Gladstone Land: I'm Sticking With The Preferred Shares

seekingalpha11-25

Gladstone Land's shift to crop-sharing leases will reduce base rent income in the short term and may boost future profitability.Preferred shares offer better value and safety compared to common shares...

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The REIT recently changed its approach by reducing the base rent in favor of a crop sharing and profit sharing focused lease agreement. This means the rental income will undoubtedly decrease in the next few quarters before the sharing agreements kick in. In my previous articles on Gladstone Land, I focused on the preferred shares and I still think that’s the best way to \"play\" Gladstone Land. Data by YChartsI wouldn’t want to be a common shareholder, but the preferred shares offer value While the net income of a REIT is not really a relevant metric, I still always like to have a look at the income statement to keep an eye on the overhead expenses and the net interest expenses. As you can see below, Gladstone Land reported a total lease revenue of $22.6M, resulting in an operating income of around $6.5M after deducting the $15.7M in net operating expenses. As shown above, the vast majority of the operating expenses are related to the depreciation and amortization expenses, which make up approximately 55% of all operating expenses.   LAND Investor RelationsFortunately the REIT has been managing its interest rate exposure quite well and the net interest expense hasn’t really increased by too much. In fact, there's a YoY decrease and that’s obviously related to the sale of assets as the proceeds were used to retire existing debt. The bottom line showed a result that was pretty much breakeven after taking the loss on the asset sale and the preferred dividends on the term preferred shares into account, but Gladstone Land also had to pay an additional $6M in preferred dividends on the perpetual preferred securities, resulting in a net loss of $5.8M or $0.16 per share. As mentioned, the net income (or in this case, the net loss) is not the best metric to judge a REIT on. After all, there were a bunch of non-cash elements that have a negative impact on the reported net income but are cash flow neutral. The $8.8M depreciation and amortization expenses, for instance, and the loss on the sale of assets also is an accounting loss and does not result in a lower FFO. Looking at the FFO and AFFO result (shown below), the starting point to start building up the FFO is the $5.8M net loss attributable to the common shareholders of Gladstone Land. The depreciation and impairment charges are added back to the equation while the $0.8M loss on the sale of assets is also added back. This results in an FFO of $6M and a recurring FFO of approximately $6.3M. The AFFO was just $4.5M after taking the gains on the redemption of preferred shares out of the calculation.   LAND Investor RelationsWhile I wouldn’t want to be a common shareholder with a quarterly AFFO of $0.126 and an AFFO of $0.37 per share on a YTD basis, I'm encouraged to see the preferred share dividends are still quite well covered. Mind you, the total AFFO before all preferred dividends is approximately $6.8M, which means the payout ratio is still approximately 60% based on the pre-dividend AFFO in the fourth quarter, and that's pretty high. However, on its Q3 call, Gladstone Land’s management provided more details on its newly signed leases:  On annual row crop farms, we renewed or amended eight different leases, and these renewals are expected to result in an aggregate increase of net operating income of about $309,000 or 11% over that of the prior leases. Overall, we continue to see steady appreciation in consistent rents growing in our annual row crops, which make up about half the portfolio. Our permanent crop farms, well, we renewed about 13 different leases there. With four of these leases, we adjusted the lease structure whereby we eliminated the base rent and provide the tenant with some cash and growing the crops. In exchange for the base rent, we significantly increases the participation in the rent component of these leases, the major of which will be recognized in the second half of 2025. So, we’re going to go through a little period here with base rents down.  This will result in a substantial decrease of the base rent income over the next five quarters, at a rate of $3.5-4.5M per quarter, before the crop-related gains can be materialized from the second half of 2025 on. Fortunately the balance sheet is getting safer thanks to the recent asset sales, but the fair value of the farmland assets dropped in the past few quarters. At the end of Q3 2024, Gladstone’s farmland was valued at $13,075 per acre compared to $13,662/acre at the end of the third quarter last year. This obviously weighed on the NAV which dropped by almost $5/share on a YoY basis. Gladstone Land ended the third quarter of this year with a NAV of $15.57. This doesn’t mean the balance sheet is unsafe or questionable. As you can see below, there are four series of preferred shares outstanding: Three are perpetual in nature and are part of the equity. One series, the Series D is a term preferred share with a (somewhat) firm maturity date in 2026 and is part of the liabilities of the company. The three series of preferred capital that are part of the equity have a total value of just over $400M, which means there is a total equity cushion of approximately $290M.   LAND Investor RelationsWhile there's a buffer, that buffer isn’t spectacularly high at the aforementioned $290M. However, if you would use the $1.46B fair value of the farmland instead of the $1.22B in book value, the total fair value of the equity increases to just over $500M, providing a better cushion for the preferred shareholders – of course on the condition the fair value of the farmland doesn’t decrease any further. And there’s an additional benefit to being a preferred shareholder instead of a common shareholder. Gladstone Land has been repurchasing preferred shares at a discount to their fair value (resulting in a gain on the repurchase) while it continued to print common shares. Subsequent to the end of the third quarter, Gladstone Land issued almost 350,000 shares as part of its ATM program, yielding approximately $4.6M in cash proceeds. This also makes the preferred shares safer from a balance sheet and asset coverage perspective. The appeal of the 5% 2026 term preferred has diminished While I wouldn’t want to be a shareholder of the common shares, I think the preferred shares still offer a decent level of safety despite the decreasing fair value of the farmland. Seeing the company retire preferred shares at a discount to the principal value and issuing more common shares definitely makes the preferred shares safer. In my previous article I mainly focused on the Series D preferred shares, which have a mandatory call feature in 2026. Back then, they were trading at $24.41. As mentioned in the previous article: Those securities are trading with ( NASDAQ:LANDM) as ticker symbol and offer a preferred dividend of $1.25 per year, payable in 12 equal monthly tranches of just over 10 cents per month. And while those preferred shares \"have\" to be redeemed by Gladstone Land by the end of January 2026, should Gladstone Land fail to call these preferred shares, the preferred dividend will increase to $2/share per year. The mandatory increase of the preferred dividend upon the REIT not calling the preferred shares is an incentive for Gladstone to effectively honor the maturity date in January 2026.   Seeking Alpha While the term preferred shares could still be interesting for investors looking to park some cash for just over a year, keep in mind that although the preferred shares \"have\" to be called in 2026, there's a clause that allows Gladstone Land to keep them outstanding, in return for a higher preferred dividend. Investment thesis I have no position in any of Gladstone Land’s securities at this moment as I took my profits on the Series D preferred shares which allowed me to lock in the capital gains and recycle the cash elsewhere. However, as some of my fixed income investments either have been called (PXSAP), will mature (some of the bonds in my portfolio) while other (non-fixed) income investments like Atlantica Sustainable will be acquired soon, I may be looking to redeploy some cash in a fixed income security where I’m reasonably certain the preferred dividend payments will be honored. While the current yield of LANDM is the lowest of all preferred shares, I can still generate a small capital gain, while the yield will increase substantially if the securities don’t get called in 2026.  I have no interest in the REIT’s common shares given the weak (operating and financial) performance recently.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2486797219"}