Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Gladstone Land Corporation’s Third Quarter Ended September 30, 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Mr. David Gladstone. Please go ahead, sir.

Thank you, Olivia, and nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land. And thank you all for calling in today and we certainly appreciate the time to talk to you, and I'm glad you're listening to our presentation. We start every meeting with Michael LiCalsi. He's our General Counsel and Secretary. He's also President of Gladstone Administration, which is the administrator for all the Gladstone funds. So Michael, take it away.

Thanks, David, and good morning, everyone. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K and other documents we filed with the SEC. Find all these on our website, www.gladstonefarms.com, specifically the Investor Relations page or on the SEC's website, which is 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. In today’s discussion, we will discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We'll also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses, and adjusted FFO, which we further adjusts core FFO for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating results and allow better comparability of our period-over-period performance. Once again, please take the opportunity to visit our website, www.gladstonefarms.com, sign up for our e-mail notification service so that you can stay up-to-date on the company. You can also find us on Facebook, keyword there is The Gladstone Companies, and we even have our own Twitter handle and that's @glatstonecomps. Today's call is an overview of our results. So we ask that you review our press release, Form 10-Q, both of which were issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website. Now I'll turn the presentation back to David Gladstone. David?

Thank you, Michael. For the three months ending September 30, 2019, the team acquired about $153 million in value of the existing farms. And since September 30, 2019, the team's acquired an additional $52 million in value of the existing farms. Even with all of these acquisitions, our current backlog of potential farms to acquire seems to be strong and looking forward to the future. As of today, we've acquired $253 million a farm since the beginning of the year. It's the best performance in the history of the company in terms of growth and assets that we have. Our strategy hasn't changed, where the company is to buy high quality farms in prime growing regions. We want to get our total farmland holdings to a size where there is sufficient diversification to provide safety and security for the cash flows coming, and thus for the dividend that we pay our shareholders. I think we're there now, but there's no guarantee and I think as we continue to grow, we'll become more and more diversified. The team needs to spend money to hire people, to help manage our growing portfolio. The choice was either to save money and sit still and not grow or to spend some money, hire some people and continue the growth, and we selected growth. This is – with these new acquisitions, which are a little higher yielding than in the past, together with our ability to lock in financing at low interest rates, we think these new acquisitions are going to result in a nice boost to the profit and dividends going forward. In addition, we're seeing rents tick up in terms of our income as evidence of our recent lease renewals. And in addition, we continue to lower our property operating expenses. We're also…

We’ll come up a little bit more next weekend.

Yes. So we're almost at $100 million of Series B preferred stock. We also raised about $5 million in net proceeds on the sale of a little bit of our common stock. Please note, please, please note, in the process of selling Series B preferred stock this company has paid certain commissions and fees to Gladstone Securities, one of the management companies affiliated broker dealers. However, Gladstone Securities is just a conduit in this offering as it pays about 94% or so of those fees that it earned to third parties. These are the brokers and the wholesalers and the others who are helping sell the shares in the Series B. So it's not a profit center for us. And the rest of the fees retained by Gladstone Securities have been used to cover expenses such as printing prospectus books. We have to update those as we go along. Information pamphlets, we also have to pay to attend certain conferences or brokers in order to present. So in total, these additional expenses are greater than the 6% fees kept by Gladstone Securities. This is a costly way to sell non-traded stock, but really it's no more expensive than having a stock offering, where you have to discount the price as well as pay expenses to the brokers. And folks, one reason we prefer – we like selling the preferred stock is to avoid the dilution of the common stock. Most common stockholders don't want the dilution either. And as a shareholder, I don't like it diluting the common stock either. So please also note that the preferred stock does not count as equity and the calculation of the fees paid to the advisor selling the Series B does not increase the fee to the advisor. I want everybody to get…

All right. Thank you, David, and good morning, everyone. I'll begin by discussing our balance sheet. During the third quarter, our total assets increased by about $128 million or 20%, primarily due to the new acquisitions. These are funded through a combination of new fixed rate loans and cash proceeds received through equity issuances. From a financing perspective, since the beginning of the third quarter, in addition to the proceeds from equity issuances as David mentioned earlier, we also secured 12 new loans from seven different lenders, including two new lenders for total proceeds of about $137 million. On our weighted average basis, these new loans will carry an effective interest rate of 3.68% and will be fixed for the next eight-plus years. From a leverage standpoint on a fair value basis, our loan-to-value ratio on our total farmland holdings was about 55% at September 30. And we're comfortable at this level, given the relative low-risk of high-quality farmland as an overall asset class. While interest rates continue to be volatile, over 97% of our borrowings are currently at fixed rates, and on a weighted average basis these rates are fixed at 3.6% for another six-plus years out. So we believe we are currently well protected on the debt side against any future interest rate hikes. And with the weighted average maturity of these borrowings being 11 years out. We also feel we're protected against potential liquidity issues should another recession hit. Regarding upcoming debt maturities, we have about $35 million coming due over the next 12 months. However, about $22 million of that represents the maturities of three bullet loans coming due over the few months. We're currently in discussions with the lender for these three loans and we expect to be able to extend all of them prior…

Okay. Lewis, nice report. Our list of potential farms to buy remains healthy, so we hope we can continue to be active and be able to report positive news to you in the near future. But as you know, and as I've mentioned before, there's really no guarantee of closing on anything and sometimes farmers push you along for a months rather than making a clean decision. Just a few final points that I'd like to make. We believe that investing in farm land and growing crops that contribute to healthy lifestyle such as fruits and vegetables and nuts follows the trend that we're seeing in the market today. Currently over 85% of our total revenue comes from farms that are growing. These types of foods that you find in either the produce or the nut section of your local grocery store. We consider these foods to be among the healthiest type foods and we're seeing growing trend toward organic among these foods, about 40%, a little over 40%. I think of our fresh produce acreage is either organic or transitioning to become organic and over 20% of our permanent crops acreage falls into the organic category. I believe the organic sector will continue to be a strong growth area. In addition, I'd like to mention that 95% of our portfolio is in GMO-free. These crops are just mandatory for us to be and then staying away from the GMO side. Another major reason our business strategy is to focus on farmland and growing fresh produce is due to the effect of inflation on a particular segment. According to the Bureau of Labor Standards – Labor Statistics, our overall annual food, that's the CPI general. It generally keeps paces with inflation. However, over the past 20 years, the fresh fruits…

Yes, sir. [Operator Instructions] And our first question coming from the line of Rob Stevenson with Janney. Your line is now open.

Good morning, guys. Lewis, how much dry powder do you currently have for incremental acquisitions today?

Today we have about $13 million. We should have about $5 million to $7 million of sales from the Series B coming in on Monday as well.

Okay. And you said that you were running about $6 million a month on the Series B. How has that been trending? Is that just been holding relatively steady? Has that been increasing? How should we be thinking about that? And are you going to wind up, hitting your sort of your target amount here and sort of mid 2020 at the current rate?

It's been averaging about $6 million. I mean, it has been increasing slightly. Just as an example, as I just mentioned, we're getting about $6 million to $7 million in Monday, and that's just for one closing. So I'm not going to – I don't want to imply that every closing will be $6 million to $7 million, meaning $12 million to $14 million per month. But we have been seeing a general increase though there is still lumping – some lumpiness over closing.

Okay. And then last one for me. Other than pistachios, what were the major crops represented in the third and fourth quarter acquisitions?

So for the third quarter, we had that water retention farm, strawberries, vegetables, wine grapes, pretty much – a pretty good variety of crops across those acquisitions. In Q4, it was so far the second phase of that pistachio farm, the first phase of which closed in Q3. And we also acquired two farms in Nebraska that grows some edible beans, soybeans and corn that will be transitioned to organic farmland.

Okay. Thanks guys. Appreciate it.

Next question.

Our next question coming from the line of Ben Zucker with Aegis Capital. Your line is open.

Good morning, guys, and thanks for taking my question, and congratulations on a strong quarter.

Thank you.

I want to talk about the market opportunity quickly. Obviously, we've seen you guys meaningfully grow your investment portfolio over the last several months. Are there any structural changes taking place in the market that are unearthing these opportunities? Or is this simply a function of this being a very large and fragmented addressable market combined with lands, ample dry powder position?

Well, it's the latter. And the difficulty, Ben, is all of those deals that we closed in the third quarter. Some of them should have closed in the first or second quarter. So it kind of bunched up on us in the third quarter, but it would be nice if we could do $150 million or $200 million a quarter. But we're going to fall back and our plan is to continue to push hard, but it just takes a long time to get these things going. No structural changes out there. The only structural thing that has changed is that we keep getting bigger and people are more trusting of taking our non-traded, if you will, the UPREIT shares. So we've seen a little bit of pickup in that. And I think over time as we get bigger and stronger, more people will do these tax-free transactions, but that's where we are today.

Understood, and definitely hear you that some of it's just the push and pull of deals and timing between quarters. I think I was going to ask about two of your subsequent acquisitions. I saw on the two that they were growing corn and soybeans, some of the commodity crops that you guys placed less of an emphasis on in the past. I was going to ask if that's just you guys kind of continuing to diversify the crop base or if there's a part of that commodity market that you're increasingly interested in, but did I hear you that you're going to be converting those farms over to organic so we shouldn't have kind of think about it as the typical commodity bucket?

That's right, Ben. As you probably know, the commodity crops, which are all the corn and cotton and rice, all of those have undergone real problems of competing in the international marketplace. And there's about 22,000 farms in that area, $112 billion worth of farmland. We have stayed out of that area even though it is gargantuan in size, obviously, simply because of the stiff competition for selling grains, even down to wheat and sugarcane. If you looked at that marketplace, it's divided pretty heavily into one big category of GMO and commodities. And another category called organic. We like the organic marketplace because it trades at about 150% to 200% of the regular marketplace. So we've been working on programs that would convert some of the existing commodity crops into organic commodity crops. And I think that will work for us, but we're testing it out slow. There's a big difference in those two marketplaces and that they have to go down different pathways to get to the consumer. If you're growing organic, you've got to have organic equipment, you've got to have – and you can't mix them. And so you got to have dryers that have to be organic. You've got all of these different ways of getting to the marketplace and it's going to take us a while to map that all out. But our guy in the Midwest, he’s out next to St. Louis, is an expert in this area and I think he's going to lead us down a path that will let us into this 22,000 farms and $112 billion worth of farms out there and maybe we can carve out a place for ourself in the organic part of that marketplace.

Understood. When I was looking through the MD&A section, it sounded like you guys have been maybe rotating some of your leases to a lower base fixed rent structure that has more higher participation rents on the back end. I guess, I'm just kind of curious. What's the calculus there from your perspective? As a farmer, I certainly get it because it seems like it's de-risking their rent obligations to only paying more when they're getting a good yield. So I'm just kind of wondering what your guys' kind of risk reward decision is when you're looking to do that. Is it only partnering with kind of proven operators who you have an added level of comfort with? Just wanting to hear your thoughts there.

Yes. The idea is to not take on too much risk when we go into the participation side. At the same time, if you've got an operator who year in and year out has made good money and had big returns and in addition have insured their crops through the federal government's crop insurance program, we look at that and say to ourselves, well, yes, we won't look as good during the first and second and third quarter, but boy we’ll show some upside on the fourth quarter. So you'll see this fourth quarter and we can measure it again of how much you want to come in toward the end of the year rather than currently across each of the month, each of the quarters. So that's the calculus that we go through. We're not going to ever have half of our crop coming in at the end of the year. That would be silly. It would jeopardize the dividend and some of the quarters. And I don't want to do that. As the largest shareholder, I love dividends, but I like them when they're steady rather than all at once. And this is contrary to people like Warren Buffett who said, if I could get a variable unknown 12% a year versus a steady 9%, I'd take the 12%. But from my perspective, since I'm dealing with other people's money, I think the 9% steady is going to be our choice for a while. Now when I get to the size of Berkshire Hathaway, we can take some chances.

All right, I hear you there. And one more if I may. Just – and maybe this is more for Lewis, just thinking about the company's capitalization, look, obviously there are clear advantages to preferred equity under your revise management agreement, but at the same time, if you're going to fully utilize this preferred allotment of $150 million, which it sounds like you guys will, at least at the current level you'll have pretty close to a 1:1 ratio on common and preferred. So just kind of like which strikes me as a bit high and I'm sure it does you too. So I'm just kind of thinking about how you guys plan the balancing of this ratio and what you think is a comfortable mix between common and preferred?

So, Ben, I think right now our common market cap is right around $250 million, a little over $250 million. So if we get to the $150 million, it will still be above a 1:1. But even with that, the plan for us is not to use strictly just the preferred equity as we're going forward. The preferred equity, it might alleviate the need for one equity raise, common equity raise per year, but we will be – we do plan to raise that common equity through either ATM or overnights, as the need arises based on how the – our list of new farms by it comes through. But I guess the bottom line – if we won't be going to capital structure, just the preferred site without going the common side as well.

Understood. And thanks for the clarification, Lewis. That's it for me guys. I appreciate you taking all my questions. Thank you.

Okay. Next question please?

[Operator Instructions] And our next question coming from the line of John Massocca with Ladenburg Thalmann. Your line is open.

Good morning.

Good morning.

So if I heard it right, the base management fee, you no longer have any more kind of no longer paying to rent anymore generators. Is there any more kind of leverage that can be pulled starting with the base management fee, the property operating expenses? You're no longer paying for anymore rentals of generators. Are there any more leverage you can pull to, to kind of further bring that number down? Any more kind of temporary costs that are still in that 536 number that you reported this quarter?

So I will say there was one property, I think we had – we had to record about $50,000 of pass supplemental taxes. And this was on a property in California where – when you buy it when ownership changes hands, the property gets reassessed at the new purchase price and it was obviously going to be higher than the cost basis from the prior owner. So we did have a step up in basis from that. But that $50,000, I don't know exactly how much, but I'd get estimate about 30,000 to 40,000 was a onetime expense recorded in this quarter that related to prior periods, if that makes sense?

That makes sense.

Hey John, I wouldn't write off the generators we bought six or so. We bought six because…

Five, five.

Five because it's very expensive to rent them. And the reason we bought them is that you probably read about PG&E, they're having a few problems out there. So we're worried as we found out the hard way that they don't always show up on time when they're hooking up our generators to their lines. And so we have to have generators to do that. And PG&E has got a lot of problems to work through. So we may have to buy a few more, we may have to hook up a few more on our own. They're not that much more expensive than going through PG&E unless you have to rent the generators. If you buy them and amortize them off over a period, they work. So we were protecting ourselves from PG&E not showing up now.

David, you kind of anticipated my next question, which was, I know you haven't been impacted from the fires in California, but have any of kind of the blackouts, rolling blackouts caused any kind of additional operating expenses or even trouble for tenants as they irrigate farms, kind of et cetera?

No. They're turning off the power to the people who live up in the mountain side where all the brush and all the dry trees are, they're not turning off the power to the people on the flat lands, and that's where most of our farms are. So we don't see that as a problem today. Some of them are our employees and people that are working when our farms get their power turned off because they're up on the hillside and they get turned off, but their worry that the winds are going to blow down the lines for PG&E and start a fire. But for us, we're in really good shape in terms of that. And the only thing I worry about is PG&E not showing up when we need them to. When we buy a farm, and we're ready to go and they turn the – don't show up to hook up the lines. We've got a problem because they need the pumps to work. So that's why we have the five generators and we may end up buying more as time goes on.

Okay. And then bigger picture, I know yields are a little higher as you kind of did a couple more kind of permanent crops in the quarter and kind of subsequent to quarter end. But just broadly speaking, have you seen any kind of cap rate compression in the farmland space as yields on kind of fixed income products have come down? Any kind of comparative pressure there?

I haven't seen a lot of that. It depends on the growing area more than anything else. If the growing area happens to be on an area that goes through some kind of cycle, like last year or a year before, Oxnard had a problem from two perspectives. One, it was a coal spring and couldn't get their crops out and Oxnard depends on being able to get to the marketplace first, since it's the most Southern part of the growing areas. And so as a result, and in addition to that, Mexico came on strong and did a lot of dumping of product in the marketplace. And that growing area suffered for that year, but it's back strong now. We have some of the best tenants we've ever had have come in and picked up our properties in Oxnard. So that area is a good area, and I think we'll see that area coming back in terms of the property values as well. But all of these things are – remember, John – it's like a manufacturing facility except that your manufacturing is alive plant and it's sitting outside. So it's a really difficult thing to figure out what's going to happen over time. If you have enough properties in enough different areas, you're not going to be affected by one property going up or down. It has to hit everything at once, which has never happened and say it can't happen, but hasn't ever happened as long as I know. And I've gone back to the 1930s on a lot of these properties just to seeing what the properties what they were growing on the properties as well as what the rents were. So John, I think we're well-protected now that we're in so many areas, I can feel a lot better if we could get sort of double where we are today in terms of things say up and down the East Coast as well as the West Coast. We have blueberries as you know, in Michigan and it's had one or two problems over the years. But if you can get enough of these and enough different places, yes, it hurts when some of your farmers get hurt in one of the areas, but it's not a downer for our company.

Appreciate all the color. That's it for me. Thank you very much.

Next question please?

Our next question coming from the line of [indiscernible]. Your line is open.

Good morning. How do you address the risk of water supply properties in California?

Yes. Water, what's that old song? Never rains in Southern California. Well, that's true. And we have to have wells in all of our properties or some other method. And some of the properties were close to water supplies such as any of the towns that have these processing plants. For example, in Watsonville, they have two giant processing plants. And they take all the affluent that comes off of the city and they turn it from bad water into potable water. Nonetheless, the people in Watsonville don't want to drink that. So they have to do something with the water. And what they do with it is, that we have pipes that run out to our farms there. And you have two alternatives, you can use the wells that were in, or you can turn on the spigot and use the water that comes from these. And they're about the same price because the California government charges you for the money you take out of your own well. So it's either one or the other. Now a lot of the farms, and we have one farm that has its own RO equipment. So it can clean up the water that is there. And so I think we're all looking at the same thing. And even in the Midwest, we're not going to take any dry farming as they call it, because you're dependent on rain. And it changes the amount of crop you can get off of something if you don't have water. If you go for a month without water in the Midwest, you've decimated your product. And so we just aren't going to be dry farmers. It's not good idea. I think we have one small farm in Texas, that doesn't have a well, and it works, but we bought it as part of a group. Anyway, that's the idea is that we must have water on every one of our farms.

Thank you.

Okay, Alan. Next question please? I'm not showing any further questions at this time. I would now like to turn the conference call back over to Mr. Gladstone for closing remarks.

All right. Thank you very much. This was a fantastic quarter and I think we'll have some more of those as time goes on. Your company has started out as a small business and is quickly becoming a very strong and viable entity to survive almost anything they throw at us. So thank you very much for listening, and that's the end of this call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Have a good day.