Gladstone Land Corporation (LANDO) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation’s Fourth Quarter and Year Ended December 31, 2018 Earnings Call and Webcast Call. 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 call will be recorded. I would now like to introduce your host for today's conference, David Gladstone. Please go ahead, sir.

All right, Chris. Thank you very much. Nice introduction. And welcome to the quarterly conference call with Gladstone Land, and thank you all for calling in. We really appreciate the time we have with you and hope we get some good questions at the end of this presentation. Now, we're going to move -- first please feel free to come by and visit us if you're ever in the Washington, D.C. area. We're located in a nearby suburb called McLean, Virginia and if you have a chance to come by you'll see some great team members here. We have over 65 people managing about $2.5 billion in assets across our four public companies. We're going to start with Michael LiCalsi. He's our General Counsel and Secretary. He also serves as the President of Gladstone Administration, which does all the administrative work for the Gladstone funds including this one. Michael?

Thanks, David and good morning. 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 in our Forms 10-Q ,10-K and other documents that we file with the SEC. These can be found on the Investor Relations page of our website www.gladstonefarms.com or the SEC's website at www.sec.gov. And 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 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. Also, we'll discuss adjusted 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 all better indications of our operating results and allow better comparability of our period-over-period performance. We ask that you take the opportunity to visit our website once again gladstonefarms.com, sign up for our email notification service so you can stay up to date on the company. You can also find us on Facebook. The keyword there is The Gladstone Companies. And we're even on Twitter. The handle there is @gladstonecomps. Today's call is an overview of our results so we ask that you review our press release and Form 10-K both issued yesterday for more detailed information. Again those can be found on the Investor Relations page of our website. Now with that I'll turn the presentation back to David Gladstone.

Okay. Thanks, Michael. We had to overcome some challenges in 2018, this is the year end presentation that we're doing particularly in that farm operation that we took over one of the strawberry farms in California, and that farm came in well below expectations. As a result the company didn't cover its quarterly dividend for that quarter and for the final numbers for the year. This is out of the way now and so we hope to continue to cover the distributions every quarter going forward. On the other view, it was another strong year for acquisitions. We acquired 13 farms, $89 million almost all of which occurred in the second half of the year last year. We did sell one farm at a very nice gain and had that gain validate the valuations that we are using in valuing our companies and our farms. This sale generated a large gain and we made it a tax-free transaction by rolling the profit into a new purchase. We are active in the equity markets as well during the year. Before I get to the details of these and other events, I'd like to give a brief overview of our business, but this is the last time that we're going to give these overviews and we'll put some of the presentation that we cover in this overview in the K or Q and the press release, so we'll shorten our presentation. So going back in time as most of you know, the company buys farmland. Farmland is called an alternate asset, because the assets are considered to be illiquid and they are hard assets, which should be around in our case for thousands of years. While the underlying assets may be relatively illiquid, your investment of course in the stock is not, since it's traded on Nasdaq under the symbol LAND. We think this company is essentially a natural resource company that invests in farmland and these farmland investments tend to have low correlation 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 who we consider to be good experienced farmers. And we typically don't farm any of the land ourselves, but rather lease the properties out to unrelated third parties. Our primary investment focus is on farms and farm operations growing a variety of high-value, fresh produce, and annual row crops, which its secondary focus is for farms growing more permanent crops. And these are the permanent crops that are grown on bushes and trees and vines, such as almonds, apples, blueberries, cherries, grapes, and pistachios all of which we grow in one farm or another. These types of crops are planted once and then are harvested for many years going forward. We like the fresh produce area and parts of the permanent segment of farms, because they typically provide greater returns than other crop types. We buy cropland that is irrigated and has access to good water. We also look for farms that have excellent soil. In addition, we seek farms and lease to those typical among the most well-established farmers in those growing areas that we're in. We prefer to keep the same farmer on the property for as long as possible, because they know the nuances of operating that particular farm. Our objective is to be the 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. Currently, most of our total revenue comes from farms that are growing types of food that you would find in either the produce section or the nut section of your local grocery store. We consider these foods to be among the healthiest type foods and we're seeing a growing trend towards organic products among these food groups. That's especially true of the product section in your grocery stores. So currently about 35% of our fresh produce acreage is either organic or in transition to become organic and about 20% of our permanent crops fall into this organic category. We believe organics -- the organic section will continue to be a strong growing area. In addition, over 95% of our portfolio is in GMO-free products, so we're more towards the healthy side. We currently own 74,000 acres on 86 farms, 10 states across the U.S. and these farms are valued at just over $620 million at December 31, 2018. Across our farmland holdings, we own farms in 19 different growing regions. One thing I want you all to know is that, these farmers grow over 40 different crop types. And on top of that all, our farms are leased to 64 different tenants, all of whom are unrelated to us. We think this is great diversification. 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 to our ability to pay our dividend. We only have a few farms growing grain crops like corn, wheat or soybeans, because quite frankly the grain prices just continue to be too low to make a reasonable profit in the United States. There's still too much grain in the world markets today, and as a result growing of these grain crops continues to have a lot of difficulty selling their grains at a profit. We own a few grain farms, one in the Midwest and one in Arizona. But the majority of the acreage is growing things like organic potatoes in the Midwest and we also have some edible beans and popcorn, so we are in the Midwest in a smaller way than we are on either one of the coasts. Most of our growing regions, we continue to see a steady trend of farms being sold and converted into suburban and urban uses and that's probably the main thing that I'd point to, regarding the factors that continue to drive long-term land values. The amounts of farms in many of these regions is relatively finite, especially in places like California's coast, also in Oregon and Florida. There are very few, if any, new farms being developed and no trees to cut down, no more land that can be converted to farms. Almost all of the arable land in these regions is already being farmed and is slowing being converted to other uses such as housing and schools and factories. And once it gets converted, it never goes back to farmland. Water availability is another factor that drives rental rates and land values. Farmers are fallowing and not planting anything on land where water is too difficult or expensive to obtain and that is driving up rents and prices of land with productive wells and reliable access to multiple water sources. And that's why, whenever we're 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 the water conditions to make sure that -- well, that the farms have plenty of water for the long-term use. We want to know that water availability is sufficient enough to withstand any drought. In the last California drought, which was about three years ago, we didn't see any significant reduction in the production or rents of our farms. And speaking of California, they've been getting a lot of rain lately, particularly in the southern part of the state. They're saying it's one of the wettest winters in California in quite a while and maybe even going back more than 10, 15 years. So I'm sure, a welcome news to a lot of farmers out there, including our own, who depend on snow in the mountains to melt in the summer and recharge the aquifers, so we're looking good, at least this year. Finally, one of the factors driving farmland value is inflation or the reduction in value of the U.S. dollar, due to the government's printing so many of them. And while the government tells us that there's been very little inflation recently, anyone who goes to the grocery store can tell you that food prices, especially fresh produce prices have been going up steadily. But keep in mind, inflation in food prices is good for us. It allows our farmers to charge more for their crops, which enabled us to earn more rent on our farms. This is the last time I'm going to go through those kinds of things and I'll incorporate most of those as I mentioned before in the attached press release and of course in the Form 10-K. Now for some recent activity. During the quarter, we acquired three farms about $40 million that grow a variety of crops such as almonds, figs, pistachios and specialty potatoes. By the way, fig trees last a couple hundred years, so we're looking long term for that investment. And shortly after year end, we bought a small farm in Nebraska for $2 million that primarily grows popcorn and some edible beans. Overall, the initial net yield on these farms is about 5.3%, but all of these leases also contain certain provisions such as annual escalations or participation in the crops and that should push the figures higher in the future. On the leasing front, we had quite a bit of leasing activity since our last call. After that quarter, we entered into and executed new leases or amended existing leases on 10 of our properties. The total new leases will result in an actual small decrease of about $294000. However the thing that keeps in mind here is that five of the new leases include participation rent components meaning that we own part of the crop and get part of the revenue and only two of the prior leases did, so we're upping the amount of participation in the crops. This previously recorded about $2 million in participation rents during the year, so we definitely like that extra bit of income. And Lewis what is it you're expecting hopefully about $2 million this year? Is that where we are?

It should be similar to this year.

Yes. As of today, our farms are 100% leased, so we are looking really good at this point in time, and looking ahead briefly less than 2% of our total minimum annualized rent from leases that expire over the next six months. We've begun negotiations with existing tenants on all of those 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. A lot of these leases that are expiring over the next six months were originally just short-term leases that we had put in place when certain of our farmers as temporary stopgaps to give us sufficient time to properly market these farms out to potential tenants. Discussion with the potential tenants on these farms seems to be going well, so we're hopeful that we'll see some increase in these renewals, but we can't guarantee that until the leases have been signed. Now our capital raising efforts during the quarter. We sold about $21 million of common stock through small overnight offerings in our ATM program. And during the fourth quarter, through the first two months in 2019, we raised about $27 million in net proceeds through the sale of our non-traded Series B preferred stock. And just as a reminder, we plan to list the Series B preferred stock on NASDAQ, so that shareholders will have liquidity in the coming months. Now in the process of these sales, we pay Gladstone Securities an affiliated broker dealer certain sales commissions and dealer management fees. However, Gladstone Securities is really just a conduit in this offering as it pays out almost all of these fees to unrelated third parties involved in the offerings such as participating broker dealers and wholesalers. To-date, it's paid out 94% of the fees it's earned to other third parties who are helping us sell the Series B preferred stock. The point of the Series B is to allow us to grow our portfolio at a steady pace without having to do quite as many common offerings which as you know immediately dilutes the value of the common stock. We look at it in a way to augment our long-term debt needs as it has a fixed coupon and allows us to get a nice spread on the amount of money that we raise with a Series B versus what we're able to invest it at. And now, I'd like to give just a brief highlight of some of the progress that we made during 2018. We invested $91 million in the acquisition of 13 new farms adding 12,000 acres of farmland to our portfolio. The initial weighted average of the cash yield on these farms was 5.6%. However, almost all of the leases on these farms also contain provisions that should push the overall cap rate on these acquisitions to a much higher number such as the fixed annual escalation that we get as well as those participating rents. And the new long-term debt we put on these farms in 2018 has a weighted average effective yield of about 4.4% and about eight years in duration. These include loans from three new lenders as we continue to further diversify our lending base. We sold one farm in Oregon that we bought five years ago for a purchase price that was 49% higher than the new cost -- net cost basis on the property at the time of the sale and we completed this sale as part of our tax-free exchanging parlaying the proceeds into an acquisition of a larger higher yielding farm. So that was about $6 million in what I call free equity since we didn't have to pay much to get it and it's working for you now. We executed nine new leases during the year on our farms which resulted in an increase in annualized net RIETs -- net rents of about $258,000. And on top of that, four of the new leases included participation rent components as compared to only one in the prior leases. We increased our minimum annual revenue run rate by 17% and our net asset base by 23%. So, we're continuing to go along on the program that we explained five years ago when we went public and we haven't changed the story at all. Well, that's enough of the operations and now I'm going to turn it over to the Chief Financial Officer, Lewis Parrish to talk to you about the numbers. Lewis?

All right. Thank you, David and good morning everyone. I'll begin by discussing our balance sheet. During the fourth quarter, our total assets increased by about $55 million or 11%, primarily due to our recent acquisitions which were funded through a combination of new fixed-rate borrowings and proceeds from new equity issuances including both our Series B preferred stocks and shares of our common stock. From a financing perspective, in addition to the proceeds from equity issuances David mentioned earlier, we also secured about $20 million of new long-term borrowings from three different lenders including two new lenders. On a weighted average basis, these new borrowings carry an effective interest rate of 4.8% which is fixed for the next eight and a half years. From a leverage standpoint on a fair value basis, our loan-to-value ratio on our total farmland holdings was about 53% at December 31st. And if you were to include all of our preferred issuances in the debt bucket, our total leverage would be about 58%. We're comfortable with these levels given the relative low risk of high quality farmland as an overall asset class. While interest rate volatility continues to be a concern of ours, essentially all of our borrowings are currently at fixed rates. And on a weighted average basis, these rates are fixed at 3.58% for another six years out, so we believe we are currently well-protected on the debt side against any further interest rate hikes. Regarding upcoming debt maturities, we have about $31 million coming due over the next 12 months. However, about $22 million of that represents the maturities of three bullet loans coming due either at the end of 2019 or the beginning of 2020. Given that the three properties collateralizing these loans have increased in value by an aggregate $1.5 million since their respective acquisitions we do not expect to have any problems refinancing each of these loans with either the current lender or potentially new lenders. So removing those maturities we only have about $9 million of amortizing principle payments coming due over the next 12 months or less than 3% of our total debt outstanding. And now I'll move on to our operating results. First, I'll note that we had a net loss for the quarter of about $1.1 million or $0.08 per common share. Compared to the prior quarter our adjusted FFO decreased by about $147,000 or 6%. From a cash earnings perspective our operating revenues increased by 3% over the prior quarter driven primarily by our recent acquisitions partially offset by a decrease in the amount of participation rents that we recorded during the fourth quarter. During the fourth quarter we recorded about $304,000 of participation rents versus $890,000 in Q3. Core operating expenses decreased by about $46,000 or 2%. We had slightly higher property operating expenses offset by lower total net related party fees and G&A expense. One note on our property operating expenses, over the past two quarters we recorded higher-than-normal amounts related to projects from three of our properties particularly costs to rent generators for newly drilled wells on two of our properties and costs related to getting certain permits in place on another of our properties. Two, of these three projects have been completed since year end and we think the third project is extremely close to being finished as well. So we believe that our property operating expenses will return to a more normalized amount if not in Q1 of 2019 then certainly by Q2. From an AFFO perspective offsetting the increase in our operating revenues and a decrease in our operating expenses was an increase in interest expense due to additional borrowings and an increase in the amount of dividends paid on our Series B preferred stock, due to additional issuances during the second half of the year. Moving on to our per-share numbers, earnings from adjusted FFO for the quarter was $13.3 per share which is equal to the dividends declared on our common stock for the quarter. Now this is a decrease of $0.12 per share or 8% from the prior quarter driven by the factors just discussed as well as the additional common shares issued as part of the overnight offering we completed in December. So after missing our dividend in Q2 for the first time in about three years we got back on track and covered it again for each of the past two quarters. Now I'll move on to net asset value. There wasn't much movement in the valuation of our farms this quarter as we only had two of our farms revalued both of them by independent third-party farmland appraisers. In total, these updated valuations resulted in a net decrease of about $300,000 from their prior valuations. So as of December 31 our farms were valued at about $618 million all of which was valued based on either third-party appraisals or the actual purchase prices. Based on these updated valuations and including the fair value of our debt and all of our preferred issuances our net asset value per share at December 31 was $12.88 which is down by $0.91 or 6.6% from last quarter. The three primary drivers of this decrease were an increase in the fair value of our fixed-rate long-term borrowings due to changes in longer-term, market interest rates, ongoing capital improvements we're making on certain of our farms, the values of which won't be reflected in the farm's fair values until the respective projects are complete. And three, dilution from equity issuances during the quarter particularly the additional shares issued as part of the December common offering as those proceeds have yet to be fully deployed into new acquisitions. Turning to liquidity, we currently have about $35 million of dry powder which translates into roughly $85 million of buying power for straight cash acquisitions. We also have the ability and intent to issue new OP Units as consideration for purchases should the opportunities arise. And we're now generally completing two closings per month of the Series B preferred stock so we expect to receive additional proceeds through future sales of that as well. Finally, we have ample availability under our largest borrowing facility and we're in discussions with the existing lender to expand our other facility. Overall, credit generally remains readily available to us and we're continuously reaching out to potential new lenders 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.

All right. Very nice report. From an acquisitions standpoint, our list of potential farms to buy remains very healthy. We currently have three properties of $42 million under signed purchase agreements and we're hoping to be able to complete these acquisitions by June 30. We're able to close these farms without a need for any additional equity capital. But as you know there's no guarantee that any of them will close and if we find a few very large farms we may need to do an offering. Just a few final points. As most of you know our funds specialize in farms that grow fresh fruits and vegetables and some farms that grow nuts and other tree crops. One reason for this is that we believe the investment in farmland growing crops that contribute to healthy lifestyles such as fruits and vegetables and nuts, mirrors the trend that we see in the marketplace today and that's the continued switch towards more healthy foods. Another major reason why our business strategy is to focus on farmland growing fresh produce is due to the effective inflation on particular segments. 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 fruits and vegetables segment of the food category has outperformed the total CPI by a multiple of about 1.7x. And while prices of commodity grain crops are typically more volatile and susceptible to global supply and demand fresh produce is mostly insulated from global volatility mainly because the crops are generally consumed locally within a very short time period of harvesting. As they say in the business, if you can't get a strawberry in somebody's mouth in 14 days after picking it it's gone. So things move very quickly in the produce side of the business. 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 farmland market in terms of both cash returns and long-term value of the farms themselves. Overall demand for prime farmland growing berries and vegetables remains stable to strong in almost all of the areas of farms where we're located in and this is mostly along the West Coast including California, Oregon and Washington and the East Coast especially, Florida. And farmland overall continues to perform extremely well compared to other assets despite some of the recent downturns in certain regions. The NCREIF Farmland Index which is currently made up of about $10.2 billion worth of agricultural properties including all of ours has averaged an annual return of about 14.7% over the past 15 years compared to just 6.9% in the S&P index. And you all know that Farmland Index for those 15 years has never had a negative year like the S&P had during the Great Recession. Farmland has generally provided investors with a safe haven during turbulent times in the financial marketplace as both land prices and food prices especially for fresh produce has continued to rise steadily. And I'll say this for the 100th time; farmland has historically been an excellent hedge against inflation. Distributions and -- as you all know we recently raised and -- in fact we do it every quarter and we are now paying $0.04445 per share, per month over the past 49 months and we've raised the dividend 13 times including the overall increase of about 48% in our monthly distributions rate to our shareholders at this time. And this is a reflection of the wonderful accomplishments by our team of agricultural experts. They are very experienced in finding and managing high-quality farms, paired with strong tenants who are generally reliable in their rental payments. Our goal is to continue to increase the dividend at a rate that outpaces inflation. As you know I'm the largest shareholder and I'm definitely liking those dividend increases. Since 2013 when we did our public offering, we've had 72 consecutive monthly distributions to shareholders, total of $3.91 per share in total distributions. Paying distributions to shareholders is paramount to our business, and we are in essence just a dividend paying stock. Our stock currently trades at $12.15. That was the close on yesterday's closing which is below our net asset value. Thus, we're hopeful our stock price will rise in the near future, so that it trades at or above the net asset value that we put on the stock. So, if you buy the stock today, you're getting a discount from the estimate net value of about 6% and so you're buying at $12.15 on a stock that's worth $12.88 in net assets. So, in the long -- well, along the way, you're getting a dividend per share of about a 4.4% return. This is a yield that's right in line with the average of the 190 REIT Index today -- 190 REITs that are in the REIT Index. But when you consider the relative stability of the underlying asset that you're investing in with our stock, I think our stock offers a wonderful alternative to the stock market. So, just in closing, please remember purchasing stock in a company like ours is a long-term investment in farmland. I think the investment in our stock really has two parts. One, it's similar to gold and it's an asset. It's dirt. It has an intrinsic value because there's a limited amount of it and it's being used up by urban development. And the second reason is unlike gold and other alternate assets, it has an active investment with cash flows to its investors and we believe we are better than a bond fund because we keep raising and increasing the dividend, so you get some protection from inflation. We expect inflation, particularly in the food sector, to grow and we expect the values of the underlying farmland to increase as a result and we expect especially it to be true in the fresh foods sector that we're in. So one way of looking at our farmland furnace is a hedge against inflation, both food prices and other areas. And second, for those looking for an asset that doesn't correlate to the overall stock market, we believe that that's true with our assets. So, if you like what we're doing, please keep buying the stock and keep eating fresh fruits and vegetables and nuts. And now we'll have some questions from those who follow us. So, Chris, if you'll come on and tell them how to ask some questions.

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

Thanks. Good morning, guys. Lewis, what's the incremental NOI that you guys are expecting from those three properties that you had capital improvements going on as of year-end, once they're stabilized?

So, over the past two quarters -- I'm not sure about the incremental yet, but over the past two quarters relating to those three projects in aggregate, we've recorded about $500,000 or $600,000 of expenses. So not sure if we'll see that go down to zero right at year one, but we do expect to see a significant decrease in Q1, and hopefully, a decrease to get rid of the majority of those costs by Q2.

Okay. And then one of the other components of the NAV decline that you guys talked about was the equity raise. At this point, how much acquisition firepower you consider whatever cash from the equity raise you still have plus debt capacity, do you have to make acquisitions without raising any additional equity either under the preferred or the common?

So where we are today, we have about $35 million of dry powder. If we were to leverage that up to 60% which has been our norm in the past, that would translate into about $85 million of buying power today for straight cash, no OP Unit transactions for acquisitions.

Okay. And then how much of the revenue in 2018 turned out to be rent participation versus just straight net lease?

So we had $1.2 million of participation rents. I think it equated out to about 4% maybe just slightly less than 4%.

And what's the expectation, it seems like with the new leases that you guys have signed, there's been a greater participation component to that that you guys put into the release. What is that 4% likely to be when you guys think about the current run rate on the assets that you have -- that you own today? Are we talking about 5% or 6% or are we talking about going up to high single-digits in 2019?

It shouldn't go up too much. I would think 5% to 6% would probably be a pretty accurate estimate, but, I mean, I don't have those numbers in front of me, but just kind of an off-the-top guess, that's what I'd put it at probably. No more than 6%.

Okay. And then in terms of the eight leases that you did thus far this year, what's the average length on those? What are the farmers wanting to do? Are they wanting to do one years or are they going out longer? How should we be thinking about that?

So for all the leases that we renewed during the year, the average -- weighted average term is just over five years. However, that is brought down by -- as David mentioned, there were some leases that we put on there as just kind of temporary one-year stopgap leases, while we had time to market the property, and those are in transition and we expect to have new leases on those that should be longer than one year by this spring or certainly by the summer.

Okay. Is that was the ones those -- those were the leases you were talking about for that you did in 2018 or are those the eight leases that you executed thus far in 2019?

The ones in 2019 range in terms between one year and three years.

Okay. So they're shorter in term. All right. And then a last one for me. How many leases right now are you not currently locked in for 2019 at this point?

So right now we are fully leased out.

Okay. Thanks guys. Appreciate it.

Sure.

Next question.

Thank you. [Operator Instructions] And our next question comes from Brandon Travis with Ladenburg Thalmann. Your line is now open.

Good morning. So touching on the percentage rent component again, how would you compare the 2018 annual number to the historic leases that have not historically had a percentage rent component?

So most of the participation rent -- the leases with those participation rent components, they came online for the first time for us in 2018. We had one lease that had a payment received in 2018 that was about $300,000, and I think it was a similar amount received in this current year, but I mean most of it's due to either A, us acquiring immature orchards in the past that are just now coming into production and should continue for quite a while, or at lease -- or properties that we acquired with a mature orchard, but the lease was put in place when we acquired it over the past year or so. So the participation rent component is just now coming into play for us.

Brandon, when you think about these percentages, you have to remember that when we add a lease that is a new one, the amount of rent that we're getting is a gross number and the participation may be 2% or 3%, when you add it into all of the rents that we're getting. So, it's not going to go up very fast unless we went crazy and started doing lots of participation rents.

Okay. That’s helpful. And then with the lease expirations coming up in the next six months, it looks like you guys are ahead of these. But for the chance that something doesn't go according to plan, would you consider the Tierra structure again?

Oh, I hope not. We're not farmers, and we happen to hit this -- about every third or fifth year at least, you're going to get one year that the weather is going to go against you pretty bad, and so we happened to pick that year to lease, and I really don't want to be in that business. We want to be in the rental business, not the operation business. And yes, the participation rents take us a little bit into that area, but we've got enough rent coming in from straight rents to really make the company continue to grow at the pace that we want to grow, and those are sort of like extras that come in. So the probability of us farming again is extremely low. I don't want to say it's never going to happen because you never know what's going to happen in the world, but that's not our goal at all Brandon.

Understood. But if it would happen again, at what point in the re-leasing process do you make that decision?

Well, as you know, we've told the story several times. The last one occurred at the most difficult period in the situation we had. The two owners of the business who rented the farm that we ended up running died, and there wasn't really a structure in place. They sold off the assets. The people who bought the process did not want that farm. Because it was late in the season, we had to hustle in order to even get plants to plant. The other thing that made us go in that direction is they had already made up the ground. They had laser-leveled it, and in addition to that they had put in all the irrigation systems. So we were just picking up a farm that was almost ready to go. And we thought that would be wonderful except that the year was really miserable in terms of the weather. And so we're having a little bit of that same thing going on for our farmers in Oxnard this year. There's been a lot of rain, and it's beat up the berry bushes pretty badly. They come back in two weeks. But I don't know the last three or four days have been beautiful weather in California, so hopefully they come back and our farmers make a lot of money. But you're – unfortunately, this is a manufacturing operation. Your manufacturing situation is a live plant. And in addition to that it's outside, so it's unpredictable when it comes to the weather and to the health of the plants, and it's very well unknown in the business what the weather is going to be. And so as a result, there's just no way of getting good predictions and that's the reason we don't like it because it lacks the predictability that we want our stockholders to see. And yes, we're dependent on those farmers, but God bless them all. They do a great job of hedging against the weather by having farms all up and down the coast in California and in Florida and some of them actually have plants and farms in Mexico, some of them are down in Chile, so as a result they have income from other areas rather than just sort of one area and that's a benefit to us. We like the diversification of our farmers. Q – Brandon Travis: Understood, thanks for the color. And then kind of switching gears with the borrowings from the diversified financial towards year end, that 5.7% effective rate is about 400 basis points higher than the rest of the borrowings made in 2018. Can you kind of discuss what drove the higher rate there and what you're seeing in the current debt markets? A – Lewis Parrish: So that's -- I mean that's a 90% LTV loan that we got with -- for just some irrigation upgrades, we're making on one of our farms, buying some brand new pivots and electrical panels and we're getting over a 7% yield on that money on the new pivots that we're spending, so just to go with a different lender in the area and it's a spread that works with the return that we're getting on the money. Q – Brandon Travis: Okay. That’s helpful. That’s all from me. Thank you. A – David Gladstone: All right. Any other questions?

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

All right. Thank you all for calling in and we'll see you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. Everyone have a great day.