Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation Second Quarter Ended June 30, 2018 Earnings Call and Webcast. At this time, all participants are in 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, today’s program is being recorded. And now I would like to introduce your host for today’s program, David Gladstone. Please go ahead, sir

All right. Thank you Jonathan. Thank you for that nice introduction and welcome to the quarterly conference call for Gladstone Land, and thank you all for calling in again today. We appreciate the timely talk with you and listen to the presentation that we have, and we always enjoy talking to you all on the phone and hope we get some good questions in this time. If you’re in the Washington DC area, please visit us. We’re located in nearby suburb called McLean, Virginia. And if you have a chance to come by, you’ll see some great team members at work. We have about 66 people and those members of the company now, and something over $2.4 billion in assets under management. I’m going to start with Erich – Erich Hellmold. He is our our Associate General Counsel. And Erich, why don’t you read your part..

Thanks, David. Good morning, everybody. Today’s report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based upon 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 risk factors in on our Forms 10-Q, 10-K and other documents we file with the SEC. Those can be found on our website, www.gladstoneland.com, specifically the Investor Relations page, or on the SEC’s website at www.sec.gov. We undertake 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. 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 or CFFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses and adjused FFO or AFFO, which further adjusts core FFO for certain non-cash items such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating results, and allow better comparability of our period-over-period performance. Please take the opportunity to visit our website, www.gladstoneland.com, and sign-up for our e-mail notification service, so you can stay up-to-date on the company. You can also find us on Facebook, keyword The Gladstone Companies and we even have our own Twitter, @GladstoneComps. Today’s call is an overview of our results. So we ask you review our press release and 10-Q both issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website. Now I’ll turn it back to David.

Thanks, Erich. Good report. Before the report on some of the details and events this quarter, I want to give a brief overview on the nature of our business. The business plan that we have for this company is to invest in farmland, which is often called an alternate asset. And that’s because farmland assets are considered to be relatively illiquid, just go out and buy or sell a farm every days. And while this underlying asset may be relatively illiquid, our stockholders’ investment in the stock is not since you can call your broker and buy it on NASDAQ under the symbol LAND. This company is also a natural resource company, because farmland is classified as a natural resource. These type of investments like farmland tend to have low correlations to the overall stock market, which we believe is one of the many benefits of owning the stock. Our business plan is to own high-quality farmland and lease it to top tier farmers. We typically don’t farm any of these ourselves, but rather lease the properties to unrelated farmers. Our business plan is to invest in farms growing a variety of high-value fresh produce that are grown on annual row crops, and our secondary focus is to buy and lease farms growing more permanent crops. And these permanent crops are the ones grown on trees and bushes and vines, such as almonds, apples, blueberries, cherries, grapes, pistachios, these are crops that are planted ones and then harvested over many years, which is not like strawberries or lettuce or other row crops that we – our farmers produce. Those are planted once, maybe twice a year and then replanted every year. We like the fresh produce segment of the market, which is growing produce, you’d see in the produce section…

All right. Thank you, David, and good morning, everybody. I’ll begin with our balance sheet. During the second quarter, our total assets only increased by about $2 million, as no new acquisitions were added to the books during the quarter. Proceeds from equity issuances during the quarter were mostly used to pay down existing indebtedness, which led to an increase in our total equity and a slight decrease to our total liabilities. From a financing perspective, during and subsequent to the quarter, we obtained a total of about $34 million of new long-term borrowings from three existing lenders. On a weighted average basis, these borrowings carry an effective interest rate of 4.18%, which is fixed for the next 6.9 years. Also during and subsequent to the quarter, as David mentioned, we raised about $2.5 million of net proceeds to the sales of the Series B Preferred Stock and about $7 million of net proceeds to the sale of the common stock, most of which came to the ATM program. From an overall leverage standpoint on a fair value basis and including all preferred stock in the debt bucket, our loan to value ratio in our total farmland holdings was about 57% at June 30. And we’re comfortable at this level, given the relative low risk of high-quality farmland as an overall asset class. While interest rate volatility remains – continues to be a concern of ours, practically all of our borrowings are currently at fixed rates. And on a weighted average basis, these rates are fixed at 3.43% for the next – for another six-plus years out. So we believe we are currently pretty well-protected on the debt side against further interest rate hikes. And while interest rates are rising, credit does remain readily available to us, and we continue…

Thank you, Lewis. Good presentation. While the first-half of the year started off slowly with acquisition front that is, our list of possible acquisitions is strong. We’re expecting to be much more active in the remaining part of 2018 and hopefully, very strong during 2019. We currently have three properties to about $33 million under signed purchase agreements, and we are expecting these acquisitions to be completed sometime in the next few months. We expect to be able to close these farms without the need for additional equity capital. However, we’re still continuing our due diligence process on these new farms. And there’s no guarantee that any of them will become our farms unless you find things that you didn’t expect to find and we walk away from it, but right now it looks pretty positive. We also have several other farms that we hope to have signed agreements on, but it’s a little early to start counting those and putting them into the list of the pipeline coming. And just one final point. As most of you know, our fund specializes in farms that grow fresh fruits, vegetables, some farms that grow nuts and other tree crops, cherries, for example. One of the reasons for this is, we believe that investing in farmland growing crops contributing to the healthy lifestyle such as fruits and vegetables and nuts. Mirror the trends that we’re seeing in the marketplace. And that’s really as people continue to switch to those kind of produce rather than into the less healthy areas. Another major reason why our business strategy is to focus on farmland growing fresh produce is due to the effect of inflation on the particular segment. According to the Bureau of Labor Statistics, the overall annual food, CPI, generally keeps pace with inflation.…

[Operator Instructions] Our first question comes from the line Rob Stevenson from Janney. Your question please.

Good morning, guys. I believe the lease on those strawberry farm started August 1. As you’re going to wind up being any negative adjustment to the third quarter for the month of July from operating expense?

For net operating income basis, it’s about 3% higher from the lease that was on the property prior to our TRS. Obviously, as you mentioned, we only get two-thirds of that benefit for the third quarter, but it will be slightly up.

Okay. But there won’t be really any drag. There’s not another – there’s not anymore lost inventory or anything else like that, that winds up heading in July rather than all of it hit in the second quarter?

There’s no additional inventory to write-off. But there – I mean, we might have a few invoices trickling in just related to cleanup costs on the farm, but I mean, we don’t expect anything significant to come through.

Okay. And then when you take a look at the go-forward run rate, I mean, is it – obviously, there’s a lot of noise in the second quarter even with – even if you exclude the strawberry stuff. I mean, what should be thinking – how should we be thinking about the third quarter that mere more like the first quarter, or is it somewhere in-between or more like the sort of core FFO from the second quarter in terms of hoping us figure out like what’s going to wind up getting from both the revenue and expense standpoint as we go into the back-half of the year? What can you tell us about that?

I – it’s going to be, I’d say, somewhere in-between the first and second, maybe different from each of them. I mean, we’ll have the additional revenues from the new Florida farm, which as David said about $1.4 million greater than what we were getting for the farm we sold. We’ll have the new lease on the farm previously operated by our TRS. New acquisitions that we expect to close on and as well as the lease that we hope to have signed up on that one farm that’s partially vacant. And I guess, another fact would be the revenue-sharing components, but those probably won’t come into play until Q4.

Rob, we don’t obviously devolves the projections we’ve given to the Board or internally. But my guess is, we’re going to be stronger.

Okay. I just wanted to make sure that there wasn’t anything that they were not thinking about that you winds up impacting the third quarter either dramatically to the plus or the negative side that would wind up moving things around more than $0.01 or two?

Well, the plus obviously is the new leases.

Yep. And then…

And there aren’t any big negatives coming, so you should – we should be fine and I just think it – it’s going to be a plus.

Okay. And then when you’re out there talking about people for lease renewals, et cetera, for next year, et cetera. What – any sort of sense that – and I know that you guys don’t have much in the way of exposure to corn, wheat and soybean. But just in terms of the crops, if you do have exposure to how much is – are the tariffs and trade war stuff coming into their thought process? And how they go forward? And what they plan for the year ahead? And how much, et cetera? And what their likelihood to take on more land or give back land and farm less land? How’s that sort of playing out in your markets?

If you look across all of the markets and I’ll be more general. I don’t think, we’re going to get hurt much by any tariffs. There’s obviously going to be some tariffs on some of the food stuffs. And so you’re going to see apples and perhaps I’m pretty sure, we’ll have some on almonds. Most of our almonds or a lot of them are organic and they don’t go to the Chinese, but the rest of the almonds will have some kind of hit, maybe not a lot. And second of all, we’ve had some cherries. That cherries have been under – the crops mostly gone in the cherries that we grow, but the cherries – that our farmers grow. But the cherries that for next year, we’ll probably get some hit there. We don’t have a lot in cherries, so it’s not going to be a big hit to us. I don’t know, I’m seeing. I don’t think they sell many pistachios to China, but I have to go look and that, we should run that to ground. We just got the list of things and I didn’t see anything in there, it was going to hit us hard. We don’t have a lot of farms obviously in the big crops that are going to be hit. I don’t know how all of that’s going to shake out. My guess is, the folks in Europe are going to blink pretty soon, but we don’t have much going to Europe. And the Chinese are going to hold out as long as they can, because the differential is huge. But hopefully, agricultural be at the top of the list. The President keeps talking about agriculture when he talks to the Chinese, but it’s mostly about grain crops. So who knows, it’s an unknown, but I think the impact to us is going to be slight. And the reason its impact to slight to us is the farmer while may not be – while they may not be making what they wanted to make, the bottom line is, they’re going to pay their rent. And they’re not going to come in and say, “Hey, you got to cut your rent, because I’m not making as much money”. We’re going to say, you’ve got to have that. That’s on your balance sheet and P&L for the foreseeable future, sure. In two or three years, if we’re still tied up in something like this, then it will have an impact, but nothing in the current quarters. I only see out about six months, maybe nine months at the most, and I see nothing coming like that.

Okay. All right. And then the only other question for me, the different – the fact that you guys are only 99.8% occupancy, is that the strawberry farm, or is that something – some other small asset or part of an asset that keeps you being 100% occupied?

That’s the one farm we acquired in January that we bought for the first time without a lease in place. We put a short-term lease on it on about 35 acres, but the remaining 100 acres or so remains vacant. But that’s the farm that we expect to have the long-term lease signed up on shortly.

Okay. Thanks, guys. I appreciate it.

Thank you.

Next question, please.

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

Good morning, gentlemen.

Good morning.

So if you kind of look at the nationwide USDA numbers. It seems like farm income and land values – farmland values are moving in opposite directions. In your kind of opinion, David, what do you think it’s driving these trends? And are you seeing these trends in your specific growing regions that I’m kind of commenting on national trends?

Yes. National trends are dominated obviously by the grain people. And I think those folks are living in La La Land, because they can’t make money. But the price of the farm still remains reasonably high, if you look at Iowa farmland, as an example. They haven’t really gone down that much, maybe 5%, 8%. And just frankly, I don’t know why anybody would buy a farm to lose money. The old joke in the business is, how do you make a small fortune in farming and that is start out with a large fortune. So the bottom line is, a lot of people are in trouble in the Midwest, and not seeing any of that in the – and all that areas. So there’s a little bit in Oxnard last year as people were cutting back on how much they were going to put into Oxnard. Oxnard is a strange marketplace and that you’ve got to be first to market. And you never know when you’re going to get hit. And so every three, four, five years, you’re going to have a year in which you get some losses, and so some people were not willing to take that anymore – take that risk anymore. And so prices went down a little bit. I think it’s pretty stable now. But heck, I don’t know, I know we’ve got one large farm out there that Dole rents from us and Dole has been going out of the business since they’ve got a new owner. And so as a result, we’ve got another group that wants to rent it and we’re currently negotiating price, and that doesn’t come up until 2020. So we’ve got a while to wait on that. But I haven’t seen any deep discount there. Oxnard is one of those places that’s getting water coming into the farmland area by the new process. They put in a new processing plant, it’s massive and they’re running pipes out to the farm. So we’ll have some of our farms in Oxnard with not only our own wells that we have in place, but also be able to have a turnout from the city that takes the excess water from the city, not excess, all the flushing and the water that’s coming out, they run it through a processing plant, then they send it out to the farmlands. It’s perfectly good water, it’s potable water. But most people are – feel like it where it’s come from is repugnant, they won’t drink it. So as a result, they ship it out to the farmers and we pay for it. We’re doing that in Watsonville very successfully. I just don’t think as long as you’ve got a good farm, that’s got good dirt and good water, the prices aren’t going to go down as long as you’re growing crops like we’re growing on ours. And so, John, I think everything’s hunky-dory at this point.

Okay, understood. And then maybe can you provide some color on the disposition you completed in Oregon. Who was this existing tenant that wanted to buy the property? And it didn’t sound like this would be something as you’re going to do a lot of going forward. But is there a market potentially for more capital recycling as you move forward?

Probably not. That was a specific case in which the farmer that we had as our tenant sold out to a tenant that has farms on, I think, three sides of our farm. And that tenant wanted to buy that farm economically. They can probably make more money out of it than non – than some other tenant and they just kept raising the price. And finally, we said okay, we can make another $8 million. We can – we don’t have to pay tax on it, because we’ll buy another farm and use that as the equity. And so we did and that that became a very nice transaction because of that. I can’t imagine there are that many farms that we have that are going to move under that kind of situation where the existing farmer just wants it in the worst way and is willing to pay up. They are a great farmer and they became our tenant once they bought our tenant obviously. So we knew them very well and have known them for years. And they own a lot of property. We try to swap it out for something else, but it ended up being a better deal this way. I would – I prefer never to sell any of the property. But I know one day that large farm we have in Oxnard, it’s about 600-some acres, it’s just too close to LA. It’s an hour and 20 minutes from LA. Some day, it’s going to get zoned or some buyers are going to know they can get it zoned, because they know all the people that approved the zoning and they’re going to be willing to pay four or five times what we paid for it. So I know those will happen going forward. I wish they wouldn’t, because I think we have a great dividend paying and having one big hit every now and then is fun to look at. But it just means, you’ve got to work harder to find another farm.

Understood. And then kind of lastly, on kind of the balance sheet side,. if you look at the two different kind of pieces of debt you guys raised subsequent to quarter end, there was almost a 100 basis point spread between the two, even though they were same term obviously entered into around the same time period. What’s kind of driving? Is it interest patronage on the one in Florida, or is it something with loan to value, just any color there?

So the difference is, as you said, it is the interest patronage in farm credit. The state of rates are anywhere between 50 to 100 basis points higher than the effective rate after getting that patronage or refund back. On an effective interest rate basis after the patronage, we expect the loans from farm credit to be probably in line, if not, a little bit lower than the farmer MCLEAN.

Okay. That makes sense. That’s it for me. Thank you guys very much.

Okay Next question, please.

Certainly. [Operator Instructions] Our next question comes from the line of Lisa Springer from Singular Research. Your question, please.

Good morning. I wanted to ask you about…

Good morning.

…the acquisitions that are on the pipeline. I’m wondering should we anticipate that those are going to be in the regions, where you already have a presence or would we maybe see you expanding geographically?

Let’s see. I’m looking at the list now. Three are in California, I’m just trying to look where they are. Those are a little bit outside – a little bit north of where we are. And we’ve got one in Texas, which is the first time we’ll be in Texas. The others are almonds in California and a little bit of citrus, but mostly vegetable in California. So I would say, yes, most of them are in our zone of where we’re looking and trying to do. We’ve got some different crops, which bring on different discussions. If you do figs, for example, the fig trees last about 100 years. And we’ve also looked at some olive trees, those only last a couple of thousand years. So you plant them once and it’s looking a little far out for me to keep up with those.

Okay.

Another question? Do you have avocados by the way, I’m just curious?

Yes, we’ve got a few avocados. But quite frankly, Mexico, and I’ll say this about it. The avocados in California, if you can find them and eat them, they’re wonderful. The ones coming out of Mexico are good, but not as good and the ones coming out of Peru are good as well. But the basic crop that you see in the grocery stores are mostly Mexican or Peruvian. There are some other places that grow. But quite frankly, those were most of them come from. We’re not going to Mexico anytime soon. I can’t quite figure out what’s going on in Mexico. We’ve seen some of the crops in Mexico get – taken over by the cartel, and I’m not working for the cartel, so that’s the other side of that.

Okay. Thank you.

Next question.

This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to you, David Gladstone, for any further remarks.

All right. Thank you all for calling in. We enjoyed the questions that you asked. Hopefully, have more than that next time, and that’s the end of this call.

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.