Farmland Partners Inc. Q1 FY2023 Earnings Call

Hello, everyone. And welcome to the Farmland Partners Inc., Q1 2023 Earnings Call. My name is Chaquan, and I'll be the coordinator for this conference. I would now like to hand over to Luca Fabbri, President and CEO to begin. Please go ahead.

Thank you, Chaquan. Good morning. And welcome to the Farmland Partners first quarter earnings conference call and webcast. We truly appreciate you taking the time to join us for this call, 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 General Counsel, Christine Garrison for some customary preliminary remarks. Christine?

Thank you, Luca, and thank you to everyone on the call. The press release announcing our first quarter earnings was distributed after market closed yesterday. The supplemental package has been posted to the investor relations section of our website under the subheader events and presentations. For those who listen to the recording of this presentation, we remind you that the remarks made here are as of today, May 4, 2023, 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, the 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, farmlandpartners.com, and is furnished as an exhibit to our current report on Form 8-K dated May 3, 2023. 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 Executive Chairman, Paul Pittman. Paul?

Thank you, Christine. We are currently facing a very challenging economic environment across nearly all asset classes, except for Farmland. The Farmland market remains exceptionally robust, but our stock price reflects the broader market turmoil. I'm not going to delve into the market issues since you’re all aware of them. However, in terms of Farmland, transactions are happening daily. Farmers are making substantial profits, lenders are financing farms, and our assets are very liquid and valuable, as demonstrated by our recent sales. Farmland has consistently been, and will continue to be, an asset class where around two-thirds of the return comes from appreciation and one-third from current yield. It seems that the market is only considering us based on the current yield, which is a significant oversight. We will keep selling farms at premium prices, repurchasing our stock, and reducing debt. Our stock is trading at a considerable discount to its true value. We believe the market values our assets at about $1.1 billion, while private assessments place that value around $1.4 billion. This discrepancy has led to a significant undervaluation of our stock. The types of assets we plan to sell will depend on our long-term outlook regarding their appreciation and yield. If we believe a particular set of assets does not offer a robust return profile compared to others in our portfolio, we will consider selling them, especially if we receive strong offers. We have always stated that we are not emotionally attached to any farm. Consequently, if we receive an irresistible offer, even for a farm we value, we would sell it. In general, we aim to streamline our portfolio by selling farms that we think will not appreciate as quickly in the future. This strategy may lead us to reduce holdings in farms facing long-term water risks. So far, we have sold approximately $10 million in farms, with closings already completed. We have another $42 million in sales under contract and about $40 million planned for auction this spring and summer. These transactions are occurring at significant gains compared to our purchase prices. Proceeds from these sales will be used to pay down debt and repurchase stock. To date, we have repurchased about 2.6 million shares at an average price of 10.33. We will continue to buy back stock until we narrow the gap between our perceived fair value and the current trading price. With that, I will hand the call over to Luca Fabbri for further comments.

Thank you, Paul. Today, I just want to spend a couple of minutes drilling down a little bit further on something that's already kind of mentioned in passing. Specifically, agriculture and farmland markets, in particular, are really marching to a different drummer in general, and we are seeing this specifically in these environments. As we look around in general markets and see a lot of turmoil, a lot of uncertainty, agriculture and the farm economy are incredibly strong. The USDA projects 2023 to be the second-best year ever in terms of farmer profitability. Looking specifically at row crops, one specific benchmark that’s widely used in the industry to predict profitability for row crop farmers is the spring pricing for crop insurance, and that was set at the second or third highest level ever for both corn and soybeans. This is in the context of yields per acre continuously going up thanks to technology and agricultural practices, so revenue for farmers is definitely going up. The permanent crops are a little more difficult to make a widespread statement about the overall health of the farm economy because of the huge diversity of crops that we see there. But specifically, as far as our portfolio is concerned, there has been a lot of uncertainty about specifically the impact of flooding and precipitation in California. As far as our portfolio is concerned, we haven't seen any widespread damage so far, albeit we are monitoring the situation closely as the snowpack in the mountains is melting. On the Farmland market specifically, prices have seen a significant, if not blistering, appreciation in the last year and a half to two years; they continue to be very strong. The appreciation itself after the huge gains that we've seen has slowed down or maybe flattened after the steep increases. We are seeing transaction volumes slowing down a bit, mostly because there is a scarcity of quality assets for sale. Whoever wanted to sell their farm pretty much has sold it already in the last couple of years because of the high prices, and therefore, the markets have thinned down a little bit. Another important thing I wanted to point out is that the specialist lenders operating in this market are very much open for business. So not only are real estate transaction markets very healthy, but the credit markets are also very healthy. This is frankly similar to the situation we saw in 2008 when the overall real estate lending market was completely frozen, except in agriculture, where it was absolutely business as usual. So our stock price right now is mostly impacted by macro factors, such as interest rates of course, that are impacting our P&L even though the leveraging industry-wide is in the low teens and therefore is really not affecting the farm economy very much. And the overall market turmoil due to bank failures and global uncertainty and so on and so forth, as Paul said, I'm not going to rattle down the list; you're more than familiar with that. So in this overall scenario where we see a very strong farm economy in Farmland markets and uncertainty in the market turmoil, we are very committed to creating value for our shareholders, effectively arbitraging between the healthy, active, and liquid private asset market and the public stock market that is very much in turmoil and a little confused. With that, I'll turn now the call over to the company's CFO, James Gilligan for his overview of the company's financial performance. James?

Thank you, Luca. I'm going to cover a number of items today, including a summary of the first quarter of 2023, a review of capital structure and interest rates, details on revenue buildup, and an updated guidance for 2023. I will refer to the supplemental package in my comments. As a reminder, the supplemental is available in the investor relations section of our website under the subheader events and presentations. Page numbers 1 through 9 contain the press release and related financial information, and page numbers 10 to 19 contain the supplemental information. First, I'll share a few financial metrics that appear on Page 2. For the three months ended March 31, 2023, net income was $1.7 million compared to $1.1 million for '22, an increase of $0.6 million. Net income per share available to common stockholders was $0.02 compared to $0.00 for '22, an increase of $0.02. AFFO was $1.6 million compared to $2.1 million for '22, a decrease of $0.6 million. AFFO per weighted average share was $0.03 compared to $0.04 for '22, a decrease of $0.01. We will review revenue changes in a couple of minutes, but if you'll turn to Page 5, we'll make a couple of comments on the expense side. Q1 2023 operating expenses were lower by $1.7 million compared to 2022, driven by lower cost of goods sold, general administrative expenses and legal and accounting expenses. It should be noted that property operating expenses were higher in Q1 2023 compared to 2022, driven by a one-time property tax expense of approximately $150,000. That tax is reimbursed by the tenant, increasing tenant reimbursements by that same amount. In other income and expenses, gain on dispositions was up $1.2 million in Q1 compared to 2022. While interest expense was $1.1 million higher in Q1 compared to 2022 due to higher rates. Next, I'll skip ahead to Page 12 to make a couple of comments about our capital structure. Total debt at March 31, 2023 was approximately $443.6 million. The fully diluted share count as of last Friday, April 28, was 53.1 million shares. If you look at the table on the bottom of Page 12, between the MetLife credit facility and the Rutledge Farm Credit Mid America credit facility, we had undrawn capacity in excess of $159 million at the end of the first quarter. As discussed in previous quarters, $174 million of MetLife debt has or had rate resets in 2023. These would be loan numbers one, four, five, six, seven, and ten. In the first quarter, we renegotiated rates for loans representing approximately $109 million of that $174 million as shown in the table. In the second quarter, we have agreed to reset the rate on the $15.7 million MetLife loan number seven to 5.87%. This goes into effect the first week of June. The reset loans also have increased flexibility to prepay without penalty, up to 40% of the original principal balance per year. We have approximately $49 million under loan number 10 that will reset in the fourth quarter of 2023. It should also be noted that the Rutledge Farm credit line had a decrease in the spread over SOFR that went into effect April 1, 2023. The rate decreased from SOFR plus 195 to SOFR plus 180. Next, I will turn to Page 13 to provide an overview of our income statement. In 2022, we presented numbers in the categories shown in the top table on Page 13. We talked about fixed payments, variable payments, direct operations, gross profit and other items. This is an effort to make the business easier to understand. However, this presentation may have made it a little difficult to model the business because it did not detail out the building blocks that comprise the different categories. The second table on Page 13 does just that. It shows the building blocks for both the GAAP revenue line items and the supplemental categories. Reading down the columns, you can see what makes up the supplemental categories; everything across the rows you can see what makes up the GAAP line items. Page 14 shows these building blocks, the ones described on 13, for 2022 in the first quarter of 2023, with comments at the bottom to describe the differences between the periods. A few points to highlight are; fixed farm rent increased as we acquired properties and renewed leases between the periods and decreased with the disposition of farms between the periods; solar increased in 2023 compared to 2022 as a large project in the State of Illinois commenced its construction phase late last year; tenant reimbursements increased with that one-time property tax assessment of $150,000 and the related tenant reimbursement that occurred in the first quarter. In the fourth quarter of 2022, we acquired land and buildings for agricultural equipment dealerships in Ohio under the John Deere brand. The accounting treatment classifies those acquisitions as financing transactions, so they appear on the balance sheet as loans and on the income statement as interest income. This accounts for the increase in interest income in the first quarter of 2023 compared to 2022. Variable payments were down $0.5 million due to lower performance in grapes and row crops, caused primarily by lower yields during the Q4 harvest period on particular farms. This is largely expected in a topic we covered on the last earnings call. Direct operations, the combination of crop sales, crop insurance, and cost of goods sold, was down $1.1 million in the first quarter of 2023, because of lower crop insurance payments and lower crop sales compared to 2022, largely in citrus. Other items decreased $0.3 million due to lower auction and brokerage activity at our subsidiary, Murray Wise Associates, in the quarter compared to 2022. It should be noted there was a large transaction where our colleagues did a great job, but the seller decided not to sell, that accounts for nearly all the shortfall between the periods. On the next page, Page 15, we have the outlook for 2023 using those same building blocks described on Page 13 on the revenue side. Assumptions are listed out at the bottom of the page, and I'll note some changes from the projections that we shared back in February. We sold approximately $7 million of assets in the first quarter and are projected to sell in the neighborhood of $80 million to $100 million over the entire year, as Paul described a few minutes back. There are estimates, and actual results may differ. On the revenue side, fixed farm rent is projected to have a net decrease of approximately $1 million to $1.3 million as a result of the projected dispositions. Solar, wind, and recreation have small changes due to potential asset sales and updated views on solar options. There's an increase in tenant reimbursements due to that tax reimbursement that we talked about earlier. No changes on the direct operations revenue items at this time. Other items decreased compared to last quarter due to lower revenue from auction and brokerage fees in the first quarter of 2023. Cost of goods sold is projected to be a little higher due to updated expenses provided by third parties on properties under direct operations. On the expense side, property operating expenses are increasing due to that same one-time property tax item that we've mentioned a couple of times, with no changes to general and administrative expenses at this time. Legal and accounting decreases with lower spending than we saw in the first quarter and interest expense decreases slightly with the combination of projected changes in debt balance as a result of the potential asset sales along with updated pricing and updated forward curves. We're estimating the last remaining interest rate reset for 2023, that MetLife loan number 10, prices in the 5.5% to 5.6% range. The weighted average shares decrease with projected share buybacks. This results in lower AFFO and also a lower weighted average share count generating AFFO per share in the range of $0.17 to $0.25, slightly higher than what we projected back in February. This wraps up my comments for this morning. Thank you all for participating. Operator, you can now begin the Q&A session.

Operator Instructions. First question today is from Rob Stevenson from Janney.

Paul or Luca, the 11 farms for $42 million under contract. What are they expected to close, is that a second-quarter thing, is that ratably throughout the year, how should we be thinking about that?

The bulk of those will be in the second quarter; some will drift over into the third quarter.

And then what about the auction process on those other farms?

The auction process will occur in the second and third quarter.

And when you think about that sort of $80 million-ish in total. Are those dispositions focused on the tree and some of the other specialty crops that you've talked about, the volatility and reducing your exposure to, or are these mainly Midwest row crops? How should we be thinking about that in terms of what the portfolio looks like going forward following the sales?

We will start keeping you informed with press releases whenever we make closings, although we may not do this for every transaction since there can be multiple closings in a week. Most of the sales have been row crops located outside the Midwest, while the auctions will primarily focus on our assets in Eastern Colorado and some in Nebraska where there is water risk. Although we haven't decided yet, we might consider selling some specialty crops due to the water risks in places like California that we discussed earlier.

And James, with some of these sale proceeds, if you're going to pay down debt, do you just pay down the Farmer Mac and Rutledge facilities, or is there other stuff that you would focus on before that? How do you think about the priority if you're going to wind up paying down some debt as to what segments of debt that's going to wind up being?

I'd say, in general, we're going to pay down the highest cost debt first today, that would be some of our floating lines, the Farm Credit Mid America Line, Farmer Mac Line next. We also have the ability to make repayments on our MetLife lines. Those that we've reset in 2023 we can repay about 40% in any one calendar year and the balance, we can repay about 20% in any one calendar year. One of the loans allows a higher percentage but that's sort of a good rule of thumb. So we have a good amount of - in terms of use of proceeds that we can go after on that side.

And last one for me. Any update in terms of timing and/or events with the Saberpoint litigation?

I don't think there's anything to report; we're on appeal and waiting. So no news, no real activity in the last several months.

The next question is from Wes Golladay from Baird.

Can you talk about how you balance scaling the business versus buying the stock at a discount? Is there a limit to how much or so?

It’s a balance, but I see our stock as the cheapest farmland available today, and our goal is to generate returns for our investors. If I can acquire our farms for about $0.30 less than their actual value, why wouldn’t we? The business strategy revolves around acquiring farmland at a low cost, and our stock is significantly undervalued in comparison. Regarding your question, we have no intention of going out of business. The team and I, especially, have built and founded this company. However, we are not hesitant to buy back our stock vigorously, as we believe it’s undervalued right now. As mentioned, we think it’s trading at a substantial discount due to two main factors: the broader market conditions and the market's failure to recognize that appreciation plays a huge role in farmland value and investment. We are showcasing that this appreciation is real and present. We want to communicate clearly during this call that our stock is significantly undervalued, and we are actively investing in it to demonstrate our conviction.

When considering the assets you plan to sell, are you targeting those with lower cash flows where there's a possibility of not incurring losses? They have already been trading at reduced cap rates, and even lower than usual rates, due to some pressure on the business related to the farms.

We focus on farms with long-term potential, which includes both increased rent opportunities and depreciation potential. These farms tend to have lower cap rates compared to others in our portfolio. Generally, the farms in Illinois, located in the core of the Corn Belt, represent the lowest cap rate assets and provide the highest total returns. In that region, asset values have increased by 25% over the past few years, illustrating that it's not solely about cap rates. While we anticipate having more lower cap rate assets, total return is the primary driver for this asset class and affects our overall valuation. It's important to note that the highest cap rates are typically associated with lower quality properties, and we're not interested in pursuing those. Additionally, the market evaluates some assets at a 4 cap while we're selling them at a 3.2 cap, varying by farm. Although the public market has its reasons for this valuation gap, it's too wide, and instead of being frustrated, we're actively addressing this situation.

Could you share your perspective on any potential weather-related effects this year, such as droughts or heavy snowpack in California? How might these factors influence crop performance and benefit farmers?

I won't predict the weather during this call, but I want to highlight a few points. Let's begin with California. The significant rain and snowfall the state has experienced over the past year is a positive development. While some localized negative events will occur, which are unfortunate, it's important to note that California will not face widespread flooding; the media's exaggeration is unwarranted. The abundance of snow and rain is beneficial for agriculture, greening yards, and filling reservoirs to levels not seen in years. This is all encouraging news, so don't get distracted by sensational headlines. I empathize with those affected by localized flooding, but we believe our farms are relatively safe. Looking at the broader situation, drought conditions persist in parts of the Western Grain Belt, including Western Kansas, Eastern Colorado, and the Texas Panhandle. However, recent rainfall has exceeded expectations over the last few months, which is a positive sign. We anticipate that the gradual global weather shifts toward El Niño and La Niña will lead to improvements. Overall, the rest of the country is off to a strong start for planting, and since we primarily operate under cash rent in row crop regions, we aren't directly impacted by the weather in any specific year, although we certainly want our farmers to thrive. We believe this year is shaping up to be quite favorable in terms of weather across various regions. So, in a way, I did end up predicting the weather after all.

The next question is from Craig Kucera from B. Riley Securities.

Paul, I know you achieved 16% rent growth on your fixed cash rents in the row crops last year, but I think food CPI has sort of flattened out here in the first quarter, a lagging indicator of course. But can you talk about the rent growth on the leases that rolled over in the quarter and maybe your expectations for the remainder of the year?

Remember, our rent rolls, our rent lease duration is about three years. So now we are looking at rent leases that last renewed two years ago, starting at the beginning of 2024. So there has been quite a lot of appreciation in farmland values. There have been a lot of yield increases that happened in the meantime. So we are expecting this to be still a relatively strong rent lease renewal cycle, but we haven't really started in kind of full depth, because again, we're looking at leases starting now at the beginning of 2024.

Let me just add a couple of things to that. We've got round numbers, 10% rent increases on the row crop stuff two years ago, something in that bracket, maybe 10 - maybe 15, that kind of bracket. We got 15, 16 in the year we just closed out. And now in the rent cycle we're in right now, I think we'll still get strong increases. I don't know if there'll be quite as strong as the 16% you referred to, Craig. And the reason for that is, as Luca alluded to, the vintage of leases we're renegotiating right now, some of them were still negotiated under a relatively tough farm economy, so they didn't get big increases three years ago. And some of the ones we negotiated later in that year actually had pretty strong increases. So we're kind of working on a higher base on an average basis than we have been for the last couple of years. So I still think we’ll get strong increases but may not be quite to the level we had last year.

And understanding that you're still kind of early in the process here. As you discuss things with your tenants, are they looking at any shift in maybe a rising amount of participating rents or are you expecting things to be relatively constant?

No, I mean, the structure of lease agreements is really more kind of a regional kind of crop basis. So just the different environments and different farm profitability really wouldn't drive any changes in structures.

And we are on the row crop side overwhelmingly a cash rent model and we want to stay that way. We do that for two reasons. Number one is just the stability and the simplicity of managing the business from a standpoint of our accounting team and our back office efforts on the operation side; cash rents are way more efficient and easier to manage. But the second thing is we think that in the marketplace over the long term, the risk-adjusted returns to using a cash rent model are higher than using some sort of flex model. In other words, you don't get enough on the upside to make up for what you're given on the downside.

I think James has something to add.

Yes, and I’d just add, in our cash rent business, we generally are paid 50% to 100% of that rent before planting, so kind of Q1 timeframe. Whereas if you’re participating or getting variable rents that would by definition be after harvest, kind of on the back end in Q4. So from a cash flow perspective, derisking perspective, it’s a very nice feature to be derisked on a meaningful portion of our rents very, very early in the year.

Just one more for me. As you go through the auction process of this roughly $40 million of assets, is that something that MWA is going to handle, or is that going to third parties, and is that included in guidance if it runs through MWA?

To answer your question in a more general way, we are not incurring significant expenses for brokerage services in these asset sales, although there will be some. Many of these transactions are happening because of the relationships that our team at Farmland Partners has with potential buyers. We have established connections within the market. Specifically for the auctions, MWA is managing the Nebraska asset sales for us and is collaborating with some partners on the Colorado asset sales, which we've worked with previously. Their involvement largely depends on the specific market and MWA's licensing and experience in each state. Regarding the guidance question, I'll let James address that.

Yes, Craig, and those numbers we're considering for guidance are really sort of external revenue sources; the internal revenue would be consolidated out. Actually, on a cash basis, we are making sure to pay our colleagues arm's length rent as they would receive in any other type of transaction to make sure we're complying with all the necessary rules. But as you think about it, that would be truly third party fees that would flow through in the projections we've got so far, and we'll continue to update that as we go throughout the year and see how the pipeline looks on their side.

Operator Instructions. It appears we have no further questions. So I'll hand back to the management team to conclude.

Thank you. We appreciate your interest in our company and look forward to updating you on our activities and results in the coming quarters. Have a great day.

This concludes today's call. You may now disconnect your lines and enjoy the rest of your day. Thank you.