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, 2023

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, 2023 (dollars in thousands, except for footnotes):


Location	No. of Farms	Total Acres	Farm Acres	Acre-feet of Water	Net Cost Basis(1)		Encumbrances(2)
California(3)(4)(5)	63	34,844	32,321	45,000	$	855,109	$	391,135
Florida	26	22,468	17,639	0	221,433		96,693
Washington	6	2,529	1,997	0	61,651		20,542
Arizona(6)	6	6,320	5,333	0	52,778		12,300
Colorado	12	32,773	25,577	0	46,061		14,768
Nebraska	9	7,782	7,050	0	30,544		11,658
Oregon(7)	6	898	736	0	29,753		11,448
Michigan	23	1,892	1,245	0	23,267		13,867
Texas	1	3,667	2,219	0	8,119		4,814
Maryland	6	987	863	0	8,044		4,345
South Carolina	3	597	447	0	3,565		2,147
Georgia	2	230	175	0	2,643		1,645
North Carolina	2	310	295	0	2,128		—
New Jersey	3	116	101	0	2,114		1,238
Delaware	1	180	140	0	1,301		697
	169	115,593	96,138	45,000	$	1,348,510	$	587,297

(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 $3.1 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, 2023, this investment had a net carrying value of approximately $1.0 million and is included within Other assets, net on the accompanying Condensed Consolidated Balance Sheets.

(4)Includes eight acres in which we own a leasehold interest via a ground lease with a private individual that expires in December 2040 and five acres in which we own a leasehold interest via a ground sublease with a California municipality that expires in December 2041. As of September 30, 2023, these two ground leases had a net cost basis of approximately $699,000 and are 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. See “—Investments in Water Assets” below for additional information.

(6)Includes two farms consisting of 1,368 total acres and 1,221 farm acres in which we own leasehold interests via two ground leases with the State of Arizona that expire in February 2025 and February 2032, respectively. As of September 30, 2023, these ground leases had an aggregate net cost basis of approximately $460,000 and are 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, 2023, 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, 2023, and December 31, 2022 (dollars in thousands):


	September 30, 2023		December 31, 2022
Real estate:
Land and land improvements	$	843,205	$	845,779
Permanent plantings	359,322		358,249
Irrigation and drainage systems	170,593		165,438
Farm-related facilities	50,883		48,690
Other site improvements	13,265		14,238
Real estate, at cost	1,437,268		1,432,394
Accumulated depreciation	(133,237)		(106,966)
Total real estate, net	$	1,304,031	$	1,325,428

Real estate depreciation expense on these tangible assets was approximately $9.0 million and $26.7 million for the three and nine months ended September 30, 2023, respectively, and approximately $8.9 million and $25.1 million for the three and nine months ended September 30, 2022, 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, 2023, and December 31, 2022 (dollars in thousands):


	September 30, 2023		December 31, 2022
Lease intangibles:
Leasehold interest – land	$	4,295	$	4,295
In-place lease values	2,579		2,763
Leasing costs	3,059		3,088
Other(1)	140		133
Lease intangibles, at cost	10,073		10,279
Accumulated amortization	(5,055)		(4,577)
Lease intangibles, net	$	5,018	$	5,702

(1)Other includes tenant relationships and acquisition-related costs allocated to miscellaneous lease intangibles.

Total amortization expense related to these lease intangible assets was approximately $244,000 and $752,000 for the three and nine months ended September 30, 2023, respectively, and approximately $258,000 and $769,000 for the three and nine months ended September 30, 2022, 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, 2023, and December 31, 2022 (dollars in thousands):


	September 30, 2023				December 31, 2022
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)	$	4,691	$	(1,133)	$	4,702	$	(585)
Below-market lease values and other deferred revenue(2)	(2,010)		648		(2,010)		518
	$	2,681	$	(485)	$	2,692	$	(67)

(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 $200,000 and $558,000 for the three and nine months ended September 30, 2023, respectively, and approximately $136,000 and $339,000 for the three and nine months ended September 30, 2022, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $42,000 and $131,000 for the three and nine months ended September 30, 2023, respectively, and approximately $44,000 and $134,000 for the three and nine months ended September 30, 2022, respectively.

Acquisitions

2023 Acquisitions

We did not acquire any new farms during the nine months ended September 30, 2023.

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	N/A	$	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	N/A	120		17		39
North Columbia River Road (5)(7)	Franklin & Grant, WA	7/21/2022	1,145	3	Wine Grapes	8.4 years	N/A	30,320		146		2,296
Prunedale Road(6)(7)	Umatilla, OR	7/21/2022	172	1	Wine Grapes	10.4 years	N/A	7,008		36		286
			2,746	5				$	62,002	$	269	$	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.

Purchase Price Allocations

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


Assets (Liabilities) Acquired	2022 Acquisitions
Land and land improvements	$	28,139
Permanent plantings	24,706
Irrigation & drainage systems	2,973
Farm-related facilities	530


In-place lease values	909
Leasing costs	1,355
Above-market lease values(1)	641

Investment in LLC(1)	2,749

Total Purchase Price	$	62,002

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

Property Disposition

On June 23, 2023, we completed the sale of a 138-acre parcel of unfarmed land in Florida for $9.6 million. Including closing costs of approximately $563,000, we recognized a net gain on the sale of approximately $6.4 million.

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, 2023, 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 $84,000 during the three and nine months ended September 30, 2023, respectively, and approximately $24,000 and $54,000 during the three and nine months ended September 30, 2022, 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. As of September 30, 2023, and December 31, 2022, our combined ownership interest in the Fresno LLC and Umatilla LLC had an aggregate carrying value of approximately $5.7 million and $5.8 million, respectively, and 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. We subsequently 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 the subsequent cost to execute the contracts and any administrative fees necessary to transfer the water to our banked water account.

While we may, in the future, sell the banked water to unrelated third parties 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, 2023, our investment in water assets had an aggregate carrying value of approximately $34.0 million and is included within Other assets, net on our Condensed Consolidated Balance Sheets.

Portfolio Concentrations

Credit Risk

As of September 30, 2023, 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% of the total lease revenue recorded during the nine months ended September 30, 2023.

Geographic Risk

Farms located in California and Florida accounted for approximately $42.9 million (65.1%) and $11.3 million (17.1%), respectively, of the total lease revenue recorded during the nine months ended September 30, 2023. 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, droughts, or hurricanes that occurred in those respective regions. See “—California Floods” below for a discussion on damage caused on certain of our farms by the January 2023 floods that occurred in California. No other single state accounted for more than 10% of the total rental revenue recorded during the nine months ended September 30, 2023.

California Floods

In January 2023, periods of heavy rainfall in California resulted in floods that impacted several areas of the state, including regions where certain of our farms are located. As a result of the flooding, one of our farms in the Central Valley suffered damage to certain structures located on the farm, and we estimated the carrying value of the structures on this property damaged by the floods to be approximately $855,000. As such, during the three months ended March 31, 2023, we wrote down the carrying value of these structures and also recorded a corresponding property and casualty loss, included within Property and casualty (loss) recovery, net on our Condensed Consolidated Statements of Operations and Comprehensive Income. Certain of our other farms in California suffered minor damage as a result of the floods, but no other farms were materially impacted.

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, 2023, and December 31, 2022, we concluded that none of our properties or investments in water assets were impaired. There have been no impairments recognized on our real estate assets since our inception.