Gladstone Land Corporation (LANDO) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation Third Quarter Ended September 30, 2018 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 is being recorded. I would now like to introduce your host for today's conference, Mr. David Gladstone. Sir, you may begin.

Thank you, Joelle, and nice introduction. And welcome to the quarterly conference call for Gladstone Land. And thank you all for calling in today. We really appreciate getting together with you over the phone and nice of to take the time to listen to our presentation. And we always enjoy telling you over the phone or any other way we could what we are doing. And hopefully, get some good questions. Feel free to come by and visit us if you're in the Washington, D.C. area. We're located in a nearby suburb called McLean, Virginia. And if you have a chance, come by, you'll see some of the great team members here. We have about 66 team members here now. And we manage about $2.5 billion in assets across our four public funds. I'm going to start with Michael LiCalsi. He is the General Counsel and Secretary and 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 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 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 risk factors listed in on our Forms 10-Q, 10-K and other documents that we file with the SEC. Those can be found on the Investor Relations page of our Web site which is www.gladstoneland.com. You can also find them on the SEC's Web site which is www.sec.gov. Now 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 also 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 we generally define as FFO adjusted for certain non-recurring revenues and expenses. We'll also discuss adjusted FFO which further adjusts core FFO for certain non-cash items such as converting GAAP rents to normalized cash rents. And we believe these are better indications of our operating results and allow better comparability of our period-over-period performance. We ask that everybody take the opportunity to visit our Web site, once again, www.gladstoneland.com, 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 there is The Gladstone Companies. And on Twitter, the handle there is @GladstoneComps. And today's call is simply an overview of our results. So, we ask everyone to review our press release and Form-10Q both issued yesterday for more detailed information. Again, you can find these on the Investor Relations page of our Web site. And with that, I'll turn the presentation back over to David Gladstone.

Thank you, Michael. That's good information for our shareholders. And before I get into the details of this quarter, let me give a brief overview of our businesses. Most of you know this company invest in farmland which is often called an alternative asset. And that's because these assets that we are investing in are considered to be relatively illiquid. While the underlying asset may be relatively illiquid, your investment in the stock is not since it's traded on NASDAQ under the symbol LAND, L-A-N-D. But I think this company is essentially a natural resource company by category because it's investing in farmland. And these farmland investments tend to have low correlations to the overall stock market, which we believe is one of the many benefits of owning farmland. Our business consists of owning high-quality farmland and leasing it to tenants that we consider to be good experienced farmers. We typically don't farm any of the land ourselves, but rather lease the properties to unrelated third-party farmers. Our primary investment focus is on farms and farm operators that are growing a variety of high-value fresh produce annual row crops with a secondary focus on farms growing more permanent crops. And those permanent crops are grown on bushes such as blueberries, trees, and vines, such as almonds, apples, cherries, grapes, and pistachios. These type of crops are planted once and then harvested over many years. We like the fresh produce area and also the nut segment because they typically provide greater returns than other crop types. We look to buy crop land that is irrigated and has plenty of access to good water. We also look for farms that have excellent soil. In addition, we try to find farmers to lease these properties who are typically among the most well established farmers in the growing regions that we happen to have our farm in. We had some issues with a couple of small farm operators. But for the most part, we've done a good job of partnering with the strong growers. We prefer to keep the same farmer on the property for as long as possible because they know the nuances of operating this particular farm or that particular farm, our objective of course is to be the long-term real estate partner of all of our farmers, so they know they have the farm for as long as they wanted. Currently, over 85% of our total revenues come from farms that are growing the types of food you'd find in either the produced or nut section of your local grocery store, we consider these foods to be among the healthiest type foods and we're seeing a growing trend toward organic among these food groups. That's especially true produce section in your grocery store currently about 35% of our fresh produce is either organic or the farm is being transitioned into organic and about 20% of our permanent crop acreage falls into that same organic category, we believe the organic section of the grocery store will continue to be a strong area in addition over 95% of the portfolio is GMO free. So we're not in the Corn Belt of the United States very much, we currently own 69,000 acres, 83 different farms, nine different states across the United States, these farms are valued at just over $600 million across our farm land holdings, we own farms in 19 different growing regions. And one thing, I want all of you to know is that these farms grow about 40 different crop types and that on top of that, this diversification of our farms is leased to 56 different tenants all of whom unrelated to us, diversification is extremely important to us, we believe a well diversified portfolio of farms growing many different types of crops, provides additional security to our stockholders and our ability to pay our dividends. We only have a few farms growing grain crops like corn, wheat or soybeans because the grain prices just continue to be too low for a reasonable farmer to make a profit in the United States, these are still too much, there is still too much grain in the world markets and as a result growers of these grain crops are continuing to have a lot of difficulty selling their grains at a profit, we own a few farms in the Midwest but a majority of those are growing things like organic potatoes, some organic popcorn, most of our growing regions, we continue to see a steady number of farms being sold and converted into suburban urban uses and that's probably the main thing that I'd like to point to regarding the factors that continue to drive long-term land values up, the amount of farms in many of these regions is relatively finite especially in the State of California and there are very few if any new farms being developed. That is there are no trees to cut them and no fields to start ploughing, so there's no more land that can be converted into farms and many of these regions, almost all of the arable land in these regions is already being farmed and are slowly being converted to other uses such as housings and schools and factories and once they get converted to those uses, it's almost never going back to farming. Water availability is another factor that drives rental rates and land values, farmers are following land that where water is too difficult or expensive to obtain and that's driving up rents and prices of land with productive wells and reliable access to multiple sources of water and that's why whenever we are buying a farm, water availability is always the first thing we look at, we spend a huge amount of time and effort in our due diligence phase simply determining that water conditions to make sure that the farms will have plenty of water for long-term use, we want to know that the water availability is sufficient enough to withstand a drought and the last California drought we didn't see any significant reductions in the production or rent farms. Finally, one other factor driving farmland values of course is inflation and the reduction in value of the dollar due to the government printing so many dollars and while the government tells us that there hasn't been very much inflation recently, anyone who goes to the grocery store can tell you that food prices especially fresh produce prices had been going up at very steady pace but keep in mind inflation in food prices is really good for us as it allows our farmers to charge more for their crops which enables us to earn a little more rent by increasing the rent on the farms. Now about some recent activity, as we mentioned in the last call, we sold a farm in Oregon to an existing tenant for about $20.5 million recognizing the gain of over $6 million. We're able to achieve a 20% IRR on the original investment in the farm and the price we sold it at represented a 22% premium over where we previously had value that in addition the proceeds from this sale of that farm in are again where we roll that into an acquisition of another property as part of a like kind exchange which just means that we don't pay any taxes on that gain and we can now earn money on all the entire amount that we got from that purchase, from that sale and just a quick note gain on the sale triggered a sizable capital gains need to the advisor since again went into the new deal as opposed to cash coming into the fund. Our advisor credited the whole feed back to the fund shareholders. During the quarter we acquired eight new farms about $47 million variety of crops such as vegetables, melons, peanuts, cherries just last week we bought a farm in California for $23 million that primarily grows figs which is a new crop for us and here's one for the record books. Fig trees can remain in production for hundreds of years, so we can look forward to harvesting figs on land until the time comes to sell it to a developer. Overall the initial net yield on these farms is about 5.4% but most of these leases also contain certain provisions such as crop sharing payments and we hope that will push the figure higher in the future in terms of the capital income sees. As far as leasing activity we had a couple of leasing issues come up during the quarter and short lease roll downs executed doing and after the quarter end will probably result in a decrease in annual cash rents of about $200,000 for the year our or some of this is just due to changing the lease from a fixed cash rent structure to a lower cash rent in exchange for adding to the crop, adding to the lease a crop rent component which we hope will help bridge the gap and provide us with additional upside not only in the next year but in many years going forward. And another renewal we executed for just one year period it was a temporary stop gap that we have time to properly market the farm, sometimes we get these farms back a little bit too late in the season, so we have to wait a little while before we can get the right 10 on it so while we may see a small reduction in our rental income over the next year, we expect to get it back most of it with the new farms we're buying as well as the proper rents that we get. But keep in mind this decrease should be more than offset by the crop sharing payments that we have coming next year. We already recorded this year over 900,000 in a crop share payments. This is just additional rent and we have a few more payment schedule coming in this fourth quarter that we're in right now for additional crop share and we should get those crop sharing payments again every year in the future plus we're adding to those crop sharing payments with these new leases that we're signing up every quarter and while there's no guarantee of anything coming in this year's any indicated we expect to have good numbers in the next year as well and of course the future looks bright. We also have additional rent coming in on some of the acquisitions that we're doing in this quarter and I'm not sure what those numbers are but it looks very promising. In terms of vacancies we currently have two farms that are vacant We had one tenant who had been in bankruptcy and we have one farm that we acquired early in this year without a lease in place and we are talking to multiple operators for each of these farms and we hope to have leases signed up on each of them in the coming months. Looking ahead briefly less than 4% of our total minimum annualized rents are from leases that expire over the next six months. We are negotiating with the existing tenants on all of these farms as well as potential new tenants and we expect to be able to renew the leases on all of them with no downtime on any of the farms. As far as where the rent numbers will fall but because the small farms, own farms growing corn these ones that are coming up we expect that the rents to be relatively flat, maybe down slightly we may change the lease a structure to a couple of these as well so that we get some fixed rent amounts in exchange for additional crop sharing payments. I am so happy that we only have a small number of farms in the Corn Belt. One final note on our farms we were fortunate again not to have any material damage on any of our farms as resulting to Hurricane Michael and we had a couple of irrigated irrigation pivots that suffered some minor damage but all of that's fully insured and I don't think we have any problem with even those farms going and they were really immaterial to the farmland itself. Also, there are few fires going on. I know people ask us what's going on in California when they read in the paper. We have a couple of fires there. But you have to remember that the fires are up in the mountains where there's lots of brush and lots of bush's that can catch on fire. We don't have any farms near either of these fires that are in Ventura County. We have them down in the flatlands and we feel bad that many of the people are having to leave their houses. I think they've got about 1,000 now. But that happens in California. On our capital raising efforts through our non-traded Series B preferred stock, we've been pleased with the pace of sales on this security so far. We sold about $15 million of preferred stock. And it's just a reminder we plan to list the series, the preferred stock on NASDAQ. So the shareholders will have liquidity. It's just illiquid now. People are buying it for the yield and I think we will sell a lot more of that in the next year. Now, in the process, the company has paid Gladstone Securities that's in this again Series B has paid. Gladstone securities our affiliated broker dealer total commissions and fees. However, Gladstone securities is really just a conduit in this offering, as it pays out almost every nickel of these fees to other unrelated third parties involved in the offering, such as participating broker dealers and wholesalers that are the people that are selling the shares today is paid out about 95% of these fees it's earned to other third parties or helping sell it. So we're not making money on this part of it. But we certainly hope to make money on the use of the proceeds to buy more properties that we can manage. The point of the Series B is to allow us to grow our portfolio at a very steady pace without having to do quite as many common stock offerings which as you know maybe it gives solution to the existing shareholders. We look at as a way to augment our long-term debt needs as it has a fixed coupon. And we can put the money to work and usually go at a pretty substantial amount higher than that, it locks in the spread and achieves a great investment for our common shareholders, and at the same time, gives our preferred shareholders a nice long-term return. Well, that's enough on the business side, I'll turn it over to Chief Financial Officer Lewis why don't you take us through section.

All right. Thank you, David, and good morning, everybody. I'll begin by discussing our balance sheet. During the third quarter, our total assets increased by about $35 million or 7%, due to our recent acquisitions, partially offset by the one farm in Oregon that we sold. Our acquisitions were ultimately funded through a combination of new the fixed rate borrowings, proceeds from sales of our Series B preferred stock and the sale proceeds from that farm that we sold. From a financing perspective, in addition to the proceeds, from a Series B, we secured about $28.1 million of new long-term borrowings from three different lenders, including one new lender. On a weighted average basis, these new borrowings carry an effective interest rate of 4.15%, which is fixed for the next 7.5 years. In addition, we had $16 million of bonds scheduled to expire during the quarter, we were able to refinance all of them with the existing lender through the issuance of $17.4 million of new bonds. The increased financing was made possible by the appreciation and value of the underlying collateral, which in total increased by about 9% since their purchases in three years ago. Compared to the old bonds, the weighted averages interest rate on the new bonds was about 180 basis points higher probably due to increase in interest rates, but also as a result of us extending the fixed rate term of the new bonds. From a leverage standpoint on a fair value basis, our loan to value ratio on our total farmland holdings was about 57% in September 30. And if you were to include the Series B preferred stock into leverage bucket, that figure would only increase to 58%. We are comfortable with both of these levels, giving the relative low risk of quality farmland as an overall asset class. And while interest rate volatility continues to be a concern of ours, about 98% of our borrowings are currently at fixed rates and on a weighted average basis. These rates are fixed at 3.55% for another six plus years out. So we believe we are currently pretty well protected on the debt side against any further interest rate hikes, while the rates are rising credit remains readily available to us and we continue to be able to borrow money on terms that make the overall economics work for us. Regarding upcoming debit charities, we have a little less than $8 million coming to over the next 12 months for only about 2% of our total debt outstanding. Now move on to our operating results. First one note that we had net income for the quarter for about $6 million or $0.35 per share. A large part of the quarter-over-quarter change in our income statement was due to the completion of the operations conducted to our taxable re-subsidiary or TRS. In the prior quarter, we recorded about $4.8 million of operating revenues through crop sales. And we had about $5.1 million of related operating expenses. However, towards beginning of this quarter, that farm was leased out to an unrelated third-party tenant for the next 10 years, so I will only be recording rental income related to that farm going forward. Moving on to adjusted FFO, which removes the impact of our TRS operations. Our AFFO for the quarter increased by about $700,000 or 41% from Q2. The main driver of this increase was additional cash rents received during the quarter due to both our recent acquisitions and approximately $890,000 of participation of rents recorded during the quarter. Partially offsetting this were some increases in certain operating expenses during the quarter primarily interest expense, property, operating expenses, and net-related party fees. Regarding the increase in property operating expenses, almost all of this increase is related to the cost incurred to rent generators to power some new wells that we've drilled on some of our properties. These wells were drilled as part of ongoing irrigation upgrades, we are making on certain properties and it often takes the electric company quite a while to come out and connect the new wells to the grid, in the meantime, to allow the farmers to go ahead and access to water, we paying for some generator rentals to bring the wells online. We expect all of these new wells to get hooked up to permanent power during the fourth quarter. So we hope this expense category will go back down to normal at that time. Move on to our per share numbers, earnings from adjusted FFO for the quarter was $14.5 per share, which was an increase of $0.04 per share or 38% from the prior quarter. So after missing our dividend last quarter, which was our first miss over the past 12 quarters, we got back on track this quarter and we hope to maintain coverage going forward. Now move on to net asset value. During the quarter, we updated the valuations on 26 of our farms, all of which were revalued by independent third-party farmland appraisers. In the aggregate, these updated evaluations resulted in an overall increase of $8.8 million or 6.9% from your prior valuations. As of September 30, our funds were valued at about $579 million, all of which was valued based on either third-party appraisals or the actual purchase price. Based on these update valuations, and including the fair debt -- the fair value of our debt and all of our preferred stock. Our net asset value per share at September 30 was $13 and $0.79, which is up by $0.28, or 2.1% from last quarter. The primary driver to this increase was the net appreciation and value of the farms that were revalued during the quarter. This is partially offset by ongoing capital improvements we are making on certain of our farms. The values of these capital improvements won't be reflected in the farm fair values until the respective projects are complete. However, I will note that for majority of these capital projects, we are earning additional rental income as the funds are dispersed by us. Turning to liquidity, we currently have about $8 million of dry powder which translates into roughly $20 million of buying power for straight cash acquisitions. We also have the ability and intent to issue new OP units of consideration for purchases should the opportunity arise and over the past several months, we've been completing two closings per month of the Series B preferred stock, so we expect to receive additional proceeds for feature sales to that security as well. Finally, we have ample availability under our two largest farming facilities and we are continuously reaching out to new lenders as we enter new regions, so we have plenty of room and ability to continue borrowing and buying new farms that meet our investment criteria. And with that, I'll turn the program back over to David.

That's very good Lewis. The first-half of the year started off a little slow and acquisition front specialty act -- activity really begin to pick up for us in the third quarter. And looking at our list of possible acquisitions, it looks like that momentum is going to carry us through the fourth quarter as well and probably into 2019. Currently have four properties or about $20 million undersigned purchase agreements. And we're going through due diligence. We expect most of these acquisitions to be completed before the end of the year. Although one, two of them might slip over into 2019. We expect to be able to close these farms without the need for additional equity capital. But as there's no guarantee that any of them are close but usually they take a little bit of extra time and finally get to the finish line. Just a few final points, as most of you know, our fund specializes in farms that grow fresh fruits and vegetables and some farms that grow nuts and other tree crops. One reason for this is we believe investing in farmland growing crops that contribute to healthy lifestyle such as fruits and vegetables and nuts, mirrors the trends that we're seeing in the marketplace today and that is people continuing to switch toward more healthy foods. Another major reason for our business strategy is to focus on farmland growing fresh produces due to the fact of inflation on that particular segment. According to the Bureau of Labor Statistics, the overall annual food CPI generally keeps pace with inflation. However, over the past 20 years the fresh fruit and vegetable segment of the food category has outpaced the total CPI by a multiple of 1.7 times. And while prices of commodity crops are typically more volatile and susceptible to global supply and demand, fresh produce is mostly insulated from the global volatility mainly because the crops, such as the ones we're investing in, are generally consumed locally within a short time after being harvested, so they're not being buffeted by outside prices. Ultimately we believe farmland that is GMO-free and growing healthy crops such as fruits and vegetables as well as nuts are going to continue to outperform the overall farmland market in terms of both cash returns and long-term value appreciation. Overall, demand for prime farmland, such as those growing berries and vegetables remain stable to strong in almost all areas of our farms. And this is mostly along the West Coast, including most of California, Oregon, and Washington in the East Coast, especially Florida, and now on up into North Carolina. And farmland, overall, continues to perform extremely well compared to other asset classes that despite some of the recent downturns in certain regions, the NCREIF Farmland Index, which is currently made up of about $9.4 billion worth of agricultural properties, including all of ours, has an average annual return of 14.9% over the past 15 years, compared to 9.1% for the S&P Index. And we want to mirror that long-term annual return with our -- we don't have obviously have $9.4 billion worth of properties, but when we get all of our properties in place we want to be like that index. And you should know that the Farmland Index has never had a negative year, like the S&P had during the great recession. Farmland has generally provided investors with a very safe haven during turbulent times in financial marketplaces, both as land prices and food prices, especially on the fresh produce side have continued to rise steadily. And I'll have to say this for the 100th time, farmland has historically been an excellent hedge against inflation. And I think our properties will provide that as well. Well, as you know, you we recently raised our dividend again, it was a small amount, but we're now paying $0.0444 per share per month in cash. Over the past 46 months we've raised the dividend 12 times now, resulting in the overall increase of about 48% in our monthly distribution rate to shareholders over this time. And this is a reflection of the wonderful accomplishments of our team and agricultural experts that we have inside the company. Their experienced at finding and managing high-quality farms, pairing it with very strong tenants who are generally reliable in their rental payments. And our goal is to continue increasing the dividend at the rate that far outpaces inflation. As you know, I'm the largest shareholder, and I'm definitely liking all these dividends, so I want to increase the dividends as much as possible. And since 2013, we've made 69 consecutive monthly distributions to our shareholders totaling $3.78 per share in total distributions. Paying distributions to shareholders, just so you know, is paramount to our business. We are in essence a dividend-paying company. The stock price is currently trading at $13.03; it's what it closed at yesterday, which is below our net asset value. Thus we're hopeful our stock price will rise in the near future so we can trade at above our net asset value. So if you by the stock today you're getting a 5.8% discount from the estimated net asset value per share of about $13.79. What a bargain, I think you should all step up and buy some more shares. And along the way, just so you know, you're getting that $0.0444 per share per month in cash distributions, and that's about a 4% yield. That yield is right in line with the average yield across the entire REIT index today. So when you consider the relative stability of the underlying assets you're investing in with our stock, I think our stock offers a nice alternative to bond funds and other REIT funds. In closing, now, please remember that purchasing stock in this company is a long-term investment in farmland. I think an investment in our stock really has two parts. First, it's similar to gold, it's a hard asset, dirt, and it has intrinsic value because there are limited amounts of it, and it's being used up by urban development. And then second, unlike gold and other alternative assets and the active investment with cash flows to investors, I believe we're better than a bond fund because we keep increasing the dividend. We expect inflation, particularly in the food sector to grow, and we expect values of underlying farmland to increase as a result. And we expect this to be especially true on the fresh produce side as people in the United States are trending more and more to eating these healthy foods. But I think a good way to look at our farmland churn is first it's a hedge against inflation in both food prices in the other areas. And second, for those looking for an asset that doesn't correlate to the overall stock market, I believe this is it. So if you like what we're doing, please, buy some stock. Keep eating fresh fruits and vegetables. And now, if you'll come on, operator, we'll have some questions from all of those nice people who've listened to us give our presentation.

Thank you. [Operator Instructions] Our first question comes from Lisa Springer with Singular Research. Your line is now open.

Thank you. Good morning. My question is, what are the factors you consider when you're contemplating the sale of a property? And should we think of property sales as being a rare event for the company?

Yes, we're not in the business of selling. The only reason we sold the one that we had out in Oregon was that the tenant that we had, and that tenant had bought the tenant that we originally started out with, had farms all around us. And it really seemed much more logical for them to have that farm as well. Plus, I have to at admit, at some price just about every farm we got is going to be sold. If you offer us a billion dollars for the company you can have that as well. At the end of the day, we're in the business of making money for our shareholders, and that was a great opportunity for us to sell that and move it down to Florida. We actually bought a much bigger farm down there with the profits and a little more equity that we put in in order to close that. So, our goal is not to sell to other farmers, but rather to hold on and continue to increase the dividends to our shareholders. And one day, I know some of you may know about our farm that we've got in Oxnard, and it's an incredible farm. It's about 600 acres. You can walk from the farm in two minutes to the ocean and beach. If I could get that zoned correctly we'd have an enormous winner. But as you know, in California it's very hard to get anything zoned for housing. But probably someday in the future someone will figure out how to do that and we'll make a few, I don't know -- a lot of money on that one. But Lisa, you're exactly right, we're not in the business of selling, and it's going to be rare that we're going to be selling properties.

Okay. Thank you.

Next question.

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

Good morning, everyone.

Good morning.

So, could you maybe provide a little more color on some of the leasing activity that occurred during and subsequent to quarter end? I mean, it seemed like there's a lot of moving pieces there. Some rent rollups, some rent roll-downs. Just maybe specifically with Ventura and Hillsboro, what maybe caused those lease agreements to change?

Well, Lewis is on top of that. I want you to speak to that one, Lewis.

So the one farm in Ventura, it was -- we just removed about 26 acres of hillside acres that were determined to be not farmable. And when we executed the lease initially that acreage was included into the leased acreage. But after a year of trying it just didn't -- too hilly there. So it wasn't a reduction in the rental rate per acre, we just removed some acres out of the lease.

And just so you know, John, we're probably going to end up planting trees on that hillside as opposed to trying to farm it for strawberries or any others.

And Chisel [ph], the operator, just wasn't able to get financing in line for this growing season. So, it has previously been rented out. At strawberry rates we found a tenant to take it on immediately for the next coming season for at veggie rates just under a one-year lease, so well we have to give us enough time to market it out to other strawberry growers and time for next season, so hopefully we'll be able to get that one back up to strawberry rates next summer and that farmer farm is right in the strawberry area. So we should be able to get somebody. You have to hit him just right John because they can't take it in the middle of the season. You can't go out and get the plants and put them in the ground mid-season, you have to do it at the beginning of the season and everybody does their plans months and months in advance of planting anything because they have to go get the plants from most of the plants are grown in Shasta area of California. So it's a whole process so sometimes we get out of sync with the timing of strawberries or whatever they're planting.

Okay. It sounds like kind of a temporary lease roll down and then you expected to come back up maybe next year so maybe execution is -- I'm getting a new strawberry tenant in there.

Yes, that's right. And then, is there something specific going on in kind of ambient [ph] and county Michigan, I know that it's both where you have the one tenant you ran into some credit issues and then also another set of kind of lease adjustments going on there, is that specific to the geography or is that just a coincidence that all that's happening in the same area?

Well, that's a big blueberry area and it's one of the better areas to grow blueberries in and blueberries have gone up and down in value and some of these guys just got whipsawed by too many blueberries coming in from the east coast. And as a result, they didn't make any money and then they can't get a loan from a bank because they can't pay back the bank loan that they've got for the inventory. We've got a couple of tenants that are hopefully going to pick up this we had to step into this one area and take over the farm and we'll get somebody to its dormant now obviously it's wintertime and we will hopefully have somebody in place when the farm is ready to come back up in the springtime. But yes, that's a difficult area I know just about everybody up there it had some kind of problems growing.

And John, you probably just on the other on the other farm in the same county, you probably saw this in the queue. But we did, that we did execute a renewal for that lease and as you refer to the cash rents are down but we -- that's another situation where we change the rent structure from just a fixed cash to a lower fixed cash rent amount in exchange for a crop share component. So we're hoping that that will bridge a majority maybe not quite all but at least the majority of the gap there.

Understood and then kind of on the positive side. Maybe what drove the lease termination and the rent roll up in Santa Cruz was definitely you guys kind of expected or was that just kind of fortuitous?

So that was one [indiscernible] it's a new tenant we had I mean I think properties rents in that area have increased at a pretty decent rate, so we were just able to get a new tenant that was willing to pay more and the existing tenant was willing to step away they're going to try a new farming methodology there, the hydroponics for raspberries, so it's just a good price for both us and for the gift situation for the old tenant too.

I had several people asked me about that. If you go online to Gladstone farms and look at that farm, you'll see it's right in the middle of a lot of houses. So I don't know, if we'll ever sell it to a housing developer but it is prime property for that to happen.

Understood. And then have all of these different kinds of movements and leasing activity were those factored in your updated NAV and was that know kind of at the timely appraisers we are going to the portfolio?

No, we have had the Michigan and the Florida farms, they were praised recently and I mean this isn't a long-term change in the market rent for the market cap rates, so that it wouldn't have impacted David the sales comps valuation approach still -- is still supports the values that were there and on the positive side note domain that was also not factored in yet. But they I think these all these properties will come up for appraisals over the next three or four quarters, so any change in market trend we will capture them then.

Okay. And then, with regards to kind of revenue sharing rent how should we kind of expect 4Q trend versus 3Q. I mean, is the bulk of it going to come -- have already come in through yours or going to be decent amount more in 4Q, you just kind of generally speaking?

Well, I think there will be a decent amount in Q4, but it won't be the same as the 900 thousands that we've got today.

Understood. That's it for me. Thank you guys very much.

Okay, next question.

Thank you. [Operator Instructions] Our next question comes from Sean Sharad [ph], a Private Investor. Your line is open.

Good morning, thank you, and appreciate the opportunity to ask a question. It's good to hear the solid results here for Q3. I'm interested in understanding more on how you view the ability of the fun to perform relative to inflation in an increasing interest rate environment. My understanding is that most of the enterprise value is debt funded. You can speak to this generally if you prefer, but a specific point is how you view the cost of service debt with higher interest rates, since that challenges the ability to fund the outperform inflation, is there an interest rate threshold where you viewed as preferable to accelerate debt reduction rather than increasing dividend distributions?

Well, that's what you're matching up all the time that we live on the spread. And what happens when interest rates go up that we have to use when we're buying something, it depresses the amount that you can pay for it. And properties do go down in value. when interest rates go up. As far as looking at on the future, most of the mortgages that we use, and that's what most of our debt is, it's in mortgages, they're all matching long-term. So we're locking in the spread for 5, 7, 10 years and don't have any problems there unless, of course, the tenant has a problem but at the end of the day, we're not we're not subject to the movements of interest rate with regard to our existing but when renegotiate, we have to take into account what the mortgages and can we pay the mortgage and it's always something that you're looking at every time you do a transaction and every time a new release comes up, you're trying to match it and make sure that you're always ahead of the curve and given the fact that they are moving interest rates up because we mortgages do typically follow whatever's going on in the 10 year Treasury every time they bump that up a little bit, it just means that properties have to pay more rent or they can't get sold to people like us that depends on the spread and today it hasn't heard us that much but at that some rate everything hurts I can remember used to make loans to small businesses at another company I ran and we did it based on prime and prime we were doing five points over prime and prime move from under he was under. I think it was 7% to 18%. So five over prime was a bit stiff for anybody to pay, and obviously you got a problem at that point in time. Now, those loans were all variable. So we lived and died right with the interest races as they moved, hours are fixed now. So we try to lock it in for the long-term. And that's the goal is to lock them in and hopefully, in seven years the property is going up in value, and people are paying more, but there's certainly no bet that is one of the bets that everybody makes by owning our stock.

So you don't see any preference towards reducing the debt as long as you think you have the spread, is that -- I have that right what you said David here.

That is right. If you can make a spread, you're going to do the next day, or you're going to do the next transaction. If you can't make the spread, you have to walk away. So if somebody tells you, gee, I'm not going to sell this farm for that price, because I think it's worth more and you just look at that and say to yourself so, I can't make the numbers work. I can't make enough money for my shareholder, so I'm not going to take any equity and put it into that transaction. I'm going to move on to the next form.

Thank you.

Okay, we have any other questions?

I'm not showing any further questions at this time. I would now like to turn the call back over to David Gladstone for any closing remarks?

Well, thank you very much. We appreciate everybody calling in and we look to talk to you next quarter. That's the end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day.