Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Farmland Partners, Inc. Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Luca Fabbri, President and CEO. You may begin your conference.

Thank you, Rob. Good morning, everyone, and welcome to Farmland Partners Second Quarter Earnings Conference Call and Webcast. It has been a busy quarter and frankly, a busy first half of the year here for Farmland Partners. So I especially welcome the opportunity for myself and the rest of the team to explain a little bit more and give a little bit more color about what we have been doing and what we are planning to do. I appreciate your taking the time to join us for this call. I will now turn it over to our General Counsel, Christine Garrison, for some customary preliminary remarks. Christine?

Thanks, Luca, and thank you to everyone on the call. The press release announcing our second quarter earnings was distributed after the market closed yesterday. The supplemental package has been posted to the Investor Relations section of our website under the sub-header Events and Presentations. For those of you who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, July 27, 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, 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 second 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 July 26, 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. This was frankly a very good quarter and a very good half for the long-term value-oriented shareholder in our stock. We have significantly increased the value of our underlying shares through stock buybacks, very strong asset sales, and the beginning of a gradual reduction of our debt loads. The market may not perceive this, but that value will come to all of us eventually. As all of you know, I'm a large, large shareholder myself, and we are taking actions that are fundamentally arbitraging very high values for Farmland against a deeply discounted stock. We will continue to do that as long as it takes to reward our shareholders. The farm economy remains quite strong. Our stock has performed pretty well since the last call. Asset values for farmland continue to rise. As we gradually trim things out of the portfolio, we are getting pretty strong gains on our farms. Please recognize that we are not selling our very best farms. We are instead selling farms where we are concerned with water challenges or market volatility, or they are outliers for some reason in our portfolio. The appreciation in the parts of the portfolio we are not selling are even stronger than those that we are selling. We want to gradually concentrate this portfolio in ways that lessen water risk and the volatility of earnings to simplify the management of the business. As I said in the last call, farmland is an investment class; you really need to think about how value is created, which is two-thirds from appreciation and approximately one-third from current yield. I conducted IRR calculations on all the assets that I have bought and sold over my 25-plus year career, and that would be roughly where the value creation comes from. For whatever reason, the public market is partly because we are a REIT that is incredibly focused on the sort of scorecard on quarterly AFFO. It is the wrong thing to focus on. The stock today is down maybe 5% to 7%. That is a buying opportunity for the smart investor. The proceeds of the sales we are making are going to buy back stock and pay down debt. To date, we have prioritized the repurchases of stock because we think the stock is at such a deep discount. We don't want these debt levels to climb much higher. So we will be shifting, at least for a quarter or so, to a much more debt reduction-oriented posture. It doesn't mean we will not do any buybacks, but we will shift from what has been sort of a balance between the two. As we watch the stock price change over time, and as our debt levels gradually come down, we may shift back. We did buy, I just want to point out, we bought back some of our preferred B. That instrument is in many ways like a debt instrument. Obviously, a hybrid is a preferred, but it is an interest-bearing or dividend-bearing instrument that transforms much like debt. It has about a 3% coupon. That instrument expires a couple of years from now. So we want to gradually whittle away at the balance so we don't get faced with a big one-time payment. But that doesn't show up in AFFO, the savings we make from having paid off a piece of the preferred. The position we find ourselves in is that we will just continue to sell farms that we aren't in love with at strong prices, buy back stock, pay down debt, and occasionally buy additional farms in markets and locations that we are very happy with. Interest rates will eventually come down, and the AFFO will have a shockingly large positive increase as that happens. No one – certainly not me and probably no one on the call – knows exactly when that will happen. But when that happens, earnings will recover strongly. That said, I don't really want to overemphasize that point. The core of our business is buying high-quality farms, managing them as efficiently as possible, getting the current yield that we can and ultimately harvesting that massive appreciation that occurs in the asset class due to inflation and everything else. With that, I'll stop, of course, will be available for questions and turn it over to Luca.

Thank you, Paul. I would like to walk everybody a little bit more in detail through what we have been doing in the first half of the year vis-à-vis the pillars of our current strategy. On the asset disposition side, in the first half, we sold about $52 million in assets. We closed on an additional approximately $3 million in asset sales at the very beginning of Q3 so far. We had about $22 million of asset sales under contract, pending closing. We have about $30 million to $33 million in assets going to auction here in Colorado at the beginning of August. We have an additional approximately $26 million of transactions in very advanced negotiations. So this is a total of about $135 million in identified transactions or closed transactions so far. We are working, and you should expect probably more transactions, more asset sales to come later in the year. So I want to stop and really focus the attention of everybody here, as Paul mentioned, on the power of appreciation in the asset class. For the $52 million we closed in the first half of the year, we recognized gains of about 33% over net book value. For the $22 million under contract, we are expecting about 75% gains over book value. This truly demonstrates that this asset class has very strong appreciation potential, and it is certainly a core component of our investing and portfolio management strategy. We are engaged in a broader portfolio optimization, and in that context, we are still buying some farms. We are, of course, given our overall strategy at this point in time, not as acquisitive as we have been in the past, but we did close on an acquisition in Q2 in Oklahoma for about $9 million. We have another pending transaction to close later this year for another farm, and we continue evaluating opportunities that fit our portfolio and that streamline and derisk the way that Paul alluded to. In terms of use of proceeds, as we announced earlier this year, we are really focusing mostly on two items: stock repurchases and reduction of leverage or pay down of debt. We front-loaded stock repurchases, buying back about $62 million in stock. In terms of shares, that is about 10% of the true diluted outstanding shares as of the beginning of the year, and we did that at an average price of $11.03 per share. In our mind, that is a very clear and material discount to the intrinsic value of the shares, and therefore, we have been creating value for all shareholders that believe in what we are doing and in building the strategy that we are pursuing. On the debt side, while the balance slightly increased as of the end of Q2 due to front-loading stock repurchases, as we said, use of proceeds later this year will overwhelmingly focus on debt reduction. In sum, we have been demonstrating value by asset sales gains. We are creating value through stock repurchases, that has some repercussions. We are losing some revenue as we sell some assets, and we have incurred temporarily higher debt, but that will reverse soon. We also experienced slightly higher interest rates than we were expecting. While asset valuations are very strong and, in some parts of the country, we're actually seeing them climb yet more despite the torrid increases in the last couple of years, the transaction volume overall in the marketplace is slowing down a bit. That results from farmers, one of the main strategic buyers in the marketplace, having used their cash intended for purchases. Given the high interest costs, buyers are hitting a little bit of a pause. There is also a paucity of transactions of assets coming to market. As a result of the slowdown in transaction volumes, the volume of business in our brokerage and auction business has slowed down a little bit, and we have revised our projections for the year down a little bit. James will walk through a little more detail concerning what that means for our expectations for the year, and he is trying to offer a 2023 view that is pro forma for the full year with all the dispositions that we have done. I will now turn the call over to him, to James for his overview of the company's financial performance.

Thank you, Luca. I'm going to cover a number of items today, including a summary of the three and six months ended June 30, 2023, a review of capital structure and interest rates, comparison of year-to-date revenue, and updated guidance for 2023. I will be referring to the supplemental package in my remarks. As a reminder, the supplemental is available in the Investor Relations section of our website under the sub-header Events and Presentations. For the three months ended June 30, 2023, net income was $7.9 million compared to $3 million for '22, an increase of $4.9 million. Net income per share available to common stockholders was $0.14, compared to $0.04 for '22, an increase of $0.10. AFFO was negative $1.1 million compared to positive $1.1 million for '22, a decrease of $2.2 million. AFFO per weighted average share was negative $0.02 compared to positive $0.02 for '22, a decrease of $0.04. For the six months ended June 30, 2023, net income was $9.6 million compared to $4.1 million for '22, an increase of $5.5 million. Net income per share available to common stockholders was $0.15 compared to $0.05 for '22, an increase of $0.10. AFFO was $0.4 million compared to $3.3 million for '22, a decrease of $2.8 million. AFFO per weighted average share was $0.01 compared to $0.07 for '22, a decrease of $0.06. Next, we'll review some of the operating expenses and other items. Depreciation, depletion, and amortization were higher in the second quarter of 2023 due to approximately $400,000 of nonrecurring adjustments made in the quarter and more depreciable assets placed into service. Property operating expenses were higher in 2023, caused by a couple of factors. Higher property taxes, including a one-time property tax of approximately $150,000 that occurred in the first quarter and was reimbursed by the tenant, which appeared in increased tenant reimbursements. Additionally, a nonrecurring expense occurred in the second quarter of 2023 of approximately $140,000 due to the final reconciliation of cost-sharing with the tenant on the California farm. That was partially offset by lower utility expenses in the second quarter of 2023. General and administrative expenses were lower in 2023 due primarily to lower stock-based compensation. Legal and accounting expenses are lower in 2023 due to lower litigation spend. Dispositions are up significantly compared to 2022, demonstrating the appreciation of the farmland sale values relative to net book value as Luca described a moment ago. Interest expense increased due to higher rates and greater debt balances in the second quarter compared to 2022. Next, I will skip ahead to make a couple of comments about our capital structure. Total debt at June 30, 2023, stood at $473.5 million. The fully diluted share count as of last Friday, July 21, was 50.1 million shares. If you look at the table towards the bottom of the page, we had undrawn capacity on lines of credit in excess of $120 million at the end of the second quarter. We have one more MetLife rate reset this year, that's MetLife loan number 10, and we started to engage with the lender. Next year, 2024, we have three MetLife rate resets totaling approximately $44 million. That’s loan numbers 9, 11, and 12. Turning to the income statement overview, the building blocks that generate revenue and cost of goods sold. I won't go through in detail, as we've done in previous quarters, but please feel free to contact me if you have any questions. A few points to highlight are: The fixed payments exceeded 2022. The remaining items came in lower. Fixed farm rent increased between the periods as we acquired properties in 2022 and renewed leases, and that was offset by the disposition so far this year. Solar increased in 2023 as a large project in the State of Illinois commenced its construction phase late last year. Tenant reimbursements increased in the first quarter due to the one-time property tax assessment of about $150,000 and the related tenant reimbursement. In Q4 2022, required land and buildings for four agricultural equipment dealerships in Ohio under the John Deere brand. The accounting treatment classifies those acquisitions as financing transactions, so if you're on the balance sheet as loans and on the income statement as interest income. This accounts for an increase in interest income in 2023 compared to 2022. Variable payments were down in Q1 due to grapes and row crops and down in Q2 due to citrus, tree nuts, and row crops. This is largely expected, with the one exception that the lower performance in row crops in the second quarter is due to a timing difference as revenue that fell into the second quarter of last year is going to slip into the third quarter of 2023. Direct operations is the combination of crop sales, crop insurance, and cost of goods sold. It was down largely due to citrus enrollments. Other items decreased due to lower auction brokerage activity compared to 2022. As Luca described earlier, we have decreased our outlook for auction and brokerage fees for the year. By flipping to Page 15, we have updated the outlook for 2023, using the same building blocks. Revenue and fixed format will change with dispositions, acquisitions, and new leases signed. Variable payments increased due to an improved outlook for citrus farms that pay variable rent, while direct operations, as crop insurance plus crop sales, less cost of goods sold is down due to citrus and walnut farms under direct operations. On the expense side, property operating expenses are increasing due to a couple of items from the first half of 2023 that we've covered: the one-time property tax expense in the first quarter, and the nonrecurring expense in the second quarter. General and administrative expenses decreased due to lower spend in the first half of 2023. Legal and accounting also decreased with lower spend in the first half of 2022. Interest expense is increasing with higher projected debt balances and updated rates. We are estimating the last remaining interest rate reset for 2023, that’s MetLife #10, pricing in the 6% to 6.5% range. While the increase in interest expense is painful, we maintain access to over $120 million of liquidity in the form of undrawn lines of credit. Weighted average shares decreased due to share buybacks. This resulted in AFFO in the $5.9 million to $9.2 million range or $0.11 to $0.18 per share, a decrease from projections provided back in May. At the bottom of Page 15, we provide information on what 2023 would have looked like pro forma for various transactions by removing the partial year data. Fixed farm rent would be approximately $1 million lower than July guidance. Solar, wind, and recreation would be approximately $200,000 lower than July guidance. Tenant reimbursements will be approximately $200,000 lower than July guidance. Net debt would be approximately $400 million to $410 million. The fully diluted shares will be approximately 1.9 million shares lower than July guidance. We will keep you updated as the year progresses. This wraps up my comments for this morning. Thank you all for participating.

Good morning, guys. So this quarter, you guys sold a couple of thousand acres in each of the Corn Belt and Delta South and almost 5,000 acres in the Southeast, but nothing in the West Coast or the High Plains. The expected sales over the remainder of '23 are going to be in those same markets? Or are you expecting to see some West Coast and High Plains sales?

The auctions that are alluded to in the earnings release that are coming soon, those are actually all High Plains-oriented auctions that are starting. The Midwest sales we did, the Corn Belt sales in Nebraska, were in the water-challenged western part of the state. As for the sales in the Delta and Southeast, we are certainly pruning farms that we don't think are as high quality as others from our perspective. Some of the acreage sold just falls into the category of someone made us an offer we cannot refuse. Our farm managers value this portfolio relatively frequently from the bottoms up, but we do not publish that. We don't want to publish it because it's being done by our own farm managers, but they use comps and everything else. We have a tracking list and an internal projection for property value growth. The remaining sales expected to come for the rest of the year will likely include more sales on the West Coast and in the High Plains, and probably less in the eastern part of the country. However, there may still be some things happening in the eastern part of the country.

Yes. And I guess you guys have talked in the past about reducing some of the volatility in the revenue streams. Are the West Coast assets that are going to be sold, are those ones with the more variable revenue streams or those the more stable ones? Are some of the variable, for example, tree crops, almonds, and so on, as in demand today? Are you having to wait a bit for the market prices and some of the supply issues to subside to really monetize any of that?

It's a little bit of a mixed bag. The volatility comes almost entirely from the specialty crops on the West Coast and from the market brokerage business. The row crops, other than occasional bad debt, is incredibly predictable. It's fixed cash rent coming in percentages throughout the year, and you can see that in how James's projections line up with actuals. The volatility is on the West Coast, but water risk is also a significant concern in that region. We want to lighten our exposure there. So yes, you will see more sales come from the West Coast. But the market is complicated; values vary greatly for adjacent acres with different crops due to factors such as land quality and water. If someone presents an offer far above our expectations, we will almost always select that deal to recycle capital into stock buybacks or additional farms.

Okay, that's helpful, Paul. I appreciate it. James, year-to-date, your AFFO per share is $0.01, and the guidance is $0.11 to $0.18. Typically, the fourth quarter is your big quarter, and it usually comprises about 75% to 80% of the second-half AFFO. Is there anything different this year suggesting more coming in the third quarter on a percentage weighting than the fourth quarter? Or is this sort of normal third quarter, fourth quarter split likely to be intact here in '23?

I think, Rob, the shape of the curve would be pretty similar to past years. So really the bulk of the earnings are likely coming in the fourth quarter. I think that would be pretty consistent.

And then last one for me, James, what level of capital gains can you absorb in the common dividend in '23, and possibly using the first quarter '24 dividend, without having to pay a special dividend? Is it a foregone conclusion that you'll need to pay a special dividend?

We are doing extensive analyses internally, and with our tax advisers. This is certainly a topic at the Board level. I think we have the potential to make an additional distribution, but we're just not in a position to declare the magnitude at this point. We will provide more information later.

Let me add just a little bit to that, James. We would not have included that in the press release if we didn't believe it was highly probable. We would prefer to distribute to shareholders rather than pay tax. The exact amount and timing are unknown, but it is probable that if we complete the $135 million of sales, we will need to address the powerful gains we've had on those sales in some form. However, I don't want to label it as a special dividend.

Okay. And then just one last one for me, Paul. Any update on the hedge fund litigation? Is that status quo at this point?

No, I'll hit it very quickly, and if you want a deeper read, you can always talk to our General Counsel after this call. The short answer is the party that caused the issue has always tried to wiggle out of it under a legal theory that they weren't involved. That is untrue. We've got the documentation and emails that prove their involvement. Occasionally, they have found a judge who didn't understand the case, but we received a unanimous favorable decision. They are appealing that decision, but we believe they will fail because of the unanimous ruling.

Thank you. That's helpful. Appreciate your time, guys.

Thanks.

Yes, hey, good morning, guys. I had a couple of questions. First, I'd like to talk about the downward volatility in some of your core row crop prices since the first quarter. Is that impacting your renewal lease discussions? And how are those discussions going?

In terms of the lease renewals, there are two important factors in that negotiation. The first is the general sense of the farm economy at the time of negotiation, and the second is what vintage lease you're renegotiating. The farm economy is currently strong, not quite as strong as it was a year ago. With the situation in Ukraine, it may strengthen further. We are renegotiating leases that were established in 2020, which varies in the negotiations yield substantial increases depending on when they were negotiated. Rent increases will continue as we negotiate leases but likely not as significantly as last year.

Thank you. And James, I've got a question on your guidance. Just looking from your May 23 assumptions to July, it looks like about a 50 to 100 basis point increase on the interest rate reset for the $49 million that's outstanding. Can you walk us through how you're getting to that? Are those discussions related to the spreads you might be looking at?

When we look at these MetLife rate resets, they are priced off a spread to treasuries. We have had movement in treasuries, and while we hoped it would be a little tighter earlier in the year, spreads have widened out. They have been in the range of about 180 to 200 over, and now we are closer to the 200 side of the range. We are typically pricing off the three-year. We also have some ability to flex further out, which is on the table for discussion with the lender.

Yes, that's helpful. Thank you. Just another follow-up on the guidance. I know that your variable payment expectations were increased due to improved outlook for citrus farms paying variable rent, but your direct operations are down, which I think are mostly comprised of citrus and tree nuts. Is that performance related or did you sell some of those farms under direct operation?

They are both under citrus, but they do grow different types of products. We have a set of farms that are paying variable rent, which are performing better than we initially estimated, while the citrus farms under direct operations are underperforming. So a bit of divergence, but nothing is really leaving the portfolio.

The auction and brokerage fee expectations have dropped significantly due to a lack of sellers. In the farm economy, when prices surge, everyone hears about high sales, and those farms get sold. However, once prices level out, buyers hesitate. The high interest rates have also contributed to the reluctance among buyers to sell farms. The transition in the past 12 months has led to a decline in the number of people selling farms.

No, that makes sense. Thank you.

Hi, thank you for taking my question. The first is on the timing of debt repayments. I heard that you mentioned in the prepared remarks that the buybacks were front-loaded, and the debt repayment will be backloaded. Can you provide some context on that schedule?

Of the $135 million referents we have discussed today, the proceeds will largely go to pay down debt. However, cash is fungible, and we may still buy an additional farm. We have decided to take that $135 million and focus on debt reduction with the future cash raised from those sales.

Thank you for that. And can you provide more color on whom you're actually selling to? How much are the assets going to farmers versus others?

It's a mixed bag. We've had a couple of transactions with institutional buyers; the who’s who of major investors in the agriculture space. Local farmers have made up the remainder of the buying group. We always offer the farms to the tenant first if they have the financial wherewithal. If they can't afford to buy it themselves, we will look for other buyers. Most of our sales are initiated through inbound calls as we wait for potential buyers.

Thank you, Rob, and thank you, everyone, for listening in and participating in this call. 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 conference call. Thank you for your participation. You may now disconnect.