Scott Fortune: Yeah. Good morning, and thank you for the question. Just want — if you kind of look at your portfolio and since look at the pipeline there of potential assets they’re out in the market and within your network? And are you continuing to see more opportunities obviously with the focus of the Corn Belt. That’s kind of where you’ve talked about moving away from the water test, or those other properties and the value there in your portfolio. And then just kind of a follow-up on the mix between row crops, and the permanent crops, any change to that mix as you look at potential pipeline or acquisitions there?
Paul Pittman: Yeah. So this is Paul and I’ll take that question. So first just to define our view of the row crop regions that we find attractive. It’s going to be the core of the Midwest, the Corn Belt, Illinois, Indiana, Missouri, the heart of the country. We will also continue though to make acquisitions in the Delta, Arkansas, Louisiana, Mississippi area. And we will make acquisitions in the Southeastern United States, largely that would be the Carolinas, Georgia, Florida, maybe Alabama. Those regions are very strong grain producers. They have relatively high-quality tenants in all of those regions. Water is seldom if ever an issue in those regions. We think they will continue to appreciate rapidly as farmland becomes ever more scarce, and they are very, very easy to operate, particularly in the Midwest, very low property operating costs, very low overheads to manage those properties.
Very consistent and predictable rents and rent growth. So we are highly attractive to those regions and we’ll continue to invest there. So what that means by implication is that the dryer for the West parts of the US. So think of that as starting about halfway across Nebraska, water starts to become a challenge. Eastern Nebraska really no problem but Western Nebraska, Eastern Colorado, so on and so forth relatively dry. We still own quite a few properties in those regions but we will continue to lighten up on that exposure. We made five years from now still own some farms there, but it will be a lower percentage of the overall portfolio than it is today. Now moving clearer to the West Coast. The West Coast is a mixed bag. Some of the places have very, very strong water, have surface water rights, groundwater rights that make the farms highly productive.
It’s a unique climate environment. So again, five years from now we may still own some farms in California, but it will be a lower percentage by quite a bit of the overall portfolio. And the reasons for that are number one water; number two, we do think there is significant over planting of many of those commodities going on across the world, which leads to a tough pricing. We don’t think there’s any way to solve the volatility problem with regard to those farms. It’s very hard to get cash rents on those farms. Therefore, we have a lot of crop share. And the crop share is number one volatile; and number two, complex to manage. So if we can lighten up on that, it feeds back into this sort of simplify the portfolio, make it more stable and predictable from an investor perspective.
And also easier and less expensive to manage. So I hope that answers your question Scott.
Scott Fortune: No I appreciate it. It’s really good color. Obviously, good opportunities, as you look at the world crops going forward here. And just a follow-up on that and kind of looking at pipeline and the potential acquisitions, what’s the environment here from the farmer standpoint or other interested parties or partners here as far as the financing at these higher rates right from that standpoint to purchase and close on these assets a little more obviously, more challenging but just kind of help us understand the environment from that type of things.
Paul Pittman: Yes. So – and James or Luca may want to add to this. But agriculture land as a marketplace is completely different than all other commercial real estate assets. There is no lack of borrowing capacity. We for example have liquidity of approximately $200 million available to us right now. The lenders in that space both traditional banks and Farm Credit and Farmer Mac and the large insurance companies that lend into that space are active and there is absolutely money available. The challenge is that, despite the fact that I am a huge believer in the appreciation story of agriculture is frankly as a personal matter, made me wealthy over the last 20 or 30 years. But you cannot run too negative a spread on borrowing costs versus current yield off of a farm property.
I’m frankly willing to run a negative spread. But today that negative spread might be four or five percentage points not one or two. And so it makes it challenging to do acquisitions. There’s plenty of opportunity but our cost of capital makes it difficult. So our acquisition program is likely to be limited to very specific transactions, where for some reason we think there’s deep value opportunity and those do come along or it’s an add-on property. Philosophically, we as an institution believe that increasing scale is well rewarded over time, both in higher rents and in the first quarter, for example, will come — we’ll have been a farmer joining something we already have. And we always — we’ll reach pretty deep to try to get those deals done.
I don’t know Luca or James.
James Gilligan : I’d just add, Scott, that to echo Paul’s point, the mortgage penetration in our sector if you think about it on like an LTV basis, it’s like 10%. That’s according to USDA data. So much lower leverage in the system than you would see in other areas of commercial real estate. Farmers are — look, outlook for profitability is down a little bit. Still very strong relative to sort of historical averages. The last three years have kind of been like the top three years of farmer profitability. This year might be number five in terms of that rank. So while it’s down a little bit, farmers are still doing pretty well, but maybe not as well. And so maybe to your question about competition from acquisitions, maybe people won’t be as likely to buy a farmers as they would have been in 2023 or 2022 but still quite a bit of appetite still folks doing pretty darn well.
Scott Fortune: Thank you. If I may add on to that one more real quick one. You mentioned after a few years, obviously farm value and rent increases going forward here. Kind of is there any kind of preliminary expectations for the rent increases levels in 2024? Obviously, you said 20% here last year, but just kind of ballpark that, if we can look forward into 2024 here.
Paul Pittman : Yes. I think you’re going to see in 2024, I’ll give you the answer, and then I’ll give you the rationale. I think it will be more in the 5% to 10% bracket on those rents we have to roll over in the 2024 year. It’s still a little bit early to say, but that would be my estimate. That is sort of closer to historic norm than the last couple of years have been, but I think we’re going to kind of revert to that historic norm. And here are the reasons for that. First, sort of a portfolio specific reason. We started to push rent increases very strongly now three years ago. And so we’ve had three years of very strong rent increases. So when we start the re-leasing cycle this time, it will be off a relatively high base already, because we got three years ago, I forget the exact statistic, high single-digit jumps in rents that year.
And then I mean the — two years ago, we got like 15%, I think, and then this year, like 20%. And so we’re going to be coming off a higher base. So I think 5% to 10% is kind of the right level. Then turning to the macro environment, rents are a function of a farmer’s three to five-year view of farm profitability. And that’s going to be a little more negative due to lower grain prices than it has been in the past couple of years. whereas land values, and this is an important point, land values are a function of a farmer’s view of the 50-year, 5-0 year outlook for Farmland depreciation. So it’s — Farmland values are largely unaffected by crop price declines, but rental markets are somewhat more effective. Thus, we’ll get a slightly lower increase in rents than we’ve gotten in the last few years.
Scott Fortune: Got it. That’s very helpful. Thank you for all the color here. I’ll jump back in the queue.
Operator: Your next question comes from the line of Alex Fagan [ph] with Baird. Your line is open.
Unidentified Analyst: Hi. Good morning, and thanks for taking my question. First one for me is, which staffing roles in the company were reduced? Were they corporate specific or property specific? Any more color on that would be great.
Paul Pittman: Yeah. They were corporate specific, and they will almost always be. We are a very thin overall team here — we’re in the REIT itself, 15 employees, something like that. We have the farm the brokerage business in Champion, Illinois different group of staff. But we’re running this pool of assets of approximately $1.5 billion with a tiny, tiny staff. But the cuts have been in the sort of headquarters rules, if you will, not out in the field. I don’t think we could get any sooner there than we are. And these cuts are not easy to make. I mean everybody in a tight team like this was — you can’t hide in a company this size. Everybody was already working quite hard, and now people are working a little bit harder. So specific roles were one role as a somewhat junior person in our operations functions here in the Denver office, left to go back to graduate school, and we just didn’t replace.
We have had a very capable PR and IR sort of person. And when I say IR, not talking to all of you necessarily, that’s really Luca, James and to some degree, me, but on the much smaller investors that might call in our Internet press process, our social media process. And we’ve let that person go and still have access to them as a consultant. Travel was down significantly in the past year. And then the — we’re not as acquisitive so just literally do not as much flying around as there used to be. And then the other major change as you look to the 24 year is we had a Board of nine and now we had a Board of five. When the annual meeting occurs, the Board will have been reduced to five. We didn’t ask any directors to leave, we just re-nominated quite a few less than we had in the past.
And that’s always a hard discussion. The directors we had were great directors, but we had — we have to get costs under control and directors are one of the costs.
Unidentified Analyst: Yeah. That’s great color. Thank you. And just one more for me. You kind of talked about rent increases in 2024 at 5% to 10%, which is closer to historical norm. Can you confirm, is that what’s embedded in the guide for 2024?
James Gilligan: So a couple of things to bear in mind, our rent renewal season is at the end of the year. So kind of think Halloween through the end of the year. A lot of that is coming in November and December. So the impact of rent rolls on 2024 is rather small. When we make projections for 2024, we make a simplifying assumption and actually keep them generally flat. And so the increases are not really baked in at this point.
Paul Pittman: Let me add something to that, though, because it’s very important, just to add to what James said. The rent increases you see in the 2024 projections are the 2023 rent increases that are already contracted for and fully leased. That’s not a guess. The 5% to 10% I’m talking about is what James just said will happen next November, and that will affect a 2025 projection. So there’s not a rent roll risk embedded in those projections because the leases are already signed that affect the 2024 projection. I hope you understand that and makes sense now.
Unidentified Analyst: Yes, it does. Thank you guys. That’s it from me.
Operator: Your next question comes from the line of John Massocca with B. Riley. Your line is open.
John Massocca: Good morning. So, you guys touched a little bit on the number of transactions you could possibly do just given kind of tax circumstances in 2024 but maybe just any brackets on what that means in terms of disposition proceeds?
Paul Pittman: Yes. It’s really, really hard to say. So, we have the seven transaction limit and we’ve actually already used one of them, so we got six left. And we used it unfortunately it was a very small transaction but it was a partial ownership of something we owned that a controlling party sold. So, we’ve taken one already off the table. So — in the beginning of the year, we’re not likely to do transactions unless they’re pretty good size, $25 million or bigger. There always is exceptions of course of a great offer came in. But we don’t want to burn through that opportunity to make asset sales too quickly. Obviously, we have the 1031 opportunity, which helps us a little bit. But as we get later in the year, we’ll probably shrink the hurdle of size for transactions we might do if we still have some left some room left.
But if I had to give you a number it would be in the neighborhood of $50 million worth of asset sales during the year. But like I said it’s not modeled into the 2024 projections no assumptions of debt reduction due to asset sales or stock buybacks is modeled in because it’s incredibly hard to predict. And if we did 50 of sales we probably do 10 more of purchases. So, net 40 if you were trying to think about how to work with it I’d say half of it will go to stock buybacks and half will at a debt reduction. But that’s a credible price dependent in terms of the stock and interest rate, outlook dependent in terms of debt.
John Massocca: All right. That’s very helpful. And then as I kind of think about the outlook for variable rent payments in 2024 how much of that decline versus 2023 is based on yield and pricing outlook? And how much of that is already kind of set from asset sales that occurred in 2023.
Paul Pittman: I’m going to let James or Luca take that and then I’ll add to it if I need to but probably some more specific numbers is helpful. So somebody else should handle it. James you go first.
James Gilligan: Yes. So, it’s a mix. We sold a couple of great farms in 2023. So some of the variable rent that in past years we received with respect to grapes goes away. We sold a couple of tree nut farms which would have the same sort of characteristics that variable rent goes away. In addition to that we have a large citrus farm that performed pretty well in 2023. And that is just in some ways reverting a little bit to historical means. So, projected outlook for that sort of citrus farm is a little bit lower. Again could surprise us to the upside could surprise us to the downside, but we’re I think being prudently conservative there. That’s really what’s impacting the variable payments change from year-to-year.
Luca Fabbri: Yes, just to build on that. As I was mentioning earlier, kind of, we grow crops outside. So, on the variable rent we rely on the best expertise out there that we have access to in terms of coming up with an outlook on price for the market, yield for our farms. But at this point, they are just relatively wild guesses. Keep in mind that yield can be affected very strongly by late season kind of weather events. So even right now in certain farms that we have the outlook on crop, yield looks potentially outstanding, that might be kind of tempered further down the road. And on price, often the ultimate price that we receive is determined by a marketing queue at the packing houses for permanent crops that is very much late in this year and if not early into the following year.
So we rely on the best information that we have but remember that there can be some significant variability both on the upside and on the downside. We try – we do our best to kind of take a middle of the road of the information that we have.
John Massocca: That makes sense. And maybe one last one on the balance sheet. Can you just remind us the process maybe the pricing outlook for some of the MetLife term loan resets in 2024?
James Gilligan: Yes. So generally, and we’ve got a little bit more detail in Note 7 to our 10-K, when it’s filed later today. So if you like that. But generally, those MetLife tranches, price as a spread to treasuries, depending on the duration of the resets, if we’re talking a three-year reset, we look at three -year treasuries, five-year, five-year treasuries, et cetera. We have historically been in a spread over treasuries in kind of a 180 to 200 basis points over. Given where the world is today, we’re probably on the high side of that. We try as hard as we can to negotiate that down and we’ve got – we certainly do what we can to bring competitive lenders to bear to make sure we’re getting good execution. So that’s how we think about it.
We’ve got a good dynamic with all the lenders, MetLife included and we engage with them early and often. And we look out and really seeing where we can get back to execution. So in last year we – most of our resets we did sort of three years. Towards the end of the year, we rolled on out to seven years to get a little bit more term. And throughout all these discussions, we maintain at least 20% and sometimes up to 50% ability to prepay these MetLife lines in any calendar year without penalty. So to the extent that rates move in our favor and we’d like to pay down on the fixed side. And we can do that with really all of these lines somewhere in that sort of 20% to 50% range every year.
John Massocca: That’s very helpful. And that was me. Thank you very much.
Paul Pittman: I think one thing to add to that because I don’t think James mentioned it. In the 2024 projections, we have based on current yield curves sort of projected those rental – those rate increases on those MetLife loans that roll over. Correct me if I’m wrong, but we’ve made an assumption of a rent. I mean of an interest rate jump in the projections that you saw in the supplemental.
John Massocca: Okay. Very helpful. Thank you very much.
Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call back over to Luca Fabbri for closing remarks.
Luca Fabbri: Thank you, Jenny and thank you, everybody. We appreciate your interest in our company. We look forward to continue this conversation through the year with our quarterly updates. And in the meantime, you have any burning questions, please never hesitate to reach out to us. Best way is through our Investor Relations email address which is ir@farmlandpartners.com. Thank you everybody and have a great day.
Operator: This concludes today’s call. You may now disconnect.
