Prepared remarks
Greetings, and welcome to the Gladstone Land Corporation Second Quarter 2026 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. David Gladstone, Chief Executive Officer. Please go ahead, sir.
Well, thank you, Melissa, for that nice introduction. This is David Gladstone, and this is the quarterly call for Gladstone Land. And thank you all for calling in today. We appreciate you taking time out of your busy day to listen to our presentation and get some updates from us. First, we'll hear from Catherine Gerkis, she is our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters concerning this call. Catherine, go ahead.
Thank you, David, and good morning, all. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstoneland.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release, both issued yesterday for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X at Gladstone Comp as well as Facebook and LinkedIn, keyword for both is the Gladstone Company. Today, we'll discuss FFO, which is funds from operations, a non-GAAP accounting term defined as net income, excluding gains or losses from the sale of real estate and any impairment losses on property plus depreciation and amortization of real estate assets. We may also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses and adjusted FFO, which further adjusts core FFO for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now I'll turn it back to David Gladstone.
All right. Thank you. Let me just talk about the portfolio we have. We currently own about 98,000 acres across 142 farms and about 56,000 acre-feet of water, which is about 18 billion gallons. Our farms are in 14 different states and our water assets are all in California. We didn't have any acquisitions or dispositions this active quarter. But at quarter end, we sold a property consisting of two citrus farms in Florida for about $3 million. It was a small amount of acreage. The original tenant had defaulted on the lease and the replacement tenant was at a substantially lower rental rate. Given the continued weakness of the citrus markets, we felt it was best to sell the property and use the proceeds to pay off some related mortgages or some other assets that we want to do something with. We may consider selling some additional farms over the next few quarters as part of our ongoing portfolio review. If we use most of the proceeds to pay down debt and buy back preferred stock, it will be very strong for us. We continue to take a disciplined approach to acquisitions and staying active in the market, so we're ready when the conditions improve. It will make sense for us to start growing the portfolio again when interest rates have gone down. So anything you can do, talking to the Fed and telling them to lower that rate, we'll be pleased to do some more transactions. As we've discussed in all of our prior calls, due to the market for permanent crops, particularly nuts and wine grapes, we modified the lease structure on a handful of farms to reduce the grower's fixed cost while allowing us to participate more in the upside with higher crop-share participation. So we are becoming much more involved in the operations. Overall, the 2025 almond and pistachio harvest were very strong with yields generally exceeding expectations. While the final pricing of the pistachio crop has not yet been determined, we received indications from certain processors that our final price is expected to be higher than the prior year. So we expect to recognize a meaningful amount of additional revenues from that harvest in the fourth quarter of this year. We entered into similar arrangements for most of these farms for the 2026 crop, so we're continuing down the same path that we set up to get us through past problems. The majority of related revenues and earnings are expected to be recognized during the fourth quarter. I also want to remind everyone that crop insurance continues to play an important role here as it helps to limit the downside risk on the farms, particularly given their strong production history. If we could have a big year and then have some problems, insurance always protects us from the big downside. Our goal is still to eventually transition these farms that we're doing on a shared basis back to more traditional lease structures with fixed base rent. But the timing of that will depend on several factors, such as crop production, pricing, interest rates, input costs and most importantly, water availability. We're finding some problems out there with water availability. Looking ahead, we have six leases scheduled to expire over the next six months. In total, these leases are about 3.5% of our leasing revenue for the year ending 2026. We're currently in discussions with both existing and prospective tenants and expect to be able to renew each of the leases prior to expiration. We're also pursuing several alternative revenue opportunities, including water leases. We have farms that have water, and we can lease that out. And following some programs and some of the solar opportunities that have been discussed with four of our tenants, we've received some cash rent payments from a couple of these tenants during the quarter. But we'll keep them on nonaccrual status until we see a consistent pattern of timely payments. We'll stop here and turn it over to our Executive Vice President, Bill Reiman. He's out in California. Is that where you are today, Bill?
Yes. Actually in Idaho today, David. Thank you. As David said, the second quarter is really highlighted by strong demand in the almond and pistachio markets. We've seen almost weekly price increases in almonds and really strong bumps in pistachio grower pricing. We also reported last quarter about an early marketing bonus that was announced in February. We received that in April. I also read just yesterday that these are the strongest almond prices we've had in 10 years. I haven't done that research myself, but those trends are really good. This upward trend in crop prices, coupled with a largely uneventful quarter as far as weather and growing conditions are concerned, has kept our budget projections on track to outperform the 2025 crop year and tracking really well for 2026. Our primary pistachio processor recently announced an expected final pricing for the 2025 crop of at least $2.70 a pound per split in-shell, which is certainly higher than we projected all year. They also announced initial pricing for 2026 of $2.50 a pound per split in-shell, which is two-thirds higher than it was last year. These are significant price increases that will have a major impact on all of our properties under modified lease arrangements, ones we operate directly and even our crop-share lease agreements. We began shaking almonds on July 28, so harvest season is here. The almond crop on our properties looks slightly larger than last year's crop, so we expect at least the same yields, maybe a little bit better. Reports across the state are saying yields in general are slightly lower, which is one of the factors supporting these price increases. Pistachios are everywhere extremely light, like we reported last quarter. We believe the overall industry was a little overly optimistic initially, but because we were projecting a much lower crop than many of our neighbors, in the last 30 days or so that reality has settled in. That in turn has caused buyers to bump up offers for new crop to levels that are way above last year. Crop expenses continue to track within our original budgets. There's been a lot of discussion in marketing circles about how to handle such a down year without jeopardizing what's likely to be a very strong production year in 2027. We feel our processors are positioned in the industry to maintain pricing so that 2027 will be like 2025, even if we have a very large crop yield. The wine grape market really hasn't changed a lot. The 2026 crop is early, harvest has started all over the West, and we expect the 2026 crop to be down, not just because of removals but because the crop looks light. It's an encouraging sign and, coupled with bulk wine inventories finally getting closer to manageable levels, we hope to see better demand for new crop this year and in the next couple of seasons. So we may finally be at a place where the industry is on the backside of the oversupply situation. In real estate markets, as we talked about last quarter, in the Western U.S. we think most real estate markets have bottomed out and are starting to get stronger again. We're seeing a strong divergence in valuations around water cost and availability. Properties with good cash flow potential are getting strong attention. Coastal California values remain flat with higher-than-normal inventory. The Pacific Northwest is stable with really good properties transacting swiftly. I'd say values and rents are stable. Stable interest rates, combined with profitable crop prices and tree nuts, are resulting in a little more lending activity. We're seeing growers having an easier time getting lines of credit; it appears these banks have money to lend. There's a clear path to cover debt payments, and financing deals can get done. I'll end my portion on water. Winter was a little disappointing, particularly from a snowpack perspective, and federal water allocations were really disappointing. We did get an additional 3% bump in allocation yesterday, which doesn't sound like a lot, but it helps not only free up a little bit of water but lowers pricing in some of our water deals that we have in place. We're finding decent purchase opportunities, but we remain diligent and conservative with what we pursue. Our goal is to only acquire water at a price that fits into the economics of a particular crop in a particular area. Looking at the long-term weather forecast, I think everybody sees a very strong El Niño situation coming this winter. So we're making preparations for a long-water situation for the upcoming winter. There should be some really good opportunities for water acquisitions and beyond just acquisitions, flood flows—being prepared to take on excess water during storm periods. The team continues to evaluate all these opportunities and the goal continues to be to strengthen the overall water security of the portfolio, both through long-term and short-term strategic water purchases, continuing to invest in water delivery and storage infrastructure and identifying opportunities to create synergies across our farm assets. That's it for me, and I'll turn it over to our CFO, Lewis Parrish.
All right. Thank you, Bill. Good morning, everyone. I'll start with a brief update on some recent financing activity. We did not secure any new borrowings or repay any loans during the quarter. However, after quarter end, we repaid a $3 million mortgage loan in connection with the property sale that David mentioned earlier. In addition, during the quarter, we added several unencumbered properties to certain existing and new credit facilities that increased our immediately available capital by about $50 million. We issued about $14 million of common stock under the ATM program earlier in the quarter at an average cost of capital of about 5.5%. Those proceeds were used to repay our line of credit and fund preferred stock repurchases. We have not issued any additional shares since April, given where the stock has been trading. Also since April 1, we've repurchased $13 million of preferred stock at an average repurchase yield of 7.2%, resulting in a total gain of about $1.1 million over that time. Turning to our operating results. For the second quarter, we reported a net loss of about $8.5 million and a net loss to common shareholders of $13.5 million or $0.32 per share. Adjusted FFO for the second quarter was negative $1.6 million or negative $0.04 per share compared to negative $3.5 million or negative $0.10 per share in the same quarter last year. The improvement in AFFO was primarily driven by higher operating cash revenue and lower interest costs, partially offset by higher property operating expenses. Year-over-year fixed base cash rents increased by about $900,000 and this was driven by rent that we collected from certain tenants that remain on nonaccrual status as well as leases executed over the past year. These increases were partially offset by lost revenue from farms that were sold over the past year. Participation rents increased slightly, primarily due to higher almond prices for the 2025 crop. Direct farming operations generated a net profit of about $590,000 during the quarter, primarily driven by the harvest and sale of an orange crop on a Florida farm following the early termination of a prior tenant's lease as well as higher almond prices. On the expense side, our recurring cash operating expenses increased by about $560,000. Total related-party fees increased primarily due to a higher administration fee and the increase in property operating expenses was largely driven by higher professional fees associated with protecting water rights on certain farms in California and additional costs related to properties that were vacant, directly operated or on nonaccrual status. G&A expenses increased primarily due to higher stock-related expenses and increased professional fees. Finally, cash flows from operations increased largely as a result of higher cash receipts from participation rates and crop sales, a decrease in cash allowances paid to certain tenants and lower interest payments. Turning to liquidity, we currently have about $125 million of immediately available capital, and we also have about $110 million of unpledged properties that could be used as additional collateral. Over 95% of our borrowings are currently at fixed rates with a weighted average interest rate of 3.45% locked in for an average of another 2.3 years. Looking at upcoming debt maturities, we have roughly $33 million of loans maturing over the next 12 months. Given the value of the underlying collateral, we do not anticipate any issue refinancing these loans should we choose to do so. In addition, we had $17 million of scheduled principal amortization payments over that time, representing less than 4% of our total debt outstanding. We also have about $148 million of loans with fixed-rate terms that are scheduled to reset over the next year, though the loans themselves are not maturing. This includes about $130 million of loans under our MetLife facility that are scheduled to reprice in January of 2027. We are actively evaluating all of our options with respect to these loans ahead of the scheduled resets. Finally, regarding the common distributions in July, we declared a monthly dividend of $0.0467 per share for the third quarter of 2026, keeping the dividend flat. At the current stock price of $8.21, that's a 6.8% annualized yield, which is well above the REIT sector average. With that, I'll turn it back over to David.
Well, thank you, Lewis. Overall, demand for prime farmland growing berries and vegetables remains stable across most regions, particularly along the coast of California. We're also starting to see some signs of improvement in certain permanent crops, both in pricing and the broader economics around those crops. So we are hopeful that the worst is over and behind us, but it's still too early to say that we are fully in the clear. In closing, over the long run, we expect inflation, particularly in the food sectors that we're in, to continue to move higher, and we expect the values of the underlying farmland to increase over time as a result. We expect this especially to be true with regard to healthy foods such as fresh fruits and vegetables and nuts, as long-term trends toward healthier eating habits continue to grow. Now I'll open up for questions. Operator, would you come on and please direct us?
Questions and answers
Our first question comes from the line of Gaurav Mehta with Alliance Global Partners.
I wanted to ask you on the participation rents. If you could provide some color on how much participation rents are you expecting in the second half of this year?
I don't think we're prepared to give a final number yet just because the pistachio pricing is still in flux and the bonus for the 2025 crop is not finalized. We do have a pretty good handle. We know the initial pricing for the 2026 crop is set, but yields are still unknown at this point. I'll let Bill comment on this more. But given where we think yields are and given higher pricing, we are expecting higher amounts this year, but I don't think we're prepared to give a final range of what that number is going to be.
I would just say it's so early. Of course, we're starting almonds, as I mentioned, but we're literally just less than two weeks in. So it's too early to have a lot of confidence in any trends we see so far. So far, so good, but there's a long way to go. Pistachios, we probably aren't going to start anything until closer to September 1. So just way too early on the crop yield side to give any decent guidance there. But pricing is so much stronger than a year ago, so we feel those factors are pushing us towards the positive.
Second question on the second quarter fixed revenues. Were there any nonrecurring one-time items in the revenue number for the second quarter?
There was one item: we received a cash payment from a tenant who we placed on nonaccrual status last quarter, Q1 of 2026. For the quarterly revenue, that was about $700,000. We would like for that to be recurring, but given that we're keeping that tenant on nonaccrual status, I wouldn't bake it in as a recurring payment at this time.
All right. And the last question, can you provide some details on the impairment charge you recognized on four farms in Arizona?
Yes. That was one property that consists of four different farms down in Arizona. We signed a PSA with a buyer subsequent to quarter end, so we marked it down to the purchase price per that agreement. That transaction has not closed, but we are expecting it to close hopefully in late Q3, possibly early Q4 at this point.
Our next question comes from the line of Craig Kucera with Lucid Capital Markets.
I want to walk through the pistachio market update. I appreciate the additional color. I think last quarter we were discussing how you received about $0.50 a pound in your first quarter marketing bonus. I thought it might be anywhere from an additional $0.40 to $0.90. Based on this update, it looks like you may be expecting towards the high end of that range, like an additional dollar per pound this year.
I would definitely say it's on the upper end of that range.
Craig, just to add to that, based on what the processor said, they didn't necessarily commit to it, but with the expectation being at least $2.70, that would imply an additional bonus of at least $0.70 per pound. Read into that "at least" what you will, but that does have us thinking it's going to be on the higher end of that range that we gave.
Got it. Okay. And I guess just mechanically, how should we think about the timing of when that's recognized? Like should we think maybe one-third this year and then two-thirds next year? Or how should we think about that?
A lot of it is going to depend on yield. Speaking from a pricing standpoint, that $2.50 is the initial guaranteed price, so we will get $2.50 per pound that gets delivered to the processor. The bonus on top of that, which could be $1 or more, will be recognized in 2027 Q4. The yield piece of that equation is what's not known yet. I won't get into yield here, but I'll let Bill comment further.
Yields obviously we haven't started yet, but it is a down year. The fruit on the trees is kind of a mess. There's blanking—you start with a down year—and then you have the heat spell in March that messed up pollination, so you had a lot of crop drop and the crop is hanging in the trees with a lot of blanks and small sizes. We're seeing that in almonds as well across the border. That puts downward pressure on yield. This year is a bit of a wildcard on crop yield. We'll know by mid-November on pistachios what total production is going to be. As Lewis said, multiply that by $2.50 and that's this year's pistachio revenue, plus any blocks that we have in crop insurance claims, on which we've already opened some claims because we know some blocks will be under our crop-insurance breakpoint. So it's a little hard to forecast crop yield and how crop insurance will pay out at this point.
Our next question comes from the line of John Massocca with B. Riley Securities.
So maybe starting with the vacant assets you still have today, any update on potential resolutions for those 10 farms?
Yes. The majority of the acreage we think we are close on getting some alternative leases in place, as David mentioned—solar leases, maybe some cattle leases and some conservation programs. We do think we'll have some of those executed before the end of Q3. Others we're still talking with new tenants, hoping to get somebody on. Bill, any more progress you want to note on some of these alternative leases we're working on?
Everything seems to move slower these days, but we have activity on virtually all of them to get something in place. In some cases, the deal is already made and we know what we're going to receive and when we receive it; we just don't have the contracts completed. So there's some minutia we're dealing with, but I would say in most cases we're getting there. I would also note that most of the acreage that's been vacant recently was due to a transition. We pulled a lot of almond trees out, and those are properties classified as vacant. It took a long time to get the trees out and clean up those properties while we worked on what's next for those, so the timing stretched out primarily because of that transition.
And just maybe rough brackets, any potential ballpark on what the NOI contribution could be from those vacancies being resolved?
We could get close to their historical performance on some of them.
From the three that we think we're closest on, we think that could be an annual add of about $1.5 million.
Okay. And then in terms of upcoming lease expirations, any color you can provide on how discussions are going with existing tenants or new tenants—just outlook for those properties as those leases roll?
Looking at the next six months, they're pretty standard leases; we expect to probably renew with existing tenants at similar terms. The rent from these expirations over the next six months makes up about 3.5% of our current annualized rent, so we would expect those numbers to stay pretty flat.
Anything to be aware of going forward that could cause oscillations in property operating expenses? You mentioned water. I know some of your leases have water contribution agreements. Could that be variable given we might be in an interesting patch in terms of water availability between now and El Niño? How should we think about that operating expense line item going forward?
There is one property where we are responsible for bringing a portion of the water to the property. We usually recognize the cost of that water usage one quarter in arrears because it takes time for final numbers and costs to get processed through the water district and made known to us. In Q1 we recognized about $200,000 of that water cost, and that's water that was actually used in Q4. Most of this water is probably going to get used in the second half of the year. So I would expect maybe a slight uptick in Q4, recognizing water that was used in Q3 as well as Q1 of 2027.
With yesterday's announcement on federal water allocations—a three percent increase—that bumps us into the next pricing category or bumps us down in terms of pricing. The domino effect is that pricing and valuation of supplemental excess water, for now until the next water year starts, all goes down. So where we may have been concerned that water pricing would rise and cost us more to finish the year, now that pressure looks like it will be reversed. We also see more water becoming available as we get towards the end of the season. Reservoirs are above average for historical levels and with the threat of a wet season coming, they need to make room, so different owners of water will be looking to sell. As we get closer to winter, those prices go down. So we feel like water as an operating expense has some downward pressure as we head into winter.
Okay. And then lastly, just because it's topical: any tenants with exposure to leafy green cultivation and any impact you're seeing there at all? I know it's probably not a big portion of the portfolio, but I wanted to check.
There are definitely negative impacts from that. A lot of our farms in those areas are growing berries, but the cyclospora outbreak, which hasn't been linked to any domestically grown fresh produce, has nonetheless caused a decrease in demand for all fresh produce. In fresh produce, we're used to quick-moving markets and ups and downs, so if this is short-lived it will be a blip. But as of right now across all fresh produce, demand is down and markets are down, and we'll see planting back off. We'll just see how this plays out as we transition into winter.
Operator, any further questions?
No, Mr. Gladstone, there are no other questions. I'll turn the floor back to you for final comments.
Okay. Thank you very much. Well, this is kind of a bumpy call that we have, but the second quarter is probably our most difficult quarter in trying to figure out what's going on in the marketplace. We'll have a lot more for you next quarter, and hope you save up all those good questions for us to answer. That's the end of this.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.