Greeting and welcome to the Land Corporation Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this content is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chairman and Chief Executive Officer. Thank you, sir. You may begin.

Okay. Thank you, Latanya for that nice introduction. You've done it many times for us and we appreciate your efforts. 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 out of your day to listen to our presentation. But before I begin, we have to hear from Michael LiCalsi, he's our General Counsel. So Michael.

Thanks, David. Good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933 Securities Exchange Act of 1934, concluding notes regarding our future performance. And 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 in our Forms 10-Q, 10-K and other documents we file with the SEC find them on our website at GladstoneLand.com, specifically go the Investors page, or on the SEC’s website that's 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. 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 are better indications of our operating results and allow better comparability of our period-over-period performance. Now we ask you to take the opportunity to visit our website, once again that’s GladstoneLand.com, sign up for our e-mail notification service there, you could stay up-to-date on the company. You could also find us on Facebook, keyword there is The Gladstone Companies and Twitter which is @Gladstonecomps. And 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, go to the Investors page of our website to find them. Now I'll turn the presentation back to David Gladstone.

Okay, thank you, Michael. I'll start with a brief overview of the Farmland Holdings that we have, currently own about 116,000 acres. And it's at 69 different farms and we also have about 45,000 acre feet of bank water. Remember that acre foot is equal to 326,000 gallons. So 45,000 acre feet is a lot of water, we use that for irrigation times when there's not enough water found. And together, if you looked at both of those together, we valued that at about 1.6 billion for both the land and the water. Our farms are in 15 different states and more importantly in 29 different growing regions. If we include the one farm that we currently operate ourselves, our farms are 100% occupied and are leased to over 90 different tenant farmers, all of whom are unrelated to us. And the tenants on these farms are growing over 60 different crops -- types of crops, but mostly fruits and vegetables and nuts. So we are well diversified across these different farms. We had to remove one tenant during the first quarter, and we stepped in to temporarily operate the farm with the help of third-party management group. We've been discussions with new group to lease this farm. And we had hoped to have it done by this time for this quarter, but we didn't quite get there. So we're finishing up now and we'll get that done hopefully in the third quarter. We are also exploring an option of direct farming this property ourselves but leasing the property is our preferred approach. In addition to slow paying tenants partly due to excess supply of their products in the markets that their work in, one of the tenants is making partial payments to us but sounds like they're might decide…

Thank you, Dave. And good morning, everyone. I'll begin by briefly going over our financing activity. We did not incur any new borrowings during the quarter, we did pay about $6 million of loans since the beginning of the quarter, there were scheduled future. On the equity side since beginning of the quarter, we raise net proceeds of about $3 million from sales of our Series E Preferred stock and $2 million from sales of our common stock through the ATM programs. Moving on to our financial results. For the second quarter, we had net income of about $7.9 million and net income to common shareholders of $1.7 million or $0.05 per common share. For the following discussion of operations, I'll be comparing the second quarter of 2023 with the corresponding second quarter of 2022. Adjusted FFO for the current quarter was approximately $3.8 million, or $10.7 per share, compared to $4.5 million, or $12.9 per share in the prior year quarter. The primary driver behind a decrease in AFFO was higher costs incurred to carry uninvested capital in our balance sheet partially offset by an increase in top line revenues. To fix base cash rents increased by about $512,000, 3% over the prior year quarter primarily driven by additional revenues earned on new farms acquired over the past year. This increase was partially offset by a decrease in revenues from the self-operated and non-accrual properties, as well as a lease we executed in the fourth quarter of 2022, in which we reduced the fixed base rent in exchange for increasing the participation rate component in the lease. And that result won't be known until later this year. Regarding the non-accrual properties, we will continue to recognize revenues from these leases on a cash basis until such time that the…

Okay, thank you, Lewis that was a nice report. We continue to stay active in the marketplace should a good opportunity presented itself. But as mentioned, we're being more cautious on the acquisition front. This is really due to the cost of borrowing and the price of farms, farms haven't fallen even though the cost to borrow them is really much higher than it was before the Fed kept raising rates. A few items to finally point to. We believe that investing in farmland crops that contribute to the healthy lifestyle such as fruits and vegetables and nuts is where we should be following this trend. We're seeing the market today. It's a good place to be because it's not susceptible to some of the changes in market demand that you'd see if you were in only corn or any of those corn crops. Overall demand for prime farmland that are growing berries and vegetables remain stable, too strong in almost all the areas where our farms are located, particularly alone each of the coast. An overall farmland in the United States is performing well. For example, the NCREIF farmland index has about $16.2 billion worth of farms and all of our $1.6 billion is in that calculation that NCREIF does. That agricultural property index is a good one, we hope to be exactly like them because their return has been 11.4% over the past 25 years, with no negative years during that period. This is better than both the S&P index and the overall REIT indexes, each of which had six or more negative years over the same timeframe theory versus zero for the farmland index. So in closing, we can go over a couple of items and then move on to questions. Please remember that if you're purchasing stock in this company, it's a long term investment. It's dirt, it's farmland, and this investment is our stock gives two parts to it. It's similar to gold in that it's a hard asset farmland that has intrinsic value because there's a limited amount of good farmland in the United States. And it's being used by urban development, especially in California and Florida, where we have many farms. And second, unlike gold and other alternative asset it's an active asset with cash flows to investors. And we believe we're better than a bond fund because we keep increasing the dividend. We expect inflation, particularly in the food sector to continue to increase, and we expect the values of underlying farmland to increase as a result. And we expect this to be especially true in the fresh produce area, as the trends are in our favor that more people in the United States are eating healthy foods and they continue to grow in that direction. Now I'm going to stop and ask the operator, Tanya to come on and tell us how to ask questions.

[Operator Instructions] Our first question comes from Rob Stevenson with Janney Montgomery.

Good morning, guys. David, any acquisitions on your contract today? And then given your commentary on how robust the market pricing for farms is, any thoughts about selling more assets in the back half of this year?

Well, if we could find somebody that would bind the nonperforming or the problem that some farms have, we'd certainly be willing to sell. But Rob, my goal is to amass as many assets as possible in the farming area. They've continued to go up in price farms that I bought 20 years ago are now about 4x the price that paid. So it's a good area. It has low downside risk. And so we don't have anything under contract right now. We have some discussions going on with farmers. And believe me, the guys and gals here are chomping at bits to buy something. So I'm not going to I'm not going to buy a farm that would pay me on a cap rate of, say, 5.5% and then borrow money at 5.5%. That's a good way to be long term in the direction. But I do wish the interest rates would come down. These federal lenders are in a position and have been in a position for some time to drop their rates and allow us to get back to business of buying farms. These farmers that we buy from are not in a hurry. And so they're only going to do it if they get the price that they want. So we're kind of on hold. We are concentrating a lot of our effort right now on water. As you know, we have plenty of water now. However, we are fixing some of our farms so that we can store water on them by putting in some firms and allowing us to go in. And believe it or not, the state of California is encouraging everyone to do that. I think we are way ahead of the curve in terms of putting water in place. I think we've got enough water today for the next two years, and we've got a couple of transactions that would push us into the direction of 2040 in terms of having enough water in underground. These aquifers that are there have gone down some, so they're trying to fill them all back up during this time of plenty of water. But in terms of buying new farms, we don't want to buy the farmers starting to talk about different cap rates, and I think it will happen. Some of them, as you know, the average farmer is about 58 now. And more than 40% of the farms in the United States are owned by individuals. So somewhere along the way as people continue to get older and have to settle up their estate, things are going to happen. We'll be ready for that as long as we can borrow some reasonable price water. We've talked about having an offering and raising more equity. I don't think it's quite the time to do that, but we'll certainly be talking to your people if we get along that line, but I hope I answered your question.

That's helpful. And Louis, where are the issues with the operator -- these operators showing up? Is it at the revenue line? Is it the property expense line, both? The reason why I ask is that property operating expenses in the first half were up more than $600,000, which is like 44%, which is a big increase for a net lease REIT. So I wanted to get a color there and if the $2 million first half operating expense is a good run rate for the back half?

So it's showing up a little bit in both places. From those properties other than the amounts received in cash, we have not recognized any revenue. And I think David mentioned, it's -- for the first half of the year, the year-over-year impact on our net operating income is about $600,000. That's a combination of the revenue line item and the property operating expenses. On the revenue side alone, I think we had a decrease of about $400,000 year-over-year. The rest of that is in the property operating expense line item and most of those costs are legal fees we've incurred to, as we said, the script, release -- sign up new leases on those properties and a big chunk also legal fees incurred to kind of help with collection of those amounts, both the rent amounts. And while they were our tenants and possibly looking to go after vacating those properties. The rest of that, the increase has primarily been two factors. One, and I don't have the exact number of breakout for these two categories. But one, we did have some prepares maintenance expense on the Florida farms to -- for repairs for the hurricane damage and as well as a couple of hundred thousand dollars on the West Coast to repair damage from flooding. And the other bucket of that was just increased cost to protect water rights on farms in California.

Okay. That's helpful. And then my last question, you guys typically see a major jump in revenues, call it, 10%, 20% quarter-over-quarter from second to third quarter and then another notable jump between third and fourth. Some of this has been in the previous years driven by acquisitions because you guys have done a bunch of acquisitions that have started benefiting in the back half of the year. But so you haven't really done anything this year on the acquisition side. How should we be thinking about the seasonality of the revenues in the back half of the year? Is it still going to be -- see that sizable jump because of the percentage of rents in some of the crops that are going to get sold, et cetera? Is it going to be less because you're also not adding the acquisitions? How should we be thinking about that?

The job will probably be less than in prior years just because as you said, we don't have the acquisition increase that will aid us on that front this year. So from a kind of a fixed base rent, if you will, it will be a lot more flat than in prior years. The one caveat I'd add to that is, as we shore up these tenant issues on the -- with these 3 issues we have and restore those properties back to full accrual status. Right now, I'm hopeful that we can get everything back on in the fourth quarter. So that will add a slight bump, but the majority of the increase in the second half of the year is going to come from the participation rents as they have in the prior years. I think last year, we had around $7 million of participation rents year before that, around $5 million. We're not sure where we're going to land yet. We're still trying to get information on yield and pricing satiates the biggest factors, but we're still gathering info on the yield data of our farms. So it's too early to say where we'll follow that, but it'll probably be slightly less than last year. Last year was a pretty good year participation rents, but we should have more color on that front in the next quarter's earnings call.

Our next question comes from Edwin Najarian with EF Hutton. Please proceed.

Good morning, guys. You mentioned the biggest change in terms of the valuation of the preferred stock within the Series C. I was just wondering if you could kind of go through the change in the BC and Series E real quickly, just so we can get sort of a sense of how much each of those drove the change in the NAV calculation. Thanks.

Sure. So the B has been listed for over a year now. So that's been valued at its market price for several quarters. That market prices -- I mean it's a fixed income security. So as interest rates go up, the demand for that security is going to go down. But the Series E is still non-listed, so that's valued at its liquidation value of $25 per share. The Series C is where I would -- I know I'm on a recording, but I just want to say, don't quote me on this, but 90% of the change probably comes from that Series C security. And the reason is last quarter before it was listed, it was valued based on a waterfall approach at its liquidation value of $25 per share. However, it got -- we listed in June, and it was trading closer to $20 per share at June 30. So once it gets listed, as our valuation policy says, we value it based on its public market price. So that's a quarter-over-quarter change from $25 to $20 on approximately I guess, $250 million of value at March 31 that got marked down to close to $200 million at June 30.

Okay. Okay. That's helpful. So really, the vast majority from the C and very well, actually, I guess, no change in the E and then little change in the B, correct?

Correct.

Okay, terrific. Thanks very much.

[Operator Instructions] As there are no further questions in the queue, I would like to turn the call back over to you for closing comments.

Well, thank you all very much for asking questions. We always hope there are more questions than we get at these meetings. So we'll have to wait until next quarter to answer your questions. So thanks again, and that's the end of this.

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