LAND - Gladstone Land: Cheap Valuation Got Cheaper; Reiterate Buy Recommendation
2023-11-10 13:05:46 ET
Summary
- Gladstone Land Corporation's shares have declined by 10%, widening the discount to net asset value.
- Q3/23 earnings showed a decline in operating revenues, but net asset value per common share increased.
- The company's cheap valuation got even cheaper, trading at only 0.7x price-to-net asset value.
It has been a few months since I last wrote about Gladstone Land Corporation ( LAND ). In my prior article, I rated LAND a buy due to its discounted valuation relative to net asset value ("NAV"). However, I also noted that LAND's discount to NAV can persist. In fact, since my article, LAND's shares have declined by 10%, further widening the discount to NAV (Figure 1).
Figure 1 - LAND's share have declined 10% since last article (Seeking Alpha)
With the company recently reporting Q3/2023 earnings, let us review the quarter and refresh our thesis on the company.
Brief Company Overview
Gladstone Land Corp. is structured as a REIT and specializes in acquiring and owning farmland across the United States. LAND's primary focus is on acquiring annual fresh produce (i.e., fruits and vegetables) and permanent crop (i.e., blueberries and nuts) farms, with a tertiary focus on commodity crops (i.e., corn and wheat) (Figure 2).
Fresh produce and permanent crops typically enjoy higher profitability and rental incomes and lower price volatility compared to commodity crops. In addition, these crops usually have lower storage costs and are typically located closer to major urban centers, giving LAND greater development potential with its farmlands.
In total, Gladstone Land currently owns 169 farms with approximately 116,000 total acres spanning 15 states and over 45,000 acre-feet of banked water in California.
Q3/23 Continue To Be Marred By Tenant Issues…
For the most recent fiscal third quarter, Gladstone Land reported a modest 2.8% YoY decline in operating revenues, driven by a small $0.4 million decline in base rents as a lease agreement executed in Q4/2022 was restructured to reduce base rents in exchange for higher participation rents. Participation rents also declined YoY due to lower production on certain almond and pistachio farms and almond pricing (Figure 3).
Net income improved YoY to $3.1 million from $1.8 million in Q3/22 on lower other expenses. However, after the payment of preferred dividends, net income to common shareholders was -$3.0 million vs. -$3.6 million YoY.
With respect to LAND's farm portfolio, Gladstone Land executed seven new or amended lease agreements in the quarter that resulted in an increase in annual net operating of $210,000 or 9.8% over the prior lease.
However, LAND continues to be hampered by tenant issues that we noted in our prior article. According to the CEO's comments in the earnings release, LAND currently has four properties (encompassing 12 farms) that are self-operated and one property (three farms) that is vacant. Gladstone also continues to recognize revenues from a troubled tenant on a cash basis, resulting in a reduction in net operating income of approximately $201,000.
…But Net Asset Value Continues To Climb
Unlike other real estate assets whose value has been negatively impacted by higher interest rates, Gladstone Land's farms appear to be relatively unaffected, with the portfolio's real estate value currently estimated at $1.6 billion (Figure 4).
Gladstone is unique compared to other REITs in that its real estate holdings are mostly verified by independent third-party appraisals on an annual basis. On a per share basis, Gladstone's net asset value comes out to $20.33, a 6.2% QoQ increase compared to $19.15 in Q2/23 (Figure 5).
Figure 5 - LAND NAV increased to $20.33 (LAND Q3/22 10-Q report)
However, much of the quarterly increase in NAV / common share was due to a reduction in the fair value of the preferred shares outstanding, which added $1.06 / share to valuation (Figure 6). Changes to the farmland portfolio only added $0.19 / share.
Figure 6 - Changes in LAND NAV / share (LAND Q3/23 10-Q report)
Cheap Valuation Getting Cheaper
On a Price-to-NAV basis, Gladstone Land is even cheaper than the 0.9x P/NAV in my prior article, currently trading at only 0.7x P/NAV (Figure 7).
Figure 7 - LAND P/NAV (Author created with data from company reports and price chart from StockCharts.com)
However, investors are cautioned that Gladstone Land's historic price-to-NAV valuations have fluctuated, from a high of 2.3x in December 2021 to a low of 0.5x in December 2015. Furthermore, low valuations can persist, as Gladstone Land spent most of 2015 and 2016 trading between 0.5x to 0.6x P/NAV.
Gladstone Land also continues to pay out an attractive dividend, currently set at $0.464 / month or a 4.0% yield.
Risks To Gladstone Land
The biggest risk to Gladstone Land continues to be leverage, as the company is heavily indebted to the tune of $587 million. However, much of LAND's debts are fixed rate and maturity matched against the company's agricultural leases, so an earnings spread is 'locked-in' that helps support the company's distribution to shareholders (Figure 8).
Figure 8 - LAND's debts are matched against leases (LAND investor presentation)
Another risk to Gladstone is if the economy worsens, then tenant issues may escalate from a handful of tenants to multiple tenants, which could lead to a reduction in operating revenues and earnings for LAND.
Conclusion
While the headline earnings from the recent quarter saw a YoY decline in revenues, actual operating results were mostly 'as expected' with Gladstone Land actually delivering a slight improvement in net income.
Overall, LAND's cheap valuation got even cheaper, as the stock price declined while net asset value per common share increased. I continue to feel comfortable owning LAND's shares, given LAND's valuation is backstopped by valuable farmlands. I see no reason to change my recommendation from a buy at this time.
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Gladstone Land: Cheap Valuation Got Cheaper; Reiterate Buy Recommendation