Back in July, I highlighted the investment thesis for Gladstone Land (NASDAQ:LAND), a farmland based investment vehicle. Shares had been beaten down after an IPO and offered strong upside. Despite the fact that shares are up 11% since that article, my investment thesis remains in place and I think the stock has more upside.
My July article highlighted renewals and acquisitions by Gladstone Land. Among them were:
· June: three renewals at an average rent increase of 21%, bringing in $470,000 additional per year
· June 2: bought two Oregon farms, 200 acres, $2.6 million price
· June 16: bought California 145 acre farm for $5.9 million
· June 23: bought two Florida farms, 94 acres, $2.7 million price
The company's second quarter earnings call brought many highlights to the forefront and provided investors with more reasons to buy shares of Gladstone Land to profit from the asset of farmland. The quarter highlighted the acquisitions above that were made during the quarter. Gladstone also extended two leases that were set to expire in 2015. The leases come with an average increase of 31% and will have new rates starting in January 2015. With the renewals, the company remains 100% leased and has only one expiring contract (October 2015) over the next year that needs to be addressed.
During the call, Gladstone also announced it recently acquired two farms for $12.7 million. This deal will add $390,000 in rental payments in the first year. After the first year, this amount will increase to $640,000 annually.
This is the key to the quarter call and one of my favorite reasons to buy shares of Gladstone Land. The five new farms acquired in the second quarter will bring in an additional $590,000 per year in rental payments. The acquisition after the call adds another $640,000 beginning in 2015. The other pending deals will add more. Rental payments will increase by more than $1.2 million in 2015. This is big for a company that trades with a market capitalization of $87 million.
The second quarter earnings report also showed that net asset value actually declined for the company. After maintaining a net asset value of $14.03 in March, the new figure was reported as $13.93. The decline came from several items the company addressed. There were fires at different properties which raised costs and will likely be reimbursed by insurance. The company also spent $1.2 million to upgrade irrigation systems, which hasn't been reflected into valuations yet.
Gladstone stands behind its net asset value and believes it will increase over time. In the second quarter, total assets increased 2%. Without the extra costs associated with the fires and irrigation, net asset value would have increased. With the recent acquisitions and the rising value of land and rising rental payments, I believe net asset value will go back over $14 when next reported and will hit $15 in 2015.
On August 18th, Gladstone Land provided an update on its acquisitions. The company bought five more farms, totaling 3552 acres of $45 million. An additional three are also expected to be added for $39 million, with total acreage of 2300. In total, the eight farms and 5,852 acres would increase the total acreage of Gladstone Land by more than 50%.
The big news for Gladstone Land and its shareholders was its official approval to be a real estate investment trust retroactive to 1/1/13. This was a long and complicated process that saw the company pay out $9.6 million in dividends and an increased monthly payout of $0.12 for most of 2013. Now, as a REIT, Gladstone Land will be required to pay out 90% of their taxable income to shareholders. The company plans on paying $0.03 per month as dividends and will also likely pay out an additional year-end dividend to ensure the 90% threshold is met.
Gladstone currently pays a monthly dividend of $0.03 per share. While that doesn't seem like much, it equals a dividend yield of 3%, and possibly more with the new 90% annual requirement. Having monthly dividends is a nice investment as it sets up well for dividend reinvestments or as a way to boost cash levels to invest in other companies. Going forward, Gladstone wants to pay a higher amount. "Our hope is that in the not too distant future, we'll be able to increase that $0.03 per share." The board will vote in October on raising the dividend for the months of October, November, and December.
Gladstone Land continues to be a good investment to capture gains from the rising values of food and farmland. With a growing world population, the increase demand for food provides some upside for the rising value of farmland. I recommend taking a long position in this newly formed REIT to get paid along the way to realize rising valuation. Shares remain down 11% from their IPO price and are down 17% on the year.
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