Gladstone Land's (LAND) CEO David Gladstone on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Gladstone Land (LAND)

Gladstone Land Corporation (NASDAQ:LAND)

Q2 2014 Earnings Conference Call

August 5, 2014 8:30 am ET

Executives

David J. Gladstone - Chairman, CEO and President

Michael LiCalsi - Internal Counsel and Secretary

Lewis Parrish - CFO

Analysts

Daniel Donlan - Ladenberg Thalman

Brian Hollenden - Sidoti & Company

Operator

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

I would now like to turn the call over to David Gladstone, Chairman and CEO. You may begin.

David J. Gladstone

Okay, thank you so much and welcome to the conference call for Gladstone Land. This is David Gladstone and I appreciate the operator's nice introduction. Thanks to all of you people that are calling in on this line and we really enjoy this time that we have with shareholders and wish we had more of these calls.

And please if you're ever in this area, over the Washington D.C. area, we are located in a suburb called McLean, Virginia, just outside of Washington D.C. and you have an open invitation to stop in and see us if you're in this area. You'll see a lot of great people here, about 60 members now, and we manage about $1.5 billion in assets. Also, some of the people bring their dogs to work, so we’re very dog friendly environment. So you might see a few puppies when you come to see us here.

We'll begin with Michael LiCalsi. He's our General Counsel and Secretary, also serves as President of our Administrator and he has some important information for all of you listening.

Michael LiCalsi

Good morning, everyone. This report that 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.

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 items listed under the caption Risk Factors in our Company’s Form 10-K and 10-Q reports that we file with the SEC. These reports can be found on our Web-site at www.gladstoneland.com and on the SEC’s Web-site at www.sec.gov. 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 REIT status, to be elect to be a Real Estate Investment Trust, 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 discussion of REITs. Please review our Form 10-Q filed yesterday with the SEC and our financial statements for a detailed description of FFO.

And we also plan to discuss core FFO which we define as FFO adjusted for property acquisition cost and certain other one-time charges. We believe this is a better indicator of the operating results of our portfolio and allows comparability of period over period performance.

To stay up-to-date on the latest news involving Gladstone Land and our other public funds, please follow us on Twitter, username GladstoneComps; and on Facebook, keywords The Gladstone Companies. You can go to our general Web-site to see more information about this Company and our affiliated publicly traded funds at www.gladstone.com.

The report from the Company’s President and CFO that you are 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 yesterday with the SEC. There is a lot of good material in the documents that will help any investor and you can find them all at our Web-site, www.gladstoneland.com and on the SEC’s Web-site www.sec.gov.

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

David J. Gladstone

Okay, thank you, Michael. Before we go into the numbers, let me update newcomers on the call about the history. We began operations in 1997 as a fully integrated berry and vegetable grower, shipper, marketer. We had about 2,500 employees. We were the largest integrated strawberry operator in the United States.

In 2004, we sold the agricultural operating business to Dole but kept the farmland. Dole became our largest tenant, still is today, but much smaller percentage than it was back then. Since then our business has consisted solely of owning farmland and leasing it to independent and corporate farmers.

The farms we own are predominantly concentrated in locations where farmers are able to grow high-value annual crops such as berries and vegetables. These are row crops which are planted and harvested annually or sometimes more frequently. We also have some farmland that's farm for blueberries which are permanent crops and the blueberry bushes may last for up to four years.

Typically blueberries are farmed by many of the same fruit farmers who grow berries and vegetables and they are also sold to similar customers such as supermarkets and wholesalers. We like blueberry business because there is a variety of the blueberries that are harvested by machinery, and as all of you know labor is one of the increasing costs in the farming business.

Also we have acquired some farm related properties, not many of them, such as coolers, coolers are used to cool the produce and all the berries whatever before they are shipped, and then we have one box barn that houses thousands of boxes that are needed for shipping. We also are looking at other things like processing plant, packaging buildings, some distribution centers, but those really aren't the highlight here. Investors should expect the bulk of our assets to be in farmland that are leased to farmers to grow food.

After acquiring two more farms in California the other week, we now own 28 farms, 11 of them in California, eight in Florida, four in Michigan, four in Oregon, and one in Arizona. We also have two coolers and one box barn, both of those, all three of those are on farms that we purchased. And there are some other smaller buildings on the farms as well but most of the dollars have been spent on actual farmland.

As is customary in the agricultural leases, we generally tend to enter into leases that have terms of two to five years. However when we lease properties that grow long-term crops, like blueberries, we anticipate entering into long-term leases, like we did in the blueberry farms that we acquired over the past six months which have leases that are anywhere from five or more years and we expect to renew those as well.

We will be required to frequently renew short-term leases that we have on the properties upon the expiration of the leases. We expect that we'll generally be able to renew these leases with the same farmers. We believe this strategy will also permit us to increase our rental rates on a frequent basis. We have been successful with this strategy to-date, as evidenced by our three most recent lease renewals which all were able to increase by an average rate of about 21%. These higher rental rates will begin much later in the year next year. So they won't hit the revenue line for a few months or maybe even six months away.

When we enter into the long-term leases, we seek to place provisions in the leases such as escalation clauses. These are fairly common in the rental business, 2% to 3%. These are the fixed increases in the rent. But we also like to put in our longer-term leases periodic market resets, that is we are able to go out and reset the market rent based on whatever is being paid by local farmers in that area.

Just as a footnote though, our leasing practice, we generally prefer to keep the same tenant on the property for as long as possible. They know the properties, so it's always best to keep those farmers in the same place.

Our shares of common stock began trading in January 2013 on NASDAQ under the trading symbol LAND and we raised total proceeds of about $53 million in that offering. Since that time, we've invested about $64 million in acquisitions of 16 farms and a small amount of capital gone into capital improvement.

We've also distributed about $11 million to our stockholders during this time, most of which was payout of prior year earnings and profits, that is all the earnings and profits to the date that we went public were paid out, and this will permit us to qualify as a real estate investment trust for the tax year ending 2013. We haven't really filed our tax return for 2013, so we can't check the box until we get that ready and file it.

And just as another footnote to our talk, we currently have no plans to make mortgage loans on the farms, but may do so if the right opportunity comes along that might lead us to an acquisition of that farm at some point in time.

Over the last year or so, we've increased our list of farms that we're trying to buy and our backlog today, that is on farm acquisitions, is now the strongest point in history. We'll talk about our backlog a bit later but first I want to go over some activities that happened during the quarter just ended.

During the quarter, we acquired five new farms, two blueberry farms in Oregon, one strawberry farm in California and two more strawberry farms in Florida. We purchased these farms for an aggregate of $11.2 million, and the overall weighted average cap rate of these deals was about 5.3%, which is right in line with our target rate today. All of the properties have good water on site and the leases are all with strong tenants we believe and their remaining terms range between 2 and 10 years on those leases that we assumed or bid at the time of the acquisition.

Subsequent to the quarter end, as you saw in the press releases, we acquired two more farms in California. One farm is a berry farm, a strawberry farm, and it's in Oxnard, California, and one is a vegetable farm in Arvin, California, and this is the first time that we have moved over in the Valley in California. These were purchased for an aggregate price of $12.7 million and when combined they provide a weighted average cap rate of about 4.8% for these last two that we bought. These properties are in the lease agreement with we think good tenants for a term of 3 to 10 years.

During the quarter, we also extended two leases that were set to expire in 2014 at an increased rate of about 31%. These increased rents will begin coming into the Company I think it's in January 2015. As we began 2014, we had two leases that were due to expire and we extended both of them for an average increase of about 26%, each with no downtime of course. And this is just typical of the business, they tend to roll over like that. This really demonstrates the strong demand we see for farmland not only in California and Florida but really all over the United States.

Now we have one lease expiring in 2015 on Dalton Lane in Watsonville, California. This lease comes up in October of 2015, and while we haven't begun negotiations, we think the tenant there is going renew and we expect to be able to release the property to the same tenant. Prior to expiration, we expect the rent to go up. All-in-all, the portfolio of farms continues to be 100% leased and all the tenants are paying as agreed.

Our marketing activities have been gaining significant traction and our list of possible acquisitions, which we call our backlog, is growing very nicely. At this point in time we have two properties worth about $21 million on the signed purchase agreement. These are purchase and sale agreements that we signed that give us a due diligence period and we're in that due diligence phase with those now, and we're moving towards completion on these two. I hope we get those done by the end of the quarter, no guarantee but we are working on them diligently.

We also have about $63 million worth of farms under signed letter of intent. Those will take a while before they go on the books, if at all. Some of these will fall out of our backlog as we perform our due diligence process on them before we sign the purchase and sale agreement. We are expecting to be very active throughout the rest of the year. For example, we're even going to one of the auctions at the end of the month. We don't usually do that but we're going to see how that works out at this auction in August.

Additionally, we have a Managing Director of Marketing and Acquisitions in California. He works with all the contacts we have and he has out there in the Western growing area. Next we'd be looking for someone in Florida to handle the Southeast region, and we would love to find a good person in the Midwest to find some good vegetable farms like sweet corn and green beans, that would be a good acquisition for us.

As you may have already heard through the press release or other things, we have a new credit facility with MetLife that increased our overall commitment from them. We were at $50 million, we're now up to $125 million. This new agreement was executed to increase the maturity date of the facility and reduce the interest rate on some of the borrowings. It was a long closing process and really slowed us down in the spring. MetLife has been a great lender though for us and we're very pleased to continue our relationship with those business folks. We've already drawn on the facility and we hope to put more of their money to work for us in the near future as we continue to close on new farms.

We've also been in talks with a few other lenders and we have agreements on a term sheet with one of them for two properties. We hope to add one or two more lenders as our lending base over the near future. It's just a good thing to have diversification of the lender base. If all of the properties we own today were pledged as one collateral, we think we would be able to borrow another $22 million or so from our lender base, and that will go up as we close on some of these properties and pledge it into our lender base.

And now I'd like to talk about the favorite part of this call and that's the net asset value. You don't get much of that on real estate investment trust. Most of the REITs don't update the value of their properties. However we intend to update the valuation of each of our properties at least once a year. Sometimes we'll use independent appraisals and other times we may do the valuations ourselves. As some of you know, we are required to calculate the net asset value quarterly in two of our affiliated funds because they are business development companies, and our administrator employees are full-time valuation professional with strong experience that serves as valuation officer for this fund as well.

In this fund, the valuation officer executes a quarterly review of our portfolio of properties pursuant to the valuation policy implemented by the Board of Directors and we intend to report those updated valuations in each of our quarterly reports to stockholders.

At June 30, 2014, the majority of our properties were valued based on either appraisals that were less than one year old or an actual purchase price if they were purchased within the last 12 months. A small portion of the portfolio, about 5% of the total value, was valued internally. The three properties we valued internally experienced an aggregate increase of $107,000 or about 2% from their last valuation which was about a year ago.

A few more properties will be valued internally next quarter and I think we'll do a good job in valuations but expect to have to extend the valuation professionals to start soon. It's a long process we go through when we do it internally.

The schedule of valuations is in our Form 10-Q that was filed yesterday. You can go through that and see what we did. And when we substitute those values that we did in our valuation process for the things that are on the balance sheet, we come up with a new net worth number that moves from $47 million book value, that's based on GAAP accounting principles, and then when we substitute the valuation of our farms, it moves to $91 million in current value. So that's just the increase in valuation.

Now remember, many of these properties have just been purchased, they are not going to go up overnight, you're going to see the value of these properties hopefully reflected over the next 10 to 15 quarters, and as few of these properties were purchased years ago and some have very low book values, but now the stockholders can watch the book value change over time. I think you'll see some tremendous increases as time goes on.

Using these values for the farms we own and the resulting net worth number, this means our estimated net asset value per share at June 30 is now about $13.93 per share, which is down from the $14.03 a share at March 31, but let me explain that. While our portfolio appreciated by about $0.02 per share, there were two reasons for the decrease in NAV, that's the net asset value.

First, we've made $1.2 million of irrigation upgrades on some of our properties, but the cost of these upgrades haven't been figured into the value of the properties yet. That would be when we value them internally or when some external valuation comes along. Second, we had to recognize a casualty loss of about $250,000 due to the damage caused by fire to our properties. We had a small fire. This loss will at least partially be offset and maybe fully offset by the insurance proceeds at a later date. So we took the hit there. However we aren't sure of the amount that we are going to get from the insurance company. We're just in the process of finishing all of those claims that you have to do, and so that will be added back when or if we receive all of it.

And of course we paid out $0.09 per share in dividends for the quarter. That's $0.36 per share annualized basis or about 2.8% yield based on the stock price at June 30. So that's where the money went. Over time, we expect our NAV to increase, we expect the value of the lands surrounding our farms to increase in value and we expect to be able to increase the rents charged on our farms, both of which would cause our farmland values to increase. However, there is no way that we can forecast what that will be over the next few quarters.

Now for some math to put you in the same frame of mind the way we look at it, from the IPO of $15 per share that people paid back in January of 2013, you should have to deduct from that the payment of the earnings and profits from all the prior years. That was $1.47 that we paid back. That was returned to the initial shareholders from the distribution of prior year's earnings and profits, leaving the cost basis for shareholders purchased on the IPO at $13.53. I think that compares favorably with the $13.93, especially after all the cost of the IPO and getting this thing started. So there's been no decline in the net asset value per share for those who purchased on the IPO.

Our stock is currently trading at $12.10, which is well below the net asset value. Thus, we are hopeful our stock price will rise this year. So if you buy stock today, you're getting a discount of 13% from our estimated net asset value of $13.93. So you're buying $13.93 in assets for $12.10.

The net asset value per share is one mark that will gauge our progress as we move forward, where we judge partially by this as we see or don't see appreciation in that number. This is the metric that Berkshire Hathaway uses. It's a lot of fun to compare ourselves there. So let's see if we can grow faster than they do. And remember, we also pay a dividend that Berkshire doesn't.

And speaking of dividends, we get our money to work from borrowing from our lenders and we have difference between what we'd pay in the borrowing of money and the amount of rent we receive. Currently the average of all of our farms is about 3.8% spread across our portfolio and we are buying properties with all debt now which means that the full spread of what we'd pay for the properties should come in to the Company as revenue.

As we leverage up about 50% of the borrowed money, and we should stop at about 50% of the borrowed money and 50% of stockholders equity, that should be a nice place for us to hold as we continue to grow the business. Assuming we put about $70 million to work in new acquisitions, that would give us a strong increase in our earnings. I think all of the holders who purchased on the IPO should be very happy. We expect the coming years to be much better and we have renewed leases increasing the rental payments as well as recent and possible future appreciation of the land values. However as we all know, there is no guarantee that any of these things will happen.

As I look at this farmland REIT as a way to hedge against inflation and food prices, I just see this as a general fight against general inflation of all kinds. I think this Company is really a better hedge than buying gold. All of you who follow Warren Buffett, in his interview he said that he rather own farmland than gold, and many smart investors have been advising to invest in farmlands. Jeremy Grantham for example up in Boston has a team that goes around, he's being buying farmland, he's way ahead of us at this point in time, but all of that is private. So we're the public company that you can invest in and own farmland.

So that's really enough about the business discussion, and before turning over to our Chief Financial Officer, Lewis Parrish, just want to mention, this change wasn't a sudden shakeup in the Company or anything like that. We've been planning those moves for some time now. As Lewis has been directly under our previous CFO, Danielle Jones, for the past couple of years and will continue to work collaboratively on the real estate related matters in the future, the move was in the works for a while, mainly to allow Danielle, who is our CFO in Commercial, that's Gladstone Commercial traded on NASDAQ under the symbol GOOD, allowing her to get back and stay on that one full-time. She has also stayed on this Company as Treasurer of LAND and helps out in that area as well.

So now we go to Lewis for the financial results. Lewis?

Lewis Parrish

Good morning, everyone. I'm excited to be the new CFO here at LAND and I look forward to having many more positive calls like this one. I'd like to start with an update on our REIT status. We've been monitoring our compliance with all REIT requirements very closely and have noted no issues to date. As such, we plan on filing our 2013 tax return later this month on which we intend to officially elect REIT status. This status will be retroactively effective as of January 1, 2013. As long as we qualify as a REIT, we generally will not be subject to federal income tax so long as we distribute at least 90% of our taxable income to our shareholders.

And now I'll discuss the financial results beginning with the balance sheet. During the second quarter, our total assets increased only slightly, by about 2%, due to the acquisitions we made during the quarter being funded mainly by cash we had on hand. As David mentioned, we acquired five new farms during the quarter worth $11.2 million. These farms will provide us with approximately $590,000 of additional revenue on an annual basis, which equates to an annual return of about 5.3%.

And we also closed on two more farms worth $12.7 million subsequent to quarter end. These farms will provide us with additional rental income of approximately $390,000 over the first year and $640,000 annually thereafter. This is due to a follow-on lease we executed on one of the properties not kicking in until 2015. And please note, these are figures per the leases, before any cost segregation has been completed or any values assigned to above or below market leases.

Our portfolio of properties and tenants are much more diversified than they were a year ago. Our 28 farms are located across five different states, and while the majority of our farms and rental operations remain concentrated in California, our reliance on income from these farms continues to decrease as we become more geographically diverse. A year ago, over 60% of our total acreage and 85% of our operating revenues came from California farms. However as of June 30, 2014, these figures are down to just 25% of our total acreage and 67% of our operating revenues.

We are also more diversified with regards to crop type as we now own several farms with permanent crops and have also expanded into the green market, and our tenant base also continues to grow as we add additional farmers on our properties. We intend to continue to further diversify our portfolio by acquiring additional farms in our regions of focus.

Switching to mortgages on our properties, David already mentioned our new facility with MetLife and we currently have $41.3 million outstanding under the $100 million mortgage note at an interest rate of 3.5%. We also had $3 million outstanding on the line of credit at June 30 which bears interest at 2.75%. We have since borrowed on the line of credit to fund our two most recent acquisitions and our current outstanding balance under the line of credit is $14.6 million today. Our next repayment on our long term debt is not due until January 2015.

For a discussion on our operating results, I'd like to talk about core FFO, which as Michael noted in the beginning of the call, we define as FFO plus one-time charges, which includes income taxes, acquisition related costs, and the property and casualty loss we recorded this quarter. Our core FFO increased from the prior quarter by 29% to $464,000. This represents earnings of $0.07 per share compared to distributions paid during the quarter of $0.09 per share. We just missed covering the dividend this quarter but we expect to be able to hit that mark in the third quarter.

Our operating revenue increased by 5% over the prior quarter. All of our acquisitions this quarter came within the last 31 days of the period, so their full impact won't be felt until next quarter. The increase in our operating expenses was mainly due to an increase in acquisition related cost expense during the quarter. We expensed $177,000 of acquisition cost during the quarter, which is an increase of $134,000 from the prior quarter. However, of these amounts, $133,000 related to the farms we closed on during the quarter. If these acquisition costs are removed, our operating expenses actually decreased by about $26,000 from the prior quarter.

As we continue to grow and achieve economies of scale, we expect our income to be able to absorb such acquisition costs. However, we are still in growth mode right now and until we get bigger these types of costs will continue to have a noticeable impact on our earnings.

And our other expenses were larger due to the property and casualty loss we recorded. As David touched on earlier, we had two fires early in the quarter. One fire destroyed the majority of a residential house on a farm in Michigan, and another fire damaged part of a cooler on a farm in California. Both of these assets were insured at the time of the fires, either by us or the tenant or both, and we expect at least partial recovery for each of these assets. However, we are still talking with the insurance companies regarding these claims and we aren't able to estimate the amount of expected proceeds at this time. We hope to have this issue settle in time for our Q3 filing, at which time we will record the proceeds received as an offset to the loss we recorded this quarter.

Turning to liquidity, we currently have about $56 million of total borrowings under our MetLife facility. With the amount of properties we currently have pledged as collateral under the facility, that leaves us with the ability to draw about $3 million more. However we also have additional properties with an aggregate appraised value of $34 million that are currently unpledged. We are working with MetLife and other lenders to pledge certain of these properties as collateral, which will provide us with more availability. As David mentioned, we have a signed term sheet with one lender and we hope to add others during Q3.

In summary, we are very excited about our pipeline of deals and we are anticipating strong growth throughout the remainder of 2014. We look forward to providing further diversification for our portfolio as well as to our lending base by adding a couple of additional lenders to help us mortgage purchases of new farms.

And now, I'll turn the program back over to David.

David J. Gladstone

Alright, thanks Lewis, good report. We just recently finished our first year as a public company, that was in December 31, 2013, and now we are finishing up our second year, and it's been very expensive to get this off the ground. I shudder to think how much these small businesses have to go through and now we're in the second half of the second year and it's far less expensive as it's a lot easier for us to continue forward.

The main point of this report today is to tell you that we have executed our plan. We used our IPO proceeds to acquire new properties and we've since been borrowing on our MetLife facility to acquire additional properties. And since the IPO, we have acquired 16 new farms for $62 million and we are hoping to add more over the next few months and certainly more by the end of the year, and we have a very nice list of potential properties and we are interested in acquiring through that list and we hopefully able to grow the farm portfolio significantly during the rest of 2014.

With the increases in the portfolio of farms comes greater diversification and protection for investors and we also expect a lot better earnings over time. We anticipate that many of the farms we'll purchase will be acquired from farmers or agricultural companies, and they or the independent farmers will simultaneously execute leases on the farms for us. This type of transaction provides the tenants with an alternative to other financing sources such as borrowing or mortgages on the real estate or even selling securities in their company.

So, we expect many of the farms we acquire to be purchased from farm owners that don't even farm the farm, they are just holding them for rental put, and those situations, there's about 38% of the farms in the United States now are owned but not farmed. So that's a huge base of individuals that own farms that aren't farming them that would be great candidates for us. In situations such as these, we intend to put in our lease in place prior to or simultaneously with the acquisition of a farm or shortly thereafter.

Now people are always asking about the drought in California, and there is a drought in California, it's there in some parts of the state, but all of our farms do have wells on them and we think the wells are doing fine. We did have one well that the motor burned out. We found out that a little bit of sand had gotten down there and if you don't have a fan or separator it burns out. So we're going to spend about $12,000 to $13,000 to put another pump in the well.

In a number of communities like Watsonville, they have a large processing plant that takes affluent from the city of Watsonville and converts it into potable water that can be used to grow crops. So those pipes run right by our farms and we can turn them on or we can continue to pump from our wells. And so, I think as far as some of the communities, it's very well-established the water that is available to the farmers.

In Oxnard, a little bit odd there. They finished the plant and now need to run the pipes out to the farms but there is some kind of disagreement that's going on there. So at this point they don't have the same thing. They have a huge beautiful processing plant but they don't have the pipes out to the farms yet and haven't turned that on. We expect that to happen over the next year or so. So that will give water to some parts of Oxnard that's different from the welled, but we do have wells on our farms there and we think they are in pretty good shape.

Other questions people ask is, why don't you have more invested in corn or other hard grains? And the reason is that grain prices are severely unpredictable. Corn is about, I don't know, last I looked $3.50, $3.60 per bushel, and that's down from the high of $8.50 a bushel a few seasons back. We don't like the variation of price there. It really hurts the farmers when these things gyrate back and forth like that, you can't predict the future.

Whereas, yes, strawberries and blueberries and all of those do have variations but they are not nearly as much as that during the season. So, I know you can store grain and you can wait around for prices to bounce back but it's very expensive to store grain and you do lose some of the grain when you're trying to store it.

Anyway, we believe that investment in farmland has performed extremely well over the last 10 years compared to other assets and farmland has provided investors with great safe haven during the recent turbulence in the financial marketplace. This is evidenced by the increase in prices of fruits and vegetables that we're all seeing in the grocery stores.

And most of all, a farmland has been a historical excellent hedge against inflation, just general inflation. And our business thesis is very straightforward. There are more people in the world today than ever before, second thing is people have to eat, farmers need farmland to grow food, farmland is being converted to non-farm uses, so there's less farmland to grow food and there's no replenishment of farmland. If you fly over California, you're not going to see a lot of trees that can be cut down and turned into farmland. So it's as simple as that, amount of farmland going down, number of people going up, and a lot of farmland is just, it's like gold today.

In July of 2014, the Board voted to maintain a monthly distribution of $0.03 per common share for each of the months of July, August and September. Including the dividend paid to-date, we have made 18 consecutive monthly distributions to shareholders or a total payout of $1.70 per share since our IPO in January 2013.

A lot of confusion about the payout, the dividend has been $0.03 per share from the beginning but during 2013 we also were paying out past earnings and profits from the many years that we were in business that we had to pay out in order to become a real estate investment trust. And although I said there are two types of payouts in the calls before we did this, people have just viewed us as cutting the dividends. We did not cut the dividend, rather we finished paying out the past profits so we could become a REIT and have continued our $0.03 per share. Our hope is that in the not too distant future, we'll be able to increase that $0.03 per share.

With our stock price now at $12.10, the distribution yield of our stock is about 3%. The entire REIT index is trading at about 3.5. So we're not that far off from REIT dividend yields index and I'm hopeful that we can increase the dividend and start to beat that index. 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 which is really a passive asset.

We expect inflation of food to be strong and the value of farmland to increase fast. There is no guarantees that this will happen but it's what we expect. So consider buying farmland in place of things like gold as a hedge against inflation, and unlike gold, farmland is an active asset that's used to feed people. The Board will vote in early October during our regularly scheduled quarterly Board Meeting on the declaration of monthly distributions for October, November and December.

And now, operator, if you'll come on, we'll have some questions from our loyal stockholders and those who are on the line.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Daniel Donlan of Ladenberg Thalman. Your line is open.

Daniel Donlan - Ladenberg Thalman

David, I appreciate the comments on the dividend. I guess for what it's worth, I think a 3% yield is actually fairly good considering that you're typically going-in cost basis on the farms is 5%. So I'm really not expecting that yield to move up that much and nor do I think it needs to. But just to start off with a couple of questions really for Lewis, in terms of how we should be modelling West Beach and San Andreas, when exactly do the rent increases start to hit the gap? I think David said fourth quarter but I think since at least I think San Andreas, since that was an extension already, does that start to hit in the third quarter or can you walk me through the accounting not only in San Andreas but in West Beach and when that starts to hit the gap?

Lewis Parrish

Sure. San Andreas, we executed the extension in the middle of June. So we did begin implementing the new lease rates in that month but you're only getting half a month for the current quarter. It will be implemented fully in the third quarter, but the cash rates don't increase until January 2015, but they will be reflected in the rental line item in the third quarter. West Beach, it is with a new tenant. So that one will not be reflected until I believe it's November 1.

David J. Gladstone

That's right.

Lewis Parrish

So that won't be reflected in the financials until Q4.

Daniel Donlan - Ladenberg Thalman

Okay. I guess I'll follow off-line with you with kind of the gap in cash difference because that's going to be, it's going to change around my adjusted funds from operations. And then as far as the acquisitions you made in the quarter, I think you said it was 5.3% implied GAAP cap rate. What was the cash cap rate or does that kind of bounce around given kind of the structure of some of the leases?

Lewis Parrish

On the cash cap rate, I don't have that figure in front of me but we can get back to you on that one.

Daniel Donlan - Ladenberg Thalman

Okay, alright. And then, David, as far as the acquisition pace has gone, it's really picked up since you hired the person in California, is there any cyclicality to the acquisition pace? I lot of the net lease REITs that I know are in a completely different business than you, the most or the bulk of their acquisitions are really done in the second half of the year. Is there some cyclicality to the farmland business as well where most people tend to sell at the end of the year versus the beginning?

David J. Gladstone

A lot of the farmers like to sell as they are finishing up their existing crop. So if you were in Florida, you'd probably see them interested in selling sort of in the April-May timeframe, would be when they are finishing up their crop. So they want to sell before they have to plant the crop again. And it would be the reverse in California, you'd see that change. So it depends on where you are, it depends on the seasons, it depends on the crop, but there's really no seasonality like you'd see in other REITs, that is everything happening in the second half.

For us, as you remember, we were struggling to get our MetLife loan closed not because of the businesspeople but because of the legal changes that they wanted then. So the lawyers took control. And so as a result, it slowed us down dramatically in although the first quarter and in part of the second quarter, but we closed that and we're in great shape now. So you should see – and if you know my approach to life, I won't make commitments that I can't fill and I didn't want to take any chance in making any commitments during that time that we didn't have the loan in place with MetLife, so unfortunately we did had to slow down, have to slow down a lot, and in fact we did none for many months.

But now with new lenders approaching us, and we hope to close on one hopefully in the next 30 to 60 days, we'll have two lenders and then hopefully we will have three or four, and so it will make it a lot easier to predict that we're going to have money and we can make commitments. So, my guess is there will be nothing other than straightforward, yes, there will be times when we'll hit a bump somewhere and not close something in one quarter when we thought we were going to close it, but at the end of the day I don't think there's going to be any cyclicality.

Daniel Donlan - Ladenberg Thalman

Okay. And as far as kind of how we should model future capital allocation, I'm just going to have everything go on the $100 million note payable that you have and it looks like that's at a rate of 3.5%, but does that rate somewhat change going forward or how should we look at what the interest rate is going to be on future purchases?

David J. Gladstone

It depends on who we finance with. We have other lenders who have different terms and conditions, and I guess what we could do is give you some indication when we do one of these financings or some of these financings, maybe Lewis can line that out for us, on 10-Q or 10-K or somewhere along the line, so we start to get a better feel for that. But yes, at the end of three years we have to adjust to the market and MetLife. So it's not a 25 year fixed rate and some of the others are longer-term, shorter-term, we're just beginning to get our act together with a number of lenders.

If you remember what we do in our other REIT, we may have 10 different lenders that we go to in order to finance something. We're still in the early stages of growth here, so it's going to take us a while to accumulate enough lenders that we can, for lack of a better term, play one-off against the other and get the best deal for our firm. We're sort of captive with MetLife now and probably will be for another year in terms of the major amount of our borrowings, but I would expect within, I don't know, let's say 24 months we will be at full course with four or five lenders.

Daniel Donlan - Ladenberg Thalman

Okay, but the fixed rate is 3.5% for at least the next three years, is that correct?

David J. Gladstone

That's correct, when we pull it down the fat end, and then the revolving line is currently at about 2.75% but that changes frequently.

Daniel Donlan - Ladenberg Thalman

Right, right, okay. And then as far as CapEx, it continues to remain elevated versus what my expectations were. What's diving that, is that going to continue? It seems to me that, I'm not sure what you expensed in the quarter, but some of this stuff that you're doing that you're getting a return on, I wouldn't think that's flowing through CapEx but I'm not positive either.

David J. Gladstone

Here's what goes on. We bought a couple of farms that needed a new well and we priced that in, but it doesn't really kick in until we spend the money. And we've put in, I don't know how many, we've probably put in five, six wells, we've got one or two more to do, when they finally kick in, we're able to raise the rent based on them being in place. And so as a result, we can give you a little more color on that each time it happens, but at this point in time it's just the way we do business.

And sometimes you can have a much better purchase of a farm. I'm trying to remember exactly what we did in the Valley in Arvin, California. I think we were putting in one new well there and the tenant is ready to pay rent on that as soon as it's put in place, and we'll drill that well, it's just an additional well into the property, the property has good water, but we like to have plenty of water on those properties. And if you remember, the press release, the man, the farmer there is a top-notch farmer and he's growing hot peppers on there and they need a lot of water. So we want to make sure we've got plenty of water.

It's just a nature of the beast and we always try to negotiate that if we're going to have to put in another well when we buy the property and lease it to somebody, that they're going to have a bump-up in the rent to take care of the amount that we spent on putting in a new well.

Daniel Donlan - Ladenberg Thalman

Okay. What I mean is, I think if you're getting a return on that CapEx immediately, I'd be a little bit punitive to kind of include that in your adjusted funds from operations?

David J. Gladstone

Sure.

Daniel Donlan - Ladenberg Thalman

And then so lastly, and a little bit of a sticking point with me, but this decision to add back the acquisition cost to FFO, some of your peers do this, some of them do not. I guess and I'm kind of curious as to what these acquisition costs are. I think most people that add back acquisition costs and do it the right way, they're adding back brokerage costs and things that they had to pay to the seller. It seems to me from reading your disclosure, these acquisition costs are related to payments to the people at your external advisor, which is fine, it's just I'm not sure adding it back is appropriate maybe for FFO purposes given that your G&A is relatively low and all these different fees that the manager charges that's just part of the overall G&A in my view.

David J. Gladstone

No, no, wait just a minute. Let's understand what this is. This is legal cost, it's survey cost, it's Phase 1, Phase 2, those kinds of things that are being added back that are one-time costs that we have to put in place simply because you need legal obviously and you need Phase 1s and Phase 2s. The lenders won't lend to you unless you go through all of that. They all want to know that there is a survey and they all want to know all of these pieces that we have to put in place in order to get a loan on it. So the appraisal for example, every lender wants an appraisal land, we have to pay for it. So that's what we're adding back. These is not fees that are coming to us, it may be fees that the management company paid on behalf and then are being reimbursed, but that's where it's all added. Sorry if I interrupted you. Go ahead, Dan.

Daniel Donlan - Ladenberg Thalman

No, that's fine. It's still a cash expense though and it's still a necessary cost of doing business. You can add back what you want to FFO, I just wanted a little more clarity, you gave it to me, but I think some of your peers do this, some of them do not, I just wanted to just make the point.

David J. Gladstone

Okay, alright. Do we have any other questions?

Operator

Our next question comes from Brian Hollenden of Sidoti. Your line is open.

Brian Hollenden - Sidoti & Company

On the acquisition front, have you seen any compression in cap rates, and if so, how will that affect your potential purchases?

David J. Gladstone

We have seen some. Some properties have gone up substantially in price because there's been others that wanted to buy it. Local farmers are really our competition. So somebody next door who owns a farm and the other farmer next to him is going to sell his farm, that's who we end up pricing against. And generally speaking, if there's a farmer next door, they may be willing to pay a lot more than we do, and we've lost a couple of farms that way in which the farmer is willing to pay say a 3% cap or even a 2% cap and we on the other hand are trying to stick to our formula for making money here.

So, yes, there is some compression out there but we've not seen as much as you may have expected. I think you see a lot of that in the Midwest. When the Midwest corn prices are $8.50, the farmers come out with their check book and bidding on just about anything. Today it's a very different story out in the Midwest because farmers aren't making very much money, and so even there's been some compression of rents out there in which the farmers are renegotiating their rent with their owners, with the owner of the property.

So, yes, there is compression. I don't think it's widespread, I think it's episodic that as and when something comes up and it just happens to have somebody next door. We did see one very large farm that went to auction in Florida. We saw a huge compression there because it was just too close to being developed. So if you're up against a developer, you're probably going to lose every time because they're not looking at cap rates and farming, they are looking at what they can convert it into, houses or buildings or whatever. So, we almost always lose to developers. Any other questions, Brian?

Brian Hollenden - Sidoti & Company

Yes, just if I can add one quick question. So how much generally do you plan on spending over the next 12 months on acquisitions? Just doing the math here on the mortgage note and the line of credit that's remaining, is about $70 million the way to look at it in the next 12 to 18 months, if you can comment on that a little?

David J. Gladstone

That's what we tried to pencil out. It's hard to know, we're just doing our first closing, we're trying to do our first closing with another lender, and we've not asked MetLife to increase theirs from the $125 million that they have in place, although they have been certainly willing to talk about that. Probably won't do any of that until probably next phone call. When we close out the September quarter and have our call, we may have a better figure for you and more understanding on that, but I think that's the round number that you could use to program in over the next period of time.

Brian Hollenden - Sidoti & Company

Okay, thank you. And then if I could ask one quick question, you talked a little bit about the drought and it not affecting you. Is there any way that it could potentially impact your business, whether it'd be buying farms cheaper or impact any of your current tenants, can you talk about any potential risk that would be to your business regarding the current drought in California?

David J. Gladstone

Sure. Droughts are always a disaster. If you go back into the 30s when there was a huge drought in the Midwest and farms turned into dust, farmland that's in dust isn't worth anything, and you remember from studying history how bad that was. So you could have that happen to the cornfields and you could have it happen to California. California in essence is a desert nine months out of the year. If you didn't have the ability to pull water out of the ground or out of these facilities that turn sewage water into potable water, if you couldn't do that, California would be very, very desolate today.

And we've had some farmers in the northern part of the Valley run into environmental situations in which they've been protecting a small fish up there, some kind of smelt, in which the water has been going to the smelt and not to the farmers. And then the water not only keeps the smelt alive but it goes all the way out to the ocean. So there's fresh water being pumped out to keep the small fish alive but denied to the farmers who are growing food for all of us to eat. Seems crazy to me but I'm not into the environmental world enough to be able to judge that.

But yes, it could get worse, it could be a drought for the next 10 years that might impact the wells that we all have out there. California has not been very strong in the use of RO, which is reverse osmosis, where you take seawater and turn it into fresh water. That's used a lot in Mexico where there isn't very much water. And so as a result, I think California is going to have to wise up at some point in time and let farmers use reverse osmosis so that they can irrigate the farms out of the sea.

Anyway, Brian, I think today we're okay. I can't forecast the future any better than anybody else but California has been around for a long time and the farmland that we own has been farm for a long time, but that doesn't guarantee anything. God only knows when it's going to rain again in California.

Brian Hollenden - Sidoti & Company

Alright, thank you very much for your comments.

David J. Gladstone

No more questions it sounds like.

Operator

(Operator Instructions) I'm showing no questions at this time. I'd like to turn the call back to David for closing remarks.

David J. Gladstone

Alright. Thank you all very much for attending and that's the end of this program.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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