Farmland Partners Inc. Q1 FY2020 Earnings Call

Good afternoon, and welcome to the Farmland Partners, Inc. First Quarter 2020 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Paul Pittman, Chairman and Chief Executive Officer. Please proceed.

Thank you. Good morning, and welcome to Farmland Partners First Quarter 2020 Earnings Call and Webcast. We appreciate you taking the time to join us during these unusual times to hear and learn a little more about our company and the performance during the first quarter. Before I turn it over to my colleague, Luca Fabbri, for customary remarks, we do wish you and your families well and hope you are healthy and safe during all of this. These are very unusual times. With that, Luca, would you begin with the standard comments that you make?

Thank you, Paul, and thank you to all who are listening to this webcast live or recorded. The press release announcing our first quarter earnings was distributed yesterday evening. A replay of this call will be available shortly after the conclusion of the call through May 22, 2020. The phone numbers to access the replay are provided in the earnings press release. For those who listen to this presentation on rebroadcast, we remind you that the remarks made herein are as of today, May 8, 2020, and have not been updated subsequent to the initial earnings call. During the call, we will make forward-looking statements, including statements related to the future performance of our portfolio, our identified and potential acquisitions and dispositions, impact of acquisitions and dispositions, and financing activities as well as comments on our outlook for our business, rents, and the broader agricultural markets. We will also discuss certain non-GAAP financial measures, including net operating income, FFO, adjusted FFO, EBITDAre, and adjusted EBITDAre. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company's press release announcing first quarter earnings, which is available on our website, www.farmlandpartners.com, and is furnished as an exhibit to our current report on Form 8-K dated as of yesterday, May 7, 2020. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release yesterday after market close and in documents we have filed with or furnished to the SEC or, in the case of the Q we are about to file. I would now like to turn the call back to our Chairman and CEO, Paul Pittman. Paul?

Thank you, Luca. So I'm going to make sort of five broad comments in my presentation today. So what we're going to start with is an elaboration of the effect of COVID-19 on our business. The punchline is that we have not seen to date very much negative effect due to COVID-19. We're certainly happy about that. However, we can’t imagine that given the economic harm to the nation as a whole, we will not eventually see some negative results related to the coronavirus. But I'm happy to report that this has not occurred, at least not yet. If you look at sort of how we are operating first before discussing sort of how we're performing, the individual farm managers in various regions are still out there doing their jobs, visiting the farms that we own. We have largely reduced the amount of travel for new acquisitions or new ideas, but we are doing everything necessary to maintain the business that we already have, and this check up on the farms that we already have. There were some tornadoes, for example, in certain parts of the country. As is typical, we had an irrigation unit blown over. These farm managers did their job, got right out there, and got those pivots back in operation so that the farmers could continue to plant. Our tenants have done a very good job of getting all their crops planted in a timely manner and continue to do so, so really not much disruption there. Our cash collections at this time of year are essentially at exactly the same pace they were at this time last year, which is why I said we really just haven't seen any pain yet, although we are certainly concerned that there may be some in the future. As far as our main office in Denver, we had taken a step before the city of Denver and the state of Colorado generally requested offices to shut down to ask that most of our employees work from home. They have done that. They have continued to perform at nearly full potential. Even though not being in the office is obviously disruptive and somewhat cumbersome, we have effectively performed the functions we need to do for our SEC filings, accounting, and the like. The economic harm due to COVID-19 and the associated shutdown is certainly going to be deep, and as I said a few moments ago, it must have some impact on us as it does in all other businesses. We believe that since at the end of the day, we are a food production business, whatever impact we eventually suffer won't be as severe as that suffered by many other industries. Places that we are concerned about in terms of the future are the restaurant industry, which is in complete turmoil. We have some of our products sold into the food service markets. We are usually not directly involved, but our tenants are. Therefore, we are worried if there could be some impact there. Luckily, that's just not a very big piece of our tenants' overall business, but there is some exposure there. The shutdowns of meat packing plants are certainly worrying, not because we directly have very much exposure to the protein side, but, obviously, the meat packing industry feeds back into the chicken, cattle, and hogs. We, of course, sell a great amount of grain that our tenants use for feed. There is some concern there. Probably the biggest area of concern, though, is the effects that the economic shutdown has had on ethanol demand. Ethanol demand, at the end of the day, is fundamentally a function of gasoline demand. We're seeing significantly reduced amounts of gasoline demand, depressed oil prices, and so forth, which will lessen corn demand. We think it will recover, but again, it’s certainly going to take some time. So we do expect a medium-term amount of financial pain in our business at some point this year. Just don't know exactly where it's going to come from and what it will look like. But the big picture is that global food demand and demand for fiber and fuel will probably be largely unaffected in the long run by COVID-19. So we think that the long-term position of our business is very strong relative to other businesses. And we, as I said, anticipate some level of pain, but our company will fundamentally weather the storm. Turning to the second general topic I want to cover, how was the quarter? Given the beginning of COVID-19 towards the end of that quarter, it was a good but not great quarter from a financial point of view. We beat the numbers from the prior year in almost all cases. We feel pretty good about that. We had an increase in revenues despite having a smaller portfolio. So all in all, I feel like the numbers are pretty good for the first quarter, but not outstanding. Turning to the third general topic, asset sales. We did not actually close any asset sales in the first quarter. However, we did close the sale of two assets since the end of the first quarter that we have reported in our subsequent events section of our financial filings. The total sales price of those two farms was $7.8 million. The sales prices were approximately 9% to 10% over what we had invested in those farms. We have acquired one additional farm for about $880,000 that joins another farm we own. As we've always said, we will continue to add farms from time to time. But when you look at the asset sales process since we began it now around 18 months ago or so, maybe even a little longer, we've sold about $75 million of assets at approximately a 15% premium to what we invested in those assets. We are quite comfortable with the valuations of our portfolio that we own and good assets that have been appreciating, and we continue to prove that point with these asset sales. The fourth general point I want to make is that we will continue to sell farms, reduce debt, and repurchase our securities in the coming quarters. We will probably be a little cautious in terms of our liquidity management until the effect of COVID-19 and related shutdowns becomes more clear. But we will generally keep the course that we have followed and will continue to do so until we see our stock price recover to a point that is much closer to net asset value. The fifth point is that litigation does continue. We will continue to pursue Rota Fortunae. I’m sure the strategy is to wear us out. That's not likely to happen. We will continue the course and eventually achieve fundamental justice for the company and the shareholders. We continue to uncover yet more evidence related to substantial financial fraud, and we will continue to pursue that in the coming quarters. With that, I’m going to turn it back over to Luca to go through key operating and financial highlights. Go ahead, Luca.

Thank you, Paul. In the first quarter of 2020, we recorded total revenues of about $11.7 million compared to $10.9 million in the first quarter of 2019. We had total operating income of $5.3 million in the first quarter of 2020 versus $4.5 million in the same quarter of last year. We recorded a basic net loss to common stockholders of $0.09 per share versus $0.10 per share in the same quarter last year. Finally, AFFO per share was negative $0.01 versus negative $0.03 in the same quarter of last year. So as Paul indicated, there were no dramatic structural changes during this quarter in 2020 compared to the same quarter in 2019, but just some slight improvement in financial performance throughout despite the fact that we disposed of some assets in the meantime. Again, one quick reminder about the seasonality of our financial performance. The vast majority of our cost structure is relatively evenly spread throughout the four quarters of the year. However, in the first three quarters of the year, we substantially recognize, for the most part, just the pro-rata portions of fixed rents. The fourth quarter typically sees a large amount of recognition of crop share revenue in comparison to other quarters. Therefore, our profitability is heavily skewed towards the fourth quarter. We don't expect that seasonal structure to be fundamentally different this year versus prior years, especially in the last couple of years. Finally, during the first quarter, we repurchased about 225,000 shares of common stock and 50,000 shares of Series B Preferred. After the quarter ended, we purchased an additional approximately 50,000 shares of Series B Preferred. Currently, the fully diluted share count is 31,769,792. Lastly, I want to join Paul's initial comment to hope that all of you, your teams, and your families are doing well through these unprecedented times. With that, I don’t have any further comments. Operator, we would like to begin the question-and-answer session.

Our first question will come from Craig Kucera with B. Riley FBR.

In your 10-K, you noted that you had a couple of debt maturities coming up in June and July, totaling about $48 million. Can you give an update on where you stand with your lenders, as those are on the horizon here?

Luca, do you want to take that question, please?

Sure. Interestingly, this was the circumstance in which we had some impact from the logistics of the shutdown, especially travel restrictions related to COVID-19. We have been working with one of our existing lenders to refinance those maturities coming due in June and July. However, because of travel restrictions, they couldn't perform full due diligence in a timely fashion. We worked with Farmer Mac to extend those maturities from June and July 2020 to October 31, 2020. This extension allows plenty of time for our refinancing lenders to conclude their full due diligence. I just want to emphasize that we're very grateful to Farmer Mac for their efficient work with us in completing this extension in a very timely manner.

Got it. So we shouldn't anticipate you selling those assets; you are going to try to get them refinanced here by the fourth quarter, correct?

No, that's correct. The plan currently is to work diligently with our refinancing lenders to complete their due diligence and refinance these maturities.

Okay. And Paul, if we see some of the medium-term decline in demand, whether it's tied to ethanol or some of the issues related to meat packing, do you anticipate that there may be more opportunities on the lending side for you guys? I know you've sort of pulled back from that business and haven't seen a lot of opportunities over the last several years. But do you see that being more of a growth potential?

There are many good lending opportunities available to our company, but we have essentially chosen not to pursue them. This decision is largely due to the significant financial impact caused by the criminal activities associated with Rota Fortunae. We don't want to expose ourselves to the risk of having a borrower associated with our company dragged through a scandal instigated by an anonymous stock fraudster. This situation is challenging. We have identified highly profitable loans for our shareholders, yet we have refrained from pursuing them. Until we resolve this litigation completely, we are unlikely to engage in much lending. It's unfortunate, as I see potential opportunities, but we are not in a position to expand into that area at this time.

Got it. And one more from me. Your cash collections in April were pretty much in line with historical norms. Could you comment on May? Have those been in line as well?

The comment I made, just to clarify, was that cash collections up to this point in the year were virtually the same amount as we had last year. That's in the context of what's been a somewhat shrinking portfolio due to asset sales. We're really in the same place. Every given month can have a few ups and downs, but we watch this cash collection as a sort of early warning of fundamental difficulties in the business, and we're tracking quite closely. So we’re cautiously optimistic that our business will avoid many troubles that other businesses have experienced, although, as I said, this is a detrimental enough national economic crisis that I can’t imagine we can get out of it completely unscathed. But so far, we're seeing pretty reassuring signs.

Our next question will come from John Austin with Raymond James.

This is John Paul on for Collin. Just wanted to ask, you've completed two dispositions thus far in the quarter. Is there anything else under contract for the rest of the Q? Also, has there been any fallout in your pipeline given the pandemic?

We don't report things just under contract. We are disciplined about only reporting closed transactions. But I would expect at the end of the second quarter that we will have additional sales to announce, whether the closings occur during the quarter, meaning prior to July 1, or in the month or so after that quarter before we actually report, I don't know. But we are always in the market. Asset sales are episodic events.

Got it. Appreciate the color. And regarding transaction volumes across the industry in farmland, has there been any noticeable slowdown?

No. In fact, I sense a flight to quality. There are individuals who believe that a safe hard asset with modest returns has long-term appreciation potential, making it a favorable place to allocate money. Most private vehicles are experiencing inflows, and farmers themselves are continuing to make purchases. People experienced just a month or a month and a half ago why having a portion of your portfolio in hard assets like farmland is wise, as the regular market has considerable volatility while farmland is significantly more stable.

Got it. Okay. Good color there. And then just a last quick one. Any appetite for share repurchases with some of those proceeds?

Yes. We always take a substantial portion of proceeds and roll it back into share repurchases. We will continue to do that with probably a little more caution than we might have had in terms of managing our cash balances because we are suspicious that something negative could happen during this year.

A couple of questions. What is the loss of $86,000 on disposition of assets for the first quarter? I didn't see any dispositions. What was that on the income statement?

Luca, I'm not sure I know the answer to that. Do you know it?

Yes, of course. We just took some buy-ins in a farm we have in California, and we just took them out to bring them to a varietal that is more in demand from the market. Those were buy-ins that were not fully depreciated yet.

Can you comment on the current state of farm financing and refinancing? With LIBOR now under 50 basis points, what do you think about that market in terms of refinancing and financing current debt that's due?

Let me give a general answer, and then Luca can add to it if he would like. Generally, we see a decline in the interest rates of our overall portfolio. The weighted average interest rate on the $510 million or $512 million of debt we have is gradually going down. A substantial portion of that debt is fixed, so it won't go down further. But some of it is adjustable quite quickly, either monthly or quarterly. Some will adjust once every three years, and some of that is rolling over this year. So we are seeing a gradual decline in interest rates. We may consider refinancing some fixed-rate debt. However, when we factor in the penalties and costs associated with that, it may not be wise. Much of it is at favorable rates and is relatively long-term debt. So I'm not sure we want to make many changes to that portion of borrowings. Luca, you may want to expand on what we did with the swap with Rabobank because that's very fact-specific.

Of course. We have half of a piece of debt with Rabobank that we swapped from LIBOR to a fixed rate. We were able to blend and extend that swap, extending it by three years and reducing the rate from 4.7% to approximately 3.8%. In that regard, we took advantage of the rate reduction. As Paul said, we see some rate reduction going through the variable portion of our debt portfolio. Interestingly, the first quarter, when all is said and done, didn't reflect a whole lot due to the mechanics of how LIBOR adjusted and how rates were set for our outstanding debt. However, we expect some of that benefit to show up beginning in the second quarter.

Is farm financing healthy? Commercial real estate in this country isn’t doing well. Are you getting good terms for refinancing, and how does that market look generally?

The problem with farm refinancings is not the market itself. The reason we delayed refinancing the $48 million of debt is that the physical mechanics of appraisals, due diligence, and travel. Many lending institutions tend to be very large companies. They've done what all large companies do, which is essentially put travel bans in place. It massively slows things down. In refinancing that $48 million, I can't even hazard a guess, but there are probably 30, 40, or 50 separate farms across multiple states involved. It slows it down, but the markets are open. These smaller transactions where we sold properties did close as scheduled. The buyers in most cases placed debt on those farms. Those closings occurred on the day they were scheduled. The title companies and lenders worked out solutions. This is only cumbersome when dealing with many different properties in various geographic locations, but it will still get done.

Our next question will come from Alex Heddel, who is also a Private Investor.

I'm curious about the upside if you prevail in the lawsuit for me as a shareholder. Are you looking to get cash into the company? Would you use it for repurchase, or would I have to fill out lengthy forms to send to the lawyers, and they would take their cut, and I'll be lucky to get a few pennies?

No. What we are trying to accomplish is the recovery of unjust enrichment on the part of the stock fraudsters I referred to earlier. That money will come into the coffers of the company and be used for general corporate purposes, whether that's repaying debt, buying back securities, or whatever. The benefit to our shareholders will be through the company's overall gains from winning these lawsuits. It’s important to note that you won't have to fill out forms or anything. This is not how it will work here. We have discovered evidence of a direct conspiracy to defraud the market. We have a clear roadmap of evidence, and we’re fighting against whether one can defraud public markets while claiming First Amendment protection doing so. This lawsuit is unbelievable. If you're a shareholder in a public company, you should contact your congresspeople. We have uncovered evidence showing that a lot of money was made off of our shareholders.

Our next question will come from John Judy, who is also a Private Investor.

Could you give an update on the class-action lawsuit initiated a while back? Has it been dismissed or is it still ongoing?

The class-action lawsuit is still out there. One of the lead plaintiffs in that lawsuit dropped out. We believe they dropped out because they realized, and we’ve got email traffic that makes that clear, that we haven't done anything wrong as a company. So that lawsuit is now being maintained and driven by a couple of small shareholders, a few hundred, if not a few thousand shares at most, and fundamentally driven by contingency lawyers who are enriching themselves at the expense of others. That lawsuit is still pending. It's not moving very fast. Erica, you want to add a comment about the exact status?

You've hit it on the head, Paul. It's pending. There hasn’t been any major movement other than the lead plaintiff dropping out. Right now, it's pending on the replacement of another plaintiff.

Good.

Why are you not hearing about the price of the stock in relation to the asset value? Why not be more aggressive in dispositions to buy back stock? You're buying farmland at $0.60 or $0.70 on the dollar. It seems like an opportunity.

Yes. We try to be a little aggressive, but these are very thin markets. When I talk about a market, it's not a national market; it's every county in the U.S. is its own market. If you want to be aggressive, and let’s say, I wanted to sell $250 million worth of property, it would drastically reduce potential buyers. We used to be a major buyer, and we’re no longer on that list. That leaves only a few buyers who tend to be bottom fishing. I personally own about 7% of the company. I'm not going to play that game. I can sell these assets slowly at 15% premiums to what we paid. I'm not going to engage in a fire sale. Everything we own is for sale at a fair price, and fair price is interpreted by farmers. I believe these assets will yield about a 10% premium on average. We have recently shown better than that, but I'm still cautious. If you're doing a back-of-the-envelope calculation, assuming 10% above what we've invested, consider that in your NAV per share. I estimate NAV per share to be around $12 or so.

Our next question will come from Collin Mings of Raymond James.

Just a couple of follow-ups from us. Paul, as you think about the situation and as you talk to farmers, can we expand on the disruptions you're seeing to the supply chain of agricultural products? Specifically, what does it mean for row crops versus specialty crops in the current environment?

There are a lot of different factors at play, which is why I say we are unsure of what will happen. We have a negative bias because we're all a little depressed. On the negative side, food demand remains about the same, but there's less demand through the restaurant chains and more through home cooking, which is somewhat more efficient. This has a certain impact on some crops. For example, seedless lemons are primarily sold in bars, but fewer bars mean they now compete for space in grocery stores. Luckily, we don't have much exposure to restaurant trade in our crop types. But where we do, it's somewhat negative. Regarding ethanol, corn is partly feed and partly fuel, and fuel side has significantly reduced. Some ethanol plants took their summer shutdown early, but if gasoline demand doesn't increase, ethanol demand will not increase. The meat packing industry is also slower due to health concerns. This creates uncertainty about corn producers like us. In the long run, I think we will be okay as U.S. agriculture is stable compared to others, but we are uncertain in the short-term.

Regarding the tough sledding comment, do you expect any impacts on rent negotiations with tenants or tenant defaults? And are trade relations with China playing a role in this?

Yes, there will likely be some financial crunch among farmers due to market shutdowns from COVID-19. We won’t see significant defaults but expect some tenants might struggle to make payments. However, we have a diversified base of 110 tenants, and while there will be impacts, we believe, on a whole, we will sustain our position. The U.S. agricultural sector is highly stable, and food production will keep moving. On trade with China, I believe both countries will try to comply with the Phase 1 obligations despite tensions and rhetoric. Our largest pork exports to China have been booming, and I think they will largely adhere to their agreements.

Can you rank order your priorities regarding capital allocation? You have near-term debt maturities, dividends, common and preferred stock repurchases, and liquidity position—all of which seem relevant in today’s uncertain environment.

We want to maintain liquidity to help farmers. We have to be cautious about that and avoid creating a habit of expecting it. We will allocate capital from asset sales in the same way we always have. We are disappointed in the stock price, but the fundamentals of our performance in this pooled farmland asset class are excellent. We achieve high returns, and while people criticize our leverage, it pays off as farmland appreciates over time. Long term, we will execute our strategy as always.

What are your thoughts on cash rents for farmers as leases are renewed in corn and soybean country next quarter? Should we expect price changes?

I don't think rents will decrease even at a $3 cash price for corn. Farmers underwrite entire operations rather than specific fields. If large farmers are confronted with giving uping any land, they have overhead costs to defer across fewer acres. They will lose out overall since this is a 0% vacancy industry. Rents have been stable in corn and soybean with very modest increases, and we don't expect large changes based on commodity prices for just one year. The underlying assumption and risk of production would drive their operations. I want to thank you all for joining us today. Please stay safe and healthy. We look forward to talking again in about 90 days and hope we see better circumstances from both a health and economic perspective. Thank you, all. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.