Q3 2020 Farmland Partners Inc Earnings Call
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Good day and welcome to the farmland partners incorporated third quarter 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions. Please note that this event is being recorded I would now like.
To turn the conference over to Paul Pittman, President and CEO. Please go ahead Sir.
Thank you.
Good morning, and welcome to farmland partners third quarter 2020, <unk> earnings conference call and webcast. We appreciate you taking the time to join US for these calls we see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings and press releases wouldn't.
With me. This morning is Luca probably the company's Chief Financial Officer, I will now turn over the call to Luca for some customary preliminary remarks.
Thanks, Paul and thank you to all of you who are listening to these webcasts either live or recorded.
The press release announcing our third quarter earnings was distributed earlier. This morning, a replay of this call will be available shortly after the conclusion of the call through November 19 Twentytwenty the.
The phone numbers to access the replay are provided in the earnings press release for those who listen to the rebroadcast of this presentation. We remind you that the remarks made hearing out as of today November nine Twentytwenty and have no not been updated subsequent to this initial earnings call.
During this call we will make forward looking statements, including statements related to the future performance of our portfolio I, what I didn't decide to potential acquisitions and dispositions impact of acquisitions dispositions and financing activities business development opportunities as well as comments about our outlook for our business trends in the broader agricultural markets.
We will also discuss discuss certain non-GAAP financial measures, including net operating income at the FFO adjusted FFO EBITDA and adjusted EBITDA free definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company's press release.
Excuse me [noise] announcing third quarter earnings, which is available on our website www dot farmland partners Dot com and is furnished as an exhibit to our current report on form 8-K dated November nine 2020.
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 yesterday after market close sorry, good morning.
And before market open and in documents, we have filed with or furnished to the SEC I.
I would like now to turn the call back to our chairman and CEO, Bob Pittman Paul.
Thank you Luca.
This morning, I want to make sort of four broad points about the company in the quarter and its performance.
It's relatively short set of comments today, and we'll leave certainly time for questions at the end.
This is frankly, a pretty strong quarter for the company revenues are up and a wise up FFO was improved.
That's all in the face of a gradual each shrinking portfolio size. So we feel pretty good about the performance for the quarter turning.
Turning for a second to co bid and its impact on us.
As we said in the public filings the cobot has not impacted us very much to date. It does create certain uncertainties and has led to the we do weakness in a couple of particular crop types.
In particular, lemons and blueberries have struggled other crop types are having challenges as well, but those two on the struggles have been more significant we've also seen some difficulty in corn demand.
As you folks may know corn prices have come up pretty strongly in the last 30 to 60 days, but they would have been even stronger and we maintained ethanol demand at pre co bid levels.
Turning to the third point I want to make today, it's really about the stock buyback and the asset sales that we have done.
We have bought back in the most recent quarter around 500000 shares of stock we.
We have funded those buybacks as well as the other buybacks from asset sales.
At this point, we have sold $104 million of assets at an average gain of 21.5% approximately.
That's very significant.
The reason I wanted to draw everyone's attention to this today is our view inside the company is that we estimate our assets are probably worth something in the neighborhood of 10% more than we have invested in those assets.
If you think of that in terms of the valuation of the company. It leads you to prices that are significantly higher than our recent trading history.
We put out today in our quotes in the press release that the management's estimate of any maybe is 13 to $15. We haven't really discussed this in recent quarters, but we really didnt want to emphasize that the company is active in buying back shares.
Shares I have personally continued to invest in the company we.
We want every shareholder to understand as we they may be selling shares to us that we are buying them because we fundamentally believe and avi is materially higher than the trading price that our stock is at today. So.
Supporting that any of the 13 to 15, you would have a range of values between approximately 950, which is just straight book value of the portfolio.
And a high if you use to cap rate based methodology of almost $18 per share.
I think.
Our view is that its really somewhere in the middle of those ranges. Thus the view the company's stated view that its 13 to $15 a share but again, we want to inform the market at least our perspective.
As we continue with the buyback programs that we've we've got going on.
With that I'll ask Luca to walk you through some key operating and financial highlights.
So please go ahead Luca thanks, Paul so.
So here are some very somebody financial highlights for the quarter in the year to date in the quarter. We had total revenues of 10 point Sixmillion versus 9.8, the same quarter a year ago.
Operating income of 3.6 million versus 3.2 million same quarter last year and a basic net loss to common stockholders of nine cents per share versus a net loss of 15 cents per share last quarter.
Well the share this quarter was negative four cents versus negative six.
Those of you that follow our company are very familiar with these but I always like to remind everybody that our.
Company of the financial results because of the revenue recognition in connection with the crop share leases.
We have a fairly heavy seasonality.
Water financial results so the.
Actual results for being a bunch of performance for the first three quarters of the year is really not indicative of the performance for the for the whole year. We expect this year as in past years.
You have a significantly better financial performance in the fourth quarter. So that that's why we always look at our financial performance really as a whole year is concerned having said that easily so we and as Paul highlighted this quarter was already.
Showing the results of the.
Our revenue performance as well as our cost performance.
Finally, one last note in the third quarter as Paul mentioned, we repurchased approximately 510000 shares of common stock.
The current fully diluted share count as of today is 30 million 990063 shares.
This concludes my remarks on our operating performance for the third quarter of Twentytwenty. Thank you for your time. This morning, and your interest in farmland partners. Chuck we would like to begin the question and answer session. Yes.
Yes, Sir we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys withdraw. Your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Rob Stevenson with Janney. Please go ahead.
Hi, good morning, guys.
I appreciate the detail on the thoughts on stock repurchases. How are you guys and the board thinking about.
How much further you guys are willing to do with the market cap call it $200 million or so.
The ability to buyback more stock versus shrinking and shrinking down to a point to where you know you're too small et cetera to illiquid.
How does that come into play for you guys and at what point do you guys break.
Again outside capital and try to do something in that manner.
Look.
Our view is we are driven by shareholder value and.
For now at least we still think buying back our traded securities whether it's the preferred or the common is a good investment.
We will continue to do an add on acquisitions, but.
But look it at.
As the quarter shows we've shrunk the cost structure to manage the gradually shrinking portfolio size.
And so we're going to keep going on those stock repurchases for the foreseeable future.
Subject to cash availability.
If we can arbitrage asset values you know.
Frankly double what the market gives us credit for.
Against stock buybacks or we're going to keep doing that I'm, a very large shareholder myself that is in every shareholders interest.
The company the company fundamentally exist to.
Create value for the shareholders not to exist.
For reasons unto itself. So that means the company gradually goes away, but we make shareholders a lot of money, we're going to keep doing it.
Okay, and then in terms of leases did anything role in the third quarter and what do you have coming up over the next.
Six to nine months, the roles and where do you expect those to renew at there's a pretty detailed table in the Q and I don't frankly remember the exact number but were rolling in the neighborhood of a third of the leases every year, 25% to a third.
Most common length of leases three years. So we're rolling over leases just like every year during the fall on those lease renewals are going reasonably well.
With the exception of a few.
Difficult properties, you're getting modest increases in leases just like we've seen in the past farmers are generally in the row crop sectors of the country reasonably optimistic youre seeing better prices for both for all of corn, soybeans and wheat than you've seen.
Now in quite a few years.
And we finally appear to have.
Push through kind of a long term oversupply situation and possibly heading back into a bit of a shortage situation. So the lease renewal processes is.
Going at least as well as years past and probably a little bit better.
Okay, and then have you guys had any damage from any of those south the southern storms or anything I can't remember how much you guys have in California. These days, but anything for the wildfires out there as well yes.
So starting with the storms in the southeast.
We've had a little bit of damage on some farms, but we're actually reasonably lucky in this cycle.
In terms of damage to irrigation units and other things.
In the years past, we've actually been unlucky, we've got one farm hit twice in one year couple of years ago. This year at every it's got to skirted around us so no real impacts.
As far as far as we know as of yet to see the hurricane seasons are completely over turning to California.
One negative impacts from the wildfires.
That are industry wide not really specific to us.
When you leave a permanent overcast.
Over the Central Valley of California for.
Yes, 60 days, maybe 90 days straight.
It does significant things to the growing conditions.
For those plants and so you had some unusual things occurring in the ripening process of virtually all of the.
Our products that were sort of in a significant portion of the growth phase while those fires were going on.
Lot of wine grapes for example get different taste because of the smoke in the air and the lack of sunlight those those things don't wipe out a crop, but they're generally negative to the crop.
Either in volume or in quality so.
The wildfires, we're certainly not a good thing for California agriculture.
California between.
Kobin.
Leftover issues from a trade war and fires.
Not a very good year frankly for for Central Valley of California, Agriculture, but again Thats why we run a large portfolio.
You'll pull through and then a few years from now we'll be talking about white collar, California, So good and the rest of the country is possibly struggling.
Okay Pedro.
All right. Thanks, guys appreciate it.
Our next question will come from Quintin Matthews Investor. Please go ahead.
How are you all a very good how are you.
I'm good Sir.
Couple of questions. So.
Your filings have had the.
Commentary on insurance on the class action lawsuits that you're.
Well exactly what the languages, but I guess, you're still in negotiations with them can you.
Update everybody on where that arm and I would think to years past you would know whether you are going to be covered.
And your.
In your coverage there.
So for everyone's benefit Quinn Matthews aka Rogo. Fortunately is asking this question.
Quint and I would prefer you not appear on my public phone calls and harassed the company, but if you choose to I will respond so.
Our perspective is that what we have in our disclosures regarding our insurance is accurate and we will continue to disclose appropriately as time goes on.
So Clinton what what company are you shorten distorting today.
Steph never never sort of underscored at anything and I may I may public participants drafting you or your shareholders I'm asking questions as a market participant so.
Well the person on the organizer recall cut that line off we're an active litigation with this individual I'm not answering any more questions. Thank.
Thank you.
Our next question will come from Buck Horne with Raymond James and Associates. Please go ahead.
Hey, Thanks, good morning, guys.
Just one quick one for me I'm, just curious about the dispositions that you guys have.
On tap for the fourth quarter and looks like a fairly fairly large one in the first quarter 21 that under contract can you. Just you know to the extent you can any particular.
Color on crop types or or other types of.
What you're thinking of selling here in the near term and if.
The proceeds you expect the vast majority of that go to repurchases or are there any other cash commitments you have in mind for the proceeds.
So just turning to the.
So the disposition that we announced for Q1, we normally do not announce transactions that have not closed. This is an unusual transaction in the sense that we collected a multimillion dollar non refundable deposit on that transaction.
Which we've already got in our bank accounts. So we felt that unlike typical contracts. This is.
Virtually certain to close so we felt it was appropriate to disclose.
Thats a large farm in the southeast that someone had an interest in acquiring.
And you know made made a proposal that was quite strong and so we agreed that put it under contract and.
And sell it.
The in terms of our general point of view.
Everything in the portfolio is for sale.
Which we get an appropriate offer on virtually any asset we will sell that asset.
Our perspective.
So is that we look at our portfolio was sort of three different layers.
As we think about our assets, we think about what we call our crown jewels, meaning farms that are incredibly unique and valuable in the sense that they are the best farms in a certain geography.
The and those farms, we are unlikely to sell unless it is a a materially higher price than we frankly think that farm is worth meaning it's it's not that the acquirers doing something crazy. It may be a neighboring farmer. They have a reason that it's more valuable to them than it.
As to us and they make a convincing offer and in one of our crown jewels as we call. It we will sell.
You know a lot of our portfolio is.
Good farms, but not absolutely great farms.
Those farms were happy to trade them again if.
If somebody wants to pay more than we think they are worth.
Those farms are most of where were making sales would be in that middle grouping of good but not great farms and then we frankly have like anyone would have in the portfolio of this size a few farms that we.
A few farms that we do not.
Like very much we don't tell anybody what those farms are.
Because we don't want that compared to anti competitive nature of getting that news getting out but those farms were happy to move.
At any price slightly better than what we paid for them, we're happy to let him go.
And so we're managing the portfolio were our best investment in our view is to continue to acquire our own stock back.
And that's where we that's what we'll keep doing.
Alright, great. Thanks, guys that's helpful.
Again, if you have a question. Please press Star then one.
Thank you and our next.
Oh, you've got quite go ahead, yes, Sir our next question comes from Mark below Duck, a investor as well.
Hi, guys.
A couple of just a couple of quick things Kevin.
You have an update on interest costs now on guidance that knowledge, you refinance that debt loan there from a farmer Mac.
And then also what are you guys thinking about in terms of the preferred I see that.
And didn't repurchase any shares there just curious about that I'm about prices moved up significantly. So it makes me wonder about that so those are the two questions. Thanks.
Sure I'll, let Luca look up some data, possibly on insurance rates. If we have if we have it in the public in interest rates, we have in the public domain happy to disclose it.
Let me give you a general comment, though while he's doing the.
The the interest rates for the company have been shrinking as you can see in the PML, we have a relatively significant portion of that portfolio that is in.
Debt Thats adjustable and that continues to decline, we think that you're not going to see it continue to go down in the coming quarters as much as it has in the last couple because those those interest rates reset every month or every three months and it's taken a while to.
Sort of get the benefit of general interest rate reductions through the portfolio, but we think we've got most of that now.
In terms of the buyback of preferred.
We think that the preferred is an interesting buyback opportunity because the face amount of that rate coupon rate on that preferred is so high.
We can we do buy it back from time to time, but we think it is a far better bargain.
For the company to acquire the common stock, which is why we've been buying it back.
Back at such an aggressive rate, but we switched back and forth between those things if we could buy in a significant percentage of the preferred we try to.
The problem, we frankly faces that no one wants to sell that prefer.
If you are getting that coupon on a on a secure.
Preferred instrument with inflation protection upside, which is that essentially what that.
Accretive.
Value factor is on the on that security people, just don't want to sell it and when we've gone in the market to try to buy it back literally trying to buy us a thousand units a day is often hard.
So its tough to pull that in.
Look I don't know if you have that answer on the question, Yes, Mark I will refer I would prefer if you just look at the Q that we'll file after market close I don't want to give too many details while the market is open. However, what you will see is.
Our interests.
Interest expense in the interest rates that we're paying are what you would expect.
And what's happening in the broader.
That market specifically.
Also we have the.
Added element that because of the timing of resets there was a little bit of a lag in some cases before we were fully caught up with the low interest rates. So you won't find any surprise us when you will see the culinary Tonight.
Okay. Thanks, guys I appreciate it.
And our next question will come from Victor Crellin Berger Investor. Please go ahead.
Hi, I joined the call little early so we're a little late so if you already covered this please let me know but.
I heard that you are the cash management is a very big deal for you guys and you are using a lot of the money to buy back shares.
Based partially on your own valuation of the portfolio can you talk about them range of cap rates you are using and how you develop your Oh your numerator for all four that valuation is it just the.
The rents being paid is it or are there any adjustments to that.
When we look at we look at our valuation internally in sort of a handful of different ways in when we used to do a more detailed supplemental you will see those methodologies I think what we haven't done wanted out a year or more but if I'm sure they're still in the public filings.
You can see a description of the internal methodology, we use.
We look at book value as a sort of floor in terms of our valuation.
We also look at book value adjusted for a couple of different things. We we have what we call. The IPO adjustment and that is the properties that were the original portfolio.
That I contributed to the company at the time of the IPO. Many of those properties have been owned since the late 19 nineties. So they they are carried on our books at a book value well below.
Fantastically below frankly.
They're they're true market value so.
So if you make that adjustment your book values would come up another dollar or so.
The.
If you look at.
If you adjust that book value yet again for what we believe is about it as I said in the in the phone call about a 10% premium to what we've invested in these properties as what we think that worth today you start to get valuations that are up there in that 13 to $15 range.
So that is so so thats kind of one method. The second method is.
What we view as a roll forward of.
Our purchase prices of these properties and then we appreciate them or differentiate them through time.
Based on the.
But based on the Usdthree land values survey.
When we do those methodologies, where again getting in that kind of 13 to $15 range that is actually the methodology that we view as probably the most accurate.
We we do from time to time have appraisals on certain properties that are required by lenders, we look at those appraisals.
We are sometimes skeptical of appraisals as an institution because this is an asset class where under 2% of assets are sold in any given year.
And so it's kind of hard to extrapolate from 2% of assets. The other 98% purely as a valuation metric. Then finally, we go to the cap rate model and this to me is the most unreliable model as I said in the in the main comments, that's driving today about an $18.
Share value and we don't frankly think our stock is worth $18 a share.
The reason, it's driving that kind of value is you did it's based on a trailing 12 months view of our gross revenues and then it's viewed on the cap rates that we're seeing in the marketplace.
This asset class. Unlike many other real estate asset classes does not see a decline in the underlying asset values when rents.
Stagnate or even pull back and so what you see happen is you see a compression essentially of cap rates in the market temporarily and if you do a strict cap rate based valuation you drive as I said I think on realistic.
Per share values.
Today, the blended average of our cap rates across the country is in a kind of a low 4% range is what we're seeing.
That's a relatively historically low number.
The cap rates in agriculture are largely related correlated with the 10 year and you know the tenures at historically low number so it would make sense. The cap rates are historically into low numbers when you get into the corn belt itself.
You are seeing farms traded 3%, sometimes even 2.5% cap rates kind of purchase price per acre to looking at versus rent per acre. So that's that's kind of the background and a little more about our valuation approach internally.
Hope that helps okay.
Yeah, that's a unsurprising, but I appreciate due and keeping on top of it.
Our next question will come from Bert their weight with reduced University. Please go ahead.
Hey, Paul its Kirk with Anderson reports just had two quick questions for you one way or do you have the right.
RK capital structure.
And then one is do you have any idea how long it might take for the stock price to catch up to the Navy.
Per year.
Your buyback strategy. Thank you.
Yes, So let me start with the.
Second question I have no idea I would have thought it would have happened by now and it hasn't.
But we're going to keep but we're confident in our approach to we're going to keep acquiring back selling assets and acquiring back stock until that gap is a gap is closed but your guess is as good as mine right.
We read says we all understand tend to trade frankly, as a multiple of cash flow.
And so I think that rental rate recovery.
And improved cash flows may drive stock valuation more than underlying asset value.
I think thats just the reality of how the market works I don't necessarily agree with that in terms of crew value of the portfolio, but thats the.
Thats the nature of being a publicly traded Reid.
If you don't mind repeat your first question for a second because I kind of forgot it.
I was asking if you had a target cap rate.
All right and taught me a target capital.
Structure, Yeah, Yeah, I mean, our our our view is that this asset class has materially more rent stability in good times and bad than most of the real estate asset classes.
This is undoubtedly true in this era of Cove. It we have not seen anything close to the negative impact in our rental collections that you've seen in many other real estate classes. So we are comfortable running at a higher leverage ratio.
Dan I think most other Reits.
If you look at the leverage ratio that we have just looking at straight debt. It's in the neighborhood of the mid Fortys per cent of our overall capital structure.
If you add in the two different preferred securities. We have you are pushing into the high sixtys.
Percent I believe.
That's probably over Levered at that point.
US continuing to buy back stock gradually makes that number frankly worse, but.
But as I've said, a couple of times the valuation differential between what we think the stock is worth.
And.
And what it's trading at drives us to go ahead and buy that stock back despite the negative impact on the overall leverage ratio of the company.
You know the it's important to recognize that those two preferreds are really long term sources of financing.
The Pref a.
Callable for the first we issued that five years ago as a 3% coupon instrument that is callable starting in February of this year, although I don't know why we call it at that kind of rate.
But it is not required to be taken out for another five years.
So that's a great piece the long term.
Long term financing for us the preferred is callable for the first time next August this is preferred b.
That is a 6% coupon with a appreciation factor based on.
On the asset class appreciation that occurs.
But again that security I think is callable for the first on next August but we have another four years after that before we were required to take it out. So we have a lot of a lot of sort of balance sheet flexibility in terms of gradually drinking the portfolio and.
Buying back assets without getting under any sort of serious pressure to do anything rapidly.
Real the real question is the one Rob Stevenson I think asked ask at the beginning.
If we gradually continue to shrink the portfolio, we've got to deal with.
We've got to do our best keep our costs down.
Okay Thats helpful.
And our next question will come from John Judy Investor. Please go ahead.
Yeah, I just wonder if you could comment on your.
Your lawsuit against which we report net that's still ongoing or any progress on that.
Yes. It is it is still ongoing that is a an active lawsuit.
We intend to pursue continue to pursue it.
Until we win we're looking to win two different things clear of indication that that was a fraud committed against us and our shareholders by road unfortunate Quinton Matthews is his name and by Sabre point.
That is the hedge fund that paid Quinton Matthews to write that article and took out many of the short positions in our company and liquidated those short positions into the panic that their article cost.
Huh.
This is a for US this is a very very serious issue and we intend to run at the ground it cost our shareholders a great deal of money.
Its cost the company its reputation.
And we're not going to drop it now we're not going to engage in recreational litigation, but we do believe there is a substantial financial covering that can be recovery that can be achieved.
And we're going to pursue that until we either lose some court cases and at this point, we seem to win most the map motion practice, we're either going to pursue it until we win.
Or until it becomes clear we can't win.
And Thats our posture there.
Just to make a comment the related case, which is frankly, even more frustrating.
Is that we were sued by the class action lawyers.
The four that stock drop.
That continues to cost the company money.
That we that's coming from all the real shareholders.
But thats the legal system, we live in it's very plaintive favorable in terms of class action lawsuits, but we didnt intend to continue to fight that as well.
As we go forward.
This concludes our question and answer session I would like to turn the conference back over to Paul Pittman for any closing remarks. Please go ahead.
Thank you all for your continued interest in our company.
Free to reach out to the company.
And the management at any point in time between these phone calls when we can be helpful to you.
Again, thank you very much for your support of our company have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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