April 23, 2015

By Dan Emerson

In 2013, Gladstone Land Corp. (NASDAQ: LAND) launched as the country’s first-ever publicly-traded company focused on investing in U.S. farmland.  Gladstone leases its farms to medium-sized, independent farmers and larger, corporate farming operations, which grow annual row crops, such as certain types of berries, lettuce and other crops. Recently, Founder, CEO and Chairman David Gladstone discussed the McLean, Virginia-based REIT’s investment strategy and future plans with GAI News.

GAI: What is the strategy behind opting to become a publicly-traded REIT?

Gladstone: Farmland is a good hedge against inflation. And we’re publicly-traded because that appeals to investors who would like to have liquidity – to own or not, depending on the day of the week. If they want to buy and hold, they can do that, too. We’re offering the opportunity to almost anybody who wants to buy the stock the opportunity to own a large number of farms.

GAI: So far you have concentrated on farmland that produces fruits and vegetables, rather than corn and other grains. What is your underlying rationale?

Gladstone: We’re very much oriented toward produce because I come out of that business. I know that area, and we’ve brought people on-board who are very good in that area. Also, we recently hired a fellow near St. Louis who is very involved in the grain business. We plan to get into that business over time, but right now we are very focused on fruits and vegetables.

GAI: Is part of the appeal of owning produce farms the fact that produce prices tend to be less volatile than grain prices?

Gladstone: True. Sometimes prices look volatile on some fruits and vegetables, but not anything like what happened in corn – it was over $8 a bushel; now, it’s under $4 a bushel. That’s a pretty drastic change.

GAI: Much of your farmland is in California and Florida. Do you have any plans to acquire more farmland in the Midwest?

Gladstone: We’re working our way up the East Coast (from Florida), and we’re also in the Midwest, now, because of the opportunity to get involved with different kinds of vegetables. In the Midwest there are a lot of potatoes, melons, beans and some tomatoes.

But we don’t want to disconnect from what I think is the biggest marketplace of all: corn wheat and rice. Those are crops that take up huge amounts of land and are probably the biggest producers in the U.S. So, we will have to go in that direction one day.

GAI: Your tenant leases are triple net leases. How does that help your bottom line?

Gladstone: With triple net leases we don’t have to spend much money on upkeep. We have wells on all of our farms and we need to keep those wells up-to-date; sometimes we have to install new pumps or drill new wells. But right now, we have plenty of water on all our farms, so there is not much maintenance.

GAI: Has the California drought had much impact on your land?

Gladstone: For us and our farmers there has not been much impact. The state has exempted agriculture from the (mandatory) reduction in water usage. The governor had established a voluntary reduction program, which most farmers have been adhering to; so, there is not much room for the government to do much more. All of the farms we own in California have wells and are irrigated. We wouldn’t want to own land in California without wells.

GAI: With water consumption continuing to grow worldwide, do you think water will become more expensive?

Gladstone: I think it will go up over time. There are a number of things going on in California that should take a large bite out of the drought (effects). Watsonville and a number of other cities have installed large, filtering stations to turn wastewater from municipal treatment plants into potable water. People don’t have a desire to drink that (treated sewage) water, so that can be piped into the fields for agriculture. Many of our farms not only have wells, they have pipes for irrigation. Those plants are going to bring huge changes to irrigation.

Also, about 20 desalination plants have been built in California and my guess is that will double over the next couple of years.

GAI: How does a period of low inflation, such as we’ve been experiencing, impact farmland prices? Does it have any dampening effect on the growth of land values?

Gladstone: About 100,000 acres of farmland in California and Florida have been “removed” recently, to be developed for housing, office buildings or schools. There’s a huge reduction going on in California. When one farm is taken out, all of the other farms become that much more valuable to the farming community. So, we haven’t seen any reduction in prices in California or Florida. As prices continue to go up it seems to be a really good time to be buying.

GAI: Do you have any plans to extend your land-buying to other countries?

Gladstone: I don’t think we’ll go outside the continental U.S. in the near term. There are millions of acres here to buy and grow with. Outside of the U.S. there is political risk and also currency risk we don’t want to have to deal with. In 10 years when we are at the $5 to $10 billion level, maybe at that point we’ll start looking outside of the U.S. We know plenty of people outside of the U.S. And it would be a good point of diversification. It’s just not on the plan, now.

We’re now over $200 million (in holdings); by the end of the year we’ll be closer to $300 million. That is fairly small when you think about public companies, but fairly large in terms of farmland. About 85 percent of all farmland is owned by families and about 1 to 3 percent comes up for sale every year.

GAI: For Gladstone, does farmland represent a long-term hold?

Gladstone: We’re not trying to be developers, or sellers to developers; we’re trying to build a company on farming alone. Our rents go up 3 to 5 percent a year on average. We have increased the per share dividend twice this year, to 4 cents per month. Also rents keep going up, so every time we renegotiate a lease we can look forward to bringing in more money.

Warren Buffet likes farmland better than gold; it has that kind of inflation protection. It does produce nice income and increases in value on a fairly regular basis, so we’re big believers.