Gladstone Land: Speculating On A 7.4% Yield To Mandatory Call On Preferreds (NASDAQ:LAND)

Introduction

As explained in a previous article, the business model of Gladstone Land (NASDAQ:LAND) is very straightforward: the REIT owns farmland and leases it to farmers. It is not exposed to successful or disappointing harvests other than the impact it has on the tenants. At the end of 2023, Gladstone Land owned almost 112,000 acres across 168 farms in 15 states. I am still very interested in the REIT’s preferred shares and I am particularly intrigued by the value proposition of LANDM as the securities either get called by the end of January 2026, or the preferred dividend yield jumps to in excess of 8%.

The REIT remains FFO positive

I’m obviously mainly interested in the REIT’s ability to generate a positive FFO and AFFO. Not because I’m keen on going long the common shares but mainly because I want to make sure the preferred dividends are still well-covered.

Looking at the Q4 results below, you can see there was a net loss of $4.3M resulting in a $6.2M FFO after adding back the depreciation charges and the loss on the sale of assets. The AFFO for the final quarter of the year was $5.4M which, based on the share count of 35.8M shares during the quarter, represented an AFFO of $0.15 per share. That was sufficient to cover the distributions of $0.139 per share.

Looking at the full-year results below, you see the AFFO came in at $20.3M for a result of just under $0.57 per share. While this means the distributions of $0.554 per share were still covered, the payout ratio increased to a relatively uncomfortably high 97%.

That actually is a pretty weak performance considering Gladstone Land paid a lower interest expense compared to the previous year. While that’s really tough for the common unitholders, I am mainly looking at the results from the perspective of a preferred shareholder. And although the coverage ratio of the preferred dividends decreased, the REIT still generated approximately $45M in AFFO before preferred dividends and the almost $25M in preferred dividends represented a payout ratio of approximately 55%. That’s a bit on the high side compared to what I like (I generally prefer to see payout ratios below 20%) but I like Gladstone Land’s substantial land bank which really provides a good asset coverage ratio.

As you can see below, The balance sheet contains $1.39B in assets, backed by $720M in equity. Of that $720M, about $410M is represented by preferred equity as there are approximately 16.35 million preferred shares outstanding. It’s important to see the Series D preferred shares (which I will discuss in more detail later) are listed as a liability on the balance sheet due to the mandatory call date.

In the worst case scenario, if Gladstone Land elects to not call those preferred shares, they will move back to the equity stack, resulting in a total equity of approximately $780M of which approximately $470M is represented by preferred equity.

This indeed means the cushion of $310M (total equity minus preferred equity) is relatively thin but there’s more than meets the eye here. Although most REITs have to deal with the difference between book value and fair value of their assets, very few actually bother to publish the fair value of the assets. According to Gladstone, the fair value of its farmland is approximately $1.6B which is several hundreds of millions of dollars higher than the book value. That sounds realistic, and subsequent to the end of 2023, the REIT sold a farm for $66M. It originally acquired the farm for $54M seven years ago and the appraisal value was just $64M.

This means the safety net for the asset coverage ratio is likely substantially higher than $310M and potentially even twice that, which makes the asset coverage ratio of the preferred shares acceptable.

I like the term preferred shares for short-term fixed income

In my article last year, I mainly focused on the Series D preferred shares that were issued by Gladstone Land. Those securities are trading with (NASDAQ:LANDM) as ticker symbol and offer a preferred dividend of $1.25 per year, payable in twelve equal monthly tranches. And while those preferred shares have to be redeemed by Gladstone Land by the end of January 2026, should Gladstone Land fail to call these preferred shares, the preferred dividend will increase to $2/share per year.

This means there are two possible ways to have a look at LANDM. The first one is by assuming the securities will indeed be redeemed in January 2026, in which case there will be a capital gain of approximately 4.3% based on the current share price of $23.97. The yield to mandatory call is approximately 7.4% which I think is pretty attractive for a short-term security.

However, the caveat indeed is the risk of Gladstone preferring to pay an 8% coupon rather than calling the securities. In that case, the annual preferred dividend of $2 would represent a yield of just over 8.3% which also is a more than acceptable compensation.

Investment thesis

Although I like farmland, I have no position in and no intention to initiate a long position in Gladstone Land. I did write some put options with a strike price of $12.50 expiring in April & May but I hope to not get any stock assigned and may close these positions ahead of the expiration date.

I currently have a small long position in the Series D preferred shares (LANDM) and will likely add to this position. While the disappointing results of Gladstone Land are mainly hurting the common shareholders, the preferred dividends are well covered while there is plenty of junior equity ranked junior to the preferred equity. I like the trade-off between either getting a 7.4% annualized return over 22 months, or the preferred dividend yield increased to approximately 8.3-8.4%. I would be fine with both outcomes.