Q4 2020 Farmland Partners Inc Earnings Call
Good day and welcome to the farmland partners, Inc, fourth quarter and fiscal year, 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on and I touched on phone to withdraw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Paul Pittman, Chairman and CEO. Please go ahead.
Thank you.
Good morning, and welcome to farmland partners fourth quarter and fiscal year, 'twenty 'twenty earnings conference call and webcast.
This is a very exciting time for our company production agriculture and farmland ownership in particular.
After five or six years of difficult economics for farmers in late 2020 and early 2021 we have seen increasing farm incomes and associated increasing land values.
This improved outlook has led to substantial improvement and the stock price.
The key strength of farmland as an asset class and its ability to hold value and downturns accompanied by meaningful appreciation over multi year holding periods.
2000, 20-F, <unk> and revenue were disappointing, partly due to asset sales and loan repayments, but also due to COVID-19 and the lingering trade issues.
The COVID-19 demand drops and warm.
And marketing delays were especially pronounced and the specialty crop sector.
And most signs suggest demand will at least partially recover and 2021.
Before turning the call over to Luca I wanted to welcome two new board members.
Mr. Tom and Hain of hand, who is the CEO of equity International He joined our board last December.
And Ms. Toby O'rourke, who's the president and Coa of campgrounds of America. She joined the board several weeks ago more about Tom and Toby as background can be read and the associated press releases, we issued when they joined.
With that I'm going to turn it over to Luca for some introductory comments and.
Thank you Paul and thank you to old who are listening to this webcast live or recorded the press release announcing our fourth quarter and full year earnings was distributed yesterday after market close and replay of this call will be available. Shortly after the conclusion of the call through March 27, 2021 day.
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 herein are as of today March 18, 2021 and have not been updated subsequent to this initial earnings call.
And the Investor Relations section of our website you can find a presentation with supplemental information that we will refer to during this conference call Julien.
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 and our outlook for our business rents and the broader agricultural markets.
We will also discuss certain non-GAAP financial measures, including net operating income <unk> adjusted <unk> EBITDA and adjusted EBITDA range.
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 fourth 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, They didn't March 17, and 2021.
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 and in dock.
Humans, we have filed with or furnished to the SEC I would now like to turn the call back to our chairman and CEO Paul Pittman, Paul. Thank you very much. So my prepared remarks. This morning are divided into really three sections first is about the farmland market and the farm economy generally sir.
There's a little more detail about 2020 and third is our plans for 2021 and beyond So let me start with the first section.
Section of my remarks.
The farmland market and the farm economy or in our opinion and beginning of multi year period.
Strong positive returns.
And row crop regions, we're coming out of five or six years of deferred difficult operator economics, but despite this sustained downturn asset values nationally for agriculture properties held up quite well the.
And they increased about four 3% from 2017 to 2020. According to the USDA land values report put out last August we.
We think that that appreciation trend will materially increase as we come in to the summer of 2021, we have started to see that land value increases already.
In the Illinois market in particular, which is our largest group of landholdings by value. We are seeing 13000 to 14000 dollar per acre sales, which are the highest numbers that we have seen since around 2013, and just as a cautionary.
No not every property, we own and Illinois would be valued that high but our best properties probably are at that level.
We think that price trend will continue.
I'm going to refer to some of the slides now that Luca mentioned, if you can access them off of our investor website that would be great.
Because I want to spend just a little time drilling down into why we see this appreciation now and why we believe it will.
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And the last several months we have.
Had very quite a few new investors and our company, so I'm going to start a little bit from the beginning.
And what really drives the asset class.
This is on page three if you are trying to follow along along.
The fundamental thesis of our company is it gradually increasing food demand in the face of land scarcity is what drives farmland values and what will ultimately drive.
Our stock price.
What you see on this chart is worldwide population growth and.
And that accompanied with GDP per capita growth really drives increases in global food demand.
What you see on the right side of that chart is a decline in tillable land per person in the world.
And the declining availability of land per person is a huge driver of farmland value increases.
And it will continue to occur.
In our opinion this is partly due.
And the gradual urban development and other higher and better use of that farmland, but all of us.
So significant amounts of farmland around the world.
R. R irrigated from non permanent water sources, so we anticipate a continuing decrease and the availability of farmland and certainly for the next.
Several decades, if not longer continuing worldwide food demand increases.
If you are trying to follow along or moved on to page four.
What this chart really shows is a 1970 to present.
Long term.
CAGR for farm land value growth.
This comes from USDA statistics that long term kanger was five 7%.
We really think this long term appreciation trend will continue.
May be slightly muted.
From that five 7%.
Due to the relatively low interest rate environment, we face, but it will certainly continue to see farmland appreciation in our opinion.
This long term appreciation.
Is the most important driver of land value and therefore should probably be the most important driver of our stock price.
And <unk> and revenue are certainly important but they are secondary traditional REIT investors and our view are overly focused on purely the revenue and <unk> growth.
And they need to take into account, both our current yield and the long term appreciation yield of these assets.
The reason that we believe that it is different for farmland portfolio, there and other real estate asset classes as we to a substantial extent do not have any real depreciation and our properties we already.
Long term land portfolio.
And without the associated depreciation and repair expense that you would have if we had built a real estate.
Great.
Moving forward to slide.
Five.
Though the drivers though of land value that do relate to operator economics, meaning farmer economics.
The key statistic is revenue per acre.
And long term revenue per acre growth is mostly driven by increasing yield.
Corn or soybeans or wheat or whatever crop you're growing.
And secondarily, driven by price change and the commodities markets.
Foreign land does not and should not trade based on near term movements and commodities, it's trading on relatively long term movements of the predicted revenue.
Or profit per acre or what.
You do see here, though is long term growth and and I use corn and soybeans as an example, but long term growth and yield per acre.
Approximately one 3% growth per annum doesn't seem like much but what it really means is that from 1990 to present, you have probably seen something in the neighborhood of 200% to 250% 200 to $250 per acre in.
Increase in grain yield.
And on the corn side.
And about about 150 to $200 per acre of of profitability increase due to bean yield. These factors get capitalized into land values and that's what's really driving the long term appreciation chart that I showed.
A few minutes ago.
Moving on to page six.
What we're trying to demonstrate here.
And as what we think will happen as you have seen grain price increase and yield increase but relatively stable farmland for the last five or so years, what do we think is going to happen and the next.
Two to five years.
So couple of important observations on this chart.
The blue bars.
Indicate that farmland from approximately 2014 to 2020 was slightly increasing but fundamentally stable and that.
And was the 4% or so of appreciation and I talked about 10 minutes ago.
Where we are now is what are these blue bars going to look like what is farmland value you're going to look like and 2021 and 2022 and so on and our view is that what you see happen.
Is that you will see grain price increase that increased grain price is multiplied against a elevated demand that has occurred during the grain price downturn.
That elevated demand is incredibly and elastic so it doesn't go away very quickly with price increases and Thats of course, because it is food.
And that Ratchets up the long term value of farmland.
That takes a little while to show up in land values. It shows up most quickly and the Midwest and.
And then shows up and the rest of the country more gradually but.
We are what we are seeing is commodity price increases.
Manned increases production increases driving increased revenue per acre.
And that that's going to show up strongly in land values. It has already shown up as I indicated and late 2020 and 2021 on top of those factors related to increased productivity and.
And price for the grains.
We have a relatively low interest rate environment. There are substantial pent up demand amongst farmers to expand because they haven't for quite some time.
There is fear of inflation there.
Specialty crop demand will rebound as COVID-19.
Moving into the rearview mirror.
And the higher and better use demand for farm land for development.
The real estate development wind development or solar development is also very strong.
So we think we're set up here for a relatively strong land price appreciation in the next two to maybe even as much as five years again, a little bit of caution relatively strong and our asset class means five maybe if you're lucky 7% depreciation.
Maybe only three or four but it is certainly stronger appreciation environment than we have seen in the past.
Finally, turning to page seven.
I was just want to focus just a little bit on what's happened to grain prices in the last six months and again this is corn and soybeans because those are the primary crops that are in our portfolio certainly on the row crop side.
This short term run up.
Really bumps farmer profitability.
Many of the good farmers that we have as tenants.
And farmers like them around the country.
And have had strong enough balance sheets.
To sit on a substantial amount of grain during the downturn.
Sometimes literally millions of bushels and for almost anybody hundreds of thousands of bushels.
As they saw.
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Grain prices recover starting around mid October.
That they have started to ship that grain. This has led to incredibly strong cash availability.
For most farmers today, and youre seeing that that cash availability show up.
Partly and land prices, certainly and demand for farm equipment, and and you will see that trend continue.
As they continue to liquidate the leftover volume that they did not sell and the downturn. So.
And we think we're as I've said in a position that we're going to have very strong economics for farmers and certainly strong economics for land values I'm going to return to the last slide in that section when I go through through some comments about the outlook for 'twenty.
<unk> 21 and beyond.
Now moving to the second part of our prepared comments 2020 revenue and <unk>.
Suffered not going to sugarcoat it is disappointing to us it was probably disappointing to you.
The row crop regions.
From a productivity perspective were stable the good in 2020 for us.
And you add and low prices during a significant portion of the year the high prices for the grains didn't show up until October or later really.
We started to see it and what the last bit of August, but nobody really believed it was permanent.
Including me frankly until you got into strongly into the fall you.
And so therefore, you haven't seen huge increases in rental rates.
We think most of the rental rate increases will come in 2021 net renegotiations because.
Because we had a lot of our rent rate renegotiate and has already done by the time, we saw grain price recovery.
You also had seen lagging demand on the grain sector, particularly related to reduced ethanol production on the corn side.
The USDA outlook now, though is quite a bit stronger, it's driven by higher exports and the face of relatively low stocks for the primary feed grains.
What's behind that is China, China demand for grains from everyone, but particularly from the U S is surging.
Paul just a couple of statistics to share this morning.
Corn imports into China, or 404% above where they were last year.
Being imports are 42%.
And let's focus just a minute on these corn imports.
Something we've said from for many years here at the company is that what drove the last surge and land values was really significant increased exports of soybeans from the United States to China that occurred and the site that occurred really strongly in a cycle that.
Went from about 2007 or eight probably started a bit early and was really strong clear up to 2013 or 14.
And that massive increase and soybean being demand pushed particularly Midwest land values quite a bit higher.
And we think that the Chinese economy is now going to do the same thing with corn. It's unclear. Whether this is just re refilling the stocks that they might have burned through during the trade war.
As you recall, there was the Asian swine flu.
And that occurred that reduced their need for feed grains for their hog inventory in particular.
But today, we are seeing it just I mean, it's unbelievable when you look at the charts. The commodity traders are looking at massive increases and corn demand coming out of China.
Most of that demand will be satisfied by U S. Corn, there are other corn producers and the world, but not nearly as many competitors to the U S. As there are and the soybean side.
And.
Our revenues as a company are about 60% from the grain.
From the row crop assets.
And so this is obviously a very positive factor for the company.
When you look specifically at at the operating results of 2020, so really tough year for specialty crops and general.
We look at revenue, which and the revenue decline to be.
Rank just fell straight to the <unk> decline.
We had about $1 million reduction in revenue actually a little more than $1 million that is really just simply from the asset sales program. We were engaged in and the repayments of the loan program.
That we that we had started.
There is nothing you can do about that it is what it is we were on our strategy of selling assets at a premium and buying back stock that strategy, obviously worked.
But that was about $1 million and revenue reduction.
And also saw.
And the citrus side of our business, particularly lemons, we saw in the neighborhood of about a $700000 reduction.
In our bonus rents related to the citrus farms and.
And the reason I call lemons out in particular.
Is that lemons.
As the demand is largely a bar and restaurant trade and Covid and particularly substantially reduced the demand for our citrus lemons in particular, we've also seen quite a bit slower marketing process.
And <unk> and pistachios.
We saw something in the neighborhood of two to two and a half million dollar reduction in our bonus rents related those crops part of that is a slower marketing process part of it is a little bit about how we restructured and changed a lease with a longer tail and the marketing cycle when we get.
Net paid.
Some of that is pistachio alternate bearing issues I think many of you know that pistachio, so have a good year and a bad year and alternate.
But some of that lost revenue will be recovered and I don't want to quantify specifically how much will be but some of it is more of a delay than a loss, whereas the Citrus example, I gave you.
Revenue, we're not going to get back because those lemons to be Frank got left on the ground instead of fully harvested.
So looking at 2021, we think the key recovery for the operating statistics of the company not the land value, but the revenues of the company.
It's really about seeing the specialty crop demand recover we feel pretty good about that it's uncertain and citrus harvest is coming up soon.
And so we're not sure youre going to have the restaurant and bar trade fully operational again as you come into this.
Lemon harvest cycle.
But we are optimistic it will certainly be.
Better than last year.
Moving on to just a couple other other matters.
Legal fees related to the.
Fortunately litigation was about eight a share that's going to continue to be elevated for the 2021 year.
But we know it will eventually come to and and.
And there is a trial date and the third quarter of 2021 and that case.
And so we do.
And do think.
Affirmative case as we call it the case against Rota fortunate.
Will that at some point come to and and we obviously are hoping for a financial and Reputational win from that process turning to the class action lawsuit for a second which as I've said many times is if anything more frustrating and then the Rota fortunate and litigation.
Yet another plaintiff and that this is the second time. This has happened that the lead plaintiff has resigned from the case, what we believe happens as they get into the diligence process and.
Discovery process depositions and the like.
And would become convinced of.
What the true really is that the company didn't do anything wrong and they give up on the case.
And it happened about almost two years ago, the substitute plaintiff. The Turner insurance agency also dropped out now just about a month ago.
Yeah.
I am guessing and this lawyer driven frivolous process that we unfortunately as the existing shareholders of the company have to live through they will find a another person to serve.
As the lead plaintiff and we'll have to continue to fight that but that's the status there.
Turning to the net asset value.
We believe that net asset value now is probably in the neighborhood of $14 a share that's looking at land appreciation and the markets. We think it's appreciate and strongly looking at book value looking at the various <unk>.
SDA data we track we think the company has historically reasonably levered, we think that you were dropping substantial additional value to the equity holders.
Share price.
Through this land depreciation and the transactions we've done for stock buybacks.
I think that that will show up in the data that the USDA puts out.
And this summer, but there may be a bit of a lag and the way they collect their data, but we are seeing and <unk>.
If you just go look at land values on recent auctions and the Midwest, which are easy to easy to find you'll see what I'm talking about and substantial land value appreciation. So we're thinking $14 a share is the appropriate NAV.
Level at this point and time.
We think the other regions will appreciate although they will show a lag to the Midwest as I said before.
And it shows up a little slower.
So now going to the third part of our presentation about plans for 2021 and 2022.
The last few days I've gotten a lot of E mails about what's the company's status on asset sales going forward.
We are likely to decrease the asset sales program going forward, we will still of course entertain on an opportunistic basis offers for our farms that we think are at prices that are very high meaning we can replace that farm.
As I said farmers will be excited about acquiring assets again, we've got quite a few inbound inquiries, but unless they are substantial premiums to what we've invested and those farms that will end up declining most if not all of those offers we are seeing the premiums being offered climb.
At this point.
We will also though continued to do asset sales when we can mix together sort of our environmental or wildlife conservation principles with our desire to create value for the shareholders.
And we've done that recently with the Ducks unlimited transaction, which we're very happy with and we're likely to continue to do some of those things from time to time.
If you wanted to if you can go back to slide eight and the.
And the Powerpoint that we put on the web investor website for a second I do want to go through a couple of things here and just summarize kind of the strategy. We've really operated with for the last couple of years and.
And and as we bring it a little bit too close so from 2018 to 2020 farmland partners sold about 13400 acres of land from a gross proceeds of about $88 million that was a 16, 8% gain over book value.
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We took that money and we paid off the associated debt with those farms and we largely invested the rest of the proceeds.
And to repurchases of our common shares.
And our.
Preferred shares.
We frankly did that as a strategy that was playing the best hand, we could based on the cards we were dealt we.
We are now going to shift back to growth, but when you look at what occurred on the 2018 to 2020 repurchases of our own securities.
We think we made the shareholders that remain today.
Something in the neighborhood of about $50 million.
And from those repurchases.
Neighborhood of a $1 50 a share.
These repurchases were done at prices that we thought were at about half of what we believe the Nia EV of the company was at the time.
And so we feel.
It's not what I wanted to do but it's what we needed to do as stewards of your capital and frankly, my own capital as a large investor and so.
And we're going to kind of close that chapter and move back to growth.
But I wanted to just summarize what we view as a very positive net effect.
From that from that program.
The net.
And looking forward.
Economies of scale will lead to large increases and the profitability of this company as the revenue goes up faster than the overhead.
We're going to push growth of the company through off balance sheet vehicles, which we believe will be accretive.
And <unk> growth because of the fees, we receive with a relatively low amount of capital we need to invest.
The opportunity Zone fund, which we announced in January and did the first closing on of asset sales and March is an example of that we believe that opportunity Zone fund will grow we are and adviser to the fund and not the primary sponsor, but we do think that vehicle will.
Grow and increase and increase assets under management and associated fee income for farmland partners.
A second sort of off balance sheet initiatives that we are getting behind and pushing we are going to restart the farmland partners loan program and we're going to we're going to call. It. The farmer Bridge program. We frankly at this point believe that all of the associated litigation.
Noise and accusations that were falsely made against us had been debunked.
There is a huge need and the marketplace for asset based lenders in the asset class historically received Unlevered returns that we're in.
Meaning yield on those loans and the neighborhood of 7% to 8%.
And we will seek a joint venture partner probably to pursue that program. We're in that process now we think that deploying capital.
And with his current yield that hopefully is in the low double digits with appropriate use of leverage to our shareholders is a good strategy.
We were going to hopefully enter that program. During this this year we will also.
Continue to focus on sustainable and organic conversions.
Farmland, we've done a small amount of this and we're likely to do more.
And we think that row crop rents will gradually be pushed up again I emphasize the word gradual but we think we'll start to see.
And at opportunity to increase our rents and a meaningful way last few years have been.
Slightly down flat or slightly up sort of the most of the leases were going up but only a tiny amount and the few down strokes that we add and lease renewals more or less wiped out the gains we had on most of the portfolio.
That we think is a situation that is going to be changing and the 2021 year.
We're going to gradually lower the over all leverage levels of the company.
And many of you have criticized us frankly for being over Levered and.
Particularly and a combination of both our preferreds and our debt we have reduced some debt already with the asset sales, but we're going to continue.
On that path and probably accelerate leverage reductions.
This growth strategy will require some investment in the company, we're likely to see increased overheads and modestly over the next couple of years and those increases and overheads will be in advance of the <unk>.
Increases in.
Revenues, it's going to be a combination of investments and human capital additional people investments and technology to more efficiently manage a greater a growing pool of assets and investments in JV related structuring costs.
And we're going to do that we're going to focus on the growth path here for the next couple of years.
If it works it will have.
Substantial rewards for equity holders if it doesn't it's frankly, a tiny portion of our overall <unk>.
<unk> base and we will we will frankly returned to the asset sales program, if we need to maximize shareholder value.
We are quite willing is the history has shown to arbitrage private land values against the public market discounts when they exist.
But we and our intent is to grow our company and to continue growing it.
Sure.
I wanted to.
I'm going to turn it over to Luca.
And to make a few comments specifically on the financial results and then I'll take it back and do a little wrap up.
Thank you Paul as usual kind of walk you through some of the financial highlights for the 2020 year versus the prior year and.
In 2020 total revenues, we're at about $50 7 million versus $53 6 million in 2019, Paul already highlighted some of the major drivers of these these revenue difference.
And certainly one of the major issues.
Major factors impacting them with the asset sales and the repayment of loans that we had made to certain farmers.
The pandemic certainly had a meaningful impact on some specifically some specialty crops that are tied more significantly to the consumption of food away from home.
Paul mentioned Les months as an example of that.
And also trade issues DD impact somewhat and some other specialty crops for example, and for all months old does some of that is more of a delay and in the pricing and.
Marketing of some of the crop so a portion of those revenues.
Revenue decrease will be probably a shift really from 2020 to 2021, and we also had a change and some lease structures in some.
Large.
And some large specialty crop leases.
That changed from a base and bonus structure to a pure variable rent.
And in decade, and those cases.
In 2019, we had been able to recognize some of the revenue some of the base rent revenue.
In the year and why.
The valuable component is oil and in the.
Following year because of the how the crop year works and.
And therefore in this case, we have and also shift of revenue from 2000 22021.
In terms of total operating income in 2020 was at $22 3 million versus $26 3 million in 2019.
In 2020, the basic net loss to common stockholders was <unk> 18, a share versus and net income of four cents a share one of the differences here was just in the and the timing and dynamic of gains related to asset sales.
And finally ASF open a share in 2020 was <unk> <unk>.
And <unk> in 2019, we internally estimate that.
Were it not for the.
The impact of the COVID-19, pandemic and of the litigation expenses related to the short and distort attack that we suffered about two five years ago. We would have currently and approximately quarter of dividend, meaning that <unk> will be approximately <unk> <unk> per share.
Currently the fully diluted share count as of today is 32.207 million 458 shares.
A quick note besides financial highlights is in relation to.
A new effort in the company focused around the ESG environment, social and governance.
We feel that.
Pharma and there is an asset class is and has always been intrinsically environmentally friendly.
Sure.
This is all about preserving and improving the land.
Means minimizing chemical and nutrient leakage because they are.
Costs for the for the operator, improving water use and improving land erosion. So this is a fact.
Factors that are absolutely center in what in modern farming practices.
And we just want to continuing collagen them and monitoring them.
And already and our underwriting and underwriting our acquisitions. We've always been focused also on climate resilience, especially in Iot is more and more prone to extreme weather events or and coastal ideas.
Farmland and asset classes also intrinsically social.
Factors friendly.
Modern agriculture, especially the way we do it here and the U S is really about making food affordable for all and certainly.
Very few kind of social causes.
Could be could be kind of doubled the least than fighting worldwide hunger and finally as a public company.
We are meeting the highest governance standards.
By overall business standards, so going forward on these ESG specific effort, we intend to really.
Photos of measuring and benchmarking our ESG performance.
And we will focus on how over time, we can improve our disclosure.
Quantitative measures related to the to these topics.
This concludes my remarks. Thank you for your time this morning, and your interest and farmland partners operator, we would like to begin the question and answer session.
We will now begin the question and answer session to ask a question you May Press Star then one and you touched on phone if you're using a speakerphone. Please pick up your handset before pressing Vicky.
And at any time. Your question has been addressed and you would like to withdraw your question. Please.
And then at this time, we will pause momentarily to assemble our roster.
The first question comes from Dave Rodgers with Baird. Please go ahead.
Paul Luca and good morning, and Paul Thanks for all the details this morning.
Wanted to I guess, maybe talk about acquisitions and the ability to grow the balance sheet going forward is something that you detailed.
And I understand Paul your comments around a $14 NAV and.
And then maybe cash flow isn't as important today versus the underlying land value but.
Yes, I'd love to get a sense, what's trading and the market for acquisitions and how aggressive do you think you can be I think your stock's about 74 times cash flow and your target. You said is about 82 times cash flow. So it looks like you are pretty close to being able to go out and really really get aggressive on the acquisition front. So is there enough trading for you to go do that.
Yes.
In terms of I assume your question about trading of land of land assets being traded.
Yes, exactly yes, I mean this is this is a.
A massive market.
Probably $2 five trillion of farmland assets out there.
And the U S institutional ownership.
5% at most.
One of the probably top five or six institutional owners of farmland and the country, but we're tiny as a percentage of of the overall asset.
And historically $30 billion.
And with a b trades each year.
So there is a lot trading the challenge were going and we are being more acquisitive, we've met and talk about it specifically because we don't we don't.
Go out and just talk about each individual transaction, we do but we bought a few row crop farms and.
We saw this we saw what we thought would be a surge and land values.
Probably starting like I said around Thanksgiving, it became more obvious to us and.
And then you still could find a farm that didn't sell at $13000 $14000 an acre and we bought a few good farms that we've added to the portfolio, but it's a few million dollars worth of purchases.
And so we are out there and the market. We are looking for large assets, we can acquire but.
But we are very focused on.
How do we increase shareholder value not purely grow the company and.
And today, we are sitting on more cash than we have his set on and the past part of that is through the investment and we got when Tom Hino and joined our board.
But part of it is that we have.
We've made a few continued asset sales and good prices and we haven't bought back stock as we saw the stock recover strongly so there is the <unk>.
Preferred that we should be out probably paying down if we can there is a few debt instruments that we have that are hot relatively higher interest rates.
And so we're going to do things that hopefully it's not that we are insensitive to <unk> per share, but we we just the way the true asset trades is appreciation first.
Current year profitability second as you judge asset value and we think our stock price should over time reflect that but I mean I.
Said revenue and <unk> I didn't say it was the 10th issue I said it was the second issue and.
We need do need to focus on it and so we're going to invest our dollars and the way that's most accretive to shareholders.
On a revenue and <unk> per share also keeping in mind.
But that growing asset value is powerful.
And with some level of leverage it really falls down falls down to value creation for the common shareholders.
And just talk about how youre thinking about potentially the issuance of equity it's been many years, but you talked about deploying money into the loan program.
You talked about deleveraging and you talked about acquisitions and flowing asset sales. So I guess with the combination of all that and given where your leverage is.
How do you think about that today and Thats something thats off the table or is that something that you're open to.
Tackle some of these issues.
No.
And we would consider equity offerings, but it is not really our first choice to drive growth today.
And the reason for that is our shareholders many of whom have been with US a long time, they've had faith and the management space and the company faced and the board and the employees and they stuck with us and I don't want to finally have a.
On a sunny day again, I don't want to do a big equity issuance and and hurt hurt them, including myself again.
It's nuanced right if we see if we see continued strong equity.
Values, we might issue some equity and in ATM and other sorts of ways.
And we will certainly observe what happens and the market and keep our options open, but what's more likely to be the case as we're going to go and grow the asset base that we have through joint ventures, using a tiny amount of the capital we have on our balance sheet to see these things as we do and the opportunity zone.
<unk> and we're going to grow AUM company scale and efficiency.
Without growing the share count.
Very much that would be our that would be our first goal now we turned around and we see a stock price that's approaching 20 and might change my mind.
But I mean, thats, you got to balance shareholder value growth.
Sure sure price growth with total asset value growth. We think these off balance sheet joint venture type structures, and it's frankly, a really good way to do that.
Spread the overheads over over increasing.
<unk> base you probably are.
Gathering up a pool of assets that the public REIT eventually owns it might be five years or 10 years, but we're and this for a long haul.
Last question from me and I appreciate that added color I guess the last one would be you had mentioned the redemption of the preferred b and had been trading at a discount, but maybe from a bigger picture perspective, instead of chipping away at it can you remind us of the opportunities maybe to get back to that preferred D and and even some of the units out there with the above average.
Yield today is there a way to get to these that would again helped the cash flow of the company and potentially deleverage it as well.
And I think that I think the first thing got recognized regarding the preferreds and just as a bit of background for everyone else listening, we have two preferreds and the company a series a and a series B series day was privately issued two of Mr. Jerry Forsyth and as his family when we acquired about two.
$200 million of farmland, and Illinois five years ago.
That's 117 million face amount of preferred.
We could.
Redeem that today for cash if we chose to we do not have to redeem it for another five years.
And when we get to the point, where we have to redeem it we can actually use either.
Cash.
<unk> stock.
And sort of excellent security and 3% coupon with no additional investment in new and additional appreciation feature, but if I could if I could redeem it.
And some way and move a 3% coupon preferred to a 1.3.
And three a one 5%.
Dividend on common you might think about it but we've got a lot of time. There is no. There is no rush there so that series, a and thats kind of our and we're thinking about all the things we can do to Delever. The company increase the cash flow and grow the asset base, but we want to do that and a way that.
Maintains and enhances individual shareholder value.
Turning to our series B and series B is slightly more complicated.
But also.
Huge opportunity.
The first date, we have the right to call that is in about October of this calendar year.
And when we call. It we can convert it into common shares if we chose to again, we have a lot of time, we don't need to do anything for another three and a half years from today.
But we start to have the opportunity.
And the <unk>.
Creative value from from <unk>.
<unk> perspective of exchanging 6% coupon preferred for one five ish.
And a dividend yield common is immense.
But again, you've got a balance of those things and figure out kind of what the right thing to do is again I emphasize.
We don't intend to get ourselves trapped with a short fuse on either of those preferreds and so we feel like were and.
And the driver's seat to do something opportunistic when the timing is right.
Alright, Thank you Paul.
Thank you.
The next question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, Paul can you talk about how much NOI, you're expecting from these off balance sheet vehicles as well as the farmer loans on a run rate basis.
Yes, so so it's a little hard to call quantify but let me give you a couple of examples.
So starting with off balance sheet asset management and.
And it depends on the features of the vehicle and how much work, we do and whether we're the primary capital raise and or just an adviser, but youre going to see something in the neighborhood.
75 basis points of assets under management fees up to one or one 1% so that kind of bracket on those sorts of vehicles.
And the reason there is a range as if we were managing assets that are all specialty crops.
It's a more much more intensive management process for our team so you'd end up with a high end of that range and fees.
And if youre doing purely Midwest row crop much more efficient from our side our side, so you'd see something at the low end of those that range. So that's the bracket as those assets under management grow.
We don't we don't carry the debt cost and we don't carry.
The the equity value of the farm, although the opportunity zone situation, we still own 10% of those those assets.
Ultimately.
But that's the kind of fee level that I think you should expect in any of those off balance sheet. The loan program is a little different.
We're hoping with our joint venture partner, there, where we share.
Some asset management fees, and then a percentage of the ops.
If you put the appropriate structure in place you should be in returns to the equity capital to seed capital and that's probably and in the low to mid double digits on those assets.
The face amount that the pharmacies and borrow the money is that 7% to 8% money, but if you.
And do a sale leaseback transaction, which is the way and many of those will be done.
Youre going to youre going to get in effect.
The ability to put regular mortgage debt.
Underneath what we and our joint venture partner invest and Thats going to give you a pretty substantially enhanced return to the equity invested and those loans, so thats, a little harder to quantify but probably.
Probably a more profitable vehicle, which is why we've tried to do it several years ago and want to go back to it we think it is a very.
A really nice way to balance some higher.
Current yield.
With what we love about farmland generally being that long term appreciation story.
But Rob you followed us and I. Thank you for that for quite a few years, that's the real challenge for us as a public company and for the equity investor in <unk>.
As a REIT that and I.
I think everybody loves the assets and struggles with where how do you get the yield high enough.
To make to make the company.
Look like look mostly like other Reits and so thats one of a kind of a strong idea for growth for us because we think it really helps by getting that higher current yield assets into our pool of ownership and we believe we are perfectly positioned to participate in that.
Because not only do we have capital and expertise we will look at the repossession of a farm as much less of a problem than almost any other investor and the space would because we're happy to hold the assets.
Okay, Yes.
And I guess like how.
Are you guys thinking about it so you guys are doing.
Sort of rough numbers about $50 million of revenues a year I mean is there a limitation of.
5% or 10% or 15% of what you want coming out of essentially fee income, whether or not and be the the management or the loans.
In terms of the overall mix of the company.
Okay.
Yes.
And theres going to be sort of REIT rule questions, we're going to have to consider.
But I don't think we see and some sort of artificial limit on while much of that we can do but if we could.
And I don't think it becomes bigger than our rental income, but if it became.
10%, 20% of our total revenue I'd be thrilled.
It's high current yield.
And in our view.
And with a gradually appreciating asset class, it's relatively low risk.
And so were.
If you make these loans that sort of maximum of 75% to 80% loan to value and the market, we're going to face in our opinion for the next few years youre going to be increase and youre, increasing your cushion and every year as a as a lender not decreasing it.
And getting a pretty good return, it's a good place to be.
And so I could see it become meaningful it's not it's not going to happen overnight. Though these are loans that are largely going to be the amalgamation of a lot of.
And the low end of a couple million dollars.
Hi, and of $10 million will be where the bulk of those loans get done there.
Not going to be $50 million at a time.
Okay helpful. And then last one from me you talked about eight cents of legal costs from the.
From a run a fortunate stuff in 2020, and you said you're going to have cost again in 2020. One how much is that expected to be is that a similar amount that we should be thinking about is that more as you go as you go to trial and have the additional trial cost.
How are you guys thinking about that cost to the income statement and 2021.
I think on an annual basis and hopefully in the same neighborhood.
Credibly hard thing to quantify Rob.
I think it will be and higher.
And we're in trial and the third quarter, it's going to be and expensive quarter, but at some point. This comes to an and and then all of a sudden and it's not and expense at all and so I think since we think this will come to an and.
And that.
And that the <unk>.
<unk> is as good a good and estimate as I can give you.
Okay. Thanks, guys I appreciate it.
Yeah.
The next question comes from Dean Butler with Secondmarket. Please go ahead.
Hey, good morning, Paul and Luca.
Hi, Dan how are you doing good and I just got it.
Question on NAV, and then a question and revenue so on the <unk> side.
The assets on the balance sheet, and obviously quite a bit larger than the market cap of the company.
So the NAV appreciation as a result, and farmland depreciation is probably more significantly more than one to one can you kind of quantify that that amplification.
Absolutely. So so when you think through the securities we have and our balance sheet.
Round numbers, we got we got a billion and whatnot looking right at the balance sheet correct me, if im way off Luca 1 billion $1 billion to something in the neighborhood of assets farmland assets.
<unk> got 500 ish million dollars of regular debt, they don't share and any of the depreciation and <unk> got another $117 million of prep a that doesn't share and any appreciation and then you've got a hub out of 140 $550 million of prep B, perhaps b shares and <unk>.
Half of the annual appreciation and accretive to the base and face amount of that security. So when you when you bake all that and you take it run it through the math, what you would see us.
By a 5% increase and farmland and I'm not making that as my annual prediction and I'm using that as an example.
And that leads you to a $55 million or so of <unk>.
Appreciation and value 32 million shares outstanding if you do that you've put a buck and a half of value in each share more or less.
It's that kind of mathematics, leverages, a very positive thing and the private ownership of farmland.
As we have all talked about many times the public markets do not like our leverage level, we think that by gradually reducing leverage we will see stock price appreciation otherwise, we wouldn't do it but.
But the silver lining of our leverage is these are this appreciation accompanied with the major buybacks, we did at such substantial discounts to NAV.
Is going to have a very possible positive appreciation factor.
For the current equity holder.
Great. Okay, and then on the and the revenue side with soybean and corn prices going up so much as well as.
Other real GAAP commodities.
How does that revenue delta to the farmers translate into <unk>.
Rental rates is it.
And b rental rates staying a similar proportion of the farmer revenues or how does that change.
Yes.
Dana.
And we're talking to you because.
And maybe it's because you're a Wisconsin based you've got a real fundamental grasp of how this all works.
So youre exactly right in each region of the country, we have a target.
Of revenue per acre that we're trying to take his rent.
And the very best growing regions of the nation, like Illinois, and Eastern Nebraska, you might see that target in the mid 30, percents, so think 35% or even more or a little bit less and you're less productive regions of the country, where there are more operating expenses.
As a percentage of revenue.
Youll see that number decline the lowest places and the grain sector are about 25% of revenue and it falls out between that 35, and a bit higher or 25% depending on the region of the country. So as.
And so increased revenue per acre will lead to increased rent per acre, but there is a lag.
And the reason Theres a lag is.
First.
The farmer really.
So it got all that grain inventory and he is.
As I talked about earlier that he's selling now and and enhances its cash position, but he is a tough couple of years. So he is using that cash now to clean up all sorts of little problems and his financials as well as you know.
Do things that they could human beings and want to do like on a condo and Florida or whatever.
They're going to spend some money now again.
Improve their equipment by a new pickup truck whatever it is some of that is going to come to rent, but as I said earlier it comes and the fall this late summer and fall as we renegotiate those rents.
And if it's and because we're on only about a third of our rents turnover in any given year, you don't get to get the rent jump.
And you don't get that rent jumped flowing through 100% of the portfolio all in one year. It takes a while so it's going to be it's going to be muted you're going to see these rents gradually increase our overall same store sales gradually increase.
And the underlying factor is what you said, it's trying to stay close to.
A.
And internally defined percentage of revenue per acre and its.
And thats kind of a different number for I would talk about it and regions, but it's even more granular than that.
The highest quality farms at the highest rent per rent per acre as a percentage of revenue and and then it waterfalls down as quality declines.
Okay. Thank you thank.
Thank you.
Your next question comes from John Judy Private and MS. Cheng. Please go ahead.
And I think you answered my question already regarding the preferred and what Youre thinking as far as the FERC would be looking.
And looking at what you are paying on that.
Compared to alternatives as far as the converting net or possibly refinancing it.
Okay.
And I won't add anything to what I said unless you have a follow up question, but thank you for being on the call. This morning Joan.
Operator, I think and Roger.
Go ahead, Okay and then a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Craig Kucera with B Riley FBR. Please go ahead.
Hey, good morning, guys.
Paul you kind of touched on this and response to one and the earlier questions, but I wanted to circle back to it.
It sounds like the leasing spreads that you achieved here and kind of last fall were relatively flat or can you give us any color there and also given where commodity prices have gone over that timeframe.
Do you think that might translate to here over the next year or so.
Yes, so so.
So that and leasing spreads and the fall of 2020 late summer and fall So and hindsight, we did a couple of things wrong and probably a couple of things right.
We leased a substantial amount of those properties, where the negotiations on those leases occurred in August or early September with final contracting and.
October or a little bit after.
If I had known exactly what was going to happen to commodity prices, we would have delayed that cycle.
So we were and we were still and a relatively depressed.
Psychology furloughs.
Renegotiations and if you looked at the entire universe of farms and you sort of said what did you get ups on and what did you get downs on we got more ups and downs, but.
And alluded to this and the prepared comments, but the ups are all and 1% one 5% rent increases and they're tiny.
Recognize that this gets this even gets a little worse as you think about it and GAAP terms many of our leases in terms of the actual cash number we receive have a one or 2% rent bumps in them, we try to get that and almost every fixed cash lease, but under GAAP straight lining you don't see.
That and the GAAP numbers at a flat number through.
Through the entire period and lease.
So you can see and a little ups and the majority of of re rentals rent Rolls and then you have a few farms.
And where you end up taking it down you have a farmer, who is really in trouble and you have a piece of land for whatever reason isn't performing really well and unfortunately, when you take it down and it's not 1%, it's 5% or something like that and so you end up with a flat.
Kind of rent environment on those rent rolls.
One thing we didn't call this out specifically, but as we saw the fall accelerate in terms of the Paul commodities pricing accelerate and the psychology of farmers change.
We actually intentionally delayed releasing certain farms.
Rent for example at least could have expired in late October and instead of rushing to re rented we drug our feet to negotiate better rents.
And then we would have otherwise received that had a negative impact we had some quote unquote last months of revenue in the late late in 2020, which hurt revenue and <unk> and 2020 and the real cash world.
You don't lose any rental income because.
Farmers paying for that farm during the growing season as a practical matter we don't.
A quote unquote unleashed farm, unlike and unleash department, you're going to still get the same total rent for that growing season.
And even though they force us to account month by month, that's not how it actually works. So that's what we've seen.
On the row crop side.
If you if I had to do it over again.
I wish I wish we had done all the leases and the last two weeks of the calendar year.
And and get the highest price you can but.
Hindsight is 2020.
What we think will happen in the coming year.
Though is that we're in and a much stronger position.
Surely the company gives the farmer.
And that's on the property first dibs, we believe deeply and that principle, it's the way farmland rental works and the private market. It makes a farmer a long term steward of the property because they.
I think theyre going to farm it for for decades and.
That's what we want as landowners.
And so we always come back to the farmer, but when we come back around late summer and early fall. This time, we're obviously going to be coming with a higher price target if the farmer meets the target.
And we keep that farmer on that property if.
If they do not meet the target will shop at to all other farmers and this is a zero vacancy asset class and and flush times like we're in now and will be and still this fall we believe.
And if for farmer doesn't hit the bid there'll be another guy and line ready to so we think we will see.
Some pretty good rent roll situation and this fall.
And the.
The one thing again to keep in mind is it's only going to be about a third of the leases on the row crop side that will rollover not not 100%.
So that's.
That's just the reality.
Got it and I appreciate that.
One other question.
And the returns from the properties that FBI directly operates and steadily gotten worse over the past several years.
Are you looking at any strategic alternatives for those assets or are you expecting better performance in 2021, given what's happened with commodities.
Yes, so so direct operations and let me just break it into two buckets. There is two different buckets theres direct operations, where we actually farm a farm because we believe we can make more money on at farming. It and we can renting it we do very little of that we're not actually going to be doing hardly any of that and the <unk>.
And in 'twenty one year.
Those are those were since we control them they were things that as the commodity prices rebounded and we said, let's get these things under lease in the coming year and we've done that with virtually every sort of fully operational grain farm, where in fact, so we ask.
Oh, and combines and tractors and stuff, we're selling that stuff off.
The the farm economy, as such while we might make a little more money operating it but it's more risky.
And importantly, it's it's a hugely time consuming thing for the farm management team and for the accounting team and as we return to a growth strategy.
And not wanting to increase overheads very much you got to decide are you going to have those people manage actual farming or you're going to have and go find acquisitions and good opportunities and so we're lessening that most of what you see and our P&L related to direct operations, though is development properties.
Meaning a a usually specialty crop farm, where we are replanting all or most of the trees.
Trees or binds on that property.
This but in those cases.
Particularly.
And the first year of redevelopment, it's all expenses if.
And if youre in the second or third or fourth year of redevelopment, it's still mostly expenses, but you start to have significant offset to those expenses from the short, but existing crop and I would say short because the trees are mature, they're not producing as many almonds or whatever it is youre <unk>.
<unk> as they otherwise would.
So we got just crushed to be blunt on development properties. This year, because we control that inventory and so what I mean.
We are direct operating the way it works right. There's no way you can get a farmer to lease it from you. If it takes more money to operate then you get but we normally have a significant offset to those development costs those cultural cost to manage those trees.
And this year and the Covid environment as I alluded you just.
Yet you all and the crop is farmland partners and you don't have much of a market for it and some of that as we've discussed will be recoverable.
As we sell through the inventories and the volumes.
But certainly not all of it.
I hope that gives you a little more color on that.
Yeah. That's helpful. Thank you Paul.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Paul Pittman for any closing remarks.
Great.
So for the first time and several years all of US here at the company are very optimistic about what the next 12 to 24 months will look like.
And for new shareholders. Thank you for joining us.
And even more importantly for the long term shareholders of which there are many both individual and institutional investors.
Thank you for your long term faith, and this company and and this management team, we do truly believe and hope that better times are ahead.
And we thank you all deserve that so thank you very much.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].