Gladstone Land: Still Worth Watching (NASDAQ:LAND)

Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on January 16th, 2023.

I last covered Gladstone Land (NASDAQ:LAND) for Cash Builder Opportunity members on May 23rd, 2022. Later, it was posted to the public on June 6th, 2022. Shares closed at $25.46 after that article was published. Since then, the price has continued to fall. To be fair, the overall market had gone in the same direction but to a much smaller degree.

At that time, I thought LAND was “almost a viable investment again.” I thought under $25 was good, but under $20 is great. That would have still resulted in an elevated P/FFO of 27x had that price been breached.

After that was posted, in June, I sold puts at a $20 strike price. We collected $0.59 in premium, which would have brought the breakeven down to $19.41 if assigned. Since it was over the course of 70 days, that worked out to a potential annualized return of 15.38%. Ultimately, those puts expired worthless.

Besides lowering the breakeven of the position should it be assigned, this is a case where the premium collected is well above the dividend rate. That’s one of the huge benefits of selling puts, which is yielding greater than what the dividend could deliver.

Here is a quick refresher on what and who LAND is.

This REIT is fairly simple but unique at the same time. They invest in farmland all across the U.S. There aren’t too many publicly-traded REITs that I know of that specialize in this interesting area of the market. Farmland Partners (FPI) is another for investors to check out.

In the case of LAND, they “primarily target fruit and vegetable cropland in regions with established rental markets and strong operations.” Their goal is to “build the premier farmland real estate company focused on the ownership of high-quality farms and farm-related properties that are leased on a triple-net basis to tenants with a strong operating history and deep farming resources. All our farms have abundant water sources and are currently 100% occupied.”

Water, Water Not Everywhere

Their farms remain 100% occupied and leased to a variety of different farmers at over 90. They also list that those farms are further diversified by “growing 60 different types of crops from fruits and vegetables and nuts.”

One thing that continues to be another headwind for the farmers is the drought. This was also something that had changed in tone from previously. They had mentioned that all their farms had sufficient water.

We believe this reflects strongly on our pre-acquisition due diligence process, which always starts with a comprehensive water analysis. We continue to actively monitor the ongoing drought in the western U.S., and all of our farms continue to have sufficient water at this time.

They have now seemed to come off as a bit more concerned in the latest conference call.

While we all are hoping for winter, and it seems to be coming that way because it’s raining out in California now, to relieve the drought in the West, we’ve been focused on increasing the water security of our current portfolio of assets. This may include, but not limited to, buying the water on the open market. We can buy water and put it out on our farms. Or more importantly, purchasing long-term water contracts and acquiring additional water credits through purchasing additional open ground.

While still seemingly confident in having abundant water, it costs them more to secure it. More specifically, they call out almonds as one of their portfolio’s pain parts. It is a combination of increased causes to source water and now seeing an oversupply of almonds. The combination of higher cost and lower profit can squeeze a tenant.

However, as almond prices remain low during to oversupply. Believe it or not, there could be an oversupply of almonds coupled with the increase in cost of water due to the decreasing supply of both groundwater and surface water, certain of our almond farmers are beginning to experience decreases in production that is they’re harvesting less.

Though they see that this will “cure itself” over time as supply is worked through.

What’s A Good Price?

Now that shares are trading below $20, I’ve still been hesitant to commit any new capital. My hesitation comes from the fact that inflation has changed. The trajectory of inflation is much lower now, but yields are still higher. That creates a situation where LAND’s land can become less coveted and also makes it more expensive for them to purchase land with higher borrowing costs.

Interestingly, despite that being the case, LAND was able to get 5% Series E Cumulative Redeemable Preferred Stock issued later in 2022. That’s the same rate as their 5% Series D Cumulative Term Preferred Stock (LANDM) that was issued in early 2021. So they certainly don’t seem to have been hit by higher rates at this point, at least not having a significant impact.

On another bright note for debt, due to most of their debt being tied to fixed rates, they aren’t directly impacted by higher rates on debt already issued.

From the chart below, we can see an almost perfect correlation between LAND’s price rising along with inflation. Then when interest rate hikes started coming in hot and heavy with inflation showing signs of peaking, a subsequent decline. However, shares have balanced out a bit more in the last couple of months.

I still think that LAND is worth considering, but I would be looking for a lower price before buying. At this time, I think that $17.50 represents a good time to consider shares, and at $15, you are getting a great deal.

Analysts estimate that FFO for fiscal 2022 would come in at $0.74. Then a small increase heading into fiscal 2023 to $0.79.

With that, a $17.50 price would mean a forward P/FFO of around 22.15x. At a $15 price tag, we see the forward P/FFO at around 19x.

It might still come off as a richly valued investment at those prices. However, it really isn’t when looking at the fund’s historical P/FFO. On that basis, the fair value price range comes in at around $16 to $17.50. Subsequently, a fair value estimate based on that would put us around $16.75, which was a big factor in picking my personal targets.

Valuation On A Yield Basis

Another way to value a REIT is by looking at the historical yield. When looking on that basis, the fair value range really opens up. It’s from $12.42 to $18.70 per share. That brings a midpoint fair value estimate to $15.56.

Of course, with higher interest rates, LAND now competes with risk-free yields of U.S. Treasuries. That makes the current yield of around 2.76% less tempting, and the 5-year average yield of 3.42% is still below what you can get for shorter-term rates.

That being said, one thing that a U.S. Treasury won’t do is provide dividend boosts over time. At least not directly; if interest rates keep rising, then investors could get a step up in the yield as their debt holdings mature. In the case of LAND, we generally get quarterly dividend boosts. They are quite small, often just around $0.001 raises per quarter in most recent years, but they can all add up over time.

The last one was exactly that, going from $0.0458 to $0.0459. That put the REIT at paying out for 119 consecutive months and raising for 29 out of the last 32 quarters. At the annualized rate of $0.5508, the forward FFO payout ratio of around 70% makes this a safe dividend.

FFO growth hasn’t been terrible in the last several years, either. It would seem that they have been letting their payout sink lower relative to their FFO growth.

In the beginning, they were much more aggressive with their raises. As they mentioned in their last earnings call, since beginning the hikes, there has been an overall increase of 52%.

Finally, regarding our common distributions. We recently raised our common dividend again to $0.0458 per share per month. Over the past 31 quarters, we’ve raised our common dividend 28x and that has resulted in an overall increase of more than 52% over this time period.

Conclusion

LAND is a REIT I wouldn’t mind having back in my portfolio, but the price has to come down for me from the current level. So once again, it is almost a viable investment again. I want it a bit cheaper, which we could potentially do by selling puts or by continuing to be patient.