Gladstone Land Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE AND INTANGIBLE ASSETS

REAL ESTATE AND INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2022

All of our properties are wholly-owned on a fee-simple basis, except where noted. The following table provides certain summary information about the 169 farms we owned as of September 30, 2022 (dollars in thousands, except for footnotes):


Location	No. of Farms	Total Acres	Farm Acres	Net Cost Basis(1)		Encumbrances(2)
California(3)(4)(5)	63	34,401	31,951	$	866,226	$	410,697
Florida	26	22,606	17,639	223,659		110,249
Washington	6	2,529	1,997	66,053		24,411
Arizona(6)	6	6,320	5,333	56,077		15,999
Colorado	12	32,773	25,577	46,650		28,527
Nebraska	9	7,782	7,050	30,465		12,135
Oregon(7)	6	898	736	29,372		11,845
Michigan	23	1,892	1,245	24,067		14,204
Texas	1	3,667	2,219	8,194		4,940
Maryland	6	987	863	8,104		4,466
South Carolina	3	597	447	3,655		2,193
Georgia	2	230	175	2,776		1,689
North Carolina	2	310	295	2,172		—
New Jersey	3	116	101	2,138		1,273
Delaware	1	180	140	1,308		717
	169	115,288	95,768	$	1,370,916	$	643,345

(1)Consists of the initial acquisition price (including the costs allocated to both tangible and intangible assets acquired and liabilities assumed), plus subsequent improvements and other capitalized costs associated with the properties, and adjusted for accumulated depreciation and amortization. Specifically, includes Total real estate, net (excluding improvements paid for by the tenant) and Lease intangibles, net; plus long-term water assets, net above-market lease values, lease incentives, and investments in special-purpose LLCs included in Other assets, net; and less net below-market lease values and other deferred revenue included in Other liabilities, net; each as shown on the accompanying Condensed Consolidated Balance Sheets.

(2)Excludes approximately $3.6 million of debt issuance costs related to notes and bonds payable, included in Notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheets.

(3)Includes ownership in a special-purpose LLC that owns a pipeline conveying water to certain of our properties. As of September 30, 2022, this investment had a net carrying value of approximately $1.1 million and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

(4)Includes five acres in which we own a leasehold interest via a ground sublease with a California municipality that expires in December 2041. The ground sublease had a net cost basis of approximately $734,000 as of September 30, 2022 (included in Lease intangibles, net on the accompanying Condensed Consolidated Balance Sheets).

(5)Includes 45,000 acre-feet of water stored with Semitropic Water Storage District, located in Kern County, California. See “—Investments in Water Assets” below for additional information on this water.

(6)Includes two farms in which we own a leasehold interest via ground leases with the State of Arizona that expire in February 2025 and February 2032, respectively. In total, these two ground leases consist of 1,368 total acres and 1,221 farm acres and had an aggregate net cost basis of approximately $794,000 as of September 30, 2022 (included in Lease intangibles, net on the accompanying Condensed Consolidated Balance Sheets).

(7)Includes ownership in a special-purpose LLC that owns certain irrigation infrastructure that provides water to two of our farms. As of September 30, 2022, this investment had a net carrying value of approximately $4.8 million and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of September 30, 2022, and December 31, 2021 (dollars in thousands):


	September 30, 2022		December 31, 2021
Real estate:
Land and land improvements	$	843,444	$	812,830
Permanent plantings	357,772		331,969
Irrigation and drainage systems	164,626		153,688
Farm-related facilities	47,470		46,804
Other site improvements	14,170		12,509
Real estate, at cost	1,427,482		1,357,800
Accumulated depreciation	(98,285)		(74,002)
Total real estate, net	$	1,329,197	$	1,283,798

Real estate depreciation expense on these tangible assets was approximately $8.9 million and $25.1 million for the three and nine months ended September 30, 2022, respectively, and approximately $6.6 million and $18.3 million for the three and nine months ended September 30, 2021, respectively.

Included in the figures above are amounts related to improvements made on certain of our properties paid for by our tenants but owned by us, or tenant improvements. As of September 30, 2022, and December 31, 2021, we recorded tenant improvements, net of accumulated depreciation, of approximately $3.5 million and $2.5 million, respectively. We recorded both depreciation expense and additional lease revenue related to these tenant improvements of approximately $178,000 and $385,000 for the three and nine months ended September 30, 2022, respectively, and approximately $88,000 and $282,000 for the three and nine months ended September 30, 2021 respectively.

Intangible Assets and Liabilities

The following table summarizes the carrying values of certain lease intangible assets and the related accumulated amortization as of September 30, 2022, and December 31, 2021 (dollars in thousands):


	September 30, 2022		December 31, 2021
Lease intangibles:
Leasehold interest – land	$	4,295	$	4,295
In-place lease values	2,763		2,174
Leasing costs	3,095		1,808
Other(1)	130		130
Lease intangibles, at cost	10,283		8,407
Accumulated amortization	(4,332)		(3,951)
Lease intangibles, net	$	5,951	$	4,456

(1)Other consists primarily of acquisition-related costs allocated to miscellaneous lease intangibles.

Total amortization expense related to these lease intangible assets was approximately $258,000 and $769,000 for the three and nine months ended September 30, 2022, respectively, and approximately $296,000 and $983,000 for the three and nine months ended September 30, 2021, respectively.

The following table summarizes the carrying values of certain lease intangible assets or liabilities included in Other assets, net or Other liabilities, net, respectively, on the accompanying Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of September 30, 2022, and December 31, 2021 (dollars in thousands):


	September 30, 2022				December 31, 2021
Intangible Asset or Liability	Deferred Rent Asset (Liability)		Accumulated (Amortization) Accretion		Deferred Rent Asset (Liability)		Accumulated (Amortization) Accretion
Above-market lease values and lease incentives(1)	$	1,267	$	(351)	$	65	$	(12)
Below-market lease values and other deferred revenue(2)	(2,010)		473		(2,010)		340
	$	(743)	$	122	$	(1,945)	$	328

(1)Net above-market lease values and lease incentives are included as part of Other assets, net on the accompanying Condensed Consolidated Balance Sheets, and the related amortization is recorded as a reduction of Lease revenue on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

(2)Net below-market lease values and other deferred revenue are included as a part of Other liabilities, net on the accompanying Condensed Consolidated Balance Sheets, and the related accretion is recorded as an increase to Lease revenue on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

Total amortization related to above-market lease values and lease incentives was approximately $136,000 and $339,000 for the three and nine months ended September 30, 2022, respectively, and approximately $47,000 for each of the three and nine months ended September 30, 2021. Total accretion related to below-market lease values and other deferred revenue was approximately $44,000 and $134,000 for the three and nine months ended September 30, 2022, respectively, and approximately $62,000 and $161,000 for the three and nine months ended September 30, 2021, respectively.

Acquisitions

2022 Acquisitions

During the nine months ended September 30, 2022, we completed the following acquisitions, which are summarized in the table below (dollars in thousands, except for footnotes):


Property Name	Property Location	Acquisition Date	Total Acres	No. of Farms	Primary Crop(s) / Use	Lease Term	Renewal Options	Total Purchase Price		Acquisition Costs(1)		Annualized Straight-line Rent(2)
Farm Road(3)	Charlotte, FL	5/20/2022	15	0	Adjacent parcel	N/A	None	$	54	$	15	$	—
County Road 35	Glenn, CA	6/16/2022	1,374	1	Olives for Olive Oil	14.5 years	1 (5 years)	24,500		55		1,714
Reagan Road(4)	Cochise, AZ	7/13/2022	40	0	Corn	12.5 years	None	120		17		39
North Columbia River Road(5)(7)	Franklin & Grant, WA	7/21/2022	1,145	3	Wine Grapes	8.4 years	None	30,320		146		2,296
Prunedale Road(6)(7)	Umatilla, OR	7/21/2022	172	1	Wine Grapes	10.4 years	None	7,008		35		286
			2,746	5				$	62,002	$	268	$	4,335

(1)Includes approximately $23,000 of external legal fees associated with negotiating and originating the leases associated with these acquisitions, which were expensed in the period incurred.

(2)Based on the minimum cash rental payments guaranteed under the respective leases, as required under GAAP, and excludes contingent rental payments, such as participation rents.

(3)Represents the acquisition of a parcel of land adjacent to an existing farm, providing additional road access to such farm. No new lease was executed related to this acquisition.

(4)Represents the acquisition of a parcel of farmable land adjacent to an existing farm. Subsequent to acquisition, we spent approximately $153,000 to install certain improvements on this property.

(5)Upon acquisition, we executed three new leases with the existing tenants on these farms. The lease terms above represent the weighted-average lease term and aggregate annualized straight-line rent of these three leases.

(6)In connection with the acquisition of this property, we also acquired an ownership interest in a related LLC, the sole purpose of which is to own and maintain an irrigation system providing water to this and other neighboring properties. Our acquired ownership, which equated to an 11.3% interest in the LLC, was valued at approximately $2.7 million at the time of acquisition and is included within Other assets, net on the accompanying Consolidated Balance Sheets. See “—Investments in Unconsolidated Entities” below for additional information on our aggregate ownership interest in this and other LLCs.

(7)These two properties were acquired as part of a single transaction. In connection with the acquisition of these vineyards, we committed to provide up to an aggregate amount of $2.2 million for certain irrigation and vineyard improvements on these farms, for which we will earn additional rent as the funds are disbursed by us.

During the three and nine months ended September 30, 2022, in the aggregate, we recognized operating revenues of approximately $920,000 and $991,000, respectively, and net income of approximately $110,000 and $147,000, respectively, related to the above acquisitions.

2021 Acquisitions

During the nine months ended September 30, 2021, we completed the following acquisitions, which are summarized in the table below (dollars in thousands, except for footnotes):


Property Name	Property Location	Acquisition Date	Total Acres	No. of Farms	Primary Crop(s) / Use	Lease Term	Renewal Options	Total Purchase Price		Acquisition Costs(1)		Annualized Straight-line Rent(2)
Palmer Mill Road	Dorchester, MD	3/3/2021	228	2	Sod	10.0 years	2 (5 years)	$	1,600	$	56	$	89
Eight Mile Road – Port Facility	San Joaquin, CA	3/11/2021	5	1	Cooling facility and storage	9.8 years	3 (5 years)	3,977		50		189
South Avenue	Tehama, CA	4/5/2021	2,285	1	Olives for olive oil	14.7 years	1 (5 years)	37,800		149		2,555
Richards Avenue	Atlantic, NJ	6/3/2021	116	3	Blueberries	14.9 years	2 (5 years)	2,150		63		129
Lerdo Highway (Phase I)(3)(4)	Kern, CA	6/4/2021	639	1	Conventional & organic almonds and banked water	10.4 years	3 (10 years)	26,492		111		974
Almena Drive	Van Buren & Eaton, MI	6/9/2021	930	8	Blueberries	14.7 years	2 (5 years)	13,300		51		785
Maricopa Highway	Kern, CA	8/11/2021	277	1	Organic blueberries	14.9 years	3 (5 years)	30,000		63		2,262
Wallace Road	Yamhill, OR	8/11/2021	143	1	Organic blueberries	10.1 years	3 (5 years)	12,320		39		768
West Orange	St. Lucie, FL	8/18/2021	617	2	Lemons and oranges	12.0 years	None	5,241		184		367
Lerdo Highway (Phase II)(3)(5)	Kern, CA	8/20/2021	479	1	Conventional & organic almonds and banked water	10.2 years	3 (10 years)	14,772		53		735
			5,719	21				$	147,652	$	819	$	8,853

(1)Includes approximately $52,000 of external legal fees associated with negotiating and originating the leases associated with these acquisitions, which were expensed in the period incurred.

(2)Based on the minimum cash rental payments guaranteed under the respective leases, as required under GAAP, and excludes contingent rental payments, such as participation rents.

(3)Lease provides for an annual participation rent component based on the gross crop revenues earned on the farm. The rent figure above represents only the minimum cash guaranteed under the lease.

(4)As part of the acquisition of this property, we acquired a contract to purchase 20,330 acre-feet of water stored with Semitropic Water Storage District, located in Kern County, California, at a fixed price. We executed this contract on June 25, 2021, at an additional cost of approximately $1.2 million, which is included in the total purchase price for this property in the table above. Rent is not currently being earned on the value attributable to the water. See “—Investments in Water Assets” below for additional information on this water.

(5)As part of the acquisition of this property, we acquired a contract to purchase 5,000 acre-feet of water stored with Semitropic Water Storage District, located in Kern County, California, at a fixed price. We executed this contract on August 23, 2021, at an additional cost of approximately $306,000, which is included in the total purchase price for this property in the table above. Rent is not currently being earned on the value attributable to the water. See “—Investments in Water Assets” below for additional information on this water.

During the three and nine months ended September 30, 2021, in the aggregate, we recognized operating revenues of approximately $1.8 million and $2.6 million, respectively, and net income of approximately $646,000 and $1.0 million, respectively, related to the above acquisitions.

Purchase Price Allocations

The allocation of the aggregate purchase price for the farms acquired during the nine months ended September 30, 2022, and 2021 respectively, is as follows (dollars in thousands):


Assets (Liabilities) Acquired	2022 Acquisitions		2021 Acquisitions
Land and land improvements	$	28,139	$	55,318
Permanent plantings	24,706		47,502
Irrigation & drainage systems	2,973		6,492
Farm-related facilities	530		17,067
Other site improvements	—		984
Leasehold interest—land	—		787
In-place lease values	909		687
Leasing costs	1,355		509
Above-market lease values(1)	641		—
Below-market lease values(2)	—		(1,321)
Investment in LLC(1)	2,749		—
Water purchase contracts(1)(3)	—		18,075
Total Purchase Price	$	62,002	$	146,100

(1)Included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

(2)Included within Other liabilities, net on the accompanying Condensed Consolidated Balance Sheets.

(3)Represents only the value attributable to the water purchase contract acquired as part of the acquisition of Lerdo Highway and excludes approximately $1.6 million paid to execute the contract subsequent to acquisition.

Investments in Unconsolidated Entities

In connection with the acquisition of certain farmland located in Fresno County, California, we also acquired an ownership in a related limited liability company (the “Fresno LLC”), the sole purpose of which is to own and maintain a pipeline conveying water to our and other neighboring properties. In addition, in connection with the acquisition of certain farmland located in Umatilla County, Oregon, we also acquired an ownership in a related limited liability company (the “Umatilla LLC”), the sole purpose of which is to own and maintain an irrigation system providing water to our and other neighboring properties.

As of September 30, 2022, our aggregate ownership interest in the Fresno LLC and the Umatilla LLC was 50.0% and 20.4%, respectively. As our investments in the Fresno LLC and Umatilla LLC are both deemed to constitute “significant influence,” we have accounted for these investments under the equity method.

We recorded an aggregate loss of approximately $24,000 and $54,000 during the three and nine months ended September 30, 2022, respectively, and approximately $19,000 and $42,000 during the three and nine months ended September 30, 2021, respectively (included in Loss from investments in unconsolidated entities on our Condensed Consolidated Statements of Operations and Comprehensive Income), which represents our pro-rata share of the aggregate loss recognized by the Fresno LLC and Umatilla LLC. Our combined ownership interest in the Fresno LLC and Umatilla LLC, which had an aggregate carrying value of approximately $5.8 million and $3.1 million as of September 30, 2022, and December 31, 2021, respectively, is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

Investments in Water Assets

In connection with the acquisition of certain farmland located in Kern County, California, we also acquired three contracts to purchase an aggregate of 45,000 acre-feet of banked water held by Semitropic Water Storage District (“SWSD”), a water storage district located in Kern County, California, at a fixed price. The contracts to purchase the banked water could not readily be net settled by means outside of the contracts, and all rights and obligations associated with the purchase contracts were transferred to us at acquisition of the related farmland. We were not required to purchase a specific amount, or any, of the 45,000 acre-feet of water.

During the year ended December 31, 2021, we executed all three contracts to purchase all 45,000 acre-feet of banked water for an aggregate additional cost of approximately $2.8 million. The purchased banked water was recognized at cost, including any administrative fees necessary to transfer the water to our banked water account. While we may, in the future, sell the banked water to an unrelated third party for a profit, our current intent is to hold the water for the long-term for future use on our farms. There is no amount of time by which we must use the water held by SWSD.

As of September 30, 2022, the investment in banked water had a carrying value of approximately $34.0 million, which includes the subsequent cost to execute the contracts, and is included within Other assets, net on our Condensed Consolidated Balance Sheets.

Each quarter, we will review the investment in banked water for any indicators of impairment and perform an impairment analysis if there are any such indicators. As of September 30, 2022, we concluded that there were no such indicators and that the water was not impaired.

Portfolio Concentrations

Credit Risk

As of September 30, 2022, our farms were leased to various different, unrelated third-party tenants, with certain tenants leasing more than one farm. No individual tenant represented greater than 10.0% of the total lease revenue recorded during the nine months ended September 30, 2022.

Geographic Risk

Farms located in California and Florida accounted for approximately $43.7 million (67.8%) and $10.8 million (16.8%), respectively, of the total lease revenue recorded during the nine months ended September 30, 2022. Though we seek to continue to further diversify geographically, as may be desirable or feasible, should an unexpected natural disaster (such as an earthquake, wildfire, or flood) occur or climate change impact the regions where our properties are located, there could be a material adverse effect on our financial performance and ability to continue operations. None of our farms in California or Florida have been materially impacted by the recent wildfires or hurricanes that occurred in those respective regions. In addition, with respect to the ongoing drought taking place in the western U.S., all of our farms in the region have independent (and, in most cases, multiple) sources of water, in addition to rainfall, and have not been materially impacted by the current drought conditions. No other single state accounted for more than 10.0% of our total lease revenue recorded during the nine months ended September 30, 2022.

Impairment

We evaluate our entire portfolio each quarter for any impairment indicators and perform an impairment analysis on those select properties that have an indication of impairment. As of September 30, 2022, and December 31, 2021, we concluded that none of our properties were impaired. There have been no impairments recognized on our real estate assets since our inception.