events will happen. Moving on to our per share numbers, per share earnings from adjusted FFO for the quarter were $0.136 fully covering our distributions of $0.124 per share, this is the third consecutive quarter in which we've covered our dividend with AFFO and we expect this to continue to be the case in the future. Further as our operator expenses have begun to stabilize over the past several quarters, we expect additional revenues earn on future acquisitions and lease renewals to increase our margins, thus enhancing the coverage of ability provided by AFFO. Now move on the net asset value; during the quarter we updated the valuations on nine of our farms, six of which provided internally and three of which we have praised by independent third party appraisers. And aggregate these farms increased by about $3.6 million over their prior valuations. And a majority of his appreciation over 90% of it came from valuations as determined by appraisals. As of June 30, 2016 our farms are valued at about $337 million, with 65% of this value based on either appraisals or the actual purchase price. In 35% of total value about $119 million was determined internally. And of the amount valued internally 95% of it or about $113 million is supported by appraisals perform between 13 and 41 months ago but the difference of $6 million representing the increases in value since that time. Basically these valuations are net asset value-per-share at June 30 was $13.68 which is down by about 1.4% from last quarter. There are two main drivers behind this decrease, first we encourage about $3.7 million or $0.34 per share of additional capital improvements on our existing properties during the quarter, which costs have not yet been included as a corresponding increase in the property fair values. Most of the improvements were 40 almond orchid development project are very mountain property. We expect this project we finished during Q3 at which time will have a reappraised we expect we capture a significant portion if not all, of these costs to an increase in the property's fair value. The second driver was a drop in long term U.S. treasury rates between March 31 and June 30, which led to an increase in the fair value of our fixed rate borrowing. Our leased reversed once rates begin writing again. While there may be some quarter-over-quarter volatility, over the long term we expect our net asset value to trends upwards as the value of our farm and portfolio depreciates, due in part to increasing rents and the neighboring farms increasing price. Turning to liquidity; we currently have about $8 million buying power in our current buying power for straight cash acquisitions is about $20 million. However, this figure does not effect in our ability to issue new OP unites as consideration for purchases. We recently expanded the size of our facility by 67%, increasing it to $125 million. And we're also finalizing discussions with another lender to modify and expand our existing facility with them which should result in additional borrowing availability for us. While there is no guarantee that anything will materialize, we expect to be able to finalize this during Q3. So we have plenty of room to leverage up and our borrowing facilities should be placed new properties to them. And we also have about $29 million available under our ATM program should our share price reach an attractive level. We're looking forward to being very active during the second half of 2016 and we expect that with the stabilization of our operating expenses, you'll see additional revenues arising from new acquisitions and lease renewals have a more direct and positive impact on our bottom line. And with that I'll turn the program back over to David.

Very nice report Lewis, the Company just continues to get better every quarter as we continue to execute our plans. We've invested now over $244 million in new farm assets since our IPO in 2013 and we expect to add to that figure during the remainder of 2016. Our backlog of possible farm purchases remains very strong, we currently have over $60 million of farms that are either under signed purchase agreement or signed letter of intent, and we expect all of these acquisitions to close in the second half of the year, and we currently have the ability to close on all of them without a need for additional capital. As some of the purchases will involve issuance of OPI units as consideration, that's a very tax advantageous to the farmers who are selling. As you know, with the increase in the portfolio comes greater diversification and that protects us all, investors, and yours truly, as big investor that we expect better earnings out of it as well. As most people know, our fund specializes in farms that grow fresh fruits and vegetables, and now a few nut farms and we have historically avoided investing heavily in farmland that grows traditional commodity crops such as corn and wheat. One reason for this is we believe investing in farmland growing crops that contribute to a healthier lifestyle such as fruits, and vegetables, and nuts. Now that's one reason we like that area is that it has strong growth, in addition, more than 90% of the rents from our farms is farms that do not have GMO crops on them; and we are continuing expanding our ownership of organic farmland through both new acquisitions -- and like some of the farms are being converted from existing farms to organic ground. However, corn prices and corn land values continue at depressed levels; we've begun to look at some in the Midwest properties that grow corn as long as they are complementary by other -- complemented by other crops on a portion of the property like our recent acquisition in Nebraska and Colorado. As many of you know, rents in many parts of the Midwest are down anywhere from 8% to 12%. This decrease is mostly a single crop ground kind of situation such as farms that grow only corn. So far we've only bought irrigated farmland that can grow rotational crops, and multiple different kinds of crops, so that you can swap out if you need to and we're confident that our farms are insulated from most of the priced and rental volatility that you'd see coming out of the Midwest. It's that unpredictable part of the grain prices that really gives us concern, and so as a result, we waited our farmland purchases very heavily in those that don't grow these traditional commodity crops. Currently, less than 10% of the total value of the portfolio is invested in farmland that grows corn, wheat or soybeans, and we believe it is really a good mix for the future. At this point in the farming cycle, farmers just can't make much money when they grow corn; prices are so low, as they are today. In terms of the economic outlook; generally farmland continues to perform extremely well compared with other assets. The NCREIF farmland index which currently is made up of 696 agricultural properties worth about $7.5 billion had a total annual return of 10.4% in 2015 and has averaged 14.3% over the past 10 years compared to 9.1% for the S&P. We hope to buy enough farmland and so that we'll be exactly like the index overtime. Farmland has provided investors with a safe haven during recent turbulence in the financial marketplace, as both land prices and food prices, especially for a fresh produce like we have, have continued to rise steadily. And most of all, farmland has historically been an excellent hedge against inflation. However, not all farmland is created equal; according to the Department of Agriculture farmland that grows corn is about $200 in rent per year in the Midwest whereas California farmland that grows strawberries, the rents are $3,900 per acre. So for every acre of strawberries, you need about twenty acres of corn farmland to get the same rents. The number of acres is not nearly as important as the revenue per acre; said another way someone who owns a thousand acres of corn land would receive rents of about $200 a year -- $200,000 a year. We only need 51 acres of strawberries and earn the same amount of rent. We specialize in higher rents, higher quality farms, that's what differentiates us from most of the farm owners in the United States. Over the past 19 months, we've raised our dividend three times resulting in an overall increase of 37.5% in our monthly distribution rates to shareholders. Our Board voted last month to maintain the monthly distribution of $0.418 per share for the third quarter, they will be meeting again in October to vote on the fourth quarter. They are considering whether it should be increased or not; we have to look at the revenues and how it's growing before we make that decision. Since 2013 we've made 42 consecutive monthly distributions to shareholders totaling $2.60 per share in total distributions, paying distributions their shareholders as paramount to do our business. We are as they say in the business, a dividend paying company. We are projecting good production and income growth in the rest of 2016, and if our expectations on that, we hope to be able to increase the dividend again. The largest stock -- as the largest stockholder, I'm working hard to increase the distributions, I certainly like receiving dividends as much as anybody else. Stocks currently trading at $11.33 and significantly below our net asset value, we hope our stock price will rise in the near future. If you're buying the stock today, you're getting a discount from the estimated net value of about 15% to 16%. So you're buying $13.68 in assets for $11.33; what a wonderful purchase that is. And along the way, you're getting $0.4125 cents per share per month in cash distributions of 4.3% yield today. This is higher than the average return you get from the entire REIT index today which is currently about 3.6%. In closing, please remember purchasing this stock is a really a very long-term investment in farmland. It is in part an asset investment just like gold, except that it's an active investment with cash flows to investors. We expect inflation, particularly in the food sector to be strong, and we expect the value of farmland to increase as a result expecting this to especially be true in the fresh produce sector as people in the United States are trending toward eating more healthy foods. I think of good way to look at the farmland REIT is the hedge against inflation and food prices in other areas. And for those looking for an asset that doesn't correlate to the stock market, this is certainly it. Now we'll get Nicole to come back on and we'll have some questions from our loyal stockholders and analysts who follow this wonderful company. Operator, would you please come on and tell him how to do that.

Thank you. [Operator Instructions] Our first question comes from the line of Rob Stevenson of Jenny [ph]. Your line is now open.

Good morning. Can you talk a little bit about what's going on that you're terminating the lease in Florida and releasing it?

The person there is retiring, and so we're going to find somebody -- he will stay on, he has a lease for two more years but he wants to retire. So we're getting a new tenant there.

Okay. And then you talked about $60 million of farms under contract or letters of intent with a healthy OP unit mix to that consideration. When you're issuing OP units these days, I mean where are they being issued? Are they being issued at market prices or they being issued above where the stock is currently trading, given the tax protection? Can you help frame that for us?

Yes, we usually start out at about 15% premium to the current price and try to start at that price. And sometimes we're above that, sometimes were below but that's generally where we are.

Okay. And then just in terms of that $60 million. I mean is that -- how much of that is being governed by what you see out there that you're finding attractive from a valuation standpoint and from actual farm standpoint versus the restrictions on you from a capital perspective? I mean, if your stock price was higher -- than $60 million go to $100 million in a pipeline to $200 million in a pipeline? I mean is it -- how scalable is that today given your acquisitions people on the ground and what you're seeing from availability and attractiveness from a pricing standpoint on assets that you want to own?

We'll think about it this way as a funnel and at the top of the funnel there are really -- I don't know, $800 million worth of stuff that we have that's coming through the funnel. It's come down to this point in time where there is $60 million that we feel pretty comfortable about -- that we're going to close. And you're exactly right, if somebody -- if some of these farmers think their farm is worth more than we do and the yield is pushed down to 2% or 3% in some cases; now we were looking at some farms in Delmarva which is really near Baltimore; there are too many gentleman farmers over there; so farm prices go for very steep amounts and very low yields. So you're right on target; if we somehow could have a stock price that was yielding 1% because of -- obviously, we could sell a lot of stock and buy a lot of these very high priced farms. Most of the farms we look at are not going to fit our basic requirements which are high quality, and then high quality tenants. And so as a result we are very peculiar at this point in time; and I know I've said this to you before but we cannot afford at this point in time to have farms that needs a lot of work; we're not out there in the marketplace trying to redo things, there are lot of opportunities for us to buy farms that needs lots of work done to them in order to make them -- and we do some of that; we'll buy a farm and drill a well or drill two wells, the wells that we probably drilled -- I don't know, 20 or 30 wells in our history. So we know how to do that and it makes the farm much more valuable. So yes, if you gave me a very high priced stock; sure, I could buy some properties that I can't afford to buy now because the yield is far too low. And so that's one of the governing factors but I'd say that's not the big governing factor; the major driver governing factor is that we want high quality farms as opposed to farms that would be sort of in the middle or maybe even lower part of the farms out there today.

Okay, and then just -- Lewis; you said about the dry powder, there was 8 million and then there was a 20 million number, which one of those is the total buying power? Is the 8 equity and the 20 the total buying power?

20 is the buying power, yes.

Okay, perfect. Thanks guys.

Okay, Next question? [Operator Instructions] And I'm showing no further questions at this time. I'd like to hand the call back over to David for any closing remarks?

Alright, we thank you all for calling in. We wish we had more questions because those are more fun but as a result we'll have to hold out until next quarter. So thank you all for calling and that's the end of this conference call.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day everyone.