GLADSTONE LAND Corp (LANDO) Q4 2025 Earnings Call Transcript

Greetings, and welcome to the Gladstone Land Corporation Year-End and Fourth Quarter Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, President and Chief Executive Officer. Thank you. You may begin.

Well, thank you for that nice introduction. And 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. Hopefully, we give you some indication of where we're going. Now, we'll hear from Catherine Gerkis, our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters concerning this call and this report. Catherine, go to it.

Good morning. 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-K 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 @GladstoneComps as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies.

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 the 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 over to David Gladstone.

Thank you, Catherine. Folks, we sold a few more farms during the fourth quarter, which brought us to 6 property sales for the year totaling $95 million in proceeds, and we recognized an aggregate gain from these sales of about $21 million. So your company is in good shape today. After these sales, we still own nearly 99,000 acres across 144 farms, which is about 56,000 acre-feet. In case you forgot, I'll translate that to 18 billion gallons of water that we've got stored in aquifers, and so we're in good shape for that part of our work. Our farms are in 14 different states, and our water assets are all in California. And right now, there's plenty of water in California. So we're all in good shape from that perspective. Regarding the two sales we completed during the quarter, one was a small blueberry farm down in North Carolina. The tenant had fallen behind in his rents, and it was a tough property for us to get to new tenants.

So while we took a small loss in the sale, we thought it best just to get rid of that farm since it was out of the normal territory that we're in. The other sale was a really nice farm in Colorado, where the lease was set to expire at the end of the year, and we were likely facing a downward rent bump and reset. So we took the opportunity to sell the property for more than we had in it originally and paid. So it was decided to go ahead and take the gain and move from that area of farms. We may consider selling some additional farms. In fact, we've got several that we're talking to buyers over the next few quarters in this part of ongoing portfolio review. If we're able to complete some of those, we'd like to use most of the proceeds to pay down debt and also to buy back some of that more expensive preferred stock that we have and trigger a gain there. But we're still evaluating the opportunities.

And at this point, we're hopeful of a good transaction that will come and show how good we are at buying and holding these properties. On the acquisition side, financing costs seem to be slowly moving closer to where we like them to be, but we're not quite there yet. We're hoping interest rates will continue to move in the right direction, that is down, so we can get back to growing the portfolio as we've been out of the business for quite a while. We've got a lot of land that we own, but it'd be nice to pick up some now because prices seem to be moving in the right direction. We're still taking a disciplined approach to any new investments. Interest rates and our overall cost of capital remain elevated, and the capital rates on most row crop farmland are still too low to make it economically viable for us today if we have to use a lot of debt to buy it. On the leasing side, first, we've talked about on prior calls due to the market conditions affecting certain permanent crops, particularly nuts and wine grapes.

We adjusted the lease structure on a handful of properties to help our growers reduce their fixed costs. And as a result of doing that reduction, in essence, we're taking a larger percentage of the gross crop sales instead of fixed rent payments. We also decided to direct operation of two properties ourselves with the help of third-party operators. We believe a lot of the farms in the United States are just set up like that. So people bring in farming expertise as we are. And well, I'll let Bill and Lewis, the two next speakers, talk about that. But overall, we had a successful harvest, particularly with almonds and pistachios. We're still expecting significant amounts of revenue from the 2025 pistachio harvest to come during 2026. So they're not in there yet, but we won't know the exact amount until the processes of those nuts have finalized their settlement with us. I wanted to remind everyone about this modified structure that we're using because we're simple approach to most of these farms for the 2026 crop year is going to be exactly the same as we used last year.

And I think it's also important to again highlight the role of crop insurance. In these cases, one of the reasons we feel so confident in taking this approach, which is a little bit like gambling on these special farms is their strong history of high production. And since insurance coverage is largely based on historical yields, we're able to secure relatively high levels of insurance. So to give you an example of this, if one of our crops that's insured is wiped out by some strange disease or whatever, the insurance allows us to recover the amount of capital that we put into these farms. And that's nice to know that the downside is covered. Our goal is still to eventually transition these leases back to a more traditional structure with fixed base rents. But our ability to do so will depend on many factors, actually, external factors such as crop productions, crop prices, interest rates, input costs of growing the nuts or whatever strawberries and water availability.

We've kind of got the last one covered to some degree, water availability, as you probably read in the newspapers and reports. Water is plentiful in California and the amount of snow in the mountains, which will melt during the summer and run off is in pretty good shape. In other leasing activity, we executed 5 renewals during the quarter. We saw a modest increase of about 7% on two of these row crops as a renewal. For three permanent crops, we reduced the fixed base rent in exchange for an additional crop share component, which is what we've done a lot of the time. We should have roughly flat compared to those of prior leases on those farms. Looking ahead, we have 5 leases scheduled to expire over the next 6 months. In total, this represents about 3.6% of our total 2025 lease revenue. We're currently in discussions with existing tenants and prospective new tenants about leasing each of these farms, so I'm pretty optimistic about getting those rented.

And now I'll take a quick update of some of the ongoing tenancy matters that we're working through. We currently have 9 farms that are wholly or partially vacant, and we're growing crops on some of these. Encompassing 4 of the farms, we've been direct operators under management agreements with unrelated third-party growers. We also recognize revenue on a cash basis for leases with 3 tenants who collectively lease about 5 of our farms. That should be okay. We are actively working towards a solution for each of these situations. We think we are close to having a resolution in place for a few of these farms soon. And hopefully, we can get some of them off of this list over the next few months. I'm going to stop here. We've got Bill Reiman on the call, and Bill is the man who really understands this since he's been working in the farming area for most of his career. So Bill, take it away.

Thank you, David, and good morning everyone. Much of our current management focus is on the properties operated under modified lease agreements or farmed directly with third-party operators. We've completed the 2025 harvest and are pleased to report that we exceeded our overall yield objectives. We're renewing some of these modified lease arrangements, particularly on 5 out of 8 farms. Two of the remaining three are redevelopment projects, and the last one, our wine grape vineyard in Napa, is now leased to a local grower, which we are pleased about. The five farms we renewed agreements on were our top performers from last year, so we're anticipating another strong year. This winter has been about average in terms of precipitation, with a couple of our wettest months ahead. Recent storms have significantly boosted snowpack levels, leading to optimism about strong surface water allocations for 2026.

Reservoirs for state and federal water projects are above historical averages, so we have plenty of supply in the short term. We're projecting a low to medium level of chilling hours this winter in California, which should meet all chill requirements for our permanent crop locations. That's great news. As of today, the almond bloom is roughly 2/3 complete. The bloom has been uneven, with reports of flash bloom in several areas of the Central Valley, and the cold, rainy weather has impacted bee activity, which might lead to lower almond yields statewide. Pistachios and wine grapes are still dormant and have benefited from the colder, wet weather, so their blooms have not yet been affected. Despite ongoing tariff issues and trade tensions, crop markets have largely adapted to this uncertainty. Nut crop markets continue to show resilience, especially for pistachios. An important development is the light supply chain; there is minimal product in the almond and pistachio markets, which has put upward pressure on pricing.

Our base guaranteed price for the current crop remains consistent with 2024, and we believe the final price for the 2025 crop will likely exceed our final 2024 pricing. One of our processors recently announced a bonus of $0.50 per pound for pistachios, which is encouraging. This positive momentum could lead to a higher base price for the 2026 crop when announced in July. Almond prices dipped in January but have since rebounded and are rising again as we progress through the bloom season. I don't expect these prices to fluctuate significantly due to strong demand and market confidence. There might be minor fluctuations as projections for the 2026 crop emerge and opinions on crop outcomes vary. The market is generally underbought, with a light supply chain, and growers are hesitant to sell, contributing to continued upward pressure on almond prices. The wine grape market is currently underperforming, but we are starting to see shortages in certain varietals, particularly some white grapes.

While this has not yet led to price increases or prompted wineries to contract for supply, it is a hopeful sign after years of stagnation. Vineyard removals are accelerating in California and globally, and we are optimistic that a pullback in supply will soon bring the market back into balance, potentially leading to underproduction. Additionally, a weakening dollar makes our products more appealing to international buyers. Returning to the topic of water, we are experiencing a normal to potentially wet year in terms of precipitation. This is promising as we continue to enjoy an extended wet period, with four out of the last six years being average or wet. Full reservoirs, ample rainfall, and adequate snowpack are crucial for maintaining a robust water market. We are actively sourcing the best water deals for our properties and exploring infrastructure improvements for optimal returns on capital expenditures.

Our goal remains to enhance the overall water security of our portfolio through strategic water purchases and investments in water delivery storage infrastructure, pipelines, and water banks, while identifying opportunities for synergy across our farm assets. Now, I will pass it over to our CFO, Lewis Parrish.

Thanks, Bill, and good morning, everyone. I'll begin with a brief update on our recent financing activities. In the last quarter, we repaid a $4 million note secured by a property we also sold during that time. After the year ended, we redeemed our Series D term preferred stock to prevent an increase in the coupon rate from 5% to 8%. This redemption was funded by issuing common stock under our ATM program and drawing on our line of credit. Since the start of the fourth quarter, we raised approximately $50 million in common stock through our ATM program, most of which went toward that redemption. Now, turning to our operating results. For the fourth quarter, we reported a net income of around $4.2 million and a net loss to common shareholders of $1.8 million, which translates to $0.05 per share. For the entire year, our net income was $13.5 million, while the net loss to common shareholders amounted to $10.5 million or $0.29 per share.

Adjusted Funds from Operations (AFFO) for the fourth quarter came in at $14.4 million or $0.38 per share compared to $3.4 million or $0.09 per share in the same quarter last year. For the year, our AFFO was $14.4 million or $0.39 per share, down from $16 million or $0.47 per share last year. The decline in AFFO was mainly due to recent changes in lease structures on certain farms, timing differences in revenue recognition for crop sales, lost revenue from farm sales over the past year, and ongoing tenancy issues that led to vacancies, resulting in lower revenues and higher costs. Year-over-year, fixed base cash rents declined by about $1.9 million for the quarter and around $19.8 million for the full year. This decline matches the reasons mentioned earlier, particularly the lease modifications on certain properties where we either reduced or eliminated fixed base rents or offered cash lease incentives in exchange for increasing the crop share components significantly.

On the flip side, and for similar reasons, participation rents rose by about $9.3 million on a quarterly basis and by $10.6 million for the full year, benefiting in part from stronger pistachio pricing compared to last year. Net profit from crop sales on our directly operated farms for the 2025 harvest year was about $2.6 million. However, we have not yet fully captured the impact of this harvest in our financial results; while we incurred a full year of growing costs, we have yet to recognize a full year of revenues, particularly for pistachios. As mentioned, the final marketing bonus payment for the 2025 pistachio crop will be recorded later in 2026, causing a timing difference with 2024, when this property was fully leased. Additionally, we recorded about $4.4 million in termination-related revenue in 2025, including $2 million in the fourth quarter, compared to none last year. Regarding expenses, our recurring cash operating expenses increased for both comparable periods.

Fees from related parties decreased by around $200,000 for the year, primarily due to reduced management fees from recent farm sales, although this was offset by a higher administration fee in the fourth quarter. Property operating expenses rose for both periods, mainly driven by the cost of supplemental water required by one of our lease agreements, along with increased insurance costs and property taxes on one of our directly operated properties. General and administrative expenses went down in both periods, largely due to lower professional fees incurred this year. On cash flows, we saw a decline in operating cash flows primarily due to timing differences between leasing and operating farms, which is particularly noticeable in the first year of operations. For our direct operated farms, most cash went out for growing costs in 2025, while the larger portion of cash proceeds will be received in 2026.

Additionally, much of the cash from the increased participation rents due to lease modifications was collected in early 2026, further contributing to the year-over-year timing differences in operating cash flows. In terms of liquidity, we currently have about $85 million in readily available capital and over $185 million in unpledged properties that could serve as additional collateral. We are actively discussing with a couple of lenders to leverage some of these properties for either existing or new facilities. Presently, around 98% of our borrowings are at fixed rates, with a weighted average interest rate of 3.39% secured for another 2.7 years, helping us mitigate the interest rate volatility experienced in recent years. Looking ahead, we have about $17 million in scheduled principal amortization payments due in the next 12 months. We do not have loans maturing in the coming year, but approximately $160 million in loans with fixed rate terms are set to reset in the next 12 months, including $135 million that will reprice under the MetLife facility in January 2027.

Finally, regarding our common distributions, we declared a monthly dividend of $0.0467 per share for the first quarter of 2026. At our current stock price of $11.51, this yields an annualized return of 4.9%, which is above the average for the REIT sector. Now, I'll turn it back over to David.

Thank you, Lewis. Good report. Nice to know that we're in a strong capital position. We are staying active in the market, so we're ready to go if a good acquisition opportunity comes along. But as mentioned earlier, we're still being cautious on the acquisition front because our cost of capital remains very high. Overall demand for prime farmland growing berries and vegetables remains stable across most of our regions, particularly along the coast. We also started seeing some signs of improvements in pricing and broader economics around those crops. So we are hopeful that the worst may be behind us, but it's still too early to say whether we are fully in the clear or not. Overall, in the long run, we expect inflation, particularly in the food sector, to continue to move higher, and we're expecting the values of underlying farmland to increase over time as a result. We do expect this to especially be true with healthy foods such as fresh fruits and vegetables and nuts like we grow for people, and we are a big producer these days. So now I'll open it up to some questions from those who are listening in. Operator, would you come on, please, and show them how they can ask some questions.

Our first question comes from Craig Kucera with Lucid Capital Markets.

I wanted to revisit your commentary regarding the 5 repositioned farms. So basically, are you saying that they're under similar leases where there won't be any base rents and you'll have a portion of higher participation rent expected in '26 and then will some of that dribble into 2027 as we saw this past year? Or how should we think about that?

Yes, that's exactly correct. It will follow the same structure, meaning there will either be no base rent or possibly a lease incentive, similar to what we had in 2025. For the 2025 crop, we recorded a significant portion of revenue in that year, with some carryover into 2026, and we'll see the same pattern. However, in 2026, we'll benefit from the carryover from the 2025 crop along with the initial payment from the 2026 crop.

And to add to that, it won't extend into 2027. Most of the revenue for the 2026 crops will come in 2027. It will be similar to this year.

Okay. At the time you restructured those leases, you estimated that around 75% would come through in the fourth quarter of 2025. Looking back, what percentage was actually recognized in the fourth quarter of 2025, and what are your expectations for 2026?

It really depends on each individual farm. For the pistachio farms, we anticipate the first-year figure will likely be between 65% and 75%, based on our estimates of the marketing bonus. However, it could end up being higher, which would lead to a greater percentage in the following year. The situation is a bit different for almonds, as some of our properties are involved in a call pool, which gives us the discretion on when to sell the crops. For instance, we have one property for the '25 crop where we haven't made a decision yet because we're observing a positive trend in prices and want to take advantage of that. Regarding pistachios, I believe the percentage will generally hold if the bonus payment remains consistent, but there are indications that it could potentially be higher, which would again increase the percentage for the subsequent year. Bill, do you have anything to add to that?

Yes. I mean that's correct. Certainly, on pistachios, we feel the likelihood of increased bonus payments is increasing every day. So we feel pretty strong about that. And Lewis mentioned the almonds on the call pool, one particular farm, we decided to make the call of when we'll sell, and we're kind of holding out for some higher almond prices. But in that particular farm, we did get a crop insurance payout. So we're already in positive territory as far as whether we made money or lost money on that farm. But we still have a small amount of crop to sell, and we're just holding out for higher prices.

Got it. And just one more on this topic. I guess, are you saying then that you would probably recognize more sort of variable payments throughout the year than you typically would because you have more control over when and at what price you sell the crop? Or should we think about this that this will mostly be recognized in the fourth quarter as far as what was earned in 2025?

I think we'll have a little bit more in the first half of the year than we typically do. Just as Bill mentioned, that we do have one pistachio processor who announced they will pay a portion of that marketing bonus early in April. So we will probably be able to pull some of that into Q1. But other than situations like that or maybe further adjustments to almond pricing, we would probably see the most bulk of it coming in Q3 and especially Q4 again.

The other impact is that if the pistachio market continues its current trend and our guaranteed base price increases, it will allow us to claim more in this calendar year. However, we will likely not know the specifics until the end of July.

Okay. Changing gears, Lou, what are your expectations for interest paid for this year in the first quarter?

I'd expect it to be anywhere from 10% to 15% less than what we recognized in 2025, and that's assuming the percentage of interest that gets paid gets refunded is the same, but reflecting just the loan balance decrease over the past year as we've paid off some loans.

Got it. I see you raised $33 million in ATM this quarter. Was the remainder of the Series D funded with cash on the balance sheet or the line of credit?

Line of credit. We currently have about $10 million outstanding on the line of credit, and that's currently at a 5.69% variable rate.

Got it. Okay. Just one more for me. I know one of your competitors has been generating significantly higher returns through lending to farmers and is seeing decent demand there. Given the somewhat tougher farming economy, is that something you guys are looking at a little harder? I believe you capped that type of activity to 5% of assets, but would just like to get your read on that situation.

We have talked about starting a loan program, but we haven't made any decisions yet. It's an ongoing discussion, but currently, we don't have any concrete plans to implement that program.

I would like to add that we are closely monitoring this situation in the long term. However, given the current economic conditions, we have evaluated some loan deals, but we do not believe the risk-return profile is suitable for us at this time. Nevertheless, we continue to assess the opportunities and receive inquiries, and in the long term, we do intend to take action.

Other questions?

Our next question comes from the line of John Massocca with B. Riley Securities.

So maybe kind of sticking with the variable rent questions from earlier. With the current season that just closed on pistachios, do you have kind of brackets as to what you think the amount remaining to be collected is just given you have some color into the bonus payments? I was kind of curious if there was a range for what more to expect in '26 you were seeing out there.

We are expecting to receive at least $3 million from our directly operated farms. While this amount is not guaranteed, previous year's bonus payments suggest that this year's marketing bonus should be at least equal to last year's. If this holds true, we could see an additional $3 million in revenue in 2026. However, this could change, but current indicators are looking positive for that outcome.

Okay. As I consider your truly vacant assets, not the ones you're currently operating, what is the estimated value of those five properties? Additionally, how quickly could you sell them if you chose to?

I don't have the exact book value or fair value, but if I had to estimate, I would say maybe $50 million. However, for the largest of those three vacant properties, we are close to finalizing agreements that would allow them to generate income again. Nothing is set in stone yet, but we are optimistic that the three largest farms will be removed from the list, hopefully within the first half of this year.

The three largest properties are vacant, and timing plays a significant role in this. We lost a tenant, and trees needed to be removed, which takes time due to their size. A major reason for the vacancies is the necessary cleanup of the farms, including tree removal. However, we are very close to getting those properties back into revenue production.

Okay. As a reminder, what is the crop type on those farms?

They were almonds.

Those three biggest were almonds. Yes.

Switching gears a little bit. As I think about the Series D repayment having been completed, how are you thinking about ATM usage going forward? I mean was the ATM, particularly ATM quarter-to-date really tied to that repayment? Or are you looking to kind of deleverage on a more organic basis?

A significant portion of the ATM usage was related to that redemption specifically. Now that it's completed, we aim to concentrate more on the other preferred securities. Currently, we have the ability to sell ATM at 5% while we could buy back preferred at 7.5%. If we can achieve a 2.5 point spread on transactions like that, it’s a strategy we would view positively and hope to implement.

Okay. And then lastly, on the water, how are you looking at kind of your own water holdings, acquiring further water holdings, just giving, now since I've got a couple of pretty strong seasons in terms of precipitation out West, but just kind of curious if that's impacting your strategy there at all.

Yes, it’s very positive. When there’s a lot of supply, prices decrease. Our decision to purchase water primarily revolves around cost. We consider what we pay, the cost of transporting it, and the expense of storing it for future use during droughts. Recently, we’ve seen some Article 21 water available at prices between $50 and $80 per acre-foot. We seize these opportunities and aim to acquire as much as possible for future needs. Our strategy is entirely cost-driven because it affects our future water expenses for crops. The lower these costs are, the better it is for us.

We have any more questions?

And there are no further questions. And therefore, I'll hand it back over to you.

Well, thank you very much, all of you for listening to this and a little bit disappointed that we're not getting enough questions. We hope you'll mark them down during the year and ask us when it comes up in March or April, whenever we're talking to you again. But thank you all for calling in, and that's the end of this session.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you, and have a great day.