Gladstone Land Q3 2024 Earnings Report

Gladstone Land EPS Results

• Actual EPS: -$0.16
• Consensus EPS: $0.13
• Beat/Miss: Missed by -$0.29
• One Year Ago EPS: $0.16

Gladstone Land Revenue Results

• Actual Revenue: $22.57 million
• Expected Revenue: $21.47 million
• Beat/Miss: Beat by +$1.10 million
• YoY Revenue Growth: N/A

Gladstone Land Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: After Market Closes
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 8:30AM ET

Gladstone Land (NASDAQ:LAND) is a real estate investment trust that owns and manages farmland in the United States. The company primarily acquires agricultural properties and leases them to farming operators under long-term agreements, generally structured to provide the company with rental income while tenants manage day-to-day agricultural operations.

Its portfolio includes farms used to grow a variety of specialty crops, such as fruits, vegetables, and nuts, as well as row crops and other agricultural products. Gladstone Land also considers the availability of irrigation and water resources, soil quality, location, and the diversity of crops and tenants when evaluating farmland investments.

Gladstone Land was formed in 2011 and completed its initial public offering in 2013. The company is externally managed by Gladstone Management Corporation and is affiliated with the broader Gladstone group of investment companies. Its properties are located across multiple U.S. agricultural regions, serving farming operations in states with established specialty-crop and row-crop production.

Gladstone Land Q3 2024 Earnings Call Transcript

Key Takeaways

• Gladstone Land now owns 112,000 acres across 168 farms in 15 states plus 54,000 acre-feet of California water rights, leased to over 90 growers producing more than 60 crops and valued at about $1.5 billion.
• In Q3 the company executed 21 new or amended leases, including four permanent-crop farms where it traded base rent for participation rents; this will shift roughly $20 million of fixed rent into crop share over 2024–2026, with upside potential in 2025.
• Q3 results showed net income of $6,000 and AFFO of $4.5 million ($0.13/share) vs. $5.4 million a quarter ago, pressured by farm sales, vacancies and lease incentives, while the common dividend remained at $0.14 per share.
• Forty-three farms were reappraised in Q3, driving a 4.5% valuation decline in permanent-crop assets (row crops still rising), pulling NAV per share down to $15.57 from $17.59 at quarter-end.
• Liquidity stands at over $160 million (including $20 million cash) and nearly $160 million of unpledged property; the REIT is fixed-rate funded at ~3.4% and remains cautious on new acquisitions until borrowing costs ease.

Presentation

[Operator]

Greetings. Welcome to Gladstone Land Corporation's third-quarter earnings call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Gladstone, Chief Executive Officer and President. Thank you, Mr. Gladstone. You may begin.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Thank you, Sherry. 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 LiCalsi. He's our general counsel. Michael?

[Michael LiCalsi, General Counsel at Gladstone Land Corporation]

Thanks, David. Good morning, everybody. Today's report may include forward-looking statements on 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. Now, 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-K, 10-Q, and other documents that we file with the SEC. You can find them on our website. That's GladstoneLand.com. Specifically, go to the Investors' Page. You can always go to the SEC's website, which is www.SEC.gov.

[Michael LiCalsi, General Counsel at Gladstone Land Corporation]

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. Now, 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. 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. Now, please visit our website. Once again, that's GladstoneLand.com.

[Michael LiCalsi, General Counsel at Gladstone Land Corporation]

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

[David Gladstone, President and CEO at Gladstone Land Corporation]

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. One acre-foot is equal to about 326,000 gallons, so we have nearly 18 billion gallons of water. And together, the land and the water are valued at right about a total price of $1.5 billion. 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Our farms are leased to over 90 different tenant farmers, and the tenants on the farms are growing over 60 different types of crops, but mostly these are fruits and vegetables, and we have a lot of nut trees as well, and you can find 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 the third quarter. We executed 21 new or amended leases on farms in eight different states, including leases on only a couple of farms that were previously vacant. On annual row crop farms, we renewed or amended eight 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, President and CEO at Gladstone Land Corporation]

Overall, we continue to see steady appreciation in the 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 four of these leases, we adjusted the lease structure whereby we eliminated the base rent and provided the tenant with some cash and growing the crops. In exchange for the base rent, we significantly increased the participation in the rent component of these leases, the majority 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. 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

These conditions make it difficult for the tenants to commit to 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 the 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 two pistachio farms, which we're doing this time. These are very high-yielding properties, the two pistachio farms, and with a history of high 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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 lease structures with the rent next year, 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 nine 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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 seven leases scheduled to expire over the next six months, and in total, they make up about 2.5% of the total lease revenue. 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 has 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 entered into an agreement to sell 11 blueberry farms in Michigan for about $5 million.

[David Gladstone, President and CEO at Gladstone Land Corporation]

These are some of our earliest farms. And if you remember, this one is one in which the entrepreneur, the farmer, well, he had some very serious accidents. I think he was in the 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 and 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. 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

In addition, we're recognizing revenue from leases with two tenants, and these tenants lease five of our farms. They have five of our farms, but we're collecting cash from two of the tenants. 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 two. 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

In total, year-over-year impact on our operating results for these tenant issues was decreased in net operating income to about $638,000 in the third quarter. 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, CFO at Gladstone Land Corporation]

Okay. Thank you, David. 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 million of loans that were scheduled to mature or reprice. On the equity side, since the beginning of the third quarter, we've raised net proceeds of about $80,000 from sales of the Series E preferred stock and about $4.5 million from sales of our common stock through the ATM program. We also continue with the repurchase program on our Series B and Series C preferred stock that was implemented in the second quarter. During the third quarter, we repurchased a total of 176,045 shares of preferred stock at a total cost of about $3.7 million, resulting in a book gain of about $231,000.

[Lewis Parrish, CFO at Gladstone Land Corporation]

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 third quarter, we had net income of $6,000 and a net loss to common shareholders of $5.8 million, or $0.16 per share. Adjusted FFO for the current quarter was approximately $4.5 million, or $0.13 per share, compared to $5.4 million, or $0.15 per share in the prior quarter. Dividends declared for common share were about $0.14 in both quarters. AFFO decreased in the third quarter 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.

[Lewis Parrish, CFO at Gladstone Land Corporation]

Fixed base cash rents decreased by about $2.6 million 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 to 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 $1.1 million increase in participation rents recorded during the current quarter. 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.

[Lewis Parrish, CFO at Gladstone Land Corporation]

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 million. 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 five quarters, beginning with Q4 2024 at a rate of between $3.5 million-$4.5 million per quarter. Then the majority of the resulting crop share from these leases will be recognized as participation rent in the second half of 2025, with the remaining smaller portion being recognized in the second half of 2026.

[Lewis Parrish, CFO at Gladstone Land Corporation]

Right now, we are expecting to recover the full $20 million 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 million 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 earned in 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 on non-accrual status. These costs included additional legal costs, property management fees, and real estate taxes.

[Lewis Parrish, CFO at Gladstone Land Corporation]

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. Finally, G&A expenses increased slightly due to additional stockholder-related costs and higher professional fees. We also recorded an impairment charge of about $2 million 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 9/30. Finally, other expenses decreased, primarily due to lower interest expense incurred as a result of loan repayments we made over the past year. With that, we'll move on to net asset value. During the quarter, we had 43 farms revalued, all via third-party appraisals. Overall, these valuations decreased by about $23 million, or 4.5% from their previous valuations from about a year ago.

[Lewis Parrish, CFO at Gladstone Land Corporation]

These decreases were limited to certain of our permanent crop farms as our annual row crop farms continued to appreciate in value, so September 30th, our portfolio was valued at about $1.5 billion, and all of this valuation was supported by either third-party appraisals or purchase prices in the case of water. Based on these updated valuations and including the fair value of our debt and preferred securities, our net asset value for common share at September 30th was $15.57, which is down from $17.59 at June 30th. The majority of this returned 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.

[Lewis Parrish, CFO at Gladstone Land Corporation]

Turning to liquidity and including availability on our lines of credit and other undrawn notes, we currently have access to over $160 million of liquidity, including about $20 million of cash on hand. We also have nearly $160 million 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, 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 million coming due over the next 12 months.

[Lewis Parrish, CFO at Gladstone Land Corporation]

However, $21 million 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. Removing those maturities, we have about $18 million 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 million 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 $4.67 per share per month for the fourth quarter. At our current stock price of $13.66 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.

[Lewis Parrish, CFO at Gladstone Land Corporation]

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 will continue to reassess it as more information regarding the 2025 crop share amount is known, and with that, I'll turn things back over to David.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Thank you, Lewis. 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. As mentioned in prior calls, we'll still be more cautious in the acquisition front because our cost of capital remains high. 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, have remained very high, and cap rates on most of those farms are not increasing enough to cover our financing cost. As a result, acquisition activity has remained well nonexistent.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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. 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're following it, and we'll try to make sure that we continue to get good farmland.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Overall demand for prime farmland and growing berries and vegetables remains stable to strong. In fact, the vegetable and berry 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. We don't have a lot of wine grapes. We do have grapes, but we don't have many. 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, and it's just not clear yet which way it's going.

[David Gladstone, President and CEO at Gladstone Land Corporation]

And if you hear anything about the farms on the West Coast, a couple of our people, well, one in particular, got ran out of his home because of 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. 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. And it's a difficult time for them these days.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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 continue 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. There are really two 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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

[Operator]

Yes, of course. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star one if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Gaurav Mehta with Alliance Global Partners. Please proceed.

[Gaurav Mehta, Analyst at Alliance Global Partners]

Yeah, thanks. Good morning. I wanted to ask you on your lease expiration. I think you said over six months, seven 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, CFO at Gladstone Land Corporation]

Yes, 2025. Give me just a minute to confirm this number. We usually look out. The reason we always talk about six 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 nine months out, twelve months out, it's not as pressing for us. 2025 in all is about we have 17 leases that are coming due in 2025, and that is a good portion of our revenue.

[Lewis Parrish, CFO at Gladstone Land Corporation]

It's about a fifth of it, 20%. We're staying in contact with the current tenants on those. And I'm looking at the, sorry, give me a minute to open up the 2025 leases. You're just trying to determine which are berries and which are nuts and those kind of things. Oh, okay. Don't have that number readily available.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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 continue to produce olives. I'm sorry, did you mention something, Gaurav?

[Gaurav Mehta, Analyst at Alliance Global Partners]

No, I was just trying to think. So half of your portfolio is permanent crops and half is annual row?

[Lewis Parrish, CFO at Gladstone Land Corporation]

Yeah, so just looking at the list of 2025, 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 due are row crop, and 40% would be of the permanent crop type.

[Gaurav Mehta, Analyst at Alliance Global Partners]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

The leases that were amended in Q3?

[Gaurav Mehta, Analyst at Alliance Global Partners]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

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 were 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. That was probably only a handful of them.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Any other questions, Gaurav?

[Gaurav Mehta, Analyst at Alliance Global Partners]

That's all. Thank you.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Okay. Next question.

[Operator]

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

[Rob Stevenson, Analyst 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, CFO at Gladstone Land Corporation]

Yes, correct.

[Rob Stevenson, Analyst at Janney Montgomery Scott]

You do have for sale? 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, CFO at Gladstone Land Corporation]

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.

[Rob Stevenson, Analyst at Janney Montgomery Scott]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

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

[Rob Stevenson, Analyst 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, CFO at Gladstone Land Corporation]

We're comfortable with the collectibility of rent from the other tenants. Right now, it's really just two tenants that are on five of our farms in total that have had issues. We have some other leases expiring later this year that we're working on lease amendments for. It could be a combination of, well, these are on permanent crop 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.

[Rob Stevenson, Analyst at Janney Montgomery Scott]

Okay. And then last one for me, the NAV decline. If I think about the $4.76 versus the decline, how much of that, I think you 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? So the row crops sort of flat and the permanent crops?

[Lewis Parrish, CFO at Gladstone Land Corporation]

Yeah. It's 100%. It's 100% permanent crops. And the $4, I guess you're talking about year-over-year from 9/30/2023, that decline is probably about half, $2-ish portfolio valuation, and then $2 due to just changes in market rates, changes in preferred stock and debt valuation. But on the portfolio side, it is strictly the permanent crop side. 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 strictly on the permanent crop side.

[Rob Stevenson, Analyst at Janney Montgomery Scott]

Okay. That's helpful.

[David Gladstone, President and CEO at Gladstone Land Corporation]

And talking about the 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'll all be gone this year.

[Rob Stevenson, Analyst at Janney Montgomery Scott]

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

[David Gladstone, President and CEO at Gladstone Land Corporation]

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, Analyst at Lucid Capital Markets]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

Two are pistachios and two are wine grapes.

[Craig Kucera, Analyst 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 fourth quarter?

[Lewis Parrish, CFO at Gladstone Land Corporation]

There was a little bit this quarter. This quarter is probably about, well, if you take out the participation rent, maybe a $500,000-$1 million 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 those restructurings happened earlier in Q3. On the two pistachio farms, that switchover will start in November, November 1st. So we'll have a portion of it impacting Q4 and then all of it impacting Q1, Q2, and Q3 next year.

[Craig Kucera, Analyst 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, CFO at Gladstone Land Corporation]

The 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, that's 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 two 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. 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.

[Lewis Parrish, CFO at Gladstone Land Corporation]

We should have a good idea in December, but it won't really be known until probably January, maybe February.

[Craig Kucera, Analyst at Lucid Capital Markets]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

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

[Craig Kucera, Analyst at Lucid Capital Markets]

Okay. Thanks. That's all for me.

[Lewis Parrish, CFO at Gladstone Land Corporation]

Okay. Do we have any other questions?

[Operator]

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

[John Massocca, Analyst at B. Riley Securities]

Good morning.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Good morning.

[John Massocca, Analyst at B. Riley Securities]

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, CFO at Gladstone Land Corporation]

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, Analyst at B. Riley Securities]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

Four properties.

[John Massocca, Analyst at B. Riley Securities]

Four properties.

[Lewis Parrish, CFO at Gladstone Land Corporation]

Yes. Four properties. 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 what makes up that $20 million swing. That will decrease our fixed base rents over the next five quarters, beginning with this Q4 2024. Again, the quarterly decrease rate is about $3.5 million-$4.5 million. And then in the second half of 2025, we will be able to record the majority of the resulting crop shares. Now, there will be a portion, what I was just mentioning about the second component to the pistachio pricing, the bonus marketing adjustments, that amount will not be known until the second half of 2026.

[Lewis Parrish, CFO at Gladstone Land Corporation]

So if I had to guess today, we'd probably be able to record about 75%-85% of the resulting total crop share amount in the second half of 2025, with the remaining amount in the second half of 2026.

[John Massocca, Analyst at B. Riley Securities]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

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 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, Analyst at B. Riley Securities]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

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 four leases that we—or four properties that we change the leases on. These four properties are pistachios and wine grapes.

[David Gladstone, President and CEO at Gladstone Land Corporation]

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

[Lewis Parrish, CFO at Gladstone Land Corporation]

Yes. 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, Analyst at B. Riley Securities]

And then, I guess, in the 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, President and CEO at Gladstone Land Corporation]

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 fourth quarter. 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 the first quarter of next year. 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.

[David Gladstone, President and CEO at Gladstone Land Corporation]

Now we're getting the payments, but they're not in the first 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.

[John Massocca, Analyst at B. Riley Securities]

Okay.

[Lewis Parrish, CFO at Gladstone Land Corporation]

John, I'd add that your question about the pricing of farms. I think in California, the main driver is still water. Is it a single-source water property or dual-source? As we said, most of our properties are dual-source. 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 value better than a lot of the fire sale prices we're seeing on farms that only have one source of water.

[John Massocca, Analyst at B. Riley Securities]

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

[David Gladstone, President and CEO at Gladstone Land Corporation]

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, President and CEO at Gladstone Land Corporation]

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. 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.

Participants

Executives

• David Gladstone, President and CEO
• Michael LiCalsi, General Counsel
• Lewis Parrish, CFO

Analysts

• Gaurav Mehta, Analyst at Alliance Global Partners
• John Massocca, Analyst at B. Riley Securities
• Craig Kucera, Analyst at Lucid Capital Markets
• Rob Stevenson, Analyst at Janney Montgomery Scott