Farmland Partners Inc. Q4 FY2020 Earnings Call

Good day and welcome to the Farmland Partners Inc. Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Paul Pittman, Chairman and CEO. Please go ahead.

Thank you. Good morning and welcome to Farmland Partners' fourth quarter and fiscal year 2020 earnings conference call and webcast. This is a very exciting time for our company, production agriculture and farmland ownership in particular. After five or six years of difficult economics for farmers, in late 2020 and early 2021, we have seen increasing farm incomes and associated increasing land values. This improved outlook has led to substantial improvement in the stock price, the key strength of farmland as an asset class with its ability to hold value in downturns accompanied by meaningful appreciation over multiyear holding periods. 2020 AFFO and revenue were disappointing partly due to asset sales and loan repayments, but also due to COVID and the lingering trade issues. The COVID demand drops over marketing delays were especially pronounced in the specialty crop sector. But most signs suggest demand will at least partially recover in 2021. Before turning the call over to Luca, I wanted to welcome two new Board members. First, Mr. Tom Heneghan, who is the CEO of Equity International, he joined our Board last December. And Ms. Toby O'Rourke, who's the President and COO of Kampgrounds of America, she joined the Board several weeks ago. More about Tom and Toby's background can be read in the associated press releases we issued when they joined. With that, I'm going to turn it over to Luca for some introductory comments.

Thank you, Paul, and thank you to all who are listening to this webcast live or recorded. The press release announcing our fourth quarter and full year earnings was distributed yesterday after market close. A replay of this call will be available shortly after the conclusion of the call through March 27, 2021. The phone numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, March 18, 2021, and have not been updated subsequent to this initial earnings call. In the Investor Relations section of our website, you can find a presentation with supplemental information that we will refer to during this conference call. During this 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, dispositions, and financing activities, business development opportunities, 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 fourth quarter earnings, which is available on our website. 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. I would now like to turn the call back to our Chairman and CEO, Paul Pittman. Paul?

Thank you very much. My prepared remarks this morning are divided into three sections. The first section covers the farmland market and the general farm economy, the second provides more detail about 2020, and the third outlines our plans for 2021 and beyond. To start with, we believe that the farmland market and farm economy are entering a multiyear period of strong positive returns. In row crop regions, we are emerging from five or six years of challenging economic conditions for operators. Despite this prolonged downturn, national asset values for agricultural properties have remained relatively stable, with an increase of about 4.3% from 2017 to 2020 according to the USDA land values report released last August. We expect that this appreciation trend will significantly accelerate as we approach the summer of 2021. We have already observed price increases in land values, particularly in Illinois, where sales are reaching $13,000 to $14,000 per acre, the highest since around 2013. While not every property we own in Illinois may command that price, our top properties likely do. We believe this price trend will persist. Now, I will refer to some slides that Luca mentioned, which you can access on our investor website. I want to take a moment to explain why we foresee this appreciation and why we believe it will continue. In recent months, we have welcomed many new investors to our company, so I will begin by highlighting the key factors driving this asset class. As shown on page 3, the fundamental premise of our company is that increasing food demand amidst land scarcity drives farmland values and ultimately influences our stock price. The global population growth, combined with GDP per capita growth, fuels rising food demand. Conversely, the right side of the chart indicates a decline in tillable land per person globally. This decrease in available land per person is a significant factor propelling farmland value increases and we believe this trend will continue due to gradual urban development and other higher uses of farmland. Additionally, a substantial amount of farmland worldwide is irrigated from non-permanent water sources, which leads us to anticipate a continuing decrease in farmland availability as worldwide food demand grows for the next several decades, if not longer. If you're following along, I've moved on to page 4. This chart illustrates the long-term compound annual growth rate for farmland value growth from 1970 to present, based on USDA statistics. The long-term CAGR stands at 5.7%. We believe this trend will persist, though it might be slightly muted due to the current low interest rate environment. Nonetheless, we expect farmland appreciation to continue. This long-term appreciation is crucial for land value and should be a key driver of our stock price. While AFFO and revenue are important, they take a secondary role. Traditional REIT investors, in our view, often focus too much on immediate revenue and AFFO growth, overlooking both current yield and long-term appreciation yield of these assets. What distinguishes farmland from other real estate assets is that we do not experience significant depreciation in our properties. We maintain a long-term land portfolio without the depreciation and repair expenses associated with built real estate. Moving on to slide 5, we discuss the factors influencing land value related specifically to farmer economics. The key statistic here is revenue per acre, primarily driven by increasing crop yields, such as corn or soybeans, along with price changes in commodity markets. Farmland does not and should not be subject to fluctuations based on near-term commodity price movements; it trades based on long-term predictions for revenue or profit per acre. Long-term yield growth, as demonstrated here with corn and soybeans, is approximately 1.3% per annum. While this may seem modest, it has led to increases of around $200 to $250 per acre in corn yield and about $150 to $200 per acre in bean yield since 1990. These factors are reflected in land values, significantly contributing to the long-term appreciation we previously highlighted. On page 6, we outline our expectations moving forward. Having witnessed stable farmland prices from 2014 to 2020—an appreciation of about 4%, as discussed earlier—we consider what farmland values will look like in 2021 and beyond. We expect to see increases in grain prices, which will further enhance demand that has built up during the downturn. This demand is highly inelastic due to its essential nature since it revolves around food. While increases in land values may take time to manifest, the Midwest is likely to experience them first, with the rest of the country following more gradually. Increased commodity prices, robust production, and higher revenue per acre will drive land values upward, as we've begun to see at the end of 2020 and into 2021. Additionally, we face a low interest rate environment, a strong pent-up demand from farmers eager to expand, inflation concerns, and a rebound in specialty crop demand as COVID-19 subsides. We believe these factors are conducive to significant land price appreciation over the next two to five years—albeit at a more modest rate, perhaps 5% to 7%, or as low as 3% to 4%. Nevertheless, we anticipate a stronger appreciation environment compared to the past. Turning to page 7, I want to highlight the recent changes in grain prices over the last six months, focusing on corn and soybeans, which are our primary crops. This short-term price surge positively impacts farmer profitability, as many of our tenants have robust balance sheets and were able to hold onto substantial grain stocks during the downturn. With grain prices beginning to recover since mid-October, they have started to sell off that grain, which results in strong cash availability for farmers. This cash availability is reflected in land prices and increased demand for farm equipment, trends we expect to continue as they process the remaining grain stocks. Therefore, we believe strong economics for farmers will translate into strong land value growth. Now, moving on to the second portion of our prepared remarks, it’s important to acknowledge that 2020 revenues and AFFO took a hit. It’s disappointing to us, and likely to you as well. Row crop regions performed adequately in terms of productivity, but low prices prevailed for a significant part of the year. The high grain prices did not materialize until late October, impacting rental rates, which we expect to see increase during 2021 renegotiations. Additionally, there was slow demand in the grain sector, particularly due to reduced ethanol production from corn. However, the USDA's current outlook appears considerably stronger, fueled by rising exports and low feed grain stocks. Notably, Chinese demand for grains, especially from the US, has surged, with corn imports into China increasing by 404% compared to last year and bean imports up by 42%. We anticipate that this surge in demand will echo the prior spike in land values driven by US soybean exports to China, which propelled Midwest land values significantly higher. In detail, the operating results for 2020 were challenging for specialty crops, resulting in a direct decline in revenue and AFFO—more than $1 million attributed to our asset sales program and repayments from previous loan initiatives, which are unavoidable. Our strategy of asset sales at premium prices, in conjunction with stock buybacks, worked effectively, but this did contribute to reduced revenue. Furthermore, our citrus business, particularly lemons, experienced a decline in bonus rents due to diminished bar and restaurant demand driven by COVID-19. We also faced slower marketing processes for almonds and pistachios, leading to a revenue drop in bonus rents of about $2 million to $2.5 million. Some of these losses may be recouped, but they primarily resulted from delays rather than permanent losses. Looking to 2021, we believe our recovery hinges on the specialty crop demand achieving a rebound. Although it's uncertain, we remain optimistic about the citrus harvest, even if the full recovery of restaurant and bar operations might take more time. Moreover, legal fees tied to the Rota Fortunae litigation amounted to about $0.08 per share, which we expect to remain high through 2021, although a trial date is set for the third quarter. As for the class action lawsuit, frustrations continue as another lead plaintiff has resigned, which may indicate that individuals involved are realizing the merits of our case. As for our net asset value, we estimate it to be around $14 per share, based on observed land appreciation in the markets. We feel our historical leverage is reasonable, and current land value appreciation along with our stock buybacks is expected to enhance equity holders’ share prices. We can see clear evidence of this in recent auction results from the Midwest. We believe our anticipations of net asset value are justified as we also expect other regions to appreciate, albeit at a lagging pace. Moving to the final portion of our presentation regarding plans for 2021 and 2022, we intend to reduce our asset sales program while remaining open to opportunistic offers for farms at attractive prices. We'll continue to evaluate offers, but only those offering significant premiums compared to our investment value. We aim to balance value creation for shareholders with environmental initiatives like the Ducks Unlimited transaction and others as opportunities arise. From 2018 to 2020, Farmland Partners sold approximately 13,400 acres for about $88 million in gross proceeds—a gain of 16.8% over book value. These funds allowed us to pay off debt associated with those farms and largely invest remaining proceeds into stock repurchases. We believe this strategic decision benefited remaining shareholders significantly, earning around $50 million. Looking forward, we plan to ramp up our growth efforts. As revenues increase, economies of scale will enhance our profitability. We will push for growth through off-balance sheet vehicles that we believe will benefit AFFO growth and reduce the capital needed to invest. For example, the opportunity zone fund, for which we are an advisor, aims to expand and boost assets under management and fee income for Farmland Partners. In addition, we will restart the Farmland Partners loan program, named the farmer bridge program, to meet marketplace needs for asset-based loans. Historically, we have achieved unlevered returns of around 7% to 8%, and we are actively pursuing a joint venture partner for this program, hoping to enter it later this year. We're also committed to sustainable and organic conversions of farmland and expect gradual increases in row crop rents this year. In conclusion, we are poised to gradually reduce our overall leverage levels, as we have received feedback about being over-levered. We have already made some debt reductions through asset sales and are set to continue this trend. This growth strategy will require investment in the company, likely leading to modest overhead increases in the coming years. We believe that if this strategy succeeds, it will yield substantial rewards for equity holders. Should it not work as anticipated, we are prepared to revert to our asset sales program to maximize shareholder value. We are consistently willing to navigate private land values against public market discounts, but our intention remains focused on growing the company. Now, I will hand the floor to Luca for comments on our financial results, after which I'll return to wrap things up.

Thank you, Paul. I want to share some financial highlights from 2020 compared to the previous year. In 2020, total revenues reached approximately $50.7 million, down from $53.6 million in 2019. Paul has already pointed out some of the primary reasons for this revenue decline. A significant factor was the asset sales and loan repayments to specific farmers. Additionally, the pandemic had a substantial effect on certain specialty crops that are more closely related to food consumption away from home, with lemons serving as an example. Trade issues also impacted other specialty crops like almonds, mainly causing delays in pricing and marketing, contributing to a portion of the revenue decline that may shift from 2020 to 2021. Furthermore, some large specialty crop leases transitioned from a base and bonus structure to a purely variable rent structure, resulting in a revenue shift from 2020 to 2021 since base rent revenue was recognized in 2019, while the variable component will be recorded in the following year due to the crop year cycle. Total operating income for 2020 was $22.3 million, compared to $26.3 million in 2019. The basic net loss to common stockholders in 2020 was $0.18 per share, in contrast to a net income of $0.04 per share previously. A key difference was related to the timing of gains from asset sales. Additionally, AFFO per share in 2020 was $0.06 compared to $0.13 in 2019. We estimate that without the impact of the COVID-19 pandemic and litigation costs from the short and distort attack experienced about two and a half years ago, our covered dividend would have been approximately $0.20 per share. Currently, our fully diluted share count is 32,207,458 shares. Moving on to a new initiative focused on ESG, we believe that Farmland has always been an environmentally friendly asset class. This initiative aims to preserve and improve land, minimize chemical and nutrient runoff, enhance water use, and reduce land erosion, which are all central to modern farming practices. We will continue to promote and monitor these practices, with a strong focus on climate resilience, especially in areas vulnerable to extreme weather. The agricultural sector is also socially friendly, as modern agriculture strives to make food affordable for everyone. Addressing global hunger is a key social cause. Lastly, as a public company, we uphold the highest governance standards. Moving forward, we plan to focus on measuring and benchmarking our ESG performance and aim to improve our quantitative disclosures over time. This concludes my remarks. Thank you for your attention this morning and your interest in Farmland Partners. Operator, we would like to start the question-and-answer session.

We will now begin the question-and-answer session. The first question comes from Dave Rodgers with Baird. Please go ahead.

Paul, Luca, good morning and thank you, Paul, for all the details this morning. I wanted to talk about acquisitions and the potential for growing the balance sheet moving forward, as you explained. I understand, Paul, your remarks about a $14 NAV and that cash flow may not be as critical right now compared to the underlying land value. However, I would like to know what the current market trends are for acquisitions and how aggressive you believe you can be. I see your stock is about 74 times cash flow, with your target around 82 times cash flow. It seems like you are close to being able to pursue acquisitions actively. Is there sufficient activity in the market for you to proceed with that?

Yes, regarding the trading of land assets, this is indeed a significant market, with approximately $2.5 trillion in farmland assets in the US, and institutional ownership at around 5%. We rank among the top five or six institutional owners of farmland nationwide, although our share is small compared to the overall market. Historically, about $30 billion in farmland trades annually, indicating a vibrant market. We are becoming more active in acquisitions. I didn't mention specific transactions because we typically don't announce each one, but we have acquired several row crop farms. Starting around Thanksgiving, we anticipated a rise in land values. We managed to find farms selling below $13,000 or $14,000 per acre and have made a few worthwhile purchases, amounting to several million dollars. We are actively looking for larger assets to acquire while remaining focused on increasing shareholder value rather than merely expanding the company. Currently, we are holding more cash than usual, partly due to the investment from Tom Heneghan joining our Board and from several asset sales at favorable prices, without needing to buy back stock as its price has rebounded strongly. We should consider using some of this cash to pay down preferred debt and other higher-interest obligations. We intend to pursue strategies that enhance shareholder value, recognizing the importance of both revenue and AFFO per share. Asset appreciation is also crucial, and by leveraging some, we aim to create value for shareholders.

I guess, talk about how you're thinking about potentially the issuance of equity. It's been many years, but you talked about deploying money into the loan program. You talked about deleveraging. You talked about acquisitions and slowing asset sales. So I guess with the combination of all that and given where your leverage is, how do you think about that today? Is that something that's off the table, or is that something that you're open to tackle some of these issues?

No, we would consider equity offerings, but they are not our preferred method for driving growth at this time. Our shareholders, many of whom have been with us for a long time, have placed their trust in management, the company, the Board, and employees, and they have remained loyal. I don't want to issue a large amount of equity during a time of recovery and negatively impact them, including myself. It's a nuanced situation. If we see continued strong equity values, we might issue some equity through an ATM or other methods. We'll definitely keep an eye on market developments and remain flexible with our options. However, it's more likely that we will expand our asset base through joint ventures while using only a small portion of the capital we currently have on our balance sheet, similar to what we're doing with the opportunity zone initiative. Our primary goal is to grow our assets under management efficiently without significantly increasing the share count. If we observe that our stock price approaches 20, I might reconsider. It's essential to balance shareholder value growth, share price growth, and total asset value growth. We believe that off-balance sheet joint venture structures are an effective approach, as they allow us to spread overhead costs across a growing asset base. This may eventually lead to a pool of assets that the public REIT will own in the next five to ten years, as we are committed to long-term growth.

Last question for me and I appreciate that added color. I guess, the last would be you had mentioned the redemption of the preferred B, it had been trading at a discount. But maybe from a bigger picture perspective instead of chipping away at it, can you remind us of the opportunities maybe to get back to that preferred B and even some of the A units out there with the above-average yield today? Is there a way to get to these that would, again, help the cash flow of the company and potentially deleverage it as well?

Yes, I want to clarify our preferred shares. We have two types: Series A and Series B. Series A was issued to Mr. Gerry Forsythe and his family when we acquired approximately $200 million in farmland in Illinois five years ago. This has a $117 million face value. We can redeem it for cash now, but we aren't obligated to do so for another five years. When that time comes, we can choose to redeem it with either cash or stock. It has a 3% coupon without the opportunity for additional appreciation, but we might consider redeeming it to exchange for a lower dividend yield on common shares. However, we have plenty of time to decide on this. As for Series B, it presents a more complex scenario but also a significant opportunity. We can call it starting this October if we choose to convert it into common shares. Again, we have the luxury of time, not needing to act for another 3.5 years. The potential value in switching a 6% coupon preferred for a 1.5% dividend yield common stock is substantial. However, we must carefully consider our options to ensure we make the best decision. I want to stress that we are not rushed and we feel confident in our position to act at the right moment.

All right. Thank you, Paul.

Thank you.

The next question comes from Rob Stevenson with Janney. Please go ahead.

Good morning. Paul, can you talk about how much NOI you're expecting from these off-balance sheet vehicles as well as the farmer loans on a run rate basis?

Yes. It's a little hard to quantify, but let me give you a couple of examples. So, starting with off-balance sheet asset management, and it depends on the features of the vehicle and how much work we do, and whether we're the primary capital raiser or just an adviser. But you're going to see something in the neighborhood of 75 basis points of assets under management fees up to 1% or 1.1%, so that kind of bracket on those sorts of vehicles. The reason there's a range is, if we were managing assets that are all specialty crops, it's a much more intensive management process for our team. So you'd end up with the high-end of that range in fees. If you're doing purely Midwest row crop, it's much more efficient from our side, so you'd see something at the low end of that range. So that's the bracket. As those assets under management grow, we don't carry the debt cost. We don't carry the equity value of the farm. Although, the opportunity is one situation we still own 10% of those assets approximately. But that's the kind of fee level that I think you should expect in any of those off-balance sheets. The loan program is a little different. We're hoping for a joint venture partner there where we share some asset management fees and then a percentage of the ups. If you put the appropriate structure in place, you should be in returns to the equity capital, the seed capital that's probably in the low to mid double digits on those assets. The face amount that the farmer sees who borrows the money is that 7% to 8% money. But if you do a sale-leaseback transaction, which is the way many of those will be done, you're going to get in effect the ability to put regular mortgage debt underneath what we and our joint venture partner invest, and that's going to give you a pretty substantially enhanced return to the equity invested in those loans. So that's a little harder to quantify, but probably a more profitable vehicle, which is why we tried to do it several years ago and want to go back to it. We think it is a very – it's a really nice way to balance some higher current yield with what we love about Farmland generally being that long-term appreciation story. But Rob, you followed us, and I thank you for that for quite a few years. That's the real challenge for us as a public company and for the equity investor in us as a REIT. Everybody loves the assets and struggles with, well, how do you get the yield high enough to make the company look like other REITs. It's one of a strong idea for growth for us, because we think it really helps by getting that higher current yield asset into our pool of ownership. We believe we're perfectly positioned to participate in that, because not only do we have capital and expertise, we will look at the repossession of a farm as a much less of a problem than almost any other investor in the space would, because we're happy to hold the asset. Hope that answers.

Okay. Yeah. And I guess like, how are you guys thinking about it? So you guys are doing sort of rough numbers about $50 million of revenues a year. I mean, is there a limitation of 5% or 10% or 15% of what you want coming out of essentially fee income, whether or not it be the management or the loans, in terms of the overall mix of the company?

Yeah. There's going to be sort of REIT rule questions we're going to have to consider, but I don't think we see some sort of artificial limit on how much of that we can do. But if we could – I don't think it becomes bigger than our rental income. But if it became 10%, 20% of our total revenue, I'd be thrilled, because it's high current yield and in our view with a gradually appreciating asset class, it's relatively low risk. So we're – if you make these loans sort of maximum of 75% to 80% loan-to-value in the market we're going to face in our opinion for the next few years, you're going to be increasing your cushion every year as a lender not decreasing it and getting pretty good return it's a good place to be. And so I could see it become meaningful. It's not going to happen overnight though. These are loans that are largely going to be the amalgamation of a lot of the low end of a couple of million high-end of $10 million will be where the bulk of those loans get done. They're not going to be $50 million at a time.

Okay. Helpful. And then last one for me. You talked about $0.08 of legal costs from the Rota Fortunae stuff in 2020. And you said you're going to have cost again in 2021. How much is that expected to be? Is that a similar amount that we should be thinking about? Is that more as you go to trial and have the additional trial cost? How are you guys thinking about that cost to the income statement in 2021?

I think on an annual basis, it's hopefully in the same neighborhood. I mean, it's an incredibly hard thing to quantify, Rob. I think it will be higher in – we're in trial in the third quarter – it's going to be an expensive quarter. But at some point, this comes to an end and then all of a sudden it’s not an expense at all. So I think since we think this will come to an end that the $0.08 is as good an estimate as I can give you.

Okay. Thanks, guys. Appreciate it.

The next question comes from Dane Bowler with 2nd Market. Please go ahead.

Hi, good morning, Paul and Luca.

Hi, Dane. How are you doing?

Good. I just got a question on NAV and then a question on revenue. So on the NAV side, the assets on the balance sheet are obviously quite a bit larger than the market cap of the company. So the NAV appreciation as a result of farmland depreciation is probably more – significantly more than one to one. Can you kind of quantify that amplification?

Certainly. When considering the securities on our balance sheet, we have around $1.1 billion to $1.2 billion in farmland assets. Additionally, we have approximately $500 million in regular debt, which does not benefit from any appreciation. There is also $117 million in Pref A, which similarly does not participate in appreciation, and about $145 million to $150 million in Pref B, which shares in half of the annual appreciation related to the face value of that security. If we calculate a hypothetical 5% increase in farmland, which I'm not predicting as an annual figure but using for example purposes, this would result in about $55 million of appreciation value, divided across 32 million outstanding shares. This translates to approximately $1.50 of value added to each share. Our leverage in private farmland ownership is beneficial; however, public markets have concerns about our current leverage levels. We believe that by gradually lowering this leverage, we'll see stock price appreciation, which is why we are committed to it. Furthermore, the potential appreciation, combined with significant buybacks executed at substantial discounts to NAV, is expected to positively impact current equity holders.

Right. Okay. And then on the revenue side, with soybean and corn prices going up so much, as well as other row crop commodities, how does that revenue delta translate into rental rates? Is it going to be rental rates staying a similar proportion of the farmer revenues, or how does that change?

Yes. I always enjoy our conversations, Dane, because you have a solid understanding of how things operate, which may be due to your Wisconsin roots. You're absolutely correct. We have specific revenue targets per acre that we're aiming for across different regions in the country. In the prime agricultural areas like Illinois and Eastern Nebraska, that target can be around 35% or slightly more or less. In regions that are less productive and have higher operating costs relative to revenue, this percentage decreases. The lowest figures in the grain sector are approximately 25% of revenue, with the range typically falling between 25% and 35%, depending on the location. Higher revenue per acre will lead to increased rent per acre, though there is a delay in realizing that. This delay occurs because farmers are currently selling their grain, which improves their cash flow, but they have faced some challenging years and are using that cash to address various financial issues, as well as personal expenses like investments in property or equipment. Some of this expenditure will eventually contribute to rent increases. However, any adjustments will largely be felt in late summer or fall when we renegotiate rents. Since only about one-third of our rents are updated each year, we won't see immediate rent increases across the entire portfolio; it will take time. Therefore, rent increases will be gradual, and similarly, our same-store sales will show a steady rise. Essentially, we're striving to maintain a specific percentage of revenue per acre that we’ve defined internally, and we have nuanced figures for different regions. The highest quality farms yield the most rent per acre as a percentage of revenue, with that percentage decreasing as the quality of the farmland declines.

Okay. Thank you.

Thank you.

Your next question comes from John Judy, a Private Investor. Please go ahead.

Yes. I think you answered my question already. It was regarding the preferred. What your thinking is as far as the preferred B, looking at what you're paying on that compared to alternatives as far as converting that or possibly refinancing it.

Okay. I mean, I won't add anything to what I said unless you have a follow-up question, but thank you for being on the call this morning, John.

The next question comes from Craig Kucera with B. Riley FBR. Please go ahead.

Hi, good morning guys. Paul, you kind of touched on this in response to one of the earlier questions, but I wanted to circle back to it. It sounds like the leasing spreads that you achieved here in the last fall were relatively flat. Can you give us any color there? And also, given where commodity prices have gone over that timeframe, what you think that might translate to here over the next year or so?

Yes. The leasing spreads in the fall of 2020 were marked by both challenges and some successes. We secured a significant number of leases through negotiations that took place in August or early September, with final agreements finalized in October. In retrospect, if I had anticipated the changes in commodity prices, I would have postponed that process. At that time, the market sentiment around lease renegotiations was still quite low. Analyzing the overall situation, we had more gains than losses, but the increases were minimal, typically around 1% or 1.5%. It's important to note that this situation worsens when viewed from a GAAP perspective. Many leases include a 1% or 2% rent increase, which we strive for in nearly every fixed cash lease. However, under GAAP straight lining, this increase isn't reflected in the numbers, remaining flat throughout the lease term. While we experienced some increases in most rerentals, a few farms faced rent reductions due to poor performance, which could result in losses greater than 1%. Moreover, as commodity prices began to rise and farmers' attitudes shifted in the fall, we purposefully delayed re-leasing certain farms. For instance, if a lease was set to expire in late October, we took our time to negotiate better rental terms, which unfortunately meant we had some lost revenue in late 2020, negatively affecting our overall revenue and AFFO that year. However, in practical terms, we did not lose rental income since farmers continue to pay during the growing season. The rental income operates differently from other property types, so despite the accounting practices indicating otherwise, our cash flow remained stable. Looking back, I wish we had executed all leases in the final two weeks of the year to capitalize on higher prices. Moving forward, we believe we are in a much stronger position. Our company prioritizes the current farmer on the property, reflecting our commitment to fostering long-term relationships. As we approach late summer and early fall this year, we plan to negotiate higher prices. If the current farmer meets our target, they will remain; if not, we will seek other farmers. This asset class has zero vacancy, and we are confident that in favorable conditions, there will be interested farmers ready to step in if needed. However, it's worth noting that only about a third of leases will roll over on the row crop side, rather than all of them.

Got it. No, I appreciate that. One other question. The returns from the properties that FDI directly operates have steadily gotten worse over the past several years. Are you looking at any strategic alternatives for those assets, or are you expecting better performance in 2021, given what's happened with commodities?

Yes. To discuss direct operations, I see it in two categories. First, there's direct farming where we believe managing it ourselves is more profitable than renting, although we do very little of this. In fact, we won’t be doing much at all in 2021. As commodity prices improved, we chose to lease the farms we controlled. We've leased nearly every operational grain farm, and we're selling off our equipment like combines and tractors. While operating the farm could yield slightly higher returns, it's also riskier and extremely time-consuming for both the farm management and accounting teams. As we shift back to a growth strategy, we want to minimize overhead, which means deciding whether to have staff manage farming or seek new acquisitions. Therefore, we are reducing direct operations. Most of what appears in our profit and loss related to direct operations pertains to development properties, usually specialty crop farms where we are replanting most or all of the trees or vines. In the initial year of redevelopment, we incur full expenses. In the following years, while expenses remain high, we start to see some offsets from the small existing crops, though they're still underperforming due to immaturity. This year, our development properties faced significant challenges because we manage that inventory ourselves. It's difficult to find a farmer willing to lease if operational costs exceed potential revenue. Typically, we would see substantial offsets to development and maintenance costs for the trees but were hit hard this year due to the COVID situation. We own the crops as Farmland Partners, yet the market for them is limited. Some recovery is possible as we clear our inventories, but certainly not all. I hope this provides additional clarity.

Yes. No, that’s helpful. Thank you, Paul.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Paul Pittman for any closing remarks.

Great. So, for the first time in several years, all of us here at the company are very optimistic about what the next 12 to 24 months will look like. For new shareholders, thank you for joining us. Even more importantly, for the long-term shareholders, of which, there are many, both individual and institutional investors, thank you for your long-term faith in this company and in this management team. We do truly believe and hope that better times are ahead. We think you all deserve that. So thank you very much.

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