LAND - NASDAQ

Greetings. Welcome to Gladstone Land Corporation's Year-End and Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I'll now turn the conference over to Mr. David Gladstone, Chief Executive Officer and President. Mr. Gladstone, you may begin.

Thank you, Rob. It's a nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We seriously appreciate all the time you take to listen to our presentations and hope we can give you some really good news this time. Before I begin though, we have to start with Michael LiCalsi. He's our General Counsel. So, Michael, take it away.

Thanks, David. Good morning everybody. Today's report may include forward-looking statements on the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. Now, these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. The many factors may cause our actual results to be materially different from the future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-K, 10-Q, and other documents we filed with the SEC, you can find them on our website, which is www.gladstoneland.com, specifically the Investors page, or on the SEC's website, which is www.sec.gov. And we undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events, or otherwise, except as required by law. Today we'll discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We may also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses. Also adjusted FFO, which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. And we believe these are better indications of our operating results and allow better comparability of our period over period performance. Please visit our website once again, gladstoneland.com, sign-up for our email notification service. You can also find us on Facebook, key word there is the Gladstone Companies, and on Twitter we're @gladstonecomps. Today's call is an overview of our results so we ask that you review our press release and Form10-K, both issued yesterday for more detailed information. Now with that, I'll turn it back to David Gladstone.

Okay. Thank you, Michael. Let me start with a brief overview of our Farmland Holdings. We currently own about 112,000 acres on 168 farms and over 46,000 acre feet of water assets. One acre foot is equal to about 326,000 gallons. So we own about 15 billion gallons of water. And although the land and the water are valued at about $1.6 billion, it'll be interesting to see where the land and buildings go over the next year or two as the changes in the economy hopefully take hold. Currently, $250 to $500 per acre foot, so $23 million worth of water. And you can't grow anything without the water, so we're in good shape there. We have that all of this land that we own plus the water is worth about $1.6 billion. Our farms are in 15 different states and more importantly in 29 different growing regions and our water assets are all in California. Our farms are leased to over 90 different tenant farmers, all of whom are unrelated to us and the tenants on these farms are growing 60 different crops, mostly fruits and vegetables and nuts and you can find these in the produce section of grocery stores which is where most of our crops -- our tenants sell our crops to those people running those grocery stores. And now I'll give a quick update on some of the tenants issued -- issues that we're continuing to have. We currently have five properties, about 15 of our 168 farms that are vacant. And we also are recognizing revenue from leases with two tenants who collectively lease five of our farms on a cash basis. So we're a little bit behind on that. Regarding the vacant farms, we're in discussion with various potential buyers or tenants to buy or lease these properties and hope to have all of those in place by this summer. And regarding the two tenants on non-accrual status, one of them is now current in their rental payments to us, and we are continuing to work with the other tenant to collect from that tenant. And total year-over-year impact on the operations as a result of these two and other tenant issues got sorted out during the year but decreased operating income by about $1.4 million for the fourth quarter and about $1.7 million for the year. I think you'll see that come up in the next quarter. As we mentioned on the past several calls, we continue to be cautious with our new investments because the cost of capital, both borrowing cost that we have to pay and equity that we have to raise remains very high and the land prices are still too high to make sense in many of the acquisitions that we look at. So as a result, acquisition activity remains slow for us and probably will for at least another couple of quarters. With inflation still above the Fed's target rate, interest rates are going to remain probably pretty high for the next six months, maybe even a year. And when the rate cuts do come, might be getting further -- the rate cuts might be pushed further down the line, so maybe a while before we can start bulking up again on more land. But overall, our existing farmland portfolio continues to perform as expected with the exception of those issues that I mentioned just about -- just a few minutes ago. We did sell one property after year-end, that's after December 31st. That resulted in a nice gain for us. This farm is in Florida and we bought it for about $54 million about seven years ago and we sold it in January for about $66 million. So net of closing costs, this resulted in a cash gain of about $10 million. And remember, during the last seven years, the tenants had been paying rent on the farm. And I'll note the price we sold out was about $2 million more than its recent appraised value and leads me to believe that the appraisals that we have on our properties which go to net asset value are a little bit low. On the leasing front, since the beginning of the quarter, we renewed or amended seven leases on farms in two different states. In total, these renewals are expected to result in a decrease of annual net operating income from those properties about $682,000 than the prior leases we had on it. However, this includes one lease executed on a property to replace a prior tenant who had been placed on non-accrual status. This prior lease was fixed, was a fixed rent basis, whereas the new lease is largely a crop share basis. We usually use that crop share where we get part of the profits from -- in new leases simply to give the new tenant a chance to feel out how much you can really pay for the property. So excluding this one lease, the remaining lease renewals are expected to result in an overall increase in net investment income of about $504,000. That's about 5.4% over the prior leases. So looking good there. Looking ahead we only have one lease that is expiring in the next six months and it makes up less than one-half of 1% of our total annualized lease revenue. We're in discussion with a group of lease groups that wants to lease the farm and we're currently anticipating an additional vacancy, no additional vacancies as a result of this or any other upcoming situations. And just a few other items I'd like to mention. In 2023, that was really a good year for our Western portfolio regarding water. Water is the key to almost everything on the West Coast. And then 2024 now is off to a very positive start. There's a lot of rain going on out there and right even today and certainly yesterday. Under the Sustainable Groundwater Management Act, or as we call it, SGMA, which was enacted in 2014, certain basins must achieve groundwater sustainability by 2040. So we've got plenty of time to do it, but our team in California has been focused on ensuring that we have a firm understanding of the impact of SGMA on the long-term sustainability of our Western portfolio. And as such, we have been working to develop projects in certain areas that have identified as having a risk of potential water shortages over the next couple of decades. During 2023, we completed a construction of a large groundwater recharge facility on two of our farms we entered into various agreements with both local water districts and private third-party individuals to acquire additional water supplies in the near term. And we secured -- we have secured a long-term water supply contract for substantial amounts of our portfolio in the western San Joaquin Valley, California. These acquisitions and projects have already made a large impact in achieving long-term and sustainable water supplies for many of the farms in California. We intend to continue this focus on water security for our farms in 2024, which has started off with another round of historic storms in California. If the rain events continue, we expect the state's water supply to allow for another year of great opportunity from farms in California, allowing us to leverage the projects and contracts secured in 2023 to acquire even more water rights. We have additional water projects that we anticipate completing in 2024 to secure additional water rights. It's important to note that these projects are largely forward-looking. Our portfolio currently has adequate supply of water and to-date none of the farms have had to fallow the farms or reduce plantings. Our goal is to remain in case through full compliance of SGMA into 2024 -- 2040 and beyond. While certain other land may have to fallow a portion of their farms, thus reducing the amount of planted acreage of certain crops, our goal is to maintain a stable production level on all of our farms. We intend to continue to partner with local groundwater management agencies across California to ensure that we have, unlike any of our farming friends, sustainable water supply for all of our farms in the west. In Florida, of course, and in the east, it's much easier to get groundwater. And just one more note regarding weather in California. They're experiencing another round of storms and flooding over the past few weeks, but fortunately we've been able to report that none of our farms have suffered any significant damage as a result of these recent storms. And we don't expect our farms to get hurt. We have good runoff programs. And finally, I just wanted to touch on a question we get from time to time from some of our good shareholders. We pay money, that is, your company pays money to Gladstone Securities to sell the preferred stock that we're issuing in the company. And Gladstone Securities is largely a conduit in this process. It remits a large majority of the fees received to other parties involved in the offering, including participating broker dealers and wholesalers. At the end of the day, it's pretty much a break-even business for Gladstone Securities, so we're not making a profit out of selling your securities. And please also remember that preferred stock is not included in the calculation of any fees that Gladstone Land pays to the advisor. So I'm going to stop here. That's enough on the operations. Now, I’ll turn it over to our CFO, Lewis Parrish, to talk to you more about the numbers that he's reported in the 10-K.

Thank you, David, and good morning, everyone. I'll begin by briefly going over our recent financing activity. We did not incur any new borrowings, but we did repay about -- we have repaid about $24 million of loans since the beginning of the fourth quarter that were scheduled to either mature or reset. On the equity side, since the beginning of the quarter, we've raised net proceeds of about $556,000 from sales of the Series E Preferred Stock. Moving on to our operating results, for the fourth quarter we had net income of about $1.8 million and a net loss to common shareholders of $4.3 million, also per share. For the year, we had net income of about $14.6 million and net loss to common shareholders of $9.9 million or $0.28 per share. On a quarter-over-quarter basis, adjusted FFO for the current quarter was approximately $5.4 million or $0.151 per share compared to $6.6 million or $0.189 per share in the prior year quarter. Dividends declared for common share were $0.139 in the current quarter compared to $0.137 in the prior year quarter. On an annual basis, adjusted FFO for 2023 was approximately $20.3 million compared to $24.3 million in 2022 and AFFO per share was $0.569 in ‘23 versus $0.701 in 2022. Dividends declared were $0.554 in 2023 and $0.546 in ‘22. Primary drivers behind the decreases in AFFO were the lost revenues and increased expenses associated with properties that were either in the vacant, self-operated, or non-accrual status during portions of the year, as well as a decrease in the amount of participation rents recorded and an increase in dividends paid out to preferred shareholders during the year. Despite the lost revenues from vacant, self-operated, and non-accrual properties, fixed-based cash rents increased by about $255,000, or 1%, on a quarter-over-quarter basis, and by about $990,000, or 1%, on a year-over-year basis. These increases were largely driven by additional rents earned on capital improvements projects that we completed on certain of our farms. During the fourth quarter, we recorded about $3.3 million of participation rents compared to $4.7 million in Q4 of last year. And for the year, we recorded participation rents of about $5.9 million versus $7.7 million in 2022. Participation rents decreased primarily due to lower yields, coupled with lower pricing for last year's crops. The lower yields were expected due to the fact that these crops were harvested at the end of a multi-year drought and of course the water landscape in California and the West in general has changed drastically since then. Pricing continued to be somewhat lower due to oversupply, particularly in the almond market however we are starting to see almond prices rebound a bit as global inventories get used up. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses remain relatively flat for both comparable periods. Total related party fees decreased for both periods and that's primarily due to a lower incentive fee earned by our advisor during the current quarter and year. This decrease was largely offset by increases in certain other core operating expenses, namely property operating expenses and general and administrative expenses. Property operating expenses increase in the current year periods due to higher property taxes and additional property management fees incurred as a result of certain properties being either vacant or self-operated during portions of 2023. And G&A expenses increased due to higher professional fees and additional costs incurred in connection with amending our credit facility with MetLife. One final thing to note on our income statement, we sometimes get reimbursed by our tenants for certain costs or they will sometimes pay these costs directly on our behalf as stipulated in the lease agreement. In these cases, we record additional lease revenue and also additional property operating expenses with the amounts offsetting each other and netting out to zero. In the past, this amount has been averaging about $50,000 per quarter. However, that figure jumped to nearly $550,000 during the fourth quarter. It still nets out to zero on the income statement, but I just wanted to point out that each of these individual line items, that is lease revenue and property operating expenses, are both inflated by about $500,000 in the fourth quarter from what it has been recently. Finally, other expenses decreased due primarily to lower interest expense incurred as a result of loan repayments made over the past year. With that, we'll move on to net asset value. We had 31 farms revalued during the quarter, and it's all via third-party appraisals. Overall, these valuations decreased by about $13 million from their previous valuations from about a year ago. So at December 31st, our portfolio was valued at about $1.6 billion, and all of this was supported by either third-party appraisals or the purchase prices. Based on these updated valuations and including the fair value of our debt and all preferred securities, our net asset value for common share at December 31st was $19.06, which is down from $20.33 at September 30. The majority of this decrease was due to the change in fair value of our fixed long-term borrowings and preferred securities as interest rates retreated somewhat from $9.30 to $12.01, as well as decreases in valuations of certain farms that were reappraised during the quarter. Turning to liquidity, including availability on our lines of credit and other undrawn notes, we currently have access to over $200 million of liquidity, including about $60 million of cash on hand, and we also have over $130 million of unpledged properties. Over 99.9% of our borrowings are currently at fixed rates, and on a weighted average basis, these rates are fixed at 3.34% for another 4.2 years. As a result, we have experienced minimal impact on our operating results from increases in interest rates. And with respect to our current debt outstanding, we believe we are well protected should interest rates remain high. Regarding upcoming debt maturities, we have about $35 million coming due over the next 12 months. However, about $17 million of that represents various loan maturities. And given the value of the underlying collateral, we do not foresee any problems refinancing any of these loans if we choose to do so. So removing those maturities, we only have about $18 million of amortizing and principal payments coming due over the next 12 months, or about 3% of our current debt outstanding. In addition we have about $10 million in loans that they are not maturing but they have a fixed term -- fixed rate term that is set to expire over the next 12 months. One last item to note here, our lines of credit with MetLife were set to expire in April 2024. However, during the fourth quarter, we amended the MetLife facility to extend the maturity date of both lines of credit to December of 2033, so almost a 10-year extension on those lines of credit. Finally, regarding our common distributions, we recently raised our common dividend again to $0.465 per share per month. This marks the 33rd time we've raised our common dividend over the past 36 quarters, resulting in an overall increase of 55% over that period. With that, I'll turn the program back over to David.

Thank you, Lewis. Nice report. We continue to stay active in the marketplace should a good opportunity present itself, but we're still being more cautious on the acquisition front. Interest rates are still too high, but we're hopeful that the rates will be lower this fall so that we can start buying more farms again. And just a few final points. We believe investing in farmland, growing crops that contribute to healthy lifestyles such as fruits and vegetables and nuts, follows the trend that we're seeing in the marketplace today. Overall demand for prime farmland growing berries and vegetables is stable to strong for almost all the areas where our farms are located, particularly along both coasts, either East or the West. So please remember that purchasing stock in this company is a long-term investment in farmland. It's an investment of a stock of two parts. One part of course is for strong assets such as similar to gold. It's a hard asset. Farmland is dirt and that has intrinsic value because there's a limited amount of good farmland in the United States and it's being used up by urban developers, especially in California and Florida where we have many farms. And the second part of investing in this stock is unlike gold or other alternative assets in that it's an active investment with cash flows to investors and believing we're better than a bond fund because we keep increasing the dividend whereas bonds are fixed. We expect inflation, particularly in the food sector, to continue to increase over time. We expect the value of the underlying farmland to increase as a result and we expect this especially to be true in the fresh produce food sector as it trends that more and more people in the United States are healthy food eaters. We have the cash, as mentioned by our CFO, to back any loans that are coming due. We have cash and credit facilities, the banks that we deal with would love to lend us more money. So we have cash to pay off loans coming due and we have borrowing capacity to do the same. So we are very secure here. And if we had to sell off our farms, I know we would get money to pay off any debts that we have. So we're strong in that regard. So the downside, from my perspective, is very low. Farmers need dirt to grow food, and we have plenty of dirt. And so we're great for farmers, while people also need to eat. Farmers need dirt to produce the food that they eat. I'm going to stop here Let's have some questions from those who follow us. Operator, would you please come on and help our listeners ask some questions?

Sure, Mr. Gladstone. [Operator Instructions] Thank you and our first question today comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your questions.

Good morning guys. David, the 15 vacant farms, what crops are those in Michigan and Washington and does that have more to do with the crop type and its demand today or is it just the financials of the previous tenants there?

A lot of it is previous tenants, this is mostly blue blueberry farms and we've had one tenant that has had some personal problems and hasn't been able to take care of the farms and we are going to get those farms back and lease them to somebody else. The crops are coming out just fine. It's the problem of the farmer in many of these cases that's giving us a problem. They haven't done a good job of managing their funds. And as a result, it impacts us, but it won't be for long. As some of you remember, some time back, we had a family who had a large farm from us. I guess there were two farms in that. And they got in trouble. The farmer died. There were real problems there. And we took them back the first year. And then after we got everything stabilized, we rented it out. And it's still paying as agreed. And we signed a 10-year lease then. So the same thing will happen here. Just takes us a while to get them. Farming is a slow process and people just don't jump on a farm and say, oh I'm going to grow some blueberries. They have to wait for it.

How should we be thinking about the delta between the NOI between you guys operating it versus having it leased to a third-party tenant for an entire year? Is there a meaningful difference in terms of how that all sort of factors into the bottom line that we need to be thinking about or is that fairly close?

It's close, but generally speaking, somebody we hire and those farms -- some of the vacant farms are now being run by people we hired to operate them for. So we are partially in the farming business with those people. That's a different process than somebody who is skilled in both growing and selling blueberries or strawberries or almonds or anything else. So I would say it's -- once you get into a situation where you're putting somebody else in to operate the farm and you are in essence backing the farmer. It's a different world. People who are really good at this business and I'll never forget one of the politicians describing farming as, punch a hole in the ground and drop some seed in and you'll be fine. And it's just not that at all. People don't realize how much the farmer knows what to do with regard to the farm that they're on. So it takes us about a year to turn around something that goes a little bit sour. And in some cases, the sourness has been chewing up some of our time. So we've used this time to get in the water side of the business and making sure that when SGMA and these other government agencies demand that you do A, B, and C, that we're ready for them. We've got people and staff that are really skilled in this area. I think anybody in the government side of it would know that we're on their side. We want to be completely, completely away from the idea that we've got to fallow anything. I'm sorry, Rob, did I answer your question?

Yeah, that's helpful. And then I know the rains and floods in California caused some damage to some structures on one farm, but are they having any negative impact on any of the crops, especially the permanent ones? And, if this continues to go on, is that something we need to be careful about?

Well, of course we'd be careful. We've got insurance that helps us out a lot. And the one situation that you mentioned, which came out of last year's rainstorm, was a few wooden structures that were just not weather ready and so as a result they got replaced and the tenant there has helped us out with some additional changes to their lease. They didn't have insurance on the trestles that these were on, and so as a result they had to take a small loss in essence. So, Rob, I don't think that's our problem. We even have -- any -- if you may remember the address, one of our addresses on one of our farms is San Andreas and there is the San Andreas fall that runs through some of our farms. While that won't destroy the farms, it could open quite a gap to have to jump over to get the crops done. But we have insurance for that. We pay for that. We want to make sure fire insurance for some of the structures that we have. So we're pretty well covered from every angle except from the problems that some of the tenants have gotten themselves into. The banks are all recovering now. They're in strong position. Most of these are federal banks, federal license. And so they're in a good position and I wish the rates would come down. If you have any influence on the Fed, would you please use it to get them to lower the rates because we need a lower rate in order to buy farms. And so we're just slowing down and making sure that we're going to be way ahead of everybody else in our management of the water that's needed on all of our farms. In other words, there's another thing that goes on. Sometimes markets change. For example, almond -- the almond marketplace was miserable for a while because we have a lot of almonds that are sold outside the United States and I've always believed that Spain and Italy had most of the almonds but in essence the United States is producing most of the almonds in the world today and sell to Spain and one area of the world was eating a lot of almonds and practically stopped for a while due to the worry of the pandemic. And so we ended up with a lot of almonds or we didn't, our tenant ended up with a lot of almonds that they didn't get sold. And almost all of that has been cleared out now and they sold almonds that they stored. The good news is almonds can be stored for a good amount of time and so they, it's not like strawberries where if you don't sell them in 14 days you're done, they can keep them for years actually. So we're in good shape today. And if we don't have another pandemic, we'll probably find the bad thing about a pandemic is all of the restaurants don't use your products. We are lucky that we sell probably more than 90% of our products are sold into grocery stores and of course grocery stores went forward and raised rates and the unfortunate thing is they didn't pay us more for our products. So the grocery stores got profitability out of it. But every bank thing has come back in line now except the Federal Reserve and the interest rates. And once that happens, I think they'll do something this year. We'll be back in business growing. And I think we mentioned somewhere along the way that we do stand behind our farmers. And if they need more things done on the farm, we'll do that and we charge them the rate for that. So the rent goes up by whatever we've done for them and it's been working very well. Our farmers know that they're not in a position that they can't get money to do some of the things they need to do to keep their farms going. I don't know, Rob, are we -- and am I answering your questions, what's up?

Yep, that's helpful. Thank you. Lewis, how much of the quarter-over-quarter NAV decline of $1.27, was the change in farm values versus the change in debt and other balance sheet items?

That breakout was -- it was down by $1.27. A little over $0.80 was the change in our long-term financing, the fixed rate debt, and the preferred securities in just under $0.40 was the result of the valuation changes.

Okay, and then what did you do with the Martin County disposition proceeds? I think it was $66 million or so on a gross basis. Is that just paying down debt? Is that sitting in earning interest? How should we be thinking about that?

We had about $1.5 million of closing costs. We repaid $16 million of debt that were encumbering the property. We repaid another loan since then, a small loan, and the rest of it right now is earning about 4.5% interest in the bank.

Okay. And then last one for me. David, given your comments about getting a good price if you sold some of your farms, stock’s trading at more than a 30% discount to your NAV. What are your thoughts and the Board's thoughts on potentially selling a few farms and doing some stock buybacks at these levels?

I hate it. I don't want to buy back stock. I think we're going to use the money to grow. I watch Warren Buffett a lot and he doesn't buy back stock often. I don't know. We could do that, but we'd just be injuring ourselves for the long-term future.

Okay. Thanks, guys. Appreciate the time.

Next question, Rob.

Yes. The next question will be from the line of Mike Albanese with EF Hutton. Please proceed with your questions.

Hey, good morning, guys. Yeah, I think most of my questions were answered with the previous caller. But I guess just if you could provide more color on crop prices and kind of the supply-demand dynamic across almonds, berries, pistachios. You mentioned or alluded to kind of that oversupply -- global oversupply normalizing as inventories are drawn down. I mean, how much runway is there left for kind of normalization? Or really, just any other context that you could help me frame that would be helpful.

I think that the current situation with almonds is pretty much over. I don't think there's any excess left. And so that's good. There's never been any in strawberries or blueberries. Every now and then, blueberries, if the farmer has turned toward doing almond, any of the juices from blueberries then he's probably got -- had some leftovers. So it's very low right now. There isn't anybody with a lot of things out there. Even the apple growers have gotten strong, which I hate that business simply because it's hard to keep an apple. You see them in the stores. They're all mealy and don't want to be in that business much, even though we've got some out there. The other businesses are hurt sometimes, like for cherries. Cherries can get wiped out completely if you get any kind of frost. And so we don't have that many cherries, so we're lucky in that regard. I don't think there's much difference in, let's say, the 2021 prices and amounts that we had back then and today going forward. 2024 is going to be a great year for us because after all, we're going to slip back into the same -- we were making lots of money before the pandemic and all of the erosion to the markets. And so I think if you want to put down something, I'll say this, 2024 will be fantastic if we get the interest rates going. The markets are good today, and so the guys who are growing almost everything these days is in good shape. Every now and then you have, as we did in the blueberry business, a person who gets himself in trouble and personally as well as just destroyed his whole business but that'll come out, unfortunately you can't get somebody to take over that farm by snapping your fingers. People want some time to operate it and feel it out and then we can go in and say, okay, if you want to go next year, then we have to go to a fixed price lease. And they usually are in agreement with us. They have to negotiate prices often in those situations because one year is really not enough time for them to explore all the alternatives they have. But we've had good luck in that regard. We've got some interesting farmers out there. I think I've mentioned it. We have one of the largest farmers in the world doing some of our stuff. In the strawberry area, we have the largest strawberry grower, has our largest farm and does extremely well there. But I don't know how to help you with that other than to say that pretty much we're back to 2021 or maybe even the beginning of 2022 in terms of pricing and farming and whatever you grow you can sell. It's a wonderful marketplace when it doesn’t have these crazy things that come along like they did in ‘08 when all the marketplaces were upside down. And today I think we're all in good shape. I think this is the one moment that this business will change.

Got it. That's helpful. That's pretty much exactly what I was looking for. Okay, and then can you just remind me kind of overall portfolio exposure to I guess the participation, the rent structure and then how much of that is, if any is captured with these tenants, that are having issues?

So I'd say about of our probably most -- all the participation rent lease structures are on our permanent crop farms. I think all but maybe one or two. But say a little less than one-third of our leases have a participation rent component. In the past couple years, both 2022 and ‘23, we've averaged about $90 million of total lease revenues. We've had participation rents of between $6 million and $7 million. So I think that's a kind of normal run rate for us right now as far as percentage of participation rents and their percentage of total lease revenues, if that's what you're asking.

Yeah, that's helpful. Thank you. That's it from me again.

Okay. Operator, would you come on and see if there's anyone else with a question?

Sure. The next question is from the line of Barry Oxford with Colliers.

Great. Thanks, guys. David, when you think about acquisitions and let's say interest rates stay roughly where they are, just move down ever so slightly, what would you have to see in the cap rate environment movement to make buying farms attractive to you?

Well, if this farmer will drop the price, then it works. But most of the farmers are long-term holders. And when you offer them something that makes the numbers work but it's lower than they believe their farm is worth. And remember, a lot of these farms are farms that have been in families for years, so they're not willing to get rid of them. They'll just continue to farm them. So, Barry, I don't think at the end of the day, you're going to see much happen unless interest rates come back in line where they were in 2021.

So they approach it more from a personal than an institutional marketplace?

I hear this phrase every time. My great-grandfather started here, migrated from wherever. And so it's a beautiful story. Unfortunately, the taxing that's going on now by the government keeps a lot of these guys from selling because they owe so much money when they sell. So they do try to do 1031s. And of course, we offer to give them stock in our company or partnership interest which we have a partnership underneath our company. And some of them take it. We have not gotten many to take all of it in terms of stock and with the stock down as far as it is today, it's almost better just to try to do everything in cash. So it's a peculiar situation we're in, but it happens every now and then just as it did in ‘08, ‘09 when people were scared to death. A lot of these farmers are people who want to get out of the business altogether. They want to sell the operating part and they want to sell their land. And the land is the piece we love. We don't really want to be in the operating part, that often for various reasons. But generally speaking, we want to be in a passive position rather than in the operation business. And so if the world changes a little bit on interest rates, I think it will be explosive in terms of what we can do. Many of the farmers are 58, 59, 60, and they want to sell and liquidate simply because they're tired and worn out from years of farming. Farming is a very difficult situation for almost everybody. You're chewing your nails over the price of fertilizer and it just goes on and on and on. So from my perspective, I think eventually people like us and maybe a few others who are out there will end up owning most of the farmland. We haven't seen what people keep arguing about and that is that China is buying up this farmland. They are only interested in the ones that are right next to an airport or something like that. For example, the buyer of our farm down in Florida was not buying it for anything other than they believe in the next 10 to 20 years, going to be able to sell pieces of that farm to people who are in the home building area. As you probably know, millions of people have moved to Florida and housing prices there just keep housing people very busy. That farm that we sold down there will probably have two golf courses and God only knows what else on it with hundreds of houses. But it's not going to happen to work for us because we need ordinary income coming in every month to meet our dividends. So we sold it to somebody who's going to end up holding it for a while and selling off big chunks of it to home builders down there. We have another big farm right next to that farm. So we will be the benefactors of that craziness that's going on in Florida in terms of housing prices. And, Barry, I just don't see anything to hold us back except the interest rate craziness that's going on now. And I think they're going to drop the rates somewhere along here. And if the Fed will drop it by a quarter of a point, all hell will break loose because the banks will be dropping their rates so that we can go use it. And there are plenty of farmers who want to sell. And I don't know how we solve the problem unless we can find somebody who wants to operate the farm, because the people who are selling really want to get out. And I think for us, our time is here today.

Right. No, that makes all the sense in the world. And then, David, in your prepared comments, you mentioned something about California and water and banking more water. Are you seeing opportunities there? Will we start to see some dribbles here in the first quarter, or first half of the year?

Dribbles meaning what? Selling water?

Land water bank.

We got, as I mentioned, 15 billion gallons banked.

Yeah. I bet I may know you're going to be doing more.

Yes, we will buy more. We will get enough that will take us to probably rest of this century. We want to get it. Because once it gets in the ground in one of the aquifers, you can hold on to it for a long time. And unless people are willing to pay, we've been offered land to buy water at prices that are ridiculous. I mean, some guy wanted us to buy $1,000 for an acre-foot and that would have been, what would we pay, about $50 million worth of water. We sold it at $1,000. Under $500, we did the math on it. That would be about $20 million, $23 million, $24 million. And we sold it at $500 an acre. We've done something unique. And I hate to mention it too much, I'm afraid people will copy us and that is we've been able to take a lot of the water that's running off of these farms and in the -- into our farms and we are putting it into some vacant areas on our farm. We built berms and we pumped water into that area and then some places we just left it in there, and other places we're over the aquifer, so it will trickle down into the aquifer and we get credits for that. And we're probably doing that at the rate of $20, $30 an acre foot. It's a little bit higher you're saying. Okay. It's your markup as the CFO. Anyway, we've really skinned the cattle very well on this. Our guys are experts at all the water problems in California. I wish there was some way to use the one in Florida, some way we could get water from Florida where you stick a hole in the ground and you got water out to California. And I think by the end of this century, they will be growing more vegetables and things in Florida than we do in California. So they'll be shipping the vegetables to California rather than vice versa. Water is key in California. If you don't have water, you have nothing. Might as well turn it. There's a group that's buying land above the capital of California and that's the worst land you've ever seen in your life for water. There's none there. So as a result, they are going to “build a city” there, I don't know what they're going to do for water and but it's -- they've got hundreds of acres and I'm just interested in watching what's going on. These are some really big technology guys that are deciding they're going to do something out there with all of that land. They're calling it New California. So anyway, we'll watch that one from afar, it's high risk. And so for us, we're just going to go back to the way we've always done things, which is buy as much property as we can with enough water. A lot of the properties are now being discounted by the people who value these properties. If you don't have at least two sources of water, all of our farms have at least one and now by buying all of this water that we've got, they've got more than two sources. So you may see our asset values go up because we have enough water to prove them out. And it will be a beautiful thing if the drought comes and we have all this water because our guys will buy our water, we'll have an agreement with them. It will be -- we now have financed pipes that go from one farm to another. We finance pipes that go from the aquifer to a number of different farms. So we're in great shape and be like one of those pipe companies down in the [terrain basis] (ph) where they take the oil out of the place and will be that hopefully with water as well. So we're just building a different company than any of us thought about building until SGMA came along and now it is going to push everybody into being water, plenty of water for their own crops. Or there's some articles out there about some of the people who in pistachios and almonds because you lose a tree you've lost everything in that business and there were water rights that were pushed over to one side, and nobody knew about it except this one guy who follows one of the growers out there, and he wrote a nice article about how they took water from one place, moved it to another. And we've seen people tear down 15,000, 20,000 acres of almonds and pistachios because they don't have enough water to grow them. It takes an almond tree about a gallon of water for every nut they produce. So it's very difficult to keep an almond tree strong for the future. So I think we're in great shape now, and I applaud the effort of our guys in getting enough water together so that we won't be in trouble. Other questions?

No, that's it for me. I'll yield the floor. Thanks so much, David, for the commentary.

Okay. And we got anybody else? One more coming.

Yes, we have one more question. It's from the line of Michael Diana with Maxim Group.

Okay. Thank you. My question is just on the impact of the sale in the first quarter here of that farm, the impact on net asset value, just that in and of itself, the sale. Is it going to be $10.4 million, in other words, the amount over cost, or is it $2 million, the amount over the appraised value?

It would have been $2 million over the appraised value because the previously appraised value was what we had on the books as far as the NAB calculation goes. However, we did already mark that up at 12/31 since we did have a PSA in place at as of 12/31. So that sales price -- that increased sales price is reflected in the NAV calc as of 12/31.

Oh, okay. All right. Thank you.

No problem.

Thank you. We have no further questions, Mr. Gladstone. I’ll turn the floor over to you for closing remarks.

Well, we certainly appreciate all of you listening to this and asking good questions and hope to see you next quarter. And if you can, jot down a couple of extra questions to ask. We have time to talk to you and we only talk to you once a quarter, so get your questions ready so we can talk some more about what's going on out there in the farming world in California and in Florida. That's the end of this. Thank you very much.