Gladstone Land: Still Worth Watching (NASDAQ:LAND)
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Written by Nick Ackerman. This article was originally published on January 16, 2023 to members of Cash Builder Opportunities.
I last covered Gladstone Land (NASDAQ:LAND) for Cash Builder Opportunity members on May 23, 2022. Later it was posted to the public on June 6, 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 went in the same direction, but to a much smaller extent.
At the time I thought LAND was “almost a viable investment again.” I thought under $25 was good, but under $20 is great. This would still have resulted in an increased P/FFO of 27x if that price had been breached.
After this was posted, I sold puts in June at a $20 strike price. We collected $0.59 in premium, which would have lowered the breakeven point to $19.41 if awarded. Since this was over the course of 70 days, this worked out to a potential annualized return of 15.38%. Eventually, those statements became worthless.
Apart from lowering the break-even point of the position should it be awarded, this is a case where the premium collected is well above the dividend rate. This is one of the great advantages of selling puts, which provide greater returns than the dividend can provide.
Here’s a quick refresher on what and who LAND is.
This REIT is quite simple, but at the same time unique. They invest in farmland 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 one for investors to check out.
In the case of LAND, they target “primarily fruit and vegetable crops 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 leased on a triple-net basis to tenants with strong operating histories and deep farming resources. All of our farms has abundant water resources and is 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 of fruits and vegetables and nuts.”
One thing that is another headwind for the farmers is the drought. It was also something that changed in tone from before. They mentioned that all their farms have enough water.
We believe this reflects strongly on our pre-acquisition due diligence process, which always begins with a comprehensive water analysis. We continue to actively monitor the ongoing drought in the western US, and all of our farms continue to have sufficient water at this time.
They now seemed a bit more concerned in the latest conference call.
While we’re all hoping for winter, and it looks like it’s coming because it’s raining now in California, to alleviate the drought in the West, we’ve been focused on increasing the water security of our current portfolio of assets. This may include, but is 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 obtaining additional water credits through the purchase of additional open land.
Although they are still seemingly confident of having abundant water, it costs them more to secure it. More specifically, they mention almonds as one of their portfolio’s pain points. This is a combination of increased causes to obtain water and now an oversupply of almonds. The combination of higher costs and lower profits can hurt a tenant.
However, as almond prices remain low during oversupply. Believe it or not, there may be an oversupply of almonds along with the increase in the cost of water due to the decreasing supply of both groundwater and surface water, some of our almond farmers are starting to experience decreases in production, meaning they are harvesting less.
Although they see it will “heal” over time as the offer is worked through.
What is a good price?
Now that stocks are trading below $20, I’m still hesitant to invest any new capital. My hesitation comes from the fact that inflation has changed. The trajectory of inflation is now much lower, but yields are still higher. This creates a situation where LAND’s land can be less sought after and also makes it more expensive for them to buy land with higher borrowing costs.
Interestingly, despite this being the case, LAND was able to get 5% Series E Cumulative Redeemable Preference Share issued later in 2022. This is the same rate as their 5% Series D Cumulative Term Preferred Share (LANDM) issued in early 2021. So it doesn’t look like they’ve been hit by higher rates at this point, at least not a significant impact.
On another bright note for debt, because most of their debt is linked to fixed interest rates, they are not directly affected by higher interest rates on debt already issued.
From the graph below, we can see an almost perfect correlation between LAND’s price increase along with inflation. When interest rate hikes started coming hot and heavy with inflation showing signs of peaking, a subsequent decline. However, stocks have balanced out a bit more in the past few months.
I still think LAND is worth considering, but I would look for a lower price before buying. At this point in time, I think $17.50 is a good time to consider stocks, and at $15, you’re getting a lot.
Analysts estimate that FFO for fiscal 2022 will be $0.74. Then a small increase heading into fiscal 2023 to $0.79.
With that, a price of $17.50 would mean a forward P/FFO of around 22.15x. At a price of $15, we see the forward P/FFO at around 19x.
It could still emerge as a richly valued investment at those prices. However, it really isn’t when you look at the fund’s historical P/FFO. Based on this, the fair value price range comes in at around $16 to $17.50. Consequently, a fair value estimate based on this would net us about $16.75, which was a big factor in choosing my personal targets.
Valuation on a yield basis
Another way to value a REIT is by looking at its historical returns. Looking at that basis really opens up the fair value range. That’s from $12.42 to $18.70 per share. This brings a midpoint fair value estimate to $15.56.
Of course, with higher interest rates, LAND now competes with risk-free yields from US Treasuries. This makes the current yield of around 2.76% less attractive, and the 5-year average yield of 3.42% is still below what you can get for shorter-term rates.
That said, one thing a US Treasury won’t do is give dividend increases over time. At least not directly; if interest rates continue to rise, investors may get a step up in yield as their debt holdings mature. In the case of LAND, we usually get quarterly dividend increases. They’re pretty small, often only about $0.001 increases per quarter in most recent years, but they can all add up over time.
The last one was exactly that, from $0.0458 to $0.0459. It has paid out the REIT for 119 consecutive months and increased for 29 of the past 32 quarters. At the annualized rate of $0.5508, the forward FFO payout ratio of around 70% makes it a safe dividend.
FFO growth hasn’t been terrible over the past few years either. It appears as if they have lowered their payout relative to their FFO growth.
In the beginning, they were much more aggressive with their raises. As they mentioned in their last earnings call, there has been an overall increase of 52% since the start of the spikes.
Finally, about our general distributions. We recently increased our common dividend again to $0.0458 per share per month. Over the past 31 quarters, we have increased our common dividend 28x and this has resulted in an overall increase of over 52% over this period.
LAND is a REIT that I don’t mind having back in my portfolio, but the price has to come down from the current level for me. So again, it’s almost a viable investment again. I want it a little cheaper, which we can possibly do by selling wells or by continuing to be patient.