Farmland Partners Inc. Q2 FY2021 Earnings Call

Good day everyone, and welcome to the Farmland Partners, Inc. Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Paul Pittman, Chairman and Chief Executive Officer. Please go ahead.

Thank you. Good morning and welcome to Farmland Partners second quarter 2021 earnings conference call and webcast. We appreciate your taking the time to join us for these calls, a very important opportunity to share with you our thinking and strategy in a less formal format than public filings and press releases. With me today is Luca Fabbri, the company’s Chief Financial Officer. I will now turn it over to Luca for some customary preliminary remarks.

Thank you, Paul. Thanks to everybody who's on this call live this morning or listening to the recording. The second quarter earnings press release went out yesterday afternoon. This call is being recorded, and a replay will be available shortly after the end through August 15, 2021. The phone numbers to access the replay are provided in your earnings press release. For those of you who are listening to the rebroadcast of this presentation, please remember that the remarks made herein are as of today, August 5, 2021, and have not been updated subsequent to this initial earnings call. In this call, we will make certain forward-looking statements, including statements related to the future performance of our portfolio, our identified and potential acquisitions and dispositions, the impact of acquisitions, dispositions and financing activities, business development opportunities, and we will also make some comments on our outlook for our business, rents, and the broader agricultural markets. We also will 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 second 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, Luca. So where we sit today as a company has me more optimistic than I have been since our IPO seven years ago. This was a solid quarter, but for the litigation expense. I'll turn to the company specific items in just a moment. But a few comments about the general market trends in our industry. Farmer profitability is up materially. It is probably back to the levels we experienced in the 2012 and 2013 era. This has been a dramatic and rapid recovery of farmer profitability since last fall. The big driver there of course is grain prices. But importantly, this is a demand-driven bull market. One characteristic of demand-driven bull markets is they usually last for a reasonably long time at least several years, as opposed to a supply shortage bull market, which can end almost overnight when supply recovers in the ag markets. But this demand-driven bull market is likely to be with us for quite some time. What that means in terms of the operating business itself is that our rent renewals that we are doing right now, and this is really the first time we've been renewing leases in a strong farm economy because the turnaround occurred after we put most of the 2021 leases in place. But as we're renewing 2022 leases, we're getting increases in low crop rents that are at least in the 7% to 10% range and some as high as 20% or more. Land prices are also up quite dramatically. We have been turning down offers for some of our properties that are materially above what we have paid. As many of you know, over the last several years, even in a down market, we sold quite a few properties at something in the neighborhood of 15% or 20% premium to our purchase price. We strongly believe that the assets we own are rapidly appreciating and will continue to do so for quite some time. I think the land value appreciation trend should last for several years; it's hard to predict out beyond two or three years. But I think we will have that land appreciation trend with us for quite some time. We have talked in the past that our NAV was in the $14 range. I don't want to get too specific here because, as many of you may know, the USDA land value survey comes out tomorrow. And we will do some updating of NAV when that occurs. But we assume that we are appreciating substantially above the $14 NAV and going to continue to go higher. In a sort of non-ag related issue that is very powerful for farmland values, of course is inflation. There's some different points of view here. But certainly, mine is that inflation is with us likely to be here for quite some time. You can certainly see it in the pricing of almost all goods that is obviously very good for farmland. Turning specifically to operational and financial performance. As I alluded to a few minutes ago, there really is a lag of almost a year between the time the farm economy turns and we start to really see it in our profit and loss statement. And the reason for that, of course, is that we roll over our leases, and we roll over about one-third of them every year. So when we rolled the leases for the 2021 year, late last summer and during the fall, in most cases, we weren't in a strong ag economy yet. As we have gotten to this summer, we are rolling those leases over in a very powerful economy and having very strong success with lease renewals. We're back to buying farms. As you've seen in some press releases, we've bought quite a few farms and we will continue to do that. We're finding from time to time, some relative bargains even though it's an appreciating market, and we will continue to grow the company. As you probably noticed in a press release a few days ago, we have reopened and restarted our loan program. This has always been a good program and meets the needs of the farmers. We are putting loans out. Those loans are usually done in the neighborhood of an 8% interest rate or 8% return to the company. We will intend to continue to expand that business. That loan program is fundamentally based on asset values rather than the cash flows of the farmers. What we're doing is giving them a chance to access the pent-up equity that they have in land. We generally will only make a loan on a farm we would be happy to own, and if the farmer would happen to default on the loan, we would continue to own that property. Our off-balance sheet asset management business has continued to grow with the opportunity zone fund, and we intend to help that organization continue to grow that business, which obviously increases our management fees but also increases the total number of acres we either own or manage. We are also exploring some other off-balance sheet asset management businesses to increase the scale of the company and give us multiple ways to grow, even if we are not happy with the equity price at a given point in time. A few comments about the litigation and another big event in this last quarter was that Quinton Mathews, also goes by the name of Rota Fortuna, admitted that he essentially made up the entire article and that his article was part of an orchestrated short and distort attack funded by a hedge fund. It’s a very powerful admission that he made, and it went so far that he has been banned, as we understand it, from further publishing any sales sort, since he intentionally misled the market and caused a great deal of damage to the company and to our investors. We believe that admission is a major step in the repair of the company and management's reputation. We also believe it makes it clear that the class action is frivolous. It does still continue against us. Believe it or not, it’s hard to imagine with that admission on the part of Rota Fortuna why the plaintiffs and their counsel in the class action think they still should have claims against the company. But they are at this point, at least still pursuing that. We do hope they will drop those cases. Some of the derivative cases have been voluntarily dismissed since that occurred. We think that the admission of Rota Fortuna substantially increases the probability that we get a recovery from Sabrepoint, the hedge fund that was involved with all of this. We think that the elevated legal spending we've seen in the last quarter or two should taper off at least for a while as some of these cases appear to either be going away or lessening, at least in the amount of time that we spend on them. With that, I'm going to turn it back over to Luca to go through some of the key financial highlights for the quarter.

Thank you, Paul. I will not kind of read out to you all the financial metrics that are contained in the earnings release that went out last night. There is, however, one measure that I want to draw your attention to that I think is the most meaningful. If you look at our financial performance year-to-date in terms of AFFO. You've probably seen in our earnings release that we are showing both AFFO as usually calculated and we also further adjusted it to take out the effect of the various legal items in progress in terms of litigation. We believe that these lots are going to really reflect our true core business. Year-to-date, we are showing an AFFO of negative $0.02 versus negative $0.03 for the same period last year. Now in this context, I just want to remind you also that we are subject to a very high degree of seasonality in our earnings because while our cost structure is by and large, majority constant through the year, evenly spread through the four quarters of the year, our revenues tend to be very concentrated in the fourth quarter because of certain lease participating lease structures. So just a quick reminder of that, especially for newer shareholders that joined the company here recently. Also wanted to mention our acquisition disposition activity. Year-to-date, we have completed four acquisitions for almost $30 million. We've also sold 15 properties for a total consideration of $31 million and a gain of $3.5 million. Now, the majority of these asset dispositions were made to the OZ Funds. So we are effectively retaining this asset base for revenue generation purposes through management fees. In the Q, we incurred new debt in the form of a short-term bridge loan of $40 million. The interest expense actually for the loan was almost 50% paid by the seller of the property underlying this transaction. Year-to-date, however, our total indebtedness is down $6 million; not very much, but certainly in line with our intent of gradually reducing the leverage in the company. Also, we are seeing a very strong cash position right now. As of the end of the second quarter, we have about $40 million of liquidity available to us for acquisitions and other purposes. Also, we have engaged in quite a bit of activity of equity issuance through our aftermarket program. Specifically, we issued about 2 million shares at an average price of about $13.11, generating net proceeds of a little over $25 million. As we see today, the fully diluted share count of the company is 34,335,000 shares. This concludes my remarks. Thank you for your time this morning and your interest in Farmland Partners. Cole, we would like to begin the question-and-answer session.

Thank you. And we will now begin the question-and-answer session. And our first question today will come from Dave Rodgers with Baird. Please go ahead.

Hi, Paul. Hi, Luca. Thanks for all the details in your prepared comments. Paul, I wanted to go back to the leasing spreads. It's obviously the first time I think since you've come public, we've seen these strong leasing spreads. So it's a great thing to see. I wondered if you could give us a little more detail on the 7% to 10% increase that you talked about, maybe the percentage of acreage or the percentage of the portfolio in total, that you achieved that on maybe some regional color, and then any thoughts around where permanent crops come in. And if there's a base reset you'd expect to see at any point in the near term?

Yeah, so the 7% to 10% is what we currently would expect portfolio-wide on renewals. We think it may be a little bit of a conservative number. But it's based on the amount; it's kind of a conservative comparison of the relatively small percentage we've already done. I mean, we probably have the releasing process, we are 25% of our way through it in the sense of at least a handshake or a signed lease. Those numbers are coming in at that 7% to 10% range or above in many cases. So I'm comfortable saying that I think we'll get through the whole process at 7% to 10% or better. But a couple of things break our way, we may come out of this at a plus 10% across the board. We have some large leases where we're trying for 20% increases. And if that happens, it pulls the whole average up pretty substantially. So look, this is a last quarter if you recall, I worked through some numbers about how the improved grain prices change profitability per acre and revenue per acre, if you remember that. So think about it this way. If revenue per acre for that farmer is going up by 20%, 25%, we frankly think rents ought to be going up almost that much, maybe not all of it. The biggest beneficiary of higher grain prices should be the farmer themselves, but the second biggest beneficiary ought to actually be the landlord in our view. And so we're working pretty hard to push it. In terms of region, strongest increases in the Midwest, as you all probably recall, like 400 million of our portfolios in the state of Illinois alone, that’d be 35%, 40% of the whole portfolio is there. And those are the places where we're getting increases; there are quite strong, really running 10% or better, and the Illinois renewal so far, the rest of the other grain-producing regions, high plains, delta, and southeast are a little below that, more like maybe call it 7% or 8%, 9%. But we think some of those will come around and be stronger as time goes by. But as is typical, the Midwest responds most rapidly to changes in crop price in terms of the rental market. Important to note, and I know you know this day, but better than your question, we should see a significant increase in rents in each of the next three years, because we roll over as I said roughly told portfolio over time.

I appreciate that color, Paul. And I guess maybe a follow-up question, with regard to the acquisitions and the pipeline. Can you talk about what the acquisition pipeline looks like today? I mean, now that you're kind of back in the acquisition market, give us a sense for what you've been underwriting? And where the yields are coming out today if you're seeing this appreciation and land, combined with the productivity, are cap rates changing much, and what are your investment cap rates today?

Recently, we announced a significant transaction in Louisiana with a current yield in the low to middle fours regarding cap rates. We also closed a couple of smaller transactions, which are yielding around five, and we're pleased with these figures. We haven't added much property in the core Midwest due to our existing heavy weighting in that area, but we plan to continue expanding there, though realistically we expect those to be in the low threes. Our focus is on growing the portfolio while maintaining the current cap rate against asset value; it's not about gradual improvement but rather how quickly we choose to grow. Lowering cap rate expectations by 10 to 15 basis points can make almost every deal attractive, but we have limited cash and aim to pursue only the best deals. Currently, I'm satisfied with the cap rates, but you should expect them in the row crop sector to range from the low threes to slightly over five, depending on the region.

And then, sorry, just the early part of the question, just the pipeline overall, do you have a pipeline number or something that you're that…

Yeah. We do have a pipeline. We've got quite a few deals. We've got a few under contract right now. And we've got quite a few, we're looking at. Certainly, measured in the kind of 50 million plus in pipeline, not to say that all those deals get done, but we have enough to keep us busy for the next couple of months for sure.

And our next question will come from Rob Stevenson with Janney. Please go ahead.

Good afternoon, guys. Just to piggyback on Dave's question. So in terms of crops and locations, you're targeting here going forward, any differences to the historical mix of what you've done in the past? Or is it more of the same, because anything looking particularly more attractive to you these days or less attractive?

So, let me start with a general then go to the specific. So the general posture and policy of the company is that we want to have a broad diversified portfolio that reflects food output on a nationwide basis. What that has historically meant, and still does is something like 70/30 row crop specialty. And we will, in relatively broad strokes stay close to that, meaning, kind of think of it as 60/40 to 75/25 kind of bracket is where we want to stay. As far as specific regions, though, in a tactical sense, we find as I said, rent increases come more quickly in the Midwest and so does appreciation. So, we are actively and aggressively pursuing opportunities in the Southeast, the High Plains, and the Delta right now. The biggest deal we've done recently was in fact in the Delta and Louisiana because you get sort of a brief window where you know, the appreciation is coming because you're seeing it already in the Midwest, but it just hasn't quite shown up in the value expectations of sellers in some of the other regions away from the Midwest. And that, we're just sort of trying to take advantage of that right now. So I'd say we are a little more focused on the Southeast and the Delta than the Midwest. But the Midwest is such an important growing region, we'll continue to grow the portfolio there as well just probably not quite as rapidly as we will in the Delta and the Southeast.

Okay. And then Paul, how should we be thinking about acquisitions over the next couple of quarters on FPIs balance sheet versus doing deals for the managed portfolio?

I believe the majority of our transactions will take place within the FBI portfolio. Unless we are dealing with an opportunity zone, we will focus on the FBI. Even some transactions in opportunity zones may be included because we have slightly better access to capital than the opportunity zone fund. Our current situation should leave our shareholders relatively indifferent. When we engage in opportunity zone projects, we benefit from fee income and reduce overheads without needing to commit additional capital. Conversely, when we invest in the publicly owned portfolio, we gain long-term appreciation. While it requires financing the asset, we also enjoy current yield. This approach is advantageous for shareholders as it fundamentally supports growth. We appreciate having options to expand our business without having to issue equity or increase debt on the public company's balance sheet, which is beneficial for shareholders. We are pursuing strategies adopted by various other REITs in different sectors that have proven effective, allowing us to access multiple sources of capital to grow our portfolio consistently, and that is the direction we are aiming for.

Okay, that's helpful. And then, earlier in the call, Paul, you said that you're expecting the litigation cost to moderate for some period of time. Given how impactful every sort of $0.5 million dollars is still to earnings? What type of magnitude should we be expecting in terms of the tapering off of the litigation costs in the back half of the year? You guys have been doing sort of call it $2.5 a quarter year to date? I mean, is it half that? Is it a quarter of that? Rough numbers? I mean, where should we be thinking?

I'm going to make an estimate, and I may be wrong, but I want to share my opinion. I think our litigation costs will be around half or slightly more than what we've experienced in the past couple of quarters, roughly 50% to 60% of that amount. Looking at our two cases, with Rota Fortunae and the Hedge Fund, they're separate matters we're pursuing. Quinton Mathews, associated with Rota, has acknowledged his wrongdoing, compensated us significantly, and will continue to cooperate, so we won't be incurring expenses there anymore. On the other hand, for our case against Sabrepoint in Texas courts, we need to assess whether the potential recovery outweighs our costs of continuing the lawsuit. For now, we believe we can recover more, so we are proceeding with it, although progress is slow. The class action lawsuits are particularly frustrating. It's hard to believe, but they seem more bothersome than the cases against the individuals involved in the short selling. We feel these class action cases are mostly driven by attorneys. Given Rota Fortunae's admission, it's difficult to justify pursuing claims against our management. It's incredibly unfair to our current shareholders that we must continue litigating this. Unfortunately, the legal system tends to favor class-action lawyers over companies and shareholders. We will keep fighting against this. Some derivative cases have seen voluntarily dismissals because pursuing them makes no sense after Rota's admission, and we hope the same will happen with the class actions. That situation is progressing slowly, with discovery now complete, which was a significant cost factor in those cases.

Okay. Are there any important dates that we should be aware of regards to either of those outstanding litigations or made around 2021, or is it likely to be a stretch to get a 2022 at this point?

I believe the class action is likely to be resolved late in the fourth quarter in my opinion. This seems to be the next significant opportunity to see that case completely resolved. Regarding the case against the Hedge Fund, if we decide to proceed, which I think we will, it ultimately comes down to whether we can recover more than the costs involved. Unfortunately, that case will likely extend into 2022.

Okay.

We will continue to address the class action case, which we cannot ignore. They fabricate claims, and we are forced to respond. It feels like a relentless torture; it's truly shocking.

All right. And then the last question for me. Luca, from a debt cost standpoint today, where are you finding the best capital? And what is the pricing looking like for you these days?

Currently, the average cost of our debt across the entire loan portfolio is just under 3%. We are anticipating some repricing in the near future, although there is some uncertainty mainly due to the current situation with LIBOR. We are still in the process of determining the right benchmark since the future replacement for LIBOR is not yet fully established. We have found that the prime rate does not serve as a suitable benchmark. Therefore, there is some unpredictability regarding how this will unfold going forward, but we are actively engaging with our lenders, both existing and new. I expect to provide a more substantial update, possibly next quarter.

And our next question will come from Craig Kucera with B. Riley Securities. Please go ahead.

Hey, guys. We saw a sequential pick up in the cost of goods sold line item. I believe that's affiliated with your development properties. Can you comment on what you're budgeting for 2021 in that regard for replanting trees and vines and things of that nature?

Luca, I’m passing this to you if you have the answer. That line likely doesn’t represent the vines and trees; it reflects the accumulated input costs over time related to the farms we operate directly. When we operate directly, it’s typically a farm undergoing some redevelopment. However, you would capitalize the costs associated with trees and vines. What you're seeing are the actual operating costs of those farms, offset by revenues. Luca, I’m not sure if you can address the specifics Craig asked about; I certainly can’t.

Yeah, no, I also don't have the figure at my fingertips that you're asking for Craig. However, the variation in that number from year-to-year is not so much related to the input costs, but to the number of properties and to which properties we are directly operating in each given crop year. So, on the other side, on the revenue side, there is somebody variability also within the same farm. And just as a reminder, we usually direct operate on a very opportunistic basis, depending on specific circumstances with tenants and with the crops and development status and so on and so forth. So, hope that helps. But unfortunately, I don't have the specific number ready for you.

That's fine. I can circle back offline. And I guess my second question relates to the decision to reopen farm lending. Is that really tied to kind of getting close to winding down litigation and feeling like a lot of those allegations are behind you? Or are you actually seeing increased demand for those types of loans that you want to take advantage of?

We had incredible demand for that program all the way through the last three years. And we lost an immense amount of revenue by not keeping that program open. But we thought that since it was the core of the accusations against the company, it was sort of imprudent to keep making loans. Plus, we were taking our capital and buying our own stock back at something like $0.50 on the dollar, in our opinion. And so it just didn't seem like a very good place to deploy capital with those two issues overhanging. As we saw the stock price recover and then had one of the major perpetrators of the short and distort attack admit that this article is largely false, we felt like it was great to get back in that business. You know, what we liked about that business is that it addresses one of the challenges of our asset class; this is a relatively low current yield asset class. It has a wonderful, long-term hold appreciation, low risk asset class. But look, investors want some yield as well. And so the loan program really helps us in our view there because it gives us a reasonably strong current yield and still exposure to farmland with a relatively low risk profile associated with that. And then, on the off chance that a loan doesn't get repaid, we're happy to own those assets. But so we're kind of thrilled to be back in the business; just felt like all the stock price was sort of depressed, and that was in the litigation was as heated as it was for a while, but it was hard to keep doing those loans.

Okay.

And our next question will come from Buck Horne with Raymond James. Please go ahead.

Hi. Thanks for the time. I'm just curious if you could just walk us through, how drought conditions are playing out across your markets and farms over the course of the summer here if there's any issues with water shortages in your neck of the woods, and just kind of any thoughts on potential impact for specialty crop performance later this year?

Yes, the distribution between specialty crops and areas in California, as well as row crop regions, has not been evenly affected. The row crop regions where we own farmland have experienced significant rainfall this year. The severe drought reported in row crop production areas actually starts in the Pacific Northwest, including Washington and Oregon, and extends across Montana, the Dakotas, and into Minnesota. We have one farm in South Dakota, which is on the edge of these conditions, and while it has been somewhat affected, they have received some rainfall. I expect it won’t be a stellar year but will be acceptable. Eastern Colorado, due to the positioning of the Jetstream, is experiencing wetter conditions because the Northern Rockies are dry, which influences the central and southern Rockies and the plains to the east. This year, Eastern Colorado has had one of its rainiest seasons in a long time. So, overall, the row crop sectors are doing relatively well. In California, however, specialty crops face a challenging water situation. We have sufficient water to complete the season for all our crops, but the cost of that water has increased, impacting our crop share profitability. Nevertheless, we anticipate this year will be better for specialty crops compared to last year, albeit from a low starting point. Despite the ongoing water issues, overall market conditions have improved. Last year, our lemon crop went unsold, but this year, with the reopening from COVID, we are not facing those same challenges. In summary, while water costs are rising, we have enough resources for the current season, and overall, 2021 should outperform 2020.

Thank you for the update. It's very informative. I have a follow-up question that is more strategic in nature. I'm considering the use of the ATM and the potential for low-cost equity. Given that you raised funds significantly below your perceived net asset value, which you believe is increasing, could you explain the rationale behind issuing equity below NAV? What are the implications for shareholders, and does this strategy still make sense now that the stock is around $12 to $13?

We issued the stock at an average price of $13.11. We agree with your concerns about issuing a lot of ATM stock, especially when the NAV is higher. Our primary consideration when issuing equity is whether it is beneficial for our balance sheet and then whether it positively impacts our income statement. We need to navigate the balance between these two factors. At around $13, we believed we could use that money to increase the company’s cash flow and support our team’s overheads across a larger asset base, which we saw as advantageous for investors. However, as the price decreases, it becomes increasingly difficult to justify issuing stock. At lower stock prices, such as $7 or $8, we decided against selling any shares, while at $20, we aimed to sell more. Therefore, we need to manage our approach carefully, balancing asset value with revenue growth. Our goal is to maintain flexibility, which is why we utilized the ATM.

Appreciate the explanation. Thanks, guys. Good luck.

Yes.

And our next question will come from Don Judy, private investor. Please go ahead.

Yes. Good afternoon. I just had a question on your for B stock. What's your thinking on that? I know you can mandatory convert it, coming this October. Certainly, at the cost-led funding, I guess 6% plus the appreciation, you're looking at 8%, 9%, at least. And just kind of what you're thinking right now is what you intend to do with that?

I don't think we've made a decision on what to do with it yet, but I can share how we're approaching it. We have considerable flexibility, with the ability to decide anytime between October and the next three years regarding either a stock buyback or conversion. Our goal is to keep our options open for both possibilities. We believe that our stock will continue to increase in value, and asset values in our sector are rising quickly. There are arguments for waiting to see this appreciation, which we hope will reflect positively on our stock price. Conversely, some argue that it might be wise to act sooner if the cost of holding this paper becomes too high. We will continue to monitor the situation and aim to choose the best strategy for long-term shareholder value, keeping in mind that there is no urgency on our part. However, we are certainly attentive to it. That's about all I can share at this moment.

Thank you.

And this will conclude our question and answer session. I'd like to turn the conference back over to Paul Pittman for any closing remarks.

Well, thank you all. This has been, as I said, the beginning an exciting quarter for the company. A lot of really good news in terms of what we're going to see come in terms of increased earnings in the coming year, as well as putting some of the litigation behind us and seeing land values go back up and go up strongly. So, we feel like we're in a good place and we'll have a good year in front of us. Thank you for your continued interest in our company. And look forward to talking with you again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.