Ladies and gentlemen, thank you for your patience and thank you for attending today's Farmland Partners Inc. Third Quarter 2022 Earnings Call. My name is Amber and I will be your operator for today's call. It is now my pleasure to hand the conference over to our host, Paul Pittman, Chairman and CEO of Farmland. Paul, please proceed.

Thank you, Amber. Good morning and welcome to Farmland Partners third quarter 2022 earnings conference call and webcast. Thank you for taking the time to hear these further insights about our business beyond those expressed in the public filings and press releases. I will now turn the call over to our General Counsel, Christine Garrison, for some customary preliminary remarks. Christine?

Thank you, Paul and thank you to everyone on the call. The press release announcing our third quarter earnings was distributed earlier today. The supplemental package has been posted to the Investor Relations section of our website under the sub header Presentations and Other Materials. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, October 25, 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 third quarter earnings which is available on our website and is furnished as an exhibit to our current report on Form 8-K dated October 24, 2022. 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 today 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.

Thank you, Christine. This was another very strong quarter for the company. Revenues were up. AFFO was up $5.7 million. Operating income was up over 200% compared to Q3 of 2021. The operations primarily benefited from increased rents on our fixed leases, largely in the row crop arena, increased auction and brokerage fee revenue, and lower litigation expenses. We think this trend will continue for the fourth quarter as well. Farmer profitability is high and will remain high. This is driven by modest shortages of the primary commodities around the world, the continued unrest in Ukraine and weather challenges in Western Europe, South America and the United States. Land appreciation has been extremely strong over the past 9 months and was even stronger in 2021. We think, in 2023, the rate of appreciation may slow but it will continue to be a strong year for Farmland values. As far as the company’s liquidity position goes, we have approximately $120 million of available liquidity. This puts the company in a strong and secure position no matter what comes in the overall economy. We think the farm economy, in particular, will weather the coming storm quite well. But we and all investors are nervous about the outlook given the recent rates of inflation and increased interest rates. So we wanted to be well prepared no matter what comes our way. With that, I will turn it over to Luca Fabbri to make a few comments.

Thank you, Paul. I would like to dive a little deeper into a topic that Paul touched on briefly which is farmland values. As we discussed in prior calls, we have been seeing quite strong appreciation in the asset class in the last 18 to 24 months. After our most recent call at the beginning of August, the USDA released its annual land value survey which we regard as the most reliable and consistent basis to evaluate trends in real estate values in the farmland sector. So I just want to quote some of the numbers that USDA came up with in terms of appreciation. One is year-over-year appreciation in the last year and one is the appreciation over the last 2 years as a total, not as an annual number. So Illinois was up 12.7% in the last year, 20.3% for the last 2 years. Iowa was up a blistering 21.5%, 33% over 2 years. Even in states like California that are seeing some drought challenges, values were up 10.1% over the last year and 20% over the last 2 years. Nationwide, farm real estate values went up 12.4% in the last year, 20.3% in the last 2 years. These stats are really for all types of farm real estate so all quality tiers. Our anecdotal evidence in the marketplace is that perhaps the upper tiers of farmland values and quality are appreciating even faster. Remember that the values per acre seen in those statistics are across all quality tiers, while we focus on the upper tier of quality of farmland, therefore, the values we pay per acre are not really comparable to the values quoted by USDA. Since the publication of the USDA numbers, we are continuing to see appreciation in farmland values, however, perhaps at a slower pace, largely due to interest rate increases. The largest buyers of farmland are still farmers, who are strategic and largely cash buyers but do use leverage from time to time. As Paul mentioned, their economics this year are very strong. Most farmers, especially in row crops, have largely secured some crop sales for next year. We expect these farmland values to remain sustained into next year. The drivers of these appreciation trends include farmer economics and continued technological advances helping productivity. We had previously seen sideways appreciation for a period of 0% to 2%, indicating potential appreciation in the marketplace that has really emerged in the last 18 to 24 months. I also want to make a couple of quick comments on our potential acquisition activity. We have a lot of liquidity available to us, primarily in the form of available lines of credit. However, capital is very expensive, and therefore, you can expect us to be much more selective in our acquisition activity but it will continue. Whenever we see especially attractive opportunities, we will act on them. Those attractive opportunities can arise from potential return expectations, either in terms of cap rate or in terms of appreciation, or both, but also due to more strategic factors. For instance, if we see an opportunity to buy a farm that is contiguous to something we already own, we will prioritize those opportunities to enhance our local portfolio's overall value. With that, I will now turn the call over to James Gilligan, our CFO, for his overview of the company's financial performance.

Thanks, Luca. I'm going to refer to the supplemental package in my comments. As a reminder, the package is available in the Investor Relations section of our website under the sub-header Events and Presentations. Pages 1 through 10 of the package contain the press release and related financial information, while Pages 11 through 21 contain supplemental info. First, I will share a few financial metrics from Page 2. For the 3 months ended September 30, 2022, net income was positive $1.1 million compared to negative $2.7 million for Q3 '21, an increase of $3.8 million. Net income per share available to common stockholders was positive $0.01 compared to negative $0.17 for Q3 '21, an increase of $0.18. AFFO was positive $2.5 million compared to negative $3.2 million for Q3 '21, an increase of $5.7 million, as Paul cited earlier. AFFO per weighted average share was positive $0.05 compared to negative $0.09 for Q3 '21, an increase of $0.14. The improved performance was due to increased revenue, reduced legal and accounting expenses, and reduced distributions on preferred stock. Cost of goods sold was higher in 2022 due to the greater number of farms under direct operations in 2022 compared to 2021. G&A expenses increased in 2022 largely due to the acquisition of Murray Wise Associates in late '21. For the 9 months ended September 30, 2022, net income was positive $5.2 million compared to negative $3.1 million for '21, an increase of $8.3 million. Net income per share available to common stockholders was positive $0.05 compared to negative $0.39 for '21, an increase of $0.44. AFFO was positive $5.8 million compared to negative $8.5 million for '21, an increase of $14.3 million. AFFO per weighted average share was positive $0.11 compared to negative $0.26 for '21, an increase of $0.37. Similar to Q3, the year-to-date performance is due to increased revenue, reduced legal and accounting expenses, and reduced distributions on preferred stock. This is partly offset by an increase in cost of goods sold due to operating more farms and an increase in G&A expenses due to the acquisition of MWA in late '21. Total debt at September 30, 2022, was $410 million. Since December 31, 2021, we reduced net debt by over $80 million. We repaid an additional $5 million of Series A preferred within the quarter, with the balance of Series A preferred at $109 million as of September 30, 2022. The fully diluted share count as of October 21 was 55.8 million shares. Next, I will turn to Page 14 to provide an overview of our income statement. On the calls in the first 2 quarters of 2022, we took a couple of minutes to review the different components listed out on the table. I won't cover the entire table today, just a few highlights. The items to highlight are: the total revenue less cost of goods sold. For fixed farm rent, 50% to 100% of the annual leases are paid in the first quarter, so we are positive from a working capital perspective for a large portion of the year. We have one large variable rent contract for approximately $6.5 million well covered by farm revenue. The lowest risk parts of our business comprise over 80% of revenue, with fixed payments plus the one large variable contract. Q3 '22 revenues were $11.4 million compared to $9.7 million for Q3 '21. Further on Page 15, we detail fixed and variable payments, creating a bridge from Q3 '21 to Q3 '22. For fixed payments associated with acquisitions and other items, we are experiencing a $0.9 million increase, attributed partly to a solar project starting its construction phase. We expect it to become operational within the next year. Variable payment details reflect the majority of cash and revenue occurring after harvest in the fourth quarter. The variance in Q3 is largely in line with expectations. Positive variance in tree nuts is due to pecans in the Southeast. The decline in citrus is due to citrus farms being under direct operations and not generating variable rent. The charts on Page 16 show year-to-date comparisons for 2022. We showed fixed payments separated similarly as on the previous page. The total year-to-date '22 revenue was $34.8 million compared to $30.4 million for year-to-date '21. Fixed payments associated with acquisitions increased by $1.7 million. For variable details, tree nuts were down due to a Q1 item caused by Q4 2020 after-harvest revenue slipping into Q1 of 2021, while Q1 of 2022 did not receive similar benefits. Citrus is down due to no citrus farms under third-party leases paying variable rent in 2022. The charts on Page 17 update the outlook for 2022. Fixed payment increases resulted from new acquisitions and signed leases. Variable payments decreased due to pricing on tree nuts and lower grape yields. Direct operations gross profit increased due to higher projections for crop insurance and increased projections for remaining citrus and blueberry crop sales in the fourth quarter. G&A decreased approximately $0.3 million due to the accounting treatment of a noncash incentive related to the Murray Wise acquisition in late 2021. This results in AFFO in the $14.3 million to $16.1 million range compared to $13.4 million to $15.6 million range shared in July. AFFO per share is in the range of $0.27 to $0.31 compared to $0.26 to $0.30 from July. This wraps up my comments for this morning. Operator, you can now begin the question-and-answer session.

Our first question comes from Rob Stevenson with Janney.

In the release, you guys said that you’ve renewed 60% of the 2022 lease expirations. Can you talk about what’s going on with the remaining 40%? And are there certain crops or geographical areas where the lease discussions are more challenging at this point?

The 60% renewed at this time is on pace with what we would expect. We're not anticipating any difficulty. I think we'll end up with renewals in excess of 15% increases across all row crop regions. So the renewal process is going fine. A lot of these leases haven't even expired yet. Farmers are busy in the field but there's nothing concerning.

Okay. And then, Luca, given the comments that you made about increases in farm values, how are rental rates increasing? Are they in line with that, above that, or below that increase in farm values? How are you characterizing that?

Yes. Obviously, when you have rapidly accelerating farmland values, you have some level of rate compression going on because rents don't reset quite as fast. That being said, we're seeing significant increases; our farmland group was formed with rates around $450, and those are unprecedented numbers for the last year or two. We are seeing rapid appreciation in farm rent but not quite as sharply as the increase in farm values.

And I guess sorry.

Go ahead.

No, I guess my follow-up to that would wind up being, how should we be thinking about acquisitions right now given that, right? The values of the farm are increasing. The rents are increasing but may lag a little bit, basically meaning the cap rates are decreasing on a nominal basis here. And so your cost of capital is going up from the debt side, especially. How are you guys thinking about deploying capital in the back half of this year and early '23 at this point?

Rob, we are indeed being cautious because of the cost of capital. However, it's critical to remember that we think of our acquisitions as a total return model. Even if we have slightly lower cap rates for a period to let the rents catch up, we believe strongly in the long-term appreciation of this asset class. We do look at cap rates because we are a public company and have to be accountable quarterly. That said, the cost of capital is a significant driver for us. That's why I said we are being selective in our future acquisitions – not abandoning them altogether, just more discerning.

Okay.

I just want to add one thing to that. I've been doing this now for 25 years. The appreciation potential remains strong in the farmland industry. High-quality farms typically generate low operating costs and as we progress, we consistently see a compounded appreciation of asset value at 5% or 6% on average.

Okay. And then a question on the balance sheet. Several of the MetLife loans and the Rutledge facility also have adjustment dates in ‘23, the early part. Can you talk about what happens to the rates on those MetLife term loans? And then what your expectations are for the Rutledge facility when that rolls?

Rob, I think you have some background noise. I'll answer your question, but if you could mute your line, I think that would be helpful. We have a substantial amount of debt resetting during the calendar year. I can't give you the exact number, but it's a considerable amount. Some of those debt instruments will be repaid from cash flow, but we certainly cannot repay them all solely from cash flow. As for the rate resets, most of those are loans with MetLife, and they allow us to fully repay those loans at the reset date. So we have considerable negotiating leverage to shift to a different point on the yield curve or to repay with money borrowed from a different lender or negotiate with MetLife. They typically set that rate based on what they’re doing with similar borrowers. We’ve navigated this process with MetLife before, and they are fair with rates. That being said, we should expect some level of increase in these interest rates at those reset dates. We are coming off of rates set around three years ago. When it resets, it will typically be higher.

Just to add to that, Rob, regarding the Rutledge facility, the spread resets on the anniversary of that facility, ranging from 1.8% over SOFR to 2.25%. Currently, we are at 1.95%, and it is an EBITDA-based test based on our numbers. Given some improvement, we might reach the top tier to lower that spread, or we might stay where we are.

Okay. Operator, can we proceed to the next question?

Yes, our next question comes from Gerry Sweeney with Roth Capital.

I wanted to confirm that you can hear me. Could you remind me of the percentage of your total farms that will roll this year? I know you mentioned that 60% of your farms that are up this year have been renewed, with 40% still to be determined.

Yes, we roll approximately 1/3. I don't have the exact number, but approximately 1/3 every year. This year, we are slightly below that but generally, it's around 1/3 because the most common lease in our portfolio is a three-year lease.

Got it. I thought it was just a little bit lower as well so I just wanted to see if we had any material lower. A couple of different questions. Murray Wise is coming up on a full year. Just curious how you felt about it internally and sort of how it’s hitting its stride and not only has it generated a little more revenue but I think it opens up opportunities for purchases. Again, I get that acquisitions could potentially be slowing, but is MWA opening up opportunity for some?

A 12-month look back on that acquisition reveals that it is perhaps the best acquisition we have made in my career. In the first 12 months, it has performed at higher revenue and profitability than we expected. It's excellent to buy a real estate brokerage business in a rapidly rising farmland market. The financial performance has been outstanding, and it has also broadened our reach and opportunities to acquire properties without incurring significant overheads within Farmland Partners.

Is there an opportunity to pivot and invest more in MWA if acquisitions become less attractive?

We are certainly sensitive to maintaining a reasonably strong cash flow in a rising interest rate environment. We would continue to grow the Murray Wise business, both in terms of farm management and brokerage. We will grow it through small acquisitions and organically by hiring more team members. I anticipate that in 2023, that business will contribute a slightly larger percentage of our overall revenue and profitability than it did this year.

Got it. I’ve spoken with you in the past. There’s significant market potential, especially given the Ukraine-Russia war that is increasing yields. Supply-demand is imbalanced, and what are your views beyond 2023? A cycle analysis is key here.

Both the positive and negative cycles in farmland and the farm economy are typically 3 to 5 years long. We're about 1.5 to 2 years into this market turnaround. I anticipate it to last at least through 2023. Grain prices are expected to remain high compared to long-term averages, driven by historical low carryouts in primary crops. Over the years, I believe that successful farmers have secured forward sales for their upcoming grains, insulating themselves against market downturns early in the cycle. From our past experiences during downturns in the farmland market, the negative effects appear to unfold gradually rather than all at once.

Got it. Can you provide a percentage of your farmers that sell crops forward?

We don’t track that exactly. However, I can say that the overwhelming majority of our row-crop farmers are marketing at least some portion of their crops forward. For best practices, they generally market between 30% to 50% of their crops for the upcoming year. For the year following that, it's usually lower, around 20%. They typically protect themselves against commodity price fluctuations, especially in favorable market conditions.

Our next question comes from Dave Rodgers with Baird.

I wanted to follow up on refinancing. I realize the rates still have to be set by your lenders next year. When you look at third-quarter projections for next year versus this year, could the increase in interest expense be around the 20% to 25% range?

I think about it in a couple of ways, considering where base rates are moving. We're observing the same curve trajectories in the market. The exact mechanics won't provide much advanced pricing since it is determined at the time of reset. Nonetheless, we do anticipate higher rates across the board.

It's important to note that not all borrowing is resetting. A substantial portion is still locked in at favorable rates. The increase in interest rates won’t be beneficial for the company in 2023, but we will manage through it. The key driver for wealth creation in our asset class is land appreciation, which inflation continues to fuel.

I wanted to return to the acquisition pipeline. You’ve balanced being opportunistic with caution. Is there a pipeline of acquisitions you anticipate and any specifics you’d like to share?

Yes, we do have some acquisitions in the pipeline. I would characterize them as quite small.

We have seen a slowdown in our acquisition process since summer. That said, we honor our commitments and will close transactions we previously agreed upon. We continue to have a pipeline of transactions to close, with a significant portion being strong cap-rate opportunities.

To echo what Luca and Paul said, we maintain discipline in our outlook. We do not include deals until they close, which could provide some changes in our numbers over time.

From a high-level perspective, you made a great case for owning farmland. Why are we not just ramping up acquisitions aggressively, given that everything is on a rise?

If you could assure me that unfettered growth would be rewarded, I would pursue it. However, the reality so far has shown that aggressive growth isn’t rewarded as much as value creation is. We believe we are trading at a modest discount currently and would prefer not to dilute our shareholders. We might issue equity for specific, attractive acquisitions but are cautious in our approach.

Yes, no further questions in queue. Do you have anything to add?

Thank you all for joining us. We appreciate your continued interest in our company and look forward to updating you on our activities and results in the coming quarters. Thank you very much.

This concludes today's Farmland Partners Inc. third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.