Gladstone Land Corporation (LANDO) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Gladstone Land Corporation’s Fourth Quarter and Year Ended December 31st 2017 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 call may be recorded. I would now like to introduce your host for today’s conference Mr. David Gladstone. Sir, you may begin.

Alright, thank you Crystal, nice introduction. And welcome to the quarterly conference call for Gladstone Land, and thank you all for calling in today. We appreciate you taking time to listen to our presentation. We do always enjoy talking to you all on the phone and hope to get some good questions at the end. Please feel free to come visit us if you're in the Washington DC area, we're in a suburb called McLean, Virginia and if you have a chance to come by, you'll see some of the great team at work here and we have about 65 people, members now manage about 2.2 billion, maybe a little more than that, and assets across our four public funds. We'll start with Michael LiCalsi, he's our General Counsel and Secretary, also serves as the President of Gladstone Administration, which is the administrator for all the Gladstone funds including this one. Michael?

Thanks, David and good morning. Today's report may include forward-looking statements under the Securities Act 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors listed in our Forms 10-Q, 10-K and other documents that we file with the SEC. All these documents can be found on our Web site, www.gladstoneland.com, specifically the Investor Relations page of that Web site, or on the SEC's Web site at www.sec.gov. We undertake no obligations 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. Now in the presentation today, we will discuss FFO which is funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We’ll also discuss core FFO, which is generally FFO adjusted for certain other non-recurring revenues and expenses, and we believe this is a better indication of our operating results and allows better comparability of our period-over-period performance. We ask everyone to take the opportunity to visit our Web site once again gladstoneland.com sign-up for our e-mail notification service that will allow you to stay up-to-date on our company. You can also find us on Facebook, keyword there is The Gladstone Companies and we even have our own Twitter handle these days and that’s @GladstoneComps. Today’s call is simply an overview of our results. So we urge everyone to read our press release and Form 10-K both issued yesterday for more detailed information. Again, those can be found on our Investor Relations page of our Web site. With that, I’ll turn the presentation back to David Gladstone.

Okay, Michael. Thank you. 2017 was a big year for us as we acquired about $120 million worth of new farms. These acquisitions span across six different states including two new states that we enter this year. And include a multitude of different crops, a significant portion of which are organic. But before I get into the details and other events, I’d like to give you a brief overview of our nature of our business. As many of you know, because you call in every quarter this company invites invest in farm land, which is often called an alternate asset and that’s because these assets are considered to be relatively illiquid. Many experts in the asset management business also classify our assets as being in the natural resource segment along with timber, and you should know these timber REITs that are out there or companies owning oil wells, coal mines, gas pipelines all of those kinds of natural resources. What makes us very different from most of the alternate asset managers is that we are publicly traded, which provides our stockholders with liquidity, since they can buy and sale with stock anytime they like. We choose to be a real estate investment trust, so that our stockholders can get cash dividends that have been packed at the corporate level. Our business consist of owning high quality farm land and leasing it to top tier farmers, except for in unique circumstance, we typically don’t farm any of the land ourselves and as thus generally don’t take on any direct farming risks. We pride ourselves in only acquiring the best farms and leasing them to the strongest farmers. We are the real estate partner for our farmers, we’re not their competitors. Our investment focus is on farms in locations where farmers are able to grow a variety of high value annual row crop such as berries, strawberries that is and vegetables. We also purchase several farms that grow more permanent crops, such as tree crops, bush crops, blueberries are in bush area or vine crops, all of you know great and certainly wine grapes. These include almonds, pistachios, blueberries, grapes, cherries, apples, lemons and others. So we’re in that permanent crop area as well. We generally only purchase irrigated farm land with great soil and plenty of access to water. We don’t want to invest in farms and have to be overly dependent on rain and to grow their crops. And the farmers we lease to are typically among the most well established farmers in the growing regions we’re in. We prefer to keep the same farmer on the property for as long as possible because they know all the nuances of operating at particular farms. Our objective is to be a long term real estate partner for all of our farmers so that they know they have that farm for as long as they want it and as long as they'll continue to pay the rent. As a vast majority of our farm land is leased to farmers to grow fresh produce, which makes us standout from a lot of the others who are in farm land, you should expect that to continue. Currently about 85% of our total revenues come from farms that grow these types of foods that you can find either in the produce section or the nut section of your local grocery store. We consider these foods to be among the healthiest foods, and we're seeing a growing trend toward organic among these food groups. I'd like to point out currently about 45% of the fresh produce acreage is either organic or transitioning to become organic and about 30% of the permanent crops acreage fall into that organic category. We believe the organic sector will continue to be a strong growing area. We currently own about 63,000 acres on 74 farms, nine different states across the United States, valued at about $536 million at the end of the year. And we believe the acreage we own to be among the highest quality farm land in some of the strongest rental markets in the United States. We also own a few farm buildings such as coolers that cool the crops when we pick them packing houses, processing facilities and we earn rent on those. But you should expect the large majority of our investments to be in actual farmland. We tend to continue to see most of our growing regions at steady decrease in the number of farms as they are being sold and converted into suburban or urban usage. That's probably the main thing that I’d point to regarding the factors that continue to drive long term land values up in most of the farming regions that we’re in. The amount of farms in these regions is relatively finite, especially in California and other areas as there's no new farms being developed there, no trees to cut down, no new land to turn into farms, more land can be converted then to farms but it would be very difficult to tear down the buildings that are there and turn it into a farm. So we’re watching urbanization and continue to gobble up a lot of the farms. All the arable land in many of these regions is already being farmed, but now it's being converted to other uses such as houses, schools, factories. And once it gets converted into those uses, it almost never goes back to farming. We have one of our farms being looked at for houses right now and maybe that gets sold in the next year. California for example has been losing according to their own records about 50,000 acres of farmland to developers each year for many, many years now. This causes the farms we own to be highly sought after and most of them have been farmed for decades without ever being vacant. Water availability is another factor that drives rental rates and land values. Farmers are not farming land where water is too difficult or expensive to obtain, and that's driving up rents and prices of land with good wells and access to multiple sources of water. That's why whenever we buy a farm, we always spend a lot of time and effort in our due diligent space, simply determining water conditions in that area and making sure that farm has plenty of water for the long term. We want to know that water availability is sufficient enough to withstand an extraordinary situation such as what happened with the drought in California a few years ago. This has paid off for us as we didn't see any significant reduction in the production on the farms that we had in California as a result of the last drought. That drought is now over with some are saying that a new drought may be beginning. But if one does come, I believe the access to water that we have on our farms will keep us in good shape and be handle it. Finally, one other factor driving up farm land values is inflation or the reduction in value of the dollar due to the government is printing so many of them. And the government will tell you that there's little inflation today but anyone buying food can tell you very different story. Food prices have been going up steadily, especially in produce sections of the grocery store. However, inflation in food prices is good for us and our farmers, because then they can make more money and turn our land values go up and allow us to increase the rents on the farms. To-date, we've not been a major investor in farms growing grain crops like corn, wheat, soybean, because grain prices are just too low to make a reasonable profit in the U.S. right now. There's just too much grain in the world today, world markets are watching this and the storage facilities throughout the Midwest for example are at capacity in storing even last year's crop much less what's coming this year. As a result, growers of these grain crops are continuing to have a lot of difficulties making payments. And as long as this situation continues, we'll stay out of the market until either prices of the crops go up or the prices of the farm land come down to a reasonable amount; one of those to have to happen before we'll consider getting it into the grain crop area. It could be a few years from now, but when good farmland reaches low enough price, we'll buy farms that are growing grain but it's not our focus today. Now about some recent activity. During the quarter, we acquired two new farms, totaling about 1400 acres in two different states. We spent about $7 million for these new farms and the overall yield on the farms is about 6.1%. However, one of the leases includes a revenue sharing component that should push up the return to a higher figure. As most of you know, some leases include participation in the amount of crops, and in our case it’s a small amount. In addition, after the quarter end, we acquired another farm in California for just under $3 million. This is first property without a lease in place. And while we don't expect it to become a common practice for us, we felt the value of this farm was too great to pass up and we expect to have it leased in a short time, probably before the end of the next quarter. During the quarter, we also sold a very small farm we owned for over five years to the farming operation that was leasing it from us. The farm was contiguous to one of the tenant's other farms and facilities and they've been seeking to buy it for several years. It was a small region where most of the farmland is owner operated and had other properties in the immediate pipeline in another area. So we sold the farm made our money back and even recognized a modest gain on the sale and used those sales proceeds to buy another and pay off a mortgage on the farm and to acquire farmland with a higher income yield to pass on to our stockholders. Our strategy is to buy and hold for the long term but if we sell a property to a farmer, farming partner and deploy the proceeds in another farm with a similar risk profile but stronger returns and then we do that and we feel it’s in the best interest of the company and certainly our shareholders. Across the farmland holdings, we now own farms in 19 different growing regions that grow about 40 different crop types and some of the farms obviously grow two different crops in a year. And they lease to 53 different tenants, all but one of whom is unrelated to us. This is important because we believe that a well diversified portfolio of farms growing lots of different crops, of crops providing additional security to our shareholders and to our dividend as well. We’ve also some recent leasing activity I wanted to update you on that. During the quarter, we terminated one of our leases with no Dole, who had been easily our largest and longest standing tenant since before our IPO and we immediately re-leased that farm to a new unrelated tenant on a three-year lease for rent that is about 11% higher than what we’ve previously leased it for. So that was a good move for us, hate to lose Dole, they’ve been a good tenant for many years. And after year end, we terminated the lease on two of our farms in Arizona and immediately re-leased them out to a new unrelated tenant. For these, we changed the lease structure up a bit. The old lease was well -- before it was fixed -- fixed cash rents and the new leases are lower base cash rent, but an amount also including a revenue sharing component. This is our only corn crop farm in that area. So while our annual base rent on these farms will be about $200,000 lower on an annual basis. We have to make most of it back in the formal crop sharing proceeds. And I am also hopeful that we can find a new use for that, I’m not in amid with the idea of keeping our corn crop there. Each of the new leases on these two corn farms is about one-year, which we believe allow us sufficient time to possibly reposition the farm from corn to a more profitable crop. And I think it’s important to note that we didn’t incur any downtime or any of the farms during these re-leasing periods nor did we have to pay for tenant improvements or leasing commissions as is so typical in the real estate investment area. Looking ahead briefly, we have only about 5% of our total minimum annualized rents are from leases that expiring 2018 to this year’s relatively free of any problems of re-leasing. So I think we’re in excellent shape for the near-term. And given the nature of our farms, I think our future is strong for the long-term. Overall, demand for crop farm land growing berries and vegetables remain stable to strong in almost all of the areas farms that we have located, and this is mostly along the west closing, including California, Oregon, Washington and on the East Coast, especially Florida and we have something in North Carolina now. Florida is particularly is coming off a very, very strong year in berries and vegetables so we are very happy about that obviously. And now just a quick update on one of the strawberry farms in California that we temporarily operated ourselves. As you know, due to -- I said this story before. But due to the two patriarchs of a prior tenant on that farm, they both passed away in the same year and the management team was not able to continue the business. So we took over the operations on our farm, berry sales are going well and we’ve got lots of berries out there these days and I think that will go on into the summer. At this point, our best estimate is after paying the rent, the interest and certain other management costs back to the REIT we’ll make a small profit on the operation. But the main point here is we won’t have to take a loss from what was a very sad situation. Now that is the death of two great farmers. We are currently talking to farmers about leasing the farm for the next season, which will begin in the summer. So we are starting to talk and hopefully we'll find the good farmer that wants to farm that location. And finally, the last thing I want to talk about is the continuous offering of our new non-traded Series B preferred stock that we launched after the year end. The first thing to stress here is that this is very different from a typical overnight offering that these shares are going to be sold on a reasonable -- in this case, these are going to be sold on a reasonable best efforts basis over the next five years. So the money will come in, in small manageable amounts. As you know, overnight offerings we get a big chunk of cash coming in and it's hard to deploy quick enough so that we don't damage the common stock. After five years or after all the shares are sold we will list these Series B preferred stock probably on NASDAQ so the shareholders will have liquidity. We didn't want to do a large overnight offering this time and have the results and dragging down our earnings until we could get the proceeds fully developed. This offering should allow us to invest the proceeds in more real time manner as money comes in. And we look at this preferred security as a way of augmenting our long term capital needs and have a fixed coupon, allowing us to lock into spread, achieve the new investments. We've identified and acquired these securities over the years and I think this is going to work well for us. Further, while we expect to use the common stock sales as a source of future capital when we feel it’s advantageous to us, we're hopeful that this additional source of capital will preclude us from having to do as many common offerings of common stock and also just keep us going at a regular pace. And now I'd like to highlight some of the progress we made on our farmland portfolio during 2017. As mentioned before, we invested $129 million in acquisition of 16 farms, adding about 13,000 acres of new farmland to our portfolio. We initially -- our weighted average cash yield on these farms was about 5.3%. However, several of these leases contain revenue sharing components, which should push the overall yield or as we call it the cap rate on these acquisitions even higher. And the new long term debt we put on these farms during 2017 has a weighted average effective interest rate of 3.6% and six for seven years. These include loans from four new lenders as we continue to further diversify our lending base. We increased our annualized revenue run rate by 32% and our tenant base by 33%. Those were very, very significant. And including one farm temporary leased to ourselves and in a taxable REIT subsidiary, we maintained 100% occupancy of our entire portfolio and it's been that since our inception. Also just to note, we received over $300,000 in revenue from one of our crop sharing leases that we were in so that bodes well for the future. While that’s enough on the business side, I'll now turn it over to our Chief Financial Officer, Lewis Parrish who is going to talk to you about the numbers. Lewis?

Alright, thank you, David, and good morning everybody. I'll begin by discussing our balance sheet. During the fourth quarter, our total assets increased by about $6 million driven by our recent new farm acquisitions, which were openly funded through a combination of new fixed rate borrowings and common equity raise to our September overnight offering and recent ATM sales. David already went into detail about the asset size, so I'll focus on the financing side here. During the quarter, we obtained an additional $4 million of new long term borrowings, including borrowings from one more new lender. On a weighted average basis, these borrowings carry an effective interest rate of 4%, which is fixed for the next nine plus years. We also sold a little over $1 million of common stock through our ATM program during the quarter. From an overall leverage standpoint on a fair value basis and including our term preferred stock and the debt bucket, our loan to value ratio was just under 61% at December 31st. And we're comfortable at this level given the relative low risk of farm land as an overall asset class. While interest rate volatility remains a concern of ours, about 97% of our total borrowings is currently at fixed rates and on a weighted average basis, these rates are fixed for another 6.4 years out. So we believe we are pretty well protected on the debt side against the near term interest rate hikes. The overall weighted average effective interest rate on our long term borrowings is currently about 3.31%, which is up by about 19 basis points from a year ago. While interest rates have risen, credit remains readily available and we continue to be able to borrow money on terms that make the overall economics work for us. Regarding upcoming debt maturities. We have about $23 million coming due over the next 12 months. However, about $16 million of that represents maturities of three bullet loans that we expect to refinance with the existing lender. So we're moving those maturities we only have about $7 million of amortized and principal payments coming due over the next 12 months for just about 2% of our total debt outstanding. Now we move on to our operating results. First, I'll note that we had a net loss for the quarter of approximately $216,000 or about $0.01 per share. Our operating revenues increased by about $248,000 or 4% from last quarter, primarily due to crop proceeds rent payment received on one of our nut farms in California, partially offset by the loss rental income on the farm currently leased to our taxable REIT subsidiary. And this income gets eliminated in consolidation. Our core operating expenses, which excludes depreciation and amortization expense and acquisition related expenses, increased by about $64,000 from the prior quarter. This was primarily due to about $149,000 of aggregate deferred rent asset balances written off during the quarter in connection with two early lease terminations, as well as the additional repairs and maintenance expense incurred on our sole gross leased property. These increases were partially offset by lower related party fees, primarily due to no incentive feed being earned by our advisors during the current quarter. Moving on to our per share numbers. Earnings from adjusted FFO for the quarter was $0.138 per share, which was a decrease of about $0.001 or about 1% from the previous quarter. And that was largely due to the additional shares issued in connection with the September overnight offering and our recent ATM sales. But I'd like to point out that this quarter still marks the ninth consecutive quarter, which our AFFO has fully covered our dividends and we expect this to continue to be the case in the future. One final item I'd like to point out. Our cash flows from operations for the quarter and year just ended were negatively impacted by two things. First, in connection with three farms we acquired during the first quarter of 2016, we received two years of prepaid rent at closing. About $1.6 million of this prepaid rent related to cash rents earned during 2017. And second during Q4 2017, we paid about $1.3 million of cost in connection with the initial operations on the farm leased to our TRS. In addition to covering the rent owed on the farm, we expect to recoup all of those costs throughout the first half of 2018 as the crops are sold. Now I'll move on to net asset value. During the quarter, we updated the valuations on five of our farms one of which was valued internally in accordance with our valuations policy and four of which we had appraised by independent third party farm land appraisals. We had increases on some farms and decreases on others but in the aggregate, these updated valuations resulted in a small overall decrease of about $700,000 or 2% from their prior valuations. As of December 31st, our farms were validated about $533 million with 76% of this value based on the third-party appraisals or the actual purchase price. And of the $129 million valued internally, about 99% of it or $127 million is supported by third-party appraisals performed between 19 and 29 months ago. Based on these updated valuations and including the fair value of our debt and Series A Term preferred stock, our net asset value per share at December 31st was $13.96, which is about 1% decrease from last quarter. And most of this decrease was due to capital improvements we continue to make on certain of our farms, value of which won’t be reflected in the farms fair value until the respected projects are completed. And I’ll note that for a large majority of these projects, we are earning additional rent as the funds are dispersed by us. Turning to liquidity. We currently have about $8 million of available funds and our current buying power for straight cash acquisitions is about $15 million to $20 million. However, this does not figure in our ability to issue new OP units as consideration for purchases. We also have plenty of room under our two largest borrowing facilities and are continuously reaching out to new lenders. So we have plenty of room and ability to continue borrowing and buying new farms that meet our investment criteria. With that, I’ll turn the program back over to David.

Nice report. Company just continues to get stronger every quarter as we continue to execute our plan. We invested about $435 million in new farms and assets since our IPO in 2013 and we expect to continue to adding to the figures. We are listing -- list of possible acquisitions remains very strong today. We currently have two properties for about $21 million under signed purchase agreements, portion which is expected to be paid in OP units. So that’s like issuing equity and we expect these acquisitions to be completed by March 31st, possibly all over a little bit into the next quarter, but any rate we’re close to closing. We also have a few other farms that we hope to have signed up soon, but it’s too early to really put any probability of closing on those. We currently have enough dry powder to close all these farms. So we got plenty of money to do that. Under the signed purchase agreements and we need additional capital -- we don’t need additional capital prior to the purchase price, it’s expected to paid-out in OP units. One of the ones that we’re looking at, just came back the other day is over $50 million. It would be in the second quarter if we can close it. I just don’t know if that’s going to close or not, it’s 25% in OP units. However, we’re still continuing to do due diligence and process the property, and there is really new guarantee that any of these will close, but we keep plotting along. And just a few final points I’d like to make. As most of you know, our funds specializes in farms that grow fresh fruits and vegetables and more recently farms that grow nuts and other tree crops, such as apples and cherries. We’ve historically avoided being heavily in farm land that grows traditional commodity crop such as corn, soybean and wheat. And the reason is that we believing investing in farm land growing crops that continue to be healthier lifestyle such as fruits vegetables and nuts. It mirrors the trends that we see going on in the marketplace and that is the continued switch toward more healthy foods. Like the investment farms that grow organic corn or organic wheat or organic soy, it’s hard to find them. The U.S. still imports lots of organic grains and the farmers are reluctant to convert to organic because of the cost of conversion. So hopefully somewhere along the way, we’ll figure out how to make that work as well. In addition, about 90% of our portfolio is GMO free. We also like fresh produce segment, because it's typically greater return to us and have less, much less price volatility then other crops. Another major reasons why our business strategy is to focus on farmland growing fresh produce is due to the effective inflation on this particular segment. According to the Bureau of Labor Statistics, the overall food CPI generally keeps pace with inflation. However, over the past 20 years, the fresh fruits and vegetable segment of the food category has outpaced the total food CPI by a multiple of 1.7 times. So we’re in the right space. And while prices of commodity crops are more volatile and susceptible to global supply and demand, fresh produce is highly insulated from the global volatility, mainly because crops are generally consumed locally and within a very short period after being harvested. It's the unpredictable nature of grain prices and other commodity crops that currently prevent us from weighing our farmland holdings too heavily in that type of farmland. Currently, only about 10% or 15% -- Lewis is it 10% or 15%. Why are we saying 10% to 15%?

Because it's somewhere between there.

Somewhere between there, okay. The total value of our farms is invested in farmland growing corn, wheat and soybeans and the nature of the beast is that people grow more than one crop per year. So you might have corn and something else, or wheat and something else. And so that makes the calculation between 10% and 15% is the way we have to catch it. At this point in the farming cycle for grains, it's really difficult for farmers to make much money. In fact, many of the corn prices are so low today that they are just not buying additional farms in the area, and I'm worried that a lot of the farmers are not going to be able to make ends meet. Ultimately, we believe farmland that is GMO free and growing healthier crops such as fruits and vegetables, and nuts are going to continue to outperform the overall farm market in terms of both cash returns and long term value appreciation of the land itself. Now let's set this record straight. We don't own any farms that are growing, cannabis or hemp. We don't like those crop and they’re illegal, and anyway the report I have read says that growing in those areas is not the profitable area, it's the distribution area. So we’re not in that farming area and don't intend to be ever be in that area. In terms of the economic outlet in general, farmland like ours continues to perform well compared to other asset classes. Despite some of the recent downturns in certain regions, the NCREIF Farmland Index, which currently is made up of 727 agricultural properties worth about $8.5 billion has an average annual return of 14.9% over the past 15 years compared to 9.1% for the S&P. And you know that the Farmland Index during that period has never had a negative year like the S&P during the recession. Our goal is to grow the size of this company and allow us to be exactly like the NCREIF Index someday. Farmland has generally provided a message with the safe haven during the turbulent times in the financial marketplace as both land prices and food prices, especially for fresh produce, have continued to rise steadily. And most of all, I'll say this for the 100th time farmland has historically been an excellent hedge against inflation. As you know, we recently raised our dividend again now $0.04425 per share per month over the past 37 months. We've raised the dividend nine times, resulting in an overall increase of 48% in our monthly distribution rate to shareholders over that time period and this is a reflection of a wonderful job our team has done at finding and managing high quality farms paired with strong tenants who are reliable in their rental payments. As you know, I'm the largest stockholder and I’m definitely liking these dividend increases, and I push every time I can at the board meetings to increase the dividends even if it's only by a small amount. Since 2013, we've made 60 consecutive monthly distributions to stockholders, totaling $3.38 per share of total distributions during that time period, paying distributions to our stockholders is paramount to our business model, we are as we like to say a dividend paying company. We're projecting good production and income growth through 2018. And if our expectations are met, we hope to be able to increase the dividend again in the near future. Our goal is to continue to increase the dividend at a rate that outpaces inflation. So this is not like a bond, because we're raising the dividend and as you all know, dividends or interest payments from bond fund don't go up, they stay the same. Our stock is currently trading at -- yesterday at $12.36, which is significantly below our net asset value base. We're hopeful the stock price will rise in near future so it trades at above the net asset value. So if you're buying the stock today, which I hope you are, you’re going to get a discount from the estimated net asset value per share of 13%. You're buying $13.96 of net assets for just $12.36. Along the way, you're getting a $0.04425 per share per month in cash distributions or just under 4.3% yield. This yield is slightly lower than the average return you can get on the entire REIT index today, which is currently about 4.9%. But when compared to others in our category, like the timber REITs, they trade at about 3.5% and I would tell you that I think we're much stronger than the timber REITs. Please remember that purchasing stock in our company is a long term investment. In farmland, this is not a substitute for bonds. It has a yield like a bond expect we keep raising the yield by increasing the dividend. This investment has two parts. In part, it’s a real estate similar to gold, it's dirt that has historic intrinsic value, because there's limited amounts of it. It's being used up by urban growers. And second part, it’s like gold -- it’s unlike gold in that it's an active investment with cash flows to investors. I mentioned this a couple of times. We always love to point out the Warren Buffet comment that he'd rather have all the farmland in the U.S. than all the gold in the world. As I understand it, his son has large holdings of land in the Midwest. We're expecting inflation, particularly in the fresh food sector to grow and we expect values in the underlying farmland to increase as a result. And we expect this especially to be true in fresh produce section of grocery store as people in the U.S. are trending toward eating more healthy foods. But I think it’s a good way to look at our farmland fund is the first hedge against inflation and inflation is people keep looking at it and saying it’s coming and I believe this time it’s not a call that can't be heeded because I'm seeing inflation in a lot of different areas. And second for those looking for an asset that doesn’t correlate to the overall stock market, we believe this is it. So if you like what we’re doing, please buy some stock and keep eating fresh fruits, vegetables, and nuts. And now we’ll have some questions from the people that are following us. So operator, if you’d come on and please help these people ask some questions.

Thank you [Operator Instructions]. And our first question comes from Rob Stevenson from Janney Montgomery. Your line is open.

David, could you talk a little bit about why Dole didn’t want to stay in that property where you replaced them as a tenant?

Dole is going through a pretty significant transition, you may have read about it. They were thinking about doing a public offering. And now it looks like about half the company is being purchased by a large British company that’s in the fresh fruits area. So they’ve been pulling away from growing berries and this is berry farm as long as I can remember the one that they got off of. And so I think it’s just a change at Dole, change in the attitude of what they’re going to grow and who they’re going to be partners with.

And then what geographic areas in crop types were the farms where you have the decreases and appraise value this quarter, as well as possibly last couple of quarters. Any trends there in terms of is it Central Valley California, is it other place, is it specific type of crop that’s being devalued?

Well, I mentioned that in the call, the one hit of about $200,000 was the corn farms in Arizona. That was unfortunate but I think that will recover quickly. And Lewis, what are the others?

In Oxnard the Santa Clara lease…

The Santa Clara lease that we have in Oxnard went to a vegetable grow instead of a berry grower, that should change over the next three years. But I can’t point to anything other than obviously the corn area is very difficult. And as we had the switch and Oxnard from berries to veggie ground that’s the kind of think that happens from time-to-time. I think it will come back. But we get a little less rent there. So no trends other than changes happen in every marketplace.

And then last from me. Can you talk a little bit about how you’re viewing the Series B preferred in terms of how much you’re willing to issue, how high you’re willing to take-up effective leverage if you’re assuming that the preferreds are in fact leverage. I mean, others were similar non-traded preferred albeit with a common conversion option have used on to jack their effective leverage well above 75%. What’s your feeling on this at this point?

I like where we are now we had about 60% and that’s a good number for us. And we do a lot of transactions. We’re doing more transactions as we get bigger with OP units. So that’s really common stock, which you think about it and that’s a good number for us. If we could do 30% or 40% in OP units in the rest of it in loans, I would -- mortgages I would love that because then I wouldn’t have to go to the marketplace for common stock issuance. And also the people that have done that have made out very well as our stock prices gone up. So we have a lot of happy campers that have OP units. From the standpoint of the quickness I wish I had a gauge for how quick the Series B is going to be sold. We've got -- I guess we've been -- one of our people has been into 12, 13 different shops. We've been received very well. Obviously, we're the only farm land in that category and the strength of farmland does let people get very excited in the fact that the down stroke in farmland is much less than in some of the other categories that have been out there. You'd probably seen the non-traded area. They’ve had some people that have been very, very high in terms of performance and then fell off pretty dramatically later on and people have lost lot of money, we're not in that category. And I think we'll be well received. When you go into one of these shops and RIA shop, they need to go through their due diligence and it usually takes a couple of months for one of them to get on. Our goal is to select enough so that we get a steady stream and then not add anymore. So we don't really want to get to waste some of the non-trades are where they're growing at $100 million a month, I don't know what we would do with that much money. So we are going to make sure that we don't grow at a fast pace in terms of money coming in, because we don't think we can put it to work in good shape that quickly. But we are hiring, we’re hiring some other people expecting that to pick up, the Series B to pick up. And I don't know, we'll see. But 60% is good for me given the fact that we've remained 100% leased or our properties have been 100% occupied since 1997.

And then one more for me here. In terms of the OP units that you guys either have issued or will issue, how are you looking at that versus common -- versus where the common is trading? Are these deals typically at where the common is trading on around that date with some trailing 10, 30 day period? Are you more or less issuing OP units effectively at some premium to the common stock price in some of these deals? How are you guys arranging these deals typically when you're using OP units and pricing units?

It's obviously a negotiation between us and the seller. And many times in these deals, the seller is going to be the person renting it afterwards. And so they are doubly involved in our operations. So I would say that 90% of the time, it's a premium, maybe a small premium to the current price. We push very hard on the idea that we're trading below net asset value and as the shareholder they might want to know when. The negotiations are hilarious sometimes, Rob, but the bottom line is to-date we've been above the current stock price and I think we'll stay there.

Thank you [Operator Instructions]. And our next question comes from John Massocca from Ladenburg Thalmann. Your line is open.

Just following up again on the Dole property. Is the new tenant farming the same crop at the same crop as that property?

Yes, it's an incredible piece of property and has been growing berries. I got that property in 1997 and it had been growing berries for at least 10, 12 years before I got it. So it's been a berry farm forever and a day. It's very much part of the crop that's been grown by this tenant, and their berry farmers. So it’s right in line. Dole is just moving out of berries and fresh produce and I don't know if that's going to stay, but maybe the new person who is buying a big chunk of Dole will want to continue. As you know, we have them on one farm in Oxnard as well, so that lease comes up in 2020. So we don’t have any worry about re-leasing. It has also been a wonderful berry farm. A lot of these farms also take second crops. For example, when I farmed the one in Watsonville the Dole farm that we were talking about, we grew radicchio and some barley and other things during the off-season. And so some of these farms make pretty good money growing vegetables and other things during the non-berry season, the berry season is about nine months in California and in Oxnard it’s probably closer to six or seven months. So there's another part of the season that they can make money on, but Dole seems to be going out of the berry business.

And then so the 11%, if I heard that correctly, increase you got when you signed a new tenant on that farm. I mean is that indicative you think of the strength of the California berry market or is that just it’s a great asset and it was kind of -- the lease was under market that sold.

The lease was under-market would have probably been marked up at our next period, but anyway they wanted out and we felt it was better for them to get out, especially if we could make 11% more. But they're good folks and we like the relationship so it was just what the market would bear at the time in terms of berries. And it was already at a pretty substantial price but I was surprised that it was -- that it needed to go up a little bit more, but that's what they're willing to pay. Again one of those farms that we’ll probably be in berries for until they build apartment buildings there cause it’s within walking distance with the ocean. It’s a wonderful farm and I'd hate to see it go to something else, but we love the fact that this new tenant has been a berry farmer forever and a day and I've known them for a long time, competed against them a couple of times when I was running farms out there so they're very happy to get this farm.

And then looking at the acquisition market more in general, have you seen cap rates tick up for farmland given the rise in interest rates or is it been fairly stable market?

It's been stable, but it's going to have to change. We're seeing of course the debt market place move up some. So as we see our cost to own going up, we have to have a -- I mean, it’s wonderful on all the farms we have in place today because we've locked in the spread for the next seven-eight years, six years on some of them, so that's locked in. But the new ones, we can't buy them at the same price we paid. You've seen our rates go up from about 3.6 to what do we have -- 4%. So we've got to make that back up and increase rent in order to keep our spreads the same. And I think it’s happening and people get the message, because they know what the bank's charging in terms of mortgages. And so they're looking at assets a way of not leveraging themselves up of just leasing the property. So we’ll see but right now everything is working.

And then you started addressing there, but on the financing front, as treasury yields have going up. Have you seen mortgage spreads contract a little bit or is it just been pretty much a one for one movement up in interest rates on mortgages?

The banks we’ve been dealing with haven’t hit us with the higher rates yet, so we’re expecting to see some movement now. And every deal that we have is dependent on A, an appraisal of the company which would go down if interest rates are going higher. And so may lose some deals overtime because one of the caveats than our purchase agreement is that we have to have an appraisal that meets the price that we’re paying. And in the farming business, unlike some of the other real estate business have been in, we don’t have people that will make sure that they value at exactly what you’re paying. So they’re pretty straight forward and honest and we lost a deal in Arkansas, a rice farm there, because the appraisal came in much lower than we had thought it was going to come in. And so as a result, we went back to the seller and said you got to drop to price or we can’t buy it, and he refused. So it’s outright now. Although, I suspect he will reconsider at some point in the future. So yes on the financing front, it’s going to have an impact on the price we can pay for farm because we’re financing 50% to 60% of every farm with debt and we can’t bear the cost of that debt we got to get it out of the financing. So that’s it.

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Mr. Gladstone for any closing remarks.

Thank you all for calling in. We really do enjoy this. I wish we had more questions and could spend more time on the phone. But this is it and we’ll see you in next quarter that’s the end of this call.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.