Gladstone Land Corporation (NASDAQ:LAND) Q3 2019 Earnings Conference Call November 7, 2019 8:30 AM ET

Company Participants

David Gladstone – Chairman and Chief Executive Officer
Michael LiCalsi – General Counsel and Secretary
Lewis Parrish – Chief Financial Officer

Conference Call Participants

Rob Stevenson – Janney
Ben Zucker – Aegis Capital
John Massocca – Ladenburg Thalmann

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Gladstone Land Corporation’s Third Quarter Ended September 30, 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would like to hand the conference over to your speaker today, Mr. David Gladstone. Please go ahead, sir.

David Gladstone

Thank you, Olivia, and nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land. And thank you all for calling in today and we certainly appreciate the time to talk to you, and I'm glad you're listening to our presentation. We start every meeting with Michael LiCalsi. He's our General Counsel and Secretary. He's also President of Gladstone Administration, which is the administrator for all the Gladstone funds.

So Michael, take it away.

Michael LiCalsi

Thanks, David, and good morning, everyone. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable.

Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K and other documents we filed with the SEC. Find all these on our website, www.gladstonefarms.com, specifically the Investor Relations 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.

In today’s discussion, we will 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'll also discuss core FFO, which we generally define as FFO adjusted for certain nonrecurring revenues and expenses, and adjusted FFO, which we further adjusts core FFO for certain noncash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating results and allow better comparability of our period-over-period performance.

Once again, please take the opportunity to visit our website, www.gladstonefarms.com, sign up for our e-mail notification service so that you can stay up-to-date on the company. You can also find us on Facebook, keyword there is The Gladstone Companies, and we even have our own Twitter handle and that's @glatstonecomps.

Today's call is an overview of our results. So we ask that you review our press release, Form 10-Q, both of which were issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website.

Now I'll turn the presentation back to David Gladstone. David?

David Gladstone

Thank you, Michael. For the three months ending September 30, 2019, the team acquired about $153 million in value of the existing farms. And since September 30, 2019, the team's acquired an additional $52 million in value of the existing farms. Even with all of these acquisitions, our current backlog of potential farms to acquire seems to be strong and looking forward to the future. As of today, we've acquired $253 million a farm since the beginning of the year. It's the best performance in the history of the company in terms of growth and assets that we have.

Our strategy hasn't changed, where the company is to buy high quality farms in prime growing regions. We want to get our total farmland holdings to a size where there is sufficient diversification to provide safety and security for the cash flows coming, and thus for the dividend that we pay our shareholders. I think we're there now, but there's no guarantee and I think as we continue to grow, we'll become more and more diversified.

The team needs to spend money to hire people, to help manage our growing portfolio. The choice was either to save money and sit still and not grow or to spend some money, hire some people and continue the growth, and we selected growth. This is – with these new acquisitions, which are a little higher yielding than in the past, together with our ability to lock in financing at low interest rates, we think these new acquisitions are going to result in a nice boost to the profit and dividends going forward.

In addition, we're seeing rents tick up in terms of our income as evidence of our recent lease renewals. And in addition, we continue to lower our property operating expenses. We're also hearing good news with regard to crop yields and that'll boost our income from crop sharing. Some of this income came in during the quarter that we're in today, but most should come in during the fourth quarter, which ends on December 31.

Looking at the total farmland ownership, we currently own about 87,000 acres or more than 100 farms in 10 different states across the United States. And based on the appraisals or the price we paid for the new farms, we believe that farms have a fair value of about $876 million. And more importantly than the number of states, our farms are – where our farms are located, the farms are in 23 different growing regions. And these growing regions, some of them are large, some of them are small, but all of them are essential to what we're trying to do is be in regions that will facilitate the turnover if we need to have a new tenant.

The tenant farmers on these farms are growing over 45 different types of crops and we think we have pretty good diversification on the crop types. And we are always trying to improve it with the next new crop or an addition to some of the ones that we have only a few items in. There's news about the farms. We are now 100% occupied and are at least 74 different tenants, all of whom are unrelated to us.

Before I get to the activity for the quarter, I just want to let you know that none of our farms in California have been negatively impacted by the most recent group of wildfires out there. These fires are taking place in the hills, where all the brush and the variety of trees are located, whereas our farms are in the valleys or the flat lands away from those mountain sides.

During the quarter ending September 30, 2019, we acquired seven farms for $153 million that grow a variety of crops. The quarter was the largest quarterly growth in terms of adding to our asset base. And since the quarter end, we acquired six more farms of about $52 million. Overall, the initial net cash yield to us on these acquisitions is about 6.4% and all the leases also contain certain provisions such as annual escalations or participation rents, and that should push that figure that I mentioned, the 6.4%, even higher as the future goes forward.

And just to note, the GAAP rate figure that we talk about, does account for operating expenses. We're responsible for under these respected leases such as property taxes. We have a few where we pay the taxes, and also some of the equipment's there, that is the piping under the ground and as well as some of the pumps.

Most of these leases are triple net, so there shouldn't be too many expenses incurred by our company. On the leasing front, during and after the quarter we entered and executed new leases, and extended or amended leases on six of our properties. Now, one of these leases was changed from a triple net to a partial net that is we have to pay the property taxes. But after accounting for these taxes, the new leases are expected to result in an increase in annual income of over $600,000 or an increase of about 11% over the prior leases.

We only have two leases expiring through the rest of 2019. They make up only about 2% of the total minimum annualized rent. And we're deep in negotiations with these potential leases, but I think we've agreed on the terms and they're trying to draft the extension of the leases now, so expect both of these leases to get signed soon.

We have several leases scheduled to expire in the year 2020. As noted in a recent press release, we renewed two of the leases that were originally scheduled to expire in 2020. And these two leases accounted for a huge amount, about 47% of the total leases expiring in 2020 as of September 30. One of those is a one of the original farms, it's about 650 acres. It's a big farm with a lot of strawberries growing on it. The remaining 2020 leases expiring make up about 10% of our total lease revenues. So we still got a lot of work to do and we're in negotiations with both the existing and a few potential new tenants on all of these farms.

Now just another point to – on our growth, beginning of the year we increased the number of people at the management company dedicated to this fund and opened offices in Salinas, California. As you know, we have one in Oxnard, but need more offices and more people in California as we grow there. We also opened an office in North Carolina. We hired additional people in anticipation of acquiring more farms and needed to manage the portfolio of over 100 farms. It takes a lot of work to manage these.

Well, after hiring all of these people, we started the year off kind of slow. But activity really started to takeoff in June, and the quarter just ending, we closed on the $150 million or so of farms. So those additional hires in new locations seem to be working out well for us. Now it's extremely difficult to match the timing of new acquisitions of farms with a need for new employees. Sometimes we get ahead of ourselves behind a few more people before we have the extra farms coming in.

Just as an example of how long some of these take, one of the farms we purchased doing this third quarter is, some people I've been negotiating with and talked to them more than 10 years ago. It took them that long to sort of get around to it. So it takes a while to get these farmers interested in selling out their – selling their farms to us. Also at the end of June, as a result of the lack of dividend coverage and to avoid harming lands, current dividends and growth trajectory since we were a little bit behind, the management company credited a full management fee and all the incentive comp to the fund to make sure we've covered the dividend. The management company actually lost money of course during that quarter. But I felt that was a credit that we needed to help with the dividend coverage. At some point in time we’ll be so strong to take a couple of hits like that, but today we didn't except for giving up the management fees.

Now in our capital raising efforts, since June 30, 2019 we've raised about $24 million in net proceeds through the sale of our non-traded Series B preferred stock. To-date, we've sold about $92 million, but that's $97 million or so today because we closed.

Michael LiCalsi

We’ll come up a little bit more next weekend.

David Gladstone

Yes. So we're almost at $100 million of Series B preferred stock. We also raised about $5 million in net proceeds on the sale of a little bit of our common stock. Please note, please, please note, in the process of selling Series B preferred stock this company has paid certain commissions and fees to Gladstone Securities, one of the management companies affiliated broker dealers. However, Gladstone Securities is just a conduit in this offering as it pays about 94% or so of those fees that it earned to third parties. These are the brokers and the wholesalers and the others who are helping sell the shares in the Series B. So it's not a profit center for us.

And the rest of the fees retained by Gladstone Securities have been used to cover expenses such as printing prospectus books. We have to update those as we go along. Information pamphlets, we also have to pay to attend certain conferences or brokers in order to present. So in total, these additional expenses are greater than the 6% fees kept by Gladstone Securities. This is a costly way to sell non-traded stock, but really it's no more expensive than having a stock offering, where you have to discount the price as well as pay expenses to the brokers.

And folks, one reason we prefer – we like selling the preferred stock is to avoid the dilution of the common stock. Most common stockholders don't want the dilution either. And as a shareholder, I don't like it diluting the common stock either. So please also note that the preferred stock does not count as equity and the calculation of the fees paid to the advisor selling the Series B does not increase the fee to the advisor. I want everybody to get that clear.

Prior to the third quarter, 100% of the management fee attributable to the preferred stock has always been credited back to Gladstone Land. That is, we didn't make any money over that even when it was part of the calculation. And with the amendment to the advisory agreement, we finally said to our Board, why are we doing this. We changed the advisory agreement that was executed in early July, 2019. The preferred stock is now excluded from any fee calculation, so I hope everybody gets that straight.

I also just want to mention that we've begun to recognize some of the crop sharing revenues on some of our properties, these are called participating rents, it's really just sharecropping. During 2018, that is last year, we had about $1.2 million in participation rents. We expect to have a lot more, well, a little bit more than in 2019. So far through 20 – through September 30, 2019, we've recorded about $875,000 participating rents. $848,000 came through in the third quarter. We expect to be able to recognize the significant amount of additional participation rents during the fourth quarter that we're in right now.

So I'll leave these and some other numbers to our CFO, who's going to talk now, Lewis.

Lewis Parrish

All right. Thank you, David, and good morning, everyone. I'll begin by discussing our balance sheet. During the third quarter, our total assets increased by about $128 million or 20%, primarily due to the new acquisitions. These are funded through a combination of new fixed rate loans and cash proceeds received through equity issuances. From a financing perspective, since the beginning of the third quarter, in addition to the proceeds from equity issuances as David mentioned earlier, we also secured 12 new loans from seven different lenders, including two new lenders for total proceeds of about $137 million. On our weighted average basis, these new loans will carry an effective interest rate of 3.68% and will be fixed for the next eight-plus years.

From a leverage standpoint on a fair value basis, our loan-to-value ratio on our total farmland holdings was about 55% at September 30. And we're comfortable at this level, given the relative low-risk of high-quality farmland as an overall asset class.

While interest rates continue to be volatile, over 97% of our borrowings are currently at fixed rates, and on a weighted average basis these rates are fixed at 3.6% for another six-plus years out. So we believe we are currently well protected on the debt side against any future interest rate hikes. And with the weighted average maturity of these borrowings being 11 years out. We also feel we're protected against potential liquidity issues should another recession hit.

Regarding upcoming debt maturities, we have about $35 million coming due over the next 12 months. However, about $22 million of that represents the maturities of three bullet loans coming due over the few months. We're currently in discussions with the lender for these three loans and we expect to be able to extend all of them prior to their respective expirations.

The three properties collateralizing these loans have increased in value by an aggregate $2.2 million since their respective acquisitions. So we don't foresee any problems refinancing these loans. So if you remove those maturities, we only have about $13 million of amortizing principle payments coming due over the next 12 months or less than 3% of our total debt standing.

Now moving on to our operating results, first to note that we had net income for the quarter of about $523,000 and we had a net loss to common shareholders of about $644,000 or $0.03 per common share. Compared to the prior quarter, our adjusted FFO increased by about $657,000 or 29%, on a per share basis AFFO increased by $0.018 per share from $0.123 per share last quarter up to $0.141 per share the current quarter. Dividends declared were $0.134 per share in each quarter.

On a year-to-date basis, our AFFO as of 9/30 was $0.399 per share versus dividends declared a $0.401 per share. And this equates to a shortfall of about $29,000. Our current expectation is that the earnings from our recent acquisitions and the participation rents we anticipate recording during Q4, will be more than enough to cover this shortfall.

The main driver behind the increase in AFFO was higher top line revenues, from a cash rent perspective, rental income increased by $2.5 million or 30% from the prior quarter, primarily due to the additional revenues from our recent acquisitions as well as about $848,000 a participation rates recorded during the quarter.

On the expense side, our core operating expenses increased by about $741,000 from last quarter. However, this was due to the fact that the full management fee was credited back to us during Q2. If you remove related-party fees, our core operating expenses actually decreased by about $182,000 or 18% from the prior quarter. This decrease was driven by a 20% decrease in our G&A expenses, which is primarily due to lower professional fees and stockholder related expenses, and by a 15% decrease in property operating expenses.

As we've discussed on prior earnings calls, our property operating expenses had been higher primarily due to generator rental costs we incurred from about July, 2018 through June, 2019. However, we're no longer incurring these particular expenses, so we're hopeful of being able to show some stability here going forward.

And now I'll move on to net asset value. We had 22 farms revalued during the quarter, all via independent third-party appraisals. Overall, these farms increased in value by about $3.7 million or 2.9% over the prior valuations from about a year ago. As of September 30, our farms were valued at about $825 million, all of which was value based on either third-party appraisals or the actual purchase prices. And based on these updated valuations and including the fair value of our debt and all of our preferred stock, our net asset value per common share at September 30 was $11.49, which is down by $0.12 or about 1% from last quarter.

Please keep in mind these changes in valuations do not show up on our balance sheet, which just shows their assets that their historical cost basis net of depreciation, nor do these valuation changes drive any of the fees we pay to any related parties. We just provide these to be able to let our shareholders denote fair values at the underlying assets they're investing in.

Turning to liquidity, including availability on our lines of credit, we currently have about $13 million of dry powder, which translates into roughly $30 million of burning power for straight cash acquisitions. We also have the ability and intent to issue new OP Units as consideration for purchases should the opportunity arise, just as we did this past quarter. And we're generally completing two closings per month of the Series B Preferred Stock, which on average is bringing in about $6 million of net proceeds every month.

Finally, we have ample availability under our largest borrowing facility, and we continue to be in discussions with potential new lenders for either additional facilities or individual borrowings. But credit generally continues to be readily available to us we have plenty of room and ability to continue borrowing and buying new farms that meet our investment criteria.

Now I’ll touch briefly on our common distributions. We recently raised our dividend again to $0.0446 per share per month. Over the past 58 months, we raised our dividend 16 times resulting in an overall increase of 48.7% in our monthly distribution rate to shareholders over this time. Since 2013, we've made 81 consecutive monthly distributions to shareholders totaling $4.31 per share in total distributions. Paying distributions to our shareholders is paramount to our business plan, and our goal is to continue to increase the dividend at a rate that outpaces inflation.

Before I turn it back over to David, there are just a couple of clarifying points I'd like to make.

First, regarding the fees land pays to its advisor and administrator. During the 12 months ended June 30, 2019 the aggregate fees paid by land to the advisor and administrator equated to about 0.4% of land's total assets of fair value as of June 30, 2019. And the 12 months prior to that, the total fees were just under 0.7% of total asset fair value. To put this into perspective, a fee of about 1% of asset values, pretty typical for a fund like ours. However, we would generally expect our fees to be well below this level for the following reasons.

Land typically finances 60% of acquisitions with long-term borrowings. Now the advisor will charge a 2% management fee on the 40% of invested common equity, which results in a fee equal to 0.8% of the historical cost of our assets. And if our equity investment consists of just a preferred stock, then there is no resulting fee pay to the advisor. I mean considering that the fair value of our farms have continued to grow – continue to grow, coupled with the fact that land’s common equity is now making up a slightly lesser portion of all acquisitions. This is due to the Series B Preferred Stock during a portion of that gap, on again, which no fee is earned.

The management fee charged as a percentage of asset value should be even less than the 0.8% mentioned earlier. And regarding the other fees paid to our advisor, namely the incentive fee and the capital gains fee, over the past three months, 12 months periods ended June 30, we've paid an average of total other fees of about $278,000 per year. And this is inclusive of a period during which we recognize a $6.5 million gain on the sale of one of our farms, and the capital gains fee attributable to that was fully credited back to us by the advisor. And in addition to that over the same periods, our advisor has shown itself be extremely shareholder friendly by crediting over $2.6 million of fees back to the fund to allow it to cover its dividends to shareholders. In short, we believe the fees we paid to our advisor are very reasonable, especially when compared to those charged to other funds with similar sizes.

Finally, just one last point, I want to touch on the cap rates versus our cost of capital. First, as David mentioned, the cap rates we disclose in our press releases and on our earnings calls our net of expected operating expenses. The majority of our farms, I'd say about three fourths of them are least under triple-net leases where the tenant is responsible for all operating expenses. Of the remaining 25% of our farms, all but four of them are at least under partial that leases where we're responsible for a certain expenses and most commonly this is just the property taxes. When we acquire new farms with these types of leases, the cap rates we quote will account for the expected property taxes we're responsible for paying.

So as noted earlier, the year one net cash cap rates on our acquisitions since July 1 is 6.4%, and for acquisitions for the year, that figure is 6.5%. But keep in mind this does not include fixed annual escalations or any future participation rents in one of these two provisions as included in all of our leases. So we actually expect these figures to be slightly higher when all the numbers come in. Now to compare this to our weighted average cost of capital or WACC, which includes all borrowings and preferred and common equity issuances.

Our WACC for the third quarter was 4.1%, and if you include the 2% management fee on the common equity fees that number increases to 4.2%. On a cumulative basis, our WACC as of 9/30 was 4.5% or just under 5.1% if you include the full 2% management fee on our common equity. Our note, this assumes no credits to the management fee, whether this is assuming the full fee is paid out, which as you know, hasn't always been the case.

The spread for us in year one won't always be as high as these particular acquisitions and it won't be as wide as you can often get on the commercial side. But when considering the type of assets we're buying and the general stability of the overall asset class, the fact that our assets have historically increased in value and knowing that we have built in escalators on virtually all of our leases, we think the spreads were achieving, provide us with sufficient margins for both our company and for our shareholders.

With that, I'll turn the program back over to David.

David Gladstone

Okay. Lewis, nice report. Our list of potential farms to buy remains healthy, so we hope we can continue to be active and be able to report positive news to you in the near future. But as you know, and as I've mentioned before, there's really no guarantee of closing on anything and sometimes farmers push you along for a months rather than making a clean decision.

Just a few final points that I'd like to make. We believe that investing in farm land and growing crops that contribute to healthy lifestyle such as fruits and vegetables and nuts follows the trend that we're seeing in the market today. Currently over 85% of our total revenue comes from farms that are growing. These types of foods that you find in either the produce or the nut section of your local grocery store. We consider these foods to be among the healthiest type foods and we're seeing growing trend toward organic among these foods, about 40%, a little over 40%. I think of our fresh produce acreage is either organic or transitioning to become organic and over 20% of our permanent crops acreage falls into the organic category.

I believe the organic sector will continue to be a strong growth area. In addition, I'd like to mention that 95% of our portfolio is in GMO-free. These crops are just mandatory for us to be and then staying away from the GMO side. Another major reason our business strategy is to focus on farmland and growing fresh produce is due to the effect of inflation on a particular segment. According to the Bureau of Labor Standards – Labor Statistics, our overall annual food, that's the CPI general. It generally keeps paces with inflation. However, over the past 20 years, the fresh fruits and vegetables segment of the food categories outpaced the total food CPI by multiple of 1.6 times.

And while prices of commodity crops like corn and soy are typically more volatile and susceptible to global supply and demand, fresh produce is mostly insulated from the global volatility because the crops are generally consumed locally within a short period of time after being harvested. Ultimately, we believe that farmland is GMO-free and growing healthier crops such as fruits and vegetables and nuts are going to continue to outperform the overall farmland market in terms of both cash returns and long-term capital appreciation.

Overall demand for prime farmland and growing berries and vegetables remains very stable to strong and almost all of the areas of farms we are located in. And this is mostly along the West coast, including California, Oregon, and Washington State and the East Coast, especially in Florida where we have a lot of holdings. And overall farmland continues to perform well compared to other assets, despite some of the recent downturns in certain regions, this NCREIF Index, they follow the farmland, which is currently made up of about $10.5 billion worth of agricultural properties. Including ours, it has an annual return of about 14.7% over the past 15 years, compared to just 6.9% for the S&P Index.

So it's a good stable area. You should know that during these 15 years, that Farmland Index has never had a negative year like you saw on the two years for the S&P and the REIT Index during the great recession. Farmland has generally provided investors with a safe haven during turbulent times and financial market places like we've seen, and both land prices and food prices, especially fresh produce, they continued to rise steadily over the time.

As you know, our current distribution run rate – stocks trading at $11.99 and that means you're getting over 4% and a return on a current basis. And that's about the yield of the whole REIT Index. So you're right in the middle of the REIT Index, where you consider relative stability of the underlying assets. When you look at those farms and that – that's out there, I think this stock offering is just a wonderful alternative for people who are looking for good income. Just so you know, September, 2019, I purchased more shares – I purchased 210,000 shares of Gladstone Land’s common stock. So as you know, that your leader is in it for the long term, and I really love these assets because they're not going anywhere.

Please remember that purchasing stock in the company like ours is a long-term investment in farmland. I think the investment in our stock really has two parts. It has its similarity to go, but it's a hard assets, farmland is and that’s the intrinsic value is there because there's a limited amount of it and it's being used up by urban developers, especially in California and Florida where we have many farms. And also it's unlike goal – and other alternative assets. It's an active investment with cash flows to investors. And our stock is better than a bond fund because we keep increasing the dividend and bond funds are usually relatively static in terms of their yield.

We expect inflation, particularly in the food sector to grow and we expect the values of the underlying farmland to increase. As a result, as you know, we do an appraisal every quarter in terms of giving you an idea of what’s your farmland is worth. That's not captured in our balance sheet, but we do have a section in the 10-Ks and 10-Qs, where we give you that value. We expect this to be especially true of the fresh produce sector. People in the United States are trending toward eating more healthy foods.

I think a good way to look at our farmland fund is a hedge against inflation in both food prices and other areas. So if you like what you're seeing us do, please buy some of the stock. And as I mentioned every time, keep eating fresh fruits and vegetables. I think it's a great farm and I think we’re really on the cusp of becoming a great stock to own. Once we get just a little bit larger in terms of asset size, I hope we'll get in that listing of the RMZ Index, which will bring in additional institutional ownership, increase the daily liquidity of our stock. But Gladstone Land wouldn't be anything with all the good people that we have operating and managing it. Buying and leasing farmland is a complex business.

Olivia, would you come on please. We will have some questions from those who are following us. And operator, give them an idea of how they can ask a question.

Question-and-Answer Session

Operator

Yes, sir. [Operator Instructions] And our first question coming from the line of Rob Stevenson with Janney. Your line is now open.

Rob Stevenson

Good morning, guys. Lewis, how much dry powder do you currently have for incremental acquisitions today?

Lewis Parrish

Today we have about $13 million. We should have about $5 million to $7 million of sales from the Series B coming in on Monday as well.

Rob Stevenson

Okay. And you said that you were running about $6 million a month on the Series B. How has that been trending? Is that just been holding relatively steady? Has that been increasing? How should we be thinking about that? And are you going to wind up, hitting your sort of your target amount here and sort of mid 2020 at the current rate?

Lewis Parrish

It's been averaging about $6 million. I mean, it has been increasing slightly. Just as an example, as I just mentioned, we're getting about $6 million to $7 million in Monday, and that's just for one closing. So I'm not going to – I don't want to imply that every closing will be $6 million to $7 million, meaning $12 million to $14 million per month. But we have been seeing a general increase though there is still lumping – some lumpiness over closing.

Rob Stevenson

Okay. And then last one for me. Other than pistachios, what were the major crops represented in the third and fourth quarter acquisitions?

Lewis Parrish

So for the third quarter, we had that water retention farm, strawberries, vegetables, wine grapes, pretty much – a pretty good variety of crops across those acquisitions. In Q4, it was so far the second phase of that pistachio farm, the first phase of which closed in Q3. And we also acquired two farms in Nebraska that grows some edible beans, soybeans and corn that will be transitioned to organic farmland.

Rob Stevenson

Okay. Thanks guys. Appreciate it.

David Gladstone

Next question.

Operator

Our next question coming from the line of Ben Zucker with Aegis Capital. Your line is open.

Ben Zucker

Good morning, guys, and thanks for taking my question, and congratulations on a strong quarter.

David Gladstone

Thank you.

Ben Zucker

I want to talk about the market opportunity quickly. Obviously, we've seen you guys meaningfully grow your investment portfolio over the last several months. Are there any structural changes taking place in the market that are unearthing these opportunities? Or is this simply a function of this being a very large and fragmented addressable market combined with lands, ample dry powder position?

David Gladstone

Well, it's the latter. And the difficulty, Ben, is all of those deals that we closed in the third quarter. Some of them should have closed in the first or second quarter. So it kind of bunched up on us in the third quarter, but it would be nice if we could do $150 million or $200 million a quarter. But we're going to fall back and our plan is to continue to push hard, but it just takes a long time to get these things going.

No structural changes out there. The only structural thing that has changed is that we keep getting bigger and people are more trusting of taking our non-traded, if you will, the UPREIT shares. So we've seen a little bit of pickup in that. And I think over time as we get bigger and stronger, more people will do these tax-free transactions, but that's where we are today.

Ben Zucker

Understood, and definitely hear you that some of it's just the push and pull of deals and timing between quarters. I think I was going to ask about two of your subsequent acquisitions. I saw on the two that they were growing corn and soybeans, some of the commodity crops that you guys placed less of an emphasis on in the past. I was going to ask if that's just you guys kind of continuing to diversify the crop base or if there's a part of that commodity market that you're increasingly interested in, but did I hear you that you're going to be converting those farms over to organic so we shouldn't have kind of think about it as the typical commodity bucket?

David Gladstone

That's right, Ben. As you probably know, the commodity crops, which are all the corn and cotton and rice, all of those have undergone real problems of competing in the international marketplace. And there's about 22,000 farms in that area, $112 billion worth of farmland. We have stayed out of that area even though it is gargantuan in size, obviously, simply because of the stiff competition for selling grains, even down to wheat and sugarcane.

If you looked at that marketplace, it's divided pretty heavily into one big category of GMO and commodities. And another category called organic. We like the organic marketplace because it trades at about 150% to 200% of the regular marketplace. So we've been working on programs that would convert some of the existing commodity crops into organic commodity crops. And I think that will work for us, but we're testing it out slow.

There's a big difference in those two marketplaces and that they have to go down different pathways to get to the consumer. If you're growing organic, you've got to have organic equipment, you've got to have – and you can't mix them. And so you got to have dryers that have to be organic. You've got all of these different ways of getting to the marketplace and it's going to take us a while to map that all out. But our guy in the Midwest, he’s out next to St. Louis, is an expert in this area and I think he's going to lead us down a path that will let us into this 22,000 farms and $112 billion worth of farms out there and maybe we can carve out a place for ourself in the organic part of that marketplace.

Ben Zucker

Understood. When I was looking through the MD&A section, it sounded like you guys have been maybe rotating some of your leases to a lower base fixed rent structure that has more higher participation rents on the back end. I guess, I'm just kind of curious. What's the calculus there from your perspective? As a farmer, I certainly get it because it seems like it's de-risking their rent obligations to only paying more when they're getting a good yield. So I'm just kind of wondering what your guys' kind of risk reward decision is when you're looking to do that. Is it only partnering with kind of proven operators who you have an added level of comfort with? Just wanting to hear your thoughts there.

David Gladstone

Yes. The idea is to not take on too much risk when we go into the participation side. At the same time, if you've got an operator who year in and year out has made good money and had big returns and in addition have insured their crops through the federal government's crop insurance program, we look at that and say to ourselves, well, yes, we won't look as good during the first and second and third quarter, but boy we’ll show some upside on the fourth quarter. So you'll see this fourth quarter and we can measure it again of how much you want to come in toward the end of the year rather than currently across each of the month, each of the quarters. So that's the calculus that we go through.

We're not going to ever have half of our crop coming in at the end of the year. That would be silly. It would jeopardize the dividend and some of the quarters. And I don't want to do that. As the largest shareholder, I love dividends, but I like them when they're steady rather than all at once. And this is contrary to people like Warren Buffett who said, if I could get a variable unknown 12% a year versus a steady 9%, I'd take the 12%. But from my perspective, since I'm dealing with other people's money, I think the 9% steady is going to be our choice for a while. Now when I get to the size of Berkshire Hathaway, we can take some chances.

Ben Zucker

All right, I hear you there. And one more if I may. Just – and maybe this is more for Lewis, just thinking about the company's capitalization, look, obviously there are clear advantages to preferred equity under your revise management agreement, but at the same time, if you're going to fully utilize this preferred allotment of $150 million, which it sounds like you guys will, at least at the current level you'll have pretty close to a 1:1 ratio on common and preferred. So just kind of like which strikes me as a bit high and I'm sure it does you too. So I'm just kind of thinking about how you guys plan the balancing of this ratio and what you think is a comfortable mix between common and preferred?

Lewis Parrish

So, Ben, I think right now our common market cap is right around $250 million, a little over $250 million. So if we get to the $150 million, it will still be above a 1:1. But even with that, the plan for us is not to use strictly just the preferred equity as we're going forward. The preferred equity, it might alleviate the need for one equity raise, common equity raise per year, but we will be – we do plan to raise that common equity through either ATM or overnights, as the need arises based on how the – our list of new farms by it comes through. But I guess the bottom line – if we won't be going to capital structure, just the preferred site without going the common side as well.

Ben Zucker

Understood. And thanks for the clarification, Lewis. That's it for me guys. I appreciate you taking all my questions. Thank you.

David Gladstone

Okay. Next question please?

Operator

[Operator Instructions] And our next question coming from the line of John Massocca with Ladenburg Thalmann. Your line is open.

John Massocca

Good morning.

David Gladstone

Good morning.

John Massocca

So if I heard it right, the base management fee, you no longer have any more kind of no longer paying to rent anymore generators. Is there any more kind of leverage that can be pulled starting with the base management fee, the property operating expenses? You're no longer paying for anymore rentals of generators. Are there any more leverage you can pull to, to kind of further bring that number down? Any more kind of temporary costs that are still in that 536 number that you reported this quarter?

Lewis Parrish

So I will say there was one property, I think we had – we had to record about $50,000 of pass supplemental taxes. And this was on a property in California where – when you buy it when ownership changes hands, the property gets reassessed at the new purchase price and it was obviously going to be higher than the cost basis from the prior owner. So we did have a step up in basis from that. But that $50,000, I don't know exactly how much, but I'd get estimate about 30,000 to 40,000 was a onetime expense recorded in this quarter that related to prior periods, if that makes sense?

John Massocca

That makes sense.

David Gladstone

Hey John, I wouldn't write off the generators we bought six or so. We bought six because…

Lewis Parrish

Five, five.

David Gladstone

Five because it's very expensive to rent them. And the reason we bought them is that you probably read about PG&E, they're having a few problems out there. So we're worried as we found out the hard way that they don't always show up on time when they're hooking up our generators to their lines. And so we have to have generators to do that. And PG&E has got a lot of problems to work through. So we may have to buy a few more, we may have to hook up a few more on our own. They're not that much more expensive than going through PG&E unless you have to rent the generators. If you buy them and amortize them off over a period, they work. So we were protecting ourselves from PG&E not showing up now.

John Massocca

David, you kind of anticipated my next question, which was, I know you haven't been impacted from the fires in California, but have any of kind of the blackouts, rolling blackouts caused any kind of additional operating expenses or even trouble for tenants as they irrigate farms, kind of et cetera?

David Gladstone

No. They're turning off the power to the people who live up in the mountain side where all the brush and all the dry trees are, they're not turning off the power to the people on the flat lands, and that's where most of our farms are. So we don't see that as a problem today. Some of them are our employees and people that are working when our farms get their power turned off because they're up on the hillside and they get turned off, but their worry that the winds are going to blow down the lines for PG&E and start a fire. But for us, we're in really good shape in terms of that. And the only thing I worry about is PG&E not showing up when we need them to. When we buy a farm, and we're ready to go and they turn the – don't show up to hook up the lines. We've got a problem because they need the pumps to work. So that's why we have the five generators and we may end up buying more as time goes on.

John Massocca

Okay. And then bigger picture, I know yields are a little higher as you kind of did a couple more kind of permanent crops in the quarter and kind of subsequent to quarter end. But just broadly speaking, have you seen any kind of cap rate compression in the farmland space as yields on kind of fixed income products have come down? Any kind of comparative pressure there?

David Gladstone

I haven't seen a lot of that. It depends on the growing area more than anything else. If the growing area happens to be on an area that goes through some kind of cycle, like last year or a year before, Oxnard had a problem from two perspectives. One, it was a coal spring and couldn't get their crops out and Oxnard depends on being able to get to the marketplace first, since it's the most Southern part of the growing areas. And so as a result, and in addition to that, Mexico came on strong and did a lot of dumping of product in the marketplace. And that growing area suffered for that year, but it's back strong now. We have some of the best tenants we've ever had have come in and picked up our properties in Oxnard.

So that area is a good area, and I think we'll see that area coming back in terms of the property values as well. But all of these things are – remember, John – it's like a manufacturing facility except that your manufacturing is alive plant and it's sitting outside. So it's a really difficult thing to figure out what's going to happen over time. If you have enough properties in enough different areas, you're not going to be affected by one property going up or down. It has to hit everything at once, which has never happened and say it can't happen, but hasn't ever happened as long as I know. And I've gone back to the 1930s on a lot of these properties just to seeing what the properties what they were growing on the properties as well as what the rents were.

So John, I think we're well-protected now that we're in so many areas, I can feel a lot better if we could get sort of double where we are today in terms of things say up and down the East Coast as well as the West Coast. We have blueberries as you know, in Michigan and it's had one or two problems over the years. But if you can get enough of these and enough different places, yes, it hurts when some of your farmers get hurt in one of the areas, but it's not a downer for our company.

John Massocca

Appreciate all the color. That's it for me. Thank you very much.

David Gladstone

Next question please?

Operator

Our next question coming from the line of [indiscernible]. Your line is open.

Unidentified Analyst

Good morning. How do you address the risk of water supply properties in California?

David Gladstone

Yes. Water, what's that old song? Never rains in Southern California. Well, that's true. And we have to have wells in all of our properties or some other method. And some of the properties were close to water supplies such as any of the towns that have these processing plants. For example, in Watsonville, they have two giant processing plants. And they take all the affluent that comes off of the city and they turn it from bad water into potable water. Nonetheless, the people in Watsonville don't want to drink that. So they have to do something with the water. And what they do with it is, that we have pipes that run out to our farms there. And you have two alternatives, you can use the wells that were in, or you can turn on the spigot and use the water that comes from these.

And they're about the same price because the California government charges you for the money you take out of your own well. So it's either one or the other. Now a lot of the farms, and we have one farm that has its own RO equipment. So it can clean up the water that is there. And so I think we're all looking at the same thing. And even in the Midwest, we're not going to take any dry farming as they call it, because you're dependent on rain. And it changes the amount of crop you can get off of something if you don't have water. If you go for a month without water in the Midwest, you've decimated your product. And so we just aren't going to be dry farmers. It's not good idea. I think we have one small farm in Texas, that doesn't have a well, and it works, but we bought it as part of a group. Anyway, that's the idea is that we must have water on every one of our farms.

Unidentified Analyst

Thank you.

David Gladstone

Okay, Alan. Next question please?

I'm not showing any further questions at this time. I would now like to turn the conference call back over to Mr. Gladstone for closing remarks.

David Gladstone

All right. Thank you very much. This was a fantastic quarter and I think we'll have some more of those as time goes on. Your company has started out as a small business and is quickly becoming a very strong and viable entity to survive almost anything they throw at us. So thank you very much for listening, and that's the end of this call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Have a good day.