Paul Pittman: So, the answer is the Farmland market itself is incredibly strong. It’s the power of a market that’s largely dominated by the thousands and thousands of small Farmland holders around the country, the farmers themselves are who drives the market, particularly in the grain producing regions. California, which is a much more institutional ownership market, there getting transactions done is a little more difficult. But for the overwhelming bulk of our portfolio, we haven’t seen any real weakness. Turning to the one specific transaction. That potential transaction would have been relatively large. And so the person that walked away from those deposits as a percentage of the entire purchase price of the property that we were talking about, it’s not that much money.
I’m guessing they have some financing challenges. We don’t know that for sure. I’m also thinking they just kind of changed their mind. It wasn’t in the context of the overall transaction, an incredibly huge amount of money. And they just decided that the asset they thought they desperately wanted, they decided they didn’t need.
Robert Stevenson: Okay. But you’re not seeing any type of reticence on the standpoint of banks or some of the government programs to lend?
Paul Pittman: Not really, but I’m going to expand your question even though you didn’t really ask it for everybody’s benefit. I view your question is the farm economy getting into trouble in a way that’s going to cause problems for us. And the answer to that question is, yes, there’s a little more trouble out there than there was 12 months ago. And we’re seeing it in having an occasional farmer come to us and say, “Hey, can you rerent this farm to someone else?” We’ve had that occur, we’ve been able to regret the farms at the same price or in some cases, a little bit higher. So we’re not really suffering yet from those sorts of problems, but we are hearing about those problems. And what’s driving that, of course, is the biggest single factor is relatively lower commodity prices for the row crop guys, in the face of somewhat higher — a particularly high interest rate environment.
As you know, a little bit of distress starting to show up in the market. Now recognize the worst bad debt this company ever had in the last downturn was still very, very tiny. This is a zero vacancy asset class, and we’re not going to end up with people with vacant farms or unrented farms, but we will occasionally have a tenant get in trouble. And we will scramble to replace that tenant and not lose any money. For those of you new to the story, we have in almost every jurisdiction what’s called a first-lien security interest in the growing crop. And if you have that security interest in the growing crop, you can seize those revenues if you’re scared of getting your rent paid at the time of harvest. And so that’s why we have incredibly low bad debt numbers even when the farm economy gets a little wobbly.
I hope that helps, Rob.
Robert Stevenson: Yes, that helps. And then a clarification on the six remaining dispositions that you guys could do. Do 1031 transactions count in that? So if you bought a $10 million farm and sold $10 million of farms, is that accepted?
Paul Pittman: A 1031 does not count. It doesn’t. And you may see us do some of those, for exactly that reason.
Robert Stevenson: Okay. And then last clarification. Luca, the three Illinois assets that you just bought, what are they growing these days? And is that what’s going to wind up being grown on there going forward?
Luca Fabbri: It’s row crops. So corn and soybean rotation.
Robert Stevenson: Okay. And I mean, where are you guys seeing the best opportunities pricing-wise? Is it Midwest row crops? Is it something else? As you’re looking out there to potentially do any more acquisitions?
Paul Pittman: Yes. So we have looked back across our portfolio, over the long kind of — in the case of the farms that I have personally owned that went into the REIT 10 years ago when we founded the REIT, we’ve got a 25-year linear set of data, so to speak. And you certainly have the last decade as a public company. Our experience is our best long-term returns have been in the core of the Corn Belt and the second best has been the Delta. Those are the two most important farming regions in the country, the Upper Midwest and the lower Mississippi River Valley, not a surprise. Those are the best farming regions in the U.S. And a combination of the following three things is why I say what I say. It’s a combination of the current yield, the long-term appreciation rates and the ease of operations, which leads to lower property operating costs and lower overheads for personnel and other things.
And the Corn Belt has the lower current yield, but higher appreciation rates and incredibly efficient operations. In our company, we have a single farm manager, who operates the Nebraska assets and the Illinois assets, which is really the core of our Upper Midwest holdings. That’s about $600 million of our overall portfolio run by one human being. We don’t have that level of efficiency anywhere else in the country. So long-term, we love buying core of the Corn Belt assets because that’s what the long-term history says has treated us the best from a financial return perspective.
Robert Stevenson: All right. That’s helpful. Thanks guys. Appreciate the time this morning.
Paul Pittman: Okay.
Operator: [Operator Instructions] Your next question comes from the line of John Massocca with B. Riley Securities. Your line is open.
John Massocca: Good morning.
Luca Fabbri: Good morning, John.
Paul Pittman: Good morning, John.
John Massocca: So I know you talked a lot about the kind of Corn Belt region, but maybe touching on some of the farms you own in California and kind of the Western region. How are those kind of trending today? I mean, have some of the issues with — particularly, let’s say, tree-nut farms, are they starting to abate at all? Or does that still remain a kind of challenged kind of farming market?
Paul Pittman: When you look at California, you really have to break the farms out crop-by-crop. So yes, California continues to be challenging. There are water issues, whether they’re caused by politics of water or the actual availability of water. In either case, they’re negative for farmers. And that’s why, as we said now for probably a year or more in these conference calls, we will gradually lessen our exposure to the U.S. West Coast and frankly, to the Colorado High Plains region as well, also because of water limitations. So those problems continue, and that’s an overlay on all crops in California. It will lead to the very best farms we own in that region, actually appreciating quite rapidly. The really good farms with a really good water.
