Q3 2021 Farmland Partners Inc Earnings Call
[music].
Yes.
Yeah.
Welcome to today's farmland partners, Inc. 's third quarter 2021 earnings conference call. My name is Jordan and I'll be coordinating your call today, if you'd like to register a question you may do so by pressing star followed by one on your telephone keypad.
I'm now going to hand over to Paul Pittman, Chairman and CEO to begin Paul. Please go ahead.
Thank you Jordan.
Morning, and welcome to farmland partners third quarter 2021 earnings conference call and webcast. We truly appreciate your taking the time to join US for these calls because we see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings.
And press releases.
As many of you know Luca Fabbri was recently promoted to president of the company and James Gilligan was promoted to CFO.
Luca as you all know was was with me at the founding of the company. He and I have worked together for over 20 years on various different ventures what.
What Luca will do from this point forward is drive many of our growth initiatives across all property types.
James who is now CFO was formerly the CFO of equity International a private equity firm controlled by Sam Zell.
James spent 16 years of his career in various roles in the Zell organization.
We are pleased to have his experience and network added into our company.
With that I will turn the call over to James for some customary preliminary remarks.
Thank you Paul.
And thank you to everyone on the call.
The press release announcing our third quarter earnings was distributed yesterday afternoon.
For those who listen to the recording of this presentation. We remind you that the remarks made herein are as of today October 28, 2021 and will not be updated subsequent to this call.
During this call we will make forward looking statements, including statements related to the future performance of our portfolio, our identified and potential acquisitions and dispositions.
Impact of acquisitions dispositions and financing activities.
Business development opportunities as well as comments on our outlook for our business rents and the broader agricultural markets.
We will also discuss certain non-GAAP financial measures, including net operating income <unk> adjusted <unk> EBITDA and.
And adjusted EBITDA.
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 third quarter earnings which is available on our website farmland partners Dot com and.
And furnished as an exhibit to our current report on form 8-K dated October 27 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 distributed yesterday after market close 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 Paul Pittman.
Thank you James.
So this is a very strong quarter for us, but for the frustrating continued litigation spend our revenue was down modestly from a year over year quarter, but thats, mostly due to asset sales and as noted in our press release many of those assets we still continue.
To manage but we no longer directly at the revenue through our P&L.
<unk>.
Adjusted for litigation approved improved substantially year over year, that's consistent with what we would expect with the improving farm economy.
The probably the most important event.
The quarter occurred a few days after the quarter and that was the conversion of the series B.
That a series B conversion will only enhance the financial results of the company in the coming quarter.
The macro environment for farm land values and farmer profits is incredibly strong.
This is the best we've seen since probably 2013 and 2014.
In my opinion, the farm economy, and therefore farmland appreciation.
We will remain strong for at least another year and possibly two.
December 2022, corn on the futures market is today $5 50.
And soybeans for November 2022, or $12 45.
Even rolling out a whole year. In addition to December 2023.
You have <unk>.
Corn prices are available to farmers that are in excess of $5, a bushel and soybeans can be sold at nearly $12. A bushel what that means is that for the sophisticated farmers such as our tenants.
They can price.
Not only this 2021 year crop and the 2022 crop and the 2023 crop at strong prices.
This means that we're likely to see continued depreciation in land values at least for the next several years.
The Chicago Fed as recently reported that Midwest land values are up 10% to 12%. Our point of view is that they are probably up even more than that the way. The fed collected data is a little bit backward looking and so already dated by the time they publish it.
What we have seen in the markets were most active in Illinois. In particular is that we believe land values in Illinois, our year over year up something in the neighborhood of 20%.
The farm income and balance sheets as I set of farmers are very very strong and likely to continue to be strong.
The last sort of macro market point I want to make is that farm land as an investment does incredibly well in inflationary environments.
And we are in my view today entering an inflationary environment that we haven't seen since probably the 19 seventies.
In the 19 seventies and early 19 eighties farmland depreciated dramatically, we think of the inflation that we're beginning to see the effects of continues that that same result will occur for farmland. This time.
Bringing this all back to the company level.
This strong farm economy has led to lease renewals were are on our rent roles for the row crop portion of our portfolio, we were up 10% plus and at this point, we have renewed about 75% of the leases.
That we need to renew this year.
The acquisition pipeline is strong as you may have seen this morning, we announced the transaction in Missouri. That's the first transaction we have done in Missouri were happy to add this diversification through putting in additional state in our portfolio.
That farm was acquired at a price that will give us about a 4% current yield and we will see more acquisitions before year end.
We have re invigorated our loan program over the last several months. We've made now a couple of modest sized loans, which have a current yield of approximately 8%.
This program helps farmers with liquidity when traditional lenders cannot and we look forward to continuing to expand this business.
I have been asked in the past by some of the analyst community.
When we have a total return on farms, we own that probably looks more like 11% to 13% with appreciation over the long term.
Why are we happy devoting our capital to our loan program with only an 8% return and the answer to that really comes down to the fact that one of the challenges in operating this company is that the current yield on assets is modest and the appreciation is strong.
But to meet expectations of our investors on <unk> in dividends and the rest we would like the blend in some higher yielding properties through this loan program with that sort of 8% yield target in mind. There are other reasons alone program makes sense, such as helping us participate in <unk>.
<unk>, where we can't actually buy land for anti corporate ownership rules or other reasons.
But.
The power of the loan program into the specifics as.
Is this increased current yield.
Turning a moment to our NAV.
In which I focus on almost every quarter.
We believe that with all of the farmland appreciation we're seeing.
Even with the conversion and the increase in the number of shares outstanding that.
That the NAV per share of our assets today is around 14 to $15 per share.
And just a final comment regarding the two litigations. This continued spend on the litigation is frustrating to us probably as it is to you.
As you know there are two separate cases.
We have a case against the Texas hedge fund, who masterminded in our opinion this entire thing.
They are trying to get out on jurisdiction on a jurisdictional basis.
We believe they will not be successful in that effort and the RF admission is incredibly damning of their position when we get to the merits of the case.
The RFS admission Rota fortunate admission.
That he made the whole thing up and was paid to do so.
Plus the other discovery makes us very confident we will ultimately win on the merits that case of course, we can choose to stop pursuing at any point in time.
If we decide it's not a good business decision to continue.
The class action case, Unfortunately is different we can't stop that case.
One would think if there was any fairness and our legal system. This would already be gone.
We were hopeful that after the admission of Rota fortunate.
We're as I said earlier was.
Admitted that he was paid by a hedge fund published the article and that most of the key elements of the article are in fact balls and were never true.
That the plaintiffs and their counsels would've dropped this case.
They did not do that we so we are faced with no choice, but to continue to defend ourselves and our reputation.
Bite the expensive nature of litigation.
Against these frivolous and fundamentally without merit claims the claims of the class action case piggyback on the statements that Rota fortunate made.
But as I said, we don't have the independent decision to get out of that.
So we are unfortunately stuck continuing to fight the good news is we think we are close to seeing it ultimately resolved on the merits, we hope that happens in the next quarter or two and we can put this in its expense behind us once and for all.
With that I'm going to turn it over to Luca to make a few comments.
At this time go ahead Luca.
Thank you Paul there are a couple of different topics that I would like to cover today. The first is the CSB conversion.
Of course, you are.
Suddenly familiar with already but I just want to cover a few of the details to gain.
These was the conversion that we did at a price of approximately $12 75 per share common share. While this is a.
Slight discount to our net asset value. It still is at 45, 2% pre.
Premium over the common stock price at the time, when we issued the Cdos.
Also these cdos be.
Conversion brings us a lot of.
Significant benefits one is the reduced overall leverage of the company. The second is an increased equity market capitalization to over $500 million.
Chile, bringing us additional demand, especially from <unk> investors and index investors.
This conversion was significantly accretive to <unk>. For example, if you looked at the last full year <unk> in 2020, which was six <unk>.
Pro forma.
Counting for D. C has been conversion it would have been 24 cents so significantly higher.
Also these conversion was very accretive to cash flow by simply reducing the 6%.
<unk> dividend on the preferred to our common dividend. So the accretion was about $6 2 million on an annual basis. So.
Overall looking back at your security.
It was a very very useful security for us it allowed us allowed us to raise capital at a time when we frankly couldn't through.
<unk> common stock through equity issuances.
It allowed us to for example, make a couple of very significant acquisitions one in.
Illinois, and one in California that we are very very happy with.
We are happy we had it but thanks to all the benefits deriving.
Deriving from this conversion.
Happy its gone.
The second topic I wanted to cover is the Green Street primer that some of you may have read or heard or heard about so since the inception of the company. We've always struggled a little bit in fully communicate to public company investors are specifically REIT investors all the benefits of farm lending.
Vesting.
And so we decided to actually partner with Green Street, which is.
Of course, a very highly recognized a reputable brand.
In the in REIT land.
To really help us convey better the benefits and the fundamentals of investing in farmland, especially from the point of view of the REIT investor So while we sponsored these.
These efforts by Green Street.
Really at.
The work product.
Timeline investing primer is really at Green Street Wharf product and we're very happy it's out there and it's already found it to be very useful in communicating with investors that are new to the asset class.
By the way both a presentation about the Cts be conversion with some more details and the Green Street primer about farmland investing are available on our website and with that I will turn the call over to James to cover some key financial highlights James Thanks Luca.
The press release distributed yesterday includes financial and operating results for the three and nine months ended September 32021, and 2020, both as reported and adjusted for litigation related items.
I will share just a few select selected metrics here.
For the nine months ended September 32021, total operating revenues were $31 7 million.
Adjusted for litigation, there were $31 1 million.
Net income was negative $3 million or negative <unk> 39 per share available to common stockholders.
Adjusted for litigation It was positive $3 8 million or negative <unk> 18.
Per share available to common stockholders.
<unk> was negative $8 5 million or negative <unk> 26 per share adjusted.
Adjusted for litigation it was negative $1 6 million or negative <unk> <unk> per share.
For the nine months ended September 32020, total operating revenues were $32 7 million.
Net income was $1 1 million or negative <unk> 28 per share available to common stockholders.
Adjusted for litigation, it was $1 9 million or negative <unk> 26.
Per share available to common stockholders.
<unk> was negative $3 2 million or negative <unk> 10 per share adjusted for litigation. It was negative $2 4 million or negative <unk> <unk> per share.
As a reminder, our earnings and our business there are seasonal with a large percentage of variable rent occurring in the fourth quarter.
Sure.
Fully diluted share count as of today is $46 million 419864 after conversion of the series B preferred in early October as Luca discussed.
This concludes my remarks. Thank you for your time this morning, operator, when you're ready.
I would like to begin the Q&A session.
Of course as a reminder, if you'd like to register a question. Please press star followed by one on your telephone keypad. If you change your mind. Please stop by to him. Please ensure your mute when speaking.
Yeah.
Our first question comes from Rob Stevenson of Janney.
The line is yours.
Hey, good morning, guys.
Paul I didn't see pricing on the Illinois purchases.
In the release this morning, three five cap rate how material was the was.
Was the purchase price there.
They were I don't have it right in front of me, but they were modest transactions. The two of them combined would it be a couple of million dollars at the most maybe three I don't know if somebody in the room here has it we can say it but.
Some modest sized transactions, which is why we didn't draw the amount specifically.
And as I said before Illinois pretty good cap rates.
Okay, and I mean, when you take a look at the so you have done the conversion of the series B.
Stock price is up although pull back a little bit off of its highs.
Given the capital requirements.
To go through.
Any substantial amount of acquisitions, how are you guys thinking about it sort of a return to a more substantial acquisition level and sort of funding there.
We likely to see ATM issuance to do that or are you going to.
Possibly sell some assets to buy some how should we be thinking about that and how are you guys.
Planning on financing that going forward.
We're likely to do all of those things at some point in the future, but basically where we are right. Now is we have a decent amount of cash we have quite a few assets. We bought all with equity. So we have some borrowing capacity fundamentally the conversion of the series B.
As a delevering if you will because many people looked at the series B almost as a debt instrument.
So we're in a pretty good position to be able to expand in a significant way without further equity issuances, but eventually we will need to do further equity issuances on obviously the ATM is the most attractive way to do that in terms of the cost of issuance.
I think you can assume we will make some ATM.
Issuances as prices seem appropriate, but we'll kind of modulate the acquisitions program to stay in line with our desire not to issue equity at deep deep discounts.
This.
This is a kind of a always a odd time of the year for us.
We report third quarter numbers.
And it's.
I mean, it's just it's just.
Not much going on from a P&L perspective, the company at this point when we get into the fourth quarter, what youre going to see is the incredible power of having reduced and paid off the or converted the preferred in terms of the <unk> per share.
Then we're also going to see the effect of all the crop shares come in.
You all as you know the fourth because you've followed the company for a long time in the fourth quarter is our strongest.
So we're hopeful that when you're right we were $12 75 on the <unk> App when we've made the conversion.
We think that with that conversion is the overhang that was in the stock from the conversion dissipates.
See the stock trade through that $12 75, and hopefully materially above it.
Because of the.
Financial performance of the company is only going to improve here in the next couple of quarters.
How are you thinking.
Acquisitions, we've already done which.
All of the acquisitions kind of post <unk>.
Roughly July at the beginning of July.
Not picking up the revenue until the next year in any meaningful way.
Okay, and how are how should we be thinking about the.
The potential here for additional JV acquisitions, how is that going and wed.
We likely to see more of those deals through the remainder of two.
2021 and into 'twenty two.
While the opportunity zone vehicle is.
Up into a modest.
But pretty good size scale I think it has over $50 million of assets and at this point in time, we of course get advisory fees from that we think that that will grow and expand and the come in the coming quarters.
And happy to do acquisitions that way when we can because it lets us further expand the.
The income of the company.
Having too.
Increase our own equity.
Position in a substantial way as you probably know we participate at about a 10% level in most acquisitions DOZ does.
But our goal there is really to generate.
A decent amount of fee income using our advisory capability on those sorts of assets.
Okay, and then last one for me.
The 25% of the leases that have yet to renew at this point is there anything specific about them location specific any reason to believe that those arent that those renewal rates aren't going to be similar to the plus 10% that you talked about on the other 75%.
Yes, I think I think we will first.
Arent, particularly geographically specific they're spread around the country a little bit.
Human nature being what it is I am sure that our farm managers are doing the hardest ones last and Thats just the way the world works, but we're frankly running at somewhat above that 10% level at this point in time.
And when we say, we're using we think will still come in at north of 10%.
Increased level once theyre all.
Redone.
And is there any.
Issue with you guys. If somebody were to give it back sort of last minute for you guys to operate it temporarily or ability to find temporary.
Operators for any of these farms in the interim.
Yes get finding finding tenants on our farms.
In the grain production regions, which is essentially everything but the west coast finding.
Finding operators is very very easy in this farm economy, we get inbound calls all the time looking for farmers looking for additional land. So there's no question. There obviously, the the bench of potential tenants in the specialty crop regions is smaller.
Are there more specialized industries that take a lot more capital on the part of the farmers to run the farms in most cases. So it is a skinnier bench strength as we call it.
My perspective, my perspective, we'd be able to find leases there, but if we couldnt we would directly operate.
We are gradually.
And certain crop types directly operating more farms.
Citrus in particular, because we find that we can generate stronger returns.
Directly operating.
And then we can with a lease model.
What it really comes down to is as you just can't capture.
High enough percentage of the upside under the lease model.
As you probably are aware many other institutional managers do a cash rent model on the row crops and a direct operations model on their citrus and other specialty crops and so.
We're starting to do a little more direct operations, which we think will be positive in.
And the overall results for the year.
But that's 2022 is where youll see that show up.
Okay. That's it for me Luca Congrats on the new role James welcome aboard.
Thanks, Rob Thank you.
Our next question comes from Nick Lumen of bed, Nick The line is yours.
Hey, guys. This is Nick on for Dave Paul You already commented a little bit about the acquisition pipeline.
But I was wondering if I can get a little more color on.
<unk> crowd permanent crop mix of that pipeline and kind of cap rates for the different types.
Yeah. So overall cap rate of the company today everything blended together is in the low fours or so.
And when I say cap rate.
Talking about purchase price of the farm divided into annual rent. So we're running around low fours.
Across the across the entire portfolio.
I would think that most of the acquisitions, we do in the coming quarters will be in the row crop area as opposed to the specialty crop area.
There is a lot going on in California related to water.
Right now and a lot of uncertainty.
<unk> of it is related to changes in the regulatory environment and some of it is related to the drought. They had last year, so we're cautious and careful.
In California expansions right now as we watched that settle out feel like we're in a pretty good position on the assets we own but.
It's a good time to probably go just a little bit slower.
We will do some acquisitions there of course, when we can get comfortable that we've got solid water rights, but.
If our historic portfolio is has been 70 30 traditional row crops to specialty we might move back to $75 25 over if you looked at this.
Again, six months from now or so so it wont be dramatic.
Matic changes, but probably we've got our foot on the accelerator on the row crop side, a little harder right now that reflects what we believe as I mentioned in the prepared comments is a multi year cycle that we've really just started.
Pretty strong.
Our returns to the row crop area I think you can still make acquisitions right now that before this cycle is over you will look back on and be quite happy that you paid those prices.
Is it because I think youre going to see pretty strong appreciation for the next couple of years.
And then turning to <unk>, you kind of touched on the crop share revenues do you have like a little bit of visibility on that.
And kind of how you're tracking relative to the same time last year.
Yes, so first.
If you look at prior years, you will see that the fourth quarter is.
Incredibly huge part of our total annual results.
We would expect that to be the case this year as far as crop by crop I don't actually have.
Find tracking.
Compared to last year I don't know James If you do go ahead and add comment if you'd like.
I'd say that we're still there's still a couple of innings to play out to see how the harvest comes in where people are able to sell one.
One thing we've talked about in the past in particular was citrus that was hit hard last year. There were some impacts of COVID-19 that were related to citrus in things like limits in particular, we've seen a nice recovery in citrus I think we've made some comments earlier in the year than we had expected citrus to do a little bit better.
So far it has been a little bit better so.
I think that's a positive and we're kind of eagerly awaiting information from our our tenants were available to understand how the fourth quarter looks.
That's all for me thanks.
Great.
Our next question comes from Eric Bolton of Baron Capital markets, Eric The line is yours.
Hey, guys. Thanks for taking my question, so given kind of the increased interest in the attractiveness of farmland has there been any increase in competition for the farms that you're targeting or could you provide any color on kind of the going in yield had there been increasing.
Or decreasing.
In the current and then are you seeing any cap rate compression kind of heading into the new year any color there would be appreciated.
Yes, so Eric if I leave off a couple of your questions prompt me again, because there was a couple of buried in there.
I just wanted to give a little bit of a shout out to you Eric.
Eric Gordon a barren Berg.
<unk> begun to write research coverage on us for anybody that's on this phone call. So thank you very much for paying attention to our company and we appreciate.
Your commentary and thoughts about the company.
So turning to your question Zoe.
As far as competition. So the strongest competition for the farms is always farmers, it's not other institutions.
Particularly true for us given the way, we sort of do our business model.
We are we are much more likely than other institutional asset managers in the farmland space to buy small and medium sized farms, meaning several million dollars a piece instead of AUM.
Only $20 million transactions, we actually think thats, a very important risk reduction strategy.
That we follow and the reason is that if you ever needed to sell the farm. There is always an active group of buyers amongst the farmers, whereas the institutional investors tend to run a little bit hot and cold.
Everything is good they are buying and if it's not so good in the farm economy. They arent buying so we like those small and medium farms. So so that's where the competition comes from.
Have a very strong network of that brings us.
It brings us a good pipeline, obviously, we do all the normal things like meet with real estate brokers and monitor what's for sale and attend the auctions, but the most powerful engine.
<unk> growth for us in terms of buying farms is the roughly 110 tenants that we have around the country.
Bring us ideas all the time those ideas in many cases are off market or just about to be marketed so we have an opportunity to pick them up.
Probably before they get fully marketed and hopefully pick them up at a slightly better price than we might otherwise.
But.
So where we're seeing what we're seeing though when you go to the biopharm is that it is a competitive environment, but if you are choosy and we attend many many auctions and many many sales and look at many more assets than we buy you can buy things at strong.
Cap rates, certainly relative to where the market is today I alluded to two small, Illinois acquisitions, we did that came out with about a three five cap rate for us, Illinois today in most auctions is trading at about a $2 75 cap rate. So we found good deals and we did good deals and they are happy with those cap rates.
So thats what were seeing as far as margin compression goes.
Top.
The top end of those markets are seeing.
Margin compression in Illinois, today, which is which as you. All know is our largest state youre seeing many transactions with price tags between 16000 $18000 per acre.
And.
The highs you had seen before even within our portfolio we're more like.
12, maybe 13000 or so at the at the high there had been some occasional 14000 dollar sales back in 2012, 13, 14 era, but not very many so you've seen us very material jump in valuations.
And virtually everything in Illinois of high quality today is selling at $15000 an acre or better.
It's hard for us to buy in those markets with those low cap rates, but Illinois is in our view sort of the park Avenue of farmland real estate. So we will continue to nibble at that market. Thank goodness, we already own about 40000 acres of it.
Because we want to continue to have a presence there.
But the prices are high and rents are reasonably low, but the long term power of.
Those assets in particular.
And building a stable diversified U S portfolio are important so we'll continue to buy some there.
Hope that answers your questions follow up if you need to.
No no that was very helpful and thank you for the shout out.
Just real quick and not to belabor the point, but I know on the recent preferred B series update in the deck. There you kind of quoted to $250 million pipeline. I was just kind of wondering if you could kind of expand on that.
Potential opportunities headed into fourth quarter, and then into 2022 like how much of the $2 50 is actionable in the near term and then kind of what's the split between the row crop and the specialty crop there.
Sure.
So if we had.
If we had unlimited capital gave I'd just add.
Ship load of money, we could buy $500 million of foreign ground in the next six months with no problem with the staff, we have and with the deals we know up to $2 50 is seriously refined pipeline that we've largely diligence and would be happy to acquire if we can strike a deal at the right price.
These are and that would be a we are very very big on the diversification point.
Just want to reemphasize.
A lot of people think of us as the row crop farmland REIT.
It's not actually true and we are we have a lot of row crops, but the reason we have row crops is the following.
We believe that the powerful story and a worldwide macro sense is gradually increasing global food demand.
In the face of land scarcity.
And if that's what you really believe that means you build a portfolio that roughly reflects.
<unk> wide food production and you don't try to pick.
Chase whatever the hot thing is right now.
<unk> citrus hot or <unk> hotter corn hot or whatever it is you build a portfolio that roughly reflects U S. Food output, that's what we've done which is in that 70% 30%.
Row crop to specialty crop.
So going forward.
You will see us continue to maintain that sort of.
Diversification, you are likely to see us expand into some new crops and some new states.
To continue that diversification point, even further.
It will be a mixture of larger transactions with.
Very very high quality long term tenants.
<unk> crops, there are little more specialized maybe things like alfalfa hay that shipped to Asia or the middle East.
And Pelletizing form I mean, that's an example of something we've been looking at it as a specialty crop returns to those those crop types are pretty strong so a little bit of a niche market.
But it's probably no more risky and probably not quite as risky frankly is doing.
Not source citrus in California, So theyre looking at things like that we're also looking at a few states in the northeastern part of the United States people often think of the northeast is not much agriculture.
Not actually true places like upstate New York, and Pennsylvania are still strong AG States and again. It's this it's this.
Story that we truly believe that that diversification of the asset class geographically crop type tenant is important so we will continue to do that.
As I made is as I said earlier when it comes to the specialty crops in California.
And this is really true of the entire West coast, not just California, also Washington and Oregon.
Some very significant changes recently in the.
Regulatory environment for <unk>.
Water.
The northeast.
Meaning in Washington State and Oregon are very very severe drought last year.
So it makes us a little bit cautious and nervous of continued expansion. There. We will certainly find deals we want to do where we're comfortable with the water.
But like I said I'd say, if you look back a year from now we will have tilted a little bit less towards the west coast and more towards the traditional row crops, but.
Two years from now we may tilt back, but at least for now that would be my judgment.
Cap rates, just I think you kind of asked that we really want to try to maintain this average that is.
North of 4% cap rate on a portfolio wide.
It's going to get easier and easier to do.
The assets, we already own the rents are growing.
And if we're already at four and were turning over a third of the portfolio and were adding 10% improvement to those rents youll see our cap rate of the existing portfolio gradually increase.
The relatively high price environment for new assets that we face.
Hope that helps.
No. That's very helpful. Thank you guys. That's it for me.
Our next question comes from Mark <unk>, a private Investor. Please go ahead.
Hi, guys I've got two questions here for you.
First one is.
Now as the company has converted the series D.
What's the company's view on their target leverage obviously, you have to first lien.
Loans and debt outstanding.
But how do you think about that and what's the target 11 is going to be going forward for the company.
Second question is and this is one I just thought of.
Why did the company issue too.
2 million shares via.
The at the market.
The facility at $13, one two and then convert the series B.
Basically at the end of the quarter from beginning of this quarter technically at a lower price.
I just I'm confused why the company wouldn't have led to that.
The equity Breeze.
Instead of sell 2 million shares.
On the open market and get a higher conversion price because it was such a large number of shares and that conversion. So if you could help me understand that particularly in the thought process as well.
Luca I'm going to turn it to you to address that 2 million shares at least the facts around it to the extent you have any comment windows, but I'll start with a target leverage one for a second.
<unk>.
So on the target leverage.
What we.
The regular first mortgage debt that we have on the farms runs in the neighborhood of 43%.
It's been pretty consistent through time, how we get there is that we tend to lever most farms at 50%.
Interest only style of debt.
And then we have some farms, which we do not put any debt on so you're sort of hanging in that low forty's traditional debt.
We still have series a preferred outstanding that pays a 3% coupon we have about another four and a quarter years that that security could remain outstanding our current thinking is to leave it in place.
At some point in the future it probably can be.
Can be converted into equity.
But 3% long term.
Long term debt like instrument, it's a good it's a good security and we're likely to leave it in place.
We will gradually reduce our leverage over time.
The market is the.
Market as we get bigger.
We put on quite a bit of leverage frankly to achieve a minimum level of scale that makes us able to cover our overheads because running a public company is expensive.
But I think we'd like to be in a slightly lower levered place than we are right now exactly what that means probably would mean total debt or debt like instruments in that 40%, maybe 35% bracket.
And we're still quite a bit higher than that when you add our debt plus that preferred security.
Together.
Luca do you want to just referenced a little bit I can give some color, but we did we did do a little bit of ATM transactions in the quarter you might just cover that yes. These are actually mainly transactions.
Pretty active in the ATM actually in Q2 and Q3, we did.
De minimis amount in very very early in Q3, I mean look the way the ATM actually.
Works in terms of true logistics, we work on a pretty much on a minute by minute basis with the trade there that is running the ATM at any given point in time to make sure that whenever we issue shares through the program. It really doesn't put pressure on the stock price.
And therefore, I don't think that the fact that we actually sold those shares in Q2 had any meaningful impact on the price if anything else, sometimes what we observe is that a little bit more trading volume on positive days. When we see that there is demand actually attracts even more demand into the stock price. So we're doing a very.
As I said and trying to not put any pressure whatsoever, we were not under any urgency.
Raising capital yet at the same time, we're eager to raise some too.
The kind of leverage some opportunities that we're seeing in the marketplace. So.
So I hope that helps.
Yes, let me just.
We covered this in the in the conference call specifically focused on the <unk>.
On the conversion, but I want to just add a couple of comments.
There is no we made that conversion in our own mind as the management team and the board.
We convert with the conversion is fantastically accretive when looked at on our income statement or P&L basis.
It is modestly dilutive when looked at on a balance sheet basis and there is no question about that and we understand that.
We believed though with a 6% coupon.
And the continued appreciation factor, which one we think when the USDA data comes out clear around in next August.
It will say 10, maybe 12% increases in farmland thats, what we think so we chose to make that conversion to avoid that big next step up that we thought in the cost of those of that money and to avoid the 6% coupon.
We think that the overwhelming.
Income statement accretion will outweigh over some period of time, hopefully not very long frankly.
The modest balance sheet dilution, we took so.
It was a judgment call.
<unk> asked me a year from now all know if it was the right one.
But we think it was and Thats why we did it.
Go ahead Adam.
One mark to your question when I think ATM I think of kind of sources and uses of capital right liquidity growth plans, because thats incremental cash that we're bringing to the business.
The series B conversion and that's really kind of a corporate finance decision. So think of that in kind of cost of capital leverage flow a lot of a lot of the <unk>.
So Luca mentioned a few minutes back so.
Although they are obviously, both relate to the capital structure.
Different decision points around those two two mechanics my mind.
Alright.
Sure.
Got it.
No I'm good. Thank you I appreciate that.
Hello. Thanks.
As a reminder for any questions that star followed by one on your telephone keypad.
Our next question comes from Craig Kucera, B Rodney Securities Craig The line is yours.
Yes. Thanks.
Paul It looks like there was a modest increase in the loan business. This quarter can you talk about the shadow pipeline of deals Youre working on and maybe how much capital you might allocate to that business over the next year or so.
Yes.
Yes, so here's a long term strategy on the business and then I'll answer the short term questions that you ask so long term strategy on that business is to build a book of loans that is in the probably neighborhood of $25 million to $50 million and then to bring in a partner with a lower cost of cap.
<unk> than ours to work.
With us on that program, thereby materially increasing our returns to us from that 8% level to hopefully mid the mid teens level would be what our target return would be.
The program meets a very real need in the marketplace.
Puts us in the flow of farmers and farmer deals and some very positive way can lead to acquisitions and things like that so the franchise value of that program is strong.
But we believe that it's a good program when it's 100% of our capital and it will be a really good program for us.
From the standpoint of profitability when we get it.
Program Big enough to bring in a somebody frankly with a big pool of capital as a partner, where we can lever our expertise and our investment in some way so that would be kind of the outlook.
The program at a bigger at the high level strategic level.
Turning to the tactical execution execution questions that we are facing.
The deals we've done now have been in the kind of two 2 million 3 million kind of bracket on the loans. We are looking at substantially larger a couple a substantially larger transactions. Our philosophy is that the primary if not the only security that we are interested in.
Is land itself real estate, maybe a few buildings, but usually just direct farm real estate, that's what we know thats, what we understand that's what we feel safe.
Lending against we will take.
As excess collateral.
Els tractors growing crops you name it.
But the primary payback.
Security for Us is that land itself so.
We would like to do some bigger transactions and a blend of smaller transactions same logic applies on the smaller.
Get stuck with a piece of property and it's a more modest size piece of property the opportunity to liquidate it if we choose not to keep it in our portfolio is so much better than what the bigger properties, but the big properties of course have an efficiency all of their own firming.
Being able to execute a larger transaction and make a big loan.
I said, we want to grow it and we want to find a strategic partner to help us grow. It I think it will be a very powerful improvement tool in terms of kind of the current yield of our portfolio.
Is something we're pretty focused on.
Got it so it sounds like this is probably a multi year type of strategy when youre, probably not anticipating getting there in 2002 is that fair.
Yes, yes, I know, it's multi year I would say.
This time next year, we might be big enough that we can start to find that partner.
And have.
This is the strategy we embarked on once before of course and got sidetracked with that with the short and distort attack.
This is incredibly good product with a lot of potential.
And it just fits so nicely with everything else we do.
But it will be slow to build that business.
Okay, great. Thanks.
We have no further questions on the phone line, so I'll hand back for any closing remarks.
Thank you. Thank you very much.
Jordan and thank you to all the participants in the call. We appreciate you taking the time to learn more and hear a little bit more about our company. We look forward to talking with you again early next year. After what we think will be a strong <unk>.
Fourth quarter.
And if there's any questions in the interim feel free to reach out to the senior management of the company here in Denver. Thank you all goodbye now.
This concludes today's call. Thank you for joining you may now disconnect your lines.