Gladstone Land Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024
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Operator

Greetings. Welcome to Gladstone Land Corporation's Third Quarter Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Gladstone, Chief Executive Officer and President.

Operator

Thank you, Mr. Gladstone. You may begin.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Well, thank you, Sherry, and that was a nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We certainly appreciate you taking time out of your busy day to listen to our presentation. Before I begin, we'll start with Michael LiCausi.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

He's our General Counsel. Michael?

Michael Licalsi
Michael Licalsi
General Counsel at Gladstone Capital

Thanks, David. Good morning, everybody. Today's report may include forward looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And 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 the risk factors listed in our Forms 10 ks, 10 Q and other documents that we filed with the SEC, and find them on our website, that's gladstoneland.com.

Michael Licalsi
Michael Licalsi
General Counsel at Gladstone Capital

Specifically, go to the Investors page. You can always go to the SEC's website, which is www.sec.gov. We undertake no obligation to publicly update or revise any of these forward looking statements, whether as a result of new information, future events or otherwise, except as required by law. Today, we will discuss FFO, which is funds from operations. FFO is a non GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets.

Michael Licalsi
Michael Licalsi
General Counsel at Gladstone Capital

And we may also discuss core FFO, which we generally define as FFO adjusted for certain non recurring revenues and expenses, as well as 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. And please visit our website, once again, that's gladstoneland.com, sign up for our email notification service. You can also find us on Facebook, keyword there is The Gladstone Companies and on X, formerly known as Twitter, and 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 Q both issued yesterday for more detailed information.

Michael Licalsi
Michael Licalsi
General Counsel at Gladstone Capital

With that, I'll turn it back to David.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Thank you, Michael. I'll start with a brief overview as I do each time just so we all know where we are. We are currently on about 112,000 acres on 168 farms and about 54,000 acre feet of water assets. 1 acre foot is equal to about 326,000 gallons. So we have nearly 18,000,000,000 gallons of water.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And together, the land and the water are valued at quite about a total price of $1,500,000,000 Our farms are in 15 different states and more importantly, they're in 29 different growing areas. And our water assets are all in California. You don't need to store much water. If you're in Florida, you can drill down and get water pretty quickly. Our farms are leased to over 90 different tenant farmers, and the tenants on the farms are growing over 60 different types of crops.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

But mostly these are fruits and vegetables and we have a lot of nut trees as well. And you can find these produce these items in the produce section of the grocery store, which is where most of the crops that are grown on our farms are sold. We've been pretty active in leasing since the beginning of Q3. We executed 21 new or amended leases on farms in 8 different states, including leases on only a couple of farms that were previously vacant. On annual row crop farms, we renewed or amended 8 different leases and these renewals are expected to result in an aggregate increase of net operating income of about $309,000 or 11% over that of the prior leases.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Overall, we continue to see steady appreciation in consistent rents growing in our annual row crops, which make up about half the portfolio. Our permanent crop farms, well, we renewed about 13 different leases there. With 4 of these leases, we adjusted the lease structure whereby we eliminated the base rent and provide the tenant with some cash and growing the crops. In exchange for the base rent, we significantly increases the participation in the rent component of these leases, the major of which will be recognized in the second half of 2025. So we're going to go through a little period here with base rents down.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

As we stated in the prior calls, market conditions around many of the permanent crop farms in the West have been hampered by lower crop prices, higher inputs and of course, borrowing costs have gone up as well. These conditions make it difficult for the tenants to commit long term leases that include high base rents. As such, we decided to adjust the lease structure on the few farms to help the grower minimize their fixed costs but also allow us to participate in the upside in the case that Farmer has a good year. We believe these lease structures will give us a best chance of making a pretty good profit on these farms in the coming years. And we believe there's a strong reason for the opinion, particularly on 2 pistachio farms, which we're doing this time.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

These are very high yielding properties, the 2 pistachio farms. And with a history of higher production, that means the crop insurance is going to be good, that is we get a higher rate there, higher opportunity to get our money back. We also continue to see pricing trends in the right direction, that is for both pistachios and almonds. Also California has experienced above average rainfall levels in recent years and most of the reservoirs are still at or above the historic averages. Our current plan is to move forward with the structure for 2025 harvest in these few farms and then hopefully revert back to more traditional leases structures with the rent next year.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Or we may also sell some of these farms if we think we're not going to be able to farm them correctly. The remaining non lease amendments on our permanent crops are expected to result in a decrease of net operating income of about $441,000 from the prior leases. So we swapped the base rents for participation on the upside. This is the old English way of farming and the King used to own all the land and lease it out in essence to his farmers and they'd give him most of the crop and they'd take some. Looking ahead, we have 7 leases scheduled to expire over the next 6 months and in total they make up about 2.5% of the total lease revenue.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

We're in discussions with various groups and either lease these farms or operate them on our behalf and we may also look to sell a couple of these farms. We do have one that we agreed to sell and we believe have some very valuable farms. So this new route is the way for us to option for is a new option for us. Subsequent to the quarter end, we also ended into an agreement to sell 11 blueberry farms in Michigan for about $5,000,000 These are some of our earliest farms. And if you remember, this one is one in which the entrepreneur, the farmer, oh, he had some very serious accidents.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

I think he was in hospital for many, many months. So we had to get others to come in and do things to the farms. And finally, we decided just to leave that Michigan area. These are the farms that have tenants issuing results on increased operating costs. So we're happy to bring these issues to a close and all of that should close-up before the end of the year.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And now I'll give a quick update to some of the remaining tenancy issues. We currently have one farm that is vacant, so we're down there. One farm is in direct operating via management agreement with an unrelated third party. In addition, we're recognizing revenue from leases in 2 tenants and these are this is collecting lease 5 of our farms. They have 5 of our farms, but we're collecting cash on 2 of the tenants.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Regarding these farms, we're in discussion with various potential buyers and tenants to buy. We're in the situation in which a lot of people are looking for farms again and that's always good to see. And we may use some of them to hire and run our farms and we hope to have an agreement in place by the end of the year on these last 2. We may end up listing some of these farms at an auction as we did in Michigan, but I don't expect that to be a lot of the farms. In total, year over year impact on our operating results for these tenant issues was decreased in net operating income about $638,000 in the Q3.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And hopefully, next year this time, we're recognizing a lot of profit from operating some farms with our operators that come in and do that. I'm going to stop at this point and we'll get Lewis to come in and talk to us about the numbers that he's got for you.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Okay. Thank you, Dave, and good morning, everyone. I'll begin by briefly going over our recent financing activity. We did not borrow any new money during the quarter, but we did repay about $13,000,000 of loans that were scheduled to mature or reprice. On the equity side, since the beginning of Q3, we've raised net proceeds of about $80,000 from sales of the Series E preferred stock about $4,500,000 from sales of our common stock in the ATM program.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

We also continue with the repurchase program on our Series B and Series C preferred stock that was implemented in the 2nd quarter. During the Q3, we repurchased a total of 176,045 shares of preferred stock at a total cost of about $3,700,000 resulting in a book gain of about $231,000 At an average repurchase cost of $21.22 per share, this resulted in a dividend yield savings of 7.1%. Moving on to our operating results. For the Q3, we had net income of $6,000 and a net loss to common shareholders of $5,800,000 or $0.16 per share. Adjusted FFO for the current quarter was approximately $4,500,000 or $0.13 per share compared to $5,400,000 or $0.15 per share in the prior quarter.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Dividends declared per common share were about $0.14 in both quarters. AFFO decreased in Q3 of 2023, primarily due to the lost revenue from the farm we sold in January and a decrease in income associated with certain properties that were either vacant, direct operated or on non accrual status during portions of the quarter. Fixed base cash rents decreased by about $2,600,000 on a year over year basis, primarily due to the reasons just mentioned. Again, that is the lost revenues from the farm we sold and additional expenses related to certain vacancies we continue to work through, as well as lease incentives granted of certain tenants associated with the lease change lease structure change that we just mentioned and a portion of one rent payment that was paid in water. This was partially offset by a $1,100,000 increase in participation rents recorded during the current quarter.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

These amounts are largely dependent upon when our tenants provide certain information to us, but thus far the increase has been largely driven by stronger production at some of our pistachio farms. One note to make on revenue over the next several quarters. As a result of the change in lease structures we made on a few farms, we are expecting a total year over year swing in our fixed base rents of about $20,000,000 This figure consists of the base rent that we were previously receiving under the prior leases, plus the cash allowances we granted to some of these tenants. This will be shown as a reduction in our fixed base rents over the next 5 quarters, beginning with Q4 2024 at a rate of between $3,500,000 to $4,500,000 per quarter. And then the majority of these resulting crop share the majority of the resulting crop share from these leases will be recognized as participation rent in the second half of twenty twenty five, with the remaining smaller portion being recognized in the second half of twenty twenty six.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Right now, we are expecting to recover the full $20,000,000 and possibly more, but we will not know these numbers until later in 2025. So things play out as we currently expect, we'll essentially be moving about $20,000,000 from the fixed base rent bucket into the participation rent bucket over the next couple of years. On the expense side, excluding reimbursable expenses and certain non recurring or non cash expenses, our core operating expenses decreased by about $140,000 during the current quarter. Related party fees decreased by $800,000 due to a higher incentive fee year ended the prior year quarter. Largely offsetting this was an increase in property operating expenses of $590,000 which was primarily driven by additional costs incurred on properties that were either vacant, direct operated or non accrual status.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

These costs included additional legal costs, property management fees and real estate taxes. As we bring these issues to a close, which we are expecting to happen by the end of the year, these costs should decrease to a more normalized level. And finally, G and A expenses increased slightly due to additional stockholder related costs and higher professional fees. We also recorded an impairment charge of about $2,000,000 during the quarter and this was the result of writing the net book value of some Michigan blueberry farms down to the sales prices per the agreements we entered into subsequent to ninethirty. Finally, other expenses decreased primarily due to lower interest expense incurred as a result of loan repayments we made over the past year.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

With that, we'll move on to net asset value. During the quarter, we had 43 farms revalued, all via 3rd party appraisals. Overall, these valuations decreased by about $23,000,000 or 4.5 percent from their previous valuations from about a year ago. These decreases were limited to certain of our permanent crop farms as our annual row crop farms continue to appreciate in value. So as of September 30, our portfolio was valued at about $1,500,000,000 and all of this valuation was supported by either third party appraisals or purchase prices in the case of water.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Based on these updated valuations and including the fair value of our debt and preferred securities, our net asset value per common share at September 30 was $15.57 which is down from $17.59 at June 30. The majority of this certain farms that were reappraised during the quarter, as well as the change in fair value of our debt and preferred securities due to changes in market rates. Turning to liquidity and including availability on lines of credit and other undrawn notes, we currently have access to over $160,000,000 of liquidity, including about $20,000,000 of cash on hand. We also have nearly $160,000,000 of unpledged properties. Over 99.9% of our borrowings are currently at fixed rates and on a weighted average basis, these rates are fixed at 3.4% for another 3.7 years.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

As a result, we have experienced minimal impact on our operating results from increased interest rates over the past couple of years. And with respect to our current borrowings, we believe we are well protected should interest rates continue at elevated levels. Regarding upcoming debt maturities, we have about $39,000,000 coming due over the next 12 months. However, dollars 21,000,000 of that represents various loan maturities. And given the value of the underlying collateral, we do not foresee any problems refinancing if we choose to do so.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Removing those maturities, we have about $18,000,000 of amortizing principal payments coming due over the next 12 months or about 3% of our current debt outstanding. And in addition, we have about $19,000,000 of loans that they are not maturing, but they have a fixed rate term that is expiring over the next 12 months. And finally, regarding our common distributions, in October, we declared a dividend of $0.467 per share per month for the Q4. At our current stock price of 13.6 $6 per share, this works out to a yield of 4.1%, which is right in line with the average dividend yield across the entire REIT sector. Given the changes we recently made in lease structure at certain properties, we believe it prudent to hold the dividend flat at this time and we'll continue to reassess it as more information regarding the 2025 crop share amount is known.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

And with that, I'll turn things back over to David.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Thank you, Louis. Nice report. We are continuing to stay active in the marketplace should a good acquisition opportunity present itself. The banks love us and would love to lend us more money, but we're not going in that direction unless interest rates come down. But mentioned in prior calls, we're still being more cautious in the acquisition front because of our cost of capital remains high.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And while we have seen decreases in prices for certain permanent crops and farms in the West, values of most of the row crops like those growing strawberries has remained very high and cap rates on most of those farms are not increasing enough to cover our financing cost. So as a result, acquisition activities remain well non existence to say slow would be a little misrepresenting, but we're not doing any new deals given the cost of capital and what you can make on it. Interest rates are still a bit too high for us despite the Feds cutting interest rates by 0.5% in September. The amount of timing of the further cuts, I just don't know when they're going to cut again. It's been up and down with them.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

But we're hopeful that the rates will be lower in the near future so that we can start looking at buying more farms again. And just a final point I'd like to make, we believe investing in farmland growing crops that contribute to healthy lifestyles such as fruits and vegetables and nuts is a great trend and we are following it and we'll try to make sure that we continue to get good farmland. Overall demand for prime farmland and growing berries and vegetables remain stable to strong. In fact, the vegetable and dairy side is relatively stronger than just about any time I've seen in the past. Almost all of the area our farms are located in, as mentioned earlier, crop prices in certain permanent crops, particularly in the nut and wine grape, have depressed lately.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

We don't have a lot of wine grapes. We do have grapes, but we don't have many. And they've been depressed lately, which has impacted the value of underlying farmland. We're seeing prices start to turn around in some of these crops, specifically almonds and pistachios, which have been pushed down pretty hard because demand hasn't been heavy for those. So we're hopeful that the worst is over with those two crops.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And it's just not clear yet which way it's going. And if you hear anything about farms on the West Coast, a couple of our people, one in particular got ran out of his home because the fire that's going on. But remember, these fires are mostly in the mountains. They're not down where we have crops. And so please remember that purchasing stock in this company is long term and so you're going to have ups and downs.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Historically speaking, long term remains strong, but there are occasionally some ups and downs that just throw us for a loop. Just like any investment, it's going to be ups and downs. These are crops. For example, you probably know if you've been reading the paper that a lot of the grain crops such as soy and corn, those prices are down and those farmers are not doing well. It's a difficult time for them these days.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

We expect inflation, particularly in food sectors to continue to increase over time. I know everybody complains about having to spend so much for food, but we expect the values of the underlying farmland to increase as the products that they can produce on those lands continues to come out. We expect especially true in the fresh produce area. If you've gone to the store recently and looked at the prices, the trends there, more and more people are eating healthy foods, but at the same time, it's driving up the prices. I did want to mention one thing that I don't think we've ever talked about before.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

There are really 2 values in the farmland that we buy. There is the intrinsic value, as I call it, and that's just the dirt. That doesn't go away. It's like any real asset you hold on to it because these are values that just continue to increase over time. And there are people who buy farmland, never farm it, but rather just hold on to it as a hedge against inflation, just like they do when they're buying gold.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Then there is the usage value, which is some of the land that we have, like most of the farmland that's used to plant crops and sell those for income. Gold doesn't have anything like that. So in essence, I think farmland is a much better hold for inflation purposes. I know each time we've sold property, it's been because we are offered really high prices. So let's stop at this point.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And the operator, if you'll come on and tell people how they can ask questions, that'd be great.

Operator

Yes, of Our first question is from gurav Mehta with Alliance Global Partners. Please proceed.

Gaurav Mehta
Managing Director at Alliance Global Partners

Yes, thanks. Good morning. I wanted to ask you on your lease expiration. I think you said over 6 months, 7 leases are expiring. But can you give us a number for 2025, how many leases are expiring and how many of those leases are permanent crops?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Yes, 2025, give me just a minute to confirm this number. We usually look out and the reason we always talk about 6 months ahead is because we always work on the properties that we'd like to renew with, but always accepting backup offers also. And we usually get these lease extensions done pretty quickly. So if things are like 9 months out, 12 months out, it's not as pressing for us. 2025 and all is about we have 17 leases are coming due in 2025 and that is a good portion of our revenue.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

It's about a 5th of it, 20%. We were staying in contact with the current tenants on those. And looking at the sorry, give me a minute to open up to 25 leases.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

You're just trying to determine which are berries and which are nuts and those kind of things. Okay.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Don't have that number readily available.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Well, about half of our farms are on the row crops, the berries and things like that. Then the other half is in the nuts and those kind of areas. We do have some crops that are wonderful and that is some of the olive trees that have been around for ages and they're pretty continue to produce olives. I'm sorry, did you mention something, Graub?

Gaurav Mehta
Managing Director at Alliance Global Partners

No, I was just clarifying. So half of your portfolio is permanent crops and half is annual growth?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Yes. So just looking at the list of 25, it looks like it probably is more skewed in terms of number of leases that are on the annual row crop side. I can't give you an exact probably 60% of the leases that are coming to our row crop and 40% would be of the permanent crop type.

Gaurav Mehta
Managing Director at Alliance Global Partners

Okay. That's helpful. On the Q3 lease amendments, were these leases expiring in Q3 or they were amended for different reasons?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

The leases that were amended in Q3?

Gaurav Mehta
Managing Director at Alliance Global Partners

Yes. Were they due for expiration or they were amended for different reasons?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

A few different reasons. Some of them were expiring in 2024 that we pushed out. Some were even expiring in 2028 that we pushed out beyond that. And there are a few others that were amended for other reasons as well. But I'd say in terms of ones that were pushed out, they were near term expirations.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

That was probably only a handful of them. Any other questions, Ronald?

Gaurav Mehta
Managing Director at Alliance Global Partners

That's all. Thank you.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Okay. Next question.

Operator

Our next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed.

Robert Stevenson
Managing Director at Janney Montgomery Scott

Good morning, guys. Lewis, the 11 blueberry farms are part of that 20 vacant direct operated and non accrual, correct?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Yes, correct.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

That you

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

have for sale?

Robert Stevenson
Managing Director at Janney Montgomery Scott

Okay. And I think David said that you had another farm that you've agreed to sell. Is that part of the 20 as well?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

No. That one is leased through middle of next year. Nothing imminent, of course, just an agreement we've entered into that could close in early next year, but nothing certain at this point.

Robert Stevenson
Managing Director at Janney Montgomery Scott

Okay. So by the a quarter from now when you're reporting Q4, if that Blueberry Farm sale goes through, the number of vacant direct operated non accrual should be basically halved at that point, right?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Yes, I think assuming that that does close, which it should close in should close this year, I think we'll be left with 1 vacant property, 1 direct operated and then 5 farms on non accrual basis.

Robert Stevenson
Managing Director at Janney Montgomery Scott

Okay. That's helpful. And then anything else at this point that's looking like it's headed towards non accrual or are you fairly comfortable with the remaining farms in the portfolio at this point?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

We're comfortable with the collectability of rent from the other tenants right now. It's really just 2 tenants that are on 5 of our farms in total that have had issues. We have some other leases expiring that later this year that we're working on lease amendments for. It could be a combination of well, these are on permacrop farms, so the ones that are expiring later this year will likely be a similar situation where we have to remove the base rent and put it more in the participation rent bucket for next year, but we don't expect those to go on non accrual basis.

Robert Stevenson
Managing Director at Janney Montgomery Scott

Okay. And then last one for me. The NAV decline, if I think about the $4.76 versus of decline, how much of that I think you said indicated that a lot of that was the permanent crops. But is any of that the row crops? How should I be thinking about the row crops?

Robert Stevenson
Managing Director at Janney Montgomery Scott

So the row crops sort of flat

Robert Stevenson
Managing Director at Janney Montgomery Scott

and the permanent crops Yes.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

It's 100% permanent crops. And the $4 I guess you're talking about year over year from ninethirtytwentytwenty 3. That decline is probably about half, dollars 2 ish portfolio valuation and then $2 due to just changes in market rates, change in preferred stock and debt valuation. But on the portfolio side, it is strictly the permanent crop side.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

We are seeing pretty much the same appreciation in our row crop ground as we have since our inception, the typical 2%, 3%, 4% per year. We still see that today. But the depreciation in values is on the strictly on the permanent crop side.

Robert Stevenson
Managing Director at Janney Montgomery Scott

Okay. That's helpful.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And talking about number of crops, the ones we had in Michigan that we sold at auction, there are a lot of small farms there. We put those on the books when we were tiny and just beginning in the area. So we made a mistake of picking that one tenant who was very careless and got himself in trouble. But that will all be gone this year.

Robert Stevenson
Managing Director at Janney Montgomery Scott

Okay. Thanks, guys. Appreciate the time this morning.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Sure. All right. Anybody else have a question?

Operator

Yes. Our next question is from Craig Kucera with Lucid Capital Markets. Please proceed.

Craig Kucera
MD - Equity Research at Lucid Capital Markets

Yes. Hey, good morning, guys. I may have missed this, but what were the crop types and locations for the 4 farms where you restructured the leases?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

2 are pistachios and 2 are wine grapes.

Craig Kucera
MD - Equity Research at Lucid Capital Markets

Got it. And was there any impact to fixed rent this quarter from the restructuring or is that expected beginning in Q4?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

There was a little bit this quarter. This quarter is probably about well, if you take out the participation rents, maybe a $500,000 to $1,000,000 decrease from, I guess, the normalized level. But that was more on the wine grape farms because they're more in a calendar year and that those restructurings happened earlier in Q3. On the Tubestachio Farms, those that switchover will start in November, November 1. So we'll have a portion of it impacting Q4 and then all of it impacting Q2's 1, 2 and 3 next year.

Craig Kucera
MD - Equity Research at Lucid Capital Markets

Okay. And kind of changing gears looking on the participation rent side, there was pretty good strength year over year. Were there any particular crops where that strength came from?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Pistachios, higher production on our pistachio farms so far. We don't have the data in for all of the full population of properties that have crop share, but of the ones we've received so far, the one kind of year over year change we're noticing is the crop share. Now pricing overall, we are seeing as David said, we are seeing that trending in the right direction, but pricing is kind of 2 components. Earlier in the harvest year, you're told what the minimum pricing is that processors will pay. And then about a year or 15 months later, they tell you what your bonus and adjustment amounts are due to quality bonuses, just marketing adjustments that happen over the marketing period.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Those amounts aren't known yet. So we can't really compare year over year pricing yet because we don't know that final component of the pricing. We won't until we should have a good idea in December, but it won't really be known until probably January, maybe February.

Craig Kucera
MD - Equity Research at Lucid Capital Markets

Got it. And just kind of thinking about here in the Q4, I think the last few years, your Q4 participation rent has been maybe 40% to 60% higher than what you got in the Q3. Is that kind of ballpark with what you guys are expecting here in the Q4?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

That's what we are hoping for. We're still we don't have all the data to say for sure, but that's kind of what we're hoping for as well.

Craig Kucera
MD - Equity Research at Lucid Capital Markets

Okay. Thanks. That's all for me.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Okay. Do we have any other questions?

Operator

We have one final question from John Massocca with B. Riley Securities. Please proceed.

John Massocca
Senior Research Analyst at B Riley Financial

Good morning.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Good morning.

John Massocca
Senior Research Analyst at B Riley Financial

So maybe touching on the Michigan blueberry farms that you sold, what's kind of the NOI impact from that? Were those putting off any cash flow for you? Or were they kind of an NOI drag given some of the operating issues there historically?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

They were definitely an NOI drag. We've had tenancy issues with these particular farms for a while. I think if you look at the last year or so, the average quarterly drag on NOI was about $125,000 and not to mention the interest expense was probably another $40,000 So call it all in $165,000 or so drag on net income. The amounts we are receiving is they are enough to pay off the debt. So we'll be relieved of the NOI drag and also the interest expense.

John Massocca
Senior Research Analyst at B Riley Financial

Okay. And then thinking about the lease changes in the quarter, just to kind of clarify that $20,000,000 annualized number you're talking about that kind of moves from being steady on a 4 quarter basis to if participation in rents are as expected back end loaded in 2025. All those numbers, that's just the 9 properties, I believe it is, where you moved into this percentage rent situation that didn't fit all of the tenants?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Yes. Four properties, we in the new leases, we removed the participation rent component and in some cases, we gave the tenants a cash allowance to cover certain capital and operating costs. Those two numbers together is about is what makes up that $20,000,000 swing. That will decrease our fixed base rents over the next 5 quarters beginning with this Q4 'twenty four. And again, the quarterly rate quarterly decrease rate is about $3,500,000 to $4,500,000 And then in the second half of twenty twenty five, we will be able to record the majority of the resulting crop shares.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Now there will be a portion, what I was just mentioning about the second component to the pistachio pricing, the bonus marketing adjustments, those that amount will not be known until the second half of twenty twenty six. So if I had to guess today, we'd probably be able to record about 75% to 85% of the resulting total crop share amount in second half of twenty twenty five with the remaining amount in the second half of twenty twenty six.

John Massocca
Senior Research Analyst at B Riley Financial

Is that based on kind of performance already or is that based on just for pricing is today on pistachios?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Just based on our now this is limited experience for us in terms of the pricing breakout because we aren't directly involved too much, but just based on the our limited experience of if you take the total amount received for a crop year once the marketing period is over, how much of that is guaranteed upfront and paid on a set schedule versus how much comes after the marketing period is over?

John Massocca
Senior Research Analyst at B Riley Financial

And is that rent level pretty much going to be reliant slowly on pistachio operations? Or is there any almonds kind of flowing through those numbers?

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

It's all pistachio. I mean, we do have some almond properties where we have crop share leases on, but that is not in this bucket of 4 leases that we change or 4 properties that we change the leases on. These four properties are pistachios and wine grapes.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

We do have some crop share that's coming in this quarter or next quarter or this

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Q4 we should have some not from these new leases, but yes, we will have we're hoping for a good amount as we do every year.

John Massocca
Senior Research Analyst at B Riley Financial

And then I guess maybe bigger picture, sticking with the California kind of permanent crop market. I mean, you've talked a bit and there's been kind of data to this point that maybe that pricing is kind of stabilizing to starting to recover. Has that filtered through in what you're seeing in the market? I mean, I know you're probably not actively out there buying properties in California, but has there been some land value stabilization, some kind of transaction market stabilization in terms of California permanent crop farms?

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Well, what we see in the price of farms right now is very, very low prices on nuts and grapes and wine grapes. So that's what hurt us. And of course, when you move from monthly payments from a farmer into participation rents, you've now backloaded everything instead of getting those nice payments in the first, second and even in the third quarter, you get most of your payments in the Q4. That's what I meant by we're going to collect a good amount of money from participation rents. This year that we're in, maybe in Q1 of next year.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

And so it's very difficult to pay dividends, not that we're in trouble with my dividends, but that's why we went down the road of leasing out our farms is because we get payments coming in that we can meet our dividends with. Now we're getting the payments, but they're not in the 1st or second quarter. They're in the last half of the year. And so you're making payments on your dividend and going to get the money in a little bit later.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

Okay. John, I'd answer your question about the pricing of farms. I think in California, the main driver is still water. It's is it a single source water property or dual source? As we've said, most of our properties are dual source.

Lewis Parrish
Lewis Parrish
CFO & Assistant Treasurer at Gladstone Land

We do have a handful of single source water properties and that's where a lot of our focus has been in buying additional water assets or creating infrastructure to, for example, building pipelines to these farms that only have groundwater so that they effectively do have a second source of water and can hold their values better than a lot of the fire sale prices we're seeing on farms that only have one source of water.

John Massocca
Senior Research Analyst at B Riley Financial

Okay. I appreciate the color. That's it for me. Thank you very much.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

Okay. Do we have any other questions?

Operator

There are no further questions at this time. I would like to hand it back off to management for closing remarks.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

All right. Well, thank you all for following us. We're going to have a good year next year because we're going to be in the participation rent side of the business. And we've got some farms that we know are great producers. We don't know the price, of course, what we're going to be getting next year, but we're going to have a good production year in 2025 and that's the first part of everything of how much you produce.

David Gladstone
David Gladstone
Chairman & CEO at Gladstone Capital

So that's the end of this and we'll see you all next quarter. Thank you for calling in.

Operator

Thank you. This will conclude today's conference. You may disconnect at this time.

Executives
    • Lewis Parrish
      Lewis Parrish
      CFO & Assistant Treasurer
Analysts
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Earnings Conference Call
Gladstone Land Q3 2024
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