Farmland Partners Inc. (NYSE:FPI) Q4 2023 Earnings Call Transcript

Farmland Partners Inc. (NYSE:FPI) Q4 2023 Earnings Call Transcript February 29, 2024

Farmland Partners Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. My name is Jeannie and I will be your conference operator today. I would like to welcome you to the Farmland Partners, Inc. Q4 and Fiscal Year 2023 Earnings 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. [Operator Instructions] Thank you. I would now like to turn the call over to Luca Fabbri, President and CEO. You may begin your conference.

Luca Fabbri: Thanks, Jeannie. Good morning and welcome to Farmland Partners full year 2023 earnings conference call and webcast. We truly appreciate your taking the time to join us for these calls, because we see them as a very important opportunity to share with you our thinking and our strategy in a 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 fourth quarter earnings was distributed after market closed yesterday. The supplemental package has been posted to the Investor Relations section of our website under the sub-header Events and Presentation. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today February 29, 2024 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 full year 2023 earnings, which is available on our website at farmlandpartners.com and is furnished as an exhibit to our current report on Form 8-K dated February 28, 2024. 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?

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Q&A Session

Paul Pittman: Thank you, Christine. So I’m going to make four or five very general comments and points about the company before I turn it over to Luca and James to go into more detail. So the first point is we continue to be significantly undervalued comparing ourselves to the underlying asset value of the portfolio. Land values across the country have continued to go up in the green producing regions of the country, the growth rate slowed some in 2023. And we think that rate will slow yet again in 2024. But that needs to be taken in the context of the prior years. So in 2021 and 2022, we saw as rapid appreciation in farmland values as we’ve probably ever seen in history in the grain-growing regions of the country. That can’t go on forever.

So we will see sort of a flattening or a plateauing in my opinion as we move into 2024. But what that has led us to and this is an overwhelmingly row crop oriented portfolio is there is a huge disconnect between the market value of our land in the private markets and the public company trading value of our common stock. As many of you know, I bought a significant amount of stock personally last year. The company bought back a lot of stock. We’re likely to continue that effort as long as that gap continues. Turning for a moment to specialty crops. We are now in the second year of reasonably strong rainfall on the West Coast of the United States particularly in California. That will help the water situation and that will help the yield situation.

We believe that we will have pretty strong crops out in those markets this year. Although continues to be price pressure due to over planting of many of those commodities across the world. Turning to the third point I want to make, which is about cost cutting. Despite what I said about the gap between our underlying asset value and the stock price, we are valued in many ways on AFFO. I frankly think that’s incorrect as it relates to our company, but that is how REITs are valued. So, we must drive AFFO higher and we’re working quite hard to do that. So, we have embarked over the last 12 months or so on an aggressive cost-cutting effort and we’re going to continue that effort into 2024. That cost cutting is coming from selective staff reductions, cutting our travel costs, [indiscernible] the size of our Board which is always a challenging thing to do but we have done it.

I am going to take a $500,000 compensation cut in the 2024 year. That’s 25% of the compensation I received for 2023 and Luca is going to stay flat in his compensation. These steps really are required to try to drive AFFO higher. As a major shareholder I think like an owner not an employee and we are going to get this stock price higher and that requires increasing of AFFO. Just to put that cost-cutting effort in context if you look back to 2022 for G&A and legal and accounting in our financials. We spent approximately $14.9 million on those two line items in 2022. For projections. Those two line items add up to 11.9%. That’s a 20% reduction in just a couple of years and there will be more to come. Turning now to the sales program of the company in 2023 and what the what that might look like in 2024.

During the 2023 year, we’ve made many, many asset sales and others will address this in more detail, so I won’t go into it here. But the focus of those asset sales were to unload properties that we think had significant water challenges. This is why we exited so much of our Eastern Colorado portfolio to get rid of properties we do not think we’re appreciating rapidly and to get rid of properties that are very difficult to manage. We will continue on those themes in the 2024 year. There will be materially less asset sales in 2024 than they were in 2023 largely driven by tax rules. We’re limited this year to probably around seven transactions and then any 1031s we do on top of that. So, expect sales this year of assets but don’t expect the same quantity as last year.

We want to continue to simplify the portfolio as we do this. that does make the cost reductions easier on the G&A line. It also lowers our property operating expenses. In terms of the use of the proceeds from those asset sales. Some of that money will be recycled into the regions and the markets we like the most, which are generally the grain-growing regions of the country. Some of that money will be used for debt reduction and some of that money will be used for stock buybacks. As far as interest cost our perspective is those savings are going to come to us eventually. We don’t know exactly when but I think we are at the beginning of a rate reduction cycle instead of a rate increase cycle. So, when we have excess cash we need to think very carefully about to sort of take the near-term jolt of debt reduction knowing that if you just wait you’re going to get an interest cost reduction anyway.

Or do we gain the $4 or $5 or maybe even $6 a share that comes from buying back our stock at such deeply discounted levels. And so that’s the trade-off we have to think about in our mind. So, when you look — and that was a final point, point five. When you look at 2024, if I had a crystal ball, this is what I think that crystal ball would say. I think we’ll see in 2024 on the specialty crops, slightly better yields and price than we have had in recent years. That is largely due on the yield side to two years of rainfall has solved a lot of agronomic problems and will help those crops. On the price side, I think we’ll get a modest recovery, just looking at what’s going on in pricing right now. On the row crop side of the portfolio, now we have fixed cash rents, so what the underlying pharma performance won’t directly affect us, but we always care about the profitability of our tenants you’re going to see somewhat lower grain prices than you have seen in recent years, probably reasonably strong yields, but we’ve seen that cycle over and over again.

We will go into a slightly lower commodity price cycle for a couple of years. It will slow the appreciation of farmland values. It will make rent increases more difficult to get, but not impossible. They just won’t be as big. And then we’ll come out of that cycle and see farmland values serve again. We will continue to lower the overheads of the company, and we will — we believe we will see late in this year a gradual reduction in our interest cost, substantial amount of our debt is variable, and that will hopefully start to flow through and give us wind at our backs in terms of our AFFO per share. And then the final point of the 2024 plan, as I mentioned is we will continue to make selective asset sales. So those will be of assets that we do not like that much or whenever we get a very high price for any asset we’re willing to let that asset go.

With that, I will turn it over to Luca to make some further remarks.

Luca Fabbri: Thank you, Paul. I will further articulate and emphasize some of the points that Paul already raised. In 2023, we really have three main strategic objectives. One was to demonstrate the value embedded in our portfolio by selected asset sales, then we wanted to reduce that. And finally, we wanted to buy back stock at a discount. As to the first strategic objective, we sold about $200 million in assets, generating significant taxable gains to the extent that we actually had to distribute a special dividend in order to meet our re-codification requirements. Those asset sales were mostly focused on assets that were not a good fit long term for our portfolio. I suppose Paul was mentioning is because the they were water challenged, they had some uncertainties about long-term appreciation potential or because there were about crops that in regions where, frankly, we did not believe that there was a significant potential for recovery, like, for example, Blueberries in Michigan.

So, we have effectively left the core of our portfolio. What we see is the core along portfolio, which is the core of the Corn Belt in the Midwest, virtually untouched and we believe that the appreciation, the embedded appreciation is actually most significant in that part of our portfolio. Our second objective was reducing debt, and we did so. We reduced that by about $76 million. At the same time, we increased liquidity by about $30 million. So we maintain access to sources of liquidity. And finally, we repurchased about 6.5 million shares at an average price right on dot of $11. However, you measure the real value of our portfolio on a per share basis, that’s a sharp discount to that value. Other things that we’ve done that were kind of very meaningful in 2023 is that we renewed the expiry leases at about 20% increase in rents.

And as Paul mentioned, we reduced overhead, general and administrative expenses and legal and accounting by about 15%. Looking forward in 2024, as Paul mentioned, we will continue some selective asset sales. We will continue to purchase assets whenever we see the good strong opportunities which always come up. We will further reduce overhead expenses. And as far as our projections go, that we put out in our supplemental, there is a degree of variability there. And I always remind you that, we grow crops outside. So, we try to be reasonably realistic in our assumptions, but we — there is always the potential for some better than or worse than expected returns. Mother Nature can be very capricious. With that, I will now turn the call over to our Chief Financial Officer, James Gilligan for his overview of the company’s financial performance.

James?

James Gilligan: Thank you, Luca. I’m going to cover a few items today, including summary of full year 2023, review of capital structure and interest rates, comparison to full year revenue and guidance for 2024. I’ll be referring to the supplemental package in my remarks. As a reminder the supplemental is available on the Investor Relations section of our website, under the sub-header Events and Presentations. First, I’ll share a few financial metrics that appear on page 2. For the full year ended December 31, 2023, net income was up over 160% to $31.7 million and net income per share available to common stockholders increased to $0.55, largely due to gains on disposition of assets, as Luca mentioned a minute ago. AFFO was down $8.1 million and AFFO per weighted average share was down to $0.16, largely due to elevated interest expense and lower revenue in the non-fixed payment categories, as we will review in a couple of minutes.

Next, we’ll review some of the operating expenses and other items shown on page number 5. Depreciation, depletion and amortization was higher in 2023, due to more depreciable assets placed into service and approximately $500000 of adjustments made in the year related to assets placed in the service. Property operating expenses were higher in 2023, caused by higher property taxes, including a onetime property tax of approximately $150000 in the first quarter. That amount was reimbursed by the tenant. In addition, a nonrecurring expense in the second quarter of approximately $140000 was due to final reconciliation of a cost sharing on the California farm. General and administrative expenses were lower for 2023, primarily due to lower travel expenses and lower compensation expenses.

Legal and accounting expenses were lower in 2023, due to lower litigation spend. Impairment of assets in 2023 relates to two items. First, as we covered on last quarter’s call, there was a sale transaction that closed in early Q4 of 2023 that resulted in a $3.8 million loss. However, the sale was carried over quarter end at 9/30, so it was considered a held for sale asset at 9/30 and that loss is considered an impairment. Second, in the fourth quarter of 2023, after reviewing the portfolio, as we do every year, we decided to take $2 million impairment on one farm in California, due to our estimate of a decrease in value. Gain on disposition was up significantly compared to 2022, demonstrating the appreciation of farmland sales values over net book value.

It should be noted that we deferred an additional gain of $2.1 million, that we think we will recognize in 2024. Interest expense increased in ’23, due to higher rates. Income tax was a benefit in 2023, relative to an expense in 2022. This was caused by an adjustment within the third quarter of 2023 adjustments that were made to prior period estimates. Next, I’ll get ahead of page 12 to make a couple of comments about our capital structure. Total debt at December 31, 2023, was $363.1 million, down approximately $60 million from the end of the third quarter and down approximately $110 million from the end of the second quarter. Floating rate debt, net of the swap, as a percent of total debt, stood at approximately 13% at the end of the year.

That’s down from approximately 24% at the end of the third quarter and down from approximately 32% at the end of the second quarter. Fully diluted share count as of February 23, was 49.2 million shares. We had undrawn capacity on the lines of credit of $201 million at the end of 2023. In 2024, we have three MetLife rate resets on debt totaling approximately $44 million. That’s loans number 9, 11 and 12 shown on the table. Page 13 provides an overview of our income statement and the building blocks that generate revenue and cost of goods sold. Please note that our GAAP financials have a small presentation change this quarter. Tenant reimbursements are now included in rental income on the income statement. In Note 2 of the 10-K, we show the components of rental income, fixed farm rent, solar wind recreation, tenant reimbursements and variable rent.

It is very similar to what we’ve been providing in the supplemental, but it is a small change from the past 10-Ks and 10-Qs. On page 14, we show these building blocks for years 2022 and 2023 with comments at the bottom to describe the differences between the periods. A few points to highlight are; fixed farm rent increased between the periods as we acquired properties in 2022 and renewed leases in 2022 and 2023. That was offset by dispositions in 2023. Solar wind and recreation changes were caused primarily by rent on land with a large solar project in the state of Illinois. The project is under construction from the third quarter of 2022 through the fourth quarter of 2023 causing an increase in rent during that time. There was an outsized increase in the fourth quarter of 2023 when that project began operations and ended its construction phase.

Tenant reimbursement increased in the first quarter of 2023 with a onetime property tax assessment that was mentioned a couple of minutes ago of $150,000 that was reimbursed by the tenant. Variable payments were down in the first and second quarters of 2023 due to grapes row crops, citrus and tree nuts. Q4, 2023 was down compared to 2022 largely due to Almonds. Direct operation is the combination of crop sales, crop insurance and cost of goods sold. It was down relative to 2022 largely due to citrus and walnuts. Other items decreased due to lower auction and brokerage activity compared to 2022. In summary, while the items that comprise fixed payments were up year-over-year, the other categories were down. Next on page 15, we show the outlook for 2024 using the same format as previous pages.

There are assumptions listed out at the bottom. We have three acquisitions targeted for the first quarter of 2024. No other transactions are included in these projections. On the revenue side, fixed farm rent changes reflect the full year impact of 2023 dispositions plus the three Q1 2024 acquisitions that we’re targeting plus of course lease renewals from late last year. Solar wind and recreation decreases relative to 2023 due to the absence of the solar rent associated with the 2023 construction project that was mentioned a minute ago. Tenant reimbursements decreased because of farm sales in 2023. Along with the absence of that onetime tax and reimbursement that occurred in the first quarter of 2023. Management fees and interest income increased due to loans issued in the fourth quarter of 2023.

Variable payments decreased due to the outlook for citrus plus the absence of tree nut and great farms that were sold during last year. Direct operations again that’s crop sales plus crop insurance less cost of goods sold is up slightly due to higher expected performance in citrus farms under direct operations. Other items have small improvements expected for auction and brokerage in 2024. On the expense side, property operating expenses decreased due to lower property taxes largely because of asset sales last year, lower insurance and other items. General and administrative decreases with lower spend on compensation travel and marketing in 2024. Legal and accounting has small changes due to cost inflation and estimates of litigation spend.

Interest expense is lower due to rates and lower debt balances. Weighted average shares decreased with the full year impact of the 2023 share buybacks that Luca mentioned a minute ago. This impacted AFFO in the $7.6 million to $11.1 million range or $0.15 to $0.23 per share, an increase over 2023. Hopefully this helps describe where we stand given what we know today. We will keep you updated as we progress throughout the year. This wraps up my comments for this morning. Thank you all for participating. Operator, you can now begin the Q&A session.

Operator: [Operator Instructions] And your question comes from the line of Scott Fortune with Roth MKM. Your line is open.