Gladstone Land's (LAND) CEO David Gladstone on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: Gladstone Land (LAND)

Gladstone Land Corporation (NASDAQ:LAND)

Q1 2014 Earnings Conference Call

May 06, 2014 8:30 AM ET


David J. Gladstone – Chairman, President & CEO

Michael B. LiCalsi – Secretary & Internal Counsel

Danielle Jones – CFO & Treasurer


John M. Roberts – Hilliard Lyons

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Brian Hollenden – Sidoti & Co. LLC


Good day, ladies and gentlemen, and welcome to the Gladstone Land Corporation’s First Quarter 2014 Earnings Call. At this time, all participants’ lines are in a listen-only mode. Later, we will be conducting a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s program, Mr. David Gladstone. Mr. Gladstone, you may begin.

David J. Gladstone

All right. Welcome to the conference call for Gladstone Land. This is David Gladstone, and thank you, Andrew, for that nice introduction. Thanks to all of you people who are on the line today, and have called in, we enjoy this time that we all have with shareholders.

Please come visit us if you’re ever in the Washington D.C. area, we are located in a suburb called McLean, Virginia and you have an open invitation to stop by and say hello. You’ll see a great team at work, and there are over 60 members of the team now running these four funds that we have, we have about $1.5 billion in assets across all our companies. Also, some of the people here bring their puppy dogs to work, so we’re very dog friendly environment.

We have a team presentation for you today. First, we are going to begin with Michael LiCalsi, our Internal Counsel and Secretary, he also serves as President of the Administrator and we ask Michael to do this part of it, because I go too fast. So, Michael, take it away.

Michael B. LiCalsi

Good morning, everyone. This report we’re about to give may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements involve certain risks and uncertainties that are based on our current plan, which we believe to be reasonable.

And there are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all of the factors listed under the caption Risk Factors in our company’s Form 10-K and Form 10-Q reports that we filed with the Securities and Exchange Commission. These form 10-Ks and 10-Qs can be found on our website at, and on the SEC’s website at The company undertakes no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

And in our talk today, we will note that we intend to be - elect to be a real estate investment trust or REIT and therefore, we plan to talk about funds from operations or FFO. Since FFO is a non-GAAP accounting term, we need to explain that FFO is defined as net income, excluding the gains and losses from the sale of real estate and any impairment losses, plus depreciation and amortization of real estate assets. The National Association of REITs or NAREIT has endorsed FFO as one of the non-accounting standards that we can use in discussing REITs. Please review our Form 10-Q filed yesterday with the SEC and our financial statements for a detailed description of FFO.

The report from the company’s President and CFO that you’re about to hear is an overview of the company’s operations and performance. And we encourage all listeners to read yesterday’s press release and the Annual Report on Form 10-Q that was filed with the SEC. There is a lot of interesting material in those documents that will help any investor. You can find them all on our website at and on the SEC’s website at

And to stay up to-date on the latest news involving Gladstone Land and our other publicly traded funds, please follow us on Twitter, username gladstonecomps and on Facebook, keywords The Gladstone Companies. And you can go to our general website to see more information about this company and our affiliated publicly traded funds at

I would also like to take this opportunity to mention that we will have our first Annual Meeting of Stockholders in McLean, Virginia this Thursday, May 8, and we’ll invite you all to attend the Annual Meeting. The meeting will be held at the Hilton McLean Tysons Corner, which is located at 7920 Jones Branch Drive, in McLean, Virginia. We hope you all have voted your shares, so that we can get a quorum for the meeting, and if you have not yet voted your shares, would you please go to and vote your shares.

Now, I will turn the presentation back over to David Gladstone.

David J. Gladstone

All right. Thank you, Michael. Before we go into the numbers, let’s update any newcomers to the call, and I will do this for few more sessions, and then we wouldn’t do it anymore, but we began operations in 1997 as a fully-integrated berry and vegetable grower. We were a shipper and marketer, had many other main brand, grocery stores, and wholesalers as our clients. We had about 2,500 employees and we were certainly the largest integrated strawberry operation in the United States.

And we sold in 2004, we sold the agricultural operating business that is the growing and the shipping and all of that to Dole, but we kept the farmland and Dole became our largest tenant and they still are today although they are smaller percentage today than they were back then. Since the sale of our business part and we consist solely now of operating and owning farmland and leasing it to independent and corporate farmers. And since 2004, we’ve been buying up farms and adding to our list of properties at a rather slow pace, but now we’re beginning to move a lot faster.

The farms we own are predominately concentrated in location where farmers are able to grow high value annual crops, such as berries and vegetables. And these are row crops, which are planted and harvested annually and sometimes even more frequently. We also have a small amount of farmland that is farmed for blueberries, which are permanent crops and that the blueberry bushes may last up to 40 years. So typically, blueberry farms are farmed by the same farm fruit farmers that grow other berries and vegetables and they’re also sold in similar customers, such as supermarkets and wholesalers.

So we like the berry and vegetable area and that’s where our concentration is. And we like these blueberry businesses, because some of the varieties can be harvested by machinery and labor is the constant cost in this business, so machinery is a nice thing to have.

Also, we’ve acquired some farm-related properties, such as coolers, which our facility is utilized to cool the produce down before it’s shipped, and we own one box barn on one of our properties, which is used to store and assemble boxes for shipping. And you would be amazed how many boxes are used to ship strawberries and vegetables out of the farm area.

We are also looking at processing plant, packaging buildings, distribution centers, we haven’t done any of those. And investors really should expect the bulk of our assets in the future as they are now to be in farmland that’s leased to farmers to grow food.

We currently own 21 farms. Eight of our farms are in California, six in Florida, four in Michigan, two in Oregon, one is in Arizona. We also own two coolers and one box barn, one of those coolers in Florida and the one cooler and one box barn is in California. There are some other smaller buildings on these farms as well, but not really material to the discussion.

As is customary in agricultural leases we generally intend to enter leases which farmers have terms of two to five years. However, when we lease properties that grow longer term permanent plants, such as blueberry bushes, we anticipate entering into longer-term leases as we did with a couple of the blueberry farms that we acquired last year, which have leases that range from five to 15 years

And we will be required to frequently renew short-term leases as we have on our properties on the expiration of the lease, and we expect that we’ll generally be able to renew these leases with the same farmers. And we believe that this strategy will also permit us to increase the rental rates over time as this is customary in the business and we’ve been successful with the strategy to-date.

When we entered into the longer term leases, we will seek to put provisions in the leases such as escalation clauses that provide for periodic increases that is annual basis usually and, as well as having that periodic increase, we have periodic market resets to the rental rates based on local rental rates, if they have gone up in price, we don’t adjust them down.

And just as a footnote on our leasing practices, we generally prefer to keep the same tenants on the property for as long as possible. Farmers really enjoy working the same farm over and over again, so that’s our goal as well as not to throw the farmers off the property.

Our shares of common stock began trading in January 2013 on NASDAQ under the symbol LAND and we raised the total net proceeds of $51 million in the offering, and we deployed about $38 million of those proceeds in the acquisition of nine new farms as in past years. And this past year and on capital improvements and only a small amount was in capital improvements on the existing properties.

And most of the remainder of these proceeds were used to make distributions to our stockholders in order to pay out prior years, what’s known as earnings and profits for prior years. We have to do that, so we’ll be able to qualify as a real estate investment trust during the tax year that ended December 31, 2013. And we don’t make that election until we file a tax return and that probably won’t be filed until August or September.

Just another foot note on the talk, we currently have no plans to make mortgage loans on the farms, and we may do some if there is an extraordinary opportunity. But you shouldn’t expect to see any mortgages put out by us. Over the last year or so, we’ve increased our list of farms that we’re trying to buy. We have a very strong list today. We didn’t acquire any farms during the quarter and that was due to the inability to close our mortgage agreement with our lender, more on that a little bit later.

Our existing portfolio of farms continues to be 100% leased and all are paying as agreed. We had two leases that were set to expire in 2014, one lease on our West Beach Farms in Watsonville, California was extended at an increase in rent of about 21%, I think this [has been factored] [ph] into value of farm, next time we do a valuation of that farm property. The other leases expiring at the end of 2014 is on our San Andreas Farm also in Watsonville, California. We’re far along in the negotiation as to renew this lease and given that it’s in Watsonville, California, farms are in that region that have gone up in price. So we expect to be able to renew this lease at a higher rate as well. There is no guarantee, of course, that we are going to meet that goal, but that’s what we are shooting for.

Our list of possible acquisitions of farms remains strong. We expect to close on more properties in the upcoming months. At this point in time, we have three properties under signed purchase and sale agreement that are currently in due diligence phase, I think one of them is near closing. We are moving towards completion of all of these transactions.

We also have other properties under letter of intent. Our marketing activity has gained significant traction towards and that will allow us to buy more farms located throughout the United States. We don’t buy any foreign farms, we’re only in the United States.

Additionally, in order to speed up this process, we hired a Managing Director of Marketing and Acquisitions in California to work on contracts to find farms, work on our contacts to find farms in the Western growing area, next we will be looking for someone in Florida that can handle the Southeastern region.

Just as a note on borrowing here, because that’s something that held us up during the first quarter. We’ve been working with our lender to increase our line of credit to expand on mortgage line, and we are very close to the finish line here. Yesterday, I signed what looked like several pounds of legal documents that I think went out yesterday. And so, the new line is for $125 million, if it closes obviously the terms are very similar to the existing line and loan.

So we are hopeful that we can finalize those documents and really the exhibits to the documents are the only thing left out now; hope to have an announcement on this in the upcoming weeks.

We’ve also begun to talk with other potential lenders as you can imagine, there are other lenders in the business, it’s not that we don’t like our existing lenders, it’s just that it’s better to have diversification of lenders when you’re in any business of borrowing.

Now, I would like to talk about my favorite part of the call and that’s net asset value. Most real estate investment trust don’t update the value of their properties because it’s expensive. However, we intend to update the valuation of our properties on at least an annual basis through either an independent or third-party appraisal or internal valuation. So our idea is that we will change these maybe through our valuation that we use internally or from an external valuation source, and we intend to report these updated valuations each of the quarter we report to you and to the SEC.

For the quarter ending March 31, 2014, all of our properties were valued based on appraisals, so we are starting out with appraisals on all of the properties that are less than – all of these appraisals are less than one-year old except those properties that we purchased within the last 12 months and there we just used the purchase price.

The schedule of valuations on a quarterly report form 10-Q is what we used that was filed yesterday with a lot of details in there about this valuation and how we do it. And when we substitute those values for carrying values of the properties in our financial statements for March 31, we come up with a new net worth number that moves from $48 million to $92 million.

Now, please remember that we just purchased some of these properties. So new appraisals really wouldn’t change the value, we don’t think. So as a result don’t expect big jumps in the valuations in the short-term period, but over the long-term there should be good movement.

Using these values that we had on the appraisals for the quarter ending March 31, it resulted in a new net worth number per share and our net asset value per share at March 31, 2014, is now $14.3 per share, which is my estimation of big jump from where we were at December 31, which was $13.51 per share. That’s a 3.85% increase in three months annualized [inaudible] guarantee of that’s being true annually, but that’s about 15.4% increase, don’t expect this every quarter, there is no way we can forecast where it will continue and be as the quarters go out there.

And of course, we paid out $0.09 per share in dividends for the quarter, that’s $0.36 per share annualized basis, or 2.5% yield based on the stock price at March 31, 2014, we will have to see how that works. And I think if now we get our loan closed, we will be able to put a lot more deals on the books and make some more money for shareholders.

Now, some math to put in the timeframe that [Unclear] same frame of mind that we look at it from the $15 per share that investors paid on the IPO and investor should have deducted from it, but payout of earnings and profits from prior years of $1.47, that is we gave back $1.47 on the earnings that we had in prior years that had been used to buy properties. That was returned to stockholders from the distributions of prior year’s earnings and profit leading to cost basis. If you think about it the way I do at $13.53 and that compares favorably with a net asset value per share of $14.03 today especially after the cost of the IPO, which was very expensive.

So there has been no decline in the net asset value per share for those who purchased on the IPO the way I think about it. Our stock is currently trading at $12.55, which is below our NAV, thus we’re hopeful our stock price will rise this year, and if you buy stock today, you are getting a discount from our estimated net value of the assets of about a 11.5%, so you’re buying $14.03 of assets for $12.55.

This net asset value per share is the mark that we gauge our progress by as we move forward. And we’re judging this as we see or don’t see appreciation on the numbers, and this is the metric that Berkshire Hathaway uses, we like to use it the same, just show you that the appreciation continues to move forward.

So let’s see if we can grow faster than the Berkshire Hathaway people and remember we also pay a dividend that Berkshire does not pay.

I think all of those holders who purchased on the IPO should be very happy, and we expect in the coming years to be much better. We have leases that are increasing [inaudible] amounts the one that we are working on for San Andreas Road soon, so we’ll see what that comes out at.

So I look at this REIT as a way to hedge against inflation and food prices and other inflation items, and I think it’s better hedged than buying gold. That’s really enough on the business side of the discussion, so now I will turn it over to our Chief Financial Officer and Treasurer, Danielle Jones, who will report on the financial results.

Danielle Jones

Thanks, Dave, and good morning, everybody. I will start by discussing our status of converting to a REIT. As discussed in the last call, we completed all significant actions necessary to elect to convert to a REIT during 2013, including the distribution of all accumulated earnings and profits from prior years.

Thus management believes we qualify and intend to elect to be taxed as a REIT for federal tax purposes beginning with the year ended December 31, 2013. This election will be made when we file our 2013 tax return this summer.

Management intends to be organized and to operate in the manner that will allow us to continue to be qualified [in tax] [ph] as a REIT. As long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax, if we distribute at least 90% of our taxable income to our stockholders.

And now I’ll discuss the operating results beginning with the balance sheet. While we did not acquire any farms during the current quarter, our pipeline of deals remains strong and our portfolio of properties and tenants are much more diversified than they were a year ago. Our 21 farms are located in five states and while the majority of our farms and rental operations remain concentrated in California, our reliance of income from these farms continues to decrease.

Over 75% of our total acreage and 87% of our revenues came from California farms a year ago. However, these figures are down to 24% and 68% as of March 31, 2014. We’re also more diversified with regard to our crop [inaudible] as we now own several farms with permanent crops and have also expanded into the green market.

And our tenant base continues to expand as we add additional growers on our property. We intend to continue to further diversify our portfolio by acquiring additional farms in [inaudible].

During the first quarter, our total assets remained relatively flat at $91.6 million, because we didn’t acquire any new farms. So we expect to grow our asset base during the remainder of 2014.

Switching to mortgages, we have a mortgage loan agreement with MetLife for $45.2 million that matures in January 2026. The note currently accrues interest at a rate of 3.5% per year and the interest rate is subject to adjustment in January 2017. As of March 31, the facility was fully drawn with $41.3 million outstanding.

As David mentioned, we are currently in discussions with our lenders to increase the commitment under this loan. We also have $4.8 million line of credit with MetLife that matures in April 2017. And as of March 31, we had $100,000 outstanding on the line, which is the minimum balance required at an interest rate of 3.25%. We are also currently in talks to expand and extend this line of credit.

Regarding upcoming principal payments on our long-term debt commitment, we made $1.7 million normal amortization payment on our mortgage loan in January and we have no other payments due on this facility for the remainder of 2014.

Turning to operating results, pre-tax FFO available to common stockholders increased from the prior quarter to $316,000. While our operating revenues increased by 27% as a result of a full quarter of earnings on the seven farms we acquired during the fourth quarter, we saw similar increase in our operating expenses during the quarter.

The increase in operating expenses was primarily due to additional depreciation and amortization expense recorded on our Q4 [inaudible] and increasing the management fee paid to our advisor and additional stockholder related expenses incurred relating to the annual report and proxy.

The increase in the management fee was expected. As per our management agreement, the fee was limited to 1% of stockholders’ equity, less any uninvested proceeds from the IPO for 2013. However, beginning in 2014, the fee increased to 2% of stockholders’ equity, and we are no longer deducting any uninvested proceed.

During the current quarter, we also recorded additional professional fees related to our REIT conversion and work surrounding the valuations of our Q4 acquisitions. We anticipate continued growth in 2014 as we expect to deploy the remaining cash we have on hand as well as any cash we may have received as a result of obtaining additional financing.

Now, I’ll turn the program back over to David.

David J. Gladstone

All right. That was a good report, Danielle. We just finished our first-year as a public company at the end of January and - end of that year, and it was very expensive to make that transition. Now that we’re on to our second-year, it should be less expensive and a lot easier for all of us. And once we close the new mortgage financing, we expect to be operating [inaudible].

Main point of this report is to tell you that we are executing the plan. We used our proceeds from the IPO to acquire nine new properties for about $38 million during 2013. And we also have a nice list of potential properties that we are interested in acquiring through that list and we hope to be able grow the farm portfolio significantly for the rest of 2014. Since we’ve used all the money from the IPO and we’re now using money that we have from our mortgage line and we also have available – and we also have availability to borrow some under our line of credit when the new line closes, and there is - we’ve got to close this new relationship.

As mentioned, we are currently finalizing the deal with our lender to expand the line of credit and the mortgage line, and once that happens, I will be able to combine quite a few more farms and we hope to finish that in the upcoming weeks. With the increase in portfolio of farms comes greater diversification and that’s a protection for investors. We all expect to have better earnings in the quarter ending June 30.

We anticipate that many of the farms we purchase will be acquired from farmers or agricultural companies, or that an independent farmer will [sign up] [ph] initially lease the farm for us. This is our mode of operation. We find some farms that are turned around and leased out quickly and we find other farms that are always under lease.

These type of transactions provide the tenant with alternative to financing sources such as borrowing or mortgaging the real estate or selling securities or selling part of their farms. So as a result this is just another way for them to grow their business. We also expect that many other farms that we acquired will be purchased from farm owners that don’t farm the property, but rather leased the property to farmers in situation such as these, we intend to put our lease in place prior to or simultaneously with acquiring the farm, if that’s not possible, we do it soon afterward as the lease on the property comes due.

We believe that an investment in farmland has performed extremely well in the last 10 years compared with other asset classes and farmland has provided investors with a safe haven during the recent turbulence in the financial marketplace. This is evident by the increasing prices of fruits and vegetables that we are all seeing in the grocery store, which allows us to increase the cost of farmland to the farmer. Most of all, farmland has historically been an excellent hedge against inflation.

And our business thesis is very straight forward. First of all, there are more people in the world every year, and second, people have to eat. So farmers need farmland to grow the food. Farmland is being converted to non-farm uses, so there is less farmland to grow food. There is no replenishment of farmland especially in the United State to become [inaudible] and so each farm then becomes more valuable every year. And it’s just as simple as that math, and it’s gone on for the last 10 years, probably for 25 or 30 years, but it’s just that simple.

Distributions in April of 2014, the Board voted to maintain the monthly distribution of $0.03 per common share for each of the month of April, May and June, and as of today we’ve made 15 consecutive monthly distributions to shareholders or a total payout of $1.85 per share since the IPO. There is a lot of confusion about the payout, and I apologize for that, I try to be clear. The dividend has been $0.03 per share since the beginning. What we were also paying out the past earnings of the company that we had to do to become a REIT that was about $0.09.

And although I thought I said that and that there were two types of payouts in all of the calls that we talked to if we look at that now and maybe we should have been much more clear, in that we were paying out two streams of income to shareholders. We stopped paying the amount of the past earnings, we had to finish that up by December 31, 2013, and we didn’t really cut the dividend, but we did stop that portion of the payout.

So we didn’t cut the dividend that some people have said, but rather finished paying out the past profit so we could become a real estate investment trust. With a stock price now at around $12.55, the distribution yield on the stock is about 2.8%, the entire REIT index is trading at about 3.5%. So in terms of yield versus other REITs out there the dividend – on the dividend yield and except all the other REITs I think we’re close, and I think over the next couple of years, we’ll certainly catch up with them and pass them.

And I’m hopeful that we can increase the dividend in the not too distant future, although I don’t have any information for you as to when we might be able to do that. But please remember that purchasing this stock is a long-term investment in farmland. It is in part an asset investment just like gold, but it’s a yielding asset and it is an active asset unlike gold that is a fully passive asset.

We expect inflation of food to be strong and the value of farmland that we own to increase. Certainly, there is no guarantees that this is going to happen, but it is what we expect to happen. So consider buying farmland in place of gold and unlike gold farmland is an active asset that is used to feed people and it generate [inaudible].

[We’ll vote] [ph] early in July during our regular scheduled quarterly Board meeting on the declaration of the monthly distributions for July, August and September. But please note that our July Board meeting is now scheduled for mid-July more towards the middle of July. So this time versus the early July that we normally meet in thus we’ll be announcing the dividend sort of the second week in July.

Now, we will have some questions from our loyal shareholders and analysts who follow our wonderful company. Would the operator please come on and help the listeners, so they can ask some questions.

Questions-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from the line of John Roberts from Hilliard Lyons. Your line is open.

John M. Roberts – Hilliard Lyons

Good morning, David.

David J. Gladstone

Good morning.

John M. Roberts – Hilliard Lyons

First, you did say three properties on the due diligence, what’s size are you – what size of those?

David J. Gladstone

I’m just trying to remember, what’s the number? About $11.2 million for those three in diligence - letter of interest, intent, I’m sorry, we had two of those, $3.5 million and then – so we’ve had letters of intent that have been signed, and then we have indications of interest, where we are trying to close on about $55 million. And there is about $860 million of [inaudible] what everybody refers to as a pipeline, but is really just a list of people that have contacted us and have something for sale.

John M. Roberts – Hilliard Lyons

Okay. Been hearing a little bit about weakening of farm land prices in general, article on The Wall Street Journal a few months back talking about that. Have you seen any weakness in pricing? And if so how are you expecting that to impact going forward?

David J. Gladstone

A large number of farms that are sold, which we don’t even look at are not counted in this are farms that do grain, hard grain, such as corn, wheat, soy. We are not in that marketplace today, some day we may get into that marketplace. There has been a weakening of prices there simply because grain prices have gone down, for example, corn has gone from about 8.50 a bushel to 4.60 a bushel, I think it is today.

And so, as a result, we can’t make as much money growing corn and as a result prices of land went down, some not much, but they went down a little bit, there was some weakening.

In the areas that we’re in which are fruits and vegetables we’ve seen none. And in fact I have seen prices in Oxnard and Watsonville, Santa Maria, which is the big three growing areas in California go up. Florida has been a little bit weaker, but in terms of growth rate, but we haven’t seen any big problems in terms of weakness in the areas that we are in.

John M. Roberts – Hilliard Lyons

Great, thanks David.

David J. Gladstone

Okay. Other questions please?


Thank you. Our next question comes from the line of Dan Donlan from Ladenburg Thalmann. Your line is open.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Thank you and good morning.

David J. Gladstone

Good morning, Dan.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

David, I’d like your version of the forward-looking statements so much better than the general counsel’s?

David J. Gladstone

We won’t fire Michael, because he is really good at other things as well other than reading the statements, but thank you for that compliment.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

You’re certainly much quicker. David, first question would be on kind of the asset management fee and I know it moved up from 1% to 2%. We are just curious, if you could kind of talk about that it was well documented in your prospectus, but given how much lower the yields are on your farm properties, call it anywhere from 5% to 5.25% versus let’s say the other REIT that you guys have where going in yields can be as much as 9% to 10%, we are just curious, why you thought it was reasonable to bump that up after just one year of operations?

David J. Gladstone

You know the truth Dan is, I need the money to hire more people, we need to get busier than we are. We got stymied and I didn’t hire anybody for Florida primarily because I wasn’t sure we were going to get our MetLife loan in place, they assured us, but I have learned the hard way to believe it when the check clears as they say. So, I really need the money in order hire people, so that’s the goal now is to beef up the management team.

And here I’m talking about not people here in the central office, where we all are right now, but people like the person that we have on the West Coast who is in the middle of the farm, he actually lives in Oxnard and he is out there with the farmers and he has been a farmer. We are also looking at someone like that in the Florida space. And then as time goes on, we will have to add more people along that way, but we sort of not made any money certainly during the first year and in terms of the management and company and I really can’t ask the other funds to subsidize the growth of management talent in this fund.

So, we raised a little back to the 2%, which is where most people are in this business. And so we will have to see; I have considered that with the Board at the last meeting of cutting that back. So, we’ll have to take a look at that again at the next Board meeting in July.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Okay, yes, completely understood given the amount of G&A that you have, which isn’t a lot at all relative to the rents, it seems like you really need to get bigger quickly to move in yield here – which it sounds like you’re definitely trying to deal. But as far as what you have in negotiation with the lenders, how much would you anticipate this might increase your debt capacity by?

David J. Gladstone

Clearly saying about $70 million of buying power with the new line. $68 million to $70 million depending on how close you want to get to using every nickel on the line?

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Right, right. Understood.

David J. Gladstone

So we have some padding built into that so that if we get - if we do that amount of money we’ll still have money to do whatever we need to do internally.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Okay. And then as far as how should we look at potential deals with OP units, it’s something you talked about at the IPO quite a bit. Haven’t seen any quite yet, but it would seem like another way to increase the size of your company and that you may or may not necessarily need to use any debt for?

David J. Gladstone

Yes, we want to use that and we’ve had inquiries and talks with people about it. Unfortunately, I think we are little bit small in order to convince people that we are, I don’t know, a real company, I guess is the way I’m thinking about it there, we’re still so small. But I remember, I was on the Board of Capital Automotive REIT and it wasn’t until they were around $200 million, $300 million in assets before they started being able to use, UPREIT units to OP units to make those acquisitions.

We do have one family that I know very well that’s very interested in OP units and Bill Reiman, our man on the West Coast has a family that’s very interested in OP units. We’ll just have to see how that comes out, but you’re right, I would love to do two or three of those with some very large farmers and move up the equity base that we have in the company.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Okay. And then as far as the new lease you executed in West Beach, it sounds like that was a new tenant not necessarily renewals. Was just curious, how that transpired, maybe who the new tenant is and why the decision to go with the nine year lease versus maybe a shorter term lease of three years or four years?

David J. Gladstone

We don’t mind doing that especially when the tenant considers this to be a key piece of property for themselves and wants to know they’re going to be able to lease it for the long-term. And what we did in that case is that every three years we have a mark-to-market on the term, on the amount of the lease that is the lease rent. And so it will go up just as if we had three year leases and re-negotiated every time. What it does and we do this - we’ve done it with several other very large tenants, what it does is it gives them the assurance that if they’re willing to pay market price for the farms they can stay on the farm we’ve done this several times. And the fact that first lease with Dole was a 10-year lease if you remember that, that was in the prospectus.

And our leases with the larger companies they want to know that they’re going to get the land and keep it. Even though they know that may have to pay a higher price every two or three years when we mark-to-market. And remember mark-to-market means it can go up, but not go down. So, the new lease was with a new tenant, much larger tenant, a tenant that has what, one of the pieces of problems in strawberry growing is labor. And this new tenant has their own labor pool that they try to keep year round. And so as a result much more certainty that they will have labor to make sure that they can harvest the crops. As you may remember we had about 2,500 Mexican Americans that were our workers for our farm before we sold it to Dole they still have many of those people.

And we were paying at the time we sold it about $10.50 an hour and our workers were with us for at least nine months in many cases. So, at the time the minimum wage was about $6.50. So these were not underpaid and we paid their health insurance, their life insurance and dental insurance; we pay all of that free of them. Labor is becoming a very critical part of all the farming operations and one thing that would change your mind a lot about going into the rice or the wheat or the corn business, labor is not necessary there, because you have these big combines and machinery they do almost everything.

So, there are people working very hard to figure out how to pick strawberries and blueberries and other items there is a new machine out now that will pick cabbage without having - and it runs down the road and picks the cabbage heads up and puts them in a box. So, people are working on mechanical ways of harvesting, but it’s still very labor intensive for almost all parts of that. So, we are very attuned to any new leases that we do with people who have some kind of guarantee that they are going to have their labor pool there for the harvesting.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Understood, so the 20% increase in GAAP rents, is there anyway that can actually be more, if we would just say the farm value rises or is that otherwise just fixed bumps you said market-to-market, but I am assuming that they’re – are they fixed or is there any variability in that?

David J. Gladstone

There is actually two parts to it, one part is fixed and I [think] what the percentage is, but it would be much like a commercial lease, where you have 2% or 3% bumps every year. And then there is a second part that at the end of two years in going into the third year. You’ll do some kind of market survey, they may do their survey, we will do ours. We presented to each other looking and for the fourth year, is it a three year bump or two year bump? Three years. So at the end of somewhere towards the end of the third year you would have a negotiation that said this we all agree on this. And therefore beginning the fourth year, it might move up by 20% depending on what the market is doing. So you’ve got the best of both worlds you’ve got your fixed rate movement up and then you’ve got a market rate adjustment at the end of the third year and at the end of the sixth year.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Okay. I guess therefore you can probably for GAAP purposes you can only model in the fixed bumps, she can actually model in with the variability to be?

David J. Gladstone

That’s exactly right you are going to do straight line rents and remember when it bumps up, unless just assume that at the end of year three it was up by 20% that new number is also going to start going up by 3% in year six, seven and eight. So you’re going to see additions on top of that. I am astounded at how fast the market place is moving in Watsonville and in Oxnard, we are seeing. If you remember, we have a large farm there that’s valued at about 85,000 per acre, I think it next year that will probably come out at 100,000 an acre.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

That’s pretty significant growth. Okay, David, I very much appreciate the answers.

David J. Gladstone

Okay, well, thank you. Next question please.


Thank you. Our next question comes from the line of Brian Hollenden with Sidoti. Your line is open.

Brian Hollenden – Sidoti & Co. LLC

Good morning, and thanks for taking my call.

David J. Gladstone

Okay, Brain what’s your question?

Brian Hollenden – Sidoti & Company, LLC

Sure, in the current quarter looking at the cash flow statement, you had a $50,000 deposit down on a property that was returns. Can you just give us a little flavor what happened with that acquisition why would you not have purchased that property?

David J. Gladstone

I’m trying to remember what was that again?

Brian Hollenden – Sidoti & Company, LLC


David J. Gladstone

Yes. And so we sold that to with the (indiscernible). We had our property down in Florida and we were going to buy it. And there were some questions about the ability to get water there and it was development deal as well. And while we have our great farmer there, we decided to let them by the farm and so we’ve sign the contract with them. We’ve got our 50,000 back from the farmer. The farmer is going to buy it, he is going to develop it. And then once it’s developed, and everything is in place, he is going to sell it to us or at least that’s what you said. He has two farms that he is doing that with, so we’re waiting for those to be completed and then we will buy from him and lease it back in.

Brian Hollenden – Sidoti & Company, LLC

Okay, great and then if I could just ask you one more question with FFO at about $0.05 this quarter and you know the dividend pay out at $0.09, how and when, do you get to a place where FFO can cover that dividend?

David J. Gladstone

Hard to guess, it depends on closings obviously, we did closings in the first quarter because and even though we projected that we were going to close, we actually just shut down until we could get our line of credit in place. As I mentioned before, I think we are 99% of the way there, no guarantees in this life, but we are waiting for the lender to sign off on the documents that we sent them signed. And I think that’s all done, we are just waiting for few exhibits to come. My hope is that either this week, next week we can close and make an announcement and then we can turn on this [picket]. We’ve got enough money to close the deals that we have and this projection that I gave you of the deals, but we wouldn’t be able to keep growing. And so I am one of those people that won’t make commitments unless I know that I have the money.

So we are waiting here disclosed and then we can go out and hopefully tackle some of these – that are sitting on the sidelines sort of waiting for us and get those done. And that will jackup the return because will be borrowing at 3.5% and hopefully making 5% and all of that a big chunk of it obviously will drop to the bottom line. I would expect us to be very close to the $0.09 per quarter, what do you think? Just looking at…

Brian Hollenden – Sidoti & Company, LLC

In the European?

David J. Gladstone

By the time we are at the end of the year we should be there. So, we are going to be a little bit slow getting there unless had a lot of big deals in the pipeline. If we can hit some of those it will be wonderful, but we have to be conservative and not lead you on to think that it is automatic, but I think we are going to get there relatively quick.

Brian Hollenden – Sidoti & Company, LLC

Okay, great thank you very much.

David J. Gladstone

Other questions?


Thank you. Our next question comes from the line of – looks like we have a follow-up from Dan Donlan from Ladenburg Thalmann. Your line is open.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Yes. David just (inaudible) on the acquisitions, I know this is just farmland and not necessarily net lease real state although it is a triple net lease that you again trying to do with farmers, but we are just curious if you comment on pricing for assets between $3 million to $10 million and may be assets that are over $50 million, is there a premium being paid right now for forms of large size relative to smaller farms or any commentary that would be helpful?

David J. Gladstone

Sure. There was one in Waltsonville fairly large attracted a lot of attention from probably half a dozen pension funds and insurance companies. We got behind one of the tenants, and said we will buy if you will go to market and bid , because you’re already farming this stuff . Unfortunately for us, we let them drive the cart and they bid low someone bid higher, so they lost it and that – we would have bid probably around $55,000 an acre. And it went for about $52,000, we believe if not closed yet.

So, yes, the larger transactions we’ll bring in the pension funds and insurance companies who are huge buyers of farmland. I think, I’m trying to remember the amount TIAA-CREF announced at the last convention, but it’s a huge number that they have in their portfolio, that’s all over the world. They only come to bid on the larger transactions now for our purpose is that one that I mentioned in Watsonville that would have been right out of 4.5% cap rate. So probably half a point off the norm, which is about a 5% than our cap rate.

So that sort of gives you an indication that it’s the big, very nice well placed farm you will get big buyers. But remember most of the big buyers are doing really large transactions in the Midwest. And if we go into the Midwest, we are going to be competing with at least for grain land would be competing with the big pension funds, the big insurance companies and the farmers. The farmers will bid, if it’s a next door farm they will bid it 2% or 3% cap rate, you just can’t beat the local farmer, but if it is something that is a little it off the norm for our farmer next door then you’ll actually get something in the 4% to 5% range for cap rates in farms, but the smaller farms we do get a better transaction in terms of cap rate. And quite frankly most of the farms in the California and Florida area are smaller transactions.

We have seen some large transactions in Florida, which were almost all developed net type deals that is they were citrus or they were cattle ranches and people were buying them with either in mind that they were going to develop them into houses over the next 10 years or they were buying them as we mentioned in the one farm, where the farmer is going to convert some open property that hasn’t been farm before into farming property and there is a development time lag of a year or two in which there is really no income during that period of time.

So, yes, for bigger conversions and I expect to see some of these in the future in our portfolio, we are just not big enough to take on something today that wouldn’t pay us anything for a year, as it is turned into farmland. So from our perspective, we look at the hundreds of acres in Florida for example that have citrus on it and Citrus is dying in Florida due to the greening. They have not found anything to stop it. So over time some of that will be converted into farming of fruits and vegetables unlikely for us to do anything in that in the near turn.

Dan P. Donlan – Ladenburg Thalmann & Co., Inc.

Okay, thank you David

David J. Gladstone

Sure, other questions please?


Thank you (Operator Instructions) And I’m seeing no further questions in the queue at this time.

David J. Gladstone

Okay, thank you all for calling in and keep your eye on net asset value, this is going to be an appreciation play more than an income play. And we will see you all next quarter.


Ladies and gentlemen thank you for participating in today’s conference. This now concludes the program and you may all disconnect. Everyone have a great day.

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