Greetings, and welcome to Gladstone Land Second 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. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. David Gladstone. Thank you sir, you may begin.

Thank you, Laura. 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 appreciate you taking the time to listen to our presentation. We'll start with Michael LiCalsi, our General Counsel and Secretary. He's also President of Gladstone Administration, which is the administrator for all the Gladstone Funds, Michael, go ahead.

Thanks, David, and good morning everybody. Today's report may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. Now these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. There are many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-K, 10-Q, and other documents we file with the SEC. You can find them on our website, www.gladstoneland.com, specifically the Investor's page or on the SEC's website, which is www.sec.gov. And we undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. 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, and also 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. We ask that you visit our website, once again, gladstoneland.com, sign up for our email notification service, so that you can stay up to date on the company. You can also find us on Facebook. Keyword there is The Gladstone Companies. And we even have our own Twitter handle and that's @GladstoneComps. Today's call is an overview of our results. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Again those are on the Investors page of our website. With that, I'll turn the presentation back to David Gladstone.

Okay. Thank you, Michael. I'll start with a brief recap of our current farmland holdings. We currently own 105,000 acres of - that's 53 farms and about 20,000 acre feet banked water valued all total at about $1.3 billion. Our farms are located in 14 different states, and more importantly in 28 different growing areas. And as Lewis will talk about later we are 100% occupied, and leased to 79 different tenants. All of these are unrelated to us. The tenants in these farms are growing over 55 different crops. This is a lot of diversification. We believe in diversification that helps protect our dividend, that we pay to our shareholders. No guarantees in this world but diversification helps. We had a strong second quarter and we continue to be able to renew expiring leases without incurring any downtime on any of the farms and we saw increases in all the lease renewals we executed, reflecting a positive trend in the rental rates that we're seeing in certain regions. Overall operations on our farms remained strong and the demand for products grown on most of our farms remains high. These are products like berries, vegetables and nuts. During the second quarter the team acquired 13 farms and over 20,000 acre feet of banked water. Just so you know, water is measured in acre feet and one acre foot is equal to a little over 125,000 gallons. So it's a lot of water. We have about $80 million invested during these - during the second quarter. Overall initial net cash yield on these investments is about 5.1%. In addition, all of the leases on these farms contain certain provisions such as participation rents or annual escalations and that should push this figure a little bit higher. One of these farm acquisitions…

Thank you, David, and good morning everyone. I'll begin with our balance sheet. During the second quarter, our total assets increased by about $67 million due to new acquisitions. We did not incur any new borrowings during the quarter as all of the acquisitions were financed with equity proceeds, most of which came from sales of our common stock through the ATM program. Since the beginning of the second quarter we've raised about $83 million of net proceeds from sales of our common stock under the ATM program and that represents a net cost of capital of 2.47% with our recently increased dividend. We also increased the size of our ATM program during the quarter. We have about $113 million remaining under the current program. Over the same time period, we've also raised about $13 million of net proceeds from sales of a Series C Preferred Stock. Moving on to our operating results. First to note that in the second quarter we had a net loss of about $531,000 and a net loss to common shareholders of $3.5 million or $11.07 per common share. Adjusted FFO for the second quarter was approximately $3.7 million compared to about $4.7 million in the first quarter. And AFFO per share was $12.06 in the second quarter versus $17.04 in the first quarter. Dividends declared per share were about $13.5 in each quarter. The primary driver behind the decrease in AFFO was about $2 million of interest patronage recorded in the prior quarter related to our loans from Farm Credit, partially offset by an incentive fee of $1 million earned by our advisor during the prior quarter. And neither of these events occurred during the current quarter. AFFO per share for the current quarter was further impacted by additional shares of common stock issued…

All right. Thank you, Lewis. That's a nice report. Nice to hear about the standard dividends going out. Acquisition activity for us picked up again in this quarter and we continue to see good amount of buying opportunities coming our way. We hope to be able to announce some additional acquisitions in the coming months, that we were talking about that, before we started and it sounds like one is coming through the - all of the things that you have to do to get out these things are a complete paper chase to catch up with all the ways of buying these. And I think you will see something in the next few days or weeks for us, or some farms out West. And just a few final points I'd like to make before we can open it up. And that is investing in farmland and growing crops that contribute to healthy lifestyle such as fruits and vegetables and nuts follows the trend we're seeing in the market today. Currently, about 85% of our total crop revenue comes from farms growing these type of foods that you can find in either produce or the nuts section of your local grocery store. We consider these foods to be among the healthier type foods out there and we continue to see growing trend toward organic among these foods. About 40% of our fresh produce today is in acreage that's organic or transitioning to organic. And over 10% of our permanent crops acreage falls into that same organic category. We believe the organic section will continue to be a strong growth area. In addition, more than 95% of our farmland classified to be non-GMO. Another major reason why our business strategy is focused on farmland growing fresh produce is due to the…

Our first question comes from the line of Rob Stevenson with Janney. You may proceed with your question.

David, how significant are any of the participating rents likely to be this year? And is that mostly a fourth quarter event or some in third quarter, some in first quarter of 2022?? How should we be thinking about that as that pertains over the back half of the year, given where your crops are and pricing and everything is today?

Rob, all of those are true. We get some indications in the third quarter. We know a lot more in the fourth quarter and actually get some of the payments and finally know the real number in the first quarter of next year.

Okay. And as it sits today with crop prices being where they are, how significant is that likely to be for you guys this year?

Well, we project it to be very significant. But I can't give you a real good reading on that now. It's just too early. Harvestings haven't happened so we don't have a good fix on it today.

And then, if I take a look back a year ago, the NAV was $11 roughly, now over $13. So it's up 19% year-over-year. Where location wise and crop wise, have been the biggest increases over the past year or so? And where are you seeing the slower appreciation crop region wise?

I think California would win that both. I haven't gone out and done the numbers, but certainly, they moved. As you know, in California, a lot of the farms get gobbled up for higher and better use, at least they call it higher and better use in government buildings, in playgrounds and schools and apartment buildings, and those kinds of things. So every year 25,000 to 50,000 farms get taken out by those kinds of developments. So it's a big change and every time that happens the land that we hold becomes more valuable because people are looking at it from two directions. One they got to get farmland to grow stuff, so they will pay more in rents. And then also, some of those will be zoned for higher and better use. So I'd say California wins that. Oregon will come in second, I think, and certainly, Florida is in the running for first or second. So it's Florida has an incredible thing. I think it's 10,000 families move to Florida every week.

And where would you wind up seeing the sort of slower appreciation, what's going to wind up being at the below the 19% average there?

Well, the State of Washington has some of that, and certainly Arizona. I just don't - I know where the slowest one would be, if you will help me determine that I'll stay out of those states.

And is there any particular crop overlap when you're looking at either the best or the slower ones? I mean, is there anything in particular, even within those regions where land for certain crop that's fertile for that winds up being much more valuable than land a few miles away for some other crop?

Yes. We went into New Jersey this year and that's been one that's been hard to chase because the prices have gone up so many times there. So I think as Northern New Jersey spreads in to Southern New Jersey, you'll get a lot of changes. They also have something going on in New Jersey that's put a great pressure on farmland. And that is the state will pay a farmer a good deal of money if they will just set up arrays of solar catching sun. They are so hell bent in New Jersey that they had to pass a law that prevents much more of that happening there. They got rid of that law. But the good news is, if the farmer keeps farming it they'll be fine. They don't have any kind of thing against them and other kinds of developments. But they have been people that have been upset that so much is being converted from regular farmland into solar arrays to help raise more energy for the state. I don't know. Rob, you could spend a lot of time analyzing that. We do it from the ground up. If a farm comes in, that we think is good, we put together a package and if they go forward or don't. We really haven't gone out and said, gee, I think New Jersey is going to be the best place in the world. Let's put all of our money there. So I can't really identify that for you, but you know of some farms for sale, just send them our way.

Our next question comes from the line of Nate Crossett with Berenberg Capital Markets. You may proceed with your question.

It's Eric on for Nate. Thanks for taking the questions. Maybe to start, could you provide any additional color on the current pipeline? I know you don't give formal guidance, but could you talk about what's currently under PSA? And historically, I think you've tried to do about $250 million a year. Do you think that's achievable this year?

We - right now, we've done about $85 million so far and we are on pace, if everything we have signed up right now closes, then we would surpass that number this year. And we do have quite a few properties under signed PSAs right now to the tune over $100 million where the properties that are under signed PSAs. The majority of these we're hoping will close in Q3 and some of them might slip to Q4, but we have others that are close to getting signed up as well. So we're hoping to get between $250 million and $300 million of acquisitions, all-in when the year's said and done.

Okay, that's great. Maybe could you expand on the type of yields, you're seeing in the current environment. Has there been any compression or increased competition for the assets you're targeting?

Yes, I would say that in Oxnard it's probably really tough to find something that meets our conditions. And so that's an area. I think other areas that we've got where we've got stuff in Oregon or Washington and certainly Northern California, you can usually find something there. The biggest problem for all of these are not the yields but just getting the farmer to consider selling. I mean this is a business in which you don't have a big brokerage community between you and the farmer. And the brokerage community is lining them up and does a great write up in the presentation and you get a lot of your work out of the way. These are people that we are meeting with, one or one or in a conference some place. And so you're working them one at a time and it takes a different style, a different orientation. That's the reason, most of the people that are working for us out in the field come from the farming community, so they can speak the same language, so to speak. And I just I think we're going to do extremely well and Lewis has got his pulse his finger on the pulse. And so I think we are in good shape to do a lot of good transactions this year. But it's - there is no way of sort of saying this is going to close. I tell the story of talking to one of the people who finally sold us the farm after 10 years of discussion back and forth. So hopefully, thank God, they're all aren't like that, but at the end of the day, it's still a very difficult business too on the front end of the business. Once we get it under purchase and sale agreement, it's a little bit easier. Although I hear people in the background saying no, it's still hard, but nonetheless, it's just a very long process. And that's the big thing that keeps us from growing extremely fast. We have the money. We're just looking for deals now. Nate, any other things I can answer.

No, I appreciate that. One last thing for me, in terms of the potential tax implications and we are losing the 1031. Are you guys utilizing the up-REIT structure more in your deals?

We preach it every time we talk to our farmer of how to sell his farm and not pay any taxes until he sells the stock. It has hit some very nice, and they did it when we were low priced and they're very happy people today. We haven't had anything recent that where people - maybe I should just get some of these guys and gals in here that are on the selling side, let them tell the story. Farmers are extremely conservative. I mean most of these farms are under leveraged. They haven't leverage themselves up. So as a result they're just skeptical of doing these up-REIT, even though we are now over $1 billion. It's just very, very difficult to get people to do that. I like you thought that we have many more of these done but they don't come as quickly as we'd like. And there are now that the 1031 has gone away or is going away, I think will get a little bit better. The neat thing about farmland is it's not one farm that's a tax entity. Usually farms are six or eight or ten different tax entities, each one of them, according to IFRS standards is a farm in itself. So if somebody wants to sell us five of those tax entities with stock, and the other five for cash we can do that. You can't really do that much with office buildings or warehouses because it's usually just one taxing entity. So we are working it, but it's - I think now that were over $1 billion we get a little bit better attention because people feel secure. But my goodness, it's still a hard sell.

Our next question comes from the line of John Massocca with Ladenburg Thalmann. You may proceed with your question.

So maybe just provide a little more color on the water rights that you purchased and just maybe kind of specifically what could potentially cause the valuation of that water to change and how would that flow through again, on both the GAAP financial statements and also potentially down AFFO if at all.

John, that's a wonderful question and Lewis knows the answer to it.

So first of all, these aren't really water rights. This is actual water that we bought. We - first we - at the acquisition, we bought a contract to buy some water for a set price and we exercised that contract right away. So we can get the water in our account and in our name and be able to use that if and when we need to. As Dave mentioned, we don't have a need to use it right now and hopefully won't over the next few years, but it's good to have that security. As far as how it's valued, so we did look at multiple sources. There is an index for California Water that we put a lot of weight on and we will monitor that index against the book value, which David said is about $718 or $728 per acre foot. If the value of the water it goes down below our book value then it would be treated similar to an impairment in real estate. So you'd see a flow-through in the impairment line item and it would be adjusted for in the AFFO numbers as well, just as an impairment on a building might be.

Okay, but that it wouldn't - would any of that flow through to AFFO, would that be considered kind of one-time or maybe the treatment is kind of going to be typically--?

It would be similar to impairment on a real property, where it would get added back. And to answer your question as to what might cause that to happen and if California, gets a lot of snow or lot of rain in rainy season, they get a wet year then the price of water is obviously going to go down. So it might hurt our financials for that period. But it's good for the overall farming community and the value of our assets there.

Okay, and then continuing with water, the Colorado, the cost of the Colorado property to kind of - I guess still some water issues, it sounded like there. I mean can you provide some more color on what that was and kind of what that OpEx or CapEx is going into?

Yes, the Colorado situation is one in which it was tied up in court for quite a period of time and seems to be resolved at least initially at the higher end of the cost of water. And so I think it's $150 per acre foot that they're charging now, up from about $80. So--

$85 to $90.

Yes, so as a result that hits every farmer right in their pocket book because they still need the same amount of water in order to grow, what they're growing. So we don't know how that's going to finally shake out there. All kinds of rumors going around and we're just going with the flow right now. Not much we can do, because this is a government interference in this situation. This is not rainwater or something like that. So we'll just have to keep playing that game the way that people have played it for a long time out there and hope for the best because there is a good amount of water out there. There is an aquifer there that's pretty large. They have stopped drilling holes into the aquifer and drawing out water, new wells some time ago. So they were hoping that it would reconstitute itself over a period of time. But it hasn't done that much. So as a result, the water cost probably going to be more expensive. And that would mean that whatever you grow there you got to tack on more money to pay for the water. Inflation is going to be a big candidate over the next 10 years in all of the farming operations. And this includes places even like Florida where you can puncture a hole in the ground and find water. It's just a very difficult thing to talk about because we don't really know what's going to happen. If you get a good snow year in California there'll be so much water that prices could go down and I would hope that happens because it means all the farms are worth a lot more, and more people want to buy farms or rent the farms. So as a result, we're just following what happens every day when you get up and read the weather report and know how it's going to impact what you're trying to do. So I don't know how to answer that John.

I guess, - I mean the kind of increased OpEx maybe versus Q1 or last year, I mean I know in prior times you'd had situations where there had been issues getting electrical wells and so you have to kind of pay generator cost. I mean it's something like that or is it just you're buying external water and that's driving that OpEx to be higher this quarter and potentially in 2H?

So in the past, on this particular farm as David mentioned, the cost of water had been in the $75 to $90 per acre foot range. And while this wasn't adjudication that was kind of the expectation that it would fall on the low end of the range. We had a provision in our lease where we would pay for the cost between anything over $75 up to $150. And the judge ruled at the high end of the range at $150 per acre foot. So that put us on the hook for $75 per acre foot of water on this farm. And most of the - so the way that the seasonality of the water usage is generally and mostly in quarters, two and three, the early summer to late fall months. So we recorded probably about 50% of the cost of that water once that judge's ruling was known in Q2 and we have the other, a little bit over 50% to be recorded throughout quarters 3 and 4. Majority of that will be in quarter 3. But this lease runs out - this lease expires at the end of this year 12/31/2021. We're looking at several options for that farm. But we do not - but right now we are not expecting that the next lease we have or any other option that we were currently looking at will include those costs being our responsibility

We do not. I'd like to turn this call back over to you for closing remarks.

Okay, thank you all for your questions. Hope we answered them all and we will see you again next quarter. That's the end of this call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.