Gladstone Land Corporation (LANDO) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the Gladstone Land Corporation First Quarter 2017 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the floor over to David Gladstone. Please go ahead, sir.

All right. Thank you, Karen. Nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land and thank you all for calling in today. We always appreciate talking to you and have time to listen to presentation and ask good questions. We want to work together and please you by doing good job plus get some good questions. And please feel free when you come to visit us here in the Washington, D.C. area, we're located in nearby suburban McLean, Virginia. Just stop by and say hello. You will see some of the people here. We have about 65 members of the team now. And we manage a little over $2 billion in assets across these 4 public companies. One of them obviously is this. We always start out with Michael LiCalsi, he is our General Counsel and Secretary and he also serves as President of Gladstone Administration which is the administrator of all the Gladstone funds. So Michael, take it away.

Good morning, everyone. Today's report may include forward-looking statements within the meaning of the Securities Act of 1933, Securities Exchange Act of 1934, including those with regard to the company's future performance and forward-looking statements involve certain risks and uncertainties that are based on our current plan which we believe to be reasonable. There are many factors that may cause our actual results to be materially different from any future results expressed or implied in these forward-looking statements, including all risk factors listed on our forms 10-Q and 10-Q that we filed with the SEC. These all can be found in our website 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 investment trust, we will also discuss funds from operations or FFO. FFO is a non-GAAP accounting term defined as net income, excluding the gains and losses from the sale of real estate and any impairment losses plus depreciation and amortization of real estate assets. The National Association of REITs is endorsed FFO as one of the non-GAAP standards that can be used in discussion of REITs. We may also discuss 2 other FFO measures, #1, core FFO or CFFO which adjusts FFO for certain nonrecurring charges, such as acquisition-related costs. And the second is adjusted FFO or AFFO which further adjusts CFFO for certain noncash items, such as converting GAAP rents to cash rents and we believe these metrics improve comparability of our results period-over-period. And to stay up to date on the latest news involving Gladstone Land and it's other affiliated public funds, please follow us on Twitter, username GladstoneComps and on Facebook keywords, the Gladstone Companies. Please also go to our general website to see more information about our companies, that's 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 and again those can be found on our website, gladstoneland.com. Now I'll turn the presentation back to our President, David Gladstone.

Okay, Michael, thank you. Thank you, you've gotten us up to date on all of the things that we need to do at the beginning. By the way, we started off 2017 with a big bang by closing our largest acquisition. This acquisition is a large organic farm in Florida that we acquired for $54 million. But before I get into the details of these events, I would like to just give a brief overview of the nature of our business and the overall market environment. All of you know, most of you know, our business consists of owning high-quality farm land that is leased to top-tier farmers. We don't farm any of the land ourselves and thus don't take any direct marketing risk in terms of farms not producing as well as they should. We pride ourselves on only acquiring the best farms and leasing them to the best farmers. Our investment focus is farms located in farmable -- in farm areas able to grow a variety of high value row crops, such as berries or vegetables. We generally only purchase irrigated cropland, with great soil and plenty of access to water. And partially because of this, almost all of the geographic regions where our farms are located continue to experience steady appreciation in both underlying land value as well as the rent charges on those. And the farmers we lease our farms to are typically the largest and best farmers in any of the growing regions that we're in. We prefer to keep the same farmer on the property for as long as possible because they begin to know all the nuances of operating on that particular farm. And our objective is to be the long term real estate partner of all of these farmers that we deal with so long as they know they have the farm, I think they feel good having us as their partner. A large majority of our farmland portfolio is leased to farmers to grow fresh produce that you should expect that to continue. Currently about 90% of our total crop revenues come from farms that are growing food you would find in either the produce section or the nut section of your local grocery store. We consider these foods to be among the healthiest type of foods and that's the area that we're in. We're seeing a growing trend toward organic and other sectors and I'd like to point out that currently about 35% of the fresh produce acreage that we have is either organic or is in transition to organic. We currently own about 54,000 acres in 59 farms, 7 different states across the United States, valued at about $160 million and the acreage we own is among the highest quality farms in the strongest rental markets in the United States. We also own some farm building, such as a cooling facility or packing house and we're able to earn some rents on those. But the majority of our money is put into the farms themselves. The trend we continue to see in growing regions is the steady decrease in the number of farms as they're being sold or converted to suburban usage. And if I had to point to one thing that's driving up rental rates, I'd say it's this. The amount of farms in these regions is relatively finite as there's no new farms being developed, that is there are no trees to cut down and no more land that can be converted into farms. All of these arable land is already being farmed. So as you fly over some of these areas, you see nothing but farms or houses or office buildings. But now it's being converted to other usage, such as housing, school, factories. And once we get converted into something like that, it never really goes back to farming. California, for example, if you look at the stats that come out of the state has been losing about hundred thousand acres of farmland every couple of years. This causes the farms we own to be highly sought-after. And they have been rented for decades and have never been vacant. Somebody has always been farming them. Water access and availability is another factor driving up land prices. Farmers are following land that has water and it's not too difficult or expensive to obtain. They are driving up rents and prices of land with good wells and multiple sources of water. And just so you know, whenever we buy a farm, we're always spending a huge amount of time and effort and due diligence simply to determine the water conditions to make sure the farms have plenty of water and water for long term. We want to know that the water availability is sufficient enough to withstand situations such as what happened to California over the last few years. Of note, we didn't see any reduction in the produce of our farms in California during that drought and today just so you know, the snow pack in the mountains and the reservoirs are so full, that the estimate is that there's probably a 2-year of supply of water. So the take away from all of this part of our discussion is our business strategy to own farms that grow vegetables, berries and we have a few nut trees that are part of the portfolio that we own. We have not investing in grain crops like corn, wheat and soybean. Crops are having difficulty because there is too much grain in the markets these days. Storage facilities in the Midwest, for example, are packed to the gills and perhaps if this rain that has been hitting the Midwest will reduce the prices because maybe some of the crops won't come in as large as before. Because the world markets are awash in grains, grain prices are too low to make a profit -- big profit in the United States. As long as this is going on, we'll stay out until the price of crops goes up and the price of farmland goes up and then -- goes down, I'm sorry and then we will have a chance to buy a lot of those farms. I think this is coming. And we have been watching some of the farmland prices in the auctions out in the Midwest. We're not quite ready to jump in, but it won't be long, I don't think. Now about recent activity. During the quarter, we acquired that farm I mentioned, 3,700 acres in Florida that grows organic vegetables. Initial cash yield on acquisition is about 5% and the straight land yield is about 5.3%. It's a beautiful farm. It's been certified organic by the U.S.DA and is leased to one of the strongest growers in the Southeast, maybe in the United States. They're growing fresh green beans and a lot of sweet peppers. They have the red peppers, the green ones, the yellow ones, you can eat them raw right out of the plastic bag they come in and are really a delight. Across the portfolio, we now own farms across 15 different growing regions that grow over 35 different row crops and they lease -- and those farms are leased to 40 different tenants, all of whom are unrelated to us. So these are independent farmers. This is important to us. We believe that well diversified portfolio of farms with different crops provide an added security to our investors. And we have 9 leases expiring in the second half of 2017 and these leases make up about 10% of our total annualized revenue. We expect to have all of these leases renewed over the next few months, without incurring any downtime on the farms. And while we can't guarantee anything with regard to the renewals, we expect the rental rates to remain strong and we will publish the results somewhere down the road, maybe in July when we talk again. Overall, the demand for prime farm land in berries and vegetables remains extremely strong in areas where our farms are located. This is mostly in the West or in the East like Florida, few farms in the Midwest growing non-grain crops. During the quarter, we also completed an offering of our common stock and raised about $20 million in net proceeds. The offering price was below our net asset value, something I don't like to do. But we did a small offering for that main reason that the price was so far under net asset value. However, we identified quite a few farms and we believe they will pay us a very nice rents and it can be passed through the shareholders. We need an addition of capital to complete these acquisitions and we expect several of these to be completed over the next couple of months. So please stay tuned. We will show you those farms as they come on board. Beyond the farms that are in the closing process, our backlog of farms is very plentiful right now. That's really enough of the business side of the business, so I'm going to turn it over to our Chief Financial Officer, Lewis Parrish and he will tell us about the numbers. Lewis?

Okay. Good morning, everybody. I will begin by discussing our balance sheet. During the first quarter, our total assets increased by about $53 million or 16% mainly due to a new farm acquisition which was ultimately funded through a combination of new fixed-rate borrowings and our recent common offering. During the quarter, we incurred an additional $32 million of new long term borrowings at an average interest rate of 3.3% and these rates are fixed for the next 3 to 7 years. We also raised about $20 million in an overnight common offering. These proceeds were initially used to pay down our line of credit, though we expect to redraw a portion of the line in connection with the upcoming acquisitions. From an overall leverage standpoint, on a fair value basis and including our term preferred stock in the debt bucket, our loan-to-value ratio was 58% at March 31. And we're comfortable at this level given the relative low risk of farmland as an overall asset class. While interest rate volatility remains a concern of ours, over 90% of our total borrowings is currently at fixed rates. And on a weighted average basis, these rates are fixed for another 7 years out, so we believe we're pretty well protected on the debt side against any near term interest-rate hikes. The overall weighted average affective interest rate on our borrowings is currently about 3.1%, down 10 basis points from a year ago. Credit remains readily available to us and we continue to be able to borrow money on favorable terms. In regarding our upcoming debt maturities, only 2% of our total debt outstanding or about $5 million is coming due over the next 12 months. Now I'll move on to our operating results. First I will note that net income for the quarter was $173,000 or about $0.015 per share. Our operating revenues increased by 17% from last quarter, primarily due to our recent acquisitions. I'd also like to point out that when compared to the same quarter last year, our rental revenues on a same property basis increased by about 6%. And that's mostly due to the leases on certain of those properties being renewed at higher rates as well as additional income earned on capital improvements made on some of our existing farms. But the point for us is that overall for our farms we're still not seeing the widespread decline of rents that you are hearing about in certain other regions of the U.S. And that's primarily due to the locations of our farms, their soil, irrigation quality, longer growing seasons and the types of crops grown on them. The increase in our operating expenses was primarily driven by a higher performance-based incentive fee earned by our adviser during the quarter as well as recording about $127,000 of what we expect to be either annual or nonrecurring expenses. Due to the timing of the annual shareholders meeting and the due dates of certain state filing and franchise fees, we expect our operating expenses to typically run slightly higher in the first quarter of each fiscal year. In addition, we wrote off certain unallocated costs related to a base registration statement we filed in 2014 that expired during the quarter. Moving on to our per-share numbers. Earnings from adjusted FFO for the quarter were $0.139 per share, representing the sixth consecutive quarter which we covered our dividend with AFFO. We expect this to continue to be the case in the future. Now we'll move on to net asset value. During the quarter, we updated the valuations on 19 of our farms, 5 of which were valued internally in accordance with our valuation policy and 14 of which we had appraised by independent third-party farm land appraisers. In aggregate, these updated valuations resulted in an increase of about $5.5 million over their prior valuations. And most of this increase, about $5 million of it came from valuations as determined by third-party appraisals. As of March 31, our farms were valued at about $461 million and 68% of its value based on either third-party appraisals or the actual purchase price. And of the $147 million valued internally, about 99% of it or $146 million is supported by third-party appraisals performed between 14 and 35 months ago. Based on these updated valuations and including the fair value of our debt, our net asset value increased by 1.8% up to $14.47 per share at March 31. This was despite the dilutive effect of our recent common stock offering. While there may be some quarter-over quarter volatility, over the long term, we expect our net asset value to trend upwards as the value of our farm land portfolio appreciates due in part to our neighboring farms increasing in price and increasing rents. Turning to liquidity. We currently have about $26 million of available funds and our current buying power for straight cash acquisitions is about $60 million. However, this figure does not factor in our ability to issue new OP units as consideration for purchases as we have done in the past. We also recently expanded the sizes of our 2 largest borrowing facilities. We have plenty of room to continue borrowing and buying new farms. And with that, I'll turn the program back over to David.

All right. That's a nice report. This company just keeps getting better every quarter as we continue to execute our plan of just steady increasing. We're selectively investing over $350 million in new farm assets since we came public in 2013 and expect to continue adding farms to that figure. Our backlog is remaining very strong. We currently have 2 farms of about $30 million under signed purchase and sale agreements. Expecting to close that later this quarter. Under the signed letters of intent, we have pretty good number, but I hate to give you numbers on that because we never know when those are going to fall out between the time that we have a letter of intent and we have a purchase agreement. We currently have the ability to close on all of these farms without a need for additional capital as some of the purchases will involve the issuance of additional OP units as consideration. However, we still continue to do the due diligence on some of these properties and there's certainly no guarantee that after the due diligence that we can't get together and close on it. As you know, an increase in the number of farms that your company owns comes -- that gives us greater diversification and protection for investors and we also expect better earnings from doing that. As most people know, our farms specialize in farms that grow fresh fruits and vegetables and historically have avoided investing in farm land that grows traditional commodity crops, such as corn and soybean and wheat. One reason is we believe in investing in farmland that grows crops that contribute to healthier lifestyles, such as fruits, vegetables and nuts. In addition, more than 90% of our portfolio is GMO-free and we're continue expanding our ownership in organic farmland through both new acquisitions and conversions of existing farms into organic ground. We like the fresh produce segment because it provides greater returns and less volatility than other crop types according to the Bureau of Labor Statistics. Fruits and vegetables segment of the -- as a category has increased at a rate of 1.7x greater than the increase in prices in the annual food CPI. So that increase allows farmers to make more money and, of course, we can charge a little higher rent. And while prices of commodity crops are more volatile and susceptible to global supply and demand, fresh produce is highly insulated from global volatility because the crops are generally grown and consumed in a very short time frame after they are harvested. It's the unpredictable nature of grain prices and other commodity crops that prevent us from weighing our farmland portfolio too heavily in the farms that grow traditional commodity crops. Currently only about 10% of the total value of our portfolio is invested in farmland growing corn, a little bit of wheat and a little bit of soybean, but we believe this is a good mix. This point in the farming cycle is just really too difficult for farmers to make much money when the corn prices are as low as they are today. But at some prices of corn farm land, there's going to be a viable alternative for us. We're just not there now. Ultimate, we believe that farmland and GMO-free crops are just healthier crops, such as fruits and vegetables and nuts and continue to outperform the overall farmland market in terms of both cash returns and long term value appreciation. As a farmland real estate company, it's our responsibility to know these marketplaces well and we take pride in having built the foundation of our company across this healthier section of agriculture industry and believe our company -- this is our core strength. In terms of economic outlook as in the general farmland -- general area farmland like ours that continues to perform extremely well compared to other asset classes. Despite some of the recent downturns in certain Midwestern grain regions, the NCREIF farmland index that has corn in it which is currently made up of about 743 agricultural properties worth about $8 billion had a total annual return of 7.1% in 2016 and has an average annual return of 13.1% over the past 10 years. That compares very favorably to 8.7% for the S&P. Farmland has provided investors for years and years with a safe haven during the turbulent times in the financial marketplace. As both land prices and food prices, especially fresh produce, have continued to rise steadily. And most of all, farmland has historically been an excellent hedge against inflation. However, not all farmland is the same, according to the Department of Agriculture. Farmland in the Midwest that's growing corn that pays about $200 per acre for rent whereas in California, farmland that grows strawberries has rent of $3,900 per acre. For every acre of strawberries and in terms of rent, you will need about 20 acres of corn farm land to get the same amount of dollars of rent. So just keep in mind, this is a key point for us. Keep in mind that the number of acres is not nearly as important as the revenue per acre. We specialize in high rent, higher quality farms and that's really the difference from us and most other farm owners in the United States. As you know, we recently raised our dividend again to $0.0435 per share per month. Over the past 28 months, we've raised our dividend 6 times resulting in an overall increase of 45% in our monthly distribution rate to shareholders over that time period. This is a reflection of the nice job our team continues to do. They achieve this by finding high-quality farmland and continues to appreciate in value paired with strong tenants who are reliable in their rent payments. In 2013, we made 51 consecutive monthly distributions to stockholders total $2.98 per share, that's since 2013. And that's the total distributions on that original stock price. Paying distributions to our shareholders is paramount to our business. And we're a dividend paying company and intend to be that way forever. We've projected good production of income growth for the rest of 2017. And if our expectations are met, we hope to be able to increase the dividend again in the near future. As our goal is to continue to increase the dividend at a rate and outpace inflation. As the largest stockholder, I'm working hard to increase your distributions and mine. I certainly like receiving dividends as much as anybody else. Our stock price is currently trading down at just a terrible price, $10.79. It's significantly below the net asset value. Thus we're hopeful our stock price will rise in the near future. So if you buy the stock today, you're getting a great discount from our estimated net asset value of about 25%. You are buying $14.47 in assets for just $10.79. It's just a wonderful purchase in today's marketplace and I certainly plan to buy some more shares myself. And along the way, you're getting $0.0435 per share per month in cash distribution or about a 4% yield. This yield is about the same as the average entire REIT index which is about 4.4% these days in terms of yield. Please remember that purchasing stock in a company like this is really a long term investment in farmland. It is in part an asset investment just like gold, except it is active investment with cash flows to the investors. We expect inflation, particularly in the food sector, to be strong. We expect values of farmland to increase as a result and we expect this to especially be true in fresh produce as people in the United States tend to be going more toward good healthy foods. I think a good way to look at our farmland REIT is a hedge against inflation in both food prices and other areas, also look for an -- if you are looking for an asset that doesn't correlate to the stock market, then this is certainly it. Now, I'll have some questions from our loyal stockholders and others who follow our wonderful company. So operator, if would come on and please give instructions on how our listeners can ask their questions.

[Operator Instructions]. Our first question comes from the line of Rob Stevenson with Janney.

You've got about 10% of your leases rolling in the reminder of '17. Could you talk about where you think those go from a rent standpoint, sort of flat, slightly down, slightly up, meaningfully up? What's the sort of thought at that point?

Well, it is awfully hard. I'd say in Florida they are going up and in California, at some of the farms we have in California, probably going to be flat or maybe a little up. But it's not a strong time to be increasing rents even though our properties are good. But I wouldn't put a lot of inflation in there for this group of leases even though I'm hopeful that we can negotiate the right numbers. We just started that. And we get a little bit of pushback from some of the California people and the Florida people seem to be doing very well right now, they had a good season.

Okay. And of your major sort of 3 or 4 crops that are grown on your land today which are the ones that got the most inflation in them and what's got the most deflation in terms of value of the crops these days?

I would say the berries side of the business is still extremely strong. Strawberries, I'm happy to say, all of you out there are eating plenty of strawberries and that's helping us out. They've moved along well. Blueberries have moved along well, although blueberries last year, they had a bumper crop. I think it was mostly in Georgia and they ended up not doing very well in that part of the country. Blueberries, they start out in Florida and then California and Georgia and it moves on up to East Coast to North Carolina and into New Jersey and then up into Michigan. And those crops were a little bit excessive last year. So we had a little bit of slowdown. We don't have any farms in Georgia or North Carolina or even New Jersey. So as a result, we're not impacted, our farmers were not impacted. Although I must admit, many of the farmers we have are big and they are in all of the regions. So berry crop is very strong. We think the almond crop is going to be good this year. And perhaps pistachios -- we have some pistachio orchards, but almonds look like they're going to be very strong this year. And I'd say the vegetables, depending on which vegetable are okay, but not highly inflated. But we don't have any in which they are going down. We don't see anybody saying, "Well I just got a dump these," other than the example I used in blueberries. We're not in the tomato business and have avoided really tomatoes simply because the guys in Mexico are producing a lot of tomatoes and they tend to dump it on the marketplace and drive down the price of tomatoes. So couple of the tomato farmers having pretty poor. We'd love to be in more onions. We tried to buy an onion farm in Georgia. We didn't get it. It was bid up by a very large producer of onions and decided not to step into that one. But it's a marketplace that's going up and down like every marketplace, but seems to be traditionally on the way up most of the time.

Is there anything, akin to the orange blight, et cetera that's impacting crops from a health standpoint, especially the orchards and stuff like that that take longer to grow these days?

You know there's nothing out there that we're worried about today. You always have pest in the field and you also have pest on the trees. The almond trees seem to be good, the pistachios trees are good as long as they are strong and healthy. They are absolutely beautiful in the springtime when the blooms come in. Strawberries are strong right now. And I think we'll have a good strawberry crop. I don't see anything out there that's blighting the crops at all right now. I'm sure there is something some place, a nematode or in the root somewhere that somebody's worried about, but generally speaking, it's sporadic. It's not like it is in Florida with oranges where the orange trees are dying and they can't find out -- find something to kill the bug that's killing the trees. But other than that, I would say that everything's pretty static right now.

Okay. And then given your comments about the discount to NAV, where do you guys turn once you're done acquiring these couple of farms that you have the capital for now? Do you turn to preferreds, do you look to do something else more creatively to raise capital? How do you make acquisitions at the back half of the year if the stock doesn't bounce up here?

Yes, we're probably end up going down the preferred route. I just can't stomach selling common stock at this price so as a result, it would be really hard to do an offering. So we will probably do some more preferred. As you know, we have some out now. So the idea will do some preferred. We've looked at a number of other alternatives. I hate to say this, I don't like a lot of debt. We're about 1:1 or a little more than 1:1 now. And given the steadiness of the rents coming in we feel comfortable with that. Taking us to 2:1 or 3:1 would be not acceptable. So I think we're looking at long term preferred would be the way to look at the marketplace in the future. Right now, we have enough money probably take us what, Lewis, through July, August, some place in there? So we're in good shape for the immediate future.

Our next question comes from the line of Jeffrey Briggs with Singular Research.

Looks like a nice pickup with the farm in Florida. The question I have has to do with your comments on sort of the land in the Midwest and the more commodity crop. Knowing that your model is to stick with high-value crops that you can command good amount of rent per acre on. You mentioned that if prices on some of the more Midwest land got so far out of whack, you may jump in there at some point. So the question is, knowing this is kind of out of the norm of what you do, what would that sort of thing look like? What would the scenario have to be for that to make sense to you? And is that something you would do as sort of like a cyclical buy where you would plan to sell it when the cycle went up? Or is it something that you would acquire at a good price and hold for the long term? I know that's not a big part of your operation so I don't want to spend a lot of time on it.

Well, let me explain what we do. Because prices of corn did hit a high and people are still bullish on corn coming back, prices of farmland haven't dipped very much. We think if they could dip, we could turn the corn land into vegetable land. We could grow sweetcorn which is sold into the produce section. There was a shortage of popcorn for a while. We could do that obviously, but more importantly we can do vegetables. You can grow green beans in the Midwest and sell them to some of the big canning companies and make a very good amount of money if you don't have to pay a lot for the land. So if land came down, it's been down from, I don't know $10 million to $12 million, it's now $8 million to $10 million and some farms are going for $6 million. We're starting to reach a point that we can grow vegetables in the Midwest and maybe some other things that -- we have a huge potato farm in the Midwest and it grows organic potatoes and they are sold at a premium price because they are organic. If we can get the land cheap enough, we can grow potatoes and vegetables that can make good amount of money. So yes, we would buy corn land, but we wouldn't use it for corn in the traditional sense. We'd use it for things like sweetcorn and vegetables.

Okay. That makes a lot more sense because -- based on sort of my recent introduction to the company, it didn't seem like that would be something you guys would do, but that does make sense.

Now you know the plan.

In terms of -- I know we talked about this a little bit. Just the amount of runway you have in terms of available debt to do the acquisitions you already have on the plate through the end of the year. If you got everything, including all the [indiscernible] how much equity, including whether it's preferred or common, would you need to raise to complete all that and sort of keep the target LTV?

We're obviously good for right now. And the guess is that you'd need another tranche of preferred stock in order to get it all the way through on all of the things that we're thinking about. So talking about $100 million to $150 million worth of purchases, we'd need to do that preferred issue.

Our next question comes from the line of John Massocca from Ladenburg Thalmann.

You guys amended the advisory agreement subsequent to quarter end. It didn't look like a lot changed. Can you go over maybe what did change between the new amended advisory agreement and the prior advisory agreement?

Yes, what happened there and probably should have spent some time on that. We looked at what we're doing in our other REIT and it had matched itself up with the other externally managed REITs in terms of its document. And we thought to ourselves it's probably a good idea to have both of the REITs with the same operating agreement or fee agreement, simply because a number of lawsuits over the years have occurred in which the manager has had one way of doing business with one group and another. I know Merrill Lynch, for years, got sued because they treated their institutional investors different from their mutual fund investors and there was a big lawsuit over that, that sort of established how things were. So we just felt like it was time to make the changes to land. One of the things that we pulled out as we did in commercial and our other REIT, is that we pulled out the sale of any land from being part of the initial fee and set it up as a separate fee item. As you know, we really do not plan on ever selling any of our land. This is a buy and hold kind of situation. So that was a good idea. In case we do sell something, it wouldn't jack up the fee, the investment advisory fee. We have some kind of separate way of looking at it. So that was the main thing. We also changed a number of other minor things. And Lewis, would you want to go through couple of pieces?

The 2 major changes were the base management fee we brought in the OP units portion of the equity. We think that makes sense since it is essentially equity used to buy properties that we're managing. We just brought that into the equation. That's going to be offset because the incentive fee will be decreased by the increase in the management fee. And as David mentioned, the break out of the capital gains fee, it was originally built into the incentive fee. So it essentially was 20%. We brought that out separately and reduced it down to 15%.

Okay. Because the base management fee will offset -- will be offset by a decrease in incentive fee, you wouldn't really expect -- I mean we'll run it through our model, but you wouldn't really expect there to be much of a change in G&A because of this?

Right. The overall expenses, we expect to remain pretty similar.

Okay. And then more on the kind of portfolio side. I know last quarter you guys said you had $42 million under LOI. And that's a number that can move around a lot as deals kind of come and go, but in terms of the near term pipeline versus that $42 million number, how have things changed? Is there less in the pipeline, is there more in the pipeline? Any color you can provide there would be great.

The current thing is what we have 3 properties that are worth about $43 million that are either purchase agreements or pretty much agreed to and we're putting leases together or their purchase agreement is done. So we would expect those, assuming due diligence, we would expect those to come out. Right now in LOIs, it is about $31 million. So altogether it is about $74 million in the pipeline that could close by year-end. I would expect the $43 million to close in this quarter, although one of them flipped a little bit the other day. And then the $31 million or so would close before year-end. Again, this is very, very tentative. So don't say that this is going to be x dollars by year-end because we never really realize what's going to happen until we get something all the way down the road and then it's pretty easy to predict. So that's the general overview.

Our next question comes from the line of Robert Sennot from Seaver Hill Capital.

A question for you. I know you just said that you are prone not to consider selling any of your parcels -- your farm parcels. But there is a parcel that I am looking at right now online from your website, Dalton Lane in Watsonville, California that is directly contiguous to hundreds of homes and I haven't seen this location in person, but if you look at the amount of homes that are built on a similar parcel, it has to be in the hundreds of home. If you take an average lot cost in California, probably in that location, you're looking at, at least $100,000 for a builder to carry a lot like that. Small acreage too because of California zoning regulations. You could easily garner, I don't know, back to the envelope, $10 million, $15 million, $20 million of non-dilutive money. Have you folks really considered parcels like this, you have 2 or 3 prime parcels.

Robert, you're taking away my best raspberries that I have got out there today. But you're right. It's right in the middle of the area. There is a farm next door that we have been trying to buy for a long time. If we get that, it would really be an ideal for a builder. But ideal is only at the lower end. The houses that are around that are at the lower end, so it's not quite as developable as you would like. You would like to be like the one we have down in Oxnard which is over 500 acres that you can walk into the beach in. And if we could get that changed into housing, it would be worth $1 million dollars an acre. So yes that's one that we're waiting for. But I would like to pick up that other property before I try something like that. And yes, if it made a lot of economic sense, we would entertain an offer from a builder who wanted to buy, but right now we're not out shopping it.

David, I don’t mean to put you on the spot on this call, but it's a point of curiosity that I have about some of your prime parcels because it would seem like you could raise capital that way in a much more efficient way. One thing I've learned, especially in real estate is do not get married to a parcel, do not fall in love with it. You have some sort of separation process where it becomes profitable.

I know you know this, but in California in order to get something zoned, it's got to be inside the city limits. Now the one in Dalton Lane is inside the city limits, but the one down in Oxnard is not. And it would be an impossibility to get that thing zoned because they make you put it on the docket for everyone to vote on. I know you know California voting takes you a 1/2 hour to do that because it's got 30 or 40 items on it. So we're not counting, we're not counting any of that and sure I would love for a developer to show up and take that one or a piece of property in Florida and say we're going to develop it, we will give you X dollars and that would be 3x of what we paid. That would be wonderful thing and we'd do it. But I'm not wedded to anything other than making money for my shareholders.

I understand David and I appreciate the job that you and your team do. I just wanted to ask that question on the call. It's something that is of value that you have in your portfolio that I hope someday you will exercise.

If a developer shows up, we will negotiate.

I see no further questions in the queue at this time. I'd like to turn the conference back to David Gladstone for any closing comments.

All right. Thank you all for calling in and really this was a wonderful call. We had a lot of good questions and I enjoy answering questions as best we can. Some of them make us make some really long term guesses which are hard to do. But that's the end of this call and we will talk to you next quarter.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a great day.