COMPANY UPDATE/ESTIMATE CHANGE Key Metrics FFO LAND - NASDAQ - 2/20/18 $12.36 Prior Current Prior Current Price Target N/A 2009 2010E 2010E 2011E 2011E 1Q 52-Week $0.51 Range -- $0.51 E $10.77 -- - $14.29 2Q Shares, $0.47 units Outstanding -- $0.51 (mm) E -- 14.8 3Q Market Cap. $0.49($mm) -- $0.52 E -- $182.9 4QE $0.48 -- $0.53 1-Mo. Average Daily Volume E -- 59,340 Year $1.95 $2.07 $2.07 E -- $2.20 E Institutional Ow nership 39.0% P/E 14.0x 13.2x 13.2x N/A 12.4x Debt/Total Capital Dec-17 57.0% Est Revenue 3-year ($mm) FFO Grow th Rate Est 3-year Dividend Prior GrowCurrent th Rate Prior 12.0% Current 2.0% 2009 2010E 2010E 2011E 2011E Book Value $ 7.73 1Q $17.7 -- $17.8 E -- 2Q Dividend $17.4 -- $18.1 E -- $ 0.53 3Q Dividend $17.3 Yield -- $18.4 E -- 4.30% 4QE Est. Fixed $17.3 Charge Coverage -- $18.8 E -- 1.7X Year $69.7 $73.1 E -- $78.0 E FFO Core Per share Normalized Company Description: LTC Properties, Inc., Prior Current headquartered in Westlake Village, California, is a real 2016 2017 2018E 2018E estate investment trust (REIT) that invests primarily in longterm healthcare facilities through mortgage loans and direct 1Q $0.13 -- $0.14 $0.14 $0.12 2Q $0.14 -- $0.14 $0.16 $0.14 real estate property ownership. 3Q $0.15 -- $0.14 $0.16 $0.14 4Q $0.14 -- $0.13 $0.16 $0.15 Year $0.56 $0.56 $0.62 $0.54 P/FFO 0.0x 22.1x 22.9x Note that quarters may not add due to rounding Revenue ($mm) Prior Current 2016 2017 2018E 2018E 1Q $3.8 -- $5.9 $7.4 $7.1 2Q $4.2 -- $6.0 $7.8 $7.4 3Q $4.5 -- $6.6 $8.1 $7.8 4Q $4.9 -- $6.8 $8.5 $8.2 Year $17.3 $25.4 $31.8 * $30.5 May not add due to rounding. Company Description: Gladstone Land Corp., headquartered in McLean, VA, is a real estate investment trust (REIT) that is focused on investments in farmland, mainly in high value non-commodity crops. Its current farmland is mainly in California, Colorado and Florida, but the company is expanding its reach into other states. Gladstone Land Corp. LAND -- NASDAQ Neutral-4 Conference Call Discussion Investment Highlights Real Estate Investment Trusts John Roberts J.J.B. Hilliard, W.L. Lyons, LLC 502.588.1165 / jmroberts@hilliard.com Institutional Sales Desk: George Moorin 502.588.9141/GMoorin@hilliard.com February 21, 2018 Despite LAND shares having moved down a bit recently, we still do not see enough risk adjusted return to justify a positive rating at this point. Our estimate of fair value in 2-3 years is just over $14, which does not provide adequate risk adjusted price appreciation potential in our opinion to recommend purchase of the stock at this time. As such, our rating remains Neutral at this time in light of the share s risk rating. We are fine-tuning our 2018 FFO estimate to $0.54 due to limited Q1 investment activity so far, as well as higher interest rate assumptions, more muted investment expectations in light of the current share price and the loss of some income around the move of some assets to new tenants, and the company s taxable REIT subsidiary. We are initiating a 2019 FFO estimate of $0.61 a share assuming some of these issues are addressed. Management noted that the current appraisal of the value of its properties places a net asset value of $13.96 per share on its underlying farmland. The company s shares are trading below this asset value. We are retaining our rating on LAND at Neutral. While LAND shares allow investors to gain exposure to a unique and attractive asset class, and offer incomeoriented investors a nice and modestly growing dividend which provides a regular cash flow stream, risk adjusted total return potential does not justify a higher rating at this point, in our opinion. Further, in the near term we do not expect to see positive quarter over quarter comps, which is not conducive to a higher share price, in our view. Note Important Disclosures on Pages 5-6. Note Analyst Certification on Page 5.
Additional Conference Call Discussion Overall, the conference call was reasonably consistent with previous conference calls. The company s appraisal of its properties was discussed with the reduced asset value for the firm standing at $13.96 a share. This valuation includes a combination of outside appraisals, internal valuations and purchase prices for those properties recently purchased. Management noted that there were new appraisals on five properties, and some capital spending made during the quarter was not reflected in the NAV number. They noted that this capital spending would eventually make its way into the NAV as projects were completed and result in increased rent. The appraised value remains above the current share price, with the recent drop in the share price expanding the discount. The company made $129 million in investments in 2017 and year end total investment is $536 million. Management noted that one of its farms in California could potentially be changed to housing use in the near future. This could result in a significant increase in value for the property (which management says is close to the coast), although we are not assuming any such appreciation in our assumptions. On the leasing front, management noted that it only has approximately 5% of its leases coming due in 2018, and expects to renew all of the leases. During 2017, management re-signed all of the leases that were set to expire that year. However, the company actually saw a decline in lease rates averaging 7.0%, although the amount of the decrease ($0.16 million annually) was minor. We note, however, that part of the attractiveness of the asset class is consistent rental increases, something that was not demonstrated in 2017. The company sold a small farm to its current tenant, and added another lease with a new tenant on an Arizona property that will be used to grow a lower margin crop, corn. We believe that this lease led to the negative leasing numbers for 2017, as this is a lower value use for the farm. Management is going to attempt to re-position this farm for higher valued crops after the one-year lease expires for the property. On the debt/capitalization front, management noted that it has some capacity left under its debt agreements, but also has some options with a new preferred stock (not publicly traded) that is being offered on an ongoing, best efforts offering. The company has issued none of these shares at this time. The company is also looking to use shares (through operating partnership (OP) units) to finance some of its investment. The company has two properties under signed purchase agreements that management expects to close later this quarter or early in the second quarter, one which it anticipates paying at least part for with its OP units. The debt level has come down recently with share issuance and now stands at 57% of capital, which does offer some debt capacity for additional purchases. The company has several more properties in various stages of the purchase process. We note that the company has little debt coming due over the next five years, with only about 2% due over the coming year. The company s mortgage line does not expire until 2029. The company s credit line does not come due until 2024. The total cost of the company s debt load was 3.38% for 2017 and we anticipate a slight bump in 2018. First Quarter and 2018 Outlook At this point, we are fine-tuning our estimate of FFO down to $0.54 a share for 2018. This is a function of a reduced level of projected investments of $60 million for the full year, a slight bump in our expectations for interest expense, the loss of some income around new leases and lower profit from the farm leased to the company s taxable REIT subsidiary. Most of the decline will be in Q1, with a slow recovery beyond that. We expect a small amount of common shares being offered, as well as some preferred, although it will likely be done at a discount to face value, resulting in higher preferred share dividends. The company will likely be using existing cash on the balance sheet and available debt capacity in the near term and then the equity will be issued, likely in the second half of the year. Our Q1 FFO estimate is $0.12. Looking forward to 2019, we are initiating an estimate of $0.61 a share and we anticipate acquisitions to push up from the low range expected in 2018 and a plateauing of interest rates. Valuation and Rating At this point in its history traditional valuation metrics have little meaning from a valuation perspective for LAND. LAND s early stage of growth means that cash flow is not an appropriate metric to judge the company s valuation, even though it is now starting to see some meaningful cash generated. At this point, Hilliard Lyons Equity Research 2 REITs
we see the appraisal valuation to be a more appropriate metric on which to evaluate LAND s attractiveness. As noted earlier, LAND s asset value actually declined this quarter as a result of some capital spending that is not reflected in the current appraisal value. While the company should recoup the value of this spending as it becomes reflected in higher rents, there is some speculation in this number until the company actually signs the new leases. Management noted on the conference call that the current appraisal for the company s farmland placed a value of $13.96 a share, approximately 13% above the current share price, including cash and other assets less debt and other liabilities. This valuation is determined mostly from third party appraisals, but is also based on internal appraisals and recent purchase prices. While the discount has increased recently with the decline in the share price, we still do not see the current price appreciation potential as compelling enough to recommend purchase of the shares at this point with comps that are likely to be negative in the year ahead. Using our past analysis to calculate our 2-3 year price target for LAND the number is now barely above $14. As the risk adjusted return is just not enough to justify a positive rating, a Neutral rating continues to seem appropriate at this time. Suitability LAND has a suitability rating of 4 on our 1-4 scale. While the company s share price is backed by its hard asset base (farms and farmland), the company at this point has a less diversified portfolio of properties than other large, more established REITs. Further, the company has a short operating history, with its IPO occurring in 2013. The company s balance sheet is somewhat levered and its access to capital is also constrained due to its stock price remaining sharply below the IPO price. Also, farmland has inherent volatility that could be magnified due to leverage and stock market activity. Risks There are a number of risks to owning LAND shares and REITs as an investment group. REITs in general need access to debt capital to grow, if such debt and equity capital is unavailable, the company may have difficulty in growing. The company s dividend is very attractive to shareholders and LAND, as well as REITs in general, have seen their prices rise with the decline in overall interest rates. Should rates rise, that could hurt LAND s share price. Because of their thirst for debt, changes in interest rates can also impact a REIT s cash flow and ability to make accretive acquisitions. LAND s concentration upon the farmland real estate sector could be a risk. Should institutional investors reduce exposure to the group, that could lower the value of the company s current portfolio, although it would offer up additional opportunities in the market if prices fall. LAND s concentrated geographic exposure to a small number of states could be an issue if any one state has a problem, or if farm commodities see declines in pricing, among others. One also must worry about management time, since they manage multiple companies, and also the dependence upon David Gladstones s expertise. Annual yield is calculated by dividing the distribution amount by the current market price of the security. For US income tax purposes, the Company may classify all or a portion of its distributions as dividends or other non-dividend distributions. Note that for some investors, for US income tax purposes all or a portion of the Company s 2017 dividend or distribution was treated as return of capital and not as dividend income as reflected on the IRS Form 1099-Div for the 2017 tax year. The Company generally makes a final determination regarding the proper tax treatment of distributions after calendar year end. We urge each shareholder to consult with his or her own tax advisor to determine the tax consequences of the distributions received, including any state, local or foreign tax considerations. Hilliard Lyons Equity Research 3 REITs
Table 1. Income Statement In thousands, except per share #'s 2014 2015 2016 2017 2018E Year Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Revenues Rental Income $ 7,170 $ 11,888 $ 3,679 $ 4,242 $ 4,467 $ 4,917 $ 17,305 $ 5,748 $ 5,994 $ 6,561 $ 6,808 $ 25,111 $ 6,925 $ 7,045 $ 7,166 $ 7,290 $ 28,426 Interest & other income $ 48 $ - $ 95 $ 9 $ 2 $ 4 $ 109 $ 184 $ - $ - $ 22 $ 206 $ - $ - $ - $ - $ - Other Income Tenant Recovery income $ 15 $ 13 $ 3 $ 3 $ 2 $ 3 $ 11 $ 2 $ 2 $ 3 $ 4 $ 11 $ 5 $ 5 $ 6 $ 7 $ 23 Acquisitions $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 218 $ 364 $ 584 $ 876 $ 2,042 Total operating revenue $ 7,232 $ 11,901 $ 3,777 $ 4,253 $ 4,472 $ 4,924 $ 17,426 $ 5,934 $ 5,996 $ 6,564 $ 6,834 $ 25,328 $ 7,149 $ 7,414 $ 7,756 $ 8,173 $ 30,491 Equity income & other $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Total Property Revenue $ 7,232 $ 11,901 $ 3,777 $ 4,253 $ 4,472 $ 4,924 $ 17,426 $ 5,934 $ 5,996 $ 6,564 $ 6,834 $ 25,328 $ 7,149 $ 7,414 $ 7,756 $ 8,173 $ 30,491 Expenses Property Operating Expenses $ 435 $ 729 $ 180 $ 159 $ 161 $ 170 $ 670 $ 248 $ 242 $ 257 $ 418 $ 1,165 $ 300 $ 293 $ 299 $ 388 $ 1,280 Due diligence expense $ 520 $ 467 $ 95 $ 25 $ 123 $ 4 $ 246 $ 9 $ 37 $ 22 $ 59 $ 127 $ 35 $ 35 $ 35 $ 40 $ 145 Net Interest Expense $ 2,009 $ 4,112 $ 1,255 $ 1,487 $ 1,555 $ 1,719 $ 6,015 $ 2,157 $ 2,193 $ 2,634 $ 2,778 $ 9,762 $ 2,936 $ 3,074 $ 3,190 $ 3,332 $ 12,533 REIT operating/adviser expenses $ 1,522 $ 2,023 $ 599 $ 724 $ 591 $ 748 $ 2,663 $ 971 $ 825 $ 991 $ 856 $ 3,643 $ 1,144 $ 1,038 $ 1,125 $ 1,103 $ 4,410 General & admin. $ 777 $ 846 $ 431 $ 408 $ 357 $ 298 $ 1,494 $ 446 $ 387 $ 374 $ 421 $ 1,628 $ 518 $ 467 $ 461 $ 466 $ 1,913 Professional fees $ 595 $ 475 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Depreciation $ 1,736 $ 3,113 $ 977 $ 1,335 $ 1,432 $ 1,444 $ 5,187 $ 1,472 $ 1,599 $ 2,051 $ 2,115 $ 7,237 $ 2,266 $ 2,309 $ 2,346 $ 2,402 $ 9,323 Total Expenses $ 7,594 $ 11,766 $ 3,537 $ 4,137 $ 4,218 $ 4,383 $ 16,275 $ 5,303 $ 5,283 $ 6,329 $ 6,647 $ 23,562 $ 7,200 $ 7,216 $ 7,456 $ 7,732 $ 29,603 Income before credits, currency and disc $ (362) $ 136 $ 240 $ 116 $ 254 $ 541 $ 1,151 $ 631 $ 713 $ 235 $ 187 $ 1,766 $ (51) $ 198 $ 300 $ 441 $ 888 Foreign Currency impacts Other $ 263 $ 97 Preferred divs $ (27) $ (219) $ (458) $ (677) $ (458) $ (458) $ (458) $ (459) $ (1,833) $ (460) $ (475) $ (490) $ (522) $ (1,947) Management fee credit $ - $ 321 $ - $ - $ - $ - $ - $ - $ - $ 54 $ - $ 54 $ - $ - $ - $ - $ - Income from disc $ - $ 14 $ - $ - $ - $ - $ - $ - $ - $ (78) $ 57 $ (21) $ - $ - $ - $ - $ - Income before minority $ (125) $ 569 $ 240 $ 116 $ 35 $ 83 $ 473 $ 173 $ 255 $ (247) $ (215) $ (34) $ (511) $ (277) $ (190) $ (81) $ (1,059) Minority interest $ - $ - $ 6 $ 8 $ 3 $ - $ 16 $ 21 $ 28 $ (26) $ (20) $ 3 $ (48) $ (22) $ (18) $ (7) $ (95) Hilliard Lyons Equity Research 4 REITs Net income to common $ (125) $ 569 $ 234 $ 108 $ 32 $ 83 $ 457 $ 152 $ 227 $ (221) $ (195) $ (37) $ (463) $ (255) $ (172) $ (74) $ (964) Net income $ (0.02) $ 0.07 $ 0.02 $ 0.01 $ 0.00 $ 0.01 $ 0.05 $ 0.01 $ 0.02 $ (0.02) $ (0.01) $ (0.00) $ (0.03) $ (0.02) $ (0.01) $ (0.00) $ (0.07) FFO per share $0.40 $0.45 $0.13 $0.14 $0.15 $0.14 $0.56 $0.14 $0.14 $0.14 $0.13 $0.56 $0.12 $0.14 $0.14 $0.15 $0.54 Shares outstanding 6,852,917 8,639,397 9,992,941 9,997,941 10,018,331 10,024,875 10,008,522 10,395,736 11,850,264 11,961,264 13,666,560 12,055,791 14,050,000 14,260,000 14,570,000 14,980,000 14,465,000 Fully diluted shares 6,852,917 8,639,397 10,230,639 10,738,820 10,872,447 11,250,353 10,773,065 11,844,994 13,249,258 13,716,360 14,761,719 13,414,581 15,245,159 15,455,159 15,765,159 16,175,159 15,660,159 Dividends $0.38 $0.47 $0.12 $0.12 $0.12 $0.13 $0.50 $0.13 $0.13 $0.14 $0.14 $0.53 $0.14 $0.14 $0.15 $0.15 $0.58 $5.00 Source: Company reports and Hilliard Lyons estimates Table 5. Funds From Operations Calculation Net income for common shareholders -125 569 240 116 35 83 457 173 255-247 -216-37 -463-255 -172-74 -964 Adjustments Depreciation and amort. 1,736 3,113 977 1,335 1,432 1,444 5,187 1,472 1,599 2,051 2,114 7,236 2,266 2,309 2,346 2,402 9,323 Other 1,392 134 110 38 173 23 343 20 62 147 18 247 35 35 35 40 145 Total funds from operations for common 3,002 3,816 1,326 1,488 1,640 1,550 5,988 1,665 1,916 1,951 1,916 7,446 1,838 2,089 2,209 2,368 8,504 FFO to partnership units 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 FFO 3,002 3,816 1,326 1,488 1,640 1,550 5,988 1,665 1,916 1,951 1,916 7,446 1,838 2,089 2,209 2,368 8,504 FFO per common share $0.40 $0.45 $0.13 $0.15 $0.16 $0.15 $0.60 $0.16 $0.16 $0.16 $0.14 $0.63 $0.13 $0.15 $0.15 $0.16 $0.59 Shares, common 6,836,514 8,639,397 9,992,941 9,997,941 10,018,331 10,024,875 10,008,522 10,395,736 11,850,264 11,961,264 13,666,560 11,968,456 14,050,000 14,260,000 14,570,000 14,980,000 14,465,000 Diluted FFO per common share $0.40 $0.45 $0.13 $0.14 $0.15 $0.14 $0.56 $0.14 $0.14 $0.14 $0.13 $0.56 $0.12 $0.14 $0.14 $0.15 $0.54 Shares, common diluted 8,639,397 10,231,639 10,738,820 10,872,447 11,254,353 11,848,994 13,253,258 13,720,360 14,765,719 15,249,159 15,459,159 15,769,159 16,179,159 Depreciation % 92.00% 92.00% 0.41% 0.50% 0.48% 0.44% 92.00% 0.40% 0.39% 0.47% 0.46% 92.00% 0.48% 0.48% 0.48% 0.48% 92.00% FFO Available for common $3,002 $3,816 $1,326 $1,488 $1,640 $1,550 $5,988 $1,665 $1,916 $1,951 $1,916 $7,446 $1,838 $2,089 $2,209 $2,368 $8,504 Less: Recurring real estate CAPX $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Required debt repayments $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Non-real estate depreciation $ (20.00) $ (20.00) $ (5.00) $ (5.00) $ (5.00) $ (5.00) $ (20.00) $ (5.00) $ (5.00) $ (5.00) $ (5.00) $ (20.00) $ (5.00) $ (5.00) $ (5.00) $ (5.00) $ (20.00) Funds available for distribution $2,982 $3,796 $1,321 $1,483 $1,635 $1,545 $5,968 $1,660 $1,911 $1,946 $1,911 $7,426 $1,833 $2,084 $2,204 $2,363 $8,484 Per share $0.44 $0.44 $0.13 $0.15 $0.16 $0.15 $0.60 $0.16 $0.16 $0.16 $0.14 $0.62 $0.13 $0.15 $0.15 $0.16 $0.59 Source: Company reports and Hilliard Lyons estimates
Additional information is available upon request. Analyst Certification I, John M. Roberts, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Important Disclosures Hilliard Lyons analysts receive bonus compensation based on Hilliard Lyons profitability. They do not receive direct payments from investment banking activity. Hilliard Lyons participated in a selling group for an offering of securities of Gladstone Land Corporation in the past 12 months. Hilliard Lyons has received investment banking compensation from Gladstone Land Corporation in the past twelve months. Gladstone Capital (GLAD-$8.82, Neutral), Gladstone Commercial Corp. (GOOD-$17.24, Long-term Buy), Gladstone Investment Corp. (GAIN-$10.08, Neutral) and Gladstone Land share the same board and management. The author of this report or members of his family own a long position in the common shares of Gladstone Investment Corp. and Gladstone Commercial Corp. but cannot trade contrary to his opinion. Investment Ratings Buy - We believe the stock has significant total return potential in the coming 12 months. Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returns to be realized over a longer time frame than our Buy rated issues, generally 2-3 years. Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform - We believe the stock is vulnerable to a price set back in the next 12 months. Suitability Ratings 1 - A large cap, core holding with a solid history 2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks 3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage 4 - Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volume or a narrow customer or product base. Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 31 28% 10% 90% Hold/Neutral 74 66% 9% 91% Sell 7 6% 0% 100% As of 7 February 2018 Hilliard Lyons Equity Research 5 REITs
Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 6 REITs