Q1 2021 Farmland Partners Inc Earnings Call
Good morning, and welcome to the farmland Partners, Inc. First quarter 2021 earnings conference call. All participants will be on listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by DRAM.
After todays presentation, there will be and opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone zone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Paul Pittman, Chairman and CEO. Please go ahead.
Thank you good morning, and welcome to farmland partners first quarter earnings and conference call and webcast. We always appreciate your taking the time to join US for these calls because we see them as a very important opportunity to share with you, our thinking and strategy and a format less formal and more active than public.
Filings and press releases with me. This morning is Luca Fabbri, the company's Chief Financial Officer, I will now turn the call over to Luca for some customary preliminary remarks.
Thank you Paul and thank you all for listening to this webcast live or recorded the press release announcing our first quarter earnings was distributed earlier. This morning and replay of this call will be available. Shortly after the conclusion on the call through May 27, and 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 and as of today May 15, 2021 and have not been updated subsequent to these initial earnings call and the Investor Relations section of our website you can find a presentation with supplemental.
And that will be referred to during this conference call. During this call. We will make forward looking statements, including statements relating to the future performance of our portfolio, our identified and potential acquisitions and dispositions impact of acquisitions dispositions and financing activities business development opportunities as well as comments on our outlook for our business rents.
And businesses rent and the broader agricultural markets.
We also will discuss certain non-GAAP financial measures, including net operating income <unk> adjusted <unk> EBITDA and adjusted EBITDA definitions.
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 first 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 as of this morning May 13 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 on our press release this morning.
Before market open and in documents, we have filed with or furnished to the SEC.
I would now like to turn the call back to our chairman and CEO bumping with Paul Thank you Luca.
So today I'm going to discuss a couple of different things the first quarter results.
I will also discuss some of the macro factors going on and the market generally and I'll also discuss our continued effort to shift from a position of asset sales and stock buybacks to a more growth oriented company.
So first starting with our highlights of the quarter and Luca will go into these and more detail, but this is really a very strong quarter for us but for the litigation expense just to give you one metric and one comparison.
And the first quarter of 2020, a year ago adjusted for litigation, we had approximately three.
300000 negative.
<unk>.
In Q1 2021 adjusted for litigation, we had approximately 900000 positive <unk>, that's a very significant swing there on a lot of different things going on and in those numbers and as we always caution.
Quarterly numbers are jumpy and volatile, but it is certainly a very strong positive move and the right direction and demonstrates what we think is the beginning of a multiyear cycle of very strong quarterly and annual performance in the portfolio.
We have begun in the first quarter and Ernest just shifts the company back to a growth mode.
As discussed in the 2020 earnings call back in March.
Prior to that we were and asset disposition and stock buyback mode.
And we started to discuss acquisitions.
And other things to put the company back on a growth path, we really began that and the first quarter of this year.
As our press release indicates we started and acquisition program again, we bought about.
Two we bought about $2 $9 million of assets.
Bought those assets without any debt, we bought them entirely with equity and which is part and parcel of our desired is gradually delever the company.
Speaking of leverage we reduced our debt by $20 million and bought back.
Some amount and frankly, a slight amount of the series B preferred.
We will continue that effort and.
And as future quarters to further Delever the company.
We also finished the setup and started to establish substantial AUM in the off balance sheet vehicle are related to the opportunity zones and we will.
These growth and deleveraging strategies in the coming quarter. Our goal is to increase the scale of assets under management, both off balance sheet and on balance sheet. So we can spread the overheads of the company over a bigger asset base, we will continue to reduce leverage as I have.
You mentioned and we believe we'll be able to substantially increase rents.
And the coming.
Quarters as we have about a third of the portfolio will rollover this summer and fall.
And we'll think we think will be and are positioned for very strong rent increases on that Paul.
On those on new leases.
Turning to net asset value for a moment.
I think we are we are now right and that sort of $14 per share range of net asset value I think it is gradually going up.
It's really difficult to measure absolute property value increases on anything shorter than on an annual basis.
It's just not enough statistical data, but we think we're in a position where we're going to see land value appreciation for the year come in pretty strong and continue for several years and the future.
Turning to the slides that we have on the website, it's under to refresh your memory as under the Investor Relations tab of our website.
And farmland partners.
Dot com.
Want to touch on just a couple of sort of macro themes that are really important to the company at this juncture.
So the first slide on page three.
Is a slide we presented last quarter, but start almost every presentation with this slide.
This is the most important thing about the farmland asset class.
We are seeing gradually increasing food demand driven by population growth and GDP per capita gains and the developing world.
Against a massive decline in tillable or arable acres per person across the world.
This trend should continue for a long long time. It is at this point set it's measured and 50 year increments at this point and time, we do not think it will change and this is what really drives the long term value gains for farmland.
But we are also seeing elevated and the more near term elevated farmer profits, which in our view will be here for several years.
What is the kind that is a demand driven bull market.
Largely driven by Chinese and other Asian demand for food stuffs out of the United States in particular.
But that demand driven bull market for the primary food commodities is exacerbated and strengthened by a slight hiccup and productivity that began late last summer and many of the growing regions of the world.
We've seen incredibly strong price recovery in the key commodities. We think we are set up for several years of very strong.
Profitability for farmers. So what we have is sort of two sources of wind at our back one is the general trend.
Increasing food demand and land scarcity, which really goes on all the time and on top of that at least for next few years very strong profitability increases.
For farmers.
Turning the page just to talk about that income increase for farmers.
And we've done and this is a page golf demand growth and productivity gains.
We have mapped on this page is for both corn and soybeans based on mostly U S da data and approximation of kind of the profitability and each year that a farmer experiences on the two different crops.
And then on the far right and side of that graph.
We took the 2020 years the most recent years, where we have actual numbers.
And we said.
What does that look like if you just change commodity price for the corn and soybeans.
And we did it in two different ways.
We looked at corn and the context of two different pricing scenarios.
And one of which was $5 a bushel and the other of which was $6 a bushel.
December corn now is just under $6 a bushel it was a little bit over a few days ago to give you a frame of reference and and we did are on the same thing on soybeans and we looked at soybeans at 12 and $14 a bushel.
And when you look at that and these are the two bars Barb charts on the far right on the page.
You see and incredibly strong increase and per acre profitability for these farmers.
Using corn as an example, it's quite realistic to think that a farmer will get something in the neighborhood of 200 to $250 an acre more profitability. This year, maybe in some cases as much as almost.
$400 an acre of increased profitability soybeans of course are not quite as strong but but.
The story is similar.
This drives farmer optimism drives farmers acquisitions of equipment, and I'll, certainly drives farmers acquisitions, and and interest and expanding their operations.
So this is a very important factor we believe it will last for several years, although there is certainly.
Never any certainty about that.
Turning to the next page and I mentioned earlier in my remarks that Chinese demand for food stuffs. In particular is a large large driver of these changes and commodity prices, but also a large driver Inc.
Global increases and food demand.
And the chart here on this page just sort of demonstrates that.
There is.
Today, and it's already mostly in place frankly on shipments already made but there is an expectation that corn imports into China will grow by 300 per cent from the 1920 marketing year to the 2021 marketing year, which is the one.
And we're in today, some sources estimate it could be as high as 400%.
This is just an example, and frankly the most extreme example, and corn, although relatively strong increases and the other key commodities soybeans, the soy meal soybean soy oil.
Into China.
This trend we believe will continue as they rebuild their hog herd in particular.
And change the way they feed that livestock.
And then turning to the final slide and our presentation and I put this slide and because it is so timely and in fact and when I read the papers and things. This morning, it's a key topic and the business news.
Is that we really are on the brink of if not already experiencing inflation and.
Despite the way the fed may look at inflation when you look at many different durable goods.
And assets, we are already seeing quite a bit of inflation.
The <unk>.
<unk> graph on the page is frankly quite noisy.
Bloom line as inflation and the Red line is farmland appreciation.
And.
There is some data collection issues and the way the USDA pulls this day to together, but if you smooth that Red line. What you would see is what it says in the far right hand.
Column of the table.
And that there is almost always a positive and pretty significant spread between farmland appreciation and inflation.
Fundamentally farmland is a very good hedge against inflation.
We think that farmland valuation and investors will benefit.
From exposure to farmland.
Because of this sort of well set trend and positive spread to inflation.
Turning to.
And sort of.
One last comment that I want to make this as previously discussed.
Wrote a fortunate and litigation, which is costing us quite a bit of money per quarter will eventually and.
We think that you and the market should expect elevated spend.
On those cases to continue.
For at least a couple more quarters, but it will and eventually and we believe it will and with success. So before I turn it back to Luca just to summarize we think frankly, a strong quarter beginning of that growth and new growth phase for this company and we will continue.
And to move forward on that vein and the in the next quarter with that Luca.
And you can go with your remarks. Thank you Paul as Paul I've mentioned and is just not on his remarks, we feel that the company's performance and this quarter was actually quite strong. However, the financial results, we're really clouded by the significant legal and accounting expense specifically the legal spend related to that on a fortunate litigation so and.
And a bit of a departure from from past practice I will mention now some of the our performance indicators.
Also excluding about $2 $5 million of Rota fortunate litigation related expense that we incurred in the first quarter of the year.
So.
For the for the quarter, we recorded total operating revenues of $11 6 million as compared to 11, 7%.
For the same period in 2020, so again pretty strong performance, considering and our portfolio has shrunk a bit over that period of time.
And in the same two comparable periods. This year, we recorded a total operating income of $3 1 million.
Versus five three in the same 2020, however, adding back.
And that legal spend as I mentioned the performance. This year would have been $5 6 million.
In the quarter, we recorded a basic net loss to common stockholders of <unk> <unk> per share. We would have had a net income of seven per share without those litigation expenses as compared to net loss of nine <unk> per share in the same period of 2020 and.
Finally for <unk> and this quarter, we recorded a negative five cents versus negative one in the same period during 2020, but this year. It would have been a positive three.
Performance without those legal expenses.
In in the quarter, we repurchased about a day 300 share so CSD preferred at about $25 90, and above sorry, 25, 82 average price subsequent to the end of Q1, we purchased an additional about 16800 shares at 25 and 98.
Average price so total since the beginning of the year, so far and we have repurchased 25073 shares of series B preferred and an average price of 25 93 for a total of approximately $650000. Finally on the debt side in the quarter, we repaid.
Approximately $20 million totaling debt on.
That 10 million was a prepayment.
And just not related to any.
To any specific asset dispositions and therefore, our need to free up collateral.
As of today the curve the total fully diluted share count is 32 million 319 and.
978.
This concludes my remarks. Thank you for your time this morning, and your interest and farmland partners Kate 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 on your touch on from if you are using a speakerphone. Please pick up your handset before pressing the keys.
And with draw from the question queue. Please press Star then two.
The first question is from Rob Stevenson of Janney. Please go ahead.
Good morning, guys, Paul what determined the 14 dispositions was that attractive pricing was that farms and our crops that you wanted to reduce exposure to was there any significant concentration in terms of those farms in terms of crops or location.
Very good question, Rob and I, probably should have covered it in the prepared remarks.
The big driver I think almost 21 or $22 million of the 25.
The roughly $28 million of dispositions were the assets, we contributed into the opportunity Zone fund.
So we still maintain management fees on those assets and it's part of our effort to expand our <unk>. So the opportunity Zone fund was ceded with some of our own assets further growth will probably largely come from third party.
True third party acquisitions of properties that we don't own today, but that was the big driver it wouldnt the.
And the remainder of the dispositions were really things, we already had deeply and process.
Before we kind of made that debt shift from asset sales and stock buybacks back to growth and we want to be perceived in the marketplace as a very good counterparty in sales and purchase transactions.
So.
Youre always when you make that shift youre already so deep into a transaction counterparties have spent money on diligence things like that and we basically went ahead and finished those transactions up because I think it's the ethical and appropriate thing to do and by the way just full use the term contributor those who had actually sales and 90% of the sales.
Price actually came to us and cash so the generated cash for us to redeploy otherwise.
Good point good point, Okay, and then what is what are you getting in terms of.
Fees of the asset management.
How should we be thinking about that.
<unk> off the existing $21 5 million or as a percentage of what you are likely to begin as you as you grow that and what level of expenses are going to be associated with that.
I don't know if we have this and the public domains I don't think so but I can give you I can frame. It for you without giving you an exact number.
And we receive.
From the.
The opportunity zone vehicles fees based on assets under management, so whether it's Levered ROE and Levered is irrelevant, it's based on assets under management and.
Those levels are set to be modestly and excess of the overheads of the company today running it as a public company. So the profit margin for us running a private vehicle with the same essentially cost and charge is pretty beneficial and pretty per.
Our full to the public vehicle.
So that if you need further information on that Rob and feel free to call US later and I'll check the documents and see what we have and the public domain and I can maybe can take it a little harder for you and it's important to you.
And also like also to add a little bit to what Paul said.
If the <unk> fund was to scale up significantly we might eventually have to incur additional expenses, but right now we expect to perform all of those activities and generate those revenues without additional expense items.
Okay and that stuff.
Is that something considered good income for REIT purposes, or is that basically need to be and some sort of taxable subsidiary.
No it is segregated and in our Trs.
Okay, and what line item does that appear on the income statement.
We don't have.
Any material right now it would be on that either revenue okay.
Okay.
And then again to be clear.
And to add that was set up and the debt.
And formal.
Sales of assets and getting off the ground of the opportunity Zone Fund was only and the first couple of weeks of March. So just a tiny impact in Q1 and Q2 will be the first time you start to see.
See those numbers come through.
Okay, and then what type of crops and locations, where the two acquisitions you made during the quarter.
The acquisitions were all in the Midwest tend to be primary row crops, largely speaking more adjacent to adjacent.
Loosely adjacent to.
The.
Land that we already owned.
And nice good acquisitions and fit and our portfolio quite nicely.
Hopefully there'll be more to come in future quarters.
Okay, and then last one from me what is the series B callable.
The first call date on the series B is the very beginning of October of this calendar year.
Erika our general counsel, who happens to be in the room with me Rob just to follow up on your question. So this is fully on the public domain.
And I can tell you the exact below we get.
85% 80.
85%, so just under 1%, 85% fee on the assets in the opportunity zone.
Okay.
Alright, and then I guess the question winds up being so.
The series B is callable at par and.
And in October and why pay more than par for it now.
Sure.
Well, it's callable at par plus appreciated value.
Okay.
It really works and so we don't think were paying above par above what part is going to be as of the new.
There'll be another pricing roughly august 5th or so when the USDA farmland values survey is released and so we don't think we're above where it is going to be at.
And at that point and time by any means.
But the other reason is.
And to get getting rid of that 6% dividend on debt that has been a drag on the Companys earnings power.
It is important to us and it's all part of this general effort to overall Delever the company.
Just to take your question one step further than you actually ask so the first call date is October where a company is not under any pressure to actually do anything we have three years after that date to either pay off with cash or convert.
That preferred into common equity.
So.
And we would love to manage our way out of that security, but we're not really under any pressure.
Really just the beginning of a three year period, where we can work on that starting October one.
Okay. Thanks, guys I appreciate the time.
Great. Thank you.
And next question is from Dave Rodgers of Baird. Please go ahead.
Paul Luca good morning, and I appreciate the comments and the messaging around growth Paul I guess I wanted to go to the rollover of your farms this year.
You showed a 30% to 50% profitability potential jump and your row crops, which is obviously the first we've seen and that in a while as you look at the rollover. This summer and confirm you said a third of the portfolio roles and and how do you view the lease roll ups that you anticipate to see this summer just given some of the strength that youre starting to see now.
Yes, so we have around 59000 acres rolling over this summer and a lot of acres, it's still roughly a third and the value and context, because some of that rollover is for example, eastern Colorado where acres are less expensive. So think of it as a third this is probably a.
Slightly bigger than than normal year, so maybe 40% of the portfolio value rolls over.
This summer I don't want to give you specifics because I'm sure we have farmers and tenants listening to this call and we are negotiating with them on these things, but I think you will see rent increases that are probably frankly, a low <unk>.
And 5% on most row crop farms, a lot of 10% increases and row crop farm rents and there will be some that are greater than 10, and 15% or more and some cases.
This is the industry dynamic is that land values and lease rates and a tough farm cycle more or less stay flat and we've talked about that day. We appreciate you being with us ever since the IPO as an analyst.
We've always said youre going to sort of stand more or less still with possibly a little downward pressure or a little moves up when the farm economy stinks and.
And when the farm economy gets strong you have you have this is this is where grain prices do matter and not directly to land value, but to rent you will have the opportunity to make material jumps in.
And your your <unk>.
Rents the weighted intellectually think about that or mathematically think about it.
And the best row crop regions, you're trying to get.
<unk> 35 to 40 cents of every revenue dollar as a landlord.
In the lesser quality regions, it's more like 25% of every revenue dollar.
But when you do that chart I presented in my prepared remarks, you start talking about.
100, 200, 300 dollar increases and revenue per acre and recognize its corn and soybean rotation and the best land. So you got to kind of take the midpoint of the improvement.
And the two crops.
It's not unlikely to see 25.
And $30 increases.
On rents, that's frankly, 10% of a 300 dollar ish sort of rent and I think youre going to see as I said more than 10% and some cases.
That helps give you a little more clarity, we're going to do the best we can and now that I've said these things when I asked somebody for a 25%.
<unk>, they're going to say you said on the conference call 10, or 15 of the bed.
First, but we're going to push them as frankly as hard as we can we are tenants do need to make money and be profitable.
But it's been a tough couple of years for us and our shareholders as well and we intend to.
Get our shares of this our share of this increase in revenue.
Now when we can.
I appreciate all that color Paul that is helpful. As you look at the mix of that third of the value that comes due.
Not necessarily share that the specialty crops are experiencing the same benefit and so I wanted to ask specifically on specialty and what.
The mix is this year and that third rolling over between kind of specialty and row profit and just as we think about the balance.
It is and Luca you may want to look at.
We can look at that will help us know this but it is more weighted to row crop and specialty this year, but youre talking value versus acres. So I don't really have a crystal clear answer for you, but it is an awful lot of row crop and that turning just to specialty and whats going on there we made a small comment I bill.
And the press release on this.
The specialty crop troubles that farmers and therefore us.
Had last year related to.
And a lot of variable income and the specialty side of our portfolio.
We think we are at least as good as last year and cautiously optimistic that we're better off.
But it's really early and the season right. It's very hard at this juncture.
We haven't had any any big problem that makes us think that volumes will be way down and the tree nuts, the citrus or anything but on the pricing side.
And that's still a long ways to go in terms of the actual production on the product and then on the pricing side.
There is still a long ways to go in terms of international supply demand characteristics that will affect pricing of key specialty products and the U S. So we're feeling.
Okay about it but you need to take the okay with a grain of salt because of just how early in the calendar. We are hopefully when we update after the second quarter, we can give a little.
Higher level of certainty in terms of where we think the specialty crop side of our portfolio will come out and David by way of background since given the prevalence of viable leases in specialty crops. The impact of lease rollover. So on specialty crops is really not particularly high so generally speaking when we make comments about lease rollovers.
Really a little bit more skewed towards our row crop portfolio.
That's a very good point, you can say you got a better lease and specialty crop, but since so much of that lease revenue was variable.
And good negotiation isn't the end of the story.
And should cut.
<unk> got to grow the crop and get the right price War.
All incredibly helpful guys last one from me just Paul on the Paul or maybe for Luca This would be on the quarter any one time items that hit the first quarter result, typically ex the legal costs, you would probably be at a negative <unk>. So it was really encouraging to see the positive I guess, maybe just a little insight on the drivers any lease.
Asian income or just some later specialty crop revenue recognition.
Might abated and the quarter.
We don't think.
And it's hard to and it's hard to always has a little bit of answer that question because as we've talked many times and in fact passed the way GAAP works for Us is.
It's not based on our industry is based on real estate more generally, but theres no really large items that come to mind.
And I believe though that there probably would have been a little shifting of.
Fourth quarter crop share revenue into the first quarter that was a little out of the ordinary and helped us.
Net.
But but not I mean, that's not the key driver.
The thing that made the most differences that were.
And our relatively low interest rate environment and a year over year.
We've seen modest improvement in the sort of operating day.
Ada of the company revenue cost and so on and so forth and youre seeing that but for the elevated legal spend because we've essentially run through our insurance at this point.
You are.
Seeing that you are seeing what we would expect to see as the farm economy turns back up.
Great. Good news thanks, Paul.
Thank you very much.
The next question is from Greg Sarah B Riley Securities. Please go ahead.
Hey, good morning, guys.
And your 10-K and you put out your expectations, Hey, guys and your 10-K, you put out your expectations around fixed rate and variable rent leases for the year I think this year it was pretty flat with 2020 and about $11 million.
But my question is with some of these commodities that you are so heavily invested in basically doubling from kind of their average is last year, how should we try to and.
Encapsulate what the impact on variable rent might be later this year is it 35% to 40% of the upside or I guess, just how should we think about that higher pricing environment.
Yes. This is Craig and many ways a continuation of the question that David asked.
So most of our variable rents are in the specialty crop area.
So this really powerful price recovery and corn soybeans and wheat.
It isn't a huge driver of our variable rate now, we do particularly and the high what we call. The high Plains region think of Eastern Colorado, Western Kansas, and Nebraska, We do have quite a bit of variable rent in that region and.
And we will see those variable rents.
Certainly on irrigated farms improve for us substantially.
On the dry land farmers in that region of which many of our acres are dry land, it's driven by the prices look really good but you have to have rainfall to get a good crop and right now we have started to see and our areas and the areas, we own farmland, but weather pattern change and improvements in.
Rainfall, which should lead us to a good crop.
Result, but again, it's it's.
Mid May ask me and mid July and I can give you a better view on whether the crop harvest volumes will be strong. So there will be a modest bump and variable for us because of of row crop.
But most of the variable side of our are rare.
Revenue stream is and that specialty crop and.
And that those commodities March to a completely different drummer.
And the row crops. So doesn't mean, they're bad it's just not the same things going on there as what's going on in that.
Crop area.
Okay. Thanks, I appreciate the color.
Okay and if you have a question. Please press Star then one and next question is from Buck Horne Raymond James. Please go ahead.
Hey, Thanks, Good morning, and my question just curious about the.
And the acquisition and disposition environment, among private market participant and obviously the good news about the pricing and commodities is probably not gone unnoticed and I'm wondering if youre seeing.
More competition coming up for bidding on acres that do come available for sale whats kind of whats in the pipeline and are people starting to underwrite.
These higher levels of farmer profitability and to their assumptions and you're getting.
Is that bidding kind of getting out of and we're not.
Well the.
Mark.
The AG the farmland markets and for this purpose of these comments think of it only has the row crop regions, So set California side for a minute and.
As you look at our portfolio.
They don't they don't all move in tandem.
So let me kind of break it apart what the very best quality land and the strongest corn and bean regions and the country like Illinois, where we are so highly invested those valuations have moved and moved swiftly over the last six months.
I think they have a long way to go and frankly, if you look at the increased revenue per acre and profit per acre and you.
Put a cap rate on that increased value that will be available to landlords.
I'm not sure those prices are done moving yet, but they have already moved.
Frankly, thousands of dollars an acre and what you see happen in this marketplace.
And as two different things.
Land values appreciate or land values stay the same for a long period of time when they stay the same for a long period of time, you see volumes gradually fall off because what we all forget is that there is a tiny percentage of farmland and trades any given year, it's only up.
Hans.
A couple of percent maybe five at the most of the farmland rolling over every year. Some people think it is just right around 2%.
If if the owners of the farmland today believe the price is available in the market are not very good volume decreases.
Except for that volume that comes from a depth and the family or a divorce or core.
True financial distress.
Conversely, when you see prices start to get strong you see volumes increase and we have started to see volumes increase in the core.
Core of the Midwest like Illinois and.
<unk> got price increase and volume increase which suggest to you that owners of farmland, which I think you can assume we're kind of the smart money and this space are saying, Hey, that's a really good price for my farm and their <unk>.
Gradually selling a slightly elevated and number of farms compared to what was in the marketplace. Two years ago for example.
We think that that's going to continue and we will see prices continue to go up.
In the Midwest and some of the other regions or and the lower quality parcels of land and the Midwest.
These price gains haven't shown up yet.
And so what you.
You have to have a point of view about how far it may go and how strong. It will go you have to also have the long term view that I expressed in the prepared remarks about this is really about global food demand and land scarcity.
And youre going to go out and make some investments hopefully where you get near and medium term appreciation right. After you make those investments, but even if you don't.
The five 710 year.
Appreciation will reward you handsomely for having made those investments. So this is what we're going to try to do we're going to deploy capital.
Moving to try to do it and some cases off balance sheet, where we don't.
Don't cost dilution to existing shareholders as much as possible and we're going and we're going to do our best to catch the cycle right.
We don't believe and I saw him and I've done this now for 25 years.
It's not about the cycle its about that power of that long term trend.
And it really is a long term trend different than the other real estate asset classes.
You cannot invest in this business sort of waiting for the big farmland value drop.
We had people back in 2014 and 15 when the farm economy started to go into a more negative stance, telling us hey, just wait farmland is going to collapse, 30% and we told people and it's on our conference call transcripts no it's not.
And on <unk>.
My lifetime Theres only been one big drop and farmland was mid 19 eighties and I was too young to take advantage of it but but but that's the only one.
Other downturns led to flat farmland pricing until you came back out of the downturn and then theres a step function increase in value and.
So the takeaway here is we'll try to get it right based on getting ahead of the curve when we can but the real wave is that long term appreciation story and we want to ride that as long as we can.
Thank you, yes, and really thoughtful and detailed answer.
I'm also curious as you're talking to your tenants and other participants and the market and if theyre talking about labor shortages and the field or other.
She was around labor costs or.
And whether there is it's about the shortage of trucking and whether it's hauling costs.
Are you hearing.
Issues around in terms of estimating that profitability.
But the farmers cost equation is doing at the moment and how do you guys think about that.
Turning to labor Labor is just one element of cost and I'm going to break this answer into the again, the two broad crop types row crop and and specialty crop.
Because it's a little bit different answer for both so.
Farmers will see gradually increased cost structure.
On.
As we.
And as we as we see prices increase.
Seed company the chemical company.
The farm machinery dealership look they've all done what we've done for the last five or six years sort of hunker down and hold on.
And theyre going to take a relative peace of that increased profitability. The ratios that everybody gets will probably stay roughly the same. It's if anyone has an advantage and that battle.
And get a slightly higher percentage of the additional revenue we think the farm owner us the landlord is and the most powerful position because we are a scarce.
Resource.
But I think we will get our share of it and so will the seat and chemical company and so we'll John Deere and so on and so forth.
So the farmers are going to see costs go up but he has his his share of that his profitability is also going to be significantly enhanced.
As far as labor specifically goes.
And the specialty crop area, we have heard some some difficulty in getting picking groos for citrus.
And that's partly COVID-19 related and.
Moving substantial amounts of workers across.
Across the southern border and a legal way and the COVID-19 era is difficult.
And so there's a little bit of constraint. There every year, there is slightly more mechanization and that picking process and there was before and we havent heard at least from any of our tenants that they couldnt get the job done we've just heard kind of expressions of frustration, but not not real crisis.
And on the on the row crop side of things Luckily that is a very mechanized industry already.
And in Rural America, and the Midwest and the planes and the southeast and the Delta.
Finding labor, particularly on labor is really hard.
Towns are shrinking.
Every every farmer I know who has four kids as at least two of them.
To come out of college, and staying on urban area and don't come home and sometimes adult <unk> don't come on and Thats. Anecdotal example of a real statistic.
And so this is a growing problem again, and mechanization and that and that industry has been pretty rapid.
You actually touched Buck on one of the ones where it hasnt occurred.
Paul the same amount of grain and semi truck today that you did 20 years ago.
The weight. The weight you are allowed to put on a truck hasnt really changed and so that's what that is a bit of an issue that trucking today, though is largely being done.
By a lot of kind of retire farmers, who have a have a trucking license.
And and it's and.
You can look at trucks during harvest and they're all guidance frankly, my age or older driving those trucks in most cases and they come in and they work really hard for a few months and then there and are.
Back to semi retirement, so to speak so we're getting through that but it'll be a bit of a growing growing problem I'm sure.
And that's very helpful and my last one just and just real quick thought is just looking at the weather patterns I guess, the western region of the U S has already seen pretty dry and record drought conditions for early in the year as debt.
And issue to watch for the specialty crops looking ahead or how do you think about.
The started the year with the water levels already pretty low on the west side of the country.
Well.
Again, you got to you got to break it into different.
You've got to break it down to a certain granular level a little bit. So first if it's irrigated ground versus non irrigated ground and the specialty crops are almost universally irrigated.
The drought and a near term sense doesn't matter.
<unk> got irrigation, where the drought matters is if you are setting into a long term cycle, five or 10 years or a permanent cycle, depending on your view on things like global warming of not having enough water that has long term implications. So and this is something we watch very closely we try to be very.
Careful about the quality and quantity of water, we have on our properties and in most cases and the specialty markets, we feel pretty good about it.
<unk>.
The thing that scares me more is this long term trend of declining.
Declining water availability than the sort of near term drought issue.
Because that's where our values of our properties could be affected.
That being said.
And is on its head just a minute.
We're not going to quit producing citrus or almonds, or pistachios and the United States.
You are in the upper half of water availability, so to speak with your properties.
May actually be benefited.
In terms of farmland valuation by the drought.
Because it takes the very bottom of the barrel and takes them out and they stopped producing so youll see commodity price and valuations on farmland that still produces those specialty crops gets stronger and we think we've got our position and the right place.
And that's kind of where it will be is on the upper end.
And the beneficiary of a drought so to speak not not on the negative and.
<unk>.
Setting those comments aside our hope is there is nobody gets hurt, but we try to be and the higher quality and quantity of water when we can.
And therefore benefiting from water restrictions on other other farms turning to the row crop side. The drought today that youre talking about some pretty strong and most of the high plains, it's particularly strong in north and South Dakota, and terms of low flow over winter snowfall and low rainfall so far.
And this spring.
Those regions on a nationwide basis are not really huge producers theres a lot acres up there a lot of good farmers, but its a.
Colder region with a shorter growing season and.
And on an absolute volume of corn and soybeans for.
For example.
And just not a huge contributor.
What really drives those key commodities are.
Illinois, Iowa, Indiana, Eastern Nebraska, Eastern Kansas, and Missouri, So on and so forth.
And that region of the country is in pretty good shape, probably a little drier than normal.
But but nothing thats crisis level yet.
But.
The predictions are that we're going to have sort of an average crop and.
In terms of yield per acre and most of the country not in huge bumper crop, which is the bumper crop.
And would probably take prices back down so frankly.
Goldilocks, not too hot and not too cold outcome and volume of grains is probably where you want to end up.
From the standpoint of <unk>.
<unk> to move farmland values higher we we think that's that'll be the best result for us and that seems to be what we're getting set up for it.
Thank you so much great color I appreciate that.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Paul Pittman for closing remarks.
Right.
Thank you. Thank you for everyone for joining our call and more importantly, thank you for supporting our company.
We will continue to try to move our business forward with growth and further profitability and look forward to talking to you again.
At the end of the at the end of the next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.