Farmland Partners Inc. (NYSE:FPI) Q1 2023 Earnings Call Transcript

Farmland Partners Inc. (NYSE:FPI) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Hello, everyone. And welcome to the Farmland Partners Inc., Q1 2023 Earnings Call. My name is , 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.

Luca Fabbri: Thank you, . 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 the 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?

Christine Garrison: 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 Web site under the sub header events and presentations. For those who listen to the recording of this presentation, we remind you that the remarks made here and our 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, 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 Web site, 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?

Paul Pittman: Thank you, Christine. So we find ourselves in a very, very tough economic environment for sort of every asset class with the exception of Farmland. The Farmland market continues to be incredibly strong but our stock price reflects the turmoil in the markets generally. I won’t talk much about the turmoil in the markets generally, because you’re all of course living it. But on the Farmland side, farms are actively being bought and sold every day. Farmer profit is high, lenders are lending on farms and our assets are highly liquid and highly valuable as the sales we’ve made in the last month and a half or so clearly show. Farmland as an asset class has always been and frankly always will be an asset class where roughly two thirds of the return comes from appreciation and one third comes from the current yield.

It appears to us that the market only values us based on that current yield and that is a deep mistake. We will continue to sell farms at very high prices buyback our stock and pay down debt. The stock is trading at a substantial discount to what it’s worth. It appears to us that the market values our assets at about $1.1 billion. The private market values our assets at approximately $1.4 billion, that difference is what is created a huge discount in our stock. The kinds of assets we’re going to sell are really a function of our long term view of appreciation and yield on those assets. We are — if we think that a set of assets does not have as strong a return profile going forward as other assets in our portfolio, we will look to sell those assets if we have strong offers.

As a business, we’ve always said that we’re not emotionally tied to any farm. So if someone makes a offer you can’t refuse even for a farm we love we would, of course, sell it. But generally speaking, we are trying to trim from the portfolio those farms that we think will not appreciate as rapidly in the future as the other assets we own. Related to that is that this process will lead us to probably lighten up on farms that have long term water risk. So what we’ve done so far is we have sold approximately $10 million of farms, the closings have already occurred on, we have $42 million of sales under contract and we have approximately $40 million slated for auction this spring and summer. These sales are all occurring at very strong gains compared to what we have paid for those farms.

The proceeds will go to pay down debt and repurchase stock. Today, we have bought back about $2.6 million shares at an average price of 10.33. We will continue to buyback stock until we have closed the gap between what we believe is the fair value of our stock and the price it’s trading at. So with that, I will turn the call over to Luca Fabbri to make some additional comments.

Luca Fabbri: Thank you, Paul. Today, I just want to spend a couple of minutes kind of drilling down a little bit further in something that’s already kind of mentioned in passing. Specifically, agriculture and farmland markets in particular are really kind of marching to a different drummer in general and we are seeing these specifically in these environments. As we looking around in general markets and we see a lot of turmoil, a lot of uncertainty, agriculture and farm economy are incredibly strong. The USDA projects 2023 to be the second or best year ever in terms of farmer profitability. Looking at specifically at row crops, one specific benchmark that it’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 the highest level ever for both corn and soybeans.

And 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. And the permanent crops is a little bit 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. And as far as our portfolio is concerned, we haven’t seen so far any widespread damage, albeit we are monitoring pretty closely the situation 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.

So 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 that I wanted to point out and the — is that the specialist lenders operating in this market are very much open for business. So not only real estate transaction kind of markets are very healthy but even the credit markets are very healthy. This is frankly similar to the situation that we saw in 2008 when the overall real estate lending market was completely frozen, except in agriculture when it was absolutely business as usual.

So it’s really what’s impacting us and our stock price right now, it’s mostly macro factors. It’s interest rates of rates, of course, that are impacting also specifically 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 with bank failures and global uncertainty and so on 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 kind of scenario where we see a very strong farm economy in Farmland markets and uncertainty in the market turmoil, we’re 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?

James Gilligan: Thank you, Luca. I’m going to cover a number of items today, including summary of the first quarter of 2023, review of capital structure and interest rates, detail and revenue build up and 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 Web site under the sub header 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 the $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 and 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 onetime 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. 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 number 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 10. 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 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 lineups.

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 increase as we acquired properties and renewed leases between the periods and decreased with 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 is the combination of crop sales, crop insurance and cost of goods sold, all together 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’s numbers and estimate and actual results may differ. On the revenue side, fixed farm rent has 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 the lower revenue from auction and brokerage fees in the first quarter of 2023. Cost of goods sold is projecting 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, 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 plus 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. Weighted average shares decreases with projected share buybacks. This results in lower AFFO and also lower weighted average share count generating AFFO per share in the range of $0.17 to $0.25, slightly higher than 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.

Q&A Session

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

Rob Stevenson: 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?

Paul Pittman: The bulk of those will be in the second quarter, some will drift over into the third quarter.

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

Paul Pittman: The auction process, second and third quarter.

Rob Stevenson: And when you think about that sort of $80 million-ish in whole. 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?

Paul Pittman: Well, one thing we’ll start doing to keep people like you informed and up to date is as we make closings, we may not do it on every transaction, because there’s a lot of times there’ll be two or three closings in a week maybe. But we’ll put out a press release so you can clearly see which one was we sold when it finally happens, or when closes. But to your broader question, most of these sales have been row crop but not in the Midwest, row crop in other regions of the United States. The auctions are going to be a lot of our Eastern Colorado assets and some Nebraska assets where we have water risk. And then we haven’t yet but we may consider selling some of the specialty crops for the reasons you and I talked about that you mentioned a second ago, as well as the fact that, of course, those things — California has long term water risk on many of the assets.

Rob Stevenson: And James, I mean, 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, is there other stuff that you would hit 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?

James Gilligan: I’d say, in general, we’re going to pay down the highest cost debt first today, that would be in 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 to sort of — in terms of use of proceeds that we could go after on that on that side.

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

Paul Pittman: 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.

Operator: The next question is from Wes Golladay from Baird.

Wes Golladay: 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?

Paul Pittman: Yes, I mean, obviously, it’s a balance. But the way I look at it is the cheapest farmland on the planet today is our stock and we’re in this to make money for our investors. And so if I can buy our farms for, call it, $0.30 less than they’re worth and I can — on a dollar — 30% discount kind of numbers, why shouldn’t we? And that’s — business is buying farmland inexpensively and the cheapest the farmland out there is our stock by miles. So that’s what we’re really doing. As far as your question, we’re not trying to go out of business. I mean, the team here and me, in particular, we built this business, we founded this business. But we’re not too proud to aggressively buyback our stock and we think it’s trading at a discount.

And as Luca said, it’s frankly trading at steep discount in our opinion for two reasons. The first is the general market environments and the second is the market appears unwilling to accept that appreciation is an incredibly big driver of farmland value and farmland investing. And so we’re demonstrating that that appreciation is real and that it’s there. We’re trying to signal to be frank in this phone call loud and clear that our stock is deeply undervalued and we’re out there putting our money where our mouth is on that point.

Wes Golladay: And then when you look at the assets that you’re looking to sell, are either maybe trough cash flows where maybe we’re not going to lose — they already traded at low cap rates but even lower cap rates than normal, just because the business was maybe under a little bit of pressure for some of the farms?

Paul Pittman: Well, obviously, when I said we focus on farms in which the long term, and what I mean by that is both increased rent opportunity and increased depreciation opportunity, where we think it’s less than it is in other places in our portfolio. Obviously, relatively lower cap rate assets will often are on that list. But it’s an important piece of this that’s — for everybody to recognize. In general, the lowest cap rate assets in the portfolio are the Illinois type farms, the core of the Corn Belt farms. They are the highest return total assets we own. You combine appreciation — I mean, that region of the country, those assets have gone up 25% in the last couple of years. And so it’s not just the cap rate thing, that’s the point we want to make.

But you’re right, there’ll be lot of — there’ll be more lower cap rate assets, I think, than higher. But its total return is what drives this asset class and it’s what drives our not just cap rate. Because I mean the problem with cap rates — the cap rate thing just to be blunt, highest cap rates in the asset class are on the lowest quality properties, that’s just how it works. And we don’t want to chase the lowest quality properties or chase the best properties. So the other thing that’s important to grasp is that what’s really happening here is the market is valuing some asset, call it, a 4 cap and we’re selling it at a 3.2 or something like that. I mean it’s different on every farm but that is the crux of what’s happening. Public market values us at a much — and there’s some sensible reasons for this, the overheads of being a public company and all of that.

But the gap is just way too wide and we’re taking that as an opportunity instead of just sitting our hands and being frustrated about it, although, we’re frustrated about it as well. But we’re doing something about it.

Wes Golladay: And then maybe if you can just give us your view on any — do you expect any weather related impacts this year, whether it’d be a drought, havy snowpack in California, maybe it could actually be a beneficiary of some crops or how to service and your crops can do well, your farmers can do well, just your view on that?

Paul Pittman: So I am not going to predict the weather on this phone call, except to say the following. First, let’s start with California. The incredible amount of rain and snowfall that California received in the last year is a great thing. There will be highly localized negative events for certain people, that’s a natural disaster that we should all feel bad about. But the State of California is not going to flood, the hyperbole in the press is ridiculous. A ton of snow and a ton of rain is a really good thing for California in every way, agriculture, your front yard is greener, the reservoirs for drinking water are more full than they’ve been in years. This is all good news, don’t get sidetracked by somebody giving you a headline in the popular press.

And like I said, I mean, sympathy to all the people that have a localized flooding event, because there will be some. But we think we’re pretty safe on our farms. Then to the more general things, the drought — on the weather. The drought continues in parts of the Western Grain Belt, Western Kansas, to some degree, Eastern Colorado, Texas, Panhandle, there’s been more rain than there’s been quite a few years here in the last few months and that’s good. And so hopefully that’s going to be — the gradual global weather shifts to El Nino and La Nina are going to make some improvements we think. The rest of the country is off to a pretty good planning start so on and so forth, and obviously, we’re mostly in cash rent in the real row regions. So we’re not directly affected by any — by weather in any given year, but we want our farmers to succeed of course.

So we think it’s setting up to be a pretty, pretty good year across the regions from a weather perspective. So I did predict the weather even though where I said I wouldn’t.

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

Craig Kucera: Paul, I know you achieved rent growth on your fixed cash rents in the row crops last year, but I think food CPI is 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?

Luca Fabbri: 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 for at least starting at the beginning of 2024. So there has been quite a lot of appreciation in farmland values. There has been a lot of yield increases that happen 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 lease starting now at the beginning of 2024.

Paul Pittman: 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 year — the sort of 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 the 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.

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

Luca Fabbri: 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.

Paul Pittman: And we are on the row crop side overwhelmingly a cash rent model and we want to stay that way. And we do that for two reasons. Number one is just 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. So we drive a cash rent model…

Luca Fabbri: I think James has something that too…

James Gilligan: 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 the 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.

Craig Kucera: 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 is run through MWA?

Paul Pittman: So whenever we’re doing — so number one, let me answer the question in a more broad sense. We are not incurring very many expenses for brokerage services and the like in these assets sales where there will be obviously some. But many of these transactions are occurring based on the relationships that the people here in Farmland partners have with potential buyers of assets. We kind of know everybody in the market. Specifically on the auctions, MWA is handling the Nebraska asset sales for us and then they are partnering with some people on the Colorado asset sales that we’ve worked with in the past and it’s really kind of market dependent, it’s all about the depth of MWAs licensing but experience in a given state in terms of how they’re involved. As far as the guidance question goes, I’m going to turn that over to — I mean, it’s all kind of consolidated, so I’m not sure what — I’ll let James answer that…

James Gilligan: Yes, Craig, and those numbers we’re considering for kind of guidance that those 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 kind of 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: It appears we have no further questions. So I’ll hand back to the management team to conclude.

Luca Fabbri: 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.

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