Good morning. Thank you for joining Farmland Partners' Q1 2022 Earnings Call. My name is Bethany, and I will be your moderator today. All lines will be muted during the presentation, but there will be a chance for questions and answers afterward. I will now hand the conference over to our host, Paul Pittman, Chairman and CEO of Farmland Partners. Please proceed.

Good morning, and welcome to Farmland Partners First Quarter 2022 Earnings Conference Call and Webcast. We appreciate you taking the time to join us for these calls because we see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings and press releases. I will now turn over the call to our CFO, James Gilligan, for some customary preliminary remarks. James?

Thank you, Paul, and thank you to everyone on the call. The press release announcing our first quarter earnings was distributed yesterday afternoon. The supplemental package was posted to the Investor Relations section of our website under the sub header presentations and other materials yesterday afternoon as well. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, May 4, 2022, and will not be updated subsequent to this 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 first quarter earnings, which is available on our website and is furnished as an exhibit to our current report on Form 8-K dated May 3, 2022. The 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 distributed yesterday and in documents we have filed with or furnished to the SEC. I would now like to turn the call to our Chairman and CEO, Paul Pittman. Paul?

Thank you, James. I would like to share some prepared comments about our quarter before we move on to your questions during the Q&A session. This has been a very strong quarter for the company. We have favorable conditions in all the major areas of our business. The value of the assets we own is increasing significantly, which has led to higher sales and revenue in our MWA Auction and Brokerage division. Rents, particularly in the row crop sector, are rising considerably. We have renewed about 25% of the leases that are set to expire at the end of 2022, and we are seeing rental increases of 15% to 20% in those renewals. The profitability of Farmland remains very strong; although fertilizer prices are rising, the increase in grain prices more than offsets this. This situation is fundamentally driven by growing food demand and a decrease in the availability of high-quality Farmland. Moreover, various factors such as adverse weather in South America, lower crop yields in India, potential planting delays in the United States, and the ongoing war in Ukraine, which is restricting exports from Russia and Ukraine, are heightening grain prices and boosting farmer profitability. While these circumstances are beneficial for our business, they are unfortunate for many people globally, especially those who are less fortunate. For FPI, these factors are reflected in the strength of our financial results, highlighted by an almost 200% increase in AFFO per share. Our strong operating performance is paired with significantly reduced costs from our financing strategy. We achieved substantial savings from the Series B conversion last fall, which is now reflected in our income statement, along with savings from debt reduction. Additionally, following a successful result in the class action lawsuit, we anticipate a decline in our future legal expenses. I’m pleased to announce that this has prompted the Board of Directors to approve a 20% increase in the dividend due to these strong results and our optimistic outlook for the future. Our acquisition pipeline remains robust, and we expect to pursue further acquisitions that will create long-term value for our shareholders. Now, I will hand it over to Luca for a few prepared remarks.

Thank you, Paul. We have observed a significant rise in investor interest in Farmland as an asset class, particularly in our company. This interest comes from several long-term factors that characterize this asset class, such as its stability and appreciation potential, which are influenced by fundamental macroeconomic factors. Currently, more specific drivers include the heightened awareness of the value of producing stable food crops in a geopolitically secure region like the United States, especially since some of the best and most productive Farmland is located in the U.S. Midwest. Additionally, as Paul mentioned, factors related to pricing and productivity play a role. Farmland has traditionally served as a strong hedge against inflation, and this characteristic has drawn significant attention from investors recently. Another key aspect attracting interest to Farmland and our company is its inherent ESG and sustainability-friendly qualities. We are committed to formalizing our approach to ESG and sustainability, and you can expect to see more developments from us soon. Our sustainability focus emphasizes the social aspect, particularly the ability to produce affordable food for everyone, a concern that is especially relevant given the logistical challenges and scarcity of essential crops like wheat and corn from Ukraine. Another layer to our definition of sustainability is producing affordable food in the most environmentally sustainable manner. We believe that effective agronomic practices align closely with environmental sustainability. Our tenants are among the best farmers globally, as demonstrated by our recent environmental sustainability survey. The results were impressive: 97% of our tenants are investing in improving soil health, 94% practice conservation tillage to reduce carbon emissions, 87% employ variable rate application technology to optimize resource usage, and 51% engage in federal conservation programs to enhance biodiversity on less productive Farmland. In response to the increased interest in our company and the asset class, we are enhancing our Investor Relations efforts. We will be attending several conferences for institutional investors, including the Jane REIT conference on May 17, a virtual conference on May 25 and 26 in Los Angeles, NAREIT week on June 7 and 8 in New York, and the ROTH Conference on June 22 and 23 in London. I encourage participants at these events to reach out and schedule meetings with us for a better presentation of our company. Now, I will turn the call back to James for his comments on our financial performance. James?

Thank you, Luca. I will reference the supplemental package in my comments. The package can be found in the Investor Relations section of our website under presentations and other materials. Pages 1 through 9 contain the press release and related financial information, while Pages 10 through 20 include supplemental information. First, I will present a few financial metrics from Page 2 for the three months ending March 31, 2022. Net income was $1.1 million compared to $2.5 million for Q1 2021. The net income for Q1 2022 included $0.7 million from the sale of assets, down from $3.4 million in Q1 2021. Adjusted for litigation, net income was $2 million compared to $5 million in Q1 2021. Net income per share for common stockholders was $0.00 compared to negative $0.02 in Q1 2021. Adjusted for litigation, net income per share available to common stockholders was $0.02 compared to $0.05 in Q1 2021. AFFO was $2.1 million compared to negative $1.6 million for Q1 2021. Adjusted for litigation, AFFO was $3 million versus $0.9 million in Q1 2021. AFFO per weighted average share was $0.04 compared to negative $0.05 for Q1 2021, and adjusted for litigation, it was $0.06 compared to $0.03 for Q1 2021. Total debt as of March 31, 2022, was $465 million, with an additional reduction of $16.9 million post-quarter. The fully diluted share count as of April 29 was $51.4 million. Next, I want to bring your attention to Page 12. As Luca noted, we've had numerous inquiries lately concerning Ukraine. I commented on Ukraine earlier, so I won’t delve deeply here. However, we wanted to offer high-level information that might respond to investor questions. One resource listed at the bottom of the page, the International Food Policy Research Institute, has published many analyses on the effects of the conflict in Ukraine, which might be beneficial for those seeking more information. Moving on to Page 14, I will provide an overview of our income statement. Like last quarter, I'll take a moment to explain the table at the top of the page. We manage over 300 farms in our portfolio, many of which generate multiple revenue streams. We try to categorize the business into a few baskets outlined in this table. We start with fixed payments, which include fixed farm rent, wind rent, solar rent, recreation rent, tenant reimbursement, management fees, and interest income on loans. We view these fixed payments as low risk, with fixed farm rent making up the majority. As a point of information, farmers generally pay between 50% and 100% of fixed farm rent before planting, usually in the first quarter, resulting in positive working capital for much of the year. Currently, we are about a third into the year, and we have received roughly 60% of the fixed farm rent for the year. The next category is variable payments, which consist of rent paid by tenants based on a percentage of gross farm proceeds. With these, we face both upside and downside based on farm performance; however, the downside risk is often alleviated since tenants cover cost overruns. Tenants usually make most variable payments after harvest in Q4, with some extending to Q1 of the following year. We have one significant variable rent contract accounting for about $6.5 million, which is well-backed by farm revenue and is considered relatively low risk. Next is direct operations, which carry higher risk than variable payments because we are not transferring cost overruns to a tenant, but the potential upside is greater as we retain all farm revenue. We display direct operations in this table as gross profit to make it comparable to the first two categories. For direct operations gross profit, we accounted for crop sales and crop insurance—insurance received instead of cash from crop sales—while subtracting the cost of goods sold. As we focus on gross direct operations, the resulting total revenue minus the cost of goods sold is presented. Other items represent revenue linked to auction, brokerage, and additional activities. In considering total revenue minus cost of goods sold, it’s noteworthy that the lower-risk components of our business, specifically fixed payments plus that large $6.5 million variable rent contract, contributed about 85% of the total for 2021. For 2022, this figure is projected to be slightly lower at around 80% due to an increased number of farms under direct operations. The chart below the table illustrates the values of these categories for Q1 2022 and Q1 2021, showing fixed payments, variable payments, direct operations, gross profit, and other items. The total in the right hand column reflects revenue minus cost of goods sold, with Q1 2022 at $12.4 million compared to $11.3 million in Q1 2021. On the next page, Page 15, we break down fixed and variable payments, providing a bridge from Q1 2021 to Q1 2022. We separated the performance of same row crop farms from other categories like acquisitions, dispositions, permanent crops, and non-comparable farms. Same row crop farms were part of the portfolio before January 1, 2021, and we find this category helpful in clarifying performance. As seen, performance increased by $0.2 million from Q1 2021 to Q1 2022, while fixed payments from acquisitions and other items rose by $0.3 million. In terms of variable payments, it's important to remember that most cash and revenue occur after harvest in Q4. The differences noted in Q1 align with our expectations, and our outlook for full-year variable payments remains unchanged. The negative variance in tree nuts was primarily due to timing shifts between years, as after-harvest revenue moved from Q4 of 2020 to Q1 of 2021, whereas Q1 2022 did not experience such timing shifts. The grapes showed a negative variance due to a mix of timing differences and decreased performance. On Page 16, we provide an updated outlook for 2022. The table continues with the same categories of fixed payments, variable payments, direct operations, gross profit, and other items. Fixed payments have increased due to new leases and acquisitions, while variable payments remain stable. Remember that three citrus farms transitioned from third-party contracts to direct operations in the latter half of 2021, which will shift 2022’s focus from fixed and variable payments toward direct operations. Direct operations gross profit has decreased based on citrus price fluctuations; while mandarins and oranges have risen, lemons have dropped due to export demand changes and shipping challenges at major ports. The season is still in its early stages, as the industry continues sales through Q3, and we will keep you updated as new information emerges. Other items saw an increase due to expanded auction business. On the expenses side, property operating expenses and general administration remained flat. Legal and accounting costs decreased as expected litigation expenses lowered. We previously forecasted litigation spending between $2.4 million and $3 million, and now anticipate a range of $1.8 million to $2.4 million. Interest expenses have decreased because of lower debt levels, although this is partly offset by rising interest rates. The weighted average shares increased due to the shares sold under the company’s ATM program. This will result in AFFO falling between $11.4 million and $14 million, compared to a prior estimate of $9.1 million to $11.7 million shared in February. AFFO per share is expected to range from $0.22 to $0.28, compared to $0.19 to $0.25 earlier in February. We are assuming litigation will conclude in 2022. Adjusting for the midpoint of estimated litigation spending, AFFO could be between $13.4 million and $16 million, compared to $11.8 million to $14.4 million provided earlier. AFFO per share adjusted for litigation would range from $0.27 to $0.32 compared to $0.25 to $0.31 shared in February. This concludes my comments this morning. I will now turn the call back to Paul for his concluding remarks.

Operator, we're going to go to Q&A, and then we'll conclude after we see if there are any questions from the audience. Thank you.

Our first question comes from Nate Crossett with Berenberg. Please go ahead.

Hey, good morning. Thank you. I had a question on just the deal flow in the pipeline. I don't think you guys gave guidance for kind of acquisition volumes for the year. But you did $8 million in the quarter. There was a presentation you put out recently that showed that you had $18 million under contract, and it was kind of sizing the pipeline at around $330 million. And so is there any way you can just give us a sense of what we can expect in terms of volumes this year? Or what the activity looks like over the next three months? And then also, if you could just maybe comment on cap rates and if you're seeing any changes in pricing just given the change in interest rates over the last few months?

Sure. A bunch of different questions there, Nate, and I'll try to answer them all. If I miss one of them, please prompt me again. But our pipeline today is as we said in our presentation, probably $300 million or more, we track a lot of transactions compared to the number we actually do. We try to measure ourselves more by doing the right transactions than focusing on a very specific quantity of transactions. We want to be selective and do the best deals. And the best deals is really balancing a variety of things. It's thinking about the portfolio balance in the context of what we already own. It's thinking about the cap rate we can get on a given asset, which is different in different regions. And then finally, and in many ways, the most important to me is what is our perspective on the long term measured in 5 years or greater upside on a given farm. We want to buy the very, very best farms. And we are now being rewarded for that discipline during the last half a decade or so. And that's really what drives which farms we do. We won't do $300 million of new acquisitions by the end of the year in any under kind of any case, but we're going to do quite a few. The next surge in acquisitions is likely to come in the fall because in the fall is when there will be a lot more properties available for sale than there are right now, kind of entering a phase where it usually slows down a little bit because it's harder to transact on a farm when there's crops in the field as it creates a set of other deal issues you have to manage. Our perspective, though, is we'll do something in the tens of millions of deals in the next quarter. And it will kind of run, I think, at roughly that pace. But don't be surprised if it's quite a bit higher or even quite a bit lower than that because really, we're driven by selectivity and doing the right deals. So the other question you asked is are we seeing price changes due to interest rates. And so far, no, we are not. So many farm acquisitions are done with cash. A Farmland as an asset class overall only has about 13% leverage on it. Many, many of these buyers show up with cash available for the transaction. Obviously, for those farmers who are using debt in the purchase, they're likely to pull their horns in a little bit because, obviously, it increases the cost of carrying that asset. But as I said, the overwhelming majority of the sort of farmers or institutions making these acquisitions are doing it with cash. And so the increased debt is not really having an effect at this point in time. I think I got most of your questions. But if I missed one, feel free to follow up.

No, that's definitely helpful. I had a question on the renewal spreads. I think last quarter, I can't remember if you guys were kind of articulating 10%, plus or minus, but the 15 to 20 that you quoted this time did seem like it was an uptick. And I guess my question is like how far out are you going to kind of see those spreads? Or what are you kind of anticipating? Is this a 2022 phenomenon? Or is this an 18-month to 24-month phenomenon? And I guess like is there any resistance on kind of resetting those rents? Any color you can give there is helpful.

Sure. To provide some context, our company resets rents on an annual basis. In the last call, I mentioned that the reset cycle reflected in our profit and loss statement for 2022 was around 10%. Currently, we are beginning to renegotiate leases for 2023, starting this process a bit earlier than usual, as we typically do this in late summer and early fall. The reason for the earlier negotiations is the favorable pricing situation for farmers. If we finalize the lease extension for three years, the farmer can sell grain and manage risk, which wouldn't be possible if there was uncertainty about losing the farm. Thus, starting early benefits both our tenants and us during this negotiation phase for 2023, 2024, and 2025. We are seeing rental increases between 15% and 20%. We've already released about 25% of our leases for this year, and these increases are stronger than last year's. This trend is expected to continue throughout the lease cycle and into renewals in 2024. We are currently dealing with a relative grain shortage that is unlikely to be resolved quickly due to strong consumption rates. Additionally, factors such as reduced crop yields in India and adverse weather conditions in South America are contributing to these challenges. In the U.S., planting delays may also negatively impact yields as pollination could occur during the hottest parts of summer. Furthermore, the ongoing conflict in Ukraine adds to these complications. Consequently, farmers are likely to maintain high profitability, which supports our rental increases. Regarding pushback from farmers, yes, we do experience some resistance to rent hikes, as is expected, but they are ultimately able and willing to adjust. This industry has patterns of strong upward trends followed by plateaus, which applies to land prices, grain prices, and rental costs. We are currently in a period of significant upward movement and are taking advantage of this opportunity. I hope this clarifies your question.

Yes, it’s very helpful. I'll leave it there. Thank you.

Our next question comes from the line of Dave Rodgers with Baird. Please go ahead.

Hey Paul, good morning. Thanks for the increasing disclosures on the company as a whole. Wanted to ask one of the most attractive features, obviously, of Farmland over many years has been the generally 100% occupancy of the farms. I wanted to talk about your direct operations business, I guess, in the sense that it is growing. And you talked about it growing again this year. So can you kind of dovetail the direct operations component in with kind of this 100% occupancy and high demand from farmers?

Yes, we engage in direct operations under certain circumstances. This occurs when we have a farm that is undergoing redevelopment, such as needing new irrigation or improving the land after purchasing it. We might also take direct action if changes like removing trees or switching to specialty crops are necessary. Leasing a farm that is not in good condition can be quite challenging. Historically, our direct operations have been limited in this regard. Most institutional managers in the farmland sector tend to prefer leasing for row crops while opting for direct operations with specialty crops due to the significant return volatility, which complicates lease agreements. Farmers are understandably cautious due to this volatility, making it tough to establish a fair lease arrangement. When leasing a farm, a significant base rent is often sought in exchange for waiving the potential upside from direct operations. However, farmers also have concerns about the potential down years where they might incur losses. In light of these challenges, we have opted to pursue direct operations for some of our specialty crops, particularly citrus, as we believe this approach will yield higher long-term profits compared to leasing. This strategy aligns us with what successful long-term managers in the industry are doing. That said, we haven't extended this approach to all our specialty crops and likely won't. We do have a strong relationship with Olam Company for specialty crops, where we have negotiated a long-term triple-net lease that provides us with a stable return. They handle tree maintenance, taxes, and more, and we achieve a good return relative to our initial purchase price. Olam, being a publicly traded company in Singapore with a solid balance sheet, has enabled us to secure a lease that delivers a strong return with fixed or nearly fixed rent. However, for our citrus operations, we have found it challenging to secure the desired fixed rent, prompting us to believe we can achieve better returns through direct operations. I hope that clarifies things, Dave.

That does, Paul. And then maybe a related question around the crop insurance proceeds in the quarter just under $2 million. I assume that was related to last year. I guess a couple of questions. One, was that in the guidance originally? And then two, would you anticipate this year actually being able to harvest the crop related to that? So maybe I don't want to say double counting, but you get kind of two shots added this year? Or will we see kind of a crop insurance number again next year? How is that kind of working in your guidance and in your outlook?

I'm going to let James take that, at least initially. I may add something afterwards. But go ahead, James.

Yes, Dave, the crop insurance figures that appeared were indeed part of our original estimates. This pertains to crop insurance instead of selling the anticipated fruit. As we look ahead to next year, we currently lack clarity on how this will unfold, but we will incorporate it into our figures as we prepare for 2023.

Okay. And then last for me, in terms of the rental increases that you guys are seeing. I think this year, if you looked at just the fixed same-store component you're up about 2.1%. It seems like on the farms, and that makes sense relative to your roughly 10% increase. So I guess just kind of translating that to next year if 25% or so of the leases are rolling and you're going to get a 15% or 20% increase. I mean the organic growth rate next year should be in that 3% to 4% range. I mean is that the right way we're thinking about it?

Yes, it's still early days, but I think that's essentially the math that we do. As Paul said, we've renewed some percentage of leases this year. We have a lot more to go. And so we'll keep you updated, but I think that's essentially the math that we do as well.

And if I was updating your model right now, Dave, I'd be using the 15% number, not the 20% number, just to be cautious. We're shooting for the 20 million but no guarantees yet. We've only renewed about 25% of the acres at this point.

Great. Very helpful. Thank you.

Our next question comes from the line of Craig Kucera with B. Riley Securities.

Hi, good morning, guys. And congrats on putting a lot of the legal issues behind you. But I'm curious, Paul, are you in the process of contemplating any sort of pursuit of a recovery related to that?

Yes, we are, Craig, and it's actually a good question. One reason you didn't see us eliminate all the increased legal expenses is because we believe the class action lawsuit against the company is resolved. We're very pleased about that. We will continue to pursue the hedge fund that initiated this situation and are optimistic about achieving a significant recovery in the future. It’s a significant milestone to have the case against us completely dismissed. We always thought the claims were unfounded, but they posed a financial risk to the company if we had lost, which we never truly expected, but you can never be certain. Additionally, it’s a situation that cannot be easily avoided; it’s a case against us. In the future, we can decide whether to continue pursuing the hedge fund for the losses incurred, based on whether we believe the potential recovery outweighs the costs of continuing. However, that wasn't the case with the class action; we had to remain actively engaged and keep fighting. Obviously, we were successful.

Great. That's helpful. And at this point, are you able to sort of contemplate what that recovery might be? Or are you still sort of restricted in what you can disclose in that matter?

It would be very difficult for me to quantify it because it's an ongoing issue, and any estimate I provide would be quite broad. The damage caused by this is substantial, but I can't go into further details.

No, that's fair. You raised some additional equity in the second quarter and paid down more debt. Most of your debt has a relatively long maturity. Can you comment on which portion of the debt capital stack is a priority for paydowns?

Yes. So when we think about paydowns on our current debt structure, we think about it really in the following way. We think about what's the absolute rate on that piece of debt. What are the alternatives we could use the cash for? If we have really good deals in front of us, we'll continue to do transactions without leveraging them. That's in effect from an overall balance sheet perspective, similar to paying down debt, frankly, because you're deleveraging overall. We will also look at when there is a reset on rates because a lot of our debt instruments might be 10-year instruments, but they may have a reset every three years or so. So if you're coming up with a reset in the near future, on one of our debts given what's going on in the background interest rates. Generally, you would think about trying to accelerate paying down on those debts that are going to reset. And then the final thing we think about, which is really important, is thinking about what collateral is underneath a given loan because if we can free up a lot of collateral, it gives us an awful lot of financing flexibility. So we're very cognizant of creating this relatively large package of assets with no pledge against them because it opens up all kinds of more efficient ways for us to finance the business going forward. So that's how we balance it.

Great. That's helpful. Just one more for me. I mean, thinking about how you converted the Series B last year into common stock, you raised more common stock to pay down more debt. Are you viewing the recent deleveraging as sort of giving you dry powder for additional acquisitions to lever back up? Or are you thinking that you want to run the balance sheet with maybe a little bit less leverage over time?

I believe it’s a combination of both. It provides us with the financial flexibility to grow the company when good opportunities arise because we have significant liquidity if needed. However, our overall trend is to have slightly less leverage over time compared to our historical levels. In the past, we believed that to support the overheads of the company, we needed to achieve considerable scale. To be candid, we are still a relatively small company on Wall Street. Our goal has been to establish a solid base of assets because running a public company requires a strong staff and a minimum number of employees. Therefore, we have utilized leverage to maintain growth and expand even without relying solely on equity. We intend to continue growing aggressively, but we are at a stage where we can likely achieve this growth with lower overall leverage ratios. If you consider the preferred shares as a debt instrument, although technically inaccurate, some do perceive it this way. We have significantly reduced our leverage in the past year when viewed from that perspective, and we believe this is positive and has contributed to our stock price performance. While we remain optimistic, it will always be a balancing act. However, over the long term, I believe you’ll observe lower overall leverage levels compared to what we have previously maintained.

Okay.

There are no additional questions waiting at this time. I would like to pass the conference back to Paul Pittman for any closing remarks.

Thank you. And thank you for all the investors and listeners on this call. We do appreciate your continued support of the company. And we look forward to talking with you either in person or on the next quarterly conference call. Thank you very much.

That concludes the Farmland Partners Q1 2022 Earnings Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.