Gladstone Land Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate and Intangible Assets

Real Estate and Intangible Assets

12 Months Ended

Dec. 31, 2023

REAL ESTATE AND INTANGIBLE ASSETS

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 December 31, 2023 (dollars in thousands, except for footnotes):


Location	No. of Farms	Total Acres	Farm Acres	Acre-feet of Water Assets	Net Cost Basis(1)		Encumbrances(2)
California(3)(4)(5)	63	34,844	32,321	46,400	$	850,610	$	389,405
Florida(6)	26	22,468	17,639	—	221,185		95,012
Washington	6	2,520	2,004	—	59,763		20,133
Arizona(7)	6	6,320	5,333	—	52,119		12,303
Colorado	12	32,773	25,577	—	45,945		14,599
Nebraska	9	7,782	7,050	—	30,402		10,357
Oregon(8)	6	898	736	—	29,534		11,308
Michigan	23	1,892	1,245	—	23,048		13,868
Texas	1	3,667	2,219	—	8,101		—
Maryland	6	987	863	—	8,013		4,344
South Carolina	3	597	447	—	3,542		2,147
Georgia	2	230	175	—	2,317		1,645
North Carolina	2	310	295	—	2,117		—
New Jersey	3	116	101	—	2,100		1,221
Delaware	1	180	140	—	1,296		697
Totals	169	115,584	96,145	46,400	$	1,340,092	$	577,039

(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, net lease incentives, and net 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 Consolidated Balance Sheets.

(2)Excludes approximately $2.9 million of debt issuance costs related to notes and bonds payable, included in Notes and bonds payable, net on the accompanying Consolidated Balance Sheets.

(3)Includes ownership in a special-purpose LLC that owns a pipeline conveying water to certain of our properties. As of December 31, 2023, this investment had a net carrying value of approximately $1.0 million and is included within Other assets, net on the accompanying Consolidated Balance Sheet.

(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 December 31, 2023, these two ground leases had a net cost basis of approximately $689,000 and are included in Lease intangibles, net on the accompanying Consolidated Balance Sheets.

(5)Includes 46.003 acre-feet of water stored with Semitropic Water Storage District, located in Kern County, California and 397 surplus water credits in our account with Westlands Water District, located in Fresno County, California. See “—Investments in Water Assets” below for additional information.

(6)Includes one property classified as held for sale; see “—Real Estate Held for Sale” below for additional information.

(7)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 December 31, 2023, these ground leases had an aggregate net cost basis of approximately $376,000 and are included in Lease intangibles, net on the accompanying Consolidated Balance Sheets.

(8)Includes ownership in a special-purpose LLC that owns certain irrigation infrastructure that provides water to two of our farms. As of December 31, 2023, this investment had a net carrying value of approximately $4.8 million and is included within Other assets, net on the accompanying Consolidated Balance Sheets.

Real Estate

The following table sets forth the components of our investments in tangible real estate assets as of December 31, 2023 and 2022, excluding real estate held for sale (dollars in thousands):


	December 31, 2023		December 31, 2022
Real estate:
Land and land improvements	$	792,277	$	845,779
Permanent plantings	359,131		358,249
Irrigation and drainage systems	168,545		165,438
Farm-related facilities	50,517		48,690
Other site improvements	13,272		14,238
Real estate, at cost	1,383,742		1,432,394
Accumulated depreciation	(142,212)		(106,966)
Real estate, net	$	1,241,530	$	1,325,428

Real estate depreciation expense on these tangible assets was approximately $36.1 million, $34.3 million, and $25.9 million for the years ended December 31, 2023, 2022, and 2021, respectively.

Intangible Assets and Liabilities

The following table summarizes the carrying value of certain lease intangible assets and the related accumulated amortization as of December 31, 2023 and 2022, excluding real estate held for sale (dollars in thousands):


	December 31, 2023		December 31, 2022
Lease intangibles:
Leasehold interest – land	$	4,295	$	4,295
In-place lease values	2,470		2,763
Leasing costs	3,017		3,088
Other(1)	141		133
Lease intangibles, at gross cost	9,923		10,279
Accumulated amortization	(5,141)		(4,577)
Lease intangibles, net	$	4,782	$	5,702

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

Total amortization expense related to these lease intangible assets was approximately $988,000, $1.0 million, and $1.3 million for the years ended December 31, 2023, 2022, and 2021, respectively.

The following table summarizes the carrying values of certain lease intangible assets or liabilities (excluding those related to real estate held for sale) included in Other assets, net or Other liabilities, net, respectively, on the accompanying Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of December 31, 2023 and 2022 (dollars in thousands):


	December 31, 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)	$	5,342	$	(1,849)	$	4,702	$	(585)
Below-market lease values and other deferred revenue(2)	(1,944)		624		(2,010)		518
	$	3,398	$	(1,225)	$	2,692	$	(67)

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

Total amortization related to above-market lease values and lease incentives was approximately $1.3 million, $573,000 and $48,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $172,000, $178,000 and $224,000 for the years ended December 31, 2023, 2022, and 2021, respectively.

The estimated aggregate amortization expense to be recorded related to in-place lease values, leasing costs, and tenant relationships and the estimated net impact on lease revenue from the amortization of above-market lease values and lease incentives or accretion of above-market lease values and other deferred revenues for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):


Period		Estimated Amortization Expense		Estimated Net Increase (Decrease) to Lease Revenue
For the fiscal years ending December 31:	2024	$	711	$	(1,184)
	2025	610		(1,184)
	2026	486		(961)
	2027	556		(1,178)
	2028	556		(1,178)
	Thereafter	1,863		3,512
		$	4,782	$	(2,173)

Real Estate Held for Sale

As of December 31, 2023, we had one property located in Martin County, Florida, that was classified as held for sale. This property had a net cost basis of approximately $53.6 million as of December 31, 2023, and was sold subsequent to December 31, 2023. See Note 11, “Subsequent Events—Portfolio Activity—Property Sale,” for additional information on this sale. We did not have any properties classified as held for sale as of December 31, 2022.

Acquisitions

2023 Acquisitions

We did not acquire any new farms during the year ended December 31, 2023.

2022 Acquisitions

During the year ended December 31, 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		36		286
Phelps Avenue(8)	Fresno, CA	12/29/2022	443	0	Open ground and water credits	5.0 years	1 (5 years)	3,100		72		25
			3,189	5				$	65,102	$	341	$	4,360

(1)Includes approximately $27,000 of external legal fees associated with negotiating and originating the leases associated with these acquisitions, which were expensed in the period incurred.

(2)Unaudited; 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.

(8)Represents the acquisition of three parcels of land adjacent to an existing farm that will initially be utilized for its water rights (including additional surface water rights and groundwater pumping rights) to be used on nearby farms. In addition, a portion of this acquisition was leased back to the seller.

During the year ended December 31, 2022, in the aggregate, we recognized operating revenues of approximately $2.1 million and net income of approximately $244,000 related to the above acquisitions.

Purchase Price Allocations

The allocation of the aggregate purchase price for the farms acquired during the year ended December 31, 2022 was as follows (dollars in thousands):


Assets (Liabilities) Acquired	2022 Acquisitions
Land and land improvements	$	30,353
Permanent plantings	24,706
Irrigation & drainage systems	3,102
Farm-related facilities	1,287


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

Investment in LLC(1)	2,749

Total Purchase Price	$	65,102

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

Acquired Intangibles and Liabilities

The following table shows the weighted-average amortization periods (in years) for the intangible assets acquired and liabilities assumed in connection with new real estate acquired during the year ended December 31, 2022:


						Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities						2022
Leasehold interest – land						0.0
In-place lease values						10.9
Leasing costs						11.7
Above-market lease values and lease incentives						9.1
Below-market lease values and other deferred revenue						0.0
All intangible assets and liabilities						10.6

Property Sale

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, 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 December 31, 2023, our aggregate ownership interest in the Fresno LLC and the Umatilla LLC was 50.00% 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.

During the years ended December 31, 2023, 2022, and 2021, we recorded an aggregate loss of approximately $59,000, $73,000, and $61,000, respectively (included in Loss from investments in unconsolidated entities on our 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 both December 31, 2023 and 2022, our combined ownership interest in the Fresno LLC and Umatilla LLC had an aggregate carrying value of approximately $5.8 million and is included within Other assets, net on the accompanying 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. In addition, during the three months ended December 31, 2023, we obtained another contract to purchase an additional 1,003 acre-feet of banked water held by SWSD, which was received from one of our tenants as partial consideration for a rent payment owed. We subsequently executed the contract to purchase all 1,003 acre-feet of banked water for an aggregate cost of approximately $61,000.

All acquired 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. As of December 31, 2023, the 46,003 acre-feet of banked water held by SWSD was recognized as a long-term water asset and had an aggregate carrying value of approximately $34.5 million (included within Other assets, net on our Consolidated Balance Sheets).

In addition, during the year ended December 31, 2023, we elected to participate in a groundwater recharge program established by Westlands Water District (“WWD”), a water district located in Fresno County, California. Under the program, WWD will pay for surplus surface water to be delivered to individual landowners’ properties with district-approved groundwater recharge facilities, also known as “water banks.” The landowner would be allowed to keep 50% of the net amount of groundwater credits generated under the program (after allowing for certain leave-behind and evaporative losses), and the remaining 50% would be used to recharge the aquifer and retained by WWD. Delivery of water under this program is subject to surplus water availability at WWD’s discretion, and WWD has not yet announced a termination date for this program. Through December 31, 2023, we have obtained 397 water credits, which represents 50% of the total net water credits generated and confirmed by WWD under the program as of December 31, 2023. As of December 31, 2023, these water credits were recognized as a long-term water asset and had an aggregate carrying value of approximately $111,000 (included within Other assets, net on our Consolidated Balance Sheets).

During the year ended December 31, 2023, we also entered into various other agreements with certain third parties (including local water districts and private individuals) to either buy water directly, buy a portion of other water districts’ surface water allocations in future years in which allocations are granted, or to store surface water on others’ behalf in one of our groundwater recharge facilities in exchange for a portion of the net groundwater credits produced and recognized by the respective water district.

As of December 31, 2023 and 2022, we owned a total of 46,400 acre-feet and 45,000 acre-feet, respectively, of long-term water assets, and our investments in these long-term water assets had an aggregate carrying value of approximately $34.6 million and $34.0 million, respectively, and are included within Other assets, net on our Consolidated Balance Sheets.

We have invested approximately $1.8 million to construct groundwater recharge facilities on two of our farms, which is included within Real estate, at cost on our Consolidated Balance Sheets. In addition, through December 31, 2023, we have invested an additional $1.8 million in the aggregate in connection with these agreements that are expected to result in additional groundwater credits in the future; however, the amount and timing of these credits, if any, is currently unknown and is dependent upon and subject to the recognition of such credits by the respective water districts, in their sole discretion. Such costs are held in a deferred asset account (also included within Other assets, net on our Consolidated Balance Sheets) until the related net water credits become estimable and are recognized by the respective water district, at which time the costs would be reclassed to investments in long-term water assets.

Future Minimum Lease Payments

We account for all of our leasing arrangements in which we are the lessor as operating leases. The majority of our leases are subject to fixed rental increases, and a small subset of our lease portfolio includes lease payments based on an index, such as the consumer price index (“CPI”). In addition, several of our leases contain participation rent components based on the gross revenues earned on the respective farms. Most of our leases also include tenant renewal options; however, these renewal options are generally based on then-current market rental rates and are therefore typically excluded from the determination of the minimum lease term. The majority of our leases generally do not include tenant termination options.

The following tables summarize the future lease payments to be received under noncancellable leases as of December 31, 2023 (dollars in thousands):


Period		Tenant Lease Revenue
For the fiscal years ending December 31,	2024	$	77,576
	2025	70,372
	2026	63,954
	2027	60,099
	2028	51,482
	Thereafter	180,832
		$	504,315

Leases—Cash Basis Recognition

As of December 31, 2023, due to credit issues with two of our tenants, we determined that the full collectability of the remaining rental payments under the respective leases with these tenants was not deemed to be probable. As such, during the year ended December 31, 2023, we recognized all or a portion of lease revenues from the three leases with these two tenants (all farms located in California) on a cash basis. We are continuing to work with the current tenants and will seek to come to an agreement for the remaining rental payments, if possible. Such agreement, if one can be reached, may include placing these tenants on payment plans, deferring a portion of the rent owed to us, or agreeing to terminate the respective leases. In the event of a termination, we estimate that we would be able to find new tenants to lease each of these properties to at market rental rates within 1 to 12 months.

During the year ended December 31, 2023, we recorded lease revenues from these three leases of approximately $2.5 million (including approximately $72,000 of participation rents), as compared to approximately $3.1 million (including approximately $0.8 million of participation rents) and approximately $2.4 million (including approximately $95,000 of participation rents) during the years ended December 31, 2022 and 2021, respectively.

Portfolio Concentrations

Credit Risk

As of December 31, 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 10.0% of the total lease revenue recorded during the year ended December 31, 2023.

Geographic Risk

Farms located in California and Florida accounted for approximately $59.1 million (65.5%) and $15.1 million (16.7%), respectively, of the total lease revenue recorded during the year ended December 31, 2023. We seek to continue to further diversify geographically, as may be desirable or feasible. If an unexpected natural disaster (such as an earthquake, wildfire, or flood) occurs or climate change impacts 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 were materially impacted by the wildfires, droughts, or hurricanes that occurred in those respective regions during the year ended December 31, 2023. See “—California Floods” below for a discussion on damage caused on certain of our farms by the January 2023 floods that occurred in California. Besides California and Florida, no other single state accounted for more than 10.0% of the total rental revenue recorded during the year ended December 31, 2023.

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 year ended December 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 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.