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Edited Transcript of LAND earnings conference call or presentation 9-Nov-18 1:30pm GMT

Q3 2018 Gladstone Land Corp Earnings Call

Mclean Jan 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Gladstone Land Corp earnings conference call or presentation Friday, November 9, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David John Gladstone

Gladstone Land Corporation - Founder, Chairman, CEO & President

* Lewis Parrish

Gladstone Land Corporation - CFO & Assistant Treasurer

* Michael B. LiCalsi

Gladstone Land Corporation - General Counsel & Secretary

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Conference Call Participants

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* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Lisa Springer

Singular Research, LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation Third Quarter Ended September 30, 2018 Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. David Gladstone. Sir, you may begin.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [2]

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Thank you, Joelle, and nice introduction. And welcome to the quarterly conference call for Gladstone Land. And thank you all for calling in today. We really appreciate getting together with you over the phone and nice of you to take the time to listen to our presentation. We always enjoy telling you over the phone or any other way we could what we're doing and hopefully get some good questions. Feel free to come by and visit us if you're ever in the Washington, D.C. area. We're located in a nearby suburb called McLean, Virginia, and if you have a chance to come by, you'll see some of the great team members here. We have about 66 team members here now and we manage about $2.5 billion in assets across our 4 public funds.

We're going to start with Michael LiCalsi, he's the General Counsel and Secretary and also serves as the President of Gladstone Administration, which is the administrator for all the Gladstone funds, including this one. Michael?

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Michael B. LiCalsi, Gladstone Land Corporation - General Counsel & Secretary [3]

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Thanks, David, and 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. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed in our forms 10-Q, 10-K and other documents that we file with the SEC. Those can be found on the Investor Relations page of our website, which is www.gladstoneland.com. You can also find them on 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 also discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We'll also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses. We'll also discuss adjusted FFO, which further adjusts core FFO for certain noncash 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.

We ask that everybody take the opportunity to visit our website, once again, gladstoneland.com, sign up for our e-mail notification service, so you can stay up-to-date on the company. You can also find us on Facebook, keyword there is, The Gladstone Companies; and on Twitter, the handle there is @GladstoneComps.

And today's call is simply an overview of our results, so we ask everyone to review our press release and Form 10-Q, both issued yesterday for more detailed information. Again, you can find these on the Investor Relations page of our website.

And with that, I'll turn the presentation back over to David Gladstone.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [4]

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Thank you, Michael. That's good information for our shareholders. And before I get into the details of this quarter, I'm going to give a brief overview of our business. As most of you know, this company invest in farmland, which is often called an alternative asset and that's because these assets that we're investing in are considered to be relatively illiquid. While the underlying assets may be relatively illiquid, your investment in the stock is not since it is traded on NASDAQ under the symbol, LAND, L-A-N-D. But I think this company is essentially a natural resource company by category because it's investing in farmland and these farmland investments tend to have low correlation to the overall stock market, which we believe is one of the many benefits of owning farmland.

Our business consist of owning high-quality farmland and leasing it to tenants that we consider to be good, experienced farmers. We typically don't farm any of the land ourselves, but rather lease the properties to unrelated third-party farmers. Our primary investment focus is on farms and farm operators that are growing a variety of high-value fresh produce annual row crops, with a secondary focus on farms growing more permanent crops. And those permanent crops are grown on bushes, such as blueberries, trees and vines, such as almonds, apples, cherries, grapes and pistachios. These type of crops are planted once and then harvested for many years. We like the fresh produce area and also the nut segment because they typically provide greater returns than other crop types.

We look to buy cropland that is irrigated and has plenty of access to good water. We also look for farms that are -- have excellent soil. In addition, we try to find farmers to lease these properties who are typically among the most well established farmers in the growing regions that we happen to have our farm in. We had some issues with a couple of small farm operators, but for the most part, we've done a good job of partnering with these strong growers.

We prefer to keep the same farmer on the property for as long as possible because they know the nuances of operating this particular farm or that particular farm. Our objective, of course, is to be the long-term real estate partner of all of our farmers, so they know they have the farm for as long as they want it.

Currently, over 85% of our total revenues come from farms that are growing the types of food you'd find in either the produced or nut section of your local grocery store. We consider these foods to be among the healthiest type foods and we're seeing a growing trend toward organic among these food groups. That's especially true on the produce section in your grocery store. Currently, about 35% of our fresh produce is either organic or the farm is being transitioned into organic, and about 20% of our permanent crop acreage falls into that same organic category. We believe the organic section of the grocery store will continue to be a strong area. In addition, over 95% of the portfolio is GMO-free. So we're not in the corn belt of the United States very much.

We currently own 69,000 acres, 83 different farms, 9 different states across the United States. These farms are valued at just over $600 million. Across our farmland holdings, we own farms in 19 different growing regions. And one thing I want to -- all of you to know is that these farms grow about 40 different crop types. And that -- on top of that, this diversification of our farms is leased to 56 different tenants, all of whom are unrelated to us.

Diversification is extremely important to us. We believe a well-diversified portfolio of farms growing many different types of crops provides additional security to our stockholders and our ability to pay our dividend. We only have a few farms growing grain crops like corn, wheat or soybean, because the grain prices just continue to be too low for a reasonable farmer to make a profit in the United States. These are still too much -- there's still too much grain in the world market and as a result, growers of these grain crops are continuing to have a lot of difficulty selling their grains at a profit.

We own a few farms in the Midwest, but a majority of those are growing things like organic potatoes, some organic popcorn. Most of our growing regions, we continue to see a steady number of farms being sold and converted into suburban or urban uses. And that's probably the main thing that I'd like to point to regarding the factors that continue to drive long term land values up. The amount of farms in many of these regions is relatively finite, especially in the state of California and there are very few, if any, new farms being developed. That is there are no trees to cut down and new fields to start plowing. So there's no more land that can be converted into farms in many of these regions. Almost all of the arable land in these regions is already being farmed and are slowly been converted to other uses such as housings and schools and factories, and once they get converted to those uses, it's almost never going back to farming.

Water availability is another factor that drives rental rates and land values. Farmers are fallowing land that -- where water is too difficult or expensive to obtain, and that's driving up rents and prices of land with productive wells and reliable access to multiple sources of water. And that's why whenever we're buying a farm, water availability is always the first thing we look at. We spend a huge amount of time and effort in our due diligence phase simply determining that water conditions to make -- we have to make sure that the farms will have plenty of water for a long-term use. We want to know that the water availability is sufficient enough to withstand a drought. In the last California drought, we didn't see any of -- any significant reductions in the production or rents of our farms.

Finally, one other factor driving farmland values, of course, is inflation and the reduction in value of the dollar due to the government printing so many dollars. And while the government tells us that there hasn't been very much inflation recently, anyone who goes to the grocery store can tell you that food prices, especially fresh produce prices have been going up at a very steady pace. But keep in mind, inflation in food prices is really good for us as it allows our farmers to charge more for their crops, which enables us to earn a little more rent by increasing the rent on the farms.

Now about some recent activity. As we mentioned in the last call, we sold a farm in Oregon to an existing tenant for about $20.5 million, recognizing a gain of over $6 million. We're able to achieve a 20% IRR on the original investment in the farm and the price we sold it at represented a 22% premium over where we previously had valued at. In addition, the proceeds from this sale of that farm in Oregon where we rolled that into an acquisition of another property as part of a like-kind exchange, which just means that we don't pay any taxes on that gain and we can now earn money on the entire amount that we got from that purchase -- from that sale. And just a quick note, while gain on the sale triggered a sizable capital gain state to the adviser, since the gain went into the new deal as opposed to cash coming into the fund, our adviser credited the whole fee back to the fund and to its shareholders.

During the quarter, we acquired 8 new farms, about $47 million for a variety of crops such as vegetables, melons, peanuts, cherries. Just last week we bought a farm in California for $23 million that primarily grows figs, which is a new crop for us. And here's one for the record books, fig trees can remain in production for hundreds of years. So we can look forward to harvesting figs on that until the time comes to sell it to a developer.

Overall, the initial net yield on these farms is about 5.4%, but most of these leases also contain certain provisions such as crop sharing payments and we hope that will push the figure higher in the future in terms of the capital -- the income we receive.

As far as leasing activity, we had a couple of leasing issues come up during the quarter. In short, the release roll downs executed during and after the quarter end will probably result in a decrease in annual cash rents of about $200,000 for the year. However, some of this is just due to changing the lease from a fixed cash rent structure to a lower cash rent in exchange for adding to the crop -- adding to the lease, a crop rent component, which we hope will help bridge the gap and provide us with additional upside, not only in the next year, but in many years going forward.

In another renewal, we executed for just one year period, it was a temporary stopgap that we have time to properly market the farms. Sometimes, we get these farms back a little bit too late in the season, so we have to wait a little while before we can get the right tenant on it.

So while we may see a small reduction in our rental income over the next year, we expect to get it back, most of it, with the new farms we're buying as well as the crop rents that we get. But keep in mind, this decrease should be more than offset by the crop sharing payments that we have coming next year. We already recorded this year over $900,000 in crop share payments. This is just additional rent. And we have a few more payment schedules coming in this fourth quarter that we're in right now for additional crop share, and we should get those crop sharing payments again every year in the future. Plus we're adding to those crop sharing payments with these new leases that we're signing up every quarter, and while there's no guarantee of anything coming in. If this year's any indicator, we expect to have good numbers in the next year as well, and of course, the future looks bright.

We also have additional rent coming in on some of the acquisitions that we're doing in this quarter, and I'm not sure what those numbers are, but it looks very promising. In terms of vacancies, we currently have 2 farms that are vacant. We had one tenant who had been in bankruptcy, and we have one farm that we acquired early in this year without a lease in place. And we are talking to multiple operators for each of these farms and we hope to have leases signed up on each of them in the coming months.

Looking ahead, briefly, less than 4% of our total minimum annualized rents are from leases that expire over the next 6 months. We are negotiating with the existing tenants on all of these farms as well as potential new tenants. And we expect to be able to renew the leases on all of them with no downtime on any of the farms. As far as where the rent numbers will fall, but because these small farms are farms growing corn, these ones that are coming up, we expect the rents to be relatively flat, maybe down slightly. We may change the leases structure to a couple of these as well so that we get some fixed rent amounts in exchange for additional crop sharing payments.

I am so happy that we only have a small number of farms in the corn belt. One final note on our farms, we were fortunate again not to have any material damage on any of our farms as resulting to Hurricane Michael. We had a couple of irrigated -- irrigation pivots that suffered some minor damage, but all of that's fully insured and don't think we have any problem with keeping those farms going. They were really immaterial to the farmland itself. Also there are few fires going on. I know people ask us what's going on in California when they read in the paper. We have a couple of fires there. But you have to remember that the fires are up in the mountains where there's lots of brush and lots of bushes that can catch on fire. We don't have any farms near either of these fires that are in Ventura county. We have one down in the flatlands and we feel bad that many of the people are having to leave their houses. I think they've got about 1,000 now. But that happens in California.

On our capital raising efforts through our nontraded Series B Preferred Stock, we've been pleased with the pace of sales on this security so far. We sold about $15 million of Preferred Stock. And it's just a reminder, we plan to list the Series B Preferred Stock on NASDAQ so that shareholders will have liquidity. It's just illiquid now, people are buying it for the yield, and I think we'll sell a lot more of that in the next year.

Now in the process, the company's paid Gladstone Securities, that's in this, again, Series B has paid Gladstone Securities, our affiliated broker-dealer, total commissions and fees. However, Gladstone Securities is really just a conduit in this offering, as it pays out almost every nickel of these fees to other unrelated third parties involved in the offering, such as participating broker-dealers and wholesalers that are the people that are selling these shares. To date, it's paid out about 95% of these fees it's earned to other third parties who are helping sell it. So we're not making money on this part of it, but we certainly hope to make money on the use of the proceeds to buy more properties that we can manage.

The point of the Series B is to allow us to grow our portfolio at a very steady pace without having to do quite as many common stock offerings, which, as you know, maybe it gives the illusion to the existing shareholders. Now we look at it as a way to augment our long-term debt needs as it has a fixed coupon and we can put the money to work and usually go at a pretty substantial amount higher than that. It locks in the spread and achieves a great investment for our common shareholders, and at the same time, gives our preferred shareholders a nice long-term return.

Well, that's enough on the business side. I'll turn it over to the Chief Financial Officer. Lewis, why don't you take us through your section?

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [5]

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All right. Thank you, David, and good morning everybody. I'll begin by discussing our balance sheet.

During the third quarter, our total assets increased by about $35 million or 7% due to our recent acquisitions, partially offset by the one farm in Oregon that we sold. Our acquisitions were ultimately funded through a combination of new fixed rate borrowings, proceeds from sales of our Series B Preferred Stock and the sale proceeds from that farm that we sold. From a financing perspective, in addition to the proceeds from a Series B, we secured about $28.1 million of new long-term borrowings from 3 different lenders, including one new lender. On a weighted average basis, these new borrowings carry an effective interest rate of 4.15%, which is fixed for the next 7.5 years. In addition, we had $16 million of bonds scheduled to expire during the quarter. We were able to refinance all of them with the existing lender through the issuance of $17.4 million of new bonds. The increased financing was made possible by the appreciation in value of the underlying collateral, which in total increased by about 9% since their purchases 3 years ago. Compared to the old bonds, the weighted average interest rate on the new bonds was about 180 basis points higher, probably due to increased interest rates, but also as a result of us extending the fixed rate term of the new bonds.

From a leverage standpoint, on a fair value basis, our loan-to-value ratio on our total farmland holdings was about 57% at September 30. And if you were to include the Series B Preferred Stock into the leverage bucket, that figure would only increase to 58%. We're comfortable at both of these levels given the relative low risk of high-quality farmland as an overall asset class. And while interest rate volatility continues to be a concern of ours, about 98% of our borrowings are currently at fixed rates and on a weighted average basis, these rates are fixed at 3.55% for another 6-plus years out. So we believe we're currently pretty well protected on the debt side against any further interest rate hikes.

While interest rates are rising, credit remains readily available to us and we continue to be able to borrow money on terms that make the overall economics work for us. Regarding upcoming debt maturities, we have a little less than $8 million coming due over the next 12 months for only about 2% of our total debt outstanding.

Now move on to our operating results. First, I'll note that we had net income for the quarter of about $6 million or $0.35 per share. A large part of the quarter-over-quarter change in our income statement was due to the completion of the operations conducted through our taxable REIT subsidiary, or TRS. In the prior quarter, we recorded about $4.8 million of operating revenues through crop sales and we had about $5.1 million of related operating expenses. However, towards the beginning of this quarter, that farm was leased out to an unrelated third-party tenant for the next 10 years. So we'll only be recording rental income related to that farm going forward.

Moving on to adjusted FFO, which removes the impact of our TRS operations. Our AFFO for the quarter increased by about $700,000 or 41% from Q2. The main driver of this increase was additional cash rents received during the quarter, due to both our recent acquisitions and approximately $890,000 of participation rents recorded during the quarter. Partially offsetting this were some increases in certain operating expenses during the quarter, primarily interest expense, property operating expenses and net related party fees.

Regarding the increase in property -- property expenses, almost all of this increase is related to cost incurred to rent generators to power some new wells that we've drilled on some of our properties. These wells were drilled as part of ongoing irrigation upgrades we're making on certain properties and it often takes the electric company quite a while to come out and connect the new wells to the grid. In the meantime, to allow the farmers to go ahead and access the water, we're paying for some generator rentals to bring the wells online. We expect all of these new wells to get hooked up to permanent power during the fourth quarter, so we hope this expense category will go back down to normal at that time.

Moving onto our per share numbers. Earnings from adjusted FFO for the quarter was $0.145 per share, which was an increase of $0.04 per share or 38% from the prior quarter. So after missing our dividend last quarter, which was our first miss over the past 12 quarters, we got back on track this quarter and we hope to maintain coverage going forward.

Now move on to net asset value. During the quarter, we updated valuations on 26 of our farms, all of which were revalued by independent third-party farmland appraisers. In the aggregate, these updated valuations resulted in an overall increase of $8.8 million or 6.9% from their prior valuations. As of September 30, our farms were valued at about $579 million, all of which was valued based on either third-party appraisals or the actual purchase price. Based on these updated valuations and including the fair debt -- the fair value of our debt and all of our preferred stock, our net asset value per share at September 30 was $13.79, which is up by $0.28 or 2.1% from last quarter. The primary driver of this increase was the net appreciation in value of the farms that were revalued during the quarter. This was partially offset by ongoing capital improvements we're making on certain of our farms. The values of these capital improvements won't be reflected in the farm's fair values until the respective projects are complete. However, I will note that for a majority of these capital projects, we are earning additional rental income as the funds are disbursed by us.

Turning to liquidity. We currently have about $8 million of dry powder, which translates into roughly $20 million of buying power for straight cash acquisitions. We also have the ability and intent to issue new OP Units as consideration for purchases should the opportunity arise. And over the past several months, we've been completing 2 closings per month of the Series B Preferred Stock, so we expect to receive additional proceeds through future sales of that security as well.

Finally, we have ample availability under our 2 largest borrowing facilities, and we are continuously reaching out to new lenders as we enter new regions. So we have plenty of room and ability to continue borrowings and buying new farms that meet our investment criteria.

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

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [6]

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That's very good, Lewis. The first half of the year started off a little slow in acquisition front, especially. Activity really began to pick up for us in the third quarter. And looking at our list of possible acquisitions, it looks like that momentum is going to carry us through the fourth quarter as well and probably into 2019. Currently, we have 4 properties for about $20 million under signed purchase agreement and we're going through due diligence. We expect most of these acquisitions to be completed before the end of the year, although 1, 2 of them might slip over into 2019. We expect to be able to close these farms without a need for additional equity capital, but as you know, there's no guarantee that any of them will close, but usually, they take a little bit of extra time and finally get to the finish line.

So just a few final points. As most of you know, our fund specializes in farms that grow fresh fruits and vegetables and some farms that grow nuts and other tree crops. One reason for this is we believe investing in farmland growing crops that contribute to healthy lifestyles such as fruits and vegetables and nuts, mirrors the trends that we're seeing in the marketplace today and that is people continuing to switch toward more healthy foods. Another major reason for our business strategy is to focus on farmland growing fresh produce is due to the effect of inflation on that particular segment. According to the Bureau of Labor Statistics, the overall annual food CPI generally keeps pace with inflation. However, over the past 20 years, the fresh fruit and vegetable segment of the food category has outpaced the total CPI by a multiple of 1.7x. And while prices of commodity crops are typically more volatile and susceptible to global supply and demand, fresh produce is mostly insulated from the global volatility, mainly because the crops such as the ones we're investing in are generally consumed locally within a short time after being harvested, so they're not being buffeted by outside prices.

Ultimately, we believe farmland, that is GMO-free and growing healthy crops such as fruits and vegetables as well as nuts, are going to continue to outperform the overall farmland market in terms of both cash returns and long-term value appreciation. Overall, demand for prime farmland such as those growing berries and vegetables remain stable to strong in almost all areas of our farms. And this is mostly along the West Coast, including most of California, Oregon and Washington and the East Coast, especially, Florida and now and up into North Carolina. And farmland overall continues to perform extremely well compared to other asset classes. Despite some of the recent downturns in certain regions, the NCREIF Farmland Index, which is currently made up of about $9.4 billion worth of agricultural properties, including all of ours, has an average annual return of 14.9% over the past 15 years compared to 9.1% for the S&P index. And we want to mirror that long term annual return with our -- we don't have, obviously, $9.4 billion worth of properties, but when we get all of our properties in place, we want to be like that index.

And you should know that the farmland index has never had a negative year like the S&P had during the great recession. Farmland has generally provided investors with a very safe haven during turbulent times in financial marketplaces, both as land prices and food prices, especially on the fresh produce side have continued to rise steadily. And I'll have to say this for the 100th time, farmland has historically been an excellent hedge against inflation, and I think our properties will provide that as well.

Well, as you know, we recently raised our dividend again, it was a small amount, but we're now paying $0.444 per share per month in cash. Over the past 46 months, we've raised the dividend 12x now resulting in a overall increase of about 48% in our monthly distribution rate to shareholders over this time. And this is a reflection of the wonderful accomplishments of our team and agricultural experts that we have inside the company. They're experienced at finding and managing high-quality farms, pairing it with very strong tenants who're generally reliable in their rental payments and our goal is to continue increasing the dividend at the rate that far outpaces inflation.

As you know, I'm the largest shareholder and I'm definitely liking all these dividends. So I want to increase the dividends as much as possible. Since 2013, we've made 69 consecutive monthly distributions to our shareholders totaling $3.78 per share in total distributions. Paying distributions to shareholders just so you know is paramount to our business. We are, in essence, a dividend-paying company. The stock price is currently trading at $13.03. It's where it closed at yesterday, which is below our net asset value. Thus, we're hopeful our stock price will rise in the near future so we can trade at above our net asset value. So if you buy the stock today, you're getting a 5.8% discount from the estimated net asset values per share of about $13.79. What a bargain. I think you should all step up and buy some more shares, and along the way, just so you know, you're getting that $4 -- $0.444 per share per month in cash distribution and that's about a 4% yield. That yield is right in line with the average yield across the entire REIT index today. So when you consider the relative stability of the underlying assets you're investing in with our stock, I think our stock offers a nice alternative to bond funds and other REIT funds.

In closing, now please remember that purchasing stock in this company is a long-term investment in farmland. I think an investment in our stock really has 2 parts: first, it's similar to goal. It's a hard asset, dirt, and that has intrinsic value because there are limited amounts of it and it's being used up by urban development. And then second, unlike gold and other alternative assets and active investment with cash flows to investors, I believe we're better than a bond fund because we keep increasing the dividend.

We expect inflation, particularly in the food sector to grow and we expect values of underlying farmland to increase as a result, and we expect this to be especially true on fresh produce side as people in the United States are trending more and more to eating these healthy foods. But I think a good way to look at our farmland fund is: first, it's a hedge against inflation in both food prices and other areas; and second, for those looking for an asset that doesn't correlate to the overall stock market, I believe this is it.

So if you like what we're doing, please buy some stock, keep eating fresh fruits and vegetables. And now if you'll come on, operator, we'll have some questions from all of those nice people who've listened to us give our presentation.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Lisa Springer with Singular Research.

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Lisa Springer, Singular Research, LLC - Research Analyst [2]

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My question is, what are the factors you consider when you're contemplating the sale of a property? And should we think of property sales as being a rare event for the company?

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [3]

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Yes. We're not in the business of selling. The only reason we sold the one that we had out in Oregon was that the tenant that we had and -- that tenant had bought the tenant that we originally started out with, had farms all around us, and it really seemed much more logical for them to have that farm as well. Plus, I have to admit at some price, just about every farm we've got is going to be sold. If you offers us $1 billion for the company, you can have that as well. At the end of the day, we're in the business of making money for our shareholders, and that was a great opportunity for us to sell that and move it down to Florida. We actually bought a much bigger farm down there with the profits and a little more equity that we put in, in order to close that. So our goal is not to sell to other farmers, but rather to hold on and continue to increase the dividends to our shareholders. And one day, I know some of you may know about our farm that we've got in Oxnard, and it's an incredible farm. It's about 600 acres. You can walk from the farm in 2 minutes to the ocean and beach. If I could get that zone correctly, we would have an enormous winter. But as you know, in California, it's very hard to get anything zoned for housing. But probably some day in the future, someone will figure out how to do that, and we'll make a few -- I don't know, lot of money on that one. But Lisa, you're exactly right, we're not in the business of selling and it's going to be rare that we're going to be selling properties.

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Operator [4]

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Our next question comes from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [5]

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So can you maybe provide a little more color on some of the leasing activity that occurred during and subsequent to quarter end? And it seems like there is a lot of kind of moving pieces there, some rent roll ups, some rent roll downs. Just maybe specifically with Ventura and Hillsborough, what maybe caused those lease agreements to change?

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [6]

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Well, Lewis is on top of that. I want you to speak to that one, Lewis.

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [7]

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So the one farm at Ventura, it was -- we just removed about 26 acres of hillside acreage that were determined to be not farmable, and when we executed the lease initially, that acreage was included into the lease acreage, but after a year of trying, it's just too hilly there. So it wasn't a reduction in the rate -- rental rate per acre, we just removed some acres out of the lease.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [8]

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And just you know, John, we're probably going to end up planting trees on that hillside as opposed to trying to farm it for strawberries or any others.

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [9]

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And Keysville, the operator just wasn't able to get financing in line for this next growing season. So it had previously been rented out at strawberry rates. We found a tenant to take it on immediately for the next growing season for -- at veggie rates. Just under a one year lease, while we have -- to give us enough time to market it out to other strawberry growers and time for next season. So hopefully, we'll be able to get that one back up to strawberry rates next summer.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [10]

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And that farmer -- farm is right in the strawberry area. So we should be able to get somebody. You have to hit them just right, John, because they can't take it in the middle of the season. You can't go out and get the plants and put them in the ground mid-season. You have to do it at the beginning of the season. And everybody does their plans months and months in advance of planting anything because they have to go get the plants from -- most of the plants are grown in Chester area of California. So it's a whole process. So sometimes we get out of sync with the timing of strawberries or whatever they're planting.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [11]

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Understood. It sounds like kind of a temporary lease roll down and then you expect it to come back up maybe next year assuming the execution is good on getting a new strawberry tenant there?

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [12]

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Yes. That's right. That's our hope there.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [13]

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Certainly.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [14]

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And then, is there something specific going on in kind of Van Buren County, Michigan? I know that it's both rare you have the one tenant who ran into some credit issues and then also another set of kind of lease adjustments going on there. Is that specific to the geography or is that just a coincidence at all that's happening in the same area?

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [15]

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Well, that's a big blueberry area, and it's one of the better areas to grow blueberries in. And blueberries have gone up and down in value and some of these guys just got whipsawed by too many blueberries coming in from the East Coast. And as a result, they didn't make any money and then they can't get a loan from the bank because they can't pay back the bank loan that they've got for the inventory. We've got a couple of tenants that are hopefully going to pick up this. We had to step into this one area and take over the farm, and we'll get somebody to -- it's dormant now, obviously, it's wintertime. And we're hopeful to have somebody in place when the farm's ready to come back up in the springtime. But yes, that's a difficult area. I know just about everybody up there's had some kind of problems growing.

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [16]

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And John, you probably on the other farm in that same county, you probably saw this in the queue, but we did execute a renewal for that lease and as you referred to, the cash rents are down, but we -- that's another situation where we changed the rent structure from just a fixed cash to a lower fixed cash rent amount in exchange for a crop share component. So we're hoping that, that will bridge a majority, maybe not quite all, but at least a majority of the gap there.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [17]

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Understood. And then kind of on the positive side. Maybe what drove the lease termination and the rent roll up in Santa Cruz. Is that something you guys had kind of expected or was that just kind of fortuitous?

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [18]

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So that was on Dalton Lane. It's a new tenant we had. I mean, I think properties -- rents in that area have increased at a pretty decent rate, so we were just able to get a new tenant that was willing to pay more and the existing tenant was wanting to step away. They're going to try a new farming methodology there, the hydroponics, for raspberries. So it was just a good price for both us and for the -- a good situation for the old tenant too.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [19]

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And I've had several people ask me about that. If you go online to Gladstone farms and look at that farm, you'll see it's right in the middle of a lot of houses. So I don't know if we'll ever sell it to a housing developer, but it is prime property for that to happen.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [20]

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Understood. And then, have all these different kind of moments in leasing activity, were those factored in your updated NAV? I mean, was that known kind of at the time the appraisers were going through the portfolio?

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Lewis Parrish, Gladstone Land Corporation - CFO & Assistant Treasurer [21]

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No. We have had the Michigan and the Florida farms. They were appraised recently. And -- I mean, this isn't a long-term change in the market rents or the market cap rates. So they -- it wouldn't have impacted that. I mean, the sales comps valuation approach still supports the values that were there. And on the positive side, no -- Dalton Lane, that was also not factored in yet. But I think these -- all of these properties will come up for appraisals over the next 3 or 4 quarters. So any change in market trends, we will capture them then.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [22]

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Okay. And then with regards to kind of revenue sharing rent, how should we kind of expect 4Q to trend versus 3Q? I mean, is the bulk of income have already come in 3Q? Or is there going to be decent amount more in 4Q? Just kind of generally speaking.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [23]

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Well, we think there would be a decent amount in Q4, but it won't be the same as the $900,000 that we've gotten today.

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Operator [24]

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(Operator Instructions) Our next question comes from [Shaan Sharad] with -- a private investor.

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Unidentified Participant, [25]

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I'm interested in understanding more on how you view the ability of the fund to perform relative to inflation in an increasing interest rate environment. My understanding is that most of the enterprise value is debt funded. You can speak to this generally if you prefer, but a specific point is how you view the cost to service debt with higher interest rates since that challenges the ability of fund to outperform inflation. Is there an interest rate threshold where you'd view it as preferable to accelerate debt reduction rather than increasing dividend distributions?

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [26]

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Well, that's what you're matching up all the time. We live on the spread. And what happens when interest rates go up, that we have to use when we're buying something, it presses the amount that you can pay for it. And properties do go down in value when interest rates go up. As far as looking out on the future, most of the mortgages that we use and that's what most of our debt is in mortgages, they're all matching long term. So we're locking in the spread for 5, 7, 10 years and don't have any problems there unless, of course, the tenant has a problem. But at the end of the day, we're not subject to the movements of interest rate with regard to our existing, but when we renegotiate, we have to take into account what the mortgage is and can we pay the mortgage and it's always something that you're looking at every time you do a transaction and every time a new lease comes up, you're trying to match it and make sure that you're always ahead of the curve. And given the fact that they're moving interest rates up because we -- mortgages do typically follow whatever is going on in the 10-year treasury, every time they bump that up a little bit, it just means that properties have to pay more rent or they can't get sold to people like us that depend on the spread. And to date, it hasn't hurt us that much, but at some rate everything hurts. I can remember, used to make loans to small businesses at another company I ran, and we did it based on prime. In prime, we were doing 5 points over prime and prime moved from under, I think it was under 7% to 18%. So 5 over prime was a bit stiff for anybody to pay, and obviously, you got a problem at that point in time. Now those loans were all variable. So we lived and died right with the interest rates as they moved. Ours are fixed now so we try to lock it in for the long term, and that's the goal is to lock them in, and hopefully in 7 years the property is going up in value and people are paying more, but there's certainly no bet. That is one of the bets that everybody makes by owning our stock.

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Unidentified Participant, [27]

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So you don't see any preference towards reducing the debt as long as you can cover the spread. Is that -- do I have that right, you'd say that way?

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [28]

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That is right. If you can make a spread, you're going to do the next deal, you're going to do the next transaction. If you can't make the spread, you have to walk away. So if somebody tells you, "Gee, I'm not going to sell this farm for that price because I think it's worth more," and you just look at that and say to yourselves, well, I can't make the numbers work, I can't make enough money for my shareholders, so I'm not going to take any equity and put it into that transaction, I'm going to move onto the next farm.

Okay. We have any other questions?

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Operator [29]

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I'm not showing any further questions at this time. I would now like to turn the call back over to David Gladstone for any closing remarks.

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David John Gladstone, Gladstone Land Corporation - Founder, Chairman, CEO & President [30]

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Well, thank you very much. We appreciate everybody calling in. And we look to talk to you next quarter. That's the end of this call.

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Operator [31]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a great day.