Greetings. Welcome to Gladstone Land Corporation's Year-End and Fourth 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 conference is being recorded. At this time, I'll now turn the conference over to Mr. David Gladstone, Chief Executive Officer and President. Mr. Gladstone, you may begin.

Thank you, Rob. It's 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 seriously appreciate all the time you take to listen to our presentations and hope we can give you some really good news this time. Before I begin though, we have to start with Michael LiCalsi. He's our General Counsel. So, Michael, take it away.

Thanks, David. Good morning everybody. Today's report may include forward-looking statements on the Securities Act of 1933 and the 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. The many factors may cause our actual results to be materially different from the future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-K, 10-Q, and other documents we filed with the SEC, you can find them on our website, which is www.gladstoneland.com, specifically the Investors 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'll 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. And we believe these are better indications of our operating results and allow better comparability of our period over period performance. Please visit our website once again, gladstoneland.com, sign-up for our email notification service. You can also find us on Facebook, key word there is the Gladstone Companies, and on Twitter we're @gladstonecomps. Today's call is an overview of our results so we ask that you review our press release and Form10-K, both issued yesterday for more detailed information. Now with that, I'll turn it back to David Gladstone.

Okay. Thank you, Michael. Let me start with a brief overview of our Farmland Holdings. We currently own about 112,000 acres on 168 farms and over 46,000 acre feet of water assets. One acre foot is equal to about 326,000 gallons. So we own about 15 billion gallons of water. And although the land and the water are valued at about $1.6 billion, it'll be interesting to see where the land and buildings go over the next year or two as the changes in the economy hopefully take hold. Currently, $250 to $500 per acre foot, so $23 million worth of water. And you can't grow anything without the water, so we're in good shape there. We have that all of this land that we own plus the water is worth about $1.6 billion. Our farms are in 15 different states and more importantly in 29 different growing regions and our water assets are all in California. 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 crops, mostly fruits and vegetables and nuts and you can find these in the produce section of grocery stores which is where most of our crops -- our tenants sell our crops to those people running those grocery stores. And now I'll give a quick update on some of the tenants issued -- issues that we're continuing to have. We currently have five properties, about 15 of our 168 farms that are vacant. And we also are recognizing revenue from leases with two tenants who collectively lease five of our farms on a cash basis. So we're a little bit behind on that. Regarding the vacant farms, we're in discussion with various potential buyers or tenants…

Thank you, David, and good morning, everyone. I'll begin by briefly going over our recent financing activity. We did not incur any new borrowings, but we did repay about -- we have repaid about $24 million of loans since the beginning of the fourth quarter that were scheduled to either mature or reset. On the equity side, since the beginning of the quarter, we've raised net proceeds of about $556,000 from sales of the Series E Preferred Stock. Moving on to our operating results, for the fourth quarter we had net income of about $1.8 million and a net loss to common shareholders of $4.3 million, also per share. For the year, we had net income of about $14.6 million and net loss to common shareholders of $9.9 million or $0.28 per share. On a quarter-over-quarter basis, adjusted FFO for the current quarter was approximately $5.4 million or $0.151 per share compared to $6.6 million or $0.189 per share in the prior year quarter. Dividends declared for common share were $0.139 in the current quarter compared to $0.137 in the prior year quarter. On an annual basis, adjusted FFO for 2023 was approximately $20.3 million compared to $24.3 million in 2022 and AFFO per share was $0.569 in ‘23 versus $0.701 in 2022. Dividends declared were $0.554 in 2023 and $0.546 in ‘22. Primary drivers behind the decreases in AFFO were the lost revenues and increased expenses associated with properties that were either in the vacant, self-operated, or non-accrual status during portions of the year, as well as a decrease in the amount of participation rents recorded and an increase in dividends paid out to preferred shareholders during the year. Despite the lost revenues from vacant, self-operated, and non-accrual properties, fixed-based cash rents increased by about $255,000, or 1%, on…

Thank you, Lewis. Nice report. We continue to stay active in the marketplace should a good opportunity present itself, but we're still being more cautious on the acquisition front. Interest rates are still too high, but we're hopeful that the rates will be lower this fall so that we can start buying more farms again. And just a few final points. We believe investing in farmland, growing crops that contribute to healthy lifestyles such as fruits and vegetables and nuts, follows the trend that we're seeing in the marketplace today. Overall demand for prime farmland growing berries and vegetables is stable to strong for almost all the areas where our farms are located, particularly along both coasts, either East or the West. So please remember that purchasing stock in this company is a long-term investment in farmland. It's an investment of a stock of two parts. One part of course is for strong assets such as similar to gold. It's a hard asset. Farmland is dirt and that has intrinsic value because there's a limited amount of good farmland in the United States and it's being used up by urban developers, especially in California and Florida where we have many farms. And the second part of investing in this stock is unlike gold or other alternative assets in that it's an active investment with cash flows to investors and believing we're better than a bond fund because we keep increasing the dividend whereas bonds are fixed. We expect inflation, particularly in the food sector, to continue to increase over time. We expect the value of the underlying farmland to increase as a result and we expect this especially to be true in the fresh produce food sector as it trends that more and more people in the United States are healthy food eaters. We have the cash, as mentioned by our CFO, to back any loans that are coming due. We have cash and credit facilities, the banks that we deal with would love to lend us more money. So we have cash to pay off loans coming due and we have borrowing capacity to do the same. So we are very secure here. And if we had to sell off our farms, I know we would get money to pay off any debts that we have. So we're strong in that regard. So the downside, from my perspective, is very low. Farmers need dirt to grow food, and we have plenty of dirt. And so we're great for farmers, while people also need to eat. Farmers need dirt to produce the food that they eat. I'm going to stop here Let's have some questions from those who follow us. Operator, would you please come on and help our listeners ask some questions?

Sure, Mr. Gladstone. [Operator Instructions] Thank you and our first question today comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your questions.

Good morning guys. David, the 15 vacant farms, what crops are those in Michigan and Washington and does that have more to do with the crop type and its demand today or is it just the financials of the previous tenants there?

A lot of it is previous tenants, this is mostly blue blueberry farms and we've had one tenant that has had some personal problems and hasn't been able to take care of the farms and we are going to get those farms back and lease them to somebody else. The crops are coming out just fine. It's the problem of the farmer in many of these cases that's giving us a problem. They haven't done a good job of managing their funds. And as a result, it impacts us, but it won't be for long. As some of you remember, some time back, we had a family who had a large farm from us. I guess there were two farms in that. And they got in trouble. The farmer died. There were real problems there. And we took them back the first year. And then after we got everything stabilized, we rented it out. And it's still paying as agreed. And we signed a 10-year lease then. So the same thing will happen here. Just takes us a while to get them. Farming is a slow process and people just don't jump on a farm and say, oh I'm going to grow some blueberries. They have to wait for it.

How should we be thinking about the delta between the NOI between you guys operating it versus having it leased to a third-party tenant for an entire year? Is there a meaningful difference in terms of how that all sort of factors into the bottom line that we need to be thinking about or is that fairly close?

It's close, but generally speaking, somebody we hire and those farms -- some of the vacant farms are now being run by people we hired to operate them for. So we are partially in the farming business with those people. That's a different process than somebody who is skilled in both growing and selling blueberries or strawberries or almonds or anything else. So I would say it's -- once you get into a situation where you're putting somebody else in to operate the farm and you are in essence backing the farmer. It's a different world. People who are really good at this business and I'll never forget one of the politicians describing farming as, punch a hole in the ground and drop some seed in and you'll be fine. And it's just not that at all. People don't realize how much the farmer knows what to do with regard to the farm that they're on. So it takes us about a year to turn around something that goes a little bit sour. And in some cases, the sourness has been chewing up some of our time. So we've used this time to get in the water side of the business and making sure that when SGMA and these other government agencies demand that you do A, B, and C, that we're ready for them. We've got people and staff that are really skilled in this area. I think anybody in the government side of it would know that we're on their side. We want to be completely, completely away from the idea that we've got to fallow anything. I'm sorry, Rob, did I answer your question?

Yeah, that's helpful. And then I know the rains and floods in California caused some damage to some structures on one farm, but are they having any negative impact on any of the crops, especially the permanent ones? And, if this continues to go on, is that something we need to be careful about?

Well, of course we'd be careful. We've got insurance that helps us out a lot. And the one situation that you mentioned, which came out of last year's rainstorm, was a few wooden structures that were just not weather ready and so as a result they got replaced and the tenant there has helped us out with some additional changes to their lease. They didn't have insurance on the trestles that these were on, and so as a result they had to take a small loss in essence. So, Rob, I don't think that's our problem. We even have -- any -- if you may remember the address, one of our addresses on one of our farms is San Andreas and there is the San Andreas fall that runs through some of our farms. While that won't destroy the farms, it could open quite a gap to have to jump over to get the crops done. But we have insurance for that. We pay for that. We want to make sure fire insurance for some of the structures that we have. So we're pretty well covered from every angle except from the problems that some of the tenants have gotten themselves into. The banks are all recovering now. They're in strong position. Most of these are federal banks, federal license. And so they're in a good position and I wish the rates would come down. If you have any influence on the Fed, would you please use it to get them to lower the rates because we need a lower rate in order to buy farms. And so we're just slowing down and making sure that we're going to be way ahead of everybody else in our management of the water that's needed on all of our farms. In other…

Yep, that's helpful. Thank you. Lewis, how much of the quarter-over-quarter NAV decline of $1.27, was the change in farm values versus the change in debt and other balance sheet items?

That breakout was -- it was down by $1.27. A little over $0.80 was the change in our long-term financing, the fixed rate debt, and the preferred securities in just under $0.40 was the result of the valuation changes.

Okay, and then what did you do with the Martin County disposition proceeds? I think it was $66 million or so on a gross basis. Is that just paying down debt? Is that sitting in earning interest? How should we be thinking about that?

We had about $1.5 million of closing costs. We repaid $16 million of debt that were encumbering the property. We repaid another loan since then, a small loan, and the rest of it right now is earning about 4.5% interest in the bank.

Okay. And then last one for me. David, given your comments about getting a good price if you sold some of your farms, stock’s trading at more than a 30% discount to your NAV. What are your thoughts and the Board's thoughts on potentially selling a few farms and doing some stock buybacks at these levels?

I hate it. I don't want to buy back stock. I think we're going to use the money to grow. I watch Warren Buffett a lot and he doesn't buy back stock often. I don't know. We could do that, but we'd just be injuring ourselves for the long-term future.

Okay. Thanks, guys. Appreciate the time.

Next question, Rob.

Yes. The next question will be from the line of Mike Albanese with EF Hutton. Please proceed with your questions.

Hey, good morning, guys. Yeah, I think most of my questions were answered with the previous caller. But I guess just if you could provide more color on crop prices and kind of the supply-demand dynamic across almonds, berries, pistachios. You mentioned or alluded to kind of that oversupply -- global oversupply normalizing as inventories are drawn down. I mean, how much runway is there left for kind of normalization? Or really, just any other context that you could help me frame that would be helpful.

I think that the current situation with almonds is pretty much over. I don't think there's any excess left. And so that's good. There's never been any in strawberries or blueberries. Every now and then, blueberries, if the farmer has turned toward doing almond, any of the juices from blueberries then he's probably got -- had some leftovers. So it's very low right now. There isn't anybody with a lot of things out there. Even the apple growers have gotten strong, which I hate that business simply because it's hard to keep an apple. You see them in the stores. They're all mealy and don't want to be in that business much, even though we've got some out there. The other businesses are hurt sometimes, like for cherries. Cherries can get wiped out completely if you get any kind of frost. And so we don't have that many cherries, so we're lucky in that regard. I don't think there's much difference in, let's say, the 2021 prices and amounts that we had back then and today going forward. 2024 is going to be a great year for us because after all, we're going to slip back into the same -- we were making lots of money before the pandemic and all of the erosion to the markets. And so I think if you want to put down something, I'll say this, 2024 will be fantastic if we get the interest rates going. The markets are good today, and so the guys who are growing almost everything these days is in good shape. Every now and then you have, as we did in the blueberry business, a person who gets himself in trouble and personally as well as just destroyed his whole business but that'll come out, unfortunately you can't get…

Got it. That's helpful. That's pretty much exactly what I was looking for. Okay, and then can you just remind me kind of overall portfolio exposure to I guess the participation, the rent structure and then how much of that is, if any is captured with these tenants, that are having issues?

So I'd say about of our probably most -- all the participation rent lease structures are on our permanent crop farms. I think all but maybe one or two. But say a little less than one-third of our leases have a participation rent component. In the past couple years, both 2022 and ‘23, we've averaged about $90 million of total lease revenues. We've had participation rents of between $6 million and $7 million. So I think that's a kind of normal run rate for us right now as far as percentage of participation rents and their percentage of total lease revenues, if that's what you're asking.

Yeah, that's helpful. Thank you. That's it from me again.

Okay. Operator, would you come on and see if there's anyone else with a question?

Sure. The next question is from the line of Barry Oxford with Colliers.

Great. Thanks, guys. David, when you think about acquisitions and let's say interest rates stay roughly where they are, just move down ever so slightly, what would you have to see in the cap rate environment movement to make buying farms attractive to you?

Well, if this farmer will drop the price, then it works. But most of the farmers are long-term holders. And when you offer them something that makes the numbers work but it's lower than they believe their farm is worth. And remember, a lot of these farms are farms that have been in families for years, so they're not willing to get rid of them. They'll just continue to farm them. So, Barry, I don't think at the end of the day, you're going to see much happen unless interest rates come back in line where they were in 2021.

So they approach it more from a personal than an institutional marketplace?

I hear this phrase every time. My great-grandfather started here, migrated from wherever. And so it's a beautiful story. Unfortunately, the taxing that's going on now by the government keeps a lot of these guys from selling because they owe so much money when they sell. So they do try to do 1031s. And of course, we offer to give them stock in our company or partnership interest which we have a partnership underneath our company. And some of them take it. We have not gotten many to take all of it in terms of stock and with the stock down as far as it is today, it's almost better just to try to do everything in cash. So it's a peculiar situation we're in, but it happens every now and then just as it did in ‘08, ‘09 when people were scared to death. A lot of these farmers are people who want to get out of the business altogether. They want to sell the operating part and they want to sell their land. And the land is the piece we love. We don't really want to be in the operating part, that often for various reasons. But generally speaking, we want to be in a passive position rather than in the operation business. And so if the world changes a little bit on interest rates, I think it will be explosive in terms of what we can do. Many of the farmers are 58, 59, 60, and they want to sell and liquidate simply because they're tired and worn out from years of farming. Farming is a very difficult situation for almost everybody. You're chewing your nails over the price of fertilizer and it just goes on and on and on. So from my perspective, I think eventually…

Right. No, that makes all the sense in the world. And then, David, in your prepared comments, you mentioned something about California and water and banking more water. Are you seeing opportunities there? Will we start to see some dribbles here in the first quarter, or first half of the year?

Dribbles meaning what? Selling water?

Land water bank.

We got, as I mentioned, 15 billion gallons banked.

Yeah. I bet I may know you're going to be doing more.

Yes, we will buy more. We will get enough that will take us to probably rest of this century. We want to get it. Because once it gets in the ground in one of the aquifers, you can hold on to it for a long time. And unless people are willing to pay, we've been offered land to buy water at prices that are ridiculous. I mean, some guy wanted us to buy $1,000 for an acre-foot and that would have been, what would we pay, about $50 million worth of water. We sold it at $1,000. Under $500, we did the math on it. That would be about $20 million, $23 million, $24 million. And we sold it at $500 an acre. We've done something unique. And I hate to mention it too much, I'm afraid people will copy us and that is we've been able to take a lot of the water that's running off of these farms and in the -- into our farms and we are putting it into some vacant areas on our farm. We built berms and we pumped water into that area and then some places we just left it in there, and other places we're over the aquifer, so it will trickle down into the aquifer and we get credits for that. And we're probably doing that at the rate of $20, $30 an acre foot. It's a little bit higher you're saying. Okay. It's your markup as the CFO. Anyway, we've really skinned the cattle very well on this. Our guys are experts at all the water problems in California. I wish there was some way to use the one in Florida, some way we could get water from Florida where you stick a hole in the ground and you got…

No, that's it for me. I'll yield the floor. Thanks so much, David, for the commentary.

Okay. And we got anybody else? One more coming.

Yes, we have one more question. It's from the line of Michael Diana with Maxim Group.

Okay. Thank you. My question is just on the impact of the sale in the first quarter here of that farm, the impact on net asset value, just that in and of itself, the sale. Is it going to be $10.4 million, in other words, the amount over cost, or is it $2 million, the amount over the appraised value?

It would have been $2 million over the appraised value because the previously appraised value was what we had on the books as far as the NAB calculation goes. However, we did already mark that up at 12/31 since we did have a PSA in place at as of 12/31. So that sales price -- that increased sales price is reflected in the NAV calc as of 12/31.

Oh, okay. All right. Thank you.

No problem.

Thank you. We have no further questions, Mr. Gladstone. I’ll turn the floor over to you for closing remarks.

Well, we certainly appreciate all of you listening to this and asking good questions and hope to see you next quarter. And if you can, jot down a couple of extra questions to ask. We have time to talk to you and we only talk to you once a quarter, so get your questions ready so we can talk some more about what's going on out there in the farming world in California and in Florida. That's the end of this. Thank you very much.

Thank you, Mr. Gladstone. This will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.