Welcome to the Gladstone Land Corporation Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note this event is being recorded. And now I'll turn the call over to David Gladstone, Chief Executive Officer and President. Please go ahead.

Thank you, Darrell. 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 that you take time out of your busy day to listen to our presentations. Before we begin, though, we need to hear from Michael LiCalsi. He's our General Counsel. Michael?

Thanks, David. 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. The many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors you can find in our 10-Q, 10-K and other documents that we file with the SEC. You can find those on our website that's gladstoneland.com specifically the Investors page or on the SEC's website which is www.sec.gov. Now 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. And 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, also adjusted FFO, which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. Now we believe these are better indications of our operating results and allow better comparability of our period-over-period performance. And please visit our website. Once again, that's gladstoneland.com. You can also sign up for our email notification service there. You can also find us on Facebook and that's @TheGladstoneCompanies is the keyword there and then Twitter is @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. With that, I'll turn it back to David Gladstone. David?

Okay, thank you, Michael. I'll start with a brief overview of our farmland holdings. We currently own about 112,000 acres on 168 farms and about 54,000 acre-feet of water assets. One acre-foot is about 326,000 gallons, so we own about 18 billion gallons of water. And together the land and the water together total value of about $1.5 billion. Our farms are in 15 different states. And more importantly in 29 different growing areas. The growing areas are key and our water assets are all in California, but we do have one clean water asset in Florida, where we produce cleaner water for the Florida area. Our farms are leased to over 90 different tenant farmers, all of whom are unrelated to us. And the tenants on these farms are growing 60 different types of crops. But mostly everything is in three categories, fruits, nuts and vegetables. You can find these in the produce section of the grocery store, which is where most of the crops that are grown on our farms are sold. On a leasing front, since the beginning of the second quarter, we executed 11 new leases or amended leases on farms in five different states, including two leases on farms that were previously vacant. In total, these renewals are expected to result in an increase in our annual net operating income of about $465,000 over the prior lease. On our direct renewals, that equals about 7% increase in our prior leases. Looking ahead, we have nine leases scheduled to expire over the next six months and currently in negotiations with people that want to rent these. That's 168 farms. We only have nine leases coming due. That's quite good. We're in discussions with groups to either lease these farms or operate them on our behalf. Seven…

Thanks, David. Good morning, everyone. I'll begin by briefly going over our recent financing activity. We did not borrow any new money during the quarter, but we did repay a $6 million loan subsequent to quarter end that was scheduled to re-price. On the equity side, since the beginning of the quarter, we've raised about $90,000 in net proceeds from the sales of the Series E Preferred Stock. We've also implemented a share repurchase program on our Series B and Series C Preferred Stock that has been working well for us thus far. Since commencing the program in May, we have repurchased 249,290 shares of Preferred Stock at a total cost of about $5.2 million, resulting in a book gain of about $415,000. At an average repurchase cost of $20.84 per share, the resulting savings on the dividend yield has been about 7.2%. Given the current -- given our current borrowing costs and overall economics around acquisitions, we believe these repurchase transactions are among the best uses of our capital at this time. Moving on to our operating results, for the second quarter, we had a net loss of $823,000 and a net loss to common shareholders of $6.7 million or $0.19 per share. Adjusted FFO for the current quarter was approximately $3.7 million or $0.103 per share compared to $3.6 million, or $0.102 per share in the prior year quarter. Dividends declared per common share were $0.140 in the current quarter, compared to $0.138 in the prior year quarter. AFFO increased slightly from the second quarter of 2023 as the increase in participation rents was largely offset by the lost income from the farm we sold in January and a decrease in revenues associated with certain properties that were either vacant, direct operated or on non-accrual status during portions…

Okay. Thank you, Lewis. That was a nice report. We continue to stay active in the market should good acquisition opportunities present themselves, especially now that interest rates may be coming down. We live as most asset-based people do, with the rate we have to pay for our capital. But as mentioned on the prior calls, we're still being more cautious on the acquisition front because the cost of capital remains high for us. And while we've seen a decrease in pricing for certain permanent crop farms in the west, value of most row crop farms, like those growing strawberries, those remain high. And cap rates on most of those farms have not increased enough yet to cover our financing costs. So, we've got to see the rates come down before we can get active in buying or selling any of our stuff. So as a result, acquisition activity remains very slow for us. Probably be another couple of quarters before anything happens. As you probably heard, the Federal Reserve people are now talking about jumbo change, that is 50 basis points to 75 basis points when they get back in gear in September. While interest rates are still a bit too high for us, it seems more likely that the Fed will be cutting rates. So, we are hopeful that rates will be lowered in the near-future and can start to look at new farms. As just a few final points before I quit. We believe that investing in farmland and growing crops that contribute to a healthy lifestyle, such as fruits and vegetables and nuts, follows the trends that we're seeing in the market today. Overall demand for prime farmland growing berries and vegetables remains stable to strong in almost all the areas that we're in where farms…

Thank you. At this time we'll be conducting a question-and-answer session. [Operator instructions] Our first question has come from the line of Gaurav Mehta with Alliance Global Partners. Please proceed with your questions.

Thank you. Good morning.

Good morning.

I wanted to ask you on your, good morning. I wanted to ask you on your comments on almonds and pistachio. Can you remind us how much exposure does your portfolio has to almonds and pistachios?

So on a revenue basis, probably about 20% is pistachio and probably just a little under 10%, 8% or 9% is almonds.

Okay. Second question. On your balance sheet, I think you mentioned $46 million of debt expiring in the next 12 months. Can you provide some color on where the current interest rates are in case you need to refinance that debt?

Sure. So right now our weighted average interest rate is about 3.4%. If we were to reprice today, we probably be 200 basis point or 200 basis points above that right now. Those loans with the cash we have on hand, each situation on a case-by-case basis, depending on what the interest rate is, when those loans mature, depending on what our plan for that particular farm is, that will determine whether we decide to pay it off or refinance.

Okay, thank you. That's all I had.

Go ahead. Go ahead Gaurav. Oh just that is. So, operator, if you'll come back on, we'll see if there's a second question for us out there.

Thank you. Our next question has come from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your questions.

Good morning, guys. The four California farms that are vacant, direct operated, non-accrual, are those all nuts?

Yes, they are.

Okay.

I believe one is -- no, actually, I think they are. They are all nuts. You're correct. Yes.

Okay. And I think if I look back last quarter, there were 20 farms. So there was an extra farm in California that was in that bucket. What happened to this other one? Did this get rented? They catch up on their rent payments and are no longer non-accrual. What accounted for the sequential change there?

It got leased. We put a lease on it.

Okay, perfect. All right. And then I guess the question winds up being is it, at this point, are these 19 farms stuff that you want to own longer term? I mean, you've talked about selling them, potentially selling some assets, et cetera. I mean, is it just a matter of trying to get a lease on it or trying to sell it at a higher price than where it would be valued today and that you don't really want to own any of these 19 longer term or was it just operator issues and you're happy to own these? How should we be thinking about these 19 assets as you go forward over the next couple of years?

Well, as long as we have water for those, I think we'll hang on to them simply because somebody will want to grow something on there. You just never know. The farmers have been pretty picky over the last two years really. And it may. You got to have a good farmer. There's no use jumping into a farming relationship with somebody who's not a very good farmer. We've done that a few times. We know how that bites back, but it's one of those things that everybody goes through. We've got an asset. We need to keep it working for us, and I think we'll get most of those 19 farms will stay with us for a considerable amount of time.

Okay. And then I guess the question, the last one for me, Lewis, how much you talked about this participating rents that you collected this quarter not impacting the back half of the year? How much in participating rents did you collect in the second half of 23? And are you expecting a similar or more or less than that in the second half of '24 at this point?

So in '23, I don't believe we -- I think all except for maybe $200,000 was recorded in the second half of the year. As for this year, you know, of course, we're still. We haven't even gotten much information from tenants at this point, but if I had to guess, we'd probably be somewhere between the past two years.

Okay.

Hopefully at least as much as last year, but not sure that we'll get as much as we did in 2022.

Okay, that's helpful. Thanks, guys, and have a great weekend.

Thank you.

[Operator Instructions] Our next question has come from the line of John Massocca with B. Riley Securities. Please proceed with your questions.

Good morning.

Good morning, John.

Maybe sticking with participation rents, I mean, you kind of mentioned a little bit of the moving pieces of why you collected the $1.1 million in the quarter. But just, you know, is that something that could potentially happen in future years? Maybe kind of why was that you know data recorded in the current quarter just any additional color there would be helpful.

Yeah, it was really from. It was from three farms. One farm did prepay us about $250,000 that in a normal year would be recording the second half of the year. We weren't expecting payment. They just prepaid us a certain amount. So we recorded that. The rest of it was kind of unique situations. One is, one of the wine grape farms that we recently -- one of those leases where we reduced the base rent and increased the participation rent component. We recorded a little bit of income from that farm in Q4 of last year. We initially we thought all the wine sales would be completed in December-January for us to be able to record that revenue in Q4. But the sales kind of lingered on and continued on into Q1 and Q2 and we weren't able to get information in Q4 or Q1, that information came to us in Q2 and so we recorded it in this quarter. Hopefully next year, we are able to get information more real-time and record it earlier, but we just weren't able to this year. The other one was one that we participated in heavily in the crop. We had a very high crop share percentage, so we were able to get payment directly from the processor. So that payment just got accelerated. But we also have a payment coming due from them later on this year, which is why I'd say that it really shouldn't impact what we're getting this year, because it's same as what we would get in a normal year if that makes sense. Basically, it's just kind of unique structures of the leases we have on those two properties.

Go ahead.

Understood. And then maybe kind of going forward on the participation rent side of things, you know, to the extent we get some kind of recovery in green up pricing, pistachios and almonds specifically, you know, how could that impact 2024 participation rent, if at all or is that more going to be something that impacts 2025, just given the nature of your leases and contracts?

It will be a 2025 impact. If prices come up, that will impact the harvest coming up, which would be recorded later for us.

So it would impact 2024 numbers.

Okay. And then, you know, maybe just on the disposition -- potential dispositions. What kind of assets are in the portfolio would you potentially be targeting for dispositions? Is there a strategic rationale or is it just kind of assets where you feel like the performance isn't going to recover from some of the headwinds they've faced in recent years?

Yeah, we're going through that now. And the dispositions, it's really a bad time to be selling almonds or pistachio crops. They're down and they're coming back. We've seen this happen many times in many of our products and it's just something you have to live with. The main thing is you can't be not able to borrow money and pay back your banks or pay whoever. And right now we have tremendous credit ability with the farm credits. And if the rates are cut, we will probably not get down to 3% where we are on some of these, but hopefully get further down than we are today and it's just a difficult period for those two crop types.

Okay.

So, we're looking, go ahead, John.

And then lastly, I know, obviously there's that bucket of farms that are kind of either being managed or a non-accrual status, but operating expense came up a little bit on a quarter-over-quarter basis and a year-over-year basis. Was there anything beyond that kind of bucket of farms that maybe drove that increase?

No, the full increase from the property operating expenses came from that bucket of farms. One tenant, we had to terminate the lease after quarter-end. We ended up having to pay real estate taxes on their behalf. That farm is now being direct operated. We hope to get a lease on it by the end of the year. And the rest of it was just management fees we're paying to operate certain of these farms.

Okay. That's it for me. Thank you very much.

Okay, we have any more questions?

Thank you, Mr. Gladstone. There are no further questions at this time.

That's too bad. We like answering questions, but I understand that people are going to save them until next quarter and give us a lot more questions. So that's the end of this. Thank you very much all of you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.