Q4 2022 Federal Agricultural Mortgage Corp Earnings Call
Over year growth in net effective spread.
10% growth in core earnings.
And 10% growth in outstanding business volume or assets under management.
I am incredibly proud of the contributions of our 158 team members it starts with them and their passion for American agriculture and rural infrastructure.
And they deliver because of their expertise and specialization that differentiates us.
I happen to believe that it is this passion expertise and specialization coupled with our exceptional access to debt securitization market funding and asset liability management that enables us to deliver consistently strong financial results.
One of our strategic initiatives has been to broaden our business those segments that we report to you in.
And the benefits of that increasing diversification were apparent in our 2020 to your results.
When rapidly rising interest rates had a more immediate impact on our farm <unk> Ranch segment. It had the opposite impact on our wholesale funding our advantaged product.
So we are more comparatively competitive with federal reserve bank alternatives than we were during the pandemic.
Similarly, our rural infrastructure segment showed less interest rate sensitivity and we booked record amounts of telecom and renewable energy project finance loans.
Diversifying our loan portfolio has been a key priority over the last few years and that diversification is benefiting us through changing market cycles.
In 2022, we've provided a gross 9 billion in liquidity and lending capacity to lenders serving rural America.
Collecting net year over year outstanding business volume growth.
Up to $3 billion.
The agricultural finance line of business grew one $7 billion last year, which is predominantly driven by growth in the farm and ranch, a vantage securities portfolio and loan purchase volume.
The overall growth in the wholesale financing space continues to reflect many of our institutional counterparties, adding longer term advantaged securities to manage their asset liability maturity profiles given the recent increases in interest rates and the comparative competitiveness a farmer.
<unk> advantage pricing relative to other market and federal reserve bank derived options.
We added a net $880 million and new farm <unk> Ranch eight vantage securities in 2022 compared to $300 million in 2021.
Looking ahead, we believe that especially in this volatile interest rate environment that farmer Mac continues to be viewed as a crucial relative value for a refinance it and.
And possibly for incremental borrowing.
For a long standing eight vantage counterparties.
To add some additional detail our farm <unk> ranch loan purchase volume growth of.
Up 8% year over year was modest compared to prior years as borrowers who are adjusting to higher rate environments and being more opportunistic.
We are optimistic the potential increases in loan purchase opportunities in 2023 will happen given the strong cash position, our farmers and ranchers as they head into their 2023 planning and planting seasons.
Our corporate AG Finance segment grew $65 7 billion to $1 6 billion.
That's year over year 2022 to 2021.
This is a relatively new business initiative for farmer Mac.
<unk> loans to larger more complex anchor businesses focused on entities spanned the food supply chain.
The persistent volatility and uncertainty in the market slowed deal opportunities in 2022.
With many transactions on pause waiting for signs of market stabilization.
While net gross on only a modest increase in 2022, primarily due to sizeable payoffs, we were able to purchase approximately $330 million of new loans at very accretive spreads, which supported a very strong increase in revenues for this segment.
However, in the fourth quarter 2022, and so far in the first quarter of 2023, we have seen an increase in deal flow in the market and are starting to build a strong pipeline for this year.
These sales continued to be very accretive from an <unk> standpoint, and a key component of our diversification strategy.
We expect this segment to have meaningful impacts on our results in the future and to enable farmer Mac to continue to strengthen and deliver on our mission.
2022 was a very strong year for rural infrastructure as the diversification of this line of business is providing significant growth opportunities across numerous key subsegment markets.
During the year, we added $608 million of business, reflecting year over year growth of about 10% in the renewable energy telecommunications and court ruling utilities Subsectors.
Loan purchase volume in the rural utility sector increased 22% in 2022, primarily due to virus normal course capital expenditures that were related to maintaining and upgrading the utility infrastructure as well as investments in broadband infrastructure.
Farmer, Mac acquired over $230 million and telecommunications loans in 2022.
And there is a growing investment in fiber and broadband in rural America, and an increasing recognition of the need for widespread investment in these areas.
We remain committed to increasing investment and to reduce the cost of capital for telecommunication providers and we look forward to providing updates on this new avenue of growth for farmer Mac.
Our renewable energy portfolio had an exceptional year with over $140 million and net growth in solar and wind transactions from a number of counterparties.
Our participation in the few broadly syndicated renewable energy transactions has increased potential counterparties to source transactions from us in future years.
The pipeline remains strong in the near term as we continue to focus on upsizing existing deals and bringing on new renewable energy opportunities.
As I've said on prior calls renewable energy as both an important economic development opportunities for <unk>.
All of America, and a business opportunity for us.
As you may have seen yesterday afternoon, I am very pleased to announce that we have successfully closed on our third $300 million approximately $300 million.
Agricultural mortgage backed securitization transaction.
Securitization continues to be a tremendous opportunity for farmer Mac and offers us many long term benefits.
One for example.
Since the successful introduction of farm serious program, we've met with customers, who have shown interest in potential securitization products that help them achieve their return objectives.
We're still in the early <unk> of building. The program are returned to the market shows our commitment to being a regular issue for the set of securitization products that align with both our borrower and investor interest.
Developing this capital flow to American cultural producers exemplifies farmer Macs core mission to lower cost for the empower and improved credit availability in North America.
So, creating a well received new investment opportunity for a leading institutional investors.
The U S. Agricultural economy continues to benefit from strong export demand and elevated commodity prices.
Farmland values reached record highs in many states in 2022, primarily due to record levels of farm income over the last couple of years.
While input costs are expected to remain elevated in 2023 <unk>.
<unk> limited global annual crops should continue to support commodity prices.
We believe our portfolio is sufficiently balance to withstand the market volatility that could arise should the U S economy and move into a recessionary period.
As agriculture, food and infrastructure industries tend not to be directly correlated are positively.
Positively correlated with the general economy.
We believe these sectors are generally well positioned to withstand an economic downturn due to ample consumer demand as well as government support.
Now before turning to <unk> I'm very pleased to announce a 16% 15 <unk> per share increase in our quarterly common stock dividend that will take it to $1 10 per share starting in the first quarter of 2023.
Hi.
In deciding to increase farmer Mac's common stock dividend and maintain our payout target.
Our board of directors considered our strong capital position and the consistency of and outlook for our earnings to support our business and to exceed our regulatory capital requirements.
This is the 12th consecutive year.
Farmer Mac has increased its quarterly dividend.
Looking ahead, we will strive to continue to be a source of stability to our customers inspire remaining adaptive and flexible to meet their needs in this changing environment.
While remaining vigilant about any indications of potential market and traction.
The foundation of our strategy is our strong financial position and proactive management of our balance sheet and funding sources, which positions us well and changing credit requirements and enables us to continue to deliver on our mission and create more opportunities for us to enhance shareholder value for you.
And with that ill turn to our partner <unk>, Our chief financial officer to discuss our financial results in more detail Parnell.
You, Brian and good morning, everyone 2022, with a remarkable year for farmer Mac.
With strong across the board highlighting a balanced well measured approach excellent credit quality and resiliency throughout market cycles.
Outperformance in fourth quarter 2022 enabled us to finish the year with very strong momentum.
Core earnings were $34 4 million.
$3 15 per share in first quarter 2022.
$124 3 million or $11.42 per share in 2022, reflecting double digit year over year growth driven by record net effective spread of <unk>.
$71 $1 billion in fourth quarter, and $255 $5 million for the year.
The sequential improvement in trend over the course of the year.
So the product of the compositional shift in our program assets and generally widespread across the board as we have seen in particular higher pricing on corporate finance loans and advantage volume.
In some part driven by the higher rate environment.
Another revolving factor that we have mentioned in prior calls.
That has contributed to net effective spread is that over the past few years, we opportunistically raised low cost debt and capital.
This excess capital reduces the need for us to be more expensive dumb and callable debt in a rising rate environment.
This is expected to continue to create a downward pressure on our non-GAAP funding costs as the short end of the curve continues to increase with fed action and the reinvesting of excess capital generates additional overdone.
Our liability side of the balance sheet remains strong as we continue to benefit from the low cost debt that we raised when rates were low and this makes us well insulated as rates rise.
The extension of debt has also strengthened our overall liquidity profile, we continue to maintain disciplined asset liability management, we carefully analyze the duration and convexity matches to minimize our interest rate risk as rates rise or.
Forward looking funding strategy, coupled with a prudent approach to hedging have allowed us to maintain and enhance profitability. Despite an inversion in the yield curve.
Turning to operating expenses.
Operating expenses increased by 11% year over year due to increased head count increased stock compensation and increased spending on software licenses and information technology.
Along with consultants to support growth and strategic initiatives.
Our efficiency ratio, our operating efficiency ratio was 28, 5% at year end and this is better than a strategic plan target of 30%.
We expect overall operating expenses to increase at a pace above historical averages due to investments that are needed to support core infrastructure and additional head count to develop critical capabilities.
We're especially pleased with our efficiency ratio and our cost containment strategy given the inflationary headwinds that all companies are experiencing.
That are impacting the market as opposed.
As we've said previously we will continue to closely monitor our efficiency ratio and we are committed to holding the run rate efficiency ratio at 30% or lower.
However, as we make decisions to invest in infrastructure and funding platforms and scale for further growth. We may see some temporary increases about the 30% level.
On this note we are on the cusp of making a significant decision to invest in our treasury and other infrastructure platforms to allow us to scale the balance sheet and manage risk as our lines of businesses diversify.
We also anticipate other investments to modernize our lending and our origination platforms in the near term.
Our credit profile continues to be strong despite the economic headwinds.
90 day delinquencies were $44 million.
17 basis points of our diet portfolio compared to $47 million in the same period last year.
As of December 31, 2022, the total allowance for losses was $17 2 million, which reflects.
And 800000 provision compared to year end 2021, and this was primarily due to the deterioration of the single agricultural storage and processing.
Turning to capital now.
Farmer Mac's $1 $3 billion of core capital as of December 31, 2022 exceeded our statutory requirement by $517 million or 64%.
Cole capital increased from year end 2021, primarily due to an increase in retained earnings of tier one capital ratio improved to 14, 9% as of December 31, 2022% from 14, 8% as of year end 2021, and this was largely due to strong earnings results in capital relief.
That we obtained through our second securitization transaction and these factors were partially offset by growth in program assets.
Maintaining consistent credit standards and strong level of capital is a fundamental part of our long term strategy to support continued growth deliver lower cost and ensure the steady execution of our business model.
We successfully closed as Brad noted our third farm <unk> securitization transaction yesterday that transaction was structured around two tranches of senior guaranteed tranche and a subordinated on guaranteed tranche.
Of which were very well received by the market despite a volatile environment infrastructure product.
This structure and there was a prior deal.
And we're encouraged by the demand for agricultural backed securitized product opportunities as these align very well with our mission and foster continued success the.
The success of this transaction further demonstrates the farmer Mac's capability to diversified long term funding sources and to develop a conduit that might generate additional revenues, but that can also serve as a source of capital to the agricultural sector.
Most importantly, this capabilities highly central to our mission and we expect to return to the market regularly with similar securitized products as we are committed to making this a more programmatic effort in the future to continue to build liquidity for our investors.
These products offer investors, a new asset class that in a volatile rate environment is not as correlated as other mortgage backed securities given the nature of prepayment behavior, that's associated with agricultural mortgages.
As Brad mentioned earlier, we're very pleased to announce a 15% increase in our quarterly common stock dividend, bringing us to a total of $1 <unk> per share for the first quarter of 2023, we believe that our strong earnings and consistent capital positions support this dividend increase.
So in summary, our entire team delivered exceptional quarterly results, while fulfilling several key strategic objectives.
Also delivered on our key metrics that we report to you on each call. We had record core earnings and continued strong credit performance and all of this resulted in a 16% return on equity and an efficiency ratio of 28, 5% exceeding our previously stated target ratios as we look ahead to 2023, we remained well.
Physicians and more optimistic than ever to deliver on our long term strategic plan objectives, and with that Brad I'll turn it back to you.
Thanks Alberto.
In summary, we're extremely proud of our financial results in 2022, and the progress we have made on our multiyear strategic plan.
Our efforts to further diversify our loan portfolio by customer geography, and loan type is working.
We believe that this drives incremental growth and profitability.
Our disciplined asset liability management as a competitive advantage as we navigate the ongoing uncertainty of these markets.
And our singular focus on fulfilling our mission efficiently in innovative ways.
As a result in steady forward rate of growth in our business through different agricultural economic cycles.
This is how we believe we can continue to differentiate ourselves and deliver value to our customers and borrowers and investors.
Now operator, I'd like to see if we have any questions from anyone on the line today.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Our first question comes from Bill Ryan from Seaport Research Partners. Please go ahead.
Morning, and thanks for taking my questions.
First kind of starting off on the micro level, obviously in last several quarters, you've had a nice increase in the net net.
Net effective spread meaning the margin.
And on the conference call you kind of implied that there has been some pricing increases, but that things may be a little bit wider as well based on the funding cost, but could you kind of talk about your outlook for the net effective spread going forward on the business lines. Thank.
Thank you.
Yes, certainly and I'm going to ask both apart and sacked away and because our asset liability management in this interest rate environment.
Has been a contributor but also.
And you can see this reflected in how we report out our segments our line of business segments.
The benefits of diversification.
So up both in the top line growth as well as the Bottomline growth because.
Some of these lines of business.
<unk> had disproportional increases over the last year.
<unk> accretive in terms of net effective spread so I don't know for SaaS Zach to elaborate a little bit on the lines of business and the spread there and then a partner to kind of round it out with the.
Asset liability management part of the story.
Yes, happy to Brad and Great question Bill.
I want to reiterate what Brian said in terms of our diversified business model. If you look at the growth we had across our two lines of business significant amount came from renewable energy and telecommunications and as you can see NR.
Press releases on.
On those new areas of growth are substantially higher than some of our existing businesses business lines, which is really attributed to that accretion in net effective spread.
In addition, you highlighted some of growth.
Having corporate <unk>.
Again, when we're focusing on agribusiness and supply chain transactions.
Generally have more accretive net effective spread and historically our foundation lines of business. So the composition of the new areas of growth are really alluding to on the business line higher pricing and higher net effective spread and a comment I want to make is really on our advantage.
Product and really that's heavily market driven so when we work with some of our investment grade counterparties, especially over the last year with a significant volatility in that market back opt out overall credit spreads in the market.
It's been a value player we are able to take some advantage of the.
Higher spreads in the market.
We put them on a significant amount of volume in the advantaged space. So in summary, a lot of new diversification our lines of business plus the dynamics in some of our existing.
Products led to.
The significant growth we had on the asset side.
Yes, and just just to weigh in on the.
Net effective spread as it relates to.
Wider or more beneficial funding costs I think one thing we continue to be accretive.
How we manage our net effective spread so we minimize the volatility and we don't do that.
By making sure that we are betting off our office with prudent liability management strategy one of the phenomenon and I think we've emphasized this on the call.
Quarterly calls as well as on this one is just the fact that as a nominal rate environment has continued to move up some of the decisions. We've made to extend our funding as well as some of the excess capital that has certainly contributed to lowering our funding costs in aggregate because that.
That's really reinvest in offsets.
In the nominal rate environment that could come with trying to raise capital or funding in this particular environment now that said in your question might be well what do you do if rates were to come back down well. This is where our asset liability management is really comes into play we actually offset some of the gains by making sure that we're hedging some of that downside.
EBIT through extending or coming out of some of the excess capital that behalf. So that would be locked in some of those higher rates. If you will and then the other aspect that we will be engaging with active derivatives.
And then we also buy a series of callable bond the issue callable bonds.
Second then reprice down.
For it to go down.
In other words this is a very very dynamic process.
Worked through this in partnership with the business development team as we understand what's coming through the pipeline and what we haven't done the funding cost and Thats why you see this real consistency within our spreads and we've always answered do somewhere between 90 to 100 basis points, but that slight tick up above the 100 basis points I'll just note.
<unk> has to do some stock with the right thing.
Bob.
Okay. Thanks for the detailed response on that and then kind of moving up to a macro level.
I know Congress is somewhat distracted and that's probably a generous word right now but.
Just in relation to the farmer Mac is there any update on that.
That's up for renewal later this year and then kind of from a macro level what would you like to see incorporated into the bill that might enhance your business opportunities.
Yes.
Youre absolutely correct.
For the benefit of anyone.
Following this the farm belt is.
Something that has to be renewed every five years.
It's the only regularly scheduled piece of it.
Legislation in Washington.
Having said that there can be.
Continuation so it's possible that.
Action on it could be delayed into 2024, which bill we think it is a possibility having said that we're very very actively engaged with key.
Stakeholders on the Hill.
With other.
Farm credit institutions other.
Other financial institutions.
So from our standpoint, what's most important to US is that what is in the farm Bill.
It's a continuation of what's in the farm Bill that is good for American.
Agricultural producers.
As an example crop insurance is.
Absolutely.
And.
We want to make sure.
That that is one example is preserved for us there may be a few improvements.
Our changes on the margin.
We're not going to get into a discussion of those specifics because.
Right now the.
<unk>.
The discussions that we're having with other financial institutions other farm credit institution stakeholders on the hill, that's very dynamic and ultimately it will come down to not only what the farmer Mac want but what are the other players in the space, what and is there an opportunity to find a good compromise that.
Ultimately is good for American producers and for Rural America, That's that's what our whole focus is.
Okay. Thanks for taking my questions.
Our next question comes from Gary Gordon.
Investor. Please go ahead thank.
Taking the questions.
Our partner you mentioned that you are considering some expansion of the treasury function you just gave a.
Headline maybe you could expand on that and describe what the benefit is for our shareholders.
Yes, I'd be happy to Gerry so when I was talking.
Talking about the treasury function I met the treasury infrastructure, so all of the platform.
End to end that support our funding activities, our hedging activities as well as our cash management I think this is something that may not be completely.
We transact a lot of cash we settled cash.
Thanks.
That you might see a very large institutions do.
Just half a trillion dollars.
Of cash is actually settled on average.
We need to make sure that we are upgrading a lot of the systems. I mean, there are a lot of bad actors out there and we've got to make sure that.
Our infrastructure remains pretty fully updated.
Other aspect of course is offensive, we want to make sure that as we continue to diversify our lines of business.
Our funding capabilities from an infrastructure standpoint, and our reporting systems in our hedging activities.
We're also moving in lock step with us so that we can scale and grow so it's a good time for us to make those technology investments, so really Gary boiling it all down this comes down to a fairly substantial at least for farmer Mac a fairly substantial.
<unk> and technology that will make over a multiyear period. So this will be a two to three year implementation cycle.
And really we're looking and evaluating a few different options in terms of what we might bring on to help us as a partner to really execute on this and more to come on that but as I said, we're really on the cusp of making that decision.
Generate some.
Temporary surge in our operating expenses at least over the next 12 to 24 months, you'll definitely see that.
Okay. Thanks also I it sounds like there was a a charge off this quarter on a storage facilities and maybe you could describe that a little.
So there really wasn't a charge offs, let's say it was I would say that it was it was really just an increase in allowance stuck with.
That's really related to one particular borrowers that we're continuing to monitor.
So they are happening.
Sure.
Okay, So no charge offs.
Okay Lastly.
You.
Brad mentioned about the.
The record.
Farm.
Land values and a very strong and I think I said record farmer incomes.
How does that play out ultimately to our growth in.
Agricultural debt.
Yes, Gary.
Very interesting question because on one hand record farm income tends to increase net liquidity.
Across Rural America.
What.
Patterns that we have seen is that.
Many farmers will.
Replace equipment.
Great equipment.
Additional capital investment.
Before paying down debt.
So our amount of Prepays actually slowed in the back half of 2022.
Very recently, it's picked up just a little bit we're trying to understand if that's because of that increased liquidity.
In Rural America or are there other factors at work but.
There is no question that.
There are.
Quite a large universe.
Parties interested in investing in American agricultural.
Productive real estate.
So.
Supply demand equation.
Farmland.
Yes.
Very favorable to sellers.
And one of the reasons that there is so much interest.
If you think about farmland is on kind of a 50 year investment horizon.
There are a lot of reasons to feel extremely bullish about <unk>.
American agriculture on the long run.
Yes.
Very good climate, we have the best transportation systems best body of law.
<unk> financial institutions, we have a reasonable government framework for supporting agriculture. It all leads up to.
Many investors to conclude that.
American agricultural farmland represents a very very good long term investment so yes.
Your line is subject to.
Valuations that are a function of our near term cash flows net cash flows and net income, but there's also this longer term component. So we see continuing support for values for American farmland.
And what it means for US is that we think actually 2023 will be at a pretty steady year for our farm and ranch.
Program.
<unk> taper down a bit with interest rates running up during the back half of 'twenty two but as I commented, we are optimistic that it will be stable to increasing as more farmers start making more capital investment in 2023.
Don't know if you'd like to add any additional color to that.
Okay.
Florida is really.
No I think Gary the biggest impact going forward is the increase in interest rates and how that will impact the farmer producer wanted to take on more debt in the medium term, but Brian as Brad said, the supply demand dynamics and.
The limited availability of land really provides an opportunity for a.
Farmers to take advantage of potentially medium term or shorter term debt in 2023.
The rate environment.
Okay. Thanks, a lot.
The next question comes from Brendan Mccarthy from Sidoti. Please go ahead.
Great. Thank you.
I was wondering if you could talk about the the demand dynamics within the renewable space I imagine, it's pretty diverse considering from an ESG perspective.
<unk>.
So I was just kind of wondering if you could talk about.
The buying opportunities with those bonds.
Certainly.
Project financing for our renewable energy projects is primarily done at the inception of the project. Most project financing is structured so that amortize over the life of the investment usually over 15 2025 years. So there.
Theres not a lot of refinancing going on there is primarily new projects and what is driving new renewable energy projects, including solar and wind in rural markets, which is our focus.
Is the fact that.
The price.
Of the capital investment the cost of the capital investment for solar and wind projects has.
Plummeted to the point, where on a straight kilowatt hour to kilowatt hour basis, it's very competitive with thermal sources of energy and so there are in addition to that there are tail wins for example from the inflation reduction act and others encourage more renewable energy, but the fundamentals the economics.
Pretty well stand on their own so we.
Acknowledging what's been going on over the last 10 years.
Continual trend and reduction of the cost of these sources of energy and the fact that this capital investment is being made in rural markets. Many times.
At least or purchase land agricultural land.
In our rural communities, all part of our mission of supporting the economic development and economic.
Opportunities.
America makes perfect sense for us to do this as well as the credit risk profile and the funding requirements for these long term amortizing projects.
So yes to your point there is.
You mentioned ESG, but most importantly, it's the economics and the inflation reduction act that are driving what we think will be an increase in investment opportunity lending opportunity.
For renewable energy project finance and.
We've committed some additional resource in some additional people.
To further develop that opportunity for us in 2023. So I think we mentioned earlier that we are quite optimistic that we can increase.
Our growth rate.
And overall level of financing activity purchase loans for project financing for renewable energy projects.
Great. Thank you and then a separate question.
Mentioned farm values on the on an uptrend.
What's your what's your outlook in that space I think.
When do you expect to see higher interest rates really.
Maybe weigh on that outlook.
Well I think there has.
Higher interest rates how.
Moderate on that that's somewhat.
Interesting.
Interesting mix amongst.
Purchasers of farmland between.
Individual farmers, who maybe are eyeing.
Jason Farm.
Where it's viewed as a 50 or 100 year multi generational.
<unk> opportunity.
And then more institutional investors.
Who maybe look at it much more like a traditional cap rate basis.
But there is continued interest that we see continuing support for all land prices, even with rising interest rates and so we do not contemplate any of our forecast or forecast right now that there would be a real drop in land values.
There could be some flatness, but overall, we think of it will continue to.
B reflect moderate growth over the next couple of years.
Great. Thank you.
Our next question comes from Deforest Hinman from a private Investor. Please go ahead.
Hey, thanks.
Couple of questions and I have some comments too just a first quick one how do you guys calculate your return on equity currently like what was the return on equity for 2022.
Yes sure.
The way we calculate it is just we look at our regulatory capital, which is about a $1 3 billion and that tends to be.
The sum total of what.
What hits, our tier one capital ratio.
That goes into the denominator.
And then in the new leader, we actually strip out a gap funding costs. So we don't really account for anything that results from fluctuations in derivative and hedging activities.
Let me just look at our core earnings. So that's that's really help get to.
Return on equity or return on regulatory capital.
It's really just a core earnings divided by our total regulatory capital.
And then if we want to look at it over a common equity then we just strip out the effect of.
Anything thats related to preferred or other sources of capital as you look at it.
On.
Just a piece of common equity.
And once that final number.
For 2022, we ended at 16% and we have a target.
We tried to really cover anyway.
14% to 16% range.
We really try to manage that in conjunction with our net effective spread which we.
I think that we try to manage that anywhere between 90 to 100 basis points. So that's really our topline revenue cut.
Couple that with our efficiency ratio. So those are the three key metrics that we.
Pay attention to efficiency ratio being under 30%. So if all of the first question.
Then we should hit that overall metric.
Yes.
Okay. So having said that this is more of a comment barfoot, so fantastic job everybody I mean, just.
Really great performance over the last few years, a phenomenal dividend growth rate really attractive.
No.
I think youre doing something in the financial space a lot of other people can't even talk.
Such.
Youre also GSE CF funding privilege.
And you're managing your spreads in your underwriting has been incredibly strong.
It just seems like your share prices is far too low and don't get any respect for what youre doing so I would say keep up the.
The good work and this is for the sell side analysts on the call. If they go back in time GSC valuations pre financial crisis were far in excess of.
Where your.
Share prices is currently valued at so.
I would say you're doing a great job keep up the good work.
Question now is.
Can you give us a little bit more color on securitization.
You announced that.
For the call.
Can you talk about how many people were buying that securitization versus some of the previous.
Securitizations.
Securitizations are we seeing a diversification among those buyers in terms of or the insurance companies.
Bond funds who's buying and then was that deal oversubscribed, and then I have some additional questions as well.
Yes first of all let the partner get into that.
The securitization.
<unk>.
Buyers, which is again, a very very positive story, but going back to your first point I mean, we completely agree.
A couple of follow on point.
Our performance is remarkably consistent challenge anyone.
So look at a more consistent performance, both internal growth and absolute levels of earnings that <unk>.
15%, 16% after tax Roe.
Can look at it over a many year period and see very little fluctuation.
So and the comparison to these pre financial that pandemic I think that's an interesting one but I would note that.
There were some behavior some actions with other gse's before the financial.
<unk> or the financial crisis.
Got them in a lot of trouble and farmer Mac, we have been remarkably free of any.
Political pressure.
To do anything other than just doing what we have been doing in terms of fulfilling our mission and maintaining very very sound and safe.
Practices and fulfilling that mission, so I would argue with that.
The consistency and the stability.
It really is without peer without comparison, but with that let me turn to a partner to talk a bit about.
The market for.
These securitizations and one one point, though before I do.
The forest and that is that if you look at the period prior to our announcement on our three securitizations.
That was the time when investors more different types of investors were taking more of a look at farmer Mac from a C class stock standpoint as well.
And so we believe that this.
It is something that has increased our general exposure to a larger group of investors, but without a partner.
No. Thank you first and I want to Echo Brad for your very kind comments very very proud of all of our results.
Just on your question regarding securitization and the investors I think you had sort of a two part question one with.
Just around the.
The size and diversity of investors and I will just say to that.
Just a few data points, obviously, we can't reveal any specific investors, but I'll just give you a few points we brought in.
Setting new investors into the program.
We had a number of investors who.
Consistent.
Buyers across all three deals.
And we've also relative to the previous issuances increased the overall investor confidence.
So just from a breadth and depth.
<unk> increased our investor count.
Suddenly over subscribed as well in both tranches.
Hey.
Just anecdotally as well.
He tranche despite a lot of the volatility in the market.
A little bit more of a return to risk on sentiment with regard to credit.
B tranche investors really did not need any selling on the name.
As Brad noted certainly it gives us broader exposure about the company, but the first two deals we really spend a lot of time talking about pharma back I mean, I think Rodney we did.
17, or 18 calls over previous period this time.
Not be to sell the company at all a lot of it came down to the granularity of the deal and the transaction itself, but even I mentioned that is it just starts to highlight just the programmatic nature of these deals but also the familiarity of investors with whom we are a collateral.
Company overall so.
And then I think it was the second aspect to your question, which is how often one of the constraining factors, obviously market conditions as well as pipeline.
We've actually committed to making this a more programmatic set of issuances. So we do hope to return to the market again at some point this year.
Okay. That's helpful. And then I just wanted to help people understand this opportunity within the renewable space because I found this very intriguing when you started talking about it.
In the past.
There is a public company out there called Hannon Armstrong and they have some.
Lending programs that appear to be into the renewable space and I believe the structure of their deals.
Where they're doing the lending, but they also want to see.
Our long term power purchase arrangement.
They have their slide deck available and they show that they're lending money in 2022 at a rate of seven 5% in their funding costs were four 3% so.
The first question is is this the type of product, we're trying to lend on within the renewable space and then <unk>.
Sure.
Our metrics look versus something like they've laid out because if they're saying they're lending money at seven 5% and they're borrowing at four 3% in.
Generating attractive returns and they are growing there.
Renewable energy lending portfolio it would seem.
A very simplistic view that you would have an extreme funding advantage.
And your cost of.
Lending would be significantly.
Lower and this 200, some odd million renewable loan book that you have.
Currently should be able to grow.
The nominal rate, so I'm going to pause and hopefully we can get some more color here.
Yes be happy to answer.
I spent.
My 40, plus year career, I've gone back and forth between agriculture, and and electric power and so I've got a lot of familiarity with with us and in fact I know him.
Hannon Armstrong and no one respect Jeff vehicles, a great deal Susan Nicky who's running those programs.
So these are people who are very very capable and have made a very.
Good niche for themselves.
Nothing but respect where we.
Were playing is quite.
Similar to that that part of Hannon Armstrong business.
But it's also.
Traditional project financing for.
Renewable energy projects that over the years has been dominated by Japanese and European banks operating in the United States.
<unk> just haven't done that much of this and part of it is because of funding and Thats why we think that we can carve out a very very nice business.
Both on secondaries with the large Japanese and European players.
And also on primaries originated.
By other seller servicers and kind of the mid market part of it where we can operate nationally.
But more efficiently than than the relatively few number of midmarket players.
So going to your question about credit metrics.
This is a pretty trial.
And proven path in project finance for renewable energy projects, if you want to dig into an abundance of of underwriting here.
History, as well as guidelines for Moody's and S&P.
Right, where farmer Mac is these are projects, where there is a long term underlying power purchase agreement where the debt is.
Typically amortizing.
Long term debt over a power purchase agreement, sometimes theres, a balloon, but oftentimes it's fully amortizing over where they are our debt service coverage ratios typically in the $1 two 5% to one four range, where they are sculpted amortization given the seasonality of the cash flows coming from solar wind projects, where their six month.
Debt service reserves.
Very very tried and proven.
Underwriting metrics and that's what we're doing at farmer Mac.
This typically as a project finance credit that will write out it kind of a triple b minus double b plus sort of equivalent again, exactly where farmer Mac is so.
We are doing something where theres been a lot of market experience and discipline developed over the years and because as you point out our funding advantages. This is something that we think is a natural for us now in terms of spread.
Taking your citation of tenant.
Hannon Armstrong at seven doesn't have funding a four and a half it's.
I'll be a little bit different for us given the space that we're playing in but I think when you look at our segment reporting you can get an idea.
Our spreads on the.
Coupons on these loans might be in the neighborhood of comparable term treasuries plus two to 300 occasionally a little bit more.
And you can back out of our cost of funds from that and kind of get to.
Anticipated on.
And that spread but to <unk> prior point.
You know I think we would emphasize that this is yet another.
Segment that is accretive to our overall returns at farmer Mac.
Okay, and then maybe just the growth piece I mean, you are steering the ship here is this.
A multibillion dollar portfolio exposure in a couple of years.
Where should we expect this to.
Go.
Yes, I think we highlighted that we put out on a percentage basis, we put on a large amount of 2022 with committed more resources to this in 2023. So we would hope that in 2023 2024.
Might be mid nine figures sort of volume number.
Looking a few years out.
It very easily could get to that kind of 10 figure number.
I think we have stated on prior calls that this is market where the market that's available to us might be in the neighborhood of $8 billion to $10 billion a year.
For us to achieve.
A 10% market share over some years it doesn't seem like an unreasonable goal.
Okay. That's incredibly helpful and I hope everyone listening closely to what you just said and then the last question would just be to two part whats the current employee head count and what's the planned head count additions in two.
2023, Thank you for all the answers.
Sure. We finished the year with I think it's a 158 employees since the beginning of the year. We may have had a few.
We actually I think on a full budget basis.
For 2022 had 170 170 and change for year end.
We had a little bit more attrition, which is by corporate standards extremely still very low. We also when interest rate volatility sat in in the second quarter of 2022, we took a go slow approach on some some hires so I think we ended the year a little bit below what we know.
And for 2023.
Are we just.
Through our board meeting went through our budgeting process and I think you know over the year, we might add about a 10% head count to where we are today.
Alright, thank you.
This concludes our question and answer session I would like to turn the conference back over to Brad Norte Holmes for any closing remarks.
Good well. Thank you all very much for participating and that's I hope that we have been able to convey to you.
Our.
Real delight with our 2022 performance as well.
Why we remain so optimistic about the future of farmer Mac, we say it over and over again, but the principles that we use the discipline that we use for our asset liability management. The focus that we have on rural America in these in these markets segments and sub segments.
It's what we do and what we're very very committed to do and because of that we've become very good at doing it.
And.
That's why we're very optimistic about the future.
Divorce raised some very good points about.
The fundamentals and why we are.
Our optimistic and should be optimistic and again, we hope we've been able to communicate that to you today.
You don't want to conclude by again, saying just how incredibly proud I am of the 158.
Employers the farmer Mac and their.
Their commitment to our mission.
Their extreme expertise and specialization and how that contributes to these great results.
And.
We look forward to speaking with you again very soon in the meantime, if you have any follow up questions. Please reach out to joppa.
And with that we wish you a very good day. Thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Okay.