Greetings, and welcome to the Gladstone Land Corporation S econd Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chairman and Chief Executive Officer. Thank you, sir. You may begin.
Okay, thank you, Latonya, for that nice introduction. You've done it many times for us, and we appreciate your effort. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate you taking the time out of your day to listen to our presentation. Before I begin, we have to hear from Michael LiCalsi, he's our General Counsel. Michael?
Thanks, David. Good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933, Securities Exchange Act of 1934, including those regarding our future performance. Now, these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable, that 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 the risk factors listed in our Forms 10-Q, 10-K and other documents we file with the SEC. Find them on our website, that's gladstoneland.com. Specifically, go to the Investors page or on the SEC's website, that's www.sec.gov. Now, 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.
Now, today, 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 may also discuss Core FFO, which we generally define as FFO, adjusted for certain non-recurring revenues and expenses, and Adjusted FFO, which further adjusts Core FFO for certain non-cash 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. Now, we ask that you take the opportunity to visit our website. Once again, that's gladstoneland.com. Sign up for our email notification service so you can stay up to date on the company. You can also find us on Facebook.
Keyword there is The Gladstone Companies, and Twitter, which is at gladstonecomps. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, go to the Investors page of our website to find them. I'll turn the presentation back to David Gladstone.
Okay, thank you, Michael. I'll start with a brief overview of the farmland holdings that we have. Currently own about 116,000 acres, and it's at 69 different farms, and we also have about 45,000 acre-feet of banked water. Remember, then acre-foot is equal to 326,000. 45,000 acre-feet is a lot of water. We use that for irrigation in times when there's not enough water around. Together, if you looked at both of those together, we valued that at about $1.6 billion for both the land and the water. Our farms are in 15 different states, and more importantly, in 29 different growing regions.
If we include the one farm that we currently operate ourselves, our farms are 100% occupied and are leased to over 90 different tenant farmers, all of whom are unrelated to us. The tenants on these farms are growing over 60 different crops, types of crops, but mostly fruits and vegetables and nuts. We are well diversified across these different farms. We had to remove one tenant during the first quarter, and we stepped in to temporarily operate the farm with the help of third-party management group. We've been in discussions with a new group to lease this farm, and we had hoped to have it done by this time for this quarter, but we didn't quite get there. We're finishing up now, and we'll get that done, hopefully, in the third quarter.
We are also exploring an option of direct farming this property ourselves, but leasing the property is our preferred approach. In addition, two slow-paying tenants, partly due to excess supply of their products in the markets that they're working in. Well, one of the tenants is making partial payments to us, but sounds like they're might decide to close up shop. We have a couple of growers who we've been talking to and lease to lease this farm, this farm, so we'll likely sign a new lease with them soon. Collecting from the second tenant was more challenging and is still ongoing. We ended up terminating their lease and entering into a new short-term lease agreement with a new grower. This will give us more time to figure out who we're gonna end up leasing this farm to.
The total year-over-year impact on our operations as a result of these issues, was a decrease in net operating income of about $318,000 for the second quarter and about $613,000 for the total year so far. As we mentioned in the past couple of calls, we continued to be more selective in the type of farms that we're looking for. Mostly it's farmers. We have to always get good farmers on these farms. As a result, acquisition activity remains slow for us. With inflation still above the Fed's target rate, interest rates continuing to rise, and the risk of a recession is still possible, we believe it's a good time to be more conservative with our capital. Just another note before we move on.
While we are helped by inflation in food prices in the grocery stores, we're hurt by interest rates as our cost of capital for buying farms, and the farm owners are not yet willing to reduce the price of their farms, so the values remain high, too high for us. But overall, the existing farmland portfolio continues to perform pretty much as we expected, with the exception of the issues with, with those couple of tenants. Finally, we continue to be able to renew all expiring leases without incurring any downtime on any of our farms, and renewals at mostly a higher rate, with one exception that I'll talk about a little later. On the bright side, we sold a portion of one of our farms during the quarter. This was a 138 acre parcel, un-farmed ground in Florida.
By selling that, we recognized a $6.4 million gain on the sale and realized a 343% return of our initial investment. By the way, we still own and lease the remainder of this farm, which is farmable, and since it was a non-farmable ground, the sale won't reduce our rent on the rest of this farm. On the leasing front, since the beginning of the quarter, we renewed 13 leases on farms in five different states. In total, these renewals are expected to result in a decrease in the annual net operating income of about $469,000. From that of the prior leases, however, four of these leases were to replace a previous tenant on some of the blueberry farms in Michigan.
We gave the new tenant a lower rent in exchange for them maintaining and bringing back the blueberry bushes that are there on the farm. That, hopefully, will be in a better position to lease these farms to a long-term tenant later this year. Including the four Michigan leases, that's to the one farmer, the remaining nine leases are expected to result in an increase in annual net operating income of approximately $209,000, or 3% over that of the prior leases. Looking ahead, we have eight leases scheduled to expire over the next six months, and in total, that makes up about 5% of the total annualized lease. We're in discussion with current tenants on each of these farms regarding extensions as well as prospective new tenants.
Well, we expect the rental rates on these renewals to be relatively the same as the current leases, but we aren't currently expecting any downtime to occur as a result on these upcoming expirations. There are a few other items I'd like to mention before we move on. Inflation is still continuing. It's slowing down some as an impact from the Fed's interest rate hikes, it now being felt throughout the economy. The latest headline, inflation numbers of 3%, still remain above the Fed's target level, which is 2%, and as does core inflation, that they keep measuring and saying, it's, their levels are gonna be subject to core inflation. Food prices are showing signs of cooling down a little bit, but still continue to outpace inflation.
Most of the crops grown on our farms are sold to grocery stores, thus fall into a category called food at home. This category was still up by 4.7% for the 12 months ending June 30th. We believe food prices will continue to outpace inflation, which should help mitigate the increases in operating expenses that many of our farmers have been experiencing. I also want to mention some water-related projects we've been working on in California since we slowed things down on the acquisition front of farms. With 2023 being a wet year, as you probably read the headlines for California, they had a lot of rain. We have been working on various water improvement projects within key areas of our portfolio.
We identified several projects to undertake that we believe will improve our portfolio's capability to comply with state groundwater restrictions. And the state's becoming more interested in the water projects that we've talked about, with a goal of ensuring that we have enough long-term water supplies to meet our current crop demands on our farms. We're in pretty good shape there. Got a few more projects we want to look at. And by the way, our overall strategy within the state is to implement projects that will allow us to maximize the water supply opportunities in wet years like we had this year, this past year. That'll reduce our water risk in dry years. There's been some mention in the newspapers that there have been tension in the news regarding depleted water levels in the Colorado River.
There's no date one day, water being generated in the United States, and the Colorado River will not reach the ocean there, taking up all of that. Thankfully, none of our properties rely on the Colorado River or any of its tributaries for water. So we have properties that lay at the edge of that, but not in the need area, and so we're not impacted if you see some headlines about the Colorado River. I'm gonna stop here. That's enough on the operations, and now I'll turn it over to our CFO, Lewis Parrish, to talk to you more about the actual numbers.
Thank you, David. Good morning, everyone. I'll begin by briefly going over our financing activity. We did not incur any new borrowings during the quarter. We did repay about $6 million of loans since the beginning of the quarter that were scheduled to mature. On the equity side, since the beginning of the quarter, we've raised net proceeds of about $3 million from sales of our Series E preferred stock and $2 million from sales of our common stock through the ATM Program. Moving on to our financial results. For the second quarter, we had net income of about $7.9 million, and net income to common shareholders of $1.7 million, or $0.05 per common share. For the following discussion of operations, I'll be comparing the second quarter of 2023 with the corresponding second quarter of 2022.
Adjusted FFO for the current quarter was approximately $3.8 million, or $0.107 per share, compared to $4.5 million, or $0.129 per share in the prior year quarter. The primary driver behind the decrease in the FFO was higher costs incurred to carry uninvested capital on our balance sheet, partially offset by an increase in top line revenues. The fixed-based cash rents increased by about $512,000, 3% over the prior -year -quarter, primarily driven by additional revenues earned on new farms acquired over the past year.
This increase was partially offset by a decrease in revenues from the self-operated and non-accrual properties, as well as the lease we executed in the fourth quarter of 2022, in which we reduced the fixed base rent in exchange for increasing the participation rent component in the lease, and that result won't be known until later this year. Regarding the nonaccrual properties, we will continue to recognize revenues from these leases on a cash basis until such time that the full collection of the future rental payments is again deemed to be probable. As David mentioned, we did replace one tenant during the quarter, and we are close to finalizing terms to replace a second tenant. The third tenant is currently caught up with their rental payments to us.
We are optimistic that all of these properties will return to a full accrual status by the end of the year. On the same property basis and including participation rents, our Q2 2023 lease revenues increased slightly by a little over $100,000, about 1% over that of the prior -year -quarter. On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses for the quarter increased by about $210,000 from last year. Total related party fees increased by about $156,000, and that was primarily driven by additional assets added to our portfolio over the past year. If we remove related party fees, our core operating expenses increased by just $54,000 from last year.
Property operating expenses increased by about $97,000. That was primarily driven by additional legal fees that we incurred in connection with drafting new lease agreements and to aid with rent collection efforts from certain tenants. This is partially offset by a decrease in repairs and maintenance expense during the current year. In addition, G&A expenses decreased by about $43,000. That was primarily due to costs related to the 2023 annual shareholders meeting being previously recognized in the first quarter. Finally, other income increased due to additional interest income earned on balances in money market accounts due to higher rates, and interest expense decreased due to loan repayments and payoffs made over the past year. We'll move on to net asset value. We had 62 farms revalued during the quarter, all via third-party appraisals.
Overall, these farms increased slightly in value by about $850,000 over their previous valuations from about a year ago. As of June 30th, our portfolio was valued at approximately $1.6 billion, all of which was supported by either the third-party appraisals or the purchase prices. Based on these updated valuations and including the fair value of our debt and all preferred securities, our net asset value per common share at June 30th was $19.15, which is up by over $2 from the value at March 31st. The main driver of this increase was the change in valuation of our fixed rate debt and preferred securities, particularly the Series C Preferred Stock. Previously, this security was valued at its liquidation value based on a waterfall approach.
However, in accordance with our valuation policy, on the security being listed on NASDAQ in June, began valuing it based on its market price at quarter end, as we do all publicly listed preferred securities. Turning to liquidity, including availability in our lines of credit and other undrawn notes, we currently have over $185 million of dry powder, and we also have about $145 million of unpledged properties. Over 99.9% of our borrowings are currently at fixed rates, and on a weighted average basis, these rates are fixed at 3.35% for another 4.6 years out. As a result, we have experienced minimal impact from the recent increases in interest rates.
The increases do impact our ability to finance new acquisitions and also play a factor in our decision to repay versus refinance maturing loans. With, with respect to our current debt load, we believe we are well protected against any further interest rate hikes for the foreseeable future. Regarding upcoming debt maturities, we have about $34 million coming due over the next 12 months. About $17 million of that represents various loan maturities. The properties collateralizing these loans have increased in value by a total of $7 million since their respective acquisitions. We don't foresee any problems refinancing any of these loans if we choose to do so. Removing those maturities, we only have about $17 million of amortizing principal payments coming due over the next 12 months, or less than 3% of our current debt outstanding.
Finally, regarding our common distributions, we recently raised our common dividend again to $0.0462 per share per month. This marks the 31st time we've raised our common dividend over the past 34 quarters, resulting in an overall increase of 54% over that period. With that, I'll turn the program back over to David.
Okay. Thank you, Lewis. That was a nice report. We continue to stay active in the marketplace should a good opportunity present itself. As mentioned, we're being more cautious on the acquisition front. This is really due to the cost of borrowing and the price of farms. Farms haven't fallen, even though the cost to borrow them is really much higher than it was before, before the Fed kept raising rates. A few items to finally point to, we believe that investing in farmland crops that contribute to the healthy lifestyle, such as fruits and vegetables and nuts, is where we should be. Following this trend, we're seeing the market today. It's a good place to be because it's not susceptible to some of the changes in market demand that you'd see if you were in only corn or any of those corn crops.
Overall demand for prime farmland that are growing berries and vegetables remains stable to strong in almost all the areas where our farms are located, particularly along each of the coasts. Overall, Farmland in the United States is performing well. For example, the NCREIF Farmland Index has about $16.2 billion worth of farms, and all of our $1.6 billion is in that calculation that NCREIF does. That agricultural property index is a good one. We hope to be exactly like them because their return has been 11.4% over the past 25 years, with no negative years during that period. This is better than both the S&P Index and the overall REIT indexes, each of which had 6 or more negative years over the same time frame period, versus zero for the Farmland Index.
In closing, we can go over a couple of items and then move on to questions. Please remember that if you're purchasing stock in this company, it's a long-term investment. It's dirt, it's Farmland, and this investment gives two parts to it. It's similar to gold in that it's a hard asset, Farmland, that has intrinsic value because there's a limited amount of good Farmland in the United States, and it's being used up by urban development, especially in California and Florida, where we have many farms. Second, unlike gold and other alternative asset, it's an active asset with cash flows to investors, and we believe we're better than a bond fund because we keep increasing the dividend. We expect inflation, particularly in the food sector, to continue to increase, and we expect the values of underlying Farmland to increase as a result.
We expect this to be especially true in the fresh produce area, as the trends are in our favor, that more people in the United States are eating healthy foods, and they continue to grow in that direction. I'm going to stop and ask the operator, Latonya, if you'll come on and tell us how to ask questions.
Thank you. We will now conduct a Q&A session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for our first question. Our first question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Good morning, guys. David, any acquisitions under contract today? You know, given your commentary on how robust the market pricing for farms is, any thoughts about selling more assets in the back half of this year?
Well, if we could find somebody who would buy the non-performing or the problem that some farms have, we'd certainly be willing to sell. Rob, my goal is to amass as many assets as possible in the farming area. They've continued to go up in price. Farms that I bought, oh, 20 years ago, are now about four times the price that I paid. It's a good area. It has low downside risk, and so we don't have anything under contract right now. We have some discussions going on with farmers, and believe me, the guys and gals here are chomping at the bits to buy something. I'm not gonna, I'm not gonna buy a farm that would pay me on a cap rate of, say, 5.5% and then borrow money at 5.5%.
That's a good way to be long-term in the wrong direction. I do wish the interest rates would come down. These federal lenders are in a position and have been in a position for some time to drop their rates and allow us to get back to business of buying farms. These farmers that we buy from are not in a hurry, and they're only gonna do it if they get the price that they want. We're kind of on hold. We are concentrating a lot of our effort right now on water. As you know, we have plenty of water now. However, we're fixing some of our farms so that we can store water on them by putting in some berms and allowing us to go in.
Believe it or not, the state of California is encouraging everyone to do that. I think we are way ahead of the curve in terms of putting water in place. I think we've got enough water today for the next two years, and we've got a couple of transactions that would push us into the direction of 2040, in terms of having enough water in underground. These aquifers that are there have gone down some, so they're trying to fill them all back up during this time of plenty of water. In terms of buying new farms, we don't want to buy farms and just tread along at the same rate that we bought them at. We'll have to, have to work our way through that. It's changing.
You're seeing some of the farmers starting to talk about different cap rates, and I think it will happen. Some of them, as you know, the average farmer is about 58 now, and more than 40% of the farms in the United States are owned by individuals. So somewhere along the way, as people continue to get older and have to settle up their estate, things are gonna happen. We 'll be ready for that as long as we can borrow some reasonable priced water. We've talked about having an offering and raising more equity. I don't think it's quite the time to do that, but we'll certainly be talking to your people if we get along that line. I hope I answered your question.
That's helpful. Thanks, David. Lewis, where are the issues with these operators showing up? Is it at the revenue line? Is it the property expense line? Both? The reason why I ask is that property operating expenses in the first half were up more than $600,000, which is like 44%, which is a big increase for a net lease REIT. So I wanted to get a color there, and if the $2 million first half operating expense is a good run rate for the back half.
It's showing up a little bit in both places. From those properties, other than the amounts received in cash, we have not recognized any revenue. As I think David mentioned, it's for the first half of the year, the year-over-year impact on our net operating income is about $600,000. That's a combination of the revenue line item and the property operating expenses. On the revenue side alone, I think we had a decrease of about $400,000 year-over-year.
The rest of that is in the, in the property operating expense line item, and most of those costs are legal fees we've incurred to, as we said, the script, re-lease, sign up new leases on those properties, and a big chunk also, legal fees incurred to kind of help with collection of those amounts, both the rent amounts and, while they were our tenants and, possibly, looking to go after it after, vacating those properties. The rest of that, the increase is primarily been two factors. One, and I don't have the exact number breakout for these two categories, but one, we did have some repairs and maintenance expense on Florida farms to...
for repairs for the hurricane damage, as well as $200,000 on the West Coast to repair damage from flooding. The other bucket of that was just increased costs to protect water rights on farms in California.
Okay, that's helpful. Then my last question: you guys typically see a major jump in revenues, call it 10%-20%, quarter-over-quarter from second to third quarter, and then another notable jump between third and fourth. Some of this has been in the previous years driven by acquisitions, because you guys have done a bunch of acquisitions that have started benefiting in the back half of the year. Since you haven't really done anything this year on the acquisition side, how should we be thinking about the seasonality of the revenues in the back half of the year? Is it still gonna be see that sizable jump because of the percentage rents and some of the crops that are gonna get sold, et cetera? Is it gonna be less because they're you're also not adding the acquisitions?
How should we be thinking about that?
The jump will probably be less than in prior years, just because, as you said, we aren't-- we don't have the acquisition increase that will aid us on that front this year. From a kind of a fixed base rent, if you will, it will be a lot more flat than in prior years. The one caveat I'd add to that is, as we shore up these tenant issues on these three tenant issues we have and restore those properties back to full accrual status. Right now, I'm, I'm hopeful that we, we can get everything back on in, in the fourth quarter. That will add a slight bump, but the majority of the increase in the second half of the year is gonna come from the participation rents, as they have in the prior years.
I think last, last year we had around $7 million of participation rents. The year before that, around $5 million. We're not sure where we're gonna land yet. We're still, we're still trying to gather information on, on yields and pricing. Pistachio and almonds are obviously the biggest factors, but we're still gathering info on the, the yield data of our farms. It's too early to say where we'll fall on that, but it'll probably be slightly less than last year. Last year was a pretty good year in participation rents, but we should have more color on that front next, in the next quarter's earnings call.
Okay. Thanks, guys.
Okay, thank you. Next question.
Our next question comes from Edward Najarian with EF Hutton. Please proceed.
Good morning, guys.
Morning.
You mentioned, you mentioned the, you know, biggest change in terms of the valuation of the preferred stock was in the Series C. I was just wondering if you could kind of go through, the change in the, in the B, C, and Series E, real quickly, just so we can get sort of a sense of, you know, how much each of those drove the, the change in the, in the NAV calculation? Thanks.
Sure. The, the Series B has been listed for over a year now, that's, that's been valued at its market price for several quarters. That market price is... I mean, it's a fixed income security, as interest rates go up, the demand for that security is gonna go down. The Series E is still non-listed, that's valued at its liquidation value of $25 per share. The Series C is where I know I'm on a recording, but I just wanna say, don't quote me on this, but 90% of the change probably comes from that Series C security. The reason is, last quarter, before it was listed, it was valued based on a waterfall approach at its liquidation value of $25 per share.
It got relisted in June, and it was trading closer to $20 per share at June 30th. Once it gets listed, as our valuation policy says, we value it based on its public market price. That's a quarter-over-quarter change from $25- $20 on approximately, I guess, $2,250 million of value at March 31st. That got marked down to close to $200 million at June 30th.
Okay. Okay, that's helpful. Really, the vast majority from the C and, and very less-
Yeah.
Well, actually, I guess, no change in the E, and then little change in the B. Correct?
Correct, correct.
Correct. Okay. Terrific. Thanks very much.
Next question.
Once again, to ask a question, that's star one at this time. Gladstone, there are no further questions in queue. I would like to turn the call back over to you for closing comments.
Well, thank you all very much for asking questions. We always hope there are more questions than we get at these meetings, we'll have to wait till next quarter to answer your questions. Thanks again, and that's the end of this.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.