Gladstone Land Corporation (LAND) Q2 2021 Earnings Call Transcript

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Gladstone Land Corporation (LAND 1.94%)
Q2 2021 Earnings Call
Aug 11, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Gladstone Land Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn this conference over to your host, Mr. David Gladstone. Thank you sir, you may begin.

David J. Gladstone -- Chairman, Chief Executive Officer and President

And thank you, Laura. That was a nice introduction. This is David Gladstone and welcome to the quarterly conference call for Gladstone Land. Thank you all for calling in today. We appreciate you taking the time to listen to our presentation.

We'll start with Michael LiCalsi. He's our General Counsel and Secretary. He's also President of Gladstone Administration, which is the administrator for all the Gladstone Funds. Michael, go ahead.

Michael LiCalsi -- General Counsel and Secretary

Thanks, David, and good morning everybody.

Today's report may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. Now these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Now many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-K, 10-Q, and other documents that we file with the SEC. You can find them on our website, www.gladstoneland.com, specifically the Investor's page or on the SEC's website, which is www.sec.gov. And we undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Today we will discuss FFO, which is funds from operations. FFO is a non-GAAP accounting term, defined as net income excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. And we may also discuss core FFO, which we generally define as FFO, adjusted for certain non-recurring revenues and expenses, and also adjusted FFO, which further adjusts core FFO for certain non-cash items such as converting GAAP rents to normalized cash rents. And we believe these are better indications of our operating results and allow better comparability of our period-over-period performance. We ask that you visit our website, once again, gladstoneland.com, sign up for our email notification service, so that you can stay up to date on the Company. You can also find us on Facebook. Keyword there is The Gladstone Companies. And we even have our own Twitter handle and that's @GladstoneComps.

Now today's call is an overview of our results. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Again, those are on the Investors page of our website.

With that, I'll turn the presentation back to David Gladstone.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Okay. Thank you, Michael.

I'll start with a brief recap of our current farmland holdings. We currently own 105,000 acres at 53 farms and about 20,000 acre-feet of banked water valued, all total at about $1.3 billion. Our farms are located in 14 different states, and more importantly in 28 different growing areas. And as Lewis will talk about later, we are 100% occupied, and leased to 79 different tenants. All of these are unrelated to us. The tenants in these farms are growing over 55 different crops. This is a lot of diversification. We believe in diversification. It helps protect our dividend that we pay to our shareholders. No guarantees in this world, but diversification helps.

We had a strong second quarter and we continue to be able to renew expiring leases without incurring any downtime on any of the farms and we saw increases in all the lease renewals we executed, reflecting a positive trend in the rental rates that we're seeing in certain regions. Overall operations on our farms remained strong and the demand for products grown on most of our farms remained high. These are products like berries, vegetables and nuts.

During the second quarter, the team acquired 13 farms and over 20,000 acre-feet of banked water. Just so you know, water is measured in acre-feet and one acre foot is equal to a little over 125,000 gallons. So it's a lot of water. We have about $80 million invested during these -- during the second quarter. Overall initial net cash yield on these investments is about 5.1%. In addition, all of the leases on these farms contain certain provisions such as participation rents or annual escalations and that should push this figure a little bit higher.

One of these farm acquisitions that we did this time was in New Jersey, which is a new state for us. We tried entering it several times before. We finally got one done. New Jersey is called the Garden State for those who know the whole state, and that's because the second half of the state, that is southern half of the state is very productive in a lot of different crops. The banked water was a new type of acquisition for us and this is one that we stored local water in a district. We can use that water on any farmland located in the Kern County sub-basin where we have several farms or we can sell it to third parties on the open market. The current price is about $856 per acre-foot and values today on our P&L -- on our balance sheet is $728.

Our plan is to hold the water to help safeguard our own assets in the region against any future water shortages. All our farms currently have enough water. We have a lot of wells drilled out there, so we're in good shape, but we like the security of having extra water. On the leasing front, since the beginning of the second quarter, we executed five lease renewals on properties located in California, Florida and Michigan. Overall these lease renewals are expected to result in operating income increase of about $168,000 and that's about 10% over the prior leases that we had on those properties.

Looking ahead, we only have three leases scheduled to expire over the next six months. They make up about 2% of our total annualized lease revenue. We are in discussions with the existing tenants on these farms, as well as some potential new tenants and we aren't expecting any downturn on these farms in terms of the overall income. Currently expect the new leases on all of farms going forward to be about flat from where they are today so we're not looking at a big increase.

There are few other items I'd like to touch on. First is the drought out West. I'm sure you've watched that on TV or heard about it on the radio. Western US is dealing with a severe drought. All of our properties are positioned where they have currently ample water to complete at least both the current crops, that is this year's and next year's. We have one farm in which we're going to take out about half the trees. They are older trees, but we bought that farm just dirt and we didn't buy any of the trees. So we're going to take out some of the old ones there. We have farms located in water districts whose districts have stored water or other supplemental sources to cover our farms' water needs in the short term.

Our farms out west have wells in the property and most of them rely on groundwater and the main source of irrigated water. For these properties, we are seeing the typical seasonal dropping in water levels, but we've not had any wells go dry. And all of our farms are currently -- I think, currently have pumping capacity to cover all the crop needs. And to skip ahead, one thing you should know is that wet and dry weather cycles, are the norm out west, especially in California. Throughout any long-term investment period, we know that we will have both drought periods and wet periods. So when we underwrite a potential investment out west, well, for all of our underwritings, we look at the properties with multiple sources of water. We build in drought scenarios and also take into account potential government regulations. It's quite a undertaking when we get into a new situation.

And while I'm on this topic, California, just mention that none of our farms have suffered any damage as a result of wildfires. You read about those in the news every day. This is something people in California deal with on an annual basis and the fires generally are in the hills, where all the brush and the various trees are located, whereas our farms are in the valleys, the flatlands near the coast or in the middle of the valley. We don't think the current wildfires pose any threat to any of our farms.

Second thing I'd like to discuss is briefly the increase in base management fee that we did this year. As you may have seen, the increase in the fee by a small amount. It was 0.1%. So we can expand the team to hire more people to buy more farms. As you know, we manage an asset class that's unlike most other public REITs. The cost of running this right is more like a private equity REIT, real estate investment fund and the standard there is much higher fees. So, these fees of the private equities are substantially above ours. We are now at 0.6% of assets as our management fee for running the business. We continue to expect a strong year in terms of participation rents. As you all know, we recorded about $2.4 million in participating rents in each of the past two years, but we expect to see an increase this year for the 2021 period. And that's mainly due to having more farms with participation rent provisions and scheduled to become active this year. We don't know how much yet. We've made some estimates. I don't want to give those out, but in the next month or so, certainly by the fourth quarter, we will have a better figure to give out to you about what's going to happen there.

We also are working on our ESG policy. That's something that's become very, very timely. We continue to actively work on developing formal policies related to disclosures that we consider relevant and we'll continue to update you on this as we get close to finalizing the policies that we're publishing, put on our website. Related to that, as you may know, the SEC approved NASDAQ's proposed changes to enhance board diversity. I'm confident that we'll meet the new standards when they become effective.

Going back, some of you know that we started Gladstone Acquisition. It's a special purpose acquisition company that we recently filed. It's now funded with $100 million and we are out looking for situations that meet that goal and some of the people that are selling their properties don't want to just sell the properties. They want to sell the financing -- their farmland operations and we want to buy those, but we can't do that in a REIT. Gladstone Land can't own operating companies because operating income is not permitted in a REIT. Gladstone Acquisitions, this public company was created to potentially take advantage of such opportunities, where Gladstone Land couldn't participate. Gladstone Acquisition is public, now traded under the symbol GLEE. So you want to know a little more about that, that's where you can go find it.

I'm going to stop here and turn it over to our CFO, Lewis Parrish, and he will give you some more details on the numbers. Go ahead, Lewis.

Michael LiCalsi -- General Counsel and Secretary

Thank you, David, and good morning everyone.

I'll begin with our balance sheet. During the second quarter, our total assets increased by about $67 million due to new acquisitions. We did not incur any new borrowings during the quarter as all of the acquisitions were financed with equity proceeds, most of which came from sales of our common stock through the ATM program. Since the beginning of the second quarter we've raised about $83 million of net proceeds from sales of our common stock under the ATM program and that represents a net cost of capital of 2.47% with our recently increased dividend. We also increased the size of our ATM program during the quarter and we have about $113 million remaining under the current program. Over the same time period, we've also raised about $13 million of net proceeds from sales of a Series C Preferred Stock.

Moving on to our operating results. First, I'll note that in the second quarter we had a net loss of about $531,000 and a net loss to common shareholders of $3.5 million or $0.117 per common share. Adjusted FFO for the second quarter was approximately $3.7 million compared to about $4.7 million in the first quarter. And AFFO per share was $0.126 in the second quarter versus $0.174 in the first quarter. Dividends declared per share were about $0.135 in each quarter. The primary driver behind the decrease in AFFO was about $2 million of interest patronage recorded in the prior quarter related to our loans from Farm Credit, partially offset by an incentive fee of $1 million earned by our advisor during the prior quarter and neither of these events occurred during the current quarter. AFFO per share for the current quarter was further impacted by additional shares of common stock issued under the ATM program, the proceeds of which have not yet been fully invested.

Fixed base cash rents increased by about $830,000 or 5% on a quarter-over-quarter basis. This was primarily driven by additional revenues earned from our recent acquisitions. On the expense side, excluding reimbursable expenses, and certain non-recurring or non-cash expenses, our core operating expenses decreased by about $626,000 on a quarter-over-quarter basis and this was primarily driven by a lower related party fees as no incentive fee was earned by our advisor during the current quarter.

If we remove related party fees, our core operating expenses increased by about $539,000. This increase was primarily driven by higher property operating expenses, which was largely due to additional water costs incurred on one of our properties in Colorado, as well as an increase in our general administrative expenses due to additional costs incurred related to the Annual Shareholders Meeting.

Regarding the additional water costs, the impact on our current quarter's numbers was about $350,000 or $0.012 per share. We currently anticipate incurring another $350,000 to $400,000 during the second half of the year in total, the majority of which will be incurred during the third quarter. Based on our current share count, this equates to another $0.012 per share throughout the rest of the year. However, we do not currently expect to continue incurring these costs beyond 2021. So if it weren't for these additional water costs, our FFO and AFFO per share for the quarter would have been $0.143 and $0.138, respectively.

Moving on to net asset value. We had 46 farms revalued during the quarter, all via third-party appraisals. And overall, these farms increased in value by about $336,000 over their previous valuations from about a year ago. So as of June 30, our portfolio was valued at about $1.3 billion, all of which was valued based on either third-party appraisals or the actual purchase prices. And based on these updated valuations and including the fair value of our debt and all preferred stock, our net asset value per common share at June 30 was $13.16, which is up by $0.47 from last quarter.

Turning to our capital makeup and overall liquidity. From a leverage standpoint and with respect to our borrowings, our loan-to-value ratio on our total farmland holdings on a fair value basis and net of cash was about 45% at June 30. Over 99% of our borrowings are currently at fixed rates. And on a weighted average basis, these rates are fixed at 3.38% for another six years out. So, we believe we are currently well protected on the debt side against any future interest rate volatility. In addition, the weighted average maturity of these borrowings is over nine years out. Regarding our upcoming debt maturities, we have about $33 million coming due over the next 12 months. However, about $17 million of this represents bullet maturities of five loans coming due.

The five properties collateralizing these loans have increased in value by a total of $6 million since their respective acquisitions. So, we do not foresee any problems refinancing any of these loans if we choose to do so. So, removing these maturities we only have about $16 million of amortizing principal payments coming due over the next 12 months or about 2% of our total debt outstanding.

From a liquidity standpoint, including availability on our lines of credit and other undrawn notes, we currently have over $125 million of dry powder in addition to about $44 million of unpledged properties. We have ample availability under our two largest borrowing facilities and we continue to be in discussions with other lenders for new borrowings and potentially new credit facilities. So overall, credit continues to be readily available to us from multiple lenders in a very favorable terms.

Finally, I'll touch on our common distributions. We recently raised our common dividend again to $0.0451 per share per month. Over the past 26 quarters, we've raised our common dividend 23 times, resulting in an overall increase of 50.3% in our monthly common distributions over this time. Since 2013, we've paid 102 consecutive monthly dividends to common shareholders, totaling $5.25 per share in total distributions. Paying dividends to our shareholders is paramount to our business plan, and our goal is to continue to increase the dividend at regular intervals. When considering the relative stability and security of the underlying assets and the related cash flows, we believe this stock continues to offer compelling investment alternative, particularly in light of today's inflationary concerns.

And with that, I'll turn the program back over to David.

David J. Gladstone -- Chairman, Chief Executive Officer and President

All right. Thank you, Lewis. That's a nice report. Nice to hear about the standard dividends going out.

Acquisition activity for us picked up again in this quarter and we continue to see good amount of buying opportunities coming our way. We hope to be able to announce some additional acquisitions in the coming months that we were talking about before we started and it sounds like one is coming through the -- all of the things that you have to do to get out these things. They're a complete paper chase to catch up with all the ways of buying these. And I think you'll see something in the next few days or weeks for us or some farms out west.

And just a few final points I'd like to make before we can open it up and that is investing in farmland and growing crops that contribute to healthy lifestyles, such as fruits and vegetables and nuts, follows the trend we're seeing in the market today. Currently, about 85% of our total crop revenue comes from farms growing these type of foods that you can find in either the produce or the nut section of your local grocery store. We consider these foods to be among the healthier type foods out there, and we continue to see growing trends toward organic among these foods. About 40% of our fresh produce today is in acreage that's organic or transitioning to organic and over 10% of our permanent crop acreage falls into that same organic category. We believe the organic section will continue to be a strong growth area.

In addition, more than 95% of our crops are grown in [Phonetic] farmland classified to be non-GMO. Another major reason why our business strategy is focused on farmland growing fresh produce is due to the effects of inflation on that particular segment. According to the Bureau of Labor Statistics, the overall annual food CPI generally keeps pace with inflation. This is why many financial advisors tell their clients to invest in farmland because it acts as a good hedge against inflation. However, over the past 40 plus years, the fresh produce and vegetable segment of food categories outpaced the total food CPI by a multiple of 1.5 times. This is a large reason, again, why we like this segment. And while prices of commodity grain crops, such as corn and wheat and other are more typically volatile than the ones we're in, global supply and demand for fresh produce is mostly insulated from the global volatility because the crops are grown in the United States and consumed locally, mostly within a short period of time of being harvested. I tell you this because we're often confused with owning farms where farmers are growing corn and soy, and wheat and we've mostly stayed clear of these crops because they have to compete with other countries like Brazil and Argentina and certainly the Ukraine, where the cost of production, even after shipping cost is very low and those farmers can undercut the price of grain farmers here in the United States.

Grain prices have been much higher this year but one reason for that is because Brazil and Argentina are in a droughts period right now and not producing as much. So that means that our farmers can get a better price. That will help some of the people that are in the grain side of the business. It's not really relevant for us. The farms in these countries largely depend on rainwater, whereas we have wells that do most of the work for us in watering.

Overall demand for prime farmland growing berries and vegetables remains stable to strong in almost all areas where our farms are located, particularly along the West Coast, including most of California, Oregon, Washington, and the East Coast, especially Florida and some of the other East Coast states that we're in. And overall, farmland continues to perform well compared to other assets. There's a NCREIF. It's an association, NCREIF Farmland Index, which is currently made up of about $13.2 billion worth of agricultural properties. I think all of ours are there, aren't they?

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

We're all in there.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Yeah. And the agricultural properties have an average annual return of 12.3% over the past 20 years compared with 11% for the REIT index and an even lower number for the Standard & Poor's index. And during those 20 years, the farmland index did not have a single negative year, whereas the REIT index and the S&P index each had four negative years over that same period. Farmland generally provides investors with a safe haven during the turbulent times in the financial marketplace as both land prices and food prices, especially for fresh produce, have continued to rise.

So in closing, please remember to purchase stock in the company and that purchasing stock in this company is a long-term investment. Don't expect a big jump overnight, as you see in some of the technology stocks. We expect inflation, particularly in the food sector to increase and we expect values underlying farmland to increase as a result. And we expect this especially true for fresh produce in the food sector, a trend of more people are eating healthy foods rather than all of those that are not quite as healthy. But Gladstone Land wouldn't be much if it weren't for the operating people here. Buying and leasing farms is really a complex business. It sounds simple, but it's complex, takes a lot of time and energy. So if you like what we're doing, please buy some of the stock in our company and especially keep eating fresh fruists and vegetables and nuts. We'll have some questions now.

So if Laurel, come on, the operator will give you some instructions on what you need to do to ask a question.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Rob Stevenson with Janney. You may proceed with your question.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning guys.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Good morning.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

David, how significant are any of the participating rents likely to be this year? And is that mostly a fourth quarter event or some in third quarter, some in first quarter of 2022?? How should we be thinking about that as that pertains over the back half of the year, given where your crops are and pricing and everything is today?

David J. Gladstone -- Chairman, Chief Executive Officer and President

Rob, all of those are true. We get some indications in the third quarter. We know a lot more in the fourth quarter and actually get some of the payments and finally know the real number in the first quarter of next year.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And as it sits today with crop prices being where they are, how significant is that likely to be for you guys this year?

David J. Gladstone -- Chairman, Chief Executive Officer and President

Well, we projecting it to be very significant, but I can't give you a real good reading on that now. It's just too early. Harvestings haven't happened. So we don't have a good fix on it today.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then, if I take a look back a year ago, the NAV was $11 roughly, now over $13, so it's up 19% year-over-year. Where location-wise and crop-wise have been the biggest increases over the past year or so? And where are you seeing the slower appreciation crop- and region-wise?

David J. Gladstone -- Chairman, Chief Executive Officer and President

I think California would win that vote. I haven't gone out and done the numbers, but certainly, they've moved. As you know, in California, a lot of the farms get gobbled up for higher and better use, at least they call it higher and better use, they are in government buildings, in playgrounds and schools and apartment buildings, and those kinds of things. So, every year 25,000 to 50,000 farms get taken out by those kinds of developments. So it's a big change.

And every time that happens, the land that we hold becomes more valuable because people are looking at it from two directions. One, they got to get farmland to grow stuff, so they will pay more in rents. And then also, some of those will be zoned for higher and better use. So, I'd say California wins that. Oregon will come in second, I think, and certainly, Florida is in the running for first or second. So, it's -- Florida has an incredible thing, I think there's 10,000 families move to Florida every week.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

And where would you wind up seeing the sort of slower appreciation? What's going to wind up being at the below the 19% average there?

David J. Gladstone -- Chairman, Chief Executive Officer and President

Well, the State of Washington has some of that, and certainly Arizona. I just don't -- I don't know where the slowest one will be. If you will help me determine that, I'll stay out of those states.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

And is there any particular crop overlap when you're looking at either the best or the slower ones? I mean, is there anything in particular, even within those regions where land for certain crop that's fertile for that winds up being much more valuable than land a few miles away for some other crop?

David J. Gladstone -- Chairman, Chief Executive Officer and President

Yeah. We went into New Jersey this year and that's been one that's been hard to chase because the prices have gone up so many times there. So, I think as Northern New Jersey spreads into Southern New Jersey, you'll get a lot of changes. They also have something going on in New Jersey that's put a great pressure on farmland, and that is, the state will pay a farmer a good deal of money if they will just set up arrays of solar catching sunset. And they are so hell-bent in New Jersey that they had to pass a law that prevents much more of that happening there. If they got rid of that law -- but the good news is, if the farmer keeps farming it, they'll be fine, they don't have any kind of thing against them and other kinds of developments.

But there have been people that have been upset that so much is being converted from regular farmland into solar arrays to help raise more energy for the state. I don't know, Rob, you could spend a lot of time analyzing that. We do it from the ground up. If a farm comes in that we think is good, we put together a package -- they go forward or don't. We really haven't gone out and said, "Gee, I think New Jersey is going to be the best place in the world, let's put all of our money there." So I can't really identify that for you, but if you know of some farms for sale, just send them our way.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Okay. All right guys. Appreciate the time.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Okay. Operator, would you come on and let's get to second list of questions, please.

Operator

Our next question comes from the line of Nate Crossett with Berenberg Capital Markets. You may proceed with your question.

Eric Borden -- Berenberg -- Analyst

Hey guys, good morning. It's Eric on for Nate. Thanks for taking the questions. Maybe to start, could you provide any additional color on the current pipeline? I know you don't give formal guidance, but could you talk about what's currently under PSA? And historically, I think you've tried to do about $250 million a year. Do you think that's achievable this year?

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

Right now, we've done about $85 million so far and we are on pace. If everything we have signed up right now closes, then we would surpass that number this year. And we do have quite a few properties under signed PSAs right now to the tune over $100 million, where the properties that are under signed PSAs. The majority of these we're hoping will close in Q3, some of them might slip to Q4, but we have others that are close to getting signed up as well. So we're hoping to get between $250 million and $300 million of acquisitions all in when the year's said and done.

Eric Borden -- Berenberg -- Analyst

Okay, that's great. Maybe could you expand on the type of yields, you're seeing in the current environment. Has there been any compression or increased competition for the assets you're targeting?

David J. Gladstone -- Chairman, Chief Executive Officer and President

Yeah, I would say that in Oxnard, it's probably really tough to find something that meets our conditions. And so that's an area. I think other areas that we've got, where we've got stuff in Oregon or Washington and certainly Northern California, you can usually find something there. The biggest problem for all of these are not the yields, but just getting the farmer to consider selling. I mean this is a business in which you don't have a big brokerage community between you and the farmer, and the brokerage community is lining them up and does a great write up in the presentation and you get a lot of your work out of the way.

These are people that we are meeting with, one on one or in a conference some place. And so you're working them one at a time and it takes a different style, a different orientation. That's the reason, most of the people that are working for us out in the field come from the farming community, so they can speak the same language, so to speak. And I just -- I think we're going to do extremely well and Lewis has got his pulse -- his finger on the pulse. And so I think we are in good shape to do a lot of good transactions this year.

But it's -- there is no way of sort of saying this is going to close. I tell the story of talking to one of the people who finally sold us the farm after 10 years of discussion back and forth. So hopefully, thank God, they're all aren't like that, but at the end of the day, it's still a very difficult business to -- on the front end of the business. Once we get it under purchase and sale agreement, it's a little bit easier. Although I hear people in the background saying no, it's still hard, but nonetheless, it's just a very long process. And that's the big thing that keeps us from growing extremely fast. We have the money, but we're just looking for deals now.

Nate, any other things I can answer.

Eric Borden -- Berenberg -- Analyst

No. I appreciate that. One last thing for me. In terms of the potential tax implications in via losing the 1031, are you guys utilizing the UPREIT structure more in your deals?

David J. Gladstone -- Chairman, Chief Executive Officer and President

We preach it every time we talk to our farmer of how to sell his farm and not pay any taxes until he sells the stock. It has hit some very nice, and they did it when we were low priced and they're very happy people today. We haven't had anything recent that where people -- maybe I should just get some of these guys and gals in here that are on the selling side, have them -- or let them tell the story.

Farmers are extremely conservative. I mean there -- most of these farms are under-leveraged, they haven't leveraged themselves up. So, as a result, they're just skeptical of doing these UPREIT. Even though we are now over $1 billion, it's just very, very difficult to get people to do that. I, like you, thought that we'd have many more of these done, but they don't come as quickly as we'd like.

And there -- now that the 1031 has gone away or is going away, I think we'll get a little bit better. The neat thing about farmland is it's not one farm that's a tax entity. Usually farms are six or eight or ten different tax entities, each one of them, according to IRS standards is a farm in itself. So, if somebody wants to sell us five of those tax entities with stock, and the other five for cash, and we can do that. You can't really do that much with office buildings or warehouses because there's usually just one taxing entity.

So we are working it, but it's -- I think now that are over $1 billion, we'll get a little bit better attention because people feel secure. But my goodness, it's still a hard sell.

Eric Borden -- Berenberg -- Analyst

Perfect, that's it for me, guys. I appreciate the time.

David J. Gladstone -- Chairman, Chief Executive Officer and President

So, who is the third person who wants to ask a question?

Operator

Our next question comes from the line of John Massocca with Ladenburg Thalmann. You may proceed with your question.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So maybe just provide a little more color on the water rights that you purchased. And just maybe kind of specifically, what could potentially cause the valuation of that water to change? And how would that flow through maybe on both the GAAP financial statements and also potentially down to AFFO, if at all?

David J. Gladstone -- Chairman, Chief Executive Officer and President

John, that's a wonderful question, and Lewis knows how to answer it.

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

So first of all, these aren't really water rights. This is actual water that we bought. First we -- at the acquisition, we bought a contract to buy some water for a set price and we exercised that contract right away, so we could get the water in our account and in our name and be able to use that if and when we need to. As Dave mentioned, we don't have a need to use it right now, and hopefully won't over the next few years, but it's good to have that security.

As far as how it's valued, so we did look at multiple sources. There is an index for California Water that we put a lot of weight on and we will monitor that index against the book value, which David said is about $718 or $728 per acre foot. If the value of the water goes down below our book value then it'd be treated similar to an impairment in real estate. So you'd see a flow-through in the impairment line item and it would be adjusted for in the AFFO numbers as well, just as an impairment on a building might be.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. But I guess it wouldn't -- would any of that flow through to AFFO? Would that be considered kind of one-time or maybe the treatment is kind of going to be typically...

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

It would be similar to impairment on a real property, where it would get added back. And to answer your question as to what might cause that to happen, and if California gets a lot of snow or lot of rain in rainy season, they get a wet year then the price of water is obviously going to go down. So, it might -- it hurt our financials for that period, but it's good for the overall farming community and the value of our assets there.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, and then continuing with water, the Colorado -- the cost of the Colorado property to kind of -- I guess still some water issues, it sounded like there. I mean can you provide some more color on what that was and kind of what that opex or capex is going into?

David J. Gladstone -- Chairman, Chief Executive Officer and President

Yeah, the Colorado situation is one in which it was tied up in court for quite a period of time and seems to be resolved, at least, initially at the higher end of the cost of water. And so I think it's $150 per acre foot that they're charging now, up from about $80. So...

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

$85 to $90.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Yeah. So as a result that hits every farmer right in their pocket book because they still need the same amount of water in order to grow, what they're growing. So, we don't know how that's going to finally shake out there. All kinds of rumors going around and we're just going with the flow right now. Not much we can do, because this is a government interference in this situation. This is not rainwater or something like that. So we'll just have to keep playing that game the way that people have played it for a long time out there and hope for the best because there is a good amount of water out there.

There is an aquifer there that's pretty large. They have stopped drilling holes into the aquifer and drawing out water, new water -- new wells some time ago. So they were hoping that it would reconstitute itself over a period of time, but it hasn't done that much. So as a result, the water cost probably going to be more expensive, and that would mean that whatever you grow there you got to tack on more money to pay for the water.

Inflation is going to be a big candidate over the next 10 years in all of the farming operations. And this includes places even like Florida, where you can puncture a hole in the ground and find water. It's just a very difficult thing to talk about because we don't really know what's going to happen. If you get a good snow year in California, there'll be so much water that prices could go down and I would hope that, that happens because it means all the farms are worth a lot more, and more people want to buy farms or rent the farms.

So, as a result, we're just following what happens every day. When you get up and read the weather report and know how it's going to impact what you're trying to do. So I don't know how else to answer that, John.

John Massocca -- Ladenburg Thalmann -- Analyst

I guess, I mean, the kind of increased opex maybe versus Q1 or last year, I mean I know in prior times you'd had situations where there had been issues getting electrical to wells and so you have to kind of pay generator cost. I mean it's something like that or is it just you're buying external water and that's driving that opex to be higher this quarter and potentially in 2H?

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

So in the past, on this particular farm, as David mentioned, the cost of water had been in the $75 to $90 per acre foot range. And while this wasn't adjudication that was kind of the expectation that it would fall on the low end of the range, we had a provision in our lease where we would pay for the cost between anything over $75 up to $150. And the judge ruled at the high end of the range at $150 per acre foot. So that put us on the hook for $75 per acre foot of water on this farm.

And most of the -- so the way that the seasonality of the water usage is generally and mostly in quarters, two and three, the early summer to late fall months. So, we recorded probably about 50% of the cost of that water, once that judge's ruling was known in Q2 and we have the other, a little bit over 50% to be recorded throughout quarters three and four, majority of that will be in quarter three.

But this lease runs out -- this lease expires at the end of this year 12/31/2021. We're looking at several options for that farm. But we do not -- but, right now we are not expecting that the next lease we have or any other option that we're currently looking at will include those costs being our responsibility.

John Massocca -- Ladenburg Thalmann -- Analyst

Perfect. Very helpful. And that's it for me. Thank you all very much.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Anybody else? Do we have any other questions?

Operator

We do not. I'd like to turn this call back over to you for closing remarks.

David J. Gladstone -- Chairman, Chief Executive Officer and President

Okay. Thank you all for your questions. Hope we answered them all, and we will see you again next quarter. That's the end of this call.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

David J. Gladstone -- Chairman, Chief Executive Officer and President

Michael LiCalsi -- General Counsel and Secretary

Lewis Parrish -- Chief Financial Officer and Assistant Treasurer

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Eric Borden -- Berenberg -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

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