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,…

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,…

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…

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…

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…

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.