Mike Albanese: Got it. That’s helpful. That’s pretty much exactly what I was looking for. Okay, and then can you just remind me kind of overall portfolio exposure to I guess the participation, the rent structure and then how much of that is, if any is captured with these tenants, that are having issues?
Lewis Parrish: So I’d say about of our probably most — all the participation rent lease structures are on our permanent crop farms. I think all but maybe one or two. But say a little less than one-third of our leases have a participation rent component. In the past couple years, both 2022 and ‘23, we’ve averaged about $90 million of total lease revenues. We’ve had participation rents of between $6 million and $7 million. So I think that’s a kind of normal run rate for us right now as far as percentage of participation rents and their percentage of total lease revenues, if that’s what you’re asking.
Mike Albanese: Yeah, that’s helpful. Thank you. That’s it from me again.
David Gladstone: Okay. Operator, would you come on and see if there’s anyone else with a question?
Operator: Sure. The next question is from the line of Barry Oxford with Colliers.
Barry Oxford: Great. Thanks, guys. David, when you think about acquisitions and let’s say interest rates stay roughly where they are, just move down ever so slightly, what would you have to see in the cap rate environment movement to make buying farms attractive to you?
David Gladstone: Well, if this farmer will drop the price, then it works. But most of the farmers are long-term holders. And when you offer them something that makes the numbers work but it’s lower than they believe their farm is worth. And remember, a lot of these farms are farms that have been in families for years, so they’re not willing to get rid of them. They’ll just continue to farm them. So, Barry, I don’t think at the end of the day, you’re going to see much happen unless interest rates come back in line where they were in 2021.
Barry Oxford: So they approach it more from a personal than an institutional marketplace?
David Gladstone: I hear this phrase every time. My great-grandfather started here, migrated from wherever. And so it’s a beautiful story. Unfortunately, the taxing that’s going on now by the government keeps a lot of these guys from selling because they owe so much money when they sell. So they do try to do 1031s. And of course, we offer to give them stock in our company or partnership interest which we have a partnership underneath our company. And some of them take it. We have not gotten many to take all of it in terms of stock and with the stock down as far as it is today, it’s almost better just to try to do everything in cash. So it’s a peculiar situation we’re in, but it happens every now and then just as it did in ‘08, ‘09 when people were scared to death.
A lot of these farmers are people who want to get out of the business altogether. They want to sell the operating part and they want to sell their land. And the land is the piece we love. We don’t really want to be in the operating part, that often for various reasons. But generally speaking, we want to be in a passive position rather than in the operation business. And so if the world changes a little bit on interest rates, I think it will be explosive in terms of what we can do. Many of the farmers are 58, 59, 60, and they want to sell and liquidate simply because they’re tired and worn out from years of farming. Farming is a very difficult situation for almost everybody. You’re chewing your nails over the price of fertilizer and it just goes on and on and on.
So from my perspective, I think eventually people like us and maybe a few others who are out there will end up owning most of the farmland. We haven’t seen what people keep arguing about and that is that China is buying up this farmland. They are only interested in the ones that are right next to an airport or something like that. For example, the buyer of our farm down in Florida was not buying it for anything other than they believe in the next 10 to 20 years, going to be able to sell pieces of that farm to people who are in the home building area. As you probably know, millions of people have moved to Florida and housing prices there just keep housing people very busy. That farm that we sold down there will probably have two golf courses and God only knows what else on it with hundreds of houses.
But it’s not going to happen to work for us because we need ordinary income coming in every month to meet our dividends. So we sold it to somebody who’s going to end up holding it for a while and selling off big chunks of it to home builders down there. We have another big farm right next to that farm. So we will be the benefactors of that craziness that’s going on in Florida in terms of housing prices. And, Barry, I just don’t see anything to hold us back except the interest rate craziness that’s going on now. And I think they’re going to drop the rates somewhere along here. And if the Fed will drop it by a quarter of a point, all hell will break loose because the banks will be dropping their rates so that we can go use it. And there are plenty of farmers who want to sell.
And I don’t know how we solve the problem unless we can find somebody who wants to operate the farm, because the people who are selling really want to get out. And I think for us, our time is here today.
Barry Oxford: Right. No, that makes all the sense in the world. And then, David, in your prepared comments, you mentioned something about California and water and banking more water. Are you seeing opportunities there? Will we start to see some dribbles here in the first quarter, or first half of the year?
David Gladstone: Dribbles meaning what? Selling water?
Barry Oxford: Land water bank.
David Gladstone: We got, as I mentioned, 15 billion gallons banked.
Barry Oxford: Yeah. I bet I may know you’re going to be doing more.
David Gladstone: Yes, we will buy more. We will get enough that will take us to probably rest of this century. We want to get it. Because once it gets in the ground in one of the aquifers, you can hold on to it for a long time. And unless people are willing to pay, we’ve been offered land to buy water at prices that are ridiculous. I mean, some guy wanted us to buy $1,000 for an acre-foot and that would have been, what would we pay, about $50 million worth of water. We sold it at $1,000. Under $500, we did the math on it. That would be about $20 million, $23 million, $24 million. And we sold it at $500 an acre. We’ve done something unique. And I hate to mention it too much, I’m afraid people will copy us and that is we’ve been able to take a lot of the water that’s running off of these farms and in the — into our farms and we are putting it into some vacant areas on our farm.
We built berms and we pumped water into that area and then some places we just left it in there, and other places we’re over the aquifer, so it will trickle down into the aquifer and we get credits for that. And we’re probably doing that at the rate of $20, $30 an acre foot. It’s a little bit higher you’re saying. Okay. It’s your markup as the CFO. Anyway, we’ve really skinned the cattle very well on this. Our guys are experts at all the water problems in California. I wish there was some way to use the one in Florida, some way we could get water from Florida where you stick a hole in the ground and you got water out to California. And I think by the end of this century, they will be growing more vegetables and things in Florida than we do in California.
So they’ll be shipping the vegetables to California rather than vice versa. Water is key in California. If you don’t have water, you have nothing. Might as well turn it. There’s a group that’s buying land above the capital of California and that’s the worst land you’ve ever seen in your life for water. There’s none there. So as a result, they are going to “build a city” there, I don’t know what they’re going to do for water and but it’s — they’ve got hundreds of acres and I’m just interested in watching what’s going on. These are some really big technology guys that are deciding they’re going to do something out there with all of that land. They’re calling it New California. So anyway, we’ll watch that one from afar, it’s high risk. And so for us, we’re just going to go back to the way we’ve always done things, which is buy as much property as we can with enough water.
A lot of the properties are now being discounted by the people who value these properties. If you don’t have at least two sources of water, all of our farms have at least one and now by buying all of this water that we’ve got, they’ve got more than two sources. So you may see our asset values go up because we have enough water to prove them out. And it will be a beautiful thing if the drought comes and we have all this water because our guys will buy our water, we’ll have an agreement with them. It will be — we now have financed pipes that go from one farm to another. We finance pipes that go from the aquifer to a number of different farms. So we’re in great shape and be like one of those pipe companies down in the [terrain basis] (ph) where they take the oil out of the place and will be that hopefully with water as well.
So we’re just building a different company than any of us thought about building until SGMA came along and now it is going to push everybody into being water, plenty of water for their own crops. Or there’s some articles out there about some of the people who in pistachios and almonds because you lose a tree you’ve lost everything in that business and there were water rights that were pushed over to one side, and nobody knew about it except this one guy who follows one of the growers out there, and he wrote a nice article about how they took water from one place, moved it to another. And we’ve seen people tear down 15,000, 20,000 acres of almonds and pistachios because they don’t have enough water to grow them. It takes an almond tree about a gallon of water for every nut they produce.
So it’s very difficult to keep an almond tree strong for the future. So I think we’re in great shape now, and I applaud the effort of our guys in getting enough water together so that we won’t be in trouble. Other questions?
Barry Oxford: No, that’s it for me. I’ll yield the floor. Thanks so much, David, for the commentary.
David Gladstone: Okay. And we got anybody else? One more coming.
Operator: Yes, we have one more question. It’s from the line of Michael Diana with Maxim Group.
Michael Diana: Okay. Thank you. My question is just on the impact of the sale in the first quarter here of that farm, the impact on net asset value, just that in and of itself, the sale. Is it going to be $10.4 million, in other words, the amount over cost, or is it $2 million, the amount over the appraised value?
Lewis Parrish: It would have been $2 million over the appraised value because the previously appraised value was what we had on the books as far as the NAB calculation goes. However, we did already mark that up at 12/31 since we did have a PSA in place at as of 12/31. So that sales price — that increased sales price is reflected in the NAV calc as of 12/31.
