ABOUT THE EPISODE
BRAD THOMAS: Hello everyone. This is Brad Thomas with iREIT, and I'm back again with another CEO Round Table interview. Today, I'm joined with David Gladstone. David is the CEO of Gladstone Land (LAND), as well as other companies that he'll tell you about. Full disclosure, I am an investor in Gladstone Land, and I love the farming sector - especially almonds.
David, it's good to see you today.
DAVID GLADSTONE: Well, I appreciate you doing this. We love the area. Nobody's ever done this before. We were the first public company - and a Real Estate Investment Trust - that pays dividends for people who want to buy land. And we're not in the traditional area. Traditional area, of course, would be something like corn, or wheat, or oats, or barley, or something like that, which is usually out in the Midwest.
And when people say “farmer,” that's who they think of. Really, when you move away from the big grain companies and the grain producers, you move into other specialty crops. And we're in that: we're in the - for example - produce: mostly berries and vegetables - lots of leafy greens that we grow. We have a lot of berries, we have a lot of strawberries.
I came through the world of strawberries. I bought, oh, I think it was about the third largest strawberry grower, in 1997. God, that seems like a million years ago. And ran it for a while and turned it around. It had been having its problems - we got it going. And we had about 5,500 Mexican American workers who are some of the most wonderful people in the world. Most of them were living in California and didn't go back and forth to Mexico.
But the point being is that once it was turned around, I sort of looked at it and said, “Do I want to be on the growing side, or do I just love the dirt?” And I voted for the dirt, and I sold the operating part of it to Dole - and kept the land. And Dole was my only tenant at the time.
BRAD THOMAS: Um-hmm.
DAVID GLADSTONE: They got - I think we had about 5,500 acres that we were farming. Most of it rented, but we had two fairly large farms, and then I just started buying farms. And then one day I woke up and said, “Well, maybe some other people would like this.” And so we did a public offering in December, January of 2013, I think it was. And we've just been grinding along. And now, we're about a billion dollars’ worth of farmland. And the wonderful thing is: they pay, as agreed, most of the time.
Every now and then, they get in a little jam, where they didn't get their crop in - when they thought they were going to get it. So they go - you know - you have to wait another couple of months while they harvest and get things in place.
So it's a wonderful, stable area. It's not going to be something that overnight, it just explodes in growth, or explodes in - you know - people eating this, that, and the other. It's just one of those wonderful areas, that's not correlated with the stock market, and it trades very well against gold. It's more like gold than it is say, a technology company, of course. So as a result, we just continue to build that up. And this fits right in with our strategy. All of our companies are monthly dividend payers, and most have paid through thick and thin.
We haven't had any trouble in Gladstone Land during the pandemic, none of the people here in the office were hurt by any of the pandemic, and most of the people out there in the marketplace, related to farming - except for some of the workers - have been pretty far removed from the pandemic craze that's going on in this country.
I must say it is still as stable as a rock. People are paying, we pay our dividend. It's been good for the grocery store business, which is where most of our people sell their product. They sell it to Kroger - as the biggest - all the way down to some of the smaller grocery stores - but that's a very stable marketplace.
And of course, people got to keep eating. And so, when the restaurants were all closed down, Mama started cooking in the (laughs) - at home - and people are eating a good 10% - maybe even 24% in some markets - more - from the grocery stores - and the grocery stores are loving it ‘cause they've been able to push their prices up, as well as the volume. So they've been making good money.
My farmers, the people who rent our farms - by the way, we don't farm any of these. We rent the land to farmers - and I was just looking at my statistics here somewhere, and we've now got 115 farms and we've got - it's interesting: we have about 70 different farmers.
And some of these are really large and strong and will be around for a long time - and others are a little bit weaker, but we know the families. And what happens when you've been in the business, as you know a lot of the people - and at the same time, you know who the good ones are, and the bad ones are.
So we're doing good deals. They keep getting bigger. This year has slowed down because it's very hard to get some of the banks who are working from home, to go through and make the loans to us. We use the Farm Credit and Farmer Mac, and they've been wonderful. They are just terrific to work with. So we've had good relationships there. And then on the other side, it's been very difficult to get some of the governments to sign off on certain things. And so as a result, it's taken more time.
It's not like they've gone away. It's just that it's taking longer to close them. I'm hopeful that next week we'll have a couple more that we've put on the books, so people can see what's coming. And we're dealing with some very large transactions that could catapult us up pretty large, in terms of the owners of farmland in - most of it is in California, Washington, Oregon.
Those are good areas. We've got some in Arizona as well, but we also are very strong on the East Coast, mostly Florida. Florida's in fact - most of the farmers we deal with in California, also farm in Florida. So it's been pretty easy to work that and Florida is doing extremely well. We've not seen problems.
And the thing the President did with the new Act that helps us out when - in Mexico, because Mexico had been dumping some of the tomatoes they were growing, and that's now settled down, and the tomato growers in Florida can make a few bucks - but it's a wonderful business. I love the farmers. The only difficulty is unlike the farms that are in the Midwest - that will trade almost like stocks sometimes because it goes by the quality of the land.
And if you're in Iowa, for example, oh my goodness. They know almost what the value of your property is, by the fact that the dirt is this kind of dirt or that kind of dirt. And you just say to yourself, I know that's what I'm going to get.
We're not in that area, and we're not in that area - but not because it's a bad area for us to be in. It's just: the margins are tiny there - because corn, for example, competes with corn coming in from all over the world. You can buy corn from Russia. You can buy corn from all over that comes to the United States. So because it's a hard grain - and same thing for wheat - and you can ship that stuff all over.
And so, if you've got a really cheap area like Brazil, Brazil is a huge, huge producer of certain things, now. And it's really hard to beat them because their land is so cheap, and their shipping is miserable. I don't know how they get that stuff up here, but they do. So they just had a huge sale of oats to China. And you couldn't match that price. I don't think we could produce it for what they are producing it. So the competition has made farming in oats and others just very difficult because there’s so much of it. So we've avoided that. Go ahead.
BRAD THOMAS: Yeah. I'll ask you, you know, ‘cause you mentioned the growth, and the banks are a little bit slower now - but last year - I believe it was - you launched a non-traded preferred. Obviously, we've been covering the company, and the common's getting a little too pricey for us - for individual investors.
DAVID GLADSTONE: No - it's too low!
BRAD THOMAS: That's a good answer from the CEO. But –
DAVID GLADSTONE: No, the analysts are saying it's a $20 stock. So please don't say it's overpriced, at $15 or $16.
BRAD THOMAS: Well, I like to use the words “soundly valued” - it's soundly valued.
DAVID GLADSTONE: Okay. I'll accept that from you. ‘Cause you're a good, conservative projector. So, I'll accept that from you.
BRAD THOMAS: I guess my question is: can you talk about the preferred, which from a yield perspective is a little more attractive today.
DAVID GLADSTONE: Yeah. The preferred that we came out with, was what we call the Series B. We had a Series A and it's toward the end of its life and will be redeemed sometime next year. But the B came out - we decided we didn't know much about the non-traded area, so this was our first entrée - and so it's a little over two years - we sold $150 million worth of Series B, which is a 6% permanent.
You're in it for life. And we're gonna list that pretty soon, we set it up so that all you need is three market makers, and you're public with that. So we're not doing that right now, because well, Mister COVID has gotten in the way of the marketplace out there right now. So we were worried about our shareholders, and we don't want them to be crushed all of a sudden, because there's a poor marketplace for preferred stock.
Should be a great marketplace for preferreds. But we haven't seen that yet. And we've got a number of preferreds in all of our other companies. So we know the market, we know who are buyers, and who are not. And so, I think this one will trade - I'm not sure when we're going to let it out of the box and let it trade, but it won't be that long - our goal is to get it out there - so people have liquidity. The problem with non-tradeds is: they're non-traded, so, you're kind of stuck.
BRAD THOMAS: Yeah.
DAVID GLADSTONE: So we want to give people the opportunity to get out there and trade it - and get out if they want to get out - or buy more. The reverse side of that is that we also are looking at a Series C - and we've announced that. That'll be for a big number, probably $500 million, and that will be something that people can buy. And it's almost identical to the B, except you can reinvest your dividends. So –
BRAD THOMAS: Oh, wow. Okay. So it's still non-traded –
DAVID GLADSTONE: Non-traded, 6%. And the only difference between the B and the C, is the fact that the C is going to allow you not to take your dividends in cash, if you don't want to have cash - and you'd get additional shares at the original price. See, the non-traded, the wonderful thing about it is, everybody has this on their books at $25, because it's ahead of the common.
And so the preferred there is just solid as a rock. And after all, the underlying feature of this, which is the exciting part about it - is just dirt. There's not many buildings. There are a few buildings here, and a few buildings there. So it's not - it's not going away. I mean, you gotta have a dust bowl, I guess, but we don't expect that to happen.
BRAD THOMAS: Yeah.
DAVID GLADSTONE: So as a result, you're solid - underneath all of this is the dirt and it's in high demand. In California, they lose about 50,000 acres to upsized developments - that is, they're building houses on farms, they're building schools on farms, they're building all kind of things that you see in the real estate, as all land moves to a higher and better use - and a higher and better price.
So as a result, somewhere along the way, I know that big farm that I have in Oxnard is a 10-minute walk to the beach across the road. And someday a builder will come along and say, “I'll give you a $1.5 million per acre” - right now it's trading at about $80,000 an acre - if we wanted to sell it. So there's some big upsides that will come - probably won't be in my lifetime, but my three daughters will say, “Wasn't Dad brilliant to buy that property out there in Oxnard,” - because they'll get a big bang for a buck when that happens. Anyway –
BRAD THOMAS: Yeah.
DAVID GLADSTONE: It's just that kind of business where it just continues to grow along. And as long as people have to eat - which is forever - they're going to do well. And especially with us, because all of our crops within - at least 90% or more - are organic, non- all of the things you think about, when you think about eating a very healthy diet - and you got berries, and nuts, and greens, and all the other things - squash - we used to grow rutabaga when the farm would be over for the strawberries for the year. I mean, it's all of those things.
I want to get into some other areas, but there's so much opportunity in this area. Why would I ever go someplace else? Everything's in the United States –
BRAD THOMAS: Yep.
DAVID GLADSTONE: But we don't have any currency problems. And it's just a plain, “buy and hold forever” kind of business. We did sell one farm for almost double what we paid for it within three years because the (chuckle) farmers around us were of the same family, and they wanted our farm in the worst way. So we sold it. They paid a very heavy price, but they'll make a huge amount of savings by having everything under one small area.
BRAD THOMAS: Yeah.
DAVID GLADSTONE: But our goal is not to sell anything. We don't do any of the bad stuff. We're not even doing hops for beer - and that's a good business if you're in Oregon - I haven't seen any of those for sale. But we don't do any wine. We have some berries that I'm sure go into something, but at the end of the day, we're not into any of the bad stuff that's out there - I don't know why anybody would be growing all the things that these people are growing, but it's pretty ugly business and I've researched it pretty well.
You're not gonna make any money growing marijuana, simply because there's a huge overstock in the marketplace. It's like corn - it is very cheap to buy. The guys who are making money in marijuana - are the ones that are at the retail level and selling it in the retail side.
BRAD THOMAS: So, David, I got to ask you - well, first, I want to tell you a funny story. When I was a developer, years ago, I went down to Hartsville, South Carolina, and decided I wanted to build a Walmart. And so I bought a hundred acres from Novartis. And when we went back to research the title, it went all the way back to - there was one owner, and then there was Novartis, and then, I guess, my group - we were the third property owner.
So - and it was a farm - is a big farm - and it still is a big farm - the surrounding land, I believe it was cotton, if I'm not mistaken - in Hartsville. And we paid $10,000 per acre for a hundred acres - and I sold 20 acres to Walmart for $20,000 an acre. And then - which really - very modest profit on that.
But what was really amazing was: I sold off out parcels for $400,000 an acre - and just the value creation - so I guess, I don't know if you have any of those sitting around, but how many of those types of assets, I mean, just in broad terms - do you think you've got some incubators that could be really interesting residential neighborhoods? I'm just curious in terms of - you know, ‘cause you mentioned your lifetime, but I mean, I'm sure there's a couple properties in your portfolio that have higher and better use than farming. I'm just curious, how much of that –
DAVID GLADSTONE: Yeah, I think that's true. I think there are some in our portfolio that have a higher and better use - no, don't know why anybody wouldn't want acres of strawberries - but somebody's going to come along and make an offer to us. We have one property in Watsonville that is right almost in the middle of town. And I've been surprised that we haven't been hit on pretty hard by some of the developers - but you know, there's not a lot of people moving to California.
So the real estate business isn't exploding in California like it is in a lot of other communities around the country. Sometime maybe the Californians will get their brains going again and figure out that “Gee, we really do need growth in all of our homes, and we gotta attract more people to California rather than less.”
BRAD THOMAS: Right.
DAVID GLADSTONE: But I think there's some out there - and there'll probably be a double or triple somewhere along the way - but we're not - we don't even put that in our projections. We know that there's some out there, but our goal is to continue to buy properties, rent 'em out, raise the rent every now and then, and just continue this methodical dividend payer that we love to be.
BRAD THOMAS: Yeah.
DAVID GLADSTONE: And all of our companies are that way.
BRAD THOMAS: So David, last question here is - you know, we use, of course, analysts’ consensus in looking at the company. And well, first off, I just checked, and Gladstone Land has returned just over 21% year to date, even though we've had a fair - a little, modest pullback lately. Through January 1st, we're calculating about a 21% total return. So obviously outperforming the REIT sector, and the peer group, and all of that. But looking at the consensus growth this year on an AFFO basis, is about 18%.
Now, obviously this is a smaller company that doesn't have that many analysts covering the company - I've only got two analysts with a 2020 forecast, but also, I'm showing fairly decent forecasts for - not in the teens, but in the 4% or 5% growth in '21, '22. So can you kind of talk about your growth, and your dividend today? ‘Cause I know you were tight - with the payout ratio - but you appear to be kind of growing out of that dividend. And obviously, you've been growing that dividend now fairly successfully - since you went public.
DAVID GLADSTONE: Exactly. I think some people are looking at it the way they look at all real estate and say, “What's my downstroke here? What could happen to me?” Now, obviously, people can have a run on sale, and you can have some crazy people that short the stock. The bottom line of this is the base is so solid in this company - because it is land, because it is growing food, that it's - I think it's like gold.
And if you look at the way the base is here - of what we're doing - I just believe it's really hard to screw up in this business. You can, and we've done it with a few little ones. We had one farm that - the two of the owners died, and we had to find another, and we had to wait six months before we could do it, because we were out of sync with what the farmers were doing at that time. There's a certain time to buy, and there's a certain time to farm.
BRAD THOMAS: Um-hmm.
DAVID GLADSTONE: And we found another farmer. He rented it for 10 years at more than we were getting from the others. So with that kind of track record - of not having the big downstroke that so many people worry about - I mean, if you were in Hotel REITs right now, you got beat up pretty bad.
BRAD THOMAS: Um-hmm.
DAVID GLADSTONE: We've not seen any change. In fact it's just - even more conservative people are buying the stock, just because at the end of the day, you got to eat, we're right in the middle of all the healthy foods that people eat - and the grocery stores are our primary customer - not restaurants. And so as a result, it's just going to sit there, and continue to pump out cash, so that we can pay our dividend.
And I don't know how to explain it. Some people like that, other people don't. I speak sometimes and talk about all four of the companies and the dividends we pay. I had one man come up and he said, "Look, I bought enough of the stock, so it pays the mortgage on my house." And it was pretty scary for me - because if I mess up, the man will lose his house. We're very protective, by the way, of all of our shareholders. Our goal is to make sure we never miss a dividend.
And if you looked at our other REIT, which is in primarily Warehouses and Industrial, but also some Office buildings - if you look at those - and they're single tenant office buildings, so we're pretty good at underwriting tenants, and they're all paying. So if you look at what we do, we try to build these pieces of machinery that are dividend payers. And I love it.
I'm probably the largest shareholder in all of them - except the Commercial REIT (GOOD). And in (LAND), I think I'm 15%, last time I looked. So I’ll put our money where everybody - where we're asking other people to put their money - as they say, “you eat your own cooking.” And as a result, it's just wonderful. Every year, I buy a few more shares and start another company and just grow it.
And it just keeps piling up, and people say, "Why don't you retire?" And I'd say, "I think I'm retired.” I mean, it's really wonderful the business we're doing, we got 70 people, and they know more about all of these areas than I will ever know. I'm like sitting on top of a rolling mill that just keeps grinding out logs - in this case, it's just dollars. And so it's a wonderful area for people who want that.
The people who want this big jump overnight - up 8%, up 20%, because they've got another million users of the internet - it's not where I am, and it's not where our companies are. These are for people that are retired, or semi-retired, or getting ready to retire. These are the kind of stocks that they should have in their portfolio. And if you're young, you have more towards the upside.
And if you're getting a little age on you, you probably want to have more in areas like this - we're much better than a bond fund. Bond funds are stuck for error. We just keep raising our dividend. We want to try to keep ahead of any inflation. And I know there is going to be inflation one day, you can't print as much money as we're printing and not have inflation somewhere along the way.
One of the stories that I like to tell - people say you can't - you know: metals don't inflate. Well, I remember when my wife was writing her PhD dissertation on the economics of Spain during the 1700s. And they were taking so much - so much - silver out of Peru, that they actually inflated the value of - nobody wanted those silver doubloons because they were worth less - there were so many of them being printed, in essence minted, by the French, that it just blew up, and inflation is going to take us at some point in time. Now I know the head of the Fed is begging for a little more inflation today, but we're not going to have it, as long as we're in the position we're at today.
And it will happen one day, and you'll be pleasantly surprised that on the real estate side, our land goes up in inflation value. And simply because it follows where the produce prices go, and produce prices are about 1.6x what you see in the regular inflation note. So if you saw - if you were drawing that line up like that for inflation, you'd have to draw it even higher for inflation in the produce section. So we love inflation. I'd like to see more inflation because of pricing. And at the same time, there would be more money for my farmers, and I'd be able to charge him a little more rent, and that would drop right down to my shareholders.
So our goal is to continue to do what we're doing - we're just a manufacturing factory, here. We're a factory. And we're just grinding along, and buying more farms, adding more farms. And over time it will be nice. We're passing a $1 billion. I'd say in two years, we'll pass $2 billion. We've got some transactions - got a lot of transactions lined up. And so as a result of - we can just close them - if the government will come back to work in these towns, and show us what's going on, or on the other hand, if the banks will get out there and get moving, we'll all continue to grow - it just is slower during the pandemic.
And I'm hopeful that within the next 90 days, we'll hear something from our government that says the pandemic's over. And I know it will be over on November 4th, simply because you won't have people using it to destroy some of the great businesses that are out there today.
But it's just a basic business. And I love it because it is so wonderfully straightforward, nothing special to do. You have to know what industries you're in, and which products you're in. But you don't really need to know much more than that, except doing underwriting of the tenant is the first thing we look at. Is this tenant strong? Is the product they're in? Do they know how to get it to marketplace? And believe me that our tenants are really good that way.
And then the second thing you look at, of course, is the farm itself. Is this a good farm? I remember I was looking at one farm and I wanted to buy it. And the guy says to me, who was helping me out, he says,
“You don't want that farm." I said, "Why not?" He said, "When the wind comes off the ocean, it knocks a lot of blooms off the strawberries. And as a result, you're going to get about 80% of what you would get if in a normal farm." And I thought, why would I ever know that, unless I'm dealing with people who are experts in the business - it's just a lot of little nitty things.
And every one of these products - we now have about 45 different crops that are grown on our farms - we're in 10 states. We're about to close on some others that'll get us into a couple more states, but it's just knowing who's there, what they're trying to do. And do you believe in it? And it's a simple business. If you remember, a lot of the people say you don't have to do much to farm, but farming is now really high tech, and it's high tech because people are trying to invent things to do the harvesting and planting.
We did one of the largest cabbage farms in the world, not too long ago. And the reason we did it is because this is a company called Cabbage Inc. So he's been around in the cabbage business. And so when he was doing it, I said, "Why are you opening up and doing so much?" And he said, "Because we have a new way of planting.” It used to be planters would get their little pegs and go out there and stick it in the ground, put the little plant in behind it. And it was a wonderful business, except it took a mountain of people to get it planted. Now they got a machine - and they put the plants in the little gauze and it's on a strip, and it's running at about 18 miles an hour, and doing 6 rows at a time. And all of those people are gone - you don't need them anymore. And it's wonderful for the farmer, 'cause that's the most difficult thing - is to be making sure you've got enough people working. And it was just wonderful to see that transition happen from one way to another.
And the blueberry business is undergoing a dramatic change because many of the blueberries now are harvested by machinery. And so, as a result, you don't need the tons of workers out there. And workers have always been the problem. I know - we paid our workers when I was in the business. Flipper at hamburgers at McDonald's was making about $6.50, and our pickers, over a nine-month period, were averaging about $21 an hour. So we were - and we paid for their health insurance, their dental insurance, we even had chiropractors on hand to help them with their backs, from bending over so much. So you take care of your workers, nobody in their right mind wants their workers to suffer - because you are dependent on them.
And the more we can move toward that area, where you can harvest - our nuts are all harvested now by machinery, they shake the tree and the nuts fall off into blankets, and they pull the blankets up and take them in, and sort it out - it's a whole different world. And I love it because the farmers are making a lot more money today than they did a hundred years ago. It used to be a hundred years ago, a guy with 100 acres was considered a big farmer. Today, if you're in farming, you really need to own a lot of acres, and farm a lot of acres in order to make a living for yourself. And I know those combines out in the Midwest, you spend $1.2 million, to get one of those things out there. It runs off the satellites. The guy who's in the cab is watching a movie - and a machine is figuring out which way to mow that thing. (Chuckles.) It's becoming highly mechanized.
BRAD THOMAS: Well, David, I think I'm in the wrong business. I need to probably start doing some farming - but anyway, I'll settle for being an investor in Gladstone Land. And Dave, I really do appreciate your time. It's always great to hear from you. And we get so much information from you. Not only in the world of farming, but just investing. So thank you again for your time today –
DAVID GLADSTONE: You're welcome.
BRAD THOMAS: And I wish you the best and we'll see you again soon.
DAVID GLADSTONE: Okay. Well, thank you. See you around.
BRAD THOMAS: Take care.