Gladstone Land Corporation

Greetings and welcome to the Gladstone Land Corporation third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It has been my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Thank you, LaTonya. Nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. I want to thank you all for calling in today. We appreciate you taking the time to listen to our presentation. Before we begin, we always ask Catherine Kirkus to, she's the Director of Investor Relations at ESG. Catherine, why don't you go with your part now?

Thanks, David, and good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the investors' page of our website, gladstoneland.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release, both issued yesterday, for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations Department. We are also on X at Gladstone Comps, as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies. Today we'll discuss FFO, which is Funds From Operations. a non-GAAP accounting term defined as net income excluding gains or losses from the sale of real estate and any impairment losses on property, plus depreciation and amortization of real estate assets. We may also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses, and adjusted FFO, which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now, I'll turn it back to David Gladstone.

Well, thank you, Katherine. I'll start with a brief overview of our farmland holdings as we do every time. Currently, we own about 100,000 acres. It's still on about 148 farms and nearly 56,000 acre feet of water assets, which is more than 18 billion gallons. Our farms are in 15 different states, and the water assets, well, all of them in California. That's where it's driest. Our farms are leased to over 80 different tenant farmers who grow over 60 different types of crops. Our farms, most of these are type of food that you will find in the produce section of the local grocery store, such as fruits and vegetables and nuts. So we're continuing to take a very disciplined approach to new investments. In fact, not doing any except in our existing farms. But no new farms simply because the interest rates are so high that we can't finance them. So we continue to be disciplined, as we call it, Investments given interest rates and their cost of capital remains elevated. We're hopeful that the banks will drop their rates in the future. At the same time, cap rates in most row crop farmlands are still too low to make the economies work. During the quarter, we completed the sale of one property consisting of two farms within that property. Those are in Florida. The sale price was $21.5 million. This is a transaction representing a 36% premium over our original purchase price and generating a gain of about $6 million. We may consider additional selective farms for sales over the next few quarters as part of our ongoing portfolio review. But we are still evaluating the opportunities and being very conservative every time we look at a new deal. And now I'll provide with an update and modifications that we've made to certain lease structures and some of our permanent crops farms. Those are all in the west. As we discussed in prior calls, due to the market conditions affecting certain permanent crops, particularly nuts and grapes, we adjusted the lease structures on six properties to help us grow. And with our partner, the grower, reduce their fixed costs while also allowing us to participate in the upside since we're putting up some of the money. In essence, we're accepting a percentage of gross crop sales instead of a fixed rent payment. We also decided to operate two properties ourselves with the help of third party operators. One of the reasons we felt confident going this route, in particular farms, is that there's strong history of higher production Because crop insurance coverage is largely based on historical yields, that means we were able to secure a high level of insurance coverage on these farms that were going to hit our numbers. And we more than did that this year in a number of farms. We're still progressing through the harvest that we did for last year, post-harvest activities on our almonds, pistachios, and grape properties. and this group wrapping up the pistachio harvest on three farms earlier this month. And we're now receiving proceeds statements confirming the volume delivered to the sheller or persons that are working for us to sell the different things, such as almonds and pistachios, along with the first cash installment. Based on those statements, we expect to recognize about $17 million in revenue In the fourth quarter, from these three orchards alone, we also received the first cash payment, a little over $5 million. In addition, subsequent to the quarter end, we transitioned one lease on a large vineyard in Napa, California from structured that included a sizable lease incentive payment back to traditional crop share arrangement. Our goal is to eventually transition all of our leases back to more traditional structure. That is, we like receiving fixed-based rents that come in every month rather than waiting till the end of the year to get part of the crop, even though the latter of those alternatives is usually much more profitable than taking monthly payments from someone leasing our property. In the other leasing activity, we executed two renewals subsequent to the quarter end. The expected results are an aggregate increase in annual NOI of about 65,000 or about 7% on those forms. Looking ahead, I have 11 leases. We have 11 leases scheduled to expire throughout the rest of 2025. Due to some of these leases containing no fixed base rent and others including cash lease incentives, both in exchange for increasing the participation rent component. These leases actually account for negative $651,000 of lease revenue, but doesn't accrue any of the payments we're going to get from selling the crops in our percentage. And that's largely because of the participation rents resulting from these leases. They won't be recognized until after the fourth quarter. That is, when we get the numbers in, we'll know what we made. And I think things are looking good on our nut crops. So we're all happy about that. We're in discussions with both existing and prospective new tenants about leasing these farms, including reverting some of these leases back to the standard lease that we started out with, that is fixed monthly rents or quarterly rents. but in essence not participating greatly in the sale of it. So the farmer is doing the farming and we are just leasing to them. But we've got these farms that we've converted over to where we are putting up some of the money and we get a lot of the money coming in from the sales. So we'll see how that works out. The first one that we talked about looks good. And I think the rest of these that we have in that, with the exception of grapes, look good. And now I'll give a quick update of some of the ongoing tenant matters that we're working through. We currently have six farms that are vacant and two properties encompassing four farms are directly operated under management agreements with an unrelated third party. In addition, we recognize the revenue on the cash basis or leases with four tenants who collectively lease seven of our farms. We're actively working towards solutions for each of these situations and are hopeful that the number of them will be resolved over the next, well, I would say several months, but it usually is not working until about six months after the year end. So I'm going to stop here. We've got Bill Ryman on the line. And Bill is gonna give us positive news.

Hey Bill, take away. Thank you, David. Good morning all. Yeah, just to expand a little bit on the eight properties that are under modified lease agreements or being direct operated with third party operators. Harvest for the 20, 25 pistachio, almond and grape crops is nearly complete. Pistachios are all in the barn as we say. And like David mentioned, we did receive our first payment for that crop. Grapes have just a few tons left to pick, and some of the almond crop remains in stockpiles as a whole, but it has all been removed from the field. We expect that to wrap up in the next few weeks. Last quarter, we reported that growing conditions have been nearly ideal, and those favorable conditions pretty much continued throughout the fall. We had some higher-than-normal rainfall in the Central Valley of California, but harvest was very smooth and uneventful, which we really like. Our pistachio orchards performed well above state averages and also exceeded our own internal projections in both crop quality and volume. We had a few almond blocks that underperformed, but the majority surpassed our internal expectations as well. We expect to receive crop insurance payouts for a few blocks that fell short, which should make us whole with respect to the growing costs. Wine grapes also delivered strong yields across the board with excellent quality. There's excellent growing and harvest conditions we experienced in 2025 have positioned the trees and vines very well for the upcoming 2026 season. While we still need sufficient chilling hours, winter precipitation, and favorable weather next year, and it's early, but we're off to a strong start for the 2026 crop. Irrigation, fertilization practices already underway, and we'll get started on some pruning activities as well here into the winter. A few words about crop markets. We have tariffs, trade tensions, geopolitical rhetoric continue to create some uncertainty across many export markets. Nut crop markets are showing notable resilience and strengths, particularly for pistachios. Changed stronger than expected demand from two specific markets right now with pistachios, the EU and the Middle East. That's significant because it reduces our reliance on the Chinese market. Chinese market's still extremely important. But spreading the crop around certainly helps reduce that risk. The result for pistachio, our base guarantee price for the current crop remains consistent with 2024, and we believe there's a strong likelihood that the final price, even though it won't be announced for a year from now and we have a lot of marketing to do, we believe that final price of the 2025 crop will be comparable to 2024 levels. Almond prices rebounded from their midsummer dip, returned to the levels we saw. early in the spring. Since then, prices continue to trend upward, gaining a few cents per pound each week. Sellers that I talk to, marketers, are all enjoying this with pricing and demand just continuing to rise each week, and everybody expects this to continue for the next several months. Wine grape markets are the opposite, continue to underperform. strong yields the past couple years, combined with declining global consumption, created one of the most severe oversupply situations the industry has ever experienced. As a result, a lot of vineyards are being removed around the world. At the pace that this is happening, we expect, hopefully within the next year, 18 months, we expect markets to start to turn around. And overall, Macroeconomically, the weakening U.S. dollar really works in our favor on all these products that we export, particularly the nuts, makes our products much more attractive to international buyers. Lastly, I'll touch on water. Nearly identical report as last quarter. We've been in this normal to wet cycle the past few years, including the most recent winter. We've remained focused on the hand-centered water delivery storage infrastructure across the portfolio. With these wet years, the availability of inexpensive water is strong, so we've been very strategic about making those acquisitions. So we continue to build on our nearly 56,000 acre feet of water assets, position several of our farms with enough water supply to meet immediate irrigation needs. regardless of weather conditions. So we feel pretty good about that, regardless of how this winter ends up. Storage situation in both the federal systems, we're expecting a minimum of 35% and as high as a 50% allocation if we get a dry winter. So if we get a normal to wet winter, we expect that to be even stronger. So very positive news on the waterfront. And now I'll turn that over to Lewis Parish, our CFO.

Thanks, Bill, and good morning, everyone. I'll start with a brief update on our recent financing activity. During the quarter, we repaid a $10 million bond that was maturing, and this bond was secured by a property that we also sold during the period. On the equity side, since the beginning of the third quarter, we've raised about $10 million through our ATM program. These issuances were made in anticipation of redeeming our Series D term preferred stock, matures at the end of January 2026. This will allow us to avoid the scheduled increase in the coupon rate from 5% to 8% and also reduce our reliance on our variable rate line of credit to fund that redemption. Turning to our operating results, for the third quarter, we recorded net income of about $2.1 million and a net loss to common shareholders of $3.9 million, or 11 cents per share. Adjusted FFO was $1.4 million, or $0.04 per share, compared to $4.5 million, or $0.13 per share, in the same quarter last year. The year-over-year decline in AFFO was driven by recent changes to lease structures on certain farms, loss of revenue from farm sales over the past years, and ongoing tenancy issues that led to vacancies, resulting in both lower revenues and higher costs. Fixed base cash rents were about $5.4 million lower than in the prior year quarter due to the reasons just mentioned, but mainly the lease modifications on certain properties where we reduced or eliminated fixed base rents, or in some cases, provided cash lease incentives in exchange for significantly higher crop share participation. And the results from these crop share components won't be known until the harvest is complete and the crops are sold, which is currently underway. Participation rents increased by about $1.9 million, largely due to the accelerated recognition related to 2024 harvest on certain farms as additional information became available to us earlier this year. This increase was further driven by much stronger pistachio pricing compared to last year. We continue to expect higher participation rates in the fourth quarter of 2025 as a result of the least modifications we made on certain ferment crop farms. As we discussed on prior calls, these changes have led to lower fixed-base rents in fiscal year 2025 compared to 2024. And the majority of the resulting crop share proceeds are expected to be recognized as participation rent in the fourth quarter of 2025, with most of the remaining smaller portion being recognized in the second half of 26. So in essence, we are shifting revenues from fixed base rents to participation rents over the next couple of years. And as a result, most of our 2025 earnings will be realized in the fourth quarter with wider earnings during the first nine months of the year. On the expense side, excluding reimbursable items and certain non-recurring or non-cash charges, our core operating expenses decreased by about $140,000 this quarter. Total related party fees fell by about $110,000 driven by a lower base manager fee due to recent sales. And our remaining recurring cash operating expenses remain relatively flat as higher property operating costs were offset by lower G&A expenses. Finally, other expenses decreased mainly due to lower interest expense driven by loan repayments made over the past year. Turning to liquidity, we currently have over $170 million of immediately available capital. We also have nearly $150 million of unpledged properties we could use as additional collateral if needed. Over 99% of our borrowings are at fixed rates with a weighted average interest rate of 3.39% locked in for another three years. This has helped show this from the volatility in interest rates over the past few years. Looking ahead, we have about $17 million of scheduled principal amortization payments due over the next 12 months. We also have about $25 million in loans with fixed rate terms expiring in the next year, so the loans themselves are not maturing. And finally, regarding our common distributions, in October, we declared a monthly dividend of 4.67 cents per share for the fourth quarter of 2025. At our current stock price of $9.24, this represents a 6.1% annualized yield, which is well above the re-sector average. With that, I'll turn it back over to David.

Thank you, Lewis. Continue to stay active in the marketplace. Should a good acquisition come along, but quite frankly, I'm not sure we're going to do any acquisitions this year, but we'll keep looking. Maybe one day one will pop up that we like. But as mentioned on prior calls, we're still being much more cautious on the acquisition front because the cost of capital remains very high. Market outlook. Overall demand for prime farmland, growing berries and vegetables remain stable in almost all of the areas where our farms are located. So a lot of underlying value there in those farms. As mentioned earlier, prices for certain Permanent crops have been depressed recently, which along with other factors has impacted the value of the underlying farmland. However, we're seeing signs of improvement as both crop prices and broader economics of some of these crops. So we are still in a good position for long term. So hopefully that the worst may be behind us. when all of the crops were having problems, we clearly were covered by the price of the land that we have. In closing, we expect inflation, particularly in the food sector, to increase over the time. And we expect the values of the underlying farmland to increase as time results. We expect this especially true of the healthy foods, such as fresh nuts, fruits, and other vegetables, which is the trend in America and all over the world, for that matter. The trend is more for people in the USA eating healthy foods, and that continues to grow. Now we'll stop and have some questions from those who follow us. Operator, would you please come on and tell them how they can ask a question?

Thank you. We will now conduct a question and answer session. 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 two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one at this time. One moment while we pull for our first question. The first question comes from Rob Stevenson with Janie Montgomery Scott. Please proceed.

Good morning, guys. David or Bill, I might have missed it, but can you talk about how that 16.9 of revenue from the pistachio harvest was versus what you were expecting, and how does this compare with what that crop would have generated a few years ago?

Well, if you're talking about a few years ago, they were leased, and so all you would have gotten in is whatever we were charging on the lease. Now we've moved and increased the probability of getting higher rates, who knows, but at the point now, we are probably two or three times the amount that we would have perceived. So it was a very positive thing that we're getting now from feedback of where the leases have gone, that is, from fixed rate to variable rate, and variable has been very nice. We've gotten some nice numbers in, and We believe when you hear us in the fourth quarter, we'll have a lot of this ironed out and you'll know what we made on what we invested. That close as I can get to just giving you a straight number.

Okay. And then, Lewis, you talked about redeeming the Series B. What's the cost associated with that and the timing?

So the Series D that's coming due January 31st, 2026, right now it's at a 5% coupon. At that date, if not redeemed, it goes up to 8%. So we plan at this time, you know, we've looked at all options, leaving it out there, absorbing the 8%, which is obviously not what we want to do. Refinancing it is still expensive and also a lot of upfront costs. So the plan right now is to take it out, redeem it to avoid that coupon with a mixture of common stock and line of credit. We've been issuing common stock at about 6.1%. The line of credit is just south of 6%. So right now the cost would look to be about 6%, higher than the 5% that the security is currently yielding, but, of course, much lower than the 8% that it would otherwise go up to.

Okay. And there's roughly $60 million of that out there?

Correct. Yes, $60.4 million.

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

Okay, next question. The next question comes from Craig Cucera with Lucid Capital. Please proceed.

Yeah, good morning. I think you mentioned that you might sell some of the permanent crop farms out west if you can't restructure the lease, and you're obviously looking at a number of different options there. But I'd be curious to get your thoughts on the depth of the transaction market out on the west coast right now.

Well, the banks aren't lending at as low a rate as they used to when we first bought these, but they're circling in that direction, and we're hopeful they'll come up with a lower rate. But the nice thing about this note that we're paying off is it doesn't come due. It just changes its rate. So liquidity is not a problem. We know the money is there, and we don't have to get it back. On the other end of it, If we give it back, we cut the rate to zero, obviously. So I think we're in very good shape. Last year this time, there were some dim moments here in the office as we contemplated what was going on in the marketplace. But today, we have a breath. I think there's maybe one farmer that's having some real problems, and we may lose that farmer. But otherwise, there seems to be a breath of fresh air in the marketplace out there. And I'm talking mostly about California. The other stuff we have in Florida and in the Midwest, they're paying as agreed and we're in good shape.

Got it. And yeah, it does. It does. Just thinking about your commentary on wine grapes, I guess when we think about when you restructured the leases last fall, Should we take away from this that any sort of weakness in wine grapes has more or less been offset by strength in tree nuts as far as sort of what you had budgeted at the time you renegotiated those leases?

That's exactly right. How did you get so smart?

Okay, just checking. All right, that's it for me. Thank you.

Next question.

Once again, to ask a question at star 1 on your telephone keypad. The next question comes from John Masaka with B Riley. Please proceed.

Good morning. Maybe kind of thinking about both the repayment of the Series D and just generally kind of, you know, the market out there to pay down debt or even potentially even buy back common stock. How are you looking at the disposition market right now or the disposition opportunities, particularly maybe outside of California, that are interesting? I know you closed the deal in Florida recently. So just kind of curious what potential for generating capital by selling farms there is today.

I think on the East Coast it's very good. The West Coast is still pretty poor in terms of generating new farmers with lots of equity credit to pay their debts. So we're still waiting for that to come back. And it has moved in the right direction, but it's still going to take a while for it to catch up with where last year was and maybe the year before. John, the more I look at that, the more I say, gee, this is going to work out just fine. And I hope you are on the call for the fourth quarter because I think the fourth quarter will tell you whether we made a great decision to go variable rates or fixed rate. That is, fixed meaning we have an amount that we get every month or every quarter. Press variable, we have to wait until the products are sold. And while they're all growing, this has been a great growing season, there's really nothing going on other than These plants will continue to grow no matter whether, as long as they're fed water and any kind of stimulant, such as some of the things we put on those crops. I think, John, this is a real turning point in this. And we're seeing some really good numbers. And the lady who does all the projections for these crops is sitting here at the table and smiling, and she wasn't smiling a couple years ago. She was pretty frustrated. We've gotten a new guy out on the West Coast who's going to go to the farms more than we have in the past, although the last person that was there was going to the farms on a recently very frequent basis, and now we're going to have somebody that knows growing and can go out and spot the crops and help us adjust things that needs to be adjusted. This is a great time to be in the business. There are going to be some people that buy crops and talk to some people. We've had people who want to buy crops, but they want to pay us with promises, and we'd rather have cash than promises. So we're working hard to get cash in as we have. And how much do we have, Lewis, cash?

Right now we have $25 million in the bank and a fully undrawn $75 million line of credit and other undrawn notes as well.

So we're not in problems territory now because liquidity is pretty much assured. We expect the fourth quarter to be a great quarter. We only got $5 million last time we got a payment coming in. I think we'll do much better in the fourth quarter. In fact, we're making sure of that by cutting deals as soon as we can. We have one large farm that a group who's trying to start over again is saying they will buy it from us. I don't know. John, you have to play your cards when you get them, but this time I think if they come up with the amount of money that we're talking about, it would certainly send us in a direction of maybe buying some farms. sure miss the ability to go out and buy farms. It's a different world out there for the nut guys. Not that they're nuts, but they're growing nuts.

I was thinking on the disposition front, I mean, you know, the Florida transaction seemed like it was kind of opportunistic. Is there more potential for those type of deals as we look into the remainder of the year in 2016? to maybe sell more assets, either to capital recycle if you do have attractive buying opportunities, or to kind of pay down pieces of the capital stack?

Well, certainly we will pay down the loans in a capital stack. If they're close to maturity, we're definitely going to get them out of the way. So I don't have any worry about that happening. As Louis mentioned earlier, The rate might go to 8% unless we do something to get rid of the loan altogether. But the loan itself is not due. It's just the rate's going to change if we don't pay it off. So we're working on that. And I think we're going to be in good. Once the money starts rolling in from our variable rate charge to some of the farmers, I think we're going to be in extremely good shape. Nothing is taken for granted, though. So we're still praying a lot that things will continue the way they're going in their direction now. And quite frankly, after the downturn that we had in which people weren't eating nuts nearly as much as they had in the past, it was a real shocker when those people didn't step in and order again. They're back ordering now. They're not ordering as much. We can live where they are now, so I feel comfortable today, and I just hope our projections are correct. If they are, we will have made a lot of money on the switch from fixed payments to variable payments from the farmers. Okay. Other questions?

And then, Lewis, we've been thinking about the series a little more. Where do you think you are today in terms of having the liquidity you'd like to fully pay that down? It seems like you could given the availability on the line, the cash today. But I mean, is there any need for kind of fresh capital in your mind to finish that repayment? And I guess it could you also maybe if you wanted to partially redeem it or does it have to be fully redeemed or fully kind of left out there to kind of pay that higher rate or that higher dividend yield?

So a few things there. We definitely could do a partial redemption, but having any kind of any product in our capital stack at 8% is not ideal for us right now. And, yes, we do have the current liquidity to take it out today if we wanted to, but it's at 5%, which is lower than the current cost of capital we would use to take it out. But it makes sense to let it go at that 5% as long as we can. But the idea between mixing the common stock and line of credit, while the line of credit is a little bit cheaper based on yesterday's closing price for our common stock, it's variable. So just having to draw less from our line of credit just reduces our exposure to future interest rate volatility there. And as David mentioned, there are some farm sales that are potentially in the works down the line, so that could be some additional capital, but To answer the question, we could take it out today if needed, but it's just a matter of managing interest rate risk and getting the lowest cost of capital to take it out that we can.

I appreciate that detail. That's it for me. Thank you.

Okay. Any more questions? Mr. Glassstone, there are no further questions in queue. I would like to turn it back to you for closing comments, please.

We don't like that. We'd like you to ask more questions. It's more fun when you do that. We'll live with it, and we'll see you next quarter. And don't miss the opportunity to listen in next quarter and see how well we did in projections. That's the end of this. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.